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THE CONCEPT OF STRATEGY

Chapter 1

The Nostalgia of the Poet  
The Nostalgia of the Poet (La Nostalgie du počte), 1914. Oil and charcoal on canvas, 89.7 x 40.7 cm. Peggy Guggenheim Collection. 76.2553 PG 65. Giorgio de Chirico © 2000 Artists Rights Society (ARS), New York/SIAE, Rome.

 

THE BEGINNING OF NATURAL COMPETITION THE BEGINNING OF STRATEGIC COMPETITION
THE UNDERLYING PRINCIPLES AND OBJECTIVES OF STRATEGY THE BEGINNING OF A GENERAL THEORY OF COMPETITION
TRIALS AND ERRORS OF CONCEPTUAL DEVELOPMENT THE EMERGENCE OF EXPLICIT BUSINESS STRATEGY
FRFROM STRATEGY TO STRUCTURE THE DILEMMA OF DECENTRALIZED STRATEGY
THE APPROACH TO A CRITICAL MASS OF KNOWLEDGE THE INTEGRATION OF STRATEGIC KNOWLEDGE
TIME COMPRESSION BY STRATEGY STRATEGY AND THE FUTURE

 

 

THE BEGINNING OF NATURAL COMPETITION

 

Competition existed long before strategy. Competition began with life itself. The first one-cell organisms required certain resources for maintenance of life. When those resources were adequate, then each generation became greater in number than the preceding one. If there had been no limitation on required resources, then exponential growth would have led to infinite numbers.

But as life evolved, the single-cell life form became a food resource for more complex life. With increasing complexity, each level became the resource for the next higher level. When two competitors were in perpetual competition, one inevitably displaced the other, unless something prevented it. In the absence of some counterbalancing force to maintain a stable equilibrium between the two competitors by giving each an advantage in its own territory, only one competitor survived.

In this way a very complex web of competitive interaction developed. It required millions of years. Now there are more than a million distinct species which have been catalogued, and there are believed to be millions more such variations of species as yet unclassified. Each has a unique advantage in competition for its required resources within its particular niche of the environment.

Since each of these competitors must be unique, the abundance of variations must match an equal variation in potential factors which define an environmental niche, and the varied characteristics in the environment which make each combination effective. The richer the environment, the more severe the competition is and the greater the number of competitors. Likewise, the richer the environment, the smaller the differences between competitors.

This is quite consistent with recent biological research. Experimental laboratory ecologists discovered in the 1930s and 1940s that if one puts two similar species of small organisms together in a bottle with food and uniform substrate, only one species can persist.

The observation that coexisting species in nature do differ ecologically and that species must differ ecologically to coexist in bottles led to Gause's Competitive Exclusion Principle: "No two species can coexist who make their living in the same way."

 

For millions of years natural competition involved no strategy. It was natural selection, adaptation, and survival of the fittest. Random chance determined the mutations and variations which survived and succeeded to compound their numbers. Those who left relatively fewer offspring became displaced. Those who adapted best displaced the rest. Physical and structural characteristics adapted, but behavior adapted also and became embedded in their instinctual reactions.

The awareness of natural competition as a systematic effect is centuries old. Thomas Malthus quoted Benjamin Franklin's observation about the crowding out of natural competition. Charles Darwin himself credited Malthus with the insight. Alfred Wallace and Darwin, separated by thousands of miles, simultaneously developed the concept of natural selection by competition. Darwin emphasized repeatedly the overriding importance of competition. It is awesome in its potential for evolution.

As far as we know, only primates possess imagination and the ability to reason logically. But without these qualities, behavior and tactics are either intuitive or the result of conditioned reflexes. Without these capabilities, strategy is impossible. Strategy depends upon the ability to foresee the future consequences of present initiatives.

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THE BEGINNING OF STRATEGIC COMPETITION

Strategy in its most elementary form most likely developed when the hunting party was formed by early humans to capture large game which could not have been handled by a single individual. But this was hardly true strategy. The quarry itself could have no counterstrategy, only its instinctive behavior. True strategy was probably first practiced by one tribe attempting to take over the hunting grounds of another tribe.

For strategy to be possible, it is necessary to be able to imagine and evaluate the possible consequences of alternate courses of action. But imagination and reasoning power are not sufficient. There also must be knowledge of competition and the higher-order effects that are characteristic of alternative actions. That knowledge must reach a critical mass before it becomes really significant. Until enough knowledge has been integrated to see the whole pattern, knowledge is no more than the individual pieces of a jigsaw puzzle. The basic requirements for strategy development are:

- A critical mass of knowledge

- Ability to integrate all of this knowledge and examine it as an interactive dynamic system.

- Skill at system analysis sufficient to understand sensitivity, time lags, and immediate and future possibilities and consequences.

- Imagination and logic to choose between specific alternatives.

- Resource control beyond immediate needs.

- The will to forgo current benefits in order to invest in the future potential.

 

Simple as these requirements may seem, they are absent in natural competition. Strategic competition requires an ability to understand the dynamics of the complex web of natural competition. The value of strategy in competition comes from developing the potential to intervene in a complex system with only a limited input and thereby produce a predictable and desired change in the system's equilibrium.

 

Strategy, as a concept, probably emerged in connection with military operations. All the elements that make strategy valuable are present in military encounters:

- Finite resources.

- Uncertainty about an adversary's capability and intentions

- Irreversible commitment of resources

- Necessity of coordinating action over time and distance

- Uncertainty about control of the initiative.

- The critical nature of the adversaries' mutual perceptions of each other.

