Another guest post from Julia Lawrence of JLSMB, providing some strategy ideas when facing an uncertain future.
Back in the 1980s, when the world of personal computers was all new and exciting, IBM entered the market with the PC – the computer after which the subsequent product category was named. In no time IBM had run most other makers out of business, and relegated Apple to the specialist students / creatives market. The key to its success? It’s strategy was to focus on its unconquerable advantage – it’s brand, and to saturate the demand for its products as quickly as possible. As strategies go, this was good for winning the start of the race, but not for finishing strong. Within a few more years it had lost its dominant position. To speed its products to market, it had purchased components from component makers rather than engineering its own. Anyone could buy chips from Intel and an operating system from Microsoft. A whole industry of “PC compatibles” sprang up, running software like Visicalc (a “killer app” on the IBM PC), but on hardware that significantly undercut IBM’s prices.
IBM was in a classically difficult place for strategy. The future of the PC market was highly uncertain. Unfortunately for IBM, management took their time about making strategic choices. Having arrived at the party late, they proceeded to take their time about responding to the clone market. By the time they took action, it was too late – the clones had won over the market, and demand for an un-clonable version of the IBM PC was negligible. If giant IBM couldn’t analyse or buy its way to dominate this market of upstarts, and if super-clever Apple wasn’t able to think its way to anything more than a tenuously held also-ran position, what hope is there for the rest of the competition?
Today the uncertainties aren’t just about markets
Businesses nowadays face a similarly uncertain future, in more ways than just high tech innovation. Some resources will be scarce, energy may become unimaginably expensive, and unexpected weather events may play havoc with supply chains, global food production, and insurance costs. There are bound to be many strategic opportunities – like the ones that faced those early personal computer makers – that will not come again. Yet it is anyone’s bet which ones will work, and what will be the best plans to take advantage of them. The only certainty is that inaction is unlikely to be the best long term strategy.
So what are the “rules” for competing effectively under uncertainty? What sorts of strategies succeed, and how does one plan for the future? Needless to say this is a big enough topic to fill a book, but I can make a few brief observations here.
1. Just how uncertain?
Let us take the example of a manufacturer of bread. What sorts of uncertainties do they face? A major input is wheat flour, whose availability and price is threatened by global weather patterns and climate change. In the short term, it is highly uncertain whether the coming year will be a “good year” for wheat or not. In the long term, it is highly uncertain whether growing wheat will be problematic, or whether varieties will be developed to combat all the vagaries this species faces in a changing climate. Should the bread maker integrate vertically into agriculture – and would this be a disaster if they’re in the place where wheat is hardest hit?
On the other hand, another key ingredient, water, may be easier to forecast. It may be possible to work out the likely highest and lowest rainfalls an area is likely to face, and to work out how to respond to these situations – with a more limited range of likely futures, it is possible to create viable strategies and to plan.
2. How much to commit?
In the US, the phrase “to bet the farm” means to make a commitment to a strategy that is win-all or lose-all, depending on how things pan out. Small businesses are often regarded as nimble, but by the same token they can often fall prey to an urge to bet the farm – essentially to pursue a strategy which will sink the firm if it goes wrong. When betting in a highly uncertain environment, this is far too much of a risk for a small firm to take. Any entrepreneur targeting an apparently unoccupied niche with a brand new, killer product should ask themselves – is there a reason why no one else got there first? Is this too risky for me?
A safer version of this approach is to play follow the leader. Compaq did this in the early days of the PC clones, when it used Intel and Microsoft products in its computers. Although it did not survive as a firm in the long term – it was purchased several years ago by HP – it remains one of the longest-lived brands in the industry.
3. Waiting costs money
Under the circumstances, it may seem like a good idea to hold off and not take big risks until the market is more predictable. Keep on developing that biofuel until the market is really ready, get customer service right before we go to market. For big corporations, this makes sense – because they can often afford to wait. They may purchase a “position” in the market by acquiring a small player, they can put a team of analysts on to the job of developing market intelligence, and they can even start to influence the market.
These strategies are expensive, but if your firm has the financial might, it can be considerably safer than taking a punt early in the game. But for the small firm, waiting strategies are unaffordable – so the priority is to find entries that can be made now, and choose the best compromise between risk and reward that can be found.
In the complicated futures we face – not knowing what the impacts of climate change may be or when they will appear, not knowing how and when “peak everything” will affect our firms – strategy is a tricky business.
Betting on something that has not yet arrived can be dangerous. Plenty of firms have bet on electric bikes to appeal to commuters trying to reduce their carbon footprint and beat the traffic. Yet electric bikes simply haven’t taken off in the way PCs did in the early 80s. Ordinary bikes work well enough, and the big advantage of the electric bike – its ability to carry cyclists up steep hills – will only be relevant to a minority of commuters. Carbon guilt, if it happens at all, is as likely to drive commuters to public transport, with its relatively good safety record, as to dangerous bike travel. When levels of uncertainty are very high, it is sometimes better to focus on a market that is already on your doorstep, and wait until you either the new market develops, or you chance onto a killer innovation that creates it.
Even the smallest firm can also hedge their bets. A one-man band can provide different products and services to different markets, perhaps putting a small amount of effort into a field that is highly uncertain, while expending the most effort on a less lucrative but better understood product area. If your company wants to commit everything because you can really only afford to make one bet, make sure it’s to an area where the future is more certain. For example, if your product helps hurricane victims, that’s pretty good – there will always be hurricanes. But if your product is only relevant in the south Atlantic, you could be in trouble – that area might or might not get a lot of them in the future. Maybe you’re the one provider and you strike it rich with an unexpected catastrophe, but on the other hand it may be the last bet you make before bankruptcy.
If you are an entrepreneur or the leader of an SME facing a highly unpredictable future, you may be interested in attending our seminar Looking back on the next 20 years – what sustained your business? on 28 June at Colston Office Centre, Bristol.