Warnock Davies

Warnock Davies consults on strategy, management, and international business to mid-sized companies and major
multinational corporations. He is the author of Partner Risk: Managing the Downside of Strategic Alliances
(Purdue University Press, 2000).
Abstract In order to provide executives with a better
understanding of the nature and purpose of strategy, the author
defines and discusses strategy-related terms, concepts, and principles
and shows how they are applied in practice. Strategy is one element
in a troika that also includes policy and resources. The author
explains the causal relationship between the elements of the troika
and the plurality of inputs, options, and outcomes that characterize
effective strategy. Case examples from GE and other firms are
included.
Keywords Strategy, Policy, Tactics, Resources, Vision
A
ccording to Michael Porter, ``Almost no
consensus exists about what corporate strategy
is, much less about how a company should
formulate it''[1]. This is due to a combination of factors
that relate to strategy terms, concepts and principles
and their practical application.
This article is designed to provide executives with a
better understanding of the nature and purpose of
strategy and draws on Jack Welch's record at GE, as well
as examples from other companies, to show how these
strategy-related terms, concepts, and principles apply in
practice.
The terms, concepts and principles of strategy
From my work as a strategy consultant, executive, and
professor of strategy in graduate and executive
programs, I have found that strategy can be best
understood if it is viewed as an element of a troika that
includes policy, strategy, and resources (the PSR
Troika). I have also found that it helps to focus on two
aspects of strategy: the causal relationship between
strategy and the other elements of the PSR Troika; and
the plurality of inputs, options, and outcomes that
characterize strategy.
The elements of the PSR Troika
Policy is from the word for the Greek city-state, polis. In
government, policy is the product of a legislature that
delineates the goals, objectives and priorities of the state.
In business, the term ``policy'' is used to define a
company's principal goals and objectives and to
prescribe the company's operational domain. Corporate
policies define a company's reason for existing (to
maximize shareholder wealth and/or fulfill one or more
social or economic function), what the company does
(design, develop, manufacture and/or market products
and/or services), and where the company does it (by
industry and/or geographical area). The responsibility
for determining corporate policy rests with a company's
legislative branch its board of directors under the
leadership of the chairman of the board. Policy defines a
company's raison d'etre and sets the parameters within
which it intends to achieve its purpose. Policy defines
what is to be achieved.
Strategy is from the Greek strategos, which means
general. In the Greek city-states, the military general was
responsible for formulating a plan for bringing the
legislature's policy decisions to fruition and for
I . : . : ] ] . ' : : : : ) . l . . ! ! ! ) ) . . ! ! # I . I . : : . ] : : : l ! l | l . | .
The author wishes to thank Wan Chew Yoong at Nanyang
Technological University in Singapore and Syed Aqeel Tirmizi at
Lahore University of Management Sciences in Pakistan for their
contributions to this article.
. .
implementing that plan. In business, strategy is a design
or plan for achieving a company's policy goals and
objectives. Whereas, policy defines the company's goals
and objectives and its operational domain, strategy
decides how the company's goals and objectives will be
achieved, what operational units will be used to achieve
the company's goals and objectives, and how those
operational units will be structured. Strategy also
determines what resources will be needed to achieve the
company's goals and objectives and how these resources
will be acquired and used. Strategy is a design or plan
that defines how policy is to be achieved.
This definition of strategy applies to corporate
strategy and unit strategy. Unit
strategies are plans for
achieving the goals and
objectives of an operating unit,
an industry or geographical
operating area, or a managerial
or business function. Unit
strategies include a company's
marketing strategy, acquisition
strategy, alliance or affiliation
strategy, human resources
recruitment and retention
strategy, production strategy,
and financial strategy. They
also include a company's
division strategies, subsidiary
strategies, and country
strategies. Corporate strategy,
on the other hand, refers to
strategy that is used to achieve
corporate goals and objectives,
that is, to achieve corporate
policy.
Whereas policy is a legislative function, strategy is an
executive function. The responsibility for formulating
and implementing a corporation's strategies rests,
therefore, with a company's senior management, under
the leadership of the chief executive officer.
The third element of the PSR Troika is resources.
