Bringing discipline to strategy

Abstract

Are you making three big and often very bad assumptions? Don't assess uncertainty unless you are willing to abandon your favorite formulas Bets and options may be more important than positional choices Strategy today is an extraordinarily demanding, complex, and subtle discipline. But you'd never know that from reading the management journals and business bestsellers of the past five years. Each season brings a new crop of experts proclaiming that their framework - core competences, customer retention, management ecosystems, strategic intent, time-based competition, TQM, white spaces, managing chaos, value migration - is the definitive way to think about strategy. Applied to specific cases, these solutions sometimes prove an exquisite fit, but just as often they offer only a mediocre approximation. Nonetheless, managers have reached out to these new theories because the classical microeconomics-based model of strategy is inadequate in a growing number of situations. Consider some recent examples: * A telco executive needs to make a $1 billion yes or decision as to whether to invest in a new network technology to provide new service to customers. One best-practice market research survey predicts a return on investment of 25 percent; a second, equally valid, forecasts minus 25 percent. What should that executive do? * How should executives at a software firm deal with a large customer that is also their chief competitor - and one of their biggest suppliers? * How should the CEO of a credit card company think strategically about positioning, when segments and value propositions come and go every six months? * A large regional bank recognizes that to achieve its aspirations in retail banking, it must shape the nature of competition by discovering huge but as yet unrecognized customer needs, and stimulating other players to follow its bold lead. How can it embark on such a strategy? All these cases lie outside the conditions for which the traditional model of strategy was designed. In fact, our work suggests that up to 50 percent of the strategy situations faced by large companies lie outside of those conditions. Equally, no single one of the new frameworks can address them all. Therefore, it is time for a new approach to strategy. The past twenty years have seen a wider range of business situations emerge than ever before. No single strategy prescription can be appropriate in each one of them. What's needed is a more robust model of business that can handle a much broader set of circumstances and suggest when and how we should use specific theories. The shortcomings of the traditional approach At the heart of the traditional strategy framework lies a microeconomic model of industry. Exhibit 1 illustrates its popularized form, the Porter model. This model combines exogenous forces acting on an industry (such as technology and regulation) with endogenous ones. More importantly, it makes three tacit but crucial assumptions. First, that an industry consists of a set of unrelated buyers, sellers, substitutes, and competitors that interact at arm's length. Second, that wealth will accrue to players that are able to erect barriers against competitors and potential entrants; in other words, that the source of value is structural advantage. Third, that uncertainty is sufficiently low that you can accurately predict participants' behavior and choose a strategy accordingly. Even if the odds of each assumption being individually correct is moderate, the combined chances of at least one of these being wrong is high. So, let's examine the validity of these assumptions. Industry structure The traditional microeconomic model is based on a rational industrial structure where each player competes at arm's length not only with its rivals, but also with customers and suppliers for control of the economic rents. …

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