What’s Wrong With Strategy?
Tuesday, October 6, 2015
What follows is a summary of the criticism by leading academics, as well as practicing managers, about the way strategic management functions in companies today and the traditional approaches to strategy.
This criticism can be organized along three distinct categories:
(1) The content of strategic management, i.e. what does strategy focus on?
(2) The process of strategic management, i.e. how are new strategies developed?
(3) And finally, the tools used for strategic management.
Criticism of the content
“…pursuing incremental improvements while rivals reinvent the industry is like fiddling while Rome burns.” (Hamel 1996)
The criticism as regards the content of current strategy practice revolves around three main themes: (1) focusing on best practice and operational effectiveness (2) too much imitation of competitors’ moves and (3) finding and holding one strategic position. As we will see the three themes are closely related to each other and interleaved and thus will be discussed simultaneously.
As discussed above the ultimate aim of strategy is competitive advantage through differentiation, which will enable a company to be successful from a financial perspective.
Financial success can be measured in a number of ways. Usually, a whole array of ratios, like Profitability, Return on Sales, Return on Investment, Return on Equity, Return on Capital Employed, or Value Management concepts, like Economic Value Added, Cash Value Added, or some customized variations of these, or other concepts, are at a company’s disposal to do so. A common element of all these concepts, and a so-called value driver in general, is profit (or again some variation of profit, e.g. EBIT, EBITDA, NOPAT, etc.). It is not only a vital indicator, as well as a measure, of financial success, but profit is also absolutely necessary to ensure the survival of any given company.
Profits being the result of revenues minus costs, it can only be raised in two ways: either we increase the revenues or we decrease the costs. In recent years management has mainly be engaged in the reduction of costs (Hamel 2001), and improved operational effectiveness (Markides 2000; Davenport, Leibold, et al. 2006) through such techniques as scientific management, operations research, reengineering, enterprise resource planning, Six Sigma, etc. (Hamel 2001; Hamel and Välikangas 2003).
Although such optimizations and improvements are necessary and have produced a considerable amount of wealth, they are hardly enough and do not lead to much differentiation and superior financial success (Lynn, Morone, et al. 1996; Godin 2001; Hammonds 2001; Hamel and Välikangas 2003).
According to Porter (Porter 1996; Hammonds 2001), the origin of the problem stems from the failure to distinguish between operational effectiveness and strategy. He defines operational effectiveness as performing similar activities better than your competition, while strategic positioning is about performing similar activities different, not only better, or performing different activities altogether. Hamel (1998), as well as Nattermann (1999), agree by saying that operational efficiency and getting better is not a strategy.
Operational effectiveness might be necessary to achieve superior profitability and survive in the market, but concentrating only on productivity leads to doing the same thing than the competitors, which in turn leads to a rapprochement of competitors and their strategies (Porter 1996; Hamel 2001; Kim and Mauborgne 2002) and not the necessary differentiation.
Furthermore, such a focus on operational effectiveness misleads companies to assessing what their peers do, matching and copying their every move and striving for doing more of it, doing it better, faster and cheaper (Ohmae 1988; Kim and Mauborgne 1997; Kim and Mauborgne 1999; Kim and Mauborgne 1999; Hamel 2001; Hamel and Välikangas 2003).
Too much focus on what competitors do and trying to do it better, in turn, leads to reactive and only incremental improvements in cost or quality or both (Hamel and Prahalad 1989; Hamel and Prahalad 1997; Kim and Mauborgne 1997; 1999; Nattermann 1999; Hammonds 2001), rather than to the creation of sustainable competitive advantages.
As a result companies do not differentiate themselves anymore but compete against each other only along the same lines and basic dimensions of competition (Kim and Mauborgne 1999; Nattermann 1999; Hamel and Välikangas 2003): costs, operational effectiveness, and price (Hamel 2001). This lack of strategic differentiation leaves customers choosing on price only, which in turn results in collapsing margins within an industry (Kim and Mauborgne 1999; 1999; Nattermann 1999; Hammonds 2001; Hamel and Välikangas 2003; Kim and Mauborgne 2004; 2005).
