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Strategy Chessboard

Strategy Games




The A.T A.T.. Kearney Strategy Chessboard A broader perspective on strategy development and formulation F or the past four decades, we have seen a staggering number of strategic schools of thought and frameworks. The 1980s were dominated by Michael Porter’s thinking, the 1990s had multiple contributors (Prahalad and Hamel stand out in Competing for the Future ), and the early 2000s saw noteworthy contributions from Kim and Mauborgne in Blue Ocean Strategy   and Deans, Kröger and Zeisel in Winning the Merger Endgame . At the same time, the Santa Fe Institute has contributed valuable insights on the economy as a “complex adaptive system” and its associated strategy implications. Dozens of schools and frameworks claim to be the most widely applicable and useful for strategy development. The question is, are these strategy schools universally applicable or can they complement one another? Based on our extensive work in strategy development we have concluded the latter. With this in mind, the A.T. Kearney Strategy Chessboard was designed to help corporate leaders select the right starting point for strategy development and formulation. This paper does the following: • Challenges two common but often awed assumptions: that industries are predictable and that a company’s primary focus is adapting its positioning  • Lays out the Strategy Chessboard and its use of industry predictability, while discussing companies’ willingness to adapt to or shape an industry  • Outlines how to use the Strategy Chessboard in strategy development Predictability Versus Adapting and Shaping Early schools of thought were commonly based on two assumptions about strategy development: first, that an industry is predictable, and second, that a company’s primary strategic challenge is to adapt successfully to that industry for maximum competitive advantage. Many companies and managers today root their strategies in these two assumptions. These assumptions are being challenged, however. The Santa Fe Institute’s recent work with complexity theory argues that industry predictability, meaning the ability to forecast an industry over the medium and long term, is not guaranteed. Forecast confidence can rise and fall—  whether in terms of market size, regulation, technology development, business models, competitors’ moves or macroeconomics—and can have a major impact on strategy development. The Santa Fe Institute argues that economists in the early twentieth century who emphasized THE A.T. KEARNEY STRATEGY CHESSBOARD | A.T. Kearney  1 deterministic and equilibrium-based systems were to predict at the granular level as described in using the wrong science analogies. Rather, the models based on complex adaptive systems. With economy is more like a complex adaptive system — this in mind, an effective strategy framework dynamic, non-linear, rarely at equilibrium, and must include the level of industry predictability populated by agents that use inductive reasoning as a main dimension. to draw generalized conclusions and that learn The top half of figure 1 highlights some and adapt over time in a co-evolutionary manner. major events that were arguably difficult or even These complex adaptive systems are, by defini- impossible to predict: the growth rate of smarttion, unpredictable at the local, granular level. phone technologies; the impact of “green” techHowever, global patterns may be predictable, and nologies on the utilities industry; the dramatic certain periods of time may prove more stable. impact of collateralized debt obligations (CDOs) Considering the sheer size and vast com- and other new financial instruments on the plexity of the modern economy, an economic banking industry. These events underscore the model (even focused on one industry) will never challenge of predicting an industry’s future develfully explain all of the characteristics and dynamics opment, particularly as globalization, increasingly of the “real world” at any given time, as the rapid technology cycles and consumer fads only model inherently will be a simplification. increase volatility. Specifically, the above model paradigms have This does not mean that all industries are different views about predictability. Based on always highly uncertain—many can be analyzed real-life experience, our conclusion is that some to generate predictions accurate and granular industries at some time intervals are reasonably enough for classic strategic decision making. predictable, in line with the spirit of the 20th Examining projects A.T. Kearney has participated century science-based models, while other indus- in during the past decade, strategic predictability tries at certain time intervals are extremely hard  was achievable in a majority of the cases. The trick Figure 1 Two common “mis-assumptions” impede strategists Two common assumptions… …are often proven wrong • • 1 IIndustries are p predictable • • • • • 2 Companies always a adapt their position within an industry • • • • Real estate and finance: bubbles burst in 2008 Utilities: renewable energy and regulatory uncertainties confound investments Pharma: blockbuster drugs stall Emerging markets bounce back in 2009 Telecom: adoption rates soar for smartphones and related apps Internet: Rapid adoption takes hold Southwest and Ryanair create low-cost carrier segment IKEA convinces customers to assemble furniture Microsoft/Wintel are kings of de-facto standardization GE becomes aggressive acquirer targeting top-two position Apple with iPhone affects all handset markets Source: A.T. Kearney analysis  2 THE A.T. KEARNEY STRATEGY CHESSBOARD | A.T. Kearney  