Today's business environment is characterised by turbulence and unpredictability. Different shifts in the global balance of economic power will undermine the ability of leading industries to control different disruptive forces.
Our vulnerability to 'black swan' events is explored by conventional approaches to risk management. But managing 'black swan' events is about building robustness to reduce vulnerability to unpredicted events and responsiveness to explore positive ones.
In most sectors of the global economy excess capacity is the norm which fuels price competition and reduces margins. Additionally, internalisation of China and India market creates competition in final user markets. One perfect example is the smart phones.
Development in digital technology also undermine the established positions in industries. New technologically advanced substitute products are more widely available. It forces businesses to reconsider their strategy landscape.
Businesses also need to adapt to the forces of society, to their values and expectations. Legitimacy has become a priority for many organisations today. Loss of social legitimacy may be a great threat to business survival. Businesses and enterprises are now social institutions and the social aspirations has been endorsed by most leading management thinkers. Changing values of society shape the business strategy. The criticism or market capitalisation result in deregulation, development of flexible labour market and liberal economic policies are believed to offer the basis for stability and prosperity.
Liberal economies, also known as market economies or free-market economies, refer to economic systems in which the operation of markets and the forces of supply and demand play a significant role in determining the production, distribution and pricing of goods and services. In a liberal economy, the government interventions in the economic activities is typically minimal and the decisions are driven by private individuals and businesses. Private ownership and entities have the right to own property, including land, capital and businesses. This allows individuals to make independent decisions regarding the allocation of resources.
Liberal economies are characterised by the competitive market environment. Multiple businesses operate within the same industry and it drives the efficacy, innovation and responsiveness to customer needs. Price and quality are determined by market forces rather then government interventions. Prices of goods and services in liberal economies are primarily determined by supply and demand. The interaction between buyers and sellers sets prices that reflects the perceived value and scarcity of products.
Liberal economies emphasise limited government interventions in economic affairs. The role of the government is usually focused on ensuring the functioning of competitive markets, protecting rights, enforcing contracts and addressing market failures such as externalities and monopolies. Liberal economies promote international trade by reducing barriers to the flow of goods, services and capital across boarders. This includes minimising tariffs, quotas and other trade restrictions to encourage the exchange of goods and services between countries.
Liberal economies prioritise individual freedom and choice. Individuals have the liberty to make economic decisions based on their own interests, including decisions on employment, consumption, savings and investment. The pursuit of profits is a central driver in liberal economies. Businesses aim to generate profits by offering goods and services that consumers demand and are willing to pay for. The profit motive encourages efficacy, innovation, and resource allocation based on the market signals. While liberal economies emphasize market mechanisms, they may also incorporate some level of government regulation and intervention in areas such as consumer protection, labour standards, environmental regulations and social safety nets. The balance between market forces and government interventions can vary across different countries and economic systems.
The relative economic decline in the US, Europe and Japan to China and other developing countries reinforced confidence in free market capitalism.
In 2010 China overtook Japan as the second largest economy. Adapting to society growing demands for fairness, ethics and sustainability present challenges for business leaders. Today companies embrace those values and make it their own mission to ensure long-term consistency in their strategy and corporate identity. There are risks, however that these values will compromise business effectiveness, therefore in many companies it becomes a form of rigidity rather the source of competitive advantage. Other companies by adopting and taking account for needs of different stakeholders report greater responsiveness to their external environment, greater commitment from employees and enhanced creativity.
Reorienting Corporate Objectives
Adapting business goals to accommodate greater social responsibility restricts the abilities of companies survive intense competition. Thus the focus of the senior management should not be profits but strategic moves that drive profit: operational efficacy, customer satisfaction, innovation and new product development. This allows to focus on managing the basic drivers for value creation. To improve corporate performance strategy analysis is imperative.
Focusing on strategy does not always mean simple strategies as competitive advantages are difficult to sustain. Most successful companies continuously focus on the drivers of competitive advantages, including cost efficiencies, differentiation, innovation, responsiveness and global learning. This impose challenges that push companies to rethink their management systems.
