On Strategies Deliberate and Emergent: A Corporate Startup Approach

The pace of change in the current business environment is staggering. It has become difficult for monolithic large organizations to keep pace with this change. At the same time, it appears that quick and nimble startups are emerging with breakthrough products, services backed by equally interesting business models. The quick emergence of a fast moving startup can catch a sleepy large organization, and quickly put it out of business. Blockbuster Inc. is a good case to illustrate this point.

Furthermore, there are industries in which traditional practices are slowly vanishing as sustainable business models; for example the music and publishing industries. What was illustrated by the last economic crisis was that ‘business as usual’ is no longer sustainable. The problem with companies assuming that they have a sustainable competitive advantage is that it creates an environment which allows inertia to build up along the lines of an existing business model. This behaviour that has proven to be deadly for established companies (e.g. Kodak).

Research by Columbia University professor Rita McGrath, suggests that rather than stability being the normal state of things and change being the abnormal, it is actually the other way around – stability, not change, is the state that is most dangerous in highly volatile economic environments.  As one writer recently commented, nowadays all swans seem black!

The challenge for established large enterprises is that the main core business is often a Cash Cow. It has high market share in a market with low growth. In fact, there is important value in continuing to refine the efficient running of this part of the business and maximising its returns. After all, it is the part of the business that is keeping the lights on, paying salaries and even funding the development and marketing of new products.  

At the same time, there is now relatively little argument among C-Suite executives about the value of innovation. A recent PWC survey showed that over 75% of managers rated innovation as being important for the success of the organization. So what to do now for the contemporary manager? One side of the business pays the bills and the other side is important for the future ability to pay the bills. Can management balance sustaining the current business with new innovation projects? It is now normative to hear that most companies are adept at refining current business models; but these same companies struggle with developing and launching new products in new markets.

The main question concerns whether a business has to escape its past to renew itself. Our argument is that this is not necessarily the case. Companies and CEO’s can be ambidextrous. At the strategic level there has been an ongoing debate about whether strategy can be deliberate versus emergent. This debate often pits Potter’s approach to strategic planning versus Mintzberg’s more emergent approach. However, recent authors have also begun to argue that it is possible to develop breakthrough innovations, while simultaneously protecting the traditional business. O’Reilly and Tushman (2004), call this the ambidextrous organization.

O’Reilly and Tushman’s seminal paper provides case study examples of organisations that have successfully executed an ambidextrous strategy. However, since the publishing of this paper there has been very little work of providing tools that mangers can use to actually execute an ambidextrous strategy in a consistent and reliable way within their companies. That is, in the day to day practice of running your main business, how do you also integrate a focus on innovation in a consistent way? We strongly feel that the tools that are being developed within hypothesis-driven innovation (business model canvas + customer development + agile engineering + lean startup + design thinking) provide a practical way for organizations and CEOs to be ambidextrous. Hypothesis-driven innovation can be used to develop a platform where deliberate and emergent strategies can have meaningful conversations that facilitate strategic management. We call this overarching approach “The Corporate Startup”.
 
On Strategy
Deliberate strategy involves the management team specifying the actions that the company should be taking to achieve specific goals. This top-down approach usually involves some form of planning and choices that are made based on some estimation of what might happen in the future. Companies with long trading histories usually have sufficient knowledge of their markets to make such five-year strategic plans. A good of example of a tool that is often used by managers is Porter’s (1985) Generic Strategies, in which companies can compete on cost leadership or differentiation, in broad or niche markets. A choice of any one of these strategies has implications for management and the employees who are then required to implement it. Such an approach has two weakness. First, it has become more difficult to predict the future because of the pace of changes in the current business environment. Secondly, deliberate strategies fail when attempting to develop and launch new products in new markets. 

In contrast, emergent strategy is about learning what works in practice. Emergent strategy happens when management does not execute on a plan but instead the company evolves its behaviours in response to changes in the market place. In a turbulent business environment, emergent strategy is highly adaptive as it allows managers to “…respond to an evolving reality, rather than having to focus on a stable fantasy” (Mintzberg & Waters, 1985). The biggest challenge for implementing emergent strategies is that there may be little opportunity for management to exercise control.

Mintzberg notes that few strategies are completely deliberate or completely emergent. This is because deliberate strategies mean no learning, and emergent strategies mean no control. Mintzberg argues that there must be a way for management to exercise some control, while simultaneously fostering learning within the organization. This has been referred as the ambidextrous organization.
 
The Ambidextrous Organization
The need for the ambidextrous organization is made most visible when companies attempt to innovate and launch new products. This is because at this point they are now engaged in two different activities at the same time. As Steve Blank notes, we are now learning that large companies are not bigger versions of startups. Large companies are designed to execute, perpetuate and defend an existing business model. In contrast, startups are designed to search and develop sustainable business models. These two activities of executing versus searching require different structures, processes, KPIs and people. Executing versus searching also maps well onto the distinction between deliberate and emergent strategies.

