In Clausewitz's terms, the era of "set-piece" competition is over. We have entered the era of total competition. No matter your industry, company, or nationality, there is a battle-ready competitor somewhere who is busy thinking how to beat you. There are no safe havens.
Yet the hard truth, for all the talk of new paradigms, reengineering, and organizational learning, is that most executives in most companies are still equipped to fight the last war. Their strategic assumptions, management structures, information systems, and training programs are geared to a competitive battlefield that no longer exists. The rules of engagement have changed. Strategic mind-sets have not.
In the life-or-death quest for strategic change, business has much to learn from war. Both are about the same thing: succeeding in competition. Even more basic, both can be distilled to four words: informed choice/timely action. The key objective in competition - whether business or war - is to improve your organization's performance along these dimensions:
- To generate better information than your rivals do
- To analyze that information and make sound choices
- To make those choices quickly
- To convert strategic choices into decisive action
Together they represent informed choice/timely action.
Why Companies Fail
It's no secret why companies fail. The failure starts at the top. CEOs and their senior executives know the problems; in fact, in the privacy of their offices, they'll volunteer them to you.
"We have the information in the company. But we don't seem to get it to the right place."
"We get the information to the right place. But then we can't seem to make the choices we should."
"We're okay at choosing what to do, but we're too damned slow. By the time we pull the trigger, the target's moved."
"We know what needs to happen. But we never seem to execute. I never see action."
For some companies, the list of symptoms includes bad habits that slowly erode performance: rivalries in the executive suite, endless turf consciousness, resource struggles between business units. In short, functional boundaries drive a wedge between managers who should be on the same side but who act like the Army, Navy, and Marines competing to see who leads the invasion. In these cases you hear sentiments like, "We can't pull together, we're always pulling separately. There's too much internal friction around here."
In every struggling large company I've seen, the symptoms are the same. It's all just a matter of where it hurts worse.
Why Companies Fail, Part 2
It's no secret why companies fail. They fail because over the last 20 years they have been taught to fail. Think of it as Joe Stalin Visits Corporate America: "We have a five-year plan. The five-year plan is in a three-ring binder. The three-ring binder is on a shelf in the CEO's office. The five-year plan sets goals. We will meet or exceed those goals."
In this all-too-familiar model, the pieces of the company and the pieces of the strategy are broken down into separate elements. Line is separate from staff. Market research has nothing to do with product positioning. There's no connection between strategy and operations.
Companies then decompose pieces of their strategy into separate projects and assign them out to different people in different places - people who have never worked together, never even met each other. In fact, these people were hired, promoted, motivated, and rewarded in ways that trained them not to like each other, not to trust each other, not to help each other, not to speak to each other. They were trained not to work together.
In this respect, right through the Vietnam War, big companies and the military shared much the same approach to strategy. Both labored under institutional dynamics that virtually guaranteed competitive defeat. The terrible irony of Vietnam was that the United States won every battle but lost the war. Most military histories of the Vietnam War agree on the reason for defeat: the military had no unified strategic doctrine, no clear definition of victory.
American business had its Vietnam 10 years after the Pentagon did. In the 1980s, one company after another confronted agile domestic competitors and new global rivals. These "guerrillas" exposed the flaws of business-as-usual. Like the Pentagon, business learned its lesson the hard way. Now it must learn to change.
What It Takes to Change
Companies compete on their ability to convert informed choice into timely action. Change means doing that more effectively. Learning how means borrowing lessons from the Pentagon to improve performance in three related areas:
* Gathering better information - that is, information that is dynamic, that cuts across organizational boundaries, and that exists "in real time"
* Establishing a framework for making decisions - that is, creating a business version of military "doctrine"
* Practicing the integration of the pieces - that is, learning to use competitive simulation or business "war games"
West Point was founded in 1802. Nearly two centuries later, only one course taught that first year remains part of the curriculum. The course is map reading. The reason is simple: information is at the heart of change, and maps are at the heart of information.
The military creates and uses a wide variety of maps: satellites photograph enemy weapons, low-flying planes monitor troop movements. From these multiple maps the military creates information that is accurate, that reflects how the battlefield changes over time, that exists as close as possible to real time. This kind of information yields informed choice.
Information is also a critical input to the most essential competitive attribute in business or war: intelligence. In modern warfare, intelligence is a full-time preoccupation. During the Gulf War, smart maps were as important as smart bombs.
