Saturday, May 5, 2012

On Strategy, Innovation, and their Convergence

In the past month I have been reading books and articles on several different but related topics. First, I have been reading and trying to really understand Michael Porter's views on corporate strategy. Second, as some of you might know based on my recent blog entry, I just finished reading Peter Drucker's classic "Innovation and Entrepreneurship" that he had written way back in 1985. Finally, I have been studying what insightful people such as Walter Isaacson have been trying to teach us about the management and innovation lessons from the legendary late Steve Jobs.

Most of us are familiar with Porter's "five forces" theory on the analysis of industry structure, his seminal work in value chain analysis, and defining competitive advantage. His groundbreaking ideas have unfolded over three decades with some of his latest work being in ways to distinguish good strategy from bad. One of the five tests he advocates for testing the "goodness" of your strategy is taking an honest look at whether your strategy is based on trade-offs that are different from your rivals. Trade-offs are like forks in a road; you have to take one and you can never take both simultaneously. Peter Drucker might have put it as if you take one road, you would "selectively abandon" the other. Ultimately, however, trade-offs will help determine what you will not do, which is the true essence of what most people miss about strategy. Take a look at Microsoft Word. Over the years, Word has become more and more laden with features that most of us will simply never need nor use. It's interface has become more cluttered, more difficult to use, and the program itself is bloated consuming much more memory. It is a perfect example of a program that is trying to become everything for every user. In an attempt to please every user, it is actually pleasing no user. In other words, Microsoft Word has relaxed its trade-offs to offer a product for everyone and in essence has undermined its strategy and consequently its competitive advantage. On the other hand, consider the approach that Steve Jobs took after he returned to Apple in 1997. As Walter Isaacson explains, after weeks of dizzying product review sessions, Jobs had finally had enough. He cancelled all but four products focusing on two desktops and two portables; one each for regular and professional consumers. That's it. In Jobs' own words "deciding what not to do is as important as what to do." Years later, when Google co-founder, Larry Page, visited Jobs, he was given the same advice. Consequently, in January 2012, Page directed Google employees to focus on a limited set of priorities that includes Google+ and Android.

Porter also claims that capital markets and their drive to force companies to focus on a singular measure of shareholder value has been enormously destructive for strategy and value creation. It has led to companies becoming more similar to each other, which forces competition on price rather than uniqueness. Peter Drucker once said that the purpose of business is to create and keep a customer. It would seem that Drucker would agree with Porter that a singular focus on shareholder value is not the most productive way to run a business. Focusing on maximizing shareholder value encourages companies to take short-term actions to boost share prices and market capitalization. Apple's rise, subsequent near death downfall, and its amazing comeback is a case in point. As Walter Isaacson explains, when Jobs and his small team designed the original Mac in the early 1980s their focus was on their product and its positive impact on their target customers rather than on profit maximization or cost trade-offs. In the decade from 1983 to 1993 when John Sculley, a sales and marketing executive, took over Apple, their focus shifted to maximizing shareholder value. This focus proved toxic and Apple nearly collapsed. After Jobs' return, he re-shifted the focus back to creating an enduring company where people are motivated to create great products. By not focusing on shareholder value, Apple under the leadership of Jobs was able to define a clear strategy with differentiated trade-offs, which allowed it to focus on creating the right products for its customers, which in turn led to record profits. The irony of the whole story is that while the focus was never there, Apple is now the most valuable company in the world! That's the power of a good strategy and the lessons learned from the greats such as Porter, Drucker, and the late Jobs.

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