When Strategy Walks Out the Door

The most frequent question I get asked by executives is: “What should our strategy be?” I tell most questioners — to their surprise — that they shouldn’t be asking me. And, frankly, neither should they rely on answers from anyone outside their organization.

There certainly is no shortage of high-priced consultants willing to answer the big questions of strategy. And advice about the “best” strategy can also be found in any number of management books.

But managers should be skeptical consumers of external strategy advice. External strategy advice can be costly — and wrong. At worst, such advice can consist of little more than generic platitudes about “leveraging core competencies” or “synergies.”

Increasingly, the best sources of insight about strategy — specifically, strategy for your company — lie dormant within the company itself, in its employees. Ironically, companies often expend significant resources on external advice while employees with the best strategy ideas are ignored and thus may walk out the door.

Consider The Walt Disney Co. in the early 1980s. During this period, John Lasseter — a young animator working for Disney — was lobbying heavily for the company to take computer animation seriously. Historically, Disney’s advantage lay in producing animated movies and characters, which it then leveraged into its theme parks and product licensing. Lasseter felt that the new computer animation technology would be central to Disney’s future. But Lasseter’s pitches to top management about the importance of computer animation fell on deaf ears — and he was, in fact, fired.

Lasseter left and joined Lucasfilm’s computer graphics group — the company that later became Pixar. While Michael Eisner created tremendous value for Disney as CEO over a two-decade period, from the mid-1980s to the mid-2000s, it quickly became clear that the computer animation Lasseter had pushed for in fact was central to Disney’s future. Disney even tried to lure Lasseter back. But it was too late. Pixar quickly became the animation powerhouse that Disney once was — and should have become again. In 2006, some two decades later, Disney purchased Pixar for $7.4 billion, and Lasseter is now chief creative officer of Walt Disney and Pixar Animation Studios.

A similar pattern — of a company’s next strategy walking out the door — can be found in other settings. The disk drive industry — a context made famous by Clayton M. Christensen’s work on disruptive innovation — illustrates this point. In the mid-1980s, Seagate Technology Inc. was among the largest disk drive players in the industry. Cofounder Finis Conner began to advocate for Seagate to move into smaller disk drives rather than trying to satisfy existing customers by maximizing storage capacity on larger-sized disk drives. The two strategies, of course, were not necessarily mutually exclusive. But Seagate preferred to focus on the larger disk drives.

Conner left the company and founded Conner Peripherals Inc. in 1985. Conner Peripherals, which produced the smaller disk drives, became a near-instant success, and at the time, the fastest manufacturing startup ever to organically grow to more than $1 billion in sales. In 1996, Seagate acquired Conner Peripherals for about $1 billion.

As these examples illustrate, the mobility of employees — whether they are fired or leave of their own volition — can be seen as a leading indicator of the future prospects of a company. If employees don’t feel listened to about strategic decisions, they may leave and take their strategies with them. In the cases of both Disney and Seagate, the companies later had to engage in costly acquisitions to, in effect, “buy” back the strategies that their former employees had gone on to realize in other settings.

The notion that employees embody strategies and may simply walk out the door is neither far-fetched nor completely new. The late economist Albert O. Hirschman developed a simple but powerful “exit, voice, and loyalty” framework to highlight the idea that one response to the decline of organizations is the exit of employees. Hirschman’s intuition can be extended and turned on its head to not only understand the decline of organizations, but also their strategy and growth. A powerful indicator of the future prospects, strategy, and performance of any company is who is joining and who is leaving, and why. The HR function thus should carefully be tied to a company’s strategy to ensure that employees are listened to.

Let Employees Vote With Their Feet

When employees leave an organization, they are essentially signaling their opinions by “voting with their feet.” Savvy companies can put the same principle to work by creating mechanisms that allow employees to vote with their feet internally — without leaving the company.

Valve Corp., based in Bellevue, Washington, does this. The company is responsible for a stream of hit video games (for example, “Half-Life” and “Portal”), and more recently the highly popular Steam software platform for gaming and digital distribution of games. Valve was founded in 1996 by employees who had left Microsoft Corp.

The founders of Valve decided early on that Valve would be the type of company that would amplify rather than stifle employee voices. Specifically, they instituted practices that explicitly capitalized on the power of employees voting with their feet. Valve lets employees create or self-select into projects and opportunities that they — the employees, rather than managers — find most promising. In its handbook for new employees, one of the questions Valve asks employees to consider is: “Is Valve not doing something that it should be doing?” Valve tells its employees, “The company is yours to steer.”

To encourage employees to explore new directions, Valve has instituted a simple practice called the “rule of three.” Essentially, if three Valve employees think that a particular initiative, project, or strategy is worthwhile, then they are empowered to pursue it. The need for the project originator to recruit at least two others onto a project ensures that the company taps, on a small scale, into the proverbial “wisdom of crowds.” Overall, as Valve employees consider whether a new project is worthwhile enough to perhaps necessitate dropping some other activities or projects, they are making important judgments that can benefit the company and its performance.

Not all companies can cede as much strategic direction to their employees as Valve does. And not all strategies can be pursued concurrently. But Valve’s approach can nonetheless be powerfully utilized within companies in amended or smaller ways.

Whatever the mechanism used, it is of first-order importance from a strategic perspective to ensure that employees are listened to. Strategy increasingly emerges from the front lines, where employees interact with technologies and customers. Top management can be far removed from these interactions — and they ignore employees’ strategic insights at the organization’s peril.