UK: Strategic Flexibility in Media and Entertainment - Scenarios, Options, Action! (Part Two)

Phase II: Formulate

Whereas the Anticipate phase of Strategic Flexibility generates insights through the application of scenario-based planning, the Formulate phase makes use of what is already known about how to develop good strategy – the well developed body of knowledge concerning both the appropriate processes to use and the content needed to maximize the probability of competitive success.

In this phase, Strategic Flexibility departs from a more conventional approach, though more in terms of volume than in the nature of the work required. That is, more traditional applications of strategic frameworks, such as Michael Porter’s Five Forces, demand (often implicitly) that competitive conditions be either fixed or accurately predicted.⁶ For example, in the seminal work on corporate strategy, Igor Ansoff begins with the observation that strategy is only meaningful within the ‘planning horizon,’ which he defines as ‘that time period within which predictions will be accurate to within, say, 20 percent. ⁷ In other words, only once the planning horizon has been fixed may the work of developing a sound strategy proceed.

A different premise – one that underpins the need for Strategic Flexibility – is that one cannot know over what time horizon which predictions will be accurate or to what degree. Worse, even those forecasts that can be trusted are typically so short-term, that the planning horizon implied would be measured in weeks or months, whereas true strategic planning necessarily looks ahead several years.

Unable to predict the future, we can however bound it – anticipate it – using scenarios (the Anticipate phase), and then apply the already well-mapped tools of strategy development to these divergent yet plausible end states. What emerges is a range of different yet potentially successful strategies, along with a definition of the conditions under which they would succeed.

There is no escaping the fact that this multiplies the strategist’s work. Instead of having to build a successful strategy for one future, the revised requirement is to build a successful strategy for each scenario that bounds an organization’s ‘possibility space.’

Fortunately, to do this, good strategists need only repeat their thinking processes, not revise them. The rigorous application of the tools of game theory, of industry structure analysis, of disruption theory, and of knowledge of an organization’s core competence, among others, are likely all that will be needed.

Even better, DTT TMT group’s experience suggests that the process of developing strategies for each scenario tends to go more smoothly than developing a strategy for a single set of assumptions. The reason is that disagreements over what constitutes a good strategy frequently do not hinge upon differences over what do to under a clearly defined set of conditions. Once the competitive environment is well defined, well-informed and rational people tend to converge on how best to respond. Disagreements tend to stem from differing views on what future circumstances will be.

For example, when conducting an industry analysis based on an assessment of future industry structure, specifying the precise bargaining power of suppliers (to pick one element of industry structure) is the hard part. Reaching agreement on how best to respond to suppliers with a defined degree of bargaining power tends to be less challenging.

In fact, a way to determine whether Strategic Flexibility might be useful to a given company is to uncover the sources of disagreements about strategy. Do you and your colleagues truly disagree about what makes sense, given the conditions? Or rather, do you disagree about what conditions you will face in the future? If the latter, Strategic Flexibility can help by taking uncertainty of the future state out of the strategy formulation equation. Each view of what lies ahead is embodied in one or another of the scenarios. With the debate about what future deserves priority attention roped off to the side, determining how best to respond in each scenario is a far less arduous task.

This report, will not attempt to offer a detailed illustration of what it would mean to formulate strategies across all five of the plausible scenarios previously defined. But, in terms of strategic priorities that can be addressed at the corporate level, the DTT TMT group would suggest that the possibility space they have developed can be analyzed in general terms with respect to the different strategic benefits conferred by scale, scope, and innovation.

Consider the competitive conditions depicted in the Basic Instinct scenario. With mergers and acquisitions facing stringent government reviews, it would be difficult to assemble a vertical chain of operating assets, let alone integrate them in any meaningful way. Slower adoption of new technologies means that scale will best confer cost advantages rather than create the market presence and cross-market synergies required to support rapid and repeated innovation.

