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I
INTRODUCTION

1 The Concept of Strategy

1
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1
The Concept of
Strategy

Strategy is the great work of the organization. In situations of life or death,

it is the Tao of survival or extinction. Its study cannot be neglected.
—SUN TZU, THE ART OF WAR

OUTLINE

l Introduction and Objectives l Strategic Management Today

What Is Strategy?
l The Role of Strategy in Success
Corporate and Business Strategy
l The Basic Framework for Strategy Describing a Firm’s Strategy
Analysis How Is Strategy Made? Design versus
Emergence
What’s Wrong With SWOT?
Multiple Roles of Strategy
Strategic Fit
l The Role of Analysis in Strategy
l A Brief History of Business Strategy
Formulation
Origins and Military Antecedents
From Corporate Planning to Strategic l Summary
Management
l Self-Study Questions

l Notes

3
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4 PART I INTRODUCTION

Introduction and Objectives

Strategy is about winning. This chapter explains what strategy is and why it is important
to success – both for organizations and individuals. We will distinguish strategy from
planning. Strategy is not a detailed plan or program of instructions; it is a unifying theme
that gives coherence and direction to the actions and decisions of an individual or an
organization.
The principal task of this chapter will be to introduce the basic framework for strategy
analysis that underlies this book. I will introduce the two basic components of strategy
analysis: analysis of the external environment of the firm (mainly industry analysis) and
the analysis of the internal environment (primarily analysis of the firm’s resources and
capabilities).

By the time you have completed this chapter, you will be able to:

l Appreciate the contribution that strategy can make to successful performance,

both for individuals and for organizations.

l Recognize the key characteristics of an effective strategy.

l Understand the basic framework of strategy analysis that underlies this book
and that we shall use both for appraising a firm’s current strategy and making
recommendations for future strategy.

l Understand the major trends in the development of business strategy over

recent decades.

l Understand how strategy is made within organizations and the role played by
strategic planning systems.

Since the purpose of strategy is to help us to win, we start by looking at the role of
strategy in success.
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CHAPTER 1 THE CONCEPT OF STRATEGY 5

The Role of Strategy in Success

Strategy Capsules 1.1, 1.2, and 1.3 outline examples of success in three very differ-
ent arenas: Madonna in popular entertainment, General Giap and the North Viet-
namese armed forces in warfare, and Lance Armstrong in cycling. Can the success of
these diverse individuals and the organizations they led be attributed to any common
factors?
For none of these three examples can success be attributed to overwhelmingly
superior resources:

l Madonna possesses vitality, intelligence, and magnetism, but lacks outstanding

talents as a vocalist, musician or actress.
l The military, human, and economic resources of the Vietnamese communists
were dwarfed by those of the United States and South Vietnam. Yet, with the
US evacuation from Saigon in 1975, the world’s most powerful nation was
humiliated by one of the world’s poorest.
l Lance Armstrong possessed a powerful combination of physical and
psycological attributes. Yet these endowments were not markedly superior to
other top-class cyclists – especially after Armstrong’s near-death encounter
with cancer.

Nor can their success be attributed either exclusively or primarily to luck. For all
three, lucky breaks provided opportunities at critical junctures. None, however, was
the beneficiary of a consistent run of good fortune. More important than luck was
the ability to recognize opportunities when they appeared and to have the clarity of
direction and the flexibility necessary to exploit these chances.
My contention is that the key common ingredient in all three success stories was
the presence of a soundly formulated and effectively implemented strategy. These
strategies did not exist as a plan; in most the strategy was not even made explicit. Yet,
in all three, we can observe a consistency of direction based on a clear understanding
of the “game” being played and a keen awareness of how to maneuver into a position
of advantage.

1 Underpinning Madonna’s many years as a superstar has been a strategy built

on dedication, opportunism, periodic reinvention of image and product
offerings, and a well-coordinated multimarket presence.
2 The victory of the Vietnamese communist forces over the French and then the
Americans is a classic example of how a sound strategy pursued with total
commitment over a long period can succeed against vastly superior resources.
The key was Giap’s strategy of a protracted war of limited engagement. With
American forces constrained by domestic and international opinion from
using their full military might, the strategy was unbeatable once it began to
sap the willingness of the US government to persevere with a costly,
unpopular foreign war.
3 Lance Armstrong’s domination of the Tour de France from 1999 to 2005
was because he and his team did the most effective job of analyzing the
requirements for success in the race, developing a strategy around those
requirements, and executing it almost faultlessly.
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6 PART I INTRODUCTION

STRATEGY CAPSULE 1.1

Madonna

August 2006 saw the 48th birthday of to 30 years, Madonna has worked incessantly
Madonna Louise Veronica Ciccone but no slow- to establish, maintain, and renew her popular
down in her hectic career. Her world concert appeal. She is widely regarded as a workaholic
tour was in its European leg. Confessions on a who survives on little sleep and rarely takes
Dancefloor, upon which the show was based, vacations: “I am a very disciplined person. I
had reached number 1 position in 40 countries. sleep a certain number of hours each night,
Together with her earnings from film, video, then I like to get up and get on with it. All that
books, record production, and managing other means that I am in charge of everything that
artists, it looked as though Madonna would be comes out.”
the world’s highest earning female, entertainer She has drawn heavily on the talents of
for yet another year and still the best-known others: writers, musicians, choreographers, and
woman on earth. designers. Many of her personal relationships
In the summer of 1978, aged 19, Madonna have been stepping stones to career transi-
arrived in New York with $35 to her name. tions. Her transition from dance to music was
After five years of struggle, she landed a assisted by relationships, first, with musician
recording contract. Madonna (1983) ultimately Steve Bray, then with disc jockey John Benitex.
sold 10 million copies worldwide, while Like Her entry into Hollywood was accompanied
a Virgin (1984) topped 12 million copies. by marriage to Sean Penn and an affair with
Between 1985 and 1990, six further albums, Warren Beatty. Most striking has been her
three world tours, and five movie roles had continuous reinvention of her image. From
established Madonna with an image and per- street-kid look of the early 1980s, to hard-core
sona that transcended any single field of sexuality of the 90s, and spiritual image that
entertainment: she was rock singer, actor, accompanied motherhood, Madonna’s fans
author, and pinup. Yet, she was more than this have been treated with multiple reincarnations.
– as her website proclaims, she is “icon, artist, As Jeff Katzenberg of Dreamworks observed:
provocateur, diva, and mogul.” She has also “She has always had a vision of exactly who she
made a great deal of money. is, whether performer or businesswoman, and
What is the basis of Madonna’s incredible she has been strong enough to balance it all.
and lasting success? Certainly not outstanding Every time she comes up with a new look it is
natural talent. As a vocalist, musician, dancer, successful. When it happens once, OK, maybe
songwriter, or actress, Madonna’s talents seem it’s luck, but twice is a coincidence, and three
modest. Few would regard her as an outstand- times it’s got to be a remarkable talent. And
ing beauty. Madonna’s on her fifth or sixth time.”
She possesses relentless drive. Her wide She was quick to learn the ropes both in Tin
range of activities – records, concerts, music Pan Alley and in Hollywood. Like Evita Perón,
videos, movies, books, and charity events – whom Madonna portrayed in Evita, Madonna
belies a remarkable dedication to a single has combined determination, ambition, social
goal: the quest for superstar status. For close astuteness, and mastery of the strategic use of
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CHAPTER 1 THE CONCEPT OF STRATEGY 7

sex. As a self-publicist she is without equal. In and management company, Maverick Inc., a
using sex as a marketing tool, she has courted joint venture with Time Warner. Her protégés
controversy through nudity, pornographic im- included Mirwais, William Orbit, Donna De
agery, suggestions of sexual deviance, and the Lory, and the Deftones, and the comedian Ali
juxtaposition of sexual and religious themes. G: “I’ve met these people along the way in my
But she is also astute at walking the fine line career and I want to take them everywhere I
between the shocking and the unacceptable. go. I want to incorporate them into my little
In recent years Madonna has devoted increas- factory of ideas. I also come into contact with
ing time to nurturing the talents of others, a lot of young talent that I feel entrepreneurial
mainly through her recording, film production, about.”

We can go further. What do these examples tell us about the characteristics of a

strategy that are conducive to success? In all three stories, four common factors stand
out (see Figure 1.1):
1 Goals that are simple, consistent, and long term. All three individuals
displayed a single-minded commitment to a clearly recognized goal that was
pursued steadfastly over a substantial part of their lifetime.
l Madonna’s career featured a relentless drive for stardom in which other
dimensions of her life were either subordinated to or absorbed within her
career goals.
l North Vietnamese efforts were unified and focused on the ultimate goal of
reuniting Vietnam under communist rule and expelling a foreign army
from Vietnamese soil. By contrast, US efforts in Vietnam were bedeviled by
confused objectives. Was the United States supporting an ally, stabilizing
Southeast Asia, engaging in a proxy war against the Soviet Union, or
pursuing an ideological struggle against world communism?
l On his return to professional cycling in 1998, Lance Armstrong committed
to a single goal: winning the Tour de France.

