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This chapter is from the book

The Economist

Hang on—The Economist is taking us on a tour of strategy over several decades in several pages. From the classics to the latest, The Economist is careful with its words.

Top managers of big firms devote the bulk of their efforts to formulating strategy, though there is remarkably little agreement about what this is.

No single subject has so dominated the attention of managers, consultants, and management theorists as the subject of corporate strategy. For the top managers of big companies, this is perhaps understandable. Served by hordes of underlings, their huge desks uncluttered by the daily minutiae of business, they often consider setting strategy as their most valuable contribution. And it is also understandable that there is a great deal of debate about which strategies work best; business is, after all, complicated and uncertain. More puzzling is the fact that the consultants and theorists jostling to advise businesses cannot even agree on the most basic of all questions: What, precisely, is a corporate strategy?

In . . . [an article in] the Harvard Business Review, Gary Hamel and C. K. Prahalad, professors at the London Business School and the University of Michigan, turn much recent thinking upside down by asserting that the real function of a company’s strategy is not to match its resources with its opportunities, as many businessmen assume, but rather to set goals which "stretch" a company beyond what most of its managers believe is possible . . . .

The authors’ reduction of strategy to little more than a rallying cry is the apotheosis of a trend away from formal planning at big firms which has been gathering pace for the past 30 years. In a vast outpouring of writing on the subject during this period, management theorists have come up with so many alternative views of what a corporate strategy should contain that they have undermined the entire concept. A growing number of businessmen now question whether thinking consciously about an overall strategy is of any benefit at all to big firms. Grabbing opportunities or coping with blows as they arise may make more sense.

Soon after the Second World War, when a new class of professional managers began to search for ideas about how to run big firms, the original view of strategy was borrowed from the military. Managers still talk about "attacking" markets and "defeating" rivals, but the analogy between generalship and running a firm was quickly abandoned when businessmen realized that slaughtering your opponents and outselling them had little in common.

By the 1960s corporate strategy had come to mean a complex and meticulously wrought plan based on detailed forecasts of economies and specific markets. That view was endorsed by two celebrated books: Alfred Sloan’s My Years With General Motors, a memoir by the man who made the car maker the world’s biggest industrial enterprise; and Alfred Chandler’s Strategy and Structure, a history of big, successful American firms in which the Harvard professor argued that their strategies had produced their multidivisional form.

This approach to strategy fell into disrepute for several reasons. Many people blame it for the overzealous diversification of the following decade and the creation of poorly performing conglomerates. In the 1970s the success of Japanese firms, which seemed to eschew detailed planning, cast further doubt on its usefulness. The two sudden oil-price rises of the 1970s also meant that many firms had to tear up their plans and start again. Most revealing of all, many companies found that the reams of statistics and targets, once assembled, sat gathering dust. Occupied with running their operations, few managers at any level of the firm ever bothered to refer again to its handsomely bound corporate strategy.

Then, in 1980, came another book: Competitive Strategy by Michael Porter, an economist at Harvard Business School. He argued that a firm’s profitability was determined by the characteristics of its industry and the firm’s position within it, so these should also determine its strategy. Applying the analytical techniques common to industrial economics, Mr. Porter said that a firm’s primary task was to find niches it could defend from competitors, either becoming the low-cost producer, differentiating its products in a way which would allow it to command a higher profit margin, or erecting barriers to the entry of new rivals. Mr. Porter’s book was an instant hit.

Nonetheless, his ideas have had little impact on how most big firms go about formulating strategy. One reason is that Mr. Porter’s work is descriptive/not prescriptive. His vast checklists provide little guide to what firms should actually do, or avoid doing. Every firm would like to be in an industry with high barriers to entry, weak rivals and high profits. But few are so lucky.

About the same time as Mr. Porter’s book appeared, James Quinn, a professor at Dartmouth College’s Amos Tuck Business School, published the results of a study of how big firms actually went about formulating strategy. He found that they proceeded by trial and error, constantly revising their strategy in the light of new experience. He called this "logical incrementalism." To a lot of people this sounded suspiciously like "muddling through" (i.e., no strategy at all), though Mr. Quinn vehemently denied this, arguing that there were great benefits to formalizing the process.

The most influential strain of theorizing about strategy in the 1980s has stressed expanding a firm’s skills—rapid product development, high-quality manufacturing, technological innovation and service—and then finding markets in which to exploit those skills. This argument was made by Messrs. Hamel and Prahalad themselves in a 1990 Harvard Business Review article.

Despite the changing fashions, decades of theorizing have not been entirely useless. How a company views strategy does depend largely on its circumstances. Small firms determined to challenge behemoths may find it helpful to call their aspirations a "strategy." Big companies defending a dominant market position may find Mr. Porter’s industry analysis illuminating. All firms should try to exploit and hone their skills. But there is no single way to approach the future. The next time your boss proudly boasts that he is off to a strategic-planning meeting, give him your condolences.

Source: © The Economist Newspaper Limited, London (March 20, 1993).

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