The potential conflict between execution and searching means that they cannot possibly be done by the same business unit within the company. O’Reilly and Tushman found that the companies that are successful at being ambidextrous segregate their search business units from those that are executing the traditional business model. This separation is important because these two types of businesses require different management cultures in order to succeed.

However, being separate is not sufficient by itself, O’Reilly and Tushman also found that in successful companies these distinct units have to be tightly integrated at the senior executive level; with heads from the different units getting a seat on the management board. This approach ensures that there is an ongoing conversation between the different parts of the business, and also that the nascent business units are protected in terms of access to resources and support. However, the fundamental question still remains. What are the tools that can be used to help the senior executive team to manage the integration of the search business units and the execution business units? This is where we feel that there is a role for the Corporate Startup approach.

The Corporate Startup
The Corporate Startup is a blend of contemporary thinking about innovation applied to the large enterprise. This approach adapts the tools utilised in business model design, customer development, lean manufacturing, corporate effectuation, agile engineering, lean startup, design thinking and lean UX. The key-defining features of this approach are the short innovation cycles defined as build-measure-learn loops by Eric Ries. Through fast innovation cycles, the methodology allows innovators to better manage the cost of failure in the search for a product that people really want – as Edison allegedly once said: the only real measure for innovation is the number of experiments one can perform in 24 hours. 

The proposed new product and its business model are viewed as hypotheses that have to be verified with the market before resources are invested to scale the product. As such innovators are encouraged to get out of the building and start having conversations with customers quite early in the product development process. The results of these conversations are then used to iterate and pivot on the proposed product, service and business model. Hence, the Corporate Startup could be regarded as customer-driven innovation. Which is quite similar to the notion of an emergent strategy.  

Except that this is not the full story. The Corporate Startup approach is actually not customer-driven innovation but Hypothesis-Driven Innovation. There is a significant role for product vision within this approach. We do not encourage non-systematic conversations with customers. Rather, a Corporate Startup requires that the vision for the product and business model be fully articulated before any customer conversations take place. The difference with previous corporate approaches to innovation is that this vision is not taken as a plan to be executed, but as a tentative set of hypotheses to be tested with customers.

The testing with customers usually begins with the riskiest assumptions in the business model.  These are transformed into falsifiable hypotheses, and the appropriate test is then designed. The results of this test are then fed back to the product vision/business model and appropriate adjustment are made. The build-measure-learn feedback loop is utilised as an ongoing process of market validation until product-market fit is achieved. Thus, in a Corporate Startup we use a combination of both vision and customer input. Hypothesis-Driven Innovation is a business strategy that is deliberately emergent.

Deliberately Emergent Strategy
If the Hypothesis-Driven Innovation is applied at a higher level to strategic management, then one can see how a company can have both deliberate and emergent strategies running simultaneously. Senior executives within the company would still be expected to provide deliberate guidance in terms of the strategic direction for the company. However, since the pace of change in the business world is rapid, senior executives would view this deliberate strategy as tentative hypotheses about the future that need to be validated in the marketplace. Instead of strategic plans, senior executives provide the company with a strategic vision.

The business units within the organization that are responsible for searching for breakthrough innovations/business models could then function as innovation sandboxes in which the senior executives’ strategic vision is tested with customers. Part of their role would be to take this strategic vision and design experiments to test market risk, market changes and customer behaviour. This can be done as part of the ongoing work of developing new products and services. Since, these business units are having constant interaction with customers, they can become a source for emergent strategy. This relationship is illustrated in the model we have developed below:

O’Reilly and Tushman argue for tight integration between the business units engaged in search and those engaged in executing the traditional business at the senior executive level. This integration is made possible by the tools that Hypothesis-Driven Innovation provides. As an ongoing process of examining the company’s strategy, the experiments and customer conversations being conducted in the innovation sandbox can be useful feedback as to the potential success of any particular strategic direction. For example, senior executives may first propose the company should compete on cost-leadership in a certain market. However, through customer engagement teams in the innovation sandbox may discover a specific form of differentiation that creates more value for the company. Since strategic conversations are integrated at the top management level, it is possible for these learnings to be quickly taken up and used to adapt the proposed strategy.

Hypothesis-Driven Innovation allows management not to have to make ‘either/or’ choices when it comes to strategy but rather ‘both/and’ decisions. The use of tools such as the business model canvas, customer development, minimum viable products, lean analytics, pirate metrics, and lean UX can provide a range of KPIs that are more meaningful for business units involved in developing breakthrough products and business model search. The appropriate use of the learnings from these units, along with the normal business KPIs from the traditional business units can provide a useful platform for each side to inspire and challenge the other. There will be accrued benefits to the traditional business from the lesson being learned in the innovation sandbox. The internal startup teams will also be able to take back the learnings and challenges being faced by the traditional business units and use these as a basis for their own tests, iterations and pivots. The Corporate Startup can be a strategic win-win for large enterprises.