strategy turbulent

Strategy Formulation in Turbulent Environments

Carlos E. Salazar

Discussion Outline

1. Framework - Section A. Anticipation - Section B. Quick Adaptive Response - Section C. Generating Turbulence2. Tools’Integration3. Case Application

In many industries and countries today, managing resembles driving a race car through an unfamiliar route in the fog. Executives have limited visibility into the future and must anticipate and respond quickly to a constantly changing environment.

Final Report Strategy Formulation in Turbulent Environments

Can a firm develop a winning business strategy in turbulent environments?


(A) Anticipate turbulence better than competitors

(B) Respond faster than competitors to turbulence

(C) Generate turbulence that competitors struggle with

The integrative framework exposed in this report details the process and tools a firm can follow to create a winning strategy in turbulent environments

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Winning in turbulent

environments

Anticipate

GenerateRespond

Anticipation

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Cone of Uncertainty

Time

Firm Value

Today

Future • Uncovering the “true” source of uncertainty

• Discriminating uncertainty from cause-effect relationships

Cone of Uncertainty Can Be Strategically Reduced By:

Principle 1. Anticipate by Shrinking the Uncertainty Cone

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To win in a turbulent environment, the firm needs to turn uncertainty into confidence more quickly and effectively than their competitors

Competitive Principle


The next three tools allow the firm to shrink the uncertainty cone by anticipating the sources of turbulence

(A) Anticipating turbulence better than competitors

Insight: Uncover the sources of uncertainty

A1. A firm can measure the level of turbulence in its industry

1.Map the level of uncertainty in external forces

2. Identify the position of the firm in the uncertainty vector map

3.Envision threats that if left unchecked, could destroy the business

Tool 1. Uncertainty Force Map Tool 2 .Uncertainty Vector Map Tool 3. “Kill Your Future” Game

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PREDICTABLE TURBULENT

Technological change

Customer demands change

FORCES

Current

Future

Industry players change

Regulatory changeEnergy change

Society norms change

Environmental change Demographic change

Geopolitical change

Economy change

The uncertainty force map allows managers to identify future sources of turbulence and design strategies to uncover the “true” drivers of change.

Tool 1. Uncertainty Force Map

Source: Marcus, A. Strategic Foresight8

InsightsTOOL

High

Spe

ed o

f cha

nge

ComplexLow

High level of uncertainty

Environmental Complexity

High predictability

Turbulent

Stable

Simple

Uncertainty Vector

Hyper-turbulentEnvironmental forces

beyond the firm’s adaptive capacity

Firm’s current position

Tool 2. Uncertainty Vector Map

Source: Glassman, A. Thinking Strategically in Turbulent Times. P. 6

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This map allows managers identify the position and type of environmental turbulence the firm is facing. The position helps to define how the firm will exploit uncertainty to create value.

InsightsTOOL

InsightsTOOL

Envision Future Scenarios that are

conceivable yet so bleak that if left unchecked, could destroy all that a

firm has created

Tool 3. The “Kill Your Future” Game

Killing Scenario 1.

Killing Scenario 2.

Uncover the “potential threats” that confront the

organization

Source: Canton, J. The Extreme Future. P. 11

Implement actions necessary to minimize or eliminate those

threats

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This tool helps managers to uncover “potential threats” that can destroy or disrupt the firm business model. And allow managers, to anticipate and implement corrective actions.

InsightsTOOL

Real Life Applications

Uncertainty Force Map

Uncertainty Vector Map

“Kill Your Future” Game

Used by Federal Express Executives to create a scenario in which a competitor steal 50% of FedEx’s customer with a crafty pricing strategy called ShipThis.com. Executives admitted this “Could happen”

Used by Hewlett-Packard executives to envision the impact of the merge with Compaq. “The acquisition of Compact was a stochastic move, a big shock to the system...and the pace of change since then has been very high”

Used by Los Angeles County leaders to envision changes in the county services. “The demographic clock doesn’t stop, aging doesn’t stop because you have a budget problem...How can we collaborate to make that a more positive situation ”

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(A) Anticipating turbulence better than competitors

Insight: “Discriminate true uncertainty from cause-effect relationships”

A2. A firm can discriminate between true uncertainty and causality by:

1. Identifying potential causality negative outcomes of any action

2. Identifying and executing the causality actions to achieve the impossible

3. Influencing now the course of events to change an envisioned future

Tool 5. Pre-Requisite Tree Tool 6. Scenario PlanningTool 4. Future Reality Tree

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The next three tools allow the firm to shrink the uncertainty cone by anticipating causality relationships between drivers of change