What seems to matter most in this version of the future is the ability to innovate with respect to business models, rather than specific products or services.⁸ These observations suggest that a more focused, process-oriented organization is most likely to succeed.

The Wizard of Oz scenario imposes very different strategic demands. More permissive regulation means that scope-based strategies are possible. In this world, IP is protected through innovation, which serves to make legitimate usage so compelling that pirated material, although available, doesn’t meet customer needs. And, in the face of the rapid adoption of new technology, scale built around a single technology likely will not matter as much as funding and supporting a stream of new products.

To highlight the different strategic requirements born out of each scenario, Figure 3 illustrates two key contributors to competitive success and maps each scenario to those requirements. Any competitive advantage conferred by organizational structure is seen in terms of scale vs. scope, where scale equates to size within a product market and scope implies controlling operating assets across several product markets.⁹ The dominant type of innovation lies along a continuum between product or service innovation and business model innovation.¹⁰

At the risk of oversimplifying what is by nature a subtle and complex analytical process, this report has mapped the scenarios and generic strategies against one another. As a result, it’s clear that the scenario/strategy combinations seem to align. The Wizard of Oz, however, appears to require a combination of all four strategies, and is therefore the most strategically challenging scenario.

Once this report has analyzed the elements of the optimal strategy for each scenario, as captured in Figure 3, it is useful to think of the Formulate phase of Strategic Flexibility as concluding with the identification of core and contingent elements. Strategic elements are initiatives from the scenario – optimal strategies such as acquiring a company with a valuable set of assets or capabilities, investing in a certain type of infrastructure, or gaining access to particular distribution channels. Core strategic elements are those that are common to all scenarios – the no-regrets bets that make sense no matter how the future turns out. Alternatively, those strategic elements specific to a single scenario – crucial under some conditions, useless or counterproductive under others – are contingent.

Fortunately, no media organization starts with a blank slate. After all, it’s hard to make sense of what constitutes a ‘scope-based, product-driven innovation strategy’ in the absence of some identification of the enterprise that might be pursuing it. Consequently, when it comes to identifying ‘for real’ core and contingent elements, the organization’s current complement of assets and capabilities is the point of departure. In other words, what the organization can do now has enormous implications for what it can do tomorrow. Management scholars refer to this as ‘path dependence.’¹¹

Therefore, as a practical matter, core elements of an organization’s strategy will be heavily weighted toward those elements that cannot be changed within the planning horizon captured by the scenarios. However, some adjustment may be possible: some existing assets can be shed, and several new core elements might be added.

The next section of this report examines how to think about contingent elements in terms of real options – that is, in terms of the investments that would be necessary to implement initiatives required if, but only if, the conditions of a particular scenario emerge.

Core elements of strategy don’t keep managers awake at night. By definition, they would be useful under any scenario. The challenge lies in dealing with contingent elements – the actions that would have value under some scenarios and not others. In Phase III we place our bets.

For example, The Wizard of Oz might never materialize. If, however, it does, it having deployed only the core strategic elements will not have been sufficient. Putting only core elements in place is a failing strategy regardless of which scenario the future resembles. It’s like building a bridge that goes only partway across the river. In fact, it’s actually worse than a best guess, since guessing provides at least some chance at the right answer. For instance, in the example, banking on Almost Famous would yield about a 20 percent chance of hitting the mark.¹²

To overcome this problem, Strategic Flexibility applies real options thinking. Real options are investments that hedge against shifts in the market or in the competitive landscape. They prepare a company to accommodate any one of many plausible futures by locking up the assets requisite to success under the associated conditions. This might be done, for example, through binding alliances, small equity stakes that can grow into full ownership, or joint ventures with provisions for buying out a business partner. The goal is to move in a way that is calibrated to the strategic value of a given asset, and thus to conserve capital. As the future reveals itself and uncertainties are resolved, certain options are exercised while others are abandoned.

