..~-~

~ Academy of Management Executive. 2001. Vol. 15. No.4 , ,., : Are you sure you have

a strategy? ~

Donald C. Hambrick and James W, Fredrickson

Executive OverviewAfter more than 30 years of hard thinking about strategy, consultants and scholars

have provided an abundance of frameworks for analyzing strategic situations.Missing, however, has been any guidance as to what the product of these tools shouldbe-or what actually constitutes a strategy. Strategy has become a catchall term usedto mean whatever one wants it to mean. Executives now talk about their "servicestrategy," their "branding strategy," their "acquisition strategy," or whatever kind ofstrategy that is on their minq at a particular moment. But strategists-whether theyare CEOs of established firms, division presidents, or entrepreneurs-must have astrategy, an integrated, overarching concept of how the business will achieve itsobjectives. If a business must have a single, unified strategy, then it must necessarilyhave parts. What are those parts? We present a framework for strategy design,arguing that a strategy has five elements, providing answers to fivequestions-arenas: where will we be active? vehicles: how will we get there?differentiators: how will we win in the marketplace? staging: what will be our speedand sequence of moves? economic logic: how will we obtain our returns? Our articledevelops and illustrates these domains of choice, particularly emphasizing howessential it is that they form a unified whole.

Consider these statements of strategy drawn from But they are no more strategies than Dell Comput-actual documents and announcements of several er's strategy can be summed up as selling direct tocompanies: customers, or than Hannibal's strategy was to use

elephants to cross the Alps. And their use reflects"Our strategy is to be the low-cost provider." an increasingly common syndrome-the catchall

fragmentation of strategy."We're pursuing a global strategy." After more than 30 years of hard thinking about

strategy, consultants and scholars have provided"The company's strategy is to integrate a set executives with an abundance of frameworks forof regional acquisitions," analyzing strategic situations, We now have five-

forces analysis, core competencies, hypercompeti-"Our strategy is to provide unrivaled cus- tion, the resource-based view of the firm, valuetomer service." chains, and a host of other helpful, often powerful,

analytic tools,l Missing, however, has been any"Our strategic intent is to always be the first- guidance as to what the product of these toolsmover." should be-or what actually constitutes a strategy.

Indeed, the use of specific strategic tools tends to"Our strategy is to move from defense to in- draw the strategist toward narrow, piecemeal con-dustrial applications." ceptions of strategy that match the narrow scope of

the tools themselves. For example, strategists whoWhat do these grand declarations have in com- are drawn to Porters five-forces analysis tend tomon? Only that none of them is a strategy.. They think of strategy as a matter of selecting industriesare strategic threads, mere elements of strategies. and segments within them. Executives who dwell

48

2001 Hambrick and Fredrickson 49

on "co-opetition" or other game-theoretic frame- this important origin. For example, what is special

works see their world as a set of choices about about the general's job, compared with that of a field

dealing with adversaries and allies. commander? The general is responsible for multi-

This problem of strategic fragmentation has pIe units on multiple fronts and multiple battles

worsened in recent years, as narrowly specialized over time. The general's challenge-and the val-

academics and consultants have started plying ue-added of generalship-is in orchestration and

their tools in the name of strategy. But strategy is comprehensiveness. Great generals think about

not pricing. It is not capacity decisions. It is not the whole. They have a strategy; it has pieces, or

setting R&D budgets. These are pieces of strate- elements, but they form a coherent whole. Business

gies, and they cannot be decided-or even consid- generals, whether they are CEOs of established

ered-in isolation. firms, division presidents, or entrepreneurs, must

Imagine an aspiring painter who has been also have a strategy-a central, integrated, exter-

taught that colors and hues determine the beauty nally oriented concept of how the business will

of a picture. But what can really be done with such achieve its objectives. Without a strategy, time and

advice? After all, magnificent pictures require far resources are easily wasted on piecemeal, dispar-

more than choosing colors: attention to shapes and ate activities; mid-level managers will fill the void

figures, brush technique, and finishing processes. with their own, often parochial, interpretations of

Most importantly, great paintings depend on artful what the business should be doing; and the result

combinations of all these elements. Some combi- will be a potpourri of disjointed, feeble initiatives.

nations are classic, tried-and-true; some are inven- Examples abound of firms that have suffered

tive and fresh; and many combinations-even for because they lacked a coherent strategy. Once a

avant-garde art-spell trouble. towering force in retailing, Sears spent 10 sad

Strategy has become a catchall term used to years vacillating between an emphasis on hard

mean whatever one wants it to mean. Business goods and soft goods, venturing in and out of ill-

magazines now have regular sections devoted to chosen businesses, failing to differentiate itself in

strategy, typically discussing how featured firms any of them, and never building a compellingare dealing with distinct issues, such as customer economic logic. Similarly, the once-unassailable

service, joint ventures, branding, or e-commerce. In Xerox is engaged in an attempt to revive itself,

turn, executives talk about their "service strategy," amid criticism from its own executives that the

their "joint venture strategy," their "branding strat- company lacks a strategy. Says one: "I hear about

egy," or whatever kind of strategy is on their minds asset sales, about refinancing, but I don't hear

at a particular moment. anyone saying convincingly, 'Here is your future."'2

Executives then communicate these strategic A strategy consists of an integrated set of choices,

threads to their organizations in the mistaken belief but it isn't a catchall for every important choice an

that doing so will help managers make tough executive faces. As Figure 1 portrays, the company's

choices. But how does knowing that their firm is pur- mission and objectives, for example, stand apart

suing an "acquisition strategy" or a "first-mover from, and guide, strategy. Thus we would not speak

strategy" help the vast majority of managers do their of the commitment of the New York Times to be Amer-

jobs or set priorities? How helpful is it to have new ica's newspaper of record as part of its strategy. GE's

initiatives announced periodically with the word objective of being number one or number two in all

strategy tacked on? When executives call everything its markets drives its strategy, but is not strategy

strategy, and end up with a collection of strategies, itself. Nor would an objective of reaching a particular

they create confusion and undermine their own cred- revenue or earnings target be part of a strategy.

