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STRATEGIC INTENT
To: Professor Friberg
From: Michael Dunagan
Date: April 27, 2010
MGT 512: Strategic Management
of Technology
Focus on Strategic Intent
Introduction
In the book "Random Walk Down Wall Street", Burton Malkiel took the idea of efficient
markets to its logical conclusion, and argued that a blindfolded monkey in theory should
be able to perform as well on the stock market as professional brokers. The Wall Street
Journal found this argument intriguing, and decided to test the hypothesis by having
reporters throw darts to select random stocks. An informal competition was consequently
arranged over several months to test how random selection performed against leading
stock traders. Luckily for the financial analysts, the latter managed to at least beat the
darts on average, but the victory was not deemed sufficiently convincing enough to
justify the hefty brokerage fees charged by analysts. Similar criticism has been raised
against management consultants, but a performance comparison can in this case not be
performed using darts or monkeys. Despite the criticism, consulting is a quickly growing
industry and the demand for tools like strategic models are increasing in correlation with
the industry. It thus created somewhat of an upheaval when London Business School
Professor Gary Hamel and University of Michigan Professor C.K. Prahalad published the
article "Strategic Intent" in a 1989 edition of The Harvard Journal.
The authors take what some consider to be a revolutionary approach to corporate
strategy, and argue that a core competency is embedded within the organisation. A core
competency is, in other words, not just something that the company does well. As the
article was written before the burst of the bubble, Hamel and Prahalad appear to be very
enthusiastic about the Japanese economy. This fascination explains much of the
background for their new approach to strategy, and Japanese examples are also used to
point out shortcomings of more traditional corporate strategy models. The thesis
presented by the authors does in some cases contradict previously accepted knowledge in
the field of corporate strategy. In other cases, though, the thesis supports the principle
behind the more traditional models. This paper will attempt to analyse the arguments
presented by Hamel and Prahalad, for then to apply models as the experience curve, the
Porter models, the growth-share matrix, the industry attractiveness model, and the
product-life cycle to the thesis. In addition, frequent references will be given to Boston
Consulting founder Bruce D. Henderson's article on "The Origin of Strategy". Before
applying the models, however, a brief review of the thesis presented by Hamel and
Prahalad is necessary.
Strategic Intent
As mentioned in the introduction, Hamel and Prahalad consider a company's core
competency to be embedded within the organisation. Defining core competency is not an
easy task, but it can be said to be a bundle of organisational and technological capabilities
that collectively capture know-how and are capable of being deployed to provide unique
functionality and sustain advantage in the market place. This know-how may evidently
include tacit knowledge, which perhaps is most evident in traditionally clan-structured
organisations. Prahalad and Hamel argue that models such as "strategic fit", "generic
strategies", and strategic hierarchy" may indeed have had a negative effect on the
performance of Western companies. The cause of this negative impact is that nonwestern companies, primarily represented by the Japanese, have underpinned the logic of
Western management thought.
Hamel and Prahalad base their argument upon the dramatic post-war ascent of Japanese
companies, and that the latter rose to dominate world markets by having initial ambitions
that in the West would have been considered highly unrealistic with regards to their
resources and capabilities. Still, an obsession to win was created and sustained at all
levels of the organisation, thus laying the groundwork for a 10- to 20-year quest for
global leadership. The authors term this "strategic intent", but the latter does more than to
simply envision a desired leadership position and establish the criterion the company will
use to chart its progress. Strategic intent also includes an active management process to
focus the entire organisation on the essence of winning, but it is also stable over time
while allowing for reinterpretation as new opportunities emerge. Similarly, it helps set a
target that deserves personal commitment and effort. Although strategic intent is stable
over time, a target should be motivational and goals thus need to be realistic. In this
sense, the professors compares strategic intent to a marathon run in 400-meter sprints:
"No one knows what the terrain will look like at mile 26, so the role of top management
is to focus the organisation's attention on the ground to be covered in the next 400
meters". Consequently, a challenge needs to create a sense of urgency, and competitor
focus should be developed at every level through widespread use of competitive
intelligence. Additionally, employees need to be provided the skills necessary to work
efficiently, and the organisation as a whole should be given time to digest one challenge
before launching another.
