Ame c lassic are you sure you have a strategy


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Ame c lassic are you sure you have a strategy

  1. 1. ஽ Academy of Management Executive, 2005, Vol. 19, No. 4 Reprinted from 2001, Vol. 15, No. 4........................................................................................................................................................................ Are you sure you have a strategy? Donald C. Hambrick and James W. Fredrickson Executive Overview After more than 30 years of hard thinking about strategy, consultants and scholars have provided an abundance of frameworks for analyzing strategic situations. Missing, however, has been any guidance as to what the product of these tools should be— or what actually constitutes a strategy. Strategy has become a catchall term used to mean whatever one wants it to mean. Executives now talk about their “service strategy,” their “branding strategy,” their “acquisition strategy,” or whatever kind of strategy that is on their mind at a particular moment. But strategists—whether they are CEOs of established firms, division presidents, or entrepreneurs—must have a strategy, an integrated, overarching concept of how the business will achieve its objectives. If a business must have a single, unified strategy, then it must necessarily have parts. What are those parts? We present a framework for strategy design, arguing that 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 marketplace? staging: what will be our speed and sequence of moves? economic logic: how will we obtain our returns? Our article develops and illustrates these domains of choice, particularly emphasizing how essential it is that they form a unified whole.........................................................................................................................................................................Consider these statements of strategy drawn from strategy, consultants and scholars have providedactual documents and announcements of several executives with an abundance of frameworks forcompanies: analyzing strategic situations. We now have five- forces analysis, core competencies, hypercompeti- “Our strategy is to be the low-cost provider.” tion, the resource-based view of the firm, value “We’re pursuing a global strategy.” chains, and a host of other helpful, often powerful, “The company’s strategy is to integrate a set of analytic tools.1 Missing, however, has been any regional acquisitions.” guidance as to what the product of these tools “Our strategy is to provide unrivaled customer should be— or what actually constitutes a strategy. service.” Indeed, the use of specific strategic tools tends to “Our strategic intent is to always be the first- draw the strategist toward narrow, piecemeal con- mover.” ceptions of strategy that match the narrow scope of “Our strategy is to move from defense to in- the tools themselves. For example, strategists who dustrial applications.” are drawn to Porter’s five-forces analysis tend toWhat do these grand declarations have in com- think of strategy as a matter of selecting industriesmon? Only that none of them is a strategy. They and segments within them. Executives who dwellare strategic threads, mere elements of strategies. on “co-opetition” or other game-theoretic frame-But they are no more strategies than Dell Comput- works see their world as a set of choices abouter’s strategy can be summed up as selling direct to dealing with adversaries and allies.customers, or than Hannibal’s strategy was to use This problem of strategic fragmentation haselephants to cross the Alps. And their use reflects worsened in recent years, as narrowly specializedan increasingly common syndrome—the catchall academics and consultants have started plyingfragmentation of strategy. their tools in the name of strategy. But strategy is After more than 30 years of hard thinking about not pricing. It is not capacity decisions. It is not 51
  2. 2. 52 Academy of Management Executive Novembersetting R&D budgets. These are pieces of strate- erals think about the whole. They have a strategy;gies, and they cannot be decided— or even consid- it has pieces, or elements, but they form a coherentered—in isolation. whole. Business generals, whether they are CEOs Imagine an aspiring painter who has been of established firms, division presidents, or entre-taught that colors and hues determine the beauty preneurs, must also have a strategy—a central,of a picture. But what can really be done with such integrated, externally oriented concept of how theadvice? After all, magnificent pictures require far business will achieve its objectives. Without amore than choosing colors: attention to shapes and strategy, time and resources are easily wasted onfigures, brush technique, and finishing processes. piecemeal, disparate activities; mid-level manag-Most importantly, great paintings depend on artful ers will fill the void with their own, often parochial,combinations of all these elements. Some combi- interpretations of what the business should be do-nations are classic, tried-and-true; some are inven- ing; and the result will be a potpourri of disjointed,tive and fresh; and many combinations— even for feeble initiatives.avant-garde art—spell trouble. Examples abound of firms that have suffered Strategy has become a catchall term used to because they lacked a coherent strategy. Once amean whatever one wants it to mean. Business towering force in retailing, Sears spent 10 sadmagazines now have regular sections devoted to years vacillating between an emphasis on hardstrategy, typically discussing how featured firms goods and soft goods, venturing in and out of ill-are dealing with distinct issues, such as customer chosen businesses, failing to differentiate itself inservice, joint ventures, branding, or e-commerce. In any of them, and