Michael Raynor has a doctorate of business administration from Harvard and works for a big-name consulting firm so I had to overcome several deep-seated prejudices to read his new book The Strategy Paradox: Why Committing to Success Leads to Failure (and What To Do About It).
He’s from Canada, and I believe that I am a Canadian stuck in a Hawaiian body (vis-a-vis hockey), so I bent my rules about helping authors with such a pedigree (pedegree?). Luckily I did because his book is quite informative. I don’t know about you, but there are many companies that succeed, and I can’t figure out why. And there are also many companies that fail (some of which I invested in), and I can’t figure out why.
This book goes a long way in explaining how strategy makes or breaks a company. To put it another way, I won’t think I’m so smart if a company that I invest in succeeds, and I won’t think I’m so dumb if it tanks.
Question: Why did Windows kick Macintosh’s butt and VHS kick Beta’s butt?
Answer: Apple continued along the path that it had blazed with the Apple II and the Macintosh: very cool, very high-performing products built around a proprietary architecture of hardware-software integration. This was a perfectly reasonable bet to continue, but it happened to be the wrong one in the personal computer market of the late 1980’s. Like a broken clock, a
strategy that never changes gets it right sometimes, though statistically it
is wrong more often than not. The iPod is Apple’s latest hit, and it’s more of the same: a cool device built around a proprietary architecture. Apple’s clock hasn’t changed; it still reads twelve o’clock. It’s just that it happens to be noon again.
By contrast, Microsoft built a series of strategic options that positioned the company for success under a variety of different outcomes. Microsoft had what turned out to be a better strategy only because it didn’t commit itself to a single strategy. For example, when IBM began aggressively creating a competitor to MS-DOS and Windows, OS/2, Microsoft collaborated with IBM. The Windows development effort is evidence of Microsoft’s belief in GUI OS’s, but Microsoft was also getting a foothold in applications development for GUI-based systems by writing Excel and Word for…Apple! Corporate customers seemed to think that UNIX had a promising future, and so Microsoft was investing in UNIX too even as it released new versions of the by-then venerable menu-driven MS-DOS.
Question: So Apple and Sony didn’t do anything “wrong” per se?
Answer: You could say that Apple’s and Sony’s strategies were great strategies that simply happened to fail. They failed not because of any shortcomings in the strategies, but because of shortcomings in each firm’s ability to predict what sort of strategy would succeed. Trying harder to craft the perfect strategic moves won’t work; companies need to more effectively manage the uncertainty that necessarily colours every strategic decision.
Question: What is the explanation for Toyota’s success?
Answer: A big part of it was being well-positioned for the oil crisis of the mid-1970s. Toyota was influenced by its origins in the Japanese market, where size and fuel economy mattered, and in the U.S., it was focusing on the second car market, where the need for low prices similarly rewarded smaller, more fuel-efficient cars. When the oil crisis hit, Toyota happened to have products that were much better suited to the suddenly-changed environment.
As Louis Pasteur said, “Fortune favours the prepared mind,” so this bit of luck would have been useless to Toyota if it made inferior cars. But of course customers quickly noted Toyota’s vehicle quality. This reflected its tradition of manufacturing excellence, of defect and cost reduction and quality improvement, a system that is known today as the Toyota Production System, or TPS.
By the way, Toyota has been selling cars in the US since the mid-1950s. They’re #2 and threatening to become #1, but it took fifty years. GM overtook Ford as the #1 automaker in the early 1930s, less than twenty years after Alfred Sloan created GM. Toyota’s accomplishment is remarkable, but it took a long time.
Question: You sure make it sound confusing: damned if you do, damned if you don’t—what’s a company to do?
Answer: This is what I call the strategy paradox. That is, the same strategies that have the highest probability of extreme success also have the highest probability of extreme failure. In other words, everything we know about the linkage between strategy and success is true, but dangerously incomplete. Vision, commitment, focus…these are all in fact the defining elements of successful strategies, but they are also systematically connected with some of the greatest strategic disasters.
