Only by fully comprehending these seven chapters can you truly understand strategy.
As of October 2009, there were more than 74,000 books on business strategy on Amazon. Faced with such a vast body of materials, readers who only want to understand the path to successful competition but struggle to find effectively curated management books may question: How many of these books are truly necessary? In fact, most readers of strategy books would likely agree that nearly all of these voluminous works can be presented in a streamlined article of around 3,000 words.
Strategy itself is a process of distillation; it is a refined, internally coherent account of a company's current state and future vision. It may take weeks of data collection to identify the key points for formulating a new company's development direction, and days of deliberate consideration by the management team to distill them into a set of action plans, but the strategy itself should be no longer than a few sentences. An employee woken up by a flashlight at 2 a.m. and asked a question related to strategy should be able to explain it fully in just a minute or two. If this is the ideal form of strategy, then why does it take 400 pages to explain what strategy is or how to formulate it?
In this spirit, what follows is a review of the best works in the field of strategy: not entire books, but the seven most brilliant chapters from the relevant titles. These chapters cannot cover everything you need to make excellent strategic decisions; that is impossible, for reasons that will be elaborated in several of the chapters. But taken together, these seven chapters cover the core themes of modern corporate strategy discussions that did not begin until the 1960s. The first three chapters (written by Alfred D. Chandler Jr., Kenneth Andrews, and Michael E. Porter respectively) and the final chapter (written by Henry Mintzberg) can arguably be regarded as classics; any serious work on the history of strategy would likely include them. All seven chapters offer profound insights that every student of strategy, whether a practitioner or a scholar, should bear in mind. Even scattered among all these rigorous discussions are some witty and delightful surprises.
Structure and Self-Definition
Alfred D. Chandler Jr.'s Strategy and Structure: Chapters in the History of the American Industrial Enterprise, originally published by MIT Press in 1962, was not the first work to link the term "strategy" to business, but it was the first to explore this concept in a far-reaching manner. This is a historical work that mainly recounts how four giant companies — DuPont, General Motors, Standard Oil of New Jersey, and Sears, Roebuck & Co. — transformed their organizational structures to meet the challenges of the early 20th century. In the introduction (which is essentially the first chapter of the book), Chandler lays out the key concepts that run through the entire work.
His definition of strategy may seem mundane to modern readers: "The determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals." Only those who experienced the stagnation of corporate thinking in the 1950s and early 1960s can appreciate how subversive Chandler's ideas were. At that time, most companies felt that they were largely subject to market forces and lacked the knowledge required to truly determine their own future. They might formulate some plans, but they lacked a framework that could integrate costs, customers, and competitive conditions to map out their own development paths.
The corporate histories Chandler narrates capture this passive, or at least unintentional, way of formulating strategic direction. Strategies are not the product of heroic, one-off decisions by senior management; instead, they emerge from a series of smaller, almost ad-hoc decisions — for example, entering new fields to find new customers, or launching new products to address problems in specific markets. (See "Professor Chandler's Revolution" by Art Kleiner.)
Chandler himself focused more on the organizational dimension of his story than the strategic dimension. His main conclusion, which is also the most well-known viewpoint of the book, is that "structure follows strategy." The lines on the organizational chart may seem arbitrary, but they actually reflect the paths planned by business decisions. For example, the four companies in his account expanded across the country to serve the U.S. market, and were almost forced to organize themselves into relatively independent divisions, with the heads of each division taking profit and loss responsibility for operations that integrated all functions from production to sales.
In the introduction to this book, Chandler was the first to elaborate on several themes that later recurred and even became the golden rules in the development of strategic thought. He wrote that strategy is a response to changes in the corporate environment. It focuses on the long term, not day-to-day operations. The responsibility for formulating strategy lies with senior management, or in Chandler's slightly ironic phrasing, the company's "headquarters," not the division or business unit headquarters. (At that time, Peter Drucker had not yet institutionalized the term "management" to refer to the executive management function or team.) Chandler believed there is a distinction between strategy formulation and strategy implementation, a distinction that still plagues related discussions today. The historian also put forward some more subtle concepts whose importance has emerged over time: innovation is the driving force behind most successful strategies, and strategies without structural changes yield little benefit to companies.
Although H. Igor Ansoff published Corporate Strategy: An Analytic Approach to Business Policy for Growth and Expansion (McGraw-Hill) as early as 1965, in my opinion, the first work fully developed around the core concept was The Concept of Corporate Strategy published in 1971 by Kenneth R. Andrews, a professor at Harvard Business School. In the second chapter — the core chapter — of this book, Andrews puts forward what we can call a grand existential assertion of strategy. At the conclusion of his definition of the term "strategy," he points out that strategy is "the pattern of major objectives, purposes or goals and essential policies and plans for achieving those goals, stated in such a way as to define what business the company is in or is to be and the kind of company it is or is to be." (I promise this will be the last definition cited in this review.) By the mid-1970s, thanks in large part to the efforts of the Boston Consulting Group (BCG) — a firm that specialized in strategy and promoted it tirelessly — most business people were familiar with the concept of strategy and the necessity of formulating it, even if they did not necessarily agree on what should be included in it.
