The Strategy Paradox

[duncan drennan]

Guy Kawasaki has an interview with Michael Raynor who wrote, "The Strategy Paradox: Why Committing to Success Leads to Failure (and What To Do About It)"

Here are two Q/A's, but read the full article for a better overview.

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.

After reading the article I just felt like the author went around in circles...what is he really saying? I left a comment on the blog along these lines....

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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.
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What do you think?

[Dave A]

@dsd: Link to blog entry?

Having been through business start-ups 4 times so far (and if limited resources defines start-up, I'm still well and truly there ), I think commiting to a strategy is the critical key. Start-ups that flop around from "strategy to strategy" and don't commit to clear direction and purpose don't have to worry about risk finding them - they're the greatest risk to themselves.

Hmm. If The Forum SA counts as a start-up, that would make 5. If organisations count.... Hmm. I'm going to run out of fingers.

Focus, commitment and clarity compensates for a lot of other stuff that might be missing from the ideal recipe (whatever that might be).

[duncan drennan]

@dsd: Link to blog entry?

Oops sorry, I've added it now.

Having been through business start-ups 4 times so far (and if limited resources defines start-up, I'm still well and truly there ), I think commiting to a strategy is the critical key. Start-ups that flop around from "strategy to strategy" and don't commit to clear direction and purpose don't have to worry about risk finding them - they're the greatest risk to themselves.

I think we're saying the same thing, we might just be elucidating it differently (yours is clearer I think). You've hit on the key point of flip-flopping wrt strategy.

It might come down to the definition of strategy, and how it is easy to blur the lines between what we do (tactics) and what we're trying to achieve (strategy). I feel that strategy should be broadly outlined, whereas tactics require the highly detailed planning.

[Dave A]

Well I've now read the blog. Probably my first observation is that the discussion is talking about organisations far larger than what I normally spend sleepless nights on. This only reinforces the massive differences between big and small business - and I'm not talking about size.

So let's look at a few things on the big scale being discussed:
The discussion on start-ups, I think, shows the dangers inherent in overanalysis. Someone can't see the wood for the trees.

Putting different start-up strategies into seperate vehicles is the optimum risk management strategy. For each start-up, picking a strategy is basically done by the time the start-up starts looking for finance. The venture capitalists role is essentially that of a bookie. He covers the spread by taking multiple options at odds so that, on balance, he wins anyway. Crying about the losses along the way is like complaining about the fact that businesses have costs.

You are buying your ticket to the ride at a price determined by the risk, and if everyone has done their job, the risk has been minimised to fairly high, as opposed to extremely serious. The lower the risk (or more certain the result), the higher the price for a ticket to ride. If the venture capitalist overcommits to any particular start-up's result, well then he's become the gambler instead of the bookie. Poor strategy!

Of course, if he can buy when the odds are at 100:1 and then improve the odds to 10:1 and sell...

For the rest, some really nice quotable quotes.

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: 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.

Then there is a wonderful bit about the different levels of an organisation's hierarchy and their relationship with strategy. Does this sound familiar in the average small business environment?

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.

[duncan drennan]

Then there is a wonderful bit about the different levels of an organisation's hierarchy and their relationship with strategy. Does this sound familiar in the average small business environment?

It is interesting that you mention that one.....I wonder how high erratic strategy rates on the cause for failure, or at least cause for not getting out of a bad cycle for small business owners. Where would that fit in with your list?

• Ambition
• Capacity
• Capital
• Expertise
• Network

[Dave A]

Strategy is driven by Ambition, and is constrained by the other four. So it rests on all five, as does the overall success (or failure) of the business. My original question there is whether there is a sixth pillar/critical point. Put another way, what adds or takes away from strategy that isn't in the 5 points. I came up with Environment. So 5 might grow to 6.

Another thought that occured to me, not so much out of the blog but more from this thread, was an alternative definition of the difference between strategy and tactics. How about this one:
Strategy sets the potential and tactics determines how (effectively) that potential is realised.

Final one: We've kinda implied Start-up is defined by resource scarcity. I'm chewing over trying to find a better definition (There's always some level of resource scarcity - it's just a question of scale). This is the best I've come up with so far:
A start-up is committed to a single strategy. Once you have the capacity to have multiple strategies (diversify), you're past the start-up stage.

As example: Ford started with one model. After a while it was wise to have more.

Instinctively, I've tended to diversify around a successful strategy. You don't let up on the main thrust, but you also start building around it. It's a form of hedging bets in the face of the uncertain future - basically covering the spread. Working through the points on this blog gives substance to what was previously instinctive.

That blog certainly stretches ones thinking....

[duncan drennan]

Strategy sets the potential and tactics determines how (effectively) that potential is realised.

I think I quite like that, I've always kinda of struggled with the subtle differences - in a lot of ways the two (strategy + tactics) seem to merge into each other.

A start-up is committed to a single strategy. Once you have the capacity to have multiple strategies (diversify), you're past the start-up stage.

Hmmm...I'm not so sure. Is diversifying a strategy or a tactic, bases on the definition above?

I think I would sway more towards agreeing with this statement from the blog,

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.

So maybe the definition of a startup has more to do with the level of strategic risk?

(this is pretty much just thinking out loud, feel free to flame )

[Dave A]

(this is pretty much just thinking out loud, feel free to flame )

Ditto.

Back to start-ups, to me the key word in my proposed definition is capacity, as in:

A start-up is committed to a single strategy. Once you have the capacity to have multiple strategies (diversify), you're past the start-up stage.

But thinking about it, then we're back to resource scarcity as the core issue again...

So it seems "bet the farm" and resource scarcity covers it in big business. It shows up my small business thinking - For the most part, small business pretty well lives in the resource scarcity zone well past what I'd think as start-up.

[duncan drennan]

So it seems "bet the farm" and resource scarcity covers it in big business. It shows up my small business thinking - For the most part, small business pretty well lives in the resource scarcity zone well past what I'd think as start-up.

Welcome to the Resource Scarcity Zone (twilight zone music playing)

As you've said, to some degree all business operates under some regime of resource scarcity - it could be materials, skills, funds, (your resource here)...

So the question is - is "small business" a result of the external or the internal environment? Or in another way, is small business actually a resource scarcity mentality (i.e. internal) rather than a result of external scarcity?

It is something that has been nagging away at me for a long time now, this whole question of how "small business" thinks versus "big business".

[Dave A]

is small business actually a resource scarcity mentality (i.e. internal) rather than a result of external scarcity?

I've no doubt. It's typical "Rich Dad Poor Dad" and "Reality follows perception" stuff.