In the last five years, I’ve spoken to approximately 500 executives in Fortune 500 companies in the United States and Europe. One of the things that struck me most is that everybody seems to have their own definition of what strategy means. I guess this is positive because it shows that the question is on everybody’s mind prompting everybody to formulate their own personal definition. But, on a deeper level, it almost seems like there’s no unique and comprehensive understanding of what corporate strategy means; at least, I found no overarching definition of strategy that could encompass everything I’ve heard. There’s no consensus on defining corporate strategy. Here are some of the various definitions of strategy I’ve heard in the last 5 years.
I/ Definition of strategy number 1: strategy is being number one in the industry
Some say that their strategy is to be “number of number 2 in their industry and, if that turns out to be impossible, then they divest out and invest into industries where they would have a chance of being number one or number two”. One of the most vocal proponents of this definition of strategy is Jack Welch, former CEO of GE. However this view of strategy fails to address the question of profitability: there are many small companies that are much more profitable than larger ones. Would it be correct to say that their strategy is flawed? Would it be correct to say that the leading company has a valid strategy even though it’s losing money?
II/ Definition of strategy number 2: strategy is delivering the best product
Another definition of strategy involves offering the best products at the lowest price. This really means identifying what “best” really means for key customers, which involves identifying key product performance criteria and price sensitivity. So, in a sense, this definition of strategy really equates strategy with operational effectiveness: once product performance criteria and price sensitivity defined, it’s a question of making it happen. Typically, this kind of understanding of strategy leads to very efficient management at every level of the organization. Managers have very specific Key Performance Indicators he or she must meet on a quarterly basis. In other words, measuring performance is critical at every level of the urbanization. Japanese companies, according to Michael Porter, “reaped enormous advantages from operational effectiveness with such practices as total quality management and continuous improvement”. But, these best practices come with two disadvantages:
- 1/ they are easily emulated by competition
- 2/ they end up by making companies look more and more alike and they lose their competitive advantage
III/ Definition of strategy number 3: strategy means beating competition
Another definition of strategy involves beating competition. In this case strategy is analogous to war. Competitors are assimilated to adversaries that you should beat and dominate. I’ve worked in a consulting company that would draw thought-provoking analogies between Chess, the Chinese game of Go and corporate strategy. The problem I have with this analogy is that it assumes that you only have one opponent. In Chess, if you’re playing white then you must be playing against black, and vice-versa. The same is true with the game of Go. And, obviously this doesn’t apply to companies because companies typically must deal with multiple competitors. But on a deeper level, this definition of strategy seems to forgo a company’s competitive environment. Surely, competitors are part of the competitive environment, but they are not the only players. Other players are also trying to capture industry value, such as suppliers, clients, substitute and potential new entrants. Clayton Christensen, a Harvard University Professor, showed that Intel and Microsoft, suppliers of established PC companies, captured most of the PC industry value in the 80s, to the expense of IBM the leading PC player of the time. In other words, companies are not only competing with direct competitors to capture industry value. Therefore, equating corporate strategy to war assumes that:
- 1/ firms only have one competitor, which is incorrect.
- 2/ firms only compete with direct rivals, which is incorrect because they are competing with suppliers and clients to capture industry created value
IV/ Definition of strategy number 4: business strategy is like sports
Finally, I often come across newspaper articles in Europe and in the United States, drawing analogies between sports and business. And I hear about some very illustrious sport’s coach that has turned into a consultant advising senior management on their strategy. The analogy with sport is seductive, but, in my opinion is also flawed. It’s flawed because again it provides and it conveys the idea that you’re playing against one single opponent. Plus it conveys the impression that time is short: in a soccer game, for example, a game will only last 90 minutes. But in business, some companies have been competing against one another for decades and, in some cases, centuries. In addition, in sports you’re playing according to specific set of rules. This is less true in business where the rules are much broader and much more multidimensional.
So, these are all the different definitions of strategy I’ve been hearing about in the last few years. Given that there are stark differences between these definitions, I have the impression that there’s no coherent definition of what strategy really means. Yet, next week, I’ll provide some ideas as to what it could mean.
Have you heard any other definitions of strategy? What are they? Would you like to provide a definition of strategy? If so, what would it be?
- What is strategy ? by Michael Porter
- For a great presentation of common misconceptions of strategy, please refer to Joan Magretta’s Understanding Michael Porter, Part 1, Chapter 1
- For a presentation of the implications of misunderstanding strategy, please refer to Michael Porter’s conference at HEC.
- For a presentation of how leading companies can fail due to disruptive innovation, please refer to Clayton Christensen’s presentation at BoxWorks
- For a presentation of why a strategy should tell a story, please refer to Jorge Barba’s post