5-17

IMD Faculty
Knut Haanaes
Your Strategy Needs a Strategy
Professor of Strategy and uses three dimensions: predictability (can we
International Management
predict and plan it?), malleability (can we shape
Howard Yu it?) and harshness (can we survive it?). The
Professor of Strategic resulting five types of business environments
Management and differentiate the strategy approach best suited
Innovation for each (Figure 1).
Jennifer Jordan
Professor of Leadership and Classical environment. This is host to highly
Organizational Behavior predictable industries with strong brands,
high regulation and limited technology
Guest Contributors change, where winning means being big and
Martin Reeves (via Skype) efficient. A classical strategy – analyze, plan
Senior Partner and and execute – is the optimal choice for wining
Managing Director, BCG in this predictable environment. Typical
Henderson Institute A common definition describes strategy as examples of companies in this domain include
José Lopez a tool or set of processes aimed at creating Coca-Cola and Mars.
Former Executive VP of sustainable competitive advantage. The Adaptive environment. This is characterized
Operations, Nestlé SA and traditional approach to strategy involves by unpredictability and technological
IMD Executive-in-Residence analysis, planning and execution, but this is disruption. Due to high uncertainty,
no longer sufficient. Driven by globalization, classical planning becomes inefficient and
Research & technology and the social feedback loops on companies can win only by being flexible and
Development social media, the business environment has experimentation-oriented. A good example is
Karine Avagyan changed drastically over the last 20 years. Zara, which is very adaptive, experiments a
Lindsay McTeague This has led to a massive proliferation of lot and produces in small batches.
strategy frameworks – over 114 by 2012.1 Visionary environment. Companies and
The business life cycle is now twice as fast, entrepreneurs that operate in predictable
the profitability of industry leaders is reduced industries yet focus on innovations, deploying
by half, and the longevity of winners is much a strategy that emphasizes visioning and
Over 50 executives
shorter. With large organizations operating implementation are typical of this setting.
attended a recent IMD
in multiple markets and having multiple Leaders of such companies are visionaries
Discovery Event on
lines of business, each working in a specific who are not locked into current solutions,
approaches to strategy.
environment and facing different conditions traditional ways of thinking. They “see
Participants gained
that change over time, strategy boils down to patterns where others see noise.” IKEA is a
insights into how long-
choosing the right approach to winning in the visionary company that disrupted the industry
lasting companies thrive
right part of the business at the right time. and does everything to stay ahead.
and renew themselves,
Shaping environment. Here, despite
often by balancing
The strategy palette unpredictability, innovators create an
exploitation and
ecosystem of many companies that
exploration strategies. The
A useful way to present the diverse business collectively reshape the industry. “We can’t
event also touched on new
environments and the optimal strategic predict the future, but we can create the
business models in an era
approaches is through the strategy palette.2 It game” is the mentality that prevails in such
of technological disruption.
companies, and their strategy is all about
Discovery Events are exclusively 1
Reeves, Martin, Knut Haanæs, and Janmejaya influencing, orchestrating and coevolving.
available to members of IMD’s Sinha. Your Strategy Needs a Strategy: How to Alibaba, Amazon and Apple, with their
Corporate Learning Network. To find out Choose and Execute the Right Approach. Boston:
Harvard Business Review Press, 2015.
ecosystems of companies, are excellent
more, go to www.imd.org/cln
examples of players in this space.
2
Ibid.

