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The essence of strategy

The essence of strategy is to make controversial choices in order to gain a competitive


advantage, but difficult choices often engender opposing views. Aneel Karnani
presents a process for strategy development that can help managers surface, manage
and resolve conflict, thus resulting in more effective strategic choices.
T
he much-publicized 2001 merger between Strategy is not only controversial; it is a critical
Hewlett-Packard and Compaq was very driver of superior firm performance. Michael Porter,
controversial. The CEOs of the two companies an influential strategy guru, argues that the root
campaigned vigorously for the merger while the cause of poor firm performance is the failure to
most visible critic of the merger, Walter Hewlett, distinguish between operational effectiveness and
14-year HP director and son of co-founder William strategy. While operational effectiveness is
Hewlett, heavily contested it. necessary, it is not sufficient for superior
To give you a feel for the strategic battle, consider performance. Managers often wonder where the
first this comment from Carly Fiorina, then the CEO dividing line is between strategy and operations,
of HP, in a letter to shareholders: “The merger between strategy and tactics. A way to define this
of HP and Compaq is the best way to strengthen slippery distinction is that strategy consists of
our businesses and improve our market position, choices that are both controversial and significant
deliver more of what our customers need, enhance drivers of firm performance. In order for firms to
opportunities for our employees and increase the benefit from their strategic planning processes, they
value of our shareowners’ investments.” By strong need to be able to manage the process of dealing
contrast, the most visible critic of the merger, with the controversy (and the inherent conflict that
Hewlett contested it with public comments like: arises) during strategy development and execution.
“We profoundly disagree with management’s
assertion that HP needs to make this large and very Conflicting strategies
risky acquisition. It worsens the HP shareholders’ In February 2005, the Wall Street Journal sampled
portfolio of businesses. It does not solve any strategic a range of industry veterans and management
problems.” Experts, including investment bankers, experts to ascertain their opinions on what HP
stock analysts and management consultants, argued should do next. Their responses highlight the
on both sides of the merger debate. problem: “turnaround experts offer a wide range of
While things do not usually get this heated, strategy conflicting strategies.” This is not an unusual, let
is always controversial; in fact, the very essence of alone a unique example. In 2005, Boeing
strategy is controversial choices and trade-offs. In announced its latest investment in its newest
order for one firm to outperform its competitors and offering, the 787 Dreamliner, a mid-size, long-range

Thinking
gain a competitive advantage, it must act differently: plane that seats between 200 and 300 passengers.
make choices and choose alternatives that are Airbus, on the other hand, bet on its A380, a super-
distinct from its competitors. Strategic decisions jumbo, long-range plane that seats between 550
also imply making trade-offs; otherwise every and 800 passengers. These two competitors placed
company would choose the same alternatives and bets based on differing views of the future growth
there would be no difference among companies. patterns in international air travel: point-to-point
Moreover, equally smart managers could have very versus hub-and spoke. Their wagers are not only
disparate views on the best strategy for a company, controversial, but also substantial: Airbus spent
as seen in the case of the HP-Compaq merger. $16 billion developing its new A380 aircraft.
Four years after the contentious merger, and four Blockbuster, the video-rental chain, has seen its
years of disappointing results later, the board of business erode in past years as a result of new
directors fired CEO Fiorina. HP Chairwoman Patricia competition from a variety of sources: low-priced
Dunn remarked that the company needed a leader DVDs, online DVD rentals, video-on-demand and
who would better execute its existing strategy. downloaded movies from the Internet. The company
Sanford Robertson, founder of the investment bank, has invested money to expand its business in
Robertson Stephens, differed in his view, “I always several different ways: selling and renting video
thought they executed pretty well [but I] was games, offering used movies for sale, starting an
curious about the strategy.” Even in hindsight, online mail-order business, establishing a
strategy can become controversial. subscription service and cancelling late fees. Carl
Most managers figure out that strategy Icahn, the largest shareholder of the company,
formulation involves making difficult choices, but disagrees with many of Blockbuster’s strategies and
often they do not also realize that similarly sharp feels that the company should significantly increase
choices are required in strategy implementation. HP its dividend payout so that investors can better
provides yet another example that highlights this invest their money elsewhere. This situation is a
point. Prior to her departure from HP, Fiorina familiar one: a once-dominant business that
restructured the organization by combining the generates plenty of cash sees its market slowly
personal computer business and the printer decline. So, should management use the cash to
business into one division. Only a few months later, diversify the business into something new but risky?
in June 2005, Mark Hurd, the new CEO, reversed Or, should they manage the business for cash and
that decision. return it to shareholders? →

