In increasingly turbulent and complex times, we understandably fall prey to a dangerous temptation – both as institutions and individuals. We’re tempted to abandon long-term strategy and fall back on rapid adaptation as the only winning game – sense and respond quickly enough to events as they occur and everything will be OK.
Don’t get me wrong, we all need to find ways to be more adaptable. But adaptation as a strategy is fraught with risk. While compelling in theory (who could be against adaptation?), adaptation in practice leads us to spread our resources way too thinly as we fall into a reactive mode, unable to prioritize or focus as we get bombarded with events occurring at a faster and faster rate. It leads us into a narrow incrementalism that often ends up at a dead-end.
So, what’s the option? The option is to focus more than ever on three core strategy questions that can help provide us with focus and stability even as the turbulence increases around us – and help us to prioritize where we need to respond and where we don’t.
What’s my differentiation?
Strategy at one level is about differentiation – meaningful differentiation in the eyes of the target constituencies we’re trying to reach and serve. To be successful, we have to be able to clearly identify who we’re trying to reach and put ourselves in the place of these people. We’ll need not just to understand their needs as they might express them, but their broader context, how it’s evolving and how it shapes needs that may not even be articulated today.
The ultimate goal of differentiation is to avoid direct confrontation with our competitors. In the words of SunTzu and The Art of War, if we have to engage the enemy in battle, then we’ve already lost. If there’s any uncertainty about why we are different, we won’t be able to focus effectively and we’ll be fighting an uphill battle to gain and sustain the attention of our audience.
Of course, differentiation has always been important to success in any environment. What’s different now is that people face an exponentially increasing array of alternatives. They have more information and more ability to switch across as larger and larger array of options. In a world of power laws, we’re competing not only with the blockbusters in the head of the power curve, but an ever expanding long tail of options that are able to serve very narrow niches. That’s why it’s more critical than ever to be able to answer this question clearly and compellingly, for ourselves and the people we want to reach.
One more thing. Too many people still view differentiation as a matter of features and functions in the product or service they are trying to deliver to the market. Sure, that matters. But it’s the most superficial level of differentiation. As many observers have recognized, differentiation is much more about the overall experience that the “customer” has with a vendor – both pre-transaction AND post-transaction. In a world of more and more options competing for scarce attention, being able to increase the return on attention for people is a much more powerful form of differentiation. An extraordinary experience, filled with value that is meaningful to someone in a way that no one else could match, is a much more effective form of differentiation than narrowly defined features and functions.
As we think about experience, let’s broaden our horizons even further. What are we trying to help people accomplish? Rather than starting with what we have to offer today, let’s start by asking what the people we want to reach are trying to do in their own lives. What’s most meaningful to them in terms of achieving more of their potential? If we could articulate that in a compelling way and then figure out how we can contribute something really different that helps them to make a difference – well, that’s a differentiation that’s very powerful.
From my perspective, the ultimate form of differentiation is a compelling narrative (not a story, as I try to make clear here) – a unique and unfolding opportunity for the audience that invites their participation to help shape the outcome. The most powerful narratives are ones that speak to the most basic needs of the people you are trying to reach. The narrative is not about you; it’s about them. Yes, you have some role to play in the narrative but only as a catalyst or enabler – the outcome depends completely on the people you’re trying to reach. Very few companies have crafted compelling narratives, but those who do, have achieved powerful differentiation. (For more on narratives, see my SXSW talk here)
What is it that makes narratives so successful to strategy? In a world of accelerating change and uncertainty, they provide a compass to focus people (both within and outside our organizations) and reassure them that they can make a difference at a time when everything seems out of control.
Of course, for narratives to be successful, they must in fact identify opportunities that are emerging and that can make a significant difference in the lives of many people. They require a deep understanding of relevant edges where forces are gathering that will have the power to make a very big difference. They require an ability to go below the surface events that buffet us about on a daily basis and zero in on the long-term forces that are re-shaping our environment. And, of course, narratives can’t just be written or spoken words. They have to be backed up with meaningful actions sustained over an extended period of time.
In times of exponential change, what matters is dynamic differentiation – the ability to learn and evolve rapidly to continue to offer meaningful differentiation. Static differentiation, no matter how powerful it is today, becomes increasingly vulnerable to competitors. Narratives can provide a powerful context to shape that learning and evolution, both for you and the people you are trying to reach.
How can I maximize my leverage?
This is a relatively new, but increasingly important, strategic question. To be clear, I’m not talking about financial leverage here – we’ve seen in graphic terms how dangerous financial leverage can be in turbulent times. What I’m focusing on here is the ability to leverage our own resources by connecting and mobilizing complementary resources to deliver more and more value to the market.
In more stable times, people wanted and needed to control all the resources required to deliver value to their market.
