Is your strategy impeding or promoting adaptive change?

State Bank now Walgreen'sChange, it’s what most business executives recognize as a constant threat. Unfortunately, many find themselves between a rock and a hard place. How might managers ably meet tomorrow’s change in environmental conditions?

Rather than react, plans that consider structure and processes matter. So too does understanding their organization as an integrated and dynamic whole.

Factors that create efficiency and make an organization and its team effective today appear less stable all too quickly.  The growing connectivity and access to information affects the pace and scale of  technology developments, consumer expectations and competition.

An organization’s survival depends on its ability to adapt and respond to external changes in its environment as well as introduce changes internally.

The connections between strategy, structure and processes not only prove defining for many organizations but also the source of pain or promise to its survival.

Participants in the Strategy discussion took a look in July 2017 at a few articles (posted at the end)  that focused on decision-making challenges that make organizations struggle to adapt.  Here’s some of what we discussed.

Choosing when and what to Change

People adapt to expected change by planning. A strategy clarifies expectations making both planning and adapting to change easier. Strategy when well communicated and understood articulates the underlying purpose that drives an organizations’ leadership to make a change. Strategy in this sense, is a choice of action affects the quality and effectiveness of changes and degree the changes stick.

Management theory differs from strategy, though it too creates expectations that make planning and adapting to change possible.  Management theory determines the organizations’ structure and processes.

Not every change that occurs is expected, and not every expectation gets realized. Both situations require adaptation but few organizations prove capable consistently of decision-making that continuously holds their competitive advantage.

Why one business proves more resilient, and/or adaptive than others continues to elude the best managers and leaders. Cause and effects are complicated to identify let alone sort out.

Nearly fifty years ago,Raymond Miles, Charles Snow, Anal Meyer and Henry J. Coleman, Jr –four management academics set out to understand the process business use to adapt. They looked for patterns in order to prescribe how existing managers might successfully meet tomorrow’s or different environmental conditions.  Their framework remains relevant and informative because it encourages management to see their organization as integrated and dynamic wholes.

For a small, or start-up business this perspective mirrors the intensity of collective singular focus on survival. Once secured, the collective focus naturally diffuses. Accommodating growth each functional role establishes separate priorities that over time compete rather than integrate their resources.

In 1978, existing descriptions of organizations’ ability to adapt were lacking. The authors of Organizational, Strategy structure and process  used their Organizational Behavior and Industrial Relations backgrounds to inform and then describe three categories of processes: entrepreneurial, engineering and administrative.

Miles et al break down basic decision making for managers into three categories: administrative, engineering and entrepreneurial. Organizations’ top management limits their choices of adaptive behavior to those they believe allow them effective direction and control of human resources. They observed that whatever theory of management executives endorsed factor significantly in their subsequent analysis of organizations’ ability to adapt to changes in the environment.

Their preliminary research uncovered a series of patterns relating management theory and organizational strategy and structure.  Fifty years later, these relationships remain evident though more patterns and interpretations and management theories have emerged. Note, this article predates the work of Michael Porter’s industrial economics inspired descriptive five forces theory of Competitive Strategy.

The evolution of expectations between managers and employees are three components of the patterns based on

  1.  a set of assumptions about human attitudes and behaviors,
  2. managerial policies and actions consistent with these assumptions, and
  3. expectations about employee performance if these policies and actions are implemented.

In light of the attention currently paid to organizational culture, their observations prove interesting, especially as nowhere in this article does the word even appear. That’s not to say they overlooked this concept. The authors merely draw the attention of management to individual behaviors and expectations with a prescriptive suggestion for their evolution from a traditional model to a human relations and a human resources model.

Perhaps culture issues playing out in many organizations reflect challenging dynamic patterns these authors identify as: Defenders, Analyzers, Prospectors and Reactors.

