Strategic Thinking and Competitive Advantage
UniSA – MBA
Martin Glaser
Intake Code: Hong Kong 23
ID No: 0010432Q
26. August 2000
Strategic Thinking and Competitive Advantage 1
1. Introduction 3
2. Compare and Contrast of Porter’s “What is Strategy”- and Hamel and Prahalad’s “Strategy as Stretch and Leverage“ articles. 4
2.1 Operational effectiveness and strategy 4
2.2 Competition, why or what 4
2.3 “Fit” or “Stretch” 5
2.4 “Activity Systems and Trade offs” or “Stretch and Leverage” 6
2.4.1 Hamel and Prahalad’s “Concentrating” meets Porter’s “Simple consistency” 6
2.4.2 Hamel and Prahalad’s “Accumulating” meets Porter’s “Activities are reinforcing” 7
2.4.3 Hamel and Prahalad’s “Complementing” meets Porter’s “Optimisation of effort” 8
2.4.4 Hamel and Prahalad’s “Conserving” meets Porter’s “Simple consistency” 8
2.4.5 Hamel and Prahalad’s “Recovering” meets Porter’s “Optimisation of effort” 9
2.5 Strategic positioning 9
2.6 The two articles, a Summary 10
3. The existing strategy of the AV Dept., and the appraisal and comparison with Porters article “What is Strategy” 11
3.1 AV Dept. Activity System 12
3.2 The existing strategy 12
3.3 Operational Effectiveness 13
3.4 Competition 14
3.5 Strategic Fit, Activity System 15
3.6 Market perspective and positioning of the AV Dept. in the future 15
4. References 17
1. Introduction
Strategy, in the view of Henry Mintzberg, “the firms objective, plans, and resources base at a given moment are no more important than what the firm has actually done and is actually doing” (Management science, 1978, 24: 934-48).
Michael Porter states “ At general management’s core is strategy: defining a company’s position, making trade-offs, and forging fit among activities” (Harvard Business Review, 1996, pg.77).
Hamel and Prahalad are the opinion that “ The essential element of the new strategy frame is an aspiration that creates by design a chasm between ambition and recourses” (Harvard Business Review, 1993, pg. 84).
The above quotes make obvious how many different views, and similarities within those views, exist around the matter Strategy.
Within the first topic, this paper compares and contrasts the (1993) article by Hamel and Prahalad Strategy as Stretch and Leverage and the (1996) article by Michael Porter What is strategy. In the second part, the existing strategy used by the Siemens Audio and Video Department (AV Dept.) will be critically appraised by using Michael Porters Activity Systems.
Siemens as the second largest electronic company worldwide (after General Electric) has a variety of both, business areas and departments. One of those departments is the Audio and Video (AV) Dept. Similar as other international organisations, Siemens has aimed its strategic future goal towards customer service and production rationalisation. The need to transform the company resulted in a variety of changes, such as outsourcing, merging and also layoffs. As argued by John Micklethwait and Adrian Wooldridge, “current management fashion has it that bigness have had its day; that the giants are rapidly replaced by much smaller nimbler organisations” (The Witch Doctors, 1997, p. 113).
2. Compare and Contrast of Porter’s “What is Strategy”- and Hamel and Prahalad’s “Strategy as Stretch and Leverage“ articles.
2.1 Operational effectiveness and strategy
Porter in his article points out that “Managers must clearly distinguish operational effectiveness from strategy” (Harvard Business Review, 1996, pg.78). He stretches the notion that “Both are essential, but the two agendas are different” (Harvard Business Review, 1996, pg.78). Furthermore Porter is arguing that “The more benchmarking companies do, the more they look alike” (Harvard Business Review, 1996, pg.64), and companies need to find and “…. establish a difference that it can preserve” (Harvard Business Review, 1996, pg.62).
In contrast, Hamel and Prahalad do not cover in their article this direct differentiation of operational effectiveness and strategy, but indirectly the point of establishing a differentiation is visible. Their argument of “…. leveraging what a company already has rather than simply allocating it ….” (Harvard Business Review, 1993, pg.78) could be seen as a form of establishing a differentiation. On order to differentiate, Hamel and Prahalad suggesting to focus on one troubled business field at a time. They argue that “Without focused attention on a view key operating goals at any one time, improvement efforts are likely to be diluted….” (Harvard Business Review, 1993, pg.79). This could be seen as differentiation.
