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Michael Raynor on Strategy RAP Model BCE Case Study · The Innovation Show

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Marshall McLuhan once wrote, we look at the present through a rear view mirror,
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we march backwards into the future.
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Mark Twain, purportedly said, history does not repeat, but it often rhymes.
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The challenge for leaders is not in recognizing the rhyme afterwards, but
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in hearing it while it's still faint.
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That is why today's episode amidst all the others within the resource
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allocation process is so relevant.
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Up until now in the book from resource allocation to strategy, there are several
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Approaches that businesses employ when dealing with disruptive technology.
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One bottom up processes like engineers following established rules like
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revenue per square inch at Intel, which redirected the company's strategy
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from DRAM to semiconductor chips.
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Two.
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Customer capture of the resource allocation process where your top
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customers heavily influence your strategy with sustaining innovations.
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Three.
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In some cases we have CEO or top-down intervention redirecting
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resource allocation, as we'll see in today's episode.
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And four, further examples include setting up a separate unit and a separate
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context, which protects that unit from capital market metrics of success, and
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indeed existing customer influences on the resource allocation process.
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Today's guest argues that diversified corporations create advantage not by
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sharing resources across divisions, but by strategic integration.
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Recombining assets from multiple divisions to pursue new opportunities
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because divisional incentives, risk and uncertainty block this.
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Top down intervention often the CEO is absolutely essential.
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He covered a case study of BCE and examined decisions about major capital
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expenditures in a turbulent environment.
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He showed how a real options approach to resource allocation
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preserved BCE E'S flexibility to exploit future strategic integration
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opportunities without Overinvesting.
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It is a pleasure to welcome back, author of all these books behind me, the three
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Rules, the Strategy Paradox, Innovators Solution with Clayton Christensen,
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and Indeed the Innovator's Manifesto, and of course, today's focus, his
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friend, his mentor, Joe Bower, and the resource allocation to strategy book
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that we've been covering on the show.
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It's a pleasure to welcome back Michael Raynor.
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Welcome to the show.
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It's great to be here.
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it's been a long time.
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Last time we spoke was we were talking about another one of your mentors, which
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was your co-author, clay Christensen.
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But I thought we'd share a little bit about your relationship with Joe, Seen as
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we're here to recognize and celebrate his contribution to their strategy literature.
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Yeah.
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Joe was the, chair of my thesis committee.
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So I started the doctoral program and the DBA program at the HBS
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in, I'll say late last century.
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So back in the late nineties.
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And and sat in my little cubicle just up the hall from Joe's office.
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And and he was characteristically supportive and helpful.
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And quite happy to say in my own small way, I'm, part of that legacy.
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It was interesting.
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We were talking to him over the time and Clark Gilbert was saying, for example,
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he helped create so many people who were brilliant contributors to the strategy
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literature, which you have come to become with those books behind me as well.
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But you were so lucky to be chosen by him.
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He was saying that those people who were chosen, those people who were
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in the book, have gone on to be very well recognized in strategic work.
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I think that's true.
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And and as I reflect on it, , maybe it was maybe it was evil genius on Joe's part.
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I don't know, but I never got the impression that there was any
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pressure or effort or need to stick haKyndryle or cattle shoot with
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doctoral students or the people we work with into a particular approach.
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I think that, and that's probably born on the fact that even then, 30 years ago, um,
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Joe was Joe was already well established and wasn't in any hurry to somehow hijack
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or co-op other people to build his legacy.
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He wanted to see people to work that they wanted to do and
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that they would find rewarding.
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And again, it, I can only tell you what it felt like to me, right?
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Is that if you found your way into that into that tradition then that was not
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something that he was actively promoting.
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But if you landed there, he was more than happy to to support you
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and to try and help you make as as meaningful contribution as you could.
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One of the things he said was that he picked people who were willing
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to do the work and willing to go after something and I thought, maybe
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we'll share yours 'cause you went after specific areas that you could.
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shine with your thesis and actually go and do the work
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and understand these companies.
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Let's share a little bit about that because it'll help
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us set up today's episode.
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I decided to go pursue doctoral studies with a particular area in mind.
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So when I got started in consulting and finished business school in
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the early nineties, that was the, that's been the, the dawn of the
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internet and kind of convergence 1.0.
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The whole notion is that phone companies and cable companies were
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all converging on the same space from very different starting points.
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That the future that we have now is the future we envisioned then that we thought
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we would have by 2003, but didn't show up until about six months ago, right?
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Where in keeping with the notion that we underestimate change in the long
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run, but overestimated in the short run.
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And so I was keen to get my arms around these.
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Relatively tactical question of how the media, entertainment, telecommunication
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space was all becoming one big airball.
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And then
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like any good doctoral program, I suppose is supposed to do, I was stepped
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back, tried to get grounded as well as I could in the, what was already known
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about strategy and organization, and then came to see that same problem as a
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specific instance of a larger phenomenon.
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So in the end, I ended up looking at exactly the companies I had hoped
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to look at, and DCE, big diversified Canadian telecoms company, a much bigger
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deal 30 years ago than it is today.
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But and looked at them through that lens and and developed what I hope
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is a set of tools that shed light on a much broader range of problems
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that are relevant even today.
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You say in the chapter at the start, it's beyond the scope of that chapter to
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rehearse the RAP model in its entirety.
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But I'd love you to give us your definition of it, or at least your
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definition as it came to light for BCEB.
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'cause it's really useful to see the different lenses and the
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different descriptions of OAP.
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Yeah.
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Well, I mean the, the book that you're, that you're focusing on is,
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and you, you will have mentioned this in other discussions, I'm sure.
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Right?
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So it's a synthesis of the number of threads of research that have emanated
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from or converged upon Bowers resource resource allocation process model.
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And that model, as I think of it essentially describes how strategy's
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actually formulated over time.
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So this goes back to the mid sixties when Joe did this work.
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What I find amazing is that it seems to me to be a fully accurate description
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of how it happens even today.
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We don't have to tear it up and start over.
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It's only the rhetoric that tells us the world is completely different.
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And so it's a description of how companies generate and improve
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project level initiative, right?
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Your strategy is what you spend your money.
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And so the RAP model describes how companies spend their money on
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one in some things and not others.
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And to my view, that's really the essence of good strategy, right?
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You've heard people say, strategy is what we don't do, right?
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Being focused means being clear about what doesn't happen.