FIGURE 1.1 Common elements in successful strategies

Successful
strategy

EFFECTIVE IMPLEMENTATION

Simple, consistent, Profound Objective

long-term understanding of the appraisal
goals competitive environment of resources
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8 PART I INTRODUCTION

STRATEGY CAPSULE 1.2

General Giap and the Vietnam Wars, 1948–75

As far as logistics and tactics were aimed at weakening the enemy and building
concerned, we succeeded in everything we military strength; finally, general counteroffen-
set out to do. At the height of the war the sive. In 1954, Giap’s brilliant victory over the
army was able to move almost a million French at Dien Bien Phu fully vindicated the
soldiers a year in and out of Vietnam, feed strategy. Against South Vietnam and its US ally,
them, clothe them, house them, supply the approach was similar.
them with arms and ammunition and
Our strategy was . . . to wage a long-
generally sustain them better than any
lasting battle . . . Only a long-term war
army had ever been sustained in
could enable us to utilize to the maximum
the field . . . On the battlefield itself, the
our political trump cards, to overcome our
army was unbeatable. In engagement after
material handicap, and to transform our
engagement the forces of the Vietcong
weakness into strength. To maintain and
and the North Vietnamese Army were
increase our forces was the principle to
thrown back with terrible losses. Yet, in
which we adhered, contenting ourselves
the end, it was North Vietnam, not the
with attacking when success was certain,
United States that emerged victorious.
refusing to give battle likely to incur
How could we have succeeded so well yet
losses.2
failed so miserably?1
The strategy built on the one resource where
Despite having the largest army in Southeast the communists had overwhelming superiority:
Asia, North Vietnam was no match for South their will to fight. As Prime Minister Pham Van
Vietnam so long as the South was backed Dong explained: “The United States is the most
by the world’s most powerful military and in- powerful nation on earth. But Americans do
dustrial nation. South Vietnam and its United not like long, inconclusive wars . . . We can
States ally were defeated not by superior outlast them and we can win in the end.”3
resources but by a superior strategy. North Limited military engagement and the charade
Vietnam achieved what Sun Tzu claimed was of the Paris peace talks helped the North Viet-
the highest form of victory: the enemy gave up. namese prolong the conflict, while diplomatic
The prime mover in the formulation of efforts to isolate the United States from its
North Vietnam’s military strategy was Gen- Western allies and to sustain the US peace
eral Vo Nguyen Giap. In 1944, Giap became movement accelerated the crumbling of Amer-
head of the Vietminh guerrilla forces. He was ican will to win.
commander-in-chief of the North Vietnamese The effectiveness of the US military response
Army until 1974 and Minister of Defense until was limited by two key uncertainties: what
1980. Giap’s strategy was based on Mao Tse were the objectives and who was the enemy?
Tung’s three-phase theory of revolutionary war: Was the US role one of supporting the South
first, passive resistance during which political Vietnamese regime, fighting Vietcong terrorism,
support is mobilized; second, guerrilla warfare inflicting a military defeat on North Vietnam,
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CHAPTER 1 THE CONCEPT OF STRATEGY 9

or combating world communism? Lack of un- recognized that the Watergate scandal had so
animity over goals translated into confusion as weakened the US presidency that an effective
to who was the enemy and whether the war American response to a new communist offen-
was military or political in scope. Diversity of sive was unlikely. On April 29, 1975, Operation
opinion and a shifting balance of political and Frequent Wind began evacuating all remaining
public opinion were fatal for establishing a Americans from South Vietnam, and the next
consistent long-term strategy. morning North Vietnamese troops entered the
The consistency and strength of North Presidential Palace in Saigon.
Vietnam’s strategy allowed it to survive errors
in implementation. Giap was premature in Sources: 1 Col. Harry G. Summers Jr., On Strategy (Novato,
CA: Presidio Press, 1982): 1; 2 Vo Nguyen Giap, Selected
launching his general offensive. Both the 1968
Writings (Hanoi: Foreign Language Publishing House, 1977);
Tet Offensive and 1972 Easter Offensive were 3
J. Cameron, Here Is Your Enemy (New York: Holt, Rinehart,
beaten back with heavy losses. By 1974, Giap Winston, 1966).

2 Profound understanding of the competitive environment. All three individuals

designed their strategies around a deep and insightful appreciation of the
arena in which they were competing.
l Fundamental to Madonna’s continuing success has been a shrewd
understanding of the ingredients of stardom and the basis of popular
appeal. This extends from the basic marketing principle that “sex sells” to
recognition of the need to manage gatekeepers of the critical media
distribution channels. Her periodic reincarnations reflect an acute
awareness of changing attitudes, styles, and social norms.
l Giap understood his enemy and the battlefield conditions where he would
engage them. Most important was appreciation of the political predicament
of US presidents in their need for popular support in waging a foreign war.
l Lance Armstrong and team director Johan Bruyneel took analysis of the
requirements for success in the Tour de France to unprecedented levels of
detail and sophistication.
3 Objective appraisal of resources. All three strategies were effective in
exploiting internal strengths, while protecting areas of weakness.
l By positioning herself as a “star,” Madonna exploited her abilities to
develop and project her image, to self-promote, and to exploit emerging
trends, while avoiding being judged simply as a rock singer or an actress.
Her live performances rely heavily on a large team of highly qualified
dancers, musicians, vocalists, choreographers, and technicians, thus
compensating for any weaknesses in her own performing capabilities.
l Giap’s strategy was carefully designed to protect against his army’s
deficiencies in arms and equipment, while exploiting the commitment and
loyalty of his troops.
l Armstrong’s campaign to win the Tour de France was based on two key
strengths: unmatched determination to win and superior team building
capability.
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10 PART I INTRODUCTION

STRATEGY CAPSULE 1.3

Lance Armstrong and the Tour de France

On July 24, 2005, Lance Armstrong became devastating his rivals with a powerful break-
the first person ever to win the Tour de away has been deemed “worthy of a Hollywood
France seven times. Armstrong’s unprecedented Oscar.” However, it was in team planning and
achievement was all the more remarkable for coordination where the major differences
the fact that in 1996 Armstrong was treated between Armstrong and his competitors were
for testicular cancer that had spread to his most evident.
lungs and brain. While the principal prize in the Tour de
Even without cancer, Lance Armstrong was France is for the individual who achieves the
not an obvious candidate for title of the fastest overall time, cyclists compete within
greatest cyclist ever. Despite certain natural teams. The team coordination and the willing-
advantages – notably a heart 30% larger than ness of the other team members (domestiques)
normal with an abnormally slow beat rate (32 to sacrifice themselves for the team leader
times per minute while at rest) – Armstrong’s is critical to individual success. Armstrong’s
aerobic rate was less than that of cycling greats US Postal Service team (which became the
such as Miguel Indurain and Greg LeMond. Discovery Channel team for the 2005 Tour)
For most of his career, Armstrong was not the was remarkable not just for the quality of
world’s preeminent cyclist. He won the world other team members, but the willingness of
championship just once (1993) and his Olympic these world class cyclists to serve their leader.
best was a bronze medal in 2000 Sydney games. Olympic gold medal winner Viatcheslav Ekimov
Armstrong’s seven-year dominance of the – “The Russian Power House” – was critical to
Tour de France resulted from a combination pulling Armstrong through the flatter stages of
of factors, not least of which was his single- the Tour. Roberto Heras and Jose Asevedo were
minded focus, not just on cycling, but on a Armstrong’s main support in the mountains –
single race. Between his 1999 and 2005 Tour shielding him from the wind and supporting
de France victories, Armstrong was overall him during breakaways. George Hinkapie rode
winner in only five other cycle races. in all seven of Armstrong’s Tour victories as a
Armstrong raised planning for the Tour to a versatile all-rounder. Why did the team show a
new level of sophistication. His meticulous unique degree of loyalty to their team leader?
preparations included: “. . . computer calcula- Part was Armstrong’s infectious commitment,
tions that balanced my body weight and my part was his willingness to pay bonuses out of
equipment weight with the potential velocity his own pocket to other riders, but also import-
of my bike,” and “careful computer graphs of ant was reciprocity – while team members
my training rides, calibrating the distances, gave total support to Armstrong on the Tour de
wattages, and thresholds.” Armstrong abilities France, in other competitions the roles were re-
were well-suited to the Tour – as well as versed and Armstrong served as a domestique
all-round strengths as a cyclist, he developed to other team members.
mastery of bluff and psychological warfare. His The team’s strategy genius was director,
feigning exhaustion at critical junctures before Johan Bruyneel, whose unrivaled knowledge of
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CHAPTER 1 THE CONCEPT OF STRATEGY 11

the Tour spanned sports physiology, game the- attention to team dynamics: he was a careful
ory, psychology, and tactics. As well as selecting listener, encouraged discussion, and welcomed
team members, assigning roles, designing new ideas. Together, Armstrong and Bruyneel
overall strategy and planning tactics for indi- recognized a critical ingredient for success: in a
vidual stages, Bruyneel managed a network of sport of independently minded individualists
secret agreements with other teams. In return where only the team leader is recognized as
for financial support, other teams agreed to the winner, team commitment and loyalty
support Armstrong should he find himself are critical and fragile. A unique feature of
split from his own team members. In addition the USPS/Discovery team was Armstrong
to the conventional roles as team decision and Bruyneel’s fostering of camaraderie,
maker, enforcer of team discipline, prepara- joint ambition, mutual support, and shared
tion and planning, Bruyneel gave continuous emotions.

