reading note, summary and reflection

» THE HIGH-PERFORMANCE ORGANIZATION

1989

BEST OF HBR

Sixteen years ago, when Cary Hamel, then a lecturer at London Business

Sehooi, and C.K. Prahalad, a University of Michigan professor, wrote “Stra-

tegic 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 advan-

tages they can sustain. By contrast, Japanese corporations leverage resources

by accelerating the pace of organizational learning and try to attain seem-

ingly 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 com-

panies to compete in innovative ways. In this McKinsey Award-winning arti-

cle, 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

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.

oday managers in many industries working hard to match the compet- e advantages of their new global ri-

vals. They are moving manufacturing offshore in search of lower labor costs, rationalizing product lines to capture global scale economies, instituting qual- ity 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 compa- nies 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. Imi- tation may be the sincerest form of flat- tery, but it will not lead to competitive revitalization. Strategies based on imi- tation are transparent to competitors who have already mastered them. More- over, successful competitors rarely stand still. So it is not surprising that many executives feel trapped in a seemingly endless game of catch-up, regularly sur- prised by the new accomplishments of their rivals.

For these executives and their com- panies, regaining competitiveness will mean rethinking many ofthe basic con- cepts of strategy.’ As “strategy” has blos- somed, the competitiveness of West- ern companies has withered. This may be coincidence, but we think not. We

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believe that the application of concepts such as”strategic fit” (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 de- cline. The new global competitors ap- proach strategy from a perspective that is fundamentally different from that which underpins Western management thought. Against such competitors, mar- ginal adjustments to current ortho- doxies 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 endow- ment (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 in- variably began with ambitions that were out of all proportion to their re- sources and capabilities. But they cre- ated an obsession with winning at all levels ofthe organization and then sus- tained that obsession over the lo- to 20- year 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.

competitive revitalization than are mar- ginal improvements in operating effi- ciency. (The sidebar “Remaking Strategy” describes our research and summa- rizes the two contrasting approaches to strategy we see in large multinational companies.)

Few Western companies have an en- viable track record anticipating the moves of new global competitors. Why? The explanation begins with the way most companies have approached com- petitor analysis. Typically, competitor analysis focuses on the existing resources (human, technical, and financial) of pres- ent competitors. The only companies seen as a threat are those with the re- sources to erode margins and market share in the next planning period. Re- sourcefulness, the pace at which new competitive advantages are being built, rarely enters in.

Cary Hamel is a visiting professor at Lon- don Business School and the chairman ofStrategos, an international consulting company based in Chicago. C.K. Prahalad is the Harvey C. Eruehauf Professor of Business Administration and a professor of corporate strategy and international business at the Stephen M. Ross School of Business at the University of Michigan in Ann Arbor.

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 reve- nue. 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 busi- ness 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 com- pany with a product scope encompass- ing a broad range of earth-moving equipment, industrial robots, and semi- conductors. Honda manufactured al- most as many cars worldwide in 1987 as Chrysler. Canon had matched Xerox’s global unit market share.

The lesson is clear: Assessing the current tactical advantages of known competitors will not help you under- stand the resolution, stamina, or inven- tiveness of potential competitors. Sun- tzu, a Chinese military strategist, made the point 3.000 years ago: “All men can

On the one hand, strategic intent en- visions a desired leadership position and establishes the criterion the organiza- tion will use to chart its progress. Ko- matsu set out to “encircle Caterpillar.” Canon sought to “beat Xerox.” Honda strove to become a second Ford-an au- tomotive 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 in- cludes focusing the organization’s at- tention on the essence of winning, mo- tivating people by communicating the value of the target, leaving room for individual and team contributions, sus- taining 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-land- ing a man on the moon ahead ofthe So- viets-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

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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 ex- ploit the convergence of computing and telecommunications. Other indus- try 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 Coca- Cola, strategic intent has been to put a Coke vtfithin “arm’s reach” of every con- sumer in the world.

