Until the 1940s, strategy was seen as primarily a matter for the military. Military history is filled with stories about strategy. Almost from the beginning of recorded time, leaders contemplating battle have devised offensive and counter-offensive moves for the purpose of defeating an enemy. The word strategy derives from the Greek for generalship, strategia, and entered the English vocabulary in 1688 as strategie. According to James’ 1810 Military Dictionary, it differs from tactics, which are immediate measures in face of an enemy. Strategy concerns something “done out of sight of an enemy.” Its origins can be traced back to Sun Tzu’s The Art of War from 500 BC.
Over the years, the practice of strategy has evolved through five phases (each phase generally involved the perceived failure of the previous phase):
Basic Financial Planning (Budgeting)
Long-range Planning (Extrapolation)
Strategic (Externally Oriented) Planning
Complex Systems Strategy:
Complex Static Systems or Emergence
Complex Dynamic Systems or Strategic Balance
Basic Financial Planning (Budgeting)
James McKinsey (1889-1937), founder of the global management consultancy that bears his name, was a professor of cost accounting at the school of business at the University of Chicago. His most important publication, Budgetary Control (1922), is quoted as the start of the era of modern budgetary accounting.
Early efforts in corporate strategy were generally limited to the development of a budget, with managers realizing that there was a need to plan the allocation of funds. Later, in the first half of the 1900s, business managers expanded the budgeting process into the future. Budgeting and strategic changes (such as entering a new market) were synthesized into the extended budgeting process, so that the budget supported the strategic objectives of the firm. With the exception of the Great Depression, the competitive environment at this time was fairly stable and predictable.
Long-range Planning was simply an extension of one year financial planning into five-year budgets and detailed operating plans. It involved little or no consideration of social or political factors, assuming that markets would be relatively stable. Gradually, it developed to encompass issues of growth and diversification.
In the 1960s, George Steiner did much to focus business manager’s attention on strategic planning, bringing the issue of long-range planning to the forefront. Managerial Long-Range Planning, edited by Steiner focused upon the issue of corporate long-range planning. He gathered information about how different companies were using long-range plans in order to allocate resources and to plan for growth and diversification.
A number of other linear approaches also developed in the same time period, including “game theory”. Another development was “operations research”, an approach that focused upon the manipulation of models containing multiple variables. Both have made a contribution to the field of strategy.
Strategic (Externally Oriented) Planning
Strategic (Externally Oriented) Planning aimed to ensure that managers engaged in debate about strategic options before the budget was drawn up. Here the focus of strategy was in the business units (business strategy) rather than in the organization centre. The concept of business strategy started out as ‘business policy’, a term still in widespread use at business schools today. The word policy implies a ‘hands-off’, administrative, even intellectual approach rather than the implementation-focused approach that characterizes much of modern thinking on strategy. In the mid-1900s, business managers realized that external events were playing an increasingly important role in determining corporate performance. As a result, they began to look externally for significant drivers, such as economic forces, so that they could try to plan for discontinuities. This approach continued to find favor well into the 1970s.
While the theorists were arguing, one large US Company was quietly innovating. General Electric Co. (GE) had begun to develop the concept of strategic business units (SBUs) in the 1950s. The basic idea-now largely accepted as the normal and obvious way of going about things-was that strategy should be set within the context of individual businesses which had clearly defined products and markets. Each of these businesses would be responsible for its own profits and development, under general guidance from headquarters.
The evolution of strategy began in the early 1960s, when a flurry of authoritative texts suddenly turned strategic planning from an issue of vague academic interest into an important concern for practicing managers. Prior to this strategy wasn’t part of the normal executive vocabulary.
Alfred Chandler (1918-)– Influential figure in both strategy and business structure-Strauss Professor of Business History at Harvard since 1971.
Chandler talks about the development of the management of a large company from history; in particular from the mid nineteenth century to the end of the First World War (what he calls ‘the formative years of modern capitalism’). During this period, the typical entrepreneurial or family firm gave way to larger organizations containing multiple units. A new form of management was needed because the owner-manager could not be everywhere at once. In addition, a new breed of manager was needed to operate in this environment – the salaried professional.
He advised splitting the functions of strategic thinking and line management. In Chandler’s analysis, the effective organization now separates strategy and day-to-day operations. Strategy becomes the responsibility of managers at headquarters, leaving the unit managers to concentrate on the here and now in decentralized units. In effect, he was advising creating a line management who would carry out plans developed by a more serious staff function elsewhere.
His influential book Strategy and Structure was published in 1962, appealing to many large companies that were having difficulty in coping with their size. In recent years it has come under heavy attack from critics, who maintain that strategy must be a line responsibility, decided as close as possible
John Gardner’sSelf-Renewal, published in 1964, which pointed out that organizations constantly need to reassess themselves, had the earliest real impact on managers. Like people, they need to keep renewing their skills and abilities – something they can only do effectively through careful planning.
Kirby Warren at Harvard looked in depth at what happened in a small number of companies to see what worked well and what didn’t. In several companies for example, he found that the managers confused the strategic plan with its components – in particular, the marketing plan was often assumed to be the same thing as the overall corporate plan.
Wickham Skinner (1924-) who was based at Harvard since 1960, pointed out that an excessive focus on marketing Planning frequently led companies to forget about manufacturing needs until late in the day, when there was little room for manoeuvre. Skinner argued for a clear manufacturing strategy to proceed in parallel with the marketing strategy. In many ways he was ahead of his time, for the concept of technology strategy or manufacturing strategy had only begun to take root in the 1980s and many manufacturing companies still have no one in charge of this aspect of their business.
One particularly influential idea from skinner was the ‘focused factory’. He demonstrated that it was not normally possible for a production unit to focus on more than one style of manufacturing. Even if the same machines were used to produce basically similar products, if those products had very different customer demands that required a different manner of working, the factory would not be successful. For example, trying to produce equipment for the consumer market, where a certain error rate in production was compensated for by higher volume sales at a lower price, was incompatible with producing 100 per cent perfect product for the military. The most likely outcome was a compromise that satisfies no one.