Options thinking
The value of a firm not only derives from profit values but the values of options. During turbulent times, growth options, abandonment options and flexibility options become increasingly important as a source of value. The implication of options thinking expends to the most fundamental aspects of a business strategy and to the tool of the strategy analysis it employs. Strategic alliances provide particularly potent tools for creating growth options as they allow firm to make minimal investments in new technological and market opportunities that can be exercised through larger investments, for example through joined ventures as more information emerges.
Options thinking in strategy refers to the ability to consider and evaluate multiple potential courses of action of strategic alternatives before making decisions. It involves adopting a flexible and adaptable mindset that recognises the existence of various options and explores that potential outcomes and risks associated with each option. Rather then focusing on the single predominated plan, options thinking encourages exploiting multiple alternatives or scenarios. It considers various strategies, approaches or potential actions that could be pursued to achieve a desired goal. Options thinking involves assessing the potential outcomes and consequences of each alternative. This includes evaluating the risks, rewards, costs and benefits associated with each option. The goal is to understand the potential impact and likelihood of success of each alternative.
Options thinking emphasises the need to be flexible and adaptable in response to changing circumstances or new information. It recognises that the future is uncertain and that adjustments may be needed to be made as the situation evolves. Real options analysis is a specific methodology within options thinking that applies financial options pricing concepts to strategic decision-making. It involves quantifying the value of various strategic options and making decisions based on their potential financial or strategic value. Options thinking acknowledges that there is inherent uncertainty in strategic decision-making. By considering multiple options, decision-makers can better navigate uncertainty and mitigate risks by selecting the most suitable option based on the available information. Options thinking encourages a mindset of continuous learning and experimentation. It recognises that not all options will lead to immediate success and that failures or setbacks can valuable insights and learning opportunities. Options thinking involves developing contingency plans and alternative strategies to address unexpected events or changes in the business environment. It helps organisations to be prepared for various scenarios and respond effectively to unexpected challenges. Options thinking in strategy is particularly relevant in dynamic and uncertain business environments. It allows organisations to be proactive, agile and responsive to challenging conditions, rather then being limited by rigid plans or a single course of action. By considering multiple options and their potential outcomes, organisations can make more informed decisions, increasing their ability to navigate complexity and seize opportunities.
Industry analysis has determined that the industry attractiveness is dependent on the profits, but with rapid changing environments we can say that its attractiveness will depends on the options value. The attractive industry is the one that is reach in options. For example an industry that producers number of different products across different segments, utilises technology and the internal mobility tends to be low.
An option approach has major implications on the capabilities and resources. An attractive resource is the one that can be applied in different businesses and support alternative strategies. A highly specialised capability and expertise offers more options.
Complementarity research
Strategy must fit with the business environment and with the firms resources and capabilities. Complementarity research addresses the linkages among firm's management practices. A key focus has been from mass manufacturing to lean manufacturing and it has been seen that reorganising the business activities has been counterproductive without adoption of human resources practices. Similarly six sigma quality needs to be accompanied with incentives, recruitment policies, product strategy and capital budgeting practices. Every firm is unique and must produce unique configuration of strategic variables and management practices.
Complementarity research refers to an approach that seeks to understand and explore the synergistic relationships between different elements, factors or components within a system. It involves examining how these elements interact and compliment each other to achieve desired outcome or result. It aims to identify how different elements work together, reinforcing or enhancing each other's effect. It recognises that a complex phenomena are often influenced by various interconnected factors that cannot be adequately understood by studying them in isolation. It emphasises the importance of studying the interactions and relationships among different elements within a large system. It seeks to identify how these elements collectively contribute to an overall outcome. The focus is to explore how different factors or elements reinforce each other's effect. It may include examining how different strategies or interventions complement each other, or how various resources or capabilities interact to create a competitive advantage. It aims to develop a holistic understanding of a complex phenomenon by considering multiple perspectives and examining the interplay of various factors. It goes beyond studying individual factors and seeks to capture the broader context and dynamics at play. It often seeks to identify practical implications and insights that can inform decision-making and action. By understanding the complimentary relationships among different factors, we can provide recommendations to how to optimise the relationships to achieve desired outcomes.