Resources are the materiel and methods that provide the
components of corporate and unit strategies. Materiel
includes capital, physical plant, raw materials, and parts,
and less tangible components such as distribution
networks, technology, human resources, market data,
market reputation, and the ability to borrow. Methods
includes a range of management, manufacturing, and
marketing functions and processes, such as motivational,
negotiating, and alliance skills, and other intangible
resources that are covered by the terms
``benchmarking,'' ``best practices,'' ``outsourcing,'' ``ISO
9000,'' ``total quality management,'' ``core
competencies,'' and ``competitive capabilities.'' A
company's resources make the formulation of corporate
and unit strategies possible and give effect to strategy
implementation. Resources are the sine qua non of
strategy: without resources, strategy can achieve
nothing.
Because resources are a means for implementing
strategy, they can be confused with tactics. Both
resources and tactics are related to how strategy is
achieved, but tactics (from the Greek taktikos, of order
or arranging) refers to the detail of strategic designs and
to the detailed actions that are needed to effect strategy
implementation. Tactics are the detail-how of strategy,
whereas resources are strategy's with-what.
The resources element of the PSR Troika provides
the with-what for implementing
strategy and, therefore, for
achieving policy. It is strategy,
however, that drives decisions
relating to the acquisition,
development, and deployment of
a company's resources; and it is
strategy that determines the
priority that will be given to
different resources, how the
combination of resources will be
configured, and how resources
will be used.
Weighting the elements of the
PSR Troika
A troika is a system made up of
three elements. What
distinguishes the troika from
other triumvirates, however, is
that in a troika, the three
elements are equal in weight and
standing, and all three elements
act in unison. A graphic example of this is the Russian
troika: the carriage, wagon, or sleigh that is drawn by a
team of three horses abreast.
In the case of the PSR Troika, however, current usage
by management theorists and corporate executives gives
the three elements very unequal weight and standing.
Policy is seen as an abstract and somewhat bookish
concept that is more applicable to the public sector than
to business, and resources are seen as necessary but
boring. Strategy, on the other hand, is seen as the
glamorous, 2,000-pound gorilla.
The distortion in the perceived weight and standing
of policy, strategy, and resources has meant that
everything that matters gets to be called ``strategy.'' The
term is frequently applied to what is, in fact, policy. This
terminology transposition makes it difficult to
differentiate between policy and strategy to distinguish
between the what and the how making it necessary to
invent new terms such as strategy action plans when
referring to strategy, or strategic intent when referring to
I . : . : ] ] . ' : : : : ) . l . . ! ! !
::] :'.:: : ::s):.]:
:::. :.: :. ::.: .:
)::s:.:: a.. a: .
..:.: .: :::: .:
).):::F F F I.:.:]] : :
::]. : ):. .:. :'.:: :a
)::] : .: : ::::F F F
|I|.:.. :::.::: :.:.:]]
::. :::: .:..]
.
policy[2]. To make matters worse, some strategy
theorists argue that strategy includes not just everything
that matters, but ``everything a company does or consists
of''[3].
The terminology transposition is also applied to
resources. Some authors have defined strategy as
resources development and utilization[4]. Hamel and
Prahalad present core competencies as strategy[5] as
do some proponents of total quality management,
benchmarking, best practices, outsourcing, and ISO
9000. A materiel or methods resource (such as David
Kearns' Leadership Through Quality Program, which is
credited with the turnaround at Xerox) can become the
critical factor in a company's survival and success. But
even in these cases, they remain resources.
Causality in the PSR Troika
The primary characteristic of strategy is that it has a
causal relationship with the other two elements in the
PSR Troika. Resources provide the with-what means for
achieving strategy; and strategy is the how means for
achieving policy. These direct relationships result in an
indirect means-ends relationship between resources and
policy (see Exhibit 1).
As with Porter's ``chain of causality,'' which provides
a process map ``that runs from competitive environment
to position to activities to employee skills and
organization''[6], mapping the causal relationships that
are at work in the PSR Troika helps to define the nature,
function, and purpose of strategy. The PSR Troika
causality model also serves as a practical tool for
executives who have strategy-related responsibilities. By
defining the what, how, and with-what of the
relationships between policy, strategy, and resources, the
model provides a diagnostic template for strategy
analysis and a design template for strategy formulation.
Plurality of inputs
Although the primary characteristic of strategy is its
causal relationship with the other elements of the PSR
Troika, strategy is also characterized by a plurality of
inputs, options, and outcomes.
