September 24, 2025 • 61 mins
In this episode, Michael Raynor — author of The Strategy Paradox and co-author with Clayton Christensen of The Innovator’s Solution — joins Aidan McCullen to explore why most strategies fail and how leaders can fix them.
From the RAP (Resource Allocation Process) model to the real-world case of BCE’s diversification journey, Raynor unpacks how strategy is shaped by resource allocation, risk, and CEO intervention. Learn how top leaders can navigate uncertainty, overcome divisional barriers, and unlock strategic synergies.
🔑 What You’ll Learn in This Episode
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Why strategies often fail — and the CEO’s role in fixing them
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How the RAP model explains real-world decision-making
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Lessons from BCE’s diversification journey
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The tension between divisional goals and corporate strategy
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Practical tools for managing risk and strategic integration
⏱️ Episode Guide
00:00 Intro & Kyndryl Overview
00:28 Historical Perspectives on Strategy
00:57 Approaches to Resource Allocation
02:36 Guest Introduction: Michael Raynor
03:13 Academic Journey & Mentors
07:35 The RAP Model Explained
11:32 Challenges in Strategic Decision Making
22:51 BCE’s Diversification Story
31:46 Entering Mobile Telephony
32:28 Strategic Synergies & Capital Constraints
33:48 Independent Operations & Market Dynamics
35:19 Challenges of Strategic Integration
36:11 Retail Distribution & Evolutionary Lessons
38:36 Governance Rights & Incentive Structures
48:31 Historical Lessons & Modern Applications
58:20 Concluding Thoughts & Future Directions
🚀 Topics Covered: strategy, resource allocation, RAP model, diversification, BCE, corporate governance, disruptive innovation, CEO decision-making, real options, strategic integration.
👉 If you enjoy this episode, please subscribe, share, and explore more insights at
https://thethursdaythought.substack.com
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
the innovation show isbrought to you by Kyndryl.
Kyndryl runs and reimagines thetechnology systems that drive advantage
for the world's leading businesses.
With a unique blend of AI poweredconsulting, built on unmatched managed
service capability kyndryl helps leadersharness the power of technology for
smarter decisions, faster innovationand a the lasting competitive edge.
(00:22):
You can find out more about Kyndrylat K-Y-N-D-R-Y-L Kyndryl.com.
Marshall McLuhan once wrote, we look atthe present through a rear view mirror,
we march backwards into the future.
Mark Twain, purportedly said, historydoes not repeat, but it often rhymes.
(00:42):
The challenge for leaders is not inrecognizing the rhyme afterwards, but
in hearing it while it's still faint.
That is why today's episode amidstall the others within the resource
allocation process is so relevant.
Up until now in the book from resourceallocation to strategy, there are several
Approaches that businesses employ whendealing with disruptive technology.
(01:06):
One bottom up processes like engineersfollowing established rules like
revenue per square inch at Intel,which redirected the company's strategy
from DRAM to semiconductor chips.
Two.
Customer capture of the resourceallocation process where your top
customers heavily influence yourstrategy with sustaining innovations.
(01:27):
Three.
In some cases we have CEO ortop-down intervention redirecting
resource allocation, aswe'll see in today's episode.
And four, further examples includesetting up a separate unit and a separate
context, which protects that unit fromcapital market metrics of success, and
indeed existing customer influenceson the resource allocation process.
(01:52):
Today's guest argues that diversifiedcorporations create advantage not by
sharing resources across divisions,but by strategic integration.
Recombining assets from multipledivisions to pursue new opportunities
because divisional incentives,risk and uncertainty block this.
Top down intervention often theCEO is absolutely essential.
(02:17):
He covered a case study of BCE andexamined decisions about major capital
expenditures in a turbulent environment.
He showed how a real optionsapproach to resource allocation
preserved BCE E'S flexibility toexploit future strategic integration
opportunities without Overinvesting.
It is a pleasure to welcome back, authorof all these books behind me, the three
(02:41):
Rules, the Strategy Paradox, InnovatorsSolution with Clayton Christensen,
and Indeed the Innovator's Manifesto,and of course, today's focus, his
friend, his mentor, Joe Bower, and theresource allocation to strategy book
that we've been covering on the show.
It's a pleasure to welcomeback Michael Raynor.
(03:03):
Welcome to the show.
It's great to be here.
it's been a long time.
Last time we spoke was we were talkingabout another one of your mentors, which
was your co-author, clay Christensen.
But I thought we'd share a little bitabout your relationship with Joe, Seen as
we're here to recognize and celebrate hiscontribution to their strategy literature.
(03:23):
Yeah.
Joe was the, chair of my thesis committee.
So I started the doctoral programand the DBA program at the HBS
in, I'll say late last century.
So back in the late nineties.
And and sat in my little cubiclejust up the hall from Joe's office.
(03:45):
And and he was characteristicallysupportive and helpful.
And quite happy to say in my ownsmall way, I'm, part of that legacy.
It was interesting.
We were talking to him over the time andClark Gilbert was saying, for example,
he helped create so many people who werebrilliant contributors to the strategy
(04:08):
literature, which you have come to becomewith those books behind me as well.
But you were so lucky to be chosen by him.
He was saying that those people whowere chosen, those people who were
in the book, have gone on to be verywell recognized in strategic work.
I think that's true.
And and as I reflect on it, , maybe it wasmaybe it was evil genius on Joe's part.
(04:32):
I don't know, but I never gotthe impression that there was any
pressure or effort or need to stickhaKyndryle or cattle shoot with
doctoral students or the people wework with into a particular approach.
I think that, and that's probably born onthe fact that even then, 30 years ago, um,
(04:52):
Joe was Joe was already well establishedand wasn't in any hurry to somehow hijack
or co-op other people to build his legacy.
He wanted to see people towork that they wanted to do and
that they would find rewarding.
And again, it, I can only tell youwhat it felt like to me, right?
(05:13):
Is that if you found your way into thatinto that tradition then that was not
something that he was actively promoting.
But if you landed there, he wasmore than happy to to support you
and to try and help you make as asmeaningful contribution as you could.
One of the things he said was thathe picked people who were willing
(05:36):
to do the work and willing to goafter something and I thought, maybe
we'll share yours 'cause you wentafter specific areas that you could.
shine with your thesis andactually go and do the work
and understand these companies.
Let's share a little bitabout that because it'll help
us set up today's episode.
I decided to go pursue doctoralstudies with a particular area in mind.
(06:00):
So when I got started in consultingand finished business school in
the early nineties, that was the,that's been the, the dawn of the
internet and kind of convergence 1.0.
The whole notion is that phonecompanies and cable companies were
all converging on the same spacefrom very different starting points.
That the future that we have now is thefuture we envisioned then that we thought
(06:21):
we would have by 2003, but didn't showup until about six months ago, right?
Where in keeping with the notion thatwe underestimate change in the long
run, but overestimated in the short run.
And so I was keen to getmy arms around these.
Relatively tactical question of how themedia, entertainment, telecommunication
(06:41):
space was all becoming one big airball.
And then
like any good doctoral program, Isuppose is supposed to do, I was stepped
back, tried to get grounded as well asI could in the, what was already known
about strategy and organization, andthen came to see that same problem as a
(07:04):
specific instance of a larger phenomenon.
So in the end, I ended up lookingat exactly the companies I had hoped
to look at, and DCE, big diversifiedCanadian telecoms company, a much bigger
deal 30 years ago than it is today.
But and looked at them through thatlens and and developed what I hope
(07:26):
is a set of tools that shed lighton a much broader range of problems
that are relevant even today.
You say in the chapter at the start,it's beyond the scope of that chapter to
rehearse the RAP model in its entirety.
But I'd love you to give us yourdefinition of it, or at least your
definition as it came to light for BCEB.
(07:46):
'cause it's really useful tosee the different lenses and the
different descriptions of OAP.
Yeah.
Well, I mean the, the book thatyou're, that you're focusing on is,
and you, you will have mentionedthis in other discussions, I'm sure.
Right?
So it's a synthesis of the number ofthreads of research that have emanated
from or converged upon Bowers resourceresource allocation process model.
(08:11):
And that model, as I think of itessentially describes how strategy's
actually formulated over time.
So this goes back to the midsixties when Joe did this work.
What I find amazing is that it seems tome to be a fully accurate description
of how it happens even today.
We don't have to tearit up and start over.
(08:31):
It's only the rhetoric that tells usthe world is completely different.
And so it's a description of howcompanies generate and improve
project level initiative, right?
Your strategy is whatyou spend your money.
And so the RAP model describeshow companies spend their money on
one in some things and not others.
(08:53):
And to my view, that's really theessence of good strategy, right?
You've heard people say, strategyis what we don't do, right?
Being focused means being clearabout what doesn't happen.
And what the RAP model describes ishow in well-functioning companies,
they systematically don't do thethings that aren't consistent
with their strategy, right?
Mechanisms of the resource allocationprocess are not a bug, it's a feature.
(09:18):
Okay.
It's how companies stay focusedon the markets they hope to serve.
But then the subsequentwork is about two things.
I think.
One is how do companies changestrategy when they need to and how
do they innovate when they needto, And that's different, right?
Because organizations necessarilyput in place constraints.
(09:42):
That's what the RAP model is.
But it says that you've gotcorporate context, you've got product
market context, and customer, allthese things that put you in a
box, but that's not a bad thing.
You put in place those constraints sothat the organization doesn't have buck
fever and just shoot anything that moves.
'cause that's its own form of pathology.
(10:03):
So management is about placing constraintson the opportunities that people pursue.
Without them, the organizationwould just dissipate.
But the problem with constraints isthat sometimes you need to break them.
And so the research in resource allocationanthology, I think describes two things.
(10:27):
It says sometimes those constraints do infact prove pathological and in two ways.
One is they may actually, um, preventyou from, for example, getting
outta businesses that are no longer,
it prevents you from seeing threatsto your existing business, and it
(10:48):
prevents you from pursuing opportunitiesthat you otherwise shouldn't.
And so the question becomes what kindsof overrides, what kinds of compensating
mechanisms can you put in place?
And this is the part that is stilltaking shape in my own head, is how
systematic can you be about that.
Right?.
Is there a process for changing?
(11:09):
Is there a metaprocess?
There's the resource allocationprocess, and then there's the process
for changing the resource allocation.
We, we will, we'll dispensewith the third order, the third
order change process for now.
But that's, that's, I suppose that'show I see the arc of, of that work.
(11:30):
And one of the things, and this will teeus up for when we talk about BCE, which
is the core case study of this chapter,is managers chase local wins that make
them look good, and not just to thecompany, but actually to their peers.
Even if it means missing bigger winsfor the company because they're so far
removed because of those compar, becauseof that com compartmentalization that's
(11:52):
happened in the company, that they'recharge, they're in charge of that
compartment and not the overall container.
Yeah.
And that's, that's notsomething you can fix, right?
I mean, it, it's easy to hearwhat you've just described, which
I think is correct and concludethat somehow it's a self-serving
pathology of small-minded managers.
I don't think that's true.
(12:13):
I think that people respond to theincentives that have put in place.
They cannot be expected to understandor know what all the larger order
trade offs and, and objectives are.
I mean, if that could actuallywork, then the only thing we need
to do is give everybody stockoptions and job done, right?
But it doesn't work that way.
The world's too complicated.
So we give people specific objectivesthat are tailored to the decision rights
(12:38):
that they have been allocated, that areappropriate to the the magnitude and scope
of opportunities that they can see, right?
They have a budget limit.
They can spend up to x milliondollars without approval.
They have to deliver agiven return on investment.
They have certain metrics beyond justROI, things like gross margin, right?
(12:58):
We, we do all of that because those arethings you can actually see the connection
between what you do and share price.
I mean, good luck with that.
And the problem, the unavoidableproblem is that every set of, of
incentives that you specify isalways going to be underspecified.
You can't fix that, right?
(13:20):
And so you put in place the best systemyou've got and, and the art of management
is constantly tinkering with theincentive structures and the organization
spreads why people go through reorgs.
So you figure about reporting structuresand it set and you change those things
to adapt the constraints to whatyou're actually trying to accomplish
as a company, that's fine, right?
