Strategic Optionality : Pathways Through Disruptive Uncertainty

This book offers a fresh approach to strategy by examining the idea of Optionality. Optionality is the right, but not the obligation, to take an action. Built on historic military tactics, static engineering principles, and equilibrium-seeking economics, conventional strategic-thinking suffers some weaknesses, principal of which is its inability to deal with conditions of high uncertainty. This book begins by dividing the business landscape into three distinct domains; (1) Fragile, (2) Robust, and (3) Long-shot (FRL), which alert us to the context-specificity of strategy tools, before suggesting that theoretical lenses are required to understand and implement strategy in VUCA (Volatile, Uncertain, Complex, and Ambiguous) domains. The authors explore the concept and methodology of Optionality in order to demonstrate how it can be used in conjunction with existing strategy tools in order to achieve competitive success. It will be of great interest to academics and students of strategy and innovation. Surja Datta is a Senior Lecturer, and Module Leader of Global Strategy and Innovation, a core module of Brookes Global MBA Programme at Oxford Brookes University, UK. He has published extensively, including books, chapters, and journal articles. His research interests include business history, innovation, and strategy. Surja is also the Associate Editor of International Journal of Technology Management and Sustainable Development. Tobias Kutzewski is a chartered accountant to the ACCA and a PhD candidate at VU University, The Netherlands. He has extensive industry experience through his work as a technology consultant for Accenture and through various roles in audit, financial, and investment management at Deloitte, ING, and in venture capital. Currently, Tobias is conducting research to pursue his PhD in the field of entrepreneurship and is also engaged in lecturing courses on Organization Theory, Academic Skills, and International Strategy. He is a reserve-officer to the German Army on civil-military cooperation Acknowledgement 5 Contents 7 List of Figures 8 1: Introduction 10 A Note on the Theories Covered in the Book 15 A Note on the Writing Style 16 Reference 16 2: The Business Landscape: Unpacking the Idea of ‘Domain Specificity’ 17 Globalisation 18 Digitisation 22 Pure Digital 23 Pure Physical 27 Physi-Digi Reality 29 Metamorphosis of Business Realities 35 FRL Domains 36 Integrating the Physi-Digi with FRL Domains 40 References 44 3: The Conventional Wisdom in Strategy 45 An Overview of Popular Strategy Frameworks 45 The PEST/PESTEL/PESTLE Framework 47 What Is It? 47 How It Works in Strategy-Making 47 The Political Domain 48 The Economic Domain 49 The Social Domain 49 The Technological Domain 50 Some Other Domains 50 Strengths and Weaknesses of the PEST Framework 53 Porter’s Diamond 54 What Is It? 54 How It Works in Strategy-Making 54 Strengths and Weaknesses of Porter’s Diamond 57 The Triple Helix 58 What Is It? 58 How It Works in Strategy-Making 59 Strengths and Weaknesses of the Triple Helix Model of Innovation 59 Scenario Planning 60 What Is It? 60 How It Works in Strategy-Making 60 Step 1: Asking the ‘What’ Question 60 Step 2: Identify the Factors 61 Step 3: Define the Forces 61 Step 4: Rank for Importance and Uncertainty 61 Step 5: Understand the Logic 62 Step 6: Write Down Scenarios 62 Step 7: Identify the Indicators 62 Step 8: Evaluate your Options 62 Strengths and Weaknesses of Scenario Planning 63 Some Concluding Remarks on Strategy Frameworks at the Macro-level 63 Strategy on the Industry Level 64 The Five Forces 65 What Is It? 65 How It Works in Strategy-Making 68 Strengths and Weaknesses of the Five Forces 69 The Industry Life Cycle 69 What Is It? 69 How It Works in Strategy-Making 70 Strengths and Weaknesses of the Industry Life Cycle 72 The Industry Architecture 73 What Is It? 73 How It Works in Strategy-Making 73 Strengths and Weaknesses of the Industry