Strategy Development in Turbulent Environments
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Strategy Development in Turbulent Environments

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Can a firm develop a winning business strategy in turbulent environments? ...

Can a firm develop a winning business strategy in turbulent environments?

The integrative framework exposed in this report details the process and tools a firm can follow to create a winning strategy in turbulent environments

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  • 1. Strategy Formulation in Turbulent EnvironmentsCarlos E. Salazar
  • 2. Discussion Outline1. Framework- Section A. Anticipation- Section B. Quick Adaptive Response- Section C. Generating Turbulence2. Tools’Integration3. Case Application
  • 3. Final Report Strategy Formulation in Turbulent Environments In many industries and countries today, managing resembles driving a race car through an unfamiliar route in the fog. Executives have limited visibility into the future and must anticipate and respond quickly to a constantly changing environment. Can a firm develop a winning business strategy in turbulent environments?
  • 4. Final Report Strategy Formulation in Turbulent EnvironmentsThe integrative framework exposed in this report details theprocess and tools a firm can follow to create a winning strategy inturbulent environments(A) Anticipate turbulence better than competitors Anticipate(B) Respond faster than competitors to turbulence(C) Generate turbulence that competitors struggle with Winning in turbulent environments Generate Respond 4
  • 5. Anticipation 5
  • 6. Competitive PrinciplePrinciple 1. Anticipate by Shrinking the Uncertainty Cone To win in a turbulent environment, the firm needs to turn uncertainty into confidence more quickly and effectively than their competitors Firm Cone of Uncertainty Can Be tainty Strategically Reduced By: Value cer f Un neo • Uncovering the “true” Co Future source of uncertainty • Discriminating uncertainty from cause- Today effect relationships Time 6
  • 7. Final Report Strategy Formulation in Turbulent EnvironmentsThe next three tools allow the firm to shrink the uncertainty cone byanticipating the sources of turbulence (A) Anticipating turbulence better than competitors Insight: Uncover the sources of uncertainty A1. A firm can measure the level of turbulence in its industry 1. Map the level of uncertainty in external forces 2. Identify the position of the firm in the uncertainty vector map 3. Envision threats that if left unchecked, could destroy the business Tool 1. Uncertainty Force Map Tool 2 .Uncertainty Vector Map Tool 3. “Kill Your Future” Game 7
  • 8. InsightsTOOL Tool 1. Uncertainty Force Map The uncertainty force map allows managers to identify future sources of turbulence and design strategies to uncover the “true” drivers of change. FORCES PREDICTABLE TURBULENT Technological change Future Geopolitical change Current Economy change Regulatory change Energy change Environmental change Demographic change Society norms change Customer demands change Industry players change Source: Marcus, A. Strategic Foresight 8
  • 9. InsightsTOOL Tool 2. Uncertainty Vector Map This map allows managers identify the position and type of environmental turbulence the firm is facing. The position helps to define how the firm will exploit uncertainty to create value. High Hyper-turbulent Environmental forces beyond the firm’s adaptive Speed of change capacity Turbulent High level of uncertainty c tor y Ve Stable t rt ain High e predictability U nc Firm’s current position Low Environmental Complexity Complex Simple Source: Glassman, A. Thinking Strategically in Turbulent Times. P. 6 9
  • 10. InsightsTOOL Tool 3. The “Kill Your Future” Game This tool helps managers to uncover “potential threats” that can destroy or disrupt the firm business model. And allow managers, to anticipate and implement corrective actions. Envision Future Killing Scenarios that are Uncover the conceivable yet so bleak Scenario 1. “potential threats” that if left unchecked, that confront the could destroy all that a Killing organization firm has created Scenario 2. Implement actions necessary to minimize or eliminate those threats Source: Canton, J. The Extreme Future. P. 11 10
  • 11. InsightsTOOL Real Life Applications Used by Los Angeles County leaders to envision changes in the county services. “The demographic clock doesn’t stop, aging doesn’t stop because you have a budget problem...How can we collaborate to make that a more positive situation ” Uncertainty Force Map Used by Hewlett-Packard executives to envision the impact of the merge with Compaq. “The acquisition of Compact was a stochastic move, a big shock to the system...and the pace of change since then has been very high” Uncertainty Vector Map Used by Federal Express Executives to create a scenario in which a competitor steal 50% of FedEx’s customer with a crafty pricing strategy called ShipThis.com. Executives admitted this “Could happen” “Kill Your Future” Game 11
