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BEST OF HBR
THE HIGH-PERFORMANCE ORGANIZATION
1989
Sixteen years ago, when Cary Hamel, then a lecturer at London Business
Sehooi, and C.K. Prahalad, a University of Michigan professor, wrote “Strategic lntent,”the article signaled that a major new force had arrived in
management.
Hamei and Prahalad argue that Western companies focus on trimming
their ambitions to match resources and, as a result, search only for advantages they can sustain. By contrast, Japanese corporations leverage resources
by accelerating the pace of organizational learning and try to attain seemingly impossible goals. These firms foster the desire to succeed among their
employees and maintain it by spreading the vision of global leadership.
This is how Canon sought to “beat Xerox”and Komatsu set out to “encircle
Caterpillar.”
This strategic intent usually incorporates stretch targets, which force companies to compete in innovative ways. In this McKinsey Award-winning article, Hamel and Prahalad describe four techniques that Japanese companies
use: building layers ofadvantage, searching for “loose bricks,” changing the
terms of engagement, and competing through collaboration.
Strategic Intent
by Gary Hamel and C.K. Prahalad
oday managers in many industries
Most leading global
companies started with
ambitions that were far
bigger than their resources
and capabilities. But they
created an obsession with
winning at ail levels ofthe
organization and sustained
that obsession for decades.
148
working hard to match the compete advantages of their new global rivals. They are moving manufacturing
offshore in search of lower labor costs,
rationalizing product lines to capture
global scale economies, instituting quality circles and just-in-time production,
and adopting Japanese human resource
practices. When competitiveness still
seems out of reach, they form strategic
alliances-often with the very companies that upset the competitive balance
in the first place.
Important as these initiatives are,
few of them go beyond mere imitation.
Too many companies are expending
enormous energy simply to reproduce
the cost and quality advantages their
global competitors already enjoy. Imitation may be the sincerest form of flattery, but it will not lead to competitive
revitalization. Strategies based on imitation are transparent to competitors
who have already mastered them. Moreover, successful competitors rarely stand
still. So it is not surprising that many
executives feel trapped in a seemingly
endless game of catch-up, regularly surprised by the new accomplishments of
their rivals.
For these executives and their companies, regaining competitiveness will
mean rethinking many ofthe basic concepts of strategy.’ As “strategy” has blossomed, the competitiveness of Western companies has withered. This may
be coincidence, but we think not. We
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THE HIGH-PERFORMANCE ORGANIZATION
believe that the application of concepts
such as”strategicfit”(between resources
and opportunities),”generic strategies”
(low cost versus differentiation versus
focus), and the “strategy hierarchy”
(goals, strategies, and tactics) has often
abetted the process of competitive decline. The new global competitors approach strategy from a perspective that
is fundamentally different from that
which underpins Western management
thought. Against such competitors, marginal adjustments to current orthodoxies are no more likely to produce
In this respect, traditional competitor
analysis is like a snapshot of a moving
car. By itself, the photograph yields little
information about the car’s speed or
direction-whether the driver is out for
a quiet Sunday drive or warming up
for the Grand Prix. Yet many managers
have leamed through painful experience
that a business’s initial resource endowment (whether bountiful or meager) is
an unreliable predictor of future global
success.
Think back: In 1970, few Japanese
companies possessed the resource base,
see the tactics whereby I conquer,” he
wrote, “but what none can see is the
strategy out of which great victory is
evolved.”
Companies that have risen to global
leadership over the past 20 years invariably began with ambitions that
were out of all proportion to their resources and capabilities. But they created an obsession with winning at all
levels ofthe organization and then sustained that obsession over the lo- to 20year quest for global leadership. We
term this obsession “strategic intent.”
For smart competitors, the goal is not competitive imitation
but competitive innovation, the art of containing competitive
risks within manageable proportions.
manufacturing volume, or technical
prowess of U.S. and European industry
leaders. Komatsu was less than 35% as
large as Caterpillar (measured by sales),
was scarcely represented outside Japan,
and relied on just one product line small bulldozers-for most of its revenue. Honda was smaller than American
Motors and had not yet begun to export
cars to the United States. Canon’s first
halting steps in the reprographics business looked pitifully small compared
with the $4 billion Xerox powerhouse.
