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Unformatted text preview: What is strategy and how do you know if you have one? Strategy bewilders and confuses at every turn. This led the Economist to claim that: "Nobody really knows what strategy is". The chasm at the heart of our knowledge of strategy, argues Costas Markides, requires a return to fundamentals. What is strategy, really? Despite the obvious importance of a superior strategy to the success of an organisation and despite decades of research on the subject, there is little agreement among academics as to what strategy really is. From notions of strategy as positioning to strategy as visioning, several possible definitions are fighting for legitimacy. Lack of an acceptable definition has opened up the field to an invasion of sexy slogans and terms, all of which add to the confusion and state of unease. What is strategy and how do you know if you have one? Not that the confusion is restricted to academics. If asked, most practising executives would define strategy as "how I could achieve my company's objectives". Although this definition is technically correct, it is so general that it is practically meaningless. Needless to say, this state of affairs is unfortunate. Perhaps nothing highlights better the sad (comical?) state of affairs surrounding strategy than the following. Summer 2004 q Volume 15 Issue 2 Business Strategy Review 5 In November 1996, the most prominent strategy academic, Michael Porter of Harvard, published a Harvard Business Review article grandly entitled "What is strategy?" (Harvard Business Review, Nov-Dec 1996).This was followed only a few months later by another famous academic, Gary Hamel of London Business School, with an equally impressively titled article, "The search for strategy"(London Business School working paper, 1997). That after 40 years of academic research on the subject, two of the most prominent academics in the field felt the need to go out of their way and start searching for strategy goes to show how much confusion we have managed to create regarding such a crucial business decision. Although part of the confusion is undoubtedly self-inflicted, a major portion of it also stems from an honest lack of understanding as to the content of strategy. I would like to propose a view of strategy that is based on my research on companies that have strategically innovated in their industries. These are companies that not only developed strategies that are fundamentally different from the strategies of their competitors but whose strategies also turned out to be tremendously successful. Strategy: your move? Based on my research on these successful strategists, I'd like to propose that there are certain simple but fundamental principles underlying every successful strategy. When one goes beyond the visible differences among strategies and probes deeper into the roots of these strategies, one cannot fail but notice that all successful strategies share the same underlying principles or building blocks. Thus, the building blocks of Microsoft's successful strategy are the same as the building blocks of the strategy that propelled Sears to industry leadership 100 years ago. My argument is that by understanding what these building blocks are, an organisation can use them to develop its own successful strategy. The building blocks are: Strategy must decide on a few parameters The building blocks of Microsoft's successful strategy are the same as the building blocks of the strategy that propelled Sears to industry leadership 100 years ago 6 In today's uncertain and ever-changing environment strategy is all about making some very difficult decisions on a few parameters. It is absolutely essential that the firm decides on these parameters because they become the boundaries within which people are given the freedom and the autonomy to operate and try things out. They also define the company's strategic position in its industry. Without clear decisions on these parameters, the company will drift like a rudderless ship in the open seas. What are these parameters? A company has to decide on three main issues: who will be its targeted customers and who it will not target; what products or services it will offer its chosen customers and what it will not offer them; and how it will go about achieving all this what activities it will perform and what activities it will not perform. What is strategy and how do you know if you have one? Business Strategy Review Summer 2004 q Volume 15 Issue 2 A company will be successful if it chooses a distinctive (that is, different from competitors) strategic position These are not easy decisions to make and each question has many possible answers, all of them ex-ante possible and logical. As a result, these kinds of decisions will unavoidably be preceded with debates, disagreements, politicking and indecision. Yet, at the end of the day, a firm cannot be everything to everybody; so clear and explicit decisions must be made. These choices may turn out to be wrong but that is not an excuse for not deciding. It is absolutely essential that an organisation make clear and explicit choices on these three dimensions because the choices made become the parameters within which people are allowed to operate with autonomy. Without these clear parameters, the end result can be chaos. Seen in another way, it would be foolish and dangerous to allow people to take initiatives without some clear parameters guiding their actions. Not only must a company make clear choices on these parameters, it must also attempt to make choices that are different from the choices its competitors have made. A company