  • 12. Final Report Strategy Formulation in Turbulent EnvironmentsThe next three tools allow the firm to shrink the uncertainty cone byanticipating causality relationships between drivers of change (A) Anticipating turbulence better than competitors Insight: “Discriminate true uncertainty from cause-effect relationships” A2. A firm can discriminate between true uncertainty and causality by: 1. Identifying potential causality negative outcomes of any action 2. Identifying and executing the causality actions to achieve the impossible 3. Influencing now the course of events to change an envisioned future Tool 4. Future Reality Tree Tool 5. Pre-Requisite Tree Tool 6. Scenario Planning 12
  • 13. InsightsTOOL Tool 4. Future Reality Tree (FrT) By establishing cause-effect connections between drivers of change, the FrT answers the question: “What to change to by validating the firm’s possible future”. “Future Realty Tree identifies potential negative outcomes of any action. The goal of the future reality tree is to understand the causal implications between the action and negative outcomes so that the negative effect can be avoided” (Goldratt, E. TOC Thinking Process) LOGIC: CAUSE-EFFECT DE (Desired Effect): Positive effects that the system is trying to achieve INJECTION: An action initiated in the present to create a favorable development in the future : Establishes a cause-effect connection : Establishes AND logic that connects causes to generate an effect Source: Goldratt, E. Theory of Constraints Thinking Process 13
  • 14. InsightsTOOL Tool 5. Pre-requisite Tree (PrT) By identifying obstacles, the PrT answers the question: “What must the firm do to achieve the ‘impossible’?” “A Pre-Requisite tree shows all the intermediate objectives necessary to carry out an action in the future and the obstacles needed to overcome” (Goldratt, E. TOC Thinking Process) LOGIC: SUFFICIENCY , Is this enough? IO (Intermediate Objective): Transitional steps, either conditions or actions, that must be completed before a firm can attain its ultimate objective Obs (Obstacle): Potential issues that could stand in the way of the firm achieving its objectives INJECTION: An action initiated in the present to create a favorable development in the future : Establishes a sufficiency logic connection Source: Goldratt, E. Theory of constraints Thinking Process 14
  • 15. InsightsTOOL Tool 6. Scenario Planning (SP) By mapping the key drivers of change, the SP tool answers the questions: “Given different future states, what might businesses do? And to what extent will these actions succeed” LOGIC: REPRESENTATIONS, What if? Scenarios are representations of different future states that can be used : (1) : To help generate options about what to do next (2) : To assist them in testing these options : Establishes the evolution of an uncertain and important force Source: Marcus, A. Strategic Foresight “A Scenario purpose is not to predict or forecast the future but rather to imagine what can happen next. They are created to influence the course of events no to accommodate them” (Marcus, A. Strategic Foresight. P.1) 15
  • 16. InsightsTOOL Real Life Applications Used by the U.S. Transportation command, a organization in charge of integrate the logistics operations between the Army, Navy and Air Force, to address the challenges in supporting U.S. future combat operations anywhere in the world. Future Reality Tree General Fogleman approved the plan embodied in the Future Reality Tree. Pre-Requisite Tree Used by Top 500 Global Fortune companies to understand and influence future events Scenario Analysis 16
  • 17. Final Report Strategy Formulation in Turbulent Environments The next tool allow the firm to shrink the uncertainty cone by anticipating and preparing the firm for the opportunity embedded in the turbulence (A) Anticipating turbulence better than competitors Insight: “Uncertainty is a dual opportunity” that simultaneously exposes firms to risk and opportunities. But, a strategic approach that only focus on minimizing risk exposure will also reduce the potential for innovation A3. A firm can anticipate risk exposure 1. Generate a strategy that simultaneously hedge and exploit uncertainty by uncovering: • Risks a firm should actively seek and exploit (Flexibility Value) • Risks a firm should reduce or eliminate (Strategic Value) Flexibility • Risks a firm should ignore ( Option Value) + = Expanded NPV Static Value Strategic UNCERTAINTY VALUE EQUATION (Traditional NPV) 17 + + Resilience (Games)
