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Published: November 28, 2007

 
 

Best Business Books: Strategy

Planning for Uncertainty

William Duggan
Strategic Intuition: The Creative Spark in Human Achievement
(Columbia University Press, 2007)

William H. Marquard
Wal-Smart: What It Really Takes to Profit in a Wal-Mart World
(McGraw-Hill, 2006)

Michael E. Raynor
The Strategy Paradox: Why Committing to Success Leads to Failure (and What to Do about It)
(Doubleday, 2007)

Ming Zeng and Peter J. Williamson
Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition
(Harvard Business School Press, 2007)

Chris Zook
Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth
(Harvard Business School Press, 2007)


It is widely held that growth is the fundamental strategic challenge for business leaders. I agree with that idea wholeheartedly, and I would add that creativity is essential for sustained growth. Effective execution of existing strategies can bring increased revenue and profits, but the most successful strategies are often the most creative, delivering growth by developing new ways to create value for customers and capture it for the enterprise.  

Today’s business environment is making creative strategy even more critical. Virtually every business author argues that the world is getting more complex, whether it’s the new rules of the Internet economy; the “flattening” of global markets; the emergence of new world-scale competitors; or the fluidity of people, ideas, and capital. In this environment, constant strategic re-creation may offer the only hope of long-term success.

What role, then, can business books play in a strategist’s own creation? Such books tell stories of great strat­egic triumphs (and failures), examining heroic leaders and critical decisions, analyzing businesses individually and en masse to glean lessons and codify rules. But what value does this serve in preparing leaders for the creative process of developing the next strategy? Many of the heroes of our best strategic tales, including some told in the books reviewed here, were not great students of strategy. Indeed, many of our modern business icons — Bill Gates, Sam Walton, Richard Branson, Fred Smith, and the like — didn’t proceed from theory to action. And perhaps their genius can’t be codified. As the philosopher Immanuel Kant argued, “Genius is a talent for producing that for which no definite rule can be given, and not an aptitude in the way of cleverness for what can be learned according to some rule.”

It is therefore no wonder that most business books discuss how to evaluate a strategy, but few offer much help in creating one.

In Strategic Intuition: The Creative Spark in Human Achievement, my choice for the best strategy book of the year, Columbia University professor William Duggan explains that Michael Porter’s classic Competitive Strategy: Techniques for Analyzing Industries and Competitors (Free Press, 1980) “tells you how to analyze your own strategy in light of your industry and your competitors. But it does not tell you how to come up with a strategic idea: that’s a ‘creative step’ Porter leaves out.” Even management academics themselves are raising doubts about the value of business scholarship, with luminaries including Jeffrey Pfeffer, Warren Bennis, Henry Mintzberg, and the late Sumantra Ghoshal all questioning whether business schools can develop effective managers and challenging the relevance, and even the validity, of academic research.

However, in business, and across many more traditionally creative fields, talented practitioners do study and learn from both theory and literature, from rules and stories. Famously, Fats Waller warmed up with classical piano pieces, and it was reported by a collaborator that “he knew Brahms, Liszt, and Beethoven as well as he knew jazz, and often discussed and analyzed their work.” Artists sketch from great paintings to explore their composition. Mathematicians work through the landmark proofs, both to learn their results and to understand the methods behind them. Such study does not make these individuals creative geniuses, but it lays the foundation for them to exercise their genius, developing a context for their activities, outlining the “rules,” and building a repertoire of examples and fragments from which new ideas can be assembled.

There is another reason to study business theory and read stories of successful strategy. Strategic theories can ultimately shape the very context in which strategies are developed and executed. The interplay of theory and actual behavior is particularly important when the paradigm of business shifts and our understanding of new potential strategies lets us create new markets or reshape competitive dynamics. In business, unlike in nature, the fittest often survive by helping create the environment that favors them.

We may have passed through just such a shift sometime in the last decade. The rules of business seem to have mutated. Familiar market boundaries have blurred, or even disappeared. Companies have lost mass and gained speed. Every business faces uncertainty. Chris Zook and his Bain & Company partners put it this way: “Almost all of our clients and their competitors [are] confronting more fundamental and more frequent threats to their core businesses.” Throughout this period, managers have become less confident, a clear sign of impending change and a need for fresh theories.

