Being strategic is more necessary than ever, but it depends on what you mean by strategic. By Ben Wilmot
After a long hiatus, the world’s leading thinker on strategy, Michael Porter, has re-emerged over the past two years in the Harvard Business Review. Since the dot-com boom, he has been no less strident than he was two decades earlier. Porter says that, contrary to recent thought, the internet is not disruptive to most existing industries and established companies. However, he finds that bad strategy seems to be de rigueur: “Many of the pioneers of internet business, dot-coms and established companies, have competed in ways that violate nearly every precept of good strategy.”
Porter’s thoughts inspired a swift rejoinder from management author Don Tapscott: “Michael Porter’s yearning for past certitudes is an example of very dangerous thinking, because a number of those certitudes have been shown to be completely false. Profitability alone is an insufficient guide for continued success in the new environment; and conventional wisdom is no guide for an unconventional future.”
David O Donnell and Joachim Maier, of the Intellectual Capital Research Institute and Imagination Lab Foundation, take this critique a little further and pose the question: “Is the word management, let alone strategy, any longer relevant in such complex, unpredictable, yet somehow adaptive contexts?”
They write that conventional business strategy can be neatly summed up in two words: “formulate” and “implement”. They pinpoint two facets of the emerging e-business landscape that militate against this model: the speed at which e-business develops allows neither senior management nor employees the luxury of older-style strategic planning; the loosely coupled nature of network relationships has reconfigured the old organisational structures.
O Donnell and Maier say that in “digital real time”, which is characterised by ambiguity and fundamental uncertainty, strategy seems to be a tenuous construction.
Yet they also understand that strategy is produced by practices that help us to make sense of the world and it thus creates social realities. This is evident in the way Porter’s phrases such as “stuck in the middle” and “generic strategies” have entered the management lexicon.
Although Porter’s terminology can be dismissed as outmoded “classical strategy”, the era of top-down management is gone. O Donnell and Maier write that power, control, ownership and influence are more widely distributed as strategy emerges from the web of interactions with customers, among people in particular communities of practice, and between diverse entities.
Moving from a paradigm based on control to a greater acceptance of uncertainty and unpredictability has obvious implications. Accepting far less control over business than in the hierarchical era challenges strategists to create intellectual capital and derive economic and social value from it.
But Toby Harfield of the University of Canterbury usefully reminds us that competitive advantage is hardly a new subject. Porter, in his old (early 1980s) and new (2000 onwards) strategy writings, emphasises the dynamic relationship between enterprise strategy and industry structure. Harfield finds qualities of “indeterminacy and plurality” in Porter’s theories of competitive advantage rather than simply labelling him a “rational positivist”. Porter, he notes, has even come under fire for being too eclectic and thus adding nothing to the “foundations” of strategy in contrast to his recent dot-com critics who have portrayed him as a stick in the mud.
The legendary, and sensible, management theorist Henry Mintzberg, who has painstakingly categorised the different schools of thinking on strategy, believes that the practice is better characterised as an emergent phenomenon rather than a planned organisational one.
He emphasises the enactment of strategy through learning, negotiation, and adaptation and suggests that a distinction between planning and implementation is unsustainable.
Rather than being a failure of the strategy model, a focus on functional processes, can, as Mintzberg argues, lead to better strategising in unpredictable environments that catch out even the best.
Despite the internet supposedly not being a disruptive technology, most of Porter’s Harvard Business Review articles are now freely posted.
MICHAEL PORTER talks to David James
about how globalisation has changed the strategic options for countries and companies. The conclusion? Get into industry clusters if you want to thrive.
What are the intellectual origins of your thinking on clusters?
The cluster concept was born out of the extensive research project that I conducted that led to the Competitive Advantage of Nations book, which was published in 1990. The history of that book is interesting. I was appointed by President Ronald Reagan to look at the competitive position of the United States in the early 1980s when there was great concern that we were losing competitiveness, particularly to the Japanese.
Most of the discussion was framed in classical macro-economic discussions of exchange rates and things like that. I was convinced that there was more to it.
We had a substantial research team in each of the 10 countries that were the focus of the project to look at the leading international industries in those countries. It became evident fairly early on that clusters were very much present. You tended to see multiple companies in the same successful industry in the same country, and these clusters were very different in each country.
The paradox was that we were seeing these local concentrations in a global economy in which you can move goods and services and information around the world very quickly.