© 2008 The Author | Journal compilation © 2008 London Business School Business Strategy Review Winter 2008 29
→ The examples above focus on large, well- do not yield the answers; managers have to make
known companies facing dramatic and challenging difficult judgements, often in the context of
choices. Yet, all companies, regardless of size and considerable uncertainty.
industry, confront equally controversial choices in One source of uncertainty is that strategy deals
formulating their strategies. Why do some firms with the long-term outlook, and there can be equally
perform better than other firms? What can you do to plausible forecasts of the future. Uncertainty also
be more successful, to gain a competitive lies in the actions and reactions of competitors, but
advantage, and to create shareholder value? one source of uncertainty is self-created. If you wait
Strategy is a useful framework for answering these to make a decision only after you have attempted to
questions; the strategy framework can help you set collect all available information and done all
your action agenda as a senior manager. necessary analyses (which is impossible to do in the
Strategy consists of a set of interrelated choices first place), it will be too late. For example, the
that have a major impact on a firm’s performance. It Marine Corps trains its soldiers to practice the “70
involves both formulation and execution. The two per cent solution”: if they have 70 per cent of the
are intricately intertwined; and it is difficult, if not information, done 70 per cent of the analysis, and
impossible, to separate the two steps. It is futile to feel 70 per cent confident, then they should move.
argue whether formulation is more important than To avoid paralysis by analysis, it is better to make a
execution or vice versa; they are both essential to decision with less information and to act despite
achieving superior performance. the greater level of uncertainty.
Strategy deals with complex issues, and it is
Vision versus strategy difficult to understand the trade-offs because we do
In the lobby of many companies you will find a not comprehend well the causal ambiguities, the
beautifully framed vision statement. However, if you cause and effect relationships that underlie
take that vision statement and hang it in the lobby strategic decision making. For example, in trying to
of a different company, most people would never understand the drivers of demand, it may be hard to
notice the difference. These statements are often measure the relative importance of price and quality
trite, generic and exchangeable, not controversial as well as to define quality. In trying to ascertain the
and, hence, not strategic. drivers of cost, it may be tricky to judge the
Thinking

Most vision statements are platitudes about being effectiveness of automation in reducing cost. In
the best in terms of quality, service, growth, designing compensation systems, it may be thorny
leadership, innovation, customers, employees and/or to determine the appropriate mix of individual and
shareholders. Both Nike, the athletic wear company, group incentives.
and Comerica, a banking organization, have vision Often the controversy in strategy resides not in a
statements that refer to “enriching people’s lives”. general statement of the firm’s direction, but rather
Scott Adams, the creator of the famous comic strip in its deliberate application: it is a matter of degree.
featuring Dilbert, tells of a company that has this Choosing between black and white is not
vision: “Create effective partnerships with our controversial, but choosing among the various
customers that enable them to achieve excellence”. shades of gray is – strategy lies in choosing the right
That is not a bad vision, even though it could apply shade. The exhortation that a company should be
to any company from IBM to organized crime. customer-oriented and listen to its customers is not
Vision statements are useful for energizing people controversial – of course, it should. The strategic
in a company and providing a common purpose and choice is to what extent it should listen to
cohesive values. Instilling a vision in a company customers. How much money should be spent on
that significantly influences the corporate culture marketing research? How much of the CEO’s time
can be a source of superior performance – a vital should be committed to customer contact?
aspect of strategy implementation; but vision Allocating scarce firm resources, both money and
statements provide little, if any, guidance for time, undeniably involves a choice and a trade-off.
making complicated strategic choices. There is Listening to customers can include other trade-offs
much more to formulating a strategy than devising as well. If you cater too much to your current
a vision. customers and align your organization solely to do
Strategy consists of a set of integrated choices: so, you might be blind-sided by a disruptive
the domain in which the firm will compete, the technology. Paying excessive attention to customers
sources of its competitive advantage, the value also may reduce your ability to pursue technology-
proposition it offers its customers, and the driven innovations.
organizational design required to execute its As another example, a large consumer products
strategy. All of these choices are complicated and firm was considering its strategy for entering China.
controversial; equally smart managers may have The issue was not whether to go to China or not;
different opinions on these choices. Analyses alone it was obvious to all the managers (and the