Architecture 74 Strategy on the Firm Level 75 The Generic Strategies 76 What Is It? 76 How It Works in Strategy-Making 76 Differentiation 77 Cost Leadership 78 Focus 78 Strengths and Weaknesses of the Generic StrategyFramework 79 The Balanced Scorecard Model 79 What Is It? 79 How It Works in Strategy-Making 81 Strengths and Weaknesses of the Balanced Scorecard Model 82 SWOT: Strength-Weaknesses-Opportunities-Threats 83 What Is It? 83 How It Works in Strategy-Making 83 Strengths and Weaknesses of the SWOT Analysis 84 The Resource-Based View of the Firm 85 What Is It? 85 How It Works in Strategy-Making 86 Strengths and Weaknesses of the Resource-Based View (RBV) of the Firm 87 Dynamic Capabilities 88 What Is It? 88 How It Works in Strategy-Making 89 Strengths and Weaknesses of the Dynamic Capabilities Framework 90 Strategy on the Corporate Level 91 The Boston Consulting Group Growth Matrix 91 What It Is? 91 How It Works in Strategy-Making 92 Strengths and Weaknesses of the Boston Consulting Group Growth Matrix 93 Ansoff Matrix 94 What Is It? 94 How It Works in Strategy-Making 95 Diversification: New Products for New Markets 95 Product Development: New Products for Existing Markets 95 Market Development: Existing Products for New Markets 95 Market Penetration: Existing Products for Existing Markets 96 Strengths and Weaknesses of the Ansoff Matrix 96 Conclusion 96 References 98 4: Strategic Optionality: Introducing the Idea 99 The Two Faces of Uncertainty: Luck and Misfortune 100 Hyper-Rationality and Strategic Management 104 The Problem of Hyper-Rationality 106 Bounded Rationality: A Dose of Realism 108 Optionality 109 Real Options and Corporate Strategy 111 Strategic Optionality and FRL Domains 113 References and Further Readings 115 5: Optionality and Innovation: Two Sides of the Same Coin? 117 Macro and Micro Perspectives on Innovation 118 Macro Perspectives on Innovation 118 System View on Innovation 118 National Innovation System and the Triple Helix Model 118 Competitive Advantage of Nations 119 Industry- and Firm-Level Innovation Dynamics 119 Architectural Innovation 119 Diffusion of Innovation (S Curve) 120 The (Industry) Life Cycle 121 Dominant Design 121 4Ps of Innovation Space Model 122 Innovation at the Individual Level 123 The Genius Myth 123 Errors and Accidents 125 Bisociation 125 Lateral Thinking 126 Integrating the Macro and Micro Perspectives on Innovation 127 The Early Adopters/Lead Users 130 Mass Adoption 130 Rejecting the Myth of the Genius Inventor 133 Optionality and Innovation 136 References 140 6: Competitive Success: Competing Across FRL Domains 142 The 4Rs of Success 143 Resources 144 Problems with RBV 149 Static Analysis 149 Dynamic Capabilities 150 Recombination 151 Reach 154 Roots 157 Competing Across FRL Domains 166 Strategic Imperative of the Fragile Domain 166 Strategic Imperative of the Robust Domain 170 Strategic Imperative of the Long-Shot Domain 171 Competing Across FRL Domains 173 References and Further Reading 174 7: Optionality: The Method 176 Step 1. Domain Identification 176 Know Thyself: Where Are You? What Brought You There? And Where Do You Want to Be? 176 Fragile 177 Key Attributes 177 Robust 177 Key Attributes 177 Long-Shot 177 Key Attributes 177 Step 2: Evaluating the Strategic Imperative 178 Where Do You Go Next? 178 Step 3: Identifying Your Free Options 179 Are There ‘Free’ Options Out There? 179 Free Options Out of Roots 180 Free Options Out of Resources 180 Free Options Out of Reach 181 Free Options Out of Recombination 181 Step 4: Developing Options Through Scenarios 182 How to Develop Optionality? 182 Phase 1: What Future Changes Might Affect Our Firm the Most? 182 Phase 2: What Elements Would These Changes Have? 183 Phase 3: What Forces Might Play a Role? 185 Phase 4: Determine Relevance and Unpredictability 185 Phase 5: What Reasoning Do You Follow? 186 Phase 6: Create Coherent Options 187 Phase 7: Find Suitable Indicators 188 Step 5: Evaluate Options 189 8: Conclusion 190 Index 195