ibility. They especially reveal that they don't really Similarly, because strategy addresses how the

have an integrated conception of the business. business intends to engage its env~ronment,

choices about internal organizational arrange-

ments are not part of strategy. So we should notWhen executives call everything speak of compensation policies, information sys-

strategy, and end up with a collection of tems, or training programs as being strategy.

strategies, they create confusion and These are critically important choices, which

undermine their own credibility. should reinforce and support strategy; but they do

not make up the strategy itself.3 If everything im-

portant is thrown into the strategy bucket, then thisMany readers of works on the topic know that essential concept quickly comes to mean nothing.

strategy is derived from the Greek strategos, or "the We do not mean to portray strategy development

art of the general." But few have thought much about as a simple, linear process. Figure 1 leaves out

.

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50 Academy of Management Executive November

"i, ii"Stratl#9icArlalysi

.industryanalysO

.customer/marke

.environmental 1

.cotIipetitdrianal.assessment 01 istrengths. wea" ,resolJIces

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urpo .~ i",' "':,"0' "iii" ...:'i~: p!ocess .people :jii:'dl"'e ii .i"~~;?i1ri~iFii,t~f"q~t,,,! t~sYIhbdls .activitie!jJ{C ~kkY ,"'c':'*kt;j"1,c',:cZ'!""",, tf" ,i,' f 0 1 10 0 ;;"yX'! c':." , , ,c:_"i:'i,'~",",,~ .""", unctlona po lclesi',~1,0'-."""" ",. """""'" ':.i,,"

FIGURE 1Putting Strategy in Its Place

feedback arrows and other indications that great Arenasstrategists are iterative, loop thinkers04 The key is Th f d 1 h 0 . kt . f 11 . to 1 b t th .e most un amenta c olces strategIsts ma eno m 0 owmg a sequen la process, u ra er mo.

h o 0 b t " f d . t are those of where, or m what arenas. the busmessac levmg a ro us. rem orce consls ency among 0 0th 1 t f th t t Ot If will be actIve. This is akin to the question Petere e emen s 0 e s ra egy 1 se ."

Drucker posed decades ago: What business willwe be in?"S The answer, however, should not be

The Elements of Strategy one of broad generalities. For instance, "We will be

If a business must have a strategy, then the strat- the lead~roin infor~ati?n technology consulting" isegy must necessarily have parts. What are those more a VISIon or objectIve than part of a strategy. Inparts? As Figure 2 portrays, a strategy has five articulating arenas, it is important to be as specificelements. providing answers to five questions: as possible about the product categories, market

.0 segments, geographic areas. and core technolo-.A Vreh~als: Whhere ~l l ill we be ahchv~? gies, as well as the value-adding stages (e.g., prod-.e lC es: ow WI we get t ere. t d . f t . 11.0 0 d.

o. .o. uc eslgn, manu ac unng. se mg, servlcmg. IS-

.llifferenhators: how will we wm m the market- t ob t. ) th b .. t d t t k1 ? n u Ion e usmess m en s 0 a eon.p ac~. .For example. as a result of an i.n-depth analysis,

.Stagmg: what will be our speed and sequence of b " t h 1 Of. d Ot th? a 10 ec no ogy company specl Ie 1 s arenas: eEmoves.. 1 0 h OIl bt . t ? company intended to use T-cell receptor technol-.conomlC OglC: ow WI we 0 am our re urns. t d 1 b h d o 0 d h 0ogy 0 eve op ot lagnoshc an t erapeuhcThis article develops and illustrates these do- products for battling a certain class of cancers; it

mains of choice. emphasizing how essential it is chose to keep control of all research and productthat they form a unified whole. Where others focus development activity, but to outsource manufactur-on the inputs to strategic thinking (the top box in ing and a major part of the clinical testing processFigure I), we focus on the output-the composition required for regulatory approvals. The companyand design of the strategy itself. targeted the U.S. and major European markets as

2001 Hambrick and Fredrickson 51~~ ".

Where will we be active?(and with how much emphasis?)

.Which product categories?

.Which market segments?

.Which geographic areas?

.Which core technologies?

.Which value-creation stages?

What will be our speed and sequence How will we get there?of moves? .Internal development?

.Speed of expansion? .J~int v7ntures? ..

.Sequence of initiatives? .Llcensmg/franchlsmg?" .Acquisitions?,-.-.-

How will we obtain our returns? ~'

.Lowest costs through scale advantages?

.Lowest costs through scope and replication advantages?

.Premium prices due to unmatchable service?

.Premium prices due to proprietary product features? How will we win?

.Image?

.Customization?

.Price?

.Styling?

.Product reliability?