Hamel and Prahalad mention four approaches to competitive innovation that have been
used by Japanese companies in their quest for global expansion. These are building layers
of advantage, searching for loose bricks, changing the terms of engagement, and
competing through collaboration. These approaches will be discussed in greater detail
throughout the paper, and further elaboration will be given on the thesis presented by the
authors. In terms of the strategic models that will be applied, it should be mentioned that
Hamel and Prahalad appear to be more critical of the way the models are actually applied
than the general theory behind them. They do in fact describe the product life cycle, the
experience curve, product portfolios, and generic strategies to be "reasonable concepts".
However, they add the models also tend to limit the number of strategic options
considered by managers: "They create a preference for selling businesses rather than
defending them. They yield predictable strategies that rivals easily decode". As will be
shown, this argument holds some validity for several of the major strategy models.
The Porter Models
Michael E. Porter's industrial organisation model argues that the state of competition in
an industry depends on five basic competitive forces. These are potential entrants,
suppliers, substitutes, buyers, and evidently the rivalry that exists between competing
firms. Based on this model, Porter developed three generic approaches to outperform
other firms in an industry, namely overall cost leadership, differentiation, and focus.
Additionally, he also developed a framework for competitor analysis, arguing that a
central aspect of strategy formulation is perspective competitor analysis. Concerning the
latter, Hamel and Prahalad consider it similar to "a snapshot of a moving car". A
traditional analysis of Honda in the 1950s would very unlikely have predicted the
company's impressive growth in a variety of industries, in particular as Honda's definition
of its market was very extensive. The company heeded to the advice of Bruce Henderson
of "moving the boundary of advantage into the potential competitor's market and keeping
that competitor from doing the same". Other companies have shown similar ability to
surprise both the market and unsuspecting competitors, Japanese companies like Sony,
Canon, Toyota and Nissan being well-known examples. As the authors mention, Western
companies rarely considered the Japanese companies to constitute an important
competitive force, but even an appreciation of the challenge would unlikely have enabled
the Western companies to successfully meet the competitive strength of the Japanese.
According to Porter, there are four components to competitor analysis, these being future
goals, current strategy, assumptions, and capabilities. To Porter's credit, he mentions that
it is very difficult to study the driving factors of a company, although these often
determine how a competitor will behave in the long run. As strategic intent is embedded
in an organisation, it can be argued that the only way to successfully study this intent is
through espionage by means of actually having someone work for the company. The
authors comment how many competitors were unable to see Honda's strategic intent and
its growing competence in engines and power trains. This evidently points back to the
wisdom of Henderson, and illustrates the powerful impact a company can make when
introducing products that are just outside the conventional definition of the leaders'
product-market domains.
It can easily be argued that it is actually necessary to be part of an organisation to
understand its future behaviour, in particular when the driving forces are as strong as they
are in many Japanese companies. The authors sarcastically comment on the tendency of
Western companies, in particular American ones, to attempt to gain a leadership position
through intrapreneurship, skunkworks or other innovative techniques for internal
venturing. Still, this more structured and orthodox model simplifies the possibility of
competitive analysis, particularly when innovation becomes an isolated activity. Hamel
and Prahalad conclude: "Assessing the current tactical advantages of known competitors
will not help you understand the resolution, stamina, and inventiveness of potential
competitors".
Still, the situation may prove different today than during the high-growth era, as Japanese
companies were experiencing increasing sales in both their domestic and foreign markets.
While Japanese companies defined their markets in ways that stunned Western
competitors, many of the same companies are currently struggling to streamline their
businesses and focus on core competencies. It is unclear if this will lead to the companies
becoming more similar to their Western counterparts, and thus perhaps also more
predictable. While American managers often found it difficult to adopt Japanese human
resource management practises, similarly may Japanese companies today find it
challenging to adopt foreign business practices. Canon, for example, recently reformed its
compensation system in favour of pay based on performance rather than seniority, but it
is difficult to say what impact this will have on the organisation as a whole. As strategic
intent needs to be successfully embedded into every level of the organisation, internal
competition among employees may for example lead to less unity with respect to set
goals.
Hamel and Prahalad do, however, see value in understanding one's competitors. As one
of the four approaches to competitive innovation is searching for loose bricks, a strategy
that begins with a careful analysis of the competitor's conventional wisdom. By focusing
on a competitor's current strategy, an understanding can be drawn with consideration to
how the competitor defines its market, the profitability of various parts of its business
portfolio and to geographically analyse the market. The objective is to build a base of
attack just outside the market territory that industry leaders currently occupy, and not to
find a corner of the industry where larger competitors seldom tread. As the latter would
imply a generic diversification strategy, it is seldom preferred by Japanese companies,
which traditionally have sought to capture dominant market share. French fashion
companies, for instance, have shown that a diversification strategy can be highly
profitable, but a lack of interest in the high-brand market might be due to Japan's
traditional competitive advantage as a low-cost producer.
