Strategy is a Greek derivation. It involves setting up a goal which is followed by mobilization of scares resources then execution. Initially, it was associated with military. In 1960s US-based scholars adopted it in business policy. Later on this term emerged as an crucial part of management theory and managerial practices. In this backdrop, the basic purpose of this blog is to offer a nuanced explanation of STRATEGY as a concept and its relevance.
In Competition & Strategy Working Paper Series by Harvard Business School, Pankaj Ghemawat wrote, “The organizational challenges involved in World War II were a vital stimulus to strategic thinking. The problem of allocating scarce resources across the entire economy in wartime led to many innovations in management science. New operations research techniques (e.g., linear programming) were devised, which paved the way for the use of quantitative analysis in formal strategic planning. In 1944, John von Neumann and Oskar Morgenstern published their classic work, The Theory of Games and Economic Behavior.
This work essentially solved the problem of zero-sum games (most military ones, from an aggregate perspective) and framed the issues surrounding non-zero-sum games (most business ones). Also, the concept of “learning curves” became an increasingly important tool for planning. The learning curve was first discovered in the military aircraft industry in the 1920s and 1930s, where it was noticed that direct labor costs tended to decrease by a constant percentage as the cumulative quantity of aircraft produced doubled. Learning effects figured prominently in wartime production planning efforts.”
Scholars say that World War II encouraged the management to think about strategy in more organized way. But modern business strategy associated with management studies in 1960s. Such approach attracted attention of academia and scholars from various leading universities especially from USA and they postulated various concepts.
Alfred Chandler: Strategy is the determination of the basic long-term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.
Michael Porter: The essence of formulating competitive strategy is relating a company to its environment.
McKinsey & Company: An integrated set of actions designed to create a sustainable advantage over competitors.
Alfred Chandler defined strategy in early 1960 and recognized importance of coordinating management. Several other thinkers and practitioners defined and contributed. Harvard Business School played and is still playing an important role in developing strategy as concept. Initially it was part of their well-known management course on business policy. Industries notes and case studies on several business become part of course curriculum.
In order to understand various business strategies, there is a need to shade light on various frameworks and tools which was developed by various scholars and institutions in several decades. These are:
Concepts & Tools
Peter Drucker(November 19, 1909 – November 11, 2005)
Alfred Chandler (September 15, 1918 – May 9, 2007)
Michael Porter (May 23, 1947)
Henry Mintzberg (September 2, 1939)
Bruce Henderson (1915–1992)
Jim Collins (1958)
Clayton Christensen (April 6, 1952)
Frameworks & Tools
SWOT Analysis: In 1957, Philip Selznick postulated distinctive competence. Later on Kenneth R. Andrews worked on it and emerged as a SWOT analysis.
In 1960s, SWOT Analysis emerged as an indispensable part of the business strategy for many corporations. It comprises four things. These are strength, weaknesses, opportunities and threats of a venture. Several new concepts challenged it.
Balanced Scorecard: Art Schneiderman coined the term – balanced scorecard. Robert S. Kaplan and David P. Norton developed concept of balanced scorecard and initially both introduced balance scorecard in HBR in 1992. Later on, they published a book titled Balanced Scorecard. After its introduction, several companies adopted it as an part of their strategy.
In a paper of Harvard Business Review (Conceptual Foundations of the Balanced Scorecard), Robert S. Kaplan wrote, “The BSC retains financial metrics as the ultimate outcome measures for company success, but supplements these with metrics from three additional perspectives – customer, internal process, and learning and growth – that we proposed as the drivers for creating long-term shareholder value.”
A Balanced Scorecard defines what management means by “performance” and measures whether management is achieving desired results. The Balanced Scorecard translates Mission and Vision Statements into a comprehensive set of objectives and performance measures that can be quantified and appraised. These measures typically include the following categories of performance: Financial performance (revenues, earnings, return on capital, cash flow)
Customer value performance (market share, customer satisfaction measures, customer loyalty)
Internal business process performance (productivity rates, quality measures, timeliness)
Innovation performance (percent of revenue from new products, employee suggestions, rate of improvement index)
Employee performance (morale, knowledge, turnover, use of best demonstrated practices)
Competitive Advantage: It is developed by Michael Porter – a professor at Harvard Business School, USA. Porter is a prolific write on competitiveness and strategy in the world. He authored a book on competitive advantage in 1985 and its title was same.