For example, Apple’s strategy sometimes works great, and sometimes fails miserably. It’s not that Apple sometimes “forgets” what makes for greatness. It’s that what makes for greatness also exposes you to catastrophe. The same goes for Sony.
To produce success, vision, commitment, and focus must be linked to an accurate view of what lies ahead, and nobody can adequately predict the future. If you can guess right on a regular basis, my hat’s off to you…and can I buy your stock? But no one—no one—has any legitimate claim to an ability to make predictions relevant to true strategic planning.
Question: Why can’t companies predict the future better?
Answer: Companies might be able to predict the future better than they can now, but for me the question is whether they will ever be able to predict the relevant future accurately enough for the purposes of strategic planning, and so avoid, or at least mitigate, the strategy paradox. I don’t think that’s going to happen anytime soon for some deep, structural reasons.
For example, randomness. Prediction requires the identification of a pattern that repeats, because a pattern is what allows you to use what has happened to infer what will happen next. Randomness is the enemy of pattern-based prediction because randomness means that there is no pattern, no way to use the past to predict the future.
In A New Kind of Science, Stephen Wolfram identifies three sources of randomness, the first two of which are relevant here. First, any system must have boundaries that define it, since any system without boundaries would be the universe itself. Second, no system is entirely closed. Therefore, every system is subject to exogenous, and necessarily unpredictable, shocks that introduce randomness into the system. And if you keep on expanding the boundaries to encompass the various externalities, you will need a theory of everything to have a theory of anything.
Question: But what if there were a system that was self-contained and orderly?
Answer: Unless we can specify the initial conditions precisely enough we cannot exploit that orderliness for the purposes of prediction. The problem is that we never really know what counts as “initial.” Exogenous shocks make it impossible to know where to stop defining a system, and sensitivity to initial conditions makes it impossible to know where to start.
Question: What’s the proper role in strategy formation for each level in a hierarchy?
Answer: I’ve found that it helps to think about strategy in two halves: the commitments that all successful strategies entail, and the uncertainties attendant to those commitments. Commitments and uncertainties are only half the answer. The rest of the solution lies in calibrating the focus of each level of the hierarchy to the uncertainties it faces. It is common sense—if not common practice—that the more senior levels of a hierarchy should be focused on longer time horizons. What hasn’t been as widely recognized is that with longer time horizons come greater
levels of uncertainty, and strategic uncertainty in particular. This fact has some profound implications for how eacg level in an organization should act.
Board members should ask: What is the appropriate level of strategic risk for a firm to take? What resources should be devoted to mitigating risk? What sacrifices in performance are acceptable in exchange for lower strategic risk? This allows the board to be involved in strategy without getting involved in strategy making, which is correctly the purview of the senior management team.
CEOs should ask: What strategic uncertainties does the company face? What strategic options are needed to cope with those uncertainties? In other words, it falls to the CEO, and the rest of the senior team, to find ways to create the strategic risk profile the board has mandated for the firm.
Divisional or business unit vice-presidents should ask: What commitments should we make in order to achieve our performance targets? For these folks, it’s no longer about mitigating strategic risks, but making strategic commitments. Someone has to take the actions that create wealth, after all.
Managers should ask: How can we best execute on the commitments that have been made in order to achieve our performance targets? To put it on a bumper sticker, they have to “show us the money.” There are no strategic choices to make at this level, because the time horizons are too short—six to twenty-four months. Strategies simply can’t change that fast.
Question: How does your answer change with respect to a start-up?
Answer: Start-ups tend to be enormously resource constrained. Typically they are not able to devote money and time to the problems of strategic uncertainty. As a result, start-ups tend to be “bet the farm” propositions: high risk, with the potential of high reward. Such firms don’t manage strategic risk, they accept it.
Question: Are you saying that by definition a startup is resource constrained, so it should/has to bet the farm on one approach?
Answer: The degree to which you manage risk will be a function of your ability to bear risk and recover from setbacks. On the continuum from the archetypal “two people in a garage” to Johnson & Johnson, I take the counter-intuitive view that start-ups are much better able to bear risk: if the venture fails, the people and other resources involved are typically far more easily redeployed than is the case with large corporations.