30 Business Strategy Review Winter 2008 © 2008 The Author | Journal compilation © 2008 London Business School
competitors) that entering the Chinese market was My favourite question to ask as a facilitator in a
critical to its growth. The controversy was the extent company’s planning process is “So what are you
to which the firm should invest in China over the next going to do (or not do) as a result of your analyses?”
three years: $15 million for a minor distribution Unfortunately, many managers do not have a good
presence or $100 million for a major presence that answer to this question. A better planning approach
would include significant manufacturing and is to first identify the major strategic choices the
technology development. company faces and then to focus the analyses on
these choices. This way the planning process is
Uncertain context, certain decisions much more directed and action-oriented.
The fact that a decision is made under uncertainty For example, a major US building products
does not mean that one cannot feel confident that company began its planning process by identifying
he or she is making the right decision. For example, five key strategic choices: (1) whether to enter China,
imagine a jar filled with balls, 75 per cent white (2) what to do with current operations in Europe,
and 25 per cent black. You are asked to blindly pick (3) how to deal with consolidation of the distribution

Strategy is always controversial; in fact, the very essence of


strategy is controversial choices and trade-offs.

out one ball, and guess, in advance, its colour. channel, (4) how to manage the shift from products
The decision to guess the colour white is absolutely to services and (5) how to deal with large commercial
correct, which you can feel certain about. However, customers. The rest of the planning process was then
after you draw the ball, there is still only a 75 per sharply focused around addressing these five issues.
cent chance that you guessed correctly. Ex ante, In the next planning cycle, the company may revisit
the decision is certainly right; though ex post, the some of these issues or identify new strategic choices.
outcome might turn out to be wrong.

Thinking
For many foreign companies in China today, Confront differences – generate conflict
the outcome of long-term profitability is highly In order to make a strategic choice in an intelligent
uncertain, but they can still be certain that their and effective manner, the firm must understand the
decision to enter China today is the right one. pros and cons of each alternative and analyse the
How, then, should one approach the planning trade-offs involved – while in the context of much
process? In a typical company, strategic planning is uncertainty and causal ambiguity. Managers may
driven by the calendar. Managers initiate the come to different conclusions based on their diverse
process to analyse and formulate the company’s perspectives, backgrounds, competencies and
strategy not because the firm faces a strategic access to information.
choice, but because it is, say, June. A better The best way to deal with this issue is to make
approach would be to have the strategic analysis the strategic planning process as participative,
triggered by the arrival of a strategic choice rather explicit and transparent as possible. The firm
than by dates on the calendar. needs all the managers to put their information,
In the traditional strategic planning process, assumptions and analyses on the table. Then the
much effort is expended on analysing the managers can share, critique, and understand each
environment (political, economic, social and other’s positions and come to an honest resolution
technological), the industry, the competitors, the of their differences. This is an idealistic view of the
customers and the company. Several different process, and it will never be perfect due to hidden
frameworks may be used for these analyses: Porter’s assumptions and biases, vested interests, and
“five forces”, strengths-weaknesses-opportunities- organizational politics. But, the more you try to foster
threats (SWOT), McKinsey’s 7-S model, generic and encourage an honest and inclusive strategic
strategies, core competencies, a Balanced decision-making process, the more likely it is that
Scorecard and/or EVA (economic value added.) the firm will make intelligent choices and develop
Yet, the problem is that these analyses are not tied strategies that create a competitive advantage.
to a specific strategic choice the company faces, Confronting differences is the key. We need to
hence the time and effort spent is scattershot and bring conflict out into the open. This is how wise
wasteful. Many of the analyses produced have no trade-offs among competing alternatives can be
impact on the actual choices the company makes. made. Intellectual debate among managers with
No wonder that many firms are disillusioned with divergent views is a vital source of creative and
their strategic planning. innovative solutions within the company. Conflict →

