Strategy as a Case to Be Cracked

28 October 2010 Walter Kiechel

Walter Kiechel presents an extract from his latest book: Lords of Strategy.

According to the story, Peter Drucker once remarked that he had "invented management". But how can that be, his listener responded, given that people had been running organisations for centuries, millennia? True, the sage replied, but when he first went to study the subject in the 1930s and 1940s, he could find only two or three books describing the functions he came to group under that rubric. By naming them "management", pulling them together with that term, he gave those practicing the art a new way of understanding what they were doing. And a new way of studying and improving their practice.

The argument of this article is that precisely the same thing went on with the invention of corporate strategy, except that it didn't spring full-blown from a single, godlike forehead but instead was assembled from the spoils of many an intellectual and business battle. This is a story not of paradigm shift, but of the bit-by-bit creation of the first comprehensive paradigm that pulled together all the elements most vital for a company to take into account if it is to compete, win, and survive.

There are three strands to the narrative, woven into a single braid. First is the history of the critical ideas, how they were devised, out of what forerunner materials, and in response to which particular problems. The second and third strands are the stories of people – Bruce Henderson, Michael Porter, Tom Peters and others – and of organisations – companies that struggled to put the new concepts to work, consulting firms that fostered so many of the ideas, and business schools that turned strategy into an academic discipline. There were and are many lords of strategy, not just the original thinkers, but also a swelling progress of executives rendered more lordly through its use.

"For the corporate world, the past 50 years have been especially rich with menacing surprises."

Horsemen of the corporate apocalypse

Every historical period feels itself beset with forces making for change, but for the corporate world, the past 50 years have been especially rich with menacing surprises, one response to which was the rise of strategy. Consider a few of the most significant jolts, which sometimes seemed like the four horsemen of the corporate apocalypse.

The first, though not necessarily chronologically, was the deregulation of industries in which competition had traditionally been held in check by government rules, as in airlines, banking and telecommunications. The second consisted of the ever-widening effect of new technologies, including the increase in computer power, its spread to desktops everywhere, and the coming of the internet.

In the third, capital markets freed themselves up, shedding inhibitions against hostile takeovers, establishing a genuine market for the control of companies. The fourth horseman usually goes by the name of globalisation, the fact that companies find themselves buying from, selling to and competing with enterprises and customers from around the world.

What all four had in common was that they worked to extend the reach of markets, and hence of competition, into places that Schumpeterian creative destructiveness had never touched before. If there's one form of mindfulness that strategy has installed in the corporate brain above all others it's an ever-edgy awareness that other guys or gals are out there, trying to take your business, probably gaining on you, and that new miscreants are popping up all the time, increasingly from places whose names you can't pronounce. The title that Intel CEO Andy Grove gave his 1996 book on strategy, Only the Paranoid Survive, nicely captures the feeling.

Competition and competitiveness

These days, competition and competitiveness are so ingrained in our thinking that we forget what a relatively recent discovery they were, particularly for American companies lulled by 30 years of postwar prosperity. Two of the earliest academic books on corporate strategy, from the early 1970s, had, respectively, two and four pages devoted to competition. In part, this merely reflected the business landscape of that time, where the worry was more about the unchecked power of companies than about the forces that might threaten them.

"Competition and competitiveness are so ingrained in our thinking that we forget what a relatively recent discovery they were."

By way of contrast to his contemporaries, consider Bruce Henderson's attitude toward competition: he was fascinated by it and passionately believed in its power to spur higher performance. So much so that in the late 1960s, after reading books about Darwinian anthropology, he divided the Boston Consulting Group into three minifirms – the red, blue and green – and set them to competing with one another. The move had the desired effect, but not in the way Henderson envisioned: less than three years later, virtually the entire blue unit, by far the most successful, decamped to set up Bain & Company, BCG's most formidable competitor for the next 15 years.

Henderson was also a pioneer in that he looked at the challenges facing his clients as mysteries to be solved, usually through massive and creative data gathering, then fitting the data to a framework, or supplying such a framework, to explain it. Big-league strategy consultants like Orit Gadiesh at Bain & Company still describe the greatest intellectual thrill as "cracking the case", a term they may have picked up in business school but an endeavor to which they bring far more firepower – that is, teams of people – than any professor could.

Part of the argument of this is that corporate strategy as something that needs to be figured out, a case to be cracked, is relatively new in the world.

Certainly new is the realisation that the effort will require unprecedented fact gathering (at the beginning of the strategy revolution, most companies didn't know how their costs compared with those of competitors; many still don't), platoons of experts from outside, and a multibillion-dollar consulting industry to deliver that expertise. Indeed, we'll see that strategic concepts were often less important than the newly muscular empiricism their use required, the imperative they gave companies to gather unprecedented amounts of data on costs, markets and competitors.

Historians of business still argue about the effect of Taylorism on our world, about whether Frederick Winslow Taylor's time-motion studies of work at the end of the 19th century and the resultant push for greater stopwatch-monitored efficiency was a good thing. But all concede that Taylorism represented a major force for change across the corporate landscape.

Greater Taylorism

Part of the strategy revolution was the coming of what I'll call "greater Taylorism", the corporation's application of sharp-pencilled analytics, this time not to the performance of an individual worker (how fast a person could load bars of pig iron or reset a machine) but more widely to the totality of its functions and processes. How much does it cost us to make our steel? How can the Japanese do it so much less expensively? How can we redesign our whole chain of activities, from purchasing raw materials to delivering the final product, so that we can compete with them?

"Corporate strategy is something that needs to be figured out, a case to be cracked."

Greater Taylorism has chewed its way across the corporate landscape to virtually everywhere large companies practice 21st-century capitalism, which means on just about every continent. Its appetite for more numbers, more data, seems only to increase with the computer power available to crunch those numbers. And it has become steadily less patient for results, in part because now you can get the numbers back from the market overnight. Private equity firms, with their short time horizons and relentless pressure for results, are merely the latest shock troops for greater Taylorism's ineluctable advance.

In many ways, the steady, relentless spread of empiricism represents a simpler, less disjointed story line than the history of the successive concepts that made up the strategy revolution.

"The early history of strategy is fairly linear," observes Pankaj Ghemawat, a Harvard Business School professor and the subject's leading academic historian. Then, about in the mid-1980s, "it turns into a bush", the different branches heading off into wild scrawls of hypothesis and assertion. Just about that time, too, the transcendent purpose of strategy became clear, at least to Wall Street: its aim was to enrich shareholders and boost the stock price.

Reprinted by permission of Harvard Business Review Press. Excerpt from Lords of Strategy. © 2010 Walter Kiechel. All rights reserved.