  • 18. InsightsTOOL Tool 7. Real Options Real Options helps the managers to anticipate and prepare the firm for capturing the value creation opportunity in the upside risks while reducing the potential value destruction of downside risks Type of Flexibility Definition Option to defer A firm with exclusive rights to an investment has the option of STRATEGIC OPTIONS deciding when to take that investment and to delay taking it, if necessary. Option to grow A firm builds a plant with the ability to add capacity at low cost Option to contract A firm hires contract and temporary employees instead of full time employees Option to shut down and A firm outsources distribution to a firm that distributes the restart products of many firms instead of outsourcing distribution to an firm that distributes only its production Option to abandon A firm have the option to abandon a project when its cash flows do not measure the expectation. Option to expand A firm invest to create one product where that investment could lead to the development of other products in the future Source: Barney, J. Gaining and Sustaining Competitive Advantage. P.316 18
  • 19. InsightsTOOL Real Life Applications STRATEGIC OPTIONS Used by private equity firms such Hall Investments, Hicks, Muse, Tate & Furst, Wasburg Pincus and Golder Thomas Cressey Rutner (GTCR)--as well as specialized publicly traded funds--to assess the value generated in a acquisition strategies under uncertainty 19
  • 20. InsightsSUMMARY Quick Adaptive Response 20
  • 21. InsightsSUMMARY Competitive Principle Principle 2. Quick adaptive response by early detection of “turbulence magnitude” “Managers in turbulent environments constantly monitor the shifting context to identify emerging sudden-death threats and golden opportunities while they are still faint tremors (Sull, D. Success Against the Odds)” Magnitude of opportunity Golden Opportunity PAST NOW Disruptive Threat Magnitude of threat 21
  • 22. InsightsSUMMARY Competitive Principle Principle 3. Quick Adaptive Response Quick adaptive response allows firms to survive business destroying threats or exploit golden opportunities Nokia, a quick adaptive responder that have survived disruptive changes since 1865 Adaptive response is generated when: • A firm acts on quick decision cycles • A firm takes the initiative to exploit uncertainty in external forces • A firm structures its organization to handle the quickest rate of change 22
  • 23. Final Report Strategy Formulation in Turbulent EnvironmentsThe next tools allow firm to respond and adapt faster to change byexecuting quick decision cycles (B) Responding faster than competitors to turbulence Insight: “Responsiveness is dependent on short cycles times, modularity, and decentralization” B1 & B2. Respond faster by: • Executing under a OODA (observe-orient-decide-act) cycle • Off-shoring of non-differentiated activities • Using process networks to gain capabilities • Using Internet to leverage best in class knowledge assets Tool 8. OODA Loop Cycle Tool 9. Quick Adaptive Cycle Tool 10. Act Decision Matrix 23
  • 24. InsightsTOOL Tool 8. OODA Loop Cycle In turbulent environments, the OBSERVE-ORIENT-DECIDE-ACT Cycle (OODA Loop ) helps manager to early uncover emerging sudden-death threats and golden opportunities and gain time to execute a quick adaptive response. “Colonel John Boyd, inventor of OODA loop, taught that effective competitors in any environment constantly look for mismatches between their initial understanding of the environment and the new circumstances as they unfold. In those mismatches there are often opportunities for a competitor to seize new advantages” (Hugos, M. Building the Real Time Enterprise. p.79)” Source: Hugos, M. Building the Real Time Enterprise. p.79 24
  • 25. InsightsTOOL Tool 9. Quick Adaptive Cycle For Business In turbulent environments, the OODA Cycle (OODA Loop ) acts a keystone that helps managers to uncover the “nature” of the opportunity to create a new business or/either improve existing operations Source: Hugos, M. Building the Real Time Enterprise. p.87 “An adaptive organization continuously observes its environment looking for mismatches. Based on orientation, it decides and acts. When it acts, it choses to either improve existent operations, create something new, or do some mix of the two”(Hugos, M. Building the Real Time Enterprise. p.87)” 25
  • 26. InsightsTOOL Tool 10. Act Decision Matrix In turbulent environments, firms acts in the OODA cycle according the significance of the opportunity and the level of business model disruption it generates. (See slides notes for detailed explanation of each quadrant) SEIZE THE Significant TRIAGE Opportunity MOMENT Normal ACTIVE Opportunity TRIAGE WAITING Non Disruptive Disruptive Business Business Threat Threat Source: Sull, D. .Success Against the Odds 26
  • 27. InsightsTOOL Real Life Applications Used to develop the C4I defense architecture for the Netherlands Armed Forces Principles applied to develop the F-16 Fighting Falcon and the F/A-18 Hornet Principles used by the Air Force during the Operation Desert Storm, Joint Pub 3-56.1 manual OODA Loop Cycle Cycle used by SyQuest marketing campaign to outmaneuver Iomega product leadership in the category of mobile data storage. Sales jumped from $10 million a month to $60 million a month in 60 days Quick Adaptive Cycle 27