© 2008 The Author | Journal compilation © 2008 London Business School Business Strategy Review Winter 2008 31
Criteria Speed to Cost Customer Standard Radical Wide
market orientation platform change adoption
Alternatives
Technology centre Good OK Poor Best Best OK

New division Best Good Good Good Good Poor

Champion division Best Good Best Good Good Poor

All divisions Poor Poor Good Poor Poor Best

Free choice OK OK Good Poor Poor Good

Figure 1: Understanding trade-offs

is the source of creativity; dissent is the source of strategic choices are thoroughly examined. Recall
learning. We learn by talking with someone with the major US building products company, previously
whom we disagree. Managers must confront conflict mentioned, that was faced with five strategic
rather than avoid it. Conflict, of course, needs to be choices. On each of these five dimensions, top
managed so that it is constructive and intellectual. management identified two or three different
Managers also need to be able to resolve their strategic responses and arbitrarily assigned a senior
conflicts to arrive at a strategic choice. A firm is not manager to make a case for each alternative at the
a debating society; the process cannot end with the company’s upcoming retreat.
managers agreeing to disagree. Once the firm has At the retreat, the top 25 managers in the
made a strategic choice, the managers who initially company spent a half-day session on each strategic
disagreed with the choice must work toward choice. Each session started with two or three
supporting the decision. managers advocating their assigned alternative for
Strategic choices are intrinsically controversial, 45 minutes. After these presentations, the entire
so, if at the start of the strategic planning process group debated the alternatives and either made a
all the managers seem to agree, this can be a strategic decision or agreed on specific steps for
symptom of organizational malaise. Lack of conflict further analysis. Unlike planning retreats at other
is not the same as real agreement; consensus can companies, the discussion at this company was
be a disguise for disengagement. focused on the strategic considerations at hand,
Thinking

Do not settle for a premature consensus. The firm was well informed by data and analyses, and was
should explore different strategic alternatives and not based on unsupported opinions or hunches.
analyse the trade-offs involved thoroughly. A quick Another approach to generating conflict is to
decision on a particular option might mean that a assign managers to play the roles of competitors in
better alternative is ignored. Even when a course of the industry. Competitor role playing is a good way
action is chosen, the managers may not fully under- to critically examine the firm’s existing strategy.
stand the negative aspects of the chosen alternative Seeing the situation from a different perspective
and risk running into problems implementing the also may produce alternatives that had not been
strategy. A complete understanding of the various considered. Since managers can be biased in their
alternatives and their pros and cons, usually view of the company’s capabilities and
achieved through extensive debate, is essential to underestimate competitors’ strengths, role playing
making a good choice and executing it well. can be a way to correct for this bias and engender
It is not enough to merely tolerate dissent; firms ways to abate potential competitor threats and even
must actively encourage dissent. Senior managers identify new opportunities.
need to actively seek out opposing points of view
and draw out people who are hesitant to volunteer Avoiding dysfunctional conflict
negative or contrary opinions. As a senior manager, Although the goal is to use debate to shed light on
it is beneficial not to express your position too early all sides of a strategic choice, conflict needs to be
in the discussion since it may intimidate managed so that it does not degenerate into
subordinates from voicing a differing opinion. An dysfunctional interpersonal conflict. Proper conflict
outside facilitator can help the company to bring management is vital so that the company benefits
forth different points of view during the strategic from the process in a manner that does not damage
planning process. To avoid “group think”, diversity people’s ability to work together as a team afterwards.
among the management team (in terms of The strategic planning process is an intellectual
education, functional expertise, work experience debate; hence it should focus on ideas and decisions
and business perspective) is also important. and not on personalities. Managers must realize
Another alternative is to intentionally generate that they have common goals and are teammates
conflict, even if artificially. Assigning roles and who do not compete with each other, but rather with
positions to different managers, some in the role of external competitors. The conflict is but a means to
devil’s advocate, ensures that all aspects of the greater collaboration.

