Strategy in a Competitive
Management Strategy - A Beginning
Many of the concepts used in strategy were developed during the late 1970s and 1980s when underlying competitive conditions evolved within a well-understood model. Japan's manufacturing success with its emphasis on operating efficiency challenged some of the traditional assumptions - but it is only in the last decade that a new competitive landscape has emerged and the rules of engagement have changed. While the canvas available to today's strategists is large and new, companies will need to understand global forces, react quickly, and innovate when defining their business models. C.K. Prahalad sets out to define the new paradigm.
It is hardly surprising that the conceptual models and administrative processes used by managers often outlast their usefulness. It takes researchers time, after all, to identify new problems and emerging solutions before they can produce theories about them. Then there is the time lag between the development of these theories and their conversion into common business practice.
Where management concepts are concerned this time lag - often a decade - brings with it an interesting conundrum. In an era of rapid and disruptive change in the economic, political, social, regulatory and technological environment do managers have to discard established and tested analytical tools equally as fast? How can they identify the on-going relevance of concepts and tools in a changing environment?
The Heritage of Strategy Concepts
The most prevalent and widely used tools of strategy analysis are: the SWOT analysis, Industry structure analysis (Five Forces), Value Chain analysis, Generic Strategies, Strategic Group analysis, barriers to entry, and others of the genre, (set out in Michael Porter's 1980 book, Competitive Strategy; Techniques for Analyzing Industries and Competitors and also in his 1985 work, Competitive Advantage).
The concepts and tools - many of them the staples of economists - were adopted and simplified for the use of managers. The formalisation of these concepts was instrumental in pushing strategy development from the realm of "the intuitive genius of the founder or a top manager" to that of logical process. However, most of these concepts were developed during the late 1970s and the decade of the 1980s. During this period, underlying competitive conditions evolved but within a well understood paradigm.
A major competitive disruption during this period, certainly for US and European companies, was the spectacular success of Japanese manufacturing in industries as diverse as steel, consumer electronics, autos, and semiconductors. The sources of competitive advantage, during this decade, accrued to those who could wrest major efficiencies in operations through focus on quality, cycle time, reengineering, and team-work. Operational efficiencies, within a relatively stable industry structure paradigm, became the focus. In fact, this focus on wresting competitive advantage through operational efficiencies led some managers to believe that strategy was unimportant and management was all about implementation.
The Emerging Competitive Landscape
The decade of the 90s has witnessed significant and discontinuous change in the competitive environment. There is now an accelerating global trend to deregulate and privatise. Countries as diverse as India, Russia, Brazil and China are at various stages of privatising their public sectors. Technological convergence - such as that between chemical and electronic companies; computing, communications, components, and consumer electronics; food and pharmaceuticals; and cosmetics and pharmaceuticals - is disrupting traditional industry structures.
These discontinuities are changing the very nature of the industry structure - the relationships between consumers, competitors, collaborators, and investors. They are challenging the established competitive positions of incumbents and allowing new types of competitors and new bases for competition to emerge.
Strategy in a Discontinuous Competitive Landscape
Strategists must start with a new mindset. Traditional strategic planning processes emphasised resource allocation - which plants, what locations, what products and sometimes what businesses - within an implicit business model. Disruptive changes challenge the business models.
Increasingly, the distinction between local and global business will be narrowed. All businesses will have to be locally responsive and all businesses will be subject to the influences and standards of global players.
Innovation as a New Source of Competitive Advantage
Innovation was always a source of competitive advantage. However, the concept of innovation was tied to product and process innovations. In many large companies, the innovation process is still called the "product creation process". Reducing cycle time, increasing modularity, tracking sales from new products introduced during the last two years as a percentage of total sales, and global product launches were the hallmarks of an innovative company. Increasingly the focus of innovation has to shift towards innovation in business models.
Strategy in the Future
Given the dramatic changes taking place in the competitive landscape, Prof. Prahalad believes that both the concept of strategy and the process of strategy making will change. Older approaches will not suffice.
While both traditional and new concepts of strategy have similar goals, it is in the focus that they differ. In the near future, it is companies with a "Strategic Intent" as against a "Strategic Planning" focus that will emerge victorious in the war for global market dominance. Strategic Intent is an "obsession with winning at all levels of the organisation and then sustain that obsession over the 10 to 20 year quest for global leadership". This entails the combination of a vision of a leadership position as well as the establishment of criteria to chart the company's progress. This also gives consistency to short-term action while leaving enough room for reinterpretation as new opportunities emerge.
