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Adaptive Execution Capabilities

 

Today’s winning capabilities are tomorrow’s table stakes. Organizations must identify what capabilities world-class competitors will possess in the future and begin to invest now. These competencies are the foundation on which the organization’s shared vision is built and executed.These competencies must provide advantage over competitors; be hard to replicate, imitate, or transfer; not be available to be bought or sold; provide value to customers; apply across markets or product lines; exist broadly across groups of employees; and be sustainable.

Focusing on future core competencies will, first of all, make the organization skilled at methods and processes that matter most. Each competency will reinforce and improve the others more rapidly than competitors are able to. Second, as the same competencies are applied across more products and services, the organization gets more value out of them. The organi-zation can afford to hire specialists, because the cost of building capabilities is amortized across the entire portfolio. Third, money will be spent where it is needed most, and less will go to table stakes, the necessary competencies and skills that every competitor brings to the market. Fourth, there will be greater alignment, as people in different product lines and geographies are attuned to the same capabilities system. They are more likely to understand one another and make independent decisions that are more or less in sync. They can combine forces and share resources more easily. They will be able to execute faster and with more force because they are all pulling in the same direction.

With rapid changes occurring in the energy industry, executives at one of the world’s largest electric and gas utilities were concerned that their business strategy would not sustain their performance and began thinking about future competencies. It was not evident what they needed to change, so they looked at how customers’ needs might evolve. They uncovered several organizational shortcomings and developed initiatives to bridge these competency gaps. In addition to reducing risk by sizing up new initiatives long before any actual investment and by recognizing early warning signs, the utility can better manage expectations of stakeholders, including regulators and suppliers.

Execution Feasibility
Many attractive strategies exist. However, not all are possible for every organization. Investing in strategies with low feasibility is a losing path. Leadership needs to recognize that how they will win may be different than the path for their competitors. Selecting strategies that have the least number of execution hurdles and the highest probability of closing capability gaps is vital.
A high percentage of strategic initiatives fail because not enough people understand the strategy and because incentives and budgets aren’t linked to the initiatives. A global survey of senior executives by PwC found not only that more than half of those surveyed did not believe their organization had a winning strategy but also that two-thirds believed their company lacked the needed capabilities to realize its strategy.
Before making any moves, therefore, organizations should inventory the principal strategic decisions for the near term and long term and then evaluate their readiness to execute. By honestly evaluating the probability of success for alternative strategies, leaders can eliminate those that appear attractive but lack a high likelihood of realizing their expected value.

In a major U.S. market, a host of problems with obstetric care created a great opportunity for several hospitals to transform the practice in the region. However, here was the question: Could the hospitals seize the opportunity? Three institutions were working to create a truly differentiated experience for mothers and infants by merging practices into one program. But success required complex cooperation by all three entities on this $500 million-plus project, including on culture and expansion of infrastructure construction. The leadership team did an exceptional job defining the business case and had a strong understanding of all the execution elements for the multiyear project. To help anticipate problems, the team used extreme scenario analysis and conducted a Monte Carlo simulation (an analysis used to model ranges of possible outcomes and their probabilities). A critical hurdle to feasibility was spotted—a team had been identified, but the assignment of roles, responsibilities, and accountabilities was not as well defined as necessary. An early symptom of this problem manifested in a lack of urgency, given the long-term nature of the project and given other demands on people’s time. To close the feasibility gap, the team set up milestones to build momentum and alignment across the three organizations and to move resources quickly to the critical path items that were behind schedule and threatened to derail the overall effort.

Adaptive playbook
Relentless testing of alternative strategies is imperative to an adaptive strategy. Organizations need more than one strategy at the ready, as market conditions often change and new threats and opportunities emerge.
Most organizations plan as if the world were predictable, developing point forecasts, budgets, and initiatives that will succeed as long as the external environment cooperates. But the business landscape is changing in many industries, and the rules of engagement are also changing. Unfortunately, most leaders realize this only after a significant value-destroying event.
Organizations must become intimately familiar with their competitors’ inner workings and pain points to better understand how competitors will possibly react to specific tactics. To build this competitor-centric approach, leadership teams should regularly employ an internal role-playing exercise to simulate the competition’s strategic intents. This behavior will help an organization anticipate the actions of current and future competitors.
A playbook of strategic choices can better prepare organizations to act quickly when the environment changes. The ability to master the principles of game theory is core to building a truly adaptive playbook.

Leadership must be prepared to swiftly shift resources to new priorities when the primary strategy and portfolio of initiatives are no longer creating their intended value.A pharmaceutical company, saw the value of an adaptive playbook as it prepared to launch a potential blockbuster in the diabetes space. The class of drugs had one well-established player and one that was widely assumed to be next to market. Given the sequencing of FDA approvals, industry consensus was that our client’s drug would be the third to enter the class. The leadership team rehearsed their strategy in a competitive war game and surfaced several what-ifs, including the possibility of a change in market-entry position. At first, the team felt that preparation for this unlikely event was not the best use of their precious prelaunch time. However, leadership decided to test several core market assumptions and created an alternative playbook. Fast-forward six months, and the FDA surprisingly placed considerable new data demands on the product that was expected to be second to market, delaying that company for years. The company was ready and captured the upside of being second into the market because of that alternative playbook.

