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Beyond Agile Operations: How To Achieve The Holy Grail Of Strategic Agility

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While most large organizations are still learning how to master operational Agility, the main financial benefits from Agile management will flow from the next Agile frontier: achieving strategic Agility.

Today, the practice of Agile management (and its analogs, such as “Lean” and “design thinking”) still reflects a preoccupation with achieving operational agility—enabling a team, a unit or an entire enterprise to nimbly adapt and upgrade its existing products and services to meet rapidly changing technology and customer needs, with efficiency gains or quality improvements.

Operational Agility is important—indeed, increasingly necessary for a firm to survive. But in a marketplace where competitors are often quick to match changes made in existing products and services and where power in the marketplace has decisively shifted to customers, it can be difficult for firms to monetize those gains and improvements. Amid intense competition, customers with choices and access to reliable information are increasingly able to demand that quality improvements be forthcoming at no cost, or even lower cost.

Efficiency gains and quality improvements operate within a limited frame. “The conventional view of the competitive landscape,” as Clayton Christensen and his colleagues explain in their book Competing Against Luck (2016) “puts tight constraints around what innovation is relevant and possible, as it emphasizes bench-marking and keeping up with the Joneses. Through this lens, opportunities to grab market share can seem finite, with most companies settling for gaining a few percentage points, within a zero-sum game.”

“We tend to confuse capitalism with competition,” says Peter Thiel, the creator of PayPal and a lecturer at Stanford. “We tend to think that whoever competes best comes out ahead. In the race to be more competitive, we sometimes confuse what is hard with what is valuable. The intensity of competition becomes a proxy for value…Instead of being slightly better than everybody else in a crowded and established field, it’s often more valuable to create a new market and totally dominate it. The profit margins are much bigger, and the value to society is often bigger, too.”

This is the dark secret of the Agile management revolution: the major financial gains from Agile management will come from the next frontier of Agile management: moving beyond operational Agility to strategic agility—namely, through mastering market-creating innovation.

Market-creating Innovations Generate Large Financial Gains

Market-creating innovations are innovations that open up markets which didn’t previously exist.

• Sometimes they transform products that are complicated, inconvenient and expensive into things that are so much more affordable, convenient and accessible that many more people are able to buy and use the product, for example, the personal computer.

• Sometimes the new products meet a need that people didn’t realize they had and create a “must-have” dynamic for customers, even though the product is relatively expensive, for example, Starbucks coffee and the iPhone.

Market-creating innovations usually don’t come from resolving customer complaints or asking existing customers what they want: As Henry Ford famously said, if he had asked customers what they wanted they would have requested a faster horse. Market-creating innovations come from imagining and delivering something that unexpectedly delights whole new groups of customers, once they realize the possibilities. Thus no one was pressing Silicon Valley to create the personal computer, or Apple to create the iPhone, or Starbucks to create a billion new flavors of high-quality expensive coffee. Those firms delivered something that surprised and delighted customers, once they experienced what it could do. The product itself created the demand.

Market-creating innovations are where major revenue growth comes from. That’s because market-creating innovations lead us to the so-called “blue oceans” of profitability, as W. Chan Kim and Renée Mauborgne explain in Blue Ocean Strategy (2015). An organization can generate high growth and profits by creating value for customers in an uncontested market spaces, (“blue oceans”), rather than by competing head-to-head with other suppliers in the bloody shark-infested waters with known customers in an existing sector (“red oceans). By looking at the world from the customer’s point of view, a firm doesn't find new ways to delight the customer: it creates them.

• Thus the Cirque du Soleil was able to enter a dying industry—circuses—and by eliminating animals, deemphasizing individual stars and combining extreme athletic skill with sophisticated dance and music, it created a high growth business appealing to all ages. While traditional circuses are going out of business, the Cirque du Soleil is thriving.

• By looking at the world from the customer’s point of view and finding ways to delight the customer, Apple has been able to take “mature” low-margin sectors—retail computers, music, mobile phones and tablet computers—and turn them into huge money-makers. In the process, Apple went from practically bankrupt in 1997 to a firm with one of the world’s largest market capitalization in just fifteen years.

In the world of strategic Agility, we have learned that there is no such thing as a mature industry: there is only an industry to which imagination has yet to be applied.

Market-Creating Innovations Also Tend To Create New Jobs

Market-creating innovations are also where economic growth and new jobs come from. They often create the need to hire more people to make and distribute the product, sell it and service it, thereby fueling the overall economy.

