Henry: Understanding Strategic Management, 2nd edition Chapter 2: The General Environment

Key work feature: Strategic inflection points and their impact on strategy A major change which has the effect of shaping the competitive environment is called a tipping or strategic inflection point. The idea of tipping point was popularized by the New Yorker magazine staffer Malcolm Gladwell. It is about trying to discover what will be a turning or tipping point that causes individuals to take action or change their opinions. The theory of tipping points has its roots in epidemiology, the branch of medicine that investigates the cause of epidemics. The contention is that in any organization, once the beliefs of a critical mass of people are engaged, acceptance of a new idea will spread like an epidemic. The critical mass, or tipping point, occurs at a crossroad for the organization. That is, a point at which there are sufficient individuals to adopt a new idea so that, for instance, a proposed change becomes self-sustaining. Or, conversely, the idea fails to gain acceptance and the organization returns to its default position. Understanding tipping points helps an organization to overcome the forces of inertia that are likely to prevent change. With a tipping point organizational change may occur suddenly rather than slowly and little causes can have big effects. Gladwell suggest three rules of epidemics. The first rule is the Law of the Few, or that a minority of people will account for the majority of the phenomenon. This clearly has similarities with Pareto’s principal commonly referred to as the 80-20 rule. For example, in an organization 20% of its customers may account for 80% of its revenues. The contention is that a few strategically placed and motivated individuals who promote a new idea may be capable of starting a social epidemic, or a change in customer buying habits. For example, in November 2007 clothing stores in Thailand saw a rush to buy pink shirts, thanks to a fashion craze sparked by the country's King Bhumibol Adulyadej. Thais were queuing in their hundreds to buy the shirts ever since the King left hospital wearing both a pink shirt and blazer. The power of translation is another way to reach a tipping point. This is achieved through mavens, connectors, and salespersons. The mavens, connectors, and salespersons are what are referred to in marketing as the innovators and early adopters. They are the first individuals to adopt and share ideas. However, if an idea is too outlandish for a majority of people, it will not be accepted. These early and late majorities are where the ideas need to take root. If the early and late majorities do not embrace the new idea, then no sustainable change will occur. Therefore, what Gladwell calls mavens, connectors, and salespersons need to disseminate ideas in ways that the majority of people can relate to and are willing to adopt. The power on mavens, connectors, and salespersons is that they

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Henry: Understanding Strategic Management, 2nd edition Chapter 2: The General Environment

interact with a wide circle of people and deliberately try to influence their behaviour. A second rule of epidemics is called the Stickiness Factor. For instance, why do some advertisements work while others do not? The stickiness factor is about communication; how an organization might attract attention and make its messages memorable. This is often accomplished through a memorable catchphrase. The third law is the Power of Context. Gladwell asserts that ‘epidemics are sensitive to the conditions and circumstances of the times and places in which they occur.’ The power of context asserts that as individuals we are all sensitive to our environment which provides signals as to how we should behave. It is this surrounding context of behaviour which can play a motivating role in shaping the actions of large numbers of people. As a result the nature and speed of a social epidemic can be a function of the environment only, or, the environment in conjunction with a small number of connectors. The idea of strategic inflection points was coined by founder and former president and CEO of Intel, Andy Grove. Intel is the world’s largest computer chip maker and as such has had to adjust to significant changes in its industry. A strategic inflection point can be caused by many factors including but not exclusively changes in technology and competitor behaviour. Left unattended they can cause an organization to go into terminal decline yet at the same time they represent opportunities for managers who are prepared to embrace change. Strategic inflection points are about fundamental change in any business. Organizations can be both the recipient and cause of strategic inflection points, as occurred at Intel. The problem with strategic inflection points for managers is that it is often only the beginning and the end of the process that is clear while the transition in-between remains uncertain and puzzling. Mathematically, an inflection point is encountered when the rate of change of the slope of a curve changes sign, for example, from positive to negative. This can be shown graphically when a curve changes from convex to concave, or vice-versa. Before a strategic inflection point occurs the rules of the competitive game remain the same but after its occurrence the rules of the game change. Therefore a strategic inflection point represents an opportunity for both incumbent firms in the industry but also new comers. As Grove states, ‘…a strategic inflection point is when the balance of forces shifts from the old structure, from the old ways of doing business and the old ways of competing, to the new…it is the point where the curve has subtly but profoundly changed, never to change back again.’ (Grove 1996, p.33)

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Henry: Understanding Strategic Management, 2nd edition Chapter 2: The General Environment For managers and leaders it’s difficult to recognize when they might be going through a strategic inflection point since it may coalesce around a set of circumstances taking place in and around the organization. Often recognition occurs in stages. The first stage may be a feeling that something is wrong and that tried and testing ways of doing business do not seem to reap the same benefits. For example, competitors you hardly noticed and now taking business from you. Secondly, there may be dissonance between what the organization believes it is doing and what is actually happening inside the organization; a divergence between corporate statements and operational actions. In time, a new framework based on new understandings and a new set of actions emerge that orchestrate together. Finally, new corporate statements are produced, often by new senior managers. The problem for managers is when to take action; the nebulous nature of the strategic inflection points provides no clear direction. Instead, managers have to rely on their business judgment. They need to train themselves to pick up a different set of signals which may be in the environment but simply be ignored.

Gladwell, M. (2000). The Tipping Point: How Little Things Can Make a Big Difference, Little, Brown, Boston, MA. Grove, A.S. (1996). Only the Paranoid Survive. Random House, New York.

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