HBR's 10 Must Reads on Strategy (including featured article "What Is Strategy?" by Michael E. Porter)

by Michael E. Porter

The creation of blue oceans, in other words, is a product of strategy and as such is very much a product of managerial action.

never use the competition as a benchmark. Instead they make it irrelevant by creating a leap in value for both buyers and the company itself.

Perhaps the most important feature of blue ocean strategy is that it rejects the fundamental tenet of conventional strategy: that a trade-off exists between value and cost.

when it comes to creating blue oceans, the evidence shows that successful companies pursue differentiation and low cost simultaneously.

Since buyer value comes from the utility and price a company offers, and a company generates value for itself through cost structure and price, blue ocean strategy is achieved only when the whole system of a company’s utility, price, and cost activities is properly aligned. It is this whole-system approach that makes the creation of blue oceans a sustainable strategy.

Execution

clarifying decision rights, designing information flows, aligning motivators, and making changes to structure. (For simplicity’s sake we refer to them as decision rights, information, motivators, and structure.)

Influencers for execution

our research shows that actions having to do with decision rights and information are far more important—about twice as effective—as improvements made to the other two building blocks.

In addressing only structure, management had attacked the visible symptoms of poor performance but not the underlying cause—how people made decisions and how they were held accountable.

execution exemplars focus their efforts on two levers far more powerful than structural change: • Clarifying decision rights—for instance, specifying who “owns” each decision and who must provide input • Ensuring information flows where it’s needed—such as promoting managers laterally so they build networks needed for the cross-unit collaboration critical to a new strategy Tackle decision rights and information flows first, and only then alter organizational structures and realign incentives to support those moves.

Decision Rights • Ensure that everyone in your company knows which decisions and actions they’re responsible for.

If managers don’t understand what it will cost to capture an incremental dollar in revenue, they will always pursue the incremental revenue.

Because Goodward had always promoted up rather than over and up, most middle and senior managers remained within a single group. They were not adequately apprised of the activities of the other groups, nor did they have a network of contacts across the organization.

ensuring that people truly understand what they are responsible for and who makes which decisions—and then giving them the information they need to fulfill their responsibilities. With these two building blocks in place, structural and motivational elements will follow.

The balanced scorecard supplemented traditional financial measures with criteria that measured performance from three additional perspectives—those of customers, internal business processes, and learning and growth.

Most companies’ operational and management control systems are built around financial measures and targets, which bear little relation to the company’s progress in achieving long-term strategic objectives. Thus the emphasis most companies place on short-term financial measures leaves a gap between the development of a strategy and its implementation.

The scorecard lets them introduce four new management processes that, separately and in combination, contribute to linking long-term strategic objectives with short-term actions.

For people to act on the words in vision and strategy statements, those statements must be expressed as an integrated set of objectives and measures, agreed upon by all senior executives, that describe the long-term drivers of success.

when managers use the ambitious goals set for balanced scorecard measures as the basis for allocating resources and setting priorities, they can undertake and coordinate only those initiatives that move them toward their long-term strategic objectives.

A sophisticated instrument panel for coordinating and fine-tuning a company’s operations and businesses so that all activities are aligned with its strategy.

The scorecard thus enables companies to modify strategies to reflect real-time learning.

the company asks both individuals and teams to articulate which of their own objectives would be consistent with the business unit and corporate objectives, as well as what initiatives they would take to achieve their objectives.

The personal scorecard helps to communicate corporate and business unit objectives to the people and teams performing the work, enabling them to translate the objectives into meaningful tasks and targets for themselves.

One company we have studied takes an intermediate position. It bases bonuses for business unit managers on two equally weighted criteria: their achievement of a financial objective—economic value added—over a three-year period and a subjective assessment of their performance on measures drawn from the customer, internal-business-process, and learning-and-growth perspectives of the balanced scorecard.

Building a scorecard thus enables a company to link its financial budgets with its strategic goals.

Once the strategy is defined and the drivers are identified, the scorecard influences managers to concentrate on improving or reengineering those processes most critical to the organization’s strategic success. That is how the scorecard most clearly links and aligns action with strategy.

The final step in linking strategy to actions is to establish specific short-term targets, or milestones, for the balanced scorecard measures. Milestones are tangible expressions of managers’ beliefs about when and to what degree their current programs will affect those measures.

double-loop learning—learning that produces a change in people’s assumptions and theories about cause-and-effect relationships. (See “Teaching Smart People How to Learn,” HBR May–June 1991.)

