0  A recent debate in BusinessWeek between Cisco's John Chambers and Intel's Andy Grove highlights the strategic dilemma facing executives today. Chambers argues that we are in the midst of a digital revolution that is fundamentally changing the way companies do business-and fast. Grove says we're simply on an evolutionary path. So which is it? Are we experiencing a major earthquake or just a minor shift in the business landscape? This question is frequently debated in my executive education classes, where senior managers struggle to understand the technological forces shaping their companies' destinies and to determine the actions they should take to prepare for the future. One recent class participant, an executive at a large paper company, was inclined to ignore the digital revolution. He had observed, for instance, that the perceived advantage of buying lower-priced paperboard from an on-line auction was illusory: the winning bidder often could not carry through with its bid, so buyers were forced to return to their long-standing suppliers. Few others in the class agreed with that executive's perspective, but even the leaders who strongly disagreed confessed that they were just beginning to address the digital challenge.
Why are executives so unsure about formulating strategies in this new business environment? There are two challenges here. The first is the sheer difficulty of gaining a clear perspective on the nature of the digital revolution-particularly for those whose careers have been in old-economy companies. The second is actually creating a new corporate future, which is even harder. It requires that managers go beyond rational calculation to dream and experiment with new possibilities.
Help is at hand for meeting the first challenge: a cascade of new books that describe the changing business landscape. Some of the books are merely gee-whiz accounts, best restricted to airport reading, but a growing number are thoughtful attempts to codify practice and define the new market. Every major consulting house, it seems, has at least one entry in this new race to capture a share of executives' attention. And some of these books do deserve serious attention, for they provide insight on the new market forces and suggest many items for the new strategy agenda.
Transforming Business
Two books in particular provide a good starting point. The first, How Digital Is Your Business? by Adrian Slywotzky and David Morrison, both of Mercer Management Consulting, offers templates that executives can complete to see how far their companies have advanced toward a digital business design. The authors recommend that companies shift their basis for creating value for customers from atoms (physical assets) to digital bits (information). To illustrate this point, they tell a series of success stories about new-economy companies like Dell and old-economy companies like Cemex, a Mexican cement producer. For instance, Cemex is using a satellite communications system to make timely and efficient cement deliveries using fewer trucks. The company has reduced its three-hour delivery window-standard for the industry-to 20 minutes and dropping. The authors point out that if a commodity-based business such as Cemex can creatively use information to challenge the leaders in its industry, other businesses can, too.
Along with demonstrating how some companies have advanced toward a digital business design, the book illuminates several familiar themes: speed as a competitive advantage, the manifold benefits of connectivity, opportunities for enormous leaps in productivity, and the breakdown of traditional industry boundaries. The book also highlights the advantages of thinking broadly. For instance, today's successful companies do not carry out narrow benchmarking searches in their own industries or even among the best-in-class companies. Instead, they look at companies in analogous markets. When Charles Schwab, was seeking strategic direction, it didn't study other brokerages; it examined Home Depot, Wal-Mart, and Hewlett-Packard- "companies in incredibly competitive environments, and with no patents, that have somehow, year after year, over decades, regenerated their competitive advantage." Schwab went beyond rational calculation to find inspiration from others who had defied economic gravity.
The second book, From .com to .profit, focuses on the economics of Internet-based businesses. The authors, Nick Earle, head of e-services at Hewlett-Packard, and Peter Keen, an independent consultant, address the challenge of competing in markets characterized by high technological uncertainty and increasing returns to scale. A winner-take-all outcome seems likely, they say, but that outcome may very well be temporary. Accordingly, the book looks beyond the Internet landgrab to lay out a six-point agenda for achieving a sustainable competitive edge: perfect your logistics, cultivate long-term customer relationships, harmonize your channels on the customers' behalf, build a power brand, transform your capital and cost structures, and become a value-adding intermediary or use one.
Sound familiar? Readers are likely to ask: What precisely is so new here? This is no more than an update of the traditional old-economy strategy agenda. Likewise, How Digital Is Your Business? doesn't offer any fundamentally new strategies-apart from a few items such as portals that revolutionize market channels. But both books are still worth serious attention: they suggest that while the content of strategy may not have changed much, the process of making strategy must change radically.
Transforming Strategy
Three aspects of the new business environment-all of them discussed directly or indirectly in the books-are driving changes in the strategy-making process.
First is the extraordinarily rapid decline in transaction costs we're seeing in markets around the world. As a result, many of the traditional advantages of scale are disappearing, allowing small companies to compete with the giants. Only a decade ago, Enron was a bit player in the world energy market. But it was an early adopter of the sort of advice offered by these books. It used new ideas as much as new technology and transformed itself from a sleepy regional pipeline operator into a market leader for a range of energy-related goods and services. Other new competitors are emerging from all quarters to challenge the established order, and incumbents need to improve their peripheral vision to get early warning of threats. Then-very rapidly-they need to find ways to innovate. It's this need for quick action and reaction that thwarts the traditional strategy-making process.
Second is how the Internet has broadened the supply of information. Unlike media technologies such as television that have promoted a passive response from users, the Internet encourages activism of all kinds. Companies and their employees can learn about experiments and developments anywhere in the world. People are overcoming "it can't work" objections by pointing to evidence from other contexts. In effect, the networked economy has broadened the base of organizational intelligence. To restrict the strategic dialogue to a few executives at the top is to ignore valuable data, ideas, and energy. And those who find their ideas and ambitions ignored are likely to leave for more conducive environments.
Third, and partly a consequence of the first two, is the growing competition among business models. Strategic contests are not just about resources-the strong against the weak-but also about alternative ideas regarding the weapons needed to compete. And those models, like their underlying technologies, are changing at an increasing pace. In previous eras, innovative strategies involved largely one-off efforts that relied on controlling physical assets-like Standard Oil's moves to control the flow of petroleum. Now that the key asset is ideas, competitive advantage can be brief, and companies must push ahead with new approaches to the marketplace if they are to grow or even survive. To change a business model once is hard enough; to do so repeatedly is the frontier challenge. Managers too often go on seeing the world through the lens of the past, and they make any evidence they collect fit that view-thereby reinforcing their existing business models.
Today's executives must adopt a new process for making strategy, one that emphasizes the role of people throughout the organization. Conventional strategy has been very good at analyzing stable markets, resources, and capabilities. It relies on detailed forecasting; just think of the assumptions that underpin the cherished SWOT analysis-an assessment of a company's strengths, weaknesses, opportunities, and threats. But never has our forecasting ability been so poor. There simply isn't enough time now to have people sit down and logically derive a strategy from the organization's current capabilities. And as both books point out, even assets are increasingly hard to pin down-just look at the divergence between book value and market value at the most successful companies. To be effective, strategy making must connect market dynamics to people's responsibilities and thus help them make the best choices for the business.
As Cisco's Chambers has said, "I can only make so many decisions and gather so much information at the pace of today's economy." But there's still a vital role for strategists who can glimpse where markets are headed, he adds. "If you empower your people, and they don't know the basic strategy-where we are going, what businesses we are going to be in, our core culture-you will get failure. People will go off in different directions." Strategy making must become distributed, yet still strongly networked, across the corporation.
Getting the Talent Together
The fact is, strategy can no longer focus single-mindedly on the fit between companies and their markets. It has to take stock of individuals and teams. It has to consider whether the climate and incentives at an organization really do encourage experimentation as well as discipline. Companies need to replicate all the strengths of a networked environment.
That means strategists have to do better than the dry, rational lists of observations and goals that I still see in most companies. The templates and prescriptions offered by these two books are fine as far as they go, but they won't amount to an effective strategy. Strategy today is nothing without passion and vision from the people creating and implementing it. Indeed, dreams need to be at front and center of the strategy-making process.
Toward the end of How Digital Is Your Business?, almost as an afterthought, Slywotzky and Morrison describe what they call "internal marketing." To harness organizational energy, they say, leaders need to create the right message of change and continually repeat it. They point to Southwest Airlines' Herb Kelleher as an executive who did that with storytelling. Indeed, numerical goals are just a starting point; it takes emotional commitment to make organizations truly effective.
In fact, today's strategists would do well to adopt entrepreneurial attitudes. When companies start to transform themselves, no one knows for sure how they will reach their ambitious goals; the means to the end are discovered along the way. The same is true for entrepreneurs, whose goals usually far exceed the available resources. Entrepreneurs often state their goals in emotional terms that lend new meaning and dignity to the work required. They don't just have goals, they have dreams that are necessarily irrational in that the logic of today's market tells them they can't do it. Strategy making in the digital age requires this kind of entrepreneurial mind-set if it is to command the energy and dedication of all concerned.
The CEO of a large Japanese manufacturer understands the meaning and power of dreams. A few years ago, he realized that the company's production costs were too high for the market. He could have simply issued an order to tighten the budgets. Instead, he issued an extravagant challenge to the organization: "We must reduce costs within four years to a third of what they are today-or the business moves to China." Though no one knew how to meet that target, they did not dismiss it as unrealistic. The CEO used stories from his own career as an entrepreneur and innovator to appeal to the imagination and emotions of his people. He was confident that they could figure out how to transform the company by sharing his dream.
As an added boost, he stimulated competition within the company by setting up "learning races" between teams of senior and middle managers, young engineers, and production workers in the company union. Regular reports and comparisons helped encourage a climate of immense creativity in what was a mature industry. When I checked on the company's progress recently, the CEO told me costs were down by more than 35%, halfway to the goal, and that the production workers were setting the pace.
In that case, as in many companies, the CEO's dream was a stretch target, imposed from the top down. To rely solely on that approach, however, can be dangerous. Imposing a stretch target is to risk falling into the trap of hierarchy and the implicit assumption that the more senior you are, the greater your wisdom about the future. It's often much more productive to let individuals and teams translate the dream into a "reach" target that they impose on themselves. Like entrepreneurs, they often have their own informed sense of how to create the future.
I've worked with several large organizations to help define and codify the ambitions and ideals of multiple teams. In most cases, the reach goals set by the teams were even more ambitious than those originally considered stretch goals. Only those people at what we British call "the coal face" can really work out the realities of translating dreams into purposeful action. Sometimes they'll fall short, but better to let them start the process; top-down goals can always be imposed later. As one chief executive remarked in a work session, "If we don't get enough reach, we'll have to settle for stretch."
It's worth pointing out that a dream isn't the same as a vision. One manager told me recently that when he hears the word "vision," he thinks of a complicated, political-sounding memo that everyone skims and nobody takes seriously. By contrast, dreams can be the focal point for extreme energy and can inform the values that sustain that energy. Dreams have a central role in sustaining effort through the pain and the sweat of a prolonged transformation program.
Without a dream, Winston Churchill and Martin Luther King would have gotten nowhere. The challenge for management in the Internet age is to create an industrial version of what we learn from all social and political revolutionaries' dreams.
Dreams matter not just for energizing the people you have but for attracting new people. We all need to ask ourselves why we choose the work we do. In today's market for talent, more and more people are choosing companies that have a passion to create something good or exciting.
British Airways dreamed of becoming the "World's Favorite Airline," and for a time that goal helped transform the company's fortunes. Instead of treating that dream as a convenient tag line for the advertising campaign, former CEO Colin Marshall and his team made it the centerpiece of a massive training effort to improve the previously woeful services offered. Cabin crews strove to be the favorite by offering the best service; it made them proud to be on board. The airline's dream drew out a burst of creative activity from its employees.
Alas, that dream didn't outlast the decade. While dreams can inspire action, they will fade without constant reinforcement and refreshment. As business thinker Philip Crosby has remarked, "Sometimes management teams become so confident they doze off." Purpose becomes dulled. People go elsewhere for more excitement-particularly the adaptable ones who are well suited to the uncertainties of dynamic markets. There is competition for dreams out there, and you won't get the most valuable people behind you if you don't give them something to rally around.
The point of strategy is to help individuals choose among competing priorities. And the dream, the company's ambition for the future, can promote a climate of values that helps people make certain choices for themselves-while still permitting them to rapidly adapt when change is necessary. That is close to what entrepreneurs have always done: they experiment; they move fast. But now the challenge is to find ways to enable literally thousands of managers to be entrepreneurs, all working on the same dream. Andy Grove is right-companies don't need radical new strategies. But they do need to radically broaden their process for getting to the winning strategy.
Tomorrow's leading firms will be lucky-they will have stumbled on a coherent way through the disorienting earthquake of change. But their luck will have been earned. As Louis Pasteur said, "Chance favors the prepared mind." So we can also expect that chance will favor the prepared organization.
To order How Digital Is Your Business? from Barnes and Nob
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