will be successful if it chooses a distinctive (that is, different from competitors) strategic position. Sure, it may be impossible to come up with answers that are 100 per cent different from those of competitors but the ambition should be to create as much differentiation as possible. Given the importance of coming up with clear answers to these three issues, the question is: who comes up with possible answers to these questions; who decides what to do out of the many possibilities; and how long do the decisions remain unchanged? Who comes up with ideas? Given the right organisational context, strategic ideas (on who to target, what to sell and how to do it) can come from anybody, anywhere, anytime. They may emerge through trial and error or because somebody has a "gut feeling" or because somebody "got lucky" and stumbled across a good idea. They may even emerge out of a formal strategic planning session. (However dismissive we can be of the modern corporation's formal planning process, the possibility still exists that What is strategy and how do you know if you have one? some good ideas can come out of such a process.) No matter how the ideas are conceived, it is unlikely that they will be perfect from the start. The firm must therefore be willing and ready to modify or change its strategic ideas as it receives feedback from the market. In general, there are numerous tactics at our disposal to enhance creativity at the ideageneration stage. Let me list a few of them: q q q q q Encourage everyone in the organisation to question the firm's implicit assumptions and beliefs (its sacred cows) as to who our customers really are, what we are really offering to them and how we do these things. Also, encourage a fundamental questioning of the firm's accepted answer to the question: "what business are we in?" To facilitate this questioning, create a positive crisis. If done correctly, this will galvanise the organisation into active thinking. If done incorrectly, it will demoralise everybody and create confusion and disillusionment throughout the organisation. Develop processes in the organisation to collect and utilise ideas from everybody employees, customers, distributors and so on. At Lan & Spar Bank, for example, every employee is asked to contribute ideas through a strategy workbook; Schlumberger has an internal venturing unit; Bank One has a specific customer centre where all customers are encouraged to phone and express their complaints; at my local supermarket, there is a customer suggestion box. Different organisations have come up with different tactics but the idea is the same: allow everybody to contribute ideas and make it easy for them to communicate their ideas to the decision makers in the organisation. Create variety in the thinking that takes place in formal planning processes. This can be achieved not only by using a diverse team of people but by also by utilising as many thinking approaches as possible. Institutionalise a culture of innovation. The organisation must create the organisational environment(culture/structure/incentives/people) that promotes and supports innovative behaviours. Summer 2004 q Volume 15 Issue 2 Business Strategy Review 7 This is not an exhaustive list of tactics that could be used to increase creativity in strategy making. I am sure that other tactics and processes exist or can be thought of. The principle, though, remains the same: at this stage of crafting an innovative strategy, the goal must be to generate as many strategic ideas as possible so that we have the luxury of choosing. Who decides? Even though anyone in an organisation can come up with new strategic ideas (and everybody should be encouraged to do so), it is the responsibility of top management to make the final choices. There have been many calls lately to make the process of strategy development "democratic" and "flexible" to bring everybody in the organisation into the process. The thinking here is that the odds of conceiving truly innovative ideas are increased if thousands of people rather than just five or 10 senior managers put their minds to work. And this much is true. But the job of choosing the ideas that the firm will actually pursue must be left to top management. Otherwise, the result is chaos, confusion and ultimately a demotivated workforce. After all is said and done, it is the leaders of an organisation, not every single employee, who must choose which ideas will be pursued. Choosing is difficult. At the time of choosing noone knows for sure whether a particular idea will work nor does anyone know if the choices made are really the most appropriate ones. One could reduce the uncertainty at this stage by either evaluating each idea in a rigorous way or by experimenting with the idea in a limited way to see if it works. However, it is crucial to understand that uncertainty can be reduced but not limited. No matter how much experimentation we carry out and no matter how much thinking goes into it, the time will come when a firm must decide one way or another. Choices have to be made and these choices may turn out to be wrong. However, lack of certainty is no excuse for indecision. Not only must a firm choose what to do but it must also make it clear what it will not do. The worst strategic mistake possible is to choose something but also keep our options open by doing other things as well. Imagine an organisation where the CEO proclaims that "our strategy is crystal clear: we will do ABC" and at the same time the employees of the organisation see the firm doing XYZ as well as ABC. In their eyes, this means one of two things: either we don't really have a strategy; or top management