Journal of Business Strategy

A FRESH LOOK AT STRATEGIC MANAGEMENT

Frederick W. Gluck
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 A FRESH LOOK AT STRATEGIC
MANAGEMENT
Frederick W. Gluck
If c o r p o r a t e America's love affair w i t h 1970s-style strategic p l a n n i n g is not over, it is
certainly o n the rocks. Planning that relies on past experience, extrapolation, and
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incremental moves cannot meet today's challenges, such as u n e x p e c t e d c o m p e t i t i o n ,
saturated markets, and c h a n g i n g technologies.
There are many signs that planning as it devel
oped and prospered in the 1960s and 1970s is in
trouble. General Electric (GE), the pioneer in the
introduction of strategic planning in the 1960s and
the much-referred-to model of the strategically
managed company in the 1970s, has recently cut
its corporate planning staff from fifty-eight to
thirty-three and has cut the size of planning staffs
throughout the company substantially [14]. Doz
ens of other companies have made similar cuts.
Much planning theory is being attacked as well.
Methodologies once held in esteem are now being
challenged, even ridiculed.
Planningand plannersare being squeezed
by several forces. Business Week's cover story,
"The New Breed of Strategic Planner," reports:
"In a fundamental shift of corporate power, line
managers in one company after another are suc
cessfully challenging the hordes of professional
planners and are forcing them from positions of
influence" [14].
Frederick W. Gluck is a Director of McKinsey & Company, Inc.,
and a principal architect of its strategic management practice.
The author gratefully acknowledges the invaluable assistance of
Ellen Nenner in the research for and preparation of the article.
This article has been excerpted from the Handbook of Strategic
Planning, edited by James R. Gardner, Robert Rachlin, and H.W.
Allen Sweeny. The book is published by John Wiley & Sons, Inc.
Copyright 1985 by McKinsey & Company, Inc. Reprinted by
permission of Frederick Gluck and McKinsey & Company.
Commenting on the growing obsolescence of
middle management, a Fortune article argues that
"computerized systems lessen the need for in
formation gathering, a principal task of corporate
bureaucrats" [18]. More important, hopscotch-
ing the middle manager is a reflection of "the new
corporate fashion [which] calls for fewer levels of
authority, with each manager controlling more
people, and for participative management, with
decisions pushed to lower levels of the company,
and out into the field" [18].
Finally, a recent study of the planning function
in a cross-section of American corporations indi
cates that "CEOs are reassuming their leadership
responsibility . . . as the originators or focal
points of the corporate strategic planning pro
cess. The CEOs interviewed believe future eco
nomic success will depend to a large extent . . . on
a stronger, more proactive planning role for the
CEOone of chief strategic thinker and corpo
rate culture leader, rather than simply the apex of
a multi-layered organizational structure" [20].
What does all this restructuring and role chang
ing mean? Is it a passing fadpart of the anti-
rational, anti-analytical thinking now in vogue
or is it in fact a new era for management? The
facts suggest that these changes are here to stay,
and that chief executives are taking the steps
necessary to make their planning more relevant
and more effective.
 THE JOURNAL OF BUSINESS STRATEGY
Environmental Change and
Management Response
Consider the disruptions that have occurred in
the last decade or so: slower growth, intense
global competition, burgeoning automation, ob
solescence due to technological change, deregula
tion, an explosion in information availability,
rapid shifts in raw material prices, chaotic money
markets, and major changes in macroeconomic
and socio-political systems. The impact of these
discontinuities on industry after industry runs
broad and deep. Destabilization and fluidity have
become the norm in world business.
As a result, there are many, many more
strategic alternatives for all types of industries.
From switching device and check cashing
technologies to food and service outlet and steel
mill configurations, people are constantly coming
up with new ways of making products and getting
them to market. Those comfortable oligopolies
and monopoliesin banking, telecommunica
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tions, airlines, automobiles, to name a feware
disappearing. Barriers to entry are much more
difficult to maintain. Markets are open, and new
competitors are coming from unexpected direc
tions. Small enterprises are overcoming barriers
through automation and new technology, or by
unique sourcing or partnering arrangements.
Hardware businesses are becoming software or
systems businesses. Big companies are crossing
industry lines with new products and processes.
Competitors seem to come from everywhere, in
cluding across the oceans and, as Third World
skills improve, this trend is likely to accelerate.
Competition, in consequence, is not only palpa
bly more intense but unpredictable.
In almost every industry, many corporations
that were dominant in the 1960s ran into trouble
in the 1970s and are scrambling in the 1980s.
Fifteen or twenty years ago, the CEOs of these
companies spent most of their time operating
their businesses and planning for growth. Change
was the enemy. "No surprises" was the watch
word. Strategic planners had two main tasks:
analysis and implementation, which boiled down
to capital allocation. Resources were distributed
and businesses bought and sold on the basis of
financial analysis and creative accounting. If the
analysis was right, the correct strategy would pop
out automatically.
In contrast, the companies that capitalized on
the discontinuities of the 1970s viewed the world
differently. The CEOs of these companies saw
instability as an opportunity, not a threat. New
ideas, new technologies, new ways to meet cus
5
tomer needs, new distribution and sourcing strat
egies, and new modes of motivation were the
ingredients of their competitive success. They
accelerated change in their industries much faster
than the more traditional companies would have
done. And, to a large extent, much of the plan
ning of these companies was inextricably en
twined with execution. They were devotees of the
"do it, try it, fix it" approach.
Their success proved that analyzing and al
locating isn't enough when things are changing
fast. The effective planner in today's world can
not simply answer the question of what to do,
leaving the how to the line manager. He must be
able to work closely with line management,
synthesizing new ways to compete and building
the organization's capability and confidence to
see them implemented. David W. Keller, the
manager of strategic planning for GE's Aerospace
Business Group provides a case in point. Com
menting that the time he spends "pestering divi
sions and departments for information ordered by
corporate and sector offices has dropped about
90%," Keller goes on to explain: "People mired in
their markets are asking us how we can bring a
broader perspective to them in assessing their
new opportunities. . . . For example [we are]
helping managers of GE's simulation and train
ing business assess a possible move into the graph
ics market" [14].
Most corporations recognize the need for
changeat least intellectually. There is plenty of
rhetoric about the need for innovation, vision,
and leadership. But too often, real response has
been inadequate. Very few of the largest and
most successful corporations are able to rethink
the way they do businessto renew them
selveswhen the fundamental nature of compe
tition in their industries changes or new market
opportunities open up.
The New York Times, writing on the current
spate of American entrepreneurial activity, de
scribes it as "second only to the period . . . when