If Western managers had extended
their competitor analysis to include
these companies, it would merely have
underlined how dramatic the resource
discrepancies between them were. Yet
by 1985. Komatsu was a $2.8 billion company with a product scope encompassing a broad range of earth-moving
equipment, industrial robots, and semiconductors. Honda manufactured almost as many cars worldwide in 1987 as
Cary Hamel is a visiting professor at LonChrysler. Canon had matched Xerox’s
don Business School and the chairman
global unit market share.
ofStrategos, an international consulting
company based in Chicago. C.K. Prahalad
The lesson is clear: Assessing the
is the Harvey C. Eruehauf Professor of
current tactical advantages of known
Business Administration and a professor competitors will not help you underof corporate strategy and international
stand the resolution, stamina, or invenbusiness at the Stephen M. Ross School of
tiveness of potential competitors. SunBusiness at the University of Michigan in
tzu, a Chinese military strategist, made
Ann Arbor.
the point 3.000 years ago: “All men can
competitive revitalization than are marginal improvements in operating efficiency. (The sidebar “Remaking Strategy”
describes our research and summarizes the two contrasting approaches
to strategy we see in large multinational
companies.)
Few Western companies have an enviable track record anticipating the
moves of new global competitors. Why?
The explanation begins with the way
most companies have approached competitor analysis. Typically, competitor
analysis focuses on the existing resources
(human, technical, and financial) of present competitors. The only companies
seen as a threat are those with the resources to erode margins and market
share in the next planning period. Resourcefulness, the pace at which new
competitive advantages are being built,
rarely enters in.
150
On the one hand, strategic intent envisions a desired leadership position and
establishes the criterion the organization will use to chart its progress. Komatsu set out to “encircle Caterpillar.”
Canon sought to “beat Xerox.” Honda
strove to become a second Ford-an automotive pioneer. All are expressions of
strategic intent.
At the same time, strategic intent is
more than simply unfettered ambition.
(Many companies possess an ambitious
strategic intent yet fall short of their
goals.) The concept also encompasses
an active management process that includes focusing the organization’s attention on the essence of winning, motivating people by communicating the
value of the target, leaving room for
individual and team contributions, sustaining enthusiasm by providing new
operational definitions as circumstances
change, and using intent consistently to
guide resource allocations.
Strategic intent captures the essence
ofwinning.The Apollo program-landing a man on the moon ahead ofthe Soviets-was as competitively focused as
Komatsu’s drive against Caterpillar. The
space program became the scorecard
for America’s technology race with the
USSR. In the turbulent information
technology industry, it was hard to pick
HARVARD BUSINESS REVIEW
strategic intent • BEST OF HBR
a single competitor as a target, so NEC’s
strategic intent, set in the early 1970s,
was to acquire the technologies that
would put it in the best position to exploit the convergence of computing
and telecommunications. Other industry observers foresaw this convergence,
but oniy NEC made convergence the
guiding theme for subsequent strategic
decisions by adopting “computing and
communications”as its intent. For CocaCola, strategic intent has been to put a
Coke vtfithin “arm’s reach” of every consumer in the world.
Strategic intent is stable over time.
In battles for global leadership, one of
Remaking Strategy
L
the most critical tasks is to lengthen the
organization’s attention span. Strategic
intent provides consistency to short-term
action, while leaving room for reinterpretation as new opportunities emerge.
At Komatsu, encircling Caterpillar encompassed a succession of medium-term
programs aimed at exploiting specific
Both models recognize the difficulty of competing
against larger competitors. But while the first leads to a
search for niches (or simply dissuades the company from
ver the last ten years, our research on global com-
challenging an entrenched competitor), tbe second pro-
petition, international alliances, and multina-
duces a quest for new rules that can devalue the incum-
tional management has brought us into close
bent’s advantages.
contact with senior managers in the United States, Europe, and Japan. As we tried to unravel the reasons for
Both models recognize that balance in the scope of an
organization’s activities reduces risk. The first seeks to
success and surrender in global markets, we became
reduce financial risk by building a balanced portfolio of
more and more suspicious that executives in Western
cash-generating and cash-consuming businesses. The sec-
and Far Eastern companies often operated witb very dif-
ond seeks to reduce competitive risk by ensuring a well-
ferent conceptions of competitive strategy. Understand-
balanced and sufficiently broad portfolio of advantages.
ing these differences, we thought, migbt belp explain tbe
Both models recognize the need to disaggregate the
conduct and outcome of competitive battles as well as
organization in a way that allows top management to dif-
supplement traditional explanations for Japan’s ascen-
ferentiate among the investment needs of various plan-
dance and the West’s decline.
ning units. In the first model, resources are allocated to
We began by mapping the implicit strategy models of
managers who had participated in our research. Then we
product-market units in which relatedness is defined by
common products, channels, and customers. Each busi-
built detailed histories of selected competitive battles.
ness is assumed to own all the critical skills it needs to ex-
We searched for evidence of divergent views of strategy,
ecute its strategy successfully. In the second, investments
competitive advantage, and the role of top management.
are made in core competences (microprocessor controls
Two contrasting models of strategy emerged. One,
or electronic imaging, for example) as well as in product-
which most Western managers will recognize, centers
market units. By tracking these investments across busi-
on the problem of maintaining strategic fit. The other
nesses, top management works to assure that tbe plans of
centers on the problem of leveraging resources. The two
individual strategic units don’t undermine future devel-
are not mutually exclusive, but tbey represent a signifi-
opments by default.
cant difference in emphasis-an emphasis tbat deeply
affects how competitive battles get played out over time.
