Framework 139 Contextual Effectiveness

Introduction

The most appropriate leadership style depends upon the situation.

In turbulent times, such as during the pandemic, organisations need to be more than just flexible and empathetic. They need to be contextually effective, ie adjust and adapt to the context and challenges facing them.
Examples of organisations that were contextually ineffective, and as a result suffered, include Nokia, Kodak, IBM, etc (for more details see elsewhere in the Knowledge Base.)

This concept can be applied to individuals. History is full of examples of individuals who displayed extraordinary leadership under certain circumstances but were unable, or unwilling, to change when the environment changed, eg Winston Churchill was a brilliant wartime leader but struggled during peacetime.

Another example: a founder of a business is usually the best to start the business but once it achieves a certain scale, a different type of leadership and skills is required. Some examples

- Google & Alphabet's founders (Sergey Brin and Larry Page) realised the need to step away from the CEO role and were replaced by Eric Schmidt in 2001; in 2015 Sundar Pichai became CEO

- Microsoft's co- founder (Bill Gates) stepped away from being CEO in 2000, being replaced by Steve Balmer; Satya Nadella replaced Bulmer in 2014 and from then to 2022, Nadella increased Microsoft's market capitalisation from $US 300 b to 2.26 t.

- Facebook's founder (Mark Zuckerberg) is  still hanging on to his position as CEO

Both Alphabet and Microsoft are thriving while Facebook is struggling.

Three Components of Contextual Effectiveness

i) drawing a map (need to understand the changing dynamics of an organisation's operating environment to create a vision of where the organisation should be heading)

ii) establishing the mindset (need to have a mindset that completely understands the map;
"...drives a shared conviction about the necessity of change and an enthusiasm for the improvements that successful change will bring about. This enthusiasm is vital because achieving change is harder than maintaining the status quo..."
Tom Hunsaker, 2022)

iii) communicating the message (the key tool for activating the change among the whole organisation, ie
"...message serves as the rallying cry that aligns the energies of the organisation around a particular goal and the attitudes and behaviours required to achieve it..."
Tom Hunsaker, 2022)

NB These 3 components will vary according to what the change is trying to achieve.

NB
"...If the map credibly identifies that needed change, and a mindset creates the appetite for change, the message is a key tool for activating a change among the broader population of employees..."
Tom Hunsaker, 2022

1. The 3 distinct forms of organisational change

i) enhancing the magnitude of the organisation's current strategy, ie 'doubling down' (as performing well on both purpose and relative advantage, need to be careful of

- complacency (happy with the status quo, ie no need to change; handle this by continually challenging the status quo)

- hubris (overconfidence in one's ability; mitigate by learning to listen to other key stakeholders, ie recognise the importance of the opinions)
"...the mapping task in this change context is to pursue excellence in reinforcing the current drivers of uniqueness, utility, and value as perceived by customers and other key stakeholders. The required mindset is that of rising to a challenge - framed either as a competitive threat or an innate commitment to excellence. Finally, the task of messaging is to maintain a focus on the ultimate priorities of the business rather than on concerns that are fleeting or disconnected from the company's core strategy..."
Tom Hunsaker et al, 2022

Apple is a good example of this
"... It has deliberately chosen to use itself as its competitive frame of reference, creating a constant challenge to enhance its already leading position through targeted and continuously deepening innovation and the integration of hardware, software, and services - without relying on large-scale acquisitions......the result has been the delivery of distinct and consistent value to expanding an engaged customer base..."
Tom Hunsaker et al, 2022

ii) reimagining the activities of pursuing a strategy (innovate new ways to the current destination so that the 
"...mindset is one of focused experimentation and targeted risk-taking. rather than radically re-inventing existing processes.......instead often looking to digitalisation, machine learning, and artificial intelligence to create more efficient methods.......the task of messaging is to emphasise the benefits that customers and other stakeholders will continue to enjoy if the methods of delivering these benefits are improved..."
Tom Hunsaker et al, 2022

