Has Strategy Changed?

Has strategy changed in the wake of the recent economic frenzy and subsequent downturn? Is the New Economy finished? Has the Old Economy returned? At this point, most managers understand what the advent of the Internet implies — operating efficiency for most companies, a terrific channel for some and a fundamentally new business opportunity for only a few. So is it back to “strategy as usual”?

The answer is no. While many executives were focused on the implications of the Internet, a more powerful force was quietly transforming the economic playing field. Globalization. Massive in scope, deep in impact —and ironically, almost unmanaged — globalization is the increasingly deep interrelationship among countries, companies and individuals. The connections may be cultural, as in the case of global brands like Sony, or environmental, as in global climate change and overfishing of the oceans. The connections may be technical, as in the case of the Web and wireless communication, or financial, as in the linking of major stock exchanges and the proliferation of NAFTA-like trade agreements. Globalization, not the Internet, is the fundamental driver of the real New Economy.

Instability

Density of connections throughout the world affects corporations by amplifying instability. Even small events in one location can affect events in another, in often oblique and nonlinear fashion. Cold weather means increased coal usage in England that can trigger acid rain in Ukraine. Economies of scale at a smattering of Australian wineries can affect life in rural France. AIDS activists in South Africa can threaten the profits of the pharmaceuticals industry. The scale and pace of change are particularly challenging to predict. Wall Street expected that a correction would follow dot-com mania, but no one anticipated the correction’s magnitude and speed.

The international power structure, or lack of one, further amplifies instability. For almost five decades, the geopolitics of the post-World War II era were shaped by the two principal Cold War combatants. Today, although the United States is dominant and the European Union is asserting a more unified point of view, free trade and transparent markets are the forces shaping commerce, not any one nation. The Internet speeds communication. Invention spreads almost overnight. Yet no one is in charge. In the era of globalization, it is not obvious whether major political leaders, such as British Prime Minister Tony Blair, or business leaders, such as AOL Time Warner’s Steve Case, have much economic clout. Perhaps both types will take a back seat to some single-issue global crusader. Adding to the instability is a strong and often thoughtful backlash to globalization among an unlikely coalition of trade unionists, environmentalists and cultural nationalists.

At the same time, industries with strong network effects (for example, telecommunications), in which standards can take hold rapidly, and industries such as software, which depend on the economics of information rather than the economics of things, have further destabilized the predictable world of business. Globalization, together with those forces, has created a new economic playing field. The play on that field is high-velocity with strikingly nonlinear instability, unpredictability and ambiguity. No wonder that the principal theme of the January 2002 gathering of the economic and political elite at the World Economic Forum in New York City is designated as “coping with fragility.”

New Economics, New Strategy

Does the new economic playing field imply throwing out traditional economics? No, but it does suggest that the belief in equilibrium and the naïve understanding of (or perhaps lack of interest in) the internal workings of corporations that characterize traditional economics render its paradigms less germane. Rather, a new economics — or more accurately, an old new economics pioneered by Frank Knight, Friedrich Hayek and Joseph Schumpeter — is coming into its own. This latter form of economics is entrepreneurial in its riveted focus on disequilibrium, the capture of fleeting opportunities and the relentless cycle of wealth creation and destruction.

The new economic playing field also suggests a fresh view of strategy. During conversations on our collective work, Donald N. Sull of Harvard Business School struck upon a military analogy that graphically conveys the point. Military leaders often fight traditional wars in the map room by locating defensible positions and then fortifying them. In the same way, executives plan their strategic positions and defend them with carefully intertwined activity systems.

Sometimes a traditional war is fought in the storeroom, with leaders amassing stockpiles of specific weapons such as tanks and then deploying them wherever the battle may be. Similarly, executives may formulate resource-based strategy and then leverage their related core competencies in many markets.

But as we know, there are wars in which the enemy is difficult to engage, battle dynamics fluctuate, and the terrain is treacherous and unknown. Here, the strategy of choice is guerilla warfare — moving quickly, taking advantage of opportunity and rapidly cutting losses. That kind of entrepreneurial strategy always makes sense for underdog companies because they lack resources and position. But in unstable, unpredictable and ambiguous terrain like the new economic playing field, entrepreneurial strategy is attractive for large companies as well. The fundamental precept that “strategy is about being different” continues to be true. But what constitutes that strategy has changed. The new strategic watchwords are simplicity, organization and timing.