While strategic planning primarily focuses on today's problems and attaining a strategic fit between resources and aspirations, Strategic Intent is future-oriented and outside the range of planning. It creates a misfit between resources and current opportunities and emphasises resource leverage against resource allocation. An accelerated organisational learning is essential for this process.
Because current western strategic thought emphasises planning that acts as a "feasibility sieve", there is a preference for selling businesses rather than defending them. These concepts are domestically focused and result in deskilling and "denominator management" and look upon strategy formulation as an elitist activity, that of only the top management.
Managers will have to start with two clear premises:
Firstly, that they can influence the competitive environment. Strategy is not about positioning the company in a given industry space but increasingly one of influencing, shaping and creating it
Secondly, it is not possible to influence the evolving industry environment, if one does not start with a point of view about how the world can be, not how to improve what is available but how radically to alter it. Imagining a new competitive space and acting to influence the migration towards that future is critical. Strategy is therefore, not an extrapolation of the current situation but an exercise in "imagining and then folding the future in". This process needs a different starting point. This is about providing a strategic direction - a point of view - and identifying, at best, the major milestones on the way. There is no attempt to be precise on product plans, or budgets.
Knowing the broad contours of the future is not as difficult as people normally assume. While a broad strategic direction (or strategic intent and strategic architecture) is critical to the process, it is equally important to recognise that dramatic changes in the environment suggest managers must act and be tactical about navigating their way around new obstacles and unforeseen circumstances.
Tactical changes are difficult if there is no overarching point of view. As competitive conditions change, the need to constantly adjust resource configuration is becoming recognised. A critical part of being strategic is the ability quickly to adjust and adapt within a given strategic direction.
The goal of Strategic Intent is to fold the future back into the present. The questions that companies should ask is not "How will next year be different from this year?", but "What must we do differently next year to get closer to our Strategic Intent?" This intent has to be communicated in unambiguous terms to the entire organisation.
In the long run, a strategic intent can be converted into market dominance only by creating and taking up challenges and competitive innovation. The enterprise should build layers of advantage by pursuing both cost and differentiation strategies. Leadership cannot be planned for, but neither can it happen without a grand and a well-considered aspiration . Strategic intent creates a larger gap between an organisation's existing resources and competencies and its aspirations. This causes the "stretch" concept to take over. The greater the stretch, the better the company is able to gear itself for the future.
In his article, "Strategy as Stretch and Leverage", Prof. Prahalad introduces the notion of strategy as "stretch". This concept seeks to bridge the gap between those who see strategy as a grand plan thought by great minds and those who see strategy as no more than a pattern in a stream of incremental decisions. Since top management has a clear view of the goal line and clears the path meter by meter, strategy as stretch is both designed and incrementalist. An organisation has to learn to concentrate, accumulate, complement conserve and recover resources if it is to achieve its stretch goals.
The most dramatic change in the process of strategy making is the breakdown in the traditional strategy hierarchy - top managers develop strategy and middle managers implement it. By its very nature discontinuous change in the competitive environment is creating a whole new dynamic. Prahalad opines that the changing nature of business necessitates that companies diversify: and their performances are inevitably linked to their diversification strategy. In his paper "The Dominant Logic: A New Linkage between Diversity and Performance", Prahalad and Bettis propose that diversity and performance are linked by "dominant general management logic". According to this, the top management of a firm should be viewed as a collection of key individuals (a dominant coalition) who have significant influence on the way the firm is arranged. The complexity of the top management process is a function of strategic variety, not just the number or the size of businesses. Strategically similar businesses can be managed using a single dominant logic. This logic can be considered as both a knowledge structure and a set of elicited management processes. The ability of the top management to manage a business is limited by the dominant logics that they are used to.
"Dominant logic" is a mind set or a worldview of the business and the administrative tools to accomplish goals and make decisions in that business. It is stored as a shared "cognitive map" among the dominant coalition. It is expressed as a learned, problem-solving behaviour. Prahalad says that top managers are less likely to respond appropriately to situations where the dominant logic is different, as well as not respond quickly enough. This happens because they are unable to interpret the meaning of information regarding unfamiliar businesses.
Thus, in a changing world, the winner is a company whose dominant coalition is able to learn faster than its competitors. However, the dominant logic can work only as long as changes in the underlying logic are not necessary. Also, an organisation anticipates that the environment will be very similar to the current and the past environment, not necessarily the future environment. The dominant logic is like a local optimum that represents an equilibrium solution. However, its is not a global optimum and when conditions change a new local optimum (new dominant logic) must be developed quickly.