Several McKinsey studies (Nattermann 1999) have supported this view. One study for example showed that imitation of best practices in the German mobile telecom industry leads to a decline in strategic differentiation of 83 percent accompanied by a 50 percent decrease in margins between 1992 and 1998.
The industry leader in such a position might even face another problem: the “herding phenomenon”. According to Nattermann (1999), the above-described imitation of competitors by copying best practices leads to a clustering of companies around the most successful one, which destroys value, as the profits of the leader are soon to be divided among the group of companies converging around its space.
This problem is even reinforced by the fact that most companies take their current position and practices as given and do not even question long-established industry rules. They share a common set of beliefs on how to compete in a certain industry or strategic group (Kim and Mauborgne 1999; Markides 2000; Kim and Mauborgne 2004; 2005), which leads them to protect and improve their gained strategic position paying little attention to searching for or discovering new ones in the market (Markides 2000).
Instead of trying to set themselves apart and escape from the herd, once companies have found a strategy that works, or has worked in the past, they want to use it, not change it. As a consequence companies are unable to see the need for change when the strategy that made them great has become obsolete (Christensen 1997; Demos, Chung et al. 2001).
Criticism of the process
The criticism as regards the process of current strategy practice revolves around two main themes: (1) strategic planning usually being nothing more than an incremental adaptation of last year’s plan, and (2) the planning process being too formal and analytical. Again, these themes are closely related to each other and thus will be discussed together.
Criticism of strategic management, as it is practiced today, comes from various authors (Hamel and Prahalad 1989; Mintzberg 1994; Camillus 1996; Hamel 1996; Hamel and Prahalad 1997; Yates and Skarzynski 1999; Hamel 2001; Beinhocker and Kaplan 2002) who argue that the process of strategy development in companies today is rather the continuation and incremental adaptation of last year’s plans and budgets, than the search for new opportunities and differentiation. This also relates to the above-stated argument that companies, once they have found a strategy or position that has been successful in the past, are not willing to change.
Furthermore, strategic planning is often a very formal and analytical process by which standardized forms are filled in by various departments and business units and then reported back to central planning. This standardized process leaves no room for adaptation to new markets, developments, and opportunities and it is argued that real strategic decisions are not made in the context of a formal process (Mintzberg 1987; Beinhocker and Kaplan 2003; Mankins 2004).
As this process usually is repeated only once a year it is also argued that in today’s fast-cycle environments, by the time all the documents have been filled in, reported and the final plan has been published and distributed, the environment is likely to have changed and the plan to be outdated (Camillus 1998; Mankins 2004).
Another point raising criticism is the fact that traditional strategic planning is seen as an analytical process only (Roos 2004; Davenport, Leibold, et al. 2006). The process takes the form of mindless number-crunching the purpose of which is to create huge reports that probably nobody even reads (Markides 2001). But planning and analysis do not lead to a strategy (Mintzberg 1987; Hamel and Prahalad 1989; Hamel 1996; 1998; Eisenhardt 1999; Markides 2001). They rather lead to the above-mentioned incremental changes in last year’s plan.
Liedtka (2000) adds that this view of strategy usually focuses on a single technique inappropriately applied and entails a loss of creativity. An argument supported by Mintzberg (1987; 1993; 1994) and Markides (2000; 2001).
Additionally this formalized planning process, usually coming from the top, raises little commitment from front line managers (Bartlett and Ghoshal 1994), as the need for upward communication is ignored (Hamel and Prahalad 1989). Thus strategy processes are often disconnected from the realities of the market place because of personal, political, and institutional factors and usually, there is little alignment between strategic goals and resource allocation (Christensen 1997).
We could add to this that planning is nothing more than a mere shot in the dark, a feeble attempt to master and control the future by creating the illusion that it can be foreseen (Mintzberg 1993; Sanders 1998; Harari 1999). And as we all should know, this can simply not be done. This obsession with control leads to a certain reluctance to consider truly creative ideas and changes, as the outcome of both are unpredictable and thereby beyond formal planning (Mintzberg 1993; Krinsky and Jenkins 1997). As the saying goes, “a plan is all the things that do not happen”.
Davenport, Leibold et al (2006) highlight further deficiencies, namely the assumption of linearity of the strategy process, which usually consists of strategy analysis, formulation, implementation, and change. In practice, they argue, the process is rather diffuse with these elements ongoing and intertwining.
Criticism of the tools
The last set of criticism one can observe in the literature centers around the tools used in strategic management, with the arguments mainly underlining the focus of the tools, just like the process, being too analytical and oriented towards planning.
A historic look at the evolution of strategic management shows that at the beginning corporate planning was associated with the problems faced by managers in the 1950s and 1960s. As their companies grew larger and became more complex they were in the need of tools, techniques, and systems for maintaining control. Annual budgets were among the first tools developed, followed by long-term (usually five years) plans for coordinating capital investment decisions and taking advantage of economies of scale, largely based on economic and market forecasts. The desire to grow and changes in the market place (e.g. the oil shocks of 1974 and 1979) led to new techniques like for example Ansoff’s SWOT analysis, or Porter’s Five Forces, which are mainly analytical in nature, and again focused on mastering and controlling the environment. The tools might have become more sophisticated, but the goals remained the same: master and control, by analyzing the environment and planning your course of action.
Considering that the tools used in strategic management today are still the ones that were developed during these years, or at least still remain grounded in the analysis and planning philosophy, we might argue that strategic management is weighed down by its historic baggage.
Thus the argument that there is a large gap between what managers want to achieve today, competitive advantage through differentiation, and what the traditional tools were developed for, analysis and planning (Amram and Kulatilaka 1999; Demos, Chung et al. 2001; Davenport, Leibold, et al. 2006).
What’s more, not only the purpose of strategic management is no longer the one the tools were developed for but also the circumstances under which they were created are no longer the same (Hamel 1998; Roos 2004). According to Coyne and Subramaniam (1996), 50 percent of strategic problems faced by companies today lie outside the conditions for which the traditional model was designed. Sanders (1998) adds that the strategy models are too complicated, take too long, are too inflexible and disconnected from the dynamics of the real world, and not suited to understand its complexities.
Traditional competitor analysis is primarily occupied with monitoring existing competitors, products, and markets (Hamel and Prahalad 1989; Harari 1999), while we have seen a lot of new entrants, new products, and new markets developing in recent years. In addition, as Christensen (1997) has shown the most successful products are not necessarily launched by industry leaders.
Traditional market research revolves around existing customer needs and mindsets, although very often the customer herself might not know what she could possibly want, and very often customers say one thing and act in a completely different way. Lynn (Lynn, Morone, et al. 1996) even shows that the use of these tools is no critical factor in the decision-making process leading to innovations.
Courtney (2001) explains while traditional tools like Porter’s Five-Forces may provide insight, they do not generally generate a lot of foresight, which is needed to create creative strategies for the future. Mintzberg and Lampel (1999) add that these analytical tools do not create a strategy as intended by Porter, as they only offer insights that can be used in thinking about what strategy to pursue. Hambrick and Fredrickson (2001) add that these tools only focus on the input of strategy.
Kim and Mauborgne (2005) argue that the traditional view, and thereby the tools used, of strategy, focus too much on competing in existing market space, beating the competition, exploit existing demand, making the value/cost trade-off, and aligning the whole system of a company’s activities with its strategic choice of differentiation or low cost.
And finally: Some organizations use planning tools, not because anyone inside the company necessarily believes in them but simply, because influential outsiders do, utilizing them rather for public relations purposes than real strategic management (Mintzberg 1993).
This criticism of the traditional approaches, tools, and techniques — strategy as operational effectiveness, as an analytical and incremental process focusing too much on beating the competition and defending a maybe outdated strategic position by using tools that were not invented for the problems at hand — leads to the assumption that strategic management, as it is practiced by companies today, is not suited to gain a unique position in the market, a position, which enables a company to build and sustain lasting competitive advantages and guarantee the necessary success and streams of revenues to assure the long term survival of a company.
Because of this criticism and the disadvantages described above, new approaches to strategic management have been developed. Regrouped under the term “Strategic Innovation” they represent a new way of thinking about strategy and offer new approaches to the development of strategies that enable a company to attain such differentiation, which is necessary for competitive advantage. These new approaches are as much about new tools and new processes, as about a completely new mindset when it comes to thinking strategically.