never building a compelling eco-turn, executives talk about their “service strategy,” nomic logic. Similarly, the once-unassailable Xe-their “joint venture strategy,” their “branding strat- rox is engaged in an attempt to revive itself, amidegy,” or whatever kind of strategy is on their minds criticism from its own executives that the companyat a particular moment. lacks a strategy. Says one: “I hear about asset Executives then communicate these strategic sales, about refinancing, but I don’t hear anyonethreads to their organizations in the mistaken be- saying convincingly, ‘Here is your future.’”2lief that doing so will help managers make tough A strategy consists of an integrated set ofchoices. But how does knowing that their firm is choices, but it isn’t a catchall for every importantpursuing an “acquisition strategy” or a “first- choice an executive faces. As Figure 1 portrays, themover strategy” help the vast majority of manag- company’s mission and objectives, for example,ers do their jobs or set priorities? How helpful is it stand apart from, and guide, strategy. Thus weto have new initiatives announced periodically would not speak of the commitment of the Newwith the word strategy tacked on? When execu- York Times to be America’s newspaper of record astives call everything strategy, and end up with a part of its strategy. GE’s objective of being numbercollection of strategies, they create confusion and one or number two in all its markets drives itsundermine their own credibility. They especially strategy, but is not strategy itself. Nor would anreveal that they don’t really have an integrated objective of reaching a particular revenue or earn-conception of the business. ings target be part of a strategy. Similarly, because strategy addresses how the business intends to engage its environment,When executives call everything choices about internal organizational arrange-strategy, and end up with a collection of ments are not part of strategy. So we should notstrategies, they create confusion and speak of compensation policies, information sys-undermine their own credibility. tems, or training programs as being strategy. These are critically important choices, which should reinforce and support strategy; but they do Many readers of works on the topic know that not make up the strategy itself.3 If everything im-strategy is derived from the Greek strategos, or portant is thrown into the strategy bucket, then this“the art of the general.” But few have thought much essential concept quickly comes to mean nothing.about this important origin. For example, what is We do not mean to portray strategy developmentspecial about the general’s job, compared with as a simple, linear process. Figure 1 leaves outthat of a field commander? The general is respon- feedback arrows and other indications that greatsible for multiple units on multiple fronts and mul- strategists are iterative, loop thinkers.4 The key istiple battles over time. The general’s challenge— not in following a sequential process, but rather inand the value-added of generalship—is in achieving a robust, reinforced consistency amongorchestration and comprehensiveness. Great gen- the elements of the strategy itself.
  3. 3. 2005 Hambrick and Fredrickson 53 FIGURE 1 Putting Strategy in Its PlaceThe Elements of Strategy one of broad generalities. For instance, “We will be the leader in information technology consulting” isIf a business must have a strategy, then the strat- more a vision or objective than part of a strategy. Inegy must necessarily have parts. What are those articulating arenas, it is important to be as specificparts? As Figure 2 portrays, a strategy has five as possible about the product categories, marketelements, providing answers to five questions: segments, geographic areas, and core technolo-• Arenas: where will we be active? gies, as well as the value-adding stages (e.g., prod-• Vehicles: how will we get there? uct design, manufacturing, selling, servicing, dis-• Differentiators: how will we win in the market- tribution) the business intends to take on. place? For example, as a result of an in-depth analysis,• Staging: what will be our speed and sequence of a biotechnology company specified its arenas: the moves? company intended to use T-cell receptor technol-• Economic logic: how will we obtain our returns? ogy to develop both diagnostic and therapeutic This article develops and illustrates these do- products for battling a certain class of cancers; itmains of choice, emphasizing how essential it is chose to keep control of all research and productthat they form a unified whole. Where others focus development activity, but to outsource manufactur-on the inputs to strategic thinking (the top box in ing and a major part of the clinical testing processFigure 1), we focus on the output—the composition required for regulatory approvals. The companyand design of the strategy itself. targeted the U.S. and major European markets as its geographic scope. The company’s chosen are- nas were highly specific, with products and mar-Arenas kets even targeted by name. In other instances,The most fundamental choices strategists make especially in businesses with a wider array ofare those of where, or in what arenas, the business products, market segments, or geographic scope,will be active. This is akin to the question Peter the strategy may instead reasonably specify theDrucker posed decades ago: “What business will classes of, or criteria for, selected arenas— e.g.,we be in?”5 The answer, however, should not be women’s high-end fashion accessories, or coun-
