Chapter 1

The Realm of Strategy

The word strategy means many things to different people -- ranging from on-side kicks for football fans, to naval blockades for military commanders, to any alternative for operations researchers, to recognition of China for heads of state. Thus in this opening chapter we need to identify the distinctive role of business strategy in the management of a company.

Turning the concept of strategy into an effective managerial tool requires considerable skill -- as we shall show in later chapters. But before embarking on the main message of the book, we want a common understanding of what the shouting is all about.

PLACE OF STRATEGY IN SHAPING AND GUIDING A COMPANY

What Strategy Is Not

Discussions about strategy with many executives have revealed several sources of confusion. If we immediately set these aside, the nature of strategy becomes clearer.

1. Strategy is not a response to short-term fluctuations in operations or the environment, nor is it the response to the frequent short-term reports on, for example, sales, labor turnover, weekly output, or competitors' prices that every manager receives. Instead, strategy deals with the predetermined direction toward which these quick responses are pointed. It is concerned with the longer-term course that the ship is steering, not with the waves.

2. Strategy is not a set of numbers merely projected out three to five years; it is not an extrapolation exercise based on this year's balance sheet and profit-and-loss statement. Rather, the emphasis in strategy is on the quality and texture of the business. New services, the focus of research, market position, foreign sources of materials, government sharing of high risks -- these are the kinds of issues that are molded into a verbal statement of where and how the company hopes to move. General Electric and several other companies, for instance, insist that the qualitative strategic plan be a separate document from the subsequently prepared financial projections.

3. Strategy is not a rationalization of what we did last year or of what appears in next year's budget. With a bit of imagination and artful wording, a statement that looks like a strategy can be written around almost any set of activities of a going concern. An actual strategy, in contrast, is a longer-term plan that sets the direction and tone of the shorter-range plans. Unless the strategy provides underlying guidance, its preparation is mere window dressing.

4. Strategy is not a functional plan, not even a long-run one -- such as a five-year marketing plan or a seven-year production plan. Rather, strategy involves the integration of all these functional plans into a balanced overall scheme. In some circumstances one function may drive the others -- product development, say, may determine marketing efforts or vice versa. Nevertheless, it is company strategy that sets the priorities and weighs or minimizes the risks. An overall viewpoint is essential.

5. Strategy is not a statement of pious intentions or optimistic wishes. Merely envisioning a future world and selecting an attractive position in that world is not a strategic plan. Instead, a strategy must be feasible in terms of resources that will be mobilized, and it must identify ways by which at least some form of superiority over competitors is to be achieved.

6. Strategy is not a cluster of ideas in the minds of a few select leaders of the company -- ideas labeled strategy if and when they are voiced because they come from key individuals. Rather, the concepts are disseminated and understood by all managers to at least the middle levels of the organization and perhaps below. Unless there is such widespread understanding, coupled with acceptance and preferably commitment, not much progress toward strategic goals will occur.

This list of "is not's' sets some helpful boundaries on the meaning of company strategy. By weeding out what may mistakenly be called strategy, we can focus on the potential power of the main concept. Of course, the converse of the "is not's' generates a set of positive characteristics -- namely, that strategy focuses on basic longer-term direction, is primarily qualitative, provides guidance for preparation of short-term plans, integrates functional plans into an overall scheme for the company, is realistic and action oriented, and is understood throughout the top and middle levels of the organization.

Realistic Mission Anchored to Action Programs

The nature of company strategy can also be suggested by sketching in broad strokes the analytical process by which a particular strategy is formulated. Methods and problems in designing a strategy are explored in Chapter 6; here we are making a quick pass to show the qualities of the end product.

An essential feature of all strategic planning is a forecast of the world ahead -- or, at best, a forecast of those parts of the environment that will have significant impact on the company's successes and failures. Of course, there will be a variety of uncertainties, and our strategic planning will have to deal with them. Nevertheless, forecast we must if we are to grasp full advantage of the changes that lie ahead.

