The Art of Manliness - #630： The Strategy Paradox

00:00:00.000 Brett McKay here and welcome to another edition of the Art of Manliness podcast. To be a great

00:00:11.720 success in business, you need to have a compelling vision, create a well thought out strategy to

00:00:15.540 achieve that vision, and then fully commit to that strategy with action and resources.

00:00:19.360 That's also the recipe for being a great failure in business. That's what my guest argues in his

00:00:22.980 book, The Strategy Paradox, why committing to success leads to failure. His name is Michael

00:00:26.860 Rayner, and we begin our discussion by describing the strategy paradox. The fact that the same

00:00:31.040 sound strategy can lead to both success and failure. We discuss how the outcome then depends

00:00:35.760 less on the strategy itself than on the idea you decide to bet on, using the example of the way

00:00:40.360 Sony employed the right strategy in backing Betamax in the VCR wars, but still lost out to VHS.

00:00:45.880 Rayner then explains the limitations of forecasting and adaptation, the approaches companies typically

00:00:50.320 use to navigate the tension between needing to commit to something and being uncertain they've

00:00:54.160 committed to the right thing. He then unpacks two more effective ways of developing strategic

00:00:58.120 flexibility, separating the management of commitment from the management of uncertainty,

00:01:02.280 and acquiring a portfolio of assets that will increase your optionality. We end our conversation

00:01:06.140 with whether the strategy paradox can be applied not only to making decisions in business, but to

00:01:10.200 making decisions in our personal lives as well. After the show's over, check out our show notes at

00:01:14.060 aom.is slash strategy paradox. All right, Michael Rayner, welcome to the show.

00:01:28.900 Thanks. Pleasure to be here.

00:01:30.240 So tell us a bit about your background because you are, I don't know, you're a business strategy guy.

00:01:35.160 You think about business strategy as your career. What got you thinking about that and doing that?

00:01:40.120 You know, that's a good question. I don't know that I've ever reflected on how I ended up there.

00:01:43.740 I suppose the honest answer, since you've caught me flat-footed, is it's because I didn't want to

00:01:49.140 go to law school. I went to law school. Okay, well, you're a braver man than I, Charlie Brown.

00:01:56.220 I did my undergrad in philosophy. Not a lot of call for court philosophers, so I had to go get a job.

00:02:03.040 Ended up working for a small consulting firm, doing, of all things, statistical process control work,

00:02:08.940 which my reading of Heidegger and Nietzsche prepared me for quite well, as you might expect.

00:02:15.240 Ended up, as I said, didn't want to go to law school. Ended up taking an MBA and started down

00:02:20.820 that path as a consequence. Spent a couple of years with Deloitte as a consultant.

00:02:26.000 Thought that I would have fun answering my own questions instead of the client's questions,

00:02:30.560 so went and did a doctorate in business, in business policy. And then, to my shock and amazement,

00:02:36.820 because a doctorate is kind of a union card to go be a business school prof, I ended up back at

00:02:42.400 Deloitte and have been there ever since, doing a variety of things. But in general, I'd say it's

00:02:47.880 sort of straddling the interstices of research and practice, which has been an enormous privilege

00:02:53.800 and a lot of fun.

00:02:54.580 Well, you said you wanted to answer your own questions. That's why you went to go get your

00:02:57.920 PhD. What were the questions that you had as you went into this world of business as a philosophy

00:03:03.740 guy? What were the questions that you came up with as you started getting into this world?

00:03:09.540 So I think uncommonly, I went in with the idea that I was going to address a particular question

00:03:15.820 and ended up doing something really quite different. But when I was, as a consultant,

00:03:20.420 back in the, and I'll date myself here, in the mid-90s, that was the first wave of technological

00:03:26.900 convergence, right? That was sort of when the internet, it was clearly going to be a thing.

00:03:30.880 And a lot of the major corporations that I was consulting with were looking at and trying to

00:03:35.740 understand what that was going to mean for their business. And so there was a flurry of

00:03:39.860 diversification back in the day when phone companies, remember them, were buying cable companies,

00:03:44.940 remember them, and movie studios and so forth were all trying to figure out how they're going to have

00:03:50.520 to reinvent their business. And so that's what I thought I was going to tackle. And just as an

00:03:56.040 aside, as it turns out, they were all right. They were just 20 years too soon. And being early is in

00:04:02.360 many ways worse than being wrong. So anyway, I ended up going into the doctoral program and ended up

00:04:08.620 focusing on diversification, but much more generally. So rather than looking at diversification in the

00:04:14.080 face of technological uncertainty, just diversification as a general management phenomenon.

00:04:19.480 Right. So I think that leads to that idea that those companies you're seeing, those technology

00:04:23.960 companies, phone companies, cable companies, trying to get a head on the internet boom that

00:04:30.160 was happening in the 90s, didn't really work out for them because they were too early. I think there's

00:04:34.340 a nice segue to what we're going to talk about today. I published a book a couple of years ago called

00:04:37.800 The Strategy Paradox. So let's start off. What is The Strategy Paradox?

