How can companies create and execute strategy when the business environment is highly turbulent? In this article, based on more than a decade of research at the Wharton School and the business schools at Purdue University and the University of Minnesota, Professor Baba Prasad describes how the concept of intelligence opens up a new frontier for strategy with surprising and deep implications for conceptualising not only business strategy but also business itself.
Uncertainty: The New Normality
The ruling metaphor to describe the current business climate is turbulence. Technologies change constantly and quickly, globalisation brings unforeseen and non-traditional competition, and customer demands and preferences become unpredictable. In addition, unstable governments and fickle regulatory policies, and changing patterns of labour migration combine with the threat of employee attrition to complete a mix that is as potent as the witches’ brew in Macbeth.
In this context, the strategy cycle – the iterative loop that takes us through strategy planning, design and implementation – is becoming faster and faster. Adi Godrej, Chairman of the Godrej Group, in a recent interview said that in today’s business climate, we should cease making five-year detailed plans; instead, he said, three years should be the maximum planning horizon in any industry. Philip Kotler and John Caslione go further to say that “the traditional three-year strategic plan is anachronistic and worthless.”
Rethinking Risk and Strategy
Turbulent business climates challenge some of the fundamental assumptions we make about risk and strategy. Typically, we believed that the goal of strategy was to arrive at a plan to perform a set of actions in a future that was uncertain. The problem of strategy is encapsulated in the word “uncertain.” Till now, we used to think that the world was predictably uncertain – that is, that we knew the world was changing, but changing in a predictable way. So, we assumed that we could track the trend of the changing world, and use judgment and analytical tools to come up with a plan of action. This assumption is under severe threat today.
The turbulent world requires that we wipe the dust off some old writing in economics and re-examine a few basic concepts. In 1921, the University of Chicago economist, Frank Knight, classified “uncertainty” to explain the difference between “risk” and “uncertainty.” To paraphrase Knight, suppose you and I are playing a game. I show you a bowl with five black balls and five white balls and tell you that the game is as follows: If you bet Rs 100, you will be allowed – with a blindfold around your eyes – to withdraw one ball from the bowl. If the ball is black, you win Rs 200; if it is white, you lose your bet. You may or may not bet because you assess your chances of winning as 50:50. Suppose you learn that the bowl contains eight black balls and two white balls. What happens to your willingness to bet?
Turbulent business climates challenge some of the fundamental assumptions we make about risk and strategy
Suppose you know that it contains three black balls and seven white balls? Now, what happens to your willingness to bet? Your willingness to bet will change depending on your knowledge of the state of the world (in this case, the distribution of coloured balls in the bowl). Essentially, what you are facing is an “unknown draw” with a “known distribution.” Knight called this condition “risk.” In situations dominated by risk, we use objective probabilistic estimation based on our “assessment of risk” to make decisions – this is what traditional strategic planning is all about. In real life, however, things are not so clear and probability distributions are generally not known. So, let me change the game a little. Suppose I tell you that the bowl contains black and white balls as before, but we do not know the actual distribution. How would you decide whether you should place a bet? This takes us into the realm of “subjective probabilities,” where we engage in making sample draws – we pull out balls and put them back into the bowl. Based on the pattern of balls that emerges from our sample drawings, we piece together an estimate of the distribution. Once we have done this, we can apply analytical techniques of the kind used in the previous game in our decision-making. In such situations, we do not have any idea of the distribution. We are faced with an “unknown draw” and an “unknown distribution”– this is what Knight called “uncertainty.”
We assumed that we could track the trend of the changing world, and use judgment and analytical tools to come up with a plan of action. This assumption is under severe threat today.
Knight also discussed a third type of uncertainty, which is very relevant to companies in today’s globalised, technology-driven world. This category concerns a future that is at once unknown, but even more so, not knowable – not knowable either objectively as in situations of “risk,” or subjectively as in situations of “uncertainty.” Not only do we have unknown distributions but are also faced with unknowable distributions. We are now operating in areas where we see “deep uncertainty.” Further, the challenge is that a company dealing with all three types of situations – risk, uncertainty and deep uncertainty – may have to create different strategies to address them.
This changes our very conception of strategy. No longer is it a “plan for a set of actions to be performed in the future.” Instead, we begin to see strategy as a plan to create a set of capabilities that we may use as the future unfolds into the present. Lord John Browne, the former Chief Executive Officer of British Petroleum, says, “All you can do is to give yourself the capacity to respond to the only certainty in life – which is uncertainty. The creation of that capability is the purpose of strategy.” How do we create that capacity to respond that Lord Browne is referring to, in companies? Frank Knight suggests an answer: “We must simply fall back upon a “capacity” in the intelligent animal to form more or less correct judgments about things, an intuitive sense of values.” [emphasis added]
Intelligences: The New Frontier
Adaptability and resilience are written into the human DNA – the history of human survival is replete with large and small instances of resourcefulness and agility. Intelligence is usually the driver of adaptability, and gains its value in times of uncertainty.
