STRATEGY—FROM MARTIAL ART TO MARKETS—THE WHO
Historically, one of the first acknowledged uses of strategy in business happened when Socrates counseled the Greek militarist, Nichomachides, after he had lost an election for the position of general to the Greek businessman, Antisthenes. Comparing the duties of a general with that of a businessman, Socrates demonstrated to Nichomachides that both instances required planning how to use one's resources to meet objectives. Unfortunately, this viewpoint was apparently lost with the fall of the Greek city-state and was not resurrected until after the beginnings of the Industrial Revolution.8
Table 1.1 portrays the development of modern strategic thought. The first vestiges of what would become modern strategy resulted as an outcome from the then newly emerging vertically integrated, multidivisional corporations of the late 1800s and early 1900s. These corporations made large investments in manufacturing and marketing and in managerial hierarchies to coordinate those functions. Over time, the largest of these companies managed to alter the competitive environment within their industries and to even cross industry lines.9 The need for a more formal approach to corporate strategy was first brought to the forefront by top executives of these large, vertically integrated and multidivisional corporations. Among the most notable were Alfred Sloan, chief executive of General Motors from 1923 to 1946, who devised a strategy explicitly based upon the perceived strengths and weaknesses of its competitor, Ford Motor Company.10 Chester Barnard, a top executive with AT&T, argued in the 1930s that managers need to pay especially close attention to "strategic factors," which depend on "personal or organizational action."11,12
It wasn't until after World War II that the concept of strategy, as related to business, began to move to the forefront. It was at this time that business moved from a relatively stable, if not static, environment into one comprising increasingly rapid change and competition. Igor Ansoff, considered by some as the father of modern strategic thought, has attributed this evolution to two significant factors: first, the marked increase in the rate of change within and between firms, and second, the accelerated application of science and technology to the process of management.1 3 This acceleration in the rate of change places a premium on the ability to anticipate change, take advantage on new opportunities, and to pro-actively avoid threats to the firm. New technologies spawned interest in,
Table 1.1. Development of Modern Strategic Thought
and ultimately acceptance of, analytical and explicit approaches to decision making. This resulted in the increasing ability of management to deal with the expanding uncertainties of the future.14
Viewing the development of strategic thought in a loose chronological order brings us to Von Neumann and Morgenstern, who were among the first modern writers to relate the concepts of strategy to business in their opus, Theory of Games and Economic Behavior.15 In that work, they defined strategy as a series of actions by the firm decided upon according to the particular situation facing the firm. Since the release of Theory of Games and Economic Behavior, numerous other writers have developed subsequent concepts and theories of strategy.
In his work, The Practice of Management, Peter Drucker argued that rather than being passive and adaptive, management is about taking action to achieve desirable results. He noted that prevalent economic theory had long viewed markets as impersonal forces, beyond the control of the individual entrepreneur and organization. With the emergence of the vertically integrated, multidivisional corporation, managing "implies responsibility for attempting to shape the economic environment, for planning, initiating, and carrying through changes in that economic environment, for constantly pushing back the limitations of economic circumstances on the enterprise's freedom of action."1 6 In Drucker's view, strategy is about analyzing the present situation and changing it if necessary. Underlying this view is the need for finding out what one's resources are or what they should be.17
Philip Selznick first introduced the concept of matching the organization's internal factors with the external environment in 1957 with the publication of Leadership in Administration: A Sociological View.18 This core idea would later be developed by E. P. Learned, K. R. Andrews and others at the Harvard Business School General Management Group into what has more commonly become known as SWOT (strengths, weaknesses, opportunities, and threats).19
Alfred Chandler expressed the importance, for the first time, of coordinating the various and often disparate aspects of management under one all-encompassing strategic umbrella. Prior to Chandler's work, the various functions of management were often separated with little, or no, overall coordination or strategy. What interactions existed between functions or departments were typically handled by a boundary position wherein one or two managers relayed information back and forth between the departments. Chandler further emphasized the importance of taking a long-term perspective when looking to the future. His work Strategy and Structure20 posited that a long-term coordinated strategy was required in order to give a company structure, direction, and focus. Chandler viewed strategy as the determiner of the basic long-term goals of an organization, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals.
Igor Ansoff built upon the work of Chandler and others to develop the keystone approach to the emerging field of corporate strategy through a framework of theories, techniques, and models. In his book Corporate Strategy: An Analytical Approach to Business Policy for Growth and Expan-sion,21 Ansoff presents a grid of elements that compare market penetration, product development, market development, and integration and diversification. By understanding and using these strategic elements, he felt management could systematically prepare for future opportunities and challenges. In this work, he developed "Gap" analysis, which posits that management must try to understand the gap between where they currently are and where they would like to be, and then develop what he described as "gap reduction actions."