Question: So if a startup fails for other than poor execution and implementation, it’s “okay” because betting the farm is the way to go?
Answer: I wouldn’t go that far. There is always room for thinking carefully about the risk you face and how to mitigate it effectively. You’ve suggested, for instance, that start-ups can think about betting on sectors, or “customers,” then trying to adapt their products, or betting on products, then adapting things like marketing or distribution to find the right customers. Either approach involves a “core” bet and a series of options on contingencies. Which approach makes the most sense will be a function of the risk implied and the cost of mitigating it.
Question: So start-ups are wrong to simply accept strategic risk?
Answer: Although accepting strategic risk is not necessarily bad, it can be unwise to just accept it without doing your homework first. It’s possible to go to the opposite extreme and squander resources on multiple investments that are styled as strategic options only to find that they actually undermine your primary strategy without securing the desired options. The common problem is not adequately assessing your firm’s risk profile and shaping it appropriately.
Sony, like Apple, similarly suffered the fate of a reasonable, but wrong, committment. It positioned the Betamax as a high-fidelity video recording device for time-shifting broadcast TV programs. In contrast, Matsushita’s VHS was a lower-performing, lower-cost device. Much to everyone’s surprise, using VCRs to view rented movies turned out to be the “killer app,” and recording fidelity became a secondary consideration.
Sony couldn’t adapt by cutting costs and hence price because Matsushita was, by the mid-1980’s, millions of units ahead of Sony on the VCR experience curve: any move by Sony would have been easily countered. In other words, much as Apple had done in the PC market, Sony made a perfectly reasonable bet that turned out to be the wrong one. Matushita didn’t end up on the right end of this battle because it had a more strategically flexible stance than Sony as in the Microsoft/Apple case. Rather, Matsushita made a different bet that simply turned out to be the right one.
A must-read for sure. Michael gives intelligent answers about why it is very difficult to predict the future and at the same time it is very important to be able to do so :)
Especially the advice to startups is interesting: try to avoid risks even though it seems you have no other option. I’ve added it to my wishlist :)
Thanks for sharing. Now I know this is the book not worth buying :)
Being one minded is important, but being flexible is too.
Michael says: “Start-ups can think about betting on sectors, or ‘customers’, then trying to adapt their products, or betting on products, then adapting things like marketing or distribution to find the right customers.”
Is this refering to one of your blog posts? If so, which one? I’d like to read it.
Not only does the information provided in this book lead to confusion, it is also weak on facts and therefore draws questionable conclusions. How do I know this, well, for part of the Beat/VHS battle, I was there.
Although the parent company was Matsushita, the actual VHS development came from one of its subsiduary companies, Victor Company of Japan, or as we know them in North America, JVC. JVC was also the leading developer behind the U-Format video system (along with Sony and others), which became the genesis for the Beta format “introduced” first for consumer use by Sony.
The facts are these. All of the major Japanese electronics firms were discussing and working toward a single format for the consumer market. They did not want to create what eventually did happen, a Beta/VHS battle.
Sony, while part of these discussions, secretly developed the Beta format out of the U-Format system and became first-movers in this category by introducing the first consumer VCR. Their motive was simple. Be first and everyone will follow their format.
It failed partly because of the growing animosity toward Sony for their continual “go it alone” attitude and, because JVC/Matsushita was very close to introducing the VHS format, which they promised would be licensed at fair value to ALL Japanese, Taiwanese and Korean manufacturers.
In the end, VHS won because there were 52 licensees of VHS worldwide and 3 for Beta (Sony, Zenith and Toshiba). Once Zenith and Toshiba began releasing VHS models, it was over for Beta.
Secondly, to compare this with Apple and computers, although I have thought of it many times as a MAC user since 1985, it is not a reasonable comparison.