Both models recognize the problem of competing in
Both models recognize the need for consistency in action across organizational levels. In the first, consistency
between corporate and business levels is largely a matter
a hostile environment with limited resources. But while
of conforming to financial objectives. Consistency be-
the emphasis in the first is on trimming ambitions to
tween business and functional levels comes by tightly
match available resources, the emphasis in the second
restricting the means the business uses to achieve its
is on leveraging resources to reach seemingly unattain-
strategy-establishing standard operating procedures,
able goals.
Both models recognize that relative competitive ad-
defining tbe served market, adhering to accepted industry practices. In the second model, businessetitive advantage as mutually desirable layers, not
155
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THE HIGH-PERFORMANCE ORGANIZATION
mutually exclusive choices. What some
call competitive suicide-pursuing both
cost and differentiation-is exactly what
many competitors strive for.-‘ Using flexible manufacturing technologies and
better marketing intelligence, they are
moving away from standardized “world
products”to products like Mazda’s minivan, developed in California expressly
for the U.S. market.
Another approach to competitive innovation, searching for loose bricks, exploits the benefits of surprise, which is
just as useful in business battles as it
is in war. Particularly in the early stages
of a war for global markets, successful
new competitors work to stay below
the response threshold of their larger,
more powerful rivals. Staking out underdefended territory is one way to do this.
To find loose bricks, managers must
have few orthodoxies about how to
break into a market or challenge a competitor. For example, in one large U.S.
multinational, we asked several country
managers to describe what a Japanese
competitor was doing in the local market. The first executive said, “They’re
coming at us in the low end. Japanese
companies always come in at the bottom.” The second speaker found the
comment interesting but disagreed:
“They don’t offer any low-end products
in my market, but they have some exciting stuff at the top end. We really
should reverse engineer that thing.” Another colleague told still another story.
“They haven’t taken any business away
from me,” he said,”but they’ve just made
me a great offer to supply components.”
In each country, the Japanese competitor had found a different loose brick.
The search for loose bricks begins
with a careful analysis of the competitor’s conventional wisdom: How does
the company define its”served market”?
What activities are most profitable?
Which geographic markets are too troublesome to enter? The objective is not to
find a comer of the industry (or niche)
where larger competitors seldom tread
but to build a base of attack just outside the market territory that industry
leaders currently occupy. The goal is
an uncontested profit sanctuary, which
156
could be a particular product segment
(the “low end” in motorcycles), a slice
of the value chain (components in the
computer industry), or a particular geographic market (Eastern Europe).
When Honda took on leaders in the
motorcycle industry, for example, it
began with products that were just outside the conventional definition ofthe
leaders’ product-market domains. As a
result, it could build a base of operations in underdefended territory and
then use that base to launch an expanded attack. What many competitors failed to see was Honda’s strategic
intent and its growing competence in
engines and power trains. Yet even as
Honda was selling 50CC motorcycles in
the United States, it was already racing
inition of industry and segment boundaries-represents still another form of
competitive innovation. Canon’s entry
into the copier business illustrates this
approach.
During the 1970s, both Kodak and
IBM tried to match Xerox’s business system in terms of segmentation, products,
distribution, service, and pricing. As a
result, Xerox had no trouble decoding
the new entrants’ intentions and developing countermoves. IBM eventually
withdrew from the copier business,
while Kodak remains a distant second in
the large copier market that Xerox still
dominates.
Canon, on the other hand, changed
the terms of competitive engagement.
While Xerox built a wide range of
Almost every strategic management theory
and nearly every corporate planning system
is premised on a strategy hierarchy in which
corporate goals guide business unit strategies and
business unit strategies guide functional tactics.
larger bikes in Europe ~ assembling the
design skills and technology it would
need for a systematic expansion across
the entire spectrum of motor-related
businesses.
Honda’s progress in creating a core
competence in engines should have
warned competitors that it might enter
a series of seemingly unrelated industries ~ automobiles, lawn mowers, marine engines, generators. But with each
company fixated on its own market, the
threat of Honda’s horizontal diversification went unnoticed. Today, companies
like Matsushita and Toshiba are similarly poised to move in unexpected ways
across industry boundaries. In protecting loose bricks, companies must extend their peripheral vision by tracking
and anticipatingthe migration of global
competitors across product segments,
businesses, national markets, valueadded stages, and distribution channels.