Here’s my crude descriptive summary

Defenders Analyzers Prospectors Reactors
Innovation Low Moderate High Low
Efficiency High moderate low low
Centralized Decision-making High Low
P&L autonomy Low High

As you can see, instead of finding a direct alignment between patterns of decision making associated with different management theories and the ability to adapt, the authors  found a mix of assumptions, policies and expectations.

Holding together a dominant coalition with mixed views concerning strategy and structure is not an easy task.

Miles et al found managers engaged in new product or service development struggled to function within planning, control and reward systems established for more stable operations.  Analyzer organizations must be successfully differentiated into its stable and changing areas and managed accordingly.  ….Numerous organizations either led or forced into a mixed strategy (multinational companies, certain forms of conglomerates, many organizations in high technology industries) and their struggles may well produce a new organizational type and demands for a supporting theory of management.

To meet tomorrow’s  environmental conditions successfully, manager’s must ably understand organizations as integrated and dynamic wholes.

A balance sheet view

I reached out to Shep Pryor, a Chicago Booth grad, co-author of The Private Equity Edge and faculty professor. I hoped his  fluency with company financial statements could  help reveal the presence of similar strategic choices about structure and process that Miles, et al described.
I asked him about examples in which the statements might reveal the effectiveness of a decision to enter a market or offer new products, and if they depends less on environmental conditions and more on strategic choices of internal structure and process?  At least that’s what my initial take on the prescriptive in the article.

Here’s Shep’s very cogent reply:

Whether a financial statement analysis, or perhaps a broader 10K, which adds additional content to the financial statements would enlighten the analyst on where the reporting company is in the spectrum described in the article.

First a comment on the article, and then maybe I can shed some light on an answer:

The article categorizes the adaptive capacity of companies more or less as follows:

Low Flexibility High Flexibility
High Stability Defender Analyzer
Low Stability Reactor Prospector

It goes further into its definition by stating that each company must bring some balance to bear on three main problems: entrepreneurial, engineering, and administrative. Finally, the authors point out that managerial theories (and their associated practices) held in high esteem by top management will enhance or confound the company’s ability to adapt.

The main points I [Shep] get from the article are:

  1. Each of the first three types of adaptive behavior may lead to business success but only if the management team’s theories and practices enable them to keep the three fundamental problems (entrepreneurial, engineering, administrative) under control.
  2. Being a Reactor is a default position for companies that lose their capability to maintain strength as one of the other types. Avoiding the position is crucial.
  3. Changing from one box of the matrix to another is a perilous enterprise.

What their commentary brings to mind as good examples:

  1. Ford motor is a Defender, but it is moving toward being a analyzer, as its market is invaded by different technology by such firms as Tesla.
  2. Sears was a defender with no hope of transforming, so it has become a reactor, and will soon become a memory.
  3. United was a Defender when Southwest was a Prospector. As the environment changed to favor Prospectors, Southwest gained dominance.
  4. Kodak Defended its vanishing market to the death, that is, to its own death.

What can you learn from a 10K?

  1. Defenders are likely to be company with higher levels of fixed assets. The more capital intensive a company is within its industry, the more operating leverage it has, and thus the more dependent it is on growth and stability. High sales can lead to colossal margins, while sales below breakeven cannibalize net worth. In the same industry, a company that is less capital intensive, will be able to maintain its margins despite variations in sales.
  2. If the MD&A of the 10k dwells on a variety of new product introductions and a lot of small acquisitions, the company is probably a Prospector.
  3. While companies are notorious for cloaking their true sectors in the 10k sector analysis, if there are disparate businesses highlighted in the sector analysis or the other commentary, it will be clear that the company is at least trying to be an Analyzer. For example, a successful company that makes truck axles and also sells ceremonial tea sets through a party plan is an Analyzer, while an unsuccessful company that does the same is a Reactor.

A little financial forensics can go a long way.

