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Chapter 1
Strategic Integrity
Strategic integrity is established by aligning strategy and execution at all levels of the organization. Every firm has two strategies. The first is explicit, defined by official strategy white papers, memos, and presentations to turn executive vision into a series of competitive moves.1 The second is implicit and defined by execution, and arises from the pattern of decisions and actions undertaken by the firm.2 The first notion of strategy is “directed” since it stems from the top-down directions of senior management.The second notion of strategy is “emergent” because it materializes from bottom-up performance and originates from the aggregate behavior of the firm’s middle managers and line employees. As organizations grow in size, and as uncertainty in the business environment increases, creating alignment between these two notions becomes increasingly difficult. A lack of alignment will fuel an unproductive duality that destroys strategic integrity and leads to catastrophic business failure.
Directed and emergent strategies diverge because strategy and execution are usually disconnected, defined at disparate points in time, placed in separate organizations, and driven by different people. But rapid change in the business environment requires constant adaptation and reassessment, which in turn necessitate an increasingly tight and responsive connection between top-down strategic priorities and the actual patterns of operational execution. Rethinking the strategy development processes, organizational capabilities, and decision-making systems to provide a better connection between top-down priorities and bottom-up actions has become one of the most important priorities on the agenda of today’s executives.
Drawing from specific examples and detailed descriptions, this book describes a general approach for organizations to achieve a single, shared strategic perspective. Strategic integrity is driven by specific approaches to organization, planning, and decision making. Beyond the establishment of measurement systems that track performance to strategic objectives, matching strategy to execution incorporates many concepts and approaches that are traditionally separated from the strategy creation process. Not only should strategy match organizational capabilities, but the specific configuration of organizational capabilities should be part of the strategy development process. Also, successful strategy benefits from a much deeper and more participatory planning process than previously recognized. Participation drives alignment and promotes teamwork, while planning connects strategic vision to execution tactics. Together, these factors mold emergent and directed strategies into one.
The Enterprise and Its Unrealized Potential
Despite the devoted efforts of managers everywhere, the potential of an enterprise often remains unrealized. Companies today are confronted by unprecedented challenges caused by the unpredictability and complexity of their competitive environment. From automobiles to financial services, from consumer electronics to computers, many recent managerial missteps have created a common belief that established enterprises can no longer compete effectively. Large companies are often slow, driven by the wrong incentives, trapped in the wrong value systems, or simply too rigid and entrenched to adapt to turbulence. In the extreme case, these problems have caused spectacular failures, as seen in the telecom industry during the dot-com era or in financial institutions leading up to the financial crisis that resulted in the recession of 2008 and 2009. It may appear to some people that once a business achieves the very success it strives for, the next step must inevitably be failure. But there must be more opportunity for success as part of an enterprise; otherwise many waste a great deal of effort.
Bridging the gaps between conflicting strategies in large organizations is essential. Enterprises drive our economy and are essential to innovation. From the phones that we use to the media that carry their signals, products and services are increasingly complex and their businesses require constant innovation. Any notion that small ventures or volunteer communities can produce all of the innovations that society requires is untenable. Countless innovations require, by their very nature, significant resources, capabilities, and investments. While start-ups and spin-outs can and do create important new technologies, new businesses, or even new markets, they simply cannot solve the class of problems that is addressed by larger and more established firms. One cannot develop a spacecraft to explore Mars, revolutionize transportation to address environmental challenges, drive innovations in biotech and pharmaceutical research to deliver cures, or engineer an operating system that serves one billion customers without mastering the management of complex, multibilliondollar organizations. There is a pervasive need to find new ways to align and manage large enterprises, especially given the nature of the problems that society must solve.
