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STRATEGIC MANAGEMENT-History and Development

Until the 1940s, strategy was seen as primarily a matter for the military. Militaryhistory is filled with stories about strategy. Almost from the beginning of recordedtime, leaders contemplating battle have devised offensive and counter-offensivemoves for the purpose of defeating an enemy. The word strategy derives from theGreek for generalship, , and entered the English vocabulary in 1688 as

. According to James 1810 Military Dictionary, it differs from tactics, whichare immediate measures in face of an enemy. Strategy concerns something doneout of sight of an enemy. Its origins can be traced back to Sun Tzusfrom 500 BC.

Over the years, the practice of strategy has evolved through five phases (eachphase generally involved the perceived failure of the previous phase):

1. Basic Financial Planning (Budgeting)

2. Long-range Planning (Extrapolation)

3. Strategic (Externally Oriented) Planning

4. Strategic Management

5. Complex Systems Strategy:

1. Complex Static Systems or Emergence

2. Complex Dynamic Systems or Strategic Balance

Basic Financial Planning (Budgeting)

(1889-1937), founder of the global management consultancy thatbears his name, was a professor of cost accounting at the school of business at theUniversity of Chicago. His most important publication, (1922), isquoted as the start of the era of modern budgetary accounting.

Early efforts in corporate strategy were generally limited to the development of abudget, with managers realizing that there was a need to plan the allocation offunds. Later, in the first half of the 1900s, business managers expanded thebudgeting process into the future. Budgeting and strategic changes (such asentering a new market) were synthesized into the extended budgeting process, so

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that the budget supported the strategic objectives of the firm. With the exceptionof the Great Depression, the competitive environment at this time was fairly stableand predictable.

Long-range Planning (Extrapolation)

Long-range Planning was simply an extension of one year financial planning into

five-year budgets and detailed operating plans. It involved little or no considerationof social or political factors, assuming that markets would be relatively stable.Gradually, it developed to encompass issues of growth and diversification.

In the 1960s, did much to focus business managers attention onstrategic planning, bringing the issue of long-range planning to the forefront.

, edited by Steiner focused upon the issue ofcorporate long-range planning. He gathered information about how differentcompanies were using long-range plans in order to allocate resources and to planfor growth and diversification.

A number of other linear approaches also developed in the same time period,

including game theory. Another development was operations research, anapproach that focused upon the manipulation of models containing multiplevariables. Both have made a contribution to the field of strategy.

Strategic (Externally Oriented) Planning

Strategic (Externally Oriented) Planning aimed to ensure that managers engagedin debate about strategic options before the budget was drawn up. Here the focusof strategy was in the business units (business strategy) rather than in theorganization centre. The concept of business strategy started out as businesspolicy, a term still in widespread use at business schools today. The word policyimplies a hands-off, administrative, even intellectual approach rather than theimplementation-focused approach that characterizes much of modern thinking onstrategy. In the mid-1900s, business managers realized that external events wereplaying an increasingly important role in determining corporate performance. As aresult, they began to look externally for significant drivers, such as economic forces,so that they could try to plan for discontinuities. This approach continued to findfavor well into the 1970s.

While the theorists were arguing, one large US Company was quietly innovating.General Electric Co. (GE) had begun to develop the concept of strategic business

units (SBUs) in the 1950s. The basic idea-now largely accepted as the normal andobvious way of going about things-was that strategy should be set within thecontext of individual businesses which had clearly defined products and markets.Each of these businesses would be responsible for its own profits and development,under general guidance from headquarters.

The evolution of strategy began in the early 1960s, when a flurry of authoritativetexts suddenly turned strategic planning from an issue of vague academic interestinto an important concern for practicing managers. Prior to this strategy wasnt partof the normal executive vocabulary.

Influential figure in both strategy and business

structure-Strauss Professor of Business History at Harvard since 1971.

Chandler talks about the development of the management of a large company fromhistory; in particular from the mid nineteenth century to the end of the First WorldWar (what he calls the formative years of modern capitalism). During this period,

George Steiner

Managerial Long-Range Planning

Alfred Chandler (1918-)


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the typical entrepreneurial or family firm gave way to larger organizationscontaining multiple units. A new form of management was needed because theowner-manager could not be everywhere at once. In addition, a new breed ofmanager was needed to operate in this environment the salaried professional.

He advised splitting the functions of strategic thinking and line management. InChandlers analysis, the effective organization now separates strategy and day-to-day operations. Strategy becomes the responsibility of managers at headquarters,leaving the unit managers to concentrate on the here and now in decentralized

units. In effect, he was advising creating a line management who would carry outplans developed by a more serious staff function elsewhere.

His influential book was published in 1962, appealing tomany large companies that were having difficulty in coping with their size. In recentyears it has come under heavy attack from critics, who maintain that strategy mustbe a line responsibility, decided as close as possible

, published in 1964, which pointed out thatorganizations constantly need to reassess themselves, had the earliest real impacton managers. Like people, they need to keep renewing their skills and abilities something they can only do effectively through careful planning.

at Harvard looked in depth at what happened in a small number ofcompanies to see what worked well and what didnt. In several companies forexample, he found that the managers confused the strategic plan with itscomponents in particular, the marketing plan was often assumed to be the samething as the overall corporate plan.

who was based at Harvard since 1960, pointed out thatan excessive focus on marketing Planning frequently led companies to forget aboutmanufacturing needs until late in the day, when there was little room formanoeuvre. Skinner argued for a clear manufacturing strategy to proceed in parallel

with the marketing strategy. In many ways he was ahead of his time, for theconcept of technology strategy or manufacturing strategy had only begun to takeroot in the 1980s and many manufacturing companies stil l have no one in charge ofthis aspect of their business.