(13:41):
But what then the higher orderproblem is what happens when you
simply can't tinker at the marginsand it requires a much more.
Directed and significant reconfigurationof those constraints, right?
So that the risk of going on alittle too long here, if we look
at disruptive innovation, right?
You've got a situation where Clay'sprescription is, look, I I need a
(14:06):
whole new organizational, right?
I need to fit the constraints tothe new opportunity and context.
I can't, I can't do that within thisexisting set of structures because
by the way, this existing company'sgot its own things to do that are
still worth doing, and I can't be allblue and all red at the same time.
(14:26):
Right?
So that's how I think about that,hierarchy of, changing versus
fundamentally reshaping, remakingthe constraints that that drive.
We'll share a little bit about thatwhen we talk about EMERGIS, which
was this emerging element of BCE.
But you just to again, give thefront loading of some of the lenses
through which to see this episode,you, you share that there's at least
(14:48):
two types of risk that, uh, are.
Leaders are confronted with ormanagers are confronted with.
The first is execution risk.
And then secondly, in at leastsome circumstance, you say, which
resources should be , recombined, andin what ways and when, and all that
can be subject to real uncertainty.
(15:08):
And those two real risks, confrontingmanagers freeze them or make them
decide not to actually back or putup resources towards an opportunity.
Yeah, I think that's right.
I mean, I, I referred to it as strategicrisk or strategic uncertainty, right?
So in the case of the BCE aCanadian telecom company, years ago.
They were faced with areconfiguration of the landscape.
(15:31):
They had been for a long time in aregulated land telecom company, and
suddenly they were faced with satelliteTV and the need to have content and
mobile telephony and internet access.
And they, and so the issue is no longerhow do we compete as a telco, but
what is the industry that we're in?
And so I referred to thatas Strategic uncertainty.
(15:54):
And the problem was that a companythat had a fairly finely tuned set of
resource allocation processes, wereunfortunately finely tuned for an
industry that was, I'll say dissolving.
Um, but what you need togo do instead is unclear.
(16:14):
And so we have , the intel examplewith gelman and the shift, as you
mentioned in your opening, comments, theshift from from memory to processors.
What they needed to be was alreadyevident because for crying out loud
processors were 50% of their revenue.
When they finally decided,Hey, you know what?
Maybe we should be a, maybewe should be a processor.
That's its own kind of problem, right?
(16:35):
But it is very different than theproblem of we look at the landline
telephone business and think this hasgot a best before day, but we don't know
what we need to transform into, right?
We haven't already become a 50% some otherkind of company, and now what we need to
do is formalize what we've already becomeand do on purpose instead of by accident.
(16:59):
No different problem entirely.
That's what call strategic uncertaintyas opposed to navigating strategic change
One of the things that I found reallyuseful is you compare the risks that
a divisional manager might face versusthe opportunities from a leader because
they can see from an overall perspectiveand you say, for example, managers
(17:22):
will skip opportunities because theylack information, they lack motivation.
They see higher risks and theyface strategic uncertainty.
And in short, , they have weak incentives,high personal risk and uncertain
payoff, which all discourage them.
But from the perspective of the RAPframework, CEOs or leaders from a
high level have huge opportunitiesbecause of the way they see things.
(17:45):
I'd love you to just juxtapose thosetwo views and see why sometimes it
takes the CEO or the leader steppingin to make these decisions just to
override any kind of divisional barriers.
I think you already, I think you'veactually laid it out , reasonably,
completely already, right?
Which is that, if the essence oforganization is differentiation
(18:05):
and integration, right?
I mean, we've got a lot of stuff to do.
We've got a lot ofdifferent decisions to make.
So in order to create coherentcollective action, we have to
divide up the labor, right?
But then we have to make sure thateverybody's doing their piece in
a way that knits back together toachieve our collective end, right?
So We differentiate by giving bycreating different functions, different
(18:28):
layers in the hierarchy and differentincentives to go with each, right?
So everybody knows what to focus on.
So you give the guess what, yougive the sales force a sales
target, shockingly, right?
You give the operationsdepartment a productivity target,
there's no surprise there.
But then how do you make sure thatthat those now differentiated efforts
(18:51):
are all rowing in the same direction?
And that's where theconstraints come in, right?
So you will say things like, yes,you have a sales target subject
to a profitability constraint.
Yes.
You have a production targetsubject to a cost constraint.
And and in, and that's what,that's the heart of management.
I do.
So when you have middle managersthat are looking at over a specific
(19:12):
time horizon, because by theway, that's what you gave me.
Certain things will look like abad idea that from a different
perspective look like a good idea.
And that's okay if noteverybody has to agree.
provided, it's clear whogets to make the call.
And so you can have senior managementkind of burning thunderbolts from Mount
(19:34):
Olympus saying, Hey, wait a minute.
We need to be in theIT consulting business.
We need to be in thesatellite TV business.
That's not something anybody in thephone business is gonna propose.
That's okay.
You want the phone, the folksrunning the phone business,
they're running the phone business.
And so they, they make those portfoliolevel decision because they've
(19:56):
got a different set of constraintsand incentives and that's okay.
I'd love if you gave us a bitof the context of the time.
The way.
I started off today's episode is to go,don't look at this as a history lesson.
Look at it as a template for theexact same pattern that you're
seeing today with any industry.
(20:17):
But maybe the technologies havechanged or the regulation have changed.
And I loved how you phrased this.
You said that at the time telcos werecaught between Scylla and Charybdis of
technology and regulatory uncertainty.
So they were in thisrock and a hard place.
That was the kind of context, but maybeyou'd share some of the technological
(20:39):
changes that were happening at the time,some of the trends that they were seeing
and some of the stuff they got wrong.
Yeah, fairly tactically, right?
They, this was when the homebased internet was relatively new.
Most people were still on dial up.
But it, I mean.
That's a technology that'sseveral layers dead now, right?
(21:01):
And dial up phones for insight.
And it was it was clear that that was notgoing to be the way of the future, right?
Everybody understood that morebandwidth was the thing that was
going to drive adoption and bea pretty thorough going change.
Um, but the question is how do you get it?
So you had the cable companieswith their coax infrastructure that
(21:23):
was inherently broader bandwidth.
But because it was a networkinfrastructure was subject to
congestions, then you had the phonecompanies with their narrower bandwidth.
But because it switched, you had basicallywhat amounted to a dedicated line.
So there was fundamental trade-offsbetween the two existing infrastructure.
(21:45):
And they each were thinking about howthey migrated to a technological platform
that broke that trade off, that gavepeople both bandwidth and no congestion.
And what that would look like forboth, it became fiber optics and
I think people really knew that.
But we, dealing with investmentrequirements measured in the billions of
(22:06):
dollars back then in the Canadian marketplus, oh, and by the way, you're worried
about wireless technology and videodistribution and the rise of I, oh my God.
So it was this whole portfolio oftechnologies that they were wrestling
and that's what made it such a challenge.
You kind of knew what the outlines of theend state are gonna look like, but how
(22:28):
you got from here to there and how fastand it, what costs, I mean there , getting
to that end state requires survivingevery intermediate state along the way.
That was, and that was the challenge.
All right.
I'm gonna set you up maybe to tell us abit about BCE and challenges they faced.
I'll give the historypiece to save you the high.
(22:51):
I'm quoting from the book here.
The largest telco service provider inCanada at the time was BCE began as Bell
Telephone Company of Canada, formed byan act of Canadian parliament in 1880.
The company's first wave ofdiversification began over a
century later in 1983 when then CEO.
(23:11):
Jean, de Grandpré restructured the companycreating Bell Canada Enterprises, or BCEA
holding company so that management couldpursue growth opportunities outside the
boundaries defined by the original act.
Only Bell Canada, the division responsiblefor legacy phone company operations,
continued to be bound by those obligations1983 and 1990 BCE undertook a series of
(23:38):
initiatives that turned out to be a failedexercise in unrelated diversification.
So maybe I'll hand you the baton at that
Yeah.
to, to tell us , how did it unfold,and then we'll compare that to a second
period of diversification in 1995.
Right.
So , the, if you will, the nationalexperiment, there was that BCE was stuck
(24:00):
in a low growth regulated business,So , the landline telephony services
in Canada have reached a point whereyou're basically gonna grow at, you'll
have new lines at the rate of populationgrowth, and you'll be allowed to charge,
you can charge for them, whateverthe regulator says you can, right?
So you're a pawn, right?
You become, you are a publicutility and know that's not an
(24:21):
insult, that's just a description.
And the management thought, wait a minute.
We want to be a growth company.
That's risk of stating the obvious.
That's our higher order economic model.
That's what we're built of.
The whole point is to grow andincrease profits and profitability.
(24:42):
So if you're in a regulated utilitybusiness, you can't do that.
Degrandpré's 'effort was to put putBell Canada in a box and that would
give the company the opportunity toraise capital separately to go pursue
growth opportunities elsewhere.
So they did things liketelecommunications, consulting
and infrastructure in Saudi Arabiaand a couple of other places.
(25:05):
So countries that were building outtheir own phone infrastructure, they
thought, well, we've done that before.
Why don't , we help othercountries do that as well.
And so they got into a number of otherbusinesses, real estate, financial
services, bunch of other things.
And what they found out is what a lotof companies tend to find out is that
if you go and decide that you are goingto get into a business where there
(25:25):
are a lot of other well-establishedcompanies whose bread and butter depends
critically on defending that ground,you're probably not gonna do very well.
What is for you, a growthopportunity is for them their lunch.
Right?
And so, especially in things likefinancial services in Canada, you're
gonna pick and fight with the RoyalBank in Canada and the Canadian
(25:48):
Imperial Bank of Commerce andthe bank in Nova Scotia in front.
Those folks have been around longerthan you have in their business.
You'll do no better in banking thanthey could do in telecoms, sweetheart.
And, that's what they, so they broketheir pick in a way that a lot of
companies end up breaking their, therethey had no particular competitive
advantage, no particular coreresource that they could leverage.
(26:09):
No particular skill that they had nothing.
And so, perhaps not surprisingly,that turned out poorly.
that's different.
I think fundamentally different in,kind different in kind on degree
from the diversification that theystarted pursuing in the nineties.
'cause there they were faced withundefined and wide open spaces.
(26:31):
There were no.
It was a relatively new space.
There.
There were other companies that alsowanted to compete for this new land.
But there was nobody really established.
It's almost as though, the Hawaiianislands suddenly emerged in the
middle of the Pacific, and it's a bitof a land grab for this new space.
Nobody's really too surehow you compete for it.
(26:53):
What you do know is you can't competefor it because what you've got is
your in your quiver right there.
And so the diversification thatthey pursued was driven by a
desire to assemble the conflictof resources that they might need.
You said there was two importantdifferences between this diversification
initiative and DeGrandpré's First wasthat each of the investments , was
(27:17):
operationally separate from the coretelephony business, the potential for
meaningful synergies at some pointin the future, featured prominently
in the company's stated strategy.
And second, each investment took theform of a partial ownership stake
rather than out outright acquisition.
They were vastly different ways ofseeing these bets that they made,
(27:39):
as well as what you said, puttingit on emerging opportunities.
Yeah, no, I think that's right.
And sometimes you do the right thing forthe wrong reason, you know, which is that
they, they understood if we're going tocompete in broadband infrastructure and
the content space, we can't do that withwhat we have in the Armory right now.
So they needed to acquire the assetsthat could potentially be recombined.
(28:02):
When and in what way?
We're not sure.
Okay, fair enough.
So, to your point, they then wentout and many of these investments
were partial equity stakes.
As a practical matter at thetime, it was largely a function
of the fact that they just didn'thave a big enough bank account.
To go buy these things over.
But what that meant is that theyactually were able to be much more
(28:26):
capital efficient and to calibratetheir investment to the level of
certainty they had with respectto the value of a, of an asset.
And its, and its synergyvalue in the front now.
And it's and even from a financialtheory perspective, I if that works.
Because what it means is that if I buy apartial 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
the cash up front and not faced with allthe risks associated with having done.
And it should turn out that integratingmobility with landline services does in
fact create significant synergy value.
