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Strategic explorations: The wellspring of corporate renewal and longevity

JEFFREY KUHN

From the ancient writings of Herodotus to the mosquito-infested travails of Juan Ponce de León during the Age of Exploration, for centuries humans have sought to discover the Fountain of Youth–a curative spring that can turn back the hands of time and restore the vitality of those who bathe in its magical waters.

In the 1990s, at the twilight of the Industrial Era, a pack of sport-coat-clad explorers embarked on a similar quest: to discover the corporate fountain of youth, a concept that had caught the attention of senior business leaders facing the dual challenge of increasing competitive intensity and decreasing corporate life spans. Armed with catchy titles like Built to Last (1994) and The Living Company (1997), these modern-day adventurers sought to crack the code of corporate longevity at the dawn of the Digital Age.

The case examples in these books are, of course, dated, but the prescriptions offered in these tomes, such as establishing big hairy audacious goals (moonshots in Google parlance) and try a lot of stuff and keep what works (moving fast and breaking things in Facebook-speak) have influenced a generation of business thinkers and leaders grappling with the perennial question of how to lead a living company that is built to last in an era in which corporate life spans can be measured in dog years.

The taming of the new

The 1990s were a pivotal period in economic history and in the field of strategic management in general. The twin forces of globalization and digitization had gained critical mass, eroding barriers to entry and giving rise to new competitors with disruptive business models. Suddenly, leaders of established firms found themselves fighting tooth and nail in a competitive landscape characterized by deep complexity, high uncertainty, and transient advantage.

In the wake of declining corporate life spans (as reflected in average S&P 500 tenure, a proxy of market dynamism) coupled with the sanguine writings of Collins and Porras (Built to Last) and Arie de Geus (The Living Company), the concepts of organizational renewal and longevity began to take center stage.

A new breed of strategists also entered the fray during this period: the game changers, a rowdy band of thinkers who drew inspiration from Charles Darwin and Joseph Schumpeter and challenged the sacred creeds of strategy, especially those promulgated by Michael Porter — the patron saint of positioning. Influenced by Gary Hamel and C.K. Prahalad’s frame-breaking concept of competing for the future and Richard D’Aveni’s seminal writings on hypercompetiton, corporate strategy abandoned its canonical roots of creating barriers to competition and evolved into an imaginative, expeditionary-based pursuit of overturning industry conventions, playing with market boundaries (rather than playing within market boundaries), and cold-cocking unsuspecting competitors with a rapid-fire succession of strategic moves that neutralize points of differentiation, eroding long-held market positions.

The era of dynamic corporate strategy had arrived.

Industry metabolism: The strategic context of organizational renewal

Organizations, like all living organisms, must possess an innate ability to continuously renew their value-creating capacity to counter the deleterious forces of senescence–the gradual deterioration of cellular function (i.e., aging)–that occurs in all living organisms.

During periods of market upheaval, steady, evolutionary-based renewal through continuous improvement is insufficient. It progresses too slowly and is not designed for step-changes in the competitive environment. In periods of upheaval, organizational renewals must take the form of metamorphoses (a change from one form to another, such as a tadpole to a frog) through a deliberate process of apoptosis (the programed death of senescent cells) and biogenesis (the production of new, healthy cells).

The rate by which organizational renewal (or metamorphosis) needs to occur varies greatly by industry, market, and organizational context. Awareness of the broader landscape of organizational renewal is a key contextual consideration for strategic leaders. A renewal model that works beautifully at Netflix could trigger an acute allergic reaction at ExxonMobil.

To address these contextual considerations, when I teach executive education programs on strategic leadership, I often introduce the concept of industry metabolism to represent the rate at which a particular industry or competitive arena matures (moves up the s-curve) and morphs into a new form.

To illustrate, highly regulated, capital-intensive industries with formidable entry barriers tend to have slow metabolic rates that follow linear, evolutionary trajectories. As a result, they mature and morph into new forms s-l-o-w-l-y. Big oil, for example, has essentially operated with the same business model since its inception more than a century ago. Consequently, leaders in these industries think in terms of multidecade capital investments and yields, with disciplined operational management functioning as a stabilizing force to reduce variance and costs, optimize physical assets, and maximize shareholder returns. The future looks a great deal like the past in these industries so there is little perceived need in the executive wing to tinker with a proven success model. Continuous improvement will suffice. Assuming the market environment remains stable, these efforts can sustain a firm’s market position for decades. However, things can quickly go awry if the metabolic rate suddenly increases and the firm is forced to switch its strategic posture from being better to being different.