Changing the terms of engagementrefusing to accept the front-runner’s def-
copiers. Canon standardized machines
and components to reduce costs. It
chose to distribute through office product dealers rather than try to match
Xerox’s huge direct sales force. It also
avoided the need to create a national
service network by designing reliability
and serviceability into its product and
then delegating service responsibility to
the dealers. Canon copiers were sold
rather than leased, freeing Canon from
the burden of financing the lease base.
Finally, instead of selling to the heads
of corporate duplicating departments,
Canon appealed to secretaries and department managers who wanted distributed copying. At each stage. Canon
neatly sidestepped a potential barrier
to entry.
Canon’s experience suggests that there
is an important distinction between barriers to entry and barriers to imitation.
Competitors that tried to match Xerox’s
business system had to pay the same
entry costs – the barriers to imitation
HARVARD BUSINESS REVIEW
strategic Intent • BEST OF HBR
were high. But Canon dramatically reduced the barriers to entry by changing
the rules ofthe game.
Changing the rules also short-circuited
Xerox’s ability to retaliate quickly against
its new rival. Confronted with the need
to rethink its business strategy and organization, Xerox was paralyzed for a
time. Its managers realized that the faster
they downsized the product line, developed new channels, and improved reliability, the faster they would erode the
company’s traditional profit base. What
might have been seen as critical success
factors-Xerox’s national sales force and
service network, its large installed base
of leased machines, and its reliance on
service revenues-instead became barriers to retaliation. In this sense, competitive innovation is like judo: The goal
is to use a larger competitor’s weight
against it. And that happens not by
matching the leader’s capabilities but
by developing contrasting capabilities
of one’s own.
Competitive innovation works on
the premise that a successful competitor is likely to be wedded to a recipe for
success. That’s why the most effective
weapon new competitors possess is
probably a clean sheet of paper. And
why an incumbent’s greatest vulnerability is its belief in accepted practice.
Through licensing,outsourcing agreements, and joint ventures, it is sometimes possible to win without fighting.
For example, Fujitsu’s alliances in Europe with Siemens and STC (Britain’s
largest computer maker) and in the
United States with Amdahl yield manufacturing volume and access to Western
markets. In the eariy 1980s, Matsushita
established a joint venture with Thorn
(in the United Kingdom), Telefunken (in
Germany), and Thomson (in France),
which allowed it to quickly multiply the
forces arrayed against Philips in the
battle for leadership in the European
VCR business. In fighting larger global
rivals by proxy, Japanese companies
have adopted a maxim as old as human
conflict itself: My enemy’s enemy is my
friend.
Hijacking the development efforts
of potential rivals is another goal of
JULY-AUGUST 2005
competitive collaboration. In the consumer electronics war, Japanese competitors attacked traditional businesses
like TVs and hi-fis while volunteering to
manufacture next generation products
like VCRs, camcorders, and CD players
for Western rivals. They hoped their rivals would ratchet down development
spending, and, in most cases, that is precisely what happened. But companies
that abandoned their own development
efforts seldom reemerged as serious
competitors in subsequent new product
battles.
Collaboration can also be used to calibrate competitors’ strengths and weaknesses. Toyota’s joint venture with GM,
and Mazda’s with Ford, give these automakers an invaluable vantage point
for assessing the progress their U.S. rivals have made in cost reduction, quality, and technology. They can also learn
how GM and Ford compete-when they
will fight and when they won’t. Of
course, the reverse is also true: Ford and
GM have an equal opportunity to learn
from their partner-competitors.
The route to competitive revitalization we have been mapping implies a
new view of strategy. Strategic intent assures consistency in resource allocation
over the long term. Clearly articulated
corporate challenges focus the efforts
of individuals in the medium term. Finally, competitive innovation helps reduce competitive risk in the short term.
This consistency in the long term, focus
in the medium term, and inventiveness
and involvement in the short term provide the key to leveraging limited resources in pursuit of ambitious goals.
But just as there is a process of winning,
so there is a process of surrender. Revitalization requires understanding that
process, too.
Given their technological leadership
and access to large regional markets,
how did U.S. and European countries
lose their apparent birthright to dominate global industries? There is no simple answer. Few companies recognize
the value of documenting failure. Fewer
still search their own managerial orthodoxies for the seeds of competitive surrender. But we believe there is a path-
ology of surrender that gives some important clues. (See the sidebar”The Process of Surrender.”)
it is not very comforting to think that
the essence of Western strategic thought
can be reduced to eight rules for excellence, seven S’s,fivecompetitive forces,
four product life-cycle stages, three
generic strategies, and innumerable
two-by-two matrices.” Yet for the past
20 years, “advances” in strategy have
taken the form of ever more typologies,
heuristics, and laundry lists, often with
dubious empirical bases. Moreover, even
reasonable concepts like the product life
cycle, experience curve, product portfolios, and generic strategies often have
toxic side effects: They reduce the number of strategic options management is
willing to consider. They create a preference for selling businesses rather than
defending them. They yield predictable
strategies that rivals easily decode.