JVC’s licensing of VHS was more a hardware design license than a software license. If Apple had wanted (and wanted is an important point here) to have the number one OS for personal computers, they could have licensed the software as freely as JVC had with VHS, however they knew that hardware was highly tied to the success of the “system”.
Finally, Beta is dead. Gone. Toast. It was a failure. Apple MacIntosh computers are not a failure. The product has seen continual improvements and is growing in marketshare once again, 25 years later.
The author’s premise that you choose your strategy by the “clock” is weak and would mean that any company that chooses to cater to a narrower or more specialized market, is doomed to failure. Obviously, this is not true.
Not sure we read the same book. :-) The most important paragraph in this interview is this one:
You could say that Apple’s and Sony’s strategies were great strategies that simply happened to fail. They failed not because of any shortcomings in the strategies, but because of shortcomings in each firm’s ability to predict what sort of strategy would succeed.
This explains the outcome of most startups–FilmLoop included.
I think the ways to use this information are:
1. Don’t invest in planning without building into your process the things the future must do for your plan to succeed, and therefore points where you can react if the future is not cooperative.
2. Build a robust model you can use to notice and adapt to the future when it converges from your plan.
By “future” I mean the real world.
I think that agile principles could help many startups and bigger companies. Adopting to changes as they appear without trying to predict them (Crystal Ball?)…
All you need to do is prepare for a change – “Fortune favours the prepared mind”…
From you questions I just get the feeling that he is talking in circles. Basically, we can’t predict the future so we have to evaluate the risk of any strategy.
Maybe (I don’t know) we often tend to focus too much on strategy (which is based on a whole bunch of unknowns) and forget about tactics…what we’re doing. Obviously the two are closely intertwined – strategy leads to tactics, outcomes of tactics lead to re-evaluation of strategy and so forth.
Maybe it all comes down to Jim Collins (Good to Great, http://www.jimcollins.com) concept of the flywheel. Each move should be continuously adding to the momentum. Another example is Toyota as explained by Matthew May (http://www.changethis.com/29.01.ElegantSolutions) which you’ve highlighted here before.
An interesting book to be sure. Some of its ideas remind me strongly of a combination of Eric Beinhocker’s 2006 book ‘The Origin of Wealth’ and Timothy Luehrman’s 1998 HBR article ‘Strategy as a Portfolio of Real Options’. Both tackle strategy formulation in uncertain and continously changing times.
Excellent strategy – no matter how it is developed – is one thing, but excellent strategy implementation is another. It is in the latter where we still clearly have plenty to do.
Ah, chaos theory. There are too many variables in the system to make a good prediction, even if we did have an adequate formula. That does explain why PCs failed for Apple but embedded systems succeeded. I guess the best an entrepreneur can do is manage change.
Good to see Pasteur’s quote, “Fortune favours the prepared mind,” here on “How to Change the World”.
For me, one good quote begets another: “Nothing will bring you peace but the triumph of principles.” – Ralph Waldo Emerson
Guy, in this context, I think Emerson’s quote is the answer to the question you pose in Number 4: “You sure make it sound confusing: damned if you do, damned if you don’t—what’s a company to do?”
If you’re standing on clearly understood principles then, the strategies, plans, methods, objectives, directions can change as much as they want to, you’ll still be better off than those who rely just on the hottest, temporal-based strategy.
That’s how I’d change the world…
Strategy is often constrained by lack of resources and management vision. If you don’t have or can’t afford the resources you need, then knowing what is the right direction to go in is of little value sinc eyou won’t be able to execute.
Then there is the vision part. People with limited imagination and knowledge cannot plan for a future that they are incapable of envisioning. Often, these people have also proven themselves incapable of “learning from history”.
From what I saw in the Betamax versus VHS wars, Betamax lost because Sony wanted royalities from anyone building Betamax machines. Matsushita didn’t. Hence everyone built VHS decks. Since there were more VHS decks, distributors sent out more movies on VHS than Betamax. Having a great selection of titles, VHS decks became the consumers choice, leading less titles to be put on out on Beta… and so the downward spiral went.
Betamax evolved in BetaSP, a niche video format for pros.