It can be difficult to come to grips with a real options approach if you are discussing the ideas abstractly. Therefore, Table 2, highlights how companies pursuing the strategies described in Table 1 would fare under each scenario. For each company, the DTT TMT group has assessed the appropriateness of its existing strategy under the conditions described by each scenario and color-coding each cell accordingly. When it seems that a company’s strategy is well-tuned to the demands of a given scenario, there’s not much left to do but execute. However, not one of the companies analyzed has a strategy that performs well under every scenario – a result that is noteworthy, but not uncommon. Consequently, DTT’s TMT group has suggested potentially useful options for each firm: contingent investments that would improve their chances of success should a particular scenario come to pass.

Up to this point, the challenge has been largely analytical. What might the future hold (Anticipate)? How should a company respond under a given set of conditions and given existing capabilities and constraints (Formulate)? In light of the optimal response, what additional resources or capabilities are required (Accumulate)?

All of this analysis is merely a prelude to action, action that occurs in the Operate phase. Yet this doesn’t mean that the analysis part of the job is finished. The final phase of the Strategic Flexibility model is not simply a matter of carrying out a formulaic set of steps prescribed by the Anticipate, Formulate, and Accumulate phases. It is instead a dynamic process that involves constant monitoring of a company’s competitive environment and periodic adjustments to various scenarios, as well as to the elements and options dictated by those scenarios.

The goal of the Operate phase is to fully deploy specific strategies against specific opportunities within a dynamic environment. The future is constantly evolving, and indeed it is this very fact that Strategic Flexibility was designed to accommodate. For, rather than having to undertake wrenching change each time a particular assumption about the future proves false, corporate management can instead ramp up, dial back, or even abandon particular real options as events dictate.

Doing this effectively means determining accurately when a given option is in the money and thus should be exercised, or out of the money and thus should be abandoned. All work leading up to this point has been merely a qualifying round, and it is only within the final phase that those complex analyses evolve into an executable strategy. And the evolution takes place not on a timetable, but in response to events that demand action as the future unfolds.

These decisions necessarily require an active and visible corporate office, because implementing certain options and abandoning others typically has a direct impact on careers, up and down the chain of command. As a result, organizational politics in both media and non-media companies too often have a company holding on to options long after any reasonable hope of exercising them has disappeared. In the short term at least, overcoming institutional political pressures to terminate losing projects quickly often demands close executive attention, and it always demands leadership.

The type of Strategic Flexibility described so far might be considered ‘pure’ Strategic Flexibility. That is, the vision is of a future that is so uncertain as to warrant the development of a set of optimal strategies before ‘advancing on all fronts.’ The corporation puts in place and enhances its core elements while carefully monitoring and managing its portfolio of real options. The corporate office measures and times its investments in each real option, exercising some in the implementation of specific strategies, while constantly rolling over its scenarios so as to accommodate new uncertainties.

Two critical questions help us make sense of our alternatives: First, what are the magnitude and importance of the differences between the optimal strategies? Second, what are the relative probabilities of each scenario actually occurring?

To answer the first question, if the differences between optimal strategies are not significant, then a large percentage of the elements in a company’s set of optimal strategies will turn out to be core elements. Additionally, the differences between contingent elements might well turn out to be minimal; for example, distribution channels might differ only in their scale.

As a result, a company might choose not to create and manage a portfolio of real options at all. Instead, it might embrace what could be called a ‘robust strategy,’ one that will probably not be optimal under any circumstance but is ‘good enough’ under all conditions.

There is much to be said for this approach – that is, when circumstances allow it. Real options aren’t free, and pursuing a robust strategy avoids the complexity of parsing core and contingent elements, thereby obviating real options and their expense. A robust strategy is a rational, appropriate trade-off between a lower cost of implementation and the increased benefit of an optimal market position. In this manner, a robust approach only makes sense when the cost of the options required to pursue optimal strategies is greater than the opportunity cost of settling for a ‘good enough’ approach.

