STRATEGIC INTENT

To: Professor FribergFrom: Michael DunaganDate: April 27, 2010

MGT 512: Strategic Managementof Technology

Focus on Strategic Intent

Introduction

In the book "Random Walk Down Wall Street", Burton Malkiel took the idea of efficient

markets to its logical conclusion, and argued that a blindfolded monkey in theory should

be able to perform as well on the stock market as professional brokers. The Wall Street

Journal found this argument intriguing, and decided to test the hypothesis by having

reporters throw darts to select random stocks. An informal competition was consequently

arranged over several months to test how random selection performed against leading

stock traders. Luckily for the financial analysts, the latter managed to at least beat the

darts on average, but the victory was not deemed sufficiently convincing enough to

justify the hefty brokerage fees charged by analysts. Similar criticism has been raised

against management consultants, but a performance comparison can in this case not be

performed using darts or monkeys. Despite the criticism, consulting is a quickly growing

industry and the demand for tools like strategic models are increasing in correlation with

the industry. It thus created somewhat of an upheaval when London Business School

Professor Gary Hamel and University of Michigan Professor C.K. Prahalad published the

article "Strategic Intent" in a 1989 edition of The Harvard Journal.

The authors take what some consider to be a revolutionary approach to corporate

strategy, and argue that a core competency is embedded within the organisation. A core

competency is, in other words, not just something that the company does well. As the

article was written before the burst of the bubble, Hamel and Prahalad appear to be very

enthusiastic about the Japanese economy. This fascination explains much of the

background for their new approach to strategy, and Japanese examples are also used to

point out shortcomings of more traditional corporate strategy models. The thesis

presented by the authors does in some cases contradict previously accepted knowledge in

the field of corporate strategy. In other cases, though, the thesis supports the principle

behind the more traditional models. This paper will attempt to analyse the arguments

presented by Hamel and Prahalad, for then to apply models as the experience curve, the

Porter models, the growth-share matrix, the industry attractiveness model, and the

product-life cycle to the thesis. In addition, frequent references will be given to Boston

Consulting founder Bruce D. Henderson's article on "The Origin of Strategy". Before

applying the models, however, a brief review of the thesis presented by Hamel and

Prahalad is necessary.

Strategic Intent

As mentioned in the introduction, Hamel and Prahalad consider a company's core

competency to be embedded within the organisation. Defining core competency is not an

easy task, but it can be said to be a bundle of organisational and technological capabilities

that collectively capture know-how and are capable of being deployed to provide unique

functionality and sustain advantage in the market place. This know-how may evidently

include tacit knowledge, which perhaps is most evident in traditionally clan-structured

organisations. Prahalad and Hamel argue that models such as "strategic fit", "generic

strategies", and strategic hierarchy" may indeed have had a negative effect on the

performance of Western companies. The cause of this negative impact is that non-

western companies, primarily represented by the Japanese, have underpinned the logic of

Western management thought.

Hamel and Prahalad base their argument upon the dramatic post-war ascent of Japanese

companies, and that the latter rose to dominate world markets by having initial ambitions

that in the West would have been considered highly unrealistic with regards to their

resources and capabilities. Still, an obsession to win was created and sustained at all

levels of the organisation, thus laying the groundwork for a 10- to 20-year quest for

global leadership. The authors term this "strategic intent", but the latter does more than to

simply envision a desired leadership position and establish the criterion the company will

use to chart its progress. Strategic intent also includes an active management process to

focus the entire organisation on the essence of winning, but it is also stable over time

while allowing for reinterpretation as new opportunities emerge. Similarly, it helps set a

target that deserves personal commitment and effort. Although strategic intent is stable

over time, a target should be motivational and goals thus need to be realistic. In this

sense, the professors compares strategic intent to a marathon run in 400-meter sprints:

"No one knows what the terrain will look like at mile 26, so the role of top management

is to focus the organisation's attention on the ground to be covered in the next 400

meters". Consequently, a challenge needs to create a sense of urgency, and competitor

focus should be developed at every level through widespread use of competitive

intelligence. Additionally, employees need to be provided the skills necessary to work

efficiently, and the organisation as a whole should be given time to digest one challenge

before launching another.