History books tend to tell us the sequence of events and who won a war. They tell us less about why the initiator thought it was worth taking the risk and even less about the strategy of each adversary. Strategy is often not clear or obvious even with the benefit of hindsight. Sun Tsu, a general in 500 B.C, said it well: "All men can see the tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved". The history of strategy is rarely more than rationalization.

There are many analogies between business and military strategy. One in particular is quite important: visible conflict is only a periodic symptom of a continuing effort on the part of each to manage a dynamic equilibrium between adversaries.

Visible "hot" wars are the result of instability in the competitive relationship. This instability is subtle and complex. It is not easily seen or easily understood. There are two basic reasons for this instability. First, no one logically starts a war unless the inevitable destruction to both adversaries is more than offset by the combination of favorable odds and potential positive net payoffs. Second, many of the events that lead to a progressive destabilization of equilibrium are emotional and not necessarily logical.

The aggression which is inherent in warfare is unavoidably destructive, but the outcome may seem to be potentially valuable enough to at least one party to justify the initiative.

The relationships of geopolitical strategy are more comparable to business strategy than the battles which usually mark the turning points in military conflict. The ideal ultimate objective for both participants is stability with peace and greater prosperity on a sustainable basis.

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Untitled  

 

Untitled, 1958. Oil on paper, mounted on Masonite, mounted on wood, 58.5 x 74 cm. Peggy Guggenheim Collection. 76.2553 PG 158. © 2001 Willem de Kooning Revocable Trust/Artists Rights Society (ARS), New York.

 

THE UNDERLYING PRINCIPLES AND OBJECTIVES OF STRATEGY

Many of the basic principle of strategy have been distilled from warfare. Liddell Hart, the military historian, stated some basic principles:

The true aim is not so much to seek battle as to seek a strategic situation so advantageous that if it does not of itself produce the decision, its continuation by a battle is sure to achieve this.

But we can at least crystallize the lessons into two simple maxims - one negative, the other positive. The first is that, in face of the overwhelming evidence of history, no general is justified in launching his troops to a direct attack upon an enemy firmly in position. The second, that instead of seeking to upset the enemy's equilibrium by one's attack, it must be upset before a real attack is, or can be successfully launched.

The principles of war, not merely one principle, can be condensed into a single word - "concentration". But for truth this needs to be amplified as the "concentration of strength against weakness".

Others have spoken on the subject:

The whole art of war consists in a well-reasoned and extremely circumspect defensive, followed by a rapid and audacious attack [Napoleon]

 

Supreme excellence consists in breaking the enemy's resistance without fighting. Thus the highest form of generalship is to baulk the enemy's plans; the next best is to prevent the junction of the enemy's forces; the next in order is to attack the enemy's army in the field; the worst policy of all is to besiege walled cities [Sun Tsu].

In all fighting, the direct method may be used for joining battle, but indirect methods will be needed in order to secure victory.

The most complete and happy victory is this: to compel one's enemy to give up his purpose, while suffering no harm oneself. [Belisarius]

 

The underlying concepts of strategy involve the allocation and concentration of resources, the need for communication and mobility, the element of surprise, and the advantage of the defense.

However, military strategy concept revolve around the assumption that open battle has already begun. Hart introduced the concept of "grand strategy" - the plan for securing and stabilizing the peace for which the war is fought. This is an aspect of strategy which is of the greatest importance to business. Business strategy must manage a constantly shifting dynamic equilibrium with multiple competitors.

For business, as for nations, continued coexistence is the ultimate objective. It is not the elimination of the competitor. The purpose of the strategy in both peace and war is a future stable relationship with respect to the competitors on the most favorable possible terms and conditions.

The emergence of grand strategy concepts for business has been severely handicapped by the lack of a comprehensive general theory of dynamic competition. Only in game theory has a systematic and methodical approach been developed. But a general theory of competition now appears possible and imminent.

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THE BEGINNING OF A GENERAL THEORY OF COMPETITION

There has always been conflict and competition for scarce resources. Strategy has been practiced whenever an advantage was gained by planning the sequence and timing of the deployment of resources while simultaneously taking into account the probable capabilities and behavior of competition. But the insight about this experience has rarely been integrated conceptually as a competitive system.

Many aspects of competition were explored in great depth but rarely as a dynamic system in equilibrium. The natural field of study which should have been expected to generate such insight was economics. For whatever reason, philosophical constraints on assumptions and their implications were biased, and economics earned the name of the "dismal science". It remained for a most unlikely discipline, biology, to develop the foundation of a general theory of competition. However, this began to emerge after considerable progress had already been made in the field of business strategy development.

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TRIALS AND ERRORS OF CONCEPTUAL DEVELOPMENT

The history of conceptual insight of the general public in the United States into the economic system can, to some extent, be judged by the evolution of the antitrust laws and the implicit assumptions embedded in them.

The antitrust laws were precipitated around the turn of the century by Standard Oil's efforts to integrate. Their tactics were to concentrate on a local competitor and undersell until it capitulated. In the absence of competition, Standard Oil could thereafter charge higher prices to recoup its losses. As strategy, it was excellent short-term. As grand strategy, it was flawed. It caused second-order effects which were very damaging.

Since the turn of the century, the antitrust laws have been interpreted and reinterpreted by the courts in the light of past and current concepts of competition. The evolution of theory represented the gradual development of generally accepted models of competitive behavior. Unfortunately, these competitive models were highly theoretical and simplistic. They were also based on untested and dogmatic assumptions.

Semantics played an important role. "Perfect competition" became a goal. Perfect competition was meant to describe an idealized situation in which all competitors were so small that no one individual competitor could have any perceptible effect on supply or demand and therefore on price. No situation of this kind has ever existed except for very short periods. Such a situation is inherently unstable. But all alternative models were labeled "imperfect competition."