FIGURE 2The Five Major Elements of Strategy

its geographic scope. The company's chosen are- of deliberate strategic choice. If we have decidednas were highly specific, with products and mar- to expand our product range, are we going tokets even targeted by name. In other instances, accomplish that by relying on organic, internalespecially in businesses with a wider array of product development, or are there other vehi-products, market segments, or geographic scope, cles-such as joint ventures or acquisitions-the strategy may instead reasonably specify the that offer a better means for achieving our broad-classes of, or criteria for, selected arenas-e.g., ened scope? If we are committed to internationalwomen's high-end fashion accessories, or coun- expansion, what should be our primary modes,tries with per-capita GDP over $5,000. But in all or vehicles-greenfield startups, local acquisi-cases, the challenge is to be as specific as possible. tions, licensing, or joint ventures? The executives

In choosing arenas, the strategist needs to indicate of the biotechnology company noted earlier de-not only where the business will be active, but also cided to rely on joint ventures to achieve their

t how much emphasis. will be pl~ced on.eac~. .Some new presence in Europe, while committing to a, market segments, for Instance, mIght be Identuled as . f t t. 1 .. t. f dd . t . i '. senes 0 ac lca acqulsl Ions or a mg cer am; centrally Important, whue others are deemed sec- th t.

d t t 1 t th ..

t.erapeu lC pro uc s 0 comp emen elr exls -

" ondary. A strategy mIght reasonably be centered on .1. f d .. d t' '. mg me 0 lagnostlc pro uc s.

Ione product category, with others-whue necessary .f d f .

f ff . t f 11 The means by whIch arenas are entered matters

or e enslve purposes or or 0 enng cus omers a u

1. b . f d . t. tl 1 . t greatly. Therefore, selection of vehicles should not: me-- emg 0 IS mc y ess Impor ance.! be an afterthought or viewed as a mere implemen-

; tat ion detail. A decision to enter new product cat-i Vehicles egories is rife with uncertainty. But that uncer-

Beyond deciding on the arenas in which the busi- tainty may vary immensely depending on whether; ness will be active, the strategist also needs to the entry is attempted by licensing other compa-I decide how to get there. Specifically, the means nies' technologies, where perhaps the firm has! for attaining the needed presence in a particular prior experience, or by acquisitions, where the, product category, market segment, geographic company is a novice. Failure to explicitly consider

area, or value-creation stage should be the result and articulate the intended expansion vehicles

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52 Academy of Management Executive November

can result in the hoped-for entry's being seriously Regardless of the intended differentiators-im-delayed, unnecessarily costly, or totally stalled. age, customization, price, product styling, after-

sale services, or others-the critical issue for strat-

F .1 t 1.. t1 .d d egists is to make up-front, deliberate choices.al ure 0 exp ICI y consl er an .WIthout that, two unfortunate outcomes loom. One

articulate the intended expansion is that, if top management doesn't attempt to cre-vehicles can result in the hoped-for ate unique differentiation, none will occur. Again,entry's being seriously delayed, differentia tors don't just materialize; they are veryunnecessarily costly, or totally stalled. hard to achieve. And firms without them lose.

The other negative outcome is that, without up-front, careful choices about differentiators, top

There are steep ~earning cu~ves associated with management may seek to offer customers across-the use of alter~atIve expanSIon mode.s. Research the-board superiority, trying simultaneously tohas fou~d, for rnstance, that companIes can ~~- outdistance competitors on too broad an array of

~elo~ hlghl,! advant~~e.°us, we:l-honed ~apa.b~h- differentiators-lower price, better service, supe-tIes rn makrng acquIsItIons or rn m,:nagrng ~ornt rior styling, and so on. Such attempts are doomed,ventures.6 The company that uses variOUS vehIcles however, because of their inherent inconsistencieson a~ ad h~c or patchwork bas.is, without an ?ver- and extraordinary resource demands. In selectingarchrng lOgIC ?nd programmatIc appro,:ch, wIll be differentiators, strategists should give explicita~ a severe dIsadvantage compared wIth compa- preference to those few forms of superiority thatmes that have such coherence. are mutually reinforcing (e.g., image and productD.ff .styling), consistent with the firm's resources and

1 erenhators b.l.t. d f h. hI 1 d .thcapa I I Ies, an ,0 course, Ig y va ue rn e

A strategy should specify no.t only where a firm will arenas the company has targeted.be active (arenas) and how it will get there (vehicles),but also how the firm will win in the marketplace-- St.how it will get customers to come its way. In a com- agIng

petitive world, winning is the result of differentiators, Choices of arenas, vehicles, and differentiatorsand such edges don't just happen. Rather, they re- constitute what might be called the substance of aquire executives to make up-front, conscious choices strategy-what executives plan to do. But this sub-about which weapons will be assembled, honed, and stance cries out for decisions on a fourth element-deployed to beat competitors in the fight for custom- staging, or the speed and sequence of major movesers, revenues, and profits. For example, Gillette uses to take in order to heighten the likelihood of suc-its proprietary product and process technology to cess.7 Most strategies do not call for equal, bal-develop superior razor products, which the com- anced initiatives on all fronts at all times. Instead,pany further differentiates through a distinctive, usually some initiatives must come first, followedaggressively advertised brand image. Goldman only then by others, and then still others. In erect-Sachs, the investment bank, provides customers ing a great building, foundations must be laid,unparalleled service by maintaining close rela- followed by walls, and only then the roof.tionships with client executives and coordinat- Of course, in business strategy there is no uni-ing the array of services it offers to each client. versally superior sequence. Rather the strategist'sSouthwest Airlines attracts and retains custom- judgment is required. Consider a printing equip-ers by offering the lowest possible fares and ment company that committed itself to broadeningextraordinary on-time reliability. its product line and expanding internationally.

