Strategy (98 page)

Was it the case that the road to success meant emulating the methods of those who were already successful? Precisely because their techniques were well known it was likely that following them would result in diminishing returns. Like the military concern with the operational art, it offered little by itself if put in the service of a flawed strategy. This was why Michael Porter questioned whether Japanese firms had any strategy at all—at least as he understood the term, that is, as a means to a unique competitive position. The Japanese advance during the 1970s and 1980s, he argued, was not the result of superior strategy but of superior operations. The Japanese managed to combine lower cost and superior quality and then imitated each other. But that approach, he noted, was bound to be subject to diminishing marginal returns as it became harder to squeeze more productivity out of existing factories and others caught up by improving the efficiency of their operations. Cutting costs and product improvements could be easily emulated and so left the relative competitive position unchanged. In fact, “hypercompetition” left everyone worse off (except perhaps the consumers). For Porter, a sustainable position required relating the company to its competitive environment. Outperformance required a difference that could be preserved.
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The problems facing companies trying to maintain a competitive advantage when everyone was trying to improve along the same metric was described as the “Red Queen effect.” It was named after the line in
Alice Through the Looking Glass
with which this chapter opened. This was originally the name of a hypothesis used by evolutionary biologists to describe an arms race between predators and prey, a zero-sum game between species, none of which could ever win.
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In the business context, it tended to be used
as more of a race between similar entities. So, for example, early and striking gains might be made by saving time on standard processes, but soon others would catch up and gains would become increasingly marginal. The comparison was with a war of attrition. By focusing solely on operational effectiveness the result would be mutual destruction, until somehow the competition was stopped, often by means of consolidation through mergers.
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If the main arena was full of increasingly worn and wan warriors desperately trying to land blows on equally exhausted competitors as they dismissed the walking wounded and tripped over company corpses, then the logic was to find a less crowded, less competitive, and much more profitable place. The history of business after all was one of the rise and fall of whole sectors and of companies within them. It was an arena marked by instability. Of the original S&P 500 companies in 1957, for example, only seventy-four were still on the list thirty years later. Much management strategy literature was addressed to those in charge of existing companies, whereas in practice the most important innovations often came with new companies, which grew with new products. As noted by W. Chan Kim and Renee Mauborgne, there were “no permanently excellent companies, just like there are no permanently excellent industries.” For this reason they argued that the hopeless firms were likely to be those competing without end in the “red oceans” instead of moving out to the blue oceans where they might “create new market space that is uncontested.” Those who failed to do so would go the way of many past companies and simply disappear or be swallowed up. They argued that the “strategic move” should be the unit of analysis rather than the company although they did not suggest that blue oceans were only found by new companies.

Kim and Mauborgne contrasted business with military strategy. The military was bound to focus in a fight “over a given piece of land that is both limited and constant,” while in the case of industry the “market universe” was never constant. Confusing their metaphors somewhat, they therefore argued that accepting red oceans meant accepting “the key constraining factors of war,” which were “limited terrain and the need to beat an enemy to succeed,” while failing to capitalize on the special advantage the business world offered of being able to “create new market space that is uncontested.”
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If their theory really depended on this idea of military strategy as being solely about battle, then it was off to a poor start. We have charted in this book how the desire to avoid battle except on the most favorable terms animated much military strategy. There was also a similar impulse at work here, the belief that the unimaginative plodders would stick with the most simplistic formulas, creating opportunities for the bold and the visionary to gain the
advantage. Though Kim and Mauborgne acknowledged that red oceans were sometimes unavoidable, and that even blue oceans might eventually turn red, they made it clear that they found red ocean strategy fundamentally uninteresting. And here they fell exactly in line with the tradition in military strategy that sought to escape the brutal logic of battle and urged the application of superior intelligence to achieve political objectives while avoiding slaughter. There was the same infatuation with dichotomy, as if the choice was always to go one way or the other—direct/indirect, annihilation/exhaustion, attrition/maneuver, red ocean/blue ocean.

It was rarely denied that the orthodox route might at times have to be followed, but there was normally a clear implication that this could never satisfy the truly creative. As with so much writing on military strategy, the best way was illustrated by examples of success from companies that had transformed themselves and their industries, whether through meticulous plan, an empowered workforce, lateral thinking, bold re-engineering, or innovative design. The failures tended to be those who had stuck with orthodoxy, drifted in complacency, or moved from one crisis to another without ever getting a grip.