The conceptual model developed through court interpretation was quite simplistic. Although scale effects and their inherent instability were recognized, they were brushed aside. A never-tested assumption that optimum scale is only a fraction of industry size was necessary for the presumption that multiple competitors are in stable equilibrium. The assumption that all cost-versus-scale curve are L-shaped or U-shaped was also a fundamental premise for competitive equilibrium to exist without monopoly. Assumptions were made that within a generalized industry all competition is essentially head to head.

These assumptions were further compounded by confusion as to whether the objective was to protect competitors from each other or to protect competition as a concept. And, of course, all of the assumptions were made within the constraints imposed by legal concepts of property and social organization.

Such constraints were simplistic enough to sharply distort a realistic view of the nature of competition. As a consequence, substantial inhibitions were created in the business community toward the usage of certain words and phrases like "dominate," "preempt share", "capture Market", and "match price".

In and of itself this was minor compared to the inhibitions created with respect to the thinking about competitive interaction between specific pairs of competitors. Yet the interaction between specific pairs of competitors who vie for specific needed and scarce resources is the essence ofstrategy.

This is a generic problem inherent in any strategy. Characteristically for any competitor there are many such pairs of competitors to be dealt with simultaneously. The realities of competition forced business leaders, often as a matter of course to think in such terms. But the effect was to suppress open discussion and conceptual development of business strategy except in a peripheral way.

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…Whose Name Was Writ in Water  

 

…Whose Name Was Writ in Water, 1975. Oil on canvas, 76 3/4 x 87 3/4 inches. Solomon R. Guggenheim Museum, By exchange. 80.2738. © 2001 Willem de Kooning Revocable Trust/Artists Rights Society (ARS), New York.

 

 

THE EMERGENCE OF EXPLICIT BUSINESS STRATEGY

Strategy, by its very nature, is like a poker game and not subject to accurate reconstruction by either kibitzers or historians. However, there are a few classic examples such as the General Motors segmentation strategy developed by Alfred P. Sloan against Ford's Model T. But this occurred in the early 1930s. Soon after, the focus was centered on war efforts. To a considerable extent, the emergence of concepts of business strategy can be traced to the late 1950s and the early 1960s.

Several streams of thought converged to produce the focus on business strategy that blossomed in the 1970s. These included:

- The problems of strategy development within a complex organization.

- The problems of strategy execution within a complex organization.

- The problems of information in a complex organization.

- The problems of control in a multiple business organization sharing common resources.

Many of these were foreshadowed by the development of the giant organizations and trusts of the early twentieth century which precipitated the antitrust laws. In the United States many of these were monolithic, single-industry, narrow-range product organizations. The conspicuous examples were the oil and steel companies. The automobile companies were close behind. Characteristically, scale was a critical factor.

However, the multiproduct companies were simultaneously beginning to emerge. The electrical manufacturing companies which had their birth in the latter part of the nineteenth century were inherently multiproduct.

Although examples of large multiproduct companies had emerged in Europe even earlier, the European environment was different from the the American environment. Consequently, the multiproduct companies in Europe had different characteristics.

When small countries are constrained by trade barriers at their boundaries, then the trade market area is inherently small. Large scale could only come from multiple product companies in small countries. Banks and banking institutions constituted the only source of capital for most concerns. Frequently such financial institutions were large equity owners.

In such countries, the interaction among the financial institutions and between them and the government tended to inhibit freewheeling competition. In such small markets specialization produced very small scale. The generalist had an advantage. Short distances prevented the growth of regional competitors who were isolated initially but who, with increasing infrastructure and transportation capability, later became competitors in other regions.

In the early twentieth century, when Japan abandoned its policy of self-imposed isolation, the same pattern emerged. However, in the United States a quite different pattern developed which, instead of inhibiting competitive strategy, required it.

A vast and growing market without barriers or regulation except logistics, the US market favored the generalist initially but forced specialization as the market density increased. A large and dense market offers economies of scale to the specialist. But increased specialization on a national scale also means increased competition with finer and finer subdivisions of the market into competitive segments. The ability to define those competitive segments, determine who sets the boundaries, appraise the potential within those boundaries, and assess the opportunity for redefinition of boundaries becomes ever more valuable. In the Untied States, the need for strategy increased even though the understanding of it did not.

Unlike those in Europe and Japan, the banking institutions of the United States were often unstable and highly fragmented until well into the twentieth century. This removed a major influence from the development of competitive growth patterns and imposed much of the responsibility for financing growth or success back upon the earnings retained in the business. The absence of an income tax on corporate earnings greatly increased the degree of competition and the need for internal financial resources. In some measure, this laid the foundation for multiproduct companies such as Westinghouse and General Electric, which, in turn, presaged the conglomerates that developed following World War II.

In all strategy the ultimate objectives tend to be access to and control of the required resources. For business this almost always includes money, supplies, markets, and recruits. Money, or its equivalent, comes first. This may have been the underlying cause of the development of the multiproduct or conglomerate form of company.

The multiproduct form of organization is particularly well suited for continual growth of a business organization in the same way that a multigeneration family pattern is well suited to propagation of the species over time. The impact of this is almost entirely in capital formation and reallocation rather than in marketing, manufacturing, or technology. Those business areas which succeed and reach full potential are characteristically unable to reinvest in themselves at rates equal to their capital generation. Conversely, they are well positioned to finance the young, rapidly growing segments of their company which offer investment potential far in excess of any possible capital self-generation.