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And what the RAP model describes is how in well-functioning companies,
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they systematically don't do the things that aren't consistent
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with their strategy, right?
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Mechanisms of the resource allocation process are not a bug, it's a feature.
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Okay.
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It's how companies stay focused on the markets they hope to serve.
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But then the subsequent work is about two things.
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I think.
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One is how do companies change strategy when they need to and how
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do they innovate when they need to, And that's different, right?
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Because organizations necessarily put in place constraints.
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That's what the RAP model is.
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But it says that you've got corporate context, you've got product
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market context, and customer, all these things that put you in a
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box, but that's not a bad thing.
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You put in place those constraints so that the organization doesn't have buck
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fever and just shoot anything that moves.
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'cause that's its own form of pathology.
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So management is about placing constraints on the opportunities that people pursue.
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Without them, the organization would just dissipate.
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But the problem with constraints is that sometimes you need to break them.
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And so the research in resource allocation anthology, I think describes two things.
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It says sometimes those constraints do in fact prove pathological and in two ways.
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One is they may actually, um, prevent you from, for example, getting
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outta businesses that are no longer,
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it prevents you from seeing threats to your existing business, and it
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prevents you from pursuing opportunities that you otherwise shouldn't.
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And so the question becomes what kinds of overrides, what kinds of compensating
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mechanisms can you put in place?
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And this is the part that is still taking shape in my own head, is how
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systematic can you be about that.
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Right?.
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Is there a process for changing?
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Is there a metaprocess?
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There's the resource allocation process, and then there's the process
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for changing the resource allocation.
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We, we will, we'll dispense with the third order, the third
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order change process for now.
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But that's, that's, I suppose that's how I see the arc of, of that work.
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And one of the things, and this will tee us up for when we talk about BCE, which
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is the core case study of this chapter, is managers chase local wins that make
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them look good, and not just to the company, but actually to their peers.
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Even if it means missing bigger wins for the company because they're so far
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removed because of those compar, because of that com compartmentalization that's
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happened in the company, that they're charge, they're in charge of that
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compartment and not the overall container.
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Yeah.
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And that's, that's not something you can fix, right?
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I mean, it, it's easy to hear what you've just described, which
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I think is correct and conclude that somehow it's a self-serving
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pathology of small-minded managers.
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I don't think that's true.
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I think that people respond to the incentives that have put in place.
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They cannot be expected to understand or know what all the larger order
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trade offs and, and objectives are.
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I mean, if that could actually work, then the only thing we need
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to do is give everybody stock options and job done, right?
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But it doesn't work that way.
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The world's too complicated.
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So we give people specific objectives that are tailored to the decision rights
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that they have been allocated, that are appropriate to the the magnitude and scope
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of opportunities that they can see, right?
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They have a budget limit.
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They can spend up to x million dollars without approval.
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They have to deliver a given return on investment.
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They have certain metrics beyond just ROI, things like gross margin, right?
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We, we do all of that because those are things you can actually see the connection
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between what you do and share price.
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I mean, good luck with that.
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And the problem, the unavoidable problem is that every set of, of
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incentives that you specify is always going to be underspecified.
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You can't fix that, right?
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And so you put in place the best system you've got and, and the art of management
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is constantly tinkering with the incentive structures and the organization
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spreads why people go through reorgs.
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So you figure about reporting structures and it set and you change those things
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to adapt the constraints to what you're actually trying to accomplish
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as a company, that's fine, right?
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But what then the higher order problem is what happens when you
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simply can't tinker at the margins and it requires a much more.
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Directed and significant reconfiguration of those constraints, right?
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So that the risk of going on a little too long here, if we look
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at disruptive innovation, right?
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You've got a situation where Clay's prescription is, look, I I need a
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whole new organizational, right?
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I need to fit the constraints to the new opportunity and context.
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I can't, I can't do that within this existing set of structures because
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by the way, this existing company's got its own things to do that are
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still worth doing, and I can't be all blue and all red at the same time.
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Right?
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So that's how I think about that, hierarchy of, changing versus
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fundamentally reshaping, remaking the constraints that that drive.
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We'll share a little bit about that when we talk about EMERGIS, which
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was this emerging element of BCE.
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But you just to again, give the front loading of some of the lenses
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through which to see this episode, you, you share that there's at least
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two types of risk that, uh, are.
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Leaders are confronted with or managers are confronted with.
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The first is execution risk.
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And then secondly, in at least some circumstance, you say, which
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resources should be , recombined, and in what ways and when, and all that
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can be subject to real uncertainty.
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And those two real risks, confronting managers freeze them or make them
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decide not to actually back or put up resources towards an opportunity.
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Yeah, I think that's right.
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I mean, I, I referred to it as strategic risk or strategic uncertainty, right?
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So in the case of the BCE a Canadian telecom company, years ago.
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They were faced with a reconfiguration of the landscape.
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They had been for a long time in a regulated land telecom company, and
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suddenly they were faced with satellite TV and the need to have content and
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mobile telephony and internet access.
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And they, and so the issue is no longer how do we compete as a telco, but
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what is the industry that we're in?
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And so I referred to that as Strategic uncertainty.
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And the problem was that a company that had a fairly finely tuned set of
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resource allocation processes, were unfortunately finely tuned for an
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industry that was, I'll say dissolving.
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Um, but what you need to go do instead is unclear.
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And so we have , the intel example with gelman and the shift, as you
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mentioned in your opening, comments, the shift from from memory to processors.
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What they needed to be was already evident because for crying out loud
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processors were 50% of their revenue.
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When they finally decided, Hey, you know what?
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Maybe we should be a, maybe we should be a processor.
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That's its own kind of problem, right?
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But it is very different than the problem of we look at the landline
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telephone business and think this has got a best before day, but we don't know
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what we need to transform into, right?
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We haven't already become a 50% some other kind of company, and now what we need to
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do is formalize what we've already become and do on purpose instead of by accident.
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No different problem entirely.
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That's what call strategic uncertainty as opposed to navigating strategic change
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One of the things that I found really useful is you compare the risks that
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a divisional manager might face versus the opportunities from a leader because
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they can see from an overall perspective and you say, for example, managers
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will skip opportunities because they lack information, they lack motivation.
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They see higher risks and they face strategic uncertainty.
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And in short, , they have weak incentives, high personal risk and uncertain
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payoff, which all discourage them.