2.2 Competition, why or what
As suggested by Hamel and Prahalad, “The first step in understanding competitiveness is to observe competitive outcomes” (Harvard Business Review, 1993, pg.75). After observation, a diagnose phase is suggested in where competitive problems are analysed. As they stress out in their article, with this approach to competition, the “…. what of competitiveness, not the why ….” (Harvard Business Review, 1993, pg.76) is discussed. But they continue to argue “Understanding the why is a prerequisite or getting out in front” (Harvard Business Review, 1993, pg.76). The idea of Hamel and Prahalad of how and due to what reasons to formulate a strategy differs from Porters view. He is not asking why or what in the first place, in contrast, he is simply states “Competitive strategy is about being different” (Harvard Business Review, 1996, pg.64). Porter’s basic idea of separating operational effectiveness and strategy is as mentioned in point 2.1 (Operational effectiveness and strategy) is a key argument for his approach to strategy. “Operational effectiveness includes but is not limited to efficiency. ….. In contrast, strategic positioning means performing different activities from rivals or performing similar activities in different ways” (Harvard Business Review, 1996, pg.62). Porter in his article points out that all activities can be copied by competitors. This “- competitive convergence – is more subtle and insidious. The more benchmarking companies do, the more they look alike” (Harvard Business Review, 1996, pg.64).
Even though Porter’s and Hamel and Prahalad view of strategy and competition seem contrary, they fight the competition with basically the same weapons. Porter’s goal to competitive advantage is being different and to have the guts to make trade offs, and Hamel and Prahalad’s goal to reach competitive advantage is to leverage resources, and to be able to find a fit between resources and opportunities.
2.3 “Fit” or “Stretch”
Porter in his article stretches the term “fit” in great detail. He describes three orders of “fit” and states “In all three types of fit, the whole matters more than any individual part” (Harvard Business Review, 1996, pg.73). He further elaborates that “It is harder for a rival to match an array of interlocked activities .…” (Harvard Business Review, 1996, pg.73). Hamel and Prahalad argue that strategy contains three major elements, “ the concept of fit .…, the allocation of resources among competitive investment opportunities, and a long-term perspective ….” (Harvard Business Review, 1993, pg.77). They go further by writing, “…. the concept of stretch supplements the idea of fit ….” (Harvard Business Review, 1993, pg.77). The idea to “…. view the competition as encirclement rather that confrontation ….” (Harvard Business Review, 1993, pg.78) is missing in Porters article. He states “ Strategy is creating a fit among a companies activities” (Harvard Business Review, 1996, pg.75) but does not cover Hamel and Prahalad’s idea of stretch.
2.4 “Activity Systems and Trade offs” or “Stretch and Leverage”
Hamel and Prahalad describe 5 basic ways to leverage financial or non-financial resources; concentrating, accumulating, complementing, conserving and recovering. Porter describes three types of fit; “First-order fit is simple consistency between each activity (function) and the overall strategy. ….. Second-order fit occurs when activities are reinforcing. …. Third-order fit goes beyond activity reinforcement to what I [he Porter] call optimisation of effect.…” (Harvard Business Review, 1996, pp.71-72). Links or similarities between these five ways of leveraging and the arguments of fit raised in Porters article can be observed and are elaborated below.
2.4.1 Hamel and Prahalad’s “Concentrating” meets Porter’s “Simple consistency”
Hamel and Prahalad describe “concentrating resources” as “Leverage requires a strategic focal point, ….” (Harvard Business Review, 1993, pg.79). They describe several examples from different companies and draw the finding that “Too many managers…. have tried to put everything right at the same time and that wondered why the progress was so painfully slow.” (Harvard Business Review, 1993, pg.79). The elaborate further that “ Without focus on a view key operating goals at a given time, improvement efforts are likely to be so deluded that the company ends up as a perpetual laggard in every critical performance area (Harvard Business Review, 1993, pg.79). Porter states” Consistency ensures that the competitive advantage of activities accumulate and do not erode or cancel themselves out” (Harvard Business Review, 1996, pg.71).
Porter’s “simple consistency” is more focused on the aligning of activities with the existing strategy, whereas Hamel and Prahalad concentrating on single activities and their success.
2.4.2 Hamel and Prahalad’s “Accumulating” meets Porter’s “Activities are reinforcing”
Using the existing “reservoir of experience” (Harvard Business Review, 1993, pg.80), is Hamel and Prahalad’s main step to “accumulating resources”. They follow the idea that “ Being a learning organisation is not enough …” (Harvard Business Review, 1993, pg.80). Hamel and Prahalad mention in their article that “…. leveraging resources through borrowing” (Harvard Business Review, 1993, pg.81) should be seen as “…. supplement internal resources with resources that lie outside a company’s boundaries.” (Harvard Business Review, 1993, pg.81). In his article Porter describes an example with an upper class Hotel and a high-grade soap manufacturer. Reinforce different activities to achieve a better outcome seems the goal here. Hamel and Prahalad do not focus on operational effectiveness when they discuss “accumulating resources”. The stretch the fact that both internal and external knowledge should be obtained and distributed within the organisation, but do not link the resources with the strategic goal. Porter’s “activities are reinforcing “ is more tailored towards aligning different activities to strategy.