An additional area of potential for the multiproduct company was sharing of experience and scale across related but not identical products and services even though the competitive segments served by the products were different. This, too, was greatly facilitated by the absence of any income tax complications on the internal expense financing as well as the lack of the inherent overhead in external financing and other supply interfaces.

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FROM STRATEGY TO STRUCTURE

All of these factors made the United States a seedbed for productivity increase. But this very dynamism and complexity increased the importance of a conceptual framework for strategy development rather than an intuitive base for resource deployment and management. Tactics can be learned from experience, but strategy cannot. Strategy is nonobvious management of a system over time. Good strategy must be based primarily on logic, not primarily on experience derived from intuition.

Perhaps the greatest insight into the complexity of the management of the large corporation was provided by Chester Barnard in his book The Functions of the Executive [Harvard University Press, 1968]. Alfred D.Chandler and Stephen Salsbury later provided additional insight into the relationships between strategy and structure in Pierre S. Du Pont and the Making of the modern Corporation {Harper & Row, 1971]. Alfred P. Sloan also revealed some of his strategy concerns in My Years with General Motors [Doubleday, 1972].

The foundation of Sloan's success with General Motors' management was divisional autonomy with central control combined with the separation of policy and operations. However, the emergence of structural and organization problems and their connection with strategy were foreshadowed prior to World War II.

Both Westinghouse and General Electric changed from functional control by central management to profit center management prior to World War II. But it was not until the early 1950s when General Electric, under Ralph Cordiner, carried the profit center concept to extremes, and General Electric became identified publicly as the pioneer and leader of this structural architecture which rapidly became widespread.

However, profit center organization soon began to reveal some problems. Carried to one extreme, there was no function for central management except as an interface between the company and the banks and tax collector. At the opposite extreme, the profit center was only a symbol. The proliferation of corporate staff and the leverage of its influence effectively wiped out the independent profit center as a functioning unit. The parallel with the king and his troubles with the barons suggests that the problem is not a new one.

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THE DILEMMA OF DECENTRALIZED STRATEGY

In large-scale, diversified, multiproduct companies it was impractical for central management to be familiar in depth with each business, each product, each competitive segment, and each unit's implied strategy. This led to more and more reliance on short-term financial control measures. This, in turn, rapidly led toward more short-term suboptimization of results.

The inevitable short-range viewpoint induced by quarterly profit measurements as the prime control often confined profit center management to tactical resource management only. In such a context, there also was little real management judgment possible at the corporate level with respect to overall strategy except with regard to financial policy. This conflict between strategy and structure may account for a company such as Westinghouse having been a pioneer and technical leader in products that ranged from automobile generators to television tubes to silicon transistors and integrated circuits yet enjoying no success in these products. On the other hand, when the developments were clearly strategic enough to threaten the core business of the company, Westinghouse became a world leader in such developments as alternating current machinery and, later atomic power.

By the late 1950s it was becoming obvious that something more than profit centers or profit centers with large corporate functional staffs were needed. The corporate staffs tended to regard themselves as the real source of policy and direction in much the same way that government agencies do. In the same fashion, large corporate staff represented a heavy drain on the time, energy, and initiative of operating unit management.

Later this dilemma was to encourage the development of long-range planning and then strategy development. Before that period, however, the "five-year plan" became the centerpiece of performance measurement and control. The use of such a forecast became widespread.

Although five-year plans provided a basis for discussion, they were almost a charade. The budgetary process and the five-year plan became almost inseparable. In the absence of an integrated, coherent strategy based on system analysis and coordinated planning, it was inevitable that five year plans could be no more than forecasts which were then frozen into budgets.

The characteristic five-year plan promised results that were based on a somewhat higher price realization forecast, somewhat higher market share forecast, and a somewhat lower cost forecast. They were revised annually to reduce the forecasted performance overall, yet to maintain a trendline forecast of ever higher achievement.

Such a pattern was inevitable in the absence of a fundamental strategy as the basis of the plan. There is no reason to expect a change in competitive equilibrium without a plan to cause it to happen. Incremental improvement in costs can be expected on the basis of the experience curve phenomenon. Most companies have long records of such reductions. So do their competitors. How can an improvement in long-term performance be forecast in the absence of a prediction of a differential change in competitive capability?

Five year plans evolved into hoped-for goals rather than significant shifts in competitive relationships. This was the common situation when the concept of long-range planning first emerged.

In spite of all the research into business administration and the functional aspects of business, all of the exploration of competitive situations by consulting firms, and a few books on the planning process such as those by George Steiner, there were no organized efforts to explore and develop an approach to the subject until Standford Research Institute developed the Long Range Planning services in the early 1960s.

The SRI Long Range Planning Service was in no sense a strategy approach for a given company; nor was Arthur D. Little's Service to Investors, which was quite similar. In both cases the firms drew on their breadth of knowledge of technical process to evaluate the development of the market itself. To do this well required some assessment of the competitive system as a whole and its behavior for specific sectors.

At about the same time, the word "development" came into rather common usage. The corporate staff position of director of corporate development began to appear in announcements in the press. The duties and responsibilities of such positions were highly variable. But the duties were apparently to evaluate the position and direction of the company as a whole in order to develop alternatives which held promise of leading to more desirable scenarios.

Another title, director of planning, soon appeared. Then in some companies the title director of strategic planning emerged. This somewhat ambiguous and redundant title served a purpose. It was an indication of a focus gradually shifting toward strategy as a concept. Although the role itself has never been clear, the value of staff work in preparation for strategy development has achieved increased recognition.

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Apropos of Little Sister  

 

Apropos of Little Sister, October 1911. Oil on canvas, 28 3/4 x 23 5/8 inches. Solomon R. Guggenheim Museum. 71.1944. Marcel Duchamp © 2001 Artists Rights Society (ARS), New York/ADAGP, Paris.