00:04:42.160 Yeah. So that title was born of the observation that when you read the liturgical texts of the

00:04:50.800 strategy field, Pankaj Gamowat, Michael Porter and company, the clear advice is that it's absolutely

00:04:59.620 crucial to be committed to a particular market position, a particular quality cost position and

00:05:06.140 devote yourself to serving a particular market segment. And that it is the commitment to those

00:05:11.160 specific positions that allows you to differentiate yourself from your competition and hence succeed.

00:05:16.900 And they're not wrong. You look at the companies that, you know, they hardly needed my validation,

00:05:21.800 but for what it's worth, they're not wrong. When you look at the companies that have been

00:05:26.280 successful, that is very often a hallmark of their success. But what occurred to me is that when I

00:05:32.200 looked at the companies that had been catastrophic failures, they often exhibited many of the same

00:05:37.260 characteristics. And they were committed to specific technologies, specific market positions,

00:05:43.020 specific market segments, specific value propositions. They just happened to choose the

00:05:47.580 wrong ones. And so that doesn't help a lot if the advice for good strategy is place the right bets.

00:05:55.480 So the question becomes, how do you figure out what kinds of bets to make when it is deeply

00:06:01.840 impossible to know in advance with any real certainty what the right bet is going to be?

00:06:07.360 All right. So just to clarify, so the recap of the strategy paradox is, you can have a good,

00:06:11.880 you can follow all the advice on developing sound strategy, but you can still fail anyway.

00:06:18.460 Yeah, exactly. So the characteristics that define both successful and failed strategies

00:06:23.520 seem to be the same characteristics, which is a bit of a paradox, it seemed to me.

00:06:27.740 I mean, why do you think most business books, these guys that you talk about, these liturgical

00:06:33.540 tests, why do you think they miss that idea of the strategy paradox?

00:06:37.820 Well, in fairness to them, they didn't miss it. It just wasn't their focus, right? So you can read

00:06:43.500 Competitive Strategy by Michael Porter, and there's a part, I think I can't remember precisely,

00:06:48.220 so Call Me a Liar for a Chapter, but something like Chapter 14, it's sort of back in there somewhere.

00:06:52.940 And it's very much an oh and by the way kind of situation. And then Pankaj Gemowat's book,

00:06:59.800 which I think is a fantastic book, right? I mean, I'm not, I hope to add to our understanding,

00:07:05.980 not take down anybody else. So Pankaj Gemowat's concept of strategy as commitment, I think is

00:07:12.020 extraordinarily powerful, because it's that commitment over time is what makes your particular

00:07:18.540 position in the marketplace very difficult for others to copy, right? They say there's only two

00:07:23.500 things you can't compress, water and time. And so when your strategic position is born of commitment

00:07:28.680 over time, it's almost impenetrable. The problem is you have to commit to the right thing. And that's

00:07:34.520 the difficulty. And so my hope was, I mean, nobody can talk about everything. So my hope was to pick up

00:07:41.420 that particular thread of the conversation and say a little more, a little bit more about it.

00:07:45.240 You have to commit for a strategy to be good. But the problem is, you're uncertain about whether

00:07:49.860 you pick the right strategy or not.

00:07:52.440 Absolutely. That's the hard part. I mean, so in the book, for example, I spent a lot of time

00:07:57.140 talking about Betamax. That really is going back to the antediluvian era. But Sony was a particularly

00:08:04.860 compelling example to my mind of a company that seemed to do everything right, and sometimes had

00:08:11.080 fantastic success and sometimes had fantastic failure. And it's not like they did anything

00:08:15.680 different when they succeeded versus when they failed, except for the fact that they guessed

00:08:20.000 wrong. So sometimes they guess right, sometimes they guess wrong. And that was the part that I

00:08:24.420 found a bit frustrating. And what could we do about that? How could we try and address that problem?

00:08:30.380 Well, let's walk through that case tag. I think they really highlight the strategy paradox in action

00:08:34.420 with the Betamax story. So for those who are young, too young to remember Betamax,

00:08:39.420 they came up with the first version of a VHS tape. VHS was the competitor, but they had their own

00:08:46.220 version of that. And it seemed really promising. But why did we use VHS tapes and not Betamax?

00:08:55.900 Yeah. So post-facto, and not surprisingly, the universe is sometimes inexplicable, but it's very

00:09:02.360 rarely capricious. So when we look back, we can explain what happened and say, here's why they ended up

00:09:07.980 on the wrong end of that bet. And it had to do with what I tried to describe in the book as a whole

00:09:13.980 number of uncertainties that simply broke against them instead of for them. The most important of

00:09:19.260 those was the movie studios making libraries of movies available to be released as a video recording.