This scenario of the future should cover social, political, and technological changes as well as economic shifts (see Figure 1-1). Ideally, we would like to spot each change that will create significant opportunities or threats to our industry and then relate that external change back to the particular parts of our operations that will be affected. Analysis of these anticipated developments should enable us to decide what strengths or capabilities, such as access to low-cost materials or strong market position, will be crucial for future success. Conversely, the forecasts should warn us of weaknesses that would spell disaster.

A second kind of forecast and analysis focuses on our company's strengths and weaknesses relative to present and anticipated competition. Future actions by these competitors sharply impacts on the strategy that makes most sense for us.

Then, we need to be creative and skillful in identifying future opportunities where our relative strengths give us a comparative advantage. On the down side, we try to spot declining or unprofitable segments that require a fresh approach or withdrawal.

From such a set of forecasts and analyses -- which, in fact, are much more complex, as will be seen in later chapters -- a picture emerges of where and what we would like our company to be in that future world. What are the particular products or services we believe we can provide to what markets in a distinctive manner with the resources we can mobilize? This becomes our strategic mission. As events unfold we may adjust the target, but at any point in time the strategy tells us the best direction to move.

A desired position in a predicted future world -- that is, a company "mission" -- can be treated as the bulls-eye or target of the strategy. But the main role of strategy is to evolve a trajectory or flight path toward that bulls-eye. Typically, a company must initiate at appropriate times a whole series of programs or action plans if it is to attain its desired domain. As Figure 1-1 suggests, to move from our present position to the desired position may require launching new products, building a reservoir of technically trained people, negotiating a merger, or perhaps liquidating part of our present operations. When and how to move aggressively on these programs is an important aspect of the strategy. The tie to current activities comes largely, though not entirely, through these thrusts.

This essential tie between mission and thrusts can be compared to the realities of a chess game. A series of smart moves without some broader strategy will not finally win the game against a capable competitor, and a grand design without a series of moves to achieve it remains but a twinkle in the loser's eye.

The Use of Strategy

Crown Cork & Seal Company presents a classic case illustrating the process just described. When J. F. Connelly became president, the company was on the verge of bankruptcy, with only a small part of its product line -- bottle caps and related closures -- earning a modest profit. The outlook for its major business, tin cans, was dismal. The product was mature, with total demand growing slowly; glass, paper, and plastics were making inroads in this market and threatening to make even more; competitors had excess capacity, and price competition was severe. But there were a few brighter spots in the total picture, and Connelly decided to concentrate on one of these. Cans that could hold contents under pressure were more difficult to make and consequently were not subject to cutthroat competition. Moreover, the growth prospects for these were better than average, with aerosols and beer the major users. As for beer containers, Connelly predicted that metal cans would take market share from glass bottles. Thus serving this special niche became Crown Cork's target.

Several major programs were necessary to develop a comparative advantage in the niche. All thought of a full line was abandoned, and the regular can business was liquidated (this provided some capital to pacify the bankers). On the other hand, Connelly tooled-up to give excellent service to his selected customers; this involved locating plants close to customers, installing some new equipment, and organizing very fast response to customer needs. Also, overhead was trimmed far below the industry average.

The results at Crown Cork have been dramatic. Volume did grow much faster than the total can industry -- not only in beer but later in soft drinks as well. Crown Cork's service has enabled the company to obtain an increasing share of this volume. Meanwhile, the low overhead gives the company the best profit margin in the industry. Granted, this market concentration and low overhead has made the company somewhat vulnerable. But for over two decades in the company's major line of business there has been a clear, realistic mission anchored in action programs.

