Is it possible to pursue a strategy amidst the markets’ current obsession with performance metrics like ROI? Obsessive focus on near term performance has upped the realization, if not fear, among many management teams that no matter how innovative or successful their current product and/or services are today, tomorrow they could become indistinguishable, just another commodity. This obvious paradox was the focus of the March monthly Chicago Booth strategic management practices discussion. Participants took the opportunity to explore the issue by considering articles describing the strategic bet made by Dow Chemical’s acquisition of Rohm Haas, Paul Krugman’s perspective on how this time is different (see notes and article links at the bottom of the post).
Leadership and vision seem to have taken a back seat to Business intelligence. Thanks to the rise of technical analysis, external pressures and other forces affecting commodity prices, increasingly compromise the best of intentional strategic moves.
In the case of Andrew Liveris, Strategy and Business recent article Strategic Bets suggested that an executive committed to a game-changing move ” can expect to face a series of harsh tests that might stretch over several years.” For Dow and Liveris, success was not the result from merely pulling off the deal amidst some significant setbacks. Ram Charan and Michael Sisk explain that the deal was nothing short of transformational for Dow, and an important shift in the level of strategic thinking necessary to Dow’s long-term survival. For Liveris and his team, they understood that the global environment was rapidly changing their industry; and to stay ahead they might be forced to put their entire enterprise at risk. Sketching out a few alternative realities on paper alone would not help them figure out how to move quickly to a new business model before other competitors came to similar conclusions.
Charan and Sisk argue that it’s no longer possible to view these kinds of strategic bets as choices. Incremental improvement seem less viable, or reliable an alternative strategy. Rather, the fluidity, fickle and abundant nature of capital has compromised the value of these approaches. Today, the growing uncertainty about the future has made the capital markets overemphasize short-term results. Companies are under great pressure to deliver ROI within a reasonable time frame, impeding efforts committed to longer term performance results thus a value paradox. A strategic bet requires management to both stake out a future vision and attract investment towards the future potential of the company. The bet’s success depends as much on an ability to place or fund it, as an ability to manage the incentives within and across the organization to pull off the strategic vision.
Basic Economics and dealing with market uncertainties
In any moment uncertainty is present, but most of the time our focus or action steps make the fear of the unknown irrelevant. The leading headlines in WSJ and NYTimes (as of March 19) report analysts scurrying to find the significance or impact of increases in commodity prices. Is this news, following a long period of stable pricing, the first in a series of tests to operating assumptions on the strength and sustained health of the economy? Oil prices and the pressures on the energy sector are often leading indicators signaling the need for businesses to adjust assumptions in their budget or profit forecast.
Mark Zandi, senior economist at Moody’s has remarked that the general inability of the best economist to forecast the speed (when) and height of future oil prices, contributes to the uncertainty in the wider market, This is what happened in the spring and early summer of 2008, when oil prices ramped up quickly and hit a record high of $150/barrel. Today, natural gas prices, which historically follow oil as it did in 2008 have not been following that trend line . In part, because of the apparent glut.
So how should rising commodity prices be interpreted? Julian Simon- Paul Ehrlich famous bet of 1980 pitted one theory about the market reaction to conditions of natural resource scarcity against another. They wagered that the inflation-adjusted prices of five base metals would either increase (Ehrlich, of course, based on his Malthusian theory of increasing scarcity), or decrease (Simon, based on his theory about human ingenuity and unlimited resources in the long run). Simon’s win in 1990 draws attention to other underlying forces that occur over time in the market, substitution and innovation. In the short run, neither will impact demand and may account for the capital markets continuing obsession with short-term performance and further constrain executives seeking to make long-term strategic bets.
Basic economics and fundamentals of analysis do work. The larger challenge for business strategy is to keep in mind the inevitable drive, or motives that fuel demand for substitutes. Good strategic planning, accounts for naturally occurring variances, such as daily weather fluctuations, while also tuning in to larger shifts, such as changing climate trends. An advance plan and preparations for changes in the environment may help you withstand the rare disaster and not wipe you out. Strategists should focus on the long-term and leave managers to heed the short-term. Infrequently longer trends in commodity pricing, when hedged using forward pricing are often considered too risky for managers who fail to incorporate them into their planning. Southwest airlines however made that bet and avoided the financial hits that the other large carriers experienced in the summer of 2008.
Sticking to one vision in the face of obvious signs of shifting environmental conditions is a delicate balancing gaming that often pits analytic trends against much softer gut instincts. Technically, every time is different and operationally it’s hard to make a big bet when your hard assets still may continue to deliver value.
Leaders continually should ask themselves “For what do you want to be known?” Daily, corporations make bets, that’s the fun of business, especially fast-moving business. Juxtaposing the commoditizing forces working against you by continuing to invest in the fundamental elements that define your business might be a useful cue. For example, Southwest consistently plays off the defining vision of themselves as the lowest cost airline to send clear signals of their strategy and inform every decision they make. In light of the recent issue of the added wear and tear on the planes from more frequent takeoffs and landings, it will be interesting to hear the next chapter in this resilient business success story.
It’s more hyperbole , than reality to believe it possible to buy innovation; but leaders who see a different future sooner, and act on it, have clear advantage. That future, or innovation’s investment price, particularly if recognized by a leader sooner than the market, will take into account risk adjusted returns. CISCO in following this acquisition strategy has successfully continued a fast growth streak , leverage its capacity to integrate, scale and deliver the new technologies and stay at the front of the pack in their industry.
“Increasing customer satisfaction” is too general. Identify a specific, quantifiable goal (ie: improving customer retention by 5 percent) and regularly measure your relative progress. The ongoing monitoring, seeing that retention inched up, or down, reinforces your strategy and helps you stay on track. Or maybe it’s what hinders you from stretching. Evaluating success of a strategy should not rely on the same measures set up to track relative progress toward specific business goals. Strategy is broader, and keeping your eye on the information that impacts the measures will insure that they don’t sink you. Inside the engine room and on the bridge, the Titanic was in fine shape, but fog and the nature of icebergs made it possible to hide the factors of their undoing in plain sight. Likewise, keeping your eye on the speedometer or the tachometer may give you a good feel for performance but it’s a really bad strategy for successfully driving a car.
Note: The Strategic bets article Most of the Friday morning participants found the title apt. In business, the CEO needs to make strategic bets regularly; and the greatest leadership test is how persuasively they sell their vision to the necessary stakeholders.
Strategic Responses to Globalization and Cost Pressures
The fallout from recent events in the Middle East will almost certainly include rising commodity prices and uncertain profit margins for many global firms. This month’s readings suggest new strategic approaches for international business leaders in an increasingly volatile world:
Strategic Bets appeared in Strategy and Business (February 2011).
Ram Charan and Michael Sisk
Commodities: This Time is Different