Netflix is a good example of this
"...They have remained focused on a goal of convenient, personalised, immersive entertainment delivered without advertising, even as the technologies for achieving this goal have changed dramatically. By keeping employees focused on innovating on the means to the end rather than on the end in itself......has maintained a sense of stability even as the business has undergone significant transformations: in its mode of distribution, from mailing DVDs to streaming; in its core business, from a content distributor to both the creator and distributor of content; and in its implementation of 'glocal' (both global and local) model of content development..."
Tom Hunsaker et al, 2022

iii) shifting direction altogether (usually required if an organisation's purpose and relative advantage are ineffective, ie
"...the mapping task is to explain why a pivot is needed and how the purpose of the business must be redefined..."
Tom Hunsaker et al, 2022

Need to be careful that pressure does not drive up anxiety levels as this will hinder effective problem-solving and encourage status quo like behaviours. Need to have a mindset that is receptive to new ideas, ie promoting a sense of possibilities.

Lego is a good example of this.
"...the turnaround in Lego's fortune......is a masterclass on how to maintain a supportive environment even while making dramatic changes to the business - halving the number of bricks from 13,000 to 6,500, exiting the theme park business, and expanding into video games and movies - how the business engaged with its customers..."
Tom Hunsaker et al, 2022

(source: Tom Hunsaker et al, 2022)

NB
"...research indicates that enhancing magnitude (doubling down) is the right decision for the 20% of companies or business lines that perform strongly on both purpose and relative advantage; shifting direction (pivoting) is required for only those 15% of companies that perform poorly on both dimensions. For nearly 2/3 of companies, the change imperative is to reimagine the activities they use to pursue their strategy rather than reimagining the strategy itself..."
Tom Hunsaker et al, 2022

"...the attitudes and behaviours that are effective in one environment will not deliver the same outcome under different circumstances. The form of change sought......shapes how contextually effective leaders define and pursue the task of map, mindset, and message..."
Tom Hunsaker et al, 2022

2. Two Diagnostic Questions

Two questions to assess the nature, scale and timing of the change required in their specific context.

i) Is the strategy fit to purpose?
"...This question establishes whether the current or proposed strategy is valued by an attractive and accessible audience - measured by size of market, willingness to pay, and business model appropriateness - and the level of resourcing outlay required to scale strategy..."
Tom Hunsaker et al, 2020

ii) Can relative advantage be sustained?
"...This question assesses whether the current or proposed strategy delivers meaningful differentiation......to accessible audience - and the durability of the competitive advantage created by the difference..."
Tom Hunsaker et al, 2020

Use the above analysis
"...to chart the organisation's  position on the MAD (magnitude-activity-direction), change matrix (MCM) (see the graphic below), providing insight about whether change should take the form of magnitude, activity, or direction. For example, if the consensus reveals high fit to purpose and higher relative advantage, this points towards change in the form of enhanced magnitude within the current course. Having low fit to purpose and low relative advantage...... sounds the alarm for implementing a fundamental shift in direction, defining a new strategy on a new path. The remaining cells in the matrix help distinguish the appropriate response to a more nuanced combination of fit for purpose and relative advantage..."
Tom Hunsaker et al, 2020

Some examples

- 3M (there was increasing competition in one of its main markets as new entrants launched cheaper products. The initial proposal was a change of direction and potentially exiting the market; more research demonstrated that 3M enjoyed a strong fit to purpose and relative advantage.

"...Lower-cost entrants might undercut the company's pricing but their competitive offering was clearly inferior..."
Tom Hunsaker et al, 2020

Thus 3M increased the magnitude of its existing actions by focusing promotional efforts to better articulate its products' distinct advantages and to inform the market about the risks of using a lesser alternative. Furthermore 3M boosted the products' functional value without increasing the cost to customers.
"...This combination of education and promotion significantly enhance the value proposition perceived by 3M's customers, leading to further increases in market share, revenues,......profits..."
Tom Hunsaker et al, 2020

- Fujifilm (using its strategic thinking that allowed them to supplant Kodak as a leading provider of chemical films in the 1990s, to recognise that its core offering, ie digital cameras, was becoming commoditised with cameras of sufficient quality being integrated into smart phone. In an response, it
"...implemented a major reorganisation to support its diversification into industries such as pharmaceuticals and cosmetics while leveraging its reputation as an imaging company to become a provider of high-fidelity imaging for medical application..."
Tom Hunsaker et al, 2020

