Value Acceleration

The September issue of the Harvard Business Review has feature article titled “How Strategy Shapes Structure.”  We’ll reprint its opening paragraphs here, with the issue we have with it in bold:

When executives develop corporate strategy, they nearly always begin by analyzing the industry or environmental conditions in which they operate. They then assess the strengths and weaknesses of the players they are up against. With these industry and competitive analyses in mind, they set out to carve a distinctive strategic position where they can outperform their rivals by building a competitive advantage. To obtain such advantage, a company generally chooses either to differentiate itself from the competition for a premium price or to pursue low costs. The organization aligns its value chain accordingly, creating manufacturing, marketing, and human resource strategies in the process. On the basis of these strategies, financial targets and budget allocations are set.

The underlying logic here is that a company’s strategic options are bounded by the environment. In other words, structure shapes strategy. This “structuralist” approach, which has its roots in the structure-conduct-performance paradigm of industrial organization economics¹, has dominated the practice of strategy for the past 30 years. According to it, a firm’s performance depends on its conduct, which in turn depends on basic structural factors such as number of suppliers and buyers and barriers to entry. It is a deterministic worldview in which causality flows from external conditions down to corporate decisions that seek to exploit those conditions.

Even a cursory study of business history, however, reveals plenty of cases in which firms’ strategies shaped industry structure, from Ford’s Model T to Nintendo’s Wii. For the past 15 years, we have been developing a theory of strategy, known as blue ocean strategy, that reflects the fact that a company’s performance is not necessarily determined by an industry’s competitive environment. The blue ocean strategy framework can help companies systematically reconstruct their industries and reverse the structure-strategy sequence in their favor.

The article goes on from there to talk about how “traditional” strategies—those that come from competitive analysis—are different from disruptive strategies, and how different kinds of organizations are required to execute each.

We disagree with much of this line of argument for the following reasons:

•  Even in a traditional, non-disruptive prone industry, there are many strategies other than low-cost or product differentiation that are available.  Channel strategies, for example, come immediately to mind.
• The notion that disruptive, or “restructuralist”, strategies can’t come from traditional environmental analyses is wrong.  Both of us come from the high-tech industry where competitive/environmental analysis always included the disruptive threats on the horizon, and the firms in our industry were always re-making themselves to take advantage of them.  Indeed we explicitly include disruptive factors in our model of product/market strategy, the Customer Manufacturing System.  Disruptive factors don’t come out of the blue – they appear over a period of time and can be seen and acted upon.   
• A structuralist approach to mature business lines can co-exist with a restructuralist approach to new opportunities in the same firm.  If an industry is always changing — frequently subject to what Christiansen calls the innovators dilemma—this kind of co-existence is a necessity, and is quite possible.  For example, a firm that managed the transition from mainframes to mini-computers to microprocessor-based computers is IBM.  An example of a firm that didn’t manage the transition is the old Digital Equipment: they failed to make the transition to micro-processor based computing.

Bottom line: we feel that the distinction between these kinds of strategies is valid, but the implication that a single organization can’t integrate both into its ongoing business model if flawed.

Ralph