Achieving a compelling marketplace advantage The executives decided that the new productsdoes not necessarily mean that the company has to should be added first, in stage one, because thebe at the extreme on one differentiating dimen- elite sales agents they planned to use for interna-sion; rather, sometimes having the best combi -tional expansion would not be able or willing tonation of differentiators confers a tremendous represent a narrow product line effectively. Evenmarketplace advantage. This is the philosophy though the executives were anxious to expandof Ronda in automobiles. There are better cars geographically, if they had tried to do so withoutthan Rondas, and there are less expensive cars than the more complete line in place, they would haveRondas; but many car buyers believe that there is wasted a great deal of time and money. The leftno better value-quality for the price-than a half of Figure 3 shows their two-stage logic.Ronda, a strategic position the company has The executives of a regional title insurance com-worked hard to establish and reinforce. pany, as part of their new strategy, were committed

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2001 Hambrick and Fredrickson S~

Printing equipment manufacturer with plans to Regional title insurance company withexpand internationally and broaden the plans to expand nationally by acquisitionproduct line and build a superior. prestigious brand

Wide 'Target N t. 1 l ' Target a lona

Stage 3

Geographic c;;: Geographic Stage 2scope fi scope r ~

CIJ Q)

mStage 1 c

...'~ CIJNarrow Currently Regional.

Currently

Narrow Wide Weak Strong

Product-line breadth Brand power

FIGURE 3Examples of Strategic Staging

to becoming national in scope through a series of concept of staging has gone largely unexplored inacquisitions. For their differentiators, they planned the strategy literature, it is often given far too littleto establish a prestigious brand backed by aggres- attention by strategists themselves.sive advertising and superb customer service. Butthe executives faced a chicken-and-egg problem: Economic logicthey co~ldn't make the ~cquisit~ons on favora~le At the heart of a business strategy must be a clearterms wIthout the brand Image In place; but w1th .d f h pr f.t "

II b n at d n t .

t1 ea 0 ow 0 1 S W1 e ge er e -0 Jus

only their current limited geographic scope, they some profits but profits above the firm's cost of

couldn't afford the quantity or quality of advertising .t 1 8 It .'

t h t 1 t hcap1 a .IS no enoug 0 vague y co un on av-needed to establish the. brand.. They decid~d on a ing revenues that are above costs. Unless there's a

three-stage plan (shown In the r1ght half of F1gure 3): compelling basis for it customers and competitors1) make sele~ted acquisitio~s in ~dj~cent regions, won't let that happen. 'And it's not enough to gen-

: hence becomIng a super-reg1onal In Slze and scale; erate a long list of reasons why customers will ber' 2) invest. ~oderately heavily" ~n. adv:ertisin~. and eager to pay high prices for your products, along

brand-buildIng; 3) make acquIsItIons In add1tIonal .th 10 g l Ost f a 0 h r t "

II beWI anI 0 re s ns w y you cos S W1regions on more favorable terms (because of the en- 1 th 0 et " t ' Th t ' f. eower an y ur comp 1 ors .a s a sure- 1rhanced brand, a record of growth, and, they hoped, route to strategic schizophrenia and mediocrity.

an appreciated stock price) while simultaneously

continuing to push further in building the brand.Decisions about staging can be driven by a num- It is not enough to vaguely count on

; ber of factors. One, of course, is resources. Funding having revenues that are above costs," and staffing ~very envisioned i~itiative, at the Unless there's a compelling basis for it,

needed levels, 1S ~enerally.not possIble ~t the outset customers and competitors won't let thatof a new strateg1c campa1gn. Urgency IS a secondfactor affecting staging; some elements of a strategy happen,may face brief windows of opportunity, requiringthat they be pursued first and aggressively. A third The most successful strategies have a centralfactor is the achievement of credibility. Attaining economic logic that serves as the fulcrum for profitcertain thresholds-in specific arenas. differentia- creation. In some cases, the economic key may betors, or vehicles-can be critically valuable for at- to obtain premium prices by offering customers atracting resources and stakeholders that are needed difficult-to-match product. For instance, the Newfor other parts of the strategy. A fourth factor is the York Times is able to charge readers a very highpursuit of early wins. It may be far wiser to success- price (and strike highly favorable licensing ar-fully tackle a part of the strategy that is relatively rangements with on-line information distributors)doable before attempting more challenging or un fa- because of its exceptional journalistic quality; inmiliar initiatives. These are only some of the factors addition, the Times is able to charge advertisersthat might go into decisions about the speed and high prices because it delivers a large number ofsequence of strategic initiatives. However, since the dedicated, affluent readers. ARAMARK, the highly

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54 Academy of Management Executive November.--~~ "UV""'1J'"

profitable international food-service company, is Second, the five elements call not only for choice,able to obtain premium prices from corporate and but also for preparation and investment. All fiveinstitutional clients by offering a level of custom- require certain capabilities that cannot be gener-ized service and responsiveness that competitors ated spontaneouslyocannot match. The company seeks out only those Third, all five elements must align with and sup-clients that want superior food service and are port each othero When executives and academicswilling to pay for it. For example, once domestic think about alignment, they typically have in mindairlines became less interested in distinguishing that internal organizational arrangements need tothemselves through their in-flight meals, ARA- align with strategy (in tribute to the maxim thatMARK dropped that segment. "structure follows strategy"9), but few pay much

In some instances, the economic logic might attention to the consistencies required among thereside on the cost side of the profit equation. elements of the strategy itselfoARAMARK-adding to its pricing leverage-uses Finally, it is only after the specification of allits huge scale of operations and presence in mul- five strategic elements that the strategist is in thetiple market segments (business, educational, best position to turn to designing all the otherhealthcare, and correctional-system food service) supporting activities-functional policies, organi-to achieve a sizeable cost advantage in food pur- zational arrangements, operating programs, andchases-an advantage that competitors cannot du- processes-that are needed to reinforce the strat-plicateo GKN Sinter Metals, which has grown by egy. The five elements of the strategy diamond canacquisition to become the world's major powdered- be considered the hub or central nodes for design-metals company, benefits greatly from its scale in ing a comprehensive, integrated activity system}Oobtaining raw materials and in exploiting. in coun-try after country, its leading-edge capabilities inmetal-forming processes.