The challenges and opportunities in managing the enterprise are amplified by the fact that today’s products are most often produced in partnership with many firms. Companies are embedded in business ecosystems, which are made up of large networks of partners, suppliers, and competitors that influence the value of products and services by producing complementary or competitive offerings.3 Having impact in such a setting requires an organization that not only reaches internal integrity, but also has the strategy and capability to align external communities. MS-DOS and then Windows were both successful because they created opportunities for millions of external software developers. Even Linux, originally developed by Linus Torvalds and a dispersed community of engineers, dramatically increased its impact when companies such as IBM, HP, Novell, and Red Hat aligned key parts of the community around a new strategy for success (focusing on the enterprise). Beyond software, automobile, appliance, and electronics companies must align suppliers and dealers, while pharmaceutical companies must connect with regulatory agencies and scientific communities. Ultimately, enterprises have great strategic potential because they shape and influence vast assets and capabilities, both internal and external to the firm. If they manage to align these resources, in a way that remains coherent through times of change, their potential will translate into enormous impact on both business and social dimensions. But without alignment, the same potential is virtually certain to remain unfulfilled.
Strategy, Execution, and Inertia
Management research has examined the challenges enterprises face in translating potential into impact. The research spans a broad variety of studies that examine thousands of organizations across every industry, from cement kilns to digital photography, and from automobiles to financial services.4,5 These research studies converge on the idea that organizations accumulate a kind of “inertia” over time, through the processes, incentive systems, routines, and relationships that shape operational execution.These routines and processes enable an organization to perform complex tasks, ranging from management of customer orders to interpretation of market research, and from choice of design features in product development to specific steps taken in driving to a particular operational improvement goal (e.g.,“We always do it this way”). These same routines shape how the organization works, and are reinforced by the company’s incentive systems, to make it efficient to do the same types of tasks over and over again. However, what makes it easy to perform repetitive tasks can make it nearly impossible for the organization to change.
Over time, routines established to optimize efficient execution converge into a pattern of behavior that defines the emergent strategy of the organization. Strategy therefore becomes the product of the firm’s incentives, structures, and patterns of behavior, not the other way around. Over time, a very large gap can emerge between emergent strategy and any top-down, directed strategy, causing the firm’s potential to stay unrealized. This may go unnoticed for some time, but will rapidly come to a head if the firm’s environment begins to evolve.6
In times of change, attempts by management to alter the strategic direction of the company can easily expand the gaps between directed and emergent strategy. If the management of the enterprise recognizes the need for change and articulates new directions, subordinates will too often reject it and stay focused on established patterns of behavior. The organization will often tend to stay the old course either because it has not been given a new definition of success that applies to daily tasks and priorities, or because that new definition has not been fully embraced. Even if the need for change is recognized in certain operating units, more gaps may open as different units move in different directions. Gaps between strategy and execution will destroy alignment and make it difficult for the enterprise to respond effectively to competitive pressures.
Dell: Inertia, Failure, and Renewal7
Before 2006, Dell had often been hailed as the world’s most successful personal computer company. For 20 years, Dell enjoyed tremendous success in the personal computer industry, driven by a powerful business model, which competitors repeatedly tried to imitate, and failed.The situation changed dramatically in recent years, with Hewlett Packard (HP) taking the lead and Dell falling behind. How did this come to happen?
Unlike most other computer manufacturers, Dell sold directly to its customers and established a unique information flow between customers and suppliers. This rapid and rich information exchange was matched by a high-velocity supply chain, and Dell was able to match customer orders with a lead time that was an order of magnitude shorter than competitors’. This had a direct impact on reducing inventory, returns, and even component costs, while dramatically improving cash flow and overall profitability. The speed of Dell’s system enabled the company to respond to changes in customer needs and market requirements with unmatched velocity and efficiency. Dell was the darling of customers and Wall Street analysts alike, as its sales and stock price increased by orders of magnitude between 1984 and 2004.