  4. 4. 54 Academy of Management Executive November FIGURE 2 The Five Major Elements of Strategytries with per-capita GDP over $5,000. But in all field startups, local acquisitions, licensing, or jointcases, the challenge is to be as specific as possible. ventures? The executives of the biotechnology In choosing arenas, the strategist needs to indicate company noted earlier decided to rely on joint ven-not only where the business will be active, but also tures to achieve their new presence in Europe,how much emphasis will be placed on each. Some while committing to a series of tactical acquisitionsmarket segments, for instance, might be identified as for adding certain therapeutic products to comple-centrally important, while others are deemed sec- ment their existing line of diagnostic products.ondary. A strategy might reasonably be centered on The means by which arenas are entered mattersone product category, with others—while necessary greatly. Therefore, selection of vehicles should notfor defensive purposes or for offering customers a be an afterthought or viewed as a mere implemen-full line— being of distinctly less importance. tation detail. A decision to enter new product cat- egories is rife with uncertainty. But that uncer- tainty may vary immensely depending on whetherVehicles the entry is attempted by licensing other compa-Beyond deciding on the arenas in which the busi- nies’ technologies, where perhaps the firm hasness will be active, the strategist also needs to prior experience, or by acquisitions, where thedecide how to get there. Specifically, the means for company is a novice. Failure to explicitly considerattaining the needed presence in a particular prod- and articulate the intended expansion vehiclesuct category, market segment, geographic area, or can result in the hoped-for entry’s being seriouslyvalue-creation stage should be the result of delib- delayed, unnecessarily costly, or totally stalled.erate strategic choice. If we have decided to ex-pand our product range, are we going to accom-plish that by relying on organic, internal product Failure to explicitly consider anddevelopment, or are there other vehicles—such as articulate the intended expansionjoint ventures or acquisitions—that offer a better vehicles can result in the hoped-formeans for achieving our broadened scope? If we entry’s being seriously delayed,are committed to international expansion, what unnecessarily costly, or totally stalled.should be our primary modes, or vehicles— green-
  5. 5. 2005 Hambrick and Fredrickson 55 There are steep learning curves associated with The other negative outcome is that, without up-the use of alternative expansion modes. Research front, careful choices about differentiators, tophas found, for instance, that companies can de- management may seek to offer customers across-velop highly advantageous, well-honed capabili- the-board superiority, trying simultaneously toties in making acquisitions or in managing joint outdistance competitors on too broad an array ofventures.6 The company that uses various vehicles differentiators—lower price, better service, supe-on an ad hoc or patchwork basis, without an over- rior styling, and so on. Such attempts are doomed,arching logic and programmatic approach, will be however, because of their inherent inconsistenciesat a severe disadvantage compared with compa- and extraordinary resource demands. In selectingnies that have such coherence. differentiators, strategists should give explicit preference to those few forms of superiority that are mutually reinforcing (e.g., image and productDifferentiators styling), consistent with the firm’s resources andA strategy should specify not only where a firm capabilities, and, of course, highly valued in thewill be active (arenas) and how it will get there arenas the company has targeted.(vehicles), but also how the firm will win in themarketplace— how it will get customers to come its Stagingway. In a competitive world, winning is the resultof differentiators, and such edges don’t just hap- Choices of arenas, vehicles, and differentiatorspen. Rather, they require executives to make up- constitute what might be called the substance of afront, conscious choices about which weapons will strategy—what executives plan to do. But this sub-be assembled, honed, and deployed to beat com- stance cries out for decisions on a fourth element—petitors in the fight for customers, revenues, and staging, or the speed and sequence of major movesprofits. For example, Gillette uses its proprietary to take in order to heighten the likelihood of suc-product and process technology to develop supe- cess.7 Most strategies do not call for equal, bal-rior razor products, which the company further dif- anced initiatives on all fronts at all times. Instead,ferentiates through a distinctive, aggressively ad- usually some initiatives must come first, followedvertised brand image. Goldman Sachs, the only then by others, and then still others. In erect-investment bank, provides customers unparalleled ing a great building, foundations must be laid,service by maintaining close relationships with followed by walls, and only then the roof.client executives and coordinating the array of ser- Of course, in business strategy there is no uni-vices it offers to each client. Southwest Airlines versally superior sequence. Rather the strategist’sattracts and retains customers by offering the judgment is required. Consider a printing equip-lowest possible fares and extraordinary on-time ment company that committed itself to broadeningreliability. its product line and expanding internationally. Achieving a compelling marketplace advantage The executives decided that the new productsdoes not necessarily mean that the company has to should be added first, in stage one, because thebe at the extreme on one differentiating dimen- elite sales agents they planned to use for interna-sion; rather, sometimes having the best combina- tional expansion would not be able or willing totion of differentiators confers a tremendous mar- represent a narrow product line effectively. Evenketplace advantage. This is the philosophy of though the executives were