“A 'value denial' is a business opportunity.
Every change and innovation creates new value denials”
McKinsey & Company - Strategy’s strategist: an interview with Richard Rumelt
Richard Rumelt: Most corporate strategic plans have little to do with strategy. They are simply three-year or five-year rolling resource budgets and some sort of market share projection. Calling this strategic planning creates false expectations that the exercise will somehow produce a coherent strategy.
This plan coordinates the deployment of resources—but it’s not strategy. These resource budgets simply cannot deliver what senior managers want: a pathway to substantially higher performance.
There are only two ways to get that. One, you can invent your way to success. Unfortunately, you can’t count on that. The second path is to exploit some change in your environment—in technology, consumer tastes, laws, resource prices, or competitive behavior—and ride that change with quickness and skill. This second path is how most successful companies make it. Changes, however, don’t come along in nice annual packages, so the need for strategy work is episodic, not necessarily annual.
So my basic recommendation is to do two things: avoid the label “strategic plan”—call those budgets “long-term resource plans”—and start a separate, nonannual, opportunity-driven process for strategy work.
So strategy starts with identifying changes? Right!
Even though these changes have long-term consequences, companies need to take a position now. By “take a position” I mean invest in resources that will be made more valuable by the changes that are happening.
Strategic thinking helps us take positions in a world that is confusing and uncertain. You can’t get rid of ambiguity and uncertainty—they are the flip side of opportunity. If you want certainty and clarity, wait for others to take a position and see how they do. Then you’ll know what works, but it will be too late to profit from the knowledge.
So how does a company take a good position?
Well, one big factor is a predatory posture focused on going after changes.
Steve Jobs: “I am going to wait for the next big thing.” Jobs didn’t give me a doorknob-polishing answer. He didn’t say, “We’re cutting costs and we’re making alliances.” He was waiting until the right moment for that predatory leap, which for him was Pixar and then, in an even bigger way, the iPod. That very predatory approach of leaping through the window of opportunity and staying focused on those big wins—not on maintenance activities—is what distinguishes a real entrepreneurial strategy.
So he spotted—and then exploited—a change whose time had come.
What capabilities do companies need in order to take advantage of these ideas?
Richard Rumelt: There is no substitute for entrepreneurial insight, but almost all innovation flows from the unexpected combination of two or more things, so companies need access to and, in some cases, control over the right knowledge and skill pools.
So how do we know which changes are important and which resources to combine?
Most of the strategy concepts in use today are static. They explain the stability and sustainability of competitive advantages. Strategy concepts like core competencies, experience curves, market share, entry barriers, scale, corporate culture, and even the idea of “superior resources” are essentially static, telling us why a particular position is defensible—why it holds the high ground.
Strategy dynamics studies how those changes would shift each dimension of an industry. Would the industry become more concentrated or less? More integrated or less? Would there be more product differentiation or less? More segmentation or less? Given consumer desires and available technologies, how should the industry or business look in, say, ten years? Where are the economic forces trying to take you? Should your strategy ride those forces or fight them?
What’s another way to understand strategy dynamics?
I use another tool I call “value denials.” These are products or services that are both desired and feasible but are not being supplied to the market. The concept combines insights into demand and potential supply. A classic example is an airline ticket guaranteeing that your luggage will not be lost. It just isn’t supplied at any price. There must be a price at which airlines would hand-carry luggage to the baggage compartment and even a price at which they would strap it into the seat next to you! There are times when we would pay the premium, but those services are not offered. That’s a value denial.
A value denial is a business opportunity. Every change and innovation creates new value denials. People wanted to buy music à la carte and keep 10,000 songs on their computers. Well, they got that, but there was a value denial: the digital music wasn’t portable. So along come the MP3 player and the iPod. But those innovations uncovered a new value denial: people also want to plug their players into their stereos. Well, this was pretty easily fixed, but playing your MP3s on your stereo uncovers yet another value denial: MP3s are compressed and just don’t sound as good as CDs. Finally, even when I have immediate access to all music anywhere and anytime through the “jukebox in the sky,” there will still be a value denial—how will I know what to listen to? I will need a private tutor and disc jockey to help arrange my listening and maybe to shape my tastes.
So one useful way to think about change is to turn aside from the central innovation and ask yourself what value denials it will uncover. How will they be fixed? And what value denials will then be uncovered by that fix?