In the context of business strategy, complimentary research refers to the study of how different elements or components of business strategy interact and reinforce each other to create competitive advantage and achieve desired outcomes. It involves examining the interdependencies across different strategic choices and elements within the organisation. Complimentary research aims to provide a comprehensive understanding of the external business environment, industry dynamics, customer needs, competitive landscape and internal capabilities. Organisations can identify opportunities, anticipate threats and make informed strategic decisions. This research involves studying the macroeconomic factors, industry trends, market dynamics and regulatory frameworks that impact the organisation's operations. Market research involves collecting and analysing data on customer preferences, behaviours and needs. It helps the business to understand its target market segments, assess customer satisfaction or identify potential gaps or unmet demands. Market research can involve surveys, interviews, focus groups and data analysis. The research focuses on understanding the competitive landscape and analysing the strengths and weaknesses of the competitors. It involves evaluating competitor's strategies, market share, product offerings, pricing and distribution channels. It helps organisations to differentiate themselves, identify competitive advantage and develop effective positioning strategy. The assessment also involves research on the organisations internal capabilities, including its resources, technology, human capital and operational processes. This allows for identifying strengths and weaknesses within the organisation and determine areas where strategic improvement or investments are needed. The research also involves monitoring technological developments, evaluating their potential impact on the industry and identifying opportunities for leveraging technology to gain competitive edge. The research also involves financial assessment, evaluate investment opportunities and determine the financial feasibility of strategic initiatives. It involves analysing financial statements, profitability ratios, cash flow projections and other indicators to make business decisions. And finally, the research includes identifying and assessing potential risks and uncertainties that could impact the business strategy execution. This can involve analysing market volatility, regulatory changes, geopolitical factors and other risk factors that could affect the business environment.
Complexity theory
Organisations are complex systems whose behaviours result from interactions or a large number of independent agents. There is a certain level of unpredictability. Power law distributions can have an impact on the business. Small changes may trigger minor consequences but may also influence major movements.
Power law distributions, also known as Parento distributions are statistical patterns that describe certain phenomena in various fields, including business strategy. They exhibit certain mathematical relationship between the frequency of an event and its magnitude of impact. In the context of business strategy, power law distributions imply that a small number of events or factors can have disproportionate large impact on outcomes. This pattern can be observed in different areas, such as customer behaviour, sales, innovations and resource allocation.
Customer Revenue Distribution. In many industries a small fraction of customers contribute to a significant portion of the overall revenue. This phenomenon is often referred as "80/20 rule" or the Parento principle. It suggests that roughly 20% of customers accounts account for approximately 80% of the company's sales. Understanding this distribution can help businesses focus their efforts on high-value customers and tailor their marketing and sales strategy accordingly.
Innovation and product adoption. Power law distributions can also be observed in the adoption of new products and technologies. In many cases, a small number of innovative products or technologies capture a significant share of market, while the majority of offerings have a limited success. This distribution highlights the importance of identifying and investing in breakthrough innovations that have the potential to disrupt the market.
Resource allocation. Power law distributions can impact resource allocation decisions within an organisation. For example, a small number of projects or initiatives may generate a majority of the value or impact, while the majority of projects have relatively lower contribution. This distribution underscores the need for strategic prioritisation and allocating resources to high-impact projects to maximise overall performance.
Network effects. Power law distributions can also be observed in network effects, where the value of the product or service increases as the number of users or participants increases. Example includes social media platforms or online marketplaces, where a small number of influential users or sellers can attract a significant number of followers or buyers, creating a feedback loop that reinforces the dominance of a few key players.
Understanding power law distribution in business strategy is crucial for decision makers as it highlights the uneven distribution of impact and emphasises the need for targeted efforts. By identifying the key factors that drive disproportionate outcomes, organisations can focus their resources, develop effective strategies and capitalise on few critical elements that significantly influence success.
