Transformation Isn’t Strategy

Poor strategy is expensive.

General Electric paid more than $6 billion in fees to a galaxy of strategic advisors since the turn of the 21st century, even as its market value collapsed 80 per cent over the same period. (For more context, see GE’s Dealmaking and Outlay to M&A Advisers Called into Question in the Financial Times.)

The company said in October it would write off $23 billion from the value of its power division alone, following the disappointing performance of businesses acquired in the 2015 takeover of Alstom, a French energy company that was one of the largest acquisitions ever by GE, ultimately weighing in at about $10 billion.

Announcing the takeover in 2014, John Flannery — one of the deal’s chief architects as GE’s head of business development at the time (and now the company’s former CEO) — called it “a highly strategic acquisition” in a power sector that “has excellent long-term growth prospects.”

The irony is that GE had also simultaneously fashioned itself as an industrial leader of the impending digital swarm that would consume all. It was to be a major player in software and putting flakes of silicon into every piece of equipment it manufactures, making the dumb atoms of physical objects smart, and defining the “era of the industrial internet with the potential to disrupt the global economy on a scale larger than any previous industrial revolution,” according to one breathless piece of promise that appeared in the Huffington Post around that time.

The writer was framing the NEXT BIG TECHNOLOGICAL ADVANCE to change the way we live and work, create a seamless economic culture, and perhaps even alter the destiny of civilization itself. The novel frontier being described was, of course, the Internet of Things (IoT), a new industrial cortex where all is linked.

Magic and Loss

It was (note past tense) a feel-good functional story about the untapped value that could be extracted from connecting all kinds of things — nodes, dimensions, relationships, physical objects — in a new harmony of interaction and common cause. The world was being clothed in one network, with all the minds, lives and artifacts woven together in a new society. The path to success was easy to see and sell. Theoretically.

But that didn’t work out so well for GE, either.

Transformation suggests a complete shift in orientation. This has nothing do with setting up a center-of-excellence to make the past more efficient to execute against. It means your most basic philosophies and cherished set of beliefs born from a history of experience and education are no longer valid in a world that obeys a new logic. Transformation thinks differently.

Jargon, technicalities, cliche and metaphors…an entire system of value and meaning used to see and understand has to be surfaced and re-evaluated. Think genetic re-engineering. This includes reframing how to assess advisors and ingest a zoo of vendors, who themselves are in need of transforming, and getting them to cohere around a new psychology.

The process is not just about adding analytics to existing kinetics in order to isolate and measure productivity goals, or achieve “optimization,” itself a dead concept given the persistent disequilibrium that is a hallmark of our time. No balance exists in nature; the thing to adapt to is economic churning, a jungle in fast-forward motion. Explains complexity economist Brian Arthur: ”If you believe that ecological systems are generally in stasis you’re terribly miseducated…”

Unfortunately, most companies do the latter (invest in optimizing the past) because doing the former (designing new marketspace) is very hard to pull off. Writes Alex Moazed in Inc:

“For GE Digital to have succeeded, it needed to be separate from GE. Making GE Digital its own business unit was a step in the right direction, but it also inherited the roles and responsibilities of GE Software.

Digital transformation initiatives don’t need thousands of people. They need a small team with very little time and very little money. Even worse, GE Digital was saddled with a quarterly P&L, which oriented its business around short-term revenue growth rather than long-term strategic objectives.”

GE’s setup is the exact opposite of what a transformation initiative needs in order to thrive.

There’s a reason why digital health startups raised an all-time high of $11.5 billion in 2017, topping 2016’s record of $8 billion, according to StartUp Health. Working with a clean slate is a less risky way to create new capabilities than trying to rearrange entrenched modes of working and thinking and incentives, where intertwined bundles always resist unraveling.

But this raises another point:

Technology Isn’t Strategy

The short road to parity is letting the potential of technology lead strategic visioning.

We all exist today in a tornado of new gizmos and their potential applications. The virtuous cycle of specialized technology solutions beget new micro-services and market niches that make possible a thousand points of wealth. “Each actualization of an idea creates room for more technology, and each new technology supplies more ideas,” says Kevin Kelly in New Rules for the New Economy.

But strategic understanding can not be keyed to a specific piece of technology. Ever. There’s simply too many cool new tools and network inventions being born in an ever-expanding loop of potential.

Technology is a commodity input: IT alone doesn’t differentiate.

So when the same infrastructure services and information capabilities are accessible to everyone, and everyone works with the same set of ideas to deploy the same technology in the same way, there is competitive convergence. Commoditized performance sets in because people are copying one another using cut-and-paste methods.

Digital is a piece of strategy, not a stand-alone strategic idea. It is a means, not an end.

The overlay of the internet should be understood as unique geography that only adds another feature to the strategic landscape. It’s worth keeping in mind that no media environment has ever been retired or made obsolete because of digital (faxing is still in widespread use, especially in healthcare; vinyl records are making a comeback). Layers of complementarity are being added, but none are being deleted.

So the shape and texture of modern strategic visions will come from discovering new language to frame new logic designed within entirely new systems of engagement. It also emerges by developing new management concepts and metaphors that yield a whole new category of ideas, thinking that dissolves boundaries and works across organizational, market, industry and even national contexts.

Yet the inertia of the industrial age mindset continues, not only in the companies themselves, but within the army of vendors (strategic partners?) the companies hire for strategy and execution: 50 Examples of Corporations that Failed to Innovate

Advertising Isn’t Strategy

“A billion here, a billion there, pretty soon you’re talking real money” — Everett McKinley Dirksen (senator from Illinois in the late 1950s).

There’s a heavy price to pay confusing components of strategy — e.g., deal-making, analytics, alliances, data, marketing, sales, real-world evidence, information technology (in all shapes and sizes) — for strategy itself. As dangerous is misreading, or not seeing, the strategic effect of decisions that flow from an operating model wed to an outmoded system of thought about what has value.