Strategic learning consists of gathering feedback, testing the hypotheses on which strategy was based, and making the necessary adjustments.

Without a balanced scorecard, most organizations are unable to achieve a similar consistency of vision and action as they attempt to change direction and introduce new strategies and processes. The balanced scorecard provides a framework for managing the implementation of strategy while also allowing the strategy itself to evolve in response to changes in the company’s competitive, market, and technological environments.

Within a single company, it’s tricky to achieve both decentralized decision making and coherent strategic action.

The distillation of a company’s strategy into a pithy, memorable, and prescriptive phrase is important because a brilliant business strategy, like an insightful approach to warfare, is of little use unless people understand it well enough to apply it—both to anticipated decisions and unforeseen opportunities.

An effective strategic principle lets a company simultaneously: • maintain strategic focus, • empower workers to innovate and take risks, • seize fleeting opportunities, • create products and services that meet subtle shifts in customers’ needs.

A successful strategic principle: • Forces trade-offs between competing resources.

Summarize your corporate strategy—your plan to allocate scarce resources in order to create value that distinguishes you from competitors—in a brief phrase.

A mission statement informs a company’s culture. A strategic principle drives a company’s strategy. A mission statement is aspirational: it gives people something to strive for. A strategic principle is action oriented: it enables people to do something now. A mission statement is meant to inspire frontline workers. A strategic principle enables them to act quickly by giving them explicit guidance to make strategically consistent choices.

an effective strategic principle does the following: • It forces trade-offs between competing resource demands; • It tests the strategic soundness of a particular action; • It sets clear boundaries within which employees must operate while granting them freedom to experiment within those constraints.

“The genius of a great leader is to leave behind him a situation that common sense, without the grace of genius, can deal with successfully,”

Today, many companies simultaneously face four situations that make a strategic principle crucial for success: decentralization, rapid growth, technological change, and institutional turmoil.

Finally, a strategic principle can help provide continuity during periods of organizational turmoil.

points to a hidden benefit of having a strong strategic principle: “You’re more efficient and can run with a leaner management team because everyone is on the same page.”

Managers need to ask themselves: how does my company allocate those resources to create value in a unique way, one that differentiates my company from competitors? Try to summarize the answer in a brief phrase that captures the essence of your company’s point of differentiation.

We agree that a mission statement is crucial for promulgating a company’s values and building a robust corporate culture. But it still leaves a large gap in a company’s management communications portfolio. At least as important as a mission statement is something that promulgates a company’s strategy—that is, a strategic principle.

develop realistic plans that are solidly grounded in the underlying economics of their markets and then use the plans to drive execution. Their disciplined planning and execution processes make it far less likely that they will face a shortfall in actual performance. And, if they do fall short, their processes enable them to discern the cause quickly and take corrective action.

Start by applying seven deceptively straightforward rules, including: keeping your strategy simple and concrete, making resource-allocation decisions early in the planning process, and continuously monitoring performance as you roll out your strategic plan.

management starts with a strategy it believes will generate a certain level of financial performance and value over time (100%, as noted in the exhibit). But, according to the executives we surveyed, the failure to have the right resources in the right place at the right time strips away some 7.5% of the strategy’s potential value. Some 5.2% is lost to poor communications, 4.5% to poor action planning, 4.1% to blurred accountabilities, and so on.

without clear information on how and why performance is falling short, it is virtually impossible for top management to take appropriate corrective action.

Each improvement priority is translated into action items with clearly defined accountabilities, timetables, and key performance indicators (KPIs) that allow executives to tell how a unit is delivering on a priority.

Textron’s CEO, summarizes the company’s approach this way: “Everyone needs to know: ‘If I have only one hour to work, here’s what I’m going to focus on.’ Our goal deployment process makes each individual’s accountabilities and priorities clear.”

Roche goes as far as to turn its business plans into detailed performance contracts that clearly specify the steps needed and the risks that must be managed to achieve the plans. These contracts all include a “delivery agenda” that lists the five to ten critical priorities with the greatest impact on performance. By maintaining a delivery agenda at each level of the company, Chairman and CEO Franz Humer and his leadership team make sure “everyone at Roche understands exactly what we have agreed to do at a strategic level and that our strategy gets translated into clear execution priorities.