The Strategic Horizon
Mihai Ionescu - Senior Strategy Consultant, Owner Balanced Scorecard Romania, Author.
You might have encountered the term Strategic Horizon in all sorts of circumstances, being interpreted in different ways. From the Strategy Formulation point of view, it is only one thing: The time-frame for which we define our Strategy. It's the current segment of our strategic journey that ends at a point in time called the Strategic Destination, where we evaluate the final success of our Strategy.
At the same time, the Strategic Horizon is the time required to finalize the development of our Transient Competitive Advantage, turning it into reality, whether it's our current one (not entirely developed today) or a new one (that we have to build from scratch). See the 'Competitive Advantage Cycle' article for more details on the relationship between the Strategic Horizon and the Transient Competitive Advantage, along this cycle.
The Strategic Destination
The Strategic Destination is tightly related to our Strategic Horizon, representing the end-point of our Strategy's execution, when we will get the answer to these questions:
Have we formulated a good Strategy?
Have we been able to execute it successfully?
The Strategic Destination represents an anticipated & desired snapshot of our organization at the end of the Strategic Horizon, illustrated by
The Strategic Choices that we have transformed from intention to reality
The Capabilities System that we have developed for supporting and bringing to life the Strategic Choices
The Strategic Gaps that we have closed, by executing our Strategic Plans
The Strategic Destination is the 'to-be' state that we aim to reach by formulating our Strategy, by planning the required strategic changes and by successfully executing those changes.
How long is the Strategic Horizon?
This is one of the first questions that pop-up, related to the Strategic Horizon. Why do we ask this question? The reasons are many. We need to set the length of the Strategic Horizon because
We have to know the time span for which we perform our Strategic Analysis, estimating the trends of the main factors that will impact our possible Strategic Choices (opportunities & threats)
We have to estimate if closing the Strategic Gaps that resulted from our Strategic Analysis is feasible within that time-frame
We need to define the timing of our strategic planning/execution cycles and to understand which Strategic Gaps will be closed during each cycle
We have to anticipate the staging of development of our Transient Competitive Advantage over this time span and set the corresponding strategic performance expectations inside and outside the organization
An important observation has to be made, at this point. Our quest for correctly defining the Strategic Horizon is justified by one of the fundamental characteristics of the Strategy. I'll use one of the widely-appreciated definitions of Strategy, which we owe to Prof. Jan Rivkin (chair of the Strategy Unit at Harvard Business School):
Strategy is an integrated set of choices that position a firm, in an industry, to earn superior returns over the long run.
It would be so easy for us to deal with the VUCA (Volatility, Uncertainty, Complexity and Ambiguity) by just choosing a short-term Strategic Horizon, let's say of one year or less, irrespective of our industry. It would be quite easy then to anticipate any significant threats that may render our Strategy invalid.
Fantastic! So, we would have a 'future-proof' Strategy. Or, would we?
The problem is that the Strategy is not about the short-term, it is about the long-term, as underlined in the definition above. And the shorter-term we make our Strategy, the more we risk to end-up having no Strategy at all. That's why we discuss here about a Strategic Horizon, not about a Tactical Horizon!
If we have no visibility into our business's evolution beyond the next 9-12 months, it means that we are in deep trouble and we need to think very seriously about changing our strategic positioning (where-to-play and how-to-win there), in order to afford a reasonable-term Strategy.
Back to our question. It is important to be able to answer it very early in our Strategy Formulation process. So, how long is our Strategic Horizon? Should it be 2-3 years, or it should be 5-7 years, or longer? How do we know? It cannot be any of these choices, at random, because the Strategic Horizon plays a far too important role for our entire Strategic Management process.
If we want a logical answer to our question, we have to look for the factors that determine the length of our Strategic Horizon.
A. The Industry Clockspeed
Prof. Charles Fine (MIT Sloan School of Management) has published back in 1999 the results of his research on the industry clockspeed in 'Clockspeed: Winning Industry Control in the Age of Temporary Advantage', a book that has introduced an empirical method to gauges the velocity of change in the business environment, specific to each industry and market(s) addressed.
The industry clockspeed is the time span (in years), beyond which our current products may no longer be competitive, the processes we operate today may become unprofitable and our place in our business ecosystem, unsustainable.
The industry clockspeed is the specific drumbeat that marks the major change milestones in the history and in the future evolution of each and every industry, varying in length from one industry to another.
At the fast-end of the change velocity spectrum are industries such as semiconductors and data storage, software applications & games, hand-held computing, telecommunication and infotainment devices, for which new breakthrough innovations happen virtually every year, due to the very tough competition, the huge markets addressed and the significant investments made in R&D by major or highly-specialized players in these industries.