Basically the diamond theory that was presented in the book was a general theory of micro-economics of competitiveness. A derivative of that theory was that you would see clusters, because the cluster is the physical juxtaposition of the various parts of the diamond in one particular location within the country.
I think it was the ability to frame the concept of clusters in a broader theory of international competition that allowed the idea to take hold among practitioners and, as usual, practitioners move more quickly than scholars.
Why do clusters that trade outside their region tend to grow faster than those that trade only within a region?
Any cluster that serves only its local market is inherently constrained by that local market. So if you have a restaurant in Sydney, basically all your available market is people who go to restaurants in Sydney. No matter how good you are at that restaurant, that is your market.
The traded clusters are clusters in which, if you are really good, you can serve the world. If you are very productive you can scale up the clusters, it can be very large. It can serve the world market. So in practice what is true is that the traded clusters have much higher levels of productivity; they have much higher levels of patterning and technological sophistication. That is why they are traded clusters, because you can develop unique competitiveness in those areas and grow the market.
Those traded clusters then create the demand for the local clusters in the local areas. If you have healthy traded clusters they will create the demand for a lot of local services. Not only business services but also consumer services. If you have healthy traded clusters and they pay high wages, then the citizens want to go to better restaurants and are willing to pay more for a meal.
How do your ideas differ from “picking winners”?
The picking winners idea says that some industries are more attractive than others because they are perceived as high technology or more rapidly growing. That is what targeting is all about, and the classic targeting strategy involves basically distorting the market. It involves subsidies, trade protection, low-cost capital.
The cluster concept comes from a very different starting place. Cluster theory says all clusters are good, and it is not a good idea, in fact it is a very bad idea, to pick among them because what is precious in the economy is any critical mass. It is precious, because they are very hard to create. It takes a long time to build a cluster.
It is making sure that you have got the appropriate kinds of infrastructure, whether it be transport or communications. It is facilitating any regulatory barriers that are causing unnecessary delay or unnecessarily raising costs.
What I find is that if you target you disenfranchise all the people you have not targeted. They become opponents of your efforts to improve competitiveness.
What is the relationship between description and prescription in your models?
I think that question could be applied to virtually every economic development approach ever used by human beings: macro-economic, laissez faire, liberalism. In the case of cluster development we have a very large body of case studies now, and we have been able to validate a lot of the theory by surveying and collecting data from actual participants. So I think we are at the point where we not only have a theory about what affects location and what creates competitiveness in a location, but we also have a considerable body of evidence that validates the theory.
Hopefully, as time goes by, we will get more and more case studies of clusters. One of the problems in cluster development is just how long it takes. We are talking about a process that takes three to four years at best.
In Australia, there are a lot of oligopolies. What is your view of market concentration in terms of clusters?
The cluster concept takes a variety of different shapes and forms. Some clusters are more like wine production in Australia, where I think there are thousands of wineries, many of them small.
You see other clusters, like Wichita, where there are three or four big aircraft companies surrounded by much smaller companies that are service providers, transport and component companies.
One of the very strong findings of the theory is that in order to create competitiveness and vitality and innovation you need local competition.
Competitive advantage has been associated with companies and comparative advantage with countries. You have to some extent reversed them.
I refer to comparative advantages as basically endowments: low-cost labor, natural resources or favorable agricultural conditions. That is the classic notion of comparative advantage.
The argument I have made since the book is that there are nations with lower labor costs and lower natural resources costs, but those advantages are less and less robust and less and less likely to support a high standard of living because there are so many of them.
I get the impression that the US business community is more advanced than Australia’s in understanding your broad strategic approach, particularly in relation to clusters. Is this so?
I think there has been a real maturing process in the US over the past 10 or 12 years. Somehow the notion [that a more collective approach to competitiveness is required] has seeped into the consciousness of many American companies. They now realise that local universities are a critical asset, and they need to access them. They realise that government is not something that you simply complain about; they realise that they need to work with government to make business more productive.
The first article about this in the Harvard Business Review was published about three years ago: that clusters really mattered to companies. So this is still a relatively new idea. It is starting to become quite prevalent in the US, but perhaps in other parts of the world it is less developed.
We have a lot of research and development that seems to go nowhere. What is your advice?
What we believe is that commercialisation starts probably with good mechanisms for transferring technology out of the research establishment into practice. There are a whole lot of things that are necessary to do that. Most universities that are serious technology universities have really explicit technology transfer offices.
