This article is a brief overview of a Working Paper that I previously published here and perhaps an eventual book. But I think the overview message in this short article is worth your attention.
Every for-profit firm has that which is inside its boundaries (internal) and that which is outside its boundaries (external). While some firms like GE have experimented with a “boundaryless organization”, financial markets demand that there is some kind of boundary around a firm. This is to assess the risk associated with each firm as an investment, whether it is a publicly traded firm or a private for-profit firm.
Let’s start off with an analogy. Let’s say you are in a stadium watching football, rugby, soccer, baseball, basketball, tennis or even golf if we view the golf course as the stadium. What is external to the two teams or two opponents playing on the field? Is it the fans in the seats that are just off of the field or the town or city outside of the stadium? Is it the weather that surrounds the town or city? Is it the financial condition of the city that hosts the competition, as we saw at Rio in the 2016 Summer Olympics? What if you are inside a protected dome thus making the weather irrelevant? Playing in front of a friendly versus a hostile set of fans can affect the competition, as we see at the Ryder Cup in golf played every two years. Nasty weather can affect the competition also. So can a system of inefficient highways leading to the stadium. Making this distinction is important for the competition between the two teams or two opponents playing on the field. Why make this distinction for for-profit firms?
The reason is simple but its application is not. That the speed of change outside of firms is increasing is almost universally agreed to. Properly viewed and measured, critical external change around any for-profit firm is happening at least every eighteen months from our research and experience. Sometimes, this outside change is much faster. Please remember this timeframe, as it is crucial to our entire argument. Should firms ignore this frequent outside change and retain “stasis”? Stasis is defined as a state or condition where things do not change, move, or progress. Or, should firms notice this external change and develop a means to continuously change and morph with the external change? Our bet is on the ‘inside’ continuously changing and morphing with the ‘outside’ change.
What if for-profit firms could continuously and seamlessly morph what they are doing inside of their firms with changes from their external competitive spaces? Does space preclude answers to the following questions: What would the pay off be for doing this well? What risks could be reduced at the same time? If all of this is valuable for firms, how could it be done? The Working Paper cited above supplies our answers to these questions. But, they will be left to another short article and should not deter the key message I am trying to make here: inside change must happen at the drumbeat of eighteen months or less. This appears to not be the norm today. Change does happen, but it is “lumpy” and it is done many times in fits and starts. Change-management-pundits still pronounce the lumpiness and inefficiency of change efforts in many firms. The word ‘continuously’ in the title above emphasizes my intent. I think it is part of a new vista for strategy and innovation for the for-profit firm.
To date, firms have not had a means to do this, according to our experience and research. Think of all of the inside change that could happen. Changing organizational form or structure, changing people assignments more than the norm, changing supply chains and operations excellence approaches, changing compensation systems, and changing ERP systems could be the tip of the iceberg. You might be thinking your firm could never change all of this at once and then continuously change again and again. Don’t worry we are not suggesting changing these kinds of things every eighteen months or less. Below I will describe how to view inside change at the drumbeat of eighteen months or less. Change management gurus urge firms to change some few key things quickly and forcefully but then retain some stasis for a while to let everyone adjust to the “new normal”. However, we think firms should properly change continuously to grow their valuation, much less thrive or even survive. We are not crying wolf. We think this regards an imperative in today’s business world.
Warren Buffett has been reported as saying something like, “show me a problematic industry and a smart executive and the problematic industry will win out almost every time”. But we think firms in even terrible industries can change how they approach their inside solutions to provide enough financial returns to at least be satisfactory and stay in the ballgame until the outside becomes more hospitable. Indeed some firms in the problematic oil and gas industry in 2015-2016 did and are doing quite well.
The first key to our view is how to describe and measure the external competitive environment with dimensions that are conducive to capturing change at the speed of eighteen months or less. Second is how to describe what the firm is doing inside so that frequent and dynamic alignment with the outside change is doable. Current views of the external competitive environment include too many things that change over long periods of time, sometimes decades. At the same time, current approaches to describe what a firm is doing on the inside reflect things that are to stay put for periods of time certainly longer than eighteen months. This is a dilemma as a key view from strategic management is that valuable resources (some call these capabilities) are required to be the foundation for competitive advantage. These things are to stay put for a relatively long period of time and only morph over time.
