Economic-model sensing means understanding profitability by business, customer, or market segment; by product line; and by geography. The business should understand not only the facts about profitability today, but also the estimated profitability from the business as it scales up. Our experience is that even the largest and most established dots haven't systematically evaluated their profitability. Since the stock market is now demanding profitability from the first wave of Internet IPOs, we anticipate economic-model sensing will receive much greater attention.
The third strategic learning discipline is to use analysis to help place the best possible bets. The key word is "help": Successful breakthrough innovators find a middle ground between the entrepreneurial, "just do it" philosophy and the "analysis paralysis" that afflicts so many large companies.
Analysis is particularly helpful in making better decisions in the following ways:
- To set priorities and improve the economics. Like the Pareto analysis of defects (the first step of total quality management), an ordered list of problems and opportunities focuses the team on the highest impact issues, not just the issues that are top-of-mind. During the race to change the world, a company has only enough time to launch initiatives that have significant impact. To capture the benefits, it's helpful to estimate the magnitude of the benefits, identify what else has to change to realize the benefits, and update day-to-day financial and operating objectives.
- To eliminate unlikely solutions. Although brainstorming about problems and opportunities yields a variety of alternative solutions, simple back-of-the-envelope analysis can demonstrate that many of the alternatives are unlikely to succeed, concentrating the team's attention on the few that can work. If any of the dots that bought television advertising on this year's Super Bowl had stopped to consider that the crowded field and commodity commercials could dilute its brand, it could have diverted millions of dollars to more effective marketing.
- To uncover the underlying opportunity. Just as a doctor identifies and treats diseases, not just symptoms, a team addressing a major challenge must use analysis to locate the underlying drivers. For example, why are e-tailers' distribution costs much higher than those of their conventional competitors? Is it a lack of scale (remedied by increased volume), a steep learning curve (remedied by time and experience), inefficient execution (remedied by systems and processes), or something else?
The three strategic learning disciplines alone won't ensure that you change the world — any more than meditating, fasting, and acting kindly will turn you into Gandhi. Like a professional musician, you need discipline to use the disciplines. And that demands both relentless effort to know, sense, and analyze, and the ability to place bets that pay off. CEOs need to learn enough to place good bets, and management teams have to develop superior execution. But they must also move quickly enough to change the world before competitors do.
Of course, it's not all discipline. Strategic innovation remains an art form. Like bebop in the jazz world, the best strategic innovations emerge out of rule-based improvisation. The disciplines — knowing, sensing, and analyzing — provide common information and engender shared insights and values that together enable a kind of innate coordination, ensuring that the improvisation is neither harshly dissonant, nor predictable like elevator music.
But it's not all improv, either. Even jazz bands need leaders — especially when they're just starting out. A strong leadership team remains a sine qua non for a company trying to change the world. The leaders are the conductors, reviewing innovations across the organization for consistency and arbitrating conflicting efforts. They are the coaches, challenging teams to create even larger improvements, faster. They are the entrepreneurs, deciding where to bet the company. They are the visionaries, updating the business vision and sharing sensing information so that teams across the company make consistent decisions.