Strategic intent is stable over time. In battles for global leadership, one of

the most critical tasks is to lengthen the organization’s attention span. Strategic intent provides consistency to short-term action, while leaving room for reinter- pretation as new opportunities emerge. At Komatsu, encircling Caterpillar en- compassed a succession of medium-term programs aimed at exploiting specific

L Remaking Strategy

ver the last ten years, our research on global com-

petition, international alliances, and multina-

tional management has brought us into close

contact with senior managers in the United States, Eu-

rope, and Japan. As we tried to unravel the reasons for

success and surrender in global markets, we became

more and more suspicious that executives in Western

and Far Eastern companies often operated witb very dif-

ferent conceptions of competitive strategy. Understand-

ing these differences, we thought, migbt belp explain tbe

conduct and outcome of competitive battles as well as

supplement traditional explanations for Japan’s ascen-

dance and the West’s decline.

We began by mapping the implicit strategy models of

managers who had participated in our research. Then we

built detailed histories of selected competitive battles.

We searched for evidence of divergent views of strategy,

competitive advantage, and the role of top management.

Two contrasting models of strategy emerged. One,

which most Western managers will recognize, centers

on the problem of maintaining strategic fit. The other

centers on the problem of leveraging resources. The two

are not mutually exclusive, but tbey represent a signifi-

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

a hostile environment with limited resources. But while

the emphasis in the first is on trimming ambitions to

match available resources, the emphasis in the second

is on leveraging resources to reach seemingly unattain-

able goals.

Both models recognize that relative competitive ad-

vantage determines relative profitability. The first em-

phasizes the search for advantages that are inherently

sustainable, the second emphasizes the need to acceler-

ate organizationai [earning to outpace competitors in

building new advantages.

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

challenging an entrenched competitor), tbe second pro-

duces a quest for new rules that can devalue the incum-

bent’s advantages.

Both models recognize that balance in the scope of an

organization’s activities reduces risk. The first seeks to

reduce financial risk by building a balanced portfolio of

cash-generating and cash-consuming businesses. The sec-

ond seeks to reduce competitive risk by ensuring a well-

balanced and sufficiently broad portfolio of advantages.

Both models recognize the need to disaggregate the

organization in a way that allows top management to dif-

ferentiate among the investment needs of various plan-

ning units. In the first model, resources are allocated to

product-market units in which relatedness is defined by

common products, channels, and customers. Each busi-

ness is assumed to own all the critical skills it needs to ex-

ecute its strategy successfully. In the second, investments

are made in core competences (microprocessor controls

or electronic imaging, for example) as well as in product-

market units. By tracking these investments across busi-

nesses, top management works to assure that tbe plans of

individual strategic units don’t undermine future devel-

opments by default.

Both models recognize the need for consistency in ac-

tion across organizational levels. In the first, consistency

between corporate and business levels is largely a matter

of conforming to financial objectives. Consistency be-

tween business and functional levels comes by tightly

restricting the means the business uses to achieve its

strategy-establishing standard operating procedures,

defining tbe served market, adhering to accepted indus-

try practices. In the second model, businessetitive advan- tage as mutually desirable layers, not

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mutually exclusive choices. What some call competitive suicide-pursuing both cost and differentiation-is exactly what many competitors strive for.-‘ Using flex- ible manufacturing technologies and better marketing intelligence, they are moving away from standardized “world products”to products like Mazda’s mini- van, developed in California expressly for the U.S. market.

Another approach to competitive in- novation, searching for loose bricks, ex- ploits 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 under- defended 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 com- petitor. For example, in one large U.S. multinational, we asked several country managers to describe what a Japanese competitor was doing in the local mar- ket. The first executive said, “They’re coming at us in the low end. Japanese companies always come in at the bot- tom.” The second speaker found the comment interesting but disagreed: “They don’t offer any low-end products in my market, but they have some ex- citing stuff at the top end. We really should reverse engineer that thing.” An- other 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 competi- tor had found a different loose brick.

The search for loose bricks begins with a careful analysis of the competi- tor’s conventional wisdom: How does the company define its”served market”? What activities are most profitable? Which geographic markets are too trou- blesome 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 out- side the market territory that industry leaders currently occupy. The goal is an uncontested profit sanctuary, which

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 geo- graphic market (Eastern Europe).

When Honda took on leaders in the motorcycle industry, for example, it began with products that were just out- side the conventional definition ofthe leaders’ product-market domains. As a result, it could build a base of opera- tions in underdefended territory and then use that base to launch an ex- panded attack. What many competi- tors 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 bound- aries-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 sys- tem in terms of segmentation, products, distribution, service, and pricing. As a result, Xerox had no trouble decoding the new entrants’ intentions and devel- oping 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 indus- tries ~ automobiles, lawn mowers, ma- rine engines, generators. But with each company fixated on its own market, the threat of Honda’s horizontal diversifica- tion went unnoticed. Today, companies like Matsushita and Toshiba are simi- larly poised to move in unexpected ways across industry boundaries. In protect- ing loose bricks, companies must ex- tend their peripheral vision by tracking and anticipatingthe migration of global competitors across product segments, businesses, national markets, value- added stages, and distribution channels.