For a recent example of well-conceived strategic action, Citibank's decision to serve worldwide corporations as a special group of clients is impressive. For years Citibank has had a network of branches in foreign countries. Traditionally, each country had a strong manager who ran the local operations with a high degree of decentralization. But several environmental changes have raised questions about the amount of local autonomy that is desirable. Multinational corporations have grown rapidly and account for an increasing share of world trade. In addition, modern communication devices have made rapid, frequent contact with all cities of the world commonplace. These developments, in turn, have led multinational corporations to centralized management of cash balances, foreign exchange transactions, funds transfer, short-term borrowing, and the like. Citibank predicts that the multinationals will seek increasing efficiencies through coordination of their fiscal operations.

These developments create an opportunity for banks that can provide integrated services worldwide tailored to the specific needs of individual multinational corporations. And Citibank, with its well-developed branch network, has a comparative strength. Seizing the opportunity, Citibank decided to serve this niche with distinction.

But picking the mission is not enough. Citibank has to assure that its widespread facilities do, in fact, serve the coordinated needs of each major customer. For this purpose Citibank created a new World Corporation Group charged with relationships with about 450 multinational clients. Work with these clients was transferred from the foreign branches (and the New York international division), and a single officer was placed in charge of serving each client. However, to avoid costly duplication, the global account officers -- like account executives in an advertising agency -- call on the local branches to perform any work that is needed.

A delicate matrix form of organization has emerged. There are continuing problems of the allocation of scarce resources -- notably, money for loans in developing countries. Nevertheless, the strategy is clear. The initiative for planning and control of services to these clients is centralized. This means some interference with service to local overseas clients, but Citibank believes that in its relative position the gains from improved service to multinational corporations will outweigh losses on the local front.

In this segment of its operations, then, Citibank has identified a mission and established programs (primarily organization and personnel in this instance) necessary to pursue that mission. To date the results have been good. Like any strategy, however, the wisdom of continuing that direction depends on the accuracy and monitoring of the forecasts -- or premises -- about future environmental conditions.

Rising Need for Strategic Direction

The concept of company strategy has been set forth in the preceding pages -- first by noting what strategy is not, next by briefly sketching the strategy formulation process, and then by giving two quick examples. The need for this kind of strategic management is increasing. Managing a company, always a challenging task, is becoming more difficult, and careful strategic analysis is vital to cut through the maze. Among the forces that are making strategy crucial are these:

1. Managers are being confronted by a wider range of external pressures that must be taken into account in their major decisions. These pressures to which management is now expected to be responsive include environmental protection, employment opportunities for minorities and all sorts of disadvantaged, shielding the consumer, and conforming to increasing government regulations.

2. Shorter payout periods are necessary for most investments. The more frequent shifts in technology, consumer preferences, resource availability, foreign exchange rates, and so forth trim the time available to recoup investments. Consequently, better forecasting and faster responses to external changes have to be built into the planning process.

3. Improved communications aid competitors, suppliers, customers, and ourselves alike. Jet travel, photo-phones, television via satellite, electronic computers, worldwide news services all increase the range of factors to be considered and the speed of responses to events everywhere. And they add to the information explosion. One result is that strategic shifts must be more discerning and more frequent.

4. Growing intensity of competition quickly removes any slack in the system. World trade means competition from anywhere; advancing technology encourages cross-industry competition. Consequently, strategic planning must consider who our future competitors will be, not only who is here today.

5. Larger enterprises require more levels of management and usually embrace more diverse kinds of businesses. This size itself leads to antitrust complications, potential synergies, hedging risks, more formal internal systems, and less first-hand experience in the industries managed. And strategy should incorporate these factors.

6. Changing values of members of the organization complicate strategy formulation. Attitudes toward leisure, self-fulfillment, mobility, insecurity (future shock), ethical behavior, "participation," and loyalty to one's employer affect the alternative strategies proposed and the commitment to new ventures. Moreover, growing sophistication of techniques within each function (finance, marketing, production, and the like) increases the danger that highly specialized technicians will pursue narrow goals, that is, suboptimize. Strategy helps to integrate these specialists.