2.4.3 Hamel and Prahalad’s “Complementing” meets Porter’s “Optimisation of effort”
Hamel and Prahalad describing different forms of blending and balancing of resources. The argue that “By blending different types of resources in ways that multiply the value of each, management transform its resources while leveraging them” (Harvard Business Review, 1993, pg.81.). Porter argues that “Co-ordination and information exchange across activities to eliminate redundancy and minimise wasted effort ….” (Harvard Business Review, 1996, pg.73) is vital to realise an “optimisation of effect”. He describes in his article a store - warehouse example and focus, same as Hamel and Prahalad is their article, on combining different activities to improve overall performance.
2.4.4 Hamel and Prahalad’s “Conserving” meets Porter’s “Simple consistency”
“The more often a given skill or competence is used, the greater the resource leverage” (Hamel and Prahalad, Harvard Business Review, 1993, pg.82). Hamel and Prahalad in their article discuss various field of conserving and leveraging resources:
· operational
· brand name
· human
These resources can be directly linked to Porter’s “simple consistency”. Porter describes that “simple consistency” is the activity linked with the overall strategy. Hamel and Prahalad describe the importance of “co-option” of resources (Harvard Business Review, 1993, pg.82) in order to gain influence.
2.4.5 Hamel and Prahalad’s “Recovering” meets Porter’s “Optimisation of effort”
Hamel and Prahalad describe another source of leveraging. “Recovering” expenditures through revenues is a vital leveraging possibility. To allow an early “recovering” of expenses, all departments of an organisation need to be linked together. Porter in his example on page 72 in his article (store – warehouse) points also out that only because there is a close link between store and warehouse the store can keep always sufficient stock.
The meaning of Hamel and Prahalad’s “recovering” is focused on the task of recovering of expenses in general, whereas Porter’s “optimisation of effort” can be linked with various business fields and the overall strategy.
2.5 Strategic positioning
Porter describes in his article three types of strategic positions.
· Variety – based positioning
· Needs – based positioning
· Access – based positioning
He makes clear with many examples that “ Positioning is not only about carving out a niche.” (Harvard Business Review, 1996, pp.65 - 68). He furthermore states that “Whatever the basis – variety, needs, access, or some combination of the three – positioning requires a tailored set of activities ….” (Harvard Business Review, 1996, pg. 68).
Hamel and Prahalad are not merely focusing on the strategic positioning of the organisation. They do point out that “ …. managers eager to externalise the causes of competitive decline – and the responsibility for it.” (Harvard Business Review, 1993, pg. 76), but this can only be loose related to positioning itself. Hamel and Prahalad in their article discuss strategy partially when the talking about resources and leveraging, they do not elaborate positioning in that great detail as Porter is doing it.
2.6 The two articles, a Summary
The focus of Porter’s article is clearly strategy itself, the positioning of the organisation, the fact that an organisation need to be different and the activity system to find a fit between resources and abilities. One main issue in Porters article is clearly the separation of operational effectiveness from strategy (point 2.1 operational effectiveness and strategy.
Hamel and Prahalad describe in their article more the way of an organisation to be fit for strategy (point 2.3 Fit or Stretch). They deliver a detailed elaboration about resources, leverage and the ways to handle stretch. They emphasise indirectly the fact that more internal problems are dealed with rather than with strategy implication itself (point 2.4 Activity Systems and Trade offs” or “Stretch and Leverage).
Even though Porter wrote his article about three years later than Hamel and Prahalad, he did not discuss Hamel and Prahalad’s idea of “stretch”. At least he did it not directly. Porter talks about being different as the key to strategy, Hamel and Prahalad state “Creating stretch, a misfit between resources and aspirations, is the most important task senior management faces.” (Harvard Business Review, 1993, pg. 78). In order to create stretch there must be a strategy. How to use resources both financial and non-financial, how to set the directions for different aspirations within the organisation and where will those aspirations take the entity in the future?
Both articles seem to view the topic strategy from different angles. Porters more strategic views and elaboration’s in his discussion leaves the impression that he is emphasising more on corporate strategy rather than on detailed strategic implications within an organisation. Hamel and Prahalad are discussing in greater detail the implication and strategic resources allocation within an entity.
3. The existing strategy of the AV Dept., and the appraisal and comparison with Porters article “What is Strategy”