Dell was perfectly optimized to fit its quick response model. The model influenced all aspects of the organization, from a ruthless cultural focus on efficient execution to a financial emphasis on rapid cycles, closing the books, and emphasizing “making the numbers”on a weekly basis, sometimes even on a daily basis.The people it recruited were focused on operational excellence and rewarded for the rapid and efficient completion of operational tasks. Dell did not always emphasize product innovation, since its computers were designed conservatively and exhibited a relatively small number of similar models, which could be stocked efficiently and shipped quickly to customers. As the organization grew rapidly during the 1990s and early 2000s, this model was continually reinforced, and its routines became second nature to the company’s employees. The organization stayed efficient but, as it grew, lost its flexibility. Managers were doing “the right things” not because they were the right things to do but because it was the same way they had always been done. Their model became a driver of organizational inertia. As an insider stated,“The business model became cast in concrete, and business processes became increasingly ossified.”8
In 2005, the personal computer industry continued to undergo incremental changes. Growth opportunities shifted increasingly to the consumer market, which favored notebook computers over desktops. This gradual shift increasingly challenged Dell’s operating model, since consumers valued design innovation and liked shopping retail, particularly for notebooks. Dell evolved its strategies toward an increased focus on notebooks and on consumers, but unlike HP and Apple, which made significant investments in design and in retail presence,9 Dell’s operations simply did not follow suit. Dell continued to execute as it had in the past, focusing on supply chain management, channel efficiencies, and economies of scale, which provided an increasingly ephemeral advantage. Dell’s relative lack of design innovation, R&D, sales channel diversity, and absence of focus on the consumer business led to increasingly poor financial performance.10
Dell’s story is particularly surprising because the challenges it encountered were so gradual and incremental. The increase in notebook share is very incremental and predictable.This is not the Internet transforming the competitive landscape overnight, but a much more gradual transition, which takes place over essentially a ten year period. Could Dell’s managers, immersed in their competitive environment, really fail to notice such incremental changes?
Most Dell executives were certainly aware of the changes way before 2004, but their knowledge did not translate into significant actions. Inertia had set in and it had become impossible for individual managers to change the company’s course and react in a coherent fashion, until it was much too late. Despite a top-down strategy calling for change, the company was only able to form pockets of activity that argued for a new operational direction, increasing a focus on design, investing in a retail presence, with many separate groups advocating different approaches. However, these groups did not reach critical mass and succeeded only in creating stress, without real impact. This caused major fractures in the organization, especially when Dell began to miss its financial targets, and then “things really hit the fan . . . ”11 The organization lost its coherence, with different executives arguing for different strategies, blaming each other, and creating a managerial panic that resulted into significant financial mismanagement.12
In early 2007, Michael Dell came back as Dell’s CEO in order to turn things around and realign the organization around a new strategy. Dell urged every manager to rethink his or her individual job in light of the new strategy and reexamine every aspect of the Dell model. Dell showed significant promise by mid-2008, when its performance was further challenged by recession.
Michael Dell rolled out changes in many key areas. He reorganized the businesses, which had hollowed out and lost key talents and skill sets. He rebuilt management capability, flattened the organization, and invested deeply to bring in new, hand-picked employees at every level, from the top executives to entry-level engineers. He moved to reinvigorate R&D to catch up with competition, particularly in consumer designs.13 Dell expanded the company’s product line breadth and focused resources on designing PCs in new ways, predicting features ahead of demand, stocking more inventory, and implementing new approaches to product distribution. In its most observable move, Dell moved to the retail channel, and now has its products in more than 10,000 retail outlets around the world. The company also redesigned its manufacturing process for lower-margin laptops—with less configurability, focusing more on build to stock and less on build to order. Additionally, Dell improved its customer support function and increased its competency in dealing with a less-technical customer base.14
It took significant managerial energy to repair old fractures and execute the new strategy in a coherent fashion. Michael Dell motivated his organization to develop, evolve, and communicate a new detailed plan and present progress on a weekly basis, with many meetings personally attended by him. The system went both up and down: He emphasized close top-down supervision while encouraging (and requiring) bottom-up participation. Gradually, the results began to emerge, and Dell appears once...
