Jan Bosch

Jan Bosch is a research center director, professor, consultant and angel investor in startups. You can contact him at jan@janbosch.com.

13 May

Rather than seeking to respond rapidly when surprise hits, companies should spend resources to prepare for disruptions.

In Swedish, there’s a saying that claims that there’s a fundamental difference between giving up and moving on. Giving up is to simply stop the fight even if it’s still worthwhile to continue to pursue a difficult goal. Moving on is concerned with realizing that the goal you’re pursuing is no longer relevant. The world has moved on and there’s now another goal that’s more worthwhile pursuing and we should stop wasting our energy on the outdated goal.

Of course, things are never as clear-cut as I make it sound. Typically, the decrease of the relevance of our current goal is gradual and slow and the next goal to pursue is initially latent and limited in relevance but becomes more important over time. As an additional complication, we often see that there are many, many things that we could pursue and it’s often far from clear which of them is the most important and relevant.

The wide variety of options to pursue is why my favorite definition of strategy is “choosing what not to do.” To make progress, we can’t peanut butter our energy, time and resources over a vast number of initiatives. Instead, we need to choose one or a very small number of initiatives to achieve a significant outcome.

We started this series by talking about quantitatively defining a vision for the product or company. Next, we explored the notion of triaging external forces to decide which ones to ignore and which ones to respond to. Here, we look at the more radical situation where we need to let go of the original vision and strategy and instead redefine success.

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There are at least three challenges that make this complicated. First, we often run into the situation where some or several key decision-makers in the company don’t consider the major shift in the external landscape sufficiently significant to abandon the defined strategy. Letting go of a strategy creates a vacuum where many feel uncomfortable and directionless. To avoid the discomfort, it’s often easier to believe that we can ignore whatever happened and achieve our goals anyway.

In addition, most decision-makers suffer from the sunk cost fallacy: the strategy we earlier agreed upon has consumed significant resources already and that investment hasn’t been capitalized upon in any way, shape or form. Walking away from that investment is painful and often leads to a loss of face for the champions of the original strategy.

Second, even if the key decision-makers inside the company are aware and ready to act, it may well be others in the business ecosystem the company is part of who are resisting change. Some of the companies I work with are held hostage by the other players in their ecosystem. Typically, partners downstream from the company, buying its products, clearly communicate that if the company makes changes to its offering to respond to external trends, it will be kicked out and the partners will stop buying its products, with competitors usually more than happy to step in. And even if we know that it’s the right thing to do, the loss of revenue of the current business is impossible for most of us to manage as the potential revenue of the new offerings will initially be highly limited. In practice, many companies will simply go bankrupt if they would make such a drastic decision.

Third, from a purely technical perspective, a fundamentally new direction will often simply take a significant amount of time to realize in products and offerings. There’s a surprisingly strong connection between business strategy and software architecture, at least if the software architects are doing their job well. So, when needing to execute a drastic course correction, R&D and product management tend to lag for a significant amount of time before coming up to speed on the new course.

In my experience, the best way to handle this is to be prepared at both the strategic and the technical level. To achieve this, we need to engage in scenario planning and be disciplined in the application of the three horizons model.

Scenario planning was developed and matured by Shell in the 1970s. Put simply, the idea is to develop multiple possible future scenarios – typically three: two of reasonable likelihood and one that’s rather unlikely but highly impactful if it were to come true. For each, the organization develops a plan to execute in case the scenario materializes. In addition, trigger points are defined that on occurrence indicate that the scenario is more likely to become a reality. As a mechanism to accelerate its response time, the company can also already start to develop prototype architectures and mockups of product ideas.

The three horizons model encourages the company to divide its resources over three horizons of businesses. Horizon 1 consists of the mature products that bring in the majority of the revenue and it should receive 70 percent of the company’s resources. Horizon 2 is concerned with new, but successful offerings that are rapidly growing but not as large as those in horizon 1. This is the breeding ground for future horizon 1 offerings and should receive 20 percent of the resources. Finally, horizon 3 is concerned with exploration and innovation. Here, the company should spend 10 percent of its resources to experiment with a wide variety of different ideas with the intent of finding new promising offerings.

Even in a stable market, the investment in horizon 3 is in many ways insurance for the company’s long-term survival. Many of the horizon 1 offerings will reach end of life and revenue will start to drop. New offerings have to take over to sustain and preferably grow revenue. However, in the case of a significant or dramatic change, it’s typically in horizon 3 that companies find innovations and early-stage offerings that can be used as a basis to stage a rapid response.

The challenge is that when companies have lived in a stable market for a long time, the investments in horizon 3 are rapidly experienced as incredibly wasteful by horizon 1 standards. In horizon 1, investments in sustaining innovations tend to have a very high success rate of more than 90 percent in terms of return on investment (ROI) and the ROI tends to follow a bell curve. In horizon 3, the majority of investments fail and are wasted. The few that lead to success, however, tend to generate such a high return that they pay for all the failed tries. ROI in horizon 3 tends to follow a power function.

There are times when there are major shifts in the context in which a company operates. When these happen, it often means that the current strategy needs to be abandoned and a new strategy pursued. This is often difficult to accomplish because of organizational resistance, constraints enforced by the partners in the ecosystem as well as technical reasons. Rather than seeking to respond rapidly when surprise hits, companies should spend resources to prepare for such disruptions. Two effective strategies are scenario planning and using the three horizons model for resource allocation. To end with one of the famous Stoics, Seneca: “Luck is what happens when preparation meets opportunity.”