Strategy recipes limit opportunities
for competitive innovation. A company
may have 40 businesses and only four
strategies – invest, hold, harvest, or divest. Too often, strategy is seen as a positioning exercise in which options are
tested by how they fit the existing industry structure. But current industry
structure reflects the strengths of the
industry leader, and playing by the
leader’s rules is usually competitive
suicide.
Armed with concepts like segmentation, the value chain, competitor benchmarking, strategic groups, and mobility
barriers, many managers have become
better and better at drawing industry
maps. But while they have been busy
mapmaking, their competitors have
been moving entire continents. The
strategist’s goal is not to find a niche
within the existing industry space but to
create new space that is uniquely suited
to the company’s own strengths-space
that is off the map.
This is particularly true now that industry boundaries are becoming more
and more unstable. In industries such as
financial services and communications,
rapidly changing technology, deregulation, and globalization have undermined the value of traditional industry
157
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THE HIGH-PERFORMANCE ORGANIZATION
analysis. Mapmaking skills are worth little in the epicenter of an earthquake.
But an industry in upheaval presents
opportunities for ambitious companies
to redraw the map in their favor, so long
as they can think outside traditional industry boundaries.
Concepts like “mature”and”declining”
are largely definitional. What most executives mean when they label a business
“mature” is that sales growth has stagnated in their current geographic markets for existing products sold through
existing channels. In such cases, it’s not
the industry that is mature, but the executives’ conception of the industry.
Asked if the piano business was mature, a senior executive at Yamaha
replied, “Only if we can’t take any market share from anybody anywhere in
the world and still make money. And
anyway, we’re not in the ‘piano’ business, we’re in the ‘keyboard’ business.”
Year after year, Sony has revitalized its
radio and tape recorder businesses, despite the fact that other manufacturers
long ago abandoned these businesses
as mature.
A narrow concept of maturity can
foreclose a company from a broad
stream of future opportunities. In the
1970s, several U.S. companies thought
that consumer electronics had become
a mature industry. What could possibly
top the color TV? they asked themselves. RCA and GE, distracted by opportunities in more “attractive” industries like mainframe computers, left
Japanese producers with a virtual mo-
holdings in less-developed countries, use of nontradi-
The Process of Surrender
tional channels, extensive corporate advertising) were ignored or dismissed as quirky. For example, managers we
n the battles for global leadership that have taken
spoke with said Japanese companies’ position in the Eu-
place during the past two decades, we have seen
ropean computer industry was nonexistent. In terms of
a pattern of competitive attack and retrench-
brand share that’s nearly true, but the Japanese control
O
ment that was remarkably similar across industries. We
as much as one-third ofthe manufacturing value added
call this the process of surrender.
in the hardware sales of European-based computer businesses. Similarly, German auto producers claimed to feel
The process started with unseen intent. Not possessing long-term, competitor-focused goals themselves,
unconcerned over the proclivity of Japanese producers
Western companies did not ascribe such intentions to
to move upmarket. But with its low-end models under
their rivals. They also calculated the threat posed by po-
tremendous pressure from Japanese producers, Porsche
tential competitors in terms of their existing resources
has now announced that it will no longer make “entry
rather than their resourcefulness. This led to systematic
level” cars,
underestimation of smaller rivals who were fast gaining
Western managers often misinterpreted their rivals’
technology through licensing arrangements, acquiring
tactics. They believed that Japanese and Korean compa-
market understanding
from downstream OEM
partners, and improv-
nies were competing
Unseen
Strategic Intent
Underestimated
Resourcefulness
Unconventional
Entry Tactics
Competitive
Surprise
I
ing product quality and
manufacturing productivity through company-
ble advantages of their rivals, American and
Partial
Response
European businesses were caught ofTguard.
4
Adding to the competitive surprise was
Catch-Up
Trap
the fact that the new entrants typically attacked the periphery ofa market (Honda in
and quality. This typically
produced a partial response to those competitors’ initiatives: moving
wide employee involvement programs.