One particularly influential idea from skinner was the focused factory. Hedemonstrated that it was not normally possible for a production unit to focus onmore than one style of manufacturing. Even if the same machines were used toproduce basically similar products, if those products had very different customerdemands that required a different manner of working, the factory would not besuccessful. For example, trying to produce equipment for the consumer market,where a certain error rate in production was compensated for by higher volume sales

at a lower price, was incompatible with producing 100 per cent perfect product forthe military. The most likely outcome was a compromise that satisfies no one.

, also from Harvard, put forth their contingencytheory of organizations. They argued that every organization is composed ofmultiple paradoxes. On the one hand, each department or unit has its ownobjectives and environment. It responds to those in its own way, both in terms ofhow it is structured, the time horizons people assume, the formality or informalityof how it goes about its tasks and so on. All these factors contribute towards whatthey call differentiation. At the same time each unit needs to work with others inpursuit of common goals. That requires a certain amount of integration, to ensure

that they are all working with rather than against each other. In their studies of USfirms in a variety of manufacturing industries, they found that companies with ahigh level of differentiation could also have a high level of integration. The reasonwas simple; the greater the differentiation, the more potential for conflict betweendepartments and therefore the greater the need for mechanisms to help them worktogether. Their work forced many managers to understand that organizations were

Strategy and Structure

John Gardners Self-Renewal

Kirby Warren

Wickham Skinner (1924-)

Paul Lawrence and Jay Lorsch


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longer-term goals or aims.

This was all very well in the 1960s and for much of the 1970s. Predictions andstrategies were formed with confidence and optimism (though they were notnecessarily implemented with such sureness). Security could be found. The businessenvironment appeared to be reassuringly stable. Objectives could be set andstrategies developed to meet them in the knowledge that the overriding objectivewould not change.

Such an approach, identifying a target and developing strategies to achieve it,became known as .

Under MBO, strategy formulation was seen as a conscious, rational process. MBOensured that the plan was carried out. The overall process was heavily logical and,indeed, any other approach (such as an emotional one) was regarded as distinctlyinappropriate. The thought process was backed with hard data. There was a beliefthat effective analysis produced a single, right answer; a clear plan was possibleand, once it was made explicit, would need to be followed through exactly andprecisely.

In practice, the MBO approach demanded too much data. It became overly complexand also relied too heavily on the past to predict the future. The entire system wasineffective at handling, encouraging, or adapting to change. MBO simplifiedmanagement to a question of reaching A from B using as direct a route as possible.Under MBO, the ends justified the means. The managerial equivalent of highwayswere developed in order to reach objectives quickly with the minimum hindrancefrom outside forces.

book was first publishedin 1994. The confusion of means and ends characterizes our age, Henry Mintzbergobserves and, today, the highways are likely to be gridlocked. When the highwaysare blocked managers are left to negotiate minor country roads to reach their

objectives. And then comes the final confusion: the destination is likely to havechanged during the journey. Equally, while MBO sought to narrow objectives andignore all other forces, success (the objective) is now less easy to identify. Todaysmeasurements of success can include everything from environmental performance tomeeting equal opportunities targets. Success has expanded beyond the bottomline.

Strategic Planning to Strategic Management

Strategic Planning to Strategic Management: Strategic planning was a plausibleinvention and received an enthusiastic reception from the business community. Butsubsequent experience with strategic planning led to mixed results. In a minority offirms, strategic planning restored their profitability and became an established part

of the management process. However, a substantial majority encountered aphenomenon, which was named paralysis by analysis: strategic plans were madebut remained unimplemented, and profits/growth continued to stagnate. Claimswere increasingly made by practitioners and some academics that strategic planningdid not contribute to the profitability of firms. In the face of these claims, Ansoffand several of his colleagues at Vanderbilt University undertook a four-year researchstudy to determine whether, when paralysis by analysis is overcome, strategicplanning increased profitability of firms.

Ansoff looked again at his entire theory. His logic was impressively simple eitherstrategic planning was a bad idea, or it was part of a broader concept which was not

fully developed and needed to be enhanced in order to make strategic planningeffective. An early fundamental answer perceived by Ansoff was that strategicplanning is an incomplete instrument for managing change, not unlike anautomobile with an engine but no steering wheel to convert the engines energyinto movement.

Management by Objectives (MBO)

Henry Mintzbergs The Rise and Fall of Strategic Planning


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Characteristically, he sought the answer in extensive research. He examinedacquisitions by American companies between 1948 and 1968 and concluded thatacquisitions which were based upon an articulated strategy fared considerablybetter than those which were opportunistic decisions. The result of the research wasa book titled .

In 1972 Ansoff published the concept under the name ofthrough a pioneering paper tit led , which wasultimately to earn him the title of the father of strategic management. The paper

asserted the importance of strategic planning as a major pillar of strategicmanagement but added a second pillar the capability of a firm to convert writtenplans into market reality. The third pillar- the skill in managing resistance to change was to be added in the 1980s.

Ansoff obtained sponsorship from IBM and General Electric for the first InternationalConference on Strategic Management, which was held in Vanderbilt in 1973 andresulted in his third book, .