In these examples the economic logics are not Comprehensive ~trategies at IKEA and Brakefleeting or transitory. They are rooted in the firms' Products Internationalfundamental and relatively enduring capabilities. IKEA: Revolutionizing an industryARAMARK and the New York Times can charge pre- 0 0 .0 0mium prices because their offerings are superior in So far we have IdentIfIed and dIscussed the livethe eyes of their targeted customers, customers elements that make up a strate?y and form ?urhighly value that superiority. and competitors can't strateg~ dIamond. Bu~ a strateg~ l~ mor~ than Slm-readily imitate the offerings. ARAMARK and GKN ply choIces ?n the.se live fronts: .It IS an m~egrated,Sinter Metals have lower costs than their competitors mutually remforcmg set of choIces-choIces thatbecause of systemic advantages of scale, experi- form.a coherent whole. ~o illustra.te the importanceence, and know-how sharingo Granted, these leads of thIS coherence we wIll now dISCUSS two exam-may not last forever or be completely unassailable, pIes of fully elaborated strategy diamonds. As abut the economic logics that are at work at these first illustration, consider the strategic intent ofcompanies account for their abilities to deliver IKEA, the remarkably successful global furniture

" strong year-in, year-out profitso retailer. IKEA's strategy over the past 25 years has

lJ bee~ highly coherent, with all five elements rein-The Imperative of Strategic Comprehensiveness forcmg each other.

0 .0 The arenas in which IKEA operates are well de-By thIS pomt, It should be clear why a strategy needs fo d th 11 1 t O l 0 0..me: e company se s re a Ive y mexpenslve,to encompass all live elements--arenas, vehIcles, t S do 0 t 1 f o

t d0 0 o. con emporary, can mavlan-s y e urnl ure an

differentiators, stagmg, and economIC lOgIC. FIrst, all h f . ho IKEA ' t t k t o0 0 0 0 orne urnls figS. sarge mar e IS young,five are important enough to reqUIre mtentlonalIty. ." I hOt 11 t Th ho0 0 0 " pnman y w 1 e-co ar cus omers. e geograp lC

Surpnsmgly, most strategIc plans emphasIze one or " ld od t 1 t 11 t o h0 0 0 0 0 scope IS wor WI e, or a eas a coun nes weretwo of the elements wIthout glvmg any consIderation 0 o. " 0h h Y d 1 t t oth t tt SOCIoeconomIC and mfrastructure condItions sup-to t e ot ers. et to eve op a s ra egy WI ou a en- 0 0. 11 fo 1 ot O 1 0 0 port the concept. IKEA IS not only a retaIler, buttlon to a Ive eaves cn lca omlsslonso " 0 0

also mamtams control of product desIgn to ensurethe integrity of its unique image and to accumulate

Surprisingly, most strategic plans unrivaled expertise in designing for efficient man-emphasize one or two of the elements ufacturingo The company, however, does not man-without giving any consideration to the ufacture, relying instead on a host of long-term

th suppliers who ensure efficient, geographically dis-0 ers.d o

perse production.

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2001 Hambrick and Fredrickson 55

In each region, IKEA has enough scale to achieveIKEA is not only a retailer, but also substantial distribution and promotional efficien-

maintains control of product design to cies. And each individual store is set up as a high-ensure the integrity of its unique image volume operation, allowing further economiesand to accumulate unrivaled expertise in in inve~tories, .advertising, .and staffing. IKEA'sd .. f ff .. t f t .phased InternatIonal expanSion has allowed exec-

eslgnlng or e lclen manu ac unng. ...

utIves to beneht, rn country after country, fromwhat they have learned about site selection, store

As its primary vehicle for getting to its chosen design, store openings, and ongoing operations.arenas, IKEA engages in organic expansion, build- They are vigilant, astute learners, and they puting its own wholly owned stores. IKEA has chosen that learning to great economic use.not to make acquisitions of existing retailers, and Note how all of IKEA's actions (shown in Figure"it engages in very few joint ventures. This reflects 4) fit together. For example, consider the strongtop management's belief that the company needs alignment between its targeted arenas and itsto fully control local execution of its highly inno- competitive differentiators. An emphasis on lowvative retailing concept. price, fun, contemporary styling, and instant fulfill-

IKEA attracts customers and beats competitors ment is well suited to the company's focus onby offering several important differentiators. First, young, first-time furniture buyers. Or consider theits products are of very reliable quality but are low logical fit between the company's differentiatorsin price (generally 20 to 30 percent below the com- and vehicles-providing a fun shopping experi-petition for comparable quality goods). Second, in ence and instant fulfillment requires very intricatecontrast to the stressful, intimidating feeling that local execution, which can be achieved far bettershoppers often encounter in conventional furniture through wholly owned stores than by using acqui-stores, IKEA customers are treated to a fun, non- sitions, joint ventures, or franchises. These align-threatening experience, where they are allowed to ments, along with others, help account for IKEA'swander through a visually exciting store with only long string of years with double-digit sales growth,the help they request. And third, the company and current revenues of $8 billion.strives to make customer fulfillment immediate. The IKEA example allows us to illustrate theSpecifically, IKEA carries an extensive inventory strategy diamond with a widely familiar businessat each store, which allows a customer to take the story. That example, however, is admittedly retro-item home or have it delivered the same day. In spective, looking backward to interpret the compa-

t contrast, conventional furniture retailers show ny's strategy according to the framework. But ther floor models, but then require a 6- to 10-week wait real power and role of strategy, of course, is in