is totally confused. Either way, the organisation is left demoralised and confidence in senior 8 management is shattered. Organisations that say one thing and then do another are those that have failed to make clear choices about what they will do and what they will not do with their strategy. The difficult choices made by Canon in attacking Xerox highlight the importance of choosing in an explicit way what to do and what not to do. At the time of the attack, Xerox had a lock on the copier market by following a well-defined and successful strategy, the main elements of which were the following: having segmented the market by volume, Xerox decided to go after the corporate reproduction market by concentrating on copiers designed for high-speed, high-volume needs. This inevitably defined Xerox's customers as big corporations, which in turn determined its distribution method: the direct sales force. At the same time, Xerox decided to lease rather than sell its machines, a strategic choice that had worked well in the company's earlier battles with 3M. At this stage of crafting an innovative strategy, the goal must be to generate as many strategic ideas as possible so that we have the luxury of choosing What is strategy and how do you know if you have one? Business Strategy Review Summer 2004 q Volume 15 Issue 2 Unless we take a holistic, big-picture approach in designing the activities of our company, our efforts will backfire Xerox's strategy proved to be so successful that several new competitors, among them IBM and Kodak, tried to enter the market by adopting the same or similar tactics. Canon, on the other hand, chose to play the game differently. Having determined in the early 1960s to diversify out of cameras and into copiers, Canon segmented the market by end-user and decided to target small and medium-sized businesses while also producing PC copiers for individuals. At the same time, Canon decided to sell its machines through a dealer network rather than lease them. And while Xerox emphasised the speed of its machines, Canon elected to concentrate on quality and price as its differentiating features. Cutting the story short, where IBM's and Kodak's assault on the copier market failed, Canon's succeeded. Within 20 years of attacking Xerox, Canon emerged as the market leader in volume terms. There are many reasons behind the success of Canon. Notice, however, that just as Xerox did 20 years before it, Canon created for itself a distinctive strategic position in the industry a position that was different from Xerox's. Whereas Xerox targeted big corporations as its customers, Canon went after small companies and individuals; while Xerox emphasised the speed of its machines, Canon focused on quality and price; and whereas Xerox used a direct sales force to lease its machines, Canon used its dealer network to sell its copiers. Rather than try to beat Xerox at its own game, Canon triumphed by creating its own unique strategic position. As in the case of Xerox, these were not the only choices available to Canon. Serious debates and disagreements must undoubtedly have taken place within Canon as to whether these were the right choices to pursue. Yet choices were made and a clear strategy with sharp and well-defined boundaries was put in place. As in the case of Xerox, Canon was successful because it chose a unique and well-defined strategic position in the industry one with distinctive customers, products and activities. What is strategy and how do you know if you have one? Strategy must put all our choices together to create a reinforcing mosaic Choosing what to do and what not to do is certainly an important element of strategy. However, strategy is much more than this. Strategy is all about combining these choices into a system that creates the requisite fit between what the environment needs and what the company does. It is the combining of a firm's choices into a well-balanced system that's important, not the individual choices. The importance of conceptualising the company as a combination of activities cannot be overemphasised. In this perspective, a firm is a complex system of interrelated and interdependent activities, each affecting the other: decisions and actions in one part of the business affect other parts, directly or indirectly. This means that unless we take a holistic, bigpicture approach in designing the activities of our company, our efforts will backfire. Even if each individual activity is optimally crafted, the whole may still suffer unless we take interdependencies into consideration. The numerous local optima almost always undermine the global optimum. The problem is that human beings can never really comprehend all the complexity embedded in our companies. We therefore tend to focus on one or two aspects of the system and try to optimise these sub-systems independently. By doing so, we ignore the interdependencies in the system and we are therefore making matters worse. Since it takes time for the effect of our actions to show up, we do not even see that we are the source of our problems. When the longterm effects of our short-sighted actions hit home, we blame other people and especially outside forces for our problems (we had no forecasts, demand is unpredictable, the economy is not growing and so on). In designing a company's system of activities, managers must bear four principles in mind: First, the individual activities we choose to do must be the ones that are demanded by the market. Summer 2004 q Volume 15 Issue 2 Business Strategy Review 9 Second, the activities we decide to perform must fit with each other. Third, activities must not only fit but must also be in