I was able to get an interview with Todd Zenger, the N. Eldon Tanner Chair in Strategy and Strategic Leadership at the David Eccles School of Business at the University of Utah and author of the new book, Beyond Competitive Advantage: How to Solve the Puzzle of Sustaining Growth While Creating Value (Harvard Business Review Press). I wanted to share some of the thoughts that came from our conversation.
Q: Your book argues that organizations need to compose a corporate theory. What is a corporate theory and why is it so essential?
We typically think of a corporation being successful when it attains some valuable position in an industry--what some call a competitive advantage. Our image is a well-protected fortress from which we can generate a hoard of cash. The challenge is that the corporate landscape is filled with firms that occupy such strategic positions, but are failing to create new value for investors. Think of Microsoft's struggles. They clearly generate lots of cash from their tremendous strategic position, but they have consistently disappointed investors and for some time. Think of GoPro's struggles today. Like Microsoft they carved out a strong position, and are now disappointing investors. These investors are now looking for what's next. A well-crafted corporate theory is something that repeatedly reveals what's next.
Q: Can you provide an example an effective corporate theory?
The example I love is Walt Disney's theory of value creation. It's a theory that was composed very early in its history. As you might expect from a gifted animator, the theory was beautifully captured visually. In the illustrations of this theory, Disney position films, particularly animated films, at the center and surrounding it lie an array of assets that draw value from these animated films and infuse value back in them. The resulting map carefully describes a web of synergistic relationships among the Disney assets. While the map continues to evolve with ongoing strategic experiments--new theme parks, Broadway shows, hotels, retail stores, and cruise lines, as well as the acquisition of Pixar, Lucas Films, and Marvel--the essence of the theory and the logical paths to value creation remain rather quite constant. Disney has certainly had its hiccups, but a rather consistent theory has guided strategic choices for nearly eighty years.
Q: If a corporation seeks to build an effective corporate theory, what are the key elements that define great ones?
Effective corporate theories possess three key components:
1. Foresight regarding the evolution of an industry, demand, technology, and customer tastes.
2. Insight regarding what is unique and distinctive about the corporation's assets, capabilities and resources.
3. Cross-sight regarding value creating complementarity between the assets your firm possesses and the array of value creating opportunities accessible.
You see all three of these "sights" in the contrarian theory that Steve Jobs used to fuel Apple's remarkable growth. He possessed foresight in recognizing that design and ergonomics could create tremendous value in computing and other digital devices. He possessed clear insight in recognizing the distinctive skills that Apple would need to compose and develop. Perhaps, most brilliantly, he had the cross-sight to recognize a rather divergent array of new opportunities beyond personal computing that leveraged his assets and capabilities in ways consistent with his theory.
Q: Why it is so important for a small firm or a startup to possess a corporate theory to fuel growth?
There is much talk in Silicon Valley about rapid experimentation, design sprints, quick pivots, and lean start-up. Faster and cheaper than all of these techniques is a thought experiment. Great theories provide a model for projecting the outcome of experiments--for running though experiments. From its theory, Disney can evaluate the success they might have producing Broadway shows or operating cruise ships. The most valuable experiments emanate from great theories, not random, rapid trials. Great theories reveal a succession of promising experiments. Corporations, however small, must constantly confront the question of what is the next act, and a well-crafted corporate theory helps reveal the script.