But once again, eighteen months or less is a key part of our approach. We just did not make this up out of thin air. It is the reality of what the speed of external change actually is from our research and experience. We have spent thirty-five years in the trenches with firms, and we have seen the speed of external change go from ten years to five years, to three years, and now to eighteen months or less.
So, we first need to describe the external competitive environment with things that can change as frequently as eighteen months or less. Examples of dimensions that can change in eighteen months or less are as follows: Changes in Abundance of Input and Demand Resources, Changes in Industry Supply-Demand Balance, and Changes in Length of Industry Intellectual Property Protection. We use fifteen such dimensions. Then we need to measure and calibrate the external environment to give it an overall sense of how hospitable that external environment is. Does space allow many and diverse competitors to grow and thrive together? Or is space just the opposite? Does space exhibit Darwinian survival-of-the-fittest attributes where all rivals are at each other’s throats?
For our purposes here then, we can calibrate each external competitive environment with an amalgam of the fifteen dimensions as Friendly, Lukewarm, or Nasty. What was the condition five years ago and then eighteen months ago? What is it now? Where is it trending – from Friendly to Lukewarm or Nasty to Lukewarm? What about Nasty all the way to Friendly?
What are the implications for inside your firm from these external shifts and overall calibration of Friendly, Lukewarm or Nasty? Describing what your firm is doing inside requires a description of the current reality of what is going on, while also allowing that description to easily be changed as outside change is happening. So instead of describing what is going on inside as nouns – here is our strategic plan, here is our organization chart, here are process maps for our processes, etc., we need to describe what is going on inside as verbs. After years of experimenting, we have come up with a way to describe any for-profit firm as a set of pockets of key decisions (PODs). Examples of our thirty PODs are: Engage People Appropriately and Effectively, Use the Science of Barrier Identification and Removal, Protect Base Business and Base Margins, and/or Dominate Segments of Unmet Needs and Uncontested Growth.
Furthermore, the status of each POD must be able to be assessed now at the current time period but also always have a forward impetus of how much each can change and be made better within the eighteen-month drumbeat. This gives the verb like quality to what we find is needed to describe the inside, so that it can be aligned dynamically with the outside change.
Viewing the inside as PODs also has other nice attributes. These PODs can be overlaid on the current tools and frameworks a firm is already using. For instance, if one pocket of decisions is to Engage Your People Appropriately and Effectively, each firm could solve this differently. In addition, what is considered best practice for that POD and the myriad decisions nested within it could be one thing in 2016 but another in 2018. The PODs remain relatively constant, but how to solve the decisions can and is likely to change in as little as eighteen months – or less.
For our purposes here, we can use the acronym SPIRF to categorize the PODs to align with Friendly, Lukewarm or Nasty external competitive environments:
People and Learning
Recognizing New Opportunities
Financial Efficiency and Effectiveness
Space precludes how we derived SPIRF, but it is based on some relevant academic research and a lot of years of tinkering in the field. In essence, it is our view of the “excellent organization” but at a high level of generality. There are many decisions nested within the thirty PODs across these five “touchstones”. The key to our approach is changing the solutions to the key decisions within SPIRF to align with changes on the outside. As the outside goes from Friendly to Lukewarm or Nasty, or any change trajectory that happens at the eighteen-month drumbeat, selected decisions and solutions in the PODs must change at that drumbeat as well. And again don’t worry; everything does not need to change at the eighteen-month drumbeat. We have developed a simple method to “pull” the most important decisions at the right time.
What do you think? Does this article meet with your experience as either a strategy professional inside of a firm or as an outside resource?
This article is part of a series on what causes a firm’s value to increase.
Dr. William Bigler is the founder and CEO of Bill Bigler Associates. He is a former Associate Professor of Strategy and the former MBA Program Director at Louisiana State University at Shreveport. He was the President of the Board of the Association for Strategic Planning in 2012 and served on the Board of Advisors for Nitro Security Inc. from 2003-2005. He has worked in the strategy departments of PricewaterhouseCoopers, the Hay Group, Ernst & Young and the Thomas Group. He can be reached at firstname.lastname@example.org or www.billbigler.com.