InsightsTOOL

Tool 4. Future Reality Tree (FrT)

“Future Realty Tree identifies potential negative outcomes of any action. The goal of the future reality tree is to understand the causal implications between the action and negative outcomes so that the negative effect can be avoided” (Goldratt, E. TOC Thinking Process)

Source: Goldratt, E. Theory of Constraints Thinking Process

DE (Desired Effect): Positive effects that the system is trying to achieve

INJECTION: An action initiated in the present to create a favorable development in the future

LOGIC: CAUSE-EFFECT

: Establishes a cause-effect connection

: Establishes AND logic that connects causes to generate an effect

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By establishing cause-effect connections between drivers of change, the FrT answers the question: “What to change to by validating the firm’s possible future”.

InsightsTOOL

Tool 5. Pre-requisite Tree (PrT)

“A Pre-Requisite tree shows all the intermediate objectives necessary to carry out an action in the future and the obstacles needed to overcome” (Goldratt, E. TOC Thinking Process)

Source: Goldratt, E. Theory of constraints Thinking Process

IO (Intermediate Objective): Transitional steps, either conditions or actions, that must be completed before a firm can attain its ultimate objective

INJECTION: An action initiated in the present to create a favorable development in the future

LOGIC: SUFFICIENCY , Is this enough?

: Establishes a sufficiency logic connection

Obs (Obstacle): Potential issues that could stand in the way of the firm achieving its objectives

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By identifying obstacles, the PrT answers the question: “What must the firm do to achieve the ‘impossible’?”

InsightsTOOL Tool 6. Scenario Planning (SP)

“A Scenario purpose is not to predict or forecast the future but rather to imagine what can happen next. They are created to influence the course of events no to accommodate them” (Marcus, A. Strategic Foresight. P.1)

Scenarios are representations of different future states that can be used :

LOGIC: REPRESENTATIONS, What if?

: Establishes the evolution of an uncertain and important force

(1) : To help generate options about what to do next

(2) : To assist them in testing these options

Source: Marcus, A. Strategic Foresight

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By mapping the key drivers of change, the SP tool answers the questions: “Given different future states, what might businesses do? And to what extent will these actions succeed”

InsightsTOOL

Scenario Analysis

Used by Top 500 Global Fortune companies to understand and influence future events

Used by the U.S. Transportation command, a organization in charge of integrate the logistics operations between the Army, Navy and Air Force, to address the challenges in supporting U.S. future combat operations anywhere in the world.

General Fogleman approved the plan embodied in the Future Reality Tree.

Future Reality Tree

Pre-Requisite Tree

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(A) Anticipating turbulence better than competitorsInsight: “Uncertainty is a dual opportunity” that simultaneously exposes firms to risk and opportunities. But, a strategic approach that only focus on minimizing risk exposure will also reduce the potential for innovationA3. A firm can anticipate risk exposure

1.Generate a strategy that simultaneously hedge and exploit uncertainty by uncovering:• Risks a firm should actively seek and exploit (Flexibility Value)• Risks a firm should reduce or eliminate (Strategic Value)• Risks a firm should ignore

ExpandedNPV

Flexibility ( Option Value)

Strategic Resilience (Games)

Static Value (Traditional

NPV)

=

UNCERTAINTY VALUE EQUATION +

+

+17

The next tool allow the firm to shrink the uncertainty cone by anticipating and preparing the firm for the opportunity embedded in the turbulence

InsightsTOOL Tool 7. Real Options

STRATEGIC OPTIONS

Type of Flexibility Definition

Option to defer A firm with exclusive rights to an investment has the option of deciding when to take that investment and to delay taking it, if necessary.

Option to grow A firm builds a plant with the ability to add capacity at low cost

Option to contract A firm hires contract and temporary employees instead of full time employees

Option to shut down and restart

A firm outsources distribution to a firm that distributes the products of many firms instead of outsourcing distribution to an firm that distributes only its production

Option to abandon A firm have the option to abandon a project when its cash flows do not measure the expectation.

