Lords of Strategy | Alessandro Desantis

Highlights

Greater Taylorism has chewed its way across the corporate landscape to virtually everywhere large companies practice twenty-first-century capitalism, which means on just about every continent. Its appetite for more numbers, more data, seems only to increase with the computer power available to crunch those numbers. And it has become steadily less patient for results, in part because now you can get the numbers back from the market overnight.
The tamer, more conventional way of framing this tension is to see the history of strategy as a struggle between two definitions, strategy as positioning and strategy as organizational learning. The positioning school, led by Harvard’s Porter, sees strategy making as the choice of where you want to compete, in what industry and from what spot within that industry, and how—on price, with distinctive products, or by finding a niche. The organizational-learning school, by contrast, maintains that no company that’s already up and running can choose its strategy as if it had a blank slate. Almost gleeful in its derision of the positionists—at least its leading spokesman, McGill’s Henry Mintzberg is—the learning school also argues that virtually no strategy ever works as originally planned. The point, they say, is for the company to set off in one direction, learn from the response it gets from markets and competitors, and then adjust accordingly.
And strategy was going to be all about disruption—or in the words of one of its wise men, “strategy is change”—not something you embark on if you want to go on quietly doing what you’ve been doing.
“Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.”
Instead of the number of units produced, BCG would speak of a company’s or industries’ accumulated “experience.” With each doubling of experience, costs and prices should decline by a predictable amount, typically between 15 and 25 percent. Second, and vastly more important, BCG posited a direct relationship between a company’s position on the experience curve—and hence its costs—and its market share.
Given that all the elements on the matrix were readily quantifiable—the major reason for its irrefutability—couldn’t clients, once privy to the device, have plotted their portfolios for themselves? To which the consultants predictably answer, “It’s not as easy as it might look.” Besides the skills required to gather data on market shares and growth, the process required a clear-eyed objectivity about one’s own situation—an intellectual honesty that doesn’t come easily to corporations. Moose cites as an example a client, a maker of lawn mowers, whose executives complained to the firm, “Your logic can’t be right. We dominate our segment, but we’re not making any money at it.”
“Being inexperienced businesspeople, we didn’t walk in there and tell [them] how to run their businesses,” says Zakon, without irony.
fund-raising for Vanderbilt, Bain had learned that it was “always easier to get money from someone who had already written you a check than from someone who’d never written you one.”
The product of Bain’s efforts was to be not a report or a study—the firm’s consultants still drip with disdain at the mention of such things—but rather a strategy and, even more important, results—results that you could see first on the bottom line, then in the stock price.
“We don’t sell advice by the hour; we sell profits at a discount.”
‘I don’t think we know what we’re doing.’” “What?” Patton replied. Gluck elaborated: “We go up there to the client, and we show them a chart that says this is the kind of revenues you need, what we call a strategic gap analysis; here’s what your projects are going to be, there’s a big gap in here. The Corning guy would say back to us, ‘Don’t worry, we’ll fill it with stuff out of our laboratories.’ Which means nothing happens.”
Gluck was also dismayed to find that, to use the phrase that would come to be applied to the problem, McKinsey had no way to systematically capture the knowledge it had gained from each consulting project. Consultants would do an assignment, finish the project, perhaps write a report for the client, and then move on. Except in one or two of the nascent practice areas—consumer products was the best example—there was no effort to formally sit down, distill the generalizable lessons that could be of help in other engagements, and share them across the firm.
Scratch most plans, and you’ll find some version of “We’re going to keep on doing what we’ve been doing, but next year, we’re going to do it more and/or better.”
Though the thought sometimes seems buried in his verbiage, Andrews also was clear on the proposition that a company’s strategy was, within certain constraints, the product of choices made by its leaders—still a surprisingly novel idea in academic circles of that era.
“What I’ve come to see as probably my greatest gift is the ability to take an extraordinary complex, integrated, multidimensional problem and get arms around it conceptually in a way that helps, that
His overall premise, as later captured in the first sentence of the first chapter of his 1980 book, Competitive Strategy, was that “the essence of formulating competitive strategy is relating a company to its environment,” and that the “key aspect” of that environment was the industry it found itself in and that industry’s structure.