(29:08):
Then they will have a differentialvalue from which to bid
for the outstanding equity.
Right.
So they're no longer just stuck with awinner's curse, overpaying for an asset.
'cause they have no particular advantage.
It's actually literally worth moreto them than it is to anybody else.
So they can afford to buy out and givethe other of the other equity holders
(29:30):
their reserve price and still haveeconomic profit to capture for themselves.
I love how you, you say this,this idea of real options,
but also that they, they can.
Easily turn off an investment becausethey're seeing the inside view, because
they have a board position, for example.
Yeah.
They have an inside view and they alsohave an inside view of the assets that
(29:53):
they're looking to combine it with, right?
So they have the requisite decisionrights to to integrate to exercise
the option, if you will, andwhen that option is in the money.
Again to repeat myself.
It's more valuable to them than it isto anybody else, and so in exercising
(30:13):
the option, they will not be forcedto give away all of the upside.
They can exceed the other equityholders reserve price and still
have access for themselves.
you inform us in this chapter, there's a
I.
asymmetry here that favors theperson who's putting the option in.
let's bring it to life becauseyou bring it to life for
four great examples in here.
(30:35):
The first is the wireless integration,and I'll tee you up again.
You wrote that, in 1984, BCE Mobile.
Or just mobile was launched as a partof bce E'S first diversification push,
and , was a wholly owned subsidiary.
Given the novelty of wirelesscommunications at the time, this is
important to cast yourself back there.
(30:56):
Entering the wireless telephony industryvia acquisition was not feasible,
and so the creation of this divisionis an example of organic growth.
I'd love you to pick us up from thereand bring us through this mini case
study within the bigger chapter.
Yeah, sure.
So I distinguished I came todistinguish result only between
(31:17):
growth options, and strategic options.
And so you can look at BCE Mobile,the mobile telephony business
initially as just a growth option.
We gonna get into a business andbecause we think there's a growth
opportunity there, we believe two things.
First of all back to my HawaiianIslands analogy, it's relatively new
technology, so it's not as thoughthere's some entrenched incumbent
(31:40):
that we're going to have to displace.
This is not BCE enterprises gettingin financial services in 1984.
This is wide open spaces inthe mobile telephony business.
Second, the risk of stating the obvious,it's the mobile telephony business.
So they probably know a thingor two about what it means to
put up a telephony network.
(32:01):
Even if so, to the extent that thetechnologies are new, they're new
to everybody, to the extent thattechnologies have any any similarities
or anything you can leverage withthe existing telephony networks.
BCD has a privileged position, soperfectly reasonable business to get into.
Don't think anybody sees that as aparticularly controversial claim.
(32:24):
What emerged was the notionthat, Hey, wait a minute.
This actually could have importantstrategic synergies with other
forms of telecommunication services.
Once the internet comes along,people immediately see, well, you
can get the internet on your laptop.
Why can't you get theinternet on your phone?
We don't know how to do it yet,but it's pretty easy to see that.
That's certainly a possibility, right?
(32:46):
Hence the need for an option.
Then they ran into a situation thatare just capital constraints, right?
Building up the network, being asuccessful mobile collecting company
required a bunch of capital andit made sense to to spin that off
in order to compete successfullyas a mobile telephony business.
(33:06):
But you hang onto enough of the equitythat you still have the option for
subsequent integration when and asthat becomes the right thing to do.
And so, as I mentioneda moment ago, right?
We can do the right thingfor the wrong reason.
They spun it off 'cause they hadto, and given their druthers,
they would've rather not.
But they had no choice.
(33:26):
But then they had foresight to say, well,given that, this is what we have to do.
We still see the future potential,and so we want to make sure that
we preserve that option value, andso we'll do so in the following.
you mentioned Clay, and again, asa reminder, Michael co-authored the
innovator's solution with Clay as well.
But the idea of measuring thesedifferent entities differently 'cause
(33:49):
they've different cost structures.
So you say here again with thecaveat here, that the technology
and market convergence has rapidlyeroded since Michael wrote this.
But you said in the ensuingdecade, which was 1987.
1997, the two companies, bell and Mobileoperated entirely independently of each
other and with good reason because thewireless and wire line businesses had
(34:14):
different technological infrastructures,cost models, and market and competitive
dynamics, and were in different placesin their respective life cycles.
I thought that was a key line and isagnostic to any industry because if
you're in investing in the Hawaiianislands that have disappeared versus the
mainland, gonna be very, very different.
(34:36):
And particularly the revenuestreams and the metrics of success
are gonna be very different.
This is a bigger lesson, I suppose,beyond this chapter, but I'd love
you to share your view on it.
Speaks to each organization's respectiveresource allocation process, right?
You want them to have verydifferent corporate context.
(34:58):
You want them to have a verydifferent strategic context.
You want them to have a differentinitiation phase, or you want
them to pursue different plan.
'cause they have different strategy.
They the constraints that youimpose upon them are very different
for reasons we've just discussed.
Um, my point around strategicflexibility is that there comes a
(35:19):
point where they become complimentaryassets and you need to integrate.
Those constraints in those contexts inorder to pursue the new opportunity.
And You cannot build a systemthat does two completely different
things at the same time, right?
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 needto flip from one to the other, right?
So good old fashioned variation,selection, retention, and creating
those options is how you createthe variation and the selection
processes within companies.
That's the resource allocation processand the selection process around
how you actually integrate them.
(36:01):
Well, that's sits up with, at thecorporate level, again, for reasons
we've discussed, and we have toseparate those decision rights.
One of the challenges then later onthat you, you may have grown them
separately, but then comes a point whereyou need to strategically integrate
them and you say, some of the challengeshere were, for example, one of the
first opportunities for Synergy wasin the retail distribution business.
(36:24):
I'd love you to take us throughthis, both what happened, but
also the challenges that happenedmainly at a divisional level.
where I ended up going with the optionsthinking is that you have to keep
these divisions on a leash, right?
So it's one thing to say, youknow, let them go off and maximize
their growth and profitability.
If you really do want to be able tostitch them back together at some point
(36:47):
it's possible to diverge too much.
Right?
If you think about, I don't know,I'm stuck in evolutionary metaphor.
If you think aboutAllopatric speciation, right?
Two species are separated by space andthey evolve along different trajectories.
And then if members of those twodifferent subspecies meet up again, well,
they can't reproduce anymore, right?
They've just, they've gone off indifferent directions for too long.
(37:09):
So you have to kind of keepthem close enough that you can
in fact put them back together.
And I think the retail distributioncase reveals what happens when the
differences are simply too great.
You know, people who come in to buy mobilephones versus people that have complaints
about their landline voicemail service.
(37:29):
Again, these are technologies thatsome people have never even listen,
we just may have never experienced.
Um, they are simply so differentthat on its face it looks like, well,
let's just leverage the sales force.
But then it turns out in reality, butthat's not the that's not the option.
You thought it was.
That option's not actually in the money.
You were talking about options, so takingoptions or investing in certain companies.
(37:53):
sometimes, and I'm sure this ringsthrough for so many people listening
to the show maybe who are involvedin this, that decision making becomes
very, very difficult because decisionshad to be made twice often by each
organization's management team or theirboard of directors, and to get around
this, BCE bought back as outstandingequity in mobile, for example, for
(38:17):
1.6 billion Canadian dollars, a 31%premium to BCE's mobile market price.
One month prior to the deal, and wasto accelerate decision making that
they felt that it was worth that marginto speed up that decision making.
Yeah, so they gave themselvesthe governance rights.
They, so they, they, theypurchased the governance rights
(38:39):
from the existing equity holders.
And and in addition, right, veryoften you have to override the
existing the existing incentivestructures for managers as well, right?
So you can buy it.
The other shareholders, you can paythem their reserve price as that, as we
were talking about a few minutes ago.
The argument is yes, you can givethem their 30% premium, but it's
(39:02):
worth, you know, some material amountmore than that to you because of
the synergies that you can capturethat would otherwise be unavailable.
So that's what makes it agood deal for your share.
In addition, right, you're gonnahave constraints systems in place
for the folks who are operating thesebusinesses, and you may not actually
want to change all of those incentivestructures in order to get the
(39:26):
organization to do what you want it to do.
Instead, it becomes a one time override.
Say, no, no, no.
I want this.
We want this to happen.
I'll, I will insulate you from theimpact it would have on your established
KPIs and your compensation, right?
Because I want this to happen, but Idon't want all the misery that comes
with having to try and figure outhow to completely reconfigure every
(39:49):
aspect of the incentive structure.
That's crazy.
The incentive structure actuallyworks pretty well, right?
I just need to smash these thingstogether for now, and for the next
six months I want to play according tothese rule and it'll go back, right?
And so it's those, those individualoverrides just to rearrange the
furniture and then let everybodygo back to doing their jobs.
(40:13):
These are all things that are easy tolook in through the rear view mirror.
That's the reason I wanted to share them.
And you said also that removing theneed to quantify the benefits of
integration for minority shareholderswas only part of the benefit.
However, within the Bell and Mobilityorganization was also considerable
resistance from relatively seniormanagement to even preliminary efforts
(40:35):
to pursue strategic integrationrather than merely synergies.
You give a great example here,simply one was a product launched
in 1999 that gave residents.
Customers, a single phone number thatforwarded incoming calls to multiple
devices until either the subscriberanswers or all identified numbers have
(40:55):
been tried in which the case, in whichcase the caller can leave a message.
The drive for Simply One you say camefrom Bell, not from Bell Mobility,
and Bell Mobility viewed it as athreat as far as they were concerned.
They owned the mobile business.
When Bell started selling a servicethat included Mobility, Bell
was sort of encroaching on theirturf and taking something away.
(41:19):
This Michael, this is in everycompany in all over the world.
No matter what size is when somebodybuilds something that could be some
type of fighter brand or emergingtechnology, and then the big brother
or the existing incumbent wants tosubsume it or package it or bundle
it, there's always that resistance.
(41:40):
I'd love you to share your views on it.
Yeah, I mean I think they, we'll startwith the specifics of, of simply one.
'cause again, 20 plus 25 fourth and30 years later and look back and say,
well, that's not the problem anymore.
'cause really only what, anybodyonly ever has one mobile number.
The notion that you would havemultiple numbers and had to manage the
(42:03):
complexity of that is bizarre to us now.
But back then it was a real issue.
And so the laKyndryline business wasin a situation where people had a
home number that they actually used.
People had an officelaKyndryline, they actually used.
Then they had a mobile numberthat they actually knew.
And so it's not crazy to have threedifferent, and then a fax owned by one.
(42:25):
So people had three differentphone numbers that they may want
people to be able to reach them.
And that was a real hassle.
the laKyndryline business thought,well, if we can make the complexity
of having multiple numbers goaway, people will actually keep
their multiple numbers right?
(42:48):
If the complexity is really burdensome,then people will start getting shedding
numbers and they're not gonna getrid of their mobile number, right?
So if, if I can hide that complexity,they'll keep their home number, they'll
keep their office number because whichevernumber it gets called, it will find them.
And so that was a solution to a problemthat customers had that actually would've
(43:11):
belonged the franchise of the wire land.
So sort of.
You can see why the mobilitybusiness would look at that
and go, whoa, whoa, whoa, whoa.
Time out, right?
This is, this, is thatthat doesn't work for you.
Right?
That actually is going to limit my growth.
And so that's where the corporateoffice steps in and says, all right,
we have to make a bet out here.
(43:32):
So leadership decided to take an optionand go, look, we're gonna, we're gonna
Yeah.
it.
So faced with this conflict betweenbetween mobility and the landline
business around just how integratedyou want those those services to be.
It falls to senior management tomake a one time ad hoc decision on
what's the right way to, to proceed.
(43:54):
You can't build an entire set ofprocesses and structures and systems
to solve what are essentiallynon repeated decisions, right?
You need processes for thingsyou do repeatedly, right?
Not for things that are almost, bydefinition, unique unique opportunities
that are difficult to predict andwill almost certainly never repeat.
(44:17):
And so that's where you have kindof that, I'll call that leadership,
and that's where you have the spotdown, ad hoc, um, limited scope,
limited duration interventions,as I said before, to rearrange the
furniture and then let everybody goback to doing what they're doing.
