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 / Second Quarter 2000 / Issue 19(originally published by Booz & Company)


How to Change the World

Strategic innovation is an art form, much like jazz, that requires the discipline to learn and the talent to improvise.

There was a time not long ago when most managers tried to win by being a little faster, better, or cheaper than their competitors; by squeezing a bit more from employees or customers, or by managing the largest possible enterprise and enjoying economies of scale. No longer. Today's standard is much higher: CEOs must strive to be extraordinary business leaders like Ford, Morita, Agnelli, and Walton. They must change the world. It's the only sure bet for creating superior long-term value for shareholders, and turning employees' stock options into real money.

Changing the world begins, of course, with a great idea — something conventional wisdom suggests is in short supply. But today's economy is awash in great ideas — there were 84 IPOs in the first 10 weeks of this year alone.

The hard part isn't the idea; it's turning the idea into a real, earth-shaking strategic innovation that serves a well-known customer need in a dramatically better way — e.g., Southwest Airlines' offer of fun flying experiences for the price of bus fare, or the Dell Computer Corporation delivering exactly the computer a consumer wants at a low cost.

The companies that successfully changed the world, at least in the 55 industries we have studied, excelled in strategic learning. They learned step-by-step, through trial and error, over time. On average, strategic innovators needed five years to evolve their breakthrough business systems. Some of the biggest winners took longer: McDonald's, for example, took 14 years to develop the business system that created the fast-food industry.

But contemporary strategic innovators don't have the luxury of learning incrementally over such a long time. In today's hypercompetitive environment, how many innovators can count on complacent competitors, like those who gave Wal-Mart's Sam Walton and Nucor's F. Kenneth Iverson the time to develop industry-toppling business systems? How many "dots" will sustain their market value through five years of learning? "Launch and learn" is no longer good enough. Today, the principal management challenge is to accelerate strategic learning.

Companies can learn faster by employing three strategic learning disciplines: knowing where you are, sensing opportunities, and analyzing bets.

We talk about "disciplines" instead of "process" precisely because disciplines are not a reproducible sequence of steps that guarantee success. The idea of discipline may seem counterintuitive in an economy running at Internet speed. But disciplines actually accelerate learning by channeling creativity, focusing experiments, forcing deliberate choices about where to spend time and money, and reducing time wasted because of miscommunication, repeated mistakes, and blind alleys.

Knowing where you are, the first discipline, starts by reminding yourself of the core "big idea" by asking: What is the central customer need that is being addressed? How will we serve that need dramatically better? Managers then must assess where they stand on the three critical elements of the integrated business system that defines a strategic innovation:

1. The value proposition to customers: Which customers have you been targeting? How strongly are they attracted to your value proposition? With what alternatives are those customers comparing you? What about other customers? How rapidly are you growing in each segment?

2. The business model: How much of an advantage do you enjoy over competitors? Are you close to the 40 percent average unit-cost advantage enjoyed by such successful past innovators as McDonald's, Midas, Nucor, Home Depot, and Southwest Airlines? To what extent will the initiatives under way close the gap? How rapidly have you been improving over time?

3. The economic model: Where are you making and losing money? To what extent will your economics improve as you scale up? How rapidly is your profitability improving?

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