 

 

THE APPROACH TO A CRITICAL MASS OF KNOWLEDGE

By the mid-1960s, many of the pieces needed for the development of business strategy were in place. Although Morgenstern and von Neumann's studies of game theory were directly applicable when published in 1953 and Jay Forrester's studies of the feedback loops and higher-order effects of dynamic systems were very substantial insights into the possibility of quantitative modeling of competitive interaction, these studies were somewhat before their time in terms of being integrated with other concepts. There was still nothing resembling a general theory of competition. Acceptance of the "perfect competition" theory of micro-economics was still widespread.

In the mid-1960s observations by The Boston Consulting Group brought into question some of the underlying assumptions of "perfect competition". BCG made the first presentation to a client of projections and recommendations based on the experience curve effect in 1966. During the next fifteen years, this characteristic cost-behavior pattern became conventional wisdom in business in most of the developed countries. Even government regulators,whose policies had been based on incompatible assumptions, conceded its validity although they continued to argue about its eventual application.

The experience curve theory postulated that in complex products and services, costs corrected for inflation typically decline about 20 to 30 percent each time total accumulated experience doubles. This was a statement of pragmatic observation easily observable and testable. The simplicity of the statement, however, did not reveal the complexity of the interaction. Nor, if this were typical, did the far-reaching implications become obvious at first.

The learning curve had first been observed in the 1920s. During World War II it had been observed repeatedly in the labor hours required for building aircraft. However, the characteristic cost declines from learning applied to labor hours were far less than the observed cost declines in the total cost as expressed in the experience curve.

Some reflection makes it obvious that all cost components do not go down in cost at equal rates. This means they follow different cost decline rates. They share different amounts of experience with other uses. The end products for different uses have differing elasticities. Substitution of cost elements is not only possible, it is also inevitable. That is probably why the experience curve is so much steeper in its cost decline than the learning curve. There were many years between the recognition of the learning curve phenomenon and the far-reaching implications of the same pattern with respect to overall cost as seen in the experience curve.

All costs and cost effects, except inflation, are included in the experience curve. This includes cost of capital and scale effects. Ordinarily these effects are obscured by accounting conventions which try to match expenditures with revenue over long time spans. The experience curve is an exponential smoothing of the ratio of cash flow to output.

Conventional accounting treatment of experience-related costs such as R&D, advertising, and staff development is impossible to couple with cash flow because of the uncertainty of the effect both on timing and in the amount of output that eventually leads to revenue. All accounting is consequently either a forecast or a smoothing model. The experience curve, however, is the rate of change in cash flow expenditures plotted against accumulated units of output. In this form it, too, is an exponentially smoothed curve.

The significant facts have far-reaching implications:

- The experience curve costs are a reasonably accurate approximation of cash flow versus volume.

- These curves apparently never turn upward in cost.

- Market share soon becomes a direct surrogate for experience.

- If the growth rate is constant, so is the rate of cost decline.

- Individual competitors tend to follow parallel, but not congruent, cost slopes if their market shares remain stable.

The experience curve is only a schematic pattern for normative behavior. But if the experience curve is representative, then the stability of competitive relationships postulated in the concept of "perfect competition"could never exist; nor could the basic assumption of conventional microeconomic theory that all cost-versus-volume curves are L-or U-shaped and turn up for below available market volume.

The strong and long-held convictions about "perfect competition" and "cost curve shape" had a reason. Without those assumptions, competitive stability would be very improbable under any circumstances. The whole foundation for public policy and conventional strategy analysis would otherwise disappear.

There is nothing to take the place of such theory without acceptance of the idea that every competitor is uniquely superior and dominates his competitive segment as a virtual monopolist. Later insights from other sources were to demonstrate that this was probably literally true. But acceptance of such radical notions takes time. It was a dozen years before understandable and acceptable alternatives for business use came into the open.

There is, or should be, a direct functional relationship between market share and cost which is, in effect, a relationship between cash generation and market share, of which the following are true:

- A business requires cash to invest in its assets as it grows.

- A rapidly growing business will require very large amounts of investment, usually more than it can finance from retained earnings.

- A slowly growing successful business cannot continually reinvest in itself faster than it grows.

The simple implication is that a corporation is a portfolio of businesses, each of which has differing cash needs and differing cash generation capabilities. But the corporation as a whole must be consistently within certain bounds in its cash flows.

The growth-share matrix developed by BCG led to a whole category of colloquial expressions for differing combinations such as "star", "cash cow", "question mark", and "dog", which became part of the business vocabulary.

Several other consulting firms developed their own versions of the relevant tradeoffs and combinations. The best-known was McKinsey's tradeoff of industry attractiveness versus the company's own competitive strength. This more generalized matrix accurately reflected the large number of variables which needed to be integrated into a realistic analysis. However, it gave no indication or guidance on the relationships or how they integrated, but contented itself with pointing out the implications of certain combinations of appraisals.

The BCG model was based on a far more logical and quantitative set of relationships. But it too was dependent upon accuracy and precision in defining relevant markets and evaluation of market shares.

Neither of these displays was really useful except as a guide to a logical way of thinking about competitive relationships. But they were a step toward the concept of a model of competition as an interactive dynamic system.

All of these hypotheses and constructs were the subject of considerable discussion which eventually included the academic community and particularly the leading graduate schools of business. While these ideas were still controversial, they were included in case materials and class discussions and argued in academic journals.