7. Professionalization of management arising from an increasing separation of owners and managers impacts on managerial styles. Tomorrow's managers will be even more sophisticated about available planning and control techniques, subjected to more formal controls, open to conflict-of-interest questions, and perhaps more averse to risk taking. One important function of strategy is to counteract a tendency of professional managers to become too conservative and bureaucratic.

Each of the trends just listed will probably continue, and, in so doing they will make forward planning increasingly complicated. They compound the problems of adjusting to new opportunities and new threats. That complexity, however, heightens the need for company strategy, because strategy becomes the beacon light that guides most other planning. It cuts through the fog. It provides a direction and a sense of purpose in practical operational terms.

SOCIAL RESPONSIBILITY AND STRATEGY

If strategy sets the direction and lays out major thrusts for companies, as we have argued, then we cannot evade the question of social responsibility. History tells us that no socially devised institution as powerful and pervasive as the private enterprise system can survive unless it serves society well. Therefore, we must ask ourselves whether the strategy formulation process we are exploring leads to socially responsible behavior.

Social responsibility is neither a mere academic issue nor a fashionable buzzword. Business enterprises, especially the very large ones, are being challenged along with other parts of the "establishment." If executives hope to retain such management prerogatives as they still have, they must be clear in their own minds and make clear to others that they are acting in a socially responsible manner.

Our conviction is that sound strategic management contributes to socially responsible behavior -- not perfectly, but overwhelmingly. The reasoning that leads us to this conviction is outlined in the next few pages, and we hope you agree. A secondary purpose of spelling out this analysis here is to emphasize a range of external relationships that must be weighed in formulating strategy. Not least is the integrating and balancing role pictured for the central manager as an essential feature in shaping strategy. Thus even if you are calloused about social responsibility, the analysis should deepen your understanding of the nature of strategy.

Resource Conversion -- The Prime Responsibility

One constructive way to merge social obligation with a managerial view of strategy is the resource-converter model. Here we step back and examine briefly the role business-units play in society.

Broadly speaking, each business-unit mobilizes resource inputs of diverse sorts and converts these resources into direct and indirect outputs that have a greater net value to society than would alternative uses of those resources. As a self-made plant manager said, "We've got to send more out the door than we take in." But the total process is much more complex than this generalization implies.

The relationship of a business-unit with each resource contributor always involves a two-way exchange. Figure 1-2 shows these flows for five typical outside groups -- material suppliers, labor, the community, suppliers of capital, and customers. For a specific company there will be a wider variety of subgroups, but the underlying concept is the same. Each group of contributors -- sometimes called stakeholders -- provides a needed resource and receives in exchange part of the output flow of the enterprise.

Much more than money is involved. Typically, an array of payoffs provides the basis for continuing cooperation. Employees, for instance, are concerned about meaningful work, stability of employment, reasonable supervision, future opportunities, and a whole range of fringe benefits in addition to their paychecks. Suppliers of materials want a continuing market, sure and prompt payment, convenient delivery times, quality standards suited to their facilities, minimum returns, and the like. Investors are concerned about uncertainty of repayment, security, negotiability of their claims, veto of major changes, and perhaps some share in the management. For each resource contributor, mutual agreement about the conditions under which the exchange will continue is subject to evolution and periodic renegotiation.

Note that most of the widely discussed social-responsibility issues deal with some modification of previous conditions of resource exchange. Examples are equal opportunity for minority labor groups, public disclosure for investors, environmental protection for communities, and quality guarantees and informative labeling for consumers.

The true essence of social responsibility, in our view, is not simply making concessions in company contributions to one or more resource groups. Rather, it is ensuring the maintenance of resource flows on mutually acceptable terms. A business-unit and its managers are performing vital social functions as catalysts and integrators of resource conversions.

