Strategic Inflection Point (SIP) - A time in the life of a business when its fundamentals are about to change. Such a change will lead to one of 2 things: a rise to new heights, or the beginning of the end. -A Strategic Inflection Points happens when the old strategic picture (goals, etc.) are changed into a new strategic picture. It is when the balance is shifted from old structure to new. + It is hard to pinpoint when a SIP takes place, even in retrospect.
There are 6 forces affecting a business: 1. The power, vigor, and competence of a company’s existing competitors a. A lot of them? b. Well funded? c. Clearly focus on the business? 2. The power, vigor, and competence of a company’s suppliers a. A lot of them (many choices)? b. Few of them (No choice) c. Aggressive/greedy? d. Conservative? 3. The power, vigor, and competence of a company’s customers a. A lot of them? b. One or two major customers? c. Very demanding? d. Gentlemanly? 4. The power, vigor, and competence of a company’s potential competitors a. Better funded? b. More aggressive? c. How likely to compete? 5. The ability of a company to build or deliver a product or service in a different way. (Substitution) a. Deadliest of all the 6 factors b. New techniques, new approaches, new technologies 6. The power, vigor, and competence of a company’s complementors
Revised 6/14/04
-1-
a. Other businesses where customers buy complementary products. The products work with your product. i.e. cars and gasoline, computers and software.
Moving from Vertical to Horizontal industry The computer industry was once vertical. In other words, each company would make its own semiconductor chips, build its own computer, develop its own operating system, and market its own applications software. All of this bundled together would be sold as one computer package. When a customer bought a computer, they would have to continue buying from the manufacturer for a long time until the computer broke. Eventually, after several small changes (such as the microprocessor appearing) occurred, the industry moved into a horizontal industry. Each company focused on one product, and the products would (maybe) be compatible with each other. Instead of developing each part of the computer and doing a good job, they would focus on one part of the computer and do a great job. The time of transition from vertical to horizontal industry was the SIP. FYI: There is a general movement towards horizontally based industries, since it is more cost-effective than a vertical industry, and the resulting products are better. The Three Rules to surviving a Horizontal Industry 1. Don’t Differentiate without a Difference. Do not create something new or improve something already existing just to gain a competitive advantage if it does not give much to the customer. 2. The Moment Opportunity Knocks, Grab it. Only the first mover will be able to gain time over its competitors, and time is valuable. They might even be able to cause a Strategic Inflection Point for its competitors. 3. Price For What The Market Will Bear, Price For Volume, Then Work Like the Devil On Your Costs So You Can Make Money At That Price. The middle managers and salespeople, who are out in the real world, are the ones who will know best when a company is approaching a strategic inflection point. Those at the highest level- the CEO, higher managers- will be the last to know about a strategic inflection point. Those at the higher level need to expose themselves to:
Revised 6/14/04
-2-
Customers- the ones staying with the company and those that may be lost Lower-level employees- who can tell a lot that they need to know Critics- journalists, others who will have more information than the higherups.
