A History of Strategy
The natural state of management has been incoherence. Strategy was not tied to execution in the past, at least not consistently.
The old questions in strategy were, Where are we going to go, and where are we going to grow? But the big current questions are, Who are we going to be, and how are we going to add value? If the latter set of questions represents strategy, then execution is extending that value proposition to market.
The yin and yang of strategic fad and fashion—the treadmill-like movement of business leadership from one trend to another over the past fifty years—has often led companies to make incoherent and ineffective moves. As writer Walter Kiechel notes, this pattern began in the 1960s, when business academics formalized the concept of strategy.1 Since then, there have been four basic schools of strategic thought, whose proponents have argued back and forth through the years. Each school represents a different theory about the best way to gain a consistent right to win in the market.
The position school proposes that the best way to win is by occupying an impregnable place in an industry or a market. This theory started with strategic planning in the 1960s—the origin of the strengths, weaknesses, opportunities, and threats (SWOT) analyses still prevalent today. A breakthrough in the school occurred with Bruce Henderson’s growth-share matrix, which was more specific: the greatest advantage went to companies that held the leading position in market share for sectors with growth prospects.2 This meant emphasizing the value of some divisions over others and basing those judgments primarily on the fit with external markets. Then, from the late 1970s to the early 1990s, Harvard Business School professor Michael Porter—probably the most influential thinker on corporate strategy in the institution’s history—brought a higher level of economic sophistication and renewed vitality to the position school. He recast the turbulence of a company’s business environment into a “value chain” and “five forces” (competitors, customers, suppliers, aspiring entrants, and substitute offerings): two frameworks that could be used to analyze the value potential and competitive intensity of any business. No matter what the specific answer, the underlying message was the same: business leaders could win by finding the right niche to dominate with first-mover advantage. This observation has been proven true, at least enough of the time, to be compellingly persuasive.3
But business leaders have also come to recognize the limits of the position school. Conventional strategic planning was resource-intensive and bureaucratic, and didn’t necessarily correlate with profitability. Defending their position has also led many companies to get caught up in ruthless price wars and commoditization. To many corporate leaders in tough businesses or in highly regulated industries like electric power generation, staking out a position made them complacent; they saw no advantage in developing distinctive capabilities. Some companies tried to escape by seeking positions in new businesses: “blue oceans” where they often didn’t know how to swim. These efforts generally failed. And too many companies with seemingly impregnable market positions, such as Nokia and Kodak, have seen their advantages fade when new competitors, such as Apple and Google, emerged.
Execution
The execution school, which began to be prominent in the West in the 1980s, started at the Harvard Business School’s operations management department. In a seminal 1980 Harvard Business Review article titled “Managing Our Way to Economic Decline,” William Abernathy and Robert Hayes proposed that competitive advantage came not from financial practices but from execution and operational excellence: the development and deployment of better processes, technologies, and products. The execution message was bolstered by manufacturers such as General Electric and Motorola, both of which provided influential examples of operations-oriented strategies with their focus on executive training and such practices as Six Sigma. Execution was also a basic tenet of the quality movement—the continuous-improvement practices that had been developed at Toyota and a few other Japanese companies during the previous few decades and were just then, in 1980, being brought back to the United States by W. Edwards Deming and several other well-known quality experts. The movement ultimately became known as lean management. The execution school gained further influence with the reengineering movement of the 1990s. This movement argued for redesigning processes from scratch and continues to be influential wherever changes in technology, particularly IT, lead to changes in organizational practices. It turned out that effective operational behavior can lead to far greater value.4
But execution-oriented ideas like reengineering, benchmarking, outsourcing, and change management also have limits—perhaps best articulated by Porter in his 1990 article “What Is Strategy?” 5 The ideas all led to better operations, but ignored the question of which businesses to operate in the first place. Execution-based practices are also vulnerable to competition. Nearly every aspect of operational excellence can be copied, and it often becomes industry standard. By the late 1990s, just about the entire global automobile industry had adopted some form of the Toyota Production System. The choice of capabilities, tied to any kind of value proposition, does not fit with the bottom-up continuous-improvement focus of the execution school.