4 Effective implementation. Without effective implementation, the best-laid

strategies are of little use. Critical to the success of Madonna, Giap, and
Armstong was their effectiveness as leaders in terms of capacity to reach
decisions, energy in implementing them, and effectiveness in instilling loyalty
and commitment among subordinates. All three built organizations that
allowed effective marshaling of resources and capabilities, and quick
responses to changes in the competitive environment.
These observations about the role of strategy in success can be made in relation to
most fields of human endeavor. Whether we look at warfare, chess, politics, sport, or
business, the success of individuals and organizations is seldom the outcome of a
purely random process. Nor is superiority in initial endowments of skills and resources
typically the determining factor. Strategies that build on the basic four elements almost
always play an influential role.
Look at the “high achievers” in any competitive area. Whether we review the
world’s political leaders, the CEOs of the Fortune 500, or our own circles of friends
and acquaintances, those who have achieved outstanding success in their careers are
seldom those who possessed the greatest innate abilities. Success has gone to those
who managed their careers most effectively – typically by combining the four stra-
tegic factors mentioned above. They are goal focused; their career goals have taken
primacy over the multitude of life’s other goals – friendship, love, leisure, knowledge,
spiritual fulfillment – which the majority of us spend most of our lives juggling and
reconciling. They know the environments within which they play and tend to be fast
learners in terms of understanding the keys to advancement. They know themselves
in terms of both strengths and weaknesses. And they implement their career strategies
with commitment, consistency, and determination. As the late Peter Drucker
observed: “we must learn how to be the CEO of our own careers.”1
There is a downside, however. Focus on a single goal may lead to outstanding
success, but may be matched by dismal failure in other areas of life. Many people who
have reached the pinnacles of their careers have led lives scarred by poor relation-
ships with friends and families and stunted personal development. These include
Howard Hughes and Jean Paul Getty in business, Richard Nixon and Joseph Stalin
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12 PART I INTRODUCTION

in politics, Marilyn Monroe and Elvis Presley in entertainment, Joe Louis and
O. J. Simpson in sport, and Bobby Fischer in chess. Fulfillment in our personal lives
is likely to require broad-based lifetime strategies.2
These same ingredients of successful strategies – clear goals, understanding the
competitive environment, resource appraisal, and effective implementation – form
the key components of our analysis of business strategy.

The Basic Framework for Strategy Analysis

Figure 1.2 shows the basic framework for strategy analysis that we shall use through-
out the book. The four elements of a successful strategy shown in Figure 1.1 are re-
cast into two groups – the firm and the industry environment – with strategy forming
a link between the two. The firm embodies three sets of these elements: goals and
values (“simple, consistent, long-term goals”), resources and capabilities (“objective
appraisal of resources”), and structure and systems (“effective implementation”).
The industry environment (“profound understanding of the competitive environ-
ment”) represents the core of the firm’s external environment and is defined by the
firm’s relationships with customers, competitors, and suppliers. Hence, we view strat-
egy as forming a link between the firm and its external environment.
The task of business strategy, then, is to determine how the firm will deploy its re-
sources within its environment and so satisfy its long-term goals, and how to organize
itself to implement that strategy.

What’s Wrong With SWOT?

Distinguishing between the external and the internal environment of the firm is com-
mon to most approaches to strategy analysis. The best known and most widely used
of these approaches is the “SWOT” framework, which classifies the various influences
on a firm’s strategy into four categories: Strengths, Weaknesses, Opportunities, and
Threats. The first two – strengths and weaknesses – relate to the internal environ-
ment; the last two – opportunities and threats – relate to the external environment.3
Which is better, a two-way distinction between internal and external influences or
the four-way SWOT taxonomy? The key issue is whether it is sensible and worth
while to classify internal factors into strengths and weaknesses and external factors
into opportunities and threats. In practice, such distinctions are difficult:

FIGURE 1.2 The basic framework: strategy as a link between the firm and its
environment

THE FIRM THE INDUSTRY

ENVIRONMENT
l Goals and values
l Resources and l Competitors
STRATEGY
capabilities l Customers
l Structure and l Suppliers
systems
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CHAPTER 1 THE CONCEPT OF STRATEGY 13

l Is BMW’s German home base a strength or a weakness for BMW? Its German
origins are fundamental for its reputation for engineering excellence and the
skills of its German-based engineers and technicians are essential to its claim
to be the “world’s ultimate driving machine.” At the same time, Germany is a
high-cost country with an inflexible labor market and is subject to a plethora
of European Union regulations. Hence, BMW’s German home base is both a
strength and a weakness.
l Is global warming a threat or an opportunity to the world’s automobile
producers? Global warming may encourage governments to raise taxes on
motor fuels and support public transport, thereby threatening the demand for
private motoring. At the same time, these circumstances create an opportunity
for developing new, fuel-efficient cars that may encourage consumers to scrap
their gas-guzzlers.

The lesson here is that an arbitrary classification of external factors into opportun-
ities and threats, and internal factors into strengths and weaknesses, is less important
than a careful identification of these external and internal factors followed by an
appraisal of their implications. My approach to strategy analysis favors a simple
two-way classification of internal and external factors. What will characterize our
strategic appraisal will be the rigor and depth of our analysis of these factors, rather
than a superficial categorization into strengths or weaknesses, and opportunities or
threats.

Strategic Fit
Fundamental to this view of strategy as a link between the firm and its external envir-
onment is the notion of strategic fit. For a strategy to be successful, it must be con-
sistent with the firm’s external environment, and with its internal environment – its
goals and values, resources and capabilities, and structure and systems. As we shall see,
the failure of many companies is caused by lack of consistency with either the internal
or external environment. During 2006, Vodafone – the world’s leading supplier of
cellphone services – suffered declining profits and asset write-downs. The problem
was a growth-oriented, acquisition-based strategy that emphasized superior content
that no longer fitted the commoditizing market for cellphone services, where there
were few advantages from global spread. In other cases, many companies have failed
to align their strategies to their internal resources and capabilities. A critical issue for
Nintendo in the coming years will be whether it possesses the financial and techno-
logical resources to continue to compete head-to-head with Sony and Microsoft in the
market for video game consoles.

A Brief History of Business Strategy

Origins and Military Antecedents
Enterprises need business strategies for much the same reasons that armies need
military strategies – to give direction and purpose, to deploy resources in the most
effective manner, and to coordinate the decisions made by different individuals.
Indeed, the concepts and theories of business strategy have their antecedents in
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14 PART I INTRODUCTION

military strategy. The term strategy derives from the Greek word strategia, meaning
“generalship.” However, the concept of strategy did not originate with the Greeks.
Sun Tzu’s classic The Art of War, written about 500 BC, is regarded as the first treatise
on strategy.4
Military strategy and business strategy share a number of common concepts and
principles, the most basic being the distinction between strategy and tactics. Strategy
is the overall plan for deploying resources to establish a favorable position; a tactic is
a scheme for a specific action. Whereas tactics are concerned with the maneuvers neces-
sary to win battles, strategy is concerned with winning the war. Strategic decisions,
whether in military or business spheres, share three common characteristics:

l They are important.

l They involve a significant commitment of resources.
l They are not easily reversible.