Thus Amazon, a firm that has demonstrated remarkable strategic agility, has created some 230,000 jobs since 1994 and has announced an intent to create more than another 100,000 jobs over the next 18 months. The new jobs, Amazon has said, “are for people all across the country and with all types of experience, education and skill levels—from engineers and software developers to those seeking entry-level positions and on-the-job training.” In addition, Amazon notes that businesses like Amazon Marketplace and Amazon Flex “create hundreds of thousands of jobs for people who want the flexibility to be an entrepreneur.” All this has been accomplished with multiple market-creating innovations, Amazon has moved from retail books, to retail everything, to cloud computing services, to delivery services, to music and video streaming, and to producing movies.

However large-scale job creation from market-creating innovation is not universal, particularly with high-tech startups. For example, Snapchat with a reported valuation of some $25 billion and around 160 million active users has only 1,900 employees.

But while market-creating innovations typically create more jobs, innovation aimed at efficiency gains or product improvements typically does not. It typically reproduces or reduces existing employment. The fact that businesses older than 5 years have been net job destroyers over the last several decades reflects the general lack of capability to generate market-creating innovations.

In a political environment in which CEOs are now being pressed by politicians to do more for local job creation, a reliance on bureaucracy or even operational Agility will rarely be enough to get by. Thus as Bloomberg reports, “several companies—from IBM to Ford and Alibaba—have publicly announced hiring sprees, though some of them were re-polishing previously announced intentions.” Unless a firm has mastered strategic Agility with market-creating innovations, announcements of job increases are more likely to be politically-motivated PR than real.

Nor will firms that are still pursuing “the world’s dumbest idea”—maximizing the current stock price—or achieving financial growth through other kinds of financial engineering such as share buybacks, offshoring, M&A or tax gadgets be able to generate substantial new jobs and real economic growth. To do so, they too will need to master strategic Agility.

Why 20th Century Firms Lacked Strategic Agility

In the 20th century, top-down bureaucracies had limited capability to innovate. The firm aimed at delivering “more of the same” with ever greater efficiency through economies of scale. The goal was to find a competitive advantage and then defend it. “Traditional, MBA-style thinking,” as Google executives, Eric Schmidt and Jonathan Rosenberg, write in their book, How Google Works, “dictates that you build up a sustainable competitive advantage over rivals and then close the fortress and defend it with boiling oil and flaming arrows.”

The fortress is “built to minimize risk and keep people in their boxes and silos,” as business school professor John Kotter writes. People “are working with a system that is designed to get today’s job done—a system that asks most people, usually benignly, to be quiet, take orders, and do their jobs in a repetitive way.”

In effect, exploitation of the existing business took priority over exploration of new possibilities. Innovation was carried out—if it happened at all—on the side with task forces, special project groups, strategy departments, tiger teams, skunk works, R&D, or dual operating systems. While these efforts made some short-term gains, they were temporary fixes to the concept of the corporation as a static machine. Any gains were a great deal less than what would have been possible if the entire firm had embraced Agile management. The corporation continued to function for the most part as a static machine—big and efficient but slow and hard to maneuver.

Some firms grew by finding new markets and expanding globally with essentially the same products and services: but eventually, even the global market has its limits. The only sustainable way to keep growing is through strategic Agility and market-creating innovations.

The capability to generate market-creating innovations by existing corporations was thus rare. Where these bureaucracies tried to go beyond the core business, they generally failed. Even where firms perceived the need to make market-creating innovations, and did all of the research needed to generate it, as at Kodak or Nokia, the firms stuck to their core and suffered devastating losses, as other firms ended up implementing the very innovations that they had pioneered intellectually.

These companies were operating from a position of strength. They enjoyed a totally dominant position in their respective industries. But suddenly they were struggling to survive.

The guiding objective for senior executives in the new era has to be different. Firms must achieve scale without sclerosis to enjoy a flexibility of maneuver that was previously thought to have been impossible at scale. What is now seen to be possible has become necessary.

The Path To Operational Agility

In the 21st century, the scene started to change with the advent of Agile management (and its analogs, “design thinking” and “Lean”). In the decade and a half since the Agile Manifesto of 2001, progress was made in understanding and implementing Agile management by mastering the three laws of Agile: “the law of the small team,” “the law of the customer” and “the law of the network,” as explained here.

“Now agile methodologies,” as HBR declared in April 2016, “involve new values, principles, practices, and benefits and are a radical alternative to command-and-control-style management—are spreading across a broad range of industries and functions and even into the C-suite.”