10X Forces A 10X force is a very large change in one of these 6 forces. When a 10X force occurs, there is a transition from the old way to the new way. That transition period is the SIP. The chart below lists examples of 10X forces and SIPs. Example (Category)
What changed
Action Taken Some stores specialize, e.g., become category killers
Result
Wal Mart
Superstores entered
(competition)
small communities
Next (competition)
PCs with Windows took over
Next becomes a software company
Next survives as a small but profitable company
Talkies (technology)
Silent Movies died
Greta Garbo speaks
Garbo becomes a star; other former stars fade
Shipping (technology)
New technology increased productivity
Singapore and Seattle adapt to containerization; San Francisco and New York do not
Singapore and Seattle ports prosper; San
Home Depot and Toys-R-Us thrive; many stores perish
Francisco and New York ports decline
PCs (technology)
PCs price/ performance was superior
Some companies adapt microcomputers as building blocks; others become systems integrators
Adaptive companies thrive; others face difficulties
Demographic time bomb (customers)
Kids have increased computer affinity
Growth of CD-ROM educational and entertainment software, aimed at kids
Computers become ubiquitous
Travel agencies (suppliers)
Airlines capped commissions
Travel agents charge consumers
Travel agency economics turn
Revised 6/14/04
-3-
tougher Telecommunications (regulation)
Competition in equipment and longdistance service
AT&T adapts to a competitive world with consumer marketing
AT&T and the Bell companies' combined valuation is over four times what it was ten years before
Privatization (regulations)
End of government monopolies and subsidies
Deutsche Telekom appoints Rom Sommer as CEO
Painful adjustments ahead
When the company is struggling through a SIP, leaders who had been with a company for most of their working lives announce their resignation. Usually these CEOs are replaced by someone from outside the organization. Though the new people are not necessarily any better than the previous CEO, they are not emotionally involved and thus can view the situation impersonally, and much more objectively. To be able to survive, the existing management needs to adopt such a level of objectivity. They need to be able to (temporarily, at least,) forget the emotional past and look towards the future. A key thing to remember is that the “men and women lower in the organization” are already alert to the fact that the company is in need of change, and have taken small steps to make the change. The management should communicate with the lower levels, and will then better understand the company’s position. Salespeople understand shifting customer demand before management does; financial analysts are the earliest to know when the fundamentals of a business change. They start taking small steps of change (salespeople focus their selling on different products, factories produce a little more of the other products, R&D work more on the different products, etc.) These changes help, in the end, to make the big change. Not all changes are 10X forces.
However, all changes should be carefully monitored. Those that are determined to be 10X forces require immediate action. Asking a few key questions can determine when your company is about to enter a
SIP. ?
Who is your key competitor? Use the silver bullet test- with only one bullet in a figurative pistol, which competitor would you save it for. Usually a competitor can be announced quickly. When it is hard to announce, ask this:
Revised 6/14/04
-4-
? ?
? Is your key competitor about to change? When the importance of your competitor shifts, it is often a sign that something significant is going on. Is your key complementor about to change? Do people seem to be “losing it” around you? Your genes were right for the original business (people selected you to the top.) But if key aspects of the business shift around you, the very process that got you and your associates where you are might retard your ability to recognize new trends. If it seems that people may not get it, it might be that the “it” has changed; the goals and environment of the company have changed.
When trying to determine whether a change such as a new technology is a 10X factor, think about a few things. 1. Everybody with a gadget hawks and hypes it and consciously or unconsciously works double time to make their product as important as possible. Under the circumstances, it’s only natural to be suspicious and so you should be. 2. When you explore these developments first hand, you’ll discover that mostly they aren’t what they’re cracked up to be. 3. however, DON’T shut off your radar screens and go on about your business. Why? You can’t judge the significance of strategic inflection points by the quality of the first version (of a product). First versions are rarely good, and are usually disappointing. Continue to watch the product, as its potential for causing a strategic inflection point may change. If your instincts suggest that a 10X improvement could make this capability exciting or threatening, you may very well be looking at the beginning of what is going to be a strategic inflection point. Debate is the most powerful/important tool in identifying a particular development as a strategic inflection point. The debate needs three parts: technical discussions, marketing discussions, and strategic repercussions discussions. The debate should include all levels of management, and people outside the company. Senior Management- take your time until you’ve heard the news start to repeat, and a conviction is built up. Middle Management- Don’t sit on the sidelines. Participate in the discussion. Give your most considered opinion and give it clearly and forcefully. Not in Management- Participate! Even though not a manager, you have the firsthand knowledge that the managers are looking for in this discussion. Approach the debate with data in hand. However, do not take the data as hard fact, form your own opinions. Data is about the past, and the debates are about the future. Use the data to support your opinions, but have opinions.