  • 28. InsightsSUMMARY Generating Turbulence 28
  • 29. InsightsSUMMARY Competitive Principle Principle 3. Faster Tempo After Every OODA Cycle “A firm that consistently move through the OODA cycle more quickly than its competitors, accumulates a tremendous advantage over time. By the time the slower competitor reacted, the quicker opponent had already moved on to a new cycle. While none of the individual moves were decisive, their cumulative effect could create a gap that left the slower competitor vulnerable (Sull, D.)” Competitive Turbulence is generated when: • A firm that cycles through the OODA loop faster that their competitors • The firm sets the pace and the tempo of competitive events •The firm seizes the initiative, and competitors wind up reacting to their moves 2009 2010 2008 MacAir IPad 29
  • 30. Final Report Strategy Formulation in Turbulent Environments The next tools allow the firm to generate turbulence by creating a competitive innovation gap that makes competitors business concepts obsolete (C) Generating turbulence that competitors struggle with Insight: “A firm that cycles through the OODA loop faster than other players generates competitive turbulence” C1 & C2. A firm can generate turbulence by: 1. Shortening the time needed to observe, orient, decide, and act 2. Promoting instability and unpredictability through innovation Tool 12. IXL’s Innovation Tool 11. Shortening Tool 13. Outcome Driven Framework OODA Innovation Framework 30
  • 31. InsightsTOOL Tool 11. OODA Loop Cycle Acceleration In turbulent environments, each step in the OODA cycle needs to be shorten to set the pace and tempo of competitive events. This helps the firm to seize the initiative and generates turbulence that competitors struggle with. OODA Source: Hugos, M. Building the Real Time Enterprise It is not the absolute speed of the cycle that matters but the speed relatively to one’s competitors” (Hugos, M. Building the Real Time Enterprise. p.79)” 31
  • 32. InsightsTOOL Tool 12. IXL’s Innovation Framework In turbulent environments, the OODA Cycle (OODA Loop ) is an irrelevant keystone without an innovation supporting cycle. The IXL’s framework makes operative the innovation cycle. + Combine capabilities in unique ways to wow Customers + Build Barriers to Entry Source: Patel, H. IXL Source: Patel, H. IXL The IXL’s process can use the OODA’s mismatches as strategic input. This inputs can be a source for building cycle of disruptive business concepts that promotes turbulence and shape competition. 32
  • 33. InsightsTOOL Tool 13. Outcome Driven Innovation In turbulent environments, the OODA Cycle (OODA Loop ) is an irrelevant keystone without an innovation supporting cycle. The Outcome Driven Innovation (ODI) supports the generation of disruptive business concepts. Source: Ulwick, A. Strategyn ODI removes variability and adds discipline and predictability to each subsequent step in the innovation process” (Ulwick, A. What Customers Want. P.15) 33
  • 34. InsightsTOOL Real Life Applications Used by McLaren-Mercedes in Formula 1 to adjust the race strategy in real time. Used by Top 100 corporations, Software SmithBayes, to adjust corporate strategy in real time Shortening OODA Used by Top 100 Global Corporations to develop novelty products and solutions. (i.g., Philips, Pfizer, P&G, Verizon, IBM, EMC2, BAE Systems, Merrimack, etc.) IXL’s Innovation Framework Used by Top 100 Global Corporations to Develop Disruptive Products and Solutions. (i.g., developing of the coronary stent by Cordys-J&J, developing CS 20 circular Saw of by Bosh, another companies as Medtronic, E-Trade, Microsoft, Abbott, GE, Bank of America, Cargill, etc.) Outcome Driven Innovation 34
  • 35. Final Report Strategy Formulation in Turbulent EnvironmentsThe integrative framework exposed in this report details theprocess and tools a firm can follow to create a winning strategy inturbulent environments(A) Anticipate turbulence better than competitors Anticipate(B) Respond faster than competitors to turbulence(C) Generate turbulence that competitors struggle with Winning in turbulent environments Generate Respond 35
  • 36. InsightsTOOL INTEGRATION Meta-Framework Market, e at Customer, and ORIENT Competitor p i cWatch Information t iand Wait An Do Not Act OBSERVE DECIDE Rapid Do Act Response ACT Improve a business Respond operation cycle Create a new business cycle DEFINE DEFINE CONTROL MESURE DESING Generate Generate IMPROVE ANALYZE BUILD 36
  • 37. InsightsTOOL INTEGRATION Meta-Framework Market, Customer, and ORIENT Competitor Watch Information and Wait Do Not Act OBSERVE DECIDE Rapid Do Act Response ACT Improve a business operation cycle Create a new business cycle DEFINE DEFINE CONTROL MESURE DESING IMPROVE ANALYZE 37 BUILD