economics

May 10, 2010

Donald C. Hambrick and James W. Fredricksona – Are You Sure You Have a Strategy?

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Are You Sure You Have a Strategy?

Donald C. Hambrick and James W. Fredricksona

Consider these statements of strategy drawn from actual documents and announcements of several companies:

“Our strategy is to be the low-cost provider.” “We’re pursuing a global strategy.”

“The company’s strategy is to integrate a set of regional acquisitions.”

“Our strategy is to provide unrivaled cus­tomer service.”

“Our strategic intent is to always be the first-mover.”

“Our strategy is to move from defense to in­dustrial applications.”

What do these grand declarations have in com­mon? Only that none of them is a strategy. They are strategic threads, mere elements of strategies.

But they are no more strategies than Dell Comput­er’s strategy can be summed up as selling direct to customers, or than Hannibal’s strategy was to use elephants to cross the Alps. And their use reflects an increasingly common syndrome—the catchall fragmentation of strategy.

After more than 30 years of hard thinking about strategy, consultants and scholars have provided executives with an abundance of frameworks for analyzing strategic situations. We now have five-forces analysis, core competencies, hyper competition, the resource-based view of the firm, value chains, and a host of other helpful, often powerful, analytic tools1, Missing, however, has been any guidance as to what the product of these tools should be—or what actually constitutes a strategy. Indeed, the use of specific strategic tools tends to draw the strategist toward narrow, piecemeal con­ceptions of strategy that match the narrow scope of the tools themselves. For example, strategists who are drawn to Porter’s five-forces analysis tend to think of strategy as a matter of selecting industries and segments within them. Executives who dwell on “co-optition” or other game-theoretic frame-works see their world as a set of choices about dealing with adversaries and allies.

This problem of strategic fragmentation has worsened in recent years, as narrowly specialized academics and consultants have started plying their tools in the name of strategy. But strategy is not pricing. It is not capacity decisions. It is not setting R&D budgets. These are pieces of strate­gies, and they cannot be decided—or even considered—in isolation.

Imagine an aspiring painter who has been taught that colors and hues determine the beauty of a picture. But what can really be done with such advice? After all, magnificent pictures require far more than choosing colors: attention to shapes and figures, brush technique, and finishing processes. Most importantly, great paintings depend on artful combinations of all these elements. Some combi­nations are classic, tried-and-true; some are inven­tive and fresh; and many combinations—even for avant-garde art—spell trouble.

1. This article is an edited version of Donald C. Hambrick & James W. Fredrickson, 2001. “Are you sure you have a strategy?” Academy of Management Executive, 15, No.4, pp.48-59. May only be used for academic purposes.

Strategy has become a catchall term used to mean whatever one wants it to mean. Business magazines now have regular sections devoted to strategy, typically discussing how featured firms are dealing with distinct issues, such as customer service, joint ventures, branding, or e-commerce. In turn, executives talk about their “service strategy,” their “joint venture strategy,” their “branding strat­egy,” or whatever kind of strategy is on their minds at a particular moment.

Executives then communicate these strategic threads to their organizations in the mistaken belief that doing so will help managers make tough choices. But how does knowing that their firm is pur­suing an “acquisition strategy” or a “first-mover strategy” help the vast majority of managers do their jobs or set priorities? Flow helpful is it to have new initiatives announced periodically with the word strategy tacked on? When executives call everything strategy, and end up with a collection of strategies, they create confusion and undermine their own cred­ibility. They especially reveal that they don’t really have an integrated conception of the business.

Many readers of works on the topic know that strategy is derived from the Greek strategos, or “the art of the general.” But few have thought much about this important origin. For example, what is special about the general’s job, compared with that of a field commander? The general is responsible for multi­ple units on multiple fronts and multiple battles over time. The general’s challenge—and the val­ue-added of generalship—is in orchestration and comprehensiveness. Great generals think about the whole. They have a strategy; it has pieces, or elements, but they form a coherent whole. Business generals, whether they are CEOs of established firms, division presidents, or entrepreneurs, must also have a strategy—a central, integrated, exter­nally oriented concept of how the business will achieve its objectives. Without a strategy, time and resources are easily wasted on piecemeal, dispar­ate activities; mid-level managers will fill the void with their own, often parochial, interpretations of what the business should be doing; and the result will be a potpourri of disjointed, feeble initiatives.

