10/17/2017 Introduction to Strategy https://cb.hbsp.harvard.edu/reader/?product_id=8097-EPB-ENG&user=38fc0263-0efd-4374-b7af-da92a2a8c329&tr=1130446&version=null#!/page/1 1/35 10/17/2017 Introduction to Strategy Ramon Casadesus­Masanell, Herman C. Krannert Professor of Business Administration, Harvard Business School, developed this Core Reading with the assistance of Sunru Yong, HBS MBA 2007. Copyright © 2014 Harvard Business School Publishing Corporation. All rights reserved. 1 INTRODUCTION The purpose of strategy is to create a competitive advantage that generates superior, sustainable financial returns. There are two requirements for doing this successfully. The first is an understanding of the business landscape: the forces that shape competition, the dynamics among players, and the drivers of industry evolution. This informs where the firm chooses to engage with its competition. The second is the choice of a position on this landscape. The firm’s positioning shapes the choice of a business model and the underlying set of activities that sustains it. Strategy, as you can see, consists of choices. It is the integrated set of choices that positions the business in its industry so as to generate superior financial returns over the long run.a Developing a good strategy is not easy: The right set of choices may not be obvious, they must be made amid uncertainty, and then they must be executed using finite resources. A strategy can fail because the firm has chosen a particularly difficult place on the business landscape and is not able to adapt to, or change, its environment. A strategy can fail because its choices are not truly integrated, and so its intended business model and positioning do not fully align. A successful strategy demonstrates consistency—consistency with the realities of the external environment, with regard to internal activities, and with respect to longer­term dynamics in the industry and the organization. In the Essential Reading section, we provide an introduction to the discipline of strategy. We begin by briefly addressing misconceptions about strategy, drawing a clear distinction between proper strategy and other ideas and tools that may use similar terminology. We then examine the https://cb.hbsp.harvard.edu/reader/?product_id=8097-EPB-ENG&user=38fc0263-0efd-4374-b7af-da92a2a8c329&tr=1130446&version=null#!/page/1 2/35 10/17/2017 Introduction to Strategy fundamental elements of strategy and the conceptual frameworks used to develop one. We introduce ways to analyze a business landscape in order to understand opportunities and constraints created by structural forces. This is followed by an overview of how the business model, and the activities that form it, must demonstrate internal consistency. Finally, we look at how the firm’s choices can lead to external consistency with the business landscape as well as to dynamic consistency over the long term. The Supplemental Reading section introduces some alternative perspectives on strategy. 2 ESSENTIAL READING 2.1 A Historical Perspective on Competitive Strategy The concept of strategy has been muddied by many different uses of the term. A business may have what it calls a marketing strategy or an innovation strategy or a technology strategy. It may implement a balanced scorecard or strategic outsourcing or a process reengineering program. Each of these may be “strategies,” but only in the general sense that they comprise a broad plan supported by underlying actions. They should not be mistaken for strategy as we are defining it here, with its focus on the business as it performs in its environment and relative to other actors. The word itself comes from the ancient Greek strategos, which referred to military command. In its original intent and in subsequent refinement in the following millennia, the concept of strategy was explicitly tied to the concerns of war. The late eighteenth­ and early nineteenth­century Prussian military theorist Carl von Clausewitz distinguished between tactics, such as campaigns on the battlefield, and the discipline of strategy. Strategy demanded a broad perspective; tactics were merely the means to an end. Strategy had to focus on “the object of the war [and] give an aim to the whole military action [emphasis added].”1 For von Clausewitz, strategy was the overarching plan—the “aim,” as he called it—to which specific campaigns and actions were subordinated, and which had to accommodate the uncertainties of external circumstances and enemy actions. https://cb.hbsp.harvard.edu/reader/?product_id=8097-EPB-ENG&user=38fc0263-0efd-4374-b7af-da92a2a8c329&tr=1130446&version=null#!/page/1 3/35 10/17/2017 Introduction to Strategy The relevance of strategy in business became more apparent in the second half of the nineteenth century. Prior to this period, industries were typically marked by intense competition; most firms were small, with limited capital and no power to significantly influence their markets. Two critical factors changed that: The expansion of railroads provided better access to distant markets, and improved financial services provided better access to capital. Recall the two fundamental questions a business must answer with its strategy: where to compete and how to compete. Better access to markets and capital dramatically changed the ways that businesses could choose their answers. With those developments, large­scale investments became both possible and profitable, creating opportunities to achieve an advantage through economies of scale or economies of scope. Managers now had reason to apply strategy to business, and they consciously built companies to outflank competitors and to adapt to external forces. This led to the gradual emergence of large, vertically integrated businesses in the late nineteenth century.2 Indeed, these large companies were among the first to clearly articulate strategic thinking. For example, in the early twentieth century, General Motors crafted a strategy specifically to outmaneuver its close competitor, the Ford Motor Company. Further developments in strategic thinking came from the unhappy circumstances of the Second World War, which necessitated new analytical tools for allocating and deploying scarce resources. Those tools proved to be as relevant in business as in armed conflict. The academic foundations of business strategy developed in parallel to the changes in the industrial economy. The earliest business schools were instrumental in establishing the role of managers as strategic thinkers rather than functional administrators. The business schools emphasized the importance of fitting a firm’s strategy with its environment. In the 1960s, the common approach was the SWOT framework, which matched a company’s “strengths” and “weaknesses” with its “opportunities” and “threats.” Subsequent work focused on defining a firm’s distinctive competencies and the logic for translating a SWOT analysis into a credible strategy. Even as the concepts of business strategy evolved, the underlying premise of strategy remained unchanged: It was the overarching plan for marshaling an organization to succeed in an uncertain environment and against opposing forces. It is critical, then, to understand strategy in this original sense, as competitive strategy. Every business must operate in an environment marked by competition, structural forces, and uncertainty. Every business must make choices that fit together in a holistic, consistent way in order to succeed in that environment. Those choices are the essence of strategy. Deploying robust technology, building a thriving culture, and introducing innovations are all important, but they must not be mistaken for strategy. Cutting costs and boosting productivity are also important and may make an organization more effective, but again, they are tactics—not strategy itself. Operational effectiveness may be necessary for strategy, but it is not sufficient.3 In the remainder of this reading, we introduce the key building blocks of strategy. We examine how an understanding of the environment shapes a firm’s choices—its positioning and business model. https://cb.hbsp.harvard.edu/reader/?product_id=8097-EPB-ENG&user=38fc0263-0efd-4374-b7af-da92a2a8c329&tr=1130446&version=null#!/page/1 4/35 10/17/2017 Introduction to Strategy We then consider how those choices enable a firm to succeed in its environment and to sustain its success over the long run. No successful strategy is crafted in a vacuum. After all, the very purpose of strategy is to enable a business to achieve superior performance in its industry. Clearly, that demands a deep and insightful analysis of the environment in order to assess opportunities and risks. Ralph Waldo Emerson, the mid­nineteenth­century American essayist and poet, declared that “if a man . make a better mousetrap than his neighbor . the world will make a beaten path to his door.”4 Imagine, for a moment, an actual mousetrap company whose managers believe that success will come from nothing more than the introduction of their literal “better mousetrap.” Unfortunately, they have only a rudimentary understanding of their competitive environment. They have not considered the likelihood that a large rival will respond aggressively, cutting prices and eroding potential industry profits. They have forgotten that a critical component in the mousetrap comes from a single global supplier that is a notoriously tough negotiator. They have ignored the probability that a new company could enter the market, copying the mousetrap innovation and making