Many of the principles of military strategy have been applied to business situations.
These include the relative strengths of offensive and defensive strategies; the merits
of outflanking over frontal assault; the roles of graduated responses to aggressive
initiatives; the benefits of surprise; and the potential for deception, envelopment,
escalation, and attrition.5 At the same time, the differences between business com-
petition and military conflict must be recognized. The objective of war is (usually) to
defeat the enemy. The purpose of business rivalry is seldom so aggressive: most
business enterprises limit their competitive ambitions, seeking coexistence rather than
the destruction of competitors.
The tendency for the principles of military and business strategy to develop along
separate paths indicates the absence of a general theory of strategy. The publication
of Von Neumann and Morgenstern’s Theory of Games in 1944 gave rise to the hope
that a general theory of competitive behavior would emerge. During the subsequent
six decades, game theory has revolutionized the study of competitive interaction, not
just in business but in politics, military conflict, and international relations as well.6 Yet,
as we shall see in Chapter 4, game theory has achieved only limited success as a prac-
tical and broadly applicable general theory of strategy.7

From Corporate Planning to Strategic Management

The evolution of business strategy has been driven more by the practical needs
of business than by the development of theory. During the 1950s and 1960s, senior
executives were experiencing increasing difficulty in coordinating decisions and main-
taining control in companies that were growing in size and complexity. Financial
budgeting provided the basic framework for annual financial planning, while dis-
counted cash flow (DCF) approaches to capital budgeting provided a new approach
to appraising individual investment projects. Corporate planning was devised as a
framework for co-ordinating individual capital investment decisions and planning the
long-term development of the firm. Macroeconomic forecasts provided the founda-
tion for the new corporate planning. The typical format was a five-year corporate
planning document that set goals and objectives, forecast key economic trends
(including market demand, the company’s market share, revenue, costs, and margins),
established priorities for different products and business areas of the firm, and
allocated capital expenditures. The diffusion of corporate planning was accelerated by
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CHAPTER 1 THE CONCEPT OF STRATEGY 15

STRATEGY CAPSULE 1.4

Corporate Planning in a Large US Steel Company, 1965

The first step in developing long-range plans various district engineers. Alternative plans for
was to forecast the product demand for future achieving company goals were also developed
years. After calculating the tonnage needed in for some areas, and investment proposals were
each sales district to provide the “target” frac- formulated after considering the amount of
tion of the total forecast demand, the optimal available capital and the company debt policy.
production level for each area was determined. The Vice President who was responsible for
A computer program that incorporated the long-range planning recommended certain
projected demand, existing production capa- plans to the President, and after the top exec-
city, freight costs etc., was used for this purpose. utives and the Board of Directors reviewed
When the optimum production rate in each alternative plans, they made the necessary
area was found, the additional facilities needed decisions about future activities.
to produce the desired tonnage were specified.
Then the capital costs for the necessary equip-
Source: Harold W. Henry, Long Range Planning Processes
ment, buildings, and layout were estimated in 45 Industrial Companies (Englewood Cliffs, NJ: Prentice-
by the Chief Engineer of the corporation and Hall, 1967): 65.

a flood of articles and books addressing this new science.8 By 1963, most large US
companies had set up corporate planning departments. Strategy Capsule 1.4 provides
an example of such formalized corporate planning.
During the 1960s and early 1970s, diversification became the major emphasis of
corporate planning for many large companies. Igor Ansoff, one of the founding figures
of the new discipline of corporate strategy, claimed that: “Strategic decisions are
primarily concerned . . . with the selection of the product-mix that the firm will
produce and the markets to which it will sell.”9
During the 1970s and early 1980s, confidence in corporate planning and infatu-
ation with scientific approaches to management were severely shaken. Not only did
diversification fail to deliver the anticipated synergies, but the oil shocks of 1974 and
1979 ushered in a new era of macroeconomic instability, combined with increased
international competition from resurgent Japanese, European, and Southeast Asian
firms. Faced with a more turbulent business environment, firms could no longer plan
their investments, new product introductions, and personnel requirements three to
five years ahead, simply because they couldn’t forecast that far into the future.
The result was a shift in emphasis from planning to strategy making, where
the focus was less on the detailed management of companies’ growth paths than on
positioning the company in markets and in relation to competitors in order to maxim-
ize the potential for profit. This transition from corporate planning to what became
termed strategic management was associated with increasing focus on competition as
the central characteristic of the business environment and competitive advantage as
the primary goal of strategy.
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16 PART I INTRODUCTION

This emphasis on strategy as a quest for performance directed attention to the

sources of profitability. During the late 1970s and into the 1980s, attention focused
on sources of profit within the industry environment. Michael Porter of Harvard
Business School pioneered the application of industrial organization economics to
analyzing industry profitability.10 Other researchers focused on how profits were
distributed between the different firms in an industry. The Boston Consulting Group
pioneered a series of studies into the impact of market share and learning upon costs
and profits.11 These two lines of inquiry – the determinants of industry profitability
and determinants of profitability differences within industries – provided the basis of
the empirical analysis undertaken by the Strategic Planning Institute’s PIMS (Profit
Impact of Market Strategy) project.12
During the 1990s, the focus of strategy analysis shifted from the sources of profit
in the external environment to the sources of profit within the firm. Increasingly the
resources and capabilities of the firm became regarded as the main source of com-
petitive advantage and the primary basis for formulating strategy.13 This emphasis on
what has been called the resource-based view of the firm represented a substantial shift
in thinking about strategy. Rather than firms pursuing similar strategies, as in seeking
attractive markets and favorable competitive positions, emphasis on internal resources
and capabilities has encouraged firms to identify how they are different from their
competitors and design strategies that exploit these differences. Michael Porter,
answering the question “What is strategy?”, makes the point: “Competitive strategy
is about being different. It means deliberately choosing a different set of activities to
deliver a unique mix of value.”14
The technology boom of the late 1990s – fueled by digitization, mobile telephony,
and the internet – ushered in a wave of new thinking about business strategy. The
new knowledge-based, post-industrial economy was seen to offer unprecedented
entrepreneurial opportunities and compelled established firms to “reinvent” them-
selves – or else succumb to “disruptive technologies.”15 Tom Peters urged companies
toward the imperative of “strategic innovation” while Gary Hamel summoned
executives to “join the revolution.”16 Fundamental to strategic innovation was the
quest for new business models – new approaches to the creation and exploitation
of value. E-commerce offered unparalleled opportunity for devising new business
models: eBay in person-to-person auctions, E-Trade in online stock broking, WebVan
and Peapod in grocery retailing, Enron in electricity trading.
The stock market meltdown of 2001 and 2002 and the demise of many of the
brightest stars of the TMT (technology, media, and telecommunications) sector –
including giants such as Enron and WorldCom – marked the end of “irrational
exuberance” and deflated optimism over the power of strategic innovation to
create new markets and new sources of competitive advantage. Nevertheless,
digital technologies have continued to be major drivers of change and sources of
new threats and opportunities – the networked economy, battles over rival technical
standards (e.g. HD-DVD vs. BluRay),17 and the rise of “winner-take-all markets”
(e.g. eBay in internet auctions).18 The turbulence and unpredictability caused by
technology, competition and geopolitical forces has meant that strategy has become
as much about managing uncertainty as a quest for profit. One outcome has been
increased interest in the application of real option thinking to the management of
flexibility.19
In terms of new developments, the reaction against excesses of greed and unbridled
shareholder value maximization has taken the form of renewed interest in business
CSAC01 1/13/07 9:18 Page 17

CHAPTER 1 THE CONCEPT OF STRATEGY 17

ethics and corporate social responsibility (CSR).20 These trends have been reinforced
by greater awareness of the fragility of Earth’s ecosystem, stimulated by accelerating
global warning. As optimism over the capacity of the “new economy” to generate
new business opportunities waned, companies looked elsewhere for new business
opportunities. Increasingly, Western companies looked to emerging countries – India
and China in particular – as sources of future growth.21
Figure 1.3 summarizes the main developments in strategic management over the
past 60 years.

Strategic Management Today

What Is Strategy?
In its broadest sense, strategy is the means by which individuals or organizations
achieve their objectives. By “means” I am referring not to detailed actions but
the plans, policies, and principles that guide and unify a number of specific actions.
Table 1.1 presents a number of definitions of the terms strategy. Common to defini-
tions of business strategy is the notion that strategy is focused on achieving certain
goals; that the critical actions that make up a strategy involve allocation of resources;
and that strategy implies some consistency, integration or cohesiveness.

TABLE 1.1 Some Definitions of Strategy

l Strategy: a plan, method, or series of actions designed to achieve a specific goal or effect.
—Wordsmyth Dictionary
l Lost Boy: “Injuns! Let’s go get ’em!”
John Darling: “Hold on a minute. First we must have a strategy.”
Lost Boy: “Uhh? What’s a strategy?”
John Darling: “It’s, er . . . it’s a plan of attack.”
—Walt Disney’s Peter Pan
l The determination of the long-run goals and objectives of an enterprise, and the adoption
of courses of action and the allocation of resources necessary for carrying out these goals.
—Alfred Chandler, Strategy and Structure (Cambridge, MA: MIT Press, 1962)
l A strategy is the pattern or plan that integrates an organization’s major goals, policies and
action sequences into a cohesive whole. A well-formulated strategy helps marshal and
allocate an organization’s resources into a unique and viable posture based upon its
relative internal competencies and shortcomings, anticipated changes in the environment,
and contingent moves by intelligent opponents.
—James Brian Quinn, Strategies for Change: Logical Incrementalism
(Homewood, IL: Irwin, 1980)
l Strategy is the pattern of objectives, purposes, or goals and the major policies and plans
for achieving these goals, stated in such a way as to define what business the company is
in or is to be in and the kind of company it is or is to be.
—Kenneth Andrews, The Concept of Corporate Strategy
(Homewood, IL: Irwin, 1971)
 CSAC01 1/13/07 9:18 Page 18