32 Business Strategy Review Winter 2008 © 2008 The Author | Journal compilation © 2008 London Business School
Unfortunately, debates can generate some heat in Strategic choices always are complex and always
the conference room. This tension must be diffused involve making judgement calls. One way to simplify
quickly and harmlessly. Humour – even if it is the process is to break down a complex problem
contrived – can be effective at relieving tension and into sub-problems and then to identify the criteria
promoting a positive mood, thereby creating a for making each trade-off. One interesting instance
collaborative esprit. A well-planned group social of this approach involved a company faced with
gathering over drinks or a meal can also go a long competition stemming from an emerging technology;
way towards smoothing ruffled feathers and creating the company decided to invest in developing the
a friendly tone. Yet, managing the tone is not capability of the new technology itself. The strategic
enough; one has to be earnest about the role that issue was how to organizationally manage the
accord plays in the conflict management process for development of the budding capability. The five
it to be constructive. identified strategic alternatives were:
Another way to steer the discussion away from the ● Ask the technology centre at the corporate level
individual is to root the debate in facts and data. In (a cost centre) to develop the new capability
the absence of good data, managers waste time in ● Form a new division (a profit centre)
pointless debates over opinions. Good data, defined ● Choose one of the current divisions to develop the
as timely, relevant and objective, encourages new capability
managers to focus on the real issues and strategic ● Require each of the current divisions to
choices; however, many companies lack the quality
simultaneously develop the new capability
of data required for a thorough examination of the
● Offer to each division the choice of developing
strategic choice. The traditional planning process,
the new capability
which typically begins with analyses, requires
extensive data collection, but much of this data and For this company, the strategy formulation choice to
the analyses conducted go unused. Starting with invest in the emerging technology was straightforward.
the strategic choices focuses managers on the data The strategy implementation choice of organizational
collection effort as well as ensures appropriate design was much more controversial. There was
depth of analysis. More importantly, it equips no easy answer to this problem; there were pros
managers to begin formulating judgements and and cons for each of the strategic alternatives. The

Thinking
making decisions on strategic issues much faster. managers identified six criteria for making the
By creating access to timely and relevant data trade-offs among the strategic alternatives, as
that is shared among all the managers, managers are shown in the related chart.
equipped with the means to begin discussions on It was simpler for managers to discuss the
differences in views based on facts and not opinions. alternatives, one criterion at a time, after seeing the
Next, it is important to create a forum that encourages choices and trade-offs in a matrix format. Weights
managers to share their underlying assumptions by were not assigned to each criterion or numerical
making them explicit. Managers with differing preferences to each alternative since this guide was

Strategic choices always are complex and always involve


making judgement calls.

assumptions that have not been articulated end up not meant to be a mechanical tool for making
arguing, which leads to misunderstandings that decisions. Rather, the managers used the matrix as
deteriorate the context of the debate. Once these a framework for initiating dialogue among the group
assumptions are uncovered, managers may still and bringing out the salient points of each
disagree about them but can, at least, focus on the alternative. At the end, the managers still had to
root cause of their disagreement, thereby improving use their judgement and experience to choose
the quality of the debate. Finally, companies should among the alternatives. Yet, the matrix allowed
train their managers to be well versed in strategic them to be more focused on the components of
analysis techniques, since then managers can their choices, to share their thoughts and ultimately,
participate more constructively in the strategic to be more comfortable with the final decision,
debate. These analytical tools (such as industry and which aided in the strategy process.
competitive analysis, value-based planning, core In order to depersonalize conflict, it is essential
competencies and others) sharpen their view and not to link the conflict to rewards. If the manager
further teach managers to support and anchor their or team that wins the debate stands to gain in terms
opinions using objective and substantive measures. of compensation, promotion or the like, then →