From society's point of view, profits are not "the name of the game." Instead, the aim is continuing resource conversion -- which provides a flow of jobs, markets for materials, taxes and other support for the community, goods and services for consumers, and effective use of capital. Indeed, profits are essential to attract the necessary capital, but also essential are satisfactory markets, good jobs, acceptable products, and other outputs. The real "name of the game" is keeping the conversion process flowing. This is a very difficult but tremendously important task in modern society, particularly in a free society seeking to operate by consent rather than by edict. That assignment is by far the foremost responsibility of managers.

Winning continuing cooperation of each resource contributor has its price. In addition to monetary payments for products/services contributed, various guarantees, timing of actions, veto rights, alternative actions foresworn, and similar limitations may be granted. Now, if the concessions made to one resource group place too heavy a burden on the company, it may become impossible to grant the quid pro quo desired by other contributors -- or stakeholders. The simple example o[ this problem appears in cash flows; a drastic jump in energy costs or wage rates (or drop in selling prices) may absorb so much cash that other demands for payment cannot be met. Employment guarantees or restrictions on how capital is used, to cite two more common examples, may be demanded by the labor or capital contributors, but these demands may place the company in an untenable position in meeting the wishes of other outside groups.

Basically, the managers of a business-unit serve as mediators between the various claimants. But since the resource contributors rarely meet face-to-face, it is the central managers who must consider the impact of demands of one group on the ability of the business to comply with other demands. This is a complex but vital social service.

Finding an Advantage in Resource Conversion

The ability of a company to reconcile diverse desires of its resource contributors is largely shaped by its strategy. In finding a distinctive mission -- an untapped source of materials, a new service for customers, a better way to finance leased equipment, or early adaptation of new technology are examples -- the company increases its social output. This additional margin helps the company to meet competition for resources on all fronts. Contrariwise, if the strategy poorly adapts the company's skills to its total environment, the capability of the company to satisfy all its contributors' exchange claims is weakened. Such an enterprise may be unable to fulfill its prime social function, namely, continuing resource conversion, and go out of existence, to the detriment of all.

It is folly to attempt to excel in all things. Instead, as noted earlier in this chapter, each business-unit should select a particular mission and a basis for differential advantage. For instance, IBM has always stressed customer service, customer orientation in product design, and liberal treatment of its employees. Humble Oil (now part of Exxon) rose to prominence because it gave high priority to acquiring a large crude oil (energy) base. Merck and Boeing stressed building a better mousetrap -- ethical pharmaceutical goods and aircraft, respectively.

Each business-unit singles out perhaps one but more likely a few areas having synergistic ties in which it hopes to excel. In these areas it tries to develop an unusually favorable relation with the selected resource groups as compared to that of competitors. Typically, it pioneers in a new form of service or unique benefit that is attractive to the key contributor group, and couples this with a compatible internal technology. (For example, Crown Cork coupled special service to beer producers with a new technology for manufacturing two-piece cans.) The internal conversion technology and organization reinforce in a symbiotic way the external relationship being stressed. And, the business-unit's primary social contribution will probably arise in these areas. If the business-unit is wise (or lucky), it selects relationships for emphasis that will become especially important strengths in the future competition within its industry.

For the many external relationships not selected as a source of differential advantage, a business-unit satisfices; that is, it seeks with each of these resource suppliers a continuing relation that is at least adequate. Often the business-unit is too small to attempt any more than following general industry practice; its location, history, personal preferences of key executives, or existing resource base may not provide a good springboard, or management may deliberately decide that effort applied in other directions will be more rewarding. These secondary relationships cannot be neglected; they must be adequately maintained -- like Herzberg's hygiene factors. Moreover, the secondary relationships should be designed so that they support or are at least compatible with the primary thrusts of the selected strategy.

In other words, using the resource-converter model we can say that a business-unit is acting in a socially responsible manner when it is able to sustain a continuing inflow of resources and outflow of services. It is not the prime responsibility of a business-unit to improve social values (although some do); rather, the primary task is finding ways to adjust to shifting pressures so that vital, satisfaction-generating exchanges will continue. Earning an adequate return on capital is one necessary condition and thus -- perhaps paradoxically -- a reasonably valid measure of social performance, but there are many others.