anxious to expandHonda in automobiles. There are better cars than geographically, if they had tried to do so withoutHondas, and there are less expensive cars than the more complete line in place, they would haveHondas; but many car buyers believe that there is wasted a great deal of time and money. The leftno better value— quality for the price—than a half of Figure 3 shows their two-stage logic.Honda, a strategic position the company has The executives of a regional title insurance com-worked hard to establish and reinforce. pany, as part of their new strategy, were commit- Regardless of the intended differentiators—im- ted to becoming national in scope through a seriesage, customization, price, product styling, after- of acquisitions. For their differentiators, theysale services, or others—the critical issue for strat- planned to establish a prestigious brand backedegists is to make up-front, deliberate choices. by aggressive advertising and superb customerWithout that, two unfortunate outcomes loom. One service. But the executives faced a chicken-and-is that, if top management doesn’t attempt to cre- egg problem: they couldn’t make the acquisitionsate unique differentiation, none will occur. Again, on favorable terms without the brand image indifferentiators don’t just materialize; they are very place; but with only their current limited geo-hard to achieve. And firms without them lose. graphic scope, they couldn’t afford the quantity or
  6. 6. 56 Academy of Management Executive November FIGURE 3 Examples of Strategic Stagingquality of advertising needed to establish the some profits, but profits above the firm’s cost ofbrand. They decided on a three-stage plan (shown capital.8 It is not enough to vaguely count on hav-in the right half of Figure 3): 1) make selected ing revenues that are above costs. Unless there’s aacquisitions in adjacent regions, hence becoming compelling basis for it, customers and competitorsa super-regional in size and scale; 2) invest mod- won’t let that happen. And it’s not enough to gen-erately heavily in advertising and brand-building; erate a long list of reasons why customers will be3) make acquisitions in additional regions on more eager to pay high prices for your products, alongfavorable terms (because of the enhanced brand, a with a long list of reasons why your costs will berecord of growth, and, they hoped, an appreciated lower than your competitors’. That’s a sure-firestock price) while simultaneously continuing to route to strategic schizophrenia and mediocrity.push further in building the brand. Decisions about staging can be driven by a num-ber of factors. One, of course, is resources. Funding It is not enough to vaguely count onand staffing every envisioned initiative, at the having revenues that are above costs.needed levels, is generally not possible at the out- Unless there’s a compelling basis for it,set of a new strategic campaign. Urgency is a sec- customers and competitors won’t let thatond factor affecting staging; some elements of a happen.strategy may face brief windows of opportunity,requiring that they be pursued first and aggres-sively. A third factor is the achievement of credi- The most successful strategies have a centralbility. Attaining certain thresholds—in specific economic logic that serves as the fulcrum for profitarenas, differentiators, or vehicles— can be criti- creation. In some cases, the economic key may becally valuable for attracting resources and stake- to obtain premium prices by offering customers aholders that are needed for other parts of the strat- difficult-to-match product. For instance, the Newegy. A fourth factor is the pursuit of early wins. It York Times is able to charge readers a very highmay be far wiser to successfully tackle a part of the price (and strike highly favorable licensing ar-strategy that is relatively doable before attempting rangements with on-line information distributors)more challenging or unfamiliar initiatives. These because of its exceptional journalistic quality; inare only some of the factors that might go into addition, the Times is able to charge advertisersdecisions about the speed and sequence of strate- high prices because it delivers a large number ofgic initiatives. However, since the concept of stag- dedicated, affluent readers. ARAMARK, the highlying has gone largely unexplored in the strategy profitable international food-service company, isliterature, it is often given far too little attention by able to obtain premium prices from corporate andstrategists themselves. institutional clients by offering a level of custom- ized service and responsiveness that competitors cannot match. The company seeks out only thoseEconomic Logic clients that want superior food service and areAt the heart of a business strategy must be a clear willing to pay for it. For example, once domesticidea of how profits will be generated—not just airlines became less interested in distinguishing
  7. 7. 2005 Hambrick and Fredrickson 57themselves through their in-flight meals, ARAMARK think about alignment, they typically have in minddropped that segment. that internal organizational arrangements need to In some instances, the economic logic might reside align with strategy (in tribute to the maxim thaton the cost side of the profit equation. ARAMARK— “structure follows strategy”9), but few pay muchadding to its pricing leverage— uses its huge scale attention to the consistencies required among theof operations and presence in multiple market seg- elements of the strategy itself.ments (business, educational, healthcare, and cor- Finally, it is only after the specification of all fiverectional-system food service) to achieve a sizeable strategic elements that the strategist is in the bestcost advantage in food purchases—an advantage position to turn to designing all the other support-that competitors cannot