Same thing happened to Apple and Microsoft, with Apple becoming the niche product.
No mystery or paradox there.
This posting is more than just informative: it is critically important. I have been “preaching” for more than a year, from my blog “Adventure of Strategy,” that strategy is not so much about a plan as about an integrated process to make make a firm resilient to a range of possible futures.
It is gratifying to see somebody of the stature of Guy Kawasaki corroborating this. All too often, I find myself facing blank stares from clients who want me to help them to (only) craft a plan that will lead them to greatness. This is only possible where the future is certain. Which, of course, it is not.
Thanks Guy! Rob.
Guy, it appears that this guy made you think. You enjoyed that, I’m sure, as evidenced by your positive feedback on his book. I’ll buy his book (after checking my library 1st! I’ve saved hundreds, maybe thousands, on books over the past few years since re-discovering my local library and it’s very cool policy of stocking newly published books regularly).
Difference between Apple and Sony cases: Apple went for reaching parents through domination of education market, rather than reaching people with jobs through domination of corporate market. Different strategy than MSFT, and who knew how that would play out? Sony/VHS is just like current hi-def DVD format wars and countless others: line up your allies and go to battle, everyone with the exact same strategy, with no one knowing the outcome until the consumer plays its hand and determines the victor.
Guy Said: “Not sure we read the same book. :-) The most important paragraph in this interview is this one…”
Good point Guy. I should have made it clear that I was really responding to the ‘interview’ and that the author’s comments on Sony strategies with Betamax were possibly flawed. The book is another story – agreed.
Guy, you were there for some of the Apple strategy decisions and I still believe that the conclusion that Apple failed is incorrect. Although for many years I personally wished that Apple would do what JVC/Matsushita did, license the software and open up the system so that they would dominate the world (obviously a MAC fanatic).
However, when that did happen (remember Mr. Sculley ;-) and MAC clones appeared, this strategy was nearly a disaster for the MAC. I guess Mr. Raynor would just say the clock/timing was wrong for that strategy?
Seems like an interesting set of ideas to me. My general take on the world of business is that everything is paradoxical – and that the law of unintended consequences is the law most often ignored. I run my own business with some of these principles in mind . . . placing bets only when I have to . . . and hedging against the roller coaster of an unknowable future.
(You also forgot ‘Answer’ at question 9 ;)
Apple is a Design Company, where as the rest aren’t. Apple is good at Design, and which is why iPhone will be winner, just as iPod was.
10 i see 11
I’ll think on this, but my immediate reaction to his “strategy paradox” was that he was praising internally consistent strategies that “failed” because the customers didn’t act as predicted (e.g. watching videos supplanted recording videos). Given that customers are an inherent part of any strategy, then a strategy that fails to understand the customer could surely be described as a bad strategy.
Why do Some Businesses Fail While Others Succeed?
Because they either get it right or get it wrong. I just read this post on Guy Kawasaki’s blog and I’m still confused.
In it Guy interviews Michael Raynor about his new book, The Strategy Paradox: Why Committing to Success Leads to Failure (an…
The Strategy Paradox
is an interesting book written by Michael Raynor on why certain strategies adopted by certain companies are successful and why some are not. Interesting simply because it directly reflects what I am facing in my industry. However the replies he gives…
I have a paradox myself Guy – why is it that the more business books you read to “educate” yourself about business (insert term here) the more you realize how little you know.
The interview was interesting but is there anything that I can use to help my businesses… NOPE! Reviewing why past strategies fail is interesting but at a different time and place, they could have gone either way… hence, the paradox continues… and hence why I don’t read business books anymore ;-)
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Interesting article, but I believe your assumptions and associated conclusions may be a bit far reaching. It appears that you have started with a predetermined conclusion (it is impossible to predict the success or failure of a company based on their strategy) and THEN gathered evidence you feel is supportive. Ignoring this fact, let me address what I believe are the faults in your conclusion.
