How CEOs Can Manage Strategic Tensions28 December, 2016 / Articles
One of the challenges of being a CEO is that you rarely are asked to choose between a wrong or right answer. Instead, chief executives are often presented with two “right” answers, but one is slightly worse. Strategy, after all, is about tradeoffs — choosing where to focus. At the strategic level, picking a slightly better option can create tremendous value. Pick the slightly worse one and the consequences can be far reaching.
CEOs should actively manage five specific tensions in today’s complex global business environment:
Disruptive innovation versus leveraging the company’s core strengths
When confronted with disruptive technologies, many companies fail to align digital strategies with their core strategies. By definition, disruptive innovation challenges a firm’s core capabilities; direct channels, for example, provide low cost and ubiquitous distribution, but cannibalize traditional salesforces and threaten partners. CEOs today must possess the technological fluency and open-mindedness to understand fully the disruptions they face, and decide which legacy capabilities are core to the future, and which should be jettisoned — all at the speed of innovation.
In 2012, GE’s CEO Jeff Immelt launched GE’s digital strategy to connect minds and machines, combining a legacy of innovative industrial manufacturing with cutting-edge data and analytics expertise. “If you went to bed last night as an industrial company,” Immelt observed, “you are going to wake up this morning as a software and data analytics company.” Failure to grasp such disruptions — and adapt quickly — can be fatal.
Pursuing cost leadership versus differentiating for value
Manage costs — or add value? Today, this tension is perilous for CEOs. Focusing on one at the expense of the other is no longer a choice. On one hand, pure cost-based strategies are now rarely viable because the forces of automated production, mass customization, global supply chains, direct channels, networked devices, etc., have permanently established a new base level for both manufacturing and total cost of ownership. Even in the most commoditized markets, winning players need to create value by adding small slivers of differentiated services, logistics, quality and reliability.
On the other hand, a highly differentiated offering is no longer a guarantee of long-term value creation. Diminishing cycle times, rapidly changing intellectual property and fast R&D allow competition to catch up quickly on any breakthrough, so even the most valuable innovations can see their price premium drop rapidly.
CEOs must constantly balance these cost/value pressures, rapidly re-evaluating strategic priorities, including where to participate in the industry value chain in order to remain competitive and profitable.
Exploiting global opportunities versus managing risk
Investment opportunities arise and disappear with alacrity — and woe to the CEOs who underestimate the risks. However, the pace of global business now often precludes doing traditionally rigorous diligence. CEOs must be agile and adaptive, operating from a mindset of continual anticipation and appraisal in order to make timely investment decisions and oversee speedy execution.
Decision making in today’s organizations often no longer has the necessary responsiveness, detaching them from both their customer base and market realities. By creating nimbler, more autonomous businesses and pushing decision-making down the management chain, CEOs can increase corporate collaboration, speed, and adaptability, as well as simplify or replace burdensome management processes (e.g., implement frequent, rapid, project-specific evaluations instead of annual performance reviews). Today’s organizational strategies call for small, manageable units focused solely on specific technologies, end markets, or geographical areas. Additionally, impractical and quickly outmoded high level P&L management can be supplanted by performance metrics that stress driving value for every critical part of the enterprise.
Responding rapidly to opportunity versus ensuring high quality
For CEOs, the mandate to identify, assess, and seize opportunities rapidly is indisputable — but it cannot be achieved at the expense of quality, which is the bedrock of brand value and customer loyalty. Yet companies across all sectors are trying to accelerate innovation so that they can break free from low-growth markets, differentiate, and sustain competitive advantage. Innovation cycles speed up and time-to-market goes down, and the resulting changes in the value chain compound customer demand for quality.
Failure to balance time-to-market with insistence on excellence has, for some CEOs, led to highly visible product recalls and damaging interruptions of service. Achieving the best of both — fast response coupled with a high-quality offering — requires a new approach; for example, leveraging partners across the supply chain such as General Motors’ collaboration with LG, a key component supplier to develop the Chevrolet Bolt EV; or Caterpillar, which has established partnerships across industry, governmental organizations and academic institutions to speed up the pace of its R&D.
Drawing in new talent versus integrating a cohesive team
Increasingly, all businesses need access to technology talent, thereby ensuring that the pace of innovation and its subsequent implementation are sustained. However, acquiring adequate technology talent continues to challenge CEOs globally because their legacy teams often lack the know-how to effectively search the most fruitful channels. CEOs should take a lesson from firms in technology hubs such as Silicon Valley, Boston’s Route 128, Austin, Texas, and the Shoreditch section of London, all of which are well-versed in what it takes to compete in the tech talent market and routinely wield enticing offers along with the opportunity to be part of a “next big thing” culture to attract the brightest and the best.
In addition to ramping up technology savvy recruitment, CEOs face the weighty challenge of creating a cohesive, high-performance culture. Integrating new capabilities with the legacy organization is critical, but poor management will bring conflict and failure. Established teams need to be motivated to embrace potentially radical ideas and approaches inherent in harnessing new talent and achieving business success. At the same time, today’s chief executive must remain focused on driving innovation (e.g., building new technology and R&D centers outside of outmoded legacy locations, developing ownership and incentive models that both attract new talent and retain key individuals).
How skillfully, and quickly, CEOs address these five tensions will go a long way toward determining success. The role’s traditional demands — balancing short-term success with long-term gains, managing conflicting stakeholder interests, showing results early, and facilitating corporate responsibility and other firmwide initiatives — will remain just as critical. Taken as a whole, these complex challenges will be best met by a leader who can rapidly deploy the technical fluency, market and customer insight, and organizational dexterity to define and mobilize a new management culture.