People who are close to the new technologies, competitors, and customers appear as managers in the middle. They have the information, urgency and motivation to act. They are also the ones who have direct control over people and physical resources. Top managers, in an era of discontinuous change are rather removed from the new and emerging competitive reality.
For example, how many top managers have personal experience of the internet, video games, fantasy football and chat rooms? Middle managers must take more responsibility for developing a strategic direction and more importantly in making decentralised decisions consistent with the road direction of the company. The involvement of middle managers is a critical element of the strategy process.
Finally, creating the future is a task that involves more than the traditional stand-alone company. Managers have to make alliances and collaborate with suppliers, partners and often competitors to develop new standards. Alliances and networks are an integral part of the total process. This requirement is so well understood that it is hardly worth elaborating here. Resources available to the company are dramatically enhanced through alliances and networks.
Competing in the Future
Prahalad talks about the future strategy that a company should adopt after having a thorough study of the existing conditions prevailing in the industry as well as the firm itself. For this, he opines that a company should look towards the future and assess its ability to shape that future. Companies can fall along a continuum in this context. One extreme is related to the maintenance of the status quo or a reactive policy while the other extreme depicts a desire to change proactively. If the company devotes too much time and energy to preserving the past, it will compromise its own future. According to Prahalad, managers devote less than 3% of their time to building the corporate perspective for the future.
Restructuring and Reengineering
Both "Restructuring and the Reengineering are important tasks, but they have more to do with shoring up today's business rather than with building tomorrow's industries. When faced with competitiveness problems like stagnant growth, declining margins, etc. most of the executives resort to the painful task of restructuring, which typically includes downsizing, overhead reduction and employee empowerment. With low growths, companies soon find it impossible to support their traditional R&D budgets and their investment plans. Prahalad says that although restructuring may perhaps be inescapable, it has destroyed lives, homes and communities in the name of efficiency and productivity.
In today's companies, the focus is on the effective use of resources, he launches a tough program to improve return on investments (ROI). Now, ROI consists of two components, the numerator - net income - and the denominator - investments or net assets. He knows that improving the net income is likely to be a hard task and so turns on to the denominator, which he is sure, will bring the fastest and surest result. This results in a spurt of downsizing, divestment and delaying. Just as any company that cuts the denominator and maintains revenues will reap productivity gains, so too will any company that succeeds in increasing its revenue stream with a slower growing or a constant capital and employment base. Although the first approach may be necessary, Prahalad says that the second is more desirable.
Thus Prahalad is trying to say that it is the means and not the result itself that matters more for the future competitive priorities. Restructuring rarely results in fundamental business improvements. At best, it buys time.
Downsizing attempts to correct the mistakes of the past, not to create the markets of the future. Recognising that restructuring is a dead end, smart companies move to reengineering. Reengineering offers at least the hope, if not always the reality, of getting better as well as getting leaner. Yet in many companies, reengineering is more about catching up than getting out in front and Prahalad says that catching up is not enough. While managers in the US, in the 1980s, thought that quality would be the main source of competitive advantage in the next millennium, Japanese managers had a primary goal of creating new businesses and products. According to Japanese managers, quality would just be the necessity of market entry, but not a differentiator.
The Quest for Foresight
Organisational transformation must be driven by a point of view about the future of the industry. Prahalad says that the first task is to develop a process for pulling together the collective wisdom within an organisation. To create the future requires industry foresight. "If managers don't have detailed answers to the questions about the future, their companies can't expect to be market leaders", says Prahalad. Industry foresight is based on deep insights into trends in technology, demographics, regulations and lifestyles, which can be harnessed to rewrite industry rules and create new competitive space.
Given that the change is inevitable, the real issue for managers is whether the change will happen belatedly in a crisis atmosphere following that by the competitors or with foresight in a calm and considered manner; whether transformation will be spasmodic and brutal or continuous and peaceful; whether the transformation agenda will be set by the company's more transient competitors or by its own point of view.
"It is for the top managers to realise that to get ahead of the industry change curve, the real focus should be the opportunity to compete for the future."
Developing Core Competencies
In the short run a company's competitiveness derives from the price/ performance attributes of current products. But in the long run, competitiveness derives from an ability to build at lower cost and more speedily than competitors, the core competencies that spawn unanticipated products.