balance with each other. Finally, in designing these activities, it is important to keep in mind that the collection of these activities will form an interrelated system. Not only should we pay particular attention to the interrelationships in this system but we should also be aware that the structure of this system will drive behaviour in it. What people do in a firm is conditioned by this underlying structure. Therefore, if we want to change behaviour, we will have to change the structure of the system. an organisational environment, which we, as managers, create. It is this organisational environment that produces the behaviour that we observe in companies. Therefore, to secure the desired strategic behaviour by employees, a firm must first create the appropriate environment that is, the environment that promotes and supports its chosen strategy. By environment, I mean four elements: an organisation's culture; its incentives; its structure; and its people. (What I call here "environment" is what is widely known as the 7S framework developed by McKinsey and Co. The 7S are: style, strategy, structure, systems, skills, staff and superordinate goals.) A company that wants to put into action a certain strategy must first ask the question: "what kind of culture, incentives, structure and people do we need to implement the strategy?" In other words, to create a superior strategy, a company must think beyond customers, products and activities. It must also decide what underlying environment to create and how exactly to create it so as to facilitate the implementation of its strategy. However, deciding on what kind of culture, structure, incentives and people to have is not enough. The challenge for strategy is to develop Strategy must achieve fit without losing flexibility Creating the right fit between what the market needs and what a firm does can backfire if the environment changes and the firm does not respond accordingly. We are all familiar with the story of the frog. When a frog is put in a pot of boiling water, it jumps out; when, instead, the same frog is put in a pot of cold water and the water is slowly brought to a boil, the frog stays in the pot and boils to death. In the same manner, if a company does not react to the constant changes taking place in its environment, it will find itself boiled to death. This implies that a company needs to create the requisite fit with its current environment while remaining flexible enough to respond to (or even create) changes in this environment. But what does it mean when we say that a firm must remain flexible? The way I use the term here, I imply three things: a firm must first be able to identify changes in its environment early enough; it must then have the cultural readiness to embrace change and respond to it; and it must have the requisite skills and competencies to compete in whatever environment emerges after the change. Thus, flexibility has a cultural element to it (being willing to change) as well as a competence element to it (being able to change). Strategy needs to be supported by the appropriate organisational environment Any strategy, however brilliant, needs to be implemented properly if it is to deliver the desired results. However, implementation does not take place in a vacuum. It takes place within 10 A firm must first create the appropriate environment that promotes and supports its chosen strategy What is strategy and how do you know if you have one? Business Strategy Review Summer 2004 q Volume 15 Issue 2 these four elements of organisational environment and then put them together so that on one hand they support and complement each other while on the other they collectively support and promote the chosen strategy. As was the case with the activities I described above, this is the real challenge for strategy: not only to create the correct individual parts but to combine them to create a strong and reinforcing system. Achieving internal and external fits will only bring short-term success. Inevitably, fit will create contentment, overconfidence and inertia. Therefore, while a company aims to achieve fit it must also create enough slack in the system so that, as it grows or as the external environment changes, the organisational environment can remain flexible and responsive. Finally, if business conditions oblige a strategic change of direction, the internal context of an organisation must change them. This is extremely difficult. Not only do we need to change the individual pieces that make up the organisational environment but we must also put them together to form an overall organisational environment that will again fit with the new strategy. If business conditions oblige a strategic change of direction, the internal context of an organisation must change No strategy remains unique for ever There is no question that success stems from the exploitation of a distinctive or unique strategic position. Unfortunately, no position will remain unique or attractive for ever. Not only do attractive positions get imitated by aggressive competitors but also and perhaps more importantly new strategic positions keep emerging all the time. A new strategic position is simply a new, viable who-what-how combination perhaps a new customer segment (a new who), or a new value proposition (a new what), or a new way of distributing or manufacturing the product (a new how). Over time, these new positions may grow to challenge the attractiveness of our own position. You see this happening in industry after industry. Once formidable companies that built their success on what seemed to be unassailable strategic positions find themselves humbled by