STRATEGICTHINKINGAComprehensiveGuide

STRATEGICTHINKINGAComprehensiveGuide

BY

FREDERICKBETZPortlandStateUniversity,USA

UnitedKingdom–NorthAmerica–Japan

India–Malaysia–China

EmeraldGroupPublishingLimited

HowardHouse,WagonLane,BingleyBD161WA,UK

Firstedition2016

Copyright©2016EmeraldGroupPublishingLimited

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ISBN:978-1-78560-467-6

Contents

Preface

1. StrategicVision

2. StrategicVenture

3. StrategicManagement

4. StrategyTheory

5. StrategicBusinessModel

6. DiversificationStrategy

7. StrategyScenarios

8. ChangeinSocieties

9. StrategicDishonor

10. StrategicPlanning

Bibliography

Index

Preface

Leadership and strategy are intricately connected, because one of the primaryresponsibilitiesofleadersistoformulatestrategy;andinanorganization,onlytheleaderhas the power to implement change, strategic change. Thus, strategic thinking is anecessaryandfundamentalcognitiveabilityofaleader—orshouldbeso.

Strategicthinkingisabout(1)imaginingafutureworldand(2)takingasequenceofshort-termtacticalactions toachieve it. It requiresbothan idealism(to imagineabetterworld) and a realism (to acquire the resources, skills, and organization to get there).However, most organizations focus and encourage only short-term thinking for theiremployees and leave long-term strategy to the executives.Andmanybookson strategyassume this is appropriate anddonot question the practice.But there is a serious errorabout “realism,” in a viewof only “top-down” strategy.Nohigh-level executive in anyorganization, at any time, inanyplace, is ever fullyknowledgeableabout thedetailsofoperations—activitiesontheground,thecurrentrealityinthetrenches.Thisisbecausethe executive level is far above the actual operations of production/sales and so can be“out-of-touch”withtheoperational.Inclimbingtheircareerstothetopoforganizationalpower,executivesprobablyknewthepastrealitiesquitewell. It is theirgraspofcurrentrealitywhichcanbeinquestion.Thisiswhatstrategyisfor—todistinguishpastrealityfromcurrentrealityandtoprepareforfuturereality.

Thus for realistic strategy, there is a need for good “top-down” and “bottom-up”communication—betweentheexecutivesatthetop-managementlevelandthetechnicalpersonnelatthebottom-operationslevel.Whenorganizationalcommunicationisonlytop-down (due to theoverwhelmingpower-of-the-boss), then in suchanorganization,high-level strategy can become only “wishful thinking” by the CEO— a wishing that canactually impose harmful management pressure on operations. Harmful pressure hasresulted in terrible examples of organizational ineffectiveness, loss of competitiveness,andevenfraud.

Unfortunately, there are many historical examples of this. Cases of contemporaryfinancialfailureandfraudaboundinthemodernworld—allduetounrealstrategyatthetop.Someofthesewere:theLiborFraudof2011,theEurodollarCrisisof2010–2014,theGlobal Financial Collapse of 2007–2008, the Bankruptcy of Enron and the Demise ofArthurAnderson in2001. In eachcase,high-levelofficials ingovernment andbusinesswere unrealistic about strategy— allowing dishonesty of trading in Barclays, fundingexcessivesovereignborrowinginEuropeanUnioncountriesbyEUbanks,securitizationoffraudulentmortgagederivativeproducts,andtheoff-bookspeculativeinvestmentsbyacompany. Ineachof thesecases, therewasaserious failureofstrategic thinkingby topbusinessandgovernmentofficials.Thewishful strategic thinkingbybankexecutives in

the Libor case was that Libor was an honest index. The wishful strategic thinking bygovernment officials in the Eurodollar Crisis was that government debt could foreverfinancegovernment serviceswithout taxes.Thewishful strategic thinking in theGlobalFinancial Crisis was the financial markets are “perfect” (self-regulating). The wishfulstrategic thinking in the Bankruptcy of Enron and the failure of Anderson was thataccounting need not be fully transparent. A purpose of proper strategic thinking is toeliminate“wishful-thinking”fromstrategicthinking.

Yet there are splendid examples of strategic thinking that has been extraordinarilysuccessful,suchas:IBMinitsearlydays,Xeroxinitsearlydays;theresurrectionoftheJapaneseeconomyandSONY,Honda,ToyotainJapan;thebuildingoftheSouthKoreaneconomyandSamsung,Hyundai,PoscoinKorea.

Whatisthetypeofthinkingwhichleadstolong-termsuccessandsurvival,notjustabigpayoffintheshortterm?Thisis“strategicthinking.”Strategicthinkingisnecessaryateverylevelofanorganization,andnotjustatthetop.Weuseactualhistoriesofbusinesssuccessesorfailurestoillustratetheoreticalconceptsinstrategicthinking.

Theseconceptsaresummarizedineachchapter.

TheoreticalPrinciplesofStrategy

1.1 Allactionsaredirectedtowardthefuture;andintelligentactionismostlikelytosucceed.

1.2 Correctvisionisnecessarytosurvivediscontinuities.

1.3 Technologystrategyisabasiccomponentofcompetitivestrategy.

1.4 Strategyiscognitivelymoresynthetic(intuition);whileplanningismoreanalytic(thinking).

1.5 Intuitionisprimarilybaseduponexperience.

1.6 The‘way’ofexperienceisperception,preparation,andcommitment.

1.7 Strategicwisdomisexpressedintheformof‘precepts’.

2.1 Strategyisimplementedinasequenceoftacticsleadingtowardthemission.

2.2 Entrepreneurialstrategyisproperforthelaunchingofnewbusinesses.

2.3 Technologyprogressisamajorsourceofentrepreneurialopportunity

3.1 Whileentrepreneurialmanagementisnecessarytostartinganewbusiness,professionalmanagementisnecessarytogrowthebusinesscompetitively.

3.2 Tacticalmilestonesarestepsinachievingalong-termstrategy.

4.1 Strategicchangeisperiodicallynecessarytosurviveandprosper.

4.2 Strategydividesintocontent(strategicissues)andintoprocess(strategicplanning).

4.3 Strategicperspectivedividesintotop-downperspective(executiveperspective)andbottom-upperspective(operationalperspective).

4.4 Thestrategyprocessrequiresformulationofthe‘bigpicture’asastrategicscenarioandthe‘operationspicture’asastrategicbusinessmodel.

5.1 Thefourfactorsofproductsuccessare:performance,innovation,marketfocus,competitivepricing.

5.2 Sixkindsofstrategicbusinessmodelscanbeconstructedfromthecombinationofthefactorsofcapital,profit,sales,resources.

5.3 Strategicbusinessmodelsareimplementedbythetechniqueofastrategicpolicymatrix.

6.1 Thereare‘opportunitycosts’tokeepanybusinesscompetitive,evenbusinessesintheportfolioofdiversifiedfirms.

6.2 Integrityandtrustbetweenaholdingcompanyanditsportfolioofbusinessesisessentialtothestrategicsurvivaloftheholdingcompany.

