Beyond Strategy

The Impact of Next Generation Companies

Michael Moesgaard Andersen, Flemming Poulfelt

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317818441
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Why is it that some companies turn out to be more successful when doing the opposite of what is prescribed in many of the current books on management and strategy?

Interestingly, many of the companies depicted as very successful companies in the standard literature end up not faring well over time - probably because they somehow end up in a dangerous autopilot mode. What this suggests is that the conventional literature cookbook isn't telling us the whole story. Even if companies have temporarily developed from an ugly duckling to a white swan, the popular recipes for success may be clipping such companies' wings.

Conversely, companies adhering to disruptive business models are seen to be more agile and to possess a higher degree of actionability. Such next generation companies are labeled black swans. They thrive because they are bold and embrace the great unknowns of tomorrow with open minds and eyes. At the same time, they are able to take advantage of incumbents' fears, risk-aversion and blindness to what's coming. Beyond Strategy delves into the inner workings of such black swans as Apple, Aravind, Emirates, Huawei, Natura, Ryanair and Tata and addresses the rise and fall of Nokia. The authors provide explosive evidence of black swan companies working against the norms to enter unchartered waters, determined not to adhere to the best practice of others, but rather to create a genuine next generation practice.

Next generation companies and their underlying philosophies are here to stay – are you?

Part I
From the Conventional to the Emerging New Paradigm

Chapter 1
Disrupters’ Paradise

Is our Mindset Geared Towards a Reality that doesn’t Exist?

Americans have an obsession with the quick fix, and nowhere has the idea of a magic formula been more fervently embraced than in the ranks of American management.

This was the introduction to Michael E. McGill’s book, American Business and the Quick Fix, published in 1988.¹ Having heavily criticized the existing literature on management and strategy and also the MBA schools’ support for quick fixes, he concluded in the last chapter that:

American management is in “a hell of a fix”! This simple, declarative observation describes a variety of conditions true of management and managers today. Certainly the noun sense of fix applies. Even the most naïve observer of business recognizes the awkward situation, the dilemma, the predicament of managers today (McGill, p. 201).

McGill’s book did not receive much attention and is not quoted in many of the very popular American textbooks, perhaps because he was critical in his approach to the idea of a ‘magic formula.’ As will be expanded on in Chapter 2, the overwhelming majority of the literature within the field of management and strategy originates from the US and is, by and large, to be found within the context of the magic formula (also labeled ‘the golden recipe’). This is interesting not only in an American context but also globally due to the considerable American impact on business thinking globally. It also has as much resonance today as it did when McGill’s book was first issued in 1988.

The bias towards the development and application of a simple recipe, which in an intuitively rational way exhausts the actions necessary for success, has important implications. These are crucial in understanding a new type of company which typically arrives on the scene unexpectedly and with disruptive success. The emergence of so-called ‘black swans’ can take whole industries by surprise.

When the mindset among academics and managers is geared towards intuitively rational strategic thinking, where is the mental space for success delivered through the unexpected, through irrationalities, unforeseen tactics, the X factor, and so on? The short answer is that there is no room!

It is this blinkered outlook that has paved the way for the emergence of black swans, and created a kind of disrupters’ paradise. It is far easier for black swans to disrupt when they are met with no response, laidback surprise, and a complacent ‘watch-and-see’ attitude. Black swan companies almost have a free lunch as long as our thinking is steered towards a reality that either doesn’t exist or is blurred.

Conventional companies typically develop their business strategies by pairing their own knowledge with that of the external strategy adviser, and by referring to what they perceive to be solid and undisputable knowledge. However, as we shall see throughout this book, black swans operate on the basis of unknowns—i.e. by addressing what they know they don’t know, or by anticipating the completely unknown. This ability to acknowledge, embrace, and be ready for what is not yet known gives black swans an important edge over conventional companies.

Is it Sufficient to be Hatched in a Swan’s Egg?

Many companies fare well by starting off as ugly ducklings and then, over the decades, developing into white swans. Much of the conventional literature on management and strategy is based on the aspiration to bring companies to the white swan stage, where they fulfill the evolutionary plan and truly fly. Such companies are not in the main the focus of this book; rather, these pages are dedicated to the phenomenon of black swan companies—businesses that find their own way to successful flight, without the expected process of conventional metamorphosis.

Consider Ryanair which in the space of just a few years gained the position as the largest inter-Europe airline, carrying more than 75 million passengers, disrupting a number of established white swan carriers. A further example is the growth rates of Emirates and Etihad, airlines originating in the United Arabic Emirates; both have commanded unexpectedly sizeable market shares and have turned their home locations into preferred international flight hubs and destination cities. Then there was Apple’s invention of the iPhone and its associated business model, which propelled the company to dizzy new heights while disrupting a number of white swan mobile phone manufacturers. Another example is Chinese telecommunication solution provider Huawei, which was not taken seriously by the white swans in its industry, yet quickly took the number one slot in its market.

Where Does the Black Swan Metaphor Come From?

The phenomenon of a so-called black swan is the appearance in real life of an animal or a company that nobody had expected. Most people have only seen white swans so they infer from this that only white swans exist. Similarly, no one is prepared for black swan companies.

The term black swan is borrowed from Nassim Nicholas Taleb’s eponymous book. He uses the term to address the philosophical problem of “the impossibility of calculating the risks of consequential rare events and predicting their occur-rence.”² For our purposes, the term is applied at a more disaggregated level, i.e. at the company level or even at the individual level, and in conjunction with strategies which seem to be disruptive by nature.³

The rare and unexpected events fostered by black swan companies are the point of departure for this book. Instead of looking at averages, statistical correlations and forecasting based on past performance, we have taken as our evidence a credible number of companies that have succeeded without conforming to accepted business strategies. By taking a manageable sample of such specimens, we have been able to delve deep into the inner workings of these new types of companies. It is only by looking at the intricate behavior of individual companies, departments, innovative business units, and single personalities that we are able to observe the important micro-foundations for black swan successes.