Hamel and Prahalad mention four approaches to competitive innovation that have been

used by Japanese companies in their quest for global expansion. These are building layers

of advantage, searching for loose bricks, changing the terms of engagement, and

competing through collaboration. These approaches will be discussed in greater detail

throughout the paper, and further elaboration will be given on the thesis presented by the

authors. In terms of the strategic models that will be applied, it should be mentioned that

Hamel and Prahalad appear to be more critical of the way the models are actually applied

than the general theory behind them. They do in fact describe the product life cycle, the

experience curve, product portfolios, and generic strategies to be "reasonable concepts".

However, they add the models also tend to limit the number of strategic options

considered by managers: "They create a preference for selling businesses rather than

defending them. They yield predictable strategies that rivals easily decode". As will be

shown, this argument holds some validity for several of the major strategy models.

The Porter Models

Michael E. Porter's industrial organisation model argues that the state of competition in

an industry depends on five basic competitive forces. These are potential entrants,

suppliers, substitutes, buyers, and evidently the rivalry that exists between competing

firms. Based on this model, Porter developed three generic approaches to outperform

other firms in an industry, namely overall cost leadership, differentiation, and focus.

Additionally, he also developed a framework for competitor analysis, arguing that a

central aspect of strategy formulation is perspective competitor analysis. Concerning the

latter, Hamel and Prahalad consider it similar to "a snapshot of a moving car". A

traditional analysis of Honda in the 1950s would very unlikely have predicted the

company's impressive growth in a variety of industries, in particular as Honda's definition

of its market was very extensive. The company heeded to the advice of Bruce Henderson

of "moving the boundary of advantage into the potential competitor's market and keeping

that competitor from doing the same". Other companies have shown similar ability to

surprise both the market and unsuspecting competitors, Japanese companies like Sony,

Canon, Toyota and Nissan being well-known examples. As the authors mention, Western

companies rarely considered the Japanese companies to constitute an important

competitive force, but even an appreciation of the challenge would unlikely have enabled

the Western companies to successfully meet the competitive strength of the Japanese.

According to Porter, there are four components to competitor analysis, these being future

goals, current strategy, assumptions, and capabilities. To Porter's credit, he mentions that

it is very difficult to study the driving factors of a company, although these often

determine how a competitor will behave in the long run. As strategic intent is embedded

in an organisation, it can be argued that the only way to successfully study this intent is

through espionage by means of actually having someone work for the company. The

authors comment how many competitors were unable to see Honda's strategic intent and

its growing competence in engines and power trains. This evidently points back to the

wisdom of Henderson, and illustrates the powerful impact a company can make when

introducing products that are just outside the conventional definition of the leaders'

product-market domains.

It can easily be argued that it is actually necessary to be part of an organisation to

understand its future behaviour, in particular when the driving forces are as strong as they

are in many Japanese companies. The authors sarcastically comment on the tendency of

Western companies, in particular American ones, to attempt to gain a leadership position

through intrapreneurship, skunkworks or other innovative techniques for internal

venturing. Still, this more structured and orthodox model simplifies the possibility of

competitive analysis, particularly when innovation becomes an isolated activity. Hamel

and Prahalad conclude: "Assessing the current tactical advantages of known competitors

will not help you understand the resolution, stamina, and inventiveness of potential

competitors".

Still, the situation may prove different today than during the high-growth era, as Japanese

companies were experiencing increasing sales in both their domestic and foreign markets.

While Japanese companies defined their markets in ways that stunned Western

competitors, many of the same companies are currently struggling to streamline their

businesses and focus on core competencies. It is unclear if this will lead to the companies

becoming more similar to their Western counterparts, and thus perhaps also more

predictable. While American managers often found it difficult to adopt Japanese human

resource management practises, similarly may Japanese companies today find it

challenging to adopt foreign business practices. Canon, for example, recently reformed its

compensation system in favour of pay based on performance rather than seniority, but it

is difficult to say what impact this will have on the organisation as a whole. As strategic

intent needs to be successfully embedded into every level of the organisation, internal

competition among employees may for example lead to less unity with respect to set

goals.

Hamel and Prahalad do, however, see value in understanding one's competitors. As one

of the four approaches to competitive innovation is searching for loose bricks, a strategy

that begins with a careful analysis of the competitor's conventional wisdom. By focusing

on a competitor's current strategy, an understanding can be drawn with consideration to

how the competitor defines its market, the profitability of various parts of its business

portfolio and to geographically analyse the market. The objective is to build a base of

attack just outside the market territory that industry leaders currently occupy, and not to

find a corner of the industry where larger competitors seldom tread. As the latter would

imply a generic diversification strategy, it is seldom preferred by Japanese companies,

which traditionally have sought to capture dominant market share. French fashion

companies, for instance, have shown that a diversification strategy can be highly

profitable, but a lack of interest in the high-brand market might be due to Japan's

traditional competitive advantage as a low-cost producer.

The authors mention Honda's entry into Eastern Europe as an example of a geographic

loose brick, while the company used a low-cost strategy to enter the motorcycle market.

Overall cost leadership is also a major component of two other approaches to competitive

advantage mentioned by Hamel and Prahalad, namely that of changing the terms of

engagement and layers of advantage. While the authors define changing the terms of

engagement as "refusing to accept the front runner's definition of industry and segment

boundaries", the example mentioned to support the strategy relies to a large extent on cost

cutting. To attack Xerox in the American market for copiers, Canon neatly side-stepped a

potential barrier to entry by using more efficient distribution channels. In addition, Canon

increased efficiency by producing fewer models than Xerox and by lowering costs in a

wide range of areas, consequently enabling the company to offer better value to

customers. Henderson wrote "Business strategists can use their imagination and ability to

reason logically to accelerate the effects of competition and the rate of change". And also

that "Competitors that make their living in the same way cannot coexist - no more in

business than in nature". Canon would evidently not have succeeded by attacking Xerox

head-on, and the earlier failure of both Kodak and IBM to do just this should, in addition

to Henderson's principle of diversity, have been more than enough to persuade them

otherwise.

Similarly, building layers of advantage basically focuses on the strength a company gains

by steadily expanding its arsenal of competitive weapons. The authors emphasise how

Japanese companies used a low-cost strategy to build a base in the private-label business,

for then to create powerful brands in order to add another competitive layer. Other

advantages have been added over time, but Japanese companies have lost the initial layer

of advantage, namely that of being the low cost producer. Presently, Japanese companies

are understandably worried that Chinese companies eventually will create successful

brands that can compete with Japanese companies in electronics, automobiles and

computers. The hope must be that they are better prepared than their American

counterparts once were.

A comparison of Hamel and Prahalad's four forces of competitive innovation and Porter's

generic will therefore show that they are not inherently different. While the emphasis and

wording may differ, the underlying principles are the same. Additionally, Prahalad and

Hamel warn that too stringent a use of strategies leads to predictable behaviour. A

competitive strategy is rarely pure in terms of following just one model, and the authors

certainly make it clear that the success of the likes of Sony and Canon was due to

strategic intent rather than blind use of strategic models. It is, however, a fact that

Japanese companies now find it much more difficult to enter foreign markets based on a

low-price strategy. A weak yen is therefore of less importance to Japan that what was

traditionally the case. Consequently, a low-cost strategy can thus not be implemented to

compress time in order to run down the experience curve.

The Experience Curve

As earlier mentioned, Hamel and Prahalad consider the experience curve to be a

reasonable concept. The curve addresses the empirical relationship that exists between

changes in direct manufacturing costs and the accumulated volume of production. It is, as

a result, considered by many managers to be a key tool by which to formally analyse the

competitive cost structure of a given industry. In short, the cost reduction due to

experience effects is believed to be caused by issues like learning, specialisation and

redesign of labour tasks, product and process improvements, methods and systems

rationalisation, economies of scale, and know-how. High market share is thus a result of

high-accumulated volume, which again is caused by a low unit cost. This is evidently

related to the earlier discussed low-cost generic strategy, but a few additional comments

need to be made.

Hamel and Prahalad take care to emphasise the limits of the experience curve, in

particular that the curve is reliant on a competitor's failure to appreciate market share or

the future growth of a market. While the strategy proved successful to many Japanese

companies, it makes a decent argument to say that companies have learnt from the past.

To emphasise this point, the authors mention the semiconductor industry as having the

capacity to serve a market twice as big as the actual size. Interestingly enough, the

persistence of over capacity in the semiconductor market has persisted until today, and

the automobile industry is a similar example. Companies understand that they need to

grow at the rate of the market just to maintain market share, and the risk of failure at this

is perceived as greater than the risk of overproduction. The Internet boom is a another

example of an industry growing at several times the actual demand, and investors in

Amazon.com are hoping the company's high market share will lead to high future profits.

Consequently, the authors argue that "an organisation's capacity to improve existing skills

and learn new ones is the most defensible competitive advantage of all". Presently, while

less competitive benefit can be derived from the experience curve than what used to be

the case, new advantages need to be built to create leverage. Thus, rather than disputing

the validity of the experience curve, Hamel and Prahalad argue that the positive effect

derived from it has been diluted with time.

Product Life-Cycle

The concept known as the product life cycle uses the age of a product category as a basis

from which to address three major issues. First, the curve helps predict future sales

growth, and also customer and competitor behaviour. Second, it helps prescribe

appropriate marketing and other strategies. Finally, the curve helps allocate resources

among categories. As with the experience curve, Hamel and Prahalad consider it a

reasonable concept that can have toxic consequences if used uncritically. They comment

that concepts like "mature" and "declining" are largely definitional, and that Japanese

companies have had a different attitude to the concept. While many Western executives

will label an industry mature when sales growth starts stagnating, this may simply mean

that sales growth has slowed in their current geographic area for existing products sold

through existing channels. Hamel and Prahalad illustrate the different Japanese thinking

by quoting a Yamaha executive on his definition of a mature industry: "Only if we can

not take any market share from anybody in the world and still make money".

As a consequence of the traditional Western viewpoint, a company may be foreclosed

from a broad stream of future opportunities. The authors mention the television industry

as an example, where some companies considered the colour TV to be the last and final

invention of the industry. In contrast, a company like Sony has continued making

products in a wide range of industries that in the traditional thinking of the product life

cycle would be considered to be in decline. Since the company still finds itself in the

television industry, it is presently well positioned to meet future demand for flat screen

TV-sets.

An additional criticism of the product life cycle is also relevant to the experience curve,

and concerns the focus of the strategies on a domestic setting. This will be discussed in

greater detail with relation to the growth-share matrix, but the product life cycle is

evidently of little use to a company that has failed to define its market. Bruce Henderson

emphasises the principle that a company must expand the market in which it can maintain

an advantage over any and all competitors that might be selling to its competitors. The

life of a product category may thus be prolonged if a company is willing and able to

expand its market and make changes to its product, pricing and distribution channels. In

other words, while the product life cycle may be predictable in shape, uncritical

application of the curve may become a self-fulfilling prophecy. In the same way as the

experience curve, the product life cycle concept should therefore be used with great care

and only as a supplement to other models.

The Growth/Share Matrix - Industry Attractiveness

Although two rather different models, they likely fall into the area of portfolio planning.

Hamel and Prahalad consider the latter approach to be flawed as it "portrays top

management's investment options as an array of businesses rather than as an array of

geographic markets". Consequently, the approach of the models becomes rather

predictable, a criticism the authors also use with regards to the experience curve, generic

strategies and the product life cycle. While the growth/share matrix displays graphically,

on a 2-by-2 matrix, the position of each business in a company's portfolio, the industry

strength matrix does the same on a 3-by-3 matrix. While the former displays market

growth rate versus market share, the latter focuses on business strength versus industry

attractiveness.

Hamel and Prahalad uses as an example the tendency of businesses to withdraw from an

industry when faced with competition from foreign companies. While a company often

will choose to enter a new industry when abandoning another to the forces of global

competition, the authors comment that there are fewer and fewer businesses in which a

domestic-oriented company can find refuge. This may well be true, particularly when

considering the liberalisation of global markets that has taken place since the publishing

of "Strategic Intent" in 1989. Presently, global scale is in many industries becoming a

necessity rather than just a presumed benefit, of which the automobile industry is an

obvious example. Even relatively small and exclusive British car manufacturers have

found it prudent to enter alliances with other companies, in other words to compete

through collaboration. The latter is evidently, in the view of the authors, one of the four

possible approaches to competitive innovation.

To further emphasise the predictability of managing by the portfolio concept, the authors

quote an executive at a global company who is always happy to encounter competitors

following this strategy. This logic can again be derived from what Bruce Henderson

considered to be a basic element of strategic competition, namely the ability "to predict

how a given strategic move will rebalance the competitive equilibrium". If a company

can predict how much market share it will need to capture from a competitor before the

latter withdraws from the market, the former will evidently be better able to decide

whether to enter the market or not. Consequently, Henderson continues: "A competitor's

failure to react and then deploy and commit its own resources against the strategic move

of a rival can turn existing competitive relationships upside down". It is evident,

however, that this counterattack will be less effective if it conforms to the expectations of

the competitor. Hamel and Prahalad are thus not being very original when criticising

other strategic models, as the latter should not be used in an uncritical and predictive

manner.

The industry attractiveness model was originally created for General Electric, a company

that the authors consider to be less than ideally organised. Generally, conglomerates tend

to perform poorly on the stock market, this as a bundle of companies tend be valued

lower than the companies would independently. The head of Tyco International, Dennis

Kozlowski, used a strategy similar to General Electric and wanted only the number one

or two spot in the market. Still, the CEO has now decided to dismantle the company, and

believes Tyco International will be worth more than 50% more when split up than as a

whole (The Economist, January 26). General Electric has, in contrast to many Asian

conglomerates, chosen not to build up a global corporate franchise. Additionally, the

company has failed to realise that the economies of scope may be as important as the

economies of scale. The authors argue that a company like General Electric, with its

preference for single business units, is less flexible than its counterparts in Asia that

rather focus on core competencies. To Japanese companies, the combined strength of a

shared global corporate brand franchise and shared core competence acts as a mortar.

Without this mortar, they would be more vulnerable to global competitors. Overall, the

authors criticise the portfolio approach to strategy as it leaves too little power with top

management, and decentralised small business units will also be less stable and more

reliant on denominator management.

Conclusion

In addition to the criticism of the strategic models that has been summarised throughout

this paper, Hamel and Prahalad also argue that most models are premised on a strategy

hierarchy in which corporate goals guide business unit strategies and business unit

strategies guide functional tactics. The role of senior management is to make strategy

while lower level management is responsible for the execution, but the result is according

to the authors a hierarchy that undermines competitiveness by fostering an elitist view of

management. The result of the latter is that the organisation becomes disenfranchised,

and employees may fail to involve themselves in the work of becoming more competitive

or to identify with corporate goals.

This certainly is an intriguing argument, and the authors elaborate further that a

hierarchical structure of this nature will result in unsatisfactory communication channels.

Western companies attempt to address the latter issue by changing from bureaucratic to

organic organisational structures. Similarly, managers prefer to be described as

transformational rather than transactional leaders. Hamel and Prahalad appear to

insinuate that the idea of strategic intent relies on a more egalitarian organisational

structure than more traditional models, but it is tempting to argue that is rather a question

of implementation. While the authors argue that "strategic intent gives employees the

only goal that is worthy of commitment: to unseat the best or remain the best, world-

wide", it is evident that alternative models can play complimentary roles on a short-term

basis. Stimulating passion for an organisation's long-term goals on all levels of the

organisation requires high managerial skill, and it probably is not easier to convoke

enthusiasm for a strategic intent than it is for a strategy based on for instance the

experience curve. Although it is doubtful that Japanese organisations consciously applied

models as the experience curve to overtake their Western competitors, a study of the

experience curve will certainly provide an interesting analysis for Honda's entry into the

motorcycle industry. The main contribution of Hamel and Prahalad is to show that the

success of Japanese companies can not be copied by simply applying any relevant

strategic model, but that the competitive advantage enjoyed by Japanese corporations up

until 1989 was derived from a much more complex background.

Not long after the publication of "Strategic Intent" in The Harvard Journal, Japan entered

a severe recession that still has not reached a conclusion. The fascination with the

Japanese economy had thus also reached its peak, and the world's second largest

economy is presently offered no other attention than ridicule. Hamel and Prahalad

certainly showed that Western companies would need to go through radical changes in

order to adopt Japanese business practices, and that the issue was not simply to

understand the experience curve. Western companies have therefore found it to be less of

a challenge to increase efficiency by other means, for instance by the use of stock-options

for both employees and managers. Although this form of remuneration has received part

of the blame for the Enron bankruptcy, it is one of many Western business practices that

many Japanese firms are struggling to adopt. Very likely, it will soon be shown that

implementation of for example stock options will demand more fundamental

organisational changes, and perhaps Japanese companies will find this as difficult as

Western companies did in the 1980s. Moreover, all strategists should bear in mind the

words of Bruce Henderson, who accurately pointed out that competition existed long

before strategy: "If the animals were of different species, they could survive and persist

together. If they were of the same species, they could not". While the Wall Street Journal

will not be able to test the performance of monkeys to that of consultants, it would

certainly constitute great progress if the latter could derive the same knowledge from

nature as Henderson once did. An understanding of the nature of competition should be

considered a prerequisite to the implementation of any strategic model.