7.1 Scenariosdepictthetrendsforopportunitiesorthreats.

7.2 Theaccuracyofforecastsdependsuponthestabilityofunderlyingstructure.

8.1 Structureandfunctioninasocietycanbepartitionedintofoursocietalsystems:economicsystems,politicalsystems,culturalsystems,andtechnologysystems.

8.2 Changesinthestructureandfunctioningofanyofthesystemswillimpactthefunctioningoftheothersystems.

8.3 The‘bigpicture’ofchangeinasocietycanbedepictedaschangesinthefoursystemsofasociety.

9.1 Thestrategicbusinessmodelofaholdingcompanyfocusesuponthefinancialmarkets;whereasthestrategicbusinessmodelofaportfoliocompanyfocusesuponcustomermarkets.

9.2 Short-termexecutivegreedcandoomthelong-termfutureofacompany,whenexecutiveslackintegrity.

10.1Thesuccessfulimplementationofaplanisasimportantasgoodplanning.

10.2Leadershipinimplementingagoodplanrequiresaccesstopropertechnology,sufficientcapital,marketentry,competitiveoperations,andmanagementintegrity

The book is aimed at the general trade market of business books, but it is alsoappropriateforMBAclassesonstrategyandstrategicplanning.Therearemanybooksonstrategy; butmany focusmostly upon the process of formulating strategy, the strategicprocess. This book balances the emphasis on “process” in strategy and with that of“content” in strategic thinking. The content in strategic thinking requires vision,competence,andintegrity.

StrategicVision

Introduction

Strategic thinking is about trying to anticipate and bring about a “desirable future” – avisionforafuture.

To realize that vision, a decision to act must be made; and the logic of an action,decisioncanbeformulatedasa“means”ofactiontowardan“end”ofaction.Aprimaryresponsibilityofleadershipstrategyistomakedecisionsaboutthefuture(strategy)andtoimplementpresentaction(tactics).Thisconceptof“strategicthinking”asactiontowardafuture is based upon a philosophy of action; and in that philosophy, there are threepostulates.

1. Allactionisdirectedtoafuture.

2. Foraction,therearetwofutures–immediateanddistant.

3. Intelligentactionismorelikelytobeproductivethanunintelligentaction.

AsshowninFigure1.1,moderndecisiontheorysketchesoutthepostulateofallactionbeingdirectedtowardafuture.

Figure1.1: DecisionTheory.

First, adecisionorientsanaction in thepresent towarda futureoutcome.Anactioncanbeanalyzedintomeansandendsoftheaction.Themeanschosenforactionarethe“tactics”oftheaction.Theends,towardwhichthemeansaredirected,areof“value”totheactor.The“vision”thathadbeenimaginedasavaluableendoccurringinthefuture.“Efficiency”isameasureofthelikelihood(orresourcesconsumed)ofameansattaininganend.“Effectiveness”ishowvaluableanendistotheactor.The“goals”aremeasuresoftheattainmentoftheenvisionedoutcomeforagivenvalue.

Postulate2 expresses thepossibility that thevisionof adesired futuremightnot beattained ina singleactionbutasa subsequent resultofa seriesofactions.A long-term“outcome”mayneedtobeattainedasasequenceofactions,eachactionbeingatacticofthe actor (decision-maker). Strategy threads a sequence of tactics together for presentactionsintheshort-termsequencetoattainafutureinthelongterm.

Thethirdpostulaterelatesknowledgetoaction.Intelligentactionismorelikelytobeproductivethanunintelligentaction.Unintelligentactioncanarisefrombeinguninformed,incompetent, foolish, irresponsible, corrupt, immoral, etc. The more a decision-makerknowsaboutachoiceofmeansandendsandvaluesandgoals,themorelikelytheactoristobesuccessfulinthefuture.Themorehonestandresponsibleadecision-maker,themorelikely others may follow and implement decisions. In the modern world, science andtechnology provide the knowledge for action, and management and power providemotivation and the capability of action. Leadership is expected (by its followers) toformulate “intelligent” action in anorganization; and for this, strategicvision is abasicresponsibilityofleadership.

Strategicchangecannotoccurwithouttopleadershiphavingavisionandcommitmenttochange.Therelationshipofleadershiptostrategicvisionisthusbasic:

1. Strategicvisionisthefundamentalresponsibilityofleadership,sinceonlytopmanagementhastheauthoritytomakemajorchangesinoperatingorganizations.

2. Strategicchangeisonlyperiodicallynecessary;buttobeeffectivesuchchangemustbeenvisioned,anticipated,andplanned.

3. Sourcesforstrategicvisionareeitherexternalintheenvironmentsoftheorganizationorinternalasopportunitiesdevelopedwithintheorganization.

Forexample,back in theyear2000,“Worth”magazine interviewedsuccessfulchiefexecutive officers (CEOs) and noted their concern for the importance of visionaryleadership.

KoiciNishimuraofSolectronsaid:

Whenyouareleadingacompany,youhavetofigureout,conceptually,whatyouaretryingtodo.Onceyouhavedecidethat,andyouthinkitsokay,thesecond thing you have to figure out is: What tactics are you going touse?…Youcontinuallyhavetoask:AretheassumptionsImadestillgood?Myjobistocontinuallyreassesstheassumptionsorthefoundationthatthecompanyisbuilton.

–Worth(2000)

RaymondGimartinofMercksaid:

You need to have a vision that is the anchor point for what you’redoing…ThereneedstobesomeformofoverarchingstatementthatmakessenseandonwhichtheECOstakeshisorherjob.

–Worth(2000)

EricSchmidtofNovellsaid:

Leadership is defined about perception, not just reality. So there’s alwaysthistensioninleadershiptooverhype.Andtomakepromisesthatyoucan’tkeepandarticulatethingsthatcan’thappen…Youwanttodosomelevelofoverselling,buttheproblemisthatthepeopleyou’recommunicatingtoaresmart.Iftheythinkyou’reasnake-oilsalesman,thenyourwholecredibilitygoestozero.Soleadershipisalsodefinedbycredibility.

–Worth(2000)

OriginofSonyCorporation

Onecanseeacaseofextraordinarystrategicvision in theoriginofSony.Sony’svisionaryfounderswereAkioMoritaandMasaruIbuka.

In1944duringthelastyearsoftheSecondWorldWarinJapan,AkioMoritawas finishing his education, while developing an interest in the newtechnologyofelectronics.Moritawasauniversitystudentstudyingappliedphysics under Professor Tsunesaburo Asada, at Tokyo University. Asada’slaboratorywasperformingresearchfortheJapanesenavyasitswareffort.Moritaworkedforhimonelectronics.Physicsappliedinthetechnologyofelectronics is an area of applied knowledge and in the interface betweenscience and technology. It is in such science/technology interfaces thatadvancedtechnologiesarecreated.MoritawasbeingtrainedbyAsadawitha scientific orientation but motivated to create advanced technology. Thisprovided a lasting influence onMorita, as a basis for his future strategyintuitionsinbusiness.