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But from the perspective of the RAP framework, CEOs or leaders from a
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high level have huge opportunities because of the way they see things.
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I'd love you to just juxtapose those two views and see why sometimes it
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takes the CEO or the leader stepping in to make these decisions just to
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override any kind of divisional barriers.
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I think you already, I think you've actually laid it out , reasonably,
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completely already, right?
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Which is that, if the essence of organization is differentiation
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and integration, right?
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I mean, we've got a lot of stuff to do.
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We've got a lot of different decisions to make.
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So in order to create coherent collective action, we have to
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divide up the labor, right?
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But then we have to make sure that everybody's doing their piece in
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a way that knits back together to achieve our collective end, right?
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So We differentiate by giving by creating different functions, different
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layers in the hierarchy and different incentives to go with each, right?
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So everybody knows what to focus on.
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So you give the guess what, you give the sales force a sales
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target, shockingly, right?
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You give the operations department a productivity target,
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there's no surprise there.
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But then how do you make sure that that those now differentiated efforts
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are all rowing in the same direction?
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And that's where the constraints come in, right?
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So you will say things like, yes, you have a sales target subject
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to a profitability constraint.
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Yes.
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You have a production target subject to a cost constraint.
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And and in, and that's what, that's the heart of management.
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I do.
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So when you have middle managers that are looking at over a specific
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time horizon, because by the way, that's what you gave me.
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Certain things will look like a bad idea that from a different
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perspective look like a good idea.
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And that's okay if not everybody has to agree.
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provided, it's clear who gets to make the call.
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And so you can have senior management kind of burning thunderbolts from Mount
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Olympus saying, Hey, wait a minute.
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We need to be in the IT consulting business.
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We need to be in the satellite TV business.
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That's not something anybody in the phone business is gonna propose.
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That's okay.
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You want the phone, the folks running the phone business,
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they're running the phone business.
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And so they, they make those portfolio level decision because they've
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got a different set of constraints and incentives and that's okay.
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I'd love if you gave us a bit of the context of the time.
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The way.
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I started off today's episode is to go, don't look at this as a history lesson.
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Look at it as a template for the exact same pattern that you're
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seeing today with any industry.
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But maybe the technologies have changed or the regulation have changed.
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And I loved how you phrased this.
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You said that at the time telcos were caught between Scylla and Charybdis of
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technology and regulatory uncertainty.
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So they were in this rock and a hard place.
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That was the kind of context, but maybe you'd share some of the technological
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changes that were happening at the time, some of the trends that they were seeing
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and some of the stuff they got wrong.
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Yeah, fairly tactically, right?
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They, this was when the home based internet was relatively new.
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Most people were still on dial up.
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But it, I mean.
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That's a technology that's several layers dead now, right?
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And dial up phones for insight.
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And it was it was clear that that was not going to be the way of the future, right?
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Everybody understood that more bandwidth was the thing that was
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going to drive adoption and be a pretty thorough going change.
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Um, but the question is how do you get it?
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So you had the cable companies with their coax infrastructure that
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was inherently broader bandwidth.
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But because it was a network infrastructure was subject to
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congestions, then you had the phone companies with their narrower bandwidth.
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But because it switched, you had basically what amounted to a dedicated line.
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So there was fundamental trade-offs between the two existing infrastructure.
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And they each were thinking about how they migrated to a technological platform
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that broke that trade off, that gave people both bandwidth and no congestion.
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And what that would look like for both, it became fiber optics and
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I think people really knew that.
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But we, dealing with investment requirements measured in the billions of
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dollars back then in the Canadian market plus, oh, and by the way, you're worried
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about wireless technology and video distribution and the rise of I, oh my God.
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So it was this whole portfolio of technologies that they were wrestling
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and that's what made it such a challenge.
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You kind of knew what the outlines of the end state are gonna look like, but how
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you got from here to there and how fast and it, what costs, I mean there , getting
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to that end state requires surviving every intermediate state along the way.
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That was, and that was the challenge.
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All right.
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I'm gonna set you up maybe to tell us a bit about BCE and challenges they faced.
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I'll give the history piece to save you the high.
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I'm quoting from the book here.
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The largest telco service provider in Canada at the time was BCE began as Bell
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Telephone Company of Canada, formed by an act of Canadian parliament in 1880.
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The company's first wave of diversification began over a
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century later in 1983 when then CEO.
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Jean, de Grandpré restructured the company creating Bell Canada Enterprises, or BCEA
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holding company so that management could pursue growth opportunities outside the
23:22
boundaries defined by the original act.
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Only Bell Canada, the division responsible for legacy phone company operations,
23:30
continued to be bound by those obligations 1983 and 1990 BCE undertook a series of
23:38
initiatives that turned out to be a failed exercise in unrelated diversification.
23:44
So maybe I'll hand you the baton at that
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Yeah.
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to, to tell us , how did it unfold, and then we'll compare that to a second
23:52
period of diversification in 1995.
23:55
Right.
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So , the, if you will, the national experiment, there was that BCE was stuck
24:00
in a low growth regulated business, So , the landline telephony services
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in Canada have reached a point where you're basically gonna grow at, you'll
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have new lines at the rate of population growth, and you'll be allowed to charge,
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you can charge for them, whatever the regulator says you can, right?
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So you're a pawn, right?
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You become, you are a public utility and know that's not an
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insult, that's just a description.
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And the management thought, wait a minute.
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We want to be a growth company.
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That's risk of stating the obvious.
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That's our higher order economic model.
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That's what we're built of.
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The whole point is to grow and increase profits and profitability.
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So if you're in a regulated utility business, you can't do that.
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Degrandpré's 'effort was to put put Bell Canada in a box and that would
24:53
give the company the opportunity to raise capital separately to go pursue
24:57
growth opportunities elsewhere.
24:58
So they did things like telecommunications, consulting
25:01
and infrastructure in Saudi Arabia and a couple of other places.
25:05
So countries that were building out their own phone infrastructure, they
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thought, well, we've done that before.
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Why don't , we help other countries do that as well.
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And so they got into a number of other businesses, real estate, financial
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services, bunch of other things.
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And what they found out is what a lot of companies tend to find out is that
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if you go and decide that you are going to get into a business where there
25:25
are a lot of other well-established companies whose bread and butter depends
25:30
critically on defending that ground, you're probably not gonna do very well.
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What is for you, a growth opportunity is for them their lunch.
25:41
Right?
