How to use dynamics to strengthen your strategy is from Professor Richard Rumelt’s book, “Good Strategy/Bad Strategy.” In classical military strategy, the defender prefers the high ground. It is harder to attack and easier to defend. The high ground constitutes a natural symmetry that can form the basis of an advantage.
One way to find the unfettered high ground is by creating it yourself through pure innovation. Another way is to exploit waves of change. No one person or organization creates these waves of change. They are mostly beyond the control of any one organization.
These changes are the net result of shifts and advances in technology, costs, competition, politics, and buyer perceptions. They can upset existing competitive positions, erase all the advantages, and enable new ones.
You exploit change by understanding its evolution and then directing resources and innovation toward positions that will become high ground, become valuably indefensible, as the dynamics play out.
We are told that stability is a relic of a bygone era. Not true. Most industries, most of the time, are relatively stable. However, after a wave of change has passed, it is too late to take advantage of its surge or to escape its negatives. Therefore, you need to seek out and deal with a wave of change in its early stages of development.
The challenge is not forecasting. The challenge s but understanding the past and present. How did these shifts occur? Were the patterns of change visible to everyone? What do they mean?
When change occurs, most people focus on the main effects, the spurts and growth of new products, and any falling demand. But, you must dig beneath the surface to understand the forces underlying the main effect and develop a point of view about second-order and derivative changes that were set in motion.
Discerning the fundamentals
The work of discerning whether there are important changes involves getting into the gritty details. You must acquire enough expertise to question the experts. You must dig beneath that surface and discover the fundamental forces at work. You need a clear understanding of this wave of change and a feel for its origin and dynamics.
It seems obvious in hindsight. But the rise of software in importance in the computer industries deconstruction had a common cause: the microprocessor. These connections were far from evident in the beginning. Everyone in high-tech could see the microprocessor, but understanding its implications was a much more difficult proposition.
Software‘s advantage
Everything from the PC to thermostats meant that the programming determined the performance of these devices. The software can be produced quickly and shipped, and that software’s advantage comes from the rapid software development cycle. One can move from concept to prototype quickly and, in the process, find and correct any errors. Consequently, software became the preferred medium.
Why computing structure radically changed
Andy Grove published an insightful, book “Only The Paranoid Survive.” He described how inflection points could disrupt all industries. The inflection that had transformed the computer industry from a vertical to a horizontal structure was the microprocessor. Each computer manufacturer made processors, memory, hard drives, keyboards, and monitors on their systems and application software in the old vertical form. The buyer signed up with the computer maker and bought everything from that manufacture.
By contrast, in the new horizontal structure, each activity became an industry in its own right. Some firms made processors, other firms made a memory, and others made hard drives. Microsoft made system software and so on.
Not only did the basis of computing change, but the basis of competition also changed. Computers were assembled by mixing and matching parts from competing manufacturers.
Was the inflection point the microprocessor? Innovative components operating within a de facto standard operating system made the systems integration job almost truly simple.
Today many academic researchers look at the computer industry and see a network of relationships, each channel whereby one firm coordinates with another.
Another great example is how Cisco Systems came into being and how it came to beat the Giants vividly demonstrates the power of using waves of change to advantage. Cisco used the rise of software as a critical skill, the growth of corporate data networking, the shift to IP networks, and the explosion of the public Internet.
Cisco road three simultaneous waves. The first wave was the microprocessor and its crucial implication to software. Cisco outsources the manufacture of its hardware, concentrating on software sales and service. Cisco cleverly sold software that plugged into the wall, had a fan, and got warm.
The second wave lifting Cisco in the early years was the rise of corporate networking. Cisco’s router ability to handle multiple protocols was in growing demand.
The third wave was IP Internet protocol networking in 1990, most network protocols and corporate owners and sponsors. Cisco exploded under the Force of a fourth wave that hit in 1993. The rise of the Internet used by the general public. Inside corporations, computer users suddenly wanted Internet access — not just dial-up access over a modem but also a direct, always-on connection to the IP backbone.
As universities and corporations scrambled to make this happen, IP won the battle for internal Internet networks. The success of Cisco shows that their rise was a mix of forces and not just scale and luck.
Some guideposts
In moments of industry transition, skills and strategies are most valuable. During relatively stable periods between episodic changes, it is difficult to catch the leader, just as it is difficult for one of the two or three leaders to pull far ahead of the others. In moments of transition, the old Pecking order or competitors may be upset, and a new order becomes possible.
There’s no simple theory or framework for analyzing waves of change. Understanding in predicting patterns of these dynamics is complex, and Chancey. Fortunately, the leader does not need to get it right; the organization’s strategy merely has to be more right than its rivals.
In Professor Rumelt’s vision into the fog of change, he uses several mental guideposts. Each guidepost is an observation or wave thinking that seems to warrant attention.
In the first guidepost, the markets and industry transitions are induced by escalating fixed costs. The second gate post calls out a shift created by the regulation—the third highlights predictable biases in forecasting. The fourth guidepost marks the need to assess incumbent response to change. And the fifth guidepost is the concept of staying in the tractor state.