In Competitive Advantage, Michael Porter wrote, “Competitive advantage is at the heart of a firm’s performance in competitive markets. After several decades of vigorous expansion and prosperity, however, many firms lost sight of competitive advantage in their scramble for growth and pursuit of diversification. Today the importance of competitive advantage could hardly be greater. Firms throughout the world face slower growth as well as domestic and global competitors that are no longer acting as if the expanding pie were big enough for all.”
Value Chain: Value chain is an important concept in business studies which was shaped and popularized by Michael Porter –a leading management guru based in USA.
According to Porter, “ The value chain is a theory of the firm that views the from as being a collection of discrete but related production functions, if production are defined as activities. The value chain formulation focuses on how these activities create value and what determines their cost, giving the firm considerable latitude in determining how activities are configured and combined.”
Value chain of firms in an industry differ, reflecting their histories, strategies and success at implementation.
Experience Curve: The experience curve is developed by Boston Consulting Group and it remains valid in various industries. It’s centered on the relationship between production experience and costs, proved a valuable predictor of competitive dynamics through the 1970s.
In BCG Classics Revisited, Martin Reeves, George Stalk and Filippo L. Scognamiglio Pasini stated, “The experience curve is one of BCG’s signature concepts and arguably one of its best known. The theory, which had its genesis in a cost analysis that BCG performed for a major semiconductor manufacturer in 1966, held that a company’s unit production costs would fall by a predictable amount—typically 20 to 30 percent in real terms—for each doubling of ―experience,‖ or accumulated production volume. The implications of this relationship for business, argued BCG’s founder, Bruce Henderson, were significant.”
Core Competency: Core Competency is a popular concept in the domain of business strategy and it was conceptualized by Late CK Prahlad – a top management thinker.
In Harvard Business Review, Prahlad wrote, “Core competencies are the collective learning in the organisation, especially how to coordinate diverse production skills and integrate multiple streams of technologies.”
According to a publication by Bian & Company, “A Core Competency is a deep proficiency that enables a company to deliver unique value to customers. It embodies an organization’s collective learning, particularly of how to coordinate diverse production skills and integrate multiple technologies. Such a Core Competency creates sustainable competitive advantage for a company and helps it branch into a wide variety of related markets. Core Competencies also contribute substantially to the benefits a company’s products offer customers. The litmus test for a Core Competency? It’s hard for competitors to copy or procure. Understanding Core Competencies allows companies to invest in the strengths that differentiate them and set strategies that unify their entire organization.”.
In BCG Classics Revisted, Martin Reeves, George Stalk and Filippo L. Scognamiglio Pasini stated, “The experience curve is one of BCG’s signature concepts and arguably one of its best known. The theory, which had its genesis in a cost analysis that BCG performed for a major semiconductor manufacturer in 1966, held that a company’s unit production costs would fall by a predictable amount—typically 20 to 30 percent in real terms—for each doubling of ―experience,‖ or accumulated production volume. The implications of this relationship for business, argued BCG’s founder, Bruce Henderson, were significant.”
Growth-share Matrix: Bruce Henderson – founder of the Boston Consulting Group(BCG) developed it in 1970s. The matrix remains highly relevant today as a way of allowing companies to manage strategic experimentation.
Keeping this in view, BCG revisited it and stated, “The matrix helped companies decide which markets and business units to invest in on the basis of two factors—company competitiveness and market attractiveness—with the underlying drivers for Sthese factors being relative market share and growth rate, respectively. The logic was that market leadership, expressed through high relative share, resulted in sustainably superior returns.”
Role of Institutions & Consulting Firms
Harvard Business School
McKinsey & Company
Boston Consulting Group(BCG)
Bian & Company
To be continued…