In contrast, enterprises in digitally based industries, with low entry barriers, have significantly higher metabolic rates and tend to mature and morph into new forms rapidly, often with unpredictable, nonlinear evolutionary trajectories.

Netflix, for example, has reinvented its business three times (from shipping DVDs by mail, to video streaming, to creating original content) since its founding in 1997. Netflix recently announced a new gaming business; presumably to counter the recent influx of big-name players, such as Disney, Apple, and HBO Max, into the video streaming business, which will inevitably commoditize this competitive arena.

Pure play digital firms like Facebook and Netflix have a much different renewal landscape and challenge than industrial colossuses. In these market arenas, the future bears little resemblance to the past, and inertia and institutional memory are often a liability, especially if the game changes suddenly. In market arenas that mature and morph into new forms rapidly, imagination and creativity are the lifeblood of the enterprise–the élan vital of continuous renewal and regeneration.

Acceleration and turbulence can inflict considerable pain on firms that built their empires in the twentieth century and are suddenly forced to play a different, digital game. Kodak comes to mind. Beginning in the 1970s, it began a steady, multidecade decline amid aggressive market share competition from Fujifilm, instant photography developed by Polaroid, protracted antitrust litigation, and the sudden, exponential growth of digital photography in the late 1990s (which, ironically, it had invented in its own research labs decades earlier). The knockout blow, however, came on June 20, 2007, when Apple, Silicon Valley’s equivalent of Mike Tyson and Kodak’s former partner in digital photography, launched the iPhone, bringing a swift, painful end to the era of point-and-shoot digital cameras in the consumer market. Few firms could survive a drubbing like that.

Why good companies go bad

There are myriad reasons why successful companies are unable to adapt their enterprises to transformational market shifts and cascade into rapid decline:

• Structural and cultural inertia
• Fear of cannibalizing the core business
• Stick to your knitting syndrome
• The curse of success
• Missing or dismissing the weak signals of change
• Frozen mental models
• Short-termism and incrementalism
• Lack of foresight and imagination

However, these are all symptoms of the same underlying disease: an absence of strategic leadership.

In most cases of organizational decline, the market signals were clear. The firms were not blindsided by the future. The executives saw the clouds gathering on the horizon but underestimated the ferocity of the storm and the speed with which it would arrive. Eyes wide shut, they were too busy managing quarterly results and fighting over a quarter point of market share with an archrival and lacked the foresight and imagination to envision the customers, businesses, and industries of tomorrow. They were trapped in the denominator management box.

Trapped in the denominator management box

As illustrated in Figure 1, leading with a long-term perspective is an exercise in paradox, a high-wire act that balances top-line growth and bottom-line profitability while managing today and creating tomorrow. Few disagree with this framework, but over the years, I have observed that the comfort zone for many managers is the lower-left quadrant: managing today and maintaining bottom-line profitability. This is the Sisyphean world of denominator management that is essential to optimizing the core business and maximizing short-term results. But keep this in mind: an inordinate focus on the denominator can leave a firm vulnerable to exogeneous threats (and missed opportunities), especially if this is the only arrow in their quiver.

Figure 1

As an organization matures, its ethos often shifts from possibility and growth to scarcity and profit-protection, leading to short-termism and incrementalism. Left unchecked, these forces can engulf organizations, suppressing the imaginative thinking essential to long-term value creation and survival.

To illustrate, ask any group of managers to cut costs by 10 percent, and, without pause, they’ll fire up their laptops and get to work delayering, reorganizing, outsourcing, offshoring, and nearshoring — classic denominator management. Now, ask the same group of managers to grow top-line revenues (the numerator) with new-to-the-company sources (the upper-right quadrant in Figure 1) and you’ll likely get a blank stare. Why? They’re not conditioned to think this way. Years of eking out slow, single-digit growth in mature markets has conditioned these managers to think in safe, incremental terms to protect short-term profits and keep investors happy. They have spent the bulk of their careers running full speed on the operational treadmill and solving complex organizational problems, rather than creating the growth platforms of tomorrow.