relatively unknown companies that base their attacks on creating and exploiting new strategic positions in the industry. New strategic positions that is new who-whathow combinations emerge all around us all the time. As industries change, new strategic positions emerge to challenge existing positions for supremacy. Changing industry conditions, changing customer needs or preferences, countermoves by competitors and a company's own evolving competencies give rise to new opportunities and the potential for new ways of What is strategy and how do you know if you have one? playing the game. Unless a company continuously questions its accepted norms and behaviours, it will never discover what else has become available. It will miss these new combinations and other, more agile, players will jump in and exploit the gaps left behind. Therefore, a company must never settle for what it has. While fighting it out in its current position, it must continuously search for new positions to colonise and new opportunities to take advantage of. Simple as this may sound, it contrasts sharply with the way most companies compete in their industries: most of them take the established rules of the game as given and spend all their time trying to become better than each other in their existing positions usually through cost or differentiation strategies. Little or no emphasis is placed on becoming different from competitors. This is evidenced from the fact that the majority of companies that strategically innovate by breaking the rules of the game tend to be small niche players or new market entrants. It is indeed rare to find a strategic innovator that is also an established industry big player a fact that hints at the difficulties of risking the sure thing for something uncertain. There are many reasons why established companies find it hard to become strategic innovators. Compared to new entrants or niche players, leaders are weighed down by structural and cultural inertia, internal politics, Summer 2004 q Volume 15 Issue 2 Business Strategy Review 11 complacency, fear of cannibalising existing products, fear of destroying existing competencies, satisfaction with the status quo and a general lack of incentives to abandon a certain present for an uncertain future. In addition, since there are fewer industry leaders than potential new entrants, the chances that the innovator will emerge from the ranks of the leaders is inevitably small. Despite such obstacles, established companies cannot afford not to innovate strategically. As already pointed out, dramatic shifts in company fortunes can only take place if a company succeeds in not only playing its game better than its rivals but in also designing and playing a different game from its competitors. Strategic innovation has the potential to take third-rate companies and elevate them to industry leadership status; and it can take established industry leaders and destroy them in a short period of time. Even if established players do not want to innovate strategically (for fear of destroying their existing profitable positions), somebody else will. Established players might as well pre-empt that from happening. The culture that established players must develop is that strategies are not cast in concrete. A company needs to remain flexible and ready to adjust its strategy if the feedback from the market is not favourable. More importantly, a company needs to continuously question the way it operates in its current position while still fighting it out in its current position against existing competitors. Continuously questioning one's accepted strategic position serves two vital purposes: first, it allows a company to identify early enough whether its current position in the business is losing its attractiveness to others (and so decide what to do about it); second, and more importantly, it gives the company the opportunity to proactively explore the emerging terrain and hopefully be the first to discover new and attractive strategic positions to take advantage of. This is no guarantee: questioning one's accepted answers will not automatically lead to new unexploited goldmines. But a remote possibility of discovering something new will never even come up if the questions are never asked. s Resources Ansoff, H Igor, Implanting Strategic Management, Prentice Hall, 1984 (2nd edition, 1990) Markides, Costas, Diversification, Refocusing and Economic Performance, MIT Press, 1995 Strategic innovation can take third-rate companies and elevate them to industry leadership; and it can take established industry leaders and destroy them Markides, Costas, All the Right Moves, Harvard Business School Press 1999 Mintzberg, Henry, The Rise and Fall of Strategic Planning, Prentice Hall, 1994 Nadler, David and Tushman, Michael, Competing by Design: The Power of Organizational Architecture, New York: Oxford University Press, 1997. Markides, Costas, Strategic innovation, Sloan Management Review, Spring 1997. Markides, Costas, "Strategic innovation in established companies", Sloan Management Review, Spring 1998. Slywotzky, Adrian J, Value Migration: How to Think Several Moves Ahead of the Competition, Harvard Business School Press, 1996. What is strategy and how do you know if you have one? Costas Markides is Robert P Bauman Professor of Strategic Leadership at London Business School. 12 Business Strategy Review Summer 2004 q Volume 15 Issue 2 ...
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This note was uploaded on 02/15/2012 for the course ECON 101 taught by Professor John during the Spring '11 term at Audencia Nantes Ecole de Management.

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