the United States shifted from an agrarian to an
industrial society." This was the era of the en
trepreneurial giants: Rockefeller, Ford, Carnegie.
"Between the two world wars," the article con
tinues, "entrepreneurial activities shifted to large
corporationsDuPont, Westinghouse, RCA and
General Electricwhich provided an umbrella
for the development of such dazzling innovations
as radio, television and nylon" [15].
Today, however, many, if not most, large cor
porations are so mired in bureaucratic red tape
and often unconscious prejudices about how
things ought to be done, that they find it almost
 6 THE JOURNAL OF BUSINESS STRATEGY
impossible to induce the kind of entrepreneurial
spirit required to develop the new businesses and
products they need for self-renewal. Further
more, the changes that so many large corpora
tions need in order to compete successfully are
threatening and potentially disruptive. Few like to
contemplate them except as a last resort, and
often that's simply too late.
Compounding these problems is the fact that
many companies misread the nature of the chal
lenges confronting them. They don't look at their
situation and the kind of change required in the
proper context. Often this is because those in a
position to make things happenthe general
managersaren't getting the raw information
they need. Or, top management is simply not
investing the time to really grapple with the impli
cations of how their customers, competitors,
markets, and technologies are changing. The re
sult may be a response that is inadequate or inap
propriate.
Take the steel companies, for example. They
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failed to see the need for reinvestment in more
modern equipment until late in the day, keeping
inefficient, outdated capacity open too long. They
didn't recognize the threat of European and
Japanese imports until response was difficult.
And they failed to anticipate the impact of
minimills. Granted, the U.S. steel industry has
come a long way up since its reckoning with these
problems at the end of the 1970s. But this is a
classic case of "too little, too late." What was
really needed was a fundamental change in the
way they both thought about and conducted their
business, not adaptation after the fact.
What does all of this mean for top manage
ment? In simple but realistic terms, it means that
business success in the 1980s and 1990s requires a
new kind of management thinking and behavior.
Management by remoteness, management by the
numbers, and management by exception are
dead. Management by involvement is in. Com
menting on the kind of management style that
breeds top performers, Business Week wrote re
cently of the "passion for competitive excel
lence" and the "fire that makes things happen at
companies such as the new-style GE under John
F. Welch, Jr. and at IBM under John R. Opel"
[17].
Many top managers either haven't quite re
alized that a new type of management is now
called for or are immobilized by the frightening
implications of that fact. The truth is, if major
corporations are to develop the flexibility to com
pete, they are going to have to make some major
changes in the way they go about planning and
managing, both at the top and in their operating
units.
To start with, top management will have to
assume a more explicit strategic decision-making
role, dedicating a large amount of time to deciding
how things ought to be instead of listening to
analyses of how they are. Second, the nature of
planning must undergo a fundamental change
from an exercise in forecasting to an exercise in
creativity. Third, planning processes and tools
that assume a future much like the past must be
replaced by a mind-set that is obsessed with being
first to recognize change and turn it into competi
tive advantage. Fourth, the role of the planner
must change from being a purveyor of incremen-
talism to that of a crusader for action and an alter
ego to line management. And finally, strategic
planning must be restored to the core of line man
agement responsibilities.
Strategic Planning in the 1970s
Looking more closely at strategic planning in the
1970s, it becomes clear why management that
relies on 1970s-style planning to win in the 1980s
and 1990s is doomed to failure. That planning
style is by and large retrospective in nature.
When things are stable, experience is a reliable
basis for decisionmaking and action. But we are
in a period of dramatic change. What determines
competitive advantage and how lasting it may be
is dependent upon the vagaries of a constantly
shifting economic order. Companies that con
tinue to rely on the past as the best guide to the
future get caught in the experience trapthey
become rigid in their thinking, set in their ways,
and lose the flexibility that is crucial to turning
change into opportunity or even effectively re
sponding to it. Reliance on experience becomes
the ultimate handicap in an environment that is
turning that very experience topsy-turvy.
Planning in the 1970s was dominated by three
key concepts: the experience curve, the strategic
business unit, and portfolio planning.
The Experience Curve
The experience curve was a derivative of the
learning-curve theory that arose from the obser
vations of the commander of Wright-Patterson
Air Force Base in Dayton, Ohio, in 1925. He
observed that production man-hours for airplanes
appeared to decline as cumulative production
volume increased. In the mid-1960s, Bruce Hen
derson, the founder of the Boston Consulting
 THE JOURNAL OF BUSINESS STRATEGY
Group (BCG), renamed the learning curve the
"experience curve" and elaborated on its rela
tionship to market share and competitive dynam
ics.
Simply stated, the experience curve hypothesis
holds that the relative costs of two competitors
are a function of their relative cumulative produc
tion volumes. From this it follows that the
market-share leader would enjoy an inherent cost
advantage over smaller competitorsan advan
tage it could exploit by setting industry price
levels to provide itself, but not its higher-cost
competitors, with a satisfactory return on in
vestment. Faced with either accepting an inade
quate return or losing market share, the com
petitors would eventually withdraw from the
market. Thusso the theory wentmanage
ment's strategic objective must be to achieve
market leadership by gaining market share dom
inance early in the life of a product and holding on
to it [2].
However, as Walter Kiechel observed in his
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Fortune article, "The Decline of the Experience
Curve," the real world did not prove to be so
simple. "[If the company was already a sig
nificant player in the market,] probably the
easiest first step was to cut price in the hope of
gaining share. The not infrequent result . . . was a
kick-'em, pound-'em, wrestle-'em to the ground
price war [with no real winners]" [11].
Then again, the market-share-based strategies
that were inherent in the experience curve con
cept ignored some fundamental facts. For exam
ple, William K. Hall in his Harvard Business Re-
view article, "Survival Strategies in a Hostile En
vironment," provides several examples of com
panies in mature industries that have enjoyed
high profitability in spite of low market share.
Hall writes: "High market share and accumulated
experience are not essential for cost leadership in
a mature market, as indicated by proponents of
the experience curve. . . . Four of the eight low-
cost producers in this studyInland Steel,
Whirlpool, Miller and Philip Morrishave
achieved their lowest cost positions without the
benefit of high relative market shares" [4].
Another major difficulty is that experience
curves don't just happen; cost decreases have to
be "managed." As Kiechel comments in his arti
cle, "Getting Amalgamated Widget's costs to
proceed down the curve was no easy matter. . . .
It required constant managerial attention
meeting productivity goals, pushing new technol
