Strategy

Today's knowledge and service-based economy presents opportunities for well-run companies to increase profits through strategic outsourcing.

A methodology to aid in anticipating and preempting the emergence of market newcomers.

Determining which business activities to bring inside a firm and which to outsource is a critical strategic decision. Firms that bring in the wrong business activities risk losing strategic focus; those that fail to bring the right business activities within their boundaries risk losing their competitive advantage. A well-developed approach for determining a firm's boundary, called transactions cost economics, specifies the conditions for managing a particular economic exchange within an organizational boundary and the conditions for choosing outsourcing. A popular version of transactions cost economics requires managers to consider a single characteristic of an economic exchange -- its level of transaction-specific investment. Three concepts aid in understanding transactions cost economics as applied to firm boundary decisions: governance (the mechanism through which a firm manages an economic exchange), opportunism (taking unfair advantage of other parties to an exchange), and transaction-specific investment (any investment that is significantly more valuable in one particular exchange than in any alternative exchange). Firms can use governance mechanisms to mitigate the threat of opportunism. Traditional transactions cost economics does not focus on the capabilities of a firm or its potential partners, even though economic exchanges involve (1) cooperating with firms that possess critical capabilities, (2) developing capabilities independently, or (3) acquiring another firm that already possesses needed capabilities. The author describes the conditions under which a firm's decisions on managing its business activities should be affected by its capabilities and those of its partners. When these conditions hold -- conditions particularly common in rapidly evolving high-technology industries -- firms should make boundary decisions that differ significantly from what would be suggested by traditional transactions cost analysis.

Viewing the evolution of strategic management as ten "schools" of practice, Mintzberg and Lampel explore whether these perspectives represent fundamentally different processes of strategy making or different parts of the same process. Unwilling to be constrained by either definition, the authors point out that some schools clearly are stages or aspects of the strategy formation process. Under certain circumstances, such as during start-up or under dynamic conditions when prediction seems impossible, the process may tilt toward the attributes of one school or another. Thus, identifiable stages and periods exist in making strategy -- not in any absolute sense, but as recognizable tendencies. Despite this, the inclination has been to favor the interpretation that the schools represent fundamentally different processes. In cautioning against adopting a pseudoscientific theory of change in strategy formation, Mintzberg and Lampel note with optimism that recent approaches to strategy formation cut across the various schools of practice in eclectic ways. Some of the greatest failings of strategic management, they say, occur when managers take one point of view too seriously. Ideas and practices that originate from collaborative contacts between organizations, from competition and confrontation, from recasting of the old, and from the sheer creativity of managers are driving the evolution of strategic management today. Mintzberg and Lampel advise scholars and consultants to get beyond the narrowness of the ten schools to learn how strategy formation -- which combines all ten schools and more -- really works. The goal is better practice, not neater theory.

Strategy development requires that managers predict the future in an inherently uncertain world. Many mistakenly do so on the basis of perceived historical patterns that, according to recent scientific understanding of complex systems, do not have great predictive value. Complex systems consisting of many dynamically interacting parts are difficult and often impossible to predict because they exhibit punctuated equilibrium (periods of relative quiescence interspersed with episodes of dramatic change) and path dependence (small, random changes at one point in time that lead to radically different outcomes later). What, then, is a strategist to do? Beinhocker recommends cultivating and managing populations of multiple strategies that evolve over time, because the forces of evolution acting on a population of strategies make them more robust and adaptive. Because both biological evolution and business evolution are complex adaptive systems, to better understand business strategy, managers can employ a tool that scientists use to better understand biological evolution. An imaginary grid called a fitness landscape is an aid to comprehending how evolution increases the odds of survival in nature. In general, the rules for success in fitness landscapes also apply to business problems, though their specific application differs significantly by company and situation. The lessons of fitness landscapes offer an untraditional picture of what a company needs to develop a successful strategy. Because shifting an organization to this way of thinking about strategy is not easy, a company can take six actions to reinforce the robust, adaptive mind-set: -- Invest in a diversity of strategies. -- Evaluate strategies as real options that may open future possibilities, and remove biases that undervalue experimentation and flexibility. -- Diversify strategies along three dimensions -- time frame, risk, and relatedness to current business. -- Ensure that the strategies include sufficiently diverse initiatives in promising areas. -- Check that selection pressures on the firm's population of strategies reflect those operating on the population of strategies in the marketplace. -- Use venture capital performance metrics.

