Strategy used to be about protecting existing competitive advantage. Today, it is about finding the next advantage. In fact, strategy starts to decay the day it is created. That’s why corporations must develop strategies that address tomorrow’s business realities. Actions that companies take belong in one ofthree boxes: Box 1 = managing the present, Box 2 = selectively abandoning the past, and Box 3 = creating the future. Box 1 is about improving current businesses; Boxes 2 and 3 are about innovation, breakout performance, and growth. Many organizations restrict their strategic thinking to Box 1, as leaders emphasize cost reduction and margin improvement in their current businesses. But strategy cannotbe just about what an organization needs to do to secure profits in the short term. Strategy must include Boxes 2 and 3; it must be about what a company needs to do to sustain leadership in the long term. Dell’s direct model in the PC industry, Wal-Mart’s transformation of the discount retailing industry, and Southwest Airlines’ revolution in the airline industry provide good examples of successfulBox 2 and Box 3 initiatives. Industries transform and change as a result of nonlinear shifts in technology and customer discontinuities. For instance, nanotechnology and genetic engineering are revolutionizing the semiconductor and pharmaceutical industries. Globalization is opening doors to emerging economies, most notably India and China, and billions of customers with vast unmet needs.Once-distinct industries, such as mass-media
entertainment, telephony, and computing, are converging. Rapidly escalating concerns about security and the environment are creating unforeseen markets. Other, more subtle changes are important as well, such as the trend toward more empowered customers, the rising middle class in the developing world, and the aging population in the developed world.As a result of these forces, companies find their strategies require almost constant reinvention because old assumptions are no longer valid, the previous strategy has been imitated and commoditized by competitors, or changes in the industry environment offer unanticipated opportunities. The only way to stay ahead is to innovate. It is the responsibility of executives to make money with the currentstrategy. That is the challenge in Box 1. It is also their responsibility to make up for the decay and commoditization of strategy. That is the challenge in Boxes 2 and 3, but too many companies ignore these boxes until it is too late. An effective illustration of nonlinear change is the history of the high-jump event at the Olympics (Exhibit 1). There have been four distinct “business models” inthe high jump. Each has enabled athletes to achieve breakout performance. Early on, the “scissors” style dominated. (It was much like hurdling.) Because all high jumpers used the scissors approach, winning depended upon being the best at that technique. The high jumpers were operating in Box 1. Had they been businesspeople, they would have been competing on cost, market share, and margins.Someone changed the rules of the game one day by inventing the “western roll.” (High jumpers launched and landed on the same foot and kept their backs to the bar.) The western roll was the style for 25 years until someone changed the rules again, introducing
the “straddle,” a.k.a. the “eastern roll.” (High jumpers launched and landed on opposite feet and faced the bar.) In the 1968 Olympics,former gymnast Dick Fosbury broke the Olympic record by three inches, creating a third, discontinuous change. (The “Fosbury flop” involved a straight approach, jumping with both feet and twisting the body 180 degrees, like a gymnast, looking away from the bar.) These nonlinear shifts exemplify Box 3 thinking. Each transformed the high-jump “industry.” In each case, the inventive high jumpers were...