00:09:27.840 So then there was a battle between the expenses associated with releasing movies in two formats,

00:09:33.920 beta and VHS. I mean, back in the day, in the late 70s, early 80s, people would go into VHS shop,

00:09:40.480 video rental stores, and they had to determine whether or not the movie they wanted was available

00:09:45.160 in the format they had. And that was at a time when video rental stores were kind of mom and pop

00:09:50.700 operations. The movie studios would charge $50, $60, and this is 40 years ago, for each of the tapes

00:09:57.380 that they would then rent out. And mom and pop video rental places don't have a huge amount of

00:10:02.080 capital. So they basically had to pick. And so they would go with whichever one had greater market

00:10:08.960 penetration. And for reasons that, again, I go into that are somewhat involved, VHS ended up with

00:10:16.800 a small advantage just when the movies were starting to be made available. And as a consequence of that,

00:10:22.560 the snowball rolled down one side of the mountain instead of the other, and Sony got swamped.

00:10:27.740 I mean, one of the advantages, VHS was, I guess, cheaper. They kind of sacrificed quality a bit.

00:10:34.040 Betamax is like super high quality, the video. VHS is like, well, we're not going to do that. And that

00:10:38.960 was one of those factors that tilted towards their favor.

00:10:42.580 Absolutely. Yeah. And the big thing was that Sony had made the bet that the device was going to be

00:10:47.860 used to record shows on television and then watch them, right? So it was basically a time-shifting

00:10:52.640 device. And the reason they had made that bet is that they looked at it and said, the movie studios

00:10:58.060 are never going to put movies on tape. They'll just never do it. And so they were devoting themselves

00:11:03.740 to a higher quality and as a consequence, higher cost and hence higher priced device.

00:11:08.740 And for the first four or five, I can't remember exactly, six years of the VCR wars, Betamax had

00:11:16.720 a, not only a commanding lead, but also had more profits than everybody else put together.

00:11:22.940 They were, if you will, the Apple of the VCR race, you know, higher quality, higher cost,

00:11:28.300 higher price, vastly more profitable, better brand cache. I mean, if, you know, anybody who looked

00:11:33.900 at this in 1978 would have said Sony is going to win. And what do you think, I mean, do you think

00:11:38.400 things could have turned out differently for Sony with the Betamax if they had done something,

00:11:42.240 I mean, if they did something, one thing different, or was it sort of just, that was,

00:11:45.700 they picked a sound strategy. It looked good on paper. They committed to it and they just happened

00:11:50.580 to pick the wrong one. Yeah. I mean, at the risk of, at the risk of being somewhat self-serving,

00:11:55.240 I mean, they could have taken, they understood the forks in the road that they were facing and

00:12:03.260 they felt we have to pick because that's kind of what good strategy looks like, as opposed to

00:12:08.900 thinking about, well, how can we hedge our bets in a way such that if it goes in the other direction,

00:12:14.620 we still have a viable strategy, right? So the two big things that they were betting on is that it

00:12:19.640 didn't make sense to license the technology because they were focusing on the profitability rather than

00:12:24.880 the network effects of market share. And the reason they looked at that, by the way, is that

00:12:31.240 the movie studios had made it very clear. I mean, they even took Sony to court in order to have the

00:12:36.720 VCR declared illegal because they said this is going to, you know, promote piracy of our intellectual

00:12:41.840 property. And so they thought, well, you know, there's no chance that Hollywood movies are going to be

00:12:48.200 available on VCRs, so we don't have to worry about that. But they understood that, well, you know,

00:12:52.460 if it went that way, that would necessitate a completely different approach to the market.

00:12:58.760 So none of that was news to them. It's just that they felt compelled to back one horse rather than

00:13:05.240 finding a way to have a, if you will, have a plan B and making the incremental investments in advance

00:13:13.160 so that when and as that happened, they were in a position to respond in a timely way.

00:13:17.660 And if I might, that's one of the things I hope the strategy paradox contributes, which is it's not

00:13:22.900 enough to kind of run the wargaming in your head and say, if they do this, then we'll do that.

00:13:27.500 It's about actually spending real money, time, and effort to prepare yourself and be positioned

00:13:32.300 to actually respond in a fundamentally different way when circumstances require.

00:13:38.060 Gotcha. So I mean, I think someone can hear this about the strategy paradox and it sounds like, well,

00:13:42.040 you know, successful companies are successful just because they lucked out and picked the right

00:13:47.940 strategy. Is that, I mean, is that sometimes the case with a lot of companies that we hold up is

00:13:51.940 like, wow, this guy, this is led by a visionary CEO. Actually, it might've just been, they just got

00:13:57.480 luck. They had a good strategy and they lucked out and they picked the right one.