is to determine early during the strategy devel- they realize—something that could create a huge opment processes whether your industry will competitive advantage. An attractive aspect of undergo evolutionary  or revolutionary   change in complex adaptive systems and their sensitivity to the coming years. A revolutionary, or unpredict- the “initial condition” is that small changes able, environment clearly requires a different upfront can have a large impact at the end. This strategic approach than an evolutionary one. In underscores the possibilities that shaping straterevolutionary environments, some leading com- gies have for future development. However, corpanies challenge the assumptions and shape their rectly estimating the consequences of actions is industry to their advantage, rather than adapt to a true challenge. Shaping strategies are often the current competitive environment. One com- perceived as somewhat riskier, meaning that pany’s actions in shaping the competitive environ- new entrants with little to lose are usually more ment may have an impact on all other players.  willing to execute them than incumbents. Rarely do the biggest corporate growth  As strategy development begins, the two success stories rely on reactive acceptance of (and main tasks are conducting an honest, critical adaptation to) current industry developments— assessment of the industry’s predictability, and especially in more revolutionary environments. articulating whether the company intends to Instead, leading firms challenge industry assump- adapt its position within the industry or to shape tions and shape them to their own advantage— the industry. and perhaps to the overall industry’s advantage. For example, Netix usurped Blockbuster’s domi- Two Dimensions, Four Approaches nance in the movie-rental industry nearly over- Devising adaptation strategies for predictable night, while Apple was the first to put all the industries is a traditional comfort zone in strategy pieces together in the twenty-first century digital development. But as noted earlier, predictability music business and took a commanding lead in differs significantly over time and among indusa new market structure. Amazon’s revolutionary tries. At the same time, not every company has the Kindle created a new e-reader market andleft right DNA—desire, need and ability—to shape many rivals in a wide range of industries—from its industry’s overall development. book sellers to consumer electronics makers— Combining predictability and a company’s DNA to adapt or shape results in mapping scrambling to catch up. Consolidation, enforcing better conduct by four distinct “umbrella strategies” and strategic customers and competitors, deconstructing value approaches (see figure 2 on page 4). Position and conquer. Strategic analysis chains, and redesigning business models are all  ways to shape an industry to one’s long-term helps determine what industry position a comadvantage, and can be done with some precision pany should pursue and how to outmaneuver in a predictable industry. Being an industry competition to grow at a faster-than-market rate. “shaper” is particularly important in highly This is a classic approach to strategy development. dynamic and uncertain environments. By buildWithin this quadrant, companies typically ing acceptance among critical customers and have the following strategic options as they adapt stakeholders and developing the necessary tech- in a predictable industry: Position to build competitive advantage. nology base, infrastructure and key competencies, many companies have more shaping power than Identify and capture a leadership position in the THE A.T. KEARNEY STRATEGY CHESSBOARD | A.T. Kearney  3 Figure 2 Two dimensions, four “umbrella strategies” and strategic approaches Company’s desire, need and ability (DNA) to: Shape the industry Adapt “within”  the industry Source: A.T. Kearney analysis  Redefine the industry Reinvent the industry Use analysis and simulations to determine how the industry can be shaped to benefit both the industry and the company. Conceptualize an attractive industry future, map the route to make it happen, and craft a role for the company to play. Position and conquer Maintain foresight and flexibility Use analysis to determine the company’s optimal position in the industry and develop a plan to pursue that position. Institutionalize a strategic process focused on pursuing a portfolio of strategic initiatives that accelerates learning and provides flexibility with limited investment. High analytical predictability Low analytical predictability Industry predictability for a relevant time horizon industry, or an attractive niche. The most inuen- areas. Anticipating shifts in industry profit pattial contributor in the position and conquer area terns will also guide a company in effectively has been Michael Porter, whose book Competitive adapting to new opportunities. Adrian Slywotzky Strategy   focuses on positioning for competitive has authored several books on profit opportunities advantage. and outlined how to identify and capture “pockets Deploy battle strategies. Increase market of profitability” in a competitive environment. share through tactics inspired by battle strateWhy are these four options used the most? gies. Military strategy is often used to meet the Because they help companies decide the best stratecompetitive challenge; Sun Tzu, for example, has gic moves to use to adapt to a predictable industry inspired many corporate strategists.  