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And so, especially in things like financial services in Canada, you're
25:45
gonna pick and fight with the Royal Bank in Canada and the Canadian
25:48
Imperial Bank of Commerce and the bank in Nova Scotia in front.
25:52
Those folks have been around longer than you have in their business.
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You'll do no better in banking than they could do in telecoms, sweetheart.
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And, that's what they, so they broke their pick in a way that a lot of
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companies end up breaking their, there they had no particular competitive
26:05
advantage, no particular core resource that they could leverage.
26:09
No particular skill that they had nothing.
26:12
And so, perhaps not surprisingly, that turned out poorly.
26:17
that's different.
26:18
I think fundamentally different in, kind different in kind on degree
26:22
from the diversification that they started pursuing in the nineties.
26:26
'cause there they were faced with undefined and wide open spaces.
26:31
There were no.
26:32
It was a relatively new space.
26:34
There.
26:34
There were other companies that also wanted to compete for this new land.
26:39
But there was nobody really established.
26:42
It's almost as though, the Hawaiian islands suddenly emerged in the
26:45
middle of the Pacific, and it's a bit of a land grab for this new space.
26:49
Nobody's really too sure how you compete for it.
26:53
What you do know is you can't compete for it because what you've got is
26:56
your in your quiver right there.
26:59
And so the diversification that they pursued was driven by a
27:03
desire to assemble the conflict of resources that they might need.
27:07
You said there was two important differences between this diversification
27:12
initiative and DeGrandpré's First was that each of the investments , was
27:17
operationally separate from the core telephony business, the potential for
27:21
meaningful synergies at some point in the future, featured prominently
27:25
in the company's stated strategy.
27:27
And second, each investment took the form of a partial ownership stake
27:31
rather than out outright acquisition.
27:34
They were vastly different ways of seeing these bets that they made,
27:39
as well as what you said, putting it on emerging opportunities.
27:43
Yeah, no, I think that's right.
27:44
And sometimes you do the right thing for the wrong reason, you know, which is that
27:47
they, they understood if we're going to compete in broadband infrastructure and
27:52
the content space, we can't do that with what we have in the Armory right now.
27:57
So they needed to acquire the assets that could potentially be recombined.
28:02
When and in what way?
28:03
We're not sure.
28:05
Okay, fair enough.
28:06
So, to your point, they then went out and many of these investments
28:10
were partial equity stakes.
28:11
As a practical matter at the time, it was largely a function
28:14
of the fact that they just didn't have a big enough bank account.
28:17
To go buy these things over.
28:22
But what that meant is that they actually were able to be much more
28:26
capital efficient and to calibrate their investment to the level of
28:29
certainty they had with respect to the value of a, of an asset.
28:34
And its, and its synergy value in the front now.
28:38
And it's and even from a financial theory perspective, I if that works.
28:42
Because what it means is that if I buy a partial equity stake in a mobile telephony
28:47
company, which is what they do BCE mobile, then they they don't have to lay out all
28:55
the cash up front and not faced with all the risks associated with having done.
28:59
And it should turn out that integrating mobility with landline services does in
29:05
fact create significant synergy value.
29:08
Then they will have a differential value from which to bid
29:12
for the outstanding equity.
29:14
Right.
29:14
So they're no longer just stuck with a winner's curse, overpaying for an asset.
29:18
'cause they have no particular advantage.
29:21
It's actually literally worth more to them than it is to anybody else.
29:25
So they can afford to buy out and give the other of the other equity holders
29:30
their reserve price and still have economic profit to capture for themselves.
29:34
I love how you, you say this, this idea of real options,
29:38
but also that they, they can.
29:40
Easily turn off an investment because they're seeing the inside view, because
29:45
they have a board position, for example.
29:48
Yeah.
29:48
They have an inside view and they also have an inside view of the assets that
29:53
they're looking to combine it with, right?
29:56
So they have the requisite decision rights to to integrate to exercise
30:02
the option, if you will, and when that option is in the money.
30:08
Again to repeat myself.
30:09
It's more valuable to them than it is to anybody else, and so in exercising
30:13
the option, they will not be forced to give away all of the upside.
30:17
They can exceed the other equity holders reserve price and still
30:20
have access for themselves.
30:22
you inform us in this chapter, there's a
30:25
I.
30:26
asymmetry here that favors the person who's putting the option in.
30:30
let's bring it to life because you bring it to life for
30:32
four great examples in here.
30:35
The first is the wireless integration, and I'll tee you up again.
30:39
You wrote that, in 1984, BCE Mobile.
30:43
Or just mobile was launched as a part of bce E'S first diversification push,
30:48
and , was a wholly owned subsidiary.
30:51
Given the novelty of wireless communications at the time, this is
30:54
important to cast yourself back there.
30:56
Entering the wireless telephony industry via acquisition was not feasible,
31:02
and so the creation of this division is an example of organic growth.
31:06
I'd love you to pick us up from there and bring us through this mini case
31:11
study within the bigger chapter.
31:13
Yeah, sure.
31:14
So I distinguished I came to distinguish result only between
31:17
growth options, and strategic options.
31:20
And so you can look at BCE Mobile, the mobile telephony business
31:24
initially as just a growth option.
31:25
We gonna get into a business and because we think there's a growth
31:28
opportunity there, we believe two things.
31:31
First of all back to my Hawaiian Islands analogy, it's relatively new
31:37
technology, so it's not as though there's some entrenched incumbent
31:40
that we're going to have to displace.
31:42
This is not BCE enterprises getting in financial services in 1984.
31:47
This is wide open spaces in the mobile telephony business.
31:52
Second, the risk of stating the obvious, it's the mobile telephony business.
31:56
So they probably know a thing or two about what it means to
31:59
put up a telephony network.
32:01
Even if so, to the extent that the technologies are new, they're new
32:05
to everybody, to the extent that technologies have any any similarities
32:10
or anything you can leverage with the existing telephony networks.
32:14
BCD has a privileged position, so perfectly reasonable business to get into.
32:20
Don't think anybody sees that as a particularly controversial claim.
32:24
What emerged was the notion that, Hey, wait a minute.
32:27
This actually could have important strategic synergies with other
32:31
forms of telecommunication services.
32:34
Once the internet comes along, people immediately see, well, you
32:37
can get the internet on your laptop.
32:39
Why can't you get the internet on your phone?