In addition to asserting that the "Big S" (strategy) is the core of corporate self-definition, Andrews also lists a long series of necessary elements that constitute a complete strategy. To capture "the organization's current state and future development direction," a strategy should clarify the company's product selection, target markets, market channels, operation financing methods, and profit targets — which can be measured by earnings per share or return on investment. Some of his proposed strategy evaluation criteria are quite reasonable, but later practitioners often ignored them, which further highlights their rationality: Does the company have the resources, including skills, needed to implement the ambitious plan? Is the level of risk appropriate? Have you informed your employees of your plan? Other criteria may seem absurd to those who are overly focused on finance, including die-hard followers of Milton Friedman: Does this strategy make the "expected contribution to society"? Does it align with "the personal values and aspirations of key managers"?
Competitive Position
For people who have been battered by corporate warfare over the past three decades, one omission by Andrews and Chandler stands out: they barely mention competition. Ah, how we miss the good old days of the two decades after the end of World War II, when the largest companies (most of which were American) did not have to worry about these troubles. By the time Michael Porter published Competitive Strategy: Techniques for Analyzing Industries and Competitors in 1980, that era was gone forever. A message that management consultants had been trying to instill for more than a decade finally began to penetrate the minds of even the most stubborn corporate executives: the primary purpose of formulating strategy is to gain competitive advantage.
The second chapter of Porter's famous work (now printed more than 60 times), titled "Generic Competitive Strategies," is remarkably noteworthy for at least three reasons. First, as Porter acknowledges, this is the only chapter in the entire book that truly discusses strategy. The rest of the chapters focus on teaching readers how to analyze industries. Andrews firmly refused to give specific guidance — he refused to list specific examples of strategies that might apply to a specific company in a specific situation, and even did not seem to believe that identifiable strategic archetypes exist — while Porter explicitly points out that you may only have three choices.
First, you can pursue overall cost leadership, which essentially means striving to become the lowest-cost producer in the industry. (For example, Porter cites the examples of Briggs & Stratton in the small-horsepower electric motor field and Lincoln Electric in the arc welding equipment field.) This also means you hold a leading market share position, and the cost advantages brought by your scale are unattainable for smaller competitors.
Second, you can pursue differentiation, producing products or services that are perceived as unique (for example, Caterpillar in the construction machinery field).
Third, you can choose focus, concentrating all your efforts on a specific customer group, geographic area, or product segment (for example, Illinois Tool Works in the professional fastener market). As Porter puts it, it is terrible if a company is "stuck in the middle"; if you do not gain an advantage in any of the three approaches but insist on dabbling in all of them slightly, you are doomed to fall into a predicament.
Although only 13 pages long, Porter's second chapter actually gives a brilliant review of some concepts that have attracted widespread attention in the strategy community over the past decade. For example, his cost leadership strategy is built on the worrying logic of the experience curve, a concept put forward by the Boston Consulting Group (BCG).
The experience curve assumes that the more a company focuses on a specific product category, the more predictable its overall costs will decline. As production experience accumulates, the company's capabilities will continue to improve. Therefore, the most experienced competitor should be able to produce the best products at the lowest cost, and consolidate this advantage by maintaining the largest market share and continuously moving down the experience curve faster than competitors.
Sudden Backlash
Just two years after Porter's book was published, the modern strategy revolution had lasted long enough to trigger a backlash. The 1982 book In Search of Excellence: Lessons from America's Best-Run Companies is now remembered mainly for its sales — about 6 million copies — some of the management lessons it put forward (focus on core business, stay close to customers), and the fact that many of the best-run companies mentioned in the book soon fell from grace. (Where are Data General, Digital Equipment, and Westinghouse of the past?) But authors Thomas J. Peters and Robert H. Waterman Jr. also put forward one of the earliest powerful critiques, arguing that strategy is nothing more than a pile of numbers and charts, ignoring the human input and ambition necessary for corporate development.
Their second chapter, "The Rational Model," fiercely attacks the prevailing strategic approach at the time, pointing out that it has many simplistic assumptions — the bigger the better, low cost will always win, and the responsibility of managers is to make decisions. More subtly, this chapter also lists the various drawbacks brought about by management retreating to what the authors call the "analytical ivory towers," which are bastions of executive decision-making disconnected from the fierce competition of daily operations. A company that follows the mainstream strategic model of that time will eventually focus almost entirely on costs, ignoring quality and value. Experiments and their accompanying errors will also be suppressed.
On the contrary, In Search of Excellence points to a different, more organic view of strategy, which later became known as "emergent strategy," standing in stark contrast to the "positioning school" of thought. Positionists like Porter (of course, any brief intellectual history is inevitably simplified, as we do here) believe that you should conduct rational analysis, identify the competitive position you want to occupy, formulate a strategy to achieve your goals, and then execute it.