ogy, pruning superfluities" [11]. The concept also
presented mammoth problems when it came to
shared experience: Just how does one go about
7
breaking out and allocating costs shared by dif
ferent product lines?
While the experience curve concept was suc
cessful in getting management to focus on costs
and relative competitive position, which was all
to the good, its usefulness has proved limited. For
one thing, it is most appropriately applied when
products are sold on the basis of price alone
reflecting a rather narrow industry band. Fur
thermore, the curve is most valid in high-growth
eras when there's a good chance the market will
eat up all a company can produce and economies
of scale constitute a real, sustainable competi
tive advantage.
In almost every industry, many
corporations that were dominant in the
1960s ran into trouble in the 1970s and are
scrambling in the 1980s.
Alan Zakon, who now heads BCG, concedes
that the experience curve slipped into disfavor
when the world changed from a high-growth, "big
is beautiful" situation to a low-growth, "big
bust" situation [11]. And that's exactly the point.
In today's business environment, competitive
advantages that rely too heavily on economies of
scalein manufacturing or distributionmay no
longer be sustainable. Moreover, competitive ad
vantage cannot be achieved by attempting to de
fend a static technological position. The status
quo is under continual stress from the forces of
change. What leads to competitive success is dy-
namic or continual technological leadershipthe
ongoing ability to design, manufacture, sell, and
service products better than the competition.
Competitive advantage in the 1980s and 1990s will
have to be continually earned and renewed as
change becomes the norm. And top management
will have to ensure that the organizational flexibil
ity to develop new, critical skills is an ever-
present corporate characteristic.
The Strategic Business Unit
The notion behind the Strategic Business Unit
(SBU) concept, which McKinsey & Company
developed in its work with GE in the late 1960s,
was that a company's activities in the mar
ketplace ought to be understood and segmented
"strategically" so that key resources could then
 8 THE JOURNAL OF BUSINESS STRATEGY
be best allocated for competitive advantage. That
is, a company ought to be able to answer three
questions: What business am I in? Who's my
competition? What's my position relative to that
competition? Getting the "right" answer to the
first question was the hard part; once you got
that, it was a lot easier to establish who your
competition was, and how you stacked up against
it.
To be designated an SBU, businesses had to
meet the following specific criteria:
Have a unique business mission, independent of
other SBUs.
Have a clearly definable set of competitors.
Compete in external markets.
Be able to carry out integrative planning rela-
tively independent of other SBUs.
Be able to manage resources in key areas.
Be large enough to justify senior management
attention, but small enough to serve as a useful
focus for resource allocation.
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In simplest terms, an SBU had to look and act
like a freestanding business.
Top management will have to assume a
more explicit strategic decision-making
role.
The great strength of the SBU concept lay in its
focus on a management style that stressed the
strategic position of businesses and the selective
allocation of key resources for competitive ad-
vantage. It sought to do this through deep under-
standing of each of the company's businesses,
and the placement of these businesses into the
most relevant "strategic" units for purposes of
top-down objective setting, strategy review, and
resource allocation.
However, in actual practice, SBU definition
was enormously difficult, particularly in complex
organizations that shared such crucial resources
as R&D or sales.1 There was (and still is) no
simple, definitive methodology for isolating
SBUs. Although the criteria for designating SBUs
1
See Richard A. Bettis and William K. Hall, "The Business
Portfolio ApproachWhere It Falls Down in Practice," Long
Range Planning, Vol. 16, April 1983, for a discussion of the difficul-
ties of identifying independent SBUs in a diversified company and
the ramifications of this for SBU-based planning systems.
are clear-cut, their application is judgmental and
problematic. For example, in certain situations,
real advantages could accrue from businesses'
sharing resources at the R&D, manufacturing, or
distribution level. If autonomy and accountability
are being pursued as an end in themselves, these
advantages may be overlooked or unnecessarily
sacrificed. To further complicate matters, if man-
agement designates SBUs around each product/
market segment in order to develop a highly fo-
cused strategy, the result may be an unman-
ageably large number of SBUs. If, on the other
hand, SBU designation were restricted to a man-
ageable number, it would be difficult to arrive at a
strategic mission appropriate to all the businesses
that then made up any one SBU.
Portfolio Planning
The logical extension of the SBU concept was its
implementation as the basis of the corporate
planning process known as portfolio planning. A
variety of portfolio planning matrices were devel-
oped in the late 1960s and 1970s to help evaluate
the strategic position of a company's individual
businesses. All were based on the plausible postu-
late that if top management understood the rela-
tive attractiveness of the company's markets, and
its competitive strength in each, it would have a
sound basis for deciding where to invest its re-
sources.
Regardless of which portfolio matrix was used,
the process of portfolio planning was the same:
the firm's businesses (or products) were divided
into SBUs, which were then evaluated on a grid
or matrix that essentially measured the strength
of the SBU relative to its competitors and the
prospects for growth in the market for that prod-
uct (or business). Once the evaluation was made,
an appropriate "strategic mission" was assigned
to each SBU, and strategies developed to achieve
it. These strategic plans were, in turn, reviewed
by corporate management to ensure they accu-
rately reflected both the strategic mission as-
signed and the appropriate balance of cash and
resource flows.
The major difference among the various port-
folio matrices was the approach taken to deter-
mine market attractiveness and competitive posi-
tion. McKinsey took the position that the factors
determining market attractiveness and competi-
tive position varied by market and so had to be
factually developed for each market. The result-
ing multicriteria nine-box matrix was criticized
by some as overly complicated and cheered by
others as realistic and practical (Exhibit 1).
 10 THE JOURNAL OF BUSINESS STRATEGY
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Another version was the 2 x 2 growth/share
folio matrix developed by BCG. This matrix
as based on BCG's assumption that two
factorsgrowth and relative shareoutweighed
all others, and that a company's success de-
pended on a portfolio of businesses or products
representing mixed growth rates and market
share. Fundamental to the growth/share concept
was BCG's contention, based on experience
curve theory, that margins were a function of
market share; that is, high market share produced
high margins.
Still another matrix, developed by Arthur D.
Little, focused on market position and industry
maturity as the two best indicators of profit per-
formance. Finally, PIMS (Profit Impact of Market
Strategies), a multiple regression model originally
developed by GE and now a part of the Strategic
Planning Institute, related profitability to thirty-
seven business variables.
The fast-growth economy of the late 1960s and
early 1970s found management ripe for a planning
approach that would help deal with the prospects
and problems of diversity. The portfolio ap-
 THE JOURNAL OF BUSINESS STRATEGY 11

