The Origin of Strategy PDF by Bruce D. Henderson

The Origin of Strategy by Bruce D. Henderson Harvard Business Review Reprint 89605 This document is authorized for use only by Cole Oman ([email protected]). Copying or posting is an infringement of copyright. Please conta...

The Origin of Strategy by Bruce D. Henderson Harvard Business Review Reprint 89605 This document is authorized for use only by Cole Oman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.  HBR NOVEMBER–DECEMBER 1989 The Origin of Strategy Bruce D. Henderson C onsider this lesson in strategy. In 1934, Pro- What explains this abundance? Variety. The richer fessor G.F. Gause of Moscow University, the environment, the greater the number of poten- known as “the father of mathematical biol- tially significant variables that can give each species ogy,” published the results of a set of experiments in a unique advantage. But also, the richer the environ- which he put two very small animals (protozoans) of ment, the greater the potential number of competi- the same genus in a bottle with an adequate supply tors—and the more severe the competition. of food. If the animals were of different species, they For millions of years, natural competition involved could survive and persist together. If they were of the no strategy. By chance and the laws of probability, same species, they could not. This observation led to competitors found the combinations of resources Gause’s Principle of Competitive Exclusion: No two that best matched their different characteristics. This species can coexist that make their living in the was not strategy but Darwinian natural selection, identical way. based on adaptation and the survival of the fittest. Competition existed long before strategy. It began The same pattern exists in all living systems, includ- with life itself. The first one-cell organisms required ing business. certain resources to maintain life. When these re- In both the competition of the ecosphere and the sources were adequate, the number grew from one competition of trade and commerce, random chance generation to the next. As life evolved, these organ- is probably the major, all-pervasive factor. Chance isms became a resource for more complex forms of determines the mutations and variations that survive life, and so on up the food chain. When any pair of and thrive from generation to generation. Those that species competed for some essential resource, sooner leave relatively fewer offspring are displaced. Those or later one displaced the other. In the absence of that adapt best displace the rest. Physical and struc- counterbalancing forces that could maintain a stable tural characteristics evolve and adapt to match the equilibrium by giving each species an advantage in competitive environment. Behavior patterns evolve its own territory, only one of any pair survived. too and become embedded as instinctual reactions. Over millions of years, a complex network of com- In fact, business and biological competition would petitive interaction developed. Today more than a million distinct existing species have been cataloged, Bruce D. Henderson is professor of management at Van- each with some unique advantage in competing for derbilt University’s Owen Graduate School of Manage- the resources it requires. (There are thought to be ment. He is also the founder and chairman emeritus of the millions more as yet unclassified.) At any given time, Boston Consulting Group and has written extensively on thousands of species are becoming extinct and thou- business strategy. His most recent book is The Logic of sands more are emerging. Business Strategy (Ballinger, 1985). Copyright © 1989 by the President and Fellows of Harvard College. All rights reserved. This document is authorized for use only by Cole Oman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.  follow the same pattern of gradual evolutionary iterative process that begins with a recognition of change except for one thing. Business strategists can where you are and what you have now. Your most use their imagination and ability to reason logically dangerous competitors are those that are most like to accelerate the effects of competition and the rate you. The differences between you and your competi- of change. In other words, imagination and logic tors are the basis of your advantage. If you are in make strategy possible. Without them, behavior and business and are self-supporting, you already have tactics are either intuitive or the result of conditioned some kind of competitive advantage, no matter how reflexes. But imagination and logic are only two of the small or subtle. Otherwise, you would have gradually factors that determine shifts in competitive equilib- lost customers faster than you gained them. The rium. Strategy also requires the ability to understand objective is to enlarge the scope of your advantage, the complex web of natural competition. which can happen only at someone else’s expense. If every business could grow indefinitely, the total Chasing market share is almost as productive as market would grow to an infinite size on a finite chasing the pot of gold at the end of the rainbow. You earth. It has never happened. Competitors perpetu- can never get there. Even if you could, you would find ally crowd each other out. The fittest survive and nothing. If you are in business, you already have prosper until they displace