duplicate. GKN Sinter Met- ing activities—functional policies, organizationalals, which has grown by acquisition to become the arrangements, operating programs, and process-world’s major powdered-metals company, benefits es—that are needed to reinforce the strategy. Thegreatly from its scale in obtaining raw materials and five elements of the strategy diamond can be con-in exploiting, in country after country, its leading- sidered the hub or central nodes for designing aedge capabilities in metal-forming processes. comprehensive, integrated activity system.10 In these examples the economic logics are notfleeting or transitory. They are rooted in the firms’ Comprehensive Strategies at IKEA and Brakefundamental and relatively enduring capabilities. Products InternationalARAMARK and the New York Times can chargepremium prices because their offerings are supe- IKEA: Revolutionizing an Industryrior in the eyes of their targeted customers, custom- So far we have identified and discussed the fiveers highly value that superiority, and competitors elements that make up a strategy and form ourcan’t readily imitate the offerings. ARAMARK and strategy diamond. But a strategy is more than sim-GKN Sinter Metals have lower costs than their ply choices on these five fronts: it is an integrated,competitors because of systemic advantages of mutually reinforcing set of choices— choices thatscale, experience, and know-how sharing. Granted, form a coherent whole. To illustrate the importancethese leads may not last forever or be completely of this coherence we will now discuss two exam-unassailable, but the economic logics that are at ples of fully elaborated strategy diamonds. As awork at these companies account for their abilities to first illustration, consider the strategic intent ofdeliver strong year-in, year-out profits. IKEA, the remarkably successful global furniture retailer. IKEA’s strategy over the past 25 years has been highly coherent, with all five elements rein-The Imperative of Strategic Comprehensiveness forcing each other.By this point, it should be clear why a strategy The arenas in which IKEA operates are well de-needs to encompass all five elements—arenas, ve- fined: the company sells relatively inexpensive,hicles, differentiators, staging, and economic logic. contemporary, Scandinavian-style furniture andFirst, all five are important enough to require in- home furnishings. IKEA’s target market is young,tentionality. Surprisingly, most strategic plans em- primarily white-collar customers. The geographicphasize one or two of the elements without giving scope is worldwide, or at least all countries whereany consideration to the others. Yet to develop a socioeconomic and infrastructure conditions sup-strategy without attention to all five leaves critical port the concept. IKEA is not only a retailer, butomissions. also maintains control of product design to ensure the integrity of its unique image and to accumulate unrivaled expertise in designing for efficient man-Surprisingly, most strategic plans ufacturing. The company, however, does not man-emphasize one or two of the elements ufacture, relying instead on a host of long-termwithout giving any consideration to the suppliers who ensure efficient, geographically dis-others. persed production. Second, the five elements call not only for choice, IKEA is not only a retailer, but alsobut also for preparation and investment. All five maintains control of product design torequire certain capabilities that cannot be gener- ensure the integrity of its unique imageated spontaneously. and to accumulate unrivaled expertise in Third, all five elements must align with and sup- designing for efficient manufacturing.port each other. When executives and academics
  8. 8. 58 Academy of Management Executive November As its primary vehicle for getting to its chosen time. In general, the company’s approach has beenarenas, IKEA engages in organic expansion, build- to use its limited resources to establish an earlying its own wholly owned stores. IKEA has chosen foothold by opening a single store in each targetednot to make acquisitions of existing retailers, and country. Each such entry is supported with aggres-it engages in very few joint ventures. This reflects sive public relations and advertising, in order totop management’s belief that the company needs lay claim to the radically new retailing concept into fully control local execution of its highly inno- that market. Later, IKEA comes back into eachvative retailing concept. country and fills in with more stores. IKEA attracts customers and beats competitors The economic logic of IKEA rests primarily onby offering several important differentiators. First, scale economies and efficiencies of replication. Al-its products are of very reliable quality but are low though the company doesn’t sell absolutely iden-in price (generally 20 to 30 percent below the com- tical products in all its geographic markets, IKEApetition for comparable quality goods). Second, in has enough standardization that it can take greatcontrast to the stressful, intimidating feeling that advantage of being the world’s largest furnitureshoppers often encounter in conventional furniture retailer. Its costs from long-term suppliers are ex-stores, IKEA customers are treated to a fun, non- ceedingly low, and made even lower by IKEA’sthreatening experience, where they are allowed to proprietary, easy-to-manufacture product designs.wander through a visually exciting store with only In each region, IKEA has enough scale to achievethe help they request. And third, the company substantial distribution and promotional efficien-strives to make customer fulfillment immediate. cies. And each individual store is set up as a high-Specifically, IKEA carries an extensive inventory volume operation, allowing further economies inat each store, which allows a customer to take the