EXHIBIT 2
Determinants of Market Attractiveness

Return
on Total
Capital
Market Conventional Case Employed
Situation Wisdom Examples 1975-1979
1. Dominant Market leader gains: Goodyear: 7.0%
market share Premium prices 40% of U.S. tire market market
Cost advantages due to scale leader
and experience curve

Maytag: 26.7%
5% of U.S. appliance industry
niche competitor

2. High market High market growth allows European tungsten carbide 15.0%
growth companies to expand output industry:
without provoking price 1% annual growth
competition leading to higher
profits U.S. airline industry: 5.7%
13.6% annual growth

3. High barriers High barriers prevent new U.S. brewing industry is highly 8.6%
to entry entrants from competing away concentrated with very high
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previously excess profits barriers to entry

SOURCE: McKinsey analysis

proaches described above represented a real ad
vance in strategic thinking in several ways:
Portfolio planning encouraged top manage
ment to evaluate the prospects of each of the
company's businesses individually, to set tai
lored objectives for each business based on
the contribution it could realistically make to
corporate goals, and to allocate resources ac
cordingly.
It stimulated the use of externally focused,
empirical data to supplement managerial
judgment in evaluating the potential of particu
lar businesses.
It explicitly raised the issue of cash flow bal
ances as management planned for expansion
and growth.
Its verbal and. graphic language facilitated
communication across all levels of the organi
zation.
But portfolio approaches also have very seri
ous limitations, which are exacerbated by the
serious challenges presented by the economic
disruptions of the last decade:
As discussed earlier, it is not easy to define the
business or product/market units appropri
ately, especially when changing market condi
tions are blurring the boundaries between
them.
Most portfolio approaches are retrospective
and overly dependent on conventional wisdom
in the way they treat both market attractive
ness and competitive position. For example,
despite evidence to the contrary, conventional
wisdom suggests that:
Dominant market share endows companies
with sufficient power to maintain price
above a competitive level or to obtain mas
sive cost advantage through scale economies
and the experience curve. However, the re
turns for such companies as Goodyear and
Maytag show that this is not always the case
(Exhibit 2).
High market growth means that rivals can
expand output and show profits without hav
ing to take demand out of each other's plants
and provoke price warfare. But the experi
ences of industries as different as the Euro
pean tungsten carbide industry and the U.S.
airline industry suggest that is not always
true (Exhibit 2).
High barriers to entry allow existing com
petitors to keep prices high and earn high
profits. But the experience of the U.S. brew-
 12 THE JOURNAL OF BUSINESS STRATEGY
ing industry seems to refute that conven
tional wisdom (Exhibit 2).
Most portfolio approaches suggest standard
or generic strategies based on the portfolio
position of the individual SBUs. But these
kinds of responses can often result in lost op
portunities, turn out to be impractical or un
realistic, and stifle creativity. For example:
The standard strategy for managing "dogs,"
(i.e., SBUs that have a low share of a mature
market) is to treat them as candidates for
divestment or liquidation. New evidence
demonstrates, however, that, with proper
management, "dogs" can be assets to a di
versified corporation. Hambrick and Mac-
Millan, in a study of the performance of over
1,000 industrial-product businesses clas
sified into the four cells of the BCG ma
trix, found that the average "dog" had a
positive cash flow even greater than the cash
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needs of the average wildcat [5]. Moreover,
in a slow-growth economy, more than half a
company's businesses might qualify as
"dogs." Disposing of them all would be
neither feasible nor desirable. Yet the port
folio approach provides no help in suggest
ing how to improve the performance of such
businesses.
The experience curve concept was
successful in getting management to
focus on costs and relative competitive
position.
This problem has been recognized even by
some of portfolio planning's most ardent
supporters. An article in the Financial Times
quoted a vice-president of BCG as follows:
"The theme that should run through these
[dog business] strategies is realism; an ac
ceptance that dogs . . . present problems,
and will need to be managed differently from
more strongly placed businesses. Given this
realism there is no reason why results from
the dog quadrant should not make a worth
while contribution within the corporate port
folio" [9].
Even GE, long a proponent of the portfolio
approach, finds that generic strategies have
stifled creativity, so much so that Chairman
Jack Welch is leading the change to put less
analysis and more strategic thinking about
innovation into GE's planning approach. In
contrast to the past, strategic planners at GE
headquarters will be focusing on issues of
interest to more than one SBU. William
Rothschild, in an interview when he was
staff executive of corporate business devel
opment and strategy at GE, commented,
"Our effort will be built more around spe
cific issuesthe impact of new tech
nologies, sayand less on specific busi
nesses" [10].
Like most sophisticated models, if it is used
uncritically, the portfolio can give users the
illusion that they are being rigorous and scien
tific, when in fact they may have fallen prey to
the old "garbage-in, garbage-out" syndrome.
For example, a Harvard Business Review arti
cle indicates that the nature of a business
unit's relationship to headquarters can have as