their competitors or out- 100% of your own market. So do your competitors. grow their resources. What explains this evolutionary Your real goal is to expand the size of your market. process? Why do business competitors achieve the But you will always have 100% of your market, equilibrium they do? whether it grows or shrinks. Remember Gause’s Principle. Competitors that Your present market is what, where, and to whom make their living in the same way cannot coexist—no you are selling what you now sell. Survival depends more in business than in nature. Each must be differ- on keeping 100% of this market. To grow and prosper, ent enough to have a unique advantage. The contin- however, you must expand the market in which you ued existence of a number of competitors is proof per can maintain an advantage over any and all competi- se that their advantages over each other are mutually tors who might be selling to your customers. exclusive. They may look alike, but they are different Unless a business has a unique advantage over its species. rivals, it has no reason to exist. Unfortunately, many Consider Sears, K mart, Wal-Mart, and Radio businesses compete in important areas where they Shack. These stores overlap in the merchandise they operate at a disadvantage—often at great cost, until, sell, in the customers they serve, and in the areas inevitably, they are crowded out. That happened to where they operate. But to survive, each of these Texas Instruments and its pioneering personal com- retailers has had to differentiate itself in important puter. TI invented the semiconductor; its business ways, to dominate different segments of the market. was built on instrumentation. Why was it forced out Each sells to different customers or offers different of the personal computer business? values, services, or products. Many executives have been led on a wild goose What differentiates competitors in business may be chase after market share by their inability to define purchase price, function, time utility (the difference the potential market in which they would, or could, between instant gratification and “someday, as soon enjoy a competitive advantage. Remember the Edsel? as possible”), or place utility (when your heating and And the Mustang? Xerox invented the copying ma- cooling system quits, the manufacturer’s technical chine; why couldn’t IBM become a major competitor expert is not nearly as valuable as the local me- in this field? What did Kodak do to virtually dominate chanic). Or it may be nothing but the customer’s the large-scale business copier market in the United perception of the product and its supplier. Indeed, States? What did Coca-Cola do to virtually dominate image is often the only basis of comparison between the soft drink business in Japan? similar but different alternatives. That is why adver- But what is market share? Grape Nuts has 100% of tising can be valuable. the Grape Nuts market, a smaller percentage of the Since businesses can combine these factors in breakfast cereal market, an even smaller percentage many different ways, there will always be many pos- of the packaged-foods market, a still smaller percent- sibilities for competitive coexistence. But also, many age of the packaged-goods shelf-space market, a tiny possibilities for each competitor to enlarge the scope percentage of the U.S. food market, a minuscule of its advantage by changing what differentiates it percentage of the world food market, and a micro- from its rivals. Can evolution be planned for in busi- scopic percentage of total consumer expenditures. ness? That is what strategy is for. Market share is a meaningless number unless a Strategy is a deliberate search for a plan of action company defines the market in terms of the bounda- that will develop a business’s competitive advantage ries separating it from its rivals. These boundaries are and compound it. For any company, the search is an the points at which the company and a particular HARVARD BUSINESS REVIEW November–December 1989 3 This document is authorized for use only by Cole Oman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.  competitor are equivalent in a potential customer’s commitment, what matters is adaptation to the way eyes. The trick lies in moving the boundary of advan- things are now. Natural competition can and does tage into the potential competitor’s market and keep- evolve exquisitely complex and effective forms even- ing that competitor from doing the same. The com- tually. Humans are just such an end result. But un- petitor that truly has an advantage can give potential managed change takes thousands of generations. customers more for their money and still have a larger Often it cannot keep up with a fast-changing environ- margin between its cost and its selling price. That ment and with the adaptation of competitors. extra can be converted into either growth or larger By committing resources, strategy seeks to make payouts to the business’s owners. sweeping changes in competitive relationships. Only So what is new? The marketing wars are forever. two fundamental inhibitions moderate its revolu- But market share is malarkey. tionary character. One is failure, which can be as Strategic competition compresses time. Competi- far-reaching in its consequences as success. The other tive shifts that might take generations to evolve is the inherent advantage that an alert defender