32:41
We don't know how to do it yet, but it's pretty easy to see that.
32:44
That's certainly a possibility, right?
32:46
Hence the need for an option.
32:48
Then they ran into a situation that are just capital constraints, right?
32:51
Building up the network, being a successful mobile collecting company
32:55
required a bunch of capital and it made sense to to spin that off
33:01
in order to compete successfully as a mobile telephony business.
33:06
But you hang onto enough of the equity that you still have the option for
33:10
subsequent integration when and as that becomes the right thing to do.
33:15
And so, as I mentioned a moment ago, right?
33:17
We can do the right thing for the wrong reason.
33:19
They spun it off 'cause they had to, and given their druthers,
33:22
they would've rather not.
33:25
But they had no choice.
33:26
But then they had foresight to say, well, given that, this is what we have to do.
33:30
We still see the future potential, and so we want to make sure that
33:34
we preserve that option value, and so we'll do so in the following.
33:38
you mentioned Clay, and again, as a reminder, Michael co-authored the
33:42
innovator's solution with Clay as well.
33:44
But the idea of measuring these different entities differently 'cause
33:49
they've different cost structures.
33:51
So you say here again with the caveat here, that the technology
33:55
and market convergence has rapidly eroded since Michael wrote this.
34:00
But you said in the ensuing decade, which was 1987.
34:04
1997, the two companies, bell and Mobile operated entirely independently of each
34:09
other and with good reason because the wireless and wire line businesses had
34:14
different technological infrastructures, cost models, and market and competitive
34:18
dynamics, and were in different places in their respective life cycles.
34:23
I thought that was a key line and is agnostic to any industry because if
34:28
you're in investing in the Hawaiian islands that have disappeared versus the
34:33
mainland, gonna be very, very different.
34:36
And particularly the revenue streams and the metrics of success
34:40
are gonna be very different.
34:41
This is a bigger lesson, I suppose, beyond this chapter, but I'd love
34:45
you to share your view on it.
34:48
Speaks to each organization's respective resource allocation process, right?
34:53
You want them to have very different corporate context.
34:58
You want them to have a very different strategic context.
35:00
You want them to have a different initiation phase, or you want
35:03
them to pursue different plan.
35:05
'cause they have different strategy.
35:08
They the constraints that you impose upon them are very different
35:13
for reasons we've just discussed.
35:15
Um, my point around strategic flexibility is that there comes a
35:19
point where they become complimentary assets and you need to integrate.
35:23
Those constraints in those contexts in order to pursue the new opportunity.
35:28
And You cannot build a system that does two completely different
35:34
things at the same time, right?
35:36
So you have the system that's exploiting, you have the system that's exploring if
35:40
you will, um, and at some point you need to flip from one to the other, right?
35:44
So good old fashioned variation, selection, retention, and creating
35:49
those options is how you create the variation and the selection
35:54
processes within companies.
35:56
That's the resource allocation process and the selection process around
36:00
how you actually integrate them.
36:01
Well, that's sits up with, at the corporate level, again, for reasons
36:04
we've discussed, and we have to separate those decision rights.
36:08
One of the challenges then later on that you, you may have grown them
36:11
separately, but then comes a point where you need to strategically integrate
36:15
them and you say, some of the challenges here were, for example, one of the
36:20
first opportunities for Synergy was in the retail distribution business.
36:24
I'd love you to take us through this, both what happened, but
36:27
also the challenges that happened mainly at a divisional level.
36:31
where I ended up going with the options thinking is that you have to keep
36:35
these divisions on a leash, right?
36:37
So it's one thing to say, you know, let them go off and maximize
36:41
their growth and profitability.
36:42
If you really do want to be able to stitch them back together at some point
36:47
it's possible to diverge too much.
36:49
Right?
36:49
If you think about, I don't know, I'm stuck in evolutionary metaphor.
36:53
If you think about Allopatric speciation, right?
36:55
Two species are separated by space and they evolve along different trajectories.
37:00
And then if members of those two different subspecies meet up again, well,
37:03
they can't reproduce anymore, right?
37:05
They've just, they've gone off in different directions for too long.
37:09
So you have to kind of keep them close enough that you can
37:12
in fact put them back together.
37:15
And I think the retail distribution case reveals what happens when the
37:21
differences are simply too great.
37:24
You know, people who come in to buy mobile phones versus people that have complaints
37:27
about their landline voicemail service.
37:29
Again, these are technologies that some people have never even listen,
37:32
we just may have never experienced.
37:34
Um, they are simply so different that on its face it looks like, well,
37:39
let's just leverage the sales force.
37:41
But then it turns out in reality, but that's not the that's not the option.
37:45
You thought it was.
37:46
That option's not actually in the money.
37:48
You were talking about options, so taking options or investing in certain companies.
37:53
sometimes, and I'm sure this rings through for so many people listening
37:57
to the show maybe who are involved in this, that decision making becomes
38:02
very, very difficult because decisions had to be made twice often by each
38:07
organization's management team or their board of directors, and to get around
38:12
this, BCE bought back as outstanding equity in mobile, for example, for
38:17
1.6 billion Canadian dollars, a 31% premium to BCE's mobile market price.
38:23
One month prior to the deal, and was to accelerate decision making that
38:29
they felt that it was worth that margin to speed up that decision making.
38:33
Yeah, so they gave themselves the governance rights.
38:36
They, so they, they, they purchased the governance rights
38:39
from the existing equity holders.
38:41
And and in addition, right, very often you have to override the
38:46
existing the existing incentive structures for managers as well, right?
38:53
So you can buy it.
38:54
The other shareholders, you can pay them their reserve price as that, as we
38:57
were talking about a few minutes ago.
38:59
The argument is yes, you can give them their 30% premium, but it's
39:02
worth, you know, some material amount more than that to you because of
39:07
the synergies that you can capture that would otherwise be unavailable.
39:11
So that's what makes it a good deal for your share.
39:14
In addition, right, you're gonna have constraints systems in place
39:17
for the folks who are operating these businesses, and you may not actually
39:21
want to change all of those incentive structures in order to get the
39:26
organization to do what you want it to do.
39:28
Instead, it becomes a one time override.
39:31
Say, no, no, no.
39:33
I want this.
39:33
We want this to happen.
39:35
I'll, I will insulate you from the impact it would have on your established
39:39
KPIs and your compensation, right?