Examples abound of firms that have suffered because they lacked a coherent strategy. Once a towering force in retailing, Sears spent 10 sad years vacillating between an emphasis on hard goods and soft goods, venturing in and out of ill-chosen businesses, failing to differentiate itself in any of them, and never building a compelling economic logic. Similarly, the once-unassailable Xerox is engaged in an attempt to revive itself, amid criticism from its own executives that the company lacks a strategy. Says one: “I hear about asset sales, about refinancing, but I don’t hear anyone saying convincingly, ‘Here is your future.”’2

Đầy rẫy những ví dụ về các doanh nghiệp khó khăn vì chúng thếu một chiến lược rõ ràng. Từng là công ty hàng đầu trong ngành bán lẻ, Sears đã mất 10 năm thảm hại dao động giữa tập trung vào hàng hóa cứng (hard goods) hay hàng mềm (soft goods), đầu tư vào rồi lại thóat ra những lĩnh vực kinh doanh kém chọn lọc, thất bại không tự phân biệt hóa được trong bất cứ lĩnh vực nào, và không bao giờ xây dựng được một sự thuyết phục kinh tế hấp dẫn. Tương tự, Xerox tunừg là một công ty hùng mạnh đã nỗ lực tự hồi sinh, khi bị các nhà lãnh đạo phê phán công ty thiếu một chiến lược. Một người nói: “Tôi nghe về bán tài sản, về tái cấp vốn, nhưng tôi không nghe một ai nói một cách thuyết phục, ‘Đây là tương lai của bạn.’” 2

A strategy consists of an integrated set of choices, but it isn’t a catchall for every important choice an executive faces. As Figure 1 portrays, the company’s mission and objectives, for example, stand apart from, and guide, strategy. Thus we would not speak of the commitment of the New York Times to be Amer­ica’s newspaper of record as part of its strategy. GE’s objective of being number one or number two in all its markets drives its strategy, but is not strategy itself. Nor would an objective of reaching a particular revenue or earnings target be part of a strategy.

Một chiến lược bao gồm một tập hợp liên kết các lựa chọn, nhưng nó không phải là một đống hổ lốn một nhà lãnh đạo phải đối diện cho một chọn lựa quan trọng. Như trinh bày ở Hình 1, sứ mạng và mục tiêu của công ty, chẳng hạn, đứng tách xa, và hướng dẫn, chiến lược. Như thế, chúng ta sẽ không nói cam kết của tờ New York Times trở thành tờ báo Mỹ kỷ lục là thành phần chiến lược của nó. Mục tiêu của GE trở thành số một hay số hai trong tất cả các thị trường dẫn dắt chiến lược của nó, nhưng không phải là chính là chiến lược. Một mục tiêu đạt được đích doanh số hay thu nhập nào đó cũng không phải là thành phân của chiến lược.

Similarly, because strategy addresses how the business intends to engage its environment, choices about internal organizational arrange­ments are not part of strategy. So we should not speak of compensation policies, information sys­tems, or training programs as being strategy. These are critically important choices, which should reinforce and support strategy; but they do not make up the strategy itself.3 If everything im­portant is thrown into the strategy bucket, then this essential concept quickly comes to mean nothing.

Tương tự, do chiến lược nêu lên cách thức doanh nghiệp dự định thích ứng với môi trường của nó, lựa chọn về sắp xếp nội bộ tổ chức không phải là thành phần chiến lược. Vì vậy, chúng ta sẽ không đề cập đến chính sách lương thưởng, hệ thống thông tin, hay các chương trình huấn luyện như là chiến lược. Đây là những chọn lựa quan trọng, sẽ củng cố và hỗ trợ chiến lược, nhưng chúng không tạo nên chính chiến lược.3 Nếu thứ gì quan trọng cũng ném vào chiếc giỏ chiến lược thì khái niệm quan trọng nầy nhanh chóng không còn có nghĩa gì nữa.

We do not mean to portray strategy development as a simple, linear process. Figure 1 leaves out feedback arrows and other indications that great strategists are iterative, loop thinkers.4 The key is not in following a sequential process, but rather in achieving a robust, reinforced consistency among the elements of the strategy itself.