much effect on its performance as its competi
tive position and the industry's environment.
Specifically, in studying the relationships that
twelve organizations' headquarters have with
their divisions (a total of sixty-nine business
units), Hamermesh and White found that "the
administrative arrangements concerning the
degree of autonomy a business unit has, how
line responsibilities are structured, and how
the unit's incentive compensation program is
designed have as much effect on its perfor
mance as market share and cash flow con
siderations" [6]. Strategies derived from
portfolio analysis rarely consider such rela
tionships with respect to expected or desired
business performance.
Notwithstanding the contributions that port
folio planning has made to management practice,
the fact is the portfolio approach works best when
conditions are stable, when the alternatives are
known and relatively constrained, and when the
future is a confirmation of the past. In and of
itself, the portfolio approach is virtually useless
for identifying new opportunities and/or setting
new directions for businesses or corporations.
Yet somewhere along the line, management fell
into the trap of thinking that strategy and port
folio planning were one and the same thing.
Granted, portfolio techniques do facilitate
top-management decisionmaking. But they can
be a grave hazard if overused. A management
that frames its strategy purely in portfolio terms
can easily lose touch with the dynamics of the
markets in which the company competes. And
 14 THE JOURNAL OF BUSINESS STRATEGY
that, in periods of dramatic change, is tantamount
to corporate suicide.
Post-1970s Planning
If American businesses are to develop the flexibil-
ity they need to compete in the decade ahead,
management will have to make some major
changes in the way it goes about planning and
managing. Events have demonstrated that staff-
dominated, paper-based, deterministic planning
approaches were not only anachronisms but seri-
ous obstacles to strategic thinking. Are there then
new trends in planning that focus on ideas rather
than processes, and that sharpen management's
ability to understand the marketplace and achieve
the quantum leaps in performance that will be
required to compete successfully? What is the
current "state of the art"?
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Portfolio Planning
Portfolio planning, it appears, is still very much
with us. In a Harvard Business Review article,
Philippe Haspeslagh reported the results of a sur-
vey on the use and impact of portfolio planning on
the Fortune 1000 companies: as of 1979, 36
percent of the Fortune 1000 and 45 percent of
the Fortune 500 industrial companies used the
portfolio to some extent. "Each year during the
last five years," Haspeslagh reports, "another 25
to 30 organizations have joined the ranks" [8].
What seems to be emerging is a second gen-
eration of portfolio planning matrices. Although
admittedly more sensitive to customers, compe-
tition, and industry dynamics than their prede-
cessors, these new matrices still hold out the
promise of a strategic "quick fix" in the guise of
generic strategies or prescriptive game plans that
derive from the various matrix positions.
For example, the "strategic environment ma-
trix" reflects BCG's current portfolio approach.
In contrast to its earlier growth/share matrix, the
determinants of profitability represented by the
axes of BCG's new matrix are the potential
sources of advantage a business has relative to its
competition (i.e., many/few) and the magnitude
of the advantage (i.e., small/large). The matrix
also divides the competitive environment into
four industry types: stalemate, fragmented,
specialization, and volume. The theory is that
businesses migrate around the matrix as they ma-
ture, with earnings and returns on investment
varying significantly depending on position. Once
management locates its business in the proper
quadrant, its industry type and the generic strate-
gies that conform to it are revealed.
Say, for example, that a business is in the lower
lefthand quadrant; that means it's in a stalemate
industry where there are few ways to beat the
competition and those few ways don't provide
much payoff. The suggested game plan in such a
situation is to control costs, limit the importance
of the business within the portfolio, look for ways
to transform the business, and be ready to exit
fast if the chance arises.
The fact is, a lot of companies in "stalemate"
industries are doing just fine. Companies like
Haagen-Dazs in ice cream, Vanderbilt in jeans,
Celestial Seasonings in teas, GE in radios, and
Sony in consumer electronics were able to change
the basis of competition and win big.
Another 1980s-style portfolio planning ap-
proach, introduced by Strategic Planning Asso-
ciates (SPA), recognizes that competitive advan-
tage manifests itself in lower costs or higher value
for customers. SPA goes on to suggest that man-
agement's fundamental business decision is
whether to compete on cost or on value to the
customer. This cost/value tradeoff is captured in
a 2 x 2 portfolio matrix with the vertical dimen-
sion being "customer price sensitivity" and the
horizontal dimension, "product mystique," i.e.,
the degree to which customers perceive a differ-
ence among competitors' products (Exhibit 3).
Once the business is positioned on the matrix,
the theory seems to say, it will be apparent which
strategycommodity, transitional, hybrid, or
specialtyshould be followed to gain and sustain
a competitive edge. An article in Fortune elabo-
rates on two of SPA's generic strategies: "Selling
to a market that is price-sensitive but not con-
scious of differencebuyers of fiat steel or
gasolinecalls for a 'commodity' strategy: back
to the old experience curve and the market-share
 THE JOURNAL OF BUSINESS STRATEGY 15