Harvard Business School meanwhile became deeply involved in a project which had originated at General Electric under Dr.Sidney Schoeffler. Professor Robert Buzzell and Dr.Schoeffler succeeded in using computerized data from multiple sources to correlate the relationship between various factors and profitability. The system became widely known as PIMS, an acronym for Profit Impact of Market Strategy. [see appendix, "The PIMS Program].

The PIMS program provided many interesting insights and the basis for a number of hypotheses. One in particular was quite timely. The correlation between market share and profitability was demonstrated beyond any reasonable doubt.

Even in the late 1970s, however, no general theory of competition had been developed. There was no integrating concept.

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Simultaneous Windows (2nd Motif, 1st Part)  

 

Simultaneous Windows (2nd Motif, 1st Part), 1912. Oil on canvas, 21 5/8 x 18 1/4 inches. Solomon R. Guggenheim Museum, Gift, Solomon R. Guggenheim. 41.464. Robert Delaunay © 2001 L&M Services B.V. Amsterdam.

 

THE INTEGRATION OF STRATEGIC KNOWLEDGE

 

There was not even a credible hypothesis to replace the suspect reference provided by traditional concepts of "perfect competition". However, a potentially revolutionary conceptual insight was about to become the subject of general discussion. Its source was a most unexpected one" biology - and more specifically, sociobiology.

In retrospect, it is clear that a number of books had been published during the preceding period which cast a great deal of light on the potential of a general theory of strategy and competition. Some of these, such as Antony Jay's Management and Machiavelli[Holt. Rinehart & Winston, 1968], Robert Ardrey's African Genesis[Atheneum, 1971], and Desmond Morris's The Naked Ape [McGraw-Hill, 1967], seemed more like popular bestsellers than the cutting edge of the state of the art.

However, some were quite relevant to the hypothesis of the disciples of ethology, an emerging branch of biology. The significance of this inquiry was emphasized when Konrad Lorenz, author of On Aggression [Bantam, 1967]and Studies in Animal and Human Behavior [harvard University Press, 1970], received a Nobel Prize. His fellow Nobel laureate, Nikolaas Tinbergen, was working in the same field. Their writing and research, as well as the more popularized versions by Ardrey and Morris, were concerned with aspects of evolution and behavior. Inevitably all of this tended to include a large component of competitive behavior.

In 1975, after the expiration of the required years, the British War Office opened the classified files concerning World War II. Serious readers of these descriptions of "War by other means" may feel inclined to revise their entire concept of what happened in World War II.

The evidence was clear that the outcome of visible conflict depended upon highly subjective evaluations of intentions, capabilities, and behavior which would be invisible to all except those involved. This behavioral component of strategy is fundamental to its development and its execution.

All of the developments, insight, and theories of strategy up until 1975 were useful but merely part of a jigsaw puzzle in which the relationships of the parts were still unknown.

The advantage of hindsight may someday cause business historians to feel that 1975 was the turning of the tide: the beginning of the integration of a general theory of strategy and competition.

In 1975 Edward O. Wilson, A Harvard professor, published a landmark book entitled Sociobiology [Harvard university Press]. In this book he attempted to synthesized all that is known about population biology, zoology, genetics, and social behavior. The resulting foundation of a conceptual framework was based on the social behavior of species which were successful because of that behavior. Since the whole structure of the biological community is determined by competition for resources, this kind of analysis has many parallels for business.

Mankind as a species is at the top of the ecological chain, but is still a member of the biological community. Economics is only a subset of the behavior pattern of this species. Alfred Marshall pointed this out in his 1920 text, The Principles of Economics, when he said, "Economics has no near kinship with any physical science. It is a branch of biology broadly interpreted".

Wilson's synthesis is the closest approach to a general theory of competition which has yet been achieved. Business competition is a specialized form of this, but nevertheless it is subject to the same principles and part of the same conceptual framework. The parallels may lead to a further insight into a general theory of business competition.

There is, however, a special link between economics and sociobiology over and above the mere fact that economics studies a subset of the social behavior of higher mammals. The fundamental organizing concepts of the dominant analytical structures employed in economics and in sociobiology are strikingly parallel. [Hirshleifer].

The traditional core of compartmentalized economics is characterized by models that:

- Postulate rational self-interest behavior on the part of individuals who have preferences for goods and services.

- Attempt to explain these interactions among such individuals through the form of market exchanges under a fixed legal system of property and free contract.

Only a very limited portion of human behavior can be adequately represented by such self-imposed constraints. In recent years economics has begun to break through these self-imposed barriers. Hirshleifer suggests this when he says, "From one point of view the various social sciences devoted to the study of mankind, taken together, constitute but a subdivision of the all-encompassing field of sociobiology".

The factors of sociobiological analysis have proceeded so far that much of the results of research has become quite suitable for computerized analysis. There is considerable promise that within the next generation or so these sociobiological factors can be so well defined and quantified that analysis can be far more predictive than ever before. This is the hope and expectation that Wilson holds out.

The mathematical descriptions of niches by G. Evelyn Hutchinson in 1958, Richard Levins in 1963, and Robert H. MacArthur in 1968, 1970, and 1972 made the analysis of niches quantitative. These authors considered a resource spectrum with the niche for each species defined by its utilization function distribution along the axis of the resource it consumes.

Biological study of competition has a long history. But that history was punctuated with a flash of brilliant insight in 1859 by Darwin and Wallace, and then followed by more than three-quarters of a century of data gathering, and apparently little progress, until all of this knowledge began to come together in the third quarter of this century.

