Setting strategy is a key for business governance, especially when the business is facing disruption or potential disruption in today’s VUCA environment, writes Cathy Parker.
Choosing the best potential path is challenging for setting strategy. But with deep disruption the most important question may be the first one you consider – what business are we in today and what are the key skills and resources we have?
Get this wrong and the best strategy in the world might not be enough.
I have recently read the fascinating story of how Kodak failed, and Fuji Film managed to survive and thrive during the huge disruption to the photographic industry with the rise of digital photography.
This was largely based on how they approached this key question. (I won’t cover the whole story, but is in itself worth reading here: https://petapixel.com/2018/10/19/why-kodak-died-and-fujifilm-thrived-a-tale-of-two-film-companies/)
The key to the differing results is that facing a precipitous downturn in their version of the Rivers of Gold – photographic film and paper, Kodak identified that their business and their strength was in photography and went big on digital cameras.
It succeeded to the extent of getting a significant market share but unfortunately in a low margin, ultra-competitive industry with low entry barriers and margins too low for them to show a profit.
So great execution of the plan, but ultimately a flawed strategy.
Meanwhile Fuji looked beyond the end product to its underlying business and its core skills involving things such as high-speed thin film and chemical manufacturing.
It looked at how to grow using these core skills outside the photography business into industries such as cosmetics, pharmaceuticals and protective film for LED screens. It did this both organically and via acquisitions and thrived.
The media industry also provides some interesting case studies and widely diversifying strategies by companies looking at how to cope with the wave of digital disruption which has seen a shift in media consumption to new media and a larger shift of advertising spend. Just bolting on digital components has challenges – not least the constantly evolving platforms and rapid shift in end-user popularity and the significantly lower revenue per advertiser.
A large US publisher who visited New Zealand commented that if print advertising can be measured in dollars, digital was nickels and mobile was dimes.
Can you operate your business on dimes? Not to mention the potential danger of over-reacting. After all radio was supposed to be wiped out by TV and movie theatres by video or Netflix. But they still survive and thrive as often an initial sharp downturn will settle back to a consistent if lower level, so over reacting may be just as bad as under reacting.
Are you in the photo business where your market will be wiped out or the radio business where the core will still remain?
Another of the bigger challenges is when to react.
If you react too soon you can spend vast sums of money on unproven technology which can rapidly become obsolete or end up taking you down a rabbit hole where there is no future as the market moves in a different direction.
But react too slowly and you may not have the continuing income and resources to finance the transition.
In today’s disruptive digital world often the margins for new products are orders of magnitude worse and won’t support legacy infrastructure built for a different business model, which gives new and more agile competitors a huge advantage.
Again, Kodak is a case in point, not only were film margins huge with a cosy virtual duopoly, it was also one of those great business models based on selling a cheap product (cameras) and profiting from the ongoing consumable sales – the same as razor or printer manufacturers. Whereas digital cameras were a totally different model – sell it once and barriers to entry were much less, leading to more competitors and commoditisation.
Cathy Parker is a director of Adrenalin Publishing, the owner of Management magazine, and serves on a number of boards.