inventories, advertising, and staffing. IKEA’sitem home or have it delivered the same day. In phased international expansion has allowed exec-contrast, conventional furniture retailers show utives to benefit, in country after country, fromfloor models, but then require a 6- to 10-week wait what they have learned about site selection, storefor the delivery of each special-order item. design, store openings, and ongoing operations. As for staging, or IKEA’s speed and sequence of They are vigilant, astute learners, and they putmoves, once management realized that its ap- that learning to great economic use.proach would work in a variety of countries and Note how all of IKEA’s actions (shown in Figurecultures, the company committed itself to rapid 4) fit together. For example, consider the stronginternational expansion, but only one region at a alignment between its targeted arenas and its FIGURE 4 IKEA’s Strategy
  9. 9. 2005 Hambrick and Fredrickson 59competitive differentiators. An emphasis on low by adding Asia, where global carmakers were rap-price, fun, contemporary styling, and instant fulfill- idly expanding. They considered widening theirment is well suited to the company’s focus on product range to include additional auto compo-young, first-time furniture buyers. Or consider the nents, but concluded that their unique design andlogical fit between the company’s differentiators manufacturing expertise was limited to brake andand vehicles—providing a fun shopping experi- suspension components. They did decide, how-ence and instant fulfillment requires very intricate ever, that they should apply their advanced capa-local execution, which can be achieved far better bility in antilock-braking and electronic traction-through wholly owned stores than by using acqui- control systems to develop braking products forsitions, joint ventures, or franchises. These align- off-road vehicles, including construction and farmments, along with others, help account for IKEA’s equipment. As an additional commitment, execu-long string of years with double-digit sales growth, tives decided to add a new service, systems inte-and current revenues of $8 billion. gration, that would involve bundling BPI products The IKEA example allows us to illustrate the with other related components, from other manu-strategy diamond with a widely familiar business facturers, that form a complete suspension system,story. That example, however, is admittedly retro- and then providing the carmakers with easy-to-spective, looking backward to interpret the compa- handle, preassembled systems modules. This ini-ny’s strategy according to the framework. But the tiative would allow the carmakers to reduce as-real power and role of strategy, of course, is in sembly costs significantly, as well as to deal withlooking forward. Based on a careful and complete a single suspension-system supplier, with sub-analysis of a company’s environment, market- stantial logistics and inventory, competitors, and internal capabilities, se- The management team identified three majornior managers need to craft a strategic intent for vehicles for achieving BPI’s presence in their se-their firm. The diamond is a useful framework for lected arenas. First, they were committed to or-doing just that, as we will now illustrate with a ganic internal development of new generations ofbusiness whose top executives set out to develop a leading-edge braking systems, including those fornew strategy that would allow them to break free off-road vehicles. To become the preferred suspen-from a spiral of mediocre profits and stagnant sion-system integrator for the major auto manufac-sales. turers, executives decided to enter into strategic alliances with the leading producers of other key suspension components. Finally, to serve carmak-Brake Products International: Charting a New ers that were expanding their operations in Asia,Direction BPI planned to initiate equity joint ventures withThe strategy diamond proved very useful when it brake companies in China, Korea, and Singapore.was applied by the new executive team of Brake BPI would provide the technology and oversee theProducts International (BPI), a disguised manufac- manufacturing of leading-edge, high-quality anti-turer of components used in braking and suspen- lock brakes; the Asian partners would take thesion systems for passenger cars and light trucks. In lead in marketing and government relations.recent years, BPI had struggled as the worldwide BPI’s executives also committed to achievingauto industry consolidated. Its reaction had been a and exploiting a small set of differentiators. Thecombination of disparate, half-hearted diversifica- company was already a technology leader, partic-tion initiatives, alternating with across-the-board ularly in antilock-braking systems and electronicexpense cuts. The net result, predictably, was not traction-control systems. These proprietary tech-good, and a new management team was brought nologies were seen as centrally important andin to try to revive performance. As part of this would be further nurtured. Executives also be-turnaround effort, BPI’s new executives developed lieved they could establish a preeminent positiona new strategic intent by making critical decisions as a systems integrator of entire suspension as-for each of the five elements—arenas, vehicles, semblies. However, achieving this advantagedifferentiators, staging, and economic logic. We would require new types of manufacturing andwill not attempt to convey the analysis that gave logistics capabilities, as well as new skills in man-rise to their choices, but rather (as with the IKEA aging relationships with other component compa-example) will use BPI to illustrate the articulation nies. This would include an extensive e-businessof a comprehensive strategy. capability that linked BPI with its suppliers and For their targeted arenas, BPI executives com- customers. And finally, as one of the few brakes/mitted to expanding beyond their current market suspension companies with a manufacturing pres-scope of North American and European car plants ence in North America and Europe—and now in