Option to expand A firm invest to create one product where that investment could lead to the development of other products in the future

Source: Barney, J. Gaining and Sustaining Competitive Advantage. P.316

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Real Options helps the managers to anticipate and prepare the firm for capturing the value creation opportunity in the upside risks while reducing the potential value destruction of downside risks

InsightsTOOL


Used by private equity firms such Hall Investments, Hicks, Muse, Tate & Furst, Wasburg Pincus and Golder Thomas Cressey Rutner (GTCR)--as well as specialized publicly traded funds--to assess the value generated in a acquisition strategies under uncertainty

STRATEGIC OPTIONS

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InsightsSUMMARY

Quick Adaptive Response

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“Managers in turbulent environments constantly monitor the shifting context to identify emerging sudden-death threats and golden opportunities while they are still faint tremors (Sull, D. Success Against the Odds)”

Principle 2. Quick adaptive response by early detection of “turbulence magnitude”

InsightsSUMMARY

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Magnitude of opportunity

Magnitude of threat

Golden Opportunity

Disruptive Threat

PAST NOW


InsightsSUMMARY

• A firm acts on quick decision cycles

• A firm takes the initiative to exploit uncertainty in external forces

• A firm structures its organization to handle the quickest rate of change

Adaptive response is generated when:

Principle 3. Quick Adaptive Response

Quick adaptive response allows firms to survive business destroying threats or exploit golden opportunities

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Nokia, a quick adaptive responder that have survived disruptive changes since 1865



(B) Responding faster than competitors to turbulence

Insight: “Responsiveness is dependent on short cycles times, modularity, and decentralization”

B1 & B2. Respond faster by:• Executing under a OODA (observe-orient-decide-act) cycle• Off-shoring of non-differentiated activities• Using process networks to gain capabilities• Using Internet to leverage best in class knowledge assets

Tool 8. OODA Loop Cycle Tool 9. Quick Adaptive Cycle

The next tools allow firm to respond and adapt faster to change by executing quick decision cycles

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Tool 10. Act Decision Matrix

InsightsTOOL

Tool 8. OODA Loop Cycle

“Colonel John Boyd, inventor of OODA loop, taught that effective competitors in any environment constantly look for mismatches between their initial understanding of the environment and the new circumstances as they unfold. In those mismatches there are often opportunities for a competitor to seize new advantages” (Hugos, M. Building the Real Time Enterprise. p.79)”

Source: Hugos, M. Building the Real Time Enterprise. p.79

In turbulent environments, the OBSERVE-ORIENT-DECIDE-ACT Cycle (OODA Loop ) helps manager to early uncover emerging sudden-death threats and golden opportunities and gain time to execute a quick adaptive response.

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InsightsTOOL Tool 9. Quick Adaptive Cycle For Business

Source: Hugos, M. Building the Real Time Enterprise. p.87

“An adaptive organization continuously observes its environment looking for mismatches. Based on orientation, it decides and acts. When it acts, it choses to either improve existent operations, create something new, or do some mix of the two”(Hugos, M. Building the Real Time Enterprise. p.87)”

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In turbulent environments, the OODA Cycle (OODA Loop ) acts a keystone that helps managers to uncover the “nature” of the opportunity to create a new business or/either improve existing operations

InsightsTOOL Tool 10. Act Decision Matrix

Source: Sull, D. .Success Against the Odds

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SEIZE THE MOMENT TRIAGE

ACTIVE WAITING TRIAGE

Significant Opportunity

Non Disruptive Business Threat

Disruptive Business Threat

Normal Opportunity

In turbulent environments, firms acts in the OODA cycle according the significance of the opportunity and the level of business model disruption it generates. (See slides notes for detailed explanation of each quadrant)

InsightsTOOL


Used to develop the C4I defense architecture for the Netherlands Armed Forces

OODA Loop Cycle

Quick Adaptive Cycle

Principles applied to develop the F-16 Fighting Falcon and the F/A-18 Hornet

Principles used by the Air Force during the Operation Desert Storm, Joint Pub 3-56.1 manual

Cycle used by SyQuest marketing campaign to outmaneuver Iomega product leadership in the category of mobile data storage. Sales jumped from $10 million a month to $60 million a month in 60 days

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InsightsSUMMARY

Generating Turbulence

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InsightsSUMMARY

• A firm that cycles through the OODA loop faster that their competitors

• The firm sets the pace and the tempo of competitive events

•The firm seizes the initiative, and competitors wind up reacting to their moves

Competitive Turbulence is generated when:

Principle 3. Faster Tempo After Every OODA Cycle

20082009MacAir

2010IPad 29

“A firm that consistently move through the OODA cycle more quickly than its competitors, accumulates a tremendous advantage over time. By the time the slower competitor reacted, the quicker opponent had already moved on to a new cycle. While none of the individual moves were decisive, their cumulative effect could create a gap that left the slower competitor vulnerable (Sull, D.)”