The complete concept of strategic management embraces a combination of strategicplanning, planning of organizational capability and effective management ofresistance to change, typically caused by strategic planning. Ansoff says that

strategic management is a comprehensive procedure which starts with strategicdiagnosis and guides a firm through a series of additional steps which culminate innew products, markets, and technologies, as well as new capabilities. StrategicManagement aimed to give people at all levels the tools and support they neededto manage strategic change. Its focus was no longer primarily external, but equallyinternal how can the organization seize and maintain strategic advantage byusing the combined efforts of the people that work in it?

Between 1974 and 1979 Ansoff developed a theory which embraces not onlybusiness firms but other environment-serving organizations. The resulting booktitled , was published in 1979.

Self-confirming Theories: In the 1980s, there was a renewed interest indiscovering ways of dealing with an increasingly complex and changing environment.It was during this time that the practice of strategy began to move toward ametaphorical application of an old idea. For many years, management theorists hadborrowed the ideas of an economic theory commonly referred to as equilibriumtheory, or equilibrium systems theory, as a basis for developing managementtheory. Basically, the concept was developed around the idea of linearity (and, tosome extent, simplicity). Self-confirming theories of strategy require the strategistto assume that what the firm has done in the past will be done in the future. Ineffect, executives confirm that past strategy has been appropriate by adopting itrepeatedly over time.

Self-confirming theories may be recognized by their historic-simple frame andmental models. Such theories use terms such as mission, core competencies,

competitive advantage, and sustainable competitive advantage. They arefounded in the theory of comparative advantage developed by economists DavidRicardo and Adam Smith. The theory of comparative advantage, which suggests thatsome countries have unique assets, has become the basis for contemporarystrategy. Strategists modified the idea and called it competitive advantage. If itchooses to use that approach, a firm needs to identify its core competencies,competitive advantage, and then convert that identification to a mission. Inprinciple, the purpose of the mission statement is to keep the firm focused upon its

unique area of competitive advantage. Further, the mission is supposed to setboundaries and to keep it in the box. Generally, self-confirming theories force theassumption of a linear mental model, since it is historic (including present)competencies or resources that provide the constructs for future strategy.

Thousands of articles and books have been written on the development of

Acquisition Behavior of US Manufacturing Firms, 1945-1963

Strategic ManagementThe Concept of Strategic Management

From Strategic Planning to Strategic Management

Strategic Management


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equilibrium-based strategy. The equilibrium-based strategic model involves asuccession of steps that are designed to keep the firm focused upon its historiccompetencies. Out of that concept ideas such as SWOT analysis (strengths,weaknesses, opportunities, and threats) and five forces analysis were developed.The latter is dealt with in Michael Porters 1985 book Competitive Strategy. In mostcases, the difference between one key thinker and another is minor at best, but

of Harvard Business School is perhaps the best known of all thestrategy theorists. He has generally been more prolific than the rest. Porter has

been responsible for the writing of numerous books and articles that have beenwidely accepted in the field. He has been especially involved in the creation orpopularization of a number of tools that have been widely used in the discipline.

Porters first book for practicing managers,, was first published in 1980. Drawing heavily

on industrial economics (a field of study that tries to explain industrial performancethrough economics), he was trying to take these basic notions and create a muchricher, more complex theory, much closer to the reality of competition. The bookdefines five competitive forces that determine industry profitability potentialentrants, buyers (customers), suppliers, substitutes, and competitors within the

industry. Each of these can exert power to drive margins down. The attractivenessof an industry depends on how strong each of these influences is.brought together in a rational and readily understandable manner both

existing and new concepts to form a coherent framework for analyzing thecompetitive environment.

The realization that he had not been focusing on choice of competitive positioning,this work led Porter in turn to his interests in the concept of competitive advantage,the theme of his next major book,

(1985). He sought a middle ground between the two polarizedapproaches then accepted-on the one hand, that competitive advantage wasachieved by organizations adapting to their particular circumstances; and, on the

other, that competitive advantage was based on the simple principle that the morein-tune and aware of a market a company is, the more competitive it can be(through lower prices and increased market share). From analysis of a number ofcompanies, he developed generic strategies: Porter contends that there are threeways by which companies can gain competitive advantage:

By becoming the lowest cost producer in a given market

By being a differentiated producer (offering something extra or special to chargea premium price)

Or by being a focused producer (achieving dominance in a niche market)

Porter insisted that though the generic strategies existed, it was up to eachorganization to carefully select which were most appropriate to them and at whichparticular time. The generic strategies are backed by five competitive forces whichare then applied to five different kinds of industries (fragmented, emerging,mature, declining, and global.

To examine an organizations internal competitive ness, Porter advocates the use ofa value chain analysis of a companys internal processes and the interactionsbetween different elements of the organization to determine how and where valueis added. A systematic way of examining all the activities a firm performs and howthey interact is essential for analyzing the sources of competitive advantage. Thevalue chain disaggregates a firm into its strategically relevant activities in order to

understand the behavior of costs and the existing and potential sources ofdifferentiation. A firm gains competitive advantage by performing these strategicallyimportant activities more cheaply or better than its competitors. Each of theseactivities can be used to gain competitive advantage on its own or together withother strategically important activities. Here, the concept of linkages (relationshipsbetween the way one value activity is performed and the cost or performance of

Michael Porter

Competitive Strategy: Techniques forAnalyzing Industries and Competitors

CompetitiveStrategy

Competitive Advantage: Creating and SustainingSuperior Performance


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people began to suggest that the real issue was change and the usualpreponderance of books soon hit the market. However, once again, the general viewwas that the majority of change initiatives added little value to the bottom line.

Discussions with a number of senior executives reveal that most people have givenup on the traditional strategic approach, which is based on mission statements andcore competencies. Interestingly, though, most of their companies still use thattraditional approach. It is important to understand that self-confirming theories ofstrategy remain the most frequently used at this time, with well over 90% of all

companies making use of the approach, or of some hybrid that is based upon it.Why do people continue to use the approach if they no longer trust it? There are anumber of answers to that question.

First, most undergraduate and graduate schools still teach that approach, almostexclusively. Second, the approach is easy to learn and understand. Third, it iscomforting, because it focuses upon what some have called self-confirming theory it confirms that what we have done in the past is good, since we are going tocontinue to do in the future what we have done in the past (i.e. our future strategywill be based upon our historic competencies).

As early as 1989, was pointing out, in, the problems with another historic-linear approach, which she refers to as

excellence. People tend to love the idea of excellence. It makes for a great booktitle, whether it involves searching for excellence or building something to last.Alongside these books were the 7 things that companies do titles, which againfocused upon excellence in practice.

Benchmarking is a variant of the excellence practice. The underlying mental modelsuggests that something someone did somewhere at some point in time will workfor your firm where it is today (and tomorrow). The reality is that it might work butit might not. Therein lies the problem with linear (simple) historic mental models.

Almost without exception, the companies featured in the excellence booksencountered problems within a few years of the books publication. This is true evenfor James C. Collins and Jerry I Porras .

As a result of the apparent failure of the self-confirming theories, strategytheorists have searched for alternatives.

The Reality of Competitive Environments:The new competitive world has movedfrom a linear (or highly predictable, somewhat simple) state to a non-linear (orhighly uncertain, complex) state. That does not mean that nothing will continue tobe predictable. It means that in the future historic relationships will most likely notbe the same as they were in the past.

In 1980, Ansoff published a paper which represented another step in thedevelopment of practical strategic management which concerned the developmentof practical tools for managing adaptation of firms to turbulent environments. Thepaper, called , presented a way of adapting a firm tothe environment, when environmental change develops so fast that strategicplanning becomes too slow to produce timely responses to surprising threats andopportunities.

From 1991 to 2001, rapid change and high levels of complexity have characterizedthe global competitive environment. As the rate of environmental changeaccelerates, and the level of complexity rises, the rules of the game change. Suchchanges mean that the firm must change in harmony with the environment. If itdoes not, ultimately the environment will eliminate it. For the company that doesnot change in harmony with the environment, the result is deterioration and,perhaps, demise.

Rosabeth Moss Kanter When Giants Learn toDance

Built To Last

Strategic Issue Management


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Companies are complex systems operating within complex dynamic systems. Inevery case, the complexity as well as the rate of system change will be different atdifferent points of time. There are a number of implications for this reality.

Simple-historic or simple-linear strategy is insufficient to prepare a firm forenvironments that involve varying levels of complexity and rates of change.

As a complex system, every aspect off the firm (not just its strategies) must bebalanced with the future environment if the firm is to maximize performance.

Imbalances between the firm and the environment result in diminishedperformance, or in some cases, the demise of the firm.

Put simply, complex environmental systems (the competitive environment) requirecomplex mental models of strategy if the firm is to succeed. The use of linearmental models in environments of varying complexity and rate of change is aprescription for failure.

has famously coined the term crafting strategy, wherebystrategy is created as deliberately, delicately, and dangerously as a potter making apot. To Mintzberg strategy is more likely to emerge, through a kind of

organizational osmosis, than be produced by a group of strategists sitting round atable believeing they can predict the future.

Mintzberg argues that intuition is the soft underbelly of management and thatstrategy has set out to provide uniformity and formality when none can be created.

Another fatal flaw in the conventional view of strategy is that it tended to separatethe skills required to develop the strategy in the first place (analytical) from thoseneeded to achieve its objectives in reality (practical).

Mintzberg argues the case for what he labels strategic programming. His view isthat strategy has for too long been housed in ivory towers built from corporate dataand analysis. It has become distant from reality, when to have any viablecommercial li fe strategy needs to become completely immersed in reality.

In an era of constant and unpredictable change, the practical usefulness of strategyis increasingly questioned. The skeptics argue that it is all well and good to comeup with a brilliantly formulated strategy, but quite another to implement it. By thetime implementation begins, the business environment is liable to have changedand be in the process of changing even further.

Mintzbergs most recent work is probably his most controversial. Strategy is notthe consequence of planning but the opposite: its starting point, he says

countering the carefully wrought arguments of strategists, from Igor Ansoff in the1960s to the Boston Consulting Group in the 1970s and Michael Porter in the 1980s.is a Masterly and painstaking

deconstruction of central pillars of management theory.

The divide between analysis and practice is patently artificial. Strategy does notstop and start, it is a continuous process of redefinition and implementation. In hisbook, , the Japanese strategic thinkersays: In strategic thinking, one first seeks a clear understanding of the particularcharacter of each element of a situation and then makes the fullest possible use ofhuman brain power to restructure the elements in the most advantageous way.Phenomena and events in the real world do not always fit a linear model. Hence the

most reliable means of dissecting a situation into its constituent parts andreassembling them in the desired pattern is not a step-by-step methodology suchas systems analysis. Rather, it is that ultimate nonlinear thinking tool, the humanbrain. True strategic thinking thus contrasts sharply with the conventionalmechanical systems approach based on linear thinking. But it also contrasts with

Henry Mintzberg

The Rise and Fall of Strategic Planning

The Mind of the Strategist Kenichi Ohmae


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the approach that stakes everything on intuition, reaching conclusions without anyreal breakdown or analysis.

When future could be expected to follow neat linear patterns, strategy had a clearplace in the order of things. Organizations are increasingly aware that, as theymove forward, they are not going to do so in a straight unswerving line. Theimportant ability now is to be able to hold on to a general direction rather than toslavishly follow a predetermined path. Now, the neatness is being upset, newperspectives are necessary. The new emphasis is on the process of strategy as well

as the output. Such flexibility demands a broader perspective of the organizationsactivities and direction. This requires a stronger awareness of the links betweenstrategy, change, team-working, and learning. Strategy is as essential today as itever was. But, equally, understanding its full richness and complexity remains aformidable task.

Kenichi Ohmae argues that an effective strategic plan takes account of three mainplayers the company, the customer, and the competition each exerting their owninfluence. The strategy that ignores competitive reaction is flawed; so is thestrategy that does not take into account sufficiently how the customer will react;and so, of course, is the strategic plan that does not explore fully the organizations

capacity to implement it.

Kenichi Ohmae says that a good business strategy is one, by which a company cangain significant ground on its competitors at an acceptable cost to itself. Hebelieves there are four principal ways of doing this:

1. Focus on the key factors for success (KFSs). Ohmae argues that certainfunctional or operating areas within every business are more critical for successin that particular business environment than others. If you concentrate effortinto these areas and your competitors do not, this is a source of competitiveadvantage. The problem, of course, is identifying what these key factors forsuccess are.

2. Build on relative superiority. When all competitors are seeking to compete onthe KFSs, a company can exploit any differences in competitive conditions. Forexample, it can make use of technology or sales networks not in directcompetition with its rivals.

3. Pursue aggressive initiatives. Frequently, the only way to win against a muchlarger, entrenched competitor is to upset the competitive environment, byundermining the value of its KFSs changing the rules of the game byintroducing new KFSs.

4. Utilizing strategic degrees of freedom. By this tautological phrase, Ohmaemeans that the company can focus on innovation in areas which are untouchedby competitors.

In each of these four methods, the principal concern is to avoid doing the samething, on the same battle-ground, as the competition, Ohmae explains.

s first book, focusedon declining businesses. Harrigan believes there is a life-cycle for businesses andthey need to revitalize themselves constantly to prevent decline. From decliningbusinesses, Harrigan moved on to the subject of vertical integration and thedevelopment of strategies to deal with it. A central premise of the framework shedeveloped was that, as firms strived to increase their control over supply anddistribution activities, they also increased their ultimate strategic inflexibility (byincreasing their exit barriers). In search of more flexible approaches she carried out

lengthy research into joint ventures. Despite their boom, Harrigans researchshowed that between 1924 and 1985 the average success rate for joint ventureswas only 46 per cent and the average life span a meager three and a half years. Inher two books on joint ventures, Harrison argued they will become a key element incompetitive strategy. The reasons she gave for this were: economic deregulation,

Kathryn Rudie Harrigan Strategies for Declining Businesses


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technological change, increasing capital requirements in connection withdevelopment of new products, increasing globalization of markets.

She predicted:

1. One-on-one competition will be replaced by competition among constellations offirms that routinely venture together.

2. Teams of co-operating firms seeking each other out like favorite dancing

partners will soon replace many current industry structures where firms standalone.

3. To cope with these changes, managers must learn how to co-operate, as well ascompete, effectively.

Harrigans later work focused on mature businesses. Managing Maturing Businesses(1988) examined the second half of a businesss life or, as it is more dramaticallyput, the endgame. She has coined the phrase The last iceman always makesmoney, which she explains as The last surviving player makes money serving thelast bit of demand, when the competitors drop away. The importance of her work inthis area was given credence by the fact that over two-thirds of the industrieswithin mature economies were experiencing slow growth or negative growth in

demand for their products.

Ameliorating the pain and avoiding premature death have been the motivatingfactors of Harrigans work. Harrigans argument is that endgame can be highlyprofitable if companies adopt a coherent strategy sufficiently early. The strategicoptions are:

1. Divest now the first company out usually gets the highest price; later leaversmay not get anything.

2. Last iceman focusing on customer niches which will continue long-term and willbe prepared to pay a premium.

3. Selective shrinking taking the profitable high ground and leaving the lessprofitable low ground to the competitors.

4. Milking the business the last option, but none the less a practical alternativein many situations.

Complex Systems Strategy

Complexity-based approaches or complex adaptive systems, were developed inresponse to the apparent failure of equilibrium-based approaches. Complexity-basedthinkers will fall into a number of different camps. The majority believe that theenvironment must be understood in terms of its complexity, chaos, and ecologicalconstructs. This group subscribes to the Darwinian hypotheses (upward evolution of

a system) as a metaphor for the business environment. This kind of thinking hasresulted in the idea of self-organizing companies.

The complexity group falls into two categories. One might be called a purecomplexity-based group, the other a hybrid. In the case of the former, theoristsgenerally apply the concept of emergence to every situation. According to this grouppredictive modeling is rendered useless by the chaotic nature of the environment.They would suggest that any attempt to plan for the future is pointless.

The hybrid group also assumes that the Darwinian hypotheses may be used as ametaphor for business systems. This particular group of thought is based upon theidea that the firm may compete on the edge of chaos, that is in a state in which the

system is complex adaptive, but at the same time with a minimal level ofpredictability in the system (Brown and Eisenhardts ). Thisgroup of thinkers have combined the emergent (complex-historic) approach with theextrapolation (simple-future)approach.

Emergence

Competing on the Edge


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The emergence camp is divided into at least two or three distinctive groups.Emergence-based theorists begin with the idea of complex systems and chaostheory. Some suggest that the ability to deal with complexity on a futuristic basis isimpossible. Others suggest that it is possible to understand some aspects offuturistic systems. A third group imposes naturalistic ecological presuppositions inits theory.

and tend to hold to the view that it is simply not

possible to consider future complex environments. As a result they suggest that thestrategist must wait for events to occur, or emerge, then develop strategy. Thisapproach of incrementalism involves the after the fact development of strategyfor discontinuous events. Mintzberg suggests that, as discontinuous events occur,the firm should dynamically craft strategy.Stacey generally agrees with Mintzberg,but in his book , he additionally suggests that it ispossible to create organizations that are designed to deal with ambiguity andcomplexity.

Others involve themselves in apparently self-defeating arguments. In, advances the idea of systems thinking and suggests that it

is possible to observe complex systems and make reliable inferences about suchsystems. On the other hand, in the multi-author work , hetends to take a purely Darwinian emergence view.

The emergent or complex-historic group of strategists is by far the fastest-growinggroup in the field. As those who see the failure of self-confirming theories seekalternatives, the focus on complexity by the emergent group seems to make a lot ofsense.

Chaos and Complexity:Around the mid-1950s, there had been a certain amount ofinvestigation into the idea of cybernetics, or the study of processes. That led somepeople to think about the competitive environment in a very different way. Chaos

and complexity theory were introduced. By the early 1990s, complexity theory hadtaken on a life of its own. At about the same time, the idea of systems thinkingwas popularized, particularly, in Peter Senges 1990 book .

The period was characterized by a blending of disciplines, including natural science,social sciences, and business. A number of business theorists moved on from themetaphor of chaos theory in business to complexity theory. Chaos theory had dealtwith the unpredictable processes that were observable in science. Those who movedon to complexity theory added an interesting twist to the basic idea of complexity.Complex systems thinking has to do with the fact that the global system orenvironment is made up of a limitless number of other systems. Theoristshypothesize that complex systems may behave in much the same way as the

molecules in a glass of water, which interact randomly.

Systems Thinking:Another approach for dealing with complex environments iscalled systems thinking. Proponents of systems thinking believe that it is possibleto consider complex issues and to make reasonable inferences about theoutcomes of such complex systems. Systems thinking has been widely discussed incorporate circles, but few companies actually utilize the approach, especially at thesenior executive level where it could be most beneficial. Those few leaders whohave the intuitive ability to think in terms of complex systems, are and will continueto be, highly successful.

Darwinian Theory:Alongside this hypothesis relating to complex systems, the ideaof using Darwins theory of evolution as a metaphor for complexity was developed.Charles Darwins concept focused upon two ideas: first, the idea of naturalselection, or the survival of the fittest; second, the idea of evolution. His concept ofevolution was based upon the hypothesis that matter was constantly in a state ofmoving from a lower level of complexity to a higher level of complexity. In his view,

Ralph Stacey Henry Mintzberg

Managing The Unknowable

The FifthDiscipline Peter Senge

The Dance of Change

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this accounted for the similarities between monkeys, apes, and the different racesof humans.

Scientific evidence generally refutes these particular views (along with others heldby Darwin), but Darwins hypothesis has none the less been adapted metaphoricallyto complexity theory as it is applied in business. Those who subscribe to the theorysay that the evolution (from lower complexity to higher complexity) that occurs

naturally in nature must apply equally to businesses. Complexity managementtheorists go on to suggest that one of the goals of every manager should be to

allow the business to emulate nature by self-organizing.

This theme is clearly revealed in Peter Senges 1999 book . Inone article in the book, entitled The leadership of profound change-toward anecology of leadership, Senge suggests that leaders need to understand more aboutnature and to manage with that in mind. The CEO, according to Senge, is not thesolution to driving meaningful change in the organization.

In most cases, the complexity-based theorists assume the Darwinian hypotheses(upward mutation or evolution of complex natural systems) as a metaphor formanagement and strategy theory. This idea is developed in what is called self-organization. It is also an integral part of the complexity theorists response to thelinear economic model referred to as equilibrium theory, which is called complexadaptive systems theory.

The evidence clearly invalidates the Darwinian hypotheses. Complex dynamicsystems as an idea is finding support not only as a way of describing the naturalenvironment, but also as a reasonable metaphor for developing management andstrategy theory. This approach deals with complex systems without theprepositional fallacies related to complex adaptive systems theory.

Brown and Eisenhardts book(1998) displays their work as somewhat of a hybrid of the

complex adaptive systems approach (including the Darwinian hypotheses) and theself-confirming schools of thought. In essence, Brown and Eisenhardt suggest thatthe firm is competing in complex environments, and thus must deal with high levelsof uncertainty. Their view is that the firm is constantly in a process of changing itscompetencies. There is some dissonance between their adoption of competenciesand their prescriptions for dynamic corporate strategy.

The work of Canadian, Henry Mintzberg counters much of thedetailed rationalism of other major thinkers. He falls in the complex-historic(emergence) category of strategists, although, unlike most in that camp, he doesnot appear to have adopted the Darwinian metaphor. Mintzberg believes inincremental responses to changes as they emerge in the environment. It is clear

that he holds to the idea of a complex environment, yet he also seems to believethat it is not possible to anticipate or prepare proactively for discontinuous events.His views are the antitheses of Ansoffs.

His book (1992) was really ahead of thecurve among the work of the proponents of complex adaptive systems. Staceyswork differs from that of many of the others in that particular school, since hesuggests that companies need to prepare proactively for complexity.

Complex Dynamic Systems

The application of a Darwinian-based theory of complexity has resulted in analternative to the equilibrium theory of economics complex adaptive systems which again, proposes that the economic system is characterized by progressiveupward evolution.

The positive aspect of the theory is that it turns managers toward thinking about

The Dance of Change

Shona L. Brown and Kathleen M. EisenhardtCompeting on the Edge

Henry Mintzberg

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complex systems. There is no doubt that linear thinking (equilibrium-basedmanagement theory) can damage a company, but the absence of scientific supportfor adaptive systems (in either nature or in business) may also be problematicwhen trying to build corporate strategy.

A number of people are now using the idea of complex dynamic systems as a way tothink about the competitive environment. Moving from the Darwinian presuppositionof evolution to a recognition of the complex nature of the environment may presenta better opportunity for the corporate strategist.

There is currently a clear trend toward complexity-based corporate strategy.Emerging research supports the fact that moving from a linear to a non-linearcomplex mental model of the environment will help managers to lead a moreprofitable organization.

Their book was firstpublished in 1994. Their work has gone through a number of cycles, or changes.Early on, it seemed to focus on self-confirming theories. However, they were quickto comprehend the apparent failure of that model, and began to move more towarda complexity-based model. In their later works they have focused on anticipatingthe complex nature of the future environment. At the same time they are notproponents of strategy based on complex adaptive systems (the Darwinianhypotheses). A very positive aspect of their work is their emphasis on proactivestrategies for dealing with future uncertainty.

The phrase core competencies has now entered the language of management. Inlaymans terms, core competencies are what a company excels at. Gary Hamel andC K Prahalad define core competencies as the skills that enable a firm to develop afundamental customer benefit. They argue that strategic planning is neither radicalenough nor sufficiently long-term in perspective. Instead its aim remainsincremental improvement. In contrast, they advocate crafting strategic architecture.The phraseology is unwieldy, but means basically that organizations should

concentrate on rewriting the rules of their industry and creating a new competitiveindustry.

The best-known work of Richard DAveni of Dartmouth College is(1994), in which he overtly takes on the traditional self-

confirming strategic approaches. Based upon his observations of the real world, thebook concludes that the world is no longer linear, and does not reward those whouse linear approaches to create corporate strategy. In its place, he suggests, theplanner needs to consider a new approach. In assessing the new corporate world,he makes a number of insightful observations in :

Firms must destroy their competitive advantage to gain advantage..

Entry barriers work only if others respect them.

A logical approach is to be unpredictable and irrational.

Traditional long-term planning does not prepare for the short term.

Attacking competitors weaknesses can be a mistake. Traditional approachessuch as SWOT analysis may not work in a hypercompetitive environment.

Companies have to compete to win, but competing makes winning more difficult.

DAveni builds the case for a complex environment and the need to change theorganization continually in response to the environment, then proposes an answerto his argument about the need for a dynamic theory: the 7-S approach.

Superior stakeholder satisfaction.

C. K. Prahalad and Gary Hamel Competing for the Future

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Strategic soothsaying.

Positioning for speed.

Shifting the rules of the game.

Signaling strategic intent.

Simultaneous and sequential strategic thrusts

At the heart DAvenis ideas is his conclusion that companies need to be focusedupon disrupting the market. He suggests that there are three critical factors thatenable a firm to deliver sustainable disruption in the market:

1. A vision for disruption.

2. Capabilities for disruption (the organization).

3. Product/market tactics used to deliver disruptions.

There are a number of similarities between the work of Ansoff and that of DAveni.Both suggest that the environment involves some level of complexity and rate ofchange. Both propose a contingency theory approach that is, the organization

must be designed to respond to the present and future environment. Both believethat the environment of the 1990s began a new period of highly turbulent,unpredictable, changing environments.

Hybrid Systems:One of the more questionable adaptations of the various theoriescomes from those who attempt to combine complex adaptive systems andequilibrium-based theory. These theorists suggest that strategists should applycomplex adaptive systems approaches to their strategy, while at the same timedeveloping historic (or even new) competencies. Clearly there are problems withthis combination.

Observing the global environment, and accepting the fact that there are twoenvironmental issues that strategists must address complexity and rate of change it is clear that an organization must be continually changing in nonlinear termsboth in speed and in complexity. Rosabeth Moss Kanters useful idea of

contingency theory (presented in ) rightly suggeststhat the organization must be able to respond contingently to future changes in theenvironment. Her approach is similar to W. R. Ashbys requisite variety theoremexplained in his .

The modified Ansoff Model is also a hybrid. On one hand, a complex dynamicsystems approach is taken. On the other, an emergence approach is viewed as partof the firms ability to respond to discontinuous events. Then, the firm is assessed

using a complex model to determine its ability aggressively to create the futurestrategy the firm needs and the responsiveness capabilities of the firm to addressdiscontinuous events as they emerge.

Also from Harvard Business School, the fact that Kanterrejects the self-confirming approach to the development of strategy in favor ofcontingency design is an important underpinning of her work. She believes that thestrategist must begin with an understanding of the future environment, thencontingently design the firm around that understanding. In her book

(1990), she offers seven ideas that describe managers who will besuccessful in the new corporate environment:

1. They operate without the power of the might of the hierarchy behind them(leadership vs. positional power).

2. They can compete (internally) without undercutting competition).

3. They must have the highest ethical standards.

When Giants Learn to Dance

Introduction to Cybernetics

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4. They possess humility.

5. They must have a process focus.

6. They must be multifaceted and ambidextrous (work across businessunits/flexible).

7. They must be willing to tie their rewards to their own performance.

(2000) by Evan Dudik takes a complex systemsapproach to strategy by suggesting that the planner must understand the level ofuncertainty of the future environment (very similar to Ansoffs turbulence) and, at

the same time, that the firm must create a complex adaptive system (the firmitself) if it is to deal with that uncertainty. It is clearly an excellent application ofcontingency theory. Dudiks book covers all of the positives related to developingcomplex mental models and is excellent in presenting contingency approaches tothe development of corporate strategy.

Predictive Modeling:Predictive modeling involves a complex mental model and afuturistic (as opposed to historic) strategic frame. Since complex-futuristicapproaches involve complexity, there are a number of types of those approaches,including some hybrids. Even though some of the approaches are especiallyconcerned with complexity, some tend to be less holistic or whole-system thanothers.

AIS: The first approach might be called artificial intelligence simulation or AIS,which involves the creation of a computer-based model in which key variables canbe manipulated. The researcher might identify 10 independent variables that appearto drive certain outcomes (dependent variables). In some cases it is possible tobase the behaviors of the variables on statistically based relationships. That addspower to the model. Regardless, the AIS process allows the researcher tomanipulate variables in order to develop some level of predictive confidence in thefuture. In some ways, AIS can be similar to war gaming.

Scenarios and war gaming can be quite helpful in complex environments.

Scenarios: The concept of scenario planning was pioneered by oil giant Shell.Creating one single strategic plan to be followed with military precision simplydidnt work in practice. As circumstances changed, the strategic plan also neededchanging and executives were either constantly going back to the drawing board ortrying to push through a plan that was no longer appropriate. The longer theplanning horizon, the worse the problem became. Shells answer was to make notone but a number of sets of assumptions about the future environment. At itssimplest, these would be optimistic, pessimistic, and straightline. Any one of thesescenarios could happen, but managers now drew up plans that followed the mostlikely series of events, while building in frequent evaluation points where one of thealternative scenarios could take over. In effect, what they were doing was thinking

through the implications of necessary deviations of a plan sufficiently far ahead tobe able to implement them at minimum cost and effort.

Scenarios are classified as complex-future models (predictive modeling) and theyhave been successfully used for the development of strategy for complexenvironments for a number of years. Scenarios involve the analysis of future drivingforces in an environment and the consideration of a range of possible outcomes..Scenarios tend to focus on a very narrow area of the future, but ideally will attemptto account for driving forces, or independent variables that could have an impactupon the area being studied. Scenarios have two purposes: first, a multiple scenario(i.e. three or four possible scenarios about a specific issue) can provide a complex

systems overview of an issue; second, they can be extremely helpful in drivingorganizational learning.

A number of comments have been made regarding driving organizational learningand managing resistance to change. It is important to remember that dissonantdata (information that indicates that the future environment will shift, and that the

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rules of the game will change) is more often rejected by senior managers thanaccepted. Managing such resistance (which can be measured using the modifiedAnsoff model) is quite important from a profit standpoint.

One of the keys to anticipating future turbulence environments is to ensure that thefirm has the level of adaptiveness required for the level of future turbulence. Inturbulence levels above 3.0, there is a growing expectation of discontinuous orsurprise events. As the turbulence level rises, the ability of the firm to reactivelytransform is clearly a profit issue. The higher the level of environmental speed and

complexity, the higher the negative profit impact if the organization has low levelsof adaptive capabilities. As research by and reveals,internal resistance to change slows the organizational response to discontinuousevents.

War gaming: War gaming is a good way of preparing for complex futures. Wargaming is somewhat similar to using scenarios. There are a number of ways ofdoing it, but it generally involves the gathering of competitor information prior tobeginning the exercise. The information might cover the predisposition or probablebehavior of different competitors. Some might use a five forces analysis and aSWOT analysis (of each competitor). A modified Ansoff strategic profile of each

competitor can be a most valuable tool.

War gaming involves the organization dividing its managers into teams, which takeon the role of competitors. The competitors simulate a battle. The game is playedin terms of successive strategies created by each team. The exercise facilitatorcreates ways for the competitors to play out their strategy, based upon the researchabout the competitor that they were given. In some cases, the senior executives ofthe client firm will take on the role of strategists for their own firm, while theirmanagement team will play the roles of their competitors. This can be an extremelyrevealing exercise, especially when the third or fourth passes or battles arecompleted.

In many ways the value of war gaming, as with scenarios, is that of organizationallearning. War gaming can help internal managers to change their mental models ofthe competitive environment as well as their perceptions of competitors mostprobable behaviors. One word of caution: there is nothing more boring than a poorlyconceived war game, and the services of external facilitators are recommended;make sure that the facilitators selected are at the cutting edge in their field. Thosethat revert to simple (non complexity-based) approaches, such as SWOT alone,should be avoided.

Dawn Kelly Terry Amburgey

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