A plurality of inputs is indicated by the origins of the
term. When a general engages in strategy formulation,
he or she evaluates and selects from a multiplicity of
resources and develops a plan that combines these in a
way that will most effectively achieve his or her
government's political objectives.
In the business world, executives use a plurality of
inputs when they select and apply a combination of
materiel and methods resources in formulating corporate
and unit strategies. The use of a plurality of inputs in
unit strategies was made famous by Neil H. Borden in
his 1964 classic, ``The concept of the marketing mix,'' in
which he identified 12 elements (which were later
reduced by others to the ``Four Ps of marketing'') and
described the business executive as a ``mixer of
ingredients''[7].
Corporate and unit strategies both rely on a plurality
of resource inputs. Corporate strategies, however, also
include and aggregate resources from the company's
unit strategies (see Exhibit 2). In both corporate and
unit strategies, the sum of the inputs may be simply
additive. In more effective strategies, the choice and
configuration of the inputs produces a result that is
synergistic.
Plurality of options and outcomes
A plurality of options and outcomes refers to the
development and use of a multiplicity of alternatives for
achieving policy goals and objectives, and the
I . : . : ] ] . ' : : : : ) . l . . ! ! !
Exhibit 1 Causality in the PSR Troika
Exhibit 2 Input plurality in the PSR Troika
. |
anticipation of a multiplicity of possible outcomes that
could result from the implementation of different
strategic options. It is the plurality of options and
outcomes that gives strategy its non-linear nature and
distinguishes it from linear thinking. Because linear
solutions employ a single-line sequence, they have the
advantage of simplicity. There are, however, three
criteria that take precedence over simplicity in business
decision-making: the solution must be implementable; it
must not produce unacceptable adverse consequences;
and it must allow for flexibility.
Because strategy is characterized by multiple options,
multiple paths, and multiple outcomes, it is more
complex to design and more
difficult to implement than
linear solutions. But the
multiple-option, multiple-path,
and multiple-outcome aspects
of strategy enable it to get
around insurmountable
obstacles, avoid unacceptable
consequences, and be tolerant
of changes in conditions (see
Exhibit 3). The plurality of
options and outcomes is
especially important in
multiple-constituency
strategies, which are designed
to satisfy several constituency
groups that have different, and
often antithetical, interests and
expectations.
Many executives, however, prefer to avoid the
complexity of multiple-input, multiple-option, multiple-
path, and multiple-outcome strategies. This is not new.
Borden developed his concept of the marketing mix to
counter the behavior by marketing executives who, in
the 1950s, were relying almost entirely on advertising. In
recent years, the tendency to avoid the complexity of
multiple-element strategies has been worsened by what
Donaldson and Hilmer call the ``management fads,''
which have popularized the belief in silver-bullet
solutions[8].
The practical application of the terms, concepts and
principles
Policy
In practice, policy defines the principal goals and
objectives of the corporation and the domain in which it
will operate. In 1983, two years after becoming
chairman and CEO of General Electric, Jack Welch
mandated that GE would only be in businesses where it
could be number one or two, and
redefined GE's operational
domain by drawing his now
famous Venn diagram (the three
overlapping circles that
prescribed the three areas within
which GE would concentrate).
Corporate policies define goals
and objectives that are relatively
fixed and that help develop and
sustain direction. This fixedness
of corporate policy is especially
applicable to a company's raison
d'etre, which may go unchanged
for decades. Operational domain
policies, however, are more
subject to periodic change. For
example, since 1981, Jack Welch
has periodically adjusted GE's
policy to focus on financial services, to shift GE from a
hardware company to a services company, and most
recently to focus on Europe. Some analysts have called
these changes in strategy, but they are changes in policy:
they relate to operational domain to what the company
does and where it does it.
In practice, policy also allows management to
communicate a company's mission, major goals and
objectives, and operational domain to its internal and
external stakeholders. Part of the reason GE was chosen
as Fortune magazine's ``Most admired company'' in 1998
and 1999, and why Fortune named Welch its ``Manager
of the century,'' is due to the company's consistently
high growth in revenues, earnings, and stock price. But it
is also because Welch has articulated what were
perceived to be appropriate and unambiguous
policies[9].
The term ``policy'' can be ambiguous, because the
word is used in at least two derivative forms: policy
positions and operations policies. Policy positions are
formal statements that are developed by a company's
board of directors or senior management to spell out the
company's core values and beliefs, and/or define the
company's position on a specific issue. For example,
I . : . : ] ] . ' : : : : ) . l . . ! ! !
|:: :: .:: :.:: .:.