Based on an inspection of Figure 2 above, both the cable company and the conglomerate launching the VOD service appear to have strategies that are reasonably aligned with the range of scenarios that have been identified in this report. This suggests that they are in position to minimize their investment in real options and instead focus on ‘robust’ strategies – strategies that promise to do well regardless of how the future unfolds.

In contrast, the free-standing record company and the DVR service provider seem to require a ‘purer’ approach, since their apparent strategy leaves them poorly positioned in several scenarios.

Finally, there may be circumstances in which it is entirely appropriate for a company to commit primarily to what it regards as the most plausible scenario and treat the options required by other scenarios as hedges. This approach can be useful in cases where a company’s senior leadership is willing to trust the intuition that the future is reasonably clear across relevant markets.

Hedging this way allows a company to commit fully to the optimal strategy for the most likely scenario, which is not to say that a company won’t still pursue real options. On the contrary, a company adopting this approach will also pursue modest, highly targeted investments that would allow a change of course, should events turn out differently than expected. This is a compromise position that balances an acceptable likelihood of being able to guess what lies over the horizon against the fundamental unpredictability of the future.

Should the executives heading a conglomerate feel especially confident about their ability to differentiate between the probabilities of occurrence associated with each of the scenarios identified above, their management of options would change dramatically. Rather than keeping ‘all the balls in the air’ until certain key uncertainties were resolved, the company might commit to specific synergies, retaining other divisions in the portfolio ‘just in case.’

Only senior management can determine which of these types of Strategic Flexibility is most appropriate in a given situation. It may even be the case that a company will use one of these approaches on one occasion and a different one two years later. It’s not so simple as making a one-time election as to which version of Strategic Flexibility a company will employ whenever it revisits its strategy. Moreover, and unfortunately, making such a determination cannot be based upon formulaic algorithms. Rather, such decision making requires informed intuition and strategic judgment. The benefit of having alternative applications from which to choose provides a company with greater ability to address different sets of conditions.

Today’s media and entertainment companies face challenges and uncertainties from every direction.

All these uncertainties are leading many media and entertainment companies to question long-held fundamental assumptions about their markets and how to best position themselves to compete. Corporate strategists are faced with an uncomfortable paradox: The future is impossible to know and increasingly difficult to even guess, yet competitive pressures preclude that uncertainties be resolved before committing to a strategy.

Strategic Flexibility offers a way out of this paradox through a framework consisting of four phases. Highly structured, scenario-based planning in the Anticipate stage reveals a range of plausible futures. In the Formulate phase, optimal strategies for each scenario are determined using time-tested methods of conventional strategic planning, and are then merged to reveal core and contingent strategic elements. The Accumulate phase consolidates those elements with the concept of real options to reveal the investments and resources that will position a firm for success across a wide range of possible futures. Finally, in the Operate phase, management creates a diverse, flexible enterprise armed for whatever conditions the future may hold.

Strategic Flexibility is neither quick nor easy. Its complexities and rigor often require re-evaluating fundamental market assumptions and organizational structures in order to recognize which holdings, contractual agreements, partnerships, and divisions serve the entire enterprise under any circumstance and which should be treated as options, to be nurtured or abandoned as events dictate. Strategic Flexibility is then a matter of carefully monitoring and reassessing options.

Yet, given the increasing uncertainties faced by media and entertainment companies, Strategic Flexibility is a highly valuable approach to planning and management. Beginning with an acceptance of uncertainty, Strategic Flexibility incorporates the reality that some portion of the assumptions underlying any commitment-based strategy will inevitably turn out to be wrong – perhaps even totally incorrect. By identifying the necessary responses to a range of possible futures and enabling the requisite advance preparation, Strategic Flexibility creates the alternatives that organizations need. In sum, Strategic Flexibility is a powerful and practical way to prepare for a future that no company is equipped to predict.