© 2008 The Author | Journal compilation © 2008 London Business School Business Strategy Review Winter 2008 33
→ everyone will fight too hard not to lose. If the They are highly sensitive to losing social face in
conflict remains an intellectual debate, it is easier public and avoid conflict, which is seen as
for people to concede gracefully. In fact, it is useful disrespectful and may lead to alienation.
(perhaps even critical) to have the person or team Consequently, dissent is avoided or suppressed,
who opposed the winning strategy to be involved in let alone encouraged and generated.
implementing it. Other countries, of course, have a much more
Another issue to be wary of in resolving conflicts individualistic culture. The US, Canada, Switzerland,
is the desire to reach a unanimous decision. Spain, Australia, Russia and the UK could be cited
Requiring unanimity implies giving each person veto as examples of such societies. The direct,
power, which might force a compromise decision individualistic, confrontational style required of
with which no one is happy. Furthermore, consensus managers in the strategic planning process I have
is not necessarily a sign of harmony; it might well proposed in this article will assuredly present a
be the result of fatigue and frustration. challenge for managers from more collectivistic
Strategy development should be participative, but cultures. Conflict-avoiding behaviour stalls the
not democratic. The purpose of generating and strategic planning process, since participants
managing conflict is to thoroughly analyze strategic cannot be relied upon to share their true views on
choices. It is important that senior managers retain issues, limiting the scope and innovativeness of the
the power to make the final decision after hearing strategic debate. There may be an even worse
and carefully considering all the facts, data and consequence: conflict may later manifest in
perspectives surrounding the strategic choices. destructive, win-lose ways that undermine both
Senior managers should, however, be prepared to performance and relationships.
explain the logic behind their final decisions, since Additionally, a country’s culture influences the
managers who disagree will be more willing to structure of organizations in that country. The more
accept it if they perceive the whole process as fair. hierarchical and rigid the organizational structure,
It is also important that senior managers make a the more conflict resolution is based on formal
definitive choice and clearly articulate the strategy. power. The strategic planning process is thus more
In fact, people in a company expect their leaders to autocratic, rather than participative. Firms in such
be resolute; they want their leaders to say clearly, situations need to devote extra effort to setting up
Thinking

“This is where we are headed”. mechanisms for strategic learning by embracing


controversy and conflict.
Cultivate the right culture In an increasingly global world, managers face
Effective strategic planning and implementation fierce competition from both domestic and foreign
require that companies cultivate a culture that players. This new competitive environment is
deals well with conflict. Companies from countries dictated by markets and is blind to country borders
with collectivist cultures may be less apt at and culture. Firms that cultivate an environment in
handling conflict within their organizations and which managers develop an appreciation for the
hence be at a disadvantage. power of conflict stand to achieve a true competitive
Collectivist societies – for example, those found advantage. ■
in Mexico, India, Japan, Brazil and China – are
characterized by harmony and “knowing one’s Resources
place”. These traits are not only valued, but Kathleen Eisenhardt, Jean Kahwajy and L.J.
expected. Conflict is viewed negatively, typically Bourgeois, How Management Teams Can Have a
avoided and, at times, suppressed. Group Good Fight, Harvard Business School Press, 2009.
cohesiveness is deemed to be very important. Jeff Weiss and Jonathan Hughes, “Want
People have a strong sense of interdependence as collaboration? Accept – and actively manage –
their identity is embedded in their relationships. conflict”, Harvard Business Review 83, no. 3, 2005.

Aneel Karnani (akarnani@umich.edu) is Associate Professor and Chair of Strategy at


the University of Michigan.

London Business School


Regent’s Park
London NW1 4SA
United Kingdom
Tel +44 (0)20 7000 7000
Fax +44 (0)20 7000 7001
www.london.edu
A Graduate School of the University of London

34 Business Strategy Review Winter 2008 © 2008 The Author | Journal compilation © 2008 London Business School