Operational Agility generates a capability to achieve greater efficiency gains and faster quality improvements. Today, most large organizations are still learning how to master operational Agility at the team and unit level as shown in Figure 2.

Operational Agility at the team or unit level can enable a firm to make necessary adaptation to rapid changes in the marketplace. It can avoid the firm being caught flat-footed and help it at least keep up with the competition. By focusing work on what adds value to customers and systematically eliminating what doesn’t, it can lead to cost savings (efficiency gains). And by giving everyone in the organization a clear line of sight to the customer and working in small teams and short cycles, it can enable continuous enhancements of existing products and services (quality improvements).

Achieving enterprise-wide Agility as shown in Figure 3 is for many firms still a challenge, particularly where the firm is still aimed at maximizing shareholder value as reflected in the current stock price.

The transition is particularly difficult in those firms where senior managers themselves are still learning to embrace and embody the Agile mindset. All too often, senior managers regard Agile as merely a set of tools and processes that lower-level folks in the IT department have to master, rather than a mindset that they themselves must understand, embody and live on a daily basis. In the end, Agile is mindset.

The result of limiting Agile management to the team or unit level is usually a failure to capture the full gains of operational Agility, as well as an inability to reach strategic Agility. The phenomenon is widespread. Surveys carried out by Scrum Alliance in 2015 and 2016 show that more than 70% of Agile teams perceive tension between the way the team function and the way the whole organization operates.

Unless the tension is resolved, it can lead to abrupt abandonment of an organizational commitment to Agile altogether, with the firm declaring disingenuously that “we are already Agile,” only to be followed by the recognition of the sad reality shortly afterwards, and a fresh effort to “implement Agile.” The full gains of operational Agility will only come when the whole firm embraces Agile.

The gains from operational Agility at the enterprise level can ensure the firm’s short-term survival in an increasingly competitive and rapidly shifting marketplace. But efficiency gains and quality improvements will rarely lead to huge financial gains. To achieve that, firms need to look beyond their existing products and services and open up markets that don’t currently exist. That entails mastering strategic Agility. Operational Agility is just part of the Agile journey.

Achieving operational agility is thus necessary. But it’s not the end point. Even firms that achieve full operational Agility still have another frontier to master: strategic Agility, as shown in Figure 4.

The Path From Operational Agility To Strategic Agility

Ideally, there is a natural progression from operational Agility to strategic Agility as shown.

• A firm may start experimenting with one or a few teams with operational Agile. Even in successful cases of “a big bang” approach as at Salesforce in 2006 there is almost always one team that has had some experience with it.

• As more and more teams take on Agile, eventually a whole unit embraces Agile, as in Microsoft’s Developer Division in 2011.

• Then multiple units and the whole firm may embrace Agile with major enhancement of the capacity to make quality improvements and efficiency gains.

• The new-found operational Agility at the enterprise level then finds its natural evolution in strategic shifts that open up new markets, as at Amazon and Apple.

In practice today, many firms are still learning how to achieve operational Agility at the enterprise level, and so never have the opportunity to achieve full operational Agility (Figure 3), let alone strategic Agility (Figure 4). They are stuck at operational Agility at the team and unit level (Figure 2), having failed to master the third law of Agile, “the law of the network.”

The Collapse Of Sectoral Boundaries

Strategic Agility is needed not only because of the limited financial gains from operational Agility. It is also required to deal with the 21st century reality that sectoral boundaries themselves are collapsing.

In the 20th century, a firm was seen as having a core competency that was solid and static. The firm would generate a product and drive that product through to market with mass-marketing. Most adjacent moves generally failed—around 90 percent failure by one estimate. Managers brought up in that oligopolistic period knew that the main thing was to concentrate on and dominate your core.

The 21st century began evolving differently. Apple successfully moved from computers, to the iPod, to the iPhone, to the iPad and the iWatch. Amazon moved from book retail books, to retail everything, to cloud computing services, to music and video streaming, to movie producing.

While these firms looked initially like individual outliers, it is now apparent that the boundaries between sectors are collapsing more generally. A firm can no longer rely on mastering the sector in which it developed its core competency. The expectation that companies will remain in one industry forever is becoming an artifact of the past. Being the best buggy whip maker in the world is not a recipe for sustained success, when the world no longer needs buggy whips.

