Success and Failure
Originally published: 02.01.09 by Guy Kawasaki
Why do some companies succeed and others fail? How does your strategic planning push you down one road or another?
I don’t know about you, but there are many companies that succeed, and I can’t figure out why. And there are also many companies that fail (some of which I invested in), and I can’t figure out why. Michael Raynor’s book goes a long way in explaining how strategy makes or breaks a company. The following is an excerpt from an interview I recently conducted with him.
Question: You give examples of great strategies that simply happen to fail — what’s a company to do?
Answer: This is what I call the strategy paradox. That is, the same strategies that have the highest probability of extreme success also have the highest probability of extreme failure. In other words, everything we know about the linkage between strategy and success is true, but dangerously incomplete. Vision, commitment, focus — these are all the defining elements of successful strategies, but they are also systematically connected with some of the greatest strategic disasters.
For example, Apple’s strategy sometimes works great, and sometimes fails miserably. It’s not that Apple sometimes “forgets” what makes for greatness. It’s that what makes for greatness also exposes you to catastrophe. The same goes for Sony.
To produce success, vision, commitment, and focus must be linked to an accurate view of what lies ahead, and nobody can adequately predict the future. If you can guess right on a regular basis, my hat’s off to you — and can I buy your stock?
Question: Why can’t companies predict the future better?
Answer: For me the question is whether (companies) will ever be able to predict the relevant future accurately enough for the purposes of strategic planning, and so avoid, or at least mitigate, the strategy paradox.
I don’t think that’s going to happen anytime soon for some deep, structural reasons.
Question: What’s the proper role in strategy formation for each level in a hierarchy?
Answer: I’ve found that it helps to think about strategy in two halves: the commitments that all successful strategies entail, and the uncertainties attendant to those commitments.
Commitments and uncertainties are only half the answer. The rest of the solution lies in calibrating the focus of each level of the hierarchy to the uncertainties it faces. It is common sense—if not common practice—that the more senior levels of a hierarchy should be focused on longer time horizons. What hasn’t been as widely recognized is that with longer time horizons come greater levels of uncertainty, and strategic uncertainty in particular. This fact has some profound implications for how each level in an organization should act.
Board members should ask: What is the appropriate level of strategic risk for a firm to take? What resources should be devoted to mitigating risk? What sacrifices in performance are acceptable in exchange for lower strategic risk? This allows the board to be involved in strategy without getting involved in strategy making, which is correctly the purview of the senior management team.
CEOs should ask: What strategic uncertainties does the company face? What strategic options are needed to cope with those uncertainties? In other words, it falls to the CEO, and the rest of the senior team, to find ways to create the strategic risk profile the board has mandated for the firm.
Divisional or business unit vice-presidents should ask: What commitments should we make in order to achieve our performance targets? For these folks, it’s no longer about mitigating strategic risks, but making strategic commitments. Someone has to take the actions that create wealth, after all.
Managers should ask: How can we best execute on the commitments that have been made in order to achieve our performance targets? To put it on a bumper sticker, they have to “show us the money.” There are no strategic choices to make at this level, because the time horizons are too short—six to twenty-four months. Strategies simply can’t change that fast.
Question: How does your answer change with respect to a start-up?
Answer: Start-ups tend to be enormously resource constrained. Typically they are not able to devote money and time to the problems of strategic uncertainty. As a result, start-ups tend to be “bet the farm” propositions: high risk, with the potential of high reward. Such firms don’t manage strategic risk, they accept it.
Question: Are you saying that by definition a start-up is resource constrained, so it should/has to bet the farm on one approach?
Answer: The degree to which you manage risk will be a function of your ability to bear risk and recover from setbacks. On the continuum from the archetypal “two people in a garage” to Johnson & Johnson, I take the counter-intuitive view that startups are much better able to bear risk: if the venture fails, the people and other resources involved are typically far more easily redeployed than is the case with large corporations.
Question: So if a startup fails for other than poor execution and implementation, it’s “okay” because betting the farm is the way to go?
Answer: I wouldn’t go that far. There is always room for thinking carefully about the risk you face and how to mitigate it effectively. You’ve suggested, for instance, that start-ups can think about betting on sectors, or “customers,” then trying to adapt their products, or betting on products, then adapting things like marketing or distribution to find the right customers. Either approach involves a “core” bet and a series of options on contingencies. Which approach makes the most sense will be a function of the risk implied and the cost of mitigating it.
Question: So start-ups are wrong to simply accept strategic risk?
Answer: Although accepting strategic risk is not necessarily bad, it can be unwise to just accept it without doing your homework first. It’s possible to go to the opposite extreme and squander resources on multiple investments that are styled as strategic options only to find that they actually undermine your primary strategy without securing the desired options. The common problem is not adequately assessing your firm’s risk profile and shaping it appropriately.
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