wars. Customers who don't worry much about

cost but care a lot about some other quality
buyers of vintage champagne or narrow-isle lift
trucksrequire a 'specialty' strategy: continue
to add the special value that sets your product
apart from the rest . . ." [12].
The unspoken, but very important, truth be
hind the SPA model is that management needs to
do a much better job of understanding who their
customers are and what drives their decisions.
The same kind of diligent information gathering
some managers reserve for their competition
should be applied to getting "closer" to their
customers. Focus groups and field surveys are
two simple and useful approaches to doing this.
In addition, recent developments in information
technology provide a myriad of ways managers
can respond more effectively to their customers.
An article in Sloan Management Review de
scribes how GE has gotten closer to its customers
by using information technology. "In 1980, the
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company found that consumers did not feel that

GE was adequately responsive to their inquiries.
They wanted more product information before
their purchase and additional information after
the purchase. The GE Answer Center, utilizing
an "800" line for toll-free calling was opened . . .
to better meet customer needs. The system cov
ers all GE products and handles over one-and-a-
half million calls per year. Computers are used to
retrieve 500,000 pieces of information about GE's
8,500 products. Some 94% of the customers who
use the system express satisfaction with the re
sult" [1].
Industry Structure Model
Professor Michael E. Porter of Harvard Business
School is another advocate of generic strategies.
His industry structure model has contributed sig
nificantly to understanding the interrelationship
between competitive strategy and industry struc
ture, and he has developed a theory of competi
tion that goes a long way toward explaining why
certain firms outperform others in the same indus
try.
What Porter has done so well in his work is to
demolish the concept of competition as a uni-
dimensional conflict. Competition is not simply
the rivalry among firms doing business in the
same industry arena. The state of competition in
an industry depends on five basic competitive
forces, Porter contends. They are, in addition to
rivalry among existing competitors: the bargain
ing power of suppliers, the bargaining power of
buyers, the threat of new entrants, and the threat
of substitute products or services (Exhibit 4). The
ultimate profit potential in an industry depends on
the collective strength of these five forces.
And how can management manipulate these
competitive forces to ensure that its business gets
the lion's share of potential industry profits? "In
coping with the five competitive forces," Porter
suggests, "there are three potentially successful
generic approaches to outperforming other firms
in an industry: (1) overall cost leadership, (2) dif
ferentiation, i.e., creating somethinga prod
uct or servicethat is perceived industrywide as
being unique, and (3) focus, i.e., concentrating on
a particular buyer group, segment of the product
line, or geographic market" [16].
On the surface, Porter's approach doesn't
sound so terribly different from some of the oth
ers. However, his model is far more complex and
demanding. Management must select its generic
strategy in response not just to rival companies
but to the other four forces driving industry com
petition as well: substitutes, customers, suppli
ers, potential entrants. Porter goes on to say,
"Certain characteristics of the industry not on
ly must be considered in choosing a generic
strategy, they in fact dictate the proper choice"
[12].
The breadth of information and knowledge re
quired to lay out such an industry panorama is
daunting; executing the generic strategy cannot
 16 THE JOURNAL OF BUSINESS STRATEGY
be less than a formidable undertaking. Yet, by
forcing managers to deepen their understanding
of the totality of forces driving industry competi-
tion, Porter's model also forces management to
consider the kinds of strategic issues that ulti-
mately determine competitive success: What will
each competitor's probable reaction be to the
range of strategic moves other firms could ini-
tiate? Why are some firms competing in the same
industry persistently more profitable? What are
the driving forces at the root of industry change
and how can management recognize change be-
fore its competition? What are the skills and re-
sources required to pursue a particular strategy?
What are the organizational requirements? What
are the risks?
Value-Based Planning
Value-based planning emerged in the early 1980s
as a way to look at a company's portfolio of
Downloaded by University of Ghana At 16:08 12 March 2017 (PT)
businesses that integrates modern financial
theory and strategy. Its basic premise is that the
principal purpose of a corporation (or a business)
is to create wealth (i.e., economic value) for its
shareholders. The corporation does this by in-
creasing its market value (stock price) and by
paying dividends. Specifically, if a company's
market value exceeds the replacement cost of its
equity assetswhich represent the equity that
shareholders have invested in the company
through direct investment or retained earnings
the company has created wealth over time for its
shareholders. On the other hand, if its market
value is less than replacement costs, the company
has eroded shareholder wealth.2
The power of the economic value concept is
that it provides management with a better way to
think about the relationship of business perfor-
mance to stock price. By using wealth creation as
a measure of business performance (i.e., the qual-
ity of business strategies), management can in-
vest in or withhold resources from businesses
based on their ability to create economic value.
The kicker in all of this is that the key to eco-
nomic value creation is the. ability to achieve sus-
tainable competitive advantage. And that leads
one right back to managers who know their cus-
tomers, competition, and markets. And with cus-
tomers, competition, and markets characterized
by rapid changesas they are todayit becomes
1
See William E. Fruhan, Financial Strategy: Studies in the Cre-
ation, Transfer and Destruction of Shareholder Value (1979), for a
discussion of the relationship between economic value and stock
price.
crucial that managers supplement current plan-
ning techniques with the one thing that tools and
techniques alone cannot provideinnovative
ideas. In other words, strategic planning must
evolve into strategic management.
A Framework for Management:
McKinsey's Basic Beliefs