There were essentially three strategies a company could choose, he posited: low-cost leadership (beloved of fans of the experience curve), product differentiation (making your offering so distinctive that you could charge more for it), or market specialization (pick a niche and dominate it).
The theme that strategy is about choice, that a company must pick a strategy that distinguishes it from its competitors, was to become a constant in Porter’s work over the decades that followed. It would secure him the place as head of the “strategy as positioning” school.
Probably his most memorable finding was that those organizations didn’t abide by theories of rational decision making. Instead of choosing the path that economists would say leads to the best possible result, they will often pick an option that keeps contending internal factions at peace, “satisficing,” to use the word Simon coined, rather than optimizing.
For all their book’s optimism—you too can be excellent if you’ll just adopt some of these good corporate habits—Peters and Waterman continually pointed up where the typical, not-so-excellent company fell short: in its flawed decision making, distrust of its people, inattention to customers, and exaggerated focus on the bottom line.
In their subsequent books, Peters and Waterman would each return again and again to the centrality of people to a company’s success—employees as the source of innovation, well-executed service, and continued corporate learning, customers as people whose wishes must be understood, honored, and if possible exceeded. It is in this sense that Waterman, in a 2002 interview, argued that “with a lot of the organizations I’ve written about, in a very important sense the strategy is the organization.”
“A ‘strategy’ explanation of events is not always about intentionality, but is sometimes simply about the forces at work that permit sustained asymmetric positions to be maintained.”
“McKinsey’s long-term studies of corporate birth, survival, and death in America clearly show that the corporate equivalent of El Dorado, the golden company that continually performs better than the markets, has never existed. It is a myth. Managing for survival, even among the best and most revered corporations, does not guarantee strong long-term performance for shareholders. In fact, just the opposite is true. In the long run, markets always win.”
“Why don’t we adopt a very different model here?” Hall suggested. “Why don’t you the client take complete responsibility for that piece of work, and we the consultants will support you, facilitate you in the framing of the analysis, in doing the analysis, in coming up with the conclusions and the implementation plan and processes.” But how was that to work, practically? “Why don’t you allocate somebody from your organization who you can see five or ten years from now being CEO or a CEO candidate,” and put that person in charge? he proposed to Stigson. “Why don’t you create the team drawn from the different businesses, a mixture of analysts and project leaders, and BCG will support them in doing the sort of work we ourselves would do in a more traditional consulting relationship?”
Part of the challenge is that value creation, whether in the form of innovation or growth, has never proven as susceptible to systematization as has cost reduction.
The value chain, with its supporting analytic apparatus, may be the last central, universal concept in the intellectual history of strategy, at least as of this writing, in the sense that it has to be taken into account in any company’s deliberations on what it should be doing.
“The other approach,” he says, “is, ‘To hell with all that. I just want it to produce money for shareholders. This is capitalism, and in capitalism, the shareholder is at the top of the evolutionary tree, and we should return profits to shareholders.’” Foster grinds the point in: “Is that the same as running this excellent, enduring institution that has white Doric columns out front? I don’t think it is.”
And yet, the client relationship frequently didn’t endure—Bain has some clients of many years standing, but not as many as does McKinsey or BCG—and in their wake, Bain consultants often left behind festering resentments, a sense that the company had been taken over by an alien force (which strategy can be).
“In this new environment, the essence of strategy is not the structure of a company’s position in products and markets, but the dynamics of its behaviors. The goal is to identify and develop the hard-to-imitate organizational capabilities that distinguish a company from its competitors. A capability is a set of business processes, strategically understood.”
By the middle of the decade, as Michael Porter would return to the discussion to announce, being state-of-the-art in your processes—what he called your “operational effectiveness”—merely constituted table stakes, the minimum required to keep you in the game. Strategy, he would argue, still finally came down to choosing.
Foster argued that what he called technological discontinuities would arrive with increasing frequency in the years to come and that the competitive battles they fostered would usually go to whoever was riding the fresh beast, the attacker, in other words. The capacity to innovate would be the key to competitive and strategic success.