39:42
Because I want this to happen, but I don't want all the misery that comes
39:45
with having to try and figure out how to completely reconfigure every
39:49
aspect of the incentive structure.
39:50
That's crazy.
39:51
The incentive structure actually works pretty well, right?
39:55
I just need to smash these things together for now, and for the next
39:59
six months I want to play according to these rule and it'll go back, right?
40:04
And so it's those, those individual overrides just to rearrange the
40:08
furniture and then let everybody go back to doing their jobs.
40:13
These are all things that are easy to look in through the rear view mirror.
40:16
That's the reason I wanted to share them.
40:18
And you said also that removing the need to quantify the benefits of
40:22
integration for minority shareholders was only part of the benefit.
40:25
However, within the Bell and Mobility organization was also considerable
40:31
resistance from relatively senior management to even preliminary efforts
40:35
to pursue strategic integration rather than merely synergies.
40:39
You give a great example here, simply one was a product launched
40:43
in 1999 that gave residents.
40:45
Customers, a single phone number that forwarded incoming calls to multiple
40:50
devices until either the subscriber answers or all identified numbers have
40:55
been tried in which the case, in which case the caller can leave a message.
41:00
The drive for Simply One you say came from Bell, not from Bell Mobility,
41:05
and Bell Mobility viewed it as a threat as far as they were concerned.
41:09
They owned the mobile business.
41:11
When Bell started selling a service that included Mobility, Bell
41:15
was sort of encroaching on their turf and taking something away.
41:19
This Michael, this is in every company in all over the world.
41:24
No matter what size is when somebody builds something that could be some
41:28
type of fighter brand or emerging technology, and then the big brother
41:33
or the existing incumbent wants to subsume it or package it or bundle
41:38
it, there's always that resistance.
41:40
I'd love you to share your views on it.
41:42
Yeah, I mean I think they, we'll start with the specifics of, of simply one.
41:46
'cause again, 20 plus 25 fourth and 30 years later and look back and say,
41:52
well, that's not the problem anymore.
41:54
'cause really only what, anybody only ever has one mobile number.
41:59
The notion that you would have multiple numbers and had to manage the
42:03
complexity of that is bizarre to us now.
42:06
But back then it was a real issue.
42:08
And so the laKyndryline business was in a situation where people had a
42:11
home number that they actually used.
42:13
People had an office laKyndryline, they actually used.
42:16
Then they had a mobile number that they actually knew.
42:20
And so it's not crazy to have three different, and then a fax owned by one.
42:25
So people had three different phone numbers that they may want
42:29
people to be able to reach them.
42:32
And that was a real hassle.
42:35
the laKyndryline business thought, well, if we can make the complexity
42:40
of having multiple numbers go away, people will actually keep
42:45
their multiple numbers right?
42:48
If the complexity is really burdensome, then people will start getting shedding
42:52
numbers and they're not gonna get rid of their mobile number, right?
42:56
So if, if I can hide that complexity, they'll keep their home number, they'll
43:00
keep their office number because whichever number it gets called, it will find them.
43:06
And so that was a solution to a problem that customers had that actually would've
43:11
belonged the franchise of the wire land.
43:14
So sort of.
43:16
You can see why the mobility business would look at that
43:18
and go, whoa, whoa, whoa, whoa.
43:20
Time out, right?
43:21
This is, this, is that that doesn't work for you.
43:25
Right?
43:25
That actually is going to limit my growth.
43:28
And so that's where the corporate office steps in and says, all right,
43:30
we have to make a bet out here.
43:32
So leadership decided to take an option and go, look, we're gonna, we're gonna
43:36
Yeah.
43:37
it.
43:37
So faced with this conflict between between mobility and the landline
43:42
business around just how integrated you want those those services to be.
43:47
It falls to senior management to make a one time ad hoc decision on
43:52
what's the right way to, to proceed.
43:54
You can't build an entire set of processes and structures and systems
43:59
to solve what are essentially non repeated decisions, right?
44:03
You need processes for things you do repeatedly, right?
44:06
Not for things that are almost, by definition, unique unique opportunities
44:11
that are difficult to predict and will almost certainly never repeat.
44:17
And so that's where you have kind of that, I'll call that leadership,
44:21
and that's where you have the spot down, ad hoc, um, limited scope,
44:25
limited duration interventions, as I said before, to rearrange the
44:29
furniture and then let everybody go back to doing what they're doing.
44:33
I love how you put it.
44:34
You say top down pressure made integration possible.
44:37
Bottom up alone would've killed it.
44:40
And that happens in so many companies where the top don't even
44:43
know that bottom up killed the idea that never emerged to the top.
44:47
We see this all the time where like, my people aren't innovative when you
44:50
kind of go, maybe they are, but it's getting stuck at this immiscible layer in
44:55
Well, Well, but so that's a really good point.
44:57
So innovative, but within what parameters?
45:00
Right.
45:01
And so the argument is there are probably plenty innovative within the parameters
45:05
of the organization has set them.
45:08
And PS that's you, senior management, you have set those parameters.
45:13
So they're kind of doing what you pay 'em to do.
45:16
You shouldn't be surprised.
45:18
And and I think it's a mistake to think that somehow.
45:23
And so what I need to do is I need to start changing all of my incentive
45:26
structures in order to... No, because if you do that, they won't do the things
45:30
they're doing now for keeping points.
45:33
Right?
45:34
This is, this is my particular take.
45:37
The way I've come to internalize and think about this very evergreen problem
45:41
that many people have, have tackled in different language in different ways.
45:45
But I think the the, the, the tradition that grew up around
45:51
Bower
45:51
and the resource allocation process is a particularly powerful and
45:56
practical and granular way of thinking about that challenge.
45:59
So yes, it's about exploitation and exploration.
46:03
What the resource allocation process model describes is how organizations actually
46:08
exploit, given the strategic context.
46:12
It talks about what needs to, how, how in fact you go about exploring where do
46:17
you create a variation in the projects and businesses that you hope to pursue.
46:23
How do you choose which of them to to invest in over time?
46:29
And how does that manifest in either reinforcing or
46:31
changing a company's strategy
46:34
that's one of the things I picked up when you talked about De GrandPré's first
46:38
excursion, and his second excursion was the second one was dictated by strategic
46:43
imperatives or strategic direction.
46:45
In some way, at least people knew where they were gonna play
46:49
yeah, I think that's true.
46:50
I mean, the first efforts were attempts purely to drive.