Changing the terms of engagement- refusing to accept the front-runner’s def-

copiers. Canon standardized machines and components to reduce costs. It chose to distribute through office prod- uct 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 de- partment managers who wanted dis- tributed copying. At each stage. Canon neatly sidestepped a potential barrier to entry.

Canon’s experience suggests that there is an important distinction between bar- riers 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

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were high. But Canon dramatically re- duced 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 or- ganization, Xerox was paralyzed for a time. Its managers realized that the faster they downsized the product line, devel- oped new channels, and improved reli- ability, 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 bar- riers to retaliation. In this sense, com- petitive 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 competi- tor 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 vulnera- bility is its belief in accepted practice.

Through licensing,outsourcing agree- ments, and joint ventures, it is some- times possible to win without fighting. For example, Fujitsu’s alliances in Eu- rope with Siemens and STC (Britain’s largest computer maker) and in the United States with Amdahl yield manu- facturing 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

competitive collaboration. In the con- sumer electronics war, Japanese com- petitors 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 ri- vals would ratchet down development spending, and, in most cases, that is pre- cisely 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 cal- ibrate competitors’ strengths and weak- nesses. Toyota’s joint venture with GM, and Mazda’s with Ford, give these au- tomakers an invaluable vantage point for assessing the progress their U.S. ri- vals have made in cost reduction, qual- ity, 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 revitaliza- tion we have been mapping implies a new view of strategy. Strategic intent as- sures consistency in resource allocation over the long term. Clearly articulated corporate challenges focus the efforts of individuals in the medium term. Fi- nally, competitive innovation helps re- duce 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 pro- vide the key to leveraging limited re- sources in pursuit of ambitious goals. But just as there is a process of winning, so there is a process of surrender. Revi- talization 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 domi- nate global industries? There is no sim- ple answer. Few companies recognize the value of documenting failure. Fewer still search their own managerial ortho- doxies for the seeds of competitive sur- render. But we believe there is a path-

ology of surrender that gives some im- portant clues. (See the sidebar”The Pro- cess of Surrender.”)

it is not very comforting to think that the essence of Western strategic thought can be reduced to eight rules for excel- lence, seven S’s, five competitive 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 portfo- lios, and generic strategies often have toxic side effects: They reduce the num- ber of strategic options management is willing to consider. They create a pref- erence 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 di- vest. Too often, strategy is seen as a po- sitioning exercise in which options are tested by how they fit the existing in- dustry 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 segmenta- tion, the value chain, competitor bench- marking, 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 in- dustry boundaries are becoming more and more unstable. In industries such as financial services and communications, rapidly changing technology, deregu- lation, and globalization have under- mined the value of traditional industry

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analysis. Mapmaking skills are worth lit- tle 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 in- dustry boundaries.

Concepts like “mature”and”declining” are largely definitional. What most exec- utives mean when they label a business “mature” is that sales growth has stag- nated in their current geographic mar- kets for existing products sold through

existing channels. In such cases, it’s not the industry that is mature, but the ex- ecutives’ conception of the industry. Asked if the piano business was ma- ture, a senior executive at Yamaha replied, “Only if we can’t take any mar- ket share from anybody anywhere in the world and still make money. And anyway, we’re not in the ‘piano’ busi- ness, we’re in the ‘keyboard’ business.” Year after year, Sony has revitalized its radio and tape recorder businesses, de- spite 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 them- selves. RCA and GE, distracted by op- portunities in more “attractive” indus- tries like mainframe computers, left Japanese producers with a virtual mo-

The Process of Surrender

O n the battles for global leadership that have taken

place during the past two decades, we have seen

a pattern of competitive attack and retrench-

ment that was remarkably similar across industries. We

call this the process of surrender.