00:14:02.400 Yeah, I would agree with that, but I'd say it's slightly less elbows, not quite so sharpened because it's,

00:14:07.620 I think very often it's very difficult to tell the difference between luck and skill. So in fact,

00:14:14.960 my last book was the three rules, how exceptional companies think was a way to try and figure out

00:14:21.800 which companies in fact had delivered a level of performance such that you could conclude it was

00:14:27.520 a function of something special about them as opposed to simply just getting lucky. So most of the time,

00:14:34.020 I can't tell the difference between luck and skill when it comes to looking at the results that a given

00:14:38.720 company has delivered. You know, the simple way to think about it is that if you held the coin

00:14:44.580 flipping contest, you know, somebody's going to flip 10 in a row. If you've got 50 people in the room,

00:14:48.880 somebody's going to flip 10 heads in a row. And if you ask them what makes them so special,

00:14:53.220 they'll give you an explanation about how to flip heads with a fair coin. But that's just variation in

00:14:59.560 a process. I'm going all the way back to my first job out of undergrad, right? And so it's important

00:15:05.640 to be very humble when we start holding up a particular company or a particular outcome and

00:15:11.220 saying, hey, this is special. We need to explain this. Very often what you've got is simply a tail

00:15:17.880 in a process that is irretrievably variable and random. And really you're just explaining a random

00:15:25.240 outcome, not something that warrants explanation. So another, I mean, some people might be listening

00:15:31.560 to this and think, okay, well, a solution to the strategy paradox is you got to commit. That's one

00:15:35.720 part. If in order for a sound strategy to exist, you have to go all into it, commit, but you have

00:15:40.820 to reduce the uncertainty. So what you can do is just forecast better, get more information,

00:15:47.240 get better idea of what's going to happen. But you argue in the book that forecasting,

00:15:51.080 predicting the future, it's a lot harder than people think it is.

00:15:55.880 Yeah, exactly. I mean, I subscribe to folks like Philip Tetlock on that one who have studied

00:16:02.340 attempts to forecast various things. There's another one that I like about called The Fortune

00:16:07.100 Sellers, Bill Sheridan's book. And there they make the argument that really the only thing we've

00:16:12.780 gotten better at predicting is the weather. And even then, after about five days, we're out of ideas.

00:16:17.520 And some of that kind of makes sense, especially in business, because in business, right, you're

00:16:21.960 trying to forecast the activities and behaviors of people for whom it is in their vested interest

00:16:28.480 to be unpredictable to you, right? Because if they are, I mean, I understand that if you can figure out

00:16:35.160 how to predict my actions, then you've got it all over me, right? I'm cooked. So I'm going to do

00:16:40.220 everything I can to make sure that you can't predict what I can do. And as soon as you demonstrate

00:16:44.840 that you're able to anticipate how I behave, well, then I'm going to change the way I behave.

00:16:51.020 So in a sense, it's almost built into the system that is going to be extraordinarily difficult to

00:16:56.600 understand how others in a system are going to act under a certain set of circumstances. However

00:17:01.200 much you might think you understand their incentives, and as a consequence, think you can say with

00:17:05.860 certainty how they're going to act. Fact of the matter is, I think as a practical matter,

00:17:10.660 there are just too many degrees of freedom. And the accuracy required to do the kinds of things

00:17:16.240 companies need to do in order to be successful, I think is fundamentally, I'll say impossible.

00:17:22.440 Right. And not only do each individual person have a lot of freedom, but like the system is complex,

00:17:27.660 so they can interact in different ways that you could never, like you'd need like a bajillion

00:17:31.480 supercomputers to predict everything.

00:17:33.660 Exactly. I mean, it's what they refer to as the Laplacian fallacy, right? So the French philosopher

00:17:38.820 Laplace said, if you gave me the position and momentum of everything in the universe, I'd be

00:17:43.500 able to tell you the position of every atom to the end of all time. He said it more eloquently and in

00:17:49.060 French. So that wasn't a quotation. But at the risk of getting a little bit esoteric, I mean,

00:17:56.540 just quantum physics, I suppose, would tell us that that's just not true.

00:18:00.340 We're going to take a quick break for your words from our sponsors.

00:18:02.340 And now back to the show. So another response to make up for the uncertainty that exists with

00:18:10.280 business strategy is adapting quickly. So you see that your strategy you committed to

00:18:15.480 is not working because the circumstances have changed or the circumstances weren't what you

00:18:19.760 thought they were. So what you can do is just adapt on the fly. And then you also argue that,

00:18:24.920 well, that's easier said than done. Why is that?