I love how you put it.
You say top down pressuremade integration possible.
(44:37):
Bottom up alone would've killed it.
And that happens in so manycompanies where the top don't even
know that bottom up killed theidea that never emerged to the top.
We see this all the time where like,my people aren't innovative when you
kind of go, maybe they are, but it'sgetting stuck at this immiscible layer in
Well, Well, but so that'sa really good point.
So innovative, but within what parameters?
(45:00):
Right.
And so the argument is there are probablyplenty innovative within the parameters
of the organization has set them.
And PS that's you, senior management,you have set those parameters.
So they're kind of doingwhat you pay 'em to do.
You shouldn't be surprised.
And and I think it's amistake to think that somehow.
(45:23):
And so what I need to do is I needto start changing all of my incentive
structures in order to... No, becauseif you do that, they won't do the things
they're doing now for keeping points.
Right?
This is, this is my particular take.
The way I've come to internalize andthink about this very evergreen problem
that many people have, have tackled indifferent language in different ways.
(45:45):
But I think the the, the, thetradition that grew up around
Bower
and the resource allocation processis a particularly powerful and
practical and granular way ofthinking about that challenge.
So yes, it's aboutexploitation and exploration.
What the resource allocation process modeldescribes is how organizations actually
(46:08):
exploit, given the strategic context.
It talks about what needs to, how, howin fact you go about exploring where do
you create a variation in the projectsand businesses that you hope to pursue.
How do you choose which ofthem to to invest in over time?
(46:29):
And how does that manifestin either reinforcing or
changing a company's strategy
that's one of the things I picked upwhen you talked about De GrandPré's first
excursion, and his second excursion wasthe second one was dictated by strategic
imperatives or strategic direction.
In some way, at least peopleknew where they were gonna play
(46:49):
yeah, I think that's true.
I mean, the first effortswere attempts purely to drive.
When that's all you're trying todo, there's basically no, curiously
enough, there's no constrainton what you could go get into.
I mean, why not get into consumer productsor food or anything's on the table?
Why look at real estate andfinancial services and I mean,
(47:11):
sure, look at those, but why not?
Nothing's off the table and itbecomes really tricky because all of
a sudden, anything that looks likeit meets your financial hurdle is
going to look like it's a good idea.
And now all of a sudden, senior managementconsists of deciding whether seven is
bigger than four, so that, that's trivia.
(47:32):
And when that's all you'reworking on, it's not a surprise
that it doesn't go well.
Um, the second round of diversificationwas driven by strategic priorities
where there were clear reasons to bein or out of specific opportunities.
The reason you don't get into consumerproducts consumables or food stuffs is
because that's got nothing to do with theconvergence threats that you're facing.
(47:54):
Right.
That that's, if, if you, if you're makinglunch meat, that's not gonna help you
fend off the cable companies who arecoming after your your mail business.
Right.
So that had a reason to bein one place versus certain
very specific uncertainties.
They were trying to behead.
It reminds me always,first real job was digital.
Digital in a media company, and they werealways going, what's the digital strategy?
(48:17):
And I go, what's the strategy first?
Yeah,
you the digital strategy.
And we're seeing it today with ai.
What's the AI strategy?
You go, well, what's the strategy
that's
an excellent point.
Yeah.
I mean, it, forget, I don't knowif this is where you wanna take
the conversation next, but you, youmentioned at the outset, but these
things are not history lessons, right?
Case studies are interesting.
(48:38):
Now that I'm a Prof at IVEY I'mdealing with this firsthand.
Cases start out as timely and current.
Then they become instructive in seasoned,then they become dated and musty and
then they become iconic in place.
Right?
And they, it's been long enough.
(48:59):
And then after that, they justbecome, so nobody really does case
studies on general Motors in 1920.
Pretty soon studying GE under Jack Welchin the eighties will be, that, that's
now sufficiently dated, that it feelsmusty, they given another 15 year classic.
(49:21):
it's really, I mentioned this earlier,it's tempting to look at Joe's work
from the sixties at national products.
Um, which I think is generallyaccepted now, Dow Chemical.
And say what could thatpossibly have to tell us?
I mean, 1960, are you kidding me?
No, I'm kidding you.
It, It, actually does describehow continues to work today.
(49:43):
The the convergence challengesthat I was looking at 30 years
ago look an awful lot to me.
Like the same kinds of issuesthat the titans of today are.
So if you look at thediversification strategies of meta,
the Microsoft it's awfully ret of the samekinds of things that the big difference
(50:06):
is that the titans of today havebasically bottomless financial mutual.
And so the kinds of things that youwould've seen around things like
hard collect mistakes and trying tobe conservative with capital, they
just don't, that's not a constraint.
Fair Enough.
Anything else to do they can godo because they just write a big
(50:27):
enough chapter and away they go.
But the cast is a bit different, right?
The imposing variation of theselection processes and the retention
I think is largely the same.
And we keep getting into things.
Meta gets into consumer products andtheir glasses and Google got into
phones very successfully and, and and.
So you see that same diversification,enducing variation, and then the
(50:52):
same, uh, coalescing around particularopportunities as they take shape.
And AI starts to look like much the samekind of thing, faith and uncertainty.
Faith in the new land grab.
people trying new thingswith an eye too, how they can
stitch together new solutions.
Brilliant.
I'm so glad you said that, Michael.
'cause that's the point I think of goingback, is that there's so much valuable
(51:15):
stuff and the thing I've realizedis that the more modern books are.
Actually just re really rehashingstuff that's been said before
in, in a more modern way.
But if you go back to the sources,when the sources are still there,
the value of it is just incredible.
You, you do see the rhymes ofhistory rather than the repetition.
(51:36):
The only thing I thought that occurredto me there is that it's the rhetoric
is always one of today is unprecedented.
Change today is massively uncertainin the way that the past never
was, and yada, yada, yada.
To paraphrase Elaine from Seinfeldbut I don't, I, I don't think
that, I don't think that's true.
(51:57):
What is true, however, I think is thatthe phenomenon that we're studying
is in the suite of human history.
Pretty New.. mean the I don'treread Chandler nearly as
often as I would like to.
Um, but he's looking at organizationsthat grew up in the late 19th,
early 20th century, and theyreally were first of a kind.
(52:20):
And so we're not even lookingat 150 years of history here.
But in that first 150 years, prettymuch experience at a conceptual
level all there is to experienceand to the extent that we understand
how that works conceptually, right?
Well, we know what we need to know.
(52:41):
Does that mean there's not more to learn?
No, that's not what I'm saying.
Right.
The human body hasn't changedmuch, but medical science still
has a lot to learn so that's true.
Right?
But the fact that there's moreto learn doesn't mean that we
need to keep relearning thethings that we already know.
And so my concern, I guess, is that a lotof us out there seems to take pride in
(53:03):
not building deliberately and carefullyon what is already proved to be true.
In the medical sciences, the physicalsciences, you can't show up with a
new theory for a brand unified theoryof everything that combines quantum
mechanics and gravitational physicswithout accurately accounting for all
of the things that we all already know.
(53:25):
So somebody shows up with a new theoryfor strategy I'm like, but wait a
minute, that doesn't explain 98% ofthe things you've already explained.
So why do I take this newthing seriously, right?
So that almost almost religious fervoraround not taking past work seriously,
I think is really a terrible mistake.
(53:46):
Amen.
Amen.
Man, I, you know, I haveto tell you this as well.
Like, I, I actually couldn't haveread your books when I first met you.
I hadn't built up the knowledge enough,like really, I mean, I mean this, I've
said this to people over the yearsthat if you go back to the early shows,
my, my questions were much more basicand my knowledge was much more basic.
(54:09):
But I'm doing this nearly 10 yearsnow and that, that knowledge compounds
and it just, it makes you be ableto have a better conversation
and actually understand what theperson's saying in the book as well.
'cause we talked before about a lotof these books are quite academic and
this book is quite academic as well.
well, and written for anacademic audience, right?
It is Oxford University Press, after all.
(54:31):
So, yeah.
Hey, and, and actually it's one of thereasons I wanna share it because for
me, I see this kind of perfect storm ofour attention spans are getting less.
We're using things like AI to do the,the, the struggle work of learning for us
or translating stuff or synopsizing it.
And it's making the decisionwhat's important or not in
(54:52):
those text, which is just crazy.
So I really wanna share this knowledgeto people and break it down into
simple bit chunks that they canunderstand it, and maybe save them
the hassle of reading it and talk.
Yeah.
Well, I wanna know how you'vebeen doing this for 10 years
and look five years younger.
So the well, it's interestingyou should mention that.
(55:15):
So, I, maybe this is an unwelcome tangent.
But now that I'm in now that I'm atIVEY and a professor there, I'm actually
building, building some courses,some of which are online in nature.
Um, and the, my explicit intent is tocreate what I see to be introductory
(55:36):
level strategy and innovation coursesthat are built around this way.
I'm looking this way again, the resourceallocation process model and its expansion
that are built around that knowledge.
Because I think the introductorystrategy courses, I think, start
too far back and they leave peoplewhere you would've been 10 years ago
(56:00):
as a way to, and we don't need, wedon't need to begin there anymore.
Right.
PE people don't, when peoplestart their technical engineering
degree, they don't start with howto transform, letting the goal.
And they don't start with alchemy,they start with the state of the art.
You can introduce the state of theart simply and in an introductory
way, but you can start people in aplace where they can take advantage
(56:22):
of the accumulated knowledge to make.
And I'm finding that, which is part of thereason why, incidentally, I've been gone
and dug out a lot of this stuff recently.
That's what I'm trying to do.
So my conceit at present is to try andcreate introductory level materials that
start people off at a place that is asclose to where, you know, we've arrived
(56:47):
after many years of thinking aboutthis stuff without having to go through
all of that misery to present to them.
Right.
As a plea, as a provenbody of knowledge, right?
So that they begin as a foundationat what is for us, the summit of
everything that we've tried to createover the, over the last several decades.
(57:09):
My and my belief is that's, and that'show we create collective progress and
forcing them to start all over and
say, let me talk to you aboutfive forces and core competence.
And, and not that that stuff's wrong.
It's not all, but wedon't need to start there.
We don't need to, we don't need to buildup somebody who's new to the field.
(57:30):
We don't need to build them upthrough the same intellectual
journey that the entire field.
You know what it's like, man, youknow, when you, you maybe are late to
a long longstanding series on Netflix.
You're kind of going, do I have to goback to series one to get to series seven?
Like, you're like, yeah, you kindof gotta go back, but you're trying
(57:51):
to go, well, no, it's Greenfield.
He can jump in wherever there'sa new cast of characters.
Well, I hope so.
I mean, I hope I can start, but I don't,I don't have a better metaphor than,
than for the offer for a minute ago.
Hope is that I can, I can bringyou in or to, to what is for
you a for what is for you?
(58:13):
A plateau, but is for us The Summit.
So Michael, we'd loads more inthere and I, I highly recommend
people reading, reading the book.
It's still out there,it's still available.
I'm gonna write about it a little bitas well to try and bring it to life.
There was a brilliant case study ofBell emerges, which was emerging tech or
emerging opportunities in there again.
They're all through the lens of resourceallocation process, why things didn't
(58:37):
work, why some things did work inthere, but look through it and realize
that it's a template or it's white.
It's white label version of exactlywhat we're all going through.
It's hard to read the labelwhen you're inside the jar.
If it's your turn.
These things happen all the time.
They repeat it over and over.
Michael, for people who wannafind you, you're kind of gonna
(58:58):
come back and cover these books.
Now that I'm up to the level and Ican start at your summit and I can,
I can speak to you at the same level.
We're gonna cover them in thefuture, but I know you're doing
amazing work at the moment.
You've, apart from your work withIvy, let's share a little bit about
that and where people can find you.
Sure.
So Mraynor@Ivey.ca, that's myacademic email can also find me
(59:25):
at Michael@michaelraynor.com.
And I'm involved with a climateclimate startup that is trying to
mobilize voluntary climate action amongcorporates to support the decarbonization
of hard to abate commodities.
So things like cements and steeland nitrogen based fertilizers.