1. You base a large part of your argument on the statistics of chance and the inability to predict the future. This is of course true, no one can predict the future 100% reliably. But this is really a “cop-out” or “catch all” argument. To that end… Why invest? Why make business strategies at all? This misrepresents the fact that it is possible to (within reason) predict trends and actions accurately. Now if an unfroseen event occures (i.e. the whole world suddenly goes to war) then things in the marketplace will change dramatically and even the best laid plans will be found wanting. But for the most part there are certain assumptions you can make, (the whole world won’t suddenly go to war) and your predictions can be fairly accurate. The problem is that most people do not want to objectively listen to the evidence and where it points. They are too involved in the outcome to make an unbiased forecast. Take as an example the current battle between HD-DVD and Bluray. To find the winner you only need to evaluate 3 things; What are the consumers TRUE purchasing motivators (needs and wants), what is the creators vision and what is the current state of the technology involved. These things will tell you what each of the players (consumers & creators) will do given a certain enabling event (technological advancement). You might say, “technology can take huge unanticipated leaps forward and this makes it difficult to predict what type of enabling will take place”. Again it is impossible to predict with 100% accuracy, but keep in mind that in most circumstances, technology moves forward at a predictable pace, (i.e. moores law). For this reason, if you properly understand the players (consumers & creators) motivations, and watch the technology involved, it is possible to forecast or “predict” trends with a good degree of accuracy.
2. You assert that a strategy that leads to “greatness” also leads to “catastrophe” ( I placed catastrophe in quotes as well, because I think some people rightly point out that Apple and Sony have not met with catastrophe. Having said that, I do understand your assertion). Your statement assumes a company is taking a very top down approach. As a company; I guess on the future, I build my product, I distribute my product and then hope I guessed correctly and consumers buy it. A company using this type of approach (strategy) will experience many of the characteristics that you outline in your article. This is an old way of thinking about business, and is increasingly becoming oudated for the reasons you outline. Many companies have successfully employed new strategies (which the internet has enabled) to better address the challenges of business. The most important newly applied strategy, is a user centered design philosophy. A good example of this strategy in practice (to some extent) is Dell computer. They allow customers to tell Dell exactly what they want, and THEN Dell builds the computer and ships it. It seems like a simple procedural change but the strategic implications have a HUGE effect. Your company strategy is now centered around the customer again, instead of around the product. When your strategy is based around the product you can hit or miss, but when it is centered on the customer, as long you properly understand their needs and wants it is almost impossible to miss.
So you want to know which stocks to buy. Buy stocks from companies place the customer at the center of their strategy. But be wary, many say they put the customer first, but often their actions do not properly reflect this.
There is a lot more I could say, but I have already written way more then I intended. In any case, thanks for examining this topic and getting people to think about it.
The Mac revolution: Blip orParadigm?
Is it just a blip, or am I noticing the Mac starting to become the i want of next computers for more people than ever before? I know my next computer will be a Macbook, and I seem to hear the same thing from more and more people all the …
I’m working as clasic industrial engineer with large structured systems and very large systems. Today I wil write “We are not able to predict future with more than 80% probability”.
Whay? Due to curent industrial revolution speed.
We know two strategies:
wait and see
think and act
With objective 20% profit I have a business strategy.
Strategy map is an public doc. at my site.
Where is the misunderstang generating “paradox”?
The “wait and see” strategy have an turnover @ two or three hours using computers. (Please note, I’m using open systems, closed systems appear only in the lab. for theoretical purposes). This turnover is increasing when I smell an enamy.
How to optimize.
Start point of procedure is the end point of strategy. Build Information Architecture as flexible as you kan with your resources. Ask for working capital! Now problem!
Find new resources…usw…
Usual we are “shooting” whitheout warning.
Now is danger! Some of us, like Bin Laden, due to religious generated neurotoxines or opium or bugs, become impredictible, become ill.
Our restrictions. We are asking others for permission to use new resources. And always are using, from 1943 RFID technology.
The Strategy Paradox is a great book and a very important piece of thinking to consider when looking at strategic planning, especially for strategists working at large organizations.