Chúng tôi không có ý mô tả sự phát triển chiến lược là một quá trình giản đơn, thẳng băng. Hình 1 đưa ra những mũi tên quay ngược và các biểu thị khác cho thấy các nhà chiến lược vĩ đại là những người tư duy lặp, vòng. 4 Điều chính yếu là không đi theo một quá trình tuần tự, mà là đạt được một sự nhất quán mạnh mẽ, vững chắc giữa các thành tố của chiến lược đó.

Figure 1. Putting Strategy in its place

The Elements of Strategy

Các Yếu tố của Chiến lược

If a business must have a strategy, then the strat­egy must necessarily have parts. What are those parts? As Figure 2 portrays, a strategy has five elements, providing answers to five questions:

• Arenas: where will we be active?

• Vehicles: how will we get there?

• Differentiators: how will we win in the market-place?

• Staging: what will be our speed and sequence of moves?

• Economic logic: how will we obtain our returns?

Nếu doanh nghiệp phải có một chiến lược thì chiến lược đó cần có những thành phần. Những thành phần nầy là gì? Như mô tả ở Hình 2, một chiến lược có năm thành phần, đưa ra đáp án cho năm câu hỏi:

· Đấu trường: ở đâu chúng ta sẽ hoạt động?

· Phương tiện: cách thức chúng ta đến đó?

· Tác nhân phân biệt hóa: chúng ta sẽ chiến thắng trên thị trường như thế nào?

· Phân kỳ: tốc độ và trình tự chuyển động của chúng ta?

· Tính thuyết phục kinh tế: chúng ta sẽ đạt được thu nhập như thế nào?

This article develops and illustrates these domains of choice, emphasizing how essential it is that they form a unified whole. Where others focus on the inputs to strategic thinking (the top box in Figure 1), we focus on the output—the composition and design of the strategy itself.

Bài viết nầy xây dựng và minh họa các khía cạnh nầy của sự chọn lựa, nhấn mạnh tính cần thiết chúng tạo nên một tổng thể thống nhất. Ở nơi mà những người khác nhấn mạnh vào đầu vào của tư duy chiến lược (hộp trên đỉnh ở Hình 1), chúng ta nhấn mạnh vào đầu ra – thành phần và thiết kế của chính chiến lược.

Figure 2

The Five Major Elements of Strategy

Arenas

Arenas ask the specific questions of our activity: 1) Which products? 2) Which market segments? 3) Which geographic areas? 4) Which core technologies? And, 5) Which value creation stages? The most fundamental choices strategists make are those of where, or in what arenas, the business will be active. This is akin to the question Peter Drucker posed decades ago: “What business will we be in?”5 The answer, however, should not be one of broad generalities. For instance, “We will be the leader in information technology consulting” is more a vision or objective than part of a strategy. In articulating arenas, as stated above, it is important to be as specific as possible about the product categories, market segments, geographic areas, and core technolo­gies, as well as the value-adding stages (e.g., prod­uct design, manufacturing, selling, servicing, & dis­tribution) the business intends to take on.

For example, as a result of an in-depth analysis, a biotechnology company specified its arenas: the company intended to use T-cell receptor technol­ogy to develop both diagnostic and therapeutic products for battling a certain class of cancers; it chose to keep control of all research and product development activity, but to outsource manufactur­ing and a major part of the clinical testing process required for regulatory approvals. The company targeted the U.S. and major European markets as its geographic scope. The company’s chosen are­nas were highly specific, with products and mar­kets even targeted by name. In other instances, especially in businesses with a wider array of products, market segments, or geographic scope, the strategy may instead reasonably specify the classes of, or criteria for, selected arenas—e.g., high-end sensors, or markets with per-capita GDP over $25,000. But in all cases, the challenge is to be as specific as possible.

In choosing arenas, the strategist needs to indicate not only where the business will be active, but also how much emphasis will be placed on each. Some market segments, for instance, might be identified as centrally important, while others are deemed sec­ondary. A strategy might reasonably be centered on one product category, with others—while necessary for defensive purposes or for offering customers a full line—being of distinctly less importance.