In an appendix to their book, Kim and Mauborgne developed a more analytical distinction between the red and blue oceans, now described as structuralist and the reconstructionist strategies. The structuralist approach derived from industrial organization theory, with Porter its most famous proponent. It was “environmentally determinist” because it took the market structure as given and thus posed the strategic challenge of competing for a known customer base. To succeed meant addressing the supply side. This meant doing whatever competitors did but better, relying on either differentiation or low cost. Sufficient resources might result in a form of victory, but the competition was essentially redistributive in that the share gained by one would be lost by another, which led to an attritional logic. The theory assumed exogenous limits. By contrast, the reconstructionist approach was derived from endogenous growth theory, which claimed that the ideas and actions of individual players could change the economic and industrial landscape. Such a strategy would suit an organization with an innovative bent and sensitivity to the risks of missing future opportunities. This addressed the demand side by using innovative techniques to create new markets. Those following a reconstructionist strategy would not be bound by the existing boundaries of the market. Such boundaries existed “only in managers' minds,” so with an imaginative leap new markets might be identified. A new market space could be created through a deliberate effort. The wealth was new, and need not be taken from a competitor.
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In a later article, Kim and Mauborgne developed the distinction further, identifying the importance of not only a value proposition that would attract buyers but also a profit proposition so that money could be made, and lastly a people proposition to motivate those within the organization to work for or with the company. From this they defined strategy as “the development and alignment of the three propositions to either exploit or reconstruct the industrial and economic environment in which an organization operates.” If these propositions were out of alignment—a great value proposition but no way of making a profit or a demotivated staff—then the result would be failure. Only at the top of the organization, with a senior executive able to take a holistic view, could the propositions be developed. On this basis they argued that “strategy can shape structure.” The title marked the shift from Chandler, whose formulation was about the effect of strategy on internal organization, to the new quest to use strategy to change the external environment.
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This takes us back to Ansoff's distinction between strategy as a relationship to the environment and strategy as decision-making with imperfect information. The broad thrust of business strategy came under the first heading. The second more campaigning form of strategy, which dominated the military literature, was put in a more subordinate position, a challenge of implementation. Porter argued that the environment shaped and limited a business's strategic options; Kim and Mauborgne claimed that these limits could be transcended through imagination and innovation. Porter claimed that the competition could be beaten by either differentiation or price; Kim and Mauborgne claimed that it was better still to develop products in areas where there was no competition, but they then had to develop a business case and have the staff to make it work.

This view of strategy as a general orientation toward the environment offered a framework for evaluating all other endeavors within the organization. Strategy of this sort had to be long term, and it might have the elements of a plan, with an anticipated sequence of events geared to an ultimate goal. The strategy could be much looser than that, however, setting out a number of goals with some sense of priorities, available resources, and preferred means, maintaining considerable flexibility to allow for changing circumstances. How well either approach would work would depend on the nature of the environment. The more stable the less the freedom to maneuver and so less scope for a strategy of any sort other than one of internal adaption. Even a reconstructionist strategy would still be affected by responses from potential competitors who might appreciate what was going on or other actors who might be able to influence the demand for new products.

Such theories still lacked a formulation as compelling as Clausewitz's portrayal of the dynamic interaction of politics, violence, and chance. There was not even a concept comparable to Clausewitz's friction, although executives were always likely to experience their own versions of the fog of war. There were few incentives to dwell on such matters in a literature increasingly infused with promotions of particular strategic nostrums as the author's unique product. The promise was of success following a true interpretation of these nostrums according to circumstances, and the will to see it through. The tendency therefore was to play down the unforeseeable factors that could frustrate the best laid plans, whether a rogue calculation in product design, a misjudged advertisement, sudden fluctuations in exchange rates, or a terrible accident. Moments could arise in business as in politics when long-term aspirations had to be put to one side in a desperate struggle for survival, as a reliable market evaporated or development process failed to deliver or debts were called in. At such moments, priorities would need to be clarified, help sought wherever it could be found, and exceptional demands made of the organization. Other types of events might require no more than mid-course corrections or a reappraisal of one element of the overall approach. Knowledge of a coming event—such as a presentation to investors, a product launch, or a meeting with customers—could raise issues that had hitherto been neglected or illuminate aspects of the changing environment that had been missed before.

The influence of equilibrium models from classical economics on business strategy remained strong, while alternative concepts of non-linearity, chaos, and complex adaptive systems, though picked up by military strategists, were less in evidence. An article by Eric Beinhocker pointed to the challenge. An open system constantly in flux, shaped and reshaped by many agents acting independently, could seem more relevant to companies than a closed system tending to equilibrium. For example, a characteristic of complex adaptive systems was described as “punctuated equilibrium,” referring to when times of relative calm and stability are interrupted by stormy restructuring periods. At such time, those whose strategies and skills were geared to the stable periods risked sudden obsolescence. Those who survived were likely to have prepared to adapt even if they could not be sure what adaptations would be required. Strategy, therefore, could not be based on a “focused line of attack—a clear statement of where, how and when to compete,” but instead on preparations to perform well in a variety of future environments. Small organizations with relatively few parts were unlikely to adapt as well as those with more parts and a larger repertoire of responses to new situations, but after a certain point the capacity to adapt would fall off as response
times shortened. There was a new balance to be struck, between complete resistance to change on the one hand and oversensitivity to shifts in the environment on the other, between stasis and chaos.
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A strategy could never really be considered a settled product, a fixed reference point for all decision-making, but rather a continuing activity, with important moments of decision. Such moments could not settle matters once and for all but provided the basis for moving on until the next decision. In this respect, strategy was the basis for getting from one state of affairs to another, hopefully better, state of affairs. Economic models might find ways of describing this dynamic but were less helpful when it came to guidance on how to cope.

I learned a great deal about military history and Confucian metaphors
.

But the only practical advice that we were given was that every company

should send teams of people from different disciplines to country hotels