Revised 6/14/04
-5-
Fear within a company is a good thing. Fear of losing is a powerful motivator. The way to make our employees feel fear is if we feel fear ourselves. It is better to act on many false alarms and thus be ready for a real SIP than ignore warning signs and be taken by surprise. A good dose of fear of losing may help sharpen survival instincts.* Fear of punishment, however, is a bad thing. Many middle managers and “Cassandras” (Lower-level people with the knowledge of potential SIPs) have the fear that if they reveal potential problems, they will be punished. Remember that this is their job. There are 2 types of power: Knowledge Power and Organizational Power. The best policy is to create an environment where those with Knowledge Power are not afraid of those with Organizational Power. This is very hard, as it only takes 1 incident to cause everyone to stop talking. It takes time and effort, but it is worth it. Neither one (KP or OP) is best; they are equal. When a manager goes through a SIP, a pattern is usually followed: denial, escape/diversion, and then acceptance and pertinent action. o Denial- Managers get to where they are by doing what they do well. Since they do things so well that they have gotten to their current level, they tend to deny what is happening. They believe that the ways of doing things that have worked so well will continue to work. o Escape- Managers will turn away from the problem. They might start acquiring other companies, fundraise for charity, etc. They will then be able to say that they are constantly busy with something important, and thus do not need to be concerned with the 10X factor staring them in the face. o Acceptance- Managers accept the truth, and then work to solve the problem. Unfortunately, this all-too-often happens too late to be of much help. Strategic Dissonance When a company is going through a SIP, the actions of the lower-levels of management will be slowly changing. Since the higher-levels do not know of this, they will continue to say the same things that they have been saying. However, the words will no longer match with the actions, and this is strategic dissonance; the gap between words and action. Businesses that continually ask “Are we saying X and meaning Y” will be the first to see a SIP. The way to ensure that your company will not crash and burn during a SIP is to experiment. Experimentation will allow you to see possible alternatives that you can use if you are in a SIP. However, experimentation must go on before a SIP, during times of health. During these times the company will be in even better
Revised 6/14/04
-6-
position to experiment, as they will have more funds and not be in dire need for the experiments to succeed. Everyone has a mental industry map of unstated rules, such as who can be counted on, what is allowed, etc. It is a good idea to physically make out an industry map. This industry map, however, should be similar to organizational charts of organization units’ interrelationships. It should show different factors and how they are connected. Take the time to share this map with colleagues, and this will lead to an evolved map that will be updated as needed, and on target. In this way, when a company goes through a SIP you can have an idea of what is changing. The Valley of Death The valley of death is the time period where, during a SIP, morale is at its worst, and the company is suffering the most. This is the critical time period where any decision can either make or break the company. To survive and come out on the other side of the valley of death, a company should have an idea of what they want to be. Also, it should also be defined what the company does NOT want to be. This is much easier as you traverse the valley of death, as you realize what does and does not work for your company. After having made it through, people need to be rearranged. It is often found that very good managers will be found to all be in one clump in one area, while another area has no good managers. Rearranging people will help to bring the company back. Also, employees and managers should dedicate themselves to learning about the new goals and new things. When Intel moved from memory to microprocessors, the managers had to learn about software, which they had originally ignored. Strategic plans- statements of what we intend to do.* Strategic actions- steps we have already taken or are taking which suggest our longer-term intent.* Strategic actions are more effective in leading the company in a new direction.
Strategic Plans
Strategic Actions
Sound like a political speech Concrete steps Abstract; no meaning except to those in Immediately affect peoples’ lives; have management positions large impact Deal with events far in the future. Deal with the present Don’t command true attention; too far Command immediate attention; immediate ahead future or present
Revised 6/14/04
-7-
Not Effective Leadership
Effective Leadership
!Shifting Early can be corrected; Shifting late cannot! 1. It is very hard to get out of the valley of death without a strategic direction. You must run in one direction as fast as you can if you are to be able to outrun your competition. 2. You must continue to run in a certain direction, even if the end seems to be in sight. If you are wrong, it is a mirage, you die. The Greatest Danger is Standing Still; continue running until you reach your destination. In other words, you MUST have a set goal, and reach that goal before you stop running. To survive in today’s business world, you must be prepared for SIPs. To be prepared you must be actively experimenting and alert to the outside world. In other words, do not be complacent; always be in touch with what is happening. Being paranoid is being alert. Only the Paranoid Survive.
Revised 6/14/04
-8-