without bringing major industry change. CompGrow in core, adjacent businesses and step out. anies in this quadrant seek attractive, easily defenMove into businesses adjacent to the core, or pursue sible strategic positions along with well-designed step-out strategies (often leading back to the first battle strategies that best grow relative market share. two options). Growing the core business is a natural Redefine the industry. Through analyses and move for any company, as is seeking expansion in simulations, companies in predictable environadjacent areas with excellent chance for success. ments can shape their industries to their own Identify and adapt to profit patterns. Adapt benefit and possibly that of the entire industry. to capture emerging profit opportunities in new In this approach, the company becomes an indus4 THE A.T. KEARNEY STRATEGY CHESSBOARD | A.T. Kearney  try architect that redraws the structure, boundar- value chains also affects how an industry works. ies, conduct and performance of the industry in This will allow new third parties to enter the a favorable direction and captures a leading role market, new ways to collaborate with competitors in its future. and customers, and new moves by competitors. The four main dimensions of redefining the Why these options not others? If you seek to industry are: challenge and shape an industry, these four Pursue global industry endgame consolida- avenues are the most common. Aggressive industry tion. Seek to consolidate the industry through M&A creates a consolidated playing field with mergers and acquisitions (M&A)—first region- typically higher return levels while also spurring ally, then globally. Actions taken by one company globalization of the industry. Industries can con will typically spur its main competitors to follow verge both in terms of supply and demand, and suit, further accelerating the pace of consolidation. from a product and technology perspective. Through extensive research, Deans, Kröger Shaping convergence trends to your advantage and Zeisel have shown natural consolidation is a critical task, often pursued using alliances patterns in industries and how an ambitious M&A and joint ventures for risk-mitigating shaping. agenda can reshape the industry structure to a Changing industry conduct—introducing more company’s advantage. For example, ArcelorMittal’s  win-win situations—will significantly impact pattern of acquisitions demonstrates how one industry profitability. Reconfiguring industry company can act as a powerful industry architect. value chains in an innovative manner can create Converge or slice the industry. Pursue attrac- a distinctively different industry landscape with tive industry convergence opportunities. Again, new opportunities. one company’s actions will likely trigger other Reinvent the industry. If predictability is low, players to act—within the industry and also in a useful goal for many companies is to reinvent neighboring industries. Alternatively, effective the industry to gain advantage, reduce or off-load “slicing” strategies can improve competitive posi- risk, or create new capabilities and resources. tioning—for example, splitting up the information Uncertainty makes prediction difficult, but it also technology (IT) industry into hardware, software opens up significant opportunities for visionary and services sub-industries, or Bloomberg’s use of leaders to guide others in a favorable direction. convergence and deconstruction to change the Companies in this quadrant often have powerful business news industry. imaginations; they’re able to develop both an Change industry conduct. Alter the way the attractive future vision and a shaping agenda industry conducts business in a direction favor- to increase the likelihood the industry moves able to one company. Well-conceived game theory toward this vision. strategies will broadly impact all PARTS—short The four strategies in this quadrant include: for players, added value, rules, tactics and scope— Create and pursue a preferred future. Launch and mold their conduct into something more big initiatives complemented with smartly focused beneficial for all members. initiatives to shape an unpredictable industry. Reconfigure industry value chains. Redefine Scenarios are often used as a basis for crafting  what is core and non-core in an industry. As an attractive preferred industry future. Execution suggested by Aurik and Willen in their book, then focuses on ways to increase the likelihood Rebuilding the Corporate Genome , reconfiguring the industry will develop in that direction. THE A.T. KEARNEY STRATEGY CHESSBOARD | A.T. Kearney  5 In their book Competing for the Future , Prepare for multiple scenarios. Develop alterPrahalad and Hamel envision and argue for new native scenarios about the future to gain a better value propositions, new technologies and new understanding of potential development needs, capabilities; we believe their thinking is in line and to prepare a broad set of strategy options. Our  with how we have worked with clients to find clients frequently request scenario development— a preferred future, mobilize, and get there first.  