The value of advertising, for instance.

Ad blocker usage surged 30 percent in 2016, according to a new report from PageFair, a company that helps publishers regain revenue lost to the software. There were 615 million devices blocking ads worldwide by the end of 2016, 62 percent (308 million) of those mobile. Desktop ad blocker usage grew 17 percent year-on-year to 236 million.

The largest geographical driver of mobile ad blocker use has been in the Asia-Pacific, where 94 percent of mobile ad blocking takes place.

There hasn’t yet been mass adoption of a mobile ad blocking app in North America or Europe yet, but PageFair predicts mobile ad blocking would accelerate in those regions if device manufacturers or distributors began to pre-configure ad blocking software as standard, as most consumers seem to want. (More on this emerging development from Scientific American in May this year: Where Will the Ad versus Ad Blocker Arms Race End?)

“The ad apocalypse is upon us,” posits Andrew Essex in The End of Advertising, because ‘advertising’ as a concept is an industrial age idea. “This $600 billion industry is now careening toward outright extinction, after having taken for granted a captive audience for too long, leading to lazy, overabundant, and frankly annoying ads. Make no mistake, Madison Avenue: Traditional advertising, as we know it, is over.”

Essex most recently served as CEO of Tribeca Enterprises, following nine years with Droga5, where he served as CEO and vice chairman. Earlier in his career, Essex was in the publishing sphere, spending four years as editor of The New Yorker (Atul Gawande, CEO of the healthcare venture from Amazon, Berkshire Hathaway and JPMorgan Chase, has been a staff writer at The New Yorker since 1998).

Essex may have the right sense of perspective. Just this week at an extended investor day conference, WPP’s new CEO Mark Read positioned his business not as a formerly dominant advertising network trying to retain its relevance, but as a “creative transformation company” best fit to serve a new kind of economy. At the same conference, WPP announced it was laying off 3,500.

Who transforms the transformers?

Strategic Effect

Procter & Gamble is cutting $2 billion in marketing spending over five years, part of a broader $10 billion cost-cutting plan launched a year ago. After publicly pressuring major technology platforms to help clean up the online ad market and fork over more information about the effectiveness of digital ads, P&G went further and slashed its spending on digital advertising by more than $200 million.

The exact opposite dynamic, though, is unfolding in the pharmaceutical industry: Pharma and Healthcare Boost Digital Ad Spend on the Way to $4.5B in 2021.

Pharmaceutical companies are one of the largest advertisers in the overall marketplace and across all media. In their bid to stimulate patient demand for branded drugs, influence physician prescribing habits and increase drug utilization, pharmaceutical brands pour billions of dollars into new TV, print, and digital advertising campaigns annually.

In the four years 2011–2015, the pharmaceutical industry has spent more than $20 billion on advertising drugs directly to consumers. Here’s the Nielsen data:

There’s no question the cost of prescription drugs has become a hot-button issue with consumers and policymakers. One in four people taking prescription drugs report difficulty affording their medication and recent Kaiser Family Foundation opinion polling has found bipartisan support for government action to lower prescription drug costs.

Yet spending on retail prescription drugs in the United States was $333.4 billion in 2017, up 0.4 percent, which is the slowest growth rate since 2012. The greatest share of healthcare spending (33%) actually went to hospitals: $1.1 trillion. This data is from Health Affairs, published on December 6, 2018 (see: National Health Care Spending In 2017: Growth Slows To Post–Great Recession Rates; Share Of GDP Stabilizes)

Put aside questions of whether investing billions/year on the sea-of-sameness we call DTC advertising yields tangible business value, the pharmaceutical industry finds itself in deep damage control mode because it doesn’t understand the strategic effect of promotional tonnage over decades — of spending more on advertising than many government entities, states and entire countries spend on public health.

Efforts to restore its reputation have so far been lacking, and the battles with D.C. won’t end in the near term. So the industry reached into the past for strategy: advertising.

The drug industry’s largest trade group and lobbying arm, the Pharmaceutical Research and Manufacturers of America (PhRMA), launched an expansive new advertising campaign aimed at getting the public — and, critically, lawmakers — to sympathize with the increasingly maligned industry, which has been slammed left and right for raising drug prices as a path to growth.

The multimillion dollar GOBOLDLY campaign includes “national TV, print, digital, radio and out-of-home advertising,” according to a PhRMA press release, and is aimed at reminding the sector’s most important stakeholders “of the groundbreaking work that it does.” The value of medicines is, well, they’re valuable.

The system-of-systems that comprise the pharmaceutical industry have run out of ideas.

Quinn Understands the Problem

Geoffrey Parker, a British historian specializing in military history and innovation, finds an answer in late twentieth-century “prospect” theory: leaders, it suggests, risk more to avoid losses than to achieve gains.

Strategy is a creative act, not an analytical one. For any individual, organization or country, the key decision is not how to raise productivity or efficiency by doing the same better with new technologies, but how to negotiate among the explosion of opportunities, and choose the right thing to do with a new vision.

It includes, and should begin with, voltage to spark strategic imagination.

The plate tectonics compelling transformation in the pharmaceutical industry are the same forces reshaping the retail industry, the healthcare industry, the marketing services industry, the technology services industry, military planning, and society as a whole. Winners obey the logic of networks, just as Amazon, Apple, Google and Microsoft do now.

The internet is a possibility factory, opportunity runs in a thousand directions at once. So tremendous is the fount of plentitude that navigating sanely through an ocean of options and new economics of supply and demand calls for a new form of creativity. This is a different kind of big.

Tell me what your strategy is, and I’ll tell you if it’s working.

/ jgs