McKinsey's approach to strategic management
rests on a number of "basic beliefs" on what
managing a business is all about, what it takes to
build an innovative and self-renewing organiza-
tion, and how top management ought to view its
own mission.
They are predicated on the assertion that man-
agement's fundamental task is to create an in-
stitution that is responsive toor, better yet,
createschange and, as such, becomes self-
renewing. Implicit in this assertion is that man-
agement is concerned with the institution's long-
term survival; that good people doing good things
are essential to the viability of the institution; and
that management can design an organization and
fashion systems that encourage people to provide
for institutional survival. These principles of
management can be captured along four action-
oriented dimensions; managing a business for
competitive advantage, viewing change as an op-
portunity, managing through people, and shaping
the strategically managed organization.
Managing a Business for Competitive
Advantage
Whenever I'm asked to assess whether or not a
business has a strategy, I ask management just
one question: What are you doing in this business
that will lead you to a sustainable competitive
advantage?
Organizations in a market economy are con-
cerned with delivering a service or product in the
most profitable way. The key to profitability in
most market situations is achieving a sustainable
competitive advantage which, in turn, is a prod-
uct of superior performance relative to competi-
tion. In other words, competitive success hinges
on building a cost or value edge into one's prod-
uct or service and then getting to the marketplace
ahead of the competition.
Fortune magazine recently ran an article de-
scribing the extraordinary performance of a group
of thirteen companies over the last ten years, a
period the author dubs "the dark decade." The
measure of performance used was average return
 THE JOURNAL OF BUSINESS STRATEGY
on equity of at least 20 percent, and never less
than 15 percent, for the ten-year period 1974-
1983.
The article's author, Carol Loomis, writes,
"The stars come from a spread of industries, but
tend to share certain characteristics. Most are
leaders in at least one product market; many are
tight with a dollar; and many believe in sticking to
businesses they clearly understand" [13]. Further
on she comments, "The generalization that goes
a long way to explain the whole list [of thirteen
companies] is that they have established a special
standing in their markets" [13].
While three out of the thirteen clearly dominate
their markets, leadership in these companies
takes other forms as well. For example, Nalco's
edge is its expertise in the use of the chemicals it
sellsit is counselor and problem solver to its
customers. In steel, Worthington has a reputation
for quality workmanship that allows it to obtain
premium prices. American Home Products thinks
Downloaded by University of Ghana At 16:08 12 March 2017 (PT)
of itself as having specialty products and as mar
keting these with particular skill. And Dow Jones'
traditionally high margins clearly flow in great
part from the unique product they offerThe
Wall Street Journal, a product their customers
want, need, and for which they are willing to pay
a premium.
Managements of these companies do three
things much better than their competition. First,
they excel at product/market definition. They are
keen observers of the marketplace and have a
true understanding of their own strengths and
weaknesses. They use both of these attributes to
select what they want to produce and for whom.
Second, they have a better-designed business
systemi.e., the operating concepts, system, or
structure that enables them to outperform com
petitors in producing and delivering the product
or service. Third, they do a better job of manag
ing the overall business systema complex and
demanding task that includes not only managing
the interrelationships within the corporation, but
also critical external relationships with suppliers,
customers, and competitors.
When managers in these companies think about
improving performance, they either push for bet
ter functional execution within the business sys
tem (e.g., better purchasing, better sales force
management, better manufacturing) or tinker at
the interfaces among functional areas to "bal
ance" the business system betterfor example,
helping marketing and manufacturing work to
gether to improve customer service. Or, if need
be, they redesign the entire business system (or
individual operating concepts) to come up with a
17
new and better way to get the product/service to
the marketplace.
Viewing Change as an Opportunity
In addition to managing for competitive advan
tage, the "stars" are adept at adapting their busi
ness systems to continuously changing conditions.
Roberto Goizueta, chairman of Coca-Cola, one of
the group of thirteen, comments in the Loomis
article, "The next ten years are going to be . . . an
age of uncertainty. Managements are going to
have to be very flexible and action-oriented. They
won't have the luxury of crossing all the 'Ts.' . . .
The world is going to pass you by if you try to do
that" [13].
The portfolio approach works best when
conditions are stable, when the
alternatives are known and relatively
constrained, and when the future is a
confirmation of the past.
Goizueta's remark underscores an essential
point about management's ability to compete
successfully. Too often, management is preoc
cupied with the here and now: the will to change
is simply not there. Change is looked on as a prob
lemunsettling, risky, annoying. But change can
also be seen as a source of opportunity,
providing the potential for creativity and inno
vation. This is the perception of change that top
management must embrace and work toward in
culcating throughout the organization.
In Fortune's article on innovation in large
companies, the author put his finger on a number
of the important aspects of creating an innovative
company: the notion of controlled experimenta
tion, the obsession with meeting customers'
needs, the importance of a strong culture, the
looseness in the idea-generation stage, and the
disciplined assessment of these ideas in terms of
commercial viability. He also observed that the
management of each of the eight "big masters of
innovation" was thoroughly convinced of the
need to innovate. "Resting on the status quo is
perceived as a sure way to corporate disaster,"
he writes [19].
All companies large and small need to pursue
some degree of innovation and find new business
opportunities. Past practices cannot accommo-
 18 THE JOURNAL OF BUSINESS STRATEGY