Problem-solving and creating are different activities requiring different cognitive capabilities and modes of thinking. Problem-solving involves fixing things and making them go away. Creating involves bringing something new into existence. Problem-solving draws on concrete, analytical modes of thinking (breaking things into parts for analysis), whereas creating draws on abstract, generative modes of thinking. Envisioning markets and businesses that don’t yet exist requires immense foresight, as well as high conceptual and creative capacity — in other words, imagination. When thrust into strategic roles, operationally oriented managers often struggle with broad conceptual thinking. They can speak at length concerning KPIs and inventory turns — concrete modes of thinking — but they have difficulty finding their footing when asked to think and lead strategically with long-term, external perspectives, rather than from the internal purview of operations. Years of slogging on the operational treadmill have etched deep grooves into their cognitive architecture.

Increasing strategic and organizational complexity also drives short-termism and incrementalism. Paradoxically, digital technologies have increased productivity and improved our quality of life immensely, but they also have led to a dramatic rise in complexity — socioeconomic, technological, customer, channel, competitive, and organizational — that places immense cognitive demands on leaders, widening the gulf between the strategic complexity of the market landscape and the strategic capacity of leaders. Rather than sharpening their strategic eye and developing the ability to recognize patterns and see the future unfold in slow motion, leaders often muddle through this frenetic environment with reactive, one-off thinking (corporate whack-a-mole) or by running faster on the operational treadmill.

As a result, given the dearth of senior leaders who have the capacity to lead with big ideas that unlock new vistas of possibility and growth, aspiring strategic leaders lack a frame of reference for being strategic. As these highflyers ascend within the organization, they learn how to fight increasingly bigger fires, and solve increasingly complex problems, leaving few opportunities to develop the capacity to think and lead strategically in dynamic market environments undergoing profound change.

Two dimensions of organizational renewal and longevity

The infinity loop shown in Figure 2 illustrates that there is an organizational dimension and a strategic dimension to renewal.

Figure 2

Organizationally, firms have made great strides over the past several decades in turbocharging hidebound hierarchies so that they are more adaptive and responsive to market changes. Through a steady stream of organizational innovations, such as autonomous teams, lean start-up, high-velocity decision making, hackathons, honeycombed organizational structures, ambidexterity, agile, and new business accelerators, firms have become flatter, fitter, and fleeter.

To foster emergence and autopoiesis (self-renewal), companies are increasingly taking cues from nature and abandoning top-down management principles and hierarchical structures in favor of organizational designs, processes, and cultures that embody the dynamic properties of ecosystems, such as a rainforest. The Chinese multinational firm Haier is a prime example. Over the past four decades, it has undergone a remarkable metamorphosis, from a mainstream white goods manufacturer to its current incarnation as an ecosystem-based enterprise encompassing a labyrinth of interconnected businesses, from smart cities to education to health care. Through its self-organizing network of microenterprises and its propagation-based growth model, the firm draws on evolutionary principles to unleash the animal spirits of its employees and create an autopoietic enterprise that essentially mirrors the connectedness and dynamism of the external market.

Cutting-edge advances in organizational designs and methodologies play an important role in helping firms adapt and keep pace with their external environment, but they are internally focused and not designed for sensing subtle shifts in the external landscape that reshape existing markets and create new ones. This is where strategic explorations come into play.

Strategic explorations: Opening the aperture to avoid a Kodak moment

There was nothing to turn around to.
— Antonio Pérez, former Kodak CEO

When leading renewal efforts, executives tend to focus on what they can perceive with their five senses. The greatest obstacle to renewal, however, is invisible — the prevailing mental models (small-scale models of reality) and belief systems that harden over time, creating strategic myopia, an acute condition in which organizations look at the outside world through a peephole. The imperative, therefore, is to keep the strategic aperture open by continually questioning, examining, and transforming prevailing mental models and belief systems–the strategic equivalent of apoptosis and biogenesis — so they are malleable and able to perceive and respond to subtle market shifts.

Many years ago, Peter Drucker spoke of the importance of looking out the window to see what is visible, but not yet seen [by others] — an aphorism for scanning the external market landscape to identify the signals, both weak and strong, that portend profound market shifts. As a rule, the more dynamic and uncertain the external environment, the more time a company needs to spend looking out the window and engaging in deep strategic reflection and dialogue to recognize intersecting trends and patterns that pose exogenous opportunities and threats.