Paul Lawrence and Jay Lorsch, also from Harvard, put forth their contingency theory of organizations. They argued that every organization is composed of multiple paradoxes. On the one hand, each department or unit has its own objectives and environment. It responds to those in its own way, both in terms of how it is structured, the time horizons people assume, the formality or informality of how it goes about its tasks and so on. All these factors contribute towards what they call ‘differentiation’. At the same time each unit needs to work with others in pursuit of common goals. That requires a certain amount of ‘integration’, to ensure that they are all working with rather than against each other. In their studies of US firms in a variety of manufacturing industries, they found that companies with a high level of differentiation could also have a high level of integration. The reason was simple; the greater the differentiation, the more potential for conflict between departments and therefore the greater the need for mechanisms to help them work together. Their work forced many managers to understand that organizations were not fixed; that strategy and planning had to be adapted to each segment of the environment with which they dealt.
Igor Ansoff (1918-) through his unstintingly serious, analytical and complex, Corporate Strategy, published in 1965, had a highly significant impact on the business world. It propelled consideration of strategy into a new dimension. It was Ansoff who introduced the term strategic management into the business vocabulary.
Ansoff’s sub-title was “An Analytical Approach to Business Policy for Growth and Expansion. “ The end product of strategic decisions is deceptively simple; a combination of products and markets is selected for the firm. This combination is arrived at by addition of new product-markets, divestment from some old ones, and expansion of the present position,” writes Ansoff. While the end product was simple, the processes and decisions which led to the result produced a labyrinth followed only by the most dedicated of managers. Analysis – and in particular ‘gap analysis’ (the gap between where you are now and where you want to be) – was the key to unlocking strategy.
The book also brought the concept of ‘synergy’ to a wide audience for the first time. In Ansoff’s original creation it was simply summed up as the “2+2=5” effect. In his later books, Ansoff refined his definition of synergy to any “effect which can produce a combined return on the firm’s resources greater than the sum of its parts.”
While Corporate Strategy was a notable book for its time, it produced what Ansoff himself labeled “paralysis by analysis”; repeatedly making strategic plans which remained unimplemented.
Reinforced by his conviction that strategy was a valid, if incomplete, concept, Ansoff followed up Corporate Strategy with Strategic Management (1979) and Implanting Strategic Management (1984). His other books include Business Strategy (1969), Acquisition Behavior in the US Manufacturing Industry, 1948-1965 (1971), From Strategic Planning to Strategic Management (1974), and The New Corporate Strategy (1988).
Implanting Strategic Management, co-written with Edward McDonnell, records much of the research conducted by Ansoff and his associates and reveals a number of ingenious aspects of the Ansoff model. These include his approach to using incremental implementation for managing resistance to change, product portfolio analysis, and issue management systems.
The Problem with Strategic Planning (Analysis): The fuel for the modern growth in interest in all things strategic has been analysis. While analysis has been the watchword, data has been the password. Managers have assumed that anything which could not be analyzed could not be managed. The belief in analysis is part of a search for a logical commercial regime, a system of management which will, under any circumstances, produce a successful result. Indeed, all the analysis in the world can lead to decisions which are plainly wrong. IBM had all the data about its markets, yet reached the wrong conclusions.
There are two basic problems with the reliance on analysis. First, it is all technique. The second problem is more fundamental. Analysis produces a self-increasing loop. The belief is that more and more analysis will bring safer and safer decisions. The traditional view is that strategy is concerned with making predictions based on analysis. Predictions, and the analysis which forms them, lead to security. The bottom line is not expansion, future growth or increased profitability-it is survival. The assumption is that growth and increased profits will naturally follow. If, by using strategy, we can increase our chances of predicting successful methods, then our successful methods will lead us to survival and perhaps even improvement. So, strategy is to do with getting it right or, as the more competitive would say, winning. Of course it is possible to win battles and lose wars and so strategy has also grown up in the context of linking together a series of actions with some longer-term goals or aims.
This was all very well in the 1960s and for much of the 1970s. Predictions and strategies were formed with confidence and optimism (though they were not necessarily implemented with such sureness). Security could be found. The business environment appeared to be reassuringly stable. Objectives could be set and strategies developed to meet them in the knowledge that the overriding objective would not change.
Such an approach, identifying a target and developing strategies to achieve it, became known as Management by Objectives (MBO).
Under MBO, strategy formulation was seen as a conscious, rational process. MBO ensured that the plan was carried out. The overall process was heavily logical and, indeed, any other approach (such as an emotional one) was regarded as distinctly inappropriate. The thought process was backed with hard data. There was a belief that effective analysis produced a single, right answer; a clear plan was possible and, once it was made explicit, would need to be followed through exactly and precisely.
In practice, the MBO approach demanded too much data. It became overly complex and also relied too heavily on the past to predict the future. The entire system was ineffective at handling, encouraging, or adapting to change. MBO simplified management to a question of reaching A from B using as direct a route as possible. Under MBO, the ends justified the means. The managerial equivalent of highways were developed in order to reach objectives quickly with the minimum hindrance from outside forces.
Henry Mintzberg’s book The Rise and Fall of Strategic Planning was first published in 1994. “The confusion of means and ends characterizes our age,” Henry Mintzberg observes and, today, the highways are likely to be gridlocked. When the highways are blocked managers are left to negotiate minor country roads to reach their objectives. And then comes the final confusion: the destination is likely to have changed during the journey. Equally, while MBO sought to narrow objectives and ignore all other forces, success (the objective) is now less easy to identify. Today’s measurements of success can include everything from environmental performance to meeting equal opportunities targets. Success has expanded beyond the bottomline.
Strategic Planning to Strategic Management
Strategic Planning to Strategic Management: Strategic planning was a plausible invention and received an enthusiastic reception from the business community. But subsequent experience with strategic planning led to mixed results. In a minority of firms, strategic planning restored their profitability and became an established part of the management process. However, a substantial majority encountered a phenomenon, which was named “paralysis by analysis”: strategic plans were made but remained unimplemented, and profits/growth continued to stagnate. Claims were increasingly made by practitioners and some academics that strategic planning did not contribute to the profitability of firms. In the face of these claims, Ansoff and several of his colleagues at Vanderbilt University undertook a four-year research study to determine whether, when paralysis by analysis is overcome, strategic planning increased profitability of firms.
