This is a book about freeing your company’s future from the pull of the past, but we should ask ourselves right from the start, why should one believe it is in need of liberation? What’s the matter with the status quo? Why isn’t “Steady as she goes” the mantra of choice, or perhaps “Stay the course”? What change is so dramatic that it calls into question the working assumptions that have sustained successful business performance for the past half century? In a word: globalization.
For all my life enterprises hosted in the United States, Western Europe, and Japan have had “home field advantage” in the great growth markets of the twentieth century, with privileged access in particular to the American consumer economy. This is our proud past, and its pull is palpable. In the twenty-first century, however, we can already see that these advantages no longer obtain. The American consumer is as readily accessed from Singapore as Seattle, and the great growth market opportunities will come from the developing, not the developed, economies. Of the next 1.3 billion people to be added to the world population, only 90 million are expected to come from developed-economy countries. This means the current set of global enterprise leaders will have to develop new skills for playing “away games” or see their power marginalized.
At the same time, the first generation of successful enterprises coming out of the developing world also need to reorient themselves to their future, leaving behind a past in which their growth came primarily from penetrating mature markets with lower-cost offers. As their standards of living rise, their cost advantages decline, and playing a game where partners and customers lead and they follow will no longer serve. They themselves must take the lead or again be content to see their power marginalized. One way or another, for everyone involved, globalization means a whole new ball game.
And that means back to the drawing board for vision, strategy, and execution. What, to begin with, do we think this new world will actually want from developed-economy companies? What will it want from IBM? Apple? Google? Microsoft? HP? Dell? More of the same? Well, yes, to some extent—but what else? And what else will it want from your company?
Posing that question unlocks a whole storehouse of questions to follow. Which markets will create your best returns, and how will you realign your management and resources to capitalize on them? Who will design your next generation of offers, and for whom will they be designed? Who are becoming your new reference competitors, and how do you stack up against the norms they are setting? On what basis will you be able to differentiate against these competitors sustainably? And how will your legacy business models stand up in an increasingly digitized, globalized, and virtualized economy? These are vexing questions indeed.
Now, to be sure, the forces we are invoking will take time to unfold. The sky is not falling—yet. There is still plenty of opportunity to read and react, to listen and evolve. If you can make reasonable and steady progress toward staking out positions in next-generation markets, while at the same time leveraging your current positions in current markets, you can be optimistic about your chances. Or can you?
What if there is some hidden force that is working against your best efforts? What if this force is operating inside your own company, with the full support of your executive team, your board of directors, your investors, and indeed yourself? What if this force is able to mysteriously redirect resource allocation so that it never quite gets deployed against the new agendas?
That force, I submit, is the pull of the past, most concretely embodied in your prior year’s operating plan. That plan exerts a gravitational force that pulls inexorably at any investments that seek to depart from its inertial path. The larger and more successful the enterprise, the greater the inertial mass, the harder it is to alter course and speed.
This observation may seem commonplace, so let us just take a minute to call to mind how deep these ruts can run.
You are on an annual calendar, and strategic planning begins, say, sometime in Q3 and comes to a close at the end of Q4. How does the process begin? Typically with the CFO circulating last year’s operating plan as a benchmark for setting next year’s resource allocation and performance goals. (“Just take your fourth-quarter numbers and multiply them by four for a start.”) By the way, this is a perfectly acceptable procedure for mature markets with cyclical growth patterns where market shares shift by a small percentage in any given year.
What happens next? The executive staff asks all the participating units to draft a bottoms-up plan for next year while, in tandem, it develops a top-down set of goals and benchmarks. These two efforts converge to shake hands early in the fourth quarter, only to confirm that their positions are so far apart they can barely see each other to wave across the table. From this inauspicious beginning, an extended exercise in stretching and cutting, putting and taking ensues, which takes on the air of something between a late-night poker game and a ritual fire dance. You might call it the ultimate zero-sum game except that it really pursues a minus-sum target, a do-more-with-less result. In any event, it is conducted with all the goodwill and trustworthiness of a used-car sale negotiation, perhaps its greatest virtue being that it makes executives anxious to get back into execution mode.
But again, let me be clear: this is standard operating procedure for squeezing operational gains from mature markets, and to the degree that your enterprise is an established player in such venues, there is nothing inherently wrong with it. OK, it could be done with better grace and less waste of energy, but it does not result, in and of itself, in bad economic results. Until you expose the enterprise to secular market change.
Secular growth, in this context, means a “not to be repeated” expansion of the market that occurs whenever a new category or a new class of customers is brought on board. It stands in contrast to cyclical growth, which refers to the ongoing returns from an established market, one in which the customers and the category remain the same and power shuttles here and there among various vendors and their latest offers. The key point here is, you can make a mistake with cyclical growth and still have plenty of chances to get yourself back in the game. That is not the case, however, with secular change. Whiff here, and you miss out on a massive growth opportunity that will never pass your way again. In short, missing out on secular growth is a disaster.
But that is precisely what you are about to do. All the resource decision making you and your colleagues are engaging in, after all, is internally focused. It gets resolved not in relation to market opportunity but rather in relation to other players on the same team—I got the head count or you did, and whichever one of us it was, we sure as heck aren’t giving it back. Which means when it comes to strategy dialogues, we have to justify the resources we have managed to secure no matter what. So we tell strategy stories that have all the authenticity of political advertisements and that collectively add up to a vision so self-centered and self-serving as to be incommunicable outside our immediate ranks. Meanwhile, the entire world is yelling at us that a train is coming, which doesn’t help, because we know a train is coming, but we are locked into relationships that do not allow any of us to move off the track. In short, we are not stupid, and we are not unaware, we are just well and truly stuck.