Đấu trường

Đấu trường đặt ra những câu hỏi cụ thể về hoạt động của chúng ta: 1) Sản phẩm gì? 2) Phân khúc thị trường nào? 3) Khu vực địa lý nào? 4)Công nghệ cốt lõi gì? Và 5) Các giai đoạn tạo giá trị cụ thể nào? Các lựa chọn căn bản nhất nhà chiến lược phải quyết định là ở đâu hay trên đấu trường nầo doanh nghiệp sẽ hoạt động. Điều nầy giống ccâu hỏi Peter Drucker đặt ra cách đây vài thập kỷ “Chúng ta sẽ ở trong ngành nào?”5 Tuy nhiên, đáp án không nên quá chung chung. Chẳng hạn, “Chúng ta sẽ là công ty dẫn đầu trong ngành tư vấn công nghệ thông tin” có vẻ là tầm nhìn hay mục đích hơn là một thành phần của chiến lược. Như đã đề cập ở trên, trong những ngành cụ thể phải nêu càng chi tiết càng tốt về chủng loại sản phẩm, phân khúc thị trường, khu vực địa lý, và công nghệ cốt lõi, cũng như các giai đoạn tăng thêm giá trị (ví dụ, thiết kế sản phẩm, sản xuất, bán hàng, dịch vụ, phân phối) mà doanh nghiệp dự định thực hiện.

Chẳng hạn, sau khi phân tích cặn kẽ, một công ty công nghệ sinh học nêu cụ thể đấu trường của nó: công ty dự định sử dụng công nghệ bộ cảm tế bào hình T (T-cell receptor technology) để phát triển các sản phẩm chẩn đóan và chữa bệnh cho cuộc chiến chống lại một số loại bệnh ung thư, nó lựa chọn kiểm soát giữ lại toàn bộ các hoạt động nghiên cứu và phát triển sản phẩm nhưng quyết định thuê ngòai (outsource) sản xuất và hầu hết các quá trình kiểm tra y tế cần thiết để được chấp nhân theo luật. Công ty nhắm thị trường Mỹ và các thị trường châu Âu chính là phạm vi địa lý của nó. Đấu trường lựa chọn của công ty rất cụ thể, với sản phẩm và thị trường thậm chí định rõ bằng tên gọi. Trong những trường hợp khác, đặc biệt với những doanh nghiệp có một loạt rộng hơn các sản phẩm, các phân khúc thị trường, hay phạm vi địa lý, chiến lược có thể thay một cách hợp lý bằng cách nêu cụ thể các loại hay các tiêu chí cho đấu trường lựa chọn, như cảm biến giá trị cao (high-end sensors) hay thị trường có GDP bình quân đầu người trên 25.000 đôla/năm. Nhưng trong tất cả trường hợp, khó khăn là phải càng cụ thể càng tốt.

Trong lựa chọn đấu trường, nhà chiến lược không những phải chỉ ra nơi doanh nghiệp hoạt động mà còn phải nêu được tầm quan trọng của từng nơi. Ví dụ, một vài phân khúc thị trường có thể xác định là quan trọng chủ yếu, và các thị trường khác là thứ yếu. Một chiến lược có thể tập trung một cách hợp lý vào một chủng loại sản phẩm – trong khi những sản phẩm khác có thể cần thiết cho mục tiêu phòng vệ hay cung cấp đầy đủ loại sản phẩm cho khách hàng – rõ là it quan trọng hơnt.

Vehicles

Phương tiện

Vehicles ask the specific questions of our path: 1) Internal development? 2) External development? 3) Growth by what mechanism? Beyond deciding on the vehicles which the busi­ness will employ, the strategist also needs to decide how to get there. Specifically, the means for attaining the needed presence in a particular product category, market segment, geographic area, or value-creation stage should be the result of deliberate strategic choice. If we have decided to expand our product range, are we going to accomplish that by relying on organic, internal product development, or are there other vehi­cles—such as joint ventures or acquisitions—that offer a better means for achieving our broad­ened scope? If we are committed to international expansion, what should be our primary modes, or vehicles—mergers, local acquisi­tions, licensing, or joint ventures? The executives of the biotechnology company noted earlier de­cided to rely on joint ventures to achieve their new presence in Europe, while committing to a series of tactical acquisitions for adding certain therapeutic products to complement their exist­ing line of diagnostic products.