Ansoff looked again at his entire theory. His logic was impressively simple – either strategic planning was a bad idea, or it was part of a broader concept which was not fully developed and needed to be enhanced in order to make strategic planning effective. An early fundamental answer perceived by Ansoff was that strategic planning is an incomplete instrument for managing change, not unlike an automobile with an engine but no steering wheel to convert the engine’s energy into movement.
Characteristically, he sought the answer in extensive research. He examined acquisitions by American companies between 1948 and 1968 and concluded that acquisitions which were based upon an articulated strategy fared considerably better than those which were opportunistic decisions. The result of the research was a book titled Acquisition Behavior of US Manufacturing Firms, 1945-1963.
In 1972 Ansoff published the concept under the name of Strategic Management through a pioneering paper titled The Concept of Strategic Management, which was ultimately to earn him the title of the father of strategic management. The paper asserted the importance of strategic planning as a major pillar of strategic management but added a second pillar – the capability of a firm to convert written plans into market reality. The third pillar- the skill in managing resistance to change – was to be added in the 1980s.
Ansoff obtained sponsorship from IBM and General Electric for the first International Conference on Strategic Management, which was held in Vanderbilt in 1973 and resulted in his third book, From Strategic Planning to Strategic Management.
The complete concept of strategic management embraces a combination of strategic planning, planning of organizational capability and effective management of resistance to change, typically caused by strategic planning. Ansoff says that “strategic management is a comprehensive procedure which starts with strategic diagnosis and guides a firm through a series of additional steps which culminate in new products, markets, and technologies, as well as new capabilities. Strategic Management aimed to give people at all levels the tools and support they needed to manage strategic change. Its focus was no longer primarily external, but equally internal – how can the organization seize and maintain strategic advantage by using the combined efforts of the people that work in it?
Between 1974 and 1979 Ansoff developed a theory which embraces not only business firms but other environment-serving organizations. The resulting book titled Strategic Management, was published in 1979.
Self-confirming Theories: In the 1980s, there was a renewed interest in discovering ways of dealing with an increasingly complex and changing environment. It was during this time that the practice of strategy began to move toward a metaphorical application of an old idea. For many years, management theorists had borrowed the ideas of an economic theory commonly referred to as “equilibrium theory,” or “equilibrium systems theory,” as a basis for developing management theory. Basically, the concept was developed around the idea of linearity (and, to some extent, simplicity). Self-confirming theories of strategy require the strategist to assume that what the firm has done in the past will be done in the future. In effect, executives “confirm” that past strategy has been appropriate by adopting it repeatedly over time.
Self-confirming theories may be recognized by their historic-simple frame and mental models. Such theories use terms such as “mission”, core competencies”, “competitive advantage”, and “sustainable competitive advantage”. They are founded in the theory of comparative advantage developed by economists David Ricardo and Adam Smith. The theory of comparative advantage, which suggests that some countries have unique assets, has become the basis for contemporary strategy. Strategists modified the idea and called it “competitive advantage”. If it chooses to use that approach, a firm needs to identify its core competencies, competitive advantage, and then convert that identification to a mission. In principle, the purpose of the mission statement is to keep the firm focused upon its unique area of competitive advantage. Further, the mission is supposed to set boundaries and to “keep it in the box”. Generally, self-confirming theories force the assumption of a linear mental model, since it is historic (including present) competencies or resources that provide the constructs for future strategy.
Thousands of articles and books have been written on the development of equilibrium-based strategy. The equilibrium-based strategic model involves a succession of steps that are designed to keep the firm focused upon its historic competencies. Out of that concept ideas such as SWOT analysis (strengths, weaknesses, opportunities, and threats) and “five forces” analysis were developed. The latter is dealt with in Michael Porter’s 1985 book Competitive Strategy. In most cases, the difference between one key thinker and another is minor at best, but
Michael Porter of Harvard Business School is perhaps the best known of all the strategy theorists. He has generally been more prolific than the rest. Porter has been responsible for the writing of numerous books and articles that have been widely accepted in the field. He has been especially involved in the creation or popularization of a number of tools that have been widely used in the discipline.
Porter’s first book for practicing managers, Competitive Strategy: Techniques for Analyzing Industries and Competitors, was first published in 1980. Drawing heavily on industrial economics (a field of study that tries to explain industrial performance through economics), he was trying ‘to take these basic notions and create a much richer, more complex theory, much closer to the reality of competition’. The book defines five competitive forces that determine industry profitability – potential entrants, buyers (customers), suppliers, substitutes, and competitors within the industry. Each of these can exert power to drive margins down. The attractiveness of an industry depends on how strong each of these influences is. Competitive Strategy brought together in a rational and readily understandable manner both existing and new concepts to form a coherent framework for analyzing the competitive environment.
The realization that he had not been focusing on choice of competitive positioning, this work led Porter in turn to his interests in the concept of competitive advantage, the theme of his next major book, Competitive Advantage: Creating and Sustaining Superior Performance (1985). He sought a middle ground between the two polarized approaches then accepted-on the one hand, that competitive advantage was achieved by organizations adapting to their particular circumstances; and, on the other, that competitive advantage was based on the simple principle that the more in-tune and aware of a market a company is, the more competitive it can be (through lower prices and increased market share). From analysis of a number of companies, he developed “generic strategies”: Porter contends that there are three ways by which companies can gain competitive advantage:
By becoming the lowest cost producer in a given market
By being a differentiated producer (offering something extra or special to charge a premium price)
Or by being a focused producer (achieving dominance in a niche market)
Porter insisted that though the “generic strategies” existed, it was up to each organization to carefully select which were most appropriate to them and at which particular time. The “generic strategies” are backed by five competitive forces which are then applied to “five different kinds of industries” (fragmented, emerging, mature, declining, and global.