Oblivious ofthe strategic intent and intangi-
solely on the basis of cost
manufacturing offshore, outsourcing, or in-
_
stituting a quality program. Seldom was the
full extent ofthe competitive threat appreciated-the multiple layers of advantage, the
expansion across related product segments,
the development of global brand positions.
small motorcycles, Yamaha in grand pianos,
Imitating the currently visible tactics of ri-
Toshiba in small black-and-white televisions)
vals put Western businesses into a perpet-
before going head-to-head with incumbents.
ual catch-up trap. One by one, companies
Incumbents often misread these attacks,
lost battles and came to see surrender as in-
seeing them as part of a niche strategy and
evitable. Surrender was not inevitable, of
not as a search for “loose bricks.” Unconven-
course, but the attack was staged in a way
tional market entry strategies (minority
that disguised ultimate intentions and sidestepped direct confrontation.
158
HARVARD BUSINESS REVIEW
strategic Intent • BEST OF HBR
nopoly in VCRs, camcorders, and CD
players. Ironically, the TV business, once
thought mature, is on the verge of a
dramatic renaissance. A $20 billion-ayear business will be created when highdefinition television is launched in the
United States. But the pioneers of television may capture only a small part of
this bonanza.
Most of the tools of strategic analysis are focused domestically Few force
managers to consider global opportunities and threats. For example, portfolio
planning portrays top management’s
investment options as an array of businesses rather than as an array of geographic markets. The result is predictable: As businesses come under attack
cess or failure squarely on the shoulders
of line managers. Each business is assumed to have ali the resources it needs
to execute its strategies successfully, and
in this no-excuses environment, it is
hard for top management to fail. But
desirable as clear lines of responsibility and accountability are, competitive
revitalization requires positive value
added from top management.
Few companies with a strong SBU
orientation have built successful global
distribution and brand positions. Investments in a global brand franchise
typically transcend the resources and
risk propensity of a single business.
While some Western companies have
had global brand positions for 30 or 40
mies of scale in entering global markets.
But capturing economies of scope demands interbusiness coordination that
only top management can provide.
We believe that infiexible SBU-type
organizations have also contributed to
the de-skilling of some companies. For
a single SBU, incapable of sustaining an
investment in a core competence such
as semiconductors, optical media, or
combustion engines, the only way to
remain competitive is to purchase key
components from potential (often Japanese or Korean) competitors. For an
SBU defined in product market terms,
competitiveness means offering an end
product that is competitive in price and
performance. But that gives an SBU
A threat that everyone perceives but no one talks about creates
more anxiety than a threat that has been clearly identified and made
the focal point for the problem-solving efforts of the entire company.
from foreign competitors, the company
attempts to abandon them and enter
other areas in which the forces of global
competition are not yet so strong. In
the short term, this may be an appropriate response to waning competitiveness, but there are fewer and fewer businesses in which a domestic-oriented
company can find refuge. We seldom
hear such companies asking. Can we
move into emerging markets overseas
ahead of our global rivals and prolong
the profitability of this business? Can
we counterattack in our global competitors’ home market and slow the
pace of their expansion? A senior executive in one successful global company
made a telling comment: “We’re glad
to find a competitor managing by the
portfolio concept – we can almost predict how much share we’ll have to take
away to put the business on the CEO’s
‘sell list.'”
Companies can also be overcommitted to organizational recipes, such as
strategic business units (SBUs) and the
decentralization an SBU structure implies. Decentralization is seductive because it places the responsibility for sucJULY-AUGUST 2005
years or more (Heinz, Siemens, IBM,
Ford, and Kodak, for example), it is hard
to identify any American or European
company that has created a new global
brand franchise in the past ten to 15
years. Yet Japanese companies have created a score or more – NEC, Fujitsu,
Panasonic (Matsushita), Toshiba, Sony,
Seiko, Epson, Canon, Minolta, and
Honda among them.
General Electric’s situation is typical.
In manyofits businesses,this American
giant has been almost unknown in Europe and Asia. GE made no coordinated
effort to build a global corporate franchise. Any GE business with international ambitions had to bear the burden of establishing its credibility and
credentials in the new market alone.
Not surprisingly, some once-strong GE
businesses opted out ofthe difficult task
of building a global brand position. By
contrast, smaller Korean companies like
Samsung, Daewoo, and Lucky-Goldstar
are busy building global-brand umbrellas that will ease market entry for a
whole range of businesses. The underlying principle is simple: Economies of
scope may be as important as econo-
manager little incentive to distinguish
between external sourcingthat achieves
“product embodied” competitiveness
and internal development that yields
deeply embedded organizational competencies that can be exploited across
multiple businesses. Where upstream
component-manufacturing activities
are seen as cost centers with cost-plus
transfer pricing, additional investment
in the core activity may seem a less profitable use of capital than investment in
downstream activities. To make matters
worse, internal accounting data may not
reflect the competitive value of retaining control over a core competence.