FIGURE 1.3 Evolution of Strategic Management; Dominant Themes

FINANCIAL CORPORATE STRATEGY AS QUEST FOR STRATEGY STRATEGY IN

BUDGETING PLANNING POSITIONING COMPETITIVE FOR THE NEW THE NEW
l DCF-based l Medium-term l Industry ADVANTAGE ECONOMY MILLENNIUM
capital economic analysis l Analysis of l Strategic l CSR and
budgeting forecasting l Market resources and innovation business
l Financial l Formal corporate segmentation capabilities l New business ethics
control through planning l Shareholder value models l Competing for
l The experience
operating l Diversification curve maximization l Disruptive
standards
budgets and quest for l PIMS analysis l Restructuring and technologies l Winner-take-
synergy re-engineering all markets
l Planning
l Creation of l Alliances l Global
business
corporate portfolios strategies
planning
departments

1950 1960 1970 1980 1990 2000 2006

CSAC01 1/13/07 9:18 Page 19

CHAPTER 1 THE CONCEPT OF STRATEGY 19

Yet, as we have seen in our historical review, the conception of firm strategy has
changed greatly over the past half century. As the business environment has become
more unstable and unpredictable, so strategy has become less concerned with detailed
plans, and more about mission, vision, principles, guidelines, and targets. This is con-
sistent with our starting point to the chapter. If we think back to our three introduc-
tory examples – Madonna, General Giap, and Lance Armstrong – none wrote detailed
strategic plans, but all possessed clear ideas of what they wanted to achieve and how
they would achieve it. This shift in emphasis from strategy as plan to strategy as
direction does not imply any downgrading of the role of strategy. Certainly, in a
turbulent environment, strategy must embrace flexibility and responsiveness. But it is
precisely in these conditions that strategy becomes more rather than less important.
When the firm is buffeted by unforeseen threats and where new opportunities are
constantly appearing, then strategy becomes a vital tool to navigate the firm through
stormy seas.
In an environment of uncertainty and change, a clear sense of direction is essential
to the pursuit of objectives. As Michael Porter has emphasized, strategy is not about
doing things better – this is the concern of operational effectiveness – strategy is about
doing things differently; hence, the essence of strategy is making choices.22
Strategic choices can be distilled to two basic questions:
l Where to compete?
l How to compete?

The answers to these questions also define the major areas of a firm’s strategy:
corporate strategy and business strategy.

Corporate and Business Strategy

If we start from basics, the purpose of strategy is to achieve certain goals. For the firm,
the basic goal is to survive and prosper. Survival, over the long term, requires that the
firm earns a rate of return on its capital that exceeds its cost of capital. There are two
possible ways of achieving this. First, the firm may locate within an industry where
overall rates of return are attractive. Second, the firm may attain a position of
advantage vis-à-vis its competitors within an industry, allowing it to earn a return in
excess of the industry average (see Figure 1.4).
These two sources of superior performance define the two basic levels of strategy
within an enterprise:
l Corporate strategy defines the scope of the firm in terms of the industries and
markets in which it competes. Corporate strategy decisions include investment
in diversification, vertical integration, acquisitions, and new ventures; the
allocation of resources between the different businesses of the firm; and
divestments.
l Business strategy is concerned with how the firm competes within a particular
industry or market. If the firm is to prosper within an industry, it must
establish a competitive advantage over its rivals. Hence, this area of strategy is
also referred to as competitive strategy.
Using different terminology, Jay Bourgeois has referred to corporate strategy as
the task of domain selection and business strategy as the task of domain navigation.23
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20 PART I INTRODUCTION

FIGURE 1.4 The sources of superior profitability

INDUSTRY
ATTRACTIVENESS
CORPORATE
STRATEGY
Which industries
RATE OF RETURN should we be in?
ABOVE THE COST
OF CAPITAL

How do we
make money?
COMPETITIVE
ADVANTAGE
BUSINESS
STRATEGY
How should we
compete?

This distinction may be expressed in even simpler terms. The basic question facing
the firm is: “How do we make money?” The answer to this question corresponds to
the two basic strategic choices we identified above: “Where to compete” (i.e. “In
which industries and markets should we be in?”) and “How should we compete?”
The distinction between corporate strategy and business strategy corresponds to the
organization structure of most large companies. Corporate strategy is the respons-
ibility of the top management team and the corporate strategy staff. Business strategy
is primarily the responsibility of divisional management.
As an integrated approach to firm strategy, this book deals with both business
and corporate strategy. However, my primary emphasis will be business strategy. This
is because the critical requirement for a company’s success is its ability to establish
competitive advantage. Hence, issues of business strategy precede those of corporate
strategy. At the same time, these two dimensions of strategy are closely linked: the
scope of a firm’s business has implications for the sources of competitive advantage,
and the nature of a firm’s competitive advantage determines the range of businesses
it can be successful in.

Describing a Firm’s Strategy

Where do we go looking for a firm’s strategy? Strategy resides primarily within the
minds of top managers. In the case of an entrepreneurial startup, strategy will exist
primarily within the mind of the founder. However, to learn about firm strategies we
do not need to be mind readers – most companies find it helpful to articulate their
strategies in one form or another. In the case of the startup enterprise, strategy is
usually written down in the business plan that was prepared to raise finance. In the
case of established companies, strategy is communicated in a number of ways:
CSAC01 1/13/07 9:18 Page 21

CHAPTER 1 THE CONCEPT OF STRATEGY 21

l Vision is an aspirational view of what the organization will be like in the

future. Charlotte Villiers defines vision as: “an ideal picture of what the
company could be if it fulfilled all of its potential and all the human potential
of its staff.” However, the vision statements found on most companies’
websites tend to be too idealized to offer clear guidance to their strategies.
l Mission is a statement of purpose: what the organization seeks to achieve over
the long term. Like vision, mission does not provide a distinct statement of
strategy but offers a pointer to the overall direction in which strategy will take
the organization.
l Business models. As noted earlier, business models came into vogue during the
e-commerce boom of the late 1990s when firms were devising innovative
ways for harvesting profit from internet-based businesses. A business model is
a statement of the basis on which a business will generate revenue and profit.
Most firms operate with a very simple business model: supply a product that
meets a consumer need and sell it at a price that exceeds the cost of
production. Other companies have more complex business models.
Broadcasters supply radio and TV programming free to consumers, but charge
for advertising (hence the threat to this business model posed by TiVo and
other technologies that allow consumers to eliminate advertising from their
viewing and listening). A business model is a preliminary to a strategy: it is
only concerned with the viability of the basic business concept; even if the
business model is sound, the firm still needs a strategy that will allow it to
survive against competitors that are using the same business model.24
l Strategic plans. A firm’s strategic plan documents its strategy in terms of
performance goals, approaches to achieving those goals, and planned resource
commitments over a specific time period (typically three to five years). For
large, multibusiness companies, strategic plans comprise business plans for
individual businesses and divisions and the overall corporate plan. Companies
may formulate regional, country, and functional plans as well. Most large
companies create their strategic plans through a regular, sequential process –
the strategic planning cycle. In most large companies there is an annual cycle.
Strategy Capsules 1.5 and 1.6 give examples of how two companies have articulated
their strategies.
Suppose that a firm is not explicit about its strategy, how do we go about describ-
ing a firm’s strategy? A useful starting point is the two basic questions we identified
as defining a firm’s basic strategic position: where is the firm competing? how is it
competing? Strategy Capsule 1.7 uses basic information about the Coca-Cola Com-
pany to describe its strategy.