Strategy Is Simple

First and foremost, strategy on the new economic playing field has to be simple. Complicated, intertwined activity systems or elaborately planned leveraging of core competencies make sense in slower and more-linear situations. On the new high-velocity playing field, they are cumbersome and glacially slow. Managers now must jump into uncertain situations because that is where the opportunities are most abundant. They must capture and exploit promising opportunities or drop them rapidly if they fail to develop. Counterintuitively, complicated markets demand simple, back-to-basics strategy.

Simple strategy means using one or two critical strategic processes and the handful of unique rules that guide them. The critical processes are those that put the corporation into the flow of the most promising opportunities and therefore will differ company to company. For consumer-products giant Colgate-Palmolive, global product management is a key strategic process. Product managers follow a few simple precepts, such as “maintain the brand” and “keep relative product positioning stable.” But within those rules, Colgate managers around the globe have considerable freedom. For example, while maintaining the defined brand image of toothpaste and its relative positioning against other Colgate dental-care products, managers can alter the flavor, change the packaging, create locally tailored advertising, tinker with the ingredients, shift prices and more. Within a few parameters, managers move as they see fit.

Another example is Netherlands-based Ispat International, one of the fastest-growing steel companies in the world. Throughout the 1990s, the Ispat strategy was centered on the acquisition process and a few simple guidelines for two aspects of that process: first, which acquisition opportunities to pick (state-owned companies, companies in which costs could be reduced, companies with direct-reduction or electric-arc technologies); second, how to integrate the acquisitions (always retain existing top managers, insist on daily meetings and reporting). But within the guidelines, Ispat managers could buy companies from Germany to Kazakhstan and run them in accordance with the changing flow of opportunities.

In contrast, complicated and richly resourced strategies often do not work. Take Pandesic, the joint venture for e-commerce services that Intel and SAP launched in 1997 and that folded in 2000. Too much effort went into a strategic plan that was overly complex and difficult to revise. Too many people were assigned to execute the plan. Pandesic executives had too many resources and an overly defined strategic position. What they did not have was simplicity. As the real market opportunity unfolded, they needed a simple focus in order to adjust flexibly.

Strategy Is Organizational

Programming the strategy from the top and then figuring out an organization to implement it may work in slow-moving markets. It’s the signature approach of strategists who simplistically think of organizations in terms of control and alignment of management incentives. In high-velocity markets, that approach won’t work. In such circumstances, strategy consists of choosing an excellent team, picking the right roles for team members and then letting their moves emerge. It’s like basketball. Los Angeles Lakers’ coach Phil Jackson does not mastermind the moves of Kobe Bryant and Shaquille O’Neal. Rather, he puts the right personnel in a triangle offense and lets them play. To the uninformed, the moves seem to flow from an elaborate playbook, but the astute fan understands that the organization itself is the strategy.

For companies, organizational strategy is the unique mapping (often termed patching) of modular businesses onto specific market opportunities. Think Velcro. Organizational strategy is firm and clear at any point in time but also is able to change quickly. A prime example: Hewlett-Packard’s wildly successful strategy in the mid-1980s to mid-1990s, which led to domination of the global printer industry.

H-P executives focused their business-unit teams — whether in Spain, Italy, Idaho, Colorado or Singapore — on clearly defined product and market targets. The teams’ assignment was to “take the hill.” They were guided by a few simple rules — for example, never spend money on an activity if someone else can do it. But the real key to the strategy was organizational. The quarterly realignment of the businesses against the shifting pattern of emerging, colliding, splitting and declining market and product opportunities defined the H-P strategy. As the markets changed, H-P executives added businesses, such as scanners and printer cartridges. They split off businesses, including removing the deskjet business from LaserJets. Sometimes they combined businesses (the dot-matrix and network-printing businesses). Occasionally, they exited a business. The repatching of businesses was rarely reported in the media, because the moves were usually small and even routine. Nonetheless, the frequent realignment of business units was the central feature of H-P’s enormously successful printer strategy.

More subtly, organizational strategy involves choosing the business scale, not just the focus, that is uniquely suited to the velocity of each market. Dell managers operate their businesses at the scale of about $1 billion. As businesses grow beyond that size, they are broken into smaller modules. Microsoft managers often operate their businesses at the scale of about 200 programmers.

The Economist magazine embodies a particularly strategic use of modularity and scale. From the outside, the weekly publication’s strategy seems to be to leverage a core competence in writing and to position itself as a magazine for the sophisticated reader. From the inside, the strategy is the organization. Editors at The Economist give their writers unusually large swaths of territory and considerable freedom in choosing what to cover. The organizational strategy not only gives writers greater scope to develop stories, it enables senior editors to hire fewer (and, presumably, better) writers and compensate them more, both with money and with unfettered, interesting work. The resulting product is more creative than that of other news magazines and has the greater depth that appeals particularly to the upmarket reader.

Strategy Is Temporal

Finally, strategy is temporal. In traditional strategy, time is not part of the strategic equation. After all, markets are assumed to move slowly and predictably, if at all. In contrast, time is crucial on the new high-velocity playing field. The easiest way to think about temporal strategy is through understanding the concept of corporate genes. A corporation’s unique mix of genes is its combined products, brand, technology, manufacturing capabilities, geographic locations and so on. Managers using temporal strategy conduct a kind of genetic engineering, pursuing a series of unique strategic moves in which one or more genes are changed. They may introduce a new technology, change a brand, enter a new country or drop a manufacturing competence. They are constantly splicing in new genes or cutting out others to engineer genetic evolution.

The best temporal strategies also exhibit a pattern that occurs in the natural world of earthquakes and tropical storms: the inverse power law. That is, small events are common, mid-size events occur occasionally, and large events are rare. Good temporal strategies are unique combinations of small, incremental changes plus midsize changes and large, radical changes. Most of the time, temporal strategy should feature safe, small changes that elaborate on aspects of the core business. But temporal strategy needs to include medium-scale moves occasionally and, even more occasionally, large-scale moves that reinvent significant portions of the corporation. This also means that the dichotomy of “stick to the core” versus “creative destruction” is a false one. Effective managers pursue both approaches.

EBay offers an excellent example of temporal strategy. The Internet star was launched as a Web site where traders of collectibles could congregate and trade. It morphed into an auction, added other kinds of merchandise (such as cars and fine art), branched beyond the auction format to fixed-price markets and expanded into numerous countries. It became what the business-to-business exchange was to have been. Most often, eBay’s changes were small. Occasionally they were large. There was always a mix of large and small changes, with varying emphasis on changing the genes of country, merchandise, business model or auction format. EBay managers also sometimes added rhythm to their temporal strategy by pacing the evolution more rapidly or more slowly as the opportunity for advantage dictated. As a result, eBay managers evolved their businesses through varying moves — and created the Internet’s most durable star.

Sustainable Competitive Advantage?

Is sustained competitive advantage still relevant? Sometimes long-term competitive advantage and its attendant creation of wealth can occur on the new economic playing field. More often, they cannot. The more salient point is, however, that the duration of competitive advantage is unpredictable. It may last 10 minutes, 10 months or 10 years. So although most executives would like sustained advantage, they are forced to operate as if it does not exist. The challenge is, therefore, not so much achieving sustainable advantage as it is coping with not knowing whether such an advantage actually exists — except in retrospect.

Strategy is still about being different. But today, the way in which strategy is different is itself different. Globalization is rearranging the turf. The speed of play on the field is lightning fast. The scale and pace of change are unpredictable. The economics of disequilibrium and information have moved to center stage. As a result, the recipe for effective strategy must now focus on unique strategic processes with simple rules, on the modular patching of businesses to fleeting market opportunities and on evolutionary timing for ongoing strategic moves. In other words, we are not back to “strategy as usual.” Whether we like it or not, strategy has changed.