3. Strategy and Change

As environments are complex and dynamic, strategy is about adaptability. The traditional assumption that industry boundaries and economics are relatively stable is no longer realistic especially with disruption by digital technologies, pandemics, etc.. These turbulent times have caused the average age of companies in the S&P 500
"...to decline from more than 60 years in 1958 to less than 20 years today. This has reduced the relevance of tools such as GE/McKinsley matrix, BCG Growth-Share matrix, the diagnostic analysis which relies on relatively stable industry structures..."
Tom Hunsaker et al, 2020

Furthermore, the pressure of 'environmental, social and governance' (ESG) purpose on companies is making strategic development more complex (for more detail, see elsewhere in the Knowledge Base).
Thus strategy needs to evolve in 2 ways:

i) change focus from what is stable to what is changing (understanding what changes may neutralise traditional competitive advantages and give rise to new opportunities)

ii) engage with more stakeholders (broadening of the stakeholder base to be included the process of strategic planning)

To evaluate the relevance sustainability of your organisational strategy and to identify what form of strategic adaptation is appropriate:
"... - Magnitude: 'we need to strengthen our execution of the current path'
      - Activity: 'we need to adopt new ways of pursuing the current path'
      - Direction: 'we need to take a different path'..."
Tom Hunsaker et al, 2020

a) The MADStrat Matrix uses 2 perspectives to determine what change (magnitude, activity, or direction) is appropriate in a given context

i) fit to purpose (this
"...evaluates your market context and involves assessing the closeness of fit between your offering and the needs of your customers (both now and in the foreseeable future) and how your business model also delivers value for other stakeholders..."
Tom Hunsaker et al, 2020

Some questions to help understand this:
    - What are the outcomes that you enable your customers and your stakeholders to achieve?
    - What wider social value does your business generate?

NB Consider differentiation from the perspective of 'who are you different for'?

ii) relative advantage (this
"...Involves assessing your capabilities relative to alternatives, not just direct competitors..."
Tom Hunsaker et al, 2020

NB Considers differentiation from the perspective of 'how are your offerings valuably different from those of others'?

Need to consider factors that cause your product/service to be regarded as irreplaceable by changing magnitude, activity or direction.

(source: Tom Hunsaker et al, 2020)
"...does your situation call for a change in magnitude to deepen your existing strengths, a re-imagination of the activities involved in the design and delivery of your offerings, or a more fundamental shift of direction to establish a sustainable future for the business?..."
Tom Hunsaker et al, 2020

This can be done by self-assessment (see https://madstrat.com) and/or primary research with different stakeholders.
"...Once a company has established the nature of the change it should be considering, the task becomes that of identifying the actions that will be the most effective in improving a fit for purpose and/or the relative advantage..."
Tom Hunsaker et al, 2020.

Some examples of using the MADStat lens:

- Google's highly successful purchase of Android in 2005 and it's largely unsuccessful acquisition of Motorola in 2011

NB Mergers based on economies of scale are effective when seeking change in magnitude and where there are already high levels of fit for purpose and relative advantage, such as in InBev's merger with Anheuser-Busch in 2008 and Disney's acquisition of 21st Century Fox in 2019, ie having a high fit for purpose factor is a pre-requisite for effective cross selling.

- Kmart and Sears in 2004 should have implemented a change of activities like Walmart did in 2016 in its acquisition of Jet.com, ie more into digital.

- Traditional car-makers like Ford and GM are shifting to electric vehicles, etc as the current and future fit for purpose of their operation is threatened by changes in technology.

NB Diversification can be seen as a change of direction.

- GE's move into mortgages through GE Capital, which was an unsuccessful diversification.
"...the most successful businesses today are those that identify when and how to change to improve their strategic advantage..."
Tom Hunsaker et al, 2020

Some examples

- Amazon embracing physical retailing to complement its digital capacity and develop new business models.
- Pfizer leverage of its marketing and distribution capabilities by partnering with other drug development companies.