The authors mention Honda's entry into Eastern Europe as an example of a geographic
loose brick, while the company used a low-cost strategy to enter the motorcycle market.
Overall cost leadership is also a major component of two other approaches to competitive
advantage mentioned by Hamel and Prahalad, namely that of changing the terms of
engagement and layers of advantage. While the authors define changing the terms of
engagement as "refusing to accept the front runner's definition of industry and segment
boundaries", the example mentioned to support the strategy relies to a large extent on cost
cutting. To attack Xerox in the American market for copiers, Canon neatly side-stepped a
potential barrier to entry by using more efficient distribution channels. In addition, Canon
increased efficiency by producing fewer models than Xerox and by lowering costs in a
wide range of areas, consequently enabling the company to offer better value to
customers. Henderson wrote "Business strategists can use their imagination and ability to
reason logically to accelerate the effects of competition and the rate of change". And also
that "Competitors that make their living in the same way cannot coexist - no more in
business than in nature". Canon would evidently not have succeeded by attacking Xerox
head-on, and the earlier failure of both Kodak and IBM to do just this should, in addition
to Henderson's principle of diversity, have been more than enough to persuade them
otherwise.
Similarly, building layers of advantage basically focuses on the strength a company gains
by steadily expanding its arsenal of competitive weapons. The authors emphasise how
Japanese companies used a low-cost strategy to build a base in the private-label business,
for then to create powerful brands in order to add another competitive layer. Other
advantages have been added over time, but Japanese companies have lost the initial layer
of advantage, namely that of being the low cost producer. Presently, Japanese companies
are understandably worried that Chinese companies eventually will create successful
brands that can compete with Japanese companies in electronics, automobiles and
computers. The hope must be that they are better prepared than their American
counterparts once were.
A comparison of Hamel and Prahalad's four forces of competitive innovation and Porter's
generic will therefore show that they are not inherently different. While the emphasis and
wording may differ, the underlying principles are the same. Additionally, Prahalad and
Hamel warn that too stringent a use of strategies leads to predictable behaviour. A
competitive strategy is rarely pure in terms of following just one model, and the authors
certainly make it clear that the success of the likes of Sony and Canon was due to
strategic intent rather than blind use of strategic models. It is, however, a fact that
Japanese companies now find it much more difficult to enter foreign markets based on a
low-price strategy. A weak yen is therefore of less importance to Japan that what was
traditionally the case. Consequently, a low-cost strategy can thus not be implemented to
compress time in order to run down the experience curve.
The Experience Curve
As earlier mentioned, Hamel and Prahalad consider the experience curve to be a
reasonable concept. The curve addresses the empirical relationship that exists between
changes in direct manufacturing costs and the accumulated volume of production. It is, as
a result, considered by many managers to be a key tool by which to formally analyse the
competitive cost structure of a given industry. In short, the cost reduction due to
experience effects is believed to be caused by issues like learning, specialisation and
redesign of labour tasks, product and process improvements, methods and systems
rationalisation, economies of scale, and know-how. High market share is thus a result of
high-accumulated volume, which again is caused by a low unit cost. This is evidently
related to the earlier discussed low-cost generic strategy, but a few additional comments
need to be made.
Hamel and Prahalad take care to emphasise the limits of the experience curve, in
particular that the curve is reliant on a competitor's failure to appreciate market share or
the future growth of a market. While the strategy proved successful to many Japanese
companies, it makes a decent argument to say that companies have learnt from the past.
To emphasise this point, the authors mention the semiconductor industry as having the
capacity to serve a market twice as big as the actual size. Interestingly enough, the
persistence of over capacity in the semiconductor market has persisted until today, and
the automobile industry is a similar example. Companies understand that they need to
grow at the rate of the market just to maintain market share, and the risk of failure at this
is perceived as greater than the risk of overproduction. The Internet boom is a another
example of an industry growing at several times the actual demand, and investors in
Amazon.com are hoping the company's high market share will lead to high future profits.