Phương tiện nêu ra những câu hỏi cụ thể về đường đi của chúng ta: 1) Sự phát triển bên trong? 2) Sự phát triển bên ngoài? 3) Tăng trưởng banừg cơ chế nào? Ngoài việc quyết định phương tiện doanh nghiệp sẽ sử dụng, nhà chiến lược còn cần phải quyết định làm sao để đến được đó. Nhất là, các phương tiện để đạt được sự có mặt cần thiết trong một chủng loại sản phẩm, phân khúc thị trường, khu vực địa lý, hay giai đoạn tăng thêm giá trị nên là kết quả của chọn lựa chiến lược cẩn thận. Nếu chúng ta quyết định mở rộng chủng loại sản phẩm của mình, chúng ta sẽ thực hiện điều đó bằng cách dựa trên sựu phát triển bên trong, hữu cơ, hay bằng những phương tiện khác – như liên doanh hay thâu tóm (acquisiton) – sẽ mang lại một phương tiện tốt hơn cho việc đạt được tầm phạm vi mở rộng của chúng ta? Nếu chúng ta cam kết mở rộng quốc tế, cách thức hay phương tiện chính của chúng ta là gì – sáp nhập, thâu tóm cục bộ, nhượng quyền (licensing), hay liên doanh? Các nhà điều hành của công ty công nghệ sinh học đề cập ở trên quyết định dựa vào liên doanh để đạt được sự có mặt ở Châu Âu, trong khi tiến hành một loạt các vụ thâu tóm mang tính chiến thuật để tăng thêm một số sản phẩm điều trị nhằm bổ sung vào số chủng loại sản phẩm chẩn đóan hiện có của họ.

The means by which arenas are entered matters greatly. Therefore, selection of vehicles should not be an afterthought or viewed as a mere implemen­tation detail. A decision to enter new product cat­egories is rife with uncertainty. But that uncer­tainty may vary immensely depending on whether the entry is attempted by licensing other compa­nies’ technologies, where perhaps the firm has prior experience, or by acquisitions, where the company is a novice. Failure to explicitly consider and articulate the intended expansion vehicles can result in the hoped-for entry’s being seriously delayed, unnecessarily costly, or totally stalled.

Các phương tiện sử dụng để xâm nhập vào đấu trường rất quan trọng. Vì thế, lựa chọn phương tiện không nên là một chuyện xảy ra sau hay chỉ xem như là một chi tiết của việc thực hiện. Quyết định xâm nhập vào các chủng loại sản phẩm mới chứa đầy sự không chắc chắn. Nhưng sự không chắc chắn có thể thay đổi rất lớn tùy vào việc sự thâm nhập đó bằng cách mua công nghệ của công ty khác hay không, doanh nghiệp có kinh nghiệm ở lĩnh vực gì trước đây, hay bằng cách thâu tóm, ở những lĩnh vực mà công ty còn mới mẻ. Việc không xem xét công khai và nêu mạch lạc các phương tiện mở rộng dự định có thể đưa đến tình trạng bị kéo dài, tốn kém không cần thiết, hay sa lầy hòan tòan.

There are steep learning curves associated with the use of alternative expansion modes. Research has found, for instance, that companies can de­velop highly advantageous, well-honed capabili­ties in making acquisitions or in managing joint ventures.6 The company that uses various vehicles on an ad hoc or patchwork basis, without an over-arching logic and programmatic approach, will be at a severe disadvantage compared with compa­nies that have such coherence.

Có những đường công kinh nghiệm dốc đứng gắn với việc sử dụng các cách thức mở rộng khác nhau. Nghiên cứu cho thấy, chẳng hạn, các công ty có thể xây dựng các khả năng lợi thế cao, well-honed bằng cách thâu tóm hay quản lý các liên doanh.6 Công ty sử dụng các phương tiện khác nhau một cách tùy biến hay chắp vá, thiếu một sự tiếp cận hợp lý và có kế hoạch tòan diện, sẽ ở thế cực kỳ bất lợi so với các công ty có được một sự mạch lạc xuyên suốt như thế.

Differentiators

Các tác nhân phân biệt hóa

A strategy should specify not only where a firm will be active (arenas) and how it will get there (vehicles), but also how the firm will win in the marketplace—how it will get customers to come its way. Differentiators ask the specific questions of how will our activity be unique: 1) Market image & awareness? 2) Price? 3) Size? 4) Performance Style? And, 5) Product reliability? In a com­petitive world, winning is the result of differentiators, and such edges don’t just happen.

