PAEI, as I have claimed many times, is a code.  It is the “DNA of organizations”.  It can be used to analyze managerial styles, organizational structures, decision making processes, and reward systems.  It can be used to predict the sequence of problems organizations will have along their lifecycles in the future.

PAEI can be also used to design corporate strategy by balancing the four roles for success: Which roles are the organization’s strengths and which are its weaknesses and thus what should management focus on for the future?

Let us look at this in more detail:

A company can have a strategy that capitalizes on:

Better service than the competition (P)

Cheaper cost of production and delivery (A)

Higher level of innovation (E)

Better organizational culture that attracts and retains better human capital (I)

Notice that this follows the code of PAEI and also that NO ONE COMPANY CAN BE THE BEST IN ALL FOUR.  It costs money to do each role and thus can be prohibitively expensive in the aggregate.

Like the myth of the Ideal Executive, there is no ideal or perfect company, performing all the roles at the highest possible level.

Southwestern Airlines focuses on better service than the competition (P).  Dell is characterized by cheaper costs (A).  A higher rate of innovation (E) is what 3M relied on to beat the competition, and a great organizational culture (I) made HP stand out in its early days.

What will your strategy be?

What do you naturally excel at, meaning what has developed organically thus far, that distinguishes you from the competition.  Is it still relevant?   Where is your industry on the lifecycle?  If it is on the aging side of the curve you must watch your costs very carefully.  Stop investing in innovation that has declining marginal utility and instead invest in services.

Take the semiconductor industry as an example in this regard:  Innovation has hit the wall because we are at the end of our knowledge of physics.  We cannot make our chips any smaller or more powerful.  For that we need new theories of physics.  Add to this the fact that the end user is not capable of catching up with what we have innovated so far.  In other words there is a glut of information that end users cannot handle.   The industry needs a period of “cooling off’ until the end users catch up with what is available now, and until new physics theories are developed.  So what do we DO now?  We must cut (E) and increase (A): improve cost structure and move to (P) to offer services in addition to products.

What about Dell?  In their case the competition has caught up – notebook computers are getting cheaper and cheaper.  On the margin Dell apparently cannot improve its cost structure (it’s “A”).  What has made them successful in the past might be the reason for failure in the future.  So what to do then?  Move to services (P) or to innovation (E), like expanding to include tablets or multi use devices.  This move requires attracting top level creative people which Dell probably did not attract in the past since they were squeezing costs to the bone.  To be innovative a company needs human capital, which wants a different culture than the cost- cutting efficiency-oriented one.   Cut (A) and increase (E) and (I).

How about Southwestern Airlines?  It will take a long time for the competition to emulate their culture.  There is little danger on that front.  But this culture can still be capitalized on.  How?  By acquiring other airlines and colonializing them with the culture that gives Southwestern the competitive advantage.

To strategize for success: analyze the industry; analyze the competition; analyze what made you succeed or fail in the past in PAEI terms; redesign your strategy in PAEI terms for the future.

What do you think?