date the demanding business environment that

social and economic changes have brought about.

Managing Through People

Shortly after Jack Welch was made CEO of GE,
he was invited to speak to a group of Harvard
Business School students about his plans for the
company. One of the students asked him what he
considered his most important task as CEO.
Welch answered without hesitation, "Choosing
and developing good people" [7].
Management's first important task must be to
create a vision of where the organization should
be going, which involves a clear assessment of
the corporation's strengths and weaknesses, what
markets it should compete in, how it will com
pete, and the major action programs required.
The next task is to take the leadership actions
necessary to convert vision to realityto de
velop the capabilities of the organization, to
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expedite change and remove obstacles, and to

shape the environment. Central to both the estab
lishment and execution of a corporate vision is
the effective acquisition, development, and de
ployment of human resources.
As John W. Gardner writes in his book, Self-
Renewal, "Institutions are renewed by individ
uals who refuse to be satisfied with the outer
husks of things" [3]. In the end, management is
measured by the skill and sensitivity with which it
manages and develops people, for it is only
through the quality of their people that organiza
tions can change effectively.
Shaping the Strategically Managed
Organization
Robert Waterman, who co-authored In Search of
Excellence with Thomas Peters, has commented
that executives he spoke with were concerned
with how they could build the kind of innovative,
self-renewing organizations that the 1980s and
1990s demand.
McKinsey's 7-S model holds that organiza
tional effectiveness is not just a product of struc
ture or strategy, but stems from multiple factors
(Exhibit 5). Organizational change comes about
through the interrelationship and orchestration of
those factorsseven to be exact: structure,
strategy, systems, style, skills, staff, and shared
values (i.e., the guiding concepts of the organiza
tion). Organizations that take an externally fo
cused, forward-looking approach to the design of
these seven Ss have a much better chance at
self-renewal than those whose perspective is pre
dominantly internal and historical. Not that line
management shouldn't strive to get their products
or services to the market efficiently or to under
stand past experience. On occasion, a competi
tive edge may indeed result from improved
execution of existing skills. But in today's envi
ronment, merely doing better isn't an adequate
formula for survival. Far too many of the large
organizations we have studied are satisfied with
pursuing incremental improvements, rather than
searching for quantum leaps that involve major
change.
People naturally resist change. Overcoming
their resistance in order to use change as an op
portunity for improving corporate performance
and encouraging creativity is a true test of leader
ship. Chief executives must take the lead in mov
ing their institutions toward strategic manage
ment by designing organizations and developing
management systems that look forward and look
out. For example, top management may require
functional managers to submit periodic com
petitive/market reports or to focus on a project/
issue-oriented approach to strategy development
 THE JOURNAL OF BUSINESS STRATEGY 19

rather than a formalized process. Strong linkages
between human resource management systems
and strategic planning should be ensured so that
skills required for the future are continually being
developed or acquired as the company moves
from a culture that perpetuates the status quo to
one that continually searches for the next step.
Management must approach information acquisi
tion and dissemination in a way that puts a great
deal of raw information in the hands of many
peopleplanners, market researchers, design
ersbut most important, line managers, because
they're the ones who are most likely to make
things happen. And the company must design
management systems that will attract, encourage,
and reward people who have the ability to com
bine, order, or connect this raw information in
novel and better ways.
McKinsey's continuing research into com
panies noted for innovation and sustained fi
nancial performance shows that tomorrow's
excellent companies will be those that have built
organizations that value self-renewal. These or
ganizations will have the capabilities to pursue
successfully both the incremental "small wins"
and the big, bold innovations. They will also have
the ability to switch emphasis as the competitive
situation demands. They will be led by man
agements that understand and effectively use the
forces at work in the external environment to
their own advantage. Such companies will truly
be able to create their own future.

REFERENCES
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8. Philippe Haspeslagh, "Portfolio Planning: Uses and Limits," Harvard Business Review, Jan./Feb. 1982.
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