To examine an organization’s internal competitive ness, Porter advocates the use of a ‘value chain’ –analysis of a company’s internal processes and the interactions between different elements of the organization to determine how and where value is added. A systematic way of examining all the activities a firm performs and how they interact is essential for analyzing the sources of competitive advantage. The value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation. A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors. Each of these activities can be used to gain competitive advantage on its own or together with other strategically important activities. Here, the concept of linkages (relationships between the way one value activity is performed and the cost or performance of another) becomes relevant. These linkages need not be internal – they can equally well be with suppliers and customers. Viewing every thing a company does in terms of its overall competitiveness, argues Porter, is a crucial step to becoming more competitive.
This has led to the myth of “sustainable competitive advantage”. In reality, any competitive advantage is short-lived. If a company raises its quality standards and increases profits as a result, its competitors will follow. If a company says that it is reengineering, its competitors will claim to be reengineering more successfully. Businesses are quick to copy, mimic, pretend and, even, steal. The logical and distressing conclusion is that an organization has to be continuously developing new forms of competitive advantage. It must move on all the time. If it stands still, competitive advantage will evaporate before its very eyes and competitors will pass.
The dangers of developing continuously are that it generates, and relies on, a climate of uncertainty. The company also runs the risk of fighting on too many fronts. This is often manifested in a huge number of improvement programs in various parts of the organization which give the impression of moving forward, but are often simply cosmetic.
Constantly evolving and developing strategy is labeled ‘strategic innovation”. The mistake is to assume that strategic innovation calls for radical and continual major surgery on all corporate arteries. Continuous small changes across an organization make a difference. “We did not seek to be 100 percent better at anything. We seek to be one percent better at 100 things,” says SAS’s Jan Carlzon.
Porter would suggest that his “five forces model” and SWOT allow for nonlinear analysis, but most would agree that the overlaying of a linear mental model (self-confirming theory) on top of any nonlinear analysis would render any such argument questionable.
Jay Barney is often credited with popularizing an adaptation of the equilibrium-based model, called the “resource view” of the firm. This particular view – that a firm’s resources must also be analyzed and understood in developing corporate strategy – might simply be viewed as an addition to the traditional self-confirming theories.
The equilibrium-based strategic model involves a succession of steps that are designed to keep the firm “in the box” or focused upon its historic competencies. Some might argue that the use of SWOT analysis avoids this problem, since it analyzes the firm’s strengths and weaknesses. That generally does not hold true, however, because the assumption that the firm’s current/historic strengths will serve the company well in the future tends to override any attempts to engage in discontinuous change.
From the early 1980s to the mid-1900s, approaches based on the equilibrium theory repeatedly failed, and the level of dissatisfaction with this particular approach grew. The new global competitive environment that emerged in the late 1980s demanded a solution. TQM gained a great deal of popularity through the early 1990s, but it soon fell far short of being a holistic solution. The generally accepted failure rate for TQM initiatives during this period was over 80%. Failure to understand the critical role that quality plays in corporate success can be disastrous, but TQM cannot replace strategy, and it is wrong to believe that quality is all a company needs to be competitive. Quality is simply the price of admission to play the game. Once in the game, it is strategy that must drive organizational activities.
In the early 1990s, major consulting firms were overwhelmed with clients who wanted to use process re-engineering as a solution – for everything from sagging profits to product development cycles. Like TQM, process re-engineering failed to deliver, with a failure rate of around 70%. As a result of these failures, many people began to suggest that the real issue was change – and the usual preponderance of books soon hit the market. However, once again, the general view was that the majority of change initiatives added little value to the bottom line.
Discussions with a number of senior executives reveal that most people have given up on the traditional strategic approach, which is based on mission statements and core competencies. Interestingly, though, most of their companies still use that traditional approach. It is important to understand that self-confirming theories of strategy remain the most frequently used at this time, with well over 90% of all companies making use of the approach, or of some hybrid that is based upon it. Why do people continue to use the approach if they no longer trust it? There are a number of answers to that question.
First, most undergraduate and graduate schools still teach that approach, almost exclusively. Second, the approach is easy to learn and understand. Third, it is comforting, because it focuses upon what some have called “self-confirming theory” – it confirms that what we have done in the past is good, since we are going to continue to do in the future what we have done in the past (i.e. our future strategy will be based upon our historic competencies).
As early as 1989, Rosabeth Moss Kanter was pointing out, in When Giants Learn to Dance, the problems with another historic-linear approach, which she refers to as “excellence”. People tend to love the idea of excellence. It makes for a great book title, whether it involves “searching for excellence” or “building something to last”. Alongside these books were the “7 things that companies do” titles, which again focused upon excellence in practice.
“Benchmarking” is a variant of the excellence practice. The underlying mental model suggests that something someone did somewhere at some point in time will work for your firm where it is today (and tomorrow). The reality is that it might work but it might not. Therein lies the problem with linear (simple) historic mental models.
Almost without exception, the companies featured in the excellence books encountered problems within a few years of the book’s publication. This is true even for James C. Collins and Jerry I Porras’ Built To Last.
As a result of the apparent failure of the “self-confirming theories”, strategy theorists have searched for alternatives.
The Reality of Competitive Environments:The new competitive world has moved from a linear (or highly predictable, somewhat simple) state to a non-linear (or highly uncertain, complex) state. That does not mean that nothing will continue to be predictable. It means that in the future historic relationships will most likely not be the same as they were in the past.
In 1980, Ansoff published a paper which represented another step in the development of practical strategic management which concerned the development of practical tools for managing adaptation of firms to turbulent environments. The paper, called Strategic Issue Management, presented a way of adapting a firm to the environment, when environmental change develops so fast that strategic planning becomes too slow to produce timely responses to surprising threats and opportunities.
From 1991 to 2001, rapid change and high levels of complexity have characterized the global competitive environment. As the rate of environmental change accelerates, and the level of complexity rises, the ‘rules of the game” change. Such changes mean that the firm must change in harmony with the environment. If it does not, ultimately the environment will eliminate it. For the company that does not change in harmony with the environment, the result is deterioration and, perhaps, demise.