Một chiến lược nên nêu cụ thể không chỉ nới mà doanh nghiệp hoạt động (đấu trường) và cách thức nó đi đến đó (phương tiện), mà còn phải nêu cách thức doanh nghiệp chiến thắng trên thị trường- làm sao nó có được khách hàng. Tác nhân phân biệt hóa

Rather, they require executives to make up-front, conscious choices about which weapons will be assembled, honed, and deployed to beat competitors in the fight for custom­ers, revenues, and profits. For example, Gillette uses its proprietary product and process technology to develop superior razor products, which the com­pany further differentiates through a distinctive, aggressively advertised brand image. Goldman Sachs, the investment bank, provides customers unparalleled service by maintaining close rela­tionships with client executives and coordinat­ing the array of services it offers to each client. Southwest Airlines attracts and retains custom­ers by offering the lowest possible fares and extraordinary on-time reliability.

Achieving a compelling marketplace advantage does not necessarily mean that the company has to be at the extreme on one differentiating dimen­sion; rather, sometimes having the best combi­nation of differentiators confers a tremendous marketplace advantage. This is the philosophy of Honda in automobiles. There are better cars than Hondas, and there are less expensive cars than Hondas; but many car buyers believe that there is no better value—quality for the price—than a Honda, a strategic position the company has worked hard to establish and reinforce. Regardless of the intended differentiators—im­age, customization, price, product styling, after-sale services, or others—the critical issue for strat­egists is to make up-front, deliberate choices. Without that, two unfortunate outcomes loom. One is that, if top management doesn’t attempt to cre­ate unique differentiation, none will occur. Again, differentiators don’t just materialize; they are very hard to achieve. And firms without them lose.

The other negative outcome is that, without up-front, careful choices about differentiators, top management may seek to offer customers across-the-board superiority, trying simultaneously to outdistance competitors on too broad an array of differentiators—lower price, better service, supe­rior styling, and so on. Such attempts are doomed, however, because of their inherent inconsistencies and extraordinary resource demands. In selecting differentiators, strategists should give explicit preference to those few forms of superiority that are mutually reinforcing (e.g., image and product styling), consistent with the firm’s resources and capabilities, and, of course, highly valued in the arenas the company has targeted.

Staging

Choices of arenas, vehicles, and differentiators constitute what might be called the substance of a strategy—what executives plan to do. But this substance cries out for decisions on a fourth element—staging, or the speed and sequence of major moves to take in order to heighten the likelihood of suc­cess.7 Staging ask the specific questions of these actions: 1) Speed of expansion? 2) And, Sequence of initiatives? Most strategies do not call for equal, bal­anced initiatives on all fronts at all times. Instead, usually some initiatives must come first, followed only then by others, and then still others. In erect­ing a great building, foundations must be laid, followed by walls, and only then the roof.

Of course, in business strategy there is no uni­versally superior sequence. Rather the strategist’s judgment is required. Consider a printing equip­ment company that committed itself to broadening its product line and expanding internationally. The executives decided that the new products should be added first; in stage one, because the elite sales agents they planned to use for interna­tional expansion would not be able or willing to represent a narrow product line effectively. Even though the executives were anxious to expand geographically, if they had tried to do so without the more complete line in place, they would have wasted a great deal of time and money.

The executives of a regional title insurance com­pany, as part of their new strategy, were committed to becoming national in scope through a series of acquisitions. For their differentiators, they planned to establish a prestigious brand backed by aggres­sive advertising and superb customer service. But the executives faced a chicken-and-egg problem: they couldn’t make the acquisitions on favorable terms without the brand image in place; but with only their current limited geographic scope, they couldn’t afford the quantity or quality of advertising needed to establish the brand. They decided on a three-stage plan: 1) make selected acquisitions in adjacent regions, hence becoming a super-regional in size and scale; 2) invest moderately heavily in advertising and brand-building; 3) make acquisitions in additional regions on more favorable terms (because of the enhanced brand, a record of growth, and, they hoped, an appreciated stock price) while simultaneously continuing to push further in building the brand.

Decisions about staging can be driven by a num­ber of factors. One, of course, is resources. Funding and staffing every envisioned initiative, at the needed levels, is generally not possible at the outset of a new strategic campaign. Urgency is a second factor affecting staging; some elements of a strategy may face brief windows of opportunity, requiring that they be pursued first and aggressively. A third factor is the achievement of credibility. Attaining certain thresholds—in specific arenas, differentiators, or vehicles—can be critically valuable for at­tracting resources and stakeholders that are needed for other parts of the strategy. A fourth factor is the pursuit of early wins. It may be far wiser to success-fully tackle a part of the strategy that is relatively doable before attempting more challenging or unfa­miliar initiatives. These are only some of the factors that might go into decisions about the speed and sequence of strategic initiatives. However, since the strategy literature, it is often given far too little attention by strategists themselves.