An intelligence-oriented perspective allows us to conceptualise an adaptable and agile organisation in new ways. First, it takes us away from the rootedness of a knowledge-based organisation, in which the knowledge that gave it value can itself become a trap in turbulent environments. Examples abound of technology companies that once were industry leaders because of their knowledge, but now do not exist because they could not adapt to new kinds of knowledge. Wang Laboratories, Digital Equipment Corporation and Prime Computers – all in the miniframe computer industry – illustrate this point. So, instead of the organisation being knowledge-based, we now think of it as being intelligence-driven – the kind of organisation that dynamically and appropriately uses and recombines resources (including bodies of knowledge), acquires new ones or even sometimes divests some resources to continuously generate competitive advantage in changing business contexts.
Second, an intelligence-oriented perspective brings the human to the centre of our idea of the firm and allows us to jointly consider leadership, innovation and strategy in one framework. Psychologists define intelligence as that quality that allows one to either adapt to an environment, shape it or find a new environment as appropriate to the context. Translated into strategy terms, this means that intelligence enables the company to either position itself in its industry (Porter’s competitive analysis), use its core-competence to reshape its environment (resource-based view), or find new areas where no competition exists (Blue Ocean strategy) in a manner that is context-sensitive.
Agility and Strategic Agility
It is a common conception that in order to excel in turbulent environments, a company needs to be agile. However, it is also becoming apparent that agility should not be one-dimensional. In fact, as Donald Sull, puts it, “In turbulent markets, however, overreliance on a single type of agility can be dangerous.” The Vivékin Agility Matrix (VAM) allows us to position companies along dimensions of both agility and context-sensitivity (see Figure 1).
- Dinosaurs are companies that are rich in resources but are not agile or context-sensitive. Thus, they continue to operate even when their resources and capabilities are irrelevant. Such companies are soon on the way to becoming extinct.
- Bears are companies that are rich in resources and capabilities but are not agile. However, they are context-sensitive and become aware that they cannot compete in the changed business climate. So they go into hibernation in the winter, to re-emerge when conditions suit their resources.
- Cheetahs are very agile but are context-insensitive – these are the companies that rely dangerously on a single agility. The agility can become a hindrance to the competitiveness of the firm.
- Humans are context-sensitive and agile. They recombine resources dynamically, invent new resources when they need them, pool resources with others when necessary – in short, they demonstrate multiple agilities that they use according to context.
The Five Intelligences of Dynamic Organisations
Building on the multiple intelligences theory of Howard Gardner at Harvard University and the Triarchic theory of Robert Sternberg at Yale University and applying it to organisational contexts, we found that most successful companies (and leaders) have five different intelligences that they use as appropriate to context.
Analytical intelligence allows a company to change means and methods of analysis. For instance, a company can adapt to and exploit new tax regulations to gain competitive advantage because it has analytical intelligence, or depending on the kind of project, it can adopt different budget justification processes.
- Operational intelligence helps the company gain dynamism through its operational resources. Examples of this are seen in flexible production systems, supply chain flexibility or dynamic collaborative arrangements.
- Inventive intelligence enables the generation of new ideas, creative solutions, and alternate uses of resources to solve problems the company has not seen before or to take advantage of new opportunities the company faces.
- Communicative intelligence is the intelligence that a company uses to persuade its audiences and to convey the value of its ideas through words and speech. Advertising campaigns and tag lines offer immediate illustrations of this intelligence. All you can do is to give yourself the capacity to respond to the only certainty in life — which is uncertainty. The creation of that capability is the purpose of strategy.
- Visionary intelligence allows the company to recognise the long-term impact of the decisions the company is making. It also checks for the breadth of impact, asking questions such as “How many people or issues are being affected?” and “In what ways?” It thus makes the company adopt a “beyond-me, beyond-profit-line” perspective that gives agility its strategic quality. In companies that have long-term success, any agile solution that is proposed by the other intelligences is vetted by visionary intelligence. Knight remarked in 1921, “If it is not counterbalanced by moral forces, the development of such intelligence must disrupt society.” The visionary intelligence adds that counterbalance.
Great companies and great leaders have all five intelligences and use them according to context. An apt metaphor would be that of the chameleon: just as a chameleon mixes the three primary colours to take on the most appropriate colour for the circumstance, great companies mix the five intelligences in the proportion that best suits the context.
An Illustrative Case Study: EID Parry
EID Parry is a sugar company with annual revenues of C 1,537 crores. It is part of the Murugappa group of companies, and has its corporate headquarters in Chennai, India. Every day, its five factories in Tamil Nadu and Puducherry crush more than 19,000 tonnes of sugarcane, and as by-products, generate 82 MW of power and distil up to 135 kilolitres of alcohol. The company sources its sugarcane from about 100,000 farmers who grow sugarcane on farms that cover about 200,000 acres.
In late December 2011, Cyclone Thane hit the region and EID’s biggest factory at Nellipukam lay directly in its path. When the storm was over, the factory’s roof had been blown off and 4,000 acres of sugarcane lay flattened. EID Parry had to process 100,000 tonnes of sugarcane in 10 days because the shelf life of sugarcane is limited – juice content starts going down by the hour after the cane is cut. Initial estimates suggested that it would take at least 30 days for the plant to be operational. EID Parry got the plant running and finished crushing the cane in five days flat. The story of how it did this offers a vivid illustration of the organisational intelligences at work.