When Darwin delivered his paper On the Origin of Species to the Royal Academy of Science in London in 1859, it was a perspective from a mountain peak. It would be a long time before the outlines would be examined in detail. But some of his remarks can readily be translated from biological competition to business competition:

Some make the deep-seated error of considering the physical conditions of a country as the most important for its inhabitants; whereas it cannot, I think, be disputed that the nature of the other inhabitants, with which each has to compete, is generally a far more important element of success.

When we reach the arctic regions, or snowcapped summits, or absolute deserts, the struggle for life is almost exclusively with the elements.... When we travel southward and see a species decreasing in numbers, we may feel sure that the cause lies quite as much in other species being favored, as in this one being hurt.

As species of the same genus have usually, though by no means invariably, some similarities in habits and constitution, and always in structure, the struggle will generally be more sever between species of the same genus, when they come into competition with each other, than between species of distinct genera.

The biologists began to focus on relationships between species in the mid-twentieth century. There are millions of species, and they are all unique in their particular niche. This very fact raises the question about the nature of the forces that keep them in equilibrium with each other. Inevitably there is perpetual competition because many species use the same resources. In addition, many of the resources for one species are other species below them in the ecological chain.

Gradually a whole series of patterns of behavior and characteristic relationships emerged from this intensive research. The analogies to business competition are striking. In the absence of strategy, it is biological competition. As Marshall and Hirshleifer pointed out, economics is only a subset of the sociobiology of one species of the primates. However, the ability to use strategy is the ability to manage the natural competitive system by calculated intervention in order to produce predictable shifts in competitive equilibrium. For that to be possible, the characteristics of natural competition must first be understood.

Natural competition in the strict sense,as it is defined by Darwinian natural selection and evolution, contains no element of strategy. It is pure expediency - almost mindless at some stages. Instinctive needs that are urgent serve as the motivation. Day-to-day survival and cyclical procreation are the ultimate objectives.

This kind of competition by natural selection is glacially slow. It is trial and error: more mistakes than improvements will prove to be fatal. Over time, the more successful patterns must be immortalized and multiplied by the genes, while the mistakes must be diminished in future generation by the same process. It must be a slow process to succeed at all.

Natural competition can and does eventually evolve exquisitely complex and effective forms. Humanity itself is such an end result. But unmanaged change take many thousands of generations. Sometimes, perhaps often, change is too slow to cope with the combination of a changing environment and the adaptation of competitors.

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TIME COMPRESSION BY STRATEGY

By contrast, strategic competition is revolutionary, not just evolutionary. It is capable of extreme time compression. However, to accomplish this revolution, the preparation must be conservative, careful, precise, and all-inclusive. The environment itself must be well understood. The competitors who are critical or even important to the change must be equally well identified and understood. Then uncertainties in the environment must be carefully assessed and evaluated. The systematic interaction of competitors with each other and with the environment must be modeled and tested for sensitivity. This meticulous staff work must be continued until cause and effect become sufficiently predictable to justify the massive commitment of nonrecoverable resources.

The wild expediency of natural competition leads to glacial evolution. The meticulous conservatism of strategic competition leads to time compression and revolutionary change because strategy is the management of natural competition.

The biological model of natural competition provides illustrations of relationships which are of important in business competition:

- Every species [business] must be uniquely superior to all others in its chosen combination of characteristics which define its competitive niche or segment.

- The boundaries of a competitive niche are determined by the points where competitors are equivalent.

- At any given boundary line, there will always be a specific competitor who determines that boundary.

- The number of boundary competitors is determined by the number of possible tradeoffs between behavioral characteristics and capabilities which will provide a differential advantage over other competitors in that environment.

- The more variable the environment, the more combinations that may become critical.

- The more distinctly different resources needed, the more possible critical combinations exist.

- If any one factor is overwhelmingly important, only one competitor will survive.

If the biological pattern of natural competition is useful as a model, then the reality of the competitive system is quite different from traditional microeconomic models:

- Every competitor, whatever the role in the competitive system, requires certain resources to enable it to persist.

- In the absence of some constraint on those resources, every competitor would tend to grow to infinity.

- In almost every case the limit on growth, or size, is set by the ability of some competitor to preempt a significant part of the supply.

- No two competitors can coexist who make their living in the same way. Their relationship is unstable. One will displace the other. This is Gause's Principle of Mutual Exclusion.

- Except for the most elementary forms of life, the required resources are other forms of life or activity. This establishes a form of vertical equilibrium. The higher levels prey on the lower levels but cannot live without them. Excessive success is self-defeating.

- The horizontal competition between organisms or organizations combined with the vertical dependency on an ecological chain constitutes a community or web of relationships which is in dynamic equilibrium, but in which competition in all dimensions is perpetual.

- A stable relationship which permits both competitors to coexist requires each competitor to have a combination of characteristics in some segment or sector of the environment which permits it to be uniquely superior in that "competitive segment."

- The source of virtually all resources is elementary natural material. The conversion of these to the form of end use must necessarily be an ecological chain in which each link is the resource for the next higher level which is dependent on the continuation of all the lower level links.

Some analogies between sociobiology and business lead to testable and reasonable hypotheses:

- Pure chance provides an initial advantage to the first competitor to enter or define a competitive segment. The initial competitor becomes a part of the environment to be coped with by the next competitor who chooses to enter that specific arena.

- Definition of a new competitive segment requires that the differences between the specific competitors involved be sufficient to provide a distinct advantage for one of the competitors compared to all others in the competitive niche which is erected.

- If competitors are alike and equally capable, they cannot coexist. One will displace the other.

- Competitors who have distinctly different capabilities cannot coexist in the same competitive segment, but they can and will be in perpetual competition along the boundary lines where their respective competitive segments come into contact [the line of zero advantage].

