Easy & Difficult
In theory or practice?
I hope all is well with you and yours, and that this e-mail finds you on a boat with shoddy connection, in the tropics, three months after I sent it.
Some quick updates before we go-go
The farce that is my collection of illnesses continues; I am now fighting sinusitis, round 2, in the worst version of Mortal Kombat thus far. Thankfully, however, I am winning. Slowly. But still.
As promised, I can now confirm the timings for Techsylvania (June 8, 11.30am, Center stage) and Cannes (June 21, 1pm, Audi K stage). If you are attending either conference and want to say hi, please do.
The guest writers for this summer have now been confirmed. I will present the full list of insanely talented people next week.
In the news
More and more DTC companies are exploring a new strategy: opening shops. Took them long enough.
Amazon has started offering customers $10 to pick up e-commerce orders from physical stores rather than having the packages delivered to their homes. Obviously, this goes hand in hand with the previous news item; brands appear to be admitting to what James and I have said for a very long time indeed: fulfillment is the key to e-commerce success, but it is inherently very costly.
Companies are going direct to purchase retail media, putting agencies at risk. I am somewhat torn on this. On one hand, agencies have screwed brands by encouraging them to buy programmatically at 96-99% investment losses. On the other, experience tells me that creativity goes out the window whenever agencies are excluded, which also hurts the end result.
Tesla does need advertising after all, Elon Musk has realized. He joins a number of other high-profile tech leaders (such as Mark Zuckerberg) who have come around. It is true what they say: everybody hates advertising until they lose their cat. Or market position.
Item of the week
The correlation between market share and profitability is often assumed, particularly by those who have read the relevant texts somewhat sloppily. In reality, there is no automatic function whereby markets share growth translates into profit growth. In fact, growth-first companies are significantly less likely to ever become profitable.
Building further on the topic, this meta-analysis by Alexander Edeling and Alexander Himme, kindly shared by Wiemer Snijders, dug deep into the topic and found that average market share–financial performance elasticity was substantially lower than the effectiveness of other intermediate marketing metrics.
All else being equal, market share should be allowed to have a higher stake in corporate strategies for manufacturing compared with service firms, for B2C compared with B2B companies, and in emerging markets and Western European markets compared with the U.S. market. Furthermore, managers of capital-market-oriented firms should be aware that investors do not regard market share as a key stock investment criterion.
Easy in theory vs easy in practice
Complicatedness is a matter of timing
As some of you may remember, I recently wrote about how a very famous professor, asked about my work, said it was “lovely, but fucking complicated”. I have heard similar takes many a time before.
Adaptive strategy, such as that advocated by yours truly, is inherently different in many ways to strategic planning of the sort that the professor in question relies upon, and its theoretical underpinnings can, I admit, be arduous to follow (especially for those who conveniently forget that they too had to study to learn the foundations of what they currently do). Complexity theory is an advanced scientific field, existing at the very forefront of what is currently known.
But – and this is an important but – the practical manifestations, implications and implementations are anything but; working with adaptive strategy in practice is very easy.
By contrast, strategic planning theory is often very simple to grasp. Many of the traditional frameworks that we have discussed over the years live on because they appear so useable; all one has to do is fill in the blanks. The problem, though, is that it is anything but simple in practice – all kinds of secondary, often entirely contradictory, theories, hypotheses and perspectives can be used.
Take, for example, the McKinsey 7S model that we discussed a couple of weeks ago:
Any CEO can take one look at the model and understand it; it is anything but “fucking complicated”. But attempt to fill in but one box, say, “strategy” (explicitly defined as “the alignment of resources and capabilities to gain competitive advantage”), and you will soon realize the magnitude of the challenge ahead.
Firstly, what is “alignment” and how would one go about securing it? Unless the strategist does everything (and I do mean everything) themselves, it would ultimately hinge on employees doing precisely as they are told and as was originally intended. It would also require a perfectly predictable environment without any forms of external interference. We know that the former is highly unlikely and the latter is entirely unrealistic.
We then get to “resources”, the definition of which will depend entirely upon who you ask. Even if we were to turn to only one person, such as the creator of the resource-based view itself, Jay Barney, we are told that they can be either
physical capital resources (physical technology, hardware, a valuable geographic location of a factory or headquarters, access to raw materials etc.),
human capital resources (training that has been completed, accumulated experience, judgment, intelligence, relationships, insights of individual managers and workers, and so on), and
organizational capital resources (e.g., reporting structures, formal and informal planning, controlling mechanisms, coordinating systems, and informal relations in groups within the firm and between the firm and its environment).
What are you dealing with? One aspect? Two? A sub aspect? All listed? Some that are not?
The story repeats itself when we get to the next word: “capabilities”. Does one define them by using Prahalad and Hamel’s concept of core competencies, or perhaps a popular framework such as VRIN or VRIO? Each will come with drawbacks.
Core competencies can never be fully planned, as they are likely to change as the context changes; they are not exclusively the result of strategic decision-making and planning, but also emergence and co-evolution.
VRIN and VRIO, meanwhile, suffer from the uniqueness dilemma (only unique resources create competitive advantages, but given that all contexts are different, all resources can also be said to be unique), the cognitive impossibility dilemma (causal ambiguity says that it is only by the very fact that managers cannot understand how a resource can be a source of sustainable competitive advantage that it becomes one; from this follows that if a resource can be recognized as a source of sustainable competitive advantage, then it cannot be a source of sustainable competitive advantage), and an asymmetry in assumptions about resource factor markets (it is not the resource itself that creates the advantage but how it is exploited).
And what about competitive advantage? Typically, it is defined as ‘superior value creation’. But, as I have written before, it does not take much critical enquiry to realize that this merely opens up another set of questions. Value as defined in what terms? To whom? When? How?
To illustrate, value can (as Richard Rumelt notes in What in the World is Competitive Advantage?) be considered a simple sales revenues vs costs equation. Yet ‘cost’ comes with all kinds of issues, not least in relation to scarce resources. Value can also be seen as ‘supernormal returns’ measured by market-book ratios (e.g., ROIC, ROA or Tobin’s Q), but again, just like with cost, each ratio brings its own set of problems.
The question of the baseline against which the advantage exists provides further obstacles; should one measure against shareholder or industry analyst expectations, a narrow set of competitors, the vertical or industry as a whole, or even the general economy? What about the value perceived by buyers, to the degree that one can measure such a thing?
Then, there is the dimension of time. Does competitive advantage mean, so to speak, winning the game or does it translate to having enough distinctive physical, human or organizational resources (however they are defined) to maintain a beneficial position in it?
By now you have undoubtedly spotted the problem: what seems to be user friendly can be, and generally is, revealed to be a veritable Pandora’s box. Even if one disregards the definition of strategy provided and uses something else, similar issues will inevitably arise.
The uncomfortable truth is that simple theory does not beget simple practice, nor does claimed-to-be general solutions solve our biggest business problems. On the contrary, claimed-to-be general solutions precisely are our biggest business problem.
In other words, that something appears to be “fucking complicated” is a moot point. What is of far greater importance is whether it is fucking useful.
Next week, we will continue this discussion. Until then, have the loveliest of weekends.
Onwards and upwards,
This newsletter continues below with additional market analyses exclusive to premium subscribers. To unlock them, an e-book, and a number of lovely perks, merely click the button. If you would rather join the nearly 3,000 other free subscribers and try the gratis version first, click here instead.