- November 11, 2019
- Posted by: Ramkumar
- Category: Strategy
Role of strategy in Tech companies
There is a view that traditional strategy development processes do not have a role in fast moving technology sector.Many view that the role of strategy is dying in technology companies. Many leaders believe that 3-5 year strategy goals have lost its relevance. This is because most of these goals turn out to be obsolete within the next 12 months. Growth determines valuation. Growth depends on innovation, speed and agility, not annual planning. Success in tech sector is focused on defining the future right now.
For companies like Amazon, Google and Tencent, their success is due to strategy development. They define bold path of leadership, make difficult portfolio choices, allocate resources strategically and built strong capabilities structures. These companies are action oriented and focus on no-regret moves in the short to medium term. At the same time they have laid a clear set of stepping stones towards it’s long term aspiration. They anticipate disruption and adapt themselves by monitoring key developments. This helps them to revisit their long term vision. These companies have built in flexibility that makes strategy development faster, more pragmatic and agile. For instance, Adobe laid out a careful M&A strategy to transform itself by offering cloud based subscriptions. This strategy helped Adobe to design and deliver exceptional digital experiences. Adobe is now a leader in market analytics and web development technology. It is also actively investing in artificial intelligence and Machine learning.
The technology companies operate in a turbulent and fast changing environment. Successful companies do not react short term. They infuse long term planning with speed, make pragmatic near and medium term bets, learn from experience and adjust their strategies based on real data and learnings. Companies need to balance the long term planning with agile responses by doing the following.
Scale matters in Strategy
The economic benefits of scale are critical in high tech. Successful companies acquire the economic benefits of size and scope without committing the time and capital to building scale the traditional way.
For instance, companies of any size can expand their capacities inexpensively via cloud. For instance, Paytm was able to use cloud to scale an innovative idea rapidly. This allowed them to challenge incumbents and disrupt industries. The most effective strategies that companies use are aimed at tapping an ecosystem or building a platform. These asset light strategies use win-win partnerships to build scale, add capabilities and accelerate innovation.
Accelerating growth by tapping an ecosystem or building a platform requires substantial investments in developing capabilities. It also involves adopting a new mindset. Many companies are reluctant to partner with others. They fear of losing control when it comes to innovation. This is a shortsighted approach. For instance china based Tencent used the partnerships and acquisitions to enhance its inhouse gaming capabilities. It also provided room for smaller companies a large platform to extend their offerings in China. Tencent took advantage of a vibrant and innovative ecosystem to expand rapidly. It was able to tap into the creative energy and insight of a diverse group of partners.
Focus on action in Strategy
Good strategy moves its focus from core strength to adjacent areas. It does to place bets on new engines of growth. Conventional companies focus first on the existing products and business models. Successful companies makes the right strategic choices by having a future back perspective. This involves understanding the raw customer need and then envisioning how the core value proposition will change under future scenarios of disruption. This is regardless of how the company operates today. The challenge with future back thinking is that it is theoretical. This can lead to inaction. Successful companies translates this future back thinking into tangible near and medium term actions at a sustainable pace.
Resource allocation Strategy
Traditional strategic planning process focus on incremental budgeting. When business units meets their goals then they will have a small increase in their budgets. Successful tech companies do not operate in this way. They focus their investments towards the winners. Resource allocation is a fundamental extension of this strategy. Winning requires focusing scarce resources on key areas that matters the most.
Amazon is known for making bold bets. It seeks new ways to take advantage of its online platform. Amazon has developed sophisticated market sensing capabilities that uses data and rapid feedback loops. This helps them determine which initiatives have the most potential to deliver on company’s promise. These promises are customer’s convenience, price leadership and product variety. They focus their investments and resources on key growing areas. This helps them to maintain a portfolio of bets that balance short term results with long term business building. Amazon invested $170 million in its fire phone. When it failed, amazon boldly took a write off after three months of its launch.
Long term planning
A clear strategic vision to guide investment is important. This is true even for markets that are constantly shifting. It is important to develop market sensing abilities and then act on them. Being agile does not mean that the company should abandon it’s long term planning. Companies need to be flexible and use agile principles to translate long term thinking to near term action. Firms need to develop prototypes and gather customer data early. They need to use this learning to achieve scale or focusing on something more promising.
Companies that combine strategy with speed build agile strategic development into a proprietary capability. They aren’t focused on the annual planning process. Their strategic process is continuous and dynamic driven by opportunity and insight. These companies rely on top talent to develop solutions internally. At the same time they also use M&A as a strategic weapon. They also tap onto the industry ecosystem using partnerships.
In order to have a successful strategy, companies need to ask the following questions:
- How to set a bold long term ambition in the context of ever changing market realities?
- How to move from core expertise to adjacencies but be an early mover to capture growth?
- How to translate the long term ambition to near and medium term actions to make bold bets and manage the stakeholders needs?
The role of strategy in tech companies is relevant, the ability to define a vision and layout a strategy is vital for technology companies. The core tenets of strategic principles still holds relevant today. The only difference is that to win today, firms need to be faster, smarter and more agile.