Two things are happening to change that. First, in a world of exponential, rather than linear, change it becomes increasingly important to maximize flexibility. The same resources that were a source of strength in stable times become an anchor that limit the ability to move in more turbulent times. Second, many forces are converging that help make it easier to connect and coordinate resources from a growing array of more specialized entities. In more and more cases, we don’t need to own all the resources required to deliver value to our market.
In a world of mounting performance pressure, we need to aggressively find ways to do more with less. Those with the most effective leverage will win against those still struggling to do it all themselves. If done right, leverage can help small moves, smartly made, to set big things in motion.
Of course, to do this effectively, we have to be able to answer the first strategic question – what’s my differentiation? If we don’t know the answer to that one, we risk giving up resources that are critical for our differentiation. If we are clear on the answer to that question, it gives us freedom to shed everything else that isn’t critical to our differentiation and frees up important resources to further deepen our areas of differentiation. We’ll be able to tap into world-class capability in all the areas that are not critical to our differentiation and augment those resources as needs and capabilities change.
When thinking about leverage, most people stop at the notion of static ecosystems – tapping into existing resources that can augment our own value. The resources already exist; the only question is how to most effectively connect and mobilize them. The real power of leverage can only be realized in dynamic ecosystems where the focus is on how to build relationships that help all participants to learn faster by working together. Dynamic ecosystems take powerful network effects and amplify them with learning effects that compound the value that can be delivered to the market.
Dynamic ecosystems harness the potential of distributed innovation. It’s not just up to us as the organizer of an ecosystem to figure out how to deliver more value in a rapidly changing market – we’re helping to create the conditions for all participants to innovate individually and collectively in terms of new forms of value. We and others can then observe and learn from the efforts of other participants in the ecosystem. What’s working and why?
Ultimately, leverage isn’t just a powerful way to deliver more value with fewer resources. It can also become a powerful differentiator in its own right. Those who can mobilize vast ecosystems of diverse and specialized participants to deliver value to their markets will stand out relative to those who continue to try to do more of it themselves.
As we move from a linear to an exponential world, ecosystems become central to harnessing exponential value.
How will we measure success?
For some, the answer to this will be annoyingly obvious – it’s all about shareholder value, at least in the corporate world.
Well, here’s the problem. Financial metrics, while important at one level, are ultimately lagging indicators. In a world moving from linear to exponential change, lagging indicators can get us into a lot of trouble, breeding complacency and blindness to the forces that are building up on the edge.
Many people have moved beyond financial metrics to operating metrics like customer churn rate or lead-times to introduce new products and services to market. These are better because they can be more helpful in anticipating performance and spotting potential problems (and opportunities) earlier.
But, of course, without a clear answer to that first question above, it’s hard to know which operating metrics really matter.
Here’s an example. Which customers really matter to us? Without a clear answer to that, it’s hard to evaluate customer churn rates. Are we losing the customers we’re really trying to reach and serve or are we losing customers who might not care about the differentiation we’re offering? If we try to serve all customers without differentiation, we’ll soon find ourselves serving no one effectively.
But, operating metrics are just the beginning. As we harness technologies that make the invisible visible, we’re finding ways to monitor interactions both within and across organizations that give an even earlier indication of potential impact on the operating metrics that matter. For example, we’re discovering that certain patterns of interaction within the organization can help to accelerate the introduction of more successful new products and services. If we focus our attention on how these patterns of interaction are evolving, we’ll have a better sense of how our operating metrics are likely to evolve and ultimately how we will perform financially.
The winners in this exponential age will be those who can focus most effectively on the relevant leading indicators of performance. And, of course, if you have more than 2 or 3 core metrics that ultimately will tell you how well you are doing, you probably have too many.
And it’s not just about taking snapshots of performance. In an exponential world, absolute performance at any point in time is becoming more and more meaningless. The real question is the relative trajectory of performance. How rapidly are we improving on relevant metrics relative to others in similar arenas? If we can’t maintain a superior trajectory, we’ve lost the game, no matter how good our performance is at any point in time.
It’s also not just about tracking these metrics and trajectories. It’s also about taking the time to gather relevant participants and systematically reflect on performance trends in rapid iterations. What can we learn from these results? What are the implications for how we move differently in the next round? Where are we improving most rapidly and how can we do more of that? Where is improvement slowing down and how can we change what we’re doing to improve the trajectory?
At the end of the day, strategy still matters. In fact, it matters more than ever. As I’ve maintained elsewhere, we are moving from a world of push to pull (LINK). We can’t pull effectively if we’re in react mode, simply responding to the latest crisis or opportunity. Accessing, attracting and achieving more of our potential – the three core levels of pull – all depend on differentiation, leverage and clear metrics for success. Without these building blocks for strategy, we’ll end up being pulled, rather than the ones pulling to create more and more value in turbulent times.
Finally, I’ve framed most of this post in terms of strategy for our institutions, especially firms. But I believe these three strategic questions are equally, if not more important, in our personal lives. Try re-reading the post from the viewpoint of you as an individual. How well can you answer the questions?