Another mechanism for commercialisation is to actually get faculties and students in universities spitting out that technology and setting up companies. That has a lot to do with the attitudes and values of the universities. I was recently in the Netherlands, which has a lot of great universities and technologies, but people in the universities think it is not very cool to commercialise things. In Japan, professors from universities are not allowed to do anything in the private sector because all the universities are government owned.
You also need to have networks created. In some regions you see entrepreneurial forums [getting people together to talk about creating new businesses] that are often connected to universities, like the MIT [Massachussets Institute of Technology] enterprise forum.
Then you need some institutions to help you do it: venture capitalists and angel networks and lawyers who are skilled at this. The trick with commercialisation is that you need a lot of different players.
Have you noticed patterns in capital formation around clusters?
If you have clusters, countries start to develop expertise in that particular cluster. A good example is California wine: every California bank is very familiar with the wine industry and very comfortable with lending in that industry. They created tailored financing vehicles that fit the industry. In wine production you have got to plant vines, and it is seven years before they are fully producing.
If you have a cluster, you will often see that the capital available for that cluster will grow and, more importantly, the packaging of that capital and the expertise of that capital will grow, and that tends to make things much more efficient.
Another thing that happens, something that is slightly less common, is that if you have a nice dynamic cluster, some of the larger companies in the cluster will finance some new things smaller companies.
Do you consider the biotechnology revolution to be a “special case”?
I don’t think biotech is an exception. Life sciences is such a huge technology; so many segments and so many diseases there is agriculture and there are all kinds of applications so biotech is not an area in which you are going to see just one or two clusters in the world. You are going to see lots and lots of them.
But you are not going to see isolated companies. You are going to see this clustering agglomeration, this clustering effect quite strongly. Again, it has to do with proximity to the best research and clinical practice, the proximity of the skill pool and the kind of people you are looking for.
A feature of your career is your ability to capture the middle ground, the underlying normative structures. Everyone working in the field of strategy has to “get around” Porter, in a sense, to put their own position. How have you been able to do that?
I hadn’t thought of it that way. If you think about academic scholarly work in the subject areas in which I work company strategy and international competitiveness being the two biggest I guess I tend to do a number of things simultaneously. I tend to operate in a middle ground between abstract quantitative models on the one hand and individual case studies on the other.
In economics for example, there is a real value to doing tightly specified models and doing maths and deriving propositions from those models. The problem with that is that a student of competition like me realises just how vast are the things that these models leave out and how important to actual reality they are, and how rich and complicated competition actually is. I am a great believer that modelling is very good and very useful in sharpening your thinking and making sure that you understand how a particular cause and effect relationship works. I don’t think modelling is particularly helpful for practitioners, because it leaves a lot out. And, unfortunately, no practitioners companies or government can leave out anything. They don’t have a ceteris peribus [all else being equal] assumption. Everything matters.
On the other hand the tradition in business schools was to use a very idiosyncratic case-study approach in which you study a small number of cases and draw some very broad generalisations. What I have tried to do is operate in between, where I am actually quite well informed in economics, in the scholarly literature.
I have a doctorate in economics and I see myself as an economist. Yet I am also carefully plugged into many cases, partly because I teach cases every day here at Harvard and work with companies. What I try to do is create frameworks that encompass the complexity, but in an elegant way that hopefully captures the whole story in a relatively small number of variables.
I always say that here is the basic framework, and the framework is very rich and in order to figure out what to do in situation A, you have got to think about that situation using the framework, which will give you the insight about what the conclusions are in that particular situation.
So I guess that means if somebody is going to attack my work he has to come up with a new conceptualisation of the phenomenon. And, since my views are so strongly rooted in practice, there is a kind of robustness to them.
Consider the industry structure model: five forces. It says that there are five things about an industry that matter. But of course those are very rich things and each of them encompasses a lot of different dimensions. It is very hard to overturn that basic idea. The critics of my work on industry structure might add an element, and so there has been a repeated debate about whether there is a sixth force.
I must say, in the strategy field where I have been working for more than 20 years it has been interesting to see the successive perspectives emerge. And one after another what seems to be the case is that they are not looking at the fundamentals of competition, so they tend to die out.
Literally every day somebody tells me that five forces is the fundamental tool they use for thinking about their business. I am very lucky that I was able to have an approach to scholarship that has had that level of robustness. The ideas are not trendy; they are not superseded by new events and technology.
Having said that, it is getting a little tiresome in the sense that because my work has this character you say a lot of scholars will tend to use me as their foil. “Porter said this, but that was wrong,” or “Porter said that, but that was wrong.” But I guess I would rather be in that position than ignored.