Compare that to "maps" in companies today. Most of the time, senior executives receive information that gives them two mutually unacceptable courses of action. Confronted by a complex investment decision, they receive either reams of computer-generated data or a one-page memo that simply recommends yes or no. It is all or nothing, a data dump or a leap of faith.
And what about intelligence? Strategic plans that take two or three years to develop are useless before they're finished. Business competition is fluid and fast-changing; companies need to gather intelligence constantly - covering a wide set of considerations. They need to go beyond conventional approaches to mapping that consider only financial and physical assets. In an economy where human assets, knowledge, software, and technology are the critical weapons, companies must map them as well.
The typical American company has what it considers perfectly suitable maps. It has an organization chart, which the company would consider a map of its executives. It has an income statement and a balance sheet, which the company would consider a map of its financial resources. It may even have a map of its physical assets: factories, offices, labs.
But think about the maps companies don't have - the maps that would support informed choices. For example, most companies don't have a single useful map of their human resources. One company I know made a bold strategic decision to preempt the competition by dominating the market for its product in China. A timely decision. But did the company have any data - a map - that would determine how many of its managers had lived or worked in China? How many spoke Chinese? How many would be willing to relocate to China with their families for five years?
Unfortunately, no. Which meant that after the CEO had made his bold, timely decision, the company discovered it was short 2,000 people to implement it. Uninformed choice; no action. Companies without relevant maps - or companies that don't update their maps to keep them dynamic and accurate - are destined to repeat this sort of strategic blunder.
Now consider maps of a company's intellectual assets. Everyone agrees that we work in a knowledge economy. But most companies not only don't map their knowledge assets, they don't know how to map them. How many companies map their patent activity in a product category against the competition? Over years, patent maps can produce remarkable insights into the trajectory of new-product development by rivals. Virtually every "killer product" emerges from a point on the map where a company has concentrated its patents. A patent map can serve as an early warning system for competitors' new-product intentions.
The point is that informed choice starts with accurate, dynamic, and real-time information. When top executives get information that cuts across boundaries, they begin to see previously hidden interconnections between functions and divisions. Integrated information enables integrated decisions.
What It Takes to Change, Part 2
To change, companies need a framework that guides people at all levels as they convert informed choice into timely action. In military terms, they need corporate doctrine.
Doctrine is fundamental to war. As defined in Warfighting, the Marine Corps' handbook on strategy and operations, doctrine is "the fundamental beliefs of the Marine Corps on the subject of war, from its nature and theory to its preparation and conduct. Doctrine establishes a particular way of thinking about war and a way of fighting, a philosophy for leading Marines into combat, a mandate for professionalism, and a common language. In short, it establishes the way we practice our profession."
In business, doctrine is still waiting to be created. All executives accept the need for formal strategies to define the means by which companies compete. Most executives have embraced mission, vision, and values to communicate the ends for which companies compete. Still, something is missing: the doctrine that provides the integration between ends and means - how companies compete.
Doctrine is not minutely prescriptive. In the case of the military, it does not provide detailed instructions on how to fight specific campaigns. Rather, it is a mixture of philosophy ("maneuver warfare," says Warfighting, "is a way of thinking in and about war that should shape our every action") and practice (subordinates "should understand the intent of the commander two levels up") and the connections between the two.
In business, good doctrine meets three needs. First, it establishes a common purpose - the company's definition of victory. Second, it establishes a common language - a shared way of expressing the corporate strategy. Third, it establishes common decision rules - a shared framework for action. The sum of these elements answers the questions that any company must answer if it expects to win: How do we compete? Where do we compete? How do we conduct ourselves? How do we know whether we're winning or losing?
Whether they use the word or not, innovative companies are beginning to invest in doctrine. Motorola, one of the world's most competitive high-technology manufacturers, operates Motorola University in part to create a company-wide language and decision-making system - a doctrine - for quality. Koch Industries, another remarkably competitive (if less visible) enterprise, has made significant investments in the Koch Management Center to create what it calls "management technology" - the common vocabulary and shared understanding that is the substance of doctrine.
Perhaps the most elaborate example of corporate doctrine is at Emerson Electric, where CEO Charles F. Knight has institutionalized a rigorous management process. Knight's doctrine includes a clear definition of victory expressed in unambiguous financial measures; a common vocabulary, with critical terms ("best cost producer," for example) that all Emerson managers understand; and decision rules that inform behavior from the executive suite to the factory floor. Every manager and worker at Emerson is expected to be able to answer four basic questions about his or her job: Who is the "enemy"? Do you understand the economics of your job? What cost reduction are you currently working on? Have you met with your managers in the past six months?
