The importance of Strategic Agility

With agile software methodologies now firmly in the mainstream, it is difficult to find a software development organisation that does not claim to follow agile principles to at least some extent. For this reason, much of the discussion in agile and lean development conferences is now shifting to its applicability in the wider business world. In this post, I have a look at some of the business challenges that can be addressed through adopting strategic agility, and make some suggestions that may help in the journey.

Looking at Fast Fashion

Agile management is firmly associated with the technology world, so the retail fashion industry may be an odd place to start an article on agile management. Nevertheless, the Spanish fashion retailer Zara provides one of the most compelling examples of the benefits that speeding up a company’s production and supply chains can have on revenues and profits. Zara can design and produce an item of clothing and have it hanging in the shelves of its stores across the world in 15 days, a speed that is revolutionary in an industry traditionally driven by heartbeat of seasonal fashion shows. A professor at Stanford University has coined the term ‘Zara Gap’ to represent the financial advantage it can bring. By reducing the unwanted stock, reacting quicker to customer feedback and reducing the lost margins in stock clearouts and sales, the Zara Gap is estimated to increase profitability by 28%. The increase in profits since that study was carried out indicates that the gap may indeed be widening. (in 2015, Inditex, Zara’s owner posted profits of $3.2 billion on sales of $23 billion)

How Agile and Zara Are Transforming The US Fashion Industry

The “Zara Gap”: US managers still live in “retail denial.”

A key tenet of Zara’s management philosophy is “postponement”, the practice of making decisions at the last responsible possible moment , a principle that agile management practitioners will be very familiar with. At all points in the development process, commitments to manufacture garments in volume are made at the last possible moment, enabling Zara to commit volume only on those garments that are successful, and quickly kill those that gain no traction with its customers. As a result, sales discounts (or markdowns) for Zara US are approximately 15%, compared to 50-70% for the rest of the clothes retail industry. The other core strength of this approach, is that it allows the company to be truly customer-responsive. This is particularly critical in the fickle and fast-moving fashion industry, allowing the company to react to trends and hype generated by media and social networks before its competitors.

Is business really speeding up?

Zara’s speeding up of its production and supply chain cycles can be viewed as part of an overall trend by business towards greater speed. This was the topic of an in-depth Economist – The Creed of Speed by the Economist magazine recently, which aimed to determine whether companies were really operating more quickly than a decade or so ago. The conclusion was somewhat mixed, as under most measures, such as rate of new product launches and production speed, business does not appear to have accelerated. The article posits that although disruptive companies such as Uber and Airbnb occupy much of the business press’ attention due to their meteoric rise to multi-billion dollar valuations, their impact on the industries they threaten to disrupt is limited. For example Airbnb barely represents 1-2% of the hotel industry’s total.

The twin challenges of disruption and unpredictability

So is speed overrated?  The threat of disruption is real enough and even the largest of companies are vulnerable. Nokia, once the largest company in Europe lost 90% of its market value in less than five years. Similarly Kodak’s revenues collapsed in 2005 as the world shifted from film cameras to digital cameras and smartphones. Both Nokia and Kodak failed to respond to fundamental structural changes in their industries. Microsoft, for example, has been facing a similar existential challenge as the consumer PC market declines and the shift to online ‘free’ software undermines its core Windows and Office product lines.

It can easily be argued that disruption is nothing new, and is simply the natural outcome of human progress. Just as iron smelting superseded the production of bronze 3000 years ago, transportation infrastructure underwent a series of revolutions, from horse-drawn carriages to canals, railways, the motor car and air transport. What is fundamentally different in today’s business environment, is that the rate of disruption and technological innovation is increasing, and few businesses are immune.