00:18:27.920 Yeah, absolutely. Well, I mean, just like, I'm not saying forecasting is useful. I'm saying

00:18:32.240 there are limits to what we can do with it. And similarly, with adaptation, it's extraordinarily

00:18:36.780 useful. And there are limits to what we can do with it. And so when you reach those limits,

00:18:41.880 that's where strategic flexibility comes in. And the reason adaptation is so challenging

00:18:47.740 is that in a sense, it's a consequence of the need to be committed. You know, it's kind of like

00:18:52.860 saying I've got an aircraft carrier, and I need to make it faster and more nimble. And okay,

00:18:59.100 that's great. I can make it faster and more nimble, but I have to get rid of the planes and

00:19:02.720 the flight deck. Well, okay, but now it's not an aircraft carrier anymore, right? So there are there

00:19:08.120 are deep trade offs in terms of what you're able to do. So if you have, you know, if you're in the

00:19:12.680 medical devices business, and it takes, you know, five years of discovery just to figure out how to

00:19:17.360 get the technology to work and another five years of testing before you can get the FDA approval,

00:19:22.140 and another two or three years of working with key opinion leaders in the medical profession

00:19:27.320 before you can get meaningful distribution, you know, you've got a 10 to 12 year runway before

00:19:32.180 you get to market. You know, you get eight years into that, and you've lost a lot of degrees of

00:19:36.680 freedom with respect to what that product can look like, what its features will be, what your

00:19:41.440 business model looks like. I mean, you have to make all those choices way in advance. So it's very

00:19:45.660 difficult just to kind of bob and weave your your way through an ever changing landscape.

00:19:51.860 Right. So yeah, that's a good point. Because I think sometimes people we forget that

00:19:55.580 the business world, you have to in order, if you're doing big stuff, building cars, build,

00:20:00.860 you know, doing creating drugs, that takes it's not just you can do this in a year, it's going to

00:20:05.580 take it's going to be a several year process and things could change.

00:20:09.020 Yeah, not everything is an app, you know, right, right. Yeah. So it's more like, you know, when

00:20:14.940 these larger businesses who are doing like big, big things, it's like in order to turn, it's like a

00:20:19.460 cruise ship, right? It's going to take a really long time, you're not in a jet boat, because it's

00:20:23.620 you're on a big hunking thing. Yes, absolutely. So to the extent you can break those trade offs,

00:20:28.900 then I'm all for it, right? I mean, if you, as I said, forecasting useful, and like everything

00:20:35.840 has its limits, adaptability useful has its limits. And when you reach those limits, that's when you

00:20:42.180 are subject to the strategy paradox. And then you need a different you need a different toolkit.

00:20:47.040 Oh, let's let's talk about that different toolkit. And one part of this toolkit is you call it

00:20:52.040 requisite uncertainty. And I think this is where you, you say that companies, organizations,

00:20:56.720 they need to separate who manages commitment and who manages uncertainty. So what does that look

00:21:02.580 like? Yeah, so then I'm borrowing there from a fellow named Elliot Jax, and that's his term. And

00:21:07.800 I've tried to translate that into an organizational framework. So there's kind of two parts to coping

00:21:13.660 with the strategy paradox. One is, if you will, the strategic dimension, and the other is the

00:21:18.860 organizational dimension. So requisite uncertainty speaks to the organizational half of that equation.

00:21:24.980 And the view there is that we'll go all the way back to Sony for a minute. If you've got somebody

00:21:30.320 who's running the beta division, and you have decided, all right, here's our best guess on what

00:21:37.220 we think the world looks like. And so we've got a someone running the beta division, and they commit to a

00:21:43.420 very particular strategy. That strategy is a high quality device with higher prices to compensate for the

00:21:48.520 higher cost. We believe that the value proposition to consumers is that it's high quality recording of

00:21:53.960 broadcast television. And that's our bet. And so you build the model accordingly, and you've got

00:21:59.760 somebody whose job it is to make that strategy as successful as they can make it. But go up a layer or

00:22:05.760 two in the hierarchy, and you've got somebody who's responsible in my model for thinking about what

00:22:11.820 kinds of uncertainties in the marketplace might cause that strategy to come off the rails. What could

00:22:16.900 validate it? And then those are all the things we talked about before, right? So what if it became

00:22:23.280 more about watching rented VCR tapes? And what would that mean for your relationship with movie

00:22:28.480 studios? What would that mean for the importance of network effects? And as a consequence, the need to

00:22:33.600 grab market share quickly, as opposed to reaping the profitability of a highly differentiated device in

00:22:40.080 what was largely a niche application, right? So almost a complete 180. And so that person looks at that

00:22:46.440 and says, all right, if that were to happen, how would that Betamax strategy have to pivot?

00:22:52.240 And what assets would we need to have in place in order to be able to respond? And it becomes that

00:22:57.700 layer of the hierarchy's responsibility to develop relationships with alternative suppliers, to

00:23:03.200 explore the kinds of, to explore how you might actually license your technology as opposed to building

00:23:08.220 them all yourself, to think about how you would relate with movie studios, et cetera, and so on.

00:23:13.820 Right? You can't leave that to the person running the beta strategy because, you know, there's only 26

00:23:18.900 hours in the day, just like for the rest of us. And so you want them focused. You want them committed

00:23:24.160 to a particular strategy as opposed to thinking about all the other stuff they might have to do if the

00:23:29.080 world turns out differently. So it's that separation of responsibilities that I think makes it possible.

00:23:34.080 It's expensive. It's complicated. It's hard, but it's possible.