The overarching point of Knight's management process is to create a framework for decision making that allows people throughout the organization to convert informed choice into timely action consistently. It is no accident that the company has recorded 35 consecutive years of increased corporate earnings and earnings per share. Doctrine matters.
What It Takes to Change, Part 3
Every year the Department of Defense issues its list of the technologies essential to national security. And every year these "critical technologies" include many of the same items: gallium arsenide chips, photonics, artificial intelligence - and simulation. Why simulation? Because the Pentagon understands that one way to improve its chances in battle is to practice fighting.
The origins of military simulation go back to the Navy in the late nineteenth century. In those days, officers practiced war games by moving toy ships around large tables. The modern Pentagon spends hundreds of millions of dollars a year on computer-driven war games. A thriving simulation community - a cottage industry - of analysts, programmers, and consultants works with the military to push the technology.
Business is just coming to recognize what the military has known for 150 years: competitive simulation allows managers at all levels to practice converting informed choice into timely action. From such practice comes faster decisions, crisper execution, and better integration. The essence of learning is doing; the essence of doing is teamwork.
"It is critical to keep in mind," notes Warfighting, "that the enemy is not an inanimate object but an independent and animate force. The enemy seeks to resist our will and impose his own will on us. It is the dynamic interplay between his will and ours that makes war difficult and complex."
Strategy, like warfare, is an interactive, dynamic process. Most executives understand that business is no longer a one-move game. The CEO who says, "The competition is gaining market share, let's cut price," is a dinosaur. Managers need to look several moves into the future and anticipate the feedback loops and time lags built into any competitive situation.
Competitive simulation provides an opportunity to practice that interactive dynamic. It trains executives to anticipate the unexpected. It helps build a management team that can roll with the punches, deal with unanticipated situations, and work together when things don't go according to plan. In fact, in business and in war practically nothing goes according to plan. Strategy dissolves when the first bullet is fired. Practicing real-time strategy is the essence of simulation.
Consider a key business unit in one large high-technology company that recently completed a war game. One of the first principles of simulation is that it has to be real. Executives have to engage intellectually and emotionally, and that requires an accurate map of the "battlefield" and moves that correspond to the dynamic complexities of business competition. These conditions, in turn, require serious investments of time and resources.
In the case of this simulation, 15 people on three continents worked for four months simply to "map the battlefield." Their preliminary work produced a rough-cut description of the competitive shape of the industry, the assets of the competitors, and their company's own assets. It took another two months to turn that rough map into a dynamic computer model in which the industry evolved in plausible ways and strategic choices produced credible results.
The parameters of the game and the structure of the exercise were straightforward. The simulation covered a seven-year time horizon during which two teams - a blue team and a green team, both representing the company - competed against seven rivals across 15 product lines. The game progressed in four strategic moves: the first move represented one year of competition, each of the next three moves represented two years. To make a move, each of the two teams made choices in four categories: business unit choices such as pricing and advertising; infrastructure choices such as deploying new technologies; strategic choices such as acquisitions and alliances; and corporate-level choices such as issuing debt or stock. In all, each team controlled roughly 300 mathematical inputs with as many as 3,000 independent variables that represented their choices in allocating company resources.
That was the part of the game the teams saw; behind the scenes, game referees and "control" converted their choices into financial results and market share consequences using software programmed with 40 pages of algorithms and more than 1 million data points - and seven NeXT workstations crunching the data.
To add even more credibility to the simulation, during each move the teams received extensive factual information on their performance: accurate financial and market data broken out by product category, corporate income statements, balance sheets, cash flows, and key performance ratios.
The teams also received information on what their rivals were doing. But here, in keeping with the "fog of war," the information was limited, intentionally sketchy, and available only after a time lag. The simulation included updates on new products, cost-reduction opportunities, acquisition candidates, and an industry newsletter that carried news, gossip, and rumors concerning major trends. Just like in real newsletters, the articles were a mixture of accurate reports and erroneous items. Just like in real business, the teams had to discern fact from fiction, information from misinformation.
To begin playing the game, the two teams were briefed on the goals and rules at company headquarters. With just four hours to prepare their first move, they were challenged to develop their own definitions of victory, to make strategic choices that met the definition, and to respond to specific industry events that would begin to unfold as soon as the game commenced.