Companies are complex systems operating within complex dynamic systems. In every case, the complexity as well as the rate of system change will be different at different points of time. There are a number of implications for this reality.
ØSimple-historic or simple-linear strategy is insufficient to prepare a firm for environments that involve varying levels of complexity and rates of change.
ØAs a complex system, every aspect off the firm (not just its strategies) must be balanced with the future environment if the firm is to maximize performance.
ØImbalances between the firm and the environment result in diminished performance, or in some cases, the demise of the firm.
Put simply, complex environmental systems (the competitive environment) require complex mental models of strategy if the firm is to succeed. The use of linear mental models in environments of varying complexity and rate of change is a prescription for failure.
Henry Mintzberg has famously coined the term “crafting strategy,” whereby strategy is created as deliberately, delicately, and dangerously as a potter making a pot. To Mintzberg strategy is more likely to “emerge,” through a kind of organizational osmosis, than be produced by a group of strategists sitting round a table believeing they can predict the future.
Mintzberg argues that intuition is “the soft underbelly of management” and that strategy has set out to provide uniformity and formality when none can be created.
Another fatal flaw in the conventional view of strategy is that it tended to separate the skills required to develop the strategy in the first place (analytical) from those needed to achieve its objectives in reality (practical).
Mintzberg argues the case for what he labels ‘strategic programming’. His view is that strategy has for too long been housed in ivory towers built from corporate data and analysis. It has become distant from reality, when to have any viable commercial life strategy needs to become completely immersed in reality.
In an era of constant and unpredictable change, the practical usefulness of strategy is increasingly questioned. The skeptics argue that it is all well and good to come up with a brilliantly formulated strategy, but quite another to implement it. By the time implementation begins, the business environment is liable to have changed and be in the process of changing even further.
Mintzberg’s most recent work is probably his most controversial. “ Strategy is not the consequence of planning but the opposite: its starting point,” he says countering the carefully wrought arguments of strategists, from Igor Ansoff in the 1960s to the Boston Consulting Group in the 1970s and Michael Porter in the 1980s. The Rise and Fall of Strategic Planning is a Masterly and painstaking deconstruction of central pillars of management theory.
The divide between analysis and practice is patently artificial. Strategy does not stop and start, it is a continuous process of redefinition and implementation. In his book, The Mind of the Strategist, the Japanese strategic thinker Kenichi Ohmae says: “In strategic thinking, one first seeks a clear understanding of the particular character of each element of a situation and then makes the fullest possible use of human brain power to restructure the elements in the most advantageous way. Phenomena and events in the real world do not always fit a linear model. Hence the most reliable means of dissecting a situation into its constituent parts and reassembling them in the desired pattern is not a step-by-step methodology such as systems analysis. Rather, it is that ultimate nonlinear thinking tool, the human brain. True strategic thinking thus contrasts sharply with the conventional mechanical systems approach based on linear thinking. But it also contrasts with the approach that stakes everything on intuition, reaching conclusions without any real breakdown or analysis.”
When future could be expected to follow neat linear patterns, strategy had a clear place in the order of things. Organizations are increasingly aware that, as they move forward, they are not going to do so in a straight unswerving line. The important ability now is to be able to hold on to a general direction rather than to slavishly follow a predetermined path. Now, the neatness is being upset, new perspectives are necessary. The new emphasis is on the process of strategy as well as the output. Such flexibility demands a broader perspective of the organization’s activities and direction. This requires a stronger awareness of the links between strategy, change, team-working, and learning. Strategy is as essential today as it ever was. But, equally, understanding its full richness and complexity remains a formidable task.
Kenichi Ohmae argues that an effective strategic plan takes account of three main players – the company, the customer, and the competition – each exerting their own influence. The strategy that ignores competitive reaction is flawed; so is the strategy that does not take into account sufficiently how the customer will react; and so, of course, is the strategic plan that does not explore fully the organization’s capacity to implement it.
Kenichi Ohmae says that a good business strategy “is one, by which a company can gain significant ground on its competitors at an acceptable cost to itself.” He believes there are four principal ways of doing this:
Focus on the key factors for success (KFSs). Ohmae argues that certain functional or operating areas within every business are more critical for success in that particular business environment than others. If you concentrate effort into these areas and your competitors do not, this is a source of competitive advantage. The problem, of course, is identifying what these key factors for success are.
Build on relative superiority. When all competitors are seeking to compete on the KFSs, a company can exploit any differences in competitive conditions. For example, it can make use of technology or sales networks not in direct competition with its rivals.
Pursue aggressive initiatives. Frequently, the only way to win against a much larger, entrenched competitor is to upset the competitive environment, by undermining the value of its KFSs – changing the rules of the game by introducing new KFSs.
Utilizing strategic degrees of freedom. By this tautological phrase, Ohmae means that the company can focus on innovation in areas which are untouched by competitors.
“ In each of these four methods, the principal concern is to avoid doing the same thing, on the same battle-ground, as the competition,” Ohmae explains.
Kathryn Rudie Harrigan’s first book, Strategies for Declining Businesses focused on declining businesses. Harrigan believes there is a life-cycle for businesses and they need to revitalize themselves constantly to prevent decline. From declining businesses, Harrigan moved on to the subject of vertical integration and the development of strategies to deal with it. A central premise of the framework she developed was that, as firms strived to increase their control over supply and distribution activities, they also increased their ultimate strategic inflexibility (by increasing their exit barriers). In search of more flexible approaches she carried out lengthy research into joint ventures. Despite their boom, Harrigan’s research showed that between 1924 and 1985 the average success rate for joint ventures was only 46 per cent and the average life span a meager three and a half years. In her two books on joint ventures, Harrison argued they will become a key element in competitive strategy. The reasons she gave for this were: economic deregulation, technological change, increasing capital requirements in connection with development of new products, increasing globalization of markets.
One-on-one competition will be replaced by competition among constellations of firms that routinely venture together.