00:23:38.040 And it sounds like too, that prevents, I don't know, some sunk cost fallacy. If you combine the

00:23:42.720 decision-making or the commitment in the person managing uncertainty, like because you're all,

00:23:48.880 because it's hard to be like, look at other ideas when you're focused on committing to this

00:23:53.680 one strategy you picked, right? So if you're in charge of the Betamax thing, but you're also in

00:23:58.740 charge of looking at other solutions, you're probably not going to pay much attention to the other

00:24:03.660 solutions because you're so focused on making this one thing work that you got.

00:24:07.280 You know, that's a really great observation. I had never thought of that before, despite the fact

00:24:11.500 that I spent a lot of time thinking about cognitive biases. I actually, that's not in the book. And I

00:24:16.800 don't know that I've bumped into that before. I think that's an excellent point. You know, somebody

00:24:20.680 committed, and I'll just, I'll, I'll say it back to you to see if I got it right. I mean, someone running

00:24:24.780 the Betamax division will have a certain view of the world and their ability to interpret conflicting data

00:24:30.500 will be colored by the fact that they've just spent the last three years hammer and tongs making

00:24:35.060 the existing strategy work. Right. They're going to be necessarily handicapped when it comes to 0.98

00:24:42.360 understanding and correctly interpreting the viability and the plausibility of alternative

00:24:47.680 outcomes. No, yeah, that's, that's, that's what I was thinking. When you were talking about that,

00:24:51.500 that's one thing that came to my mind. So that's one solution. So that you do this, you separate who

00:24:55.820 manages commitment, who manages uncertainty. Do, do a lot of companies do that or no? What do you

00:25:01.360 think? I think it's, I mean, you know, I'd love to say that everybody read my book and thought it

00:25:06.060 was brilliant. Sadly, I can't make that claim. I do think that it's not uncommon in organizations

00:25:12.900 for there to be kind of a de facto, to de facto kind of make those sorts of separations. So the notion

00:25:18.840 that somebody is worrying about operations and somebody else is worried about strategy is not,

00:25:23.320 that that's, that's not a particular breakthrough. Right. So I think you see

00:25:27.300 inklings of that hints of that in most organizations, but I don't think it's something

00:25:32.120 that is explicitly pursued. I think that in, and I see this in my consulting work and in working with

00:25:38.820 clients in a variety of organizations. Indeed, it's why consultants can be valuable to their clients

00:25:43.400 is that it's only too common for the urgent to push out the important to use a cliche.

00:25:49.600 And, and what that translates into as often as not is that the important is executing on the

00:25:55.600 current strategy and the urgent rather. And the important is thinking about the uncertainty and

00:26:00.080 that's what can get overlooked. You know, you know, what came to mind who does this, the military

00:26:04.720 has separation between commitment and uncertainty. Made me think of like World War II. So you had

00:26:09.820 Eisenhower, who was, who's seen over overseeing the European operation. And like, he only thought

00:26:15.080 about the big picture stuff. Like that's the only thing he, he didn't, he didn't even think about

00:26:19.980 like the, the battles. I mean, he thought he told what you need to do, but he didn't think about

00:26:23.920 logistics or what he let other people take care of that stuff and the commitment part. But then he

00:26:28.880 was still busy thinking about, well, how will this play out in the longterm? He was thinking about

00:26:32.900 ally ships he had to make and managing people. So he was, he was always staying, he always stayed

00:26:37.860 high level. He never got down in that commitment part.

00:26:40.160 Yeah. I think that's a good point. And, and, and that works when you have soldiers in the field

00:26:45.300 who are really good at their jobs. And it makes me think that a few years ago, I read Shelby Foote's

00:26:50.460 the civil war narrative, and it goes into great detail on the relationship between Lincoln and

00:26:55.460 McClellan. So Lincoln, unfortunately had to pay attention to the details because McClellan

00:27:00.200 wouldn't, wouldn't go do anything.

00:27:02.340 Right. All right. So a requisite uncertainty is one way you can manage the strategy paradox.

00:27:08.440 The other part is strategic flexibility. What is, what does that look like?

00:27:13.600 Yeah. So, so we've, we've kind of touched on that a little bit, right? So strategic flexibility has

00:27:17.440 the two components, one of which we've touched on, which is requisite uncertainty. And the other

00:27:22.720 is the assembling a portfolio of assets and capabilities that allow you to change your strategy

00:27:29.940 much more quickly than you would have been able to otherwise. So that's some of what I was alluding

00:27:33.980 to before in my counterfactual on Sony example. And indeed it's, it's what I spent a fair bit of

00:27:39.640 time studying in, with the companies that I examined for my, for my doctoral thesis is that

00:27:45.240 they are, they actually go out and start purchasing other companies, right? That have capabilities and

00:27:52.000 assets and operations in potentially adjacent fields, right? So going all the way back to where you

00:27:57.480 started the conversation, when you think about technological and media convergence, you had phone companies

00:28:02.880 buying media businesses, right? So this was back many years, BC, what was then known as BCE, now Bell Canada.