  10. 10. 60 Academy of Management Executive NovemberAsia—BPI executives concluded that they had a intent were the greatest. For example, executivespotential advantage—what they referred to as decided that, in order to provide a clear, early sign“global reach”—that was well suited to the global of continued commitment to the major global autoconsolidation of the automobile industry. If BPI did manufacturers, a critical first step was to establisha better job of coordinating activities among its the joint ventures with brake manufacturers ingeographically dispersed operations, it could pro- Asia. They felt just as much urgency to gain avide the one-stop, low-cost global purchasing that first-mover advantage as a suspension-system in-the industry giants increasingly sought. tegrator. Therefore, management committed to promptly establish alliances with a select group ofIf BPI did a better job of coordinating manufacturers of other suspension components, and to experiment with one pilot customer. Theseactivities among its geographically two sets of initiatives constituted stage one of BPI’sdispersed operations, it could provide the strategic intent. For stage two, the executivesone-stop, low-cost global purchasing that planned to launch the full versions of the systems-the industry giants increasingly sought. integration and global-reach concepts, complete with aggressive marketing. Also in this second BPI’s executives approached decisions about stage, expansion into the off-road vehicle marketstaging very deliberately. They felt urgency on would commence.various fronts, but also realized that, after several BPI’s economic logic hinged on securing pre-years of lackluster performance, the firm lacked mium prices from its customers, by offering themthe resources and credibility to do everything all at at least three valuable, difficult-to-imitate bene-once. As is often the case, decisions about staging fits. First, BPI was the worldwide technologywere most important for those initiatives where the leader in braking systems; car companies wouldgaps between the status quo and the strategic pay to get access to these products for their new FIGURE 5 BPI’s Strategy
  11. 11. 2005 Hambrick and Fredrickson 61high-end models. Second, BPI would allow global Table 1customers an economical single source for braking Testing the Quality of Your Strategyproducts; this would save customers considerable Key Evaluation Criteriacontract administration and quality-assurance 1. Does your strategy fit with what’s going on in thecosts—savings that they would be willing to share. environment?And third, through its alliances with major suspen- Is there healthy profit potential where you’re headed? Doession-component manufacturers, BPI would be able your strategy align with the key success factors of yourto deliver integrated-suspension-system kits to chosen environment? 2. Does your strategy exploit your key resources?customers—again saving customers in purchasing With your particular mix of resources, does this strategycosts, inventory costs, and even assembly costs, for give you a good head start on competitors? Can you pursuewhich they would pay a premium. this strategy more economically than competitors? BPI’s turnaround was highly successful. The sub- 3. Will your envisioned differentiators be sustainable?stance of the company’s strategy (shown in Figure Will competitors have difficulty matching you? If not, does your strategy explicitly include a ceaseless regimen of5) was critically important in the turnaround, as innovation and opportunity creation?was the concise strategy statement that was com- 4. Are the elements of your strategy internally consistent?municated throughout the firm. As the CEO stated: Have you made choices of arenas, vehicles, differentiators, and staging, and economic logic? Do they all fit and We’ve finally identified what we want to be, mutually reinforce each other? and what’s important to us. Just as impor- 5. Do you have enough resources to pursue this strategy? tantly, we’ve decided what we don’t want to Do you have the money, managerial time and talent, and be, and have stopped wasting time and effort. other capabilities to do all you envision? Are you sure Since we started talking about BPI in terms of you’re not spreading your resources too thinly, only to be left with a collection of feeble positions? arenas, vehicles, differentiators, staging, and 6. Is your strategy implementable? economic logic, we have been able to get our Will your key constituencies allow you to pursue this top team on the same page. A whole host of strategy? Can your organization make it through the decisions have logically fallen into place in transition? Are you and your management team able and support of our comprehensive strategic willing to lead the required changes? agenda. There might be those who wonder whether strat-Of Strategy, Better Strategy, and No Strategy egy isn’t a concept of yesteryear, whose time hasOur purpose in this article has been elemental—to come and gone. In an era of rapid, discontinuousidentify what constitutes a strategy. This basic environmental shifts, isn’t the company that at-agenda is worthwhile because executives and tempts to specify its future just flirting with disas-scholars have lost track of what it means to engage ter? Isn’t it better to be flexible, fast-on-the-feet,in the art of the general. We particularly hope to ready to grab opportunities when the right onescounter the recent catchall fragmentation of the come along?strategy concept, and to remind strategists that Some of the skepticism about strategy stemsorchestrated