How Successful Strategies Develop and When Subsidies Make Sense

Deliberate and Emergent Strategies

Christensen talks about how the best strategies develop through a mix of deliberate, intended creation and emergent, opportunistic, iterative adjustments. A strategy is initially deliberate and explicitly stated (at least normally). It then goes through an emergent fine-tuning process as a company discovers what does and doesn’t work, and as it discovers new opportunities it didn't initially think of. See Concepts page and discussion of Clayton Christensen and list of sources. 

In How Will You Measure Your Life?, Christensen notes that 93% of successful companies have had to abandon their original strategy. Companies need to be opportunistic and change strategies when appropriate. Once a strategic approach starts clicking, a company can shift from an emergent strategic approach to a deliberate approach, where the focus is on execution. See Concepts page and discussion of Clayton Christensen and list of sources.

Christensen says the best way to test a strategy's viability is to make a list of the assumptions which must prove true for the strategy to work. If key assumptions are unrealistic or unlikely to prove true, then the strategy probably isn't the right one.

Serendipity can also play a part. In How Will You Measure Your Life?, Christensen notes that in the 1970's Honda abandoned its original, unsuccessful strategy of selling large motorcycles (competing directly with companies like Harley-Davidson), and started selling smaller Honda Cub motorcycles when customers showed an unexpected interest in the Cub. 

When a strategy changes, resources should be reallocated as necessary. A company shouldn’t keep pouring resources into an initial deliberate strategy that isn’t working. It should look for mistakes and opportunities to adjust and improve the original strategy through an emergent, iterative process, and should adjust its resource allocation appropriately (as Honda finally did with the Honda Cub motorcycle). 

If the original strategy, and emergent adjustments to the strategy, don't have the necessary resources supporting them, then they'll never actually happen. Christensen notes that strategic actions are what's relevant, not strategic intent.

The end result of cycling back and forth between deliberate and emergent strategic approaches is a set of activities/processes that’s been fine-tuned over time, and that’s often difficult for competitors to duplicate. 

Resource scarcity and the need for early profits facilitate the development of a successful, unique strategy, because companies with limited resources are forced to promptly adjust their original strategy, as necessary, to generate the profits needed to continue funding the new product. That's why Christensen counsels new companies to be impatient for profit and patient for sales growth. 

Once a company develops a successful strategy, and achieves profitability sufficient to fund upmarket product improvements, it can shift its focus to growing sales and increasing the scale of manufacturing/distribution, all of which leads to growing bottom line profits.

Companies that don't face resource scarcity can pursue and fund an unprofitable deliberate strategy indefinitely, often growing sales but not profits. These companies aren't forced to cycle between deliberate and emergent strategies in search of life-blood profits. As a result they never develop a profitable, unique set of activities with great fit (although they may fully develop -- and find themselves mired in -- an unprofitable set of unique activities, making future strategic changes more difficult). See Concepts page and discussion of Michael Porter; also see post titled "Acquisitions, Rivalry, and Strategic Trade-Offs.

Product-specific strategies can be emergent until an attractive offering is developed/created, at which point product strategy should become deliberate and execution focused. Once a company hits on a successful product strategy through an emergent process, it should shift to a deliberate approach that aggressively executes the strategy. Successful product strategies are targeted on a job that customers need done. Products that don't accomplish a job well -- for a meaningful segment of the market -- struggle to succeed.

Blending the ideas of Porter and Christensen, Porter seems focused on the strategic target, which is a unique strategy that’s hard to duplicate. Christensen seems focused on how companies reach this strategic target, which is through deliberate and emergent strategic approaches.

Real World Applications and When Product Subsidies Make Sense

Apple seems to pursue product-specific, emergent strategies in-house, through its own employees. Apple keeps working on a product until it's something its own employees want, and then shifts to a deliberate strategy that brings the product to market. The one exception seems to be the Apple TV: in this case Apple seems to be following a very public emergent product strategy, slowly adding content and features and letting the product gradually gain market traction (in the classic, unthreatening style of a new market or low end disruptor). 

The concept of emergent strategy is helpful in examining how Apple might handle the slow-selling iPhone 5c. If sales of the 5c are profitable but small, then Apple can afford to be patient for sales growth (so long as sales are slowly trending up). If sales are not profitable, or if sales are profitable but remain flat over time, then Apple can adjust its product strategy by questioning the underlying assumptions that led to the 5c’s release. If any of these assumptions appear untrue or unrealistic, then Apple can modify its “low end” iPhone strategy accordingly. The overall goal is a product that does an important job for a significant/meaningful customer segment.

Christensen and Porter’s strategy concepts also impact when a company should subsidize unprofitable or break-even products or services. Apple runs iTunes, the App Store, iWork, iLife, and Apple TV hardware at anywhere from a loss to slightly above break-even. But these products also enhance and protect Apple's hardware margins and whole company profits, in addition to raising switching costs for anyone who wants to leave Apple’s ecosystem. So in total, Apple’s approach seems to make sense. 

Amazon subsidizes break-even — or close to break-even — Kindle Fire hardware to generate profitable e-commerce sales for Amazon.com. But Amazon’s margins have stayed razor thin, suggesting the Kindle Fire hasn't enhanced Amazon's pricing power, while whole company, bottom line profits have stayed small (both before and after introduction of the Kindle Fire). Given this kind of limited financial impact, do Kindle Fire subsidies make sense?

Product subsidies are more logical when they’re part of a unique, well-integrated set of carefully chosen activities that produce healthy margins and strong profits. Without this profitability test, product subsidies can burn through a company’s resources indefinitely, in addition to preventing the company from really working to develop a profitable product strategy.  

It's interesting how so many companies today -- Amazon and Twitter come to mind — have been rewarded by investors for being patient for profit and impatient for sales, which is exactly the opposite of what Christensen recommends. 

The author owns stock shares of Apple.