In other industries, significant changes happen over longer intervals, typically measured in years. Car manufacturers launch new engine systems or power-trains every 3-4 years, while airplane manufacturers introduce new air-frames every 10-15 years. On the slow-end of the change velocity spectrum, we find industries such as steel, petrochemicals, pulp & paper or mining, which are marked by significant changes over decades, or more.
It is important to retain this research's conclusion: the Industry Clockspeed Driversare (a) the level of Competition and (b) the level of Technology innovation, specific to each industry and its associated target-market(s).
The industry clockspeed assesses the rate of change or change velocity along nine items, grouped into three areas:
Product clockspeed: 1.1. Changes in product models portfolio, 1.2. Changes in design of dominant product model, 1.3. Changes in optional or complementary product features
Process clockspeed: 2.1. Change in dominant processes, 2.1. Change in organizational paradigms (e.g. from using Lean production to using mass production), 2.3. purchases of new equipment or production plants
Organization clockspeed: 3.1. Frequency of CEO transitions, 3.2. Frequency of ownership changes, including M&A, 3.3. Frequency of organizational restructurings
Although the industry clockspeed has accelerated over the past 15 years in many industries, the values resulted from Charles Fine's empirical research provide an initial guidance for typical fast/medium/slow clockspeed industries:
The values above are empirical estimates, for several 4-digit NAICS-code industries. However, you know your industry better than anybody else, therefore you can look into its history and find some more accurate industry clockspeed values that are applicable in your case and define the most relevant formula for the Average Industry Clockspeed (in the table above, the formula is using 40%, 40% and 20% weights for the three clockspeed areas).
By analyzing where we are today, between the major turning points (last major change and the next anticipated major change) of our industry's clockspeed (or of our target-industry), we can determine an Initial Strategic Horizon, to be further refined, based on other complementary factors.
Why do we base our Strategic Horizon on the Industry Clockspeed? Because if we attempt to extend our Strategic Horizon beyond its next anticipated major change point, we'll face a high level of uncertainty regarding the impact of the respective changes on our industry, taking a high risk that our Strategy may become invalid or obsolete beyond that point in time.
For example, Nokia planned to boost their handset Competitive Advantage with the Communicator line of Symbian PDA devices over a 10-year Strategic Horizon (2002-2012) that didn't adequately consider the non-PDA (iPhone) next major change, anticipated by Steve Jobs in April 2003 (first iPhone launched in June 2007). Nokia had to abandon their Communicator line Strategy half-way along their Strategic Horizon, because they've miss-estimated the hand-held devices industry clockspeed. Nokia had to ultimately sell their mobile phone business to Microsoft, in April 2014.
Here is the illustrated story of Nokia's hand-held PDA Strategic Horizon case:
What happened? Were the Nokia executives asleep at the switch? Did they not trust that the non-PDA hand-held devices, such as the anticipated iPhone concept, will have a future in the mobile phone business? Actually, that didn't matter anymore, because their problem was elsewhere.
They didn't account for the Industry Uncertainty, as
The Customer Demand shifted towards simpler devices, easier to use than their Nokia Communicator PDAs
The Revenue of the hand-held devices increased world-wide beyond the early adopters stage
New companies entered the hand-held devices industry, even if not with mobile phones, yet (Apple and the iPod, HP/Microsoft and the PocketPC)
The Technology of several related technologies (such as the large touch-screens) accelerated, entering the main stream components market
The consequence? Nokia miss-estimated the Industry Clockspeed by 5 years! And that turned to be fatal for their entire mobile phone business.
B. The Industry Uncertainty Correction
The newest book in the Disruptive Innovation series, which started 18 years ago with 'The Innovator's Dilemma' written by Prof. Clayton Christensen (Harvard Business School), is 'The Innovator's Method', published last year and co-authored by Prof. Jeff Dyer (BYU Marriott School) and Prof. Nathan Furr (INSEAD). One of the concepts introduced by the book is the Industry Uncertainty Matrix, which was also the subject of their September 2014 HBR article titled 'The Industries Plagued by the Most Uncertainty'.
The Industry Uncertainty Drivers, identified by Dyer & Furr, are (a) the level of Demand Uncertainty and (b) the level of Technology Uncertainty, specific to each industry and its associated target-market(s). In building the matrix, they have used the following industry census statistical parameters:
(a.1) Industry Revenue Volatility, which is the aggregated Revenue variation, during their 10-years research window (2002-2011) (a.2) Industry Firms Turnover, calculated as the ratio of (New Entrants + Exits) / Total number of firms (b) Industry R&D Index, calculated as the ratio of R&D spending / Revenue
The Industry Uncertainty Matrix is plotted on the (a) x (b) axes, where (a) is calculated as an equal weight average of (a.1) and (a.2):
The parameters used in this matrix allow us to calculate the Industry Uncertainty Index (IUx), used as an additional factor, complementing the Average Industry Clockspeed in determining a more realistic value for our Strategic Horizon. The missing piece in Nokia's hand-held case!