The process started with unseen intent. Not possess-

ing long-term, competitor-focused goals themselves,

Western companies did not ascribe such intentions to

their rivals. They also calculated the threat posed by po-

tential competitors in terms of their existing resources

rather than their resourcefulness. This led to systematic

underestimation of smaller rivals who were fast gaining

technology through licensing arrangements, acquiring

market understanding

holdings in less-developed countries, use of nontradi-

tional channels, extensive corporate advertising) were ig-

nored or dismissed as quirky. For example, managers we

spoke with said Japanese companies’ position in the Eu-

ropean computer industry was nonexistent. In terms of

brand share that’s nearly true, but the Japanese control

as much as one-third ofthe manufacturing value added

in the hardware sales of European-based computer busi-

nesses. Similarly, German auto producers claimed to feel

unconcerned over the proclivity of Japanese producers

to move upmarket. But with its low-end models under

tremendous pressure from Japanese producers, Porsche

has now announced that it will no longer make “entry

level” cars,

Western managers often misinterpreted their rivals’

tactics. They believed that Japanese and Korean compa-

nies were competing

Unseen Strategic Intent

from downstream OEM

partners, and improv-

ing product quality and

manufacturing produc-

tivity through company-

wide employee involvement programs.

Oblivious ofthe strategic intent and intangi-

ble advantages of their rivals, American and

European businesses were caught ofTguard.

Adding to the competitive surprise was

the fact that the new entrants typically at-

tacked the periphery ofa market (Honda in

small motorcycles, Yamaha in grand pianos,

Toshiba in small black-and-white televisions)

before going head-to-head with incumbents.

Incumbents often misread these attacks,

seeing them as part of a niche strategy and

not as a search for “loose bricks.” Unconven-

tional market entry strategies (minority

Underestimated Resourcefulness

Competitive Surprise

Partial Response

4 _ Catch-Up

Trap

Unconventional Entry Tactics

solely on the basis of cost

and quality. This typically

I produced a partial re- sponse to those competi-

tors’ initiatives: moving

manufacturing offshore, outsourcing, or in-

stituting a quality program. Seldom was the

full extent ofthe competitive threat appreci-

ated-the multiple layers of advantage, the

expansion across related product segments,

the development of global brand positions.

Imitating the currently visible tactics of ri-

vals put Western businesses into a perpet-

ual catch-up trap. One by one, companies

lost battles and came to see surrender as in-

evitable. Surrender was not inevitable, of

course, but the attack was staged in a way

that disguised ultimate intentions and side-

stepped direct confrontation.

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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-a- year business will be created when high- definition television is launched in the United States. But the pioneers of tele- vision may capture only a small part of this bonanza.

Most of the tools of strategic analy- sis are focused domestically Few force managers to consider global opportuni- ties and threats. For example, portfolio planning portrays top management’s investment options as an array of busi- nesses rather than as an array of geo- graphic markets. The result is predict- able: As businesses come under attack

cess or failure squarely on the shoulders of line managers. Each business is as- sumed 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 responsibil- ity 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. In- vestments 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 de- mands 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 Jap- anese 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 appro- priate response to waning competitive- ness, but there are fewer and fewer busi- nesses 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 com- petitors’ home market and slow the pace of their expansion? A senior exec- utive in one successful global company made a telling comment: “We’re glad to find a competitor managing by the portfolio concept – we can almost pre- dict how much share we’ll have to take away to put the business on the CEO’s ‘sell list.’”

Companies can also be overcommit- ted to organizational recipes, such as strategic business units (SBUs) and the decentralization an SBU structure im- plies. Decentralization is seductive be- cause it places the responsibility for suc-

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 cre- ated 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 Eu- rope and Asia. GE made no coordinated effort to build a global corporate fran- chise. Any GE business with interna- tional ambitions had to bear the bur- den 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 umbrel- las that will ease market entry for a whole range of businesses. The under- lying 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 com- petencies 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 prof- itable use of capital than investment in downstream activities. To make matters worse, internal accounting data may not reflect the competitive value of retain- ing control over a core competence.

Together, a shared global corporate brand franchise and a shared core com- petence act as mortar in many Japa- nese 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 co- opt domestically oriented companies into long-term sourcing dependence and capture the economies of scope of global brand investment through inter- business coordination.