How Is Strategy Made? Design vs. Emergence

So far, the picture I have painted has involved strategies being created deliberately by
top management utilizing the tools and techniques of strategic analysis. But is this
how strategies are really made? When we examined Madonna’s career, we discerned
a consistency and pattern to her career decisions that we described as a strategy, yet
there is no evidence that she engaged in any systematic strategic planning or articu-
lated her strategy. Similarly with many successful companies, Wal-Mart’s incredibly
successful strategy based on large store formats, hub-and-spoke distribution system,
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22 PART I INTRODUCTION

STRATEGY CAPSULE 1.5

Nokia’s Strategy

OUR VISION: Life goes Mobile! STRATEGY

Ten years ago, we had a vision that seemed The Nokia Strategy continues to focus on three
revolutionary for the times: Voice Goes Mobile! activities to expand mobile communications in
As history shows, this vision became reality in terms of volume and value:
an incredibly short amount of time. With more
l Expand mobile voice: We can further
than 1.6 billion mobile phone subscriptions
develop the mobile voice market – both in
globally – and more mobile phones than fixed-
markets where mobile telephony is just
line phones in use – we see that mobility has
taking off as well as in more mature
transformed the way people live their lives.
markets. Nokia estimates the number of
Today, Nokia sees mobility expanding into
mobile subscriptions to surpass three
new areas such as imaging, games, entertain-
billion in 2008. Nokia’s position in mobile
ment, media, and enterprises. There are new
voice is strong thanks to our key assets and
mobile services already taking our industry
excellent logistics capabilities.
forward and creating new opportunities. At
the same time, major opportunities still exist l Drive consumer multimedia: Nokia is
in bringing mobile voice to completely new playing a key role in shaping this emerging
users. complex market by focusing on the fastest
If it can go mobile – it will! growth areas: imaging, music, and games,
to name a few.
l Bring extended mobility to enterprises:
MISSION: Connecting People
Nokia will provide a range of competitive,
By connecting people, we help fulfill a funda- specifically targeted handsets, platforms,
mental human need for social connections and and connectivity solutions so enterprises
contact. Nokia builds bridges between people can boost productivity through the power
– both when they are far apart and face-to-face of mobility.
– and also bridges the gap between people and
the information they need. Source: www.nokia.com/P11879 accessed March 22, 2006

small-town locations, and unique approach to employee motivation was not the
result of grand design – it was the result of Sam Walton’s hunches and intuition plus
a series of historical accidents.
How organizations make strategy has emerged as an area of intense debate within
the strategy field. Henry Mintzberg distinguishes intended, realized, and emergent
strategies. Intended strategy is strategy as conceived of by the top management team.
Even here, rationality is limited and the intended strategy is the result of a process of
negotiation, bargaining, and compromise, involving many individuals and groups
within the organization. However, realized strategy – the actual strategy that is
implemented – is only partly related to that which was intended (Mintzberg suggests
CSAC01 1/13/07 9:18 Page 23

CHAPTER 1 THE CONCEPT OF STRATEGY 23

STRATEGY CAPSULE 1.6

Apple Computer, Inc.: Business Strategy

The Company is committed to bringing the is critical to facilitate innovation of new and
best personal computing and music experi- improved products and technologies. Besides
ence to students, educators, creative profes- updates to its existing line of personal com-
sionals, businesses, government agencies, and puters and related software, services, peri-
consumers through its innovative hardware, pherals, and networking solutions, the Company
software, peripherals, services, and internet continues to capitalize on the convergence of
offerings. The Company’s business strategy digital consumer electronics and the computer
leverages its unique ability, through the design by creating innovations like the iPod and iTunes
and development of its own operating system, Music Store. The Company’s strategy also
hardware, and many software applications and includes expanding its distribution network to
technologies, to bring to its customers new effectively reach more of its targeted customers
products and solutions with superior ease- and provide them a high-quality sales and
of-use, seamless integration, and innovative after-sales support experience.
industrial design. The Company believes con-
tinual investment in research and development Source: Apple Computer Inc., 10K Report, 2005.

only 10 –30 percent of intended strategy is realized). The primary determinant of

realized strategy is what Mintzberg terms emergent strategy – the decisions that emerge
from the complex processes in which individual managers interpret the intended
strategy and adapt to changing external circumstances.25
Analysis of Honda’s successful entry into the US motorcycle market has provided
a battleground for the debate between those who view strategy making as primarily
a rational, analytical process of deliberate planning (the design school) and those
that envisage strategy as emerging from a complex process of organizational decision
making (the emergence or learning school of strategy).26 Boston Consulting Group
identified Honda as pursuing a global strategy based on exploiting economies of scale
and volume to establish unassailable cost leadership.27 However, subsequent inter-
views with the Honda managers in charge of US market entry revealed a different
story: a haphazard approach to entry, with little analysis and no clear plan.28 As
Mintzberg observes: “Brilliant as its strategy may have looked after the fact, Honda’s
managers made almost every conceivable mistake until the market finally hit them
over the head with the right formula.”29
Henry Mintzberg’s critique over analytical approaches to strategy design goes
further. Not only is rational design an inaccurate account of how strategies are actu-
ally formulated, it is a poor way of making strategy. “The notion that strategy is some-
thing that should happen way up there, far removed from the details of running an
organization on a daily basis, is one of the great fallacies of conventional strategic
management.”30 At the basis of this fallacy is that it fails to allow for learning though
a continuous interaction between strategy formulation and strategy implementation
in which strategy is constantly being adjusted and revised in light of experience.
CSAC01 1/13/07 9:18 Page 24

24 PART I INTRODUCTION

STRATEGY CAPSULE 1.7

Describing the Strategy of The Coca-Cola Company

Coca-Cola’s mission statement – “To refresh the With regard to how: Coca-Cola pursues a
world . . . To inspire moments of optimism . . . differentiation strategy in which it relies on
To create value in everything we do . . .” – is brand image developed through heavy adver-
ethereal, but doesn’t say much about how tising and promotion. It seeks market share
these lofty goals are translated into strategy. leadership through its mass marketing and
However, on the basis of some basic facts through close relationships with the leading
about the company’s operation and intentions, bottlers in every country where it does business.
we can provide a more explicit statement of These facts outline Coca-Cola’s strategy only
its strategy. Our starting point is to answer in the static sense of describing its current com-
the two basic questions of where and how it petitive stance. Strategy is also dynamic – it’s
competes. about the direction in which a company is
The where question can be answered as developing. Coca-Cola’s company reports tell
follows: us a good deal about what the company is cur-
rently doing to change its competitive position.
l Coca-Cola competes in the soft drinks
In particular, it is committed to continuous
industry where it supplies concentrate for
growth of both volume and earnings, and to
its branded carbonated drinks (e.g. Coca-
the reinforcement of its world leadership. Its
Cola, Sprite, Fanta, Tab, and Fresca) and
major growth opportunities will be in fast-
supplies other drinks (e.g. Minute Maid,
growing countries outside the US, such as
Hi-C, and Fiver Alive fruit juices and Dasani
China, Russia, and Turkey. (During 2001–5, the
bottled water).
international portion of its capital expenditure
l Geographically, Coca-Cola competes in budget increased from 56% to 71%.) Coca-
200 countries, with 27% of sales in the US Cola also sought to capitalize on increasing
and a further 27% in its next four biggest demand for low carbohydrate and natural in-
markets (Mexico, Brazil, Japan, and China). gredient drinks. However, its primary emphasis
l In terms of vertical scope, Coca-Cola is will be on marketing its core brands – particu-
primarily engaged in product larly targeting younger consumers through
development, brand management, linking Coca-Cola products with sport and
and the manufacture of concentrate. music. Acquisition will play an important role
It relies on franchised local bottlers for in building and reinforcing Coca-Cola’s inter-
bottling and distribution. Coca-Cola holds national market position.
equity interest in over half of its larger
bottlers. Source: www2.coca-cola.com/investors/index.html

While the debate between these schools rumbles on,31 it is apparent that the cen-
tral issue is not “who is right?” but “how can the two views complement one another
to give us a richer understanding of how strategy is made?” In most organizations,
strategy is made through a combination of design and emergence. At the formal,
deliberate level, strategy is made in board meetings, meetings of the top management
CSAC01 1/13/07 9:18 Page 25

CHAPTER 1 THE CONCEPT OF STRATEGY 25

team, and within the strategic planning process. At the same time, strategy is
being continually enacted through decisions that are made by every member of the
organization – by middle management especially. The decentralized, bottom–up pro-
cess of strategy emergence may lead formal, top–down strategy formulation. Intel’s
historic decision to abandon memory chips and concentrate on microprocessors was
initiated through a host of decentralized decisions taken by divisional and plant man-
agers that were subsequently acknowledged by top management and promulgated
into strategy.32 Maximizing responsiveness and adaptability requires that strategic
management processes combine design and emergence. Thus, the strategic planning
process typically combines both top–down and bottom–up strategy making. Corpor-
ate headquarters sets guidelines in the form of mission statements, business prin-
ciples, and performance targets while the individual business units take the lead in
formulating strategic plans. Within the strategic plans that are decided, divisional and
business unit managers have considerable freedom to adjust, adapt, and experiment.
This predominant pattern of strategic planning may be described as one of “planned
emergence.”33
This idea of strategy providing overall direction for an emergent, adaptive, re-
sponsive process of strategic decision making is central to Bain & Company’s advo-
cacy of strategic principles to guide the organization. A strategic principle is a “pithy,
memorable distillation of strategy that guides employees as it empowers them.” Thus,
America’s most successful airline, Southwest, encapsulates its strategy in a simple
statement: “Meet customers’ short-haul travel needs at fares competitive with the cost
of automobile travel.” This principle provides a clear strategy focus of the company
while allowing employees to enact the strategy in adaptive, innovative ways.34
The notion of fostering strategic adaptation through establishing a few broad
principles and directives to guide decentralized decision making is consistent with the
tenets of complexity theory. Jack Welch’s management of General Electric combined
simple directives (“Be number 1 or number 2 in your sector,” “Simplicity . . .
Self-confidence,” “Achieve six-sigma quality”), strong performance incentives, and
considerable autonomy for divisional managers. The result was that one of the world’s
biggest and most complex companies achieved outstanding financial performance,
rapid response to change, and a high level of internal cohesiveness.35 We shall
explore the implications of complexity theory more fully in Chapter 17.
The optimal balance between design and emergence depends on the stability of
the external environment. The Roman Catholic Church and the US Postal Service
inhabit relatively stable environments. They can use top–down, formalized approaches
to planning strategy. Organizations whose environments are fast changing and
unpredictable – Google Inc. or the Baghdad Home Security Services Ltd. – must limit
their strategic planning to a few principles and guidelines; the rest must emerge as
circumstances unfold.