4. Stakeholders

Increasing focus on going beyond the needs of customers and investors to include employees, business partners and local communities as essential stakeholders that need to be meaningfully integrated. Sometimes all can benefit.
"...some strategies effectively expand the addressable market, a key indicator of fit to purpose, which we define as relevance sustainability of the company's value proposition. Other strategies primarily affect the company's competitive position of its relative advantage, defined its perceived distinctiveness and vulnerability substitution - by either enhancing its ability to command a premium price or reducing its cost base...."
Tom Hunsaker et al, 2021

"...Traditionally, strategy has been approached as an exercise about where to play (identifying industries with favourable economic structures) and how to win (identifying how to capture value by focusing on product leadership, operational excellence, or customer intimacy). The only stakeholders that have mattered were shareholding investors, as the providers of scarce financial capital, and customers as a source of revenue..."
Tom Hunsaker et al, 2021

In recent times, the traditional approach to strategy has been challenged owing to

- technology (it has blurred the boundaries between industries and eroded stable economic structure)

- finance is no longer the scarcest asset (increasing focus on customer retention, employee talent and intellectual property)

- multi-stakeholders (primacy of shareholders has been challenged by customers, community, staff, etc, ie viewing companies as social entities; they exist in multi-faceted economic environment and are engaged in value exchange with multiple categories of stakeholders; less emphasis on capital-based metrics like return on equity, return on capital, etc and increasing emphasis on customer-based metrics like lifetime value; this is sometimes called stakeholder, rather than shareholder, capitalism, ie
"...About replacing a linear, mechanical metaphor for business with a dynamic, biological one. Employees, partners, and communities are not commodity inputs to a financial model of essential participants in an adaptive economic eco-system......in commerce, the transfer of value between different stakeholder groups creates a vibrant sustainable business ecosystem..."
Tom Hunsaker et al, 2021

With more stakeholders, there is a need for more varied strategies.

Some of the stakeholders that need to be considered include

- investors, eg shareholders

- customers, eg internal and external

- employees, ie staff

- partners, eg upstream (suppliers) and downstream (distributors)

- communities, eg public, bureaucrats, etc.

a) Value creation with employees

Build the business models around delivering a memorable customer experience; staff are the key to this
"...research......highlights the impact of employee engagement on business outcomes such as productivity, customer retention, and profitability. Companies across industries have modified their talent management approaches in light of the role that employees' knowledge, relationships, and credibility play in value creation..."
Tom Hunsaker et al, 2021.

Many industries have changed from a 'dog eat dog'; mentality to adopting talent-centric approach as used by the tech companies.

This has resulted in

i) increased focus on metrics that include measures of employee engagement as well as traditional customer-and capital-based metrics

ii) being recognised as 'employer of choice' has the same status as 'most-admired' or 'fastest-growing' organisation

iii) providing better work-life balance and reducing burnout, which has improved productivity.

Some examples of leaders recognising employees as a pivotal part of the overall value equation

- Bill Marriot (Marriot hotels)

- Herb Kelleher (South-west airlines)

- Jim Sinegal (Costco)

b) Value creation with upstream partners

Increasing complexity and handling of key supply change management, especially during the pandemic.
"...leading retailers understand that their appeal to shoppers is based on a combination of predictability and surprise. Costco classifies 75% of its product range as 'triggers', essential items that Costco members know they need, and 25 as 'treasures', discretionary items that delight members based on their quality and price..."
Tom Hunsaker et al, 2021

Another example is Pfizer, with its 'build-buy-partner' strategy of
"...partnering with other drug developers and offering them access to its trade development and commercialisation capabilities and reimbursing much of the development costs......accelerated these partners' growth while also enabling Pfizer's access to new drug pipelines..."
Tom Hunsaker et al, 2021

c) Value creation with downstream partners

"...To increase the lifetime value of customers, manufacturers must evolve simply selling products to customers through the distributor to providing solutions to the customer by leveraging distributors experience and insight..."
Tom Hunsaker et al, 2021

Gone are the days when the right financial incentive commission payments and market development funds was a basis of the relationship. It is now a value-creating relationship that requires more collaboration and nuance.

Some examples

- Apple, Alphabet/Google, etc (these leading technology companies that invest
"...in community platforms provide opportunities for developers, distributors, and end users to collaborate, co-create and specialise. Rather than eliminating or limiting their distributors' roles, tech companies have provided support services, online forums, and marketing tools to help those distributors evolve into partners that add value to the overall end-user experience..."
Tom Hunsaker et al, 2021