well-known because of the pioneering work of Create Blue Ocean opportunities. Develop Royal Dutch Shell—as an effective means of preinnovative, attractive customer value propositions paring for uncertain or risky industry futures. that open up new market spaces. Blue Ocean Deploy real options-based strategies. Evaluate Strategy , written by Kim and Mauborgne, outlines strategies as real options for business models, approaches for developing new and more inno- capacity and markets to add a financial perspecvative value propositions. tive on dealing with uncertainty. Such methods Think big and lateral. Use creativity and big are frequently used for long-term, big-investment thinking to develop out-of-the-box strategies to situations (for example, for utilities or largetransform an industry. In his book Big Think capacity manufacturing plants). Strategy,  Bernd Schmitt introduces new ways to Pursue dynamic strategies. Revisit the create such transformational strategies. assumptions and premises of your current stratCross the chasm with innovative products. egy. Several schools of thought about “dynamic  Apply smart ecosystem building and vertical strategy” stress the importance of frequent and market segmentation, and initiate return dynam- exible strategic planning, such as in Fast Strategy  ics to capture new market opportunities. In his by Doz and Kosonen. books Crossing the Chasm, Inside the Tornado and Implement an evolutionary strategic proDealing with Darwin , Geoffrey Moore outlines cess. Use an evolutionary approach that emphastrategies to get the mass market to embrace inno- sizes fast learning and adaptation, based on a vative products used by leading-edge adopters. broad base of experiments. Several important Why these strategies and not others? If you strategy contributions have been made to the choose to shape your industry amid a high degree evolutionary field, such as Eric Beinhocker’s book of uncertainty, then various adaptation strategies The Origin of Wealth . are no longer applicable while you are hesitant Why these strategies and not others? These about the more aggressive strategies of the “rede- strategies are best for dealing with unpredictable fine the industry” section. Here, visionary and situations—when position-and-conquer moves imaginative leaders will seize the advantage. prove too risky. When major growth investments in Maintain foresight and flexibility.  For com- core and adjacent businesses cannot hold up to the panies unwilling or unable to reshape an industry, uncertainty, companies may instead benefit from the key is to institutionalize a strategic process exible and risk-mitigating strategic approaches. It that accelerates learning across the company, while is often wise to focus on learning and preparing for pursuing a portfolio of strategic initiatives that different possibilities while ensuring that the comoffer exibility with limited investment. The com- pany can adapt quickly—and cost-effectively— pany may encourage strategic experimentations in once the future becomes clearer. The ability to order to prepare for different futures. conduct the right ventures and quickly realize what The four main strategies within this area are:  works and what doesn’t is crucial to success. 6 THE A.T. KEARNEY STRATEGY CHESSBOARD | A.T. Kearney  The Strategy Chessboard The strategic options listed in this paper— along with the portfolio strategy that is applicable in most situations—combine to make the  A.T. Kearney Strategy Chessboard (see figure 3). In creating the Strategy Chessboard we selected what we consider the most useful and complementary strategy schools of thought, based on our work with clients. We excluded more general leadership schools of thought, including In Search of Excellence, Built to Last, From Good to Great, and the Learning Organization, as these are more about identifying leading management practices. When deciding during a strategydevelopment exercise which strategy schools to apply, nothing is black-and-white. A clear choice tends to emerge, however, based on a company’s DNA and the predictability of its industry. Remember that schools of thought are not completely mutually exclusive; those selected should provide a complementary and valuable strategic perspective. The maturity and scientific depth differs substantially across the schools, with Michael Porter’s Competitive Strategy  likely being the most comprehensive and best-known school. Again, schools were selected based on how well a company could create a complementary portfolio of schools for its strategic development and formulation. We believe that most of the strategy schools are familiar to our readers, but the appendix on page 14 includes a short summary of the 17 discussed in this paper. Figure 3 The A.T. Kearney Strategy Chessboard Company’s desire, need and ability (DNA) to: Portfolio strategy (Ansoff matrix, GE matrix, various consultants)  Pursue global industry endgame consolidation (Kröger)  Shape the industry Reconfigure industry value chains Converge or slice industry (Pennings and  Puranam; Stieglitz;  Lind; Christensen;  Rosenberg)  Change industry conduct (von Neumann, Morgenstern;  (Porter; Aurik and Willen;  Ghemawat; Chussil;  J. Moore; Christensen)  Oriesek and Schwarz;  Pfeffer, Salancik)  Position to build competitive advantage (Porter)  Adapt “within”  the industry Identify and adapt to profit patterns (Slywotzky)  Source: A.T. Kearney analysis  Create “Blue Ocean” opportunities Create and pursue “preferred future” (Kim and Mauborgne;  Christensen;  Schumpeter; von Hippel)  (Hamel, Prahalad, Kratzert)  Cross the “chasm” with innovative products Think big and lateral (Schmitt; de Bono)  (Moore; Arthur)  Grow in core, adjacent business, and step out Pursue dynamic strategies (Andrew; Wernerfelt;  Zook; Viguerie et al.;  Deans, Kröger et al.)  (Doz et al.;  Carpenter et al.;  Lindblom; Quinn;  Markides)  (Kahn; de Geus, Wack; Wilkinson)  Deploy real options-based strategies Implement an evolutionary strategic process (Myers; Schwarz;  Luehrman; Arms)  (Arthur et al;  Beinhocker;  Holland; Gell-Mann)  Deploy battle strategies (Sun Tzu; Clausewitz;  Welch; McNeilly, El-Kadi)  High analytical predictability Prepare for multiple scenarios Low analytical predictability Industry predictability for a relevant time horizon THE A.T. KEARNEY STRATEGY CHESSBOARD | A.T. Kearney  7