Guidepost one, rising fixed costs.
The simplest form of transition is caused by a substantial increase in fixed costs. Rising fixed costs can force the industry to consolidate because only the largest competitors can cover these fixed charges.
For example, in the photographic film industry, the movement of black and white to color film in the 1960s strengthened the industry leaders. There was also a little incentive to invest because black and white quality was very good.
There were also improvements in quality and the ease of processing color film. As the cost of color film R&D escalated, many firms were forced out of the market. That wave of change left behind a consolidated industry of fewer but more prominent firms, dominated by Kodak and Fuji.
Guidepost two, deregulation.
Many major transitions are triggered by significant changes in government policy, especially deregulation. Over the years, the Government has dramatically changed the rules it imposes on the navigation, finance, banking, cable television, trucking, and telecommunication industries. In each case, the competition shifted dramatically.
You can assume some general observations about this kind of transition. First, regulated prices generally subsidized some buyers at the expense of others. Regulated airline prices helped rural Travelers at the cost of transcontinental travelers; telephone pricing similarly supported suburban customers at the expense of urban business customers. Ordinary bank depositors subsidized savings and loan depositors and mortgage customers.
These subsidies diminished pretty quickly, but the newly regulated players chased what used to be the more profitable segments long after the differential vanished because of corporate inertia and poor cost data. Highly regulated companies may not know their costs because they have to developed complex systems to justify their fees and pricing systems that hide their actual costs even from themselves.
Guidepost three, predictable biases
During a change, it is helpful to understand that predictable biases in forecasting will surround you. For instance, people rarely predict their business or economic trend will peak and then decline. If sales of a product are multiplying, the forecast will be for continued growth, with the rate of change gradually decreasing. Such a prediction may be valid for a frequently purchased product, but it can be far off for a durable good.
There is an initial rapid expansion of sales for durable products such as flatscreen televisions when the product is first offered. But soon, everyone who was interested has acquired one, and sales can suffer a sharp drop. After that, sales track population growth and replacement demand.
Predicting the existence of such peaks is not difficult, although it is difficult to pin down the timing that the growth rate begins to slow. The logic of the situation is counterintuitive to many people. The faster the update of a durable product, the sooner the market will be saturated. Many managers find these kinds of forecasts uncomfortable, even disturbing.
Another bias is the standard forecast that there will be a battle of the major firms. This battle is sometimes correct but often applied to all situations.
The third bias is that the standard advice offered will be to adopt the strategies of those competitors that are currently the largest, most profitable, or showing the largest rates of stock price appreciation. Or more simply, they predict what the future winners will be or look like the current apparent winners.
For example, with regulated aviation, consultants advised airlines to copy Delta’s Atlanta-based hub and spoke strategy. But, unfortunately for the copycats, Delta’s profits from subsidized prices on its short-haul routes to rural towns were disappearing with deregulation.
Guidepost four, incumbent response
It is essential to understand the structure of the incumbent responses to a wave of change. In general, you would expect incumbent firms to resist a transition that threatens to undermine the valuable positions they have accumulated over time. See the discussion on entropy.
Guidepost five, attractor states
An attractor state describes how the industry should work when technology changes and its effects on the direction and efficiency of meeting buyer demands. Having a clear perspective about the industry’s attractor state helps you ride the wave of change more effectively.
During 1995 -2000, the telecommunication industry was in turmoil. Cisco Systems’ strategic vision of IP everywhere was a description of an attractor state. All data would move by IP packets in this possible future, whether it moved over home Internet, wireless networks, telephone company ATM networks, or submarine cables. Also, all information would be coded into IP packets, whether it was a voice, text messaging, pictures files, or video conference.
Other firms envisioned a future in which carriers provided intelligent networks and value-added services like software to support videoconferencing. In contrast, in the IP everywhere attractive state, the device would supply the network’s intelligence at specific points in a standardized pipeline.
The attractive state provides a sense of direction for the future evolution of an industry. The critical distinction between an attractive state in many corporate visions is that the attractor state is based on overall efficiency rather than a single companies desire to capture most of the pie. The IP everywhere vision was an attractive state because it was more efficient and eliminated the margins and inefficiencies of mismatch of proprietary standards.
Conclusion
When a significant change in an industry occurs, our natural bias is to assume the direction of the change will favor the leading company. In classical military strategy, the defender prefers the high ground because It is harder to attack and easier to defend. The high ground constitutes a natural symmetry that can form the basis of an advantage.
One way to find the unfettered high ground is by creating it yourself through pure innovation. Another way is to exploit waves of change. No one person or organization creates these waves of change. They are mostly beyond the control of any one organization.
But there are signposts you can monitor to help you discern the direction of the long-term change.
You know changes are happening in many industries — technology, telemedicine, newspapers, robotics, communications, and many others. Is your company keeping abreast of changes in your industry? Have you constructed a (changing) vision of the future?