.for the delivery of each special-order item. looking forward. Based on a careful and completeAs for staging, or IKEA's speed and sequence of analysis of a company's environment, market-

moves, once management realized that its ap- place, competitors, and internal capabilities, se-proach would work in a variety of countries and nior managers need to craft a strategic intent forcultures, the company committed itself to rapid their firm. The diamond is a useful framework forinternational expansion, but only one region at a doing just that, as we will now illustrate with atime. In general, the company's approach has been business whose top executives set out to develop ato use its limited resources to establish an early new strategy that would allow them to break freefoothold by opening a single store in each targeted from a spiral of mediocre profits and stagnantcountry. Each such entry is supported with aggres- sales.sive public relations and advertising, in order tolay claim to the radically new retailing concept in B k P d t I t t. I Ch t "ra e ro uc s n erna Iona : ar mg athat market. Later, IKEA comes back into each d. t "

...new Irec Ioncountry and hIls rn with more stores.The economic logic of IKEA rests primarily on The strategy diamond proved very useful when it

scale economies and efficiencies of replication. Al- was applied by the new executive team of Brake.though the company doesn't sell absolutely iden- Products International (BPI), a disguised manufac-

tical products in all its geographic markets, IKEA turer of components used in braking and suspen-has enough standardization that it can take great sion systems for passenger cars and light trucks. Inadvantage of being the world's largest furniture recent years, BPI had struggled as the worldwideretailer. Its costs from long-term suppliers are ex- auto industry consolidated. Its reaction had been aceedingly low, and made even lower by IKEA's combination of disparate, half-hearted diversifica-proprietary, easy-to-manufacture product designs. tion initiatives, alternating with across-the-board

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56 Academy of Management Executive November

Arenas

.Inexpensive contemporary furniture.Young. white-collar customers.Worldwide

Staging

.Rapidinternational Vehiclesexpansion. by region " "

.Early footholds .OrganIc expanSionin each country; .Wholly owned stores

fill in later /I\

\I

.-"Economic Logic "

".Economies of scale (global. ~ Differentiators

regional. and individual-store . V 1" bl I "tI ) ery re ia e qua 1 ysca e ."Eff " " " f I "" Low price

.iCienCies rom rep icatlon F h . h ." .un. nont reatenmg s oppmg experience

.Instant fulfillment

FIGURE 4IKEA's Strategy

expense cuts. The net result, predictably, was not dIe, preassembled systems modules. This initia-good, and a new management team was brought tive would allow the carmakers to reduce assem-in to try to revive performance. As part of this bly costs significantly, as well as to deal with aturnaround effort, BPI's new executives developed single suspension-system supplier, with sub-a new strategic intent by making critical decisions stantiallogistics and inventory savings.for each of the five elements-arenas, vehicles, The management team identified three majordifferentiators, staging, and economic logic. We vehicles for achieving BPI's presence in theirwill not attempt to convey the analysis that gave selected arenas. First, they were committed torise to their choices, but rather (as with the IKEA organic internal development of new genera-example) will use BPI to illustrate the articulation tions of leading-edge braking systems, includingof a comprehensive strategy. those for off-road vehicles. To become the pre-

For their targeted arenas, BPI executives com- ferred suspension-system integrator for the ma-mitted to expanding beyond their current market jor auto manufacturers, executives decided toscope of North American and European car enter into strategic alliances with the leadingplants by adding Asia, where global carmakers producers of other key suspension components.were rapidly expanding. They considered widen- Finally, to serve carmakers that were expandinging their product range to include additional their operations in Asia, BPI planned to initiateauto components, but concluded that their equity joint ventures with brake companies inunique design and manufacturing expertise was China, Korea, and Singapore. BPI would provide

~ limited to brake and suspension components. the technology and oversee the manufacturing ofThey did decide, however, that they should apply leading-edge, high-quality anti lock brakes; thetheir advanced capability in anti lock-braking Asian partners would take the lead in marketingand electronic traction-control systems to de- and government relations.velop braking products for off-road vehicles, in- BPI's executives also committed to achievingcluding construction and farm equipment. As an and exploiting a small set of differentiators. Theadditional commitment, executives decided to company was already a technology leader, par-

y. add a new service, systems integration, that ticularly in antilock-braking systems and elec-would involve bundling BPI products with other tronic traction-control systems. These propri-related components, from other manufacturers, etary technologies were seen as centrallythat form a complete suspension system, and important and would be further nurtured. Execu-then providing the carmakers with easy-to-han- tives also believed they could establish a preem-