Together, a shared global corporate
brand franchise and a shared core competence act as mortar in many Japanese companies. Lacking this mortar, a
company’s businesses are truly loose
bricks – easily knocked out by global
competitors that steadily invest in core
competences. Such competitors can coopt domestically oriented companies
into long-term sourcing dependence
and capture the economies of scope of
global brand investment through interbusiness coordination.
159
»
THE HIGH-PERFORMANCE ORGANIZATION
Last in decentralization’s list of dangers is the standard of managerial performance typically used in SBU organizations. In many companies, business
unit managers are rewarded solely on
the basis of their performance against
return on investment targets. Unfortunately, that often leads to denominator
management because executives soon
discover that reductions in investment
and head count-the denominator-“improve”the financial ratios by which they
are measured more easily than growth
in the numerator: revenues. It also fosters a hair-trigger sensitivity to industry
downturns that can be very costly. Managers who are quick to reduce investment and dismiss workers find it takes
much longer to regain lost skills and
catch up on investment when the industry turns upward again. As a result,
they lose market share in every business
cycle. Particularly in industries where
there is fierce competition for the best
peopie and where competitors invest relentlessly, denominator management
creates a retrenchment ratchet.
The concept ofthe general manager
as a movable peg reinforces the problem
of denominator management. Business
schools are guilty here because they
have perpetuated the notion that a
manager with net present value calculations in one hand and portfolio planning in the other can manage any business anywhere.
In many diversified companies, top
management evaluates line managers
on numbers alone because no other
basis for dialogue exists. Managers move
so many times as part of their “career
development” that they often do not understand the nuances ofthe businesses
they are managing. At GE, for example,
one fast-track manager heading an important new venture had moved across
five businesses in five years. His series
of quick successesfinallycame to an end
when he confronted a Japanese competitor whose managers had been plodding along in the same business for
more than a decade.
Regardless of ability and effort, fasttrack managers are unlikely to develop
the deep business knowledge they need
160
to discuss technology options, competitors’ strategies, and global opportunities substantive ly. Invariably, therefore,
discussions gravitate to “the numbers,”
while the value added of managers is
limited to the financial and planning
savvy they carry from job to job. Knowledge of the company’s internal planning and accounting systems substitutes
for substantive knowledge of the business, making competitive innovation
unlikely.
When managers know that their assignments have a two- to three-year
time frame, they feel great pressure to
create a good track record fast. This pressure often takes one of two forms. Either
the manager does not commit to goals
whose time line extends beyond his or
her expected tenure. Or ambitious goals
are adopted and squeezed into an unreaiistically short time frame. Aiming to
be number one in a business is the
essence of strategic intent; but imposing
a three- to four-year horizon on the effort simply invites disaster. Acquisitions
are made with little attention to the
archy undermines competitiveness by
fostering an elitist view of management
that tends to disenfranchise most ofthe
organization. Employees fail to identify
with corporate goals or involve themselves deeply in the work of becoming
more competitive.
The strategy hierarchy isn’t the only
explanation for an elitist view of management, of course. The myths that
grow up around successful top managers-“Lee Iacocca saved Chrysler,””Carlo
De Benedetti rescued Olivetti,” “John
Sculley turned Apple around”-perpetuate it. So does the turbulent business
environment Middle managers buffeted
by circumstances that seem to be beyond their control desperately want to
believe that top management has ail the
answers. And top management, in turn,
hesitates to admit it does not for fear of
demoralizing lower-level employees.
The result of all this is often a code
of silence in which the full extent of a
company’s competitiveness problem is
not widely shared. We interviewed business unit managers in one company,
Japanese companies realize that top managers
are a bit like the astronauts who circie the Earth
in the space shuttle. It may be the astronauts
who get ail the glory, but everyone knows that the
real inteiiigence behind the mission is located
firmly on the ground.
problems of integration. The organization becomes overloaded with initiatives. Collaborative ventures are formed
without adequate attention to competitive consequences.
Almost every strategic management
theory and nearly every corporate planning system is premised on a strategy hierarchy in which corporate goals guide
business unit strategies and business
unit strategies guide functional tactics.^
In this hierarchy, senior management
makes strategy and lower levels execute
it. The dichotomy between formulation
and implementation is familiar and
widely accepted. But the strategy hier-
for example, who were extremely anxious because top management wasn’t
talking openly about the competitive
challenges the company faced. They assumed the lack of communication indicated a lack of awareness on their senior managers’ part. But when asked
whether they were open with their own
employees, these same managers replied
that while they could face up to the
problems, the people below them could
not Indeed, the only time the workforce
heard about the company’s competitiveness problems was during wage negotiations when problems were used to
extract concessions.