After the 1860s in Japan, the society had faced the challenges ofindustrializationandofficialshadencouragedanactiveinterestinacquiringand innovating technology. Professor Asada wrote a weekly column forTokyonewspapers,inwhichheexplainedthelatestdevelopmentsinresearchandtechnology.SometimeswhenAsadawasbusy,hewouldlethisstudent,Morita,writetheseforhim.OnecolumnMoritawrotewasaboutthetheoryofatomicenergy,inwhichMoritanotedthattheenergyintheatomwassogreatthatifaweaponcouldbemadeusingtheatom’senergyitwouldbeanextremelypowerfulweapon.But in 1944, noone in Japan knew that theirenemy,theAmericans,hadmadesuchaweaponwhichsoonwouldbeuseduponJapan.

Morita was trained to learn the new advances in science and to imagine

what technological use could bemade of them.Morita viewed science assourceof ideas fornew technologies.Viewingscienceasa source fornewtechnologywasbeenthehallmarkforsuccessfulvisionofhigh-techfirmsinthetwentiethcentury.

WhenMoritanearedgraduation,hehadnotyetbeendrafted.But thewarwasstillgoingon,andhelearnedthathecouldenlistasacareertechnicalofficer in the navy by taking an examination and then be assigned to aresearch facility instead of a ship (which would allow him to finish hiseducation).Inearly1945,hewasassignedtotheopticslaboratoryinOfficeof Aviation Technology at Yokosuka. There he worked on the problem ofpreventingstaticelectricstreaksonthefilmsofaerialmappingcameras.

Then graduating from the university, he underwent a four-month officer’sindoctrinationandtraining,andhereceivedtherankoflieutenant.Hewasassignedbacktotheopticaldivisionandbegansupervisingaunitworkingonthermallyguidedweaponsandalsoonanight-visiongunsight.ThiswasinasmalltownsouthofKamakuraonSagamibay.Moritawrote:“Wewerebased inabigoldcountryhouse inZushi… .Thehousewasbuilt on theWesternstyle,facedwithstucco,withacourtyardgarden…Thehousewasbuilt at the foot of a cliff just above the beach, and I took a room at thenearbyNagisaHotel… . It seemed incongruousbecause sometimes itwasaspeacefulasanybeachresort,yetwewererightunderthereturnpathoftheB-29’s…”(Moritaetal.,1986).

TheAmericanlongrangebombers,B-29s,weredroppingincendiarybombsonmajorJapanesecities,destroyingentirecities.MoritawasworriedabouttheAmericanbombersbutfeltluckytobeatSagamibay.DuringJuly1945,theTokyo-Yokohamaareawasbombedalmostdaily.MoritawatchedthebigsilverB-29’spassingoverhead,andwatchingwithhimwasacolleagueonthe special project,Masaru Ibuka.Moritaand Ibukabecamegood friends(andafterthewar,theywouldtogetherfoundtheSonyCorporation).Oneoftheirworrieswas that theJapanesemilitarymightnotgiveup thewar,nomatter how badly itwas going. AnAmerican invasionwould likely occur,where they were stationed on the Miura Peninsula at Sagami Bay. Theyknewthatthispeninsulawouldbecomeabloodyandlastbattleground.

InAugust of 1945,Morita took leave to visit his family at their ancestralhomeinKosugaya.Whilehewasthere,thetwoatomicbombsweredroppedonNagasakiandHiroshima.Themilitarydidobey theEmperor’sorder tosurrender.Moritarecalledtheoccasion:“Iwasshakenawakebymymotherintheearlymorning…ShesaidtheEmperorHirohitowasgoingtomakeanannouncement on the radio at noon. Even the announcement that theemperorwould speak to the nationwas stunning… . The emperor’s voicehadneverbeenheardbytheJapanesepeople…BecauseIwas,afterall,anavalofficer, Iputonmy fulluniform, includingmysword,andI stoodat

attentionwhilewe listened to the broadcast… the high, thin voice ofHisMajestycamethrough… .‘Thewarwasover’”(Moritaetal.,1986).

EmperorShōwawasthe124thEmperorofJapan(AccordingtotheTraditionalOrder,Reigningfrom1926to1989).HisPersonalNamewasHirohito.Source:

UnitedStatesLibraryofCongress.

Thepostwarworldwasoneofgrimsurvival.MoritareturnedtohisstationonAugust16.Americanoccupationforcesarrivedwithoutincident.Moritawaited at the station for dayswithout orders.Finally,Morita received theorder to close the project. He bartered equipment for railway tickets andsent thestaffhome.Moritawrote:“Thenewperiodofpeacewasstrange.Thebombersdidnotcomeanymore,butmanycitieslookedasthoughtherewasnothingmoretobomb… .TheMoritafamilywasfortunatebecausewehadlostnooneinthewarandthecompanyofficesandfactoryinNagoyaandevenourhome, survivedwithnoserousbombingdamage” (Moritaetal.,1986).

TheMoritafamilybusinesswasabreweryrunbyMorita’sfather.Althougheldersons,suchasAkioMorita,wereexpectedtosucceedtheirfatherinthebusiness,buthisfatherwasstillhealthyandrobustanddidnotyetneedhim.Besides,Morita’sinterestswereinadvancedelectronics,andheacceptedaposition to teach physics at the Tokyo Institute of Technology. There helookedup forhis friend Ibuka. Ibukawasgoing to startanewelectronicscompany. Since Morita did not really want to teach but to create newtechnology,hedecidedtojoinIbukainfoundinganewcompany.HelefttheinstituteandworkedwithIbuka.Hisfatherinvestedinthenewfirm,whichfirsttheycalledTokyoTelecommunicationsEngineeringCompanyandlaterrenameditasSony.

Morita’s family traced itsoriginback to theEdoPeriodof theseventeenthcentury,whentheheadofthefamilyKyuzaemonMoritaestablishedasakebrewery inKosugayaVillage,at thecenterof theChitaPeninsula inAichiPrefecture. Morita’s father was the fourteenth head of family, with thetraditionalnameofKyuzaemonMoritaXIV.ThusAkioMoritawouldhavehad the traditional name of KyuzaemonMorita XV, had he continued thebrewingbusiness;insteadAkiofoundedSony.

Discontinuities occur in a society in war and its aftermath. As Japaneseindustrywas so heavily destroyed byU.S. bombing in SecondWorldWar,Japan had to rebuild its industry. Itwas in this societal discontinuity thatMoritaandIbukawouldbegintheirnewfirm.