Prior to Ansoff, there was little in the way of guidance for companies on how to plan for, or make decisions about, the future. Planning was traditionally based upon existing budgeting systems, used for annual budgets, and was intended for just a few years into the future. This approach largely ignored strategic issues. However, as competition increased, along with greater interest in acquisitions, mergers and diversification, and higher turbulence in the business environment, strategic issues could no longer be overlooked. According to Ansoff, strategy development was essential and required the company to systematically anticipate future environmental challenges, and to develop plans to appropriately respond to those challenges. To Ansoff, strategy is a rule for making decisions determined by product/market scope, growth direction, competitive advantage, and synergy.22
If Igor Ansoff is considered the father of modern strategic thought, then Michael Porter is its "rock star." An economist by training, Porter made his mark in the area of strategy with the publication of "How Competitive Forces Shape Strategy."23 His principal and enduring contribution to the field of strategy is the concept of the five forces analysis, where he identifies the forces that shape a firm's strategic environment. The five forces analysis is similar to Selznick's SWOT analysis with the structure and purpose focusing on the external forces that shape a company's strategic environment. This approach portends to provide an approach for a company to obtain a sustainable competitive advantage. Where Chandler presented the concept of structure following strategy, Porter extended it by introducing a second level; organizational structure follows strategy, which in turn follows industry structure.
In addition to the five forces, Porter contributed to the strategic knowledge base by writing about the generic strategies, the value chain, strategic groups, and clusters. Porter's work on generic strategies focuses on the interactions between cost-minimization strategies, product-differentiation strategies, and market-focus strategies. Although he did not conceive these terms or concepts, his work does highlight the importance of choosing one over another rather than trying to position the company between them. Porter proposes that a firm will only be successful to the extent that it contributes to the industry's value chain. As such, management must look at the operations of their companies from the viewpoint of the customer. Every operational facet of the company needs to be examined in light of the value it adds in the eyes of the customer. This view is grounded in Porter's economic training of supply and demand, where the buyer will purchase a given quantity at a given price, where the price differential is equal to the perceived incremental added value of the product or service.
A principal criticism of Porter's view of the firm is that it is based on a rather static perception of the world, with the size of markets being fixed. In essence, companies compete in a zero-sum game where one company's gain in market share comes at the loss of another company's.24
As the nature of the economy and its technological underpinnings began to change so did perceptions of strategy and strategic activities. One of the earliest thinkers who reexamined the paradigm of strategy was Kenichi Ohmae. Ohmae's view was that successful strategy stems from creative minds, not from some rote formula. In his seminal work, The Mind of the Strategist, published in 1982, Ohmae wrote that successful strategy comes from a thought process that is creative and intuitive rather than simply from step-by-step analysis. He defines strategy as the way a corporation attempts to differentiate itself positively from its competitors, using its relative strengths to better satisfy customer needs. He goes on to assert that strategy is really no more than a plan of action for maximizing one's strengths against the forces at work in the environment.25 Ohmae focuses on how organizations allocate and utilize resources. To be effective, a company's strategy should be difficult to imitate, and to achieve this, the company must either develop a completely new product or make use of a position of relative superiority. Jay Barney, a strong proponent of the criticality of the organization's internal resources, would later extend this view and suggest strategy as assembling the optimum mix of resources, including technological, human, and supplier relations, and then configuring them in unique and sustainable ways.26 This is what is known as the resource-based view.
The delineation between strategy and strategic planning is exemplified by the works of Henry Mintzberg. In Crafting Strategy,27 Mintzberg likens the strategic process to a craft. He presents the position that strategies are not necessarily deliberate acts, but that they can also emerge through circumstances; and that they can form as much as they are formulated. He also goes on to expand upon the old adage "those who cannot remember the past are condemned to repeat it,"28 with his assertion that organizations must make sense out of the past if they hope to manage the future. He asserts that only by understanding the patterns of past behavior does an organization come to know its capabilities and potential.
To Mintzberg, strategy provides a vehicle for organizations and individuals to examine their internal and external worlds.29 Finally, Mintzberg's contention that because analysis is not synthesis—implying that strategic planning is not strategy formulation—has been the source of much intellectual discourse, particularly by Ansoff.30
Continuing along the line of thought started by Ohmae and Mintzberg, Gary Hamel and C. K. Prahalad question the more traditional approach to strategy development. In "Competing for the Future,"31 they suggest that companies need to spend less time talking about strategy and planning and more time thinking about strategizing, which entails the concepts of "strategic intent," "strategic architecture," "industry foresight," and "core competencies." The last of these may be the best known and most important concept to come from their work.32 Core competencies are those one or two key things a company does better than any of its competitors.