Economic logic

At the heart of a business strategy must be a clear idea of how profits will be generated—not just some profits, but profits above the firm’s cost of capital. It is not enough to vaguely count on hav­ing revenues that are above costs. Unless there’s a compelling basis for it, customers and competitors won’t let that happen. And it’s not enough to gen­erate a long list of reasons why customers will be eager to pay high prices for your products, along with a long list of reasons why your costs will be lower than your competitors’. That’s a sure-fire route to strategic schizophrenia and mediocrity.

Economic logic asks the specific questions of our ability to generate profit. How will we gain lowest costs: 1) through scale advantage? 2) through scope and replication advantage? And, how will we attract premium prices: 1) due to unmatchable service? 2) due to proprietary product features? The most successful strategies have a central economic logic that serves as the fulcrum for profit creation. In many cases, the economic key may be to obtain premium prices by offering customers a difficult-to-match product.

The Imperative of Strategic Comprehensiveness

By this point, it should be clear why a strategy needs to encompass all five elements—arenas, vehicles, differentiators, staging, and economic logic. First, all five are important enough to require intentionality. Surprisingly, most strategic plans emphasize one or two of the elements without giving any consideration to the others. Yet to develop a strategy without atten­tion to all five leaves critical omissions.

Second, the five elements call not only for choice, but also for preparation and investment. All five require certain capabilities that cannot be gener­ated spontaneously.

Third, all five elements must align with and sup-port each other. When executives and academics think about alignment, they typically have in mind that internal organizational arrangements need to align with strategy (in tribute to the maxim that “structure follows strategy”9, but few pay much attention to the consistencies required among the elements of the strategy itself.

Finally, it is only after the specification of all five strategic elements that the strategist is in the best position to turn to designing all the other supporting activities—functional policies, organi­zational arrangements, operating programs, and processes—that are needed to reinforce the strat­egy. The five elements of the strategy diamond can be considered the hub or central nodes for design­ing a comprehensive, integrated activity system.10

Of Strategy, Better Strategy, and No Strategy

Our purpose in this article has been elemental—to identify what constitutes a strategy. This basic agenda is worthwhile because executives and scholars have lost track of what it means to engage in the art of the general. We particularly hope to counter the recent catchall fragmentation of the strategy concept, and to remind strategists that orchestrated holism is their charge.

But we do not want to be mistaken. We don’t believe that it is sufficient to simply make these five sets of choices. No—a business needs not just a strategy, but a sound strategy. Some strat­egies are clearly far better than others. Fortu­nately, this is where the wealth of strategic-analysis tools that have been developed in the last 30 years becomes valuable. Such tools as industry analysis, technology cycles, value chains, and core competencies, among others, are very helpful for improving the soundness of strategies. When we compare these tools and extract their most powerful central messages, several key criteria emerge to help executives test the quality of a proposed strategy. These criteria are presented in Table 1. We strongly encourage you to apply these tests throughout the strategy-design process and especially when a proposed strategy emerges. There might be those who wonder whether strat­egy isn’t a concept of yesteryear, whose time has come and gone. In an era of rapid, discontinuous environmental shifts, isn’t the company that at-tempts to specify its future just flirting with disas­ter? Isn’t it better to be flexible, fast-on-the-feet, ready to grab opportunities when the right ones come along?

Some of the skepticism about strategy stems from basic misconceptions. First, a strategy need not be static: it can evolve and be adjusted on an ongoing basis. Unexpected opportunities need not be ignored because they are outside the strategy. Second, a strategy doesn’t require a business to become rigid. Some of the best strat­egies for today’s turbulent environment keep multiple options open and build in desirable flexibility—through alliances, outsourcing, leased assets, toehold investments in promising technolo­gies, and numerous other means. A strategy can help to intentionally build in many forms of flexibility—if that’s what is called for. Third, a strategy doesn’t deal only with an unknowable, distant future. The appropriate life spans of business strategies have become shorter in recent years. Strategy used to be equated with 5- or 10-year horizons, but today a ho­rizon of two to three years is often more fitting. In any event, strategy does not deal as much with preor­daining the future as it does with assessing current conditions and future likelihoods, then making the best decisions possible today.