A recent PwC report called “The Future of Industries: Bringing Down the Walls,” documents how the boundaries among sectors are dissolving. “The pace of technological change is creating at least the prospect of a new industrial order, in which most companies no longer operate within the comfort zones of their established sectors. Already, a few companies (Apple, Amazon, and GE, among them) have boldly and successfully moved into new industries. Now just about every other company will have to do business that way.”

The report cites many examples where whole sectors are being redefined and reinvented:

• Telecommunications: A telecom company used to be a business of routing calls and data. But now, they are becoming entertainment content companies.

• Automakers: Car manufacturing is now facing a future where they will be “facilitating mobility on demand. Consumers will order cars from mobility services to suit their immediate needs: a spacious wagon for a weekend away with the family or a microcar for a solo trip into the city. Add in the driverless dimension and the potential for car-sharing, and it’s not difficult to see a future where owning a car becomes the exception rather than the rule.”

• Electric utilities: The staid industry of power generation is facing a future of smart infrastructure. It begins with “security and temperature control,” and expands to embrace “a diverse range of integrated and automated services, including… larger-scale energy management, monitoring of building maintenance, city resource management, transportation efficiency, and eldercare.”

• Hardware: The Internet of Things (IoT) is transforming hardware, as firms can add sensors to their products to enable predictive maintenance and other forms of security and monitoring.

• Healthcare: Here too, IoT is leading to “the use of sensors to provide data that health professionals can use to provide early diagnostic or real-time follow-up services.” In the process, “the traditional boundaries separating technology, healthcare, and pharma are coming down.”

• Personalized services: “The IoT will greatly intensify the focus on outcomes, convenience, and value. In consumer products manufacturing, for example, the IoT makes it possible to get feedback directly from consumers and develop more personal relationships with them, potentially bypassing retailers and redefining sector boundaries further.”

• 3D printing: “The time is coming soon when digital fabrication will make it possible for a single factory to build everything from airplane parts to garden ornaments.”

As a result, companies in all industries need to be ready to stretch their horizons beyond their existing businesses. “This doesn’t necessarily mean the borders will disappear among all industries. But if you are a business leader, you should expect your company’s sector to be transformed, probably within a decade, by the shockwave of technology change that is upon us.”

Achieving Strategic Agility Isn’t Easy

Achieving strategic Agility isn’t easy. Quite apart from mastering operational Agile at the enterprise level, firms are facing social, financial and institutional pressures to maintain the status quo. As columnist David Brooks points out, some pre-determined paths are antagonistic to creativity, innovation and value-creation.

“First, students have to jump through ever-more demanding, preassigned academic hoops. Instead of developing a passion for one subject, they’re rewarded for becoming professional students, getting great grades across all subjects, regardless of their intrinsic interests… Then they move into businesses in which the main point is to beat the competition, in which the competitive juices take control and gradually obliterate other goals…. Competition has trumped value-creation. In this and other ways, the competitive arena undermines innovation.”

Financial pressures also prioritize short-term gains over market-creating innovation. Firms are pushed by activist shareholders to focus on short-term financial gains, even if this is at odds with long-term financial health. This phenomenon is relatively recent: quarterly guidance to the stock market only became legal in the USA in 1996.

Even firms that are investing huge investments in market-creating innovation are finding it difficult. Google is spending billions on a plethora of market-creating businesses, including Google Glass, Nest thermostats, smart contact lenses, giant video screens, seawater based fuel, delivery drones, self-driving cars, all-terrain robots, Wi-Fi kiosks, energy-creating kites and artificial intelligence. And yet over 90% of its revenue still comes from its core business of ad revenue. Bloomberg Businessweek reports that Google’s “business divisions not named Google lost about $3.6 billion in 2015, roughly twice what they’d lost the year before.” Google’s moonshots may eventually pay off, but so far, the jury is out.

And it’s not just Google. Studies show that more generally R&D spending doesn’t correlate with market value or growth. As Booz & Company reports, “Spending more on R&D won’t drive results. The most crucial factors are strategic alignment and a culture that supports innovation.”

If firms are to master strategic Agility, they must adopt a more consistent and coherent approach towards market-creating innovation.

In Part 2 of this article, I will explore what market-creating innovation looks like in practice: stay tuned for “Four Key Steps To Achieving Strategic Agility.”

And read also:

Explaining Agile

How To Make The Whole Organization Agile

Fresh Insights in Disruptive Innovation

Where New Jobs Come From

The Dumbest Idea In The World

Follow Steve Denning on Twitter @stevedennning.