To their credit, the founding fathers of the resource-based view did try to establish criteria for judging resources on their potential for contributing to strategic advantage. 1 They settled on four criteria, whose first letters gave birth to still another acronym, VRIN. A resource must be valuable, in the sense of adding value by enabling the company to better exploit opportunities or reduce threats. It must be rare—if it’s available to anyone in the industry, it won’t confer much advantage. It must be inimitable; if your advantage is to be sustainable, the resource can’t be something competitors can easily duplicate. Finally, the resource must be nonsubstitutable: barrels of whale oil won’t do you much good when competitors are already filling your customers’ lamps with kerosene.
Perhaps most cruelly, detractors charged that the resource-based view was “tautological”: value-creating resources are valuable, and so on down a hall of mirrors. This led to scholarly debate on issues such as the “parameterization of imitability,” from which we may, without great loss, tiptoe away as rapidly as possible.
The aim of strategy should be to “create tomorrow’s competitive advantages faster than competitors mimic the ones you possess today.” The secret to doing this lies in the corporation’s skills and its ability to acquire new ones—“learning,” in other words—which the authors describe as “the most defensible competitive advantage of all.”
McKinsey’s work suggested that two types of capabilities usually came up to that standard, “tradable privileged assets”—everything from brands like Coke’s, to patents, to physical assets such as low-cost mines—and “distinctive competences,” mushier but including such skills as the ability to “attract and retain talent,” “continuously innovate,” and the capacity to “build and sustain corporate reputation.”
At the outset of the piece, Porter rejected what he called the “new dogma” that in a world of more dynamic markets and changing technologies, “rivals can quickly copy any market position, and competitive advantage is, at best, temporary.” People who fell for this canard did so, he maintained, because they failed to distinguish between “operational effectiveness” and “strategy.”
Operational effectiveness thus boiled down, for Porter, to pretty much performing the same activities as your competitors, but more efficiently than they do. In contrast—drumroll here—“Strategic positioning means performing different activities from rivals’ or performing similar activities in different ways.”
Most of all, the leaders have to fight the temptation to grow the business, which too often leads to “extending product lines, adding new features, imitating competitors’ popular services, matching products, and even making acquisitions.” No, if you’re forced to grow, then you should deepen your position, “making your company’s activities more distinctive, strengthening fit, and communicating the strategy better to those customers who should value it.”
The Firm’s ability to insinuate itself into local elites drives its competitors slightly berserk with envy. In their eyes, McKinsey partners seeking to open a new office arrive in town bearing letters of introduction to the local corporate gentry from their counterparts elsewhere, satisfied clients typically. Somehow, given their backgrounds and polish, the partners are soon invited to join the most exclusive clubs. They play golf in such environs. They begin holding small dinners, perhaps at the club, perhaps in their swank homes—just a few congenial people like yourself, to kick around some issues we may have in common. They become active in local not-for-profits, almost certainly at the board level. And mysteriously, the son or daughter of a local corporate chieftain, attending business school far away, may find his or her interest in joining the Firm as a junior consultant heartily reciprocated.
Second, for all they may complain about not being able to hire the best MBAs, it isn’t at all evident that most traditional companies, including industrial giants, have entry-level positions that fully put to use the education, particularly in analytics, that a new, hotshot graduate comes equipped with. Among the reasons why large companies hire strategy consulting firms is that the companies don’t continuously need, and can’t support economically or organizationally, the concentrations of high-octane brain power that the consulting firms can assign to a project.
“There’s been a lot of speculation as to when I’m going to deliver a vision of IBM, and what I’d like to say to all of you is that the last thing IBM needs right now is a vision.”
Kotter, a professor at HBS, shadowed thirteen general managers—a technical use of the term, we’d call almost all of them senior executives—who were judged by their companies to be high performers. What he found tracking their daily rounds was that they moved the world forward not by issuing orders or making speeches, but rather by a seemingly endless series of small interactions—a question here, a brief comment there—with scores or even hundreds of people they knew, networks within the company and the industry that they had built up over years.
To borrow a wonderful line from The Communist Manifesto on the effect of capitalism, all that is solid melts into air, including, apparently, competitive advantage.