Multiple Roles of Strategy

What emerges from this discussion is that strategy making is not some abstract
analysis for devising the optimal strategy for the firm. Strategy making is part of an
ongoing management process. The reason that strategic management has displaced
the terms long-range planning and corporate planning is partly to disassociate strategy
from planning, but also to emphasize that strategy making is a central component
of what managers do. Viewing strategy making as a part of the management process
allows us to see that strategy plays multiple roles within organizations.
CSAC01 1/13/07 9:18 Page 26

26 PART I INTRODUCTION

Strategy as Decision Support I have described strategy as a pattern or theme

that gives coherence to the decisions of an individual or organization. But why can’t
individuals or organizations make optimal decisions in the absence of such a unifying
theme? Consider the 1997 “man-versus-computer” chess epic in which Garry
Kasparov was defeated by IBM’s “Deep Blue.” Deep Blue did not need strategy. Its
phenomenal memory and computing power allowed it to identify its optimal moves
based on a huge decision tree.36 Kasparov – although the world’s greatest chess player
– was subject to bounded rationality: his decision analysis was subject to the cognitive
limitations that constrain all human beings.37 For chess players, a strategy offers guide-
lines and decision criteria that assist positioning and help create opportunities.
Strategy improves decision making in several ways. First, strategy simplifies
decision making by constraining the range of decision alternatives considered and
by acting as a heuristic – a rule of thumb that reduces the search required to find an
acceptable solution to a decision problem. Second, a strategy-making process permits
the knowledge of different individuals to be pooled and integrated. Third, a strategy-
making process facilitates the use of analytic tools – the frameworks and techniques
that we will encounter in the ensuing chapters of this book.

Strategy as a Coordinating Device The greatest challenge of managing an

organization is coordinating the actions of different organizational members. Strategy
can promote coordination in several ways. First, it is a communication device. State-
ments of strategy are a powerful means through which the CEO can communicate
the identity, goals, and competitive stance of the company to all organizational mem-
bers. However, communication alone is not enough. For coordination to be effective,
buy-in is essential from the different groups and functions that make up the organ-
ization. The strategic planning process can provide a forum in which views are ex-
changed and consensus developed. Once formulated, the implementation of strategy
through goals, commitments, and performance targets that are monitored over the
strategic planning period also provides a mechanism to ensure that the organization
moves forward in a consistent direction.

Strategy as Target Strategy is forward looking. It is concerned not only with

how the firm will compete now, but also with what the firm will become in the future.
A key purpose of a forward-looking strategy is not only to establish a direction of
the firm’s development, but also to set aspirations that can motivate and inspire the
members of the organization. Gary Hamel and C. K. Prahalad use the term “strategic
intent” to describe the articulation of a desired leadership position. They argue that:
“. . . strategic intent creates an extreme misfit between resources and ambitions. Top
management then challenges the organization to close the gap by building new
competitive advantages.”38 The implication they draw is that strategy should be less
about fit and resource allocation, and more about stretch and resource leverage.39 The
evidence from Toyota, Virgin, and Southwest Airlines is that resource scarcity may
engender ambition, innovation, and a “success-against-the-odds” culture. Jim Collins
and Jerry Porras make a similar point: US companies that have been sector leaders for
50 years or more – Merck, Walt Disney, 3M, IBM, and Ford – have all generated
commitment and drive through setting “Big, Hairy, Ambitious Goals.”40 Ambitious,
inspirational goals are typical of most organizations’ statements of vision and mis-
sion. One of the best known is the goal set by President Kennedy for NASA’s space
program: “. . . before this decade is out, of landing a man on the moon and return-
ing him safely to Earth.” British Airways aspires to be “The World’s Favorite Airline,”
CSAC01 1/13/07 9:18 Page 27

CHAPTER 1 THE CONCEPT OF STRATEGY 27

while Coca-Cola’s drive for growth is driven by the quest to “have a Coca-Cola within
arm’s reach of everyone in the world.”

The Role of Analysis in Strategy Formulation

Despite the criticism of rational, analytical approaches to strategy formulation by
Henry Mintzberg and others, the approach of this book is to emphasize analytic
approaches to strategy formulation. This is not because I wish to downplay the role
of intuition, creativity and spontaneity – these qualities are essential ingredients of
successful strategies. Nevertheless, whether strategy formulation is formal or informal,
whether strategies are deliberate or emergent, systematic analysis is a vital input into
the strategy process. Without analysis, strategic decisions are susceptible to power
battles, individual whims, fads, and wishful thinking. Concepts, theories, and analytic
tools are complements not substitutes for experience, commitment, and creativity.
Their role is to provide frameworks for organizing discussion, processing informa-
tion and opinions, and assisting communication and consensus.
This is not to endorse current approaches to strategy analysis. The weakness of
our existing toolbox of strategy concepts and techniques is that they have failed to take
adequate account of expertise and experiential knowledge, of creativity, and of the
merits of decentralized, emergent processes of strategy making. My purpose is not to
defend conventional approaches to business strategy analysis, but to do better. The
challenge is to extend our analytic tools to take account of the role of values and goals,
the drivers of innovation, the value of flexibility and adaptability, and the conditions
conducive to rapid evolutionary development in complex adaptive systems. In the
course of the book you will encounter concepts such as real options, tacit knowledge,
hypercompetition, and complexity science that can help us extend our tools of strat-
egy analysis to remedy many of the inadeqacies addressed by Mintzberg and others.
We must also recognize the nature of strategy analysis. Unlike many of the analyt-
ical techniques in accounting, finance, market research, or production management,
strategy analysis does not generate solutions to problems. It does not yield schedul-
ing algorithms or identify which investment project has the greatest net present value.
The strategic questions that companies face (like those that we face in our own careers
and lives) are simply too complex to be programmed.
The purpose of strategy analysis is not to provide answers but to help us understand
the issues. Most of the analytic techniques introduced in this book are frameworks
that allow us to identify, classify, and understand the principal factors relevant to
strategic decisions. Such frameworks are invaluable in allowing us to come to terms
with the complexities of strategy decisions. In some instances, the most useful con-
tribution may be in assisting us to make a start on the problem. By guiding us to the
questions we need to answer, and by providing a framework for organizing the in-
formation gathered, we are in a superior position to a manager who relies exclusively
on experience and intuition. Finally, analytic frameworks and techniques can improve
our flexibility as managers. The analysis in this book is general in its applicability;
it is not specific to particular industries, companies, or situations. Hence, it can help
increase our confidence and effectiveness in understanding and responding to new
situations and new circumstances. By encouraging depth of understanding in funda-
mental issues concerning competitive advantage, customer needs, organizational
capabilities, and the basis of competition, the concepts, frameworks, and techniques in
this book will encourage rather than constrain innovation, flexibility, and opportunism.
CSAC01 1/13/07 9:18 Page 28

28 PART I INTRODUCTION

Summary
This chapter has covered a great deal of ground – and structure and systems – comprise the basic
I hope that you are not suffering from indigestion. components of strategy analysis. Part II of the
If you are feeling a little overwhelmed, not to book will devote a separate chapter to each. (In
worry: we shall be returning to most of the the case of industry analysis – two chapters.) We
themes and issues raised in this chapter in the then deploy these tools in the analysis of compet-
subsequent chapters of the book. itive advantage (Part III), in the formulation and
The next stage is to delve further into the basic implementation of business strategies in different
strategy framework shown in Figure 1.2. Each ele- industry contexts (Part IV), and then in the devel-
ment of this framework – goals and values, the opment of corporate strategy (Part V). Figure 1.5
industry environment, resources and capabilities, shows the framework for the book.