Four of the strategy books reviewed here are well worth reading for their informative and insightful treatment of strategy, in theory and in practice: The Strategy Paradox: Why Committing to Success Leads to Failure (and What to Do about It), by Michael E. Raynor, for its view on how strategic uncertainty can best be managed; Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition, by Ming Zeng and Peter J. Williamson, and Wal-Smart: What It Really Takes to Profit in a Wal-Mart World, by William H. Marquard, for their analyses of how emerging dominant competitors are changing the strategic environment; and Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth, by Chris Zook, for rules and examples for renewing business. The fifth and best, Duggan’s Strategic Intuition, takes on a more challenging task: identifying the processes that lie behind the creative flash of genius and suggesting the means to develop greater intuitive strategy skills.

Creating Strategic Flexibility 
Strategists have long argued for strategic purity (i.e., focused, distinctive strategy) and commitment (i.e., clear alignment of all resources and capabilities with that strategy), citing research and examples showing that the highest returns are correlated with focus and commitment. In The Strategy Paradox, the most rigorous and scholarly of this year’s selection, Michael Raynor identifies the fundamental paradox in this thinking. Since one cannot plan for an unknowable future, the same focus and commitment that promise the highest returns necessarily imply the greatest probability of failure.

In Raynor’s analysis, this is caused by the strategic uncertainty inherent in the marketplace. The choices underlying a focused, committed strategy must often address a future that involves unpredictable changes in consumer response, market dynamics, and development paths. “Middle-of-the-road” strategies offer more resilience, “but at the cost of being able to generate significant returns,” he writes. It is impossible to build sufficient adaptability at the business level, even if competitors’ responses might be parried. With classic examples, including Sony Betamax, Raynor illustrates that the firms that guess right and commit more vigorously to the strategy that fortune ultimately favors will defeat their competitors, but they risk catastrophe.

Raynor believes the resolution of this paradox at the business level lies in strategic flexibility at the corporate level. Corporations can reduce risk by “managing strategic uncertainty through the creation of strategic options,” investing in a portfolio of positions, even as individual businesses take the risks inherent in high-return strategies. As decisions move up the corporate hierarchy, executives’ time horizons should lengthen and their priorities should shift from managing commitments to building options on an uncertain future. “CEOs should not see their role in terms of making strategic choices — that is, commitments,” Raynor writes. “Rather, they should focus on building ‘strategic options,’ that is, creating the ability to pursue alternative strategies that could be useful, depending on how key uncertainties are resolved.”

Building strategic flexibility is messy and difficult, as Raynor shows in his analyses of Microsoft, Johnson & Johnson, and Vivendi Universal, as well as in the processes he describes for developing a range of possible future scenarios and then assembling and managing a collection of options to address them.

This philosophy of strategic flexibility, because it is costly and complex and unavailable to the individual entrepreneur, may be appropriate only for the largest of companies. More fundamentally, assembling a portfolio of options may best be left to investors, not operators. A collection of businesses reflecting alternative views on an uncertain future seems more like a venture-capital fund than a classic corporation. The justification for flexibility as a corporate strategy, Raynor recognizes (in a discussion similar to Chris Zook’s arguments in Unstoppable, discussed below), is the potential for linkages across the portfolio: “Corporate diversification makes sense to shareholders only if it either captures synergies or creates options on synergies that investors cannot replicate.”

China Rising
The rise of China in the global economy is one of the greatest forces changing today’s context for business strategy. Consider how it has reshaped certain industries once dominated by American companies: According to Ming Zeng and Peter J. Williamson in Dragons at Your Door, in air conditioners, microwave ovens, and cranes, the global market share of Chinese firms is 50 percent; in marine containers, lighters, and sewing machines, it is more than 70 percent. China is also enjoying high levels of trade surpluses, foreign direct investment, and foreign currency reserves.

Zeng and Williamson conclude that the most successful Chinese companies collectively represent a disruptive competitor of unprecedented scale and threat, exploiting a new strategy of “cost innovation,” offering “high technology at low costs…presenting customers with an unmatched choice of products in what used to be considered standardized, mass-market segments — using low costs to offer specialty products at dramati­cally lower costs.” By using a huge workforce that combines high skills and low wages, China is able to break the traditional trade-offs among sophisticated technol­ogy, product line complexity, and cost — at the design, process, and production levels.

In many ways, Chinese businesses today are retracing the evolutionary paths of their Asian predecessors. From the 1960s through the ’80s, Japanese and then Korean companies introduced low-cost products built for the home market (albeit not on the same scale as modern China), then migrated quickly up-market as the incumbent players retreated to high-feature (but ultimately undefendable) niches.

However, China’s threat is developing with greater speed and severity than that of the earlier Asian tigers. In addition to low wages and talented labor, China provides its companies with significant advantages, including subsidized access to government assets and intellectual property, management autonomy and stability, weak shareholder protections, and a national commitment to globalization and industri­alization. Moreover, Zeng and Williamson note, the world in which Chinese companies are competing has opened new gateways for them: the increasing modularization of products and services, a more sophisticated knowledge economy, the concentration and globalization of retailing, a more fluid international market for talent, and professional services and a more open market for corporate control.