Six weeks later, the teams reassembled at Jupiter Beach, FL to play out the remaining moves over the next four days. What had been an interesting mind-teaser at company headquarters became an intense competition in Florida. In move one, for example, the blue team, responding to an announced regulatory change, committed itself to holding market share by cutting price to whatever level was necessary. The move triggered a disastrous price war. In Florida, the team got its first printouts which showed how severely the computer and the war game referees had evaluated their strategy. The team's response: "We've got a stock price. The guys in the other team have a stock price. We're still going to beat them."
In move two as the fog of war began to thicken, the simulation accelerated. The newsletters detailed further changes in the regulatory environment, major technological developments, acquisition opportunities, and juicy rumors about competitors. The consequences of strategic choices were already becoming clear. Now the teams had only four hours to work up the detailed decisions that could decisively determine the outcome of the game.
The next day the two teams received the results of their second moves and met to prepare move three. Here two new developments kicked in. First, the teams were given less time to make their moves, picking up the pace even more. Second - perhaps as a direct consequence of the faster pace - teamwork emerged as the critical feature of the exercise.
Two different styles of teamwork emerged. The blue team worked as one group to develop its arena-by-arena decisions. The green team broke into smaller groups, each of which focused on different sets of choices. One team was reflective and contemplative in its work style; the other was boisterous and aggressive.
By the end of move three, all the substantive and strategic issues were on the table. At this point, the teams were testing themselves - and being tested - on whether they had developed a consistent and coherent view of the world. Had they, in fact, fashioned a strategy that could fit rapidly changing circumstances? Had they consistently executed it? Could they convert informed choice into timely action?
At the end of the game, the two teams came together to learn the results and reflect on the experience. In fact, the outcome of the simulation confirmed the larger point of the exercise: the value of competitive simulation is not in the computer's output but in the players' input. There was no clear winner. The teams had settled on vastly different strategic directions. The green team had developed a shrewd strategy for working with competitors who were also valued customers. The blue team had focused on heavy investments in new technologies and future growth opportunities. The results: the green team won based on stock price, the blue team won based on other financial measurements. Neither strategy was ultimately "more right" than the other.
The investment in the simulation produced a fluid, dynamic, credible process backed by sophisticated, powerful technology. But the real lessons of the war game were only partly - and least significantly - quantitative. The real value was interpersonal and organizational: the simulation exposed the company politics and undiscussable human issues that exist in every large-scale organization. The players learned much about strategy; they learned even more about teamwork.
The Lessons of War
Top executives need a chance to experience change. They need to practice, to rehearse. Simulation provides just that opportunity. The players in the war game get to try their hand at a realistic, interactive demonstration. And when competitive reality asserts itself in the game results, they learn the consequences of different strategic choices. It is practice in the best sense: learning by doing.
Just as important, a simulation exercise reveals a list of action items that the team needs to focus on after the simulation, and the barriers that can keep those items from being accomplished. Both the list and the barriers need to be preserved. The list of action items can become the transition to action following the simulation. But the barriers can become the more important list - they are the obstacles that need to be cleared for significant change to occur.
But the real lesson of the game, like the real lesson of war, is about teamwork. The dirty little secret in most companies is that senior executives lack what the military calls "unit cohesion." With strong unit cohesion, an outfit has a high degree of battle readiness; without it, even the best-equipped outfit is unprepared for combat.
In most companies, executive teams are stretched thin; their lives are fragmented and compartmentalized. Team members may not even see each other that often. So they never learn to trust each other; in fact, they often view each other as internal competitors. When they do get together to make a decision, they bring great ignorance and distraction, and little urgency or trust.
Competitive simulation builds teamwork. Just as it practices strategic integration, it practices human integration. This is the final, most important connection between the art of waging war and the work of doing business.
After World War II, the US military commissioned S.L.A. Marshall, a Harvard historian, to do a remarkable study. The question he was asked to research was, literally, why are men willing to die in war? Marshall was allowed to advance and test a variety of explanations. Patriotism - people would die for their country. Or family - men would fight and die to protect their wives and children. The answer that finally emerged was small-group integrity. In a group of people where each is truly committed to the others, no one will be the first to run. So they all stand and fight together.
The same principle applies to companies. In business today, managerial courage is tested every day. In ways large and small, company leaders are challenged to make tough decisions in an atmosphere of uncertainty, change, and increasingly high stakes. Simulation does not provide answers to executives looking for off-the-shelf solutions to strategic problems. It works on something more important. It builds teamwork and teaches courage.
Mark B. Fuller is cofounder and CEO of Monitor Company, one of the world's leading strategy consulting firms. Headquartered in Cambridge, MA, Monitor has offices in New York, Los Angeles, Toronto, London, Milan, Tokyo, and other cities around the world.