The Managing Director, Ravindra Singhvi, told me that he was away on vacation when the storm hit. When he rushed back the same day, he could not believe the destruction. The housing complex of the factory was also badly damaged and EID staff families were left without electricity and water. Singhvi and his executives decided that the first priority should be the families because no employee would concentrate on work with his or her family suffering at home. They mobilised staff and resources from other plants, and work began immediately. Generators were brought from other factories, even purchased or rented. On the very first day, they restored power to the residences. Then Singhvi met the Chairman of the Tamil Nadu State Electricity Board (TNSEB) who promised to send a senior executive to supervise the restoration of power to the sugarcane farms. But Singhvi made the unusual request that the senior executive work with EID executives because they knew best where power was most needed and where it was less critical. The TNSEB Chairman agreed to this request, and as a result, power was restored to farmers very efficiently.
Since food and water were major issues, EID ensured that food was cooked in Chennai and they established a transport system to take food and fresh water to the factory areas for a few days. Everybody worked night and day and the factory was up and running in a couple of days. The crushing was completed in five days. Then, EID Parry did something unusual that is a classic illustration of visionary intelligence. As the cane was not fully grown and had been stored for a few days, the juice yield had come down significantly. However, EID Parry paid its farmers the same price it would have for good sugarcane. In the process, it suffered a loss of Rs 4.5 crores. Why is this visionary intelligence?
For EID Parry, its farmers are not suppliers, but partners. The company handholds the farmers throughout the cultivation, advising them about what to plant, how to use technologies like drip irrigation, how to fertilise and what pesticides to use. It has recently established a 300-person call centre where farmers can call in with questions. As a result, farming becomes much easier. In an exhibition of analytical intelligence, the company has created a rare financial arrangement in which it acts as a guarantor to banks for loans that famers take for equipment and agricultural services. These loans are currently an outstanding amount of C 850 crores. Demonstrating a combination of various intelligences, EID has also helped some of its farmers become entrepreneurs by helping them buy expensive farm equipment that they then rent out to other farmers. To overcome labour shortages, the company has arranged 25,000 farm labourers who can be hired by farmers in groups of 20 labourers.
Instead of the organisation being knowledge-based, we now think of it as being intelligence-driven – the kind of organisation that dynamically and appropriately uses and recombines resources (including bodies of knowledge), acquires new ones or even sometimes divests some resources to continuously generate competitive advantage in changing business contexts.
The conscious development and deployment of these intelligences has become strategy for EID Parry, with long-term benefits. Its farms have a 20% higher yield: 32 tonnes per acre against the national average of 27 tonnes per acre. Moreover, its relationship with its farmers ensures that the farmers will not abandon it for other factories or for other crops. In fact, EID has changed the running period of a factory in the sugar industry from the traditional 180 days to 300 days, taking advantage of the Tamil Nadu climate. EID is guaranteed procurement of the additional cane required because of its relationship with its farmers. In fact, while many sugar factories are dreading the potential liberalisation of the sugar industry when farmers will become free to associate with any sugar factory of their choice, EID is looking forward to it.
By being consciously attentive to, and carefully nurturing, the five intelligences, companies can develop the strategic agility success, however turbulent the business environment may be. Our research has also helped develop a robust system of metrics and methodologies to strategically required for sustained assess, develop and implement these intelligences within organisations. That discussion is for another article.
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1Confederation of Indian Industries (CII). “Thriving in a Volatile World: Conversation with Mr.Adi Godrej, Chairman-Godrej Group.” Video gallery. http://www.cii.in/VideoDetail.aspx?enc=SJNztEFgNlINg+j2MA4lILVOfTrNb9rPY7UYPR/aMy0=, accessed March 13 2013.
2Kotler, Philip, and John A Caslione. Chaotics: The Business of Managing and Marketing in the Age of Turbulence. New York, New York: AMACOM, 2009. 69.
3Knight, Frank, H. Risk, Uncertainty and Profit. New York: Augustus Kelley, reprinted 1964 [1921].
4Browne, Lord John, “Lord Goold Memorial Lecture: Marketing Strategy.” Speech delivered at Bradford University, London, November 23, 2001.
5Knight, Frank. ibid. 227
6Cianciolo, A. T., and R. J. Sternberg. Intelligence: A brief history. Malden, Massachusetts: Blackwell Publishing, 2004.
7Knight, Frank. Ibid. esp. 267-269.
8Sternberg, R.J. “A Broad View of Intelligence: The Theory of Successful Intelligence”. Consulting Psychology Journal: Practice & Research 55.3, (2003): 139–154. Sull, Donald. “Competing through Organizational Agility,” McKinsey Quarterly 1, (2010): 1-9.
9Gardner, Howard. Frames of Mind: The Theory of Multiple Intelligences. 3rd ed. New York: Basic Books, 2011.
10Sternberg, Robert J. Beyond IQ: A Triarchic Theory of Human Intelligence. New York: Cambridge University Press, 1985.
11Knight, Frank. ibid. xxxi