© 2017 IMD – International Institute for Management Development. No part of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means without the permission of IMD.
 • Balance exploration and exploitation
well (see below), though differently.
• Remain market-focused and driven from
the outside in, rather than becoming
more introverted.
• Are not first movers, but are always
early movers. If needed, they make
large acquisitions.
• Embrace disruptions without falling into
the success trap. Many have in fact
disrupted themselves.
• Adopt a portfolio perspective to “owning”
their market space. They constantly
scan for new ideas, megatrends and
key needs, and are not afraid to exit
profitable businesses and markets if
they will not serve long-term interests.
Source: Reeves, Haanaes & Sinha. Your Strategy Needs a Strategy, HBP 2015 • Have a culture of building capabilities as
they transform.
Figure 1: The • Make efforts in the digital and – perhaps
Renewal environment. This is
strategy palette: Five surprisingly – sustainability areas.
characterized by harsh conditions,
environments and
when a company needs transformation. José Lopez stressed two additional
approaches to strategy
The strategy should aim not to create factors contributing to a company’s long-
competitive advantage but to ensure the term success: having a profound vision
company’s survival, by restructuring to free and purpose beyond mere numbers; and
up and redistribute resources. Only when the ability to say no to things, in order
the survival goal has been achieved should to find the right opportunity. A crucial
the company attempt to deploy another step in bringing the vision to reality is
strategy. American Express and Carlsberg operationalizing, described by Lopez as
Group are good examples of companies “intending the unintended.” Without it,
that underwent major transformation – short-term goals and a narrow focus on
and then renewal – when weakening numbers tend to overtake mid- and long-
performance initially threatened their very term goals. Nespresso, for example, took
existence. an intended decision (for technical and
Evidence from over 200 transformations strategic reasons) not to sell its capsules in
shows that the majority of companies start retail outlets, which led to the “unintended”
transforming only in times of turbulence consequence of its product becoming the
and underperformance. The first step reference in coffee.
Visionaries are not is operational turnaround (cost cutting, When participants were asked to name
locked into current reallocation of internal resources, etc), successful companies, along with factors
solutions and traditional which lasts about six months until the that would contribute to their survival
ways of thinking; they company recovers and reaches industry- over the next 20 years, an interesting
“see patterns where average performance. Yet most companies list emerged (Table 1). It also triggered a
others see noise.” undergoing transformation cannot sustain discussion on how success is defined when
the result in the long run, as they tend to Tesla was mentioned independently by two
stop after the first phase without picking a groups. Tesla has yet to make a profit, but
new strategic approach for innovation and the value of its future growth is huge.
growth.
New business models
Successful business renewal
Professor Yu spoke about the dramatic
Ongoing IMD research shows that out of changes in business models over the
the top 50 Fortune 500 companies in the last 20 years, driven by accelerated
1970s, only 16 made it to the 2016 list, developments in technology and increased
successfully renewing themselves. All of social expectations. The consequences
these companies: of technological disruption are: reduced

Page 2 www.imd.org insights@IMD

transaction costs, increased connectivity, is inward-facing, with an emphasis on
accessibility, scalability and removed entry discipline and clarity of direction. Once enabling
barriers. Regulators are lagging behind The extremes of the two approaches technologies emerge,
these developments and always have to represent the traps companies can fall into: they open up new paths
play catch-up, as in the cases of Uber, • Success trap, the “I am so good, for organizations to
AirBnB and blockchain technology. I don’t want to change” mentality. reimagine their business
At the same time, social expectations Many successful companies neglect models, to make services
are higher than ever. Consumer power exploration and become complacent, more convenient and
has increased through user ratings and bureaucratic and inward-oriented. They closer to consumers.
peer feedback, which are now used to focus on their existing competencies and
build trust that before was mainly ensured on delivering short-term performance,
by government regulations. People and they care too much about executive
have grown accustomed to ease of use, legacy. Kodak and Nokia, for example,
efficiency and instant gratification; they got caught in this trap and failed – a fate
have less patience. that happens to one in three companies,
With the lowering of entry barriers, new according to BCG research.4
entrants that rely heavily on technological • Perpetual search trap, the “I like new
advancements are threatening many ideas, I don’t want to spend time
existing businesses. For instance, refining old ones” mentality. This often
traditional shipping companies are being happens in small innovative companies
challenged by small technologically savvy that continually search for new ideas.
entrants trying out the Uber model for the A famous example is Xerox PARC,
“last mile” in the B2B shipping industry. which spawned many innovations but
Technology companies also dominate failed to commercialize them (including
the stock markets. If ten years ago there the first PC mouse, which Apple went
was only one tech company in the Top on to develop). To avoid this trap
10 companies with the highest market companies should engage in relevant
capitalization, now they occupy half of the innovations, define time horizons, select
list, and most have a platform strategy, opportunities that fit their capabilities,
which leads to much higher performance use tactical experimentation and create
and efficiency. On the strategy palette, this external innovative platforms.
is a Shaping environment in which firms
orchestrate an ecosystem of companies.
4
Reeves, Haanæs, & Harnoss. https://www.
Table 1: Successful
bcgperspectives.com/content/articles/growth-
Exploration and innovation-tomorrow-never-dies-art-of-staying- companies: Still here in
exploitation in business on-top/ 19 Nov. 2015. 20 years?