It is almost impossible to refute those emerging viewpoints. Unless you are a startup, you can only start from the existing conditions. You can only move in a general direction with your existing strengths and weaknesses. You will encounter reality — including markets, products, and competitors that do not act as you expected, you will learn from mistakes, make adjustments, and then "go all out" (as Jack Welch later suggested). In this process, your strategy will gradually take shape.
The 1980s were not kind to strategic positionists. With deregulation and the increasingly fierce global competition, the liberating effect of the free market continued to expand, and it became increasingly difficult for companies to hold the strategic positions they thought they had occupied. To maintain existing competitive advantages, or even further, create new advantages, companies must integrate innovation capabilities into their strategies: invest heavily in new products, new services, and even management processes that can make enterprises outperform competitors. In his 1986 book Innovation: The Attacker's Advantage, Richard N. Foster cleverly linked this necessity to an enduring theoretical legacy of the strategic positioning school: the strategy of pattern recognition that lies behind many successful strategies.
This time it is not the experience curve, but the S-curve. In the fourth chapter, "The S-Curve: A New Forecasting Tool," Foster describes the development process of emerging technologies: usually going through a slow and gradual period of performance improvement — the flat part at the bottom of the "S" curve — then rising rapidly, and finally stabilizing and maturing. He gives examples of the improvement speed of artificial hearts and the increase in thickness of watches.
Foster's insight is strategically significant because he observed that such curves usually develop in waves, with the performance curve of new technologies starting higher than that of old technologies. Each new technology develops slowly at first, but eventually progresses rapidly, eventually phasing out the old technology. Most companies cannot jump directly from one curve to the next. Every strategist should have a copy of Foster's chart in their desk drawer (admittedly, you need to turn to Chapter 5 to find it), which shows that the top three companies in the vacuum tube field (RCA, Sylvania, GE) have no connection with the industry leaders in the next wave — the transistor field (Hughes, Transitron, Philco), which are completely different from the companies that eventually dominated the semiconductor field (TI, Motorola, Fairchild).
Paranoia Strikes
You'd better be an attacker, even if it means innovating to replace existing technologies. How difficult is it to do that, or to make any major change in strategic direction? Andrew S. Grove elaborates brilliantly on this in Chapter 5 of his 1996 book Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company, titled "Why Not Do It Ourselves?". Grove recounts how in 1985 he and Gordon Moore realized that Intel, the company they led, needed to exit the semiconductor memory chip manufacturing business it had been founded on and focus on microprocessors. The reactions they encountered while leading the company through this "strategic inflection point" will not surprise anyone who has tried to implement change in an organization. "How could you even think of doing that?" the heads of Intel's memory chip business units asked in unison. "Look at all the good things we are developing" (even as we are being bled dry by low-cost Japanese competitors).
Even if it meant closing factories, laying off thousands of employees, and even abandoning what many saw as the company's "birthright," Grove and Moore persisted. Intel subsequently achieved tremendous success in the microprocessor field, especially its famous "386" model, and soon became the world's largest semiconductor company. If you ever, in a moment of unrealistic fancy, mistakenly think that putting strategy into practice is easy, even strategies that seem to emerge out of thin air, you should read about all the hardships Intel went through along the way.
The emerging school did get one thing right: you cannot predict the future, no matter how much research you collect or how many alternative scenarios you conceive. Critics use this frustrating fact to attack the entire concept of strategy. If the future will not develop as anyone expects, why should companies bother to formulate strategies? They ignore a key distinction. Formulating a strategy for a company is completely different from the so-called strategic planning, which almost never works.
You need to understand who your customers are, who your competitors are, and how your costs and capabilities compare to those of your competitors. (In the early days of the strategy revolution, a considerable number of companies did not have sufficient understanding of the latter two points.) Most importantly, you must understand — the deeper the better — what your competitive advantage is, and how to maintain and expand it. Gaining this understanding is completely different from spending weeks every year forecasting the sales of toasters in northwestern Brazil three years from now. This is also one of the reasons why consulting firms like BCG and Bain prefer to work with business executives rather than corporate planners who bury themselves in such forecasts. Some pioneers of strategic consulting proudly told me that in their 30-year careers, they have never written or participated in writing any strategic plan.
The Evolving Irrationalists
If you or your company wants to develop such plans, just refer to Chapter 5 ("The Fundamental Fallacies of Strategic Planning") of Henry Mintzberg's 1994 book The Rise and Fall of Strategic Planning. In this chapter, the Canadian scholar — author of six other strategy books — reviews and refutes the three fundamental fallacies of strategic planning. He first discusses the fallacy of predetermination, explaining why most forecasts are nonsense (they are almost inevitably affected by the contingencies that enterprises face in the real world).
Next, he explores the fallacy of detachment: why would anyone think that the people who formulate strategy can or should be isolated from the many people responsible for implementing it? Finally, as a leading figure of the emergent strategy school, Mintzberg attacks the fallacy of formalization, the idea that any disconnected analytical process can cover everything needed to formulate a company's future development direction. No planning exercise, no matter how detailed, can capture all the intuition and nuanced judgment that experienced managers use to respond to the rapidly