00:28:09.920 So BCE got into the media business and they purchased a satellite TV capability. Now, did they think there

00:28:16.160 were any clear synergies between long distance services and satellite TV? Not particularly, but they had a view

00:28:23.160 that said under certain circumstances, the ability to broadcast television was going to be important in its

00:28:29.440 competitive battle with cable, should the cable companies actually start offering phone services

00:28:34.420 over their cable infrastructure, which they have since begun to do. And so Bell BCE's strategic

00:28:41.180 flexibility was born of assembling this diverse set of assets, not because there were clear synergies

00:28:48.000 among them, but because there might be clear synergies among them at some point in the future, should the world

00:28:54.220 turn out in one way versus another. So that's not an excuse to go buy everything you can think of

00:28:59.340 because you run out of money before you run out of things to buy. But it is a reason to think very

00:29:04.760 carefully about where you need to place some potentially strategic bets. And it's because they're

00:29:10.960 potentially strategic as opposed to actually strategic that we refer to it as, if you will, strategic

00:29:16.200 flexibility. And that whole strategic flexibility label is intended to be a bit of an oxymoron,

00:29:22.200 right? Strategies about commitment, flexibilities about not being committed. So we're going to glue

00:29:26.860 the two together. And how do you, how do you make options for yourself, right? Without overwhelming or

00:29:34.000 diluting what you do, like taking away from like that, what the main strategy that you've picked?

00:29:39.440 Absolutely. So, and, and so now you've, and now what you've done is put your finger on what the limits

00:29:43.800 of strategic flexibility are, right? So I went on about how commitment is great, but has its limits and

00:29:48.940 the same for adaptability. You know what, strategic flexibility, I think is terrific. And you've run

00:29:53.340 into limits there too, which is, it's very possible to overdo it, right? If, if, if all of a sudden

00:29:58.860 every acquisition is justified in virtue of its option value, well, now you've got seemingly carte

00:30:05.760 blanche to go buy whatever you want at whatever price you want, and you can make the wrong choice. 0.93

00:30:10.680 So it does require ultimately managerial judgment to say, we will go this far and no further,

00:30:16.820 right? So you're making a subjective call on the nature of the risks you face and the value to the

00:30:24.100 organization of hedging those risks in one way versus another. Are there any companies today that you

00:30:31.320 see who are applying this strategic flexibility and using requisite uncertainty? Yeah, not, not highly

00:30:37.400 visible companies that, that, that make the news. I think in a lot of what we see in the most salient

00:30:42.840 markets today, it really is dominated by very large and very successful companies because a lot of

00:30:49.380 competition in the industries that we care about most is driven by, by network economics and very

00:30:55.880 nearly winner take all outcomes. So a lot of the organizations that I have tended to work with

00:31:01.080 these days, I alluded to it earlier, are in places like smaller organizations in industries like medical

00:31:06.580 devices or transport or manufacturing and so forth. And I think they're, they are doing their best to try and

00:31:13.580 build the kinds of portfolios that will help them cope with a number of uncertainties. One of the most salient of

00:31:19.160 which these days is climate change, because that arguably will require in many instances, a wholesale shift in,

00:31:27.220 in how literally how they power their organizations.

00:31:30.380 I imagine too, the pandemic has sort of brought the, you know, made the strategy paradox bear in a lot of

00:31:37.480 organizations. They probably weren't even thinking about a pandemic, a global pandemic affecting their

00:31:42.120 business. Yeah, it's an excellent point. I mean, I almost, I'm tempted to put the pandemic in the

00:31:47.380 short run and we're still kind of in the short run, right? It's been six months and not a strategic

00:31:53.300 uncertainty, but really a, a, a truly transformational exogenous shock to the system. And it's unclear

00:32:01.220 as yet whether that will result in fundamental strategic changes in organizations or whether

00:32:07.200 we sort of try and right the ship and get back to where we were. I think in some cases it will be

00:32:12.900 transformative. And in other cases, it will be an enormously painful shock to the system, but we will

00:32:18.380 in fact, go back to largely what we were before. So the jury's kind of out, or let me say that again,

00:32:24.120 it's, um, I think it's context specific what the impact of the pandemic will be on different

00:32:29.220 organizations.

00:32:30.740 So this book is geared towards businesses and organizations, but as I was reading the strategy

00:32:35.080 paradox, I could see the strategy paradox play out in my personal life, right? Like you're in college

00:32:40.500 and you have to make a decision about what you're going to do for your future. It's like, well, I'm going to go to

00:32:45.480 law school and you have to, in order for that strategy to work, it has to, you have to commit

00:32:50.600 to it. Right. But it might end up, you go through law school and you figure out, man, I don't like this

00:32:55.440 at all. Right. And so you, you, you were, you were, you were on the uncertainty was like, do you, is your

00:33:01.960 future self actually going to enjoy the practice of law? I mean, have you thought about the strategy

00:33:05.860 paradox for like individuals at all?