VisionandDiscontinuities

Theimportanceofstrategicvisionforeffectiveleadershiphaslongbeenrecognizedinthebusiness literature. The early writings of the business theorist, Chester Barnard,emphasized that strategy was an important executive function (Barnard, 1938). Manyother writers on management, such as A. Chandler (Chandler, 1962) and J. B. Quinn(Quinn,1988),furtheremphasizedtheexecutiveimportanceofrethinkingstrategywhenstructuralchangehasmadepaststrategyineffective.

John P. Kotter observed more than 100 companies trying to change themselves tobecomeimprovedcompetitors:“Afewof thesecorporatechangeeffortshavebeenverysuccessful.Afewhavebeenutterfailures.Mostfallsomewhereinbetween…”(Kotter,1996).Kottersawstrategicvisionofleadershipasthevitalroleinchange,suggestingthatseveralstepswerenecessarytochangeanorganization:

–establishingasenseofurgencyforchangeandformingahigh-levelmanagementcoalitionforchange,

– creating a vision of change and communicating that vision through theorganization,

–empoweringmanagerstoactonthevisionandplanningforandcreatingshort-termwinsaboutchange,

–consolidating improvementsand institutionalizingnewapproaches forcontinuingchange.

These steps all require top-level leadership in envisioning a future. A strategic visionsummarizestheneedandpurposeofstrategicchange.

Why leadership in large organizations often fails to perform such steps for changearisesfromthenatureofleadershipinlargeorganizations.Inlargeorganizations,leaders

areusuallyselectedasthosewhoaresuccessfulatdoing“moreof thesame.”Managersoftenriseup to leadershipbecause theyembodyavisionof theorganization’spast.Thevisionofthepastrepresentedatestedstoryofsuccess.Pastleadershipbuiltorganizationalstructures and culture that evolved into a successful company. But when the businessenvironmentchanges,theearlierstructures,cultures,andleadershipbecameineffectualinthenewconditions.Despitethetendencyformanagementnottomakechanges,theneedforlong-termchangeisindigenous:organizationshavelittlecontroloverchangeintheirenvironments.Particularly,businessesareforcedbycompetitiontochangeordie.

Manystudentsof strategyandorganizationhaveargued that instability is aperiodicexperience for all organizations. For example,Michael Tushman and Elaine Romanelliargued that organizations experience periods of relative stability interrupted by sharpstrategicreorientations(Tushman&Romanelli,1985).Theysaworganizationalchangeasa kind of evolution, stimulated by responding to change in business and economicstructures.

MichaelTushmanandElaineRomanelliwithBeverlyViranynicelysummarized theconnectionbetweenstrategicvision,environmental(structural)change,andorganizationaldecline: “At least part of the reason for substantial organization decline in the face ofenvironmental change lieswith the executive team.A set of executiveswho have beenhistorically successful may become complacent with existing systems and/or be lessvigilanttoenvironmentalchanges.Or,evenifanexecutiveteamregistersexternalthreat,theymaynothave theenergyand/orcompetence toeffectivelydealwithfundamentallydifferent competitive conditions. The importance of an effective executive team isaccentuated in industries where the rate of change in underlying technologies issubstantial”(Tushmanetal.,1985).

Also students of innovationhavedocumented that amajor sourceof changes in thebusiness environment andwithin the economic structure consists of applied knowledgediscontinuities,whichTushmancalled“technologydiscontinuities”(Tushmanetal.,1985)andlaterClaytonChristensencalled“disruptivechange”(Christensen,2000).

As an example, Tushman and his colleagues looked at themini computer industry,focusing on 59 firms started between 1967 and 1971. They compared firm records ofsuccess and failure over a subsequent 14-year period. In their analysis of the reasons,some firms survived and many failed; they argued that one must understand how theconduct of the firm in the context of the changing economic structure affected theperformanceofthefirm.

The conduct of firms consists of the strategic, tactical, and organizational activitiesguidedbytheexecutiveteam(CEOandotherprincipalexecutiveofficers).Conductmustalterasthecontextofthefirmchangeswhenalterationsintheeconomicstructureaffectcompetition.Changescanarisefrom:(1) technologicalchanges,(2)marketchanges,(3)resourcechanges,(4)regulationchanges,and(5)competitivechanges.

Successful leadership performance depends upon the executive team’s ability toenvision,anticipateacorrectfuture,andformulateacorrectstrategyandorganizationforthe future operations of the business. Such vision, strategy, and organization correctly

anticipates technological opportunities for newproducts,market changes for newneedsandapplications,resourcechangeswhichaffecttheavailabilityandcostofmaterialsandenergy,andchangesingovernmentregulationsaffectingsafety,monopolies,taxes,etc.

Over the periods in which industries faced changes in economic structural factors,Tushmanetal.foundthatthosefirms–whoseexecutiveteamslackedvisionandmadenochanges in strategy and organization and product – failed after the structural changesoccurred. Even those firms with correct vision but whose executives constantly madechanges in strategy, organization, and product (whether or not structural changes wereoccurring) also failed. The firms which survived and prospered through a competitivediscontinuity (a disruptive change) are those whose executive teams: (1) envision andcorrectlyanticipatethediscontinuityandprepareforitwithappropriateproductstrategyandre-organization,and(2)aftermakingtheappropriatestrategicchangesholdasteadycoursetoproduceproperproducts/serviceswithqualityandlowcosts.

It is difficult for the company to formulate a new product strategy when it hits acompetitivediscontinuitygeneratedbynewappliedknowledge.Theprincipalreasonsinthedifficultyofformulatinganewproductstrategyinacompetitivediscontinuityare:(1)the technical uncertainties of a new applied knowledge vision, (2) the differingperspectives among the different product-groupmanagers and the technical staff aboutthatvision.

In order for a company to develop a radically new next-generation product-linestrategy,thewholecompanymustfightoutdifferentvisionsabouttheproductplansinanew applied knowledge situation. To formulate a next-generation product plan for anapplied-knowledge competitive-discontinuity, it is necessary for a high-level executiveteam to envision and formulate a strategy issue and to organize the effort necessary toformulateandimplementanewstrategyforthewholecompany.

Competitivediscontinuitiesareacommonproblemforafirminitiallysuccessfulinaradically new industry because, as we have seen in the industrial life cycle, appliedknowledge in the industry continues to progress for a long time. The crisis is thatcompetitive discontinuities due to rapid progress in applied knowledge force not onlychangesinproductstrategybutalsochangesinbusinessstrategytoexploitthechangingmarket.This iswhycompetitivediscontinuitiesarestrategicallychallenging.Andthis iswhyastrategicvisionthatforeseesdiscontinuitiesandstrategicplanningthatpreparesfordiscontinuitiesarethekeychallengesofstrategicthinking.