~l Hambrick and Fredrickson~

inent position as a systems integrator of entire mium prices from its customers, by offering themsuspension assemblies. However, achieving this at least three valuable, difficult-to-imitate bene-advantage would require new types of manufac- fits. First, BPI. was the worldwide technologyturing and logistics capabilities, as well as new leader in braking systems; car companies wouldskills in managing relationships with other com- pay to get access to these products for their newponent companies. This would include an exten- high-end models. Second, BPI would allowsive e-business capability that linked BPI with global customers an economical single sourceits suppliers and customers. And finally, as one for braking products; this would save customersof the few brakes/suspension companies with a considerable contract administration and qua I i-

manufacturing presence in North America and ty-assurance costs-savings that they would beEurope-and now in Asia-BPI executives con- willing to share. And third, through its alliancescluded that they had a potential advantage- with major suspension-component manufactur-what they referred to as "global reach"-that ers, BPI would be able to deliver integrated-sus-was well suited to the global consolidation of the pension-system kits to customers-again savingautomobile industry. If BPI did a better job of customers in purchasing costs, inventory costs,coordinating activities among its geographically and even assembly costs, for which they woulddispersed operations, it could provide the one- pay a premium.stop, low-cost global purchasing that the indus- BPI's turnaround was highly successful. Thetry giants increasingly sought. substance of the company's strategy (shown in

Figure 5) was critically important in the turn-around, as was the concise strategy statementIf BPI did a better job of coordinating that was communicated throughout the firm. As

activities among its geographically the CEO stated:

dispersed operations, it could provide the: one-stop, low-cost global purchasing that We've finally identified what we want to be,

t . d ... 1 h and what's important to us. Just as impor- l the In ustry gIants InCreasIng y soug t.I , d .d d h t d 't t ttant y, we ve eCI e w a we on wan 0

be, and have stopped wasting time and effort.BPI's executives approached decisions about Since we started talking about BPI in terms of

staging very deliberately. They felt urgency on arenas, vehicles, differentiators, staging, andvarious fronts, but also realized that, after sev- economic logic, we have been able to get oureral years of lackluster performance, the firm top team on the same page. A whole hostlacked the resources and credibility to do every- of decisions have logically fallen into placething all at once. As is often the case, decisions in support of our comprehensive strategicabout staging were most important for those in- agenda.itidtives where the gaps between the status quoand the strategic intent were the greatest. For

Of St t B tt St t d N St t Yra egy, e er ra egy, an 0 ra egexample, executives decided that, in order toprovide a clear, early sign of continued commit- Our purpose in this article has been elemental-toment to the major global auto manufacturers, a identify what constitutes a strategy. This basiccritical first step was to establish the joint ven- agenda is worthwhile because executives andtures with brake manufacturers in Asia. They felt scholars have lost track of what it means to engagejust as much urgency to gain a first-mover ad- in the art of the general. We particularly hope tovantage as a suspension-system integrator. counter the recent catchall fragmentation of theTherefore, management committed to promptly strategy concept, and to remind strategists that

i establish alliances with a select group of manu- orchestrated holism is their charge.

facturers of other suspension components, and to But we do not want to be mistaken. We don't[ experiment with one pilot customer. These two believe that it is sufficient to simply make theser sets of initiatives constituted stage one of BPI's five sets of choices. No-a business needs not:- strategic intent. For stage two, the executives just a strategy, but a sound strategy. Some strat-

planned to launch the full versions of the sys- egies are clearly far better than others. Fortu-tems-integration and global-reach concepts, nately, this is where the wealth of strategic-complete with aggressive marketing. Also in this analysis tools that have been developed in thesecond stage, expansion into the off-road vehicle last 30 years becomes valuable. Such tools asmarket would commence. industry analysis, technology cycles, value

BPI's economic logic hinged on securing pre- chains, and core competencies, among others,

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58 Academy of Management Executive November

Arenas

.North American. European. andAsian passenger-car andlight-truck makers

.Brakes and suspension-systemcomponents

.Suspension-system integration

.Braking systems for off-roadvehicles

Staging

.Stage 1: Asian JVs andalliances withsuspension-component " h. Icompanies .e IC es

.Stage 2: Aggressively .Internal development ofdesign and market new. leading-edgesystems-integration braking productsoffering; commence / .Strategic alliances withoff-road vehicle market I suspension-component

\ manufacturers\ .Joint ventures with brake

/' companies in Asia"

/"Economic Logic Differentiators

.Preferred s~pplier status and premium pricing. .ABS design technologydue to leadmg-edge technology .Electronic traction control

.Preferre.d.supplier status and premi~m pricing. technologyby pr?vldm\iJ ,;=ustomers ~l~bal solutions .Systems integration capability

.~remlum prl.cmg by provldmg customers .E-business capability withmtegrated kIts suppliers and customers

.Global reach

FIGURE 5BPI's Strategy

are very helpful for improving the soundness of egies for today's turbulent environment keepstrategies. When we compare these tools and multiple options open and build in desirableextract their most powerful central messages, flexibility-through alliances, outsourcing, leasedseveral key criteria emerge to help executives assets, toehold investments in promising technolo-test the quality of a proposed strategy. These gies, and numerous other means. A strategy can helpcriteria are presented in Table 1.11 We strongly en- to intentionally build in many forms of flexibility-ifcourage executives to apply these tests throughout that's what is called for. Third, a strategy doesn'tthe strategy-design process and especially when a deal only with an unknowable, distant future. Theproposed strategy emerges. appropriate lifespans of business strategies have be-

There might be those who wonder whether strat- come shorter in recent years. Strategy used to beegy isn't a concept of yesteryear, whose time has equated with 5- or la-year horizons, but today a ho-come and gone. In an era of rapid, discontinuous rizon of two to three years is often more fitting. In anyenvironmental shifts, isn't the company that at- event, strategy does not deal as much with preor-tempts to specify its future just flirting with disas- daining the future as it does with assessing currentter? Isn't it better to be flexible, fast-on-the-feet, conditions and future likelihoods, then making theready to grab opportunities when the right ones best decisions possible today.come along? Strategy is not primarily about planning. It