Consequently, the authors argue that "an organisation's capacity to improve existing skills
and learn new ones is the most defensible competitive advantage of all". Presently, while
less competitive benefit can be derived from the experience curve than what used to be
the case, new advantages need to be built to create leverage. Thus, rather than disputing
the validity of the experience curve, Hamel and Prahalad argue that the positive effect
derived from it has been diluted with time.
Product Life-Cycle
The concept known as the product life cycle uses the age of a product category as a basis
from which to address three major issues. First, the curve helps predict future sales
growth, and also customer and competitor behaviour. Second, it helps prescribe
appropriate marketing and other strategies. Finally, the curve helps allocate resources
among categories. As with the experience curve, Hamel and Prahalad consider it a
reasonable concept that can have toxic consequences if used uncritically. They comment
that concepts like "mature" and "declining" are largely definitional, and that Japanese
companies have had a different attitude to the concept. While many Western executives
will label an industry mature when sales growth starts stagnating, this may simply mean
that sales growth has slowed in their current geographic area for existing products sold
through existing channels. Hamel and Prahalad illustrate the different Japanese thinking
by quoting a Yamaha executive on his definition of a mature industry: "Only if we can
not take any market share from anybody in the world and still make money".
As a consequence of the traditional Western viewpoint, a company may be foreclosed
from a broad stream of future opportunities. The authors mention the television industry
as an example, where some companies considered the colour TV to be the last and final
invention of the industry. In contrast, a company like Sony has continued making
products in a wide range of industries that in the traditional thinking of the product life
cycle would be considered to be in decline. Since the company still finds itself in the
television industry, it is presently well positioned to meet future demand for flat screen
TV-sets.
An additional criticism of the product life cycle is also relevant to the experience curve,
and concerns the focus of the strategies on a domestic setting. This will be discussed in
greater detail with relation to the growth-share matrix, but the product life cycle is
evidently of little use to a company that has failed to define its market. Bruce Henderson
emphasises the principle that a company must expand the market in which it can maintain
an advantage over any and all competitors that might be selling to its competitors. The
life of a product category may thus be prolonged if a company is willing and able to
expand its market and make changes to its product, pricing and distribution channels. In
other words, while the product life cycle may be predictable in shape, uncritical
application of the curve may become a self-fulfilling prophecy. In the same way as the
experience curve, the product life cycle concept should therefore be used with great care
and only as a supplement to other models.
The Growth/Share Matrix - Industry Attractiveness
Although two rather different models, they likely fall into the area of portfolio planning.
Hamel and Prahalad consider the latter approach to be flawed as it "portrays top
management's investment options as an array of businesses rather than as an array of
geographic markets". Consequently, the approach of the models becomes rather
predictable, a criticism the authors also use with regards to the experience curve, generic
strategies and the product life cycle. While the growth/share matrix displays graphically,
on a 2-by-2 matrix, the position of each business in a company's portfolio, the industry
strength matrix does the same on a 3-by-3 matrix. While the former displays market
growth rate versus market share, the latter focuses on business strength versus industry
attractiveness.
Hamel and Prahalad uses as an example the tendency of businesses to withdraw from an
industry when faced with competition from foreign companies. While a company often
will choose to enter a new industry when abandoning another to the forces of global
competition, the authors comment that there are fewer and fewer businesses in which a
domestic-oriented company can find refuge. This may well be true, particularly when
considering the liberalisation of global markets that has taken place since the publishing
of "Strategic Intent" in 1989. Presently, global scale is in many industries becoming a
necessity rather than just a presumed benefit, of which the automobile industry is an
obvious example. Even relatively small and exclusive British car manufacturers have
found it prudent to enter alliances with other companies, in other words to compete
through collaboration. The latter is evidently, in the view of the authors, one of the four
possible approaches to competitive innovation.
To further emphasise the predictability of managing by the portfolio concept, the authors
quote an executive at a global company who is always happy to encounter competitors
following this strategy. This logic can again be derived from what Bruce Henderson
considered to be a basic element of strategic competition, namely the ability "to predict
how a given strategic move will rebalance the competitive equilibrium". If a company
can predict how much market share it will need to capture from a competitor before the
latter withdraws from the market, the former will evidently be better able to decide
whether to enter the market or not. Consequently, Henderson continues: "A competitor's
failure to react and then deploy and commit its own resources against the strategic move
of a rival can turn existing competitive relationships upside down". It is evident,
however, that this counterattack will be less effective if it conforms to the expectations of
the competitor. Hamel and Prahalad are thus not being very original when criticising
other strategic models, as the latter should not be used in an uncritical and predictive
manner.