HARVARD BUSINESS REVIEW
strategic Intent • BEST OF HBR
Unfortunately, a threat that everyone
perceives but no one talks about creates
more anxiety than a threat that has
been clearly identified and made the
focal point for the problem-solving efforts ofthe entire company. That is one
reason honesty and humiiity on the part
of top management may be thefirstprerequisite of revitalization. Another reason is the need to make “participation”
more than a buzzword.
Programs such as quality circles and
total customer service often fall short
of expectations because management
does not recognize that successful implementation requires more than administrative structures. Difficulties in
embedding new capabilities are typically put down to “communication”
problems, with the unstated assumption that if only downward communication were more effective – “if only
middle management would get the message straight”-the new program would
quickly take root. The need for upward
communication is often ignored, or assumed to mean nothing more than feedback. In contrast, Japanese companies
win not because they have smarter managers but because they have developed
ways to harness the “wisdom of the
anthiIl.”They realize that top managers
are a bit like the astronauts who circle
the Earth in the space shuttle. It may
be the astronauts who get all the glory,
but everyone knows that the real intelligence behind the mission is located
firmly on the ground.
Where strategy formulation is an
elitist activity, it is also difficult to produce truly creative strategies. For one
thing, there are not enough heads and
points of view in divisional or corporate planning departments to challenge
conventional wisdom. For another, creative strategies seldom emerge from
the annual planning ritual. The starting
point for next year’s strategy is almost
always this year’s strategy. Improvements are incremental. The company
sticks to the segments and territories it
knows, even though the real opportunities may be elsewhere. The impetus
for Canon’s pioneering entry into the
personal copier business came from an
JULY-AUGUST 2 0 0 5
overseas sales subsidiary – not from
planners in Japan.
The goal ofthe strategy hierarchy remains valid – to ensure consistency up
and down the organization. But this
consistency is better derived from a
clearly articulated strategic intent than
from inflexibly applied top-down plans.
In the 1990s, the challenge will be to
enfranchise employees to invent the
means to accomplish ambitious ends.
clear: “We don’t trust you. You’ve shown
no ability to achieve profitable growth.
Just cut out the slack, manage the denominators, and perhaps you’ll be taken
over by a company that can use your
resources more creatively.” Very little
in the track record of most large Westem companies warrants the confidence
of the stock market. Investors aren’t
hopelessly short-term, they’re justifiably
skeptical.
The goal ofthe strategy hierarchy remains validto ensure consistency up and down the
organization. But this consistency is better
derived from a clearly articulated strategic intent
than from inflexibly applied top-down plans.
We seldom found cautious administrators among the top managements of
companies that came from behind to
challenge incumbents for global leadership. But in studying organizations that
had surrendered, we invariably found
senior managers who, for whatever reason, lacked the courage to commit their
companies to heroic goals – goals that
lay beyond the reach of planning and existing resources. The conservative goals
they set failed to generate pressure and
enthusiasm for competitive innovation
or give the organization much useful
guidance. Financial targets and vague
mission statements just cannot provide
the consistent direction that is a prerequisite for winning a global competitive war.
This kind of conservatism is usually
blamed on the financial markets. But
we believe that in most cases, investors’
so-called short-term orientation simply
reflects a lack of confidence in the ability of senior managers to conceive and
deliver stretch goals. The chairman of
one company complained bitterly that
even after improving return on capital
employed to over 40% (by ruthlessly divesting lackluster businesses and downsizing others), the stock market held the
company to an 8:1 price/earnings ratio.
Of course, the market’s message was
We believe that top management’s
caution refiects a lack of confidence in
its own ability to involve the entire organization in revitalization, as opposed
to simply raising financial targets. Developing faith in the organization’s ability to deliver on tough goals, motivating
it to do so, focusing its attention long
enough to internalize new capabilities – this is the real challenge for top
management. Only by rising to this challenge will senior managers gain the
courage they need to commit themselves and their companies to global
leadership.
^
1. Among the first to apply the concept of strategy
to management were H, Igor Ansoff in Corporate
Strategy: An Analytic Approach toBusiness Policyfor
Growth and Expansion (McGraw HitI, 1965) and
Kenneth R. Andrews in The Concept of Corporate
Strategy (Dow Jones-lrwin, 1971).
2. Robert A. Burgelman,”A Process Model of Internal Corporate Venturing in the Diversified Major
Firm” Administrative Science Quarterly, June 1983.
3. For example, see Michael E. Porter, Competitive
Strategy (Free Press, 1980).
4- Strategic frameworks for resource allocation in diversified companies are summarized in Charles W.
Hofer and Dan E. Schendel, Strategy Formulation:
Analytical Concepts (West Publishing, 1978),
5. For example, see Peter Lorange and Richard F.
Vancil, Strategic Planning Systems (Prentice-Hail,
1977).
Reprint R0507N; HBR OnPoint 6557
To order, see page 195.
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