Whereas companies once focused primarily on outplaying competitors at a fixed game, now their central focus is on understanding the relationship between an environment's turbulence and their choice of strategy. By doing so, managers can develop better strategies that lead to and maintain strategic supremacy. This process begins with analysis of a firm's current competitive environment, followed by an understanding of the rules of the game in that industry. If a firm lacks the capabilities to succeed in the environment or wishes to challenge the status quo to improve its position, it might consider changing the rules. The ability to establish the rules of the game to control evolution is one facet of strategic supremacy. The player with strategic supremacy shapes the field and basis of competition for its rivals. Studies of hypercompetitive environments provide insight into the inextricably intertwined relationships among disruption, patterns of turbulence, the rules of competition, and definition of the playing field. Why is changing the environment important? Some strategies may work well in one environment but not in another. For example, strategies that are successful in fairly stable environments may be a liability in unstable ones. Whereas profits previously depended on stability and lack of rivalry, profits in hypercompetitive environments like those of the 1990s result from increased rivalry that focuses on defining a new basis of competition for customers. Extending the insights gained from hypercompetitive markets, D'Aveni suggests that turbulence creates competitive environments characterized by distinct patterns of disruption determined by frequency and their competence-destroying or competence-enhancing nature. The four competitive environments (equilibrium, fluctuating equilibrium, punctuated equilibrium, and disequilibrium) require different strategies. The goal of incumbent leaders and challengers in each environment is to achieve strategic supremacy by controlling the degree and pattern of turbulence. But, because rivals and customers are never content with the status quo, the battle for strategic supremacy is continuous.

Traditional strategic planning draws from forecasts of parameters like market growth, prices, exchange rates, and input costs that managers are unable to predict five or ten years in advance with any accuracy. Nevertheless, some firms meticulously construct strategic plans on the basis of forecasting that, in all probability, will be wrong. These companies tend to overinvest in building assets and capabilities that are highly specific to a particular strategy, relative to what would be optimal if planning explicitly acknowledged that forecasts would likely be off the mark. While companies may focus on executing a single strategy at any particular time, they must also build and maintain a portfolio of strategic options on the future. They must invest in developing new capabilities and learning about new, potential markets. By establishing a set of strategic options, a company can reposition itself faster than competitors that have focused on "doing more of the same." Williamson discusses a strategy that embodies a coherent portfolio of options, sketches a process managers can use to develop this kind of strategy, and explains how planning and management opportunism can reinforce each other. Creating a portfolio of future options involves: -- Uncovering the hidden constraints on a company's future -- both capability constraints and market-knowledge constraints. -- Establishing processes to minimize the costs of building and maintaining the portfolio. -- Optimizing the portfolio by considering (1) alternative capabilities that could profitably meet customer needs and (2) future markets or new customer behaviors. -- Combining planning and opportunism, both of which are essential to the proactive creation of strategic options. Williamson cautions that a company must keep tactical opportunism within the bounds of its overall direction, ruling out options that might cause it to deviate from its long-term mission. Short-term opportunism must determine which precise option a company chooses to exercise.