46:55
When that's all you're trying to do, there's basically no, curiously
46:58
enough, there's no constraint on what you could go get into.
47:01
I mean, why not get into consumer products or food or anything's on the table?
47:08
Why look at real estate and financial services and I mean,
47:11
sure, look at those, but why not?
47:13
Nothing's off the table and it becomes really tricky because all of
47:17
a sudden, anything that looks like it meets your financial hurdle is
47:21
going to look like it's a good idea.
47:23
And now all of a sudden, senior management consists of deciding whether seven is
47:28
bigger than four, so that, that's trivia.
47:32
And when that's all you're working on, it's not a surprise
47:35
that it doesn't go well.
47:36
Um, the second round of diversification was driven by strategic priorities
47:40
where there were clear reasons to be in or out of specific opportunities.
47:45
The reason you don't get into consumer products consumables or food stuffs is
47:49
because that's got nothing to do with the convergence threats that you're facing.
47:54
Right.
47:54
That that's, if, if you, if you're making lunch meat, that's not gonna help you
47:58
fend off the cable companies who are coming after your your mail business.
48:03
Right.
48:04
So that had a reason to be in one place versus certain
48:07
very specific uncertainties.
48:08
They were trying to behead.
48:10
It reminds me always, first real job was digital.
48:13
Digital in a media company, and they were always going, what's the digital strategy?
48:17
And I go, what's the strategy first?
48:20
Yeah,
48:21
you the digital strategy.
48:22
And we're seeing it today with ai.
48:23
What's the AI strategy?
48:24
You go, well, what's the strategy
48:26
that's
48:26
an excellent point.
48:27
Yeah.
48:28
I mean, it, forget, I don't know if this is where you wanna take
48:30
the conversation next, but you, you mentioned at the outset, but these
48:35
things are not history lessons, right?
48:37
Case studies are interesting.
48:38
Now that I'm a Prof at IVEY I'm dealing with this firsthand.
48:43
Cases start out as timely and current.
48:47
Then they become instructive in seasoned, then they become dated and musty and
48:54
then they become iconic in place.
48:56
Right?
48:57
And they, it's been long enough.
48:59
And then after that, they just become, so nobody really does case
49:02
studies on general Motors in 1920.
49:07
Pretty soon studying GE under Jack Welch in the eighties will be, that, that's
49:12
now sufficiently dated, that it feels musty, they given another 15 year classic.
49:21
it's really, I mentioned this earlier, it's tempting to look at Joe's work
49:24
from the sixties at national products.
49:27
Um, which I think is generally accepted now, Dow Chemical.
49:31
And say what could that possibly have to tell us?
49:34
I mean, 1960, are you kidding me?
49:38
No, I'm kidding you.
49:39
It, It, actually does describe how continues to work today.
49:43
The the convergence challenges that I was looking at 30 years
49:48
ago look an awful lot to me.
49:50
Like the same kinds of issues that the titans of today are.
49:54
So if you look at the diversification strategies of meta,
49:59
the Microsoft it's awfully ret of the same kinds of things that the big difference
50:06
is that the titans of today have basically bottomless financial mutual.
50:13
And so the kinds of things that you would've seen around things like
50:16
hard collect mistakes and trying to be conservative with capital, they
50:20
just don't, that's not a constraint.
50:22
Fair Enough.
50:23
Anything else to do they can go do because they just write a big
50:27
enough chapter and away they go.
50:29
But the cast is a bit different, right?
50:31
The imposing variation of the selection processes and the retention
50:36
I think is largely the same.
50:37
And we keep getting into things.
50:39
Meta gets into consumer products and their glasses and Google got into
50:43
phones very successfully and, and and.
50:45
So you see that same diversification, enducing variation, and then the
50:52
same, uh, coalescing around particular opportunities as they take shape.
50:56
And AI starts to look like much the same kind of thing, faith and uncertainty.
51:00
Faith in the new land grab.
51:03
people trying new things with an eye too, how they can
51:06
stitch together new solutions.
51:07
Brilliant.
51:08
I'm so glad you said that, Michael.
51:09
'cause that's the point I think of going back, is that there's so much valuable
51:15
stuff and the thing I've realized is that the more modern books are.
51:18
Actually just re really rehashing stuff that's been said before
51:22
in, in a more modern way.
51:24
But if you go back to the sources, when the sources are still there,
51:28
the value of it is just incredible.
51:31
You, you do see the rhymes of history rather than the repetition.
51:36
The only thing I thought that occurred to me there is that it's the rhetoric
51:41
is always one of today is unprecedented.
51:44
Change today is massively uncertain in the way that the past never
51:48
was, and yada, yada, yada.
51:51
To paraphrase Elaine from Seinfeld but I don't, I, I don't think
51:56
that, I don't think that's true.
51:57
What is true, however, I think is that the phenomenon that we're studying
52:01
is in the suite of human history.
52:03
Pretty New.. mean the I don't reread Chandler nearly as
52:08
often as I would like to.
52:10
Um, but he's looking at organizations that grew up in the late 19th,
52:15
early 20th century, and they really were first of a kind.
52:20
And so we're not even looking at 150 years of history here.
52:25
But in that first 150 years, pretty much experience at a conceptual
52:31
level all there is to experience and to the extent that we understand
52:36
how that works conceptually, right?
52:39
Well, we know what we need to know.
52:41
Does that mean there's not more to learn?
52:43
No, that's not what I'm saying.
52:44
Right.
52:44
The human body hasn't changed much, but medical science still
52:47
has a lot to learn so that's true.
52:50
Right?
52:50
But the fact that there's more to learn doesn't mean that we
52:54
need to keep relearning the things that we already know.
52:58
And so my concern, I guess, is that a lot of us out there seems to take pride in
53:03
not building deliberately and carefully on what is already proved to be true.
53:10
In the medical sciences, the physical sciences, you can't show up with a
53:13
new theory for a brand unified theory of everything that combines quantum
53:17
mechanics and gravitational physics without accurately accounting for all
53:23
of the things that we all already know.
53:25
So somebody shows up with a new theory for strategy I'm like, but wait a
53:28
minute, that doesn't explain 98% of the things you've already explained.
53:32
So why do I take this new thing seriously, right?
53:35
So that almost almost religious fervor around not taking past work seriously,
53:44
I think is really a terrible mistake.
53:46
Amen.
53:47
Amen.