Finally, the Chinese market has embraced world trade relatively early in its development process, attracting foreign (and overseas Chinese) capital, technology, and human resources, further accelerating growth and innovation.

How does a competitor address these challenges? Zeng and Williamson describe a range of strategic responses for organizations under threat, including emulating the strategy of cost innovation, which is difficult for most Western incumbents with high costs and legacy processes. Another response is to “give China a global mandate” by creating a local operation serving the Chinese market while providing cost innovation in products and development to the entire company. This approach can preempt the emergence of a world-scale local competitor. And the third suggestion is to build alliances with “dragons” to accomplish the same end, by positioning a partner’s Chinese capacity as part of a global product portfolio and manufacturing footprint.

The best companies already pursue these strategies. For example, Procter & Gamble is developing lower-cost products to move beyond the wealthiest 8 percent of the Chinese market. Many industrial companies are focusing capacity investments in China to capture demand and preempt local competition.

However, the future of the dragons is not guaranteed; China’s growth may be generating challenges of its own. Costs are rising in Guangzhou and Shanghai. Local demand is becoming more sophisticated. And in the Wal-Mart world that William Marquard describes, China’s current perfor­mance in terms of quality, safety, emissions, and governance may not be acceptable to global consumers in the long term.

Competing in a Wal-Mart World
In Wal-Smart, William Marquard, a former Wal-Mart executive, examines the strategy behind a second great force shaping the current business environment and also recommends responses to China. Wal-Mart “is the dominant company of our era,” he declares, representing 2.5 percent of the U.S. economy and nearly 1 percent of the global economy. Wal-Mart has transformed the retail world, making big boxes and “everyday low prices” part of every consumer’s shopping experience. It has triggered among competitors greater specialization and focus on the shopping event so that they can offer consumers a distinctive alternative. Among its suppliers, Wal-Mart has changed patterns of product development and operations. Marquard says that “half the increase in retail productivity [from 1995 to 1999] could be traced directly or indirectly to Wal-Mart.”

As hundreds of articles and many books have done before, Marquard’s work describes Wal-Mart’s killer strategy of relentless cost reduction, internally and through suppliers, that drives price reductions and in turn volume increases, feeding the cost reduction loop. Supporting this are strong processes that spread the improvements quickly across company stores.

The value of Marquard’s book is that it identifies potential responses to this familiar situation. He believes competitors must make choices about “how to differentiate, what to emulate, and where to dominate” in order to distance themselves from Wal-Mart’s low costs, utilitarian range, and experience. For suppliers, the preferred response seems to be to engage Wal-Mart on its own terms, leveraging brands, investing in supply and development processes, and diversifying channels.

Wal-Smart is a more thoughtful, and hopeful, analysis than most books about Wal-Mart. It recognizes that Wal-Mart is formidable, but understands where its limits might lie, both in Porter-esque terms of supplier, customer, and competitive power and in terms of its acceptability to the communities and societies in which it operates. For suppliers and competitors, the author makes clear the dynamics underlying Wal-Mart’s success and the choices that must be made in response.

Whether you are a friend or a foe of Wal-Mart on issues of social responsibility, Marquard shows how the implications of Wal-Mart’s strategic success for employees and communities are as important as its impact on competitors and suppliers. Wal-Mart “turned into a lightning rod for outrage over labor rights, human rights, women’s issues, urban sprawl, energy consumption, small-town decline, you name it…. Thanks to the catalyzing effect of Wal-Mart, business was witnessing the birth of a new progressive social movement.” Marquard’s prescriptions are less well formed and less compellingly argued, perhaps because the phenomena he describes are themselves in the formative stage.

Beyond the Core
Unstoppable is the final volume in Chris Zook’s “Core” trilogy. Having explained how to Profit from the Core: Growth Strategy in an Era of Turbulence (Harvard Business School Press, 2001) and to move Beyond the Core: Expand Your Markets without Abandoning Your Roots (Harvard Business School Press, 2004), he now describes how to develop a new core business when the current one no longer provides sufficient growth. In many ways, this is the practical handbook for developing and managing the sort of options for an uncertain future advocated by Raynor.

As in his earlier books, Zook still encourages companies to leverage their current customers, established businesses, and existing capabilities to sustain profitable growth. However, in Unstoppable, he acknowledges that it may become necessary to create a new core business, because of a “shrinking or shifting of the future profit pool,” a direct threat from a competitor with a fundamental economic advantage, or failure of the current growth strategy to produce results.