FIGURE 1.5 The structure of the book

I INTRODUCTION
Ch. 1 The Concept of Strategy

II THE TOOLS OF STRATEGY ANALYSIS

Analysis of Industry and Competition Analysis of the Firm
Ch. 2 Goals, Values, and Performance
Ch. 3 Industry Analysis: The Fundamentals Ch. 5 Analyzing Resources and Capabilities
Ch. 4 Further Topics in Industry and Ch. 6 Organization Structure and
Competitive Analysis Management Systems

III THE ANALYSIS OF COMPETITIVE ADVANTAGE

Ch. 7 The Nature and Sources of Competitive Advantage
Ch. 8 Cost Advantage Ch. 9 Differentiation Advantage

IV BUSINESS STRATEGIES IN DIFFERENT INDUSTRY CONTEXTS

Ch. 10 Industry Ch. 11 Technology-based Ch. 12 Competitive
Evolution and Industries and the Management Advantage in Mature
Strategic Change of Innovation Industries

V CORPORATE STRATEGY
Ch. 13 Vertical Integration Ch. 14 Global Strategies and Ch. 15 Diversification
and the Scope of the Firm the Multinational Corporation Strategy
Ch. 16 Managing the Multibusiness Ch. 17 Current Trends in
Corporation Strategic Management
CSAC01 1/13/07 9:18 Page 29

CHAPTER 1 THE CONCEPT OF STRATEGY 29

Self-Study Questions
1 In relation to the four characteristics of successful strategies (clear, consistent, long-term
objectives; profound understanding of the environment; objective appraisal of resources; and
effective implementation), assess the US strategy towards Iraq during 2003–7.

2 To what extent does McDonald’s Corporation achieve a close strategic fit between its
strategy, the characteristics of its external environment, and its internal resources and
capabilities? Are changes occurring in its external environment weakening this strategic fit?
If so, how should McDonald’s adjust its strategy?

3 My discussion of the evolution of business strategy (“From Corporate Planning to Strategic

Management”) established that the characteristics of a firm’s strategic plans and its strategic
planning process are strongly influenced by the volatility and unpredictability of its external
environment. On this basis, what differences would you expect in the strategic plans and
strategic planning processes of Coca-Cola Company and Google Inc.?

4 I have noted that a firm’s strategy can be described in terms of the answers to two questions:
where are we competing? and how are we competing? (“Describing a Firm’s Strategy”).
Applying these two questions, provide a concise description of the Madonna’s career strategy
(see Strategy Capsule 1.1).

5 What is your career strategy for the next five years? To what extent does your strategy fit
with your long-term goals, the characteristics of the external environment, and your own
strengths and weaknesses?

Notes
1 P. F. Drucker, “Managing Oneself,” Harvard Business 6 On the contribution of game theory to business strategy
Review (March–April 1999): 65–74. analysis, see F. M. Fisher, “Games Economists Play: A
2 Stephen Covey (The Seven Habits of Highly Effective Non-cooperative View,” RAND Journal of Economics 20
People, Simon & Schuster, 1989) advises us to start at (Spring 1989): 113–24; and C. F. Camerer, “Does
the end – to visualize our own funerals and imagine Strategy Research Need Game Theory?,” Strategic
what we would like the funeral speakers to say about us Management Journal 12, Special Issue (Winter 1991):
and our lives. On this basis, he recommends that we 137–52.
develop lifetime mission statements based on the 7 For practical and accessible introductions to the
multiple roles that we occupy in life. application of game theory, see T. C. Schelling, The
3 On SWOT analysis see entries in Wikipedia Strategy of Conflict, 2nd edn (Cambridge, MA: Harvard
(http:/en.wikipedia.org/wiki/SWOT) or Mindtools University Press, 1980); A. K. Dixit and B. J. Nalebuff,
(www.mindtools.com/pages/articles/newTMC_05.htm). Thinking Strategically (New York: W. W. Norton, 1991);
4 Sun Tzu, The Art of Strategy: A New Translation of and A. Brandenburger and B. J. Nalebuff, Co-opetition
Sun Tzu’s Classic “The Art of War,” trans. R. L. Wing (New York: Doubleday, 1996).
(New York: Doubleday, 1988). 8 During the late 1950s, Harvard Business Review featured
5 On the links between military and business strategy, see a number of articles on corporate planning, e.g. D. W.
R. Evered, “So What Is Strategy?” Long Range Planning Ewing, “Looking Around: Long-range Business
16, no. 3 ( June 1983): 57–72; E. Clemons and J. Planning,” Harvard Business Review ( July–August 1956):
Santamaria, “Maneuver Warfare,” Harvard Business 135– 46; B. Payne, “Steps in Long-range Planning,”
Review (April 2002): 46–53. Harvard Business Review (March–April 1957): 95–101.
CSAC01 1/13/07 9:18 Page 30

30 PART I INTRODUCTION

9 I. Ansoff, Corporate Strategy (London: Penguin, 1985): Management: Inside Our Strange World of Organizations
18. (New York: Free Press, 1988).
10 M. E. Porter, Competitive Strategy (New York: Free 26 The two views of Honda are captured in two Harvard
Press, 1980). cases: Honda [A] (Boston: Harvard Business School,
11 Boston Consulting Group, Perspectives on Experience Case No. 384049, 1989) and Honda [B] (Boston:
(Boston: Boston Consulting Group, 1978). Harvard Business School, Case No. 384050, 1989).
12 R. D. Buzzell and B. T. Gale, The PIMS Principles 27 Boston Consulting Group, Strategy Alternatives for the
(New York: Free Press, 1987). British Motorcycle Industry (London: Her Majesty’s
13 R. M. Grant, “The Resource-based Theory of Stationery Office, 1975).
Competitive Advantage: Implications for Strategy 28 R. T. Pascale, “Perspective on Strategy: The Real Story
Formulation,” California Management Review 33 Behind Honda’s Success,” California Management
(Spring 1991): 114–35; D. J. Collis and Review 26, no. 3 (Spring 1984): 47–72.
C. Montgomery, “Competing on Resources: Strategy in 29 H. Mintzberg, “Crafting Strategy,” Harvard Business
the 1990s,” Harvard Business Review ( July–August Review 65 ( July–August 1987): 70.
1995): 119–28. 30 H. Mintzberg, “The Fall and Rise of Strategic Planning,”
14 M. E. Porter, “What is Strategy?,” Harvard Business Harvard Business Review ( January–February 1994):
Review (November–December 1996): 64. 107–14.
15 C. Christensen, The Innovator’s Dilemma (Boston: 31 H. Mintzberg, R. T. Pascale, M. Goold, and
Harvard Business School Press, 1997). R. P. Rumelt, “The Honda Effect Revisited,” California
16 T. Peters, The Pursuit of Wow (New York: Vintage Management Review 38 (Summer 1996): 78–117.
Books, 1994); G. Hamel, Leading the Revolution 32 R. A. Burgelman and A. Grove, “Strategic Dissonance,”
(Boston: Harvard Business School Press, 2000). California Management Review 38 (Winter 1996): 8–28.
17 C. Shapiro and H. R. Varian, Information Rules (Boston: 33 R. M. Grant “Strategic Planning in a Turbulent
Harvard Business School Press, 1998). Environment: Evidence from the Oil and Gas Majors,”
18 R. H. Frank and P. J. Cook, The Winner-Take-All Society Strategic Management Journal 14 ( June 2003): 491–517.
(New York: Penguin, 1997). 34 O. Gadiesh and J. Gilbert, “Transforming Corner-office
19 On option theory and strategy see: T. Copeland and Strategy into Frontline Action,” Harvard Business
V. Antikarov, Real Options: A Practitioner’s Guide Review (May 2001): 73– 80.
(Texere, 2001); A. van Putten and I. C. Macmillan, 35 B. McKelvey, “Energising Order-Creating Networks of
“Making Real Options Really Work,” Harvard Business Distributed Intelligence: Improving the Corporate
Review (December 2004): 134– 41. Brain,” International Journal of Innovation Management
20 C. Smith, “Corporate Social Responsibility: Whether or 5(2) ( June 2001): 181–212.
How?” California Management Review 45, no. 4 36 “Strategic Intensity: A Conversation with Garry
(Summer 2003): 52–76. Kasparov,” Harvard Business Review (April 2005):
21 “Survey: India and China,” Economist (March 3, 2005). 105–13.
22 M. E. Porter, “What is Strategy?” op. cit. 37 The concept of bounded rationality was developed by
23 L. J. Bourgeois, “Strategy and the Environment: A Herbert Simon (“A Behavioral Model of Rational
Conceptual Integration,” Academy of Management Choice,” Quarterly Journal of Economics, 69 (1955):
Review 5 (1980): 25–39. 99–118).
24 J. Magretta, “Why Business Models Motter,” Harvard 38 G. Hamel and C. K. Prahalad, “Strategic Intent,”
Business Review (May 2002): 86–92; George Yip, “Using Harvard Business Review (May–June 1989): 63–77.
Strategy to Change Your Business Model,” Business 39 G. Hamel and C. K. Prahalad, “Strategy as Stretch and
Strategy Review 15, issue 2 (Summer 2004): 17–24. Leverage,” Harvard Business Review (March–April
25 See H. Mintzberg, “Patterns of Strategy Formulation,” 1993): 75– 84.
Management Science 24 (1978): 934– 48; “Of Strategies: 40 J. C. Collins and J. I. Porras, Built to Last: Successful
Deliberate and Emergent,” Strategic Management Habits of Visionary Companies (New York:
Journal 6 (1985): 257–72; and Mintzberg on HarperCollins, 1995).