(59:46):
So in addition to a lot of this conceptualwork, I'm actually trying to use the
golf clubs to play an actual golf course.
Uh, and, , it is beeninstructive in many ways.
Not least.
It's, it's keeping me humble whenit comes to how difficult it can be
that to put this stuff into practice,
And keep the world in golf coursesas well, at the same time as well.
(01:00:09):
well, the world could probably do withfewer golf courses, frankly, but but
that's a whole different conversation.
And I'll link to where to find youwith that work as well, Michael.
And again, as I said, I'm looking forwardto coming back and covering your work.
Author of chapter 14 of the ResourceAllocation to Strategy book in
tribute to Joe Bauer, MichaelRaynor, thank you for joining us.
(01:00:31):
My pleasure, take care.
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(01:00:51):
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With a unique blend of AI poweredconsulting, built on unmatched managed
service capability kyndryl helps leadersharness the power of technology for
smarter decisions, faster innovationand a the lasting competitive edge.
(00:22):
You can find out more about Kyndrylat K-Y-N-D-R-Y-L Kyndryl.com.
Marshall McLuhan once wrote, we look atthe present through a rear view mirror,
we march backwards into the future.
Mark Twain, purportedly said, historydoes not repeat, but it often rhymes.
(00:42):
The challenge for leaders is not inrecognizing the rhyme afterwards, but
in hearing it while it's still faint.
That is why today's episode amidstall the others within the resource
allocation process is so relevant.
Up until now in the book from resourceallocation to strategy, there are several
Approaches that businesses employ whendealing with disruptive technology.
(01:06):
One bottom up processes like engineersfollowing established rules like
revenue per square inch at Intel,which redirected the company's strategy
from DRAM to semiconductor chips.
Two.
Customer capture of the resourceallocation process where your top
customers heavily influence yourstrategy with sustaining innovations.
(01:27):
Three.
In some cases we have CEO ortop-down intervention redirecting
resource allocation, aswe'll see in today's episode.
And four, further examples includesetting up a separate unit and a separate
context, which protects that unit fromcapital market metrics of success, and
indeed existing customer influenceson the resource allocation process.
(01:52):
Today's guest argues that diversifiedcorporations create advantage not by
sharing resources across divisions,but by strategic integration.
Recombining assets from multipledivisions to pursue new opportunities
because divisional incentives,risk and uncertainty block this.
Top down intervention often theCEO is absolutely essential.
(02:17):
He covered a case study of BCE andexamined decisions about major capital
expenditures in a turbulent environment.
He showed how a real optionsapproach to resource allocation
preserved BCE E'S flexibility toexploit future strategic integration
opportunities without Overinvesting.
It is a pleasure to welcome back, authorof all these books behind me, the three
(02:41):
Rules, the Strategy Paradox, InnovatorsSolution with Clayton Christensen,
and Indeed the Innovator's Manifesto,and of course, today's focus, his
friend, his mentor, Joe Bower, and theresource allocation to strategy book
that we've been covering on the show.
It's a pleasure to welcomeback Michael Raynor.
(03:03):
Welcome to the show.
It's great to be here.
it's been a long time.
Last time we spoke was we were talkingabout another one of your mentors, which
was your co-author, clay Christensen.
But I thought we'd share a little bitabout your relationship with Joe, Seen as
we're here to recognize and celebrate hiscontribution to their strategy literature.
(03:23):
Yeah.
Joe was the, chair of my thesis committee.
So I started the doctoral programand the DBA program at the HBS
in, I'll say late last century.
So back in the late nineties.
And and sat in my little cubiclejust up the hall from Joe's office.
(03:45):
And and he was characteristicallysupportive and helpful.
And quite happy to say in my ownsmall way, I'm, part of that legacy.
It was interesting.
We were talking to him over the time andClark Gilbert was saying, for example,
he helped create so many people who werebrilliant contributors to the strategy
(04:08):
literature, which you have come to becomewith those books behind me as well.
But you were so lucky to be chosen by him.
He was saying that those people whowere chosen, those people who were
in the book, have gone on to be verywell recognized in strategic work.
I think that's true.
And and as I reflect on it, , maybe it wasmaybe it was evil genius on Joe's part.
(04:32):
I don't know, but I never gotthe impression that there was any
pressure or effort or need to stickhaKyndryle or cattle shoot with
doctoral students or the people wework with into a particular approach.
I think that, and that's probably born onthe fact that even then, 30 years ago, um,
(04:52):
Joe was Joe was already well establishedand wasn't in any hurry to somehow hijack
or co-op other people to build his legacy.
He wanted to see people towork that they wanted to do and
that they would find rewarding.
And again, it, I can only tell youwhat it felt like to me, right?
(05:13):
Is that if you found your way into thatinto that tradition then that was not
something that he was actively promoting.
But if you landed there, he wasmore than happy to to support you
and to try and help you make as asmeaningful contribution as you could.
One of the things he said was thathe picked people who were willing
(05:36):
to do the work and willing to goafter something and I thought, maybe
we'll share yours 'cause you wentafter specific areas that you could.
shine with your thesis andactually go and do the work
and understand these companies.
Let's share a little bitabout that because it'll help
us set up today's episode.
I decided to go pursue doctoralstudies with a particular area in mind.
(06:00):
So when I got started in consultingand finished business school in
the early nineties, that was the,that's been the, the dawn of the
internet and kind of convergence 1.0.
The whole notion is that phonecompanies and cable companies were
all converging on the same spacefrom very different starting points.
That the future that we have now is thefuture we envisioned then that we thought
(06:21):
we would have by 2003, but didn't showup until about six months ago, right?
Where in keeping with the notion thatwe underestimate change in the long
run, but overestimated in the short run.
And so I was keen to getmy arms around these.
Relatively tactical question of how themedia, entertainment, telecommunication
(06:41):
space was all becoming one big airball.
And then
like any good doctoral program, Isuppose is supposed to do, I was stepped
back, tried to get grounded as well asI could in the, what was already known
about strategy and organization, andthen came to see that same problem as a
(07:04):
specific instance of a larger phenomenon.
So in the end, I ended up lookingat exactly the companies I had hoped
to look at, and DCE, big diversifiedCanadian telecoms company, a much bigger
deal 30 years ago than it is today.
But and looked at them through thatlens and and developed what I hope
(07:26):
is a set of tools that shed lighton a much broader range of problems
that are relevant even today.
You say in the chapter at the start,it's beyond the scope of that chapter to
rehearse the RAP model in its entirety.
But I'd love you to give us yourdefinition of it, or at least your
definition as it came to light for BCEB.
(07:46):
'cause it's really useful tosee the different lenses and the
different descriptions of OAP.
Yeah.
Well, I mean the, the book thatyou're, that you're focusing on is,
and you, you will have mentionedthis in other discussions, I'm sure.
Right?
So it's a synthesis of the number ofthreads of research that have emanated
from or converged upon Bowers resourceresource allocation process model.
(08:11):
And that model, as I think of itessentially describes how strategy's
actually formulated over time.
So this goes back to the midsixties when Joe did this work.
What I find amazing is that it seems tome to be a fully accurate description
of how it happens even today.
We don't have to tearit up and start over.
(08:31):
It's only the rhetoric that tells usthe world is completely different.
And so it's a description of howcompanies generate and improve
project level initiative, right?
Your strategy is whatyou spend your money.
And so the RAP model describeshow companies spend their money on
one in some things and not others.
(08:53):
And to my view, that's really theessence of good strategy, right?
You've heard people say, strategyis what we don't do, right?
Being focused means being clearabout what doesn't happen.
And what the RAP model describes ishow in well-functioning companies,
they systematically don't do thethings that aren't consistent
with their strategy, right?
Mechanisms of the resource allocationprocess are not a bug, it's a feature.
(09:18):
Okay.
It's how companies stay focusedon the markets they hope to serve.
But then the subsequentwork is about two things.
I think.
One is how do companies changestrategy when they need to and how
do they innovate when they needto, And that's different, right?
Because organizations necessarilyput in place constraints.
(09:42):
That's what the RAP model is.
But it says that you've gotcorporate context, you've got product
market context, and customer, allthese things that put you in a
box, but that's not a bad thing.
You put in place those constraints sothat the organization doesn't have buck
fever and just shoot anything that moves.
'cause that's its own form of pathology.
(10:03):
So management is about placing constraintson the opportunities that people pursue.
Without them, the organizationwould just dissipate.
But the problem with constraints isthat sometimes you need to break them.
And so the research in resource allocationanthology, I think describes two things.
(10:27):
It says sometimes those constraints do infact prove pathological and in two ways.
One is they may actually, um, preventyou from, for example, getting
outta businesses that are no longer,
it prevents you from seeing threatsto your existing business, and it
(10:48):
prevents you from pursuing opportunitiesthat you otherwise shouldn't.
And so the question becomes what kindsof overrides, what kinds of compensating
mechanisms can you put in place?
And this is the part that is stilltaking shape in my own head, is how
systematic can you be about that.
Right?.
Is there a process for changing?
(11:09):
Is there a metaprocess?
There's the resource allocationprocess, and then there's the process
for changing the resource allocation.
We, we will, we'll dispensewith the third order, the third
order change process for now.
But that's, that's, I suppose that'show I see the arc of, of that work.
(11:30):
And one of the things, and this will teeus up for when we talk about BCE, which
is the core case study of this chapter,is managers chase local wins that make
them look good, and not just to thecompany, but actually to their peers.
Even if it means missing bigger winsfor the company because they're so far
removed because of those compar, becauseof that com compartmentalization that's
(11:52):
happened in the company, that they'recharge, they're in charge of that
compartment and not the overall container.
Yeah.
And that's, that's notsomething you can fix, right?
I mean, it, it's easy to hearwhat you've just described, which
I think is correct and concludethat somehow it's a self-serving
pathology of small-minded managers.
I don't think that's true.
(12:13):
I think that people respond to theincentives that have put in place.
They cannot be expected to understandor know what all the larger order
trade offs and, and objectives are.
I mean, if that could actuallywork, then the only thing we need
to do is give everybody stockoptions and job done, right?
But it doesn't work that way.
The world's too complicated.
So we give people specific objectivesthat are tailored to the decision rights
(12:38):
that they have been allocated, that areappropriate to the the magnitude and scope
of opportunities that they can see, right?
They have a budget limit.
They can spend up to x milliondollars without approval.
They have to deliver agiven return on investment.
They have certain metrics beyond justROI, things like gross margin, right?
(12:58):
We, we do all of that because those arethings you can actually see the connection
between what you do and share price.
I mean, good luck with that.
And the problem, the unavoidableproblem is that every set of, of
incentives that you specify isalways going to be underspecified.
You can't fix that, right?
(13:20):
And so you put in place the best systemyou've got and, and the art of management
is constantly tinkering with theincentive structures and the organization
spreads why people go through reorgs.
So you figure about reporting structuresand it set and you change those things
to adapt the constraints to whatyou're actually trying to accomplish
as a company, that's fine, right?
(13:41):
But what then the higher orderproblem is what happens when you
simply can't tinker at the marginsand it requires a much more.
Directed and significant reconfigurationof those constraints, right?
So that the risk of going on alittle too long here, if we look
at disruptive innovation, right?
You've got a situation where Clay'sprescription is, look, I I need a
(14:06):
whole new organizational, right?
I need to fit the constraints tothe new opportunity and context.
I can't, I can't do that within thisexisting set of structures because
by the way, this existing company'sgot its own things to do that are
still worth doing, and I can't be allblue and all red at the same time.
(14:26):
Right?
So that's how I think about that,hierarchy of, changing versus
fundamentally reshaping, remakingthe constraints that that drive.
We'll share a little bit about thatwhen we talk about EMERGIS, which
was this emerging element of BCE.
But you just to again, give thefront loading of some of the lenses
through which to see this episode,you, you share that there's at least
(14:48):
two types of risk that, uh, are.
Leaders are confronted with ormanagers are confronted with.
The first is execution risk.
And then secondly, in at leastsome circumstance, you say, which
resources should be , recombined, andin what ways and when, and all that
can be subject to real uncertainty.