The Articles

Alignment of Strategies

http://smallbusiness.chron.com/alignment-strategies-4649.html

Organizational strategy, structure and process
The Academy of Management Review, July 1978

http://www.wiggo.com/mgmt8510/Readings/Readings5/miles1978amr.pdf


How aligned is your organization

https://hbr.org/2017/02/how-aligned-is-your-organization


OPTIONAL

If you need a focal point to think about the question, consider the activist investor LOEB’s stake in Nestle

Nestle: Third Point Daniel Loeb Activist Investor

https://nyti.ms/2tbczyS

Sports analogies for business – how effectively do their impact and influence extend beyond the game ?

George Toma Readies Superbowl 48 Giants Stadium Field.
Superbowl XLVIII, Giants Stadium NJ readied by George Toma, official groundskeeper for all 47 preceding superbowls and his crew.

On the day of  Super Bowl XLVIII, it’s impossible to ignore the power of sports to captivate the attention of the world. Few events compare historically to viewership levels and  calls for  the all-consuming air time devoted by the media to a singular recurring event. Think about it, other than religious or national holidays, only acts of pure terror or wonder attract this much attention.

Irrespective of the team match ups, the pinnacle represented by the Super Bowl offers several compelling lessons to further Business Strategy, though we will overlook the obvious promotional marketing option.

Successful business strategy defines itself as a quest for clear advantage.  Sports stories typify this quest and that’s why we wondered about the value of the analogies, given their abundance and frequent invocation.  Do they help business leverage competency, inspire confidence and deliver positive outcomes?  As usual, participants reviewed in advance a few selected articles (linked at the bottom of this post). These thought starters warmed up participants reflective abilities and helped us frame the conversation as follows:

  • A battle of objectives-Winning vs. Value Creation
  • Numbering Success
  • Beyond the action of “the game”
  • Game Changers

The topic was not intended to prove conclusive, and we offer the following post-discussion elaboration of hasty notes for those of you who missed out.  Do feel free to add your thoughts and share the responses with others.

Winning Objectives

Undeniably there is a cross-relevance between many sports philosophies and business. Competition and Sports go hand in hand. Opposition, rivalry and contest make up the elements necessary to motivate both players and observers. The experiences of playing or watching sports evoke great passion and focus, behaviors which naturally pervade our lives and make the contests universally appealing. No wonder, sport stories succeed as shorthand references connecting experiences across a series of interpersonal activities including business.

How and do sports’ stories help or hurt business strategy? The context of a game doesn’t exactly mirror the ongoing demands of business.  A specific sport’s rules, frequency of play and consistency of  playing conditions (e.g. the field, the season, the equipment, ethics etc) make sport’s winners easy to name and likewise test the merits of a particular set of plays or strategy.  Business by contrast strives to eliminate ambiguity and standardize its rules and apply them consistently.  The result is the frequent restatement of results which makes the parallels to sport that much more divergent.

The context of game doesn’t exactly mirror the ongoing demands of business.  For example, is the business of business to win, or create value?  Does strategy offer greater value when it focuses on generating general or more specific outcomes?

The delimiters present in sports—the field,the game, the season –all make possible two fundamental self-sustaining attributes:

  • Emotional fervor, and sheer adrenaline fuels high performance  in individuals, teams and fans but is impossible to sustain naturally.
  • Measurable relationships easily established between actions and rewards—both tangible and intangible .

Business strategy in contrast struggles with these issues and looks to sports for inspiration while persistently under playing the value and resists imposing similar clear and consistent delimiters.

For example, the value of  a win, though always significant accumulates in sports but often dissipates in business.  To get the points, make the down or win the game rarely engages and rewards  employees directly as  it does  players.  To deliver success, employees need more sustainable incentives.

How a business measures or tracks a win or a loss differs dramatically from sports.  It also differs within industries or within an organization based on the business unit.  Are forecasters held accountable for their targets in manners equal to sales professionals?  What about wins in customer service versus IT?

Clear outcomes generate stories that rouse emotions to a degree that no numerical analysis of performance musters. Engagement in a given task or play and the survival lesson it produces can motivate both employees and players to focus, as well as extol the importance of each effort.  The analogy of surviving a skirmish makes clear connections between the single event’s outcome and its impact on the larger mission.