In the past top executives were judged on their ability to restructure, declutter and delayer their corporations. Today, they'll be judged on their ability to identify, cultivate and exploit the core competencies that make growth possible. And to do this, they'll have to rethink the concept of corporation itself.
The critical task for top management is to create an organisation capable of creating products that customers need but haven't yet imagined. The first step towards this immensely difficult task is for top management to assume responsibility for the company's competitive nature. The notion of a "reciprocal responsibility" is important in this context. While demanding commitment from workers, the top management has to lead and clearly articulate its own commitment and a willingness to accept responsibility to the Strategic Intent and an understanding of the stretch challenges.
A committee of top managers is needed to oversee the development of core products and core competencies. Co-ordination groups and committees that cut across the interests of individual businesses are needed.
Core competencies are collective learning in an organisation, especially how to co-ordinate diverse production skills and integrate multiple streams of technologies. It is about harmonising streams of technology, organisation of work and the delivery of value. Core competence is communication, involvement, and a deep commitment to work across organisational boundaries. It involves many levels of people and all functions. Competencies are the glue that binds existing businesses. They guide patterns of diversification and market entry. What seems to be an extremely diversified portfolio of businesses belies a few shared core competencies.
In contrast, other businesses have failed because the top management was overly committed to individual business units. Such a mindset inevitably causes individual businesses to depend on external sources for critical components. But these are not just components, they are core products that contribute to the competitiveness of a wide range of end products. They are physical embodiments of core competencies.
How do we identify a Core Competence?
According to Prahalad, a core competence should:
To sustain leadership in the chosen core competence areas, a company must maximise its world-manufacturing share in core products ("the tangible link between core competence and end products"). A dominant position in core products allows a company to shape the evolution of application and end markets.
If a company is winning the race to build core competencies, it will almost certainly outpace its rivals in new business development. Pre-empting competitors in the development of new markets requires an early start to building core competencies.
Developing Strategic Architecture
According to Prahalad, "fragmentation of core competencies becomes inevitable" when a company's information & communication systems, career paths, reward systems and processes of its strategy development do not transcend SBU lines. " A strategic architecture is a roadmap of the future that identifies which core competencies to build and their constituent technologies".
Some fundamental Questions that a company has to answer:
The strategic architecture makes resource allocation priorities transparent to the entire organisation and therefore helps allocation decisions.
Core competencies are corporate resources and may be reallocated by corporate management. The positive contribution of the SBU manager should be made visible across the company. Co-operative SBU managers should be celebrated as team players. Competence carriers should be regularly brought together from across the corporation to trade notes and ideas, build a strong feeling of community among these people. Loyalty should be to the integrity of the core competence area they represent. Competence carriers may be encouraged to discover new market opportunities.
Quality in Software: Relevant?
In their article "The New Meaning of Quality in the Information Age", Prahalad and Krishnan opine that the rise of software as an industry has led to the redefinition of quality as applied to software products as against traditional products. Also the Y2K scare and increasing use of software in business has led to companies paying more attention to the quality of their information systems.
The company's information systems determine "the nature of experience that customers, employees and suppliers have with the company, its products, services and operations. The speed and accuracy of managerial decision-making also depends on the kind of systems in place. Unfortunately, there is no agreement on what determines quality in software. The new view of quality synthesises conformance, service and innovation approaches to assess an organisation's IT infrastructure.
A company's IT infrastructure needs to change as the managers learn about and adjust to evolving domains. However, the software applications, while catering to the functional domain, should be stable, evolvable and flexible.
In this era of change, there is no easy recipe for the success of business organisations. The only way that companies can survive are by realising the importance of revitalising themselves - both from within and without. Towards this purpose, any firm has to stretch its goals by creating a Strategic Intent that the entire organisation identifies with and subscribes to. While global leadership cannot be planned for, it does not come by accident. Managers must learn to make decisions that are outside the range of conventional "Strategic planning". Developing core competencies is an essential part of the path to achieving the firm's strategic intent. Thinking globally, companies must identify the fields in which it needs competencies - not only with the current products but also with an eye on the future. Also, the speed at which decisions need to be made is bound to increase in the coming years. Companies must learn to harness the power of the byte and the Internet to speed up decisions. Finally, a company must also look to its alliances - with suppliers, with competitors and customers - with a view to co-opting them as the company moves on the road to achieving global excellence.
Subramanian Ramachandran is a Post Graduate in Management(MBA) preparing for his Doctorate. He has experience in business - in general management, operations and systems and his key interest area is change management. Contact Subramanian by e-mail: email@example.com .