Balanced portfolio
A portfolio approach to investing for the future is essential for any adaptive strategy. It creates a structure to enable short-term resource fluidity while simultaneously providing the discipline required to meet long-term growth aspirations.

Strategic transformation requires the seeds of growth and innovation to be planted while maintaining the core business, enabling rapid scaling when those seeds start to bear fruit. A well-constructed portfolio balances investments with knowable return on investment (ROI) in the short term along with investments that have long-term potential and can’t be evaluated with such traditional financial metrics.

Traditional metrics assume that the source of competitive advantage will stay the same or at least be predictable many quarters and years into the future—but that’s not how the world works these days. Portfolios need to incorporate varying levels of risk and multiple time horizons to address the growth problems that plague many organizations.For example, a leading global chemicals manufacturer recognized that it was losing its edge, particularly when it came to long-term innovation, because near-term initiatives with a clear ROI were siphoning resources from research and development (R&D) and the next generation of products. So the company devised a disciplined portfolio management approach that allocated its investments into three distinct categories: core, new, and experimental. Each category comes with a specific time horizon and risk level: Core is short term/low risk. New is medium term/medium risk. Experimental is long term/high risk. Budgets are allocated for each category, with strict structures in place to prevent longer-term budget dollars from getting pulled into short-term, core investments. Only investments within the same category can compete for budget dollars. This helps ensure that short-term focus never crowds out long-term investment, minimizing the potential for a growth gap later on.

Fail Fast stategy
Every organization has limited resources. An organization with accelerated performance can objectively assess which strategies are working and which are not, allowing it to pull the plug on those that are failing, double down on those that are working, and invest in new ideas. An organization burdened with too many stagnant strategic initiatives quickly faces a drag on overall performance.

Most organizations cling too long to failing strategies. That is partly because of a lack of discipline, especially if a leader feels some attachment to the strategy—but letting go of a failing strategy sooner instead of falling prey to the sunk-cost fallacy is important to minimizing losses. Organizations also must learn how to reward failure and celebrate related learnings rather than penalizing failure.George Day from the Wharton School brings much-needed discipline to failing fast through his “real, win, worth it” framework. Management teams need to repeatedly ask themselves, “Is the opportunity still real?” “Can we still win?” and “Is it worth doing in terms of the expected return?” This type of framework pushes leaders to constantly challenge thinking and track performance. Early on, managers must establish critically important triggers that enable them to pull the plug on a failing effort faster than they would have otherwise.
A company used this sort of approach when it had to decide whether to aggressively increase production capacity to meet demand in the Chinese tire market, by asking the following questions: Will the market continue to grow as assumed? Was the opportunity still real and worth it? Investing heavily would exploit current opportunities but leave the company with significant overcapacity in the longer term once the Chinese market slowed.
Choosing to limit investment would eliminate the long-term problem but result in a significant loss of market share and profits in the short term.The company engaged in a stress test of capital investments and the business model in relation to the possibilities of global overcapacity and change in the Chinese market. Leadership uncovered significant risks in the medium and longer term. As a result, the company pivoted its resources elsewhere, accepting a small loss but avoiding a much more significant market collapse.

Rapid response
Rapid response requires the ability to sense threats and opportunities in the market. Sensing is not enough, though—organizations must relentlessly pursue improvement in how they respond when signals emerge. These skills are critical to maximizing the upside and minimizing the downside as part of an adaptive strategy.
Responding to a threat or opportunity more quickly than competitors, based on less-than-perfect information, can be the difference between just being average or being accelerated. Most organizations struggle to act swiftly and commit resources because the near-term risks of being wrong far outweigh the long-term reward of being right.It’s important for organizations to understand how well they sense threats and opportunities. In a Harvard Business Review article, George Day and Paul Schoemaker introduce a simple but powerful idea, as exemplified : An organization can sort through threats and opportunities, both seen and unseen, by categorizing them. (Most organizations find iteasier to see threats than opportunities, so they will need to work harder to spot the opportunities.)
No company is perfect, of course, but every company must strive for a healthier balance between the opportunities and threats that are seen versus those that are unseen.
You can’t just go fast all the time. You have to pick your spots, and sometimes you have to go slow first before you go fast. A study of 343 companies found that those that focused on “strategic speed”— reducing the time it takes to deliver value rather than just operating at a greater pace—had 40 percent higher revenue and 52 percent higher profit over a three-year period.

A global pharmaceutical company had to strike this balance as it was preparing to launch an oncology drug that had been granted breakthrough therapy (BT) designation by the FDA. Its main competitor was preparing to launch a combination treatment in the same time frame, with both companies seeking to gain much more lucrative indications (that is, approval for additional uses) in the 12 to 18 months following the launch. The pharma company needed to understand how and when to engage its key stakeholders to build interest among those making and influencing treatment decisions. The brand leadership team worked to understand how to differentiate their treatment from that of their competitor and win over key influencers. The team then developed a road map for how and when to engage each stakeholder group for the initial indication as well as the targeted second and third indications. The strategy garnered support from key influencers, positioning the company well for substantial market share once its treatment achieved a second indication 15 months later.

 

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