War analogies and larger battles such as the Super Bowl share common language but differ drastically in participant experience. Isolating a single event and elevating its importance can be an effective motivator, but in business performance goals need to be sustained and ever-increasing.

Sports analogies dominate conversation today may be due to the increasing prominence of the business of sports and the remoteness of common war experiences in many American’s lives.  To be successful understood, metaphors need to be familiar to your audience which increases its authenticity and your credibility.  These conditions make it easy to turn to sports for help.  In a single game, the event stakes don’t carry the same consequences as being a general or platoon leader in battle.

The idea of surviving the skirmish and larger battles may be proper in sports but many business problems are often ongoing.  To call for action, any insight the analogy inspires must ring true.

Beyond the action of “the game”

Before any game, a coach and the players generally agree on a strategy.

Coaches help their players gain the knowledge they need to be effective and win. Regular practice, drilled instruction and constant review raise the level of experience and consistency of individual performance.  These factors help coaches recognize the readiness of a player and affect whether to play them in a given game and situation. Since players once they possess the ball often have wide discretion for their actions, the coach’s decisions to play them matters.  In business there’s no overt practice, and few managers and leaders prove effective as coaches, though they remain accountable. In business proven performers get more freedom than in many team sports.  For example, players may blame their poor collective performance on  decisions made by others, as reported by Darin Gannt.

‘‘That was a changeup,’’ Brian Urlacher said, via the Chicago Sun-Times. ‘‘I don’t like coming out of the game. But he’s the head coach. So I do what he says.’’

Few people close to the details willingly write or disclose these facts and their reflections in a timely manner for fear of repercussions.  There’s greater value to silence and avoids becoming the subject of wider scrutiny.  Sure, there are some wonderful tell all stories even if they tend to be extreme– great failures and great successes.  It’s no wonder that everyone confuses tactics and strategy. the failure of planned plays in both business and sport always depend on both the player capabilities and circumstances.  The difference isn’t just whose calling the shots, or is it?

Admittedly different sports offer different learning opportunities for business, but in general business could benefit from more post-mortem reflections on the game and analysis of play.

Organizations that do demand routine project reflection, write and publish  them at least internally demonstrably outperform their peers.  Still the number of organizations who have embraced this practice exemplifies the larger ambiguities that are rampant in business.  Of course sports isn’t immune to the fall out that comes to their industry from these stories but not to the extreme  and speed with which the market punishes business.

Numbering Success

Numerous performance indicators exist in both business and sports.  In sports, wins and losses are the common denominator of success for both players and teams.  Regularly, new scorecards and metrics attempt to track and match up players within an organization or rank the organization in an industry.  The quest for more data and more metrics has led to the rise of numerous successful businesses.

Numbers try to provide great performance inspirations, but fail to rouse people at the level of a great story.  Using alternative statistics to recruit and balance a team ‘s capabilities and diversity of skills plays out in both arenas.  Michael Lewis and his compelling story Moneyball heralding the quants’ efforts  in baseball to change the dynamic of the game, proved to be an ineffective strategy.  Sports management quickly learned  that an over-reliance on more statistical data missed the things that trained scouts or observers of real behavior historically captured.  Situational competence, summarized in statistical measures still requires a great deal of domain knowledge to properly interpret and produce winning combinations. .  Either may be sufficient to generate a strategy, but both are necessary to create effective strategies.

These lessons, business sadly discovers slowly and fails to fully embrace even in the wake of the colossal market disruptions caused by internet and mortgage back investing bubbles. Moneyball profiled the underdogs and arguable changed the consciousness of average America about the power of data analysis, a welcome message to Chicago quants.

Another key lesson was the use of underutilized information to plea the case for alternative strategies.

The NY Times story that second guessed the NFL coaches we read illustrates the common decision-making tension data analysis presents to both sports and business leaders.  Data’s  wide  availability made it possible for the NY Times to create an accurate predictive model and demonstrate the value of punting  in the fourth quarter, an impulse Coaches rarely heed.  Response by Ditka in the comments that follow reminds modelers that the model fails to consider what people in the game may know about the particular event that may be missing from the analysis–may being the operative phrase and tension point.