Notable Black Swan Events

Apple’s history is a long and involved affair, marked by a number of distinct phases. First was the sudden emergence of the user-friendly personal computer (Macintosh in 1984)—something that consumers did not yet know they needed. In this sense, this episode resembles a black swan event, albeit that its potential impact didn’t fully materialize due to Microsoft’s rapid commercialization of its own graphically controlled operating system. Despite some reasonable years, Apple’s success did not live up to its early promise and the company did not fulfill its real potential until its very disruptive foray into music, smartphones, tablet computing, and digital publishing.

A closer look at the inner workings of Apple reveals a black swan transformation of the company and the emergence of a more dynamic business.

Black Swan Influencers

Looking at Apple from a historical perspective it can be argued that John Sculley, who took over in 1985 (when Steve Jobs left the company), followed a white swan strategy based on his experiences from the retail industry (he came from Pepsi). It was during this period that Apple’s profile as an innovator and prominent player was arguably at its lowest. When Steve Jobs returned to Apple and later took over the CEO role, he reintroduced a fresh outlook and culture of innovation to the company. During Jobs’ reign, Apple produced some revolutionary products and completely changed the way people communicate and consume content. The rest, as they say, is history.

When we turn to the micro-foundation of Huawei, it is striking to consider the personal background of founder Ren Zhengei. His military roots shaped the company’s corporate mindset so that sales teams were referred to as ‘market guerrillas’, and market strategy in terms of ‘countryside surrounding cities’ and the need to “develop a pack of wolves.”⁴ By seeing things differently, he was able to command an authoritative position in the market.

How Are Black Swans Different?

The black swan is characterized as something completely unexpected, and something which is largely unexplainable—something which does not make sense to people who only expect to see white swans. The black swan is a true outlier. Conventional firms converge around the mathematical mean of the Bell curve based on known metrics, while the black swan often operates on the basis of metrics that are not yet known, throwing out the neat graph and challenging existing assumptions in a highly disruptive way.

As recently as just a few years ago, nobody would have expected Apple to enter the smartphone market, still less have the phenomenal success it has enjoyed with its App Store. Market leader Nokia was slow to react, and when it did launch a counterattack it was too late; as a result Nokia lost market share at a faster rate than it was able to adjust its cost structure. The upshot was a drop in share price to a tenth of the value it had held before Apple launched its assault on the then fledgling smartphone market.

Similarly, traditional airlines have seen their market and business models challenged. Just a few years ago, it would have been unthinkable to the market leaders that flights would be promoted free of charge, yet this is precisely what Ryanair and some of the other rule-breakers have begun to experiment with.

What is most striking about black swans above all is the impact they have on their environment. This is twofold. The first effect is the sheer growth of the black swan itself, and the speed at which they absorb market share from established rivals, as has been seen with Ryanair, Apple, Emirates, Etihad, Huawei, and other black swans.

Another, to some extent overlooked attribute of the black swan, is the disruptive effect they have on the wider business environment. Very often market segments converge resulting in a zero-sum game where consumers’ expenditure does not exceed a certain threshold. Consequently the success of the black swan is usually in direct proportion to the strategic and financial failure of traditional market players. In short, black swans deliberately create value while simultaneously removing a relatively large proportion of value from competitors.

To summarize, the black swan is synonymous with disruption. It is not a friendly beast whose presence everyone welcomes, as could be considered to be the case with white swans—because their existence is expected and their traits well understood, meaning they can be enjoyed for what they are. The black swan, by contrast, is an often unwelcome outlier whose propensity to thrive is based on its ability to disrupt and take away from others, destroying existing incumbents which do not have the mindset or agility to respond adequately and in a timely fashion.

The black swan is not the ugly duckling hatched from a swan’s egg and fulfilling its destiny in the expected way. Rather it may burst onto the scene, fully formed, unabashed by its different plumage, and ready to menace. It is the author of its own fairytale—one with a dark twist.

Are White Swans Really Disrupted by Black Swans?

White swans are often characterized by a certain level of complacency. Once a company has reached the white swan stage, everyone views it as a success. As human beings we have an inbuilt preference for success. With reference to Karl Popper, we tend to use our energy to verify a success (rather than to look for falsification).

Nokia provides an example of an ugly duckling that over time grew to become a white swan. In the 1970s and 1980s the Nordic Mobile Telephone (NMT) system was rolled out in Nordic countries, and then beyond. The system was designed to be open, a relatively new principle at that time, which allowed mobile devices to be supplied by different manufacturers and for mobile telephony users to roam internationally. In order to draw Finland in as a major partner in this Nordic collaboration, Nokia was encouraged to participate in the development and manufacturing of mobile devices.

At the time Nokia made rubber boots and a number of other products not related to mobile communications, giving it the appearance of an ugly duckling. Nokia responded to the prompt gratefully, and in the 1980s set all sails to the wind to develop mobile phones. Its chance to expand geographically came in the 1990s with GSM, providing global sales opportunities in a g...

Table of contents

• Cover Page
• Half Title page
• Title Page
• Copyright Page
• Contents
• Detailed Table of Contents
• Foreword
• Introduction: Can You Predict the Unexpected?
• I From the Conventional to the Emerging New Paradigm
• II On the Inner Workings of Black Swans
• III Beyond Strategy and Metrics
• Appendix 1 Metrics and Diagnostics
• Bibliography
• Index