- If there are few competitors and the market is thin, then the generalist has the advantage. The generalist can obtain a small amount of resources from multiple sources, but the thin market will support few specialists on an adequate scale to be effective competition for the generalist.

- Conversely, rich markets tend to eliminate generalists since the market can be subdivided into competitive segments, each of which can be dominated by specialists of significant scale and scope.

- The ability to grow rapidly when conditions are favorable, and to survive long periods of adversity when conditions are unfavorable, can be a critical combination that offsets superiority in many other respects if the environment is cyclical.

- Since size or scale often provides a significant advantage and size or scale is incompatible with many other characteristics, then an orderly distinction from small to large size is predictable when there is a diversity of factors that are important in a market or environment.

- Since distance and logistics are often critical factors, then both scale and total market size are factors that determine the number, size, distribution, and competitive segment boundaries where these factors are important.

- Since the variety of characteristics among competitors is matched by an equal or greater variety in desired or required resources, then every significant difference in customer preferences provides the possibility of subdivision into multiple competitive segments. This is dependent upon the capability to serve both segments simultaneously being incompatible with optimization of both.

- The characteristic fundamental resource segments for business are sources of:

- Money, either in capital or in ongoing revenue.

- Suitable skills, abilities, and individuals on an ongoing basis.

- Materials, supplies, energy, and components not contained within the

organization

- Knowledge and communication capability with respect to all external

resources and factors affecting their availability.

- Since multiple resources are always required, there will always be multiple competitors, each of which has characteristics that cause it to be the constraint on that specific resource availability.

- Each competitor for each resource will require a different combination of capabilities to be in stable equilibrium with competition.

- Adaptation to meet a specific competitor will often reduce the capability to offset another competitor.

- Any change in the environment will require adaptation of all competitors either to the environment, or to each other, or both. The equilibrium points between competitors will be shifted for all members of the community web of relationships.

This is the logic which describes the competitive system's major constraints. The complexity should be obvious, since it is inherent in millions of unique competitors in a moving but stable dynamic equilibrium.

For any specific individual competitor to use strategy, that competitor must be able to visualize the system's behavior and the competitor's own relationship to it. The fundamental requirements for such strategy development are:

- A critical mass of knowledge.

- The ability to relate this knowledge in the form of an interactive system.

- The capability of system analysis adequate to determine the probabilities of cause and effect for inputs that result in delayed higher-order effects.

- The orderly analysis of alternatives and tradeoffs to determine the optimum sequence and timing of reallocation of available resources.

- An adequate excess of resources beyond current needs to permit reallocation and the capability of tolerating deferral of benefits in order to compound them.

In business these basics must be converted into an analytical process which permits development of a specific strategy. There are six steps:

1] Self-examination to determine what is needed to achieve the organization's purposes and implicit goals. This will determine the combination of resources which will be required on a continuing basis.

2] Determination of which competitors are the obstacles to those specific resources.

3] Determination of the differences between a given competitor and each of those specific competitors which make each superior within its own competitive segments.

4] Determination of which combinations of what factors produce those differences in capability.

5] Mapping of the boundaries of "zero advantage" which determine the individual competitive segments.

6] Mapping of the competitive characteristic resources, behavior patterns, and alternatives.

At this point the strategy development process becomes highly analytical in an effort to assess the available alternative payoffs, risks, and odds. Because the possible combinations are nearly infinite, however, the final choice, like many business decisions, is essentially an intuitive one.

In spite of the enormous effort and attention devoted to this process, procedure, and conceptual framework during the past twenty years, it is still very much in an early stage of development. The task is even more complex than it appears to be.

Almost every corporate organization is composed of multiple businesses. This requires multiple but compatible strategies. The strategies must be compatible because, for a given company, all the business units draw upon a common base of resources. The different businesses may share certain capabilities in a synergistic fashion or in an incompatible or preemptive fashion. The company as a whole may have purposes and goals which override or are incompatible with those of the units.

The defender of a competitive segment normally has a significant advantage if alert and entrenched. The results of this is usually a "cold war" stable equilibrium between most competitors. This kind of equilibrium is conditionally unstable, that is , stable unless disturbed beyond a certain point. Skirmishing and testing of limits occurs continually on the boundary line.

Such a cold war stability depends on the acceptance by both parties that the odds of winning a hot war are insufficient to offset the inevitable losses and destruction of a" negative sum" payoff from such an escalation.

A company with multiple businesses has a multiple of the total resources available to a single business. However, it loses that advantage if the strategies of the individual businesses are not coordinated to preserve adequate uncommitted reserves if any individual business strategy contemplates escalation.

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STRATEGY AND THE FUTURE

Strategy development is still embryonic. But the rate of development of the conceptual base is very rapid and holds forth the promise of precision, elegance, and power within a reasonable time period.

Sociobiologist Wilson foresees the probability of the quantification of sociobiological behavior, even the computerization of analysis, within the next decade or so. In the same way, business strategy development should soon go through a period of rapid development.

As this happens, the problems of strategy execution will emerge as even more formidable and challenging. Here, too, there is promise that sociobiology will provide guides that will compress the time of accomplishment.

It seems almost certain that exponential growth in insight with respect to business competitive strategy will result in time compression for change. Those companies who are not able to learn, adapt, and apply these emerging insights at an accelerated rate are subject to Darwinian natural selection. In this context, the race will be won by the swift.

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Eiffel Tower  
Eiffel Tower, 1911. Oil on canvas, 79 1/2 x 54 1/2 inches. Solomon R. Guggenheim Museum, Gift, Solomon R. Guggenheim. 37.463. Robert Delaunay © 2001 L&M Services B.V. Amsterdam.