.:: )::::.:: :: :s):.]
. .:.::: ::::.s:.] .:
::..:. s.:. : s):s:..::
. s.:. .:. ):.:: ..::::).::
:::: ::.::;.:.::: :. .
s.:. ::a ': ':s.]
Exhibit 3 Option and outcome plurality in the
PSR Troika
. l
General Motors, General Foods and Johnson & Johnson
issue policy positions on affirmative action, professional
ethics, the environment, and customer service, and issue
ad hoc policy position statements relating to the recall of
a defective product or to communicate their response to
regulatory or industrial action.
Operations policies are rules, regulations, guidelines,
or contractual standards that govern the conduct of a
company's operations. When Nordstrom states its
legendary return and refund policy or McDonald's states
the supply provisions of its franchise policy, both
companies are using the word ``policy'' to lend weight to
what is, in fact, a company operating rule, regulation,
guideline, or contractual
standard.
There are two additional
terms that are frequently
associated with policy: mission
and vision. Mission statements
are mechanisms for
communicating corporate or
institutional policy to an
organization's internal and
external constituents. They are
grounded in that part of policy
which defines the
organization's raison d'etre, but
they frequently address
operational domain and
sometimes include references
to strategy.
Vision is also policy-related. But unlike mission
statements, which are derived from corporate policy,
vision provides a conceptual precursor to the creation of
corporate policy. Vision is seeing a desired future
situation. Jean-Paul Sartre (when talking about art,
religion, science, social structures, and politics) defined
vision as the ability to think of what is not. In business,
vision is Jeffrey Bezos in 1994 imagining the virtual
bookstore and in 1999 seeing Amazon.com as the
``earth's biggest river, the earth's biggest selection''[10].
It is Jack Welch in 1981 saying, ``A decade from now I
would like General Electric to be perceived as a unique,
high-spirited, entrepreneurial enterpriseF F F ''[11].
The what of corporate vision, the image of what the
corporation will be and what it will do, provides the
conceptual basis for corporate policy. The visual image
of how these whats will be achieved provides the
conceptual basis for corporate strategy.
The policy terminology waters are also muddied by
what can be called quasi policy slogans. These are the
frequently invoked phrases (such as Jack Welch's
exhortation that GE be ``Better than the best'') that are
often a mix of promotional tag-lines and motivational
mantras. Quasi policy slogans often look like corporate
policy, but they do not define substantive goals and
objectives or prescribe the company's operational
domain. Quasi policy slogans can be important and
effective communication, leadership, and motivational
tools, but they do not drive strategy.
Strategy
The practical purpose of strategy is to provide a plan that
employs multiple inputs, options, and outputs to achieve
a company's policy goals and objectives. To achieve
GE's corporate policy goals and objectives, Welch used
divestiture strategies to remove units that did not satisfy
financial performance policies or that fell outside the
parameters of his Venn diagram; he used acquisition
strategies to add units that fit
with his vision of GE as a
``unique, high-spirited,
entrepreneurial enterprise''; and
used vertical and horizontal
diversification strategies to
achieve the company's policy
shift from hardware to services.
This resulted in the divestiture of
Utah International (one of the
GE's largest and most profitable
subsidiaries), because as a mining
company it did not fit within the
company's domain parameters,
and drove GE's acquisition of
NBC and financial services
companies.
In practice, the purpose of strategy has been confused
by policy-strategy inversion. This occurs when the term
``strategy'' is applied to the goal, and the term ``policy'' is
applied to the means for achieving the goal, as when
Porter argues ``the need for policies that achieve strategic
goals.'' But by definition, having a policy that achieves a
strategy is a literal impossibility. When viewed in
context, policy usually refers either to policy positions,
operations policies, or materiel and methods resources.
Resources
The purpose of the resources element of the PSR Troika
is to supply the materiel and methods that are the
components of corporate and unit strategies. Although
many of the measures taken by Jack Welch to keep GE
achieving its policy objectives have been strategic, part of
GE's success is due to the design, development,
acquisition, and implementation of resources that
provide the with-whats that are needed to give effect to
the company's new strategies. For example, GE's highly
publicized use of workouts, benchmarking, process
mapping, and best practices and the aggressive use of
other motivational and cost cutting measures are all
resource methods.