The industry attractiveness model was originally created for General Electric, a company
that the authors consider to be less than ideally organised. Generally, conglomerates tend
to perform poorly on the stock market, this as a bundle of companies tend be valued
lower than the companies would independently. The head of Tyco International, Dennis
Kozlowski, used a strategy similar to General Electric and wanted only the number one
or two spot in the market. Still, the CEO has now decided to dismantle the company, and
believes Tyco International will be worth more than 50% more when split up than as a
whole (The Economist, January 26). General Electric has, in contrast to many Asian
conglomerates, chosen not to build up a global corporate franchise. Additionally, the
company has failed to realise that the economies of scope may be as important as the
economies of scale. The authors argue that a company like General Electric, with its
preference for single business units, is less flexible than its counterparts in Asia that
rather focus on core competencies. To Japanese companies, the combined strength of a
shared global corporate brand franchise and shared core competence acts as a mortar.
Without this mortar, they would be more vulnerable to global competitors. Overall, the
authors criticise the portfolio approach to strategy as it leaves too little power with top
management, and decentralised small business units will also be less stable and more
reliant on denominator management.
Conclusion
In addition to the criticism of the strategic models that has been summarised throughout
this paper, Hamel and Prahalad also argue that most models are premised on a strategy
hierarchy in which corporate goals guide business unit strategies and business unit
strategies guide functional tactics. The role of senior management is to make strategy
while lower level management is responsible for the execution, but the result is according
to the authors a hierarchy that undermines competitiveness by fostering an elitist view of
management. The result of the latter is that the organisation becomes disenfranchised,
and employees may fail to involve themselves in the work of becoming more competitive
or to identify with corporate goals.
This certainly is an intriguing argument, and the authors elaborate further that a
hierarchical structure of this nature will result in unsatisfactory communication channels.
Western companies attempt to address the latter issue by changing from bureaucratic to
organic organisational structures. Similarly, managers prefer to be described as
transformational rather than transactional leaders. Hamel and Prahalad appear to
insinuate that the idea of strategic intent relies on a more egalitarian organisational
structure than more traditional models, but it is tempting to argue that is rather a question
of implementation. While the authors argue that "strategic intent gives employees the
only goal that is worthy of commitment: to unseat the best or remain the best, worldwide", it is evident that alternative models can play complimentary roles on a short-term
basis. Stimulating passion for an organisation's long-term goals on all levels of the
organisation requires high managerial skill, and it probably is not easier to convoke
enthusiasm for a strategic intent than it is for a strategy based on for instance the
experience curve. Although it is doubtful that Japanese organisations consciously applied
models as the experience curve to overtake their Western competitors, a study of the
experience curve will certainly provide an interesting analysis for Honda's entry into the
motorcycle industry. The main contribution of Hamel and Prahalad is to show that the
success of Japanese companies can not be copied by simply applying any relevant
strategic model, but that the competitive advantage enjoyed by Japanese corporations up
until 1989 was derived from a much more complex background.
Not long after the publication of "Strategic Intent" in The Harvard Journal, Japan entered
a severe recession that still has not reached a conclusion. The fascination with the
Japanese economy had thus also reached its peak, and the world's second largest
economy is presently offered no other attention than ridicule. Hamel and Prahalad
certainly showed that Western companies would need to go through radical changes in
order to adopt Japanese business practices, and that the issue was not simply to
understand the experience curve. Western companies have therefore found it to be less of
a challenge to increase efficiency by other means, for instance by the use of stock-options
for both employees and managers. Although this form of remuneration has received part
of the blame for the Enron bankruptcy, it is one of many Western business practices that
many Japanese firms are struggling to adopt. Very likely, it will soon be shown that
implementation of for example stock options will demand more fundamental
organisational changes, and perhaps Japanese companies will find this as difficult as
Western companies did in the 1980s. Moreover, all strategists should bear in mind the
words of Bruce Henderson, who accurately pointed out that competition existed long
before strategy: "If the animals were of different species, they could survive and persist
together. If they were of the same species, they could not". While the Wall Street Journal
will not be able to test the performance of monkeys to that of consultants, it would
certainly constitute great progress if the latter could derive the same knowledge from
nature as Henderson once did. An understanding of the nature of competition should be
considered a prerequisite to the implementation of any strategic model.