Around the same time that Hamel and Prahalad were writing about core competencies, Michael Hammer and James Champy published Re-engineering the Corporation,33 where they proposed that the internal resources of the company need to be restructured around whole processes rather than just tasks. They asserted the benefits of having a team of people see a project through, from inception to completion. They posited that this approach avoids functional silos where isolated departments seldom communicate with each other, as is so often found in organizations. They felt that this approach had the benefit of eliminating waste due to functional overlap.
The next logical step in the evolution of strategic thought was presented by Peter Senge. He examined the impact of the Information Age upon a company's performance. In "The Fifth Discipline,"34 Senge presents the theory that a company's ability to gather, analyze, and use information is necessary for success in the Information Age. In what is an extension of the work of his predecessors, Senge proposes that an organization needs a structure through which people can continuously expand their capacity to learn and be productive—new patterns of thinking are nurtured, collective aspirations are encouraged, and people are encourage to see the "whole picture" together. Thinking strategically starts with reflection on the deepest nature of the undertaking and on the central challenge that it possesses.35 The most commonly cited barrier to the implementation of what Senge proposes is that few organizations come close to having the characteristics that he identifies with a learning organization. However, with the growth in the focus of knowledge management in an increasingly globalized economy, an organization might begin to increase focus and attention on the development and growth of its employees, who primarily create the intellectual capital of the organization.
The list of contributors to the development and advancement of the study of strategy is extensive. The preceding group is by no means intended to be all inclusive. Rather it attempts to touch upon those whose contributions, some argue, had the most impact, if by no other measure than their respective popularity and notoriety.
The preceding thinkers and authors shaped the discussion on strategy during the last half of the 20th century. Their respective contributions are indisputable and provide the foundation for any further discussion regarding strategy. However, with the transition from the 20th to the 21st century came a transformation.
The age of the Internet, the networked world, has brought about a major, some suggest a tectonic, shift in the way commerce is viewed and conducted. What became known as the "dot-com" world defied long-established economic principles. The rush was to "Web enable" the enterprise in some manner regardless of its economic value. The mantra of the time, to quote the movie Field of Dreams, was "if you build it they will come." However, the era of the "dot-com" quickly became the age of the "dot-gone." Although visibility on the Web was, and is, increasingly important, profits still matter. Carl Shapiro and Hal R. Varian in their work Information Rules: A Strategic Guide to the Network Economy,36 stress that you ignore basic economic principles at your own risk. Technology changes, but economic laws do not. The book addresses a number of issues, including pricing and versioning information, rights management, recognizing and managing lock-in, switching costs, and how to account for government policy and regulation in strategy development.37
Although Shapiro and Varian examined the impact of the Internet, another phenomena had been entrenching itself in the landscape of commerce. Historically, capital was viewed as a physical or financial item—it manifests itself as building and equipment, or what could be found in corporate balance sheets. Beginning in the 1990s, the emergence of a more elusive form of asset, the intangible asset often identified as intellectual capital, began to command attention. Senge addressed the issue in The Fifth Discipline: The Art and Practice of the Learning Organization,38 and in 1994 Drucker wrote that "the true investment in the knowledge society is not in machines and tools but in the knowledge of the knowledge worker."39
Intellectual Capital by Thomas Stewart40 serves as a guide to understanding and managing intangible assets. Steward posits that merely understanding what intellectual capital comprises is only part of the issue. The real value of intellectual capital, and other intangible assets, comes from the organization's ability to capture and deploy these assets. The effective strategic utilization of intellectual capital can serve as a competitive differentiator in the market. "Knowledge assets, like money or equipment, exist and are worth cultivating only in the context of strategy. You cannot define and manage intellectual assets unless you know what you to do with them."41,42
It becomes increasingly evident that the field of strategy is a discipline that is still evolving and will continue to evolve to keep pace with the dynamic nature of modern commerce. There are no clear indications as to where strategy may be heading over the coming years. As Yogi Berra once famously said, "The future ain't what it used to be." There does appear to be a growing consensus in the strategy field that the world is unpredictable and by extension, the future is inherently unknowable because of the chaotic nature of events.
An area of potential applicability is the field of chaos theory. Chaos theory examines the underlying behaviors of systems, which are ruled by simple physical laws, but where the actual events appear so unpredictable they might as well be random. The field studies the complex relationships that underlie the "everyday" systems we encounter and observe in the real world. The greatest contribution of chaos theory is the revelation that even simple systems seem to create extraordinarily difficult problems of predictability. The universe is chaotic, ruled by entropy, and a never-ending tendency toward disorder. Long-term planning has been notoriously ineffective in predicting the future. In fact, detailed planning systems, and their underlying economic support systems, cannot be effective because of lack of certainty about what will happen next. Strategy needs to borrow from the physical sciences, most notably physics and biology. These lenses stress adaptability, flexibility, and speed of change. The old order of static positioning and long-term competitive advantage are no longer adequate. It is not just "running faster" but "thinking faster" that makes a difference.43