Teams of co-operating firms seeking each other out like favorite dancing partners will soon replace many current industry structures where firms stand alone.
To cope with these changes, managers must learn how to co-operate, as well as compete, effectively.
Harrigan’s later work focused on mature businesses. Managing Maturing Businesses (1988) examined ‘the second half of a business’s life’ or, as it is more dramatically put, the endgame. She has coined the phrase ‘The last iceman always makes money’, which she explains as ‘The last surviving player makes money serving the last bit of demand, when the competitors drop away.’ The importance of her work in this area was given credence by the fact that over two-thirds of the industries within mature economies were experiencing slow growth or negative growth in demand for their products.
Ameliorating the pain and avoiding premature death have been the motivating factors of Harrigan’s work. Harrigan’s argument is that endgame can be highly profitable if companies adopt a coherent strategy sufficiently early. The strategic options are:
Divest now – the first company out usually gets the highest price; later leavers may not get anything.
Last iceman –focusing on customer niches which will continue long-term and will be prepared to pay a premium.
Selective shrinking – taking the profitable high ground and leaving the less profitable low ground to the competitors.
Milking the business – the last option, but none the less a practical alternative in many situations.
Complex Systems Strategy
Complexity-based approaches or “complex adaptive systems,” were developed in response to the apparent failure of equilibrium-based approaches. Complexity-based thinkers will fall into a number of different camps. The majority believe that the environment must be understood in terms of its complexity, chaos, and ecological constructs. This group subscribes to the Darwinian hypotheses (upward evolution of a system) as a metaphor for the business environment. This kind of thinking has resulted in the idea of “self-organizing” companies.
The complexity group falls into two categories. One might be called a “pure” complexity-based group, the other a “hybrid”. In the case of the former, theorists generally apply the concept of emergence to every situation. According to this group predictive modeling is rendered useless by the chaotic nature of the environment. They would suggest that any attempt to plan for the future is pointless.
The hybrid group also assumes that the Darwinian hypotheses may be used as a metaphor for business systems. This particular group of thought is based upon the idea that the firm may compete on the edge of chaos, that is in a state in which the system is complex adaptive, but at the same time with a minimal level of predictability in the system (Brown and Eisenhardt’s Competing on the Edge). This group of thinkers have combined the emergent (complex-historic) approach with the extrapolation (simple-future)approach.
The emergence camp is divided into at least two or three distinctive groups. Emergence-based theorists begin with the idea of complex systems and chaos theory. Some suggest that the ability to deal with complexity on a futuristic basis is impossible. Others suggest that it is possible to understand some aspects of futuristic systems. A third group imposes naturalistic ecological presuppositions in its theory.
Ralph Stacey and Henry Mintzberg tend to hold to the view that it is simply not possible to consider future complex environments. As a result they suggest that the strategist must wait for events to occur, or emerge, then develop strategy. This approach of “incrementalism” involves the “after the fact” development of strategy for discontinuous events. Mintzberg suggests that, as discontinuous events occur, the firm should dynamically craft strategy.Stacey generally agrees with Mintzberg, but in his book Managing The Unknowable, he additionally suggests that it is possible to create organizations that are designed to deal with ambiguity and complexity.
Others involve themselves in apparently self-defeating arguments. In The Fifth Discipline, Peter Senge advances the idea of systems thinking and suggests that it is possible to observe complex systems and make reliable inferences about such systems. On the other hand, in the multi-author work The Dance of Change, he tends to take a purely Darwinian emergence view.
The emergent or complex-historic group of strategists is by far the fastest-growing group in the field. As those who see the failure of self-confirming theories seek alternatives, the focus on complexity by the emergent group seems to make a lot of sense.
Chaos and Complexity:Around the mid-1950s, there had been a certain amount of investigation into the idea of cybernetics, or the study of processes. That led some people to think about the competitive environment in a very different way. Chaos and complexity theory were introduced. By the early 1990s, complexity theory had taken on a life of its own. At about the same time, the idea of systems thinking was popularized, particularly, in Peter Senge’s 1990 book The Fifth Discipline.
The period was characterized by a blending of disciplines, including natural science, social sciences, and business. A number of business theorists moved on from the metaphor of chaos theory in business to complexity theory. Chaos theory had dealt with the unpredictable processes that were observable in science. Those who moved on to complexity theory added an interesting twist to the basic idea of complexity. Complex systems thinking has to do with the fact that the global system or environment is made up of a limitless number of other systems. Theorists hypothesize that complex systems may behave in much the same way as the molecules in a glass of water, which interact randomly.
Systems Thinking:Another approach for dealing with complex environments is called systems thinking. Proponents of systems thinking believe that it is possible to consider complex issues and to make “reasonable inferences” about the outcomes of such complex systems. Systems thinking has been widely discussed in corporate circles, but few companies actually utilize the approach, especially at the senior executive level – where it could be most beneficial. Those few leaders who have the intuitive ability to think in terms of complex systems, are and will continue to be, highly successful.
Darwinian Theory:Alongside this hypothesis relating to complex systems, the idea of using Darwin’s theory of evolution as a metaphor for complexity was developed. Charles Darwin’s concept focused upon two ideas: first, the idea of natural selection, or the survival of the fittest; second, the idea of evolution. His concept of evolution was based upon the hypothesis that matter was constantly in a state of moving from a lower level of complexity to a higher level of complexity. In his view, this accounted for the similarities between monkeys, apes, and the different races of humans.
Scientific evidence generally refutes these particular views (along with others held by Darwin), but Darwin’s hypothesis has none the less been adapted metaphorically to complexity theory as it is applied in business. Those who subscribe to the theory say that the evolution (from lower complexity to higher complexity) that occurs “naturally” in nature must apply equally to businesses. Complexity management theorists go on to suggest that one of the goals of every manager should be to allow the business to emulate nature by “self-organizing”.
This theme is clearly revealed in Peter Senge’s 1999 book The Dance of Change. In one article in the book, entitled “The leadership of profound change-toward an ecology of leadership”, Senge suggests that leaders need to understand more about nature and to manage with that in mind. The CEO, according to Senge, is not the solution to driving meaningful change in the organization.
In most cases, the complexity-based theorists assume the Darwinian hypotheses (upward mutation or evolution of complex natural systems) as a metaphor for management and strategy theory. This idea is developed in what is called “self-organization”. It is also an integral part of the complexity theorists’ response to the linear economic model referred to as “equilibrium theory”, which is called “complex adaptive systems” theory.
The evidence clearly invalidates the Darwinian hypotheses. “Complex dynamic systems” as an idea is finding support not only as a way of describing the natural environment, but also as a reasonable metaphor for developing management and strategy theory. This approach deals with complex systems without the prepositional fallacies related to complex adaptive systems theory.
Shona L. Brown and Kathleen M. EisenhardtBrown and Eisenhardt’s book Competing on the Edge (1998) displays their work as somewhat of a hybrid of the complex adaptive systems approach (including the Darwinian hypotheses) and the self-confirming schools of thought. In essence, Brown and Eisenhardt suggest that the firm is competing in complex environments, and thus must deal with high levels of uncertainty. Their view is that the firm is constantly in a process of changing its competencies. There is some dissonance between their adoption of competencies and their prescriptions for dynamic corporate strategy.
Henry Mintzberg The work of Canadian, Henry Mintzberg counters much of the detailed rationalism of other major thinkers. He falls in the complex-historic (emergence) category of strategists, although, unlike most in that camp, he does not appear to have adopted the Darwinian metaphor. Mintzberg believes in incremental responses to changes as they emerge in the environment. It is clear that he holds to the idea of a complex environment, yet he also seems to believe that it is not possible to anticipate or prepare proactively for discontinuous events. His views are the antitheses of Ansoff’s.
Ralph Stacey His book Managing the Unknowable (1992) was really ahead of the curve among the work of the proponents of complex adaptive systems. Stacey’s work differs from that of many of the others in that particular school, since he suggests that companies need to prepare proactively for complexity.
Complex Dynamic Systems
The application of a Darwinian-based theory of complexity has resulted in an alternative to the equilibrium theory of economics – “complex adaptive systems” – which again, proposes that the economic system is characterized by progressive upward evolution.
The positive aspect of the theory is that it turns managers toward thinking about complex systems. There is no doubt that linear thinking (equilibrium-based management theory) can damage a company, but the absence of scientific support for “adaptive systems” (in either nature or in business) may also be problematic when trying to build corporate strategy.
A number of people are now using the idea of complex dynamic systems as a way to think about the competitive environment. Moving from the Darwinian presupposition of evolution to a recognition of the complex nature of the environment may present a better opportunity for the corporate strategist.
There is currently a clear trend toward complexity-based corporate strategy. Emerging research supports the fact that moving from a linear to a non-linear complex mental model of the environment will help managers to lead a more profitable organization.
C. K. Prahalad and Gary Hamel Their book Competing for the Future was first published in 1994. Their work has gone through a number of cycles, or changes. Early on, it seemed to focus on self-confirming theories. However, they were quick to comprehend the apparent failure of that model, and began to move more toward a complexity-based model. In their later works they have focused on anticipating the complex nature of the future environment. At the same time they are not proponents of strategy based on complex adaptive systems (the Darwinian hypotheses). A very positive aspect of their work is their emphasis on proactive strategies for dealing with future uncertainty.
The phrase “ core competencies” has now entered the language of management. In layman’s terms, core competencies are what a company excels at. Gary Hamel and C K Prahalad define core competencies as “the skills that enable a firm to develop a fundamental customer benefit.” They argue that strategic planning is neither radical enough nor sufficiently long-term in perspective. Instead its aim remains incremental improvement. In contrast, they advocate crafting strategic architecture. The phraseology is unwieldy, but means basically that organizations should concentrate on rewriting the rules of their industry and creating a new competitive industry.
Richard D’Aveni The best-known work of Richard D’Aveni of Dartmouth College is Hypercompetition (1994), in which he overtly takes on the traditional self-confirming strategic approaches. Based upon his observations of the real world, the book concludes that the world is no longer linear, and does not reward those who use linear approaches to create corporate strategy. In its place, he suggests, the planner needs to consider a new approach. In assessing the new corporate world, he makes a number of insightful observations in Hypercompetition:
ØFirms must destroy their competitive advantage to gain advantage..
ØEntry barriers work only if others respect them.
ØA logical approach is to be unpredictable and irrational.
ØTraditional long-term planning does not prepare for the short term.
ØAttacking competitor’s weaknesses can be a mistake. Traditional approaches such as SWOT analysis may not work in a hypercompetitive environment.
ØCompanies have to compete to win, but competing makes winning more difficult.
D’Aveni builds the case for a complex environment and the need to change the organization continually in response to the environment, then proposes an answer to his argument about the “need for a dynamic theory”: the 7-S approach.
ØSuperior stakeholder satisfaction.
ØPositioning for speed.
ØShifting the rules of the game.
ØSignaling strategic intent.
ØSimultaneous and sequential strategic thrusts
At the heart D’Aveni’s ideas is his conclusion that companies need to be focused upon disrupting the market. He suggests that there are three critical factors that enable a firm to deliver sustainable disruption in the market:
A vision for disruption.
Capabilities for disruption (the organization).
Product/market tactics used to deliver disruptions.
There are a number of similarities between the work of Ansoff and that of D’Aveni. Both suggest that the environment involves some level of complexity and rate of change. Both propose a contingency theory approach – that is, the organization must be designed to respond to the present and future environment. Both believe that the environment of the 1990s began a new period of highly turbulent, unpredictable, changing environments.
Hybrid Systems:One of the more questionable adaptations of the various theories comes from those who attempt to combine complex adaptive systems and equilibrium-based theory. These theorists suggest that strategists should apply complex adaptive systems approaches to their strategy, while at the same time developing historic (or even new) competencies. Clearly there are problems with this combination.
Observing the global environment, and accepting the fact that there are two environmental issues that strategists must address – complexity and rate of change – it is clear that an organization must be continually changing in nonlinear terms both in speed and in complexity. Rosabeth Moss Kanter’s useful idea of “contingency theory” (presented in When Giants Learn to Dance) rightly suggests that the organization must be able to respond contingently to future changes in the environment. Her approach is similar to W. R. Ashby’s “requisite variety theorem” explained in his Introduction to Cybernetics.
The modified Ansoff Model is also a hybrid. On one hand, a complex dynamic systems approach is taken. On the other, an emergence approach is viewed as part of the firm’s ability to respond to discontinuous events. Then, the firm is assessed using a complex model to determine its ability aggressively to create the future strategy the firm needs and the responsiveness capabilities of the firm to address discontinuous events as they emerge.
Rosabeth Moss Kanter Also from Harvard Business School, the fact that Kanter rejects the self-confirming approach to the development of strategy in favor of contingency design is an important underpinning of her work. She believes that the strategist must begin with an understanding of the future environment, then contingently design the firm around that understanding. In her book When Giants Learn to Dance (1990), she offers seven ideas that describe managers who will be successful in the new corporate environment:
They operate without the power of the might of the hierarchy behind them (leadership vs. positional power).
They can compete (internally) without undercutting competition).
They must have the highest ethical standards.
They possess humility.
They must have a process focus.
They must be multifaceted and ambidextrous (work across business units/flexible).
They must be willing to tie their rewards to their own performance.
Evan DudikStrategic Renaissance (2000) by Evan Dudik takes a complex systems approach to strategy by suggesting that the planner must understand the level of uncertainty of the future environment (very similar to Ansoff’s turbulence) and, at the same time, that the firm must create a complex adaptive system (the firm itself) if it is to deal with that uncertainty. It is clearly an excellent application of contingency theory. Dudik’s book covers all of the positives related to developing complex mental models and is excellent in presenting contingency approaches to the development of corporate strategy.
Predictive Modeling:Predictive modeling involves a complex mental model and a futuristic (as opposed to historic) strategic frame. Since complex-futuristic approaches involve complexity, there are a number of types of those approaches, including some hybrids. Even though some of the approaches are especially concerned with complexity, some tend to be less holistic or whole-system than others.
AIS: The first approach might be called “artificial intelligence simulation” or AIS, which involves the creation of a computer-based model in which key variables can be manipulated. The researcher might identify 10 independent variables that appear to drive certain outcomes (dependent variables). In some cases it is possible to base the behaviors of the variables on statistically based relationships. That adds power to the model. Regardless, the AIS process allows the researcher to manipulate variables in order to develop some level of predictive confidence in the future. In some ways, AIS can be similar to war gaming.
Scenarios and war gaming can be quite helpful in complex environments.
Scenarios: The concept of scenario planning was pioneered by oil giant Shell. Creating one single strategic plan to be followed with military precision simply didn’t work in practice. As circumstances changed, the strategic plan also needed changing and executives were either constantly going back to the drawing board or trying to push through a plan that was no longer appropriate. The longer the planning horizon, the worse the problem became. Shell’s answer was to make not one but a number of sets of assumptions about the future environment. At its simplest, these would be optimistic, pessimistic, and straightline. Any one of these scenarios could happen, but managers now drew up plans that followed the most likely series of events, while building in frequent evaluation points where one of the alternative scenarios could take over. In effect, what they were doing was thinking through the implications of necessary deviations of a plan sufficiently far ahead to be able to implement them at minimum cost and effort.
Scenarios are classified as complex-future models (predictive modeling) and they have been successfully used for the development of strategy for complex environments for a number of years. Scenarios involve the analysis of future driving forces in an environment and the consideration of a range of possible outcomes.. Scenarios tend to focus on a very narrow area of the future, but ideally will attempt to account for driving forces, or independent variables that could have an impact upon the area being studied. Scenarios have two purposes: first, a multiple scenario (i.e. three or four possible scenarios about a specific issue) can provide a complex systems overview of an issue; second, they can be extremely helpful in driving organizational learning.
A number of comments have been made regarding “driving” organizational learning and “managing” resistance to change. It is important to remember that dissonant data (information that indicates that the future environment will shift, and that the “rules of the game” will change) is more often rejected by senior managers than accepted. Managing such resistance (which can be measured using the modified Ansoff model) is quite important from a profit standpoint.
One of the keys to anticipating future turbulence environments is to ensure that the firm has the level of adaptiveness required for the level of future turbulence. In turbulence levels above 3.0, there is a growing expectation of discontinuous or surprise events. As the turbulence level rises, the ability of the firm to reactively transform is clearly a profit issue. The higher the level of environmental speed and complexity, the higher the negative profit impact if the organization has low levels of adaptive capabilities. As research by Dawn Kelly and Terry Amburgey reveals, internal resistance to change slows the organizational response to discontinuous events.
War gaming: War gaming is a good way of preparing for complex futures. War gaming is somewhat similar to using scenarios. There are a number of ways of doing it, but it generally involves the gathering of competitor information prior to beginning the exercise. The information might cover the predisposition or probable behavior of different competitors. Some might use a “five forces” analysis and a SWOT analysis (of each competitor). A modified Ansoff strategic profile of each competitor can be a most valuable tool.
War gaming involves the organization dividing its managers into teams, which take on the role of competitors. The competitors simulate a battle. The game is played in terms of successive “strategies” created by each team. The exercise facilitator creates ways for the competitors to play out their strategy, based upon the research about the competitor that they were given. In some cases, the senior executives of the client firm will take on the role of strategists for their own firm, while their management team will play the roles of their competitors. This can be an extremely revealing exercise, especially when the third or fourth passes or battles are completed.
In many ways the value of war gaming, as with scenarios, is that of organizational learning. War gaming can help internal managers to change their mental models of the competitive environment as well as their perceptions of competitors’ most probable behaviors. One word of caution: there is nothing more boring than a poorly conceived war game, and the services of external facilitators are recommended; make sure that the facilitators selected are at the cutting edge in their field. Those that revert to simple (non complexity-based) approaches, such as SWOT alone, should be avoided.