Managers typically assess what competitors do and strive to do it better. Using this approach, companies expend tremendous effort and achieve only incremental improvement -- imitation, not innovation. By focusing on the competition, companies tend to be reactive, and their understanding of emerging mass markets and changing customer demands becomes hazy. During the past decade, Kim and Mauborgne have studied companies of sustained high growth and profits. All pursue a strategy, value innovation, that renders the competition irrelevant by offering new and superior buyer value in existing markets or by enabling the creation of new markets through quantum leaps in buyer value. Value innovation places equal emphasis on value and innovation, since innovation without value can be too strategic or wild, too technology-driven or futuristic. Hence, value innovation is not the same as value creation. Although value creation on an incremental scale creates some value, it is not sufficient for high performance. To value innovate, managers must ask two questions: "Is the firm offering customers radically superior value?" and "Is the firm's price level accessible to the mass of buyers in the target market?" A consequence of market insight gained from creative strategic thinking, value innovation focuses on redefining problems to shift the performance criteria that matter to customers. Kim and Mauborgne ask five key questions contrasting conventional competition-based logic with that of value innovation and describe the type of organization that best unlocks its employees' ideas and creativity. Rather than follow conventional practices for maximizing profits, successful value innovators use a different market approach that consists of (1) strategic pricing for demand creation and (2) target costing for profit creation. Value innovation as strategy creates a pattern of punctuated equilibrium, in which bursts of value innovation that reshape the industrial landscape are interspersed with periods of improvements, geographic and product-line extensions, and consolidation.

Existing management frameworks do not describe all the ways that companies are competing successfully today. When queried, senior executives concurred that conventional theories and business practices do not provide the necessary guidance and support for decision making in a world of change, complexity, and uncertainty. The authors' research on more than 100 companies is the basis of their Delta model which (1) defines strategic positions that reflect fundamentally new sources of profitability, (2) aligns these strategic options with a firm's activities and provides congruency between strategic direction and execution, and (3) introduces adaptive processes capable of continually responding to an uncertain environment. They describe three strategic options having three distinct economic perspectives -- best product, customer solutions, and system lock-in. These strategic options provide a mechanism for defining the vision of a business. Outstanding real-life business successes achieved through strikingly different strategies and drawn from fundamentally different sources of profitability illustrate the nature of these strategic positions. The Delta model links strategy with execution by selecting a distinctive strategic position and then integrating it with a company's collective processes. The authors identify three fundamental processes that are always present and are the repository of key strategic tasks: operational effectiveness, customer targeting, and innovation. Strategy must adapt continuously, and implementation must respond to market changes and to greater understanding of the market that becomes apparent only during implementation. A firm's actions must be aligned with its strategic position, and the results must give feedback for adapting the strategy. The authors outline common responsive mechanisms for obtaining feedback from the adaptive processes and suggest metrics that are essential to adaptation. To anticipate the future, it is necessary to track performance against the adaptive processes, which are the initiatives enabling the strategy. The Delta model provides a rich overall framework that integrates a firm's options and activities without running the risk of oversimplifying the context in which it makes decisions.

Global business today requires leaders to be like explorers, guiding their organizations through unfamiliar and turbulent environments. With markets, suppliers, competitors, technology, and customers around the world constantly shifting, traditional leadership models no longer work. The authors' three-year study across Europe, North America, and Asia indicates that companies seek more global leaders and desire future global leaders of higher caliber and quality. To achieve these goals, organizations must understand the characteristics of global leaders and what they can do to develop these leaders. The research results reveal that every global leader needs certain core qualities: exhibiting character, or the capacity to build relationships with people from different backgrounds and to act with high ethical standards; embracing duality, or knowing when and whether to act and initiate change, depending on country or region; and demonstrating savvy, or recognizing worldwide market opportunities and understanding firm capabilities. Underlying each of these characteristics must be inquisitiveness -- a sense of adventure and a desire to experience new things. The authors' research further shows that global leaders are born and then made. Four strategies are particularly effective in developing global leaders: foreign travel, with immersion in the country's way of life; the formation of teams in which individuals with diverse backgrounds and perspectives work together closely; training that involves classroom and action learning projects; and overseas assignments, which serve to broaden the outlook of future global leaders.