Strategy is not primarily about planning. It is about intentional, informed, and integrated choices. The noted strategic thinkers Gary Hamel and C.K. Prahalad said: “[A company’s] leadership cannot be planned for, but neither can it happen without a grand and well-considered aspiration.”12 We offer the strategy diamond as a way to craft and articulate a business aspiration.

Table 1
Testing the Quality of Your Strategy

Key Evaluation Criteria

1. Does your strategy fit with what’s going on in the environment?

Is there healthy profit potential where you’re headed? Does your strategy align with the key success factors of your chosen environment?

2. Does your strategy exploit your key resources?

With your particular mix of resources, does this strategy give you a good head start on competitors? Can you pursue this strategy more economically than competitors?

3. Will your envisioned differentiators be sustainable?

Will competitors have difficulty matching you? If not, does your strategy explicitly include a ceaseless regimen of innovation and opportunity creation?

4. Are the elements of your strategy internally consistent?

Have you made choices of arenas, vehicles, differentiators, and staging, and economic logic? Do they all fit and mutually reinforce each other?

5. Do you have enough resources to pursue this strategy?

Do you have the money, managerial time and talent, and other capabilities to do all you envision? Are you sure you’re not spreading your resources too thinly, only to be left with a collection of feeble positions?

6. Is your strategy implementable?

Will your key constituencies allow you to pursue this strategy? Can your organization make it through the transition? Are you and your management team able and willing to lead the required changes?

Endnotes

1. Porter, M. E. 1980. Competitive strategy. New York: The Free Press, provides an in-depth discussion of the five-forces model. Hypercompetition is addressed in D’Aveni, R. A. 1994. Hyper-competition. New York: The Free Press. The resource-based view of the firm is discussed in Barney, J. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17: 99-120. See Brandenburger, M., & Nalebuff, R. J. 1995. The right game: Use game theory to shape strategy. Harvard Busi­ness Review, July-August: 57-71, for a discussion of co-opetition.

2. Bianco, A., & Moore, P. L. 2001. Downfall: The inside story of the management fiasco at Xerox. Business Week, 5 March 2001.

3. A widely applicable framework for strategy implementa­tion is discussed in Galbraith, J. R., & Kazanjian, R. K. 1986. Strategy implementation: Structure, systems and process, 2nd ed. St. Paul: West Publishing. A similar tool is offered in Ham-brick, D. C., & Cannella, A. 1989. Strategy implementation as substance and selling. The Academy of Management Executive, 3(4): 278 -285.

4. This observation has been made for years by many con­tributors, including Quinn, J. B. 1980. Strategies for change Logical incrementalism. Homewood, IL: Richard D. Irwin Pub­lishing; and Mintzberg, H. 1973. Strategy making in three modes. Calif. Management Review, 15: 44-53.

5. Drucker, P. 1954. The practice of management. New York: Harper & Row.

6. Haleblian, J., & Finkelstein, S. 1999. The influence of orga­nizational acquisition experience on acquisition performance: A behavioral learning perspective. Administrative Science Quarterly, 44: 29-56.

7. Eisenhardt, K. M., & Brown, S. L. 1998. Time pacing: Com­peting in markets that won’t stand still. Harvard Business Re-view, March-April: 59-69, discusses “time pacing” as a compo­nent of a process of contending with rapidly changing environments.

8. The collapse of stock market valuations for Internet com­panies lacking in profits—or any prospect of profits—marked a return to economic reality. Profits above the firm’s cost of cap­ital are required in order to yield sustained or longer-term shareholder returns.

9. Galbraith & Kazanjian, op. cit., and Hambrick & Cannella, op. cit.

10. Porter, M. E. 1996. What is strategy? Harvard Business Review, Nov-Dec: 61-78.

11. See Tilles, S. 1963. How to evaluate strategy. Harvard Busi­ness Review, July-August: 2-121, for a classic, but more lim­ited, set of evaluative tests.

12. See Hamel, G., & Prahalad, C. K. 1993. Strategy as stretch and leverage. Harvard Business Review, March-April: 84–91.

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