While the main changes in land transportation infrastructure took place over the course of three centuries, the infrastructure that underpins the digital economy has been transformed in a couple of decades. Fifteen years ago, mobile internet speeds peaked at around 10kbit/s, while the average 4G speed in the UK today is 20Mbit/s, a 20,000 fold increase. The Nokia Communicator was the state-of-the-art-phone in 1996. It was aimed at high-end business users who could afford it, yet today’s mass-market iPhones have about 30,000 as much storage space. The cloud computing industry which is used by so many disruptive players to host their services, did not even exist ten years ago. It was Amazon’s opening up of its computing platform in 2006 that provided the starting gun for the industry. DropBox, one of the earliest cloud storage companies launched the following year using Amazon’s platform, and you’d be hard-pressed to find any sizeable company today without some form of Cloud IT strategy.

The Nokia 9000 - state-of-the-art in 1996
The Nokia 9000 – state-of-the-art in 1996

The other core challenge facing many industries today is unpredictability. While many businesses still operate in a relatively predictable and slow-moving world, they too are subject to sudden and unpredictable (or difficult to predict) shocks. From the frivolous – such as Kim Kardashian’s backside breaking the internet – to the geopolitical – wars, commodity prices, terrorism, and even the weather, companies are often tossed about by external effects over which they have no control. In a competitive marketplace, it is not sufficient to be able to spot a trend or change in the environment. A company must also have the organisation agility to change and adapt quickly. As a minimum, it must do so as fast as its competitors. Those companies that can change and respond quickly will be much better placed to survive and thrive in a changing world.

The Importance of Strategic Agility

A sole focus on speed without considering agility, or the ability to change direction, is unlikely to deliver success. Andy Grove, Intel’s luminary leader, famously compared the enormous efforts to create ever faster computer processors to “running simply to remain still”. This adage remains true, as long as companies also build the ability to change direction at speed. One way of looking at the challenge is that if your competitors are able to change direction more effectively and efficiently than you, then you are in trouble!

The ability to change direction needs to be preceded by an acceptance within the company’s DNA (decision & investment boards, progamme offices, executive committees, roadmap planners) of the limitations of business planning. Accepting that the outside environment is a changing place, requires a company to be prepared to change plans and execute upon such changes effectively and quickly. In too many companies, once a direction has been set, it becomes difficult to change course, even when it becomes increasingly obvious that the project is doomed to failure. Most of the reasons for this rigidity are bureaucratic. Once money has been allocated, people assigned to an initiative, and a plan set in motion, it is often very difficult to change direction. The people running it are very reluctant to cancel it, for fear of losing the money allocated or their teams. More corrosively, the careers of those who are most closely associated with the initiatives are often tied to their success. While this would seem like an appropriate motivator, it also means that leaders will stick to a doomed course, as to change tack would would spell doom to their careers.

So how should one achieve agility and avoid the pitfalls above? The following pointers can be useful:

1. Don’t unnecessarily lock yourself into a given path – Maintain a flexible Supply Chain

Most fundamentally, to be fleet of foot, it is important to keep one’s options open as long as possible, and not be committed to a given course too early in a project.  A key factor here is the supply chain, as often this is the limiting factor into how quickly organisations can change direction. They may be locked into large sourcing commitments made early in a project or struggle to change or identify new suppliers or materials. As we have seen above, supply chain agility is a key strategic strength of Zara.

2. Don’t waste too much energy on planning 

In my experience, this is the area that causes large companies most difficulty. It is possible to run a development organisation under well-understood agile principles, and then fall foul of the long-range planning cycles dictated by the company’s finance and programme organisations. If an initiative contains a modicum of innovation, or there is some degree uncertainty about its uptake, then there will be inherent uncertainty in any forecast made.

This doesn’t mean that there is no place for planning, but simply that there is no need to over-cook the plans, and focus on what is achievable in the near term. Planning multiple product releases in advance only gives the illusion of control, and will have limited validity in the real world. In the seemingly predictable path of a snooker (or billiards) ball, tiny variations and imperfections in the ball and table mean that it is impossible to predict where the ball will end up after just a handful of collisions. Tiny variations can have a cumulatively enormous impact given enough collisions (or product releases). In the world of modern product development, these variations are anything but tiny.