Clearly quants have their place but good decisions always include some domain knowledge.  The access to information makes it easy for competitors to rely on the same information and in fact that’s part of why the law of averages continue to pan out.  Statistics are wonderful reference points but one still needs domain knowledge to recognize what made the outlier an outlier.

Important to understand boundaries or the difference between situational competence and domain Knowledge.  Sports metaphors can help more people think differently when used effectively.

Game changers

The business of sports creates value regularly, but what about sport itself?

George Steinbrenner

George Steinbrenner purchased the Yankees at the low point of their competitiveness in 1973 for $8.7 million. According to Forbes, the teams’ worth was $1.7 billion  in 2010, at the time of his death.  Steinbrenner was the first to grasp the handle of the free-agent market and he made it work for him. In effect he made the rules they all had to live by and he dominated the game.  He made offers to players they couldn’t refuse. Mike DeGiovanna writing for the LA Times explained that  lavish spending on free agents became investments that helped fuel five world Series Championships since 1996.  His willingness to pay the premium  for exceeding the league’s salary caps allowed them to keep a winning streak.  Under his tenure, the Yankees started a television network and built a new stadium.

“The bottom line is he put great players on the field, and he delivered championships,” Cashman said. “He built something the fans can be proud of, and that’s what a great owner does.” (see )

Discussion Takeaways

In business turnarounds, surely the numbers matter but they are often not the deciding factor.

Steinbrenner’s leadership style and strategies show how it’s possible for a single individual to usher in sweeping changes in an industry.

When it comes to Big Data, it’s important to differentiate situational vs. statistical know how.  The premium value attached to Baseball statistics could easily explain why Alex Rodriquez got kicked out, because his drug enhanced performance was screwing up the stats.

Business can learn a lot from Sports.  The ready availability of numerous statistics offers a baseline and yet one still needs to overlay good judgment.  Efforts to track results may bring you closer understanding the true nature of  a problem’s structure.  Numbers  balance your  intuition and know how. They  may clarify your findings, but in the end performance is a blend of art and science.

Steinbrenner’s decision to reward players so heavily for performance may have changed the game but it also made it more lucrative for players to juice.  Be careful what lesson you take.

Sports analogies can be intimidating, to those who don’t fully understand the sport or make the connections story tellers perceive as relevant.

Increasingly Sports has taken to applying business analogies to improve its own game, its own business performance.  None the less some of the greatest quotes come from sports players, e.g  yogi Berra. “I like the moment when I break a man’s ego.

Business is a long-term effort toward an ever elusive goal, while sports  and sports management operate in a much more limited, shorter term horizon. The lessons don’t offer much assistance or inspiration for sustaining success over  longer horizons.

Sports has its Black Monday, the day in Januaray when poor performing coaches often get cut.  No singular day of reckoning in business though the swift reaction after annual earnings may produce a similar response.

ARTICLES

Journalism second guessing NFL coaches

http://gigaom.com/2013/12/06/awesome-a-new-york-times-bot-is-second-guessing-nfl-coaches-on-twitter/

be sure to check out the comments and remark by Ditka.

NASCAR second guessing

http://sports.yahoo.com/news/tony-stewart-second-guessing-decision-following-ryan-newman-201900576.html

Adopting analytics

http://www.sportsbusinessdaily.com/Journal/Issues/2013/08/12/Opinion/Sutton-Impact.aspx

Think Tank: sport and business are not a good fit 

http://www.telegraph.co.uk/finance/businessclub/management-advice/9400111/Think-Tank-sport-and-business-are-not-a-good-fit.html

Communicating your strategy

http://gbr.pepperdine.edu/2010/08/communicating-your-strategy/

Optional:
Focus on Game Changer—short video for investors in sports

http://www.sloansportsconference.com/?p=11021