Incredibly, as simple as it sounds, looking out the window is an unnatural act in many established firms. Sophisticated cognitive capabilities (divergent thinking, curiosity, imagination, pattern recognition, paradoxical thinking, framing strategic questions, reflection, and synthesis) are needed to engage in strategic sense-making activities — capabilities that are often lacking in operationally oriented managers. Further complicating matters are a host of organizational pathologies that function as an invisible hand, influencing what we see and how we see it.

However, with the right developmental journey and organizational environment, operationally oriented managers can escape the denominator management box and learn how to look out the window and think strategically about converging trends and patterns that shape and create markets. Central to this approach are immersive, multi-month strategic explorations in which a cohort of next-generation enterprise leaders explore broadly framed, board-level strategic questions and engage in strategic reflection and dialogue under the watchful eye of an expert facilitator (typically an external partner) to develop their strategic capacity and infuse new thinking into the organization. Working in partnership with the CEO, the facilitator plays an important role in creating a generative space for strategic questioning, reflection, and dialogue to occur. (Think Yoda from Star Wars in an Armani suit).

To illustrate, let’s say you’re an auto manufacturer like General Motors or Volkswagen. A board-level question would undoubtedly concern the concept of “peak car” (automobile) and how the growing preference for access to transportation (mobility-as-a-service) over ownership in many market segments will affect the century-old business model of making and selling cars to customers who prefer to purchase, maintain, and drive their own vehicles. Participants begin by immersing themselves in the tangle of socioeconomic, technological, and environmental trends that are shaping the emerging mobility landscape, honing their skills in spotting emerging trends that foretell fundamental market shifts, before making their way to business model and organizational implications.

Strategic leaders think in the form of questions; framing strategic questions to stimulate reflection and dialogue is an important leadership competency and sense-making tool in complex market environments. Sadly, this has become a lost art in today’s execution-oriented organizations, especially among high-strung leaders who pride themselves on having all the answers. This is where the external facilitator comes into play. Using Socratic inquiry, the facilitator (Yoda) poses penetrating, often unsettling, questions at key moments to unlock the shackles of short-termism and incrementalism and provoke deeper levels of strategic thinking: What are potential future scenarios concerning vehicle ownership versus mobility-as-a-service? How will traditional industry boundaries likely evolve? Will they blur and converge into entirely new market arenas? What will be your core business ten years from now and how will value be created? How quickly will the future arrive? What signposts do you need to monitor?

At regular intervals, the facilitator leads unscripted sessions with the cohort and the CEO to hone participants’ strategic thinking and dialogue skills. Gradually, through successive rounds of question framing, reflection, and dialogue, participants master the language, logic, and lens of strategic leadership. Later in the exploration, as a point of view coalesces concerning the shifting contours of the mobility landscape, unstructured strategic dialogue sessions are held with the executive team, and, eventually, the board, to shape the strategic narrative and build systems-level strategic capacity.

Strategic explorations can be used in any organizational context but are particularly effective in companies facing increasing competitive intensity and market dynamism, or that are approaching an inflection point, such as the oil and gas industry, which is facing a peak demand scenario as clean energy sources gain ground. They can be launched periodically throughout the year to keep the organizational aperture open and fresh thinking flowing into the enterprise. I have guided scores of teams over the years and am always impressed by the quality of thinking and dialogue, as well as the generative power of these explorations in shifting executive worldviews and imbuing new perspectives and possibilities.

This is just the opening act

The past 25 years have been a tumultuous time for incumbents, especially those who have amassed their fortunes within stable oligopolies. In the coming decade, rapid adoption of artificial intelligence, robotics, blockchain, additive manufacturing (3D printing), and the Internet of Things will spin the flywheel ever faster. The collision of the exponential growth curves of the Digital Age (think Alibaba and Airbnb) and the linear S-curves of the Industrial Era will likely shorten corporate life spans even further.

A pond will quickly become stagnant without a fresh source of water. The same can be said for organizations. A steady flow of new questions, conversations, and perspectives are needed to keep an organization’s aperture open and its mental models and belief systems from becoming stagnant and out of sync with market realities. Strategic explorations are the revitalizing fountain that enable established firms to maintain their youth.

About the author

Dr. Jeffrey Kuhn is an executive advisor and educator focused on enterprise strategy, leadership, and transformation. His work centers on helping senior business leaders develop the capacity to think and lead strategically in dynamic market environments undergoing profound change. He holds a doctorate in adult and organizational learning from Columbia University.