Strategy of each business-unit points the way that unit has selected out of a myriad of possibilities to demonstrate its justification to continuing existence. Idealistic but unworkable strategies are as antisocial as cynical strategies that defy social norms.

Summarizing, the preceding line of thought shifts the role of central managers away from the single-minded profit maximizers pictured in economic theory; it also undercuts the illusion of all-powerful dictators whose special interests block social reforms. Instead, from a social viewpoint:

1. Central managers assemble and integrate resources of many sorts for purposes of conversion into desired outputs; they are essential as catalysts.

2. In so doing they must mediate incompatible demands to keep the conversion process moving.

3. Because the claimants for, say, less pollution, more jobs, lower prices, or absolute safety do not confront each other directly and are seldom concerned about the trade-offs involved in the pursuit of their provincial goals, managers bear the brunt of negotiating on all fronts.

4. Managers' most constructive task is conceiving and executing strategies that adjust resource conversions to new threats and opportunities while at the same time using a conversion technology that creates an optimum mixture of socially desired outputs.

Performing these interrelated tasks well is a great social contribution, and adept strategy formulation and implementation is a vital part of the process.

FROM CONCEPT TO PRACTICE

Strategy is a potentially powerful tool of management. As we have noted, it can give a company direction in the buzzing confusion of a topsy-turvy world. It encourages integrated and concentrated effort on a clear mission. It helps managers serve social needs. It puts lofty objectives into an operational form. All this and more is the realm of strategy.

A wide gap exists, however, between this general concept of company strategy and purposeful, committed behavior on the front lines of action. In fact, moving from concept to practice has turned out to be elusive for most companies. Thus the aim of the following chapters is to explore ways to close this gap.

The scope and form of a company strategy strongly influence its impact on other kinds of planning. Also, the process of developing the strategy to be followed affects its acceptance. More specifically:

1. A clear distinction needs to be recognized between business-unit and corporate strategy, because they concern quite different issues. (Chapters 2, 3, and 4 deal with this question of multilevel planning.)

2. Although strategy deals with the posture and thrusts of "our" enterprise, a significant part of the content focuses on relationships with other enterprises. (Chapter 5 explores these external alignments.)

3. Strategy is not God-given, as the Ten Commandments to Moses. Rather, strategy emerges from much give-and-take, Primarily among the executives who will either disregard it or put it into effect. (Chapter 6 examines the birth and nourishment of a new strategy.)

In addition to these important issues in strategy formulation, the force of any strategy is closely tied to the consistency and reinforcement of other managerial practices within the company. Too often a bridge is lacking between the selected strategy and short-run action. Among the critical links are:

4. Strategy -- programming (action plans) in each department as well as for special projects.

5. Strategy -- resource allocation -- especially when it is focused on short-run results.

6. Strategy -- policies and accepted values that have a sustained and pervasive influence on the way business is conducted -- and often are slow to change.

7. Strategy -- organization structure that either obstructs or facilitates moving in new directions.

8. Strategy -- selection and motivation of key executives who can make or break the venture.

Building these linkages between the strategic concept and managing the daily business is discussed in Part II -- Chapters 7 through 11. Then, because even the best-designed schemes may falter or fail to keep in tune with unexpected events, periodic evaluation is needed. Important here are:

9. Controls that measure progress and monitor external developments and feedback of these data for progressive revisions of strategy. (Chapter 12 tackles this task.)

10. Through all this "make-happen" effort, balance and reinforcement are critical, yet flexibility must be maintained. (That is the subject of Chapters 13 and 14.)

Clearly, strategy is no separate device that can be merely grafted onto an existing organization. If it is to be effective, it must be made an integral part of the total management process and system.

Copyright © 1982 by The Free Press