(15:08):
And those two real risks, confrontingmanagers freeze them or make them
decide not to actually back or putup resources towards an opportunity.
Yeah, I think that's right.
I mean, I, I referred to it as strategicrisk or strategic uncertainty, right?
So in the case of the BCE aCanadian telecom company, years ago.
They were faced with areconfiguration of the landscape.
(15:31):
They had been for a long time in aregulated land telecom company, and
suddenly they were faced with satelliteTV and the need to have content and
mobile telephony and internet access.
And they, and so the issue is no longerhow do we compete as a telco, but
what is the industry that we're in?
And so I referred to thatas Strategic uncertainty.
(15:54):
And the problem was that a companythat had a fairly finely tuned set of
resource allocation processes, wereunfortunately finely tuned for an
industry that was, I'll say dissolving.
Um, but what you need togo do instead is unclear.
(16:14):
And so we have , the intel examplewith gelman and the shift, as you
mentioned in your opening, comments, theshift from from memory to processors.
What they needed to be was alreadyevident because for crying out loud
processors were 50% of their revenue.
When they finally decided,Hey, you know what?
Maybe we should be a, maybewe should be a processor.
That's its own kind of problem, right?
(16:35):
But it is very different than theproblem of we look at the landline
telephone business and think this hasgot a best before day, but we don't know
what we need to transform into, right?
We haven't already become a 50% some otherkind of company, and now what we need to
do is formalize what we've already becomeand do on purpose instead of by accident.
(16:59):
No different problem entirely.
That's what call strategic uncertaintyas opposed to navigating strategic change
One of the things that I found reallyuseful is you compare the risks that
a divisional manager might face versusthe opportunities from a leader because
they can see from an overall perspectiveand you say, for example, managers
(17:22):
will skip opportunities because theylack information, they lack motivation.
They see higher risks and theyface strategic uncertainty.
And in short, , they have weak incentives,high personal risk and uncertain
payoff, which all discourage them.
But from the perspective of the RAPframework, CEOs or leaders from a
high level have huge opportunitiesbecause of the way they see things.
(17:45):
I'd love you to just juxtapose thosetwo views and see why sometimes it
takes the CEO or the leader steppingin to make these decisions just to
override any kind of divisional barriers.
I think you already, I think you'veactually laid it out , reasonably,
completely already, right?
Which is that, if the essence oforganization is differentiation
(18:05):
and integration, right?
I mean, we've got a lot of stuff to do.
We've got a lot ofdifferent decisions to make.
So in order to create coherentcollective action, we have to
divide up the labor, right?
But then we have to make sure thateverybody's doing their piece in
a way that knits back together toachieve our collective end, right?
So We differentiate by giving bycreating different functions, different
(18:28):
layers in the hierarchy and differentincentives to go with each, right?
So everybody knows what to focus on.
So you give the guess what, yougive the sales force a sales
target, shockingly, right?
You give the operationsdepartment a productivity target,
there's no surprise there.
But then how do you make sure thatthat those now differentiated efforts
(18:51):
are all rowing in the same direction?
And that's where theconstraints come in, right?
So you will say things like, yes,you have a sales target subject
to a profitability constraint.
Yes.
You have a production targetsubject to a cost constraint.
And and in, and that's what,that's the heart of management.
I do.
So when you have middle managersthat are looking at over a specific
(19:12):
time horizon, because by theway, that's what you gave me.
Certain things will look like abad idea that from a different
perspective look like a good idea.
And that's okay if noteverybody has to agree.
provided, it's clear whogets to make the call.
And so you can have senior managementkind of burning thunderbolts from Mount
(19:34):
Olympus saying, Hey, wait a minute.
We need to be in theIT consulting business.
We need to be in thesatellite TV business.
That's not something anybody in thephone business is gonna propose.
That's okay.
You want the phone, the folksrunning the phone business,
they're running the phone business.
And so they, they make those portfoliolevel decision because they've
(19:56):
got a different set of constraintsand incentives and that's okay.
I'd love if you gave us a bitof the context of the time.
The way.
I started off today's episode is to go,don't look at this as a history lesson.
Look at it as a template for theexact same pattern that you're
seeing today with any industry.
(20:17):
But maybe the technologies havechanged or the regulation have changed.
And I loved how you phrased this.
You said that at the time telcos werecaught between Scylla and Charybdis of
technology and regulatory uncertainty.
So they were in thisrock and a hard place.
That was the kind of context, but maybeyou'd share some of the technological
(20:39):
changes that were happening at the time,some of the trends that they were seeing
and some of the stuff they got wrong.
Yeah, fairly tactically, right?
They, this was when the homebased internet was relatively new.
Most people were still on dial up.
But it, I mean.
That's a technology that'sseveral layers dead now, right?
(21:01):
And dial up phones for insight.
And it was it was clear that that was notgoing to be the way of the future, right?
Everybody understood that morebandwidth was the thing that was
going to drive adoption and bea pretty thorough going change.
Um, but the question is how do you get it?
So you had the cable companieswith their coax infrastructure that
(21:23):
was inherently broader bandwidth.
But because it was a networkinfrastructure was subject to
congestions, then you had the phonecompanies with their narrower bandwidth.
But because it switched, you had basicallywhat amounted to a dedicated line.
So there was fundamental trade-offsbetween the two existing infrastructure.
(21:45):
And they each were thinking about howthey migrated to a technological platform
that broke that trade off, that gavepeople both bandwidth and no congestion.
And what that would look like forboth, it became fiber optics and
I think people really knew that.
But we, dealing with investmentrequirements measured in the billions of
(22:06):
dollars back then in the Canadian marketplus, oh, and by the way, you're worried
about wireless technology and videodistribution and the rise of I, oh my God.
So it was this whole portfolio oftechnologies that they were wrestling
and that's what made it such a challenge.
You kind of knew what the outlines of theend state are gonna look like, but how
(22:28):
you got from here to there and how fastand it, what costs, I mean there , getting
to that end state requires survivingevery intermediate state along the way.
That was, and that was the challenge.
All right.
I'm gonna set you up maybe to tell us abit about BCE and challenges they faced.
I'll give the historypiece to save you the high.
(22:51):
I'm quoting from the book here.
The largest telco service provider inCanada at the time was BCE began as Bell
Telephone Company of Canada, formed byan act of Canadian parliament in 1880.
The company's first wave ofdiversification began over a
century later in 1983 when then CEO.
(23:11):
Jean, de Grandpré restructured the companycreating Bell Canada Enterprises, or BCEA
holding company so that management couldpursue growth opportunities outside the
boundaries defined by the original act.
Only Bell Canada, the division responsiblefor legacy phone company operations,
continued to be bound by those obligations1983 and 1990 BCE undertook a series of
(23:38):
initiatives that turned out to be a failedexercise in unrelated diversification.
So maybe I'll hand you the baton at that
Yeah.
to, to tell us , how did it unfold,and then we'll compare that to a second
period of diversification in 1995.
Right.
So , the, if you will, the nationalexperiment, there was that BCE was stuck
(24:00):
in a low growth regulated business,So , the landline telephony services
in Canada have reached a point whereyou're basically gonna grow at, you'll
have new lines at the rate of populationgrowth, and you'll be allowed to charge,
you can charge for them, whateverthe regulator says you can, right?
So you're a pawn, right?
You become, you are a publicutility and know that's not an
(24:21):
insult, that's just a description.
And the management thought, wait a minute.
We want to be a growth company.
That's risk of stating the obvious.
That's our higher order economic model.
That's what we're built of.
The whole point is to grow andincrease profits and profitability.
(24:42):
So if you're in a regulated utilitybusiness, you can't do that.
Degrandpré's 'effort was to put putBell Canada in a box and that would
give the company the opportunity toraise capital separately to go pursue
growth opportunities elsewhere.
So they did things liketelecommunications, consulting
and infrastructure in Saudi Arabiaand a couple of other places.
(25:05):
So countries that were building outtheir own phone infrastructure, they
thought, well, we've done that before.
Why don't , we help othercountries do that as well.
And so they got into a number of otherbusinesses, real estate, financial
services, bunch of other things.
And what they found out is what a lotof companies tend to find out is that
if you go and decide that you are goingto get into a business where there
(25:25):
are a lot of other well-establishedcompanies whose bread and butter depends
critically on defending that ground,you're probably not gonna do very well.
What is for you, a growthopportunity is for them their lunch.
Right?
And so, especially in things likefinancial services in Canada, you're
gonna pick and fight with the RoyalBank in Canada and the Canadian
(25:48):
Imperial Bank of Commerce andthe bank in Nova Scotia in front.
Those folks have been around longerthan you have in their business.
You'll do no better in banking thanthey could do in telecoms, sweetheart.
And, that's what they, so they broketheir pick in a way that a lot of
companies end up breaking their, therethey had no particular competitive
advantage, no particular coreresource that they could leverage.
(26:09):
No particular skill that they had nothing.
And so, perhaps not surprisingly,that turned out poorly.
that's different.
I think fundamentally different in,kind different in kind on degree
from the diversification that theystarted pursuing in the nineties.
'cause there they were faced withundefined and wide open spaces.
(26:31):
There were no.
It was a relatively new space.
There.
There were other companies that alsowanted to compete for this new land.
But there was nobody really established.
It's almost as though, the Hawaiianislands suddenly emerged in the
middle of the Pacific, and it's a bitof a land grab for this new space.
Nobody's really too surehow you compete for it.
(26:53):
What you do know is you can't competefor it because what you've got is
your in your quiver right there.
And so the diversification thatthey pursued was driven by a
desire to assemble the conflictof resources that they might need.
You said there was two importantdifferences between this diversification
initiative and DeGrandpré's First wasthat each of the investments , was
(27:17):
operationally separate from the coretelephony business, the potential for
meaningful synergies at some pointin the future, featured prominently
in the company's stated strategy.
And second, each investment took theform of a partial ownership stake
rather than out outright acquisition.
They were vastly different ways ofseeing these bets that they made,
(27:39):
as well as what you said, puttingit on emerging opportunities.
Yeah, no, I think that's right.
And sometimes you do the right thing forthe wrong reason, you know, which is that
they, they understood if we're going tocompete in broadband infrastructure and
the content space, we can't do that withwhat we have in the Armory right now.
So they needed to acquire the assetsthat could potentially be recombined.
(28:02):
When and in what way?
We're not sure.
Okay, fair enough.
So, to your point, they then wentout and many of these investments
were partial equity stakes.
As a practical matter at thetime, it was largely a function
of the fact that they just didn'thave a big enough bank account.
To go buy these things over.
But what that meant is that theyactually were able to be much more
(28:26):
capital efficient and to calibratetheir investment to the level of
certainty they had with respectto the value of a, of an asset.
And its, and its synergyvalue in the front now.
And it's and even from a financialtheory perspective, I if that works.
Because what it means is that if I buy apartial 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
the cash up front and not faced with allthe risks associated with having done.
And it should turn out that integratingmobility with landline services does in
fact create significant synergy value.
(29:08):
Then they will have a differentialvalue from which to bid
for the outstanding equity.
Right.
So they're no longer just stuck with awinner's curse, overpaying for an asset.
'cause they have no particular advantage.
It's actually literally worth moreto them than it is to anybody else.
So they can afford to buy out and givethe other of the other equity holders
(29:30):
their reserve price and still haveeconomic profit to capture for themselves.
I love how you, you say this,this idea of real options,
but also that they, they can.
Easily turn off an investment becausethey're seeing the inside view, because
they have a board position, for example.
Yeah.
They have an inside view and they alsohave an inside view of the assets that
(29:53):
they're looking to combine it with, right?
So they have the requisite decisionrights to to integrate to exercise
the option, if you will, andwhen that option is in the money.
Again to repeat myself.
It's more valuable to them than it isto anybody else, and so in exercising
(30:13):
the option, they will not be forcedto give away all of the upside.
They can exceed the other equityholders reserve price and still
have access for themselves.
you inform us in this chapter, there's a
I.
asymmetry here that favors theperson who's putting the option in.
let's bring it to life becauseyou bring it to life for
four great examples in here.
(30:35):
The first is the wireless integration,and I'll tee you up again.