All of Welch's resources initiatives have been related
causally to strategies that have been means-ends related
I . : . : ] ] . ' : : : : ) . l . . ! ! !
I.::.:..] a:. :.:.:]] :
:: ::. ::s)::.: ] .:
):'::.:. . .: ..s: :'
::::: :' :.:.:]: .:.]. :.
] .: ..::).: ::.
::::: .:: :' .: .:s
.
to policies. In 1981, GE had no core competencies in
financial services. But Welch's policy decision to make
financial services central to GE's operational domain
drove GE's financial services acquisition strategy, which
included the acquisition of financial services core
competency resources. GE's financial services now
account for 30 percent of the company's revenues and
60 percent of its profits.
What strategy is
Understanding what strategy is has been complicated by
the proliferation in the number of schools of strategic
thought and by the undisciplined, even reckless, use of
the term[3]. Understanding strategy has also been made
more difficult by the popularity of the resource methods
that Donaldson and Hilmer call the techniques du jour.
Porter addresses this in ``What is strategy?,'' where he
protests that the:
F F F remarkable number of management tools and techniques: total
quality management, benchmarking, time-based competition,
outsourcing, partnering, reengineering, [and] change management
F F F have taken the place of strategy[12].
Understanding strategy has been hurt by the tendency to
view strategy as a stand-alone phenomenon, rather than
as a causally linked element in the PSR Troika. In
theory, the concept of strategy is difficult to sustain
without a means-ends dichotomy. In practice, it is
extremely difficult, if not impossible, for executives to
make strategic decisions without knowing what is the
end goal or objective. For example, choosing between
Porter's ``low cost'' or ``differentiation'' generic
strategies, or deciding to develop a non-generic third
option, is almost impossible without applying policy as
the dependent variable in the decision-making process.
Strategy is driven by its purpose, and its purpose is to
achieve policy. Strategy must include a plurality of
inputs, a multiplicity of options, and an ability to
accommodate more than one possible outcome. But
where policy is ignored or where there is no end-means
linkage between policy and strategy, strategy has no
means-end object. In these situations, strategy suffers
from being a means without an end, an end in itself, or a
means of achieving an operational end, rather than being
a design or plan for achieving the company's policy goals
and objectives. I.'
References
1. Porter, M.E., ``From competitive advantage to corporate
strategy'', Harvard Business Review, May-June 1987, p. 43.
2. Hamel, G. and Prahalad, C.K., ``Strategic intent'', Harvard
Business Review, May-June 1989, pp. 63-76.
3. Mintzberg, H., Ahlstrand, B. and Lampel, J., Strategy Safari: A
Guided Tour Through the Wilds of Strategic Management, Simon &
Schuster, New York, NY, 1998, p. 119.
4. Wernelfelt, B., ``A resource-based view of the firm'', Strategic
Management Journal, Vol. 5, 1998, pp. 171-80; Barney, J., ``Firm
resources and sustained competitive advantage'', Journal of
Management, Vol. 17 No. 1, 1991, pp. 99-120; Peteraf, M.A.,
``The cornerstones of competitive advantage: a resources-based
view'', Strategic Management Journal, Vol. 14 No. 3, March 1993,
pp. 99-120.
5. Prahalad, C.K. and Hamel, G., ``The core competencies of the
corporation'', Harvard Business Review, May-June 1990,
pp. 71-91.
6. Porter, M.E., ``Response to letters to the editor'', Harvard
Business Review, March-April 1997, p. 162.
7. Borden, N.H., ``The concept of the marketing mix'', Journal of
Advertising Researcher, June 1964, p. 3.
8. Donaldson, L. and Hilmer, F.G., ``The case against fads that
harm management'', Organizational Dynamics, Spring 1998,
pp. 7-20.
9. Colvin, G., ``The ultimate manager'', Fortune, 22 November
1999, pp. 111-15.
10. Brooker, K., ``Amazon vs. everybody'', Fortune, 8 November,
1999, p. 125.
11. Aguilar, F.J., Hamermesh, R.G. and Brainard, C., ``General
electric: 1984'', HBS Case No. 385-315, Harvard University
Press, Cambridge, MA, 1984, p. 4.
12. Porter, M.E., ``What is strategy?'', Harvard Business Review,
November-December 1996, p. 61.
I . : . : ] ] . ' : : : : ) . l . . ! ! !
! !