The values above are census statistical values, for several 4-digit NAICS-codeindustries. You can calculate them more precisely for your specific industry, using statistical data from Compustat, US/EU Census Office, or equivalent sources, and adapting the formula to the time-frame of your Average Industry Clockwork (in the table above we have use a 3-year time-frame).
As Dyer & Furr highlight, 'although these are imperfect measures, they identify the industries facing the highest and lowest baseline levels of uncertainty'. The formula for the Industry Uncertainty Index (IUx) should be adapted even more, should you want to calculate it based on other parameters than those used here.
This is how our re-calculated, more accurate, Strategic Horizon A looks like, when taking into consideration the Industry Uncertainty Index, applied as a corrective factor to the Initial Strategic Horizon.
Strategic Horizon A = Initial Strategic Horizon * (100% - IUx%)
In our quest to define a realistic Strategic Horizon, the Industry Clockspeed and the Industry Uncertainty are helping us address the first two of the VUCA aspects, the (Industry) Volatility and the (Industry & Competitive) Uncertainty. What about the other two: the (Market) Complexity and the (Adoption) Ambiguity? How can we factor them in, to improve our probability of defining the Strategic Horizon more realistically?
C. The Market & Adoption Correction
In the December 2002 issue, Harvard Business Review was included an article called 'The Consolidation Curve', written by a team of bright A.T Kearney consultants who have published their ideas, one month before that, in 'Winning the Merger Endgame', a book that identified, based on an empirical research, how industries evolve, from their early days to the full maturity status, according to the Consolidation-Endgame Curve.
Born from innovative concepts for new products or services, any industry can reach maturity only if the customer need for such products or services is confirmed by the market adoption. That's something that has been studied since 1962, when Everett Rogers published his book 'Diffusion of Innovations', which introduced the famous Law of Diffusion of Innovations.
While the diffusion of innovations explains what happens at the customers-end, the Consolidation-Endgame Curve shows what happens with the vendors.
In the Stage 1 (Opening) of any industry, one or more companies compete to satisfy a new or newly-shifted customer need. As more companies join the new industry, the customer demand is represented by Innovators and Early Adopters (3%-5% of the total market). In this stage, the industry consolidation is low, as shown by the CR3 ratio (the Cumulative Revenue of the Top-3 players / Total industry revenue), which takes values around 15%-25%, in this stage. So, we say about this industry that it's very fragmented.
The Stage 2 (Scaling) is where the market demand passes the tipping point (of 15%-18% of the total market) and the Early Majority of the customers are beginning to be acquired. If the market adoption cannot be pushed over the tipping point, then it has good chances of becoming a flop and disappearing, never reaching the majority of the potential customers.
It's around the tipping point when the industry consolidation begins, as the main players rush to scale their share of the confirmed market - and one of the fastest ways to do this is by buying some of the smallest competitors. The market fragmentation decreases, as the CR3 reaches values of up to 45%.
Ten years later, the A.T. Kearney consultants released a revised version of their theory, extending the initial four phases to eight (sixteen, in a more granular version), taking into consideration a larger number of researched M&A cases, as well as the Hype-cycle Curve (used extensively by Gartner): (1) Technology Trigger, (2) Peak of Inflated Expectations, (3) Trough of Disillusionment, (4) Slope of Enlightenment and (5) Plateau of Productivity.
The revised version of A.T Kearney's theory (The Merger Endgame Revisited), published in 2013, can be found here.
How does this affect the Strategic Horizon?
As we can see, the Industry Clockspeed and the Industry Uncertainty are not enough for determining a Strategic Horizon that accounts for the critical mass of factors of influence. The Consolidation Endgame and the Hype-cycle have to be factored in, as well.
Negative Market & Adoption Correction
The companies that make the Early-Mover strategic choice, have to significantly reduce their Strategic Horizon (with a Negative Correction factor), in order to take into consideration the first Market Reopening phase and the Trough of Disillusionment phase, that may or may not push their product, service or business model beyond the market adoption tipping-point, from the Early Adopters to the Early Majority. At least two Strategic Scenarios have to be employed for the following Strategic Horizon, beyond this point.
Positive Market & Adoption Correction
On the other hand, if the Strategic Horizon starts from the beginning of the second Concentration phase and of the Slope of Enlightenment, then it can be extended (with a Positive Correction factor) beyond the initial Strategic Horizon that is based only on the Industry Clockspeed and on the Industry Uncertainty factor. The final formula is illustrated like this:
With apologies for the length of this article, I hope that, if you've reached this far in reading it, it was worth it.
Your more-than-welcomed comments or questions have a guaranteed response from my side, within a reasonable time frame.