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» THE HIGH-PERFORMANCE ORGANIZATION

Last in decentralization’s list of dan- gers is the standard of managerial per- formance typically used in SBU organi- zations. In many companies, business unit managers are rewarded solely on the basis of their performance against return on investment targets. Unfortu- nately, that often leads to denominator management because executives soon discover that reductions in investment and head count-the denominator-“im- prove”the financial ratios by which they are measured more easily than growth in the numerator: revenues. It also fos- ters a hair-trigger sensitivity to industry downturns that can be very costly. Man- agers who are quick to reduce invest- ment and dismiss workers find it takes much longer to regain lost skills and catch up on investment when the in- dustry 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 re- lentlessly, 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 calcu- lations in one hand and portfolio plan- ning in the other can manage any busi- ness 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 un- derstand the nuances ofthe businesses they are managing. At GE, for example, one fast-track manager heading an im- portant new venture had moved across five businesses in five years. His series of quick successes finally came to an end when he confronted a Japanese com- petitor whose managers had been plod- ding along in the same business for more than a decade.

Regardless of ability and effort, fast- track managers are unlikely to develop the deep business knowledge they need

to discuss technology options, competi- tors’ strategies, and global opportuni- ties 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. Knowl- edge of the company’s internal plan- ning and accounting systems substitutes for substantive knowledge of the busi- ness, making competitive innovation unlikely.

When managers know that their as- signments have a two- to three-year time frame, they feel great pressure to create a good track record fast. This pres- sure 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 unre- aiistically 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 ef- fort 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 them- selves deeply in the work of becoming more competitive.

The strategy hierarchy isn’t the only explanation for an elitist view of man- agement, of course. The myths that grow up around successful top manag- ers-“Lee Iacocca saved Chrysler,””Carlo De Benedetti rescued Olivetti,” “John Sculley turned Apple around”-perpet- uate it. So does the turbulent business environment Middle managers buffeted by circumstances that seem to be be- yond 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 busi- ness 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 organiza- tion becomes overloaded with initia- tives. Collaborative ventures are formed without adequate attention to compet- itive consequences.

Almost every strategic management theory and nearly every corporate plan- ning system is premised on a strategy hi- erarchy 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 anx- ious because top management wasn’t talking openly about the competitive challenges the company faced. They as- sumed the lack of communication in- dicated a lack of awareness on their se- nior 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 competi- tiveness problems was during wage ne- gotiations when problems were used to extract concessions.

160 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 ef- forts ofthe entire company. That is one reason honesty and humiiity on the part of top management may be the first pre- requisite of revitalization. Another rea- son 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 im- plementation requires more than ad- ministrative structures. Difficulties in embedding new capabilities are typ- ically put down to “communication” problems, with the unstated assump- tion that if only downward communi- cation were more effective – “if only middle management would get the mes- sage straight”-the new program would quickly take root. The need for upward communication is often ignored, or as- sumed to mean nothing more than feed- back. In contrast, Japanese companies win not because they have smarter man- agers 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 intel- ligence behind the mission is located firmly on the ground.

Where strategy formulation is an elitist activity, it is also difficult to pro- duce truly creative strategies. For one thing, there are not enough heads and points of view in divisional or corpo- rate planning departments to challenge conventional wisdom. For another, cre- ative strategies seldom emerge from the annual planning ritual. The starting point for next year’s strategy is almost always this year’s strategy. Improve- ments are incremental. The company sticks to the segments and territories it knows, even though the real opportu- nities may be elsewhere. The impetus for Canon’s pioneering entry into the personal copier business came from an

overseas sales subsidiary – not from planners in Japan.

The goal ofthe strategy hierarchy re- mains 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 de- nominators, 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 West- em companies warrants the confidence of the stock market. Investors aren’t hopelessly short-term, they’re justifiably skeptical.

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.

We seldom found cautious adminis- trators among the top managements of companies that came from behind to challenge incumbents for global leader- ship. But in studying organizations that had surrendered, we invariably found senior managers who, for whatever rea- son, lacked the courage to commit their companies to heroic goals – goals that lay beyond the reach of planning and ex- isting 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 pre- requisite for winning a global competi- tive 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 abil- ity 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 di- vesting lackluster businesses and down- sizing 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 or- ganization in revitalization, as opposed to simply raising financial targets. De- veloping faith in the organization’s abil- ity to deliver on tough goals, motivating it to do so, focusing its attention long enough to internalize new capabili- ties – this is the real challenge for top management. Only by rising to this chal- lenge will senior managers gain the courage they need to commit them- selves 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 Inter- nal 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 di- versified 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.

JULY-AUGUST 2005 161

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