You wrote that, in 1984, BCE Mobile.
Or just mobile was launched as a partof bce E'S first diversification push,
and , was a wholly owned subsidiary.
Given the novelty of wirelesscommunications at the time, this is
important to cast yourself back there.
(30:56):
Entering the wireless telephony industryvia acquisition was not feasible,
and so the creation of this divisionis an example of organic growth.
I'd love you to pick us up from thereand bring us through this mini case
study within the bigger chapter.
Yeah, sure.
So I distinguished I came todistinguish result only between
(31:17):
growth options, and strategic options.
And so you can look at BCE Mobile,the mobile telephony business
initially as just a growth option.
We gonna get into a business andbecause we think there's a growth
opportunity there, we believe two things.
First of all back to my HawaiianIslands analogy, it's relatively new
technology, so it's not as thoughthere's some entrenched incumbent
(31:40):
that we're going to have to displace.
This is not BCE enterprises gettingin financial services in 1984.
This is wide open spaces inthe mobile telephony business.
Second, the risk of stating the obvious,it's the mobile telephony business.
So they probably know a thingor two about what it means to
put up a telephony network.
(32:01):
Even if so, to the extent that thetechnologies are new, they're new
to everybody, to the extent thattechnologies have any any similarities
or anything you can leverage withthe existing telephony networks.
BCD has a privileged position, soperfectly reasonable business to get into.
Don't think anybody sees that as aparticularly controversial claim.
(32:24):
What emerged was the notionthat, Hey, wait a minute.
This actually could have importantstrategic synergies with other
forms of telecommunication services.
Once the internet comes along,people immediately see, well, you
can get the internet on your laptop.
Why can't you get theinternet on your phone?
We don't know how to do it yet,but it's pretty easy to see that.
That's certainly a possibility, right?
(32:46):
Hence the need for an option.
Then they ran into a situation thatare just capital constraints, right?
Building up the network, being asuccessful mobile collecting company
required a bunch of capital andit made sense to to spin that off
in order to compete successfullyas a mobile telephony business.
(33:06):
But you hang onto enough of the equitythat you still have the option for
subsequent integration when and asthat becomes the right thing to do.
And so, as I mentioneda moment ago, right?
We can do the right thingfor the wrong reason.
They spun it off 'cause they hadto, and given their druthers,
they would've rather not.
But they had no choice.
(33:26):
But then they had foresight to say, well,given that, this is what we have to do.
We still see the future potential,and so we want to make sure that
we preserve that option value, andso we'll do so in the following.
you mentioned Clay, and again, asa reminder, Michael co-authored the
innovator's solution with Clay as well.
But the idea of measuring thesedifferent entities differently 'cause
(33:49):
they've different cost structures.
So you say here again with thecaveat here, that the technology
and market convergence has rapidlyeroded since Michael wrote this.
But you said in the ensuingdecade, which was 1987.
1997, the two companies, bell and Mobileoperated entirely independently of each
other and with good reason because thewireless and wire line businesses had
(34:14):
different technological infrastructures,cost models, and market and competitive
dynamics, and were in different placesin their respective life cycles.
I thought that was a key line and isagnostic to any industry because if
you're in investing in the Hawaiianislands that have disappeared versus the
mainland, gonna be very, very different.
(34:36):
And particularly the revenuestreams and the metrics of success
are gonna be very different.
This is a bigger lesson, I suppose,beyond this chapter, but I'd love
you to share your view on it.
Speaks to each organization's respectiveresource allocation process, right?
You want them to have verydifferent corporate context.
(34:58):
You want them to have a verydifferent strategic context.
You want them to have a differentinitiation phase, or you want
them to pursue different plan.
'cause they have different strategy.
They the constraints that youimpose upon them are very different
for reasons we've just discussed.
Um, my point around strategicflexibility is that there comes a
(35:19):
point where they become complimentaryassets and you need to integrate.
Those constraints in those contexts inorder to pursue the new opportunity.
And You cannot build a systemthat does two completely different
things at the same time, right?
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 needto flip from one to the other, right?
So good old fashioned variation,selection, retention, and creating
those options is how you createthe variation and the selection
processes within companies.
That's the resource allocation processand the selection process around
how you actually integrate them.
(36:01):
Well, that's sits up with, at thecorporate level, again, for reasons
we've discussed, and we have toseparate those decision rights.
One of the challenges then later onthat you, you may have grown them
separately, but then comes a point whereyou need to strategically integrate
them and you say, some of the challengeshere were, for example, one of the
first opportunities for Synergy wasin the retail distribution business.
(36:24):
I'd love you to take us throughthis, both what happened, but
also the challenges that happenedmainly at a divisional level.
where I ended up going with the optionsthinking is that you have to keep
these divisions on a leash, right?
So it's one thing to say, youknow, let them go off and maximize
their growth and profitability.
If you really do want to be able tostitch them back together at some point
(36:47):
it's possible to diverge too much.
Right?
If you think about, I don't know,I'm stuck in evolutionary metaphor.
If you think aboutAllopatric speciation, right?
Two species are separated by space andthey evolve along different trajectories.
And then if members of those twodifferent subspecies meet up again, well,
they can't reproduce anymore, right?
They've just, they've gone off indifferent directions for too long.
(37:09):
So you have to kind of keepthem close enough that you can
in fact put them back together.
And I think the retail distributioncase reveals what happens when the
differences are simply too great.
You know, people who come in to buy mobilephones versus people that have complaints
about their landline voicemail service.
(37:29):
Again, these are technologies thatsome people have never even listen,
we just may have never experienced.
Um, they are simply so differentthat on its face it looks like, well,
let's just leverage the sales force.
But then it turns out in reality, butthat's not the that's not the option.
You thought it was.
That option's not actually in the money.
You were talking about options, so takingoptions or investing in certain companies.
(37:53):
sometimes, and I'm sure this ringsthrough for so many people listening
to the show maybe who are involvedin this, that decision making becomes
very, very difficult because decisionshad to be made twice often by each
organization's management team or theirboard of directors, and to get around
this, BCE bought back as outstandingequity in mobile, for example, for
(38:17):
1.6 billion Canadian dollars, a 31%premium to BCE's mobile market price.
One month prior to the deal, and wasto accelerate decision making that
they felt that it was worth that marginto speed up that decision making.
Yeah, so they gave themselvesthe governance rights.
They, so they, they, theypurchased the governance rights
(38:39):
from the existing equity holders.
And and in addition, right, veryoften you have to override the
existing the existing incentivestructures for managers as well, right?
So you can buy it.
The other shareholders, you can paythem their reserve price as that, as we
were talking about a few minutes ago.
The argument is yes, you can givethem their 30% premium, but it's
(39:02):
worth, you know, some material amountmore than that to you because of
the synergies that you can capturethat would otherwise be unavailable.
So that's what makes it agood deal for your share.
In addition, right, you're gonnahave constraints systems in place
for the folks who are operating thesebusinesses, and you may not actually
want to change all of those incentivestructures in order to get the
(39:26):
organization to do what you want it to do.
Instead, it becomes a one time override.
Say, no, no, no.
I want this.
We want this to happen.
I'll, I will insulate you from theimpact it would have on your established
KPIs and your compensation, right?
Because I want this to happen, but Idon't want all the misery that comes
with having to try and figure outhow to completely reconfigure every
(39:49):
aspect of the incentive structure.
That's crazy.
The incentive structure actuallyworks pretty well, right?
I just need to smash these thingstogether for now, and for the next
six months I want to play according tothese rule and it'll go back, right?
And so it's those, those individualoverrides just to rearrange the
furniture and then let everybodygo back to doing their jobs.
(40:13):
These are all things that are easy tolook in through the rear view mirror.
That's the reason I wanted to share them.
And you said also that removing theneed to quantify the benefits of
integration for minority shareholderswas only part of the benefit.
However, within the Bell and Mobilityorganization was also considerable
resistance from relatively seniormanagement to even preliminary efforts
(40:35):
to pursue strategic integrationrather than merely synergies.
You give a great example here,simply one was a product launched
in 1999 that gave residents.
Customers, a single phone number thatforwarded incoming calls to multiple
devices until either the subscriberanswers or all identified numbers have
(40:55):
been tried in which the case, in whichcase the caller can leave a message.
The drive for Simply One you say camefrom Bell, not from Bell Mobility,
and Bell Mobility viewed it as athreat as far as they were concerned.
They owned the mobile business.
When Bell started selling a servicethat included Mobility, Bell
was sort of encroaching on theirturf and taking something away.
(41:19):
This Michael, this is in everycompany in all over the world.
No matter what size is when somebodybuilds something that could be some
type of fighter brand or emergingtechnology, and then the big brother
or the existing incumbent wants tosubsume it or package it or bundle
it, there's always that resistance.
(41:40):
I'd love you to share your views on it.
Yeah, I mean I think they, we'll startwith the specifics of, of simply one.
'cause again, 20 plus 25 fourth and30 years later and look back and say,
well, that's not the problem anymore.
'cause really only what, anybodyonly ever has one mobile number.
The notion that you would havemultiple numbers and had to manage the
(42:03):
complexity of that is bizarre to us now.
But back then it was a real issue.
And so the laKyndryline business wasin a situation where people had a
home number that they actually used.
People had an officelaKyndryline, they actually used.
Then they had a mobile numberthat they actually knew.
And so it's not crazy to have threedifferent, and then a fax owned by one.
(42:25):
So people had three differentphone numbers that they may want
people to be able to reach them.
And that was a real hassle.
the laKyndryline business thought,well, if we can make the complexity
of having multiple numbers goaway, people will actually keep
their multiple numbers right?
(42:48):
If the complexity is really burdensome,then people will start getting shedding
numbers and they're not gonna getrid of their mobile number, right?
So if, if I can hide that complexity,they'll keep their home number, they'll
keep their office number because whichevernumber it gets called, it will find them.
And so that was a solution to a problemthat customers had that actually would've
(43:11):
belonged the franchise of the wire land.
So sort of.
You can see why the mobilitybusiness would look at that
and go, whoa, whoa, whoa, whoa.
Time out, right?
This is, this, is thatthat doesn't work for you.
Right?
That actually is going to limit my growth.
And so that's where the corporateoffice steps in and says, all right,
we have to make a bet out here.
(43:32):
So leadership decided to take an optionand go, look, we're gonna, we're gonna
Yeah.
it.
So faced with this conflict betweenbetween mobility and the landline
business around just how integratedyou want those those services to be.
It falls to senior management tomake a one time ad hoc decision on
what's the right way to, to proceed.
(43:54):
You can't build an entire set ofprocesses and structures and systems
to solve what are essentiallynon repeated decisions, right?
You need processes for thingsyou do repeatedly, right?
Not for things that are almost, bydefinition, unique unique opportunities
that are difficult to predict andwill almost certainly never repeat.
(44:17):
And so that's where you have kindof that, I'll call that leadership,
and that's where you have the spotdown, ad hoc, um, limited scope,
limited duration interventions,as I said before, to rearrange the
furniture and then let everybody goback to doing what they're doing.
I love how you put it.
You say top down pressuremade integration possible.
(44:37):
Bottom up alone would've killed it.
And that happens in so manycompanies where the top don't even
know that bottom up killed theidea that never emerged to the top.
We see this all the time where like,my people aren't innovative when you
kind of go, maybe they are, but it'sgetting stuck at this immiscible layer in
Well, Well, but so that'sa really good point.
So innovative, but within what parameters?
(45:00):
Right.
And so the argument is there are probablyplenty innovative within the parameters
of the organization has set them.
And PS that's you, senior management,you have set those parameters.
So they're kind of doingwhat you pay 'em to do.
You shouldn't be surprised.
And and I think it's amistake to think that somehow.
(45:23):
And so what I need to do is I needto start changing all of my incentive
structures in order to... No, becauseif you do that, they won't do the things
they're doing now for keeping points.
Right?
This is, this is my particular take.
The way I've come to internalize andthink about this very evergreen problem
that many people have, have tackled indifferent language in different ways.
(45:45):
But I think the the, the, thetradition that grew up around
Bower
and the resource allocation processis a particularly powerful and
practical and granular way ofthinking about that challenge.