If you want to know what it would look like for a strategy consultant to actually run a company, gaze no further than the properties held in the portfolios of many a PE firm; that is precisely what’s going on there.
Defining entrepreneurship as “the pursuit of opportunity beyond the resources currently controlled,” he maintained that it differed from conventional management along at least six dimensions. These included strategic orientation—entrepreneurial outfits that “are driven by the perception of opportunity, whereas administrative organizations are driven by the resources currently controlled”—and strategic experimentation, the upstarts being willing to make “revolutionary, short-duration commitments to opportunity,” while the old corporate bags plodded along with evolutionary, longer-duration bets.
Hamel published an HBR article, “Strategy as Revolution.” The piece would rehearse some of Hamel’s old saws—strategic planning as practiced at most companies was “ritualistic, reductionist, extrapolative, elitist, easy” and about “positioning.”
Evans is the only thinker I’ve encountered who talks about the ontology of strategy (the philosophy of being it’s premised on) and its epistemology (its theory of the nature of knowledge, in this instance, the knowledge of how to achieve competitive advantage).
“Once you start from the idea that the unit of competitive advantage is not necessarily the corporation, as conventionally defined … it’s like in biology, going from thinking of competition among animals to thinking of competition among genes. The generation of strategic thinking we’re now entering challenges the earlier ontological assumptions. It says that the only irreducible unit in this picture is the person—the customer, worker, or executive. It says that people engage in transactions, broadly defined, that may be competitive, or may be cooperative, but what emerges is a network. As technology drives down the costs of transactions, breaking the constraints of distance or of institutions, those networks become more fluid.” In this emerging world, according to Evans, “the key way to think about competitive advantage is to think about how to design ecology in such a way to achieve goals you’re trying to pursue. To say that we’re trying to design an ecology means I’m trying to shape my behavior, the behavior of people who are co-employed with me, the behavior of people who are not co-employed with me but with whom I’m collaborating, and with people who are not employed with me and with whom I’m competing.”
For Bain partners, commitment to the business isn’t merely institutional. “As a partner group, we’ve invested over four hundred million dollars of our after-tax income in the last six or seven years in those deals and those funds we’ve worked on,” Haas says. “It’s a set of economics that forces us to eat our own cooking.”
The PE firms use debt aggressively to leverage up the acquired assets, part of what Haas calls “working the balance sheet.” They concentrate on just a few metrics, chief among them usually cash flow, abandoning the dizzying panoply of measures the acquired business may have layered on over its history. They reduce costs relentlessly.
“Every day you don’t sell a portfolio company, you’ve made an implicit buy decision.”
Without strategy and strategy consultants, we could have broad swaths of the U.S. industry that look like the automakers—that is, uncompetitive on a global basis (as are, for instance, many sectors of the Japanese economy once you get beyond automobiles and consumer electronics). The fiercening of capitalism isn’t going away; if anything, it looks likely to grow more intense. In response, strategists will have to heighten and broaden their sensitivity to potential dangers, shedding any remnants of the profit-fueled complacency that, for example, allowed them to remain oblivious to systemic risk.
Over its history, strategy has usually been smart, if not always wise. It has seldom been humble.
Instead of headquarters dictating a strategy based on “analysis, prediction, and deduction,” the goal would be to set “optimal conditions for the continuous emergence of superior strategies through an adaptive—or evolutionary—process.”
As the consultants note in their as yet unpublished white paper, adaptive strategy would require distinct competences on the part of a company, and one übercompetence in particular: what they italicize as “learning how to learn across industries.”
In some ways, the challenge to strategy here is another one related to integrating the human element, namely, finding a place in strategy’s deliberations for judgment, even intuition, that can hold its own with the numbers.
What the systems don’t capture is Keynes’s famous “animal spirits,” entrepreneurial energies and imaginings that bring a business to life. They also miss out on the aspirations employees may harbor to think a bit on their own, experiment with new ways of doing the same old drill, and perhaps even be recognized by the company for what they create. For most of strategy’s history, those are precisely the factors that the paradigm hasn’t found a way to work into its calculations. If the discipline is to continue to be of service, it will have to find that way.