has instead occur in a few short years. Strategic competi- over an attacker. Success usually depends on the tion is not new, of course. Its elements have been culture, perceptions, attitudes, and characteristic be- recognized and used ever since humans combined havior of competitors and on their mutual awareness intelligence, imagination, accumulated resources, of each other. and coordinated behavior to wage war. But strategic This is why, in geopolitics and military affairs as competition in business is a relatively recent phe- well as in business, long periods of equilibrium are nomenon. It may well have as profound an impact on punctuated by sharp shifts in competitive relation- business productivity as the industrial revolution had ships. It is the age-old pattern of war and peace and on individual productivity. then war again. Natural competition continues dur- The basic elements of strategic competition are ing periods of peace. In business, however, peace is these: (1) ability to understand competitive behavior becoming increasingly rare. When an aggressive com- as a system in which competitors, customers, money, petitor launches a successful strategy, all the other people, and resources continually interact; (2) ability businesses with which it competes must respond to use this understanding to predict how a given with equal foresight and dedication of resources. strategic move will rebalance the competitive equi- In 1975, the British War Office opened its classified librium; (3) resources that can be permanently com- files on World War II. Serious readers of these descrip- mitted to new uses even though the benefits will be tions of “war by other means” may feel inclined to deferred; (4) ability to predict risk and return with revise their thinking about what happened in that enough accuracy and confidence to justify that com- war and about strategy generally, particularly the mitment; and (5) willingness to act. differences between actual strategies and apparent This list may sound like nothing more than the strategies. basic requirements for making any ordinary invest- The evidence is clear that the outcome of individ- ment. But strategy is not that simple. It is all-encom- ual battles and campaigns often depended on highly passing, calling on the commitment and dedication subjective evaluations of the combatants’ intentions, of the whole organization. Any competitor’s failure capabilities, and behavior. But until the records were to react and then deploy and commit its own re- unsealed, only people who were directly involved sources against the strategic move of a rival can turn appreciated this. Historians and other observers as- existing competitive relationships upside down. That cribed victories and defeats to grand military plans or is why strategic competition compresses time. Natu- chance. ral competition has none of these characteristics. Also in 1975, Edward O. Wilson published Sociobi- Natural competition is wildly expedient in its mo- ology, a landmark study in which he tried to synthe- ment-to-moment interaction. But it is inherently size all that is known about population biology, zool- conservative in the way it changes a species’s charac- ogy, genetics, and animal behavior. What emerged teristic behavior. By contrast, strategic commitment was a framework for understanding the success of is deliberate, carefully considered, and tightly rea- species in terms of social behavior—that is, competi- soned. But the consequences may well be radical tion for resources. This synthesis is the closest ap- change in a relatively short period of time. Natural proach to a general theory of competition that I know competition is evolutionary. Strategic competition is of. It provides abundant parallels for business behav- revolutionary. ior as well as for the economic competition that Natural competition works by a process of low- characterizes our own species. risk, incremental trial and error. Small changes are Human beings may be at the top of the ecological tried and tested. Those that are beneficial are gradu- chain, but we are still members of the ecological ally adopted and maintained. No need for foresight or community. That is why Darwin is probably a better 4 HARVARD BUSINESS REVIEW November–December 1989 This document is authorized for use only by Cole Oman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.  guide to business competition than economists are. In contrast, Charles Darwin’s On the Origin of Classical economic theories of business competi- Species, published in 1859, outlines a more fruitful tion are so simplistic and sterile that they have been perspective and point of departure for developing less contributions to understanding than obstacles. business strategy: “Some make the deep-seated error These theories postulate rational, self-interested be- of considering the physical conditions of a country as havior by individuals who interact through market the most important for its inhabitants; whereas it exchanges in a fixed and static legal system of prop- cannot, I think, be disputed that the nature of the erty and contracts. Their frame of reference is “per- other inhabitants with which each has to compete is fect competition,” a theoretical abstraction that generally a far more important element of success.” never has existed and never could exist. 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