SonyCorporation

Starting their firm, the situation facing Ibuka and Morita was a veryuncertain future. They could not then have devised a meaningful anddetailedplan,sincepostwarJapanwouldbenewanduncharteredterritory.MoritaandIbukaweregoingintounexploredterritory.Theirnewfirmwasa

company with only a strategic vision about being high-tech; they had nospecificproductplan.

Morita’spartner,MasaruIbuka,hadbeenbornin1908inNikkoCity,northofTokyo.Hisfatherwasanengineer,buthehaddiedwhenIbukawasonlythree years old. His mother was a graduate of Japan Women’s College(Nihon Joshi Daigaku) and had taught kindergarten. Ibuka was inventiveandhadalwaysbeenfascinatedwithtechnology.Asaboy,Ibukahadlikedradioandbuiltoneusingthreevacuumtubes.ButsincevacuumtubesthenwereexpensiveinJapan,Ibukahadfabricatedhisowntubes.IbukawenttoWaseda University and studied engineering. He patented the first of hismanyinventionswhileastudent.(DuringIbuka’slife,hecontinuedtoinventanddesign,sothatbytheageof83in1991,hehadacquired104patents.Hewould design Japan’s first transistor radio, transistorized television, avideo cassette recorder forhomeuse, theWalkmanpersonal stereo, andacompactdiscplayer.)

In1946,whenMoritaandIbukaformedtheirnewfirmwith$500,theydidnotevenhaveaproductplan.Theysearchedforaproducttoproduce;andthey considered producing radios. But Ibuka decided this was a badcommercial strategy, since he was certain the existing large Japaneseelectronics firms would soon produce radios and be unwilling to sellcomponents toothers.Moreover, theradiowasthenastandardtechnologyand could not provide their new company with an innovative competitiveedge. Lead time is essential for using innovation in competitive strategy.Ibuka was anticipating the competitive conditions in the industrial valuechain.Ibukawantedaproductinwhichtheywerethetechnologyleaders.Asmall firm has a chance against bigger competitors only with strategicleadershipintechnologyandknowledge.

But what competitive edge? What product? Immediate products werenecessary for cash flow survival. At first, they made shortwave radioadapters to enhance the medium-wave radios that were widely owned inJapan. Shortwave could receive broadcasts from other countries, animportantsourceofnewsinoccupiedJapan.Shortwaveradioswereinshortsupply,andthisproductbegantheirbusiness.

Next they noted thatmany Japanese households had prewar phonographsthatneeded repair.Theybeganmakingnewmotorsandmagneticpickups.American thingswerearriving inJapan,and theAmericanswingand jazzrecordswereverypopular.Butthepartsbusinesswasnotafuture.Theystillwantedtoproduceacompletelynewhigh-techconsumerproduct–thatwastheirstrategictechnologyattitude.

At that time they knew of the wire recorder, which had been invented inGermany just before the war. Ibuka found a company, Sumitomo MetalsCorporation,whichcouldmakeforSonythespecialkindofsmall,precise-

diameter steel wire for such a recorder. Ibuka decided to produce a wirerecorder.But therewasaproblem.Sumitomowasnot interestedinasmallorderfromanew,untriedcompany.Withoutthis,theywouldnotthenbeabletoproduceawirerecorder.IbukaandMoritacontinuedtokeepthecompanyafloatwiththeirpartsbusiness.

Meanwhile, the U.S. occupation forces had taken over the JapanBroadcastingCompany(NHK)andneedednewtechnicalequipment.Ibukawas familiarwithaudio-mixingunitsand submittedabid tomakeone forthe U.S. forces. He received a contract and made the mixing unit. Whendelivering the unit to theNHK station, he saw a newAmerican high-techproduct,aWilcox-Gaytaperecorder,whichtheArmyhadbroughtfromtheUnitedStates.ItwasthefirsttaperecorderIbukahadeverseen.Helookeditoverandcouldseeimmediatelythatithadtechnicaladvantagesoverwirerecorders.

In thewirerecorder, thewirehadtopassover therecordingandplaybackheads at very high speeds to obtain decent fidelity in the reproduction ofsound.Butthetapeofthetaperecorderwithitswidesizeprovidedamuchlargermagneticareaforsignalrecordingandthereforecouldbeallowedtotravelmuchmoreslowlyinprovidingfidelityofreproduction.Also,togetalongenoughplayingtime,wirereelshadtobeverybig;whereasthelargermagnetic area of a recording tape meant that tape reels could be muchshorter for the same playing time. The wire could not be spliced as tapecould, in order to correct recording errors or to rearrange recordedsequences.Forthesereasons,Ibukaknewthattapewouldinevitablyreplacewire in audio recorders.Thiswas thenewhigh-techproduct forwhichhehadbeensearching!Ibukaunderstoodwhatkindofelectronics,physics,andchemistrywouldberequiredtocopyanddevelopthenewtechnology.Ibukadecidedtaperecordersweretobetheirproduct.

Oneseeshereastrategicvisionatwork.Ibukawascommittedtoahigh-techconsumerelectronicproduct–hehadnoplan, justacommitment.Hewaslookingforanewhigh-techproductwithwhichtocompetewiththebiggerbut slower-moving established Japanese electronics firms. He saw aninnovativeforeigntechnologyanddecidedtoduplicateit.Hisdecisionwasbaseduponthedistinctadvantagesofthenewtechnology.

Therearemanytechnicalproblemsininnovatinganewproduct,butIbukaandMorita knewhow to proceed–with systems analysis of the high-techproduct and with new applied knowledge through the process of appliedscientificresearch.Therealizedthecriticalpartofthesystemwhichtheydidknowhowtomakewastherecordingtape.Earlier,theyhadworkedonwirerecordersasapossiblehigh-techproductandunderstoodhowtomakethemechanicalandelectricalcomponentsofarecorder.

The tape was a subsystem of the new high-tech product, providing the

recordingmedium.Thetapewouldbecomposedofmaterialsthatwerebothphysical and chemically based. The rest of the system was based inelectroniccircuitryandmechanicalprocesses.IbukaandMoritawantedtoproducethetapeaswellasthemachine,inordertoobtainafollow-onsalesbusiness.Thiscommercialstrategytoproducetapeaswellastaperecordersoccurred immediately after they had made a decision to produce taperecorders,andtheresearchnecessaryfortherecorderbeganimmediately.

Ibuka’s andMorita’s first technical problemwas the basematerial for thetape,butagaintherewasasupplyproblem.TheAmericanfirm3Mwasthenthe source of the base tape material, but they were also the major tapeproducer.IbukaandMoritathoughttheymightnotwishtosupplytapetoasmallJapanesecompetitor.

TherewereseverematerialsshortagesinpostwarJapan.IbukaandMoritafoundtheycouldnotobtaincellophaneinJapan,whichwastheirfirstideaforabase.Theytriedit,evenknowingitmightproveinadequate.Itturnedout tobewholly inadequate.Theycut it into longquarter-inch-widestripsand coated it with various ferromagnetic materials. The cellophanestretchedhopelessly after only one or twopasses as tape on themachine.Theyevenhiredchemiststoimprovecellophanebutwithoutsuccess.