So yes, it's aboutexploitation and exploration.
What the resource allocation process modeldescribes is how organizations actually
(46:08):
exploit, given the strategic context.
It talks about what needs to, how, howin fact you go about exploring where do
you create a variation in the projectsand businesses that you hope to pursue.
How do you choose which ofthem to to invest in over time?
(46:29):
And how does that manifestin either reinforcing or
changing a company's strategy
that's one of the things I picked upwhen you talked about De GrandPré's first
excursion, and his second excursion wasthe second one was dictated by strategic
imperatives or strategic direction.
In some way, at least peopleknew where they were gonna play
(46:49):
yeah, I think that's true.
I mean, the first effortswere attempts purely to drive.
When that's all you're trying todo, there's basically no, curiously
enough, there's no constrainton what you could go get into.
I mean, why not get into consumer productsor food or anything's on the table?
Why look at real estate andfinancial services and I mean,
(47:11):
sure, look at those, but why not?
Nothing's off the table and itbecomes really tricky because all of
a sudden, anything that looks likeit meets your financial hurdle is
going to look like it's a good idea.
And now all of a sudden, senior managementconsists of deciding whether seven is
bigger than four, so that, that's trivia.
(47:32):
And when that's all you'reworking on, it's not a surprise
that it doesn't go well.
Um, the second round of diversificationwas driven by strategic priorities
where there were clear reasons to bein or out of specific opportunities.
The reason you don't get into consumerproducts consumables or food stuffs is
because that's got nothing to do with theconvergence threats that you're facing.
(47:54):
Right.
That that's, if, if you, if you're makinglunch meat, that's not gonna help you
fend off the cable companies who arecoming after your your mail business.
Right.
So that had a reason to bein one place versus certain
very specific uncertainties.
They were trying to behead.
It reminds me always,first real job was digital.
Digital in a media company, and they werealways going, what's the digital strategy?
(48:17):
And I go, what's the strategy first?
Yeah,
you the digital strategy.
And we're seeing it today with ai.
What's the AI strategy?
You go, well, what's the strategy
that's
an excellent point.
Yeah.
I mean, it, forget, I don't knowif this is where you wanna take
the conversation next, but you, youmentioned at the outset, but these
things are not history lessons, right?
Case studies are interesting.
(48:38):
Now that I'm a Prof at IVEY I'mdealing with this firsthand.
Cases start out as timely and current.
Then they become instructive in seasoned,then they become dated and musty and
then they become iconic in place.
Right?
And they, it's been long enough.
(48:59):
And then after that, they justbecome, so nobody really does case
studies on general Motors in 1920.
Pretty soon studying GE under Jack Welchin the eighties will be, that, that's
now sufficiently dated, that it feelsmusty, they given another 15 year classic.
(49:21):
it's really, I mentioned this earlier,it's tempting to look at Joe's work
from the sixties at national products.
Um, which I think is generallyaccepted now, Dow Chemical.
And say what could thatpossibly have to tell us?
I mean, 1960, are you kidding me?
No, I'm kidding you.
It, It, actually does describehow continues to work today.
(49:43):
The the convergence challengesthat I was looking at 30 years
ago look an awful lot to me.
Like the same kinds of issuesthat the titans of today are.
So if you look at thediversification strategies of meta,
the Microsoft it's awfully ret of the samekinds of things that the big difference
(50:06):
is that the titans of today havebasically bottomless financial mutual.
And so the kinds of things that youwould've seen around things like
hard collect mistakes and trying tobe conservative with capital, they
just don't, that's not a constraint.
Fair Enough.
Anything else to do they can godo because they just write a big
(50:27):
enough chapter and away they go.
But the cast is a bit different, right?
The imposing variation of theselection processes and the retention
I think is largely the same.
And we keep getting into things.
Meta gets into consumer products andtheir glasses and Google got into
phones very successfully and, and and.
So you see that same diversification,enducing variation, and then the
(50:52):
same, uh, coalescing around particularopportunities as they take shape.
And AI starts to look like much the samekind of thing, faith and uncertainty.
Faith in the new land grab.
people trying new thingswith an eye too, how they can
stitch together new solutions.
Brilliant.
I'm so glad you said that, Michael.
'cause that's the point I think of goingback, is that there's so much valuable
(51:15):
stuff and the thing I've realizedis that the more modern books are.
Actually just re really rehashingstuff that's been said before
in, in a more modern way.
But if you go back to the sources,when the sources are still there,
the value of it is just incredible.
You, you do see the rhymes ofhistory rather than the repetition.
(51:36):
The only thing I thought that occurredto me there is that it's the rhetoric
is always one of today is unprecedented.
Change today is massively uncertainin the way that the past never
was, and yada, yada, yada.
To paraphrase Elaine from Seinfeldbut I don't, I, I don't think
that, I don't think that's true.
(51:57):
What is true, however, I think is thatthe phenomenon that we're studying
is in the suite of human history.
Pretty New.. mean the I don'treread Chandler nearly as
often as I would like to.
Um, but he's looking at organizationsthat grew up in the late 19th,
early 20th century, and theyreally were first of a kind.
(52:20):
And so we're not even lookingat 150 years of history here.
But in that first 150 years, prettymuch experience at a conceptual
level all there is to experienceand to the extent that we understand
how that works conceptually, right?
Well, we know what we need to know.
(52:41):
Does that mean there's not more to learn?
No, that's not what I'm saying.
Right.
The human body hasn't changedmuch, but medical science still
has a lot to learn so that's true.
Right?
But the fact that there's moreto learn doesn't mean that we
need to keep relearning thethings that we already know.
And so my concern, I guess, is that a lotof us out there seems to take pride in
(53:03):
not building deliberately and carefullyon what is already proved to be true.
In the medical sciences, the physicalsciences, you can't show up with a
new theory for a brand unified theoryof everything that combines quantum
mechanics and gravitational physicswithout accurately accounting for all
of the things that we all already know.
(53:25):
So somebody shows up with a new theoryfor strategy I'm like, but wait a
minute, that doesn't explain 98% ofthe things you've already explained.
So why do I take this newthing seriously, right?
So that almost almost religious fervoraround not taking past work seriously,
I think is really a terrible mistake.
(53:46):
Amen.
Amen.
Man, I, you know, I haveto tell you this as well.
Like, I, I actually couldn't haveread your books when I first met you.
I hadn't built up the knowledge enough,like really, I mean, I mean this, I've
said this to people over the yearsthat if you go back to the early shows,
my, my questions were much more basicand my knowledge was much more basic.
(54:09):
But I'm doing this nearly 10 yearsnow and that, that knowledge compounds
and it just, it makes you be ableto have a better conversation
and actually understand what theperson's saying in the book as well.
'cause we talked before about a lotof these books are quite academic and
this book is quite academic as well.
well, and written for anacademic audience, right?
It is Oxford University Press, after all.
(54:31):
So, yeah.
Hey, and, and actually it's one of thereasons I wanna share it because for
me, I see this kind of perfect storm ofour attention spans are getting less.
We're using things like AI to do the,the, the struggle work of learning for us
or translating stuff or synopsizing it.
And it's making the decisionwhat's important or not in
(54:52):
those text, which is just crazy.
So I really wanna share this knowledgeto people and break it down into
simple bit chunks that they canunderstand it, and maybe save them
the hassle of reading it and talk.
Yeah.
Well, I wanna know how you'vebeen doing this for 10 years
and look five years younger.
So the well, it's interestingyou should mention that.
(55:15):
So, I, maybe this is an unwelcome tangent.
But now that I'm in now that I'm atIVEY and a professor there, I'm actually
building, building some courses,some of which are online in nature.
Um, and the, my explicit intent is tocreate what I see to be introductory
(55:36):
level strategy and innovation coursesthat are built around this way.
I'm looking this way again, the resourceallocation process model and its expansion
that are built around that knowledge.
Because I think the introductorystrategy courses, I think, start
too far back and they leave peoplewhere you would've been 10 years ago
(56:00):
as a way to, and we don't need, wedon't need to begin there anymore.
Right.
PE people don't, when peoplestart their technical engineering
degree, they don't start with howto transform, letting the goal.
And they don't start with alchemy,they start with the state of the art.
You can introduce the state of theart simply and in an introductory
way, but you can start people in aplace where they can take advantage
(56:22):
of the accumulated knowledge to make.
And I'm finding that, which is part of thereason why, incidentally, I've been gone
and dug out a lot of this stuff recently.
That's what I'm trying to do.
So my conceit at present is to try andcreate introductory level materials that
start people off at a place that is asclose to where, you know, we've arrived
(56:47):
after many years of thinking aboutthis stuff without having to go through
all of that misery to present to them.
Right.
As a plea, as a provenbody of knowledge, right?
So that they begin as a foundationat what is for us, the summit of
everything that we've tried to createover the, over the last several decades.
(57:09):
My and my belief is that's, and that'show we create collective progress and
forcing them to start all over and
say, let me talk to you aboutfive forces and core competence.
And, and not that that stuff's wrong.
It's not all, but wedon't need to start there.
We don't need to, we don't need to buildup somebody who's new to the field.
(57:30):
We don't need to build them upthrough the same intellectual
journey that the entire field.
You know what it's like, man, youknow, when you, you maybe are late to
a long longstanding series on Netflix.
You're kind of going, do I have to goback to series one to get to series seven?
Like, you're like, yeah, you kindof gotta go back, but you're trying
(57:51):
to go, well, no, it's Greenfield.
He can jump in wherever there'sa new cast of characters.
Well, I hope so.
I mean, I hope I can start, but I don't,I don't have a better metaphor than,
than for the offer for a minute ago.
Hope is that I can, I can bringyou in or to, to what is for
you a for what is for you?
(58:13):
A plateau, but is for us The Summit.
So Michael, we'd loads more inthere and I, I highly recommend
people reading, reading the book.
It's still out there,it's still available.
I'm gonna write about it a little bitas well to try and bring it to life.
There was a brilliant case study ofBell emerges, which was emerging tech or
emerging opportunities in there again.
They're all through the lens of resourceallocation process, why things didn't
(58:37):
work, why some things did work inthere, but look through it and realize
that it's a template or it's white.
It's white label version of exactlywhat we're all going through.
It's hard to read the labelwhen you're inside the jar.
If it's your turn.
These things happen all the time.
They repeat it over and over.
Michael, for people who wannafind you, you're kind of gonna
(58:58):
come back and cover these books.
Now that I'm up to the level and Ican start at your summit and I can,
I can speak to you at the same level.
We're gonna cover them in thefuture, but I know you're doing
amazing work at the moment.
You've, apart from your work withIvy, let's share a little bit about
that and where people can find you.
Sure.
So Mraynor@Ivey.ca, that's myacademic email can also find me
(59:25):
at Michael@michaelraynor.com.
And I'm involved with a climateclimate startup that is trying to
mobilize voluntary climate action amongcorporates to support the decarbonization
of hard to abate commodities.
So things like cements and steeland nitrogen based fertilizers.
(59:46):
So in addition to a lot of this conceptualwork, I'm actually trying to use the
golf clubs to play an actual golf course.
Uh, and, , it is beeninstructive in many ways.
Not least.
It's, it's keeping me humble whenit comes to how difficult it can be
that to put this stuff into practice,
And keep the world in golf coursesas well, at the same time as well.
(01:00:09):
well, the world could probably do withfewer golf courses, frankly, but but
that's a whole different conversation.
And I'll link to where to find youwith that work as well, Michael.
And again, as I said, I'm looking forwardto coming back and covering your work.
Author of chapter 14 of the ResourceAllocation to Strategy book in
tribute to Joe Bauer, MichaelRaynor, thank you for joining us.
(01:00:31):
My pleasure, take care.
Thanks once again to our sponsorKyndryl, who run and reimagine the
technology systems that drive advantagefor the world's leading businesses.
With a unique blend of AI poweredconsulting, built on unmatched
managed service capability.
Kyndryl helps leaders harness thepower of technology for smarter
(01:00:51):
decisions, faster innovation,and a lasting competitive edge.
You can find out more about Kyndryland the Kyndryl institute@Kyndryl.com
or Kyndryl.com/institute.
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