Big players tend to think that the game Company Factors contributing to survival in 20 years
in their industry is well defined and it’s all
3M Strongly diversified portfolio of innovations across
about winning that game; small players
products and segments.
believe they will reshape the industry.
These two attitudes fit into the exploitation IKEA Extremely customer-driven, very adaptive, addition of
and exploration framework developed e-commerce creates barriers to competitors, great at
by James March in 1991.3 Exploration is talent acquisition.
about what’s new, search and discovery. LEGO Company and brand are relevant, emotional and adaptive.
In such organizations the focus is on long-
term initiatives and projects, innovation Swatch Strong brand and price, lives its vision of “Swiss quality
watches available to everyone.” Succession from dynamic
and growth, and the culture promotes
father to son seems to have worked.
outward-orientation, flexible adaptation
Toyota Strong company with heavy focus on long-term perspective
and empowerment. Exploitation is taking
in investing. Was the first to invest in a mainstream hybrid
something that exists and making it car and to introduce “lean.”
better. Here the focus is on the short term,
efficiency and productivity; the company Tesla Innovative, customer experience-oriented, new models are
being tested. BUT relies heavily on its founder Elon Musk
3
March, James G. “Exploration & Exploitation and faces industry disruption from car sharing, as well as
in Organizational Learning.” Organization drawbacks from slow battery improvement.
Science, 2(1), 1991: 71–87.

insights@IMD www.imd.org Page 3

 High Low
Exploration • Pursuit of new ventures • Fear of new ventures
• Willingness to take risks • Staying in comfort zone
• Desire for innovation • Hiring / promoting people like myself
• Pursuit of differentiation • Routinized processes
• Comfort with uncertainty
Exploitation • Capitalizing on contextual strengths • Anxiety around current state
• Development of people • Constant dissatisfaction with current state
• Job commitment • Desire to escape situation
• Refinement and perfection of current • Opportunities left on the table
processes

Table 2: Influence A recent study5 showed that only 2% new experiences and skills, battling the
of leader’s personal of companies are ambidextrous – they unknown. Exploitation-oriented people
preferences on team efficiently balance both exploitation and enjoy doing well what they know, are
exploration, live longer and are more reluctant to leave their comfort zone and
profitable. They maintain exploitation are process- and efficiency-oriented.
business units while engaging in In addition to being aware of their own
exploration activities through internal preferences, leaders should be cognizant
R&D departments, corporate venture of variations among team members.
capital structures or intense M&A activity. Thus different teams (exploration- or
The latter is a more efficient way to exploitation-oriented, or balanced) might
integrate exploration, since scanning for be more suited to achieving different
and acquiring innovative new start-ups project goals (Table 2). Hence, leaders
provides more flexibility and opportunities should think about their team composition,
for better and more diverse ideas. as well as what they are doing to stimulate
exploration and exploitation in their teams.
Exploration and exploitation Exploration is stimulated by providing a
– implications for leaders secure base, nurturing curiosity and being
comfortable with uncertainty; exploitation is
Professor Jordan looked at the framework usually motivated by focusing on “the now,”
from the individual perspective. At the satisfaction with and commitment to the
personal level, exploitation has been current state, and delivering the numbers.
Just as different defined as reliability in experience through
environments need refinement, routinization, production Key learnings
different strategies, and implementation of knowledge,
different goals while exploration refers to variety in • Companies need to employ different
need differently experience through search, discovery, strategies in different environments.
balanced teams. novelty, innovation and experimentation.6 There is no “one size fits all.”
Neuroscience has shown that different • The main reason companies fail is
parts of the brain trigger each mode – one they either focus only on exploitation
area is responsible for enhanced attention (doing more of the same) or only on
focus, while the other activates a search exploration (doing what is new). Both
for alternatives. approaches are essential for success
Very few people are equally good and need to be balanced properly.
at exploration and exploitation; they • Most technology companies succeed
tend towards one or the other, which because they employ new business
eventually affects individual behaviors and models based on platform-type
productivity. Explorers gain energy from strategies that form a whole ecosystem
going beyond their comfort zone, meeting of companies.
new people, doing new things, learning • Good leaders do not need to balance
exploitation and exploration equally well
within themselves; rather they should
5
Ibid.
be aware of their own preferences
6
Holmqvist, Mikael. “Experiential Learning and efficiently balance exploration
Processes of Exploitation and Exploration
within and between Organizations.” and exploitation in the teams and
Organization Science, 15(1), 2004: 70-81. organizations they lead.

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