53:47
Man, I, you know, I have to tell you this as well.
53:49
Like, I, I actually couldn't have read your books when I first met you.
53:56
I hadn't built up the knowledge enough, like really, I mean, I mean this, I've
54:00
said this to people over the years that if you go back to the early shows,
54:04
my, my questions were much more basic and my knowledge was much more basic.
54:09
But I'm doing this nearly 10 years now and that, that knowledge compounds
54:13
and it just, it makes you be able to have a better conversation
54:17
and actually understand what the person's saying in the book as well.
54:20
'cause we talked before about a lot of these books are quite academic and
54:24
this book is quite academic as well.
54:27
well, and written for an academic audience, right?
54:29
It is Oxford University Press, after all.
54:31
So, yeah.
54:32
Hey, and, and actually it's one of the reasons I wanna share it because for
54:36
me, I see this kind of perfect storm of our attention spans are getting less.
54:40
We're using things like AI to do the, the, the struggle work of learning for us
54:46
or translating stuff or synopsizing it.
54:49
And it's making the decision what's important or not in
54:52
those text, which is just crazy.
54:55
So I really wanna share this knowledge to people and break it down into
54:58
simple bit chunks that they can understand it, and maybe save them
55:02
the hassle of reading it and talk.
55:06
Yeah.
55:06
Well, I wanna know how you've been doing this for 10 years
55:08
and look five years younger.
55:09
So the well, it's interesting you should mention that.
55:15
So, I, maybe this is an unwelcome tangent.
55:19
But now that I'm in now that I'm at IVEY and a professor there, I'm actually
55:23
building, building some courses, some of which are online in nature.
55:28
Um, and the, my explicit intent is to create what I see to be introductory
55:36
level strategy and innovation courses that are built around this way.
55:42
I'm looking this way again, the resource allocation process model and its expansion
55:47
that are built around that knowledge.
55:49
Because I think the introductory strategy courses, I think, start
55:55
too far back and they leave people where you would've been 10 years ago
56:00
as a way to, and we don't need, we don't need to begin there anymore.
56:03
Right.
56:03
PE people don't, when people start their technical engineering
56:06
degree, they don't start with how to transform, letting the goal.
56:10
And they don't start with alchemy, they start with the state of the art.
56:14
You can introduce the state of the art simply and in an introductory
56:19
way, but you can start people in a place where they can take advantage
56:22
of the accumulated knowledge to make.
56:26
And I'm finding that, which is part of the reason why, incidentally, I've been gone
56:31
and dug out a lot of this stuff recently.
56:33
That's what I'm trying to do.
56:34
So my conceit at present is to try and create introductory level materials that
56:40
start people off at a place that is as close to where, you know, we've arrived
56:47
after many years of thinking about this stuff without having to go through
56:50
all of that misery to present to them.
56:53
Right.
56:53
As a plea, as a proven body of knowledge, right?
56:57
So that they begin as a foundation at what is for us, the summit of
57:04
everything that we've tried to create over the, over the last several decades.
57:09
My and my belief is that's, and that's how we create collective progress and
57:15
forcing them to start all over and
57:18
say, let me talk to you about five forces and core competence.
57:21
And, and not that that stuff's wrong.
57:23
It's not all, but we don't need to start there.
57:26
We don't need to, we don't need to build up somebody who's new to the field.
57:30
We don't need to build them up through the same intellectual
57:32
journey that the entire field.
57:35
You know what it's like, man, you know, when you, you maybe are late to
57:39
a long longstanding series on Netflix.
57:43
You're kind of going, do I have to go back to series one to get to series seven?
57:48
Like, you're like, yeah, you kind of gotta go back, but you're trying
57:51
to go, well, no, it's Greenfield.
57:52
He can jump in wherever there's a new cast of characters.
57:57
Well, I hope so.
57:58
I mean, I hope I can start, but I don't, I don't have a better metaphor than,
58:01
than for the offer for a minute ago.
58:04
Hope is that I can, I can bring you in or to, to what is for
58:10
you a for what is for you?
58:13
A plateau, but is for us The Summit.
58:16
So Michael, we'd loads more in there and I, I highly recommend
58:20
people reading, reading the book.
58:22
It's still out there, it's still available.
58:24
I'm gonna write about it a little bit as well to try and bring it to life.
58:27
There was a brilliant case study of Bell emerges, which was emerging tech or
58:31
emerging opportunities in there again.
58:33
They're all through the lens of resource allocation process, why things didn't
58:37
work, why some things did work in there, but look through it and realize
58:41
that it's a template or it's white.
58:44
It's white label version of exactly what we're all going through.
58:48
It's hard to read the label when you're inside the jar.
58:51
If it's your turn.
58:52
These things happen all the time.
58:54
They repeat it over and over.
58:55
Michael, for people who wanna find you, you're kind of gonna
58:58
come back and cover these books.
59:00
Now that I'm up to the level and I can start at your summit and I can,
59:05
I can speak to you at the same level.
59:07
We're gonna cover them in the future, but I know you're doing
59:10
amazing work at the moment.
59:11
You've, apart from your work with Ivy, let's share a little bit about
59:15
that and where people can find you.
59:17
Sure.
59:18
So Mraynor@Ivey.ca, that's my academic email can also find me
59:25
at Michael@michaelraynor.com.
59:28
And I'm involved with a climate climate startup that is trying to
59:34
mobilize voluntary climate action among corporates to support the decarbonization
59:41
of hard to abate commodities.
59:42
So things like cements and steel and nitrogen based fertilizers.
59:46
So in addition to a lot of this conceptual work, I'm actually trying to use the
59:51
golf clubs to play an actual golf course.
59:54
Uh, and, , it is been instructive in many ways.
59:57
Not least.
59:58
It's, it's keeping me humble when it comes to how difficult it can be
1:00:02
that to put this stuff into practice,
1:00:05
And keep the world in golf courses as well, at the same time as well.
1:00:09
well, the world could probably do with fewer golf courses, frankly, but but
1:00:12
that's a whole different conversation.
1:00:15
And I'll link to where to find you with that work as well, Michael.
1:00:18
And again, as I said, I'm looking forward to coming back and covering your work.
1:00:22
Author of chapter 14 of the Resource Allocation to Strategy book in
1:00:27
tribute to Joe Bauer, Michael Raynor, thank you for joining us.
1:00:31
My pleasure, take care.
1:00:32
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