holism is their charge. from basic misconceptions. First, a strategy need But we do not want to be mistaken. We don’t not be static: it can evolve and be adjusted on anbelieve that it is sufficient to simply make these ongoing basis. Unexpected opportunities need notfive sets of choices. No—a business needs not just be ignored because they are outside the strategy.a strategy, but a sound strategy. Some strategies Second, a strategy doesn’t require a business toare clearly far better than others. Fortunately, this become rigid. Some of the best strategies for to-is where the wealth of strategic-analysis tools that day’s turbulent environment keep multiple optionshave been developed in the last 30 years becomes open and build in desirable flexibility—throughvaluable. Such tools as industry analysis, technol- alliances, outsourcing, leased assets, toehold in-ogy cycles, value chains, and core competencies, vestments in promising technologies, and numer-among others, are very helpful for improving the ous other means. A strategy can help to intention-soundness of strategies. When we compare these ally build in many forms of flexibility—if that’stools and extract their most powerful central mes- what is called for. Third, a strategy doesn’t dealsages, several key criteria emerge to help execu- only with an unknowable, distant future. The ap-tives test the quality of a proposed strategy. These propriate lifespans of business strategies have be-criteria are presented in Table 1.11 We strongly come shorter in recent years. Strategy used to beencourage executives to apply these tests through- equated with 5- or 10-year horizons, but today aout the strategy-design process and especially horizon of two to three years is often more fitting. Inwhen a proposed strategy emerges. any event, strategy does not deal as much with
  12. 12. 62 Academy of Management Executive Novemberpreordaining the future as it does with assessing incrementalism. Homewood, IL: Richard D. Irwin Publishing;current conditions and future likelihoods, then and Mintzberg, H. 1973. Strategy making in three modes. Cali- fornia Management Review, 15: 44 –53.making the best decisions possible today. 5 Drucker, P. 1954. The practice of management. New York: Strategy is not primarily about planning. It is Harper & Row.about intentional, informed, and integrated 6 Haleblian, J., & Finkelstein, S. 1999. The influence of orga-choices. The noted strategic thinkers Gary Hamel nizational acquisition experience on acquisition performance:and C. K. Prahalad said: “[A company’s] leadership A behavioral learning perspective. Administrative Sciencecannot be planned for, but neither can it happen Quarterly, 44: 29 –56. 7 Eisenhardt, K. M., & Brown, S. L. 1998. Time pacing: Com-without a grand and well-considered aspiration.”12 peting in markets that won’t stand still. Harvard Business Re-We offer the strategy diamond as a way to craft view, March–April: 59 – 69, discusses “time pacing” as a compo-and articulate a business aspiration. nent of a process of contending with rapidly changing environments. 8 The collapse of stock market valuations for Internet compa-Acknowledgments nies lacking in profits— or any prospect of profits—marked aWe thank the following people for helpful suggestions: Ralph return to economic reality. Profits above the firm’s cost of cap-Biggadike, Warren Boeker, Kathy Harrigan, Paul Ingram, Xavier ital are required in order to yield sustained or longer-termMartin, Atul Nerkar, and Jaeyong Song. shareholder returns. 9 Galbraith & Kazanjian, op. cit., and Hambrick & Cannella, op. cit. 10Endnotes Porter, M. E. 1996. What is strategy? Harvard Business Re- view, November–December: 61–78. 1 Porter, M. E. 1980. Competitive strategy. New York: The Free 11 See Tilles, S. 1963. How to evaluate strategy. Harvard Busi-Press, provides an in-depth discussion of the five-forces model. ness Review, July–August: 112–121, for a classic, but more lim-Hypercompetition is addressed in D’Aveni, R. A. 1994. Hyper- ited, set of evaluative tests.competition. New York: The Free Press. The resource-based 12 See Hamel, G., & Prahalad, C. K. 1993. Strategy as stretchview of the firm is discussed in Barney, J. 1991. Firm resources and leverage. Harvard Business Review, March–April: 84 –91.and sustained competitive advantage. Journal of Management,17: 99 –120. See Brandenburger, M., & Nalebuff, R. J. 1995. The Donald C. Hambrick is the Samuel Bronfman Professor of Dem-right game: Use game theory to shape strategy. Harvard Busi- ocratic Business Enterprise at the Graduate School of Business,ness Review, July–August: 57–71, for a discussion of co-opetition. Columbia University. He holds degrees from the University of 2 Bianco, A., & Moore, P. L. 2001. Downfall: The inside story of Colorado (B.S.), Harvard University (MBA), and the Pennsylva-the management fiasco at Xerox. BusinessWeek, 5 March 2001. nia State University (Ph.D.). An active consultant and executive 3 A widely applicable framework for strategy implementa- education instructor, he also served as president of the Acad-tion is discussed in Galbraith, J. R., & Kazanjian, R. K. 1986. emy of Management. Contact: implementation: Structure, systems and process, 2nded. St. Paul: West Publishing. A similar tool is offered in Ham- James W. Fredrickson is a professor of strategic managementbrick, D. C., & Cannella, A. 1989. Strategy implementation as and Chevron Oil Centennial Foundation Fellow in the Mc-substance and selling. The Academy of Management Executive, Combs School of Business of the University of Texas at Austin.3(4): 278 –285. He was previously on the Faculties of Columbia University and 4 This observation has been made for years by many contrib- the University of Pittsburgh, and holds a Ph.D. from the Univer-utors, including Quinn, J. B. 1980. Strategies for change: Logical sity of Washington. Contact: