Strategy as Stretch and Leverage
FROM THE
MARCH–APRIL 1993 ISSUE
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General Motors
versus Toyota. CBS versus CNN. Pan Am versus British Airways. RCA versus Sony.
Suppose you had been asked, 10 or 20 years ago, to choose the victor in each of
these battles. Where would you have placed your bets? With hindsight, the
choice is easy. But at the time, GM, CBS, Pan Am, and RCA all had stronger
reputations, deeper pockets, greater technological riches, bigger market
shares, and more powerful distribution channels. Only a dreamer could have
predicted that each would be displaced by a competitor with far fewer
resources—but far greater aspirations.
Driven by the need
to understand the dynamics of battles like these, we have turned
competitiveness into a growth industry. Companies and industries have been
analyzed in mind-numbing detail, autopsies performed, and verdicts rendered.
Yet when it comes to understanding where competitiveness comes from and where
it goes, we are like doctors who have diagnosed a problem—and have even found
ways to treat some of its symptoms—but who still don’t know how to keep people
from getting sick in the first place.
We can analyze
companies in mind-numbing detail, perform autopsies, and render verdicts, but
we are still addressing the what of competitiveness, not
the why.
Consider the
analogy. The first step in understanding competitiveness is to observe competitive
outcomes: some companies gaining market share, others losing it, some companies
in the black, others bleeding red ink. Like doctors taking a patient’s blood
pressure or temperature, we can say whether the patient is well or ill, but
little more.
The next step is to
move from observation to diagnosis. To diagnose competitive problems, we rely
on industry structure analysis. A company’s market position—the particular
market segments in which the company participates—broadly determines the
potential for profitability and growth. Within any particular market segment,
it is the company’s relative competitive advantage that determines actual
profitability and growth.
Industry structure
analysis points us to the what of competitiveness: what makes
one company more profitable than another. As new whats have been discovered,
companies have been exhorted to strive for six sigma quality, compete on time,
become customer led, and pursue a host of other desirable advantages. In
diagnosing a specific competitive disease, we may conclude that a company is in
an unattractive industry segment with a cost disadvantage and subpar quality.
This is a bit like determining that a patient has Parkinson’s disease: the
diagnosis may point to a cure, but it isn’t the cure itself and certainly won’t
prevent disease.
To find a cure, the
medical researcher must unravel the workings of disease. The competitive
analogy lies in studying organizational structure and process: For example,
what are the administrative attributes of a speedy product-development process
or a successful total quality management program? But however deeply we
understand the various elements of a company’s competitive advantage, we are
still addressing the what of competitiveness, not the why.
Understanding the what
of competitiveness is a prerequisite for catching up. Understanding the why is
a prerequisite for getting out in front. Why do some companies continually
create new forms of competitive advantage, while others watch and follow? Why
do some companies redefine the industries in which they compete, while others
take the existing industry structure as a given?
To answer these
questions, another layer of understanding must be peeled back. If the goal of
medicine is to prevent rather than simply cure disease, a doctor must search
for the reason some people fall ill while others do not. Differences in
life-style and diet, for instance, predispose some to sickness and others to
wellness. A company’s institutional environment is the industrial corollary
here. Monetary and fiscal policy, trade and industrial policy, national levels
of education, the structure of corporate ownership, and the social norms and
values of a particular nation all have an impact on how well that nation’s
industries will compete.
But often too much
attention is paid to these factors, especially by managers eager to externalize
the causes of competitive decline—and the responsibility for it. After all, we
regularly see companies that fail to benefit from the inherent advantages of
their institutional context and others that manage to escape the disadvantages.
Why hasn’t Japan, with more snow skiers than any country on earth, produced a
world-class manufacturer of ski equipment? Conversely, why did Yamaha, a
Japanese company, become the world’s largest producer of high-quality grand
pianos, which are not suited to the homes or traditional musical tastes of
Japanese customers? And why do U.S. computer manufacturers, competing in an
industry targeted by Japan’s industrial policymakers, thrive around the world
when U.S. automakers often wilt in the face of Japanese competition?
Institutional factors are only part of the story.
Breaking the Managerial Frame
To understand why
some people contract a disease while others do not, a medical researcher must
finally confront genetics. Just as genetic heritage manifests itself as a
susceptibility to some diseases and an ability to resist others, managerial
frames of reference—the assumptions, premises, and accepted wisdom that bound
or “frame” a company’s understanding of itself and its industry and drive its
competitive strategy—determine in large part which diseases a company will fall
prey to and which it will avoid.
Managers acquire
their frames of reference invisibly from business school and other educational
experiences, from peers, consultants, and the business press, and, above all,
from their own career experiences. But invisible as the frames themselves may
be, their consequences are visible at every turn in how a company’s senior
managers understand what it means to be “strategic,” in their choice of
competitive stratagems, in their relationships with subordinates. In this
sense, managerial frames, perhaps more than anything else, bound a company’s
approach to competitive warfare and thus determine competitive outcomes.
Failure to reckon
with managerial frames was understandable as long as competition took place
mostly between companies whose managers graduated from the same universities,
hired the same consultants, subscribed to the same trade journals, and
job-hopped among the same few companies. After all, it wasn’t Ford that
challenged GM’s long-held managerial precepts, nor Thomson that compelled
Philips to discard once-sacrosanct organizational tenets. Today such blindness
is inexcusable. Just as the health of biological species depends, over time, on
genetic variety, so it is with global companies: long-term competitiveness
depends on managers’ willingness to challenge continually their managerial
frames.
The term
“head-to-head competition” is literal. Global competition is not just product
versus product, company versus company, or trading bloc versus trading bloc. It
is mind-set versus mind-set, managerial frame versus managerial frame.
From Fit to Stretch
A good place to
begin deconstructing our managerial frames is with the question, “What is
strategy?” For a great many managers in large Western companies, the answer
centers on three elements: the concept of fit, or the relationship between the
company and its competitive environment; the allocation of resources among
competing investment opportunities; and a long-term perspective in which
“patient money” figures prominently. From this perspective, “being strategic”
implies a willingness to take the long view, and “strategic” investments are those
that require a large and preemptive commitment of resources—betting bigger and
betting earlier—as well as a distant return and substantial risk.
This dominant
strategy frame is not wrong, only unbalanced. That every company must
ultimately effect a fit between its resources and the opportunities it pursues,
that resource allocation is a strategic task, and that managers must often
countenance risk and uncertainty in the pursuit of strategic objectives all go
without saying. But the predominance of these planks in corporate strategy
platforms has obscured the merits of an alternative frame in which the concept
of stretch supplements the idea of fit, leveraging resources is as important as
allocating them, and the long term has as much to do with consistency of effort
and purpose as it does with patient money and an appetite for risk.
To illustrate the
effects of these opposing frames, imagine two companies competing in the same
industry. Alpha, the industry leader, has accumulated a wealth of resources of
every kind—human talent, technical skills, distribution access, well-known
brands, manufacturing facilities, and cash flow—and it can fund just about any
initiative it considers strategic. But its aspirations to remain atop its
present perch, to grow as fast as its industry, and to achieve a 15% return
on equity are modest. “Where do you go,” Alpha’s managers ask themselves, “when
you’re already number one?”
Beta, its rival, is
a relative latecomer to the industry. It is much smaller than Alpha and has no
choice but to make do with fewer people, a smaller capital budget, more modest
facilities, and a fraction of Alpha’s R&D budget. Nevertheless, its
ambitions belie its meager resource base. Beta’s managers have every intention
of knocking Alpha off its leadership perch. To reach this goal, they know that
they must grow faster than Alpha, develop more and better products than Alpha,
and build a worldwide brand franchise and a presence in every major market, all
while expending fewer resources. The misfit between Beta’s resources and its
aspirations would lead most observers to challenge the feasibility of its
goals, if not the sanity of its managers.
But consider the
likely effects of Alpha’s abundance and Beta’s ambition on how the two
companies frame their competitive strategies and marshal their resources.
Clearly, Alpha is
much better placed to behave “strategically”: to pre-empt Beta in building new
plant capacity, to outspend Beta on R&D, to buy market share through
aggressive pricing, and so on. Alpha’s managers are likely to rest easily,
confident that they can overpower their smaller rival in any confrontation.
They are also likely to approach their battles with a mind-set reminiscent of
World War I trench warfare—“Whoever runs out of ammunition first is the
loser”—however resource-inefficient this approach may be.
Beta, on the other
hand, is likely to adopt the tactics of guerrilla warfare in hopes of
exploiting the orthodoxies of its more powerful enemy. It will search for
undefended niches rather than confront its competitor in well-defended market
segments. It will focus investments on a relatively small number of core
competencies where management feels it has the potential to become a world
leader. It might even find itself compelled to invent lean manufacturing with
an emphasis on doing more with less.
The argument here
is substantially more subtle than the oft-made point that small companies are
more nimble. What distinguishes Beta from Alpha is not Beta’s smaller resource
base but the greater gap that exists between Beta’s resources and its
aspirations. In contrast, Alpha’s problem is not that it is large—there’s no
inherent virtue in being small—but that it has insufficient stretch in its
aspirations. Alpha’s managers will not think and behave as if they were in a
small, resource-restrained company. What bedevils Alpha is not a surfeit of
resources but a scarcity of ambition.
Abundant resources
alone won’t keep an industry giant on top when its hungrier rival practices the
strategic discipline of stretch.
The products of
stretch—a view of competition as encirclement rather than confrontation, an
accelerated product-development cycle, tightly knit cross-functional teams, a
focus on a few core competencies, strategic alliances with suppliers, programs
of employee involvement, consensus—are all elements of a managerial approach
typically labeled “Japanese.” But as the less than sterling performance of
Japan’s well-endowed banks and brokerage houses reminds us, there is no magic
simply in being Japanese. Indeed, so-called Japanese management may have less
to do with social harmony and personal discipline than it does with the
strategic discipline of stretch. Companies like NEC, CNN, Sony, Glaxo, and
Honda were united more by the unreasonableness of their ambitions and their
creativity in getting the most from the least than by any cultural or
institutional heritage. Material advantages are as poor a substitute for the
creativity stretch engenders in Japan as they are in the United States or
Europe. Creating stretch, a misfit between resources and aspirations, is the
single most important task senior management faces.
From Allocation to Leverage
“If only we had
more resources, we could be more strategic.” Every experienced manager will
recognize that lament. Yet it is clear that copious resources cannot guarantee
continued industry leadership. Tens of billions of dollars later, no one can
accuse GM of not being “strategic” in its pursuit of factory automation. If
anything, GM was too strategic. The company’s ability to
invest outpaced its ability to absorb new technology, retrain workers,
reengineer work flows, rejuvenate supplier relationships, and discard
managerial orthodoxies.
Conversely, if
modest resources were an insurmountable deterrent to future leadership, GM,
Philips, and IBM would not have found themselves on the defensive with Honda,
Sony, and Compaq. NEC succeeded in gaining market share against AT&T, Texas
Instruments, and IBM despite an R&D budget that for most of its history was
more modest in both absolute and relative terms than those of its rivals.
Toyota developed a new luxury car for a fraction of the resources required by
Detroit. IBM challenged Xerox in the copier business and failed, while Canon, a
company only 10% the size of Xerox in the mid-1970s, eventually displaced
Xerox as the world’s most prolific copier manufacturer. CNN in its adolescence
managed to provide 24 hours of news a day with a budget estimated at one-fifth
that required by CBS to turn out 1 hour of evening news. Performance like this
isn’t just lean manufacturing; it’s lean everything.
Allocating
resources across businesses and geographies is an important part of top
management’s strategic role. But leveraging what a company already has rather
than simply allocating it is a more creative response to scarcity. In the
continual search for less resource-intensive ways to achieve ambitious
objectives, leveraging resources provides a very different approach from the
downsizing and delayering, the restructuring and retrenchment that have become
common as managers contend with rivals around the world who have mastered the
art of resource leverage.
There are two basic
approaches to garnering greater resource productivity, whether those resources
be capital or human. The first is downsizing, cutting investment and head count
in hopes of becoming lean and mean—in essence, reducing the buck paid for the
bang. The second approach, resource leveraging, seeks to get the most out of
the resources one has—to get a much bigger bang for the buck. Resource leverage
is essentially energizing, while downsizing is essentially demoralizing. Both
approaches will yield gains in productivity, but a company that continually
ratchets down its resource base without improving its capacity for resource leverage
will soon find that downsizing and restructuring become a way of life—until
investors locate a new owner or demand a management team with a better track
record. Indeed, this is happening in the United States and in Europe as an
increasing share of human and physical capital falls through acquisition, joint
venture, and surrender of market share to competitors who are better at getting
more from less.
The Arenas of Resource Leverage
Management can
leverage its resources, financial and nonfinancial, in five basic ways:
by concentrating them more effectively on key strategic goals;
by accumulating them more efficiently; by complementing one
kind of resource with another to create higher order value; by conserving resources
wherever possible; and by recovering them from the marketplace
in the shortest possible time. Let us look, one by one, at some of the
components that make up these broad categories and ask the questions that
managers must ask to assess the scope within their company for further resource
leverage.
Convergence: Have
we created a chasm between resources and aspirations that will compel creative
resource leverage? Have we been loyal to our strategic goals and consistent in
their pursuit?
Concentrating
Resources: Convergence and Focus. Leverage
requires a strategic focal point, or what we have called a strategic intent, on
which the efforts of individuals, functions, and businesses can converge over
time. Komatsu’s goal of “encircling Caterpillar,” President Kennedy’s challenge
to “put a man on the moon by the end of the decade,” British Airway’s quest to
become the “world’s favorite airline,” and Ted Turner’s dream of global news
all provided a strategic intent.
Yet in many,
probably most, companies there is neither a strategic focal point nor any deep
agreement on the company’s growth trajectory. As a result, priorities shift
constantly. Resources are squandered on competing projects. Potentially great
ideas are abandoned prematurely. And the very definition of core business
changes often enough to confuse both investors and employees. It is hardly
surprising then that in many companies there is little cumulativeness to
month-by-month and year-by-year strategic decisions.
Compare NEC’s
relentless pursuit of “computers and communication” with IBM’s on-again,
off-again affair with telecommunications. While NEC was first a
telecommunications equipment manufacturer and IBM first a computer maker, both
have long recognized that the two industries are converging. Yet IBM’s
Satellite Business Systems, dalliances with MCI and Mitel, and the acquisition
of Rolm have come and, for the most part, gone, while its communications
business remains a poor relation to its computer business. NEC, on the other
hand, is the only company in the world that is a top-five producer of both
computer and communications equipment. NEC achieved this not by outspending IBM
but rather through its strategic focus. In the mid-1970s, management
established the goal of becoming a leader in both computers and communications;
next it elaborated the implications of that goal in terms of the skills and
capabilities it would require; and finally, it pursued its ambition
unswervingly for the next decade and a half.
As NEC’s experience
suggests, convergence requires an intent that is sufficiently precise to guide
decisions. Converging resources around an amorphous goal—becoming a $100
billion company, growing as fast as the industry, achieving a 15% return
on equity—is difficult if not impossible.
Resource
convergence is also unlikely if strategic goals fail to outlive the tenures of
senior executives. Even with a high degree of resource leverage, the attainment
of worldwide industry leadership may be a ten-year quest. Recasting the
company’s ambition every few years virtually guarantees that leadership will
remain elusive. The target has to sit still long enough for all members of the
organization to calibrate their sights, take a bead on the target, fire, adjust
their aim, and fire again.
Focus: Have we
clearly identified the next competitive advantage that we must build? Is top
management’s attention focused firmly on the task until it is accomplished?
If convergence
prevents the diversion of resources over time, focus prevents the dilution of
resources at any given time. Just as a general with limited forces must pick
his targets carefully, so a company must specify and prioritize the
improvements it will pursue. Too many managers, finding their companies behind
on cost, quality, cycle time, customer service, and other competitive metrics,
have tried to put everything right at the same time and then wondered why
progress was so painfully slow. No single business, functional team, or
department can give adequate attention to all these goals at once. Without
focused attention on a few key operating goals at any one time, improvement
efforts are likely to be so diluted that the company ends up as a perpetual
laggard in every critical performance area.
Consider Komatsu.
Starting with products that were judged only half the quality of Caterpillar’s,
Komatsu won Japan’s highest quality award, the Deming Prize, in three years.
Many other companies have been wrestling with quality for a decade or more and
still cannot lay claim to world-class standards. What accounts for this
difference? When Komatsu initiated its total quality control program, every
manager was given explicit instructions to vote quality in a choice between
cost and quality. Although quality may be free in the long run, Komatsu’s
managers recognized that the pursuit of quality is anything but free in the
short run. Thus Komatsu focused almost exclusively on quality until it had
achieved world standards. Then, and only then, did it turn successively to
value engineering, manufacturing rationalization, product-development speed,
and the attainment of variety at low cost. Each new layer of advantage provided
the foundation for the next.
Dividing meager
resources across a host of medium-term operational goals creates mediocrity on
a broad scale. Middle managers are regularly blamed for failing to translate
top-management initiatives into action. Yet middle management often finds
itself attempting to compensate for top management’s failure to sort out
priorities, with the result that mixed messages and conflicting goals prevent a
sufficient head of steam from developing behind any task.
Extraction: Are we
willing to apply lessons learned on the front line, even when they conflict
with long-held orthodoxies? Have we found a way to tap the best ideas of every
employee?
Accumulating
Resources: Extracting and Borrowing. Every
company is a reservoir of experiences. Every day, employees come in contact
with new customers, learn more about competitors, confront and solve technical
problems, and discover better ways of doing things. But some companies are
better than others at extracting knowledge from those experiences. Thus what
differentiates companies over time may be less the relative quality or depth of
their stockpile of experiences than their capacity to draw from that stockpile.
Because experience comes at a cost, the ability to maximize the insights gained
from every experience is a critical component of resource leverage. Being a
“learning organization” is not enough; a company must also be capable of
learning more efficiently than its competitors.
Take Mazda, for
example. The Japanese automaker has launched a fraction of the new models
created by Ford or GM, yet it seems capable of developing new products in a
fraction of the time it takes the other two and at a fraction of the cost.
Mazda’s experience mocks the experience curve because it suggests that the rate
of improvement in a company’s capabilities is determined not by some lockstep
relationship with accumulated volume but by the relative efficiency with which
the company learns from experience. The smaller a company’s relative experience
base, the more systematic its managers must be in searching for clues to where
and how improvements might be made.
The capacity to
learn from experience depends on many things: employees who are both reflective
and well schooled in the art of problem solving; forums (such as quality
circles) where employees can identify common problems and search for higher
order solutions; an environment in which every employee feels responsible for
the company’s competitiveness; the willingness to fix things before they’re
broken; continuous benchmarking against the world’s best practice. But learning
takes more than the right tools and attitudes. It also requires a corporate
climate in which the people who are closest to customers and competitors feel
free to challenge long-standing practices. Unless top management declares open
season on precedent and orthodoxy, learning and the unlearning that must
precede it cannot begin to take place.
Borrowing: Are we
willing to learn from outsiders as well as from insiders? Have we established
borrowing processes and learning goals for employees working within alliances
and joint ventures?
“Borrowing” the
resources of other companies is another way to accumulate and leverage
resources. The philosophy of borrowing is summed up in the remark of a Japanese
manager that “you [in the West] chop down the trees, and we [in Japan] build
the houses.” In other words, you do the hard work of discovery, and we exploit
those discoveries to create new markets. It is instructive to remember that
Sony was one of the first companies to commercialize the transistor and the
charge-coupled device, technologies pioneered by AT&T’s Bell Laboratories.
Increasingly, technology is stateless. It crosses borders in the form of
scientific papers, foreign sponsorship of university research, international
licensing, cross-border equity stakes in high-tech start-ups, and international
academic conferences. Tapping into the global market for technology is a
potentially important source of resource leverage.
At the extreme,
borrowing involves not only gaining access to the skills of a partner but also
internalizing those skills. Internalization is often a more efficient way to
acquire new skills than acquiring an entire company. In making an acquisition,
the acquirer must pay both for the critical skills it wants and for skills it
may already have. Likewise, the costs and problems of integrating cultures and
harmonizing policy loom much larger in an acquisition than they do in an
alliance.
NEC relied on
hundreds of alliances, licensing deals, and joint ventures to bolster its
product-development efforts and to gain access to foreign markets. Alliances
with Intel, General Electric, Varian, and Honeywell, to name a few, multiplied
NEC’s internal resources. Indeed, NEC managers have been forthright in
admitting that without the capacity to learn from their partners, their
progress toward the goal of computers and communication would have been much
slower.
Borrowing can
multiply more than technical resources. Companies such as Canon, Matsushita,
and Sharp sell components and finished products on an OEM basis to
Hewlett-Packard, Kodak, Thomson, Philips, and others to finance their
leading-edge research in imaging, video technology, and flat-screen displays.
Almost every Japanese company we have studied had a bigger share of world
development spending in core competence areas and a bigger share of world
manufacturing in core components than its brand share in end-product markets. The
goal is to capture investment initiative from companies either unwilling or
unable to invest in core competence leadership, in order to gain control of
critical core competencies. Think of this as borrowing distribution channels
and market share from downstream partners to leverage internal development
efforts and reduce market risks.
In leveraging
resources through borrowing, absorptive capacity is as important as inventive
capacity. Some companies are systematically better at borrowing than others
are, not least because they approach alliances and joint ventures as students,
not teachers. Suffice it to say, arrogance and a full stomach are not as
conducive to borrowing as humility and hunger. Captives of their own success,
some companies are more likely to surrender their skills inadvertently than to
internalize their partners’ skills. We might call this negative leverage!
Borrowing can take
a myriad of forms: welding tight links with suppliers to exploit their
innovations; sharing development risks with critical customers; borrowing
resources from more attractive factor markets (as, for example, when Texas
Instruments employs relatively low-cost software programmers in India via a
satellite hookup); participating in international research consortia to borrow
foreign taxpayers’ money. Whatever the form, the motive is the same, to
supplement internal resources with resources that lie outside a company’s
boundaries.
Blending: Have we
created a class of technology generalists who can multiply our resources? Have
we created an environment in which employees explore new skill combinations?
Complementing
Resources: Blending and Balancing. By
blending different types of resources in ways that multiply the value of each,
management transforms its resources while leveraging them. The ability to blend
resources involves several skills: technological integration, functional
integration, and new-product imagination.
It is possible that
GM or Ford could outspend Honda in developing engine-related technologies like
combustion engineering, electronic controls, and lean burn—and perhaps even
attain scientific leadership in each area—but still lag Honda in terms of
all-around engine performance because the U.S. companies were able to blend
fewer technologies. Blending requires technology generalists, systems thinking,
and the capacity to optimize complex technological trade-offs. Leadership in a
range of technologies may count for little and the resources expended in such a
quest may remain underleveraged if a company is not as good at the subtle art
of blending as it is at brute-force pioneering.
Successfully
integrating diverse functional skills like R&D, production, marketing, and
sales is a second form of blending. Where narrow specialization and
organizational chimneys exist, functional excellence is rarely translated into
product excellence. In such cases, a company may outinvest its competitors in
every functional area but reap much smaller rewards in the marketplace. Again,
what is required is a class of generalists who understand the interplay of
skills, technologies, and functions.
The third form of
blending involves a company’s ingenuity in dreaming up new-product
permutations. Sony and 3M, for example, have demonstrated great imagination in
combining core technologies in novel ways. Sony’s “Walkman” brought together
well-known functional components—headphones and an audiotape playback
device—and created a huge market if not a new life-style. Yamaha combined a
small keyboard, a microphone, and magnetically encoded cards to create a
play-along karaoke piano for children. In these cases, the leverage comes not
only from better amortizing past investments in core competencies but also from
combining functional elements to create new markets.
Balancing: Have we
pursued high standards across the board so that our ability to exploit
excellence in one area is never imperiled by mediocrity in another? Can we
correct our imbalances?
Balancing is
another approach to complementing resources. To be balanced, a company, like a
stool, must have at least three legs: a strong product-development capability;
the capacity to produce its products or deliver its services at world-class
levels of cost and quality; and a sufficiently widespread distribution,
marketing, and service infrastructure. If any leg is much shorter than the
others, the company will be unable to exploit the investments it has made in
its areas of strength. By gaining control over the missing resources, however,
management can multiply the profits extracted from the company’s unique assets.
To illustrate,
consider the situation EMI faced in the early 1970s when it invented
computerized axial tomography, or the CAT scanner. Although the British company
had a ground-breaking product, it lacked a strong international sales and
service network and adequate manufacturing skills. As a result, EMI found it
impossible to capture and hold onto its fair share of the market. Companies
like GE and Siemens, with stronger distribution and manufacturing capabilities,
imitated the concept and captured much of the financial bonanza. As for EMI, it
ultimately abandoned the business.
Today many small,
high-tech companies are unbalanced the way EMI was. While they can enter
partnerships with companies that have complementary resources, the innovators
are likely to find themselves in a poor bargaining position when it comes to
divvying up profits. This imbalance explains why so many Japanese companies
worked throughout the 1980s to set up their own worldwide distribution and
manufacturing infrastructures rather than continue to borrow from their
downstream partners. They realized they could fully capture the economic
benefits of their innovations only if they owned all complementary resources.
Today, in contrast, Japanese companies are acquiring innovators to complement
their strong brand and manufacturing skills. Of the more than 500 small,
high-tech U.S. companies sold to foreign interests between 1988 and 1991,
Japanese companies bought about two-thirds.
Whatever the nature
of the imbalance, the logic is the same. A company cannot fully leverage its
accumulated investment in any one dimension if it does not control the other
two in some meaningful way. Rebalancing leads to leverage when profits captured
by gaining control over critical complementary assets more than cover
acquisition costs.
Recycling: Do we
view core competencies as corporate resources rather than the property of
individual businesses? Have we created lateral communication to ensure that
ideas aren’t trapped?
Conserving
Resources: Recycling, Co-opting, and Shielding. The more often a given skill or competence is
used, the greater the resource leverage. Sharp exploits its
liquid-crystal-display competence in calculators, electronic pocket calendars,
mini-TVs, large-screen-projection TVs, and laptop computers. Honda has recycled
engine-related innovations across motorcycles, cars, outboard motors,
generators, and garden tractors. It is little wonder that these companies have
unmatched R&D efficiency. The common saying in Japan is, “No technology is
ever abandoned, it’s just reserved for future use.” Honda and Sharp are proof
of that maxim.
Recycling isn’t
limited to technology-based competencies. Brands can be recycled too.
Familiarity with a high-quality “banner” brand can predispose customers at
least to consider purchasing new products that bear the “maker’s mark.” Think
of the leverage Sony gets when it launches a new product, thanks to the
relatively modest incremental cost of building credibility with retailers and
consumers and the implicit goodwill with which the product is imbued simply
because it carries the Sony brand.
Banner branding
cannot turn a loser into a winner. In fact, a lousy product will undermine the
most respected brand. And in companies such as Unilever and Procter &
Gamble, with a long history of product branding, it would be foolish to abandon
well-loved brands for an unknown corporate banner. Yet even these companies are
more and more apt to use their corporate monikers along with well-known product
brands. For example, in working to build a strong presence in Japan, P&G
recognized the added oomph its efforts would receive from a judicious use of
its corporate name. Building brand leadership in a new market is always a slow
and expensive process. But it becomes even more so when advertising budgets and
customer awareness are fragmented across multiple brands.
Walk through an
international airport and note the billboards bearing the corporate logos of
Japan’s and Korea’s industrial giants. For these companies, brand building is a
corporate responsibility. No one expects each business to bear the costs of
building global share of mind. A few years ago, a major U.S. company took what,
for it, was an unusual step. It erected an illuminated billboard at Heathrow
with its logo and a slogan. The billboard didn’t stay up long, however; none of
the business units was willing to pay for the sign. A few days later, that
piece of English sky belonged to a Japanese competitor.
Opportunities for
recycling hard-won knowledge and resources are manifold. The ability to switch
a production line quickly from making widgets to making gadgets, known as
flexible manufacturing, is one. Others include sharing merchandising ideas
across national sales subsidiaries, transferring operating improvements from
one plant to another, using the same subsystem across a range of products,
quickly disseminating ideas for better customer service, and lending
experienced executives to key suppliers. But recycling will not occur without a
strong organizational foundation. It requires a view of the corporation as a
pool of widely accessible skills and resources rather than a series of
fiefdoms.
Co-option: Have we
identified the industry players who are dependent on us for some critical skill
or for their very livelihood? Do we understand how to enroll others in the
pursuit of our goals?
Co-option provides
another route to conserving resources. Enticing a potential competitor into a
fight against a common enemy, working collectively to establish a new standard
or develop a new technology, building a coalition around a particular
legislative issue—in these and other cases, the goal is to co-opt the resources
of other companies and thereby extend one’s own influence. In borrowing
resources, management seeks to absorb its partners’ skills and make them its
own; in co-opting resources, the goal is to enroll others in the pursuit of a
common objective.
The process of
co-option begins with a question: “How can I convince other companies that they
have a stake in my success?” The logic is often, “My enemy’s enemy is my
friend.” Philips has a knack for playing Sony and Matsushita against each
other, enrolling one as a partner to block the other. Being slightly
Machiavellian is no disadvantage when it comes to co-opting resources.
Sometimes co-option
requires a stick as well as a carrot of common purpose. Typically, the stick is
control over some critical resource, and the unstated logic here is, “Unless
you play the game my way, I’ll take my ball and go home.” Fujitsu’s relationship
with its partners in the computer business is a good example. Each of these
partners—ICL in Britain, Siemens in Germany, and Amdahl in the United
States—shares a common objective to challenge the dominance of IBM. That is the
carrot. The stick is the substantial, in some cases almost total, dependence of
these companies on Fujitsu’s semiconductors, central processors, disc drives,
printers, terminals, and components.
Shielding: Do we
understand competitors’ blind spots and orthodoxies? Can we attack without
risking retaliation? Do we know how to explore markets through low-cost,
low-risk incursions?
To understand
shielding, the third form of resource conservation, think about military
tactics. Wise generals ensure that their troops are never exposed to
unnecessary risks. They disguise their true intentions. They reconnoiter enemy
territory before advancing. They don’t attack heavily fortified positions. They
feint to draw the enemy’s forces away from the intended point of attack. The
greater the enemy’s numerical advantage, the greater the incentive to avoid a
full frontal confrontation. The goal is to maximize enemy losses while
minimizing the risk to one’s own forces. This is the basis for “resource
shielding.”
Attacking a
competitor in its home market, attempting to match a larger competitor
strength-for-strength, accepting the industry leader’s definition of market
structure or “accepted industry practice” are strategies akin to John Wayne
taking on all the bad guys single-handedly—and they work better in Hollywood
than they do in global competition. In business, judo is more useful than a
two-fisted brawl. The first principal in judo is to use your opponent’s weight
and strength to your own advantage: deflect the energy of your opponent’s attack;
get him off balance; then let momentum and gravity do the rest.
Dell Computer,
America’s fastest growing personal computer company, could never have matched
Compaq’s dealer network or IBM’s direct sales force, so the company chose to
sell its computers by mail. Computer industry incumbents have found it almost
impossible to match Dell, not because they don’t have the resources but because
these companies face powerful constituents who have a big stake in the status
quo. Critical success factors become orthodoxies when a competitor successfully
changes the rules of engagement. Such competitive innovation is an important
way of shielding resources.
Searching for
underdefended territory is another way to shield resources. Honda’s success
with small motorbikes, Komatsu’s early forays into Eastern Europe, and Canon’s
entry into the “convenience” copier segment all failed to alert incumbents
whose attention was focused elsewhere. Understanding a competitor’s definition
of its “served market” is the first step in the search for underdefended
competitive space. The goal is to build up forces just out of sight of stronger
competitors. This may be one reason why Toyota chose to launch the Lexus, its
challenge to Mercedes Benz, not in Germany but in California, where buyers are
technologically sophisticated, value conscious, and not overly swayed by brand
loyalty.
Recovery: Have we
shortened product-development, order-processing, and product-launch times? Have
we built global brands and distribution positions that allow us to preempt
slower rivals?
Recovering
Resources: Expediting Success. The
time between the expenditure of resources and their recovery through revenues
is yet another source of leverage—the more rapid the recovery process, the
higher the resource multiplier. A company that can do anything twice as fast as
its competitors, with a similar resource commitment, enjoys a twofold leverage
advantage. This rudimentary arithmetic explains, in part, why Japanese
companies have been so intent on accelerating product-development times.
Consider the effects of the two-to-one development-time advantage Japanese
automakers traditionally held over their U.S. and European rivals. This lead
not only allowed them to recoup investments more quickly but also gave them
more up-to-date products and gave customers more excuses to abandon their brand
loyalties.
But fast-paced
product development is only one way of expediting recovery time. A company that
has built a highly esteemed global brand will find customers eager to try out new
products. This predisposition to buy can expedite recovery dramatically, since
recovery time is measured not from product concept to product launch but from
product concept to some significant level of world-market penetration.
Stretch Without Risk
The essential
element of the new strategy frame is an aspiration that creates by design a
chasm between ambition and resources. For many managers, great ambition equals
big risk. If managers at Ford, for instance, were simply to extrapolate past
practices, they might believe that developing a car five times as good as the
Escort (a potential Lexus beater, say) would require five times the resources.
But stretch implies risk only when orthodox notions dictate how the ambition is
to be achieved.
Stretch can beget
risk when an arbitrarily short time horizon is set for long-term leadership
goals. Impatience brings the risk of rushing into markets not fully understood,
ramping up R&D spending faster than it can be managed, acquiring companies
that cannot be digested easily, or rushing into alliances with partners whose
motives and capabilities are poorly understood. Trouble inevitably ensues if
resource commitments outpace the accumulation of customer and competitor
insights. The job of top management is not so much to stake out the future as
it is to help accelerate the acquisition of market and industry knowledge. Risk
recedes as knowledge grows, and as knowledge grows, so does the company’s
capacity to advance.
The notion of
strategy as stretch helps to bridge the gap between those who see strategy as a
grand plan thought up by great minds and those who see strategy as no more than
a pattern in a stream of incremental decisions. On the one hand, strategy as
stretch is strategy by design, in that top management has a clear view of the
goal line. On the other hand, strategy as stretch is strategy by
incrementalism, in that top management must clear the path for leadership meter
by meter. In short, strategy as stretch recognizes the essential paradox of
competition: leadership cannot be planned for, but neither can it happen
without a grand and well-considered aspiration.
A version of this article appeared in
the March–April
1993 issue of Harvard Business Review.
Gary Hamel is a visiting professor at
London Business School and the founder of the Management Lab. He is a co-author
of Humanocracy: Creating Organizations
as Amazing as the People Inside Them (Harvard Business Review
Press, forthcoming).
C.K. Prahalad was the Paul and Ruth
McCracken Distinguished University Professor of Strategy at the University of
Michigan’s Ross School of Business. He wrote this article, his 16th for HBR,
before he passed away, on April 16, 2010.