All moves away from the core are risky, but Zook’s research suggests that redefining the business to center on its “hidden assets” is far more likely to succeed than either making transformational acquisitions or diversifying into hot markets. He identifies three categories of hidden assets that offer the promise of new options and a more attractive future: undervalued business platforms (products, adjacencies, support organizations, noncore businesses); unexploited customer assets (unrecognized segments, privileged access or trust, underused information); and underused capabilities.

Like Raynor, Zook begins his book by telling readers to develop “a view on impending turbulence” and its likely impact on the business core. Unstoppable’s great value lies in the way it addresses the increasingly common problem of creating growth where there is none, especially the author’s pragmatic detailing of the range of hidden assets and means of identifying them. However, like Raynor, Zook describes what an attractive asset- and option-driven move should look like, while offering only limited help on the creative processes for those trying to invent one.

The Creative Flash
Taking on a fundamentally different challenge than the other authors discussed in this review, William Duggan declares in Strategic Intuition that he hopes to fill a gap in modern strategic thinking, where “the reigning models of business strategy…leave out how strategists actually come up with their ideas.” In one of the more ambitious books in recent years, he wrestles with the nature of strategic intuition — the “creative spark” — and how to develop it.

Duggan views the process of creating new ideas as complementary to the more rational tools for analyzing them: “Strategic analysis and strategic intuition are the two main pieces of the modern puzzle of business strategy.” As he writes, “A creative flash yields rational insight.” This linkage is most easily seen in mathematics, where the processes of discovery and demonstration are distinct. Discovering a new theory or proof is messy, with no clear rules or prescribed processes, only an array of tools and techniques. Once discovered, however, it can be presented with clear, compelling logic and praised for its elegance.

Duggan’s close reading of military strategy and the history of science informs the book greatly. Thomas Kuhn, for example, in The Structure of Scientific Revolutions, shows that revolutionary insights are constructed from existing pieces of information. “The common idea of how a leap of progress happens is a leap of imagination,” Duggan writes. “[Kuhn] gives us an alternative: a selective combination of elements from the past make something new. The elements themselves are not new.” The raw material feeding the creative process is past experience, either direct or learned from history. The strategist searches for a better combination of resources, actions, and even goals.

Duggan illustrates this through a distinctive reading of the recent history of the computer industry. He studies Bill Gates, Steve Jobs, and Lou Gerstner, and their critical strategic decisions, showing how their context and experience provided the pieces they assembled to create new strategies. He concludes, “When we step up close to study the details of each new bend in the road, we find that each strategist took elements from the past to make a new combination in the future.”

This view, that “a flash of insight draws on past elements,” suggests a very different way of reading strategy. There is some value in studying theory, to understand what “rules” there may be (provided one recognizes that the rules of business may change). And synthesized lessons can help apply today’s solutions to today’s world. However, the real value is to be found in close study of the specific decisions and actions of the past, to assemble the pieces from which a new idea can be created. As Duggan writes, “You must study the past in detail, to put on the shelves of your brain what later comes together in a new combination.”

This is consistent with creative artists’ use of theory and literature. A writer is more likely to learn from reading great works closely than from absorbing literary criticism. Although architects need to understand building codes and mechanical engineering, they must also see how others have solved the problems of space and light. Musicians listen to learn.

There is another reason to put the literature of strategy on an equal footing with the theory of strategy. Ultimately, strategic insight and strategic leadership are human activities. Yet most strategy books are sparsely populated by people, with Bill Gates or Sam Walton serving as emblems of their businesses rather than as the creative and motive forces behind them. Most writing about strategy focuses on the dead artifacts of the strategic process, rather than on the live, human creative act itself. This may be interesting in its own right, but it is of limited use to a reader hoping to become a creative strategist and leader. For that, we need to experience the context, the people, and the leader’s actions.

In reading strategy as stories of individuals taking action, we might do well to keep in mind the view of Bruno Bettelheim, the Austrian-born American writer and child psychologist, who posited that reading about the trials, tribulations, successes, and failures of fairy-tale heroes will prepare children for the trials, tribulations, successes, and failures that they will encounter in their own lives. In The Uses of Enchantment (1975), Bettelheim wrote, “The fairy tale reassures, gives hope for the future and holds out the promise of a happy ending.” The best writing about strategy won’t help us predict a successful future, but it may help us create it.

Author Profile:


David Newkirk ([email protected]) is CEO of executive education at the University of Virginia’s Darden Graduate School of Business. He was formerly a strategist with American Express and a vice president with Booz Allen Hamilton.
 
 
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