When even bad strategy is worth doing well; Good implementation of even a poor strategy can lead to the discovery of better ones

When even bad strategy is worth doing well

Sat, January 25 2014, 7:00 AM

Good implementation of even a poor strategy can lead to the discovery of better ones.
When an assignment to create the first version of Apple’s Graphing Calculator software was cancelled in 1993, freelance software developers Ron Avitzur and Greg Robbins paid no heed. In an act of innovation-as-rebellion that has become legendary, they used their Apple ID badges to gain unauthorized access to the campus, working into the wee hours for six unpaid months until the project was finished. Ten years after its completion, the Graphing Calculator software had shipped with an estimated 20 million machines.
This is a compelling example of what organizational researchers call “bottom-up exploration” – employee deviations from official strategy that sometimes result in huge gains for companies. Apple isn’t the only Silicon Valley firm to have benefited from letting staff follow their muse: Google famously allows employees to spend 20 percent of their time on company-related personal projects, a policy that led to Google News, AdSense, and Gmail.
But knowing as we do these benefits of deviations from strategy, as well as the reality that the strategies coming from the C-suite are seldom perfect, is it sensible for managers to place such a heavy emphasis on implementing them effectively? In a recent working paper Explaining the Implementation Imperative: Why Effective Implementation May Be Useful Even With Bad Strategy, my co-author Eucman Lee (a PhD candidate at London Business School) and I develop a theory that explains why aggressively pursuing effective implementation may in fact be very sensible indeed.
By effectiveness at strategy implementation, I mean the extent to which an organization’s actions correspond to its strategic intentions. Thus, a company that seeks to pursue a low-cost strategy can be said to have successfully implemented the strategy if its costs indeed fall relative to its rivals; whether this leads to high profits or not depends on the appropriateness of the low-cost strategy in that particular industry.
The fundamental feature of strategy implementation we focused on in our research is the separation between beliefs and actions; i.e., in the typical company the people who come up with strategies and refine them are typically not those who implement them. In an attempt to study the consequences of this separation carefully, we built what is known as an “agent based model”, basically a computer program that replicates the logic of interaction between individuals in a way that allows us to project what is likely to occur over many such interactions, and in a wide variety of circumstances.
Our model involved a manager and a subordinate, programmed to try to look for the biggest possible profit by choosing from a range of options through trial and error, akin to a gambler facing a slot machine with several arms. Each period, the manager would pick a strategy, “tell” the subordinate what to do, the subordinate would implement the strategy as he understood it, there would be a performance outcome, and the manager would then modify his beliefs about the value of the strategy based on the performance observed.
We ran the model through numerous periods, building in different types of features corresponding to the real world such as communication errors and top-down and bottom-up exploration of ideas.
Across a range of conditions, we found that, in fact, it was generally a good idea to improve the implementation effectiveness of the subordinate, even when the strategy the manager chose was not necessarily a good one to begin with.
As we picked open the model to see what was going on, we discovered there are two main reasons for this phenomenon. Firstly, bad implementation makes it quite difficult for companies to learn from failure or success. When a strategy produces undesirable outcomes, how are leaders to know whether the problem lies in the strategy itself or all the deviations that crop up in the absence of effective implementation? If the outcome was good, how do we know if it was indeed because of the strategy? This could lead a CEO into unfortunate decision-making based on a confounded impression of the outcome.
Secondly, the organization as a whole does indeed benefit from learning better strategies through some deviations from current strategy. Beyond a certain point, these aberrations hurt because they don’t allow the organization to extract the value of the good strategies uncovered. Any communication gap between managers and employees will automatically foster some amount of divergence, and attempts by senior managers to look for new strategies also generate deviations over time. On top of these, deviations resulting from imperfect implementation tip the level of deviation into the harmful zone.
Our results also suggest that not only should companies continue to invest in improving their strategic implementation but they should also focus on sharpening their measurement of implementation effectiveness. Indeed, a manager who looks and listens and accurately interprets implementation effectiveness can be a greater asset than a silver-tongued boardroom orator who knows how to communicate the strategy effectively.
Why? The communicated strategy may not be the best anyway, and deviations arising from misunderstanding it can be benign. But an unobservant manager may contribute biases, false realities about what actions were actually driving current performance. Indeed, eagle-eyed managers who can measure implementation effectiveness are the most likely to help companies capitalize on innovations originating from bottom-up exploration. The potential breakthroughs that occasionally come about when employees (wittingly or unwittingly) deviate from company strategy are unlikely to be replicated, let alone propagated as best practice, without managerial intervention.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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