Rules for self-organising
With all these different factors, risks and uncertainties, how do we cope?
Complex systems have a capacity to self-organising. This can be achieved by adopting of few simple rules: 1. Identify with the organisation, 2. Information that provides synchronised behaviour and 3. Relationships.
Complex systems can also stagnate and become disorderly. In between there is an intermediate region where evolutionary adoption occurs. Small, localised adoptions my allow the business to achieve fitness peaks.
The Contextuality of Linkages within a firm
The Contextuality of linkages is the extend to which the benefits from any particular activity depend on which other activities take place. Some management activities are generic and their performance effect are interdependent of other activities in a business. Other interactions are context-specific. Acknowledging the different ways in which firm's activities interact offers insights into some of the complexities of strategic management. It helps to understand why a strategy that has worked well for one company is a failure when adopted by a competitor. There are risks in adopting best practices which may worsen the situation rather then making it better.
Redesigning the organisations
Organisational capabilities need to be embodied in the business process and provide basis for coordination between the departments. The more capabilities a business develops the more complex systems are becoming. Businesses implement quality management processes. This also involves the adoption of social and environmental responsibilities. There are needs to develop multiple capabilities as organisations operate in international markets and meet the needs of large global customers. The quest for innovation and organisational change pushed companies to create multi-functional teams for developing new products and new businesses. These create dynamic capabilities and new learning structures.
If firm expands their range of capabilities there are implications on the business complexity. The answer to these is the informal rather then formal structures. The organisational requirements for coordination are different then those required by compliance and control. Coordination support structures that requires modularity where teams are more inclined to support the business activities. The coordination between modules does not necessarily needs to be managed in a directive sense. Coordination can be achieved through standardisation, mutual adjustment and horizontal collaboration. More companies organising their activities less around functions and more about time-designated projects where a team is designed to a specific project with a clearly defined outcomes and completion dates. There are more likely to achieve innovation, adaptability and rapid learning then more traditional structures. They avoid the ossification of structures and concentrations of power. Reducing complexity at a formal level can foster a greater variety and coordination at the informal level.
For coordination to be effective in the absence of the top-down directories, it requires shared cognition of what the organisation is. Organisations loose advantage when they fail to create clear identity. A business with coherent core is able to be sustainable through turbulence because of the clarity of who it is. It permits flexibility and responsiveness to be reconciled with stability. Organisational identity creates an important linkage between the firm's internal self-image and the market positioning.
Additionally, within companies, information and communication networks support complex coordination with little or no hierarchical direction. Real-time information is characterised by automated processes.
Relationships are also the pathways for coordination in the systems. Through relationships information is created and transformed, organisation's identity expands and the business becomes wiser. In self-organised systems people need access to everything to accomplish their work.
strategic alliances also allow or reducing the complexity. In order to expand range of capabilities businesses access the capabilities of other firms and technologies allow for that collaboration.
These changing conditions call for new roles or managers within organisations. As organisations and their environments become increasingly complex the CEOs are not longer able to access certain information, thus their role becomes more into guiding the business evolution.
The notion of the leader as the heroic decision maker is untenable. Leaders need to be come social architects, constitution writers and entrepreneurs of meaning. The role is creating an environment where employees can thrive, have a change to collaborate, innovate and excel. The leadership is less about decision making but more about cultivating the identity and purpose. The key role of top management is to clarify and communicate the company's purpose, heritage, personality, values and norms. To unify and inspire the efforts leadership involves providing the meaning to people's own aspirations. Senior management requires different knowledge and skills. This includes self-awareness, self-management, control, integrity, conscientiousness, social-awareness with empathy and social skills including communication, collaboration and relationship building.
More decisive interventions are needed to foster radical changes. Behaviours and complex systems can be managed with few simple rules. Managers need to create a level of adaptive tension that optimise the peace of change and innovation, often achieved through performance targets.
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