They needed another material. Morita went to one of his cousins, GoroKodera,whoworked forHonsuPaperCompany.Moritaaskedhim if theycouldproduceaverystrong,verythinandverysmoothcraft-paperfortheirtape. Kodera said he would try. He did, and it worked. They had a basematerial,whichtheyslicedintotape,usingrazorbladesatfirst.

The next problem was the magnetic coating to put on the paper tape.NobutoshiKihara,oneoftheyoungengineerstheyhadhired,didempiricalresearchbygrindingupmagneticmaterialsforthepowderforthetape.Atfirst themagneticmaterialsweretoopowerfulforthesystem.ThenKiharatried by burning to transform the oxalic ferrite into ferric oxide. Thatworked!MoritaandKiharasearchedallthepharmaceuticalwholesalersintheirdistrictofTokyo,findingtheonlystorethatstockedoxalicferrite.Theyboughttwobottlesofit,cookeditinapanuntilitturnedbrownandblack.Thebrownstuffbeingtheferricoxidetheywantedandtheblackstuffbeingferroustetraoxide,whichtheydidn’twant.

NexttheymixedthebrownstuffwithJapaneselacquerandtriedtoairbrushit onto the tape. That didn’t work. They tried brushes. They found that abrushmadefromtheveryfinebristlesfromthefurofaraccoon’sbellydidthebestjob.

Still it was terrible tape, of very poor fidelity. They really needed plastictape.Finally,theygotasupplyofplastictape.Withasupplyofplastictapeand the ferric oxide coating, they had a recording-tape technology. TapebecameamajorsourceofcashflowforSony.Theycontinuedtoputheavy

development into it. (Manyyears later, in1965, IBMchoseSonymagnetictapeastheirsuppliersforIBMcomputermagneticdatastorage.)

In the year of 1950, Ibuka’s andMorita’s first tape machine, which usedtheirnewplastic-basedmagnetictape,hadturnedouttobeverybulkyandheavy (about 75 pounds) and expensive (170 thousand yen). Next, theybeganlearningsomethingabout themarketingofnewandexpensivehigh-techproducts.Japaneseconsumerssimplywouldn’tbuyit.Theyhadtolookforanothermarket.

Atthetime,therewasanacutelaborshortageofstenographers.Duringthewar, so many students had been pushed from school into war materialproduction. IbukaandMoritademonstrated theirnew taperecorder to theJapan Supreme Court and immediately sold 20 machines. It was thebreakthrough sale for their new high-tech product.We see that from theirstrategicvisiontoproduceleadingedgehigh-techconsumerproducts,theywerelearningaboutproductandmarketingstrategy.

They redesigned their tape recorder into amedium-sizedmachine, a littlelarger thananattachécase.Theyalso simplified it fora single speedandsold it at a much lower price. They then sold their modified product toschoolsforEnglishlanguageinstructiontoJapanesestudents.

Astheirproductandmarketingstrategyprogressed,theynextdevelopedanintellectualpropertystrategy.Toobtainahigh-qualityrecorded-signal,theyhadpurchasedalicensetoaninventionpatentedbyDr.KnszoNagai,whichwasahigh-frequencyACbiassystemforrecording.Thisdemagnetizedthetapebefore it reached the recordinghead, reducingbackgroundandpriorrecordingnoise.Atthattime,thepatentwasownedbyAnritsuElectric,andthey bought half-rights in the patent from them in 1949.Eventually,whenAmericansimportedU.S.-madetaperecordersintoJapanusingtheACbiassystem technology, the U.S. firms had to pay royalties to Sony. ThisencouragedSonytobeaggressiveaboutintellectualproperty.

By1950,thenewcompanyhadproducts,taperecorders,magneticrecordingtapes,andintellectualproperty.Theywereusing theirstrategicvision;buttheystilldidnothaveastrategicplan.Thatwastocomenext.

Visionas“Exploration”oras“Repetition-in-Action”

We pause in this case to discuss a basic idea to the concept of strategic vision – thedifferencesbetweenrepetitiveactionandexploratoryaction–planningto“go-where-one-has-been-before”andplanningto“go-where-no-one-has-gone-before.”

Successfulvisionisbaseduponthesameconditionsthatallsuccessfulintuitionrests–an experiential base. Therefore, the basis of experience provides the grounds for and

foundationofintuition.Repetitiveactionprovidesadetailedexperientialbasefordetailedplanning.Exploratoryactionprovidesaninexperiencedbaseforonlysketchyplanning.

Repetitive action can be planned in operational detail – since one has gone therebefore and the route of the action has beenwellmapped. This is the common kind ofplanning performed in organizations for the short-term time horizons – quarterly andyearlyplanning.Forexample,ifonenowplansadrivefromNewYorktoPortlandintheUnitedStates,onecanpurchasedetailedroadmapsandplanpreciselytherouteandtimesofthetravel.However,thefirstU.S.citizenstoexploretherouteofwhatthencametobeknownhistoricallyasthe“Oregontrail”hadnosuchmapsandhadtoexploreandfindtheroute,usingthehelpofAmericanIndianslivingintheareaatthetime.Strategyplanningisabout“exploration” intoanunchartedfuture–Ibuka’sandMorita’svision tocreateanewhigh-techbusiness.

A plan is a systematic approach into the future. But known and unknown futuresrequiredifferentbalancesofanalysis/intuitionplanning.Anexampleofthiscanbeseeninconstructionprojects.Totheextentthatonehaspreviouslydesignedsimilarbuildingsandusedsimilarprocesses,anewconstructionprojectwillbeacustomizationofpreviouslyuseddesigns.Aconstructionprojectcanbecarefullyanalyzedandplannedindetailandthen scheduled, using the prior experience of the previous designs and projects. In thiscase, project planning tools (such as PERT) are extremely useful in laying out thescheduledmapfor theproject(suchasIbukasettingthetasksofdevelopingarecordingtape,designingthetaperecorder,redesigningthetaperecorder,etc.).

To the extent a future is repetitive, than analysis is more important inplanningthanintuition.

Totheextentafutureisunexplored,uniqueandnon-repetitive,thenintuitionismoreimportantinplanningthanisanalysis.

In the cases of uniqueness, such as radically innovative projects, a project is anexplorationintotheunknown,andnotasimilarrepetitionoftheprojectsofthepast.Suchnon-repetitiveprojectplanningismorelikebeingonanadventureintounknownterritory.One may start with a plan but the plan will likely change when something new isdiscovered.Thus,moreimportantthananinitialplanismethod,preparation,supplies,andrapidlearninginnewenvironments.

Inexploration,visionandmethodaremoreimportanttosuccessthaninitialplans.