00:33:09.200 A little bit. Yeah. I mean, it's a, your comment reminds me of one of the many lawyer jokes that we, I'm sure you got

00:33:14.540 more of them than I do, but you know, the only people who hate law more than law students are

00:33:19.100 lawyers. And in fact, law schools, when I was looking at it, one of the ways they sell themselves

00:33:24.300 to you to say, look, don't think that if you go to law school, you have to be a lawyer, you know,

00:33:27.720 a present company would, would demonstrate same, right? I mean, law school has all manner of

00:33:33.320 applicability. And so they're really selling you based on its optionality, right? In the same,

00:33:38.720 and, and, and indeed when I was looking at a philosophy degree, the chairman of the department said,

00:33:43.600 look, you know, we won't go become a professional philosopher, at least that's not the odds, but

00:33:48.040 here's why it's helpful, right? So they sell you on its optionality at that stage in your career.

00:33:53.060 And it's, I guess my view of it is that the, when it comes to an individual, the strategy paradox may

00:34:01.720 provide some, some metaphorical guidance, but it's not clear to me that it could be taken literally

00:34:08.620 because we don't have enough resources and we literally can't do two and three things at once.

00:34:17.720 Right.

00:34:18.180 So it's, you know, the, the, the portfolio approach to your life is really kind of tricky.

00:34:23.120 You know, if you think about your relationships, it's, you want to have a healthy relationship with

00:34:28.180 a significant other. It's probably a bad idea to think about the thing is spend too much time

00:34:34.260 thinking about what you're going to do if it fails. Right. Right. You know, keep your, keep your

00:34:40.100 match.com profile live after you've been going out for six months. I, you know, that's probably not

00:34:45.500 healthy. Yeah, exactly. I'm, I'm no psychologist. I'm not going to offer any advice on that. I'll

00:34:49.360 just tell you that from where I'm sitting, that sounds like a bad idea. Well, it sounds too,

00:34:53.080 for individuals or even like really small, like a small business, they have more room to adapt.

00:34:58.500 Like they're, they're more able to adapt better than larger businesses or larger organizations.

00:35:02.120 I think that's an excellent point. Yes. And, and perhaps that applies to individuals too,

00:35:05.820 right? So your ability to adapt and change is such that you actually don't need the overhead

00:35:11.240 that comes with trying to build strategic options, right? You can, you can kind of think about what

00:35:16.140 you might do, but you don't actually take any action to prepare for it because if it turns out

00:35:20.060 you have to do it, well, then you can just go do it, right? You don't, you don't have to

00:35:24.380 prepare in that way. Gotcha. That's different from contingency planning. I'm not saying, you know,

00:35:29.140 don't have some cash in the bank and in case you hit a rough patch that, but that's not what we're

00:35:33.960 talking about. I mean, the big takeaway I got from this book was, you know, when you, if you are

00:35:38.820 successful or have organizations successful, or even on the personal level or you fail, might, you

00:35:45.060 might not, you might've done everything right. You might, the decision-making process was probably

00:35:49.140 the right thing to do. You might, you shouldn't take it so personally or the organization shouldn't

00:35:54.820 beat themselves up because they did everything right. They, they just, they just need to have

00:35:59.640 more flexibility in their system. Yeah. I think that's, um, I think that's, I think that's a,

00:36:04.220 I think that's a good point. And in fact, it relates fairly directly to how people tend to talk

00:36:09.200 about innovation, right? I mean, they'll talk about innovation and say, look, it's not like everything

00:36:12.680 succeeds. You can do everything right and it doesn't work out. And you have to be, you have to be at

00:36:18.440 peace with the fact that, that, that failure is an option. And I guess what the strategy paradox

00:36:25.420 prescribes in the content with strategic flexibility in particular is that here's something you can do

00:36:32.160 about that. So when it, when what you committed to would have otherwise failed, you're actually in

00:36:39.240 a position to pull that out of the fire and save it. Well, Michael, this has been a great conversation.

00:36:44.120 Where can people go to learn more about your work and other books you've written?

00:36:46.760 Any of the online booksellers will have the four books that I've done available. If you're

00:36:52.540 interested in what I'm doing these days at Deloitte, you can look me up on the Deloitte website,

00:36:56.520 D-E-L-O-I-T-T-E.com. And yeah, so that's, uh, that would be the first port, first port of call.

00:37:04.160 Fantastic. Well, Michael Rayner, thanks for your time. It's been a pleasure.

00:37:06.540 And for me as well. Take care.

00:37:08.360 My guest today was Michael Rayner. He's the author of the book,

00:37:10.560 The Strategy Paradox. It's available on amazon.com. Check out our show notes at

00:37:13.780 aom.is slash strategyparadox. We can find links to resources. We can delve deeper in this topic.

00:37:25.680 Well, that wraps up another edition of the AOM podcast. Check out our website at

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The Art of Manliness - July 27, 2020

#630： The Strategy Paradox

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