3. And don’t spend too much time in market or customer research

In an unpredictable world, it can be as time-consuming to carry out the necessary research to build a new product, as it would be simply to try it out and test it. General Electric have adopted an approach called FastWorks, based on Eric Ries’ Lean Startup philosophy, where low-cost prototypes are made and taken to customers to test whether the value proposition works with them. The idea is that this iterative approach is faster, cheaper and provides better insights and more relevant products than traditional market research. Additionally, the improved customer engagement this generates also creates sales uplift.

4. Maintain alternative options

This is a natural corollary of all the above rules. If you are to be able to change direction quickly, you must also have a number of different options. This means baking in the possibility, and indeed, the likelihood of change into the project. This means focusing not only Plan A, but be ready with Plans B, C and D.

5. Use platforms as a tool of speed

There are a number of ways by which this can be achieved. Creating common underpinnings or ‘platforms’ which can be adapted to create new and different products that can adapted quickly to meet different customer demands. Often seen as a way to reduce cost by sharing R&D investment over multiple products and product lines, this technique is equally effective at shortening product development time. The auto industry uses this approach extensively – For example, Volkswagen Group’s small family car “A Series” platform underpins eleven very different car models, from the sporty Audi TT to the more sedate Skoda Octavia. There is however no way Volkswagen, or indeed any other car manufacturer can sustain their product release schedules, launching a new car every year, without use of shared platforms.

6. No Sacred Cows

One of the largest impediments to change in organisations is the psychological difficulty in abandoning technologies, markets, assets that have served the company well. A variant of the ‘sunk cost fallacy’, companies are often beholden to approaches that will no longer drive success. One of the most striking examples in recent times was Nokia’s attachment to the Symbian mobile phone operating system. Once the world’s dominant smartphone platform, it was made obsolete by the introduction of the iPhone and Google’s Android platforms. Yet it took Nokia four years to make a decision to jump from what it then called a “burning platform” to Microsoft’s mobile ecosystem, in which time the market share of Symbian plummeted from around 75% to less than 20%, before finally becoming extinct. When Nokia finally did bite the bullet, there were limited options available, and its fate was sealed.

And finally, Strategic Planning remains important. Decouple products from platforms

And finally, for the avoidance of doubt, none of the above recommendations should be construed as advice to forgo proper strategic planning and investment. For example, Google is often held as a paragon of innovation, providing its engineers with time to experiment wit their own ideas, frequently bringing out new features in beta, through its Google Labs programme. Google describe this as “a playground where our more adventurous users can play around with prototypes of some of our wild and crazy ideas and offer feedback directly to the engineers who developed them.” Nevertheless this is coupled by very long-term strategic investments, making $18 billion capital investment, mainly in Cloud Infrastructure and making long-term bets in areas such as artificial intelligence (see its acquisition of DeepMind); Calico, its life sciences research arm; Sidewalk, which develops smart city inf rastructure, not to mention its supremely successful Android platform for smartphones, tablets, phones and TVs. Likewise, Apple intends to invest $15 billion in manufacturing capability, data centres and retail footprint.

What this shows is that by making long-term bets on core technology, people and infrastructure, these leading companies create the underlying capability to move quickly and be innovative. Google’s engineers are able to innovate and create products as diverse as Gmail, Maps and Adsense, only because they have access to a fantastically-capable web platform with global reach and access to all its users data collated, and organised over practically the entire period in which Google has been arrived. This patient investment in people, infrastructure and, above-all, data, provides the capability which Google needs in order to innovate at speed.

 

Read More:

  1. Supply Chain Quarterly – The Five Dimensions of Strategic Agility
  2. Death of the Business Plan?
  3. General Electric Wants to Act Like a Startup
  4. Succeed with Innovation Internally – Horizon Planning
  5. The Economist – The Creed of Speed

 

Leave a Comment