Strategic visions are necessary to long-term planning because: nothing in the long-termfutureeverreallyhappensquiteasplanned.Thelongerthetermintothefuture,themoreithappensthatonelearns“realgoals,”asthefutureunfolds.Itisastrategicvisionwhich enables the explorer to effectively use a planning process as a real guide in anylong-termaction:

–The strategicvisionallows theplanner to exploitunplannedopportunities and torevisegoals.

–Thestrategicvisionallowsaplantocopewithunanticipateddelaysandproblems.

–Adelayedandalteredplancanberescheduledandredirected,becausethestrategicvisionwillprovidecontinuinglong-termdirection.

SonyandTechnologicalInnovationofTransistorizedProducts

In1952,IbukadecidedtotryexportingtheirtapesandrecordingmachinestotheUnitedStates.He visited theUnited States to study itsmarkets.He had earlier read about theinventionof the transistor atBellLabs,Figure1.2.He visitedWesternElectric inNewYork (then the patent holder on the transistor). Ibuka was impressed by the newtechnology; he wanted it. In the following year in 1953, Morita went to America topurchasealicensetothetransistorfromWesternElectricfor$25,000dollars–abigsumtothenewcompanyinthosedays.

Figure1.2: JohnBardeen,WilliamShockley,andWalterBrattainatBellLabs,1948.Source:AT&T;Photographer:JackSt.(lastpartofnamenotstampedwellenoughto

read),NewYork,NY(http://en.wikipedia.org/wiki/Transistors).

Ibuka appreciated the inherently great performance advantage that transistorspotentiallyhadovervacuumtubes.Atransistorcouldoperateinafractionofthesizeandatafractionofoperatingcurrent. IbukaandMoritaknewthatanybusinesswhichmadeportableconsumerelectronicsproductswouldhaveeventuallychangefromvacuumtubecircuits totransistorizedcircuits.ThiswasthebeginningofSony’s technologystrategy–transistorized circuitry andminiaturization. Ibuka andMoritawere a team – Ibuka the

technicalstrategistandMoritathebusinessstrategist.Nowtheyhadastrategictechnologywhichfocuseduponacoretechnologycompetency–transistorizedelectronics.

But the transistor invention had to be improved to use it in a radio. They had toimprovethefrequencyresponseofthetransistoracrossawiderrange.TheproblemwiththeoriginaltransistorinventedatBellLabswasitspoorfrequencyresponse.Theoriginaltransistorswereconstructedoutoftwokindsofsemiconductors,arrangedlikeasandwich,in which themiddle slab controls the current flow between the outer two slabs. Sincecurrentinsemiconductorscaneitherbecarriedbyelectronsorbyholes(holesareunfilledelectronic orbits around atoms), one can design either hole-electron-hole carriercombinations (positive-negative-positive: pnp) or electron-hole-electron combinations(negative-positive-negative:npn).

The original Bell Labs transistor had a pnp sandwich of germanium-indium-germanium. Electrons (the negative carriers) inherently move faster through asemiconductorthanholes(thepositivecarriers).Thephysicalreasonforthisisthatholeswaitforanelectrontoputintoitsemptyorbitfromaneighboringatombeforethatemptyorbitappearstohavemovedfromoneatomtoanother.Thisisinherentlyaslowerprocessthan a relatively freelymoving electron passing by one atom after another. So the firstthingtheSonyresearchershadtodotomakethenewtechnologyofthetransistorusefulwastospeedupthesignalprocessingcapabilityofthetransistorbyusingelectronsratherthan holes as carriers. The Sony researchers accordingly reversed the order of thetransistor sandwich: from a positive-negative-positive structure to a negative-positive-negativestructure(indium-germanium-indium).

The development of the transistor by altering its phenomenal basis from holeconductiontoelectronconductionisanexampleofatechnologystrategy.IfIbuka’sandMorita’snewelectronicsfirmhadbeenstaffedwithonlyelectronicsengineersandwithoutany scientists, they would not have been able to understand the new physics ofsemiconductors.Theywouldnothavehadthetechnicalimaginationtobegindevelopingthe transistor, knowing they could reverse the combination to seek a higher frequencyresponse. Ibuka andMorita had established a firm with both an innovative electronicstechnical capability and alsowith an innovative applied physics capability. That’s howMoritawastrained.AppliedphysicsunderlayMorita’sknowledgestrategy.

Thenextproblemtheresearchersfacedwasthechoiceofmaterialsforthebasesofthetransistoranditsimpurities.Withoutaddingasmallquantityofdifferentatoms“doping,”neithergermaniumnor indiumconductselectricity.Thedopedatoms“impurities”makethesematerials semiconducting, as opposed to non-conducting.Theydecided to discardthe indium used in Bell Labs’ original version of the transistor. Indium had too low ameltingpointforuseinacommercialtransistor.Theytriedworkingwiththecombinationofgalliumwithantimonyasitsdopingatom.Thatdidn’tworkwelleither.

Next they tried replacing the doping element of antimony in the gallium withphosphorus.Atfirst,theresultswerenotencouraging,buttheypersisted.Eventually,theyfound just the right level of phosphorus doping. Then they had an npn transistor ofgallium-germanium-gallium structure, with just the right amount of phosphorus atoms

dopingthegalliummaterial;Sonyresearchershaddevelopedahigh-frequencygermaniumtransistor,whichwascommerciallyadequatefortheirpocketradio.

Thenewfirmhadgoodresearchphysicists.Infact,theyweresogoodthatduringthecourseof the transistor researchoneof them,LeoEsaki,discoveredanewfundamentalphenomenon of physics – quantum tunneling (inwhich electrons can sometimes tunnelthroughphysicalbarriersthatwouldbarthem,iftheyobeyedclassicalphysicallawsandnotquantumphysics).HehadbeenborninOsaka,Japan,in1925.HegraduatedfromtheUniversityofTokyowithaB.S.inphysicsin1947andaPh.D.in1959.AfterworkingatSony,hemovedtoIBMResearchCenterinYorktownHeights,NewYork,USA.Therehedesignednewsemiconductorquantumstructures.In1973,EsakiwontheNobelPrizeinphysics.

Theradio–aconsumerproductthatIbukawouldnotproduceafewyearsbacksinceat that time the new firm had no technological competitive advantage – would nowbecomeasecondflagshipproductline,thepocketradio.In1955,theyproducedtheirfirsttransistorizedradioinasmallsize,asapockettransistorradio.However,sincetheradioturned out to be just a little larger than a standardmen’s shirt pocket, they did sew aslightlylargerpocketonthefrontoftheirsalesmenshirts,whentheywentouttomarketthenewproduct.

