What is Strategy?

the technology revolution, and other major

forces pieked up speed and began to radieally

environmental

change the competitive

underlying

the indus trial economies model came under scrutiny. Should the

be treated as a constraint on strategy

competitive

environment

or was strategy really about shaping competitive

formulation,

conditions? Was the assumption

should contrai

most of the relevant strategie resources needed to compete still

applicable? Were strategie resources really as mobile as the tradi-

associated with

tional model assumed,

owning partieular

therefore neces-

sarily short-lived?

and was the advantage

resources and competencies

that businesses

emerged. Rather

ln response to these questions, a resource-basedperspective of

than focusing on posi-

strategy development

this

tioning a company within environment-dietated

new school of thought

in terms of

defined strategie

building core capabilities that transcend the boundaries of tradi-

tional business units. It focused on creating corporate portfolios

around core businesses and on adopting goals and processes

aimed at enhancing core competencies.2 This new paradigm

from capturing economie value to

reflected a shift in emphasis

of key

creating value through the development

resources and capabilities.

and nurturing

constraints,

thinking

resource

extension

The current

is a natural

view of strategy and fits with the transition

focus on human and intellectual capital as a com-

of the

pany' s key strategie

of

resource-based

global commerce to a knowledge-based

economy. For a majority

of companies, access to physieal or financial resources no longer

to growth or opportunity; not having the right

is an impediment

people or knowledge has become the limiting factor. Mierosoft

science gradua tes every

scans the entire pool of US. computer

the few it accepts. It recognizes

that

year to identify and attract

that

competency-based

on people,

and

scarce knowledge and expertise drive product development,

to market

that personal

responsiveness.3

relationships with clients are critieal

are dependent

strategies

4

Strategy: A View from the Top

portion

in their

of their

revealed

respective

distributors,

environment

as a determinant

are reintroducing

that a substantial

It is interesting to note that researchers

the

ide a of a company's

of perfor-

mance, albeit in a different way. A study into how Wal-Mart and

indus-

Microsoft have achieved dominance

tries

is

to the success of their ecosystems, the loose networks

attributable

contract manufacturers, makers of

of suppliers,

related

and

raIe in the creation and the delivery

others that play an important

strategy formulation,

of their products and services. Thoughtful

therefore,

oppor-

its ecosystem's

tunities

for example,

overaH health.4 Wal-Mart's procurement

on cus-

real-time

also offers suppliers

tomer preferences

for

themselves

system,

information

the y could not gather

and demand that

at the same level of casto

should look beyond a company' s immediate

and also promote

and capabilities

and services,

technology

providers,

products

valuable

success

Strategy Versus Tactics

technologies,

innovation,

aH have

are barn

and ideas

total quality,

flexibility,

corne to be recognized

for example,

concepts,

New business

every clay. The Internet,

and speed,

as essential

a result, corporations

six-sigma,

benchmarking,

a hast

competitiveness.

of other

to a company' s competitive

continue

to embrace

quality management,

outsourcing,

concepts

partnering,

in an aH-out

strength and agility. As

such as

initiatives

time-based

competition,

reengineering,

effort

and

to enhance

dramatic

have produced

Some of these initiatives

results.

have spent billions of dollars reengi-

Automobile manufacturers

neering their design and production processes. As a result, unit

costs have fallen dramatically, quality has gone up, relationships

with component manufacturers

and other suppliers are stronger,

and the time needed to take a new car from concept to production

it is

has been cut

them in their proper context. Enhancing opera-

important

competitive

in today' s cutthroat

tional effectiveness

environment, but it is no substitute for sound strategic thinking.

in half. Though such results are gratifying,

is crucial

to put

Chapter 1 What Is Strategy?

5

I!II!"!!!!!' -

tools and managerial philosophies

There is a difference between strategy and the application of op er-

ational

focused on operational

to competitiveness. But whereas

effectiveness. Both are essential

the application of managerial

tools is aimed at doing things better

than competitors and therefore tactical in nature, strategy focuses

on doing things differently. Understanding

this distinction is criti-

that embraced the

cal, as recent history has shawn. Companies

Internet as "the strategie answer" to their business rather than just

if important, new tool were in for a rude awakening. By

another,

of

focusing tao mu ch on e-business

strategie concerns, many found themselves chasing cus-

broader

tomers

trading quality and serviee for priee,

indiscriminately,

and, with it,losing their competitive advantage and profitability.5

ultimate

Long-term,

goal of strategy-can

only occur if a company can preserve mean-

ingful differences between itself and its rivaIs. E-business initia-

tives,

benchmarking,

performance,

fairly easily imitated. Enhanced performance

actions is at best temporary.

competition,

and other tactics aimed at improved operational

are generally

however

attributable to such

superior performance-the

quality management,

and necessary,

the expense

sustainable

time-based

desirable

options

total

at

Strategy Forces Trade-offs

instead,

Strategie thinking,

focuses on taking different approaches

to delivering customer value; on choosing different sets of activities

thereby providing a basis for an

that cannot easily be imitated,

enduring competitive advantage. When Dell pioneered its highly

successful direct sales, made-to-order business model,

it carefully

sourcing, and inven-

designed every aspect of its manufacturing,

tory system to support

ln the

strategy.

its low-cost, direct-sales

process,

it redefined value for many customers in terms of speed

and cost and created major barriers to imitation. Hs competitors,

stuck with traditional distribution networks and manufacturing

models, faced a difficult choiee: abandon their traditional business

model or focus on alternative ways of delivering customer value.

tools can improve

to

force companies

effectiveness

they do not by themselves

Thus, whereas operational

competitiveness,

6

Strategy: A View from the Top

IBM and other competitors

internally consistent sets of

to

coùJd have responded

strategy by also selling directly to end users,

they would have had to dismantle their traditional di~tribu-

to reap the benefits Dell realizes froID its strategy.

essence of

to do and, equally

choose between entirely different,

activities.

Dell's innovative

but

tion structures

Thus, choosing a unique competitive positioning-the

strate gy-forces

important, of what not to do, and creates barriers to imitation.

in terms of what

trade-offs

Positioning choices should not only dicta te what activities a

company chooses to perform and how it will perform them; they

also should specify how they interrelate

set

that differentiates

froID competitive

the chosen activity

bundles of activities. Figure 1-2 shows how Southwest Airlines'

strategy is based on a carefully integrated set of activities that

is

more than just a collection of parts. The different

activities fit

together and reinforce each other to create real economic value.

Collec~ively, they deter imita tors, who are forced to duplicate the

entire chain of value-creating

components

to form a coherent

set

if they wish to achieve similar results.

than individual

activities

rather

Strategy Should Focus on Value Creation

shareholders,"

A good strategy focuses on creating value-for

partners,

satisfy-

suppliers, employees, and the community-by

ing the needs and wants of customers better than anyone else. If

a company can deliver value to its customers better than its rivaIs

that company likely has a

can over a sustained period of time,

strategy. This is not a simple task. Customers' wants,

superior

change, often rapidly, as they become

needs, and preferences

about a product or service, as new competi-

more knowledgeable

tors enter the market, and as new entrants

redefine what value

means. As a result, what

is valuable today might not be valu able

tomorrow. The moral of this story is simple but powerful: The

value of a particular product or service offering, unless constantly

maintained, nourished, and improved, erodes with time.

The PC market provides a good example. The business model

developed Saille years aga by Dell to eliminate

and sell direct provided a significant competitive

intermediaries

advantage

Charter 1 What 15Strategy?

to

7

Figure

1-2

Southwest Airlines' Activity System

Source:Reprinted by Permission of Harvard Business Review. From "What 1s Strategy" by Michael

Porter, Nov IDee. 1996. Copyright @ 1996 by the Harvard Business Sehool Publishing Corporation;

aH rights reserved.

such as IBM and HP had a hard time

the company. Competitors

on exten-

responding, because their business models depended

sive distribution systems. Customers valued the direct approach.

Personalizing Jour own machine was appealing when the typical

PC cost between $2,000 and $3,000. Customers could focus their

purchasing dollars on the features that mattered most to them. If

you were a gamer, you bought a powerful video card.

As the market evolved, so did the definition of value. Today,

demand an oversized hard drive to store

digital photographers

their

images. Us ers of big mathematical models or elaborate

spreadsheets want rapid computing power, multiple processors,

and lots of memory. An office worker who only needs email and

8

Strategy: A View from the Top

for computers,

Ward is satisfied with a stripped-down m~chine or gets by with a

PDA. Priees of processors, memory, graphics, hard drives, key-

boards, wireless modems, and so on have all collapsed over the

cell phones, PDAs,

last decade. As the markets

and other communication devices converge, customers face an

increasing array of chaires. Today, the most expensive part of a

computer may well be the software. Although

IBM has aban-

doned the PC market, HP has reinvented itself and now produces

high-performance,

homogenized machines, built with just about

everything anyone would want, and makes them easily available

in local stores.

This has created a major dilemma

for Dell. Margins have

fallen, the market has fragmented, and the definition of value has

changed. How should Dell respond? Should it offer a reliable,

full-featured machine aimed at a global market? Should it sell in

its own stores,

as well as direct? Should it

design.its machines to compete with Apple? Should it enter the

mobile device market?

resellers,

through

customers

away. A decade

Figure 1-3 depicts this competitive

As it crea tes a new value proposition, Dell knows thaï reliabil-

and accessible service have become increas-

ity, dependability,

to customers. Battery recalls, hours in a service

ingly important

queue to get help, high priees, and confusing catalogs all serve to

drive

machines was an effective strategy for building market

Today' s customer values a more personalized

knowledgeable,

as immediate,

aga, offering promotional

share.

approach as well

local customer service.

cycle. It shows

advantage

in time comparues compete with a partic-

thaï at any given point

ular mix of resources. Some of a company' s assets and capabili-

ties are better

than those of its rivaIs; others are inferior. The

superior

advantages.6 Whatever competitive

it must expect

films continuously work to

and competitive moves by rival

(1) slow-

erode it. Competitive strategy thug has a dual purpose:

sources of

ing clown the erosion process by protecting

the actions of competitors

advantage

and (2) investing

against

thaï form the basis for the next position of

in new capabilities

are the source of positional

a film possesses,

thaï ongoing change in the strategie environment

assets and capabilities

advantage

current

Charter 1 What Is Strategy?

9

Figure

1-3

The Competitive Advantage Cycle

Sources of

Advantage

.Superior assets

.Superior capabilities

Positional

Advantages Realized

.Superior customer

value

Investments

in Renewal

Barriers to

imitation

Competitive

Dynamics Erode

Advantages

Source:WHARTON on Dynamic CompetitiveStrategyby George S. Day and David J. Reibstein.

Copyright @ 1997 by John Wiley & Sons, Inc. This material

Sons, Inc.

is used by permission of John Wiley &

competitive advantage. The creation and maintenance of ad van-

tage is therefore a continuous process.

Strategy Is About Creating Options

as positioning

strategy formulation

When we characterize

an

advantage, we do not mean decid-

organization for competitive

ing on a detailed long-term plan and following it to the letter.

Rapid change in the competitive environment makes such a view

of strategy un tenable. At the time a strategy is crafted some out-

cornes are more predictable than others. When Motorola invests

this tech-

in a new technology,

nology holds promise in several markets.

in

however, might not be known with any

different applications,

it might know that

!ts precise returns

for example,

10

Strategy: A View from the Top

degree of certainty until mu ch later? Therefore, strategy formula-

tion is about crafting a long-term vision for an organization while

maintaining a degree of flexibility about how to get there and cre-

ating a portfolio of options for adapting to change. Learning is an

essential

of this process. As soon as a company

component

begins to implement

how weIl attuned the chosen direction is to the competitive envi-

ronment, about how rivaIs are likely to respond, and about how

weIl prepared

its competitive

intentions.

it starts to learn-about

a chosen direction,

the organization

is to carry out

and encourage

as well as inte-

share information

cqlIaboration,

grate systems within the ecosystem. Wal-Mart's

success as the

world' s largest retailer, for example, is base d, in part, on informa-

tion technology decisions that are closely tied to its understand-

ing of the ecosystem on whieh it depends. Wal-Mart maintains a

to

vast supply-chain ecosystem that stretches froID manufacturer

consumer. This centralized

to

supply chain brings efficiencies

Wal-Mart and also crea tes value for its suppliers, bath large and

smalI, by providing

for them to reach

a m;lssive new channel

consumers worldwide.

An ecosystem-based

perspective makes clear

importance of interdependency

in today' s business environment.

Stand-al one strategies often no longer suffiee, because a com-

pany' s performance

on its ability to

influence assets outside its direct controI.

is increasingly

dependent

strategy

the

Strategy as Alignment

s

activities

numerous

calI for implementing

culture to installing appropriate

Strategies

ranging

froID acquiring and allocating resources to building capabilities

to shaping corporate

support

systems. These activities are aimed at aligning an organization'

and capabilities with the goals of a chosen strategie

resources

direction. Strategie alignment can be directed at closing strategie

eapability gars or at maintaining strategielocus.

Strategie eapability gars are substantive

in compe-

tences, skills, and resources between what customers demand or

the organization cur-

are likely to demand in the future and what

rently can deliver. This strategie alignment dimension,

therefore,

focuses on closing the gap between what it takes to succeed in the

and what the company eurrently ean do. Examples

marketplace

of activities in this category are developing better

technologies,

adopting a stronger brand-

creating faster delivery mechanisms,

ing, and building a stronger distribution network.

disparities

A second dimension of alignment

strategie locus. Strategy formulation

hJ1man activities

even abuse. Therefore,

is concerned with maintaining

are

or

to successfully execute a chosen strategy

and thug are subject

to error, obstruction,

and implementation

12

Strategy: A View from the Top

find ways to ensure that what is said-by

an organization must

groups and individuals

in

tact Jane. Making sure strategic objectives are effectively commu-

nicated, allocating the necessary resources, and creating proper

incentives for effective alignment are examples of activities in this

category.

of the organization-is

at alIlevels

Is Ali Strategy Planned?

Even the best-Iaid plans do not always result in the intended out-

is, when

cornes. Between the time a strategy is crafted-that

intended outcomes

the time that strategy is

a hast of things can change. For example, a com-

implemented,

introduce a new product or new regulations might

petitor might

have been passed. Thus,

the realized strategy can be somewhat

different froID the intended strategy.9

are specified-and

Multiple levels of Strategy

levels.

diversified

corporation,

ln a single-product

ln a multibusiness,

occurs at the corporate, business unit, and

Strategy formulation

functional

a

corporate strategy is concerned with what kinds of businesses

firm should compete in and how the overall portfolio of busi-

nesses should be managed.

or single-service

corporation, business

business or in a division of a multibusiness

unit strategy is concerned with deciding what product or service

to offer, how to manufacture or create it, and how to take it to the

a more

strategies

market place. Functional

limited domain, su ch as marketing, human resources, or technol-

ogy. AlI three are part of strategic management-the

totality of

processes used to guide the long-term future of an

managerial

organiza tion.

typically

involve

The Role of Stakeholders

Most companies

stakeholders-suppliers,

ing value for customers. The motivation of internaI stakeholders-

top executives, middle managers, and employees-also

directors,

rely, to a great extent, on a network of external

creat-

partners, and even competitors-in

Charter 1 What Is Strategy?

13

suppliers,

to success. A misstep in managing

can set back a company' s progress

is critical

a major

error in employee relations, or a lack of commUnication with prin-

cipal shareholders

for years.

to a company' s competi-

The importance of different stakeholders

tive position depends on the stakethey have in the organization

and the kind of influence they can exert. Stakeholders can have an

ownershipstake(shareholders, directors, among others), an economic

stake (creditors, employees, customers, suppliers), or a socialstake

(regulatory

activist

groups).1° Some have formaI power, others economic or political

power.FormaI power is usually associated with legaI obligations or

rights; economic power

products,

ability to persuade other stakeholders

an organization.

is rooted in an

to influence the behavior of

services, or capital; and political power

is derived froID an ability to withhold

the local community,

agencies,

charities,

Vision and Mission

represents

the purpose

broad strategic

to guide management

ln crafting a vision statement,

it must acquire to get there. As such,

senior management's

description

long-range

A vision statement

of what competitive

goals for the organization-a

position it wants to attain over a given period of time and what

core competencies

it sum-

focus for the future. A

marizes

a company's

s

for an organization'

mission statement documents

existence. Mission statements often contain a code of corporate

conduct

the mission.

lessons are worth

heeding. First, most successful companies focus on relatively few

activities and do them extremely weIl. McDonald' s is successful

precisely because it sticks to hamburgers, H&R Block because it

and Microsoft because it focuses

concentra tes on tax preparation,

on software. This suggests that effective strategy development

is

as much about deciding what not to do as it is about choosing what

activities tofocus on. The second lesson is that most successful com-

pallies achieved their leadership position by adopting a vision far

greater than their resource base and competencies would allow.

leader, a focus on the drivers of competi-

To become the market

tion is not enough; a vision that paints "a new future" is required.

in implementing

two important

14

Strategy: A View from the Top

With such a minci-set, gars between

become challenges

ning can sustain a sense of urgency over a long period of time.ll

and goals

than constraints, and the goal of win-

capabilities

rather

provide

bath strategie

guid-

should

focus. A good vision has the following

A vision statement

ance and motivational

characteristies:

. It is clear, but not so constraining that it inhibits initiative.

. It meets the legitimate interests and values of all stakeholders.

. It is feasible; that is, it can be implemented.12

Vision statements

action. When Jack

help frame strategie

Welch became CEG of General Electric in 1981, the US. economy

was in recession. High interest

rates and a strong dollar ~xacer-

bated the problem. To get the company moving and to leverage

performance

the new

than the best.1I This

CEG challenged each business

that each

challenge led to the adoption of the vision statement

business become.

two competitor

in its industry-or

. . "the number one or number

to disengage.lI13

in GE's diverse portfolio of businesses,

to be "better

Increasingly, companies around the world are adopting formaI

statements of corporate values, the core of a mission statement, and

senior executives now routinely identify ethical behavior, honesty,

integrity, and social concerns as top issues on their companies'

agendas. A recent survey by consultants Booz Allen Hamilton,

Inc. showed that of the 89 percent of companies surveyed that had

a written corporate values statement, 90 percent specified ethical

conduct as a key guiding principle. Further, 81 percent believed

their management practices encouraged ethical behavior among

staff. Ethics-related language in formaI statements not only sets

it also serves as a

corporate expectations

shield companies are using in an increasingly complex and global

legal and regulatory environment. The survey also showed that

the importance

align

by region.

those values with their strategies vary significantly

Asian and European

are more likely than North

American firms to emphasize values related to the corporation' s

responsi-

broader raie in society, such as social and environmental

bility. Finally, in implementing a values-based strategy, the CEG' s

values and how companies

for employee behavior;

of particular

companies

Charter 1 What Is Strategy?

15

rely on explicit CEG support

say their

talle matters. Eighty-five percent of the respondents

to reinforce values, and

companies

77 percent say such support

is one of the "most effective" prac-

tiees for reinforcing the company' s ability to act on its values. It is

considered the most effective practiee among respondents

in aH

regions, industries, and company sizes.14

its Credo-a

responsibility

The usefulness of a carefuHy crafted mission statement

is to the doctors, nurses,

and fathers and aH others who use our products

is iHus-

trated by the history of Johnson & Johnson. For more than 50

beliefs about how

years,

statement of fundamental

the company defines its corporate responsibilities-has

guided

It begins "We believe our

Johnson & Johnson in aH its actions.

to

first

mothers

and

to explicitly define the company' s

serviees . . . ." and continues

responsibilities

the community and shareholders.

to employees,

Its value was reaffirmed during the Tylenol crises of 1982 and

1986 when the company's product was adulterated with cyanide.

With Johnson & Johnson's name and reputation at stake, execu-

tives made important decisions

that were inspired by the com-

pany' s Credo. It helped the company preserve its reputation and

regain its Tylenol acetaminophen

and patients,

business.

Strategie Intent and Streteh

has adopted

is a company's

that successful

strategie intent. A statement of

A related concept

is at once an executive summary of the strategie

strategie intent

and a motivational message.

goals a company

of strategie intent does more

a statement

Properly artieulated,

it signaIs the desire to win and

than paint a vision for the future;

strategies

are built as much around

recognizes

is. It focuses the organization on key

what caTIbe as around what

competitive targets and provides goals about which competencies

to harness, and what seg-

to develop, what kinds of resources

the degree of

ments to concentrate on. Instead of worrying about

it shifts the focus

fit between current resources and opportunities,

resources and capabil-

to how to close the capability gap. Current

ities become starting points for strategy development,

not con-

straints on strategy formulation or its implementation.15

16

Strategy: A View frOIDthe Top

the

A related ide a is the concept of stretch. Stretch reflects

recognition that successful

are built as much around

strategies

what can be as around what is. Ultimately, every company must

create a fit between its resources and its opportunities. The ques-

tion is over what

time frame? Too short a time frame encourages

a focus on fit rather than stretch, on resource allocation rather than

on getting more value from existing resources. The use of too

long a time horizon, however, creates an unacceptable

degree of

uncertainty and threatens

to turn stretch objectives into unrealis-

tic goals.