But the world outside us is not stuck. It is changing, and the fact that the pace of change is measured no longer reassures, now that we find ourselves sinking deeper and deeper into a fixed legacy position. It is now that we really appreciate the power of the force field around us. We begin to get an inkling that what happened at Burroughs and Sperry Univac and Honeywell and Control Data, what happened at Digital Equipment Company and Wang and Data General and Prime, what happened at Kodak and Polaroid, at Lucent and Nortel, at Compaq and Gateway, what happened at Lotus and Ashton-Tate and Borland and Novell, what happened at General Motors and Ford and Chrysler, what happened at Eastern Airlines and Western Airlines and Northwest Airlines, what happened at Businessweek and Newsweek and the Chicago Tribune, what happened at Tower Records and Borders, what happened at Motorola and Nokia, what happened at Pacific Bell and Quest and America West and Bell South—what happened at all these companies might just be happening to us.
Well, perhaps it is, but let us be clear: It does not have to be that way. There is another path, one that can achieve the escape velocity required to engineer a genuine change in course. This path accommodates both the sustaining demands of cyclical market positions and the disruptive ones of new secular change. Like the one we are currently bound to, it ends with an annual operating plan and a resource negotiation that can have zero-sum or even minus-sum characteristics (although secular growth gives you a lot more leeway to play non-zero-sum games). But it does not start there.
Instead it begins with a highly structured set of dialogues around vision, strategy, and execution that tee up future opportunities and risks in a way that allows them to compete more effectively for resources against our existing franchises. The dialogue process will differ in details from firm to firm but overall will look something like the following:
1. Once a year, at the beginning of the strategic planning process, before circulating last year’s plan, before financial goal setting of any kind, you and your colleagues commit to reimagine your enterprise from the outside in. Specifically, you agree to temporarily let go of your inside-out perspective and ask the question we began this introduction with: What does the world really want from us? In other words, what opportunities unfold if you put yourself in service to and take your direction from the people in the world you most want to succeed and who most want you to succeed?
2. Keeping this question in mind and leveraging the framing model of this book, which we call the Hierarchy of Powers, you organize and shape your approach to the planning effort for next year with three goals foremost:
a. Articulate a compelling vision of the future that others will want to support,
b. Set a strategy consistent with your vision that positions you as the leader in the markets you want to serve, and
c. Resource your execution so that it can both accomplish your highest aspirations and generate superior economic returns.
To address the first of these goals, the dialogue will use the frameworks around category power, company power, and market power to develop a common vision as to what is happening in the world and how it relates to your business.
To address the second, the focus will step down a level and use the frameworks around company power, market power, and offer power to forge a strategy for sustainable competitive advantage in the markets you have targeted, relative to the companies that also seek to serve those markets.
And to address the third goal, the conversation will step down another level to get to the very base of the model and use the frameworks around market power, offer power, and execution power to construct an operating plan that dramatically skews your resource allocation toward escape velocity initiatives such that your direct competitors either cannot or will not match your commitments.
As you can see from this final step, the resource allocation outcome from this process is categorically different from the one that results from staying within the gravitational field of last year’s operating plan. This is not about adding 10 percent or giving back 10 percent on a unit-by-unit basis. You are not trying to maximize your power internally relative to each other. Instead this is all about maximizing your enterprise’s ability to create unmatchable power in the world. You are not dividing up a check at a restaurant. You are setting up base camp to climb K2. Or, to leave metaphors behind for a moment, you are doing everything you can to give vision and strategy a chance to make their case before you dive into the zero-sum exercise of resource allocation.
During the past two decades, my colleagues and I have seen this process succeed firsthand at Cisco and Sybase, at Agilent and Cognizant, at Akamai and BEA, at Amdocs and Documentum, at Lawson and Activant, at SAP and BMC, at Agile and PeopleSoft, at Autodesk and Synopsys, at Rackspace and Adobe, at Symbol and Qualcomm, not to mention dozens of Silicon Valley–funded start-ups. Over and over again, executive teams have used these frameworks to align around a common vision that truly means something to people other than themselves, to commit to a strategy that capitalizes on the opportunities unveiled by that vision, and to allocate resources in strikingly asymmetrical ways to create customer success and drive competition from the field.
Now, as you no doubt have noticed, every one of the companies cited above is in high tech, and not accidentally so. This sector has been the exclusive focus of our consulting practice, both at the Chasm Group during the 1990s and at TCG Advisors in the past decade. That focus has allowed us to separate ourselves from our competitive set and compete effectively against enterprises with orders of magnitude larger and more experienced than us. It has also resulted in intimate discussions with the top executives in each of the firms cited above. There is no form of research that can approximate the learning and perspective gained from such engagements.
One consequence of this experience base, however, is that this book clearly does have a high-tech bias, and to the degree your enterprise operates under different norms, you’ll have to make allowances (or just chuck the book aside and move on to a more profitable activity). But more and more industries are becoming drawn into the high-tech sector’s disruptive field. First it was telecommunications and financial services, along with defense and aerospace. Then the Internet arrived to disrupt retail commerce, media, music, entertainment, and news. Health care is now being touched, and one can only hope education is not far behind. Energy companies are deploying smart grids, automotive enterprises are selling smart cars, and construction firms are pitching smart buildings, all converging on creating the smart cities of the future.
It is possible that your company has nothing to do with any of this, but it is becoming increasingly less likely. And if you are looking for secular growth, this is where it is most likely to come from. And most important, if those disruptions are beginning to swirl around you, there is never a more important time to embrace an outside-in perspective and planning process.
As Cisco’s CEO, John Chambers, likes to say, “Market transitions wait for no one.” Not for your customers. Not for your partners. Not for your competitors. And not for you. When the time comes, that sets the time. And just like when you were a kid playing hide and seek, there’s a voice that comes out of nowhere calling, “Ready or not, here I come!”