(C) Generating turbulence that competitors struggle with

Insight: “A firm that cycles through the OODA loop faster than other players generates competitive turbulence”C1 & C2. A firm can generate turbulence by:

1.Shortening the time needed to observe, orient, decide, and act

2.Promoting instability and unpredictability through innovation

Tool 12. IXL’s Innovation Framework Tool 13. Outcome Driven

Innovation FrameworkTool 11. Shortening OODA

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The next tools allow the firm to generate turbulence by creating a competitive innovation gap that makes competitors business concepts obsolete

InsightsTOOL

Tool 11. OODA Loop Cycle Acceleration

It is not the absolute speed of the cycle that matters but the speed relatively to one’s competitors” (Hugos, M. Building the Real Time Enterprise. p.79)”

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Source: Hugos, M. Building the Real Time Enterprise

OODA

In turbulent environments, each step in the OODA cycle needs to be shorten to set the pace and tempo of competitive events. This helps the firm to seize the initiative and generates turbulence that competitors struggle with.

InsightsTOOL

Tool 12. IXL’s Innovation Framework

The IXL’s process can use the OODA’s mismatches as strategic input. This inputs can be a source for building cycle of disruptive business concepts that promotes turbulence and shape competition.

Combine capabilities in unique ways to wow Customers + Build Barriers to Entry

+

Source: Patel, H. IXL Source: Patel, H. IXL

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In turbulent environments, the OODA Cycle (OODA Loop ) is an irrelevant keystone without an innovation supporting cycle. The IXL’s framework makes operative the innovation cycle.

InsightsTOOL Tool 13. Outcome Driven Innovation

ODI removes variability and adds discipline and predictability to each subsequent step in the innovation process” (Ulwick, A. What Customers Want. P.15)

Source: Ulwick, A. Strategyn

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In turbulent environments, the OODA Cycle (OODA Loop ) is an irrelevant keystone without an innovation supporting cycle. The Outcome Driven Innovation (ODI) supports the generation of disruptive business concepts.

InsightsTOOL

Real Life ApplicationsUsed by McLaren-Mercedes in Formula 1 to adjust the race strategy in real time.

IXL’s Innovation Framework

Outcome Driven Innovation

Shortening OODA

Used by Top 100 Global Corporations to Develop Disruptive Products and Solutions. (i.g., developing of the coronary stent by Cordys-J&J, developing CS 20 circular Saw of by Bosh, another companies as Medtronic, E-Trade, Microsoft, Abbott, GE, Bank of America, Cargill, etc.)

Used by Top 100 Global Corporations to develop novelty products and solutions. (i.g., Philips, Pfizer, P&G, Verizon, IBM, EMC2, BAE Systems, Merrimack, etc.)

Used by Top 100 corporations, Software SmithBayes, to adjust corporate strategy in real time

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(A) Anticipate turbulence better than competitors

(B) Respond faster than competitors to turbulence

(C) Generate turbulence that competitors struggle with

The integrative framework exposed in this report details the process and tools a firm can follow to create a winning strategy in turbulent environments

35

Winning in turbulent

environments

Anticipate

GenerateRespond

InsightsTOOL INTEGRATION

Market, Customer, and

Competitor Information

ORIENT

DECIDE

ACT

OBSERVE

Rapid Response Do Act

Do Not Act

Watch and Wait

DESING

BUILD

DEFINEDEFINE

MESURE

ANALYZEIMPROVE

CONTROL

Create a new business cycle

Improve a business operation cycle

36

Meta-Framework

Respond

Generate

Antic

ipate

Generate

InsightsTOOL INTEGRATION

Market, Customer, and

Competitor Information

ORIENT

DECIDE

ACT

OBSERVE

Rapid Response Do Act

Do Not Act

Watch and Wait

DESING

BUILD

DEFINEDEFINE

MESURE

ANALYZEIMPROVE

CONTROL

Create a new business cycle

Improve a business operation cycle

37

Meta-Framework

strategy turbulent

Documents

uncertainty cone6to

uncertainty force map

uncertainty vector map

uncertainty force map

uncertainty vector map

true source of uncertainty

uncertainty vector map3

turbulent environmentscan