Some of the skepticism about strategy stems is about intentional, informed, and integratedfrom basic misconceptions. First, a strategy need choices. The noted strategic thinkers Gary Hamelnot be static: it can evolve and be adjusted on an and C.K. Prahalad said: "[A company's] leadershipongoing basis. Unexpected opportunities need cannot be planned for, but neither can it happennot be ignored because they are outside the without a grand and well-considered aspiration."12strategy. Second, a strategy doesn't require a We offer the strategy diamond as a way to craftbusiness to become rigid. Some of the best strat- and articulate a business aspiration.

i~;J..

r2001 Hambrick and Fredrickson2

Table I competition. New York: The Free ~ress. The resource-based

Testing the Quality of Your Strategy view of the firm is discussed in Barney, J. 1991. Firm resourcesand sustained competitive adv~ntage. Journal of Management,

Key Evaluation Criteria 17: 99-120. See Brandenburger, M., & Nalebuff, R. J. 1995. The1. Does your strategy fit with what's going on in the right game: Use game theory to shape strategy. Harvard Busi-

environment? ness Review, July-August: 57-71, for a discussion of co-opetition.Is there healthy profit potential where you're headed? Does 2 Bianco, A., & Moore, P. 1. 2001. Downfall: The inside story of

your strategy align with the key success factors of your the management fiasco at Xerox. BusinessWeek, 5 March 2001.chosen environment? 3 A widely applicable framework for strategy implementa-

2. Does your strategy exploit your key resources? tion is discussed in Galbraith, J. R., & Kazanjian, R. K. 1986.

With your particular mix of resources, does this strategy Strategy implementation: Structure, systems and process, 2nd

give you a good head start on competitors? Can you ed. St. Paul: West Publishing. A similar tool is offered in Ham-pursue this strategy more economically than competitors? brick, D. C., & Cannella, A. 1989. Strategy implementation as

3. Will your envisioned differentiators be sustainable? substance and selling. The Academy of Management Executive,

Will competitors have difficulty matching you? If not, does 3(4): 278-285.your strategy explicitly include a ceaseless regimen of 4 This observation has been made for years by many con-

innovation and opportunity creation? tributors, including Quinn, J. B. 1980. Strategies for change:4. Are the elements of your strategy internally consistent? Logical incrementalism. Homewood, 11: Richard D. Irwin Pub-

Have you made choices of arenas, vehicles, differentiators, lishing; and Mintzberg, H. 1973. Strategy making in three modes.and staging, and economic logic? Do they all fit and California Management Review, 15: 44-53.mutually reinforce each other? 5 Drucker, P. 1954. The practice of management. New York:

5. Do you have enough resources to pursue this strategy? Harper & Row.Do you have the money, managerial time and talent, and 6 Haleblian, J., & Finkelstein, S. 1999. The influence of orga-

other capabilities to do all you envision? Are you sure nizational acquisition experience on acquisition performance:

you're not spreading your resources too thinly, only to be A behavioral learning perspective. Administrative Scienceleft with a collection of feeble positions? Quarterly, 44: 29-56.

6. Is your strategy implementable? 7 Eisenhardt, K. M., & Brown, S. 1. 1998. Time pacing: Com-

Will your key constituencies allow you to pursue this peting in markets that won't stand still. Harvard Business Re-

strategy? Can your organization make it through the view, March-April: 59-69, discusses "time pacing" as a compo-transition? Are you and your management team able and nent of a process of contending with rapidly changingwilling to lead the required changes? environments.

8 The collapse of stock market valuations for Internet com-

panies lacking in profits-or any prospect of profits-marked aAcknowledgments ~eturn to eco~omic. reality. Profits above the firm's cost of cap-

1tal are required In order to yield sustained or longer-termWe thank the following people for helpful suggestions: Ralph shareholder returns.Biggadike, Warren Boeker, Kathy Harrigan, Paul Ingram, Xavier 9 Galbraith & Kazanjian, op. cit., and Hambrick & Cannella,

Martin, Atul Nerkar, and Jaeyong Song. op. cit.10 Porter, M. E. 1996. What is strategy? Harvard Business Re-

view, November-December: 61-78.Endnotes II See Tilles, S. 1963. How to evaluate strategy. Harvard Busi-

I ..ness Review, July-August: 112-121, for a classic, but more lim-Porter, M. E. 1980. CompetItIve strategy. New York: The Free it ed, set of evaluative tests.

Press, provid~~ an!n-depth disc~SSi?n of ~he five-forces model. 12 See Hamel, G., & Prahalad, C. K. 1993. Strategy as stretch

~~ Hypercompehh9n 1S addressed In D Avem, R. A. 1994. Hyper- and leverage. Harvard Business Review, March-April: 84-91.

,I

Donald C. Hambrick is the Sam-uel Bronfman Professor of Dem- James W, Fredrickson is a pro-

ocratic Business Enterprise at fessor of strategic managementthe Graduate School of Busi- and Chevron Oil Centennial

ness, Columbia University. He Foundation Fellow in the Mc-holds degrees from the Univer- Combs School of Business ofsity of Colorado (B.S.), Harvard the University of Texas at Aus-

University (MBA), and the Penn- tin. He was previously on thesylvania State University (Ph.D.). faculties of Columbia Univer-An active consultant and execu- sity and the University of Pitts-

tive education instructor, he also burgh, and holds a Ph.D. from

served as president of the Acad- the University of Washington.emy of Management. Contact: Contact:james.fredrickson@bus.

dch2@Columbia.edu. utexas.edu.

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