Adaptation
The adaptation school of strategy started in the 1990s. It is most prominently represented by Henry Mintzberg, professor of management studies at McGill University. In his history The Rise and Fall of Strategic Planning, Mintzberg dismissed the position school as formulaic and execution as insufficient for strategic success. He sought a more creative, experimental approach to executive decision making. Executives could gain competitive advantage by experimenting with new ideas and directions, discarding those that don’t work and adjusting their efforts on the fly to meet new challenges. In Mintzberg’s words, they “let a thousand strategic flowers bloom … [using] an insightful style, to detect the patterns of success in these gardens of strategic flowers, rather than a cerebral style that favors analytical techniques to develop strategies in a hothouse.” 6 Adaptation has helped many companies grow quickly and respond to external threats creatively. It has also been the most central guiding theme of Tom Peters’s work, starting with his seminal business bestseller, In Search of Excellence.7
But the adaptation school is also seriously limited, because its freewheeling nature tends to lead to incoherence. A multitude of products and services that all have different capability requirements cannot possibly be brought into sync. The more diverse a company’s efforts become, the more it costs to develop and apply the advantaged capabilities the company needs. Letting a thousand flowers bloom can lead to a field full of weeds—and to businesses that can’t match the expertise and resources of more focused, coherent competitors.
Concentration
Hence the appeal of the fourth group of strategy thinkers—the concentration school. Its most prominent members were Gary Hamel and C. K. Prahalad, authors of Competing for the Future (1994).8 They argued that the most effective companies owed their success to a select set of “core competencies”: these were the bedrock skills and technological capabilities (e.g., new forms of hardware, software, systems, biotechnology, and financial engineering) that allowed companies to compete in distinctive ways. Their approach to capabilities was a foundational influence on the ideas in this book. In recent years, private equity firms have championed the idea of focusing on your core business. They acquire overextended companies and bring them back to their own core businesses as a way to promote growth and value.9
However, in practice, the concentration strategy often becomes a way of holding on to old approaches, even when they become outdated. Many companies (including private-equity firms) translate this strategy into slash-and-burn retrenchment. They cut costs and minimize investments in R&D and marketing to create a pared-down company that produces more profits at first, but that can’t sustain the growth required for a healthy bottom line. When they seek to grow, it’s through “adjacencies”: products or services that seem related to their existing core businesses. But many adjacencies are less profitable than they were expected to be, partly because they may require very different capabilities—and partly because the truly successful game-changing leaps, like Apple’s jump into consumer media or Amazon’s foray into cloud computing, can’t be managed from a concentration strategy alone.
Balancing the Schools of Thought
Not surprisingly, each of the four basic schools of thought (position, execution, adaptation, and concentration) has something significant to offer business strategists, as long as the ideas are adopted in an appropriately balanced way. But if you keep switching between them, as some companies do, you will simply end up using each one to compensate for the failings of the previous fashion. You’ll never make time to go in your own chosen direction.
What we need is a theory of strategy that incorporates the best of all four points of view in practice. This type of theory can help you make strategic thinking a way of life. We believe that our approach to strategy and capabilities provides that theory. It suggests that the path to sustainable success, as the companies in this book have found, is through developing an identity all your own, grounded in your own way of capturing and delivering value and in your most distinctive capabilities. This identity is expressed as who you are and what you are great at doing, rather than where you are going and what you sell. Every day—instead of chasing unprofitable market opportunities, or getting mired in execution, or adapting incoherently, or being constrained by your core—you place a bet on your own company’s identity. Every day, your company becomes closer to who you are. And in this way, you gain a consistent competitive advantage—a true right to win—in your chosen markets.