ThedevelopmentofthetransistorforradioapplicationisanexampleoftheJapanesestrategic acquisition of a foreign-invented applied knowledge and the subsequentimprovementofthatknowledgeforcommercializationbytheirknowledge-assetcapabilityof applied research. This pattern of acquisition of foreign-originated knowledge andsubsequent improvement of applied knowledge for commercializationwas the commonpattern inbothearlyand later industrialdevelopmentof Japan that led to itsemergencefirstasaworld-militarypowerandsecondasaworld-economicpower.

Withtheirnewknowledgestrategyofthetransistorandthenewproductofthepocketradio,IbukaandMoritadecidedtochangethenameofthenewfirm.Theynowhadglobalaspirationsandtheywantedagloballyrecognizablename.TheychangedfromtheTokyoTelecommunicationsEngineeringCompanytoSony.

WhenSony introduced its transistorizedpocket radio intoAmerica, theydiscoveredthatTexasInstruments(TI)hadindependentlyinnovatedatransistorizedpocketradio.ButTIhadnostrongcommitmenttotheconsumermarket,andtheysoondroppedtheproduct.Sonywascommittedtotheconsumerelectronicsmarketandbegantheirclimbtoaworldleader in consumer electronics. This is the second element of a strategic leadership –commitment.TI’scommercialsuccessesremainedintheindustrialandmilitarymarkets,whereitsrealheartwas–itsstrategicperceptionandcommitment.

Sonyfocusedupontheconsumerelectronicsmarketandbecameaninnovative,high-tech, top-quality consumer electronics firm and a giant, global company. Sony alsointroducedthefirsttransistorizedsmallblackandwhitetelevisionset.Incolortelevision,Sony innovated a single-gun, three-color TV tube. It innovated theWalkman series ofminiatureaudioplayers.It innovatedthefirsthomevideocassetterecorder(VCR),afterthe industrial version had been invented in the United States. Ibuka and Morita had

imbuedtheirnewcorporationwithastrategictechnologyattitudewhichsearchedforandfocusednewtechnologiesonadvancedconsumerelectronicsproducts–withacorporatetechnologycompetenceintransistorizedandminiaturizedproducts.

We see in this case on the founders’ strategic vision.Theyhadno operational plan,only a direction, innovative consumer electronics. The experiential base of their visionoccurred in the postwar situationwith its overwhelming need to rebuild Japan upon anadvancedhigh-techcompanybasis.Theirotherexperientialbasewasanunderstandingofprogressintheknowledgeareaofphysicsandtheappliedknowledgeareaofelectronics.Upontheseexperientialbases, theirvisionwastobuildanewcompanyuponanareaofadvancing applied knowledge. To do this, they committed to exploration for a newbusiness.Theyfound,acquired,developed,andappliednewknowledgeonelectronicstobuild innovate consumer electronic products.They acquired new applied knowledge bylicensing the new technology of the transistor. They then had a knowledge strategy tocontinuetodevelopthenewtechnologythroughresearch.Theirproductstrategywasthento apply the new technology in a stream of newminiaturized products, such as pocketradios,Walkman,VCRs, and so on.Their policieswere to create newmarkets throughinnovation.

IntuitionandVision

HenryMintzberg emphasized that the formulationof “strategic vision” is an “intuitive”activity (Mintzberg, 1990). About “intuition,” the Swiss psychologist, Carl Jung, hademphasized that intuition is one of the four basic cognitive functions – operations ofmentalprocesses. In1913at aMunichPsychologicalCongress, Jungdescribeda setofcognitiveprocesses (and in1921published this inhisbook,PsychologicalTypes). Jungdescribed the conscious operations of the mind as occurring in different processes ofthinking (T), of feeling (F), of intuition (I), and of sensation (S).Away to understandJung’scognitiontypesistoplacetheminataxonomy,constructedbytwodichotomiesofmental–bodyandanalysis–synthesis.

Thinking is a cognitive process which is primarily mental in focus andanalyticalinapproach.

Intuition is a cognitive process which is primarily mental in focus andsyntheticinapproach.

Sensation is a cognitive process which is primarily bodily in focus andanalyticalinapproach.

Feeling is a cognitive process which is primarily bodily in focus andsyntheticinapproach.

A strategic vision is a synthetic cognition of the idea about how a future can ormightoccur–anintuitionofthefuture.

CarlJung(1875–1961)wasborn inThurgau,Switzerland.HeattendedtheUniversity of Basel, graduating in medicine in 1900. He practicedpsychiatricmedicineandin1906sentcopyofhisbookonStudiesinWordAssociationtoSigmundFreud,afterwhichtheybecamefriendsforthenextsixyears.

In1941,KatharineCookBriggsandIsabelBriggsMyersintroducedsetsofquestions to help identifywhichof the cognitive functions (T, I, S,F) arepreferredinfrequency-of-usebyagivenindividual’scognition–calledtheMyers-BriggsTypeIndicator.

Analysis and synthesis are complementary operations in human thought. Analysistakes a complex concept into parts, into simpler component ideas. Synthesisassembles/generalizes different-but-related ideas into a unifying idea – in which theassembledsub-ideasnowbecomecomponentsoftheunifyingidea.Analysisdivides,andsynthesisunites.

In the plans by large organizations, often too much emphasis on analysis oversynthesis can occur, since it is easier to organize group processes for analysis than forsynthesis.Whenthishappens,planscanbedeficientinvision.Onesymptomofafailurein strategic vision can be seen, when a strategic planning process results in a veryvoluminous planning report, which is then neither read nor used. Another symptom iswhenalargecorporationcreatesanexpensivecorporateresearchlaboratorythatremainsisolatedfromthefirm’sbusinessunitsand isalwaysbeingcriticizedbymanagementasunrelated to the firm’s businesses. Another symptom of a lack of strategic vision in adiversified firm is when a strategic business unit’s product development incorrectlyimplements research results fromcorporate research, because the business divisions arelooking sideways andbackwards towards competitor’s past technology andnot forwardtoward technologywhich can leapfrog a competitor’s capabilities. Other symptoms arewhen a firm’s productivity lags and continues to lag behind competition, when newproducts are not getting out in a timely manner, and when a firm is falling behindcompetitors in theraceofcompetence.Failure instrategicvisioncanresult in failure tomeetfuturechallengesinafirm.

Musashi:ASamurai’sStrategicVision

In the Western management literature, while there are many books on“creativity,”butthereislittleconsensusastohowsynthesisoccursorhowto facilitate synthesis. For example, even in Mintzberg’s emphasis on theimportance of intuition in strategy, he himself offered only a vaguedescriptionof intuition:“Intuition isadeeplyheldsense thatsomething isgoingtowork.Itisgroundedinthecontextinwhichitisrelevantandbasedonexperienceofthatcontext.IcannotbeintuitiveaboutsomethingIknownothing about” (Campbell, 1990, p. 109). And this negative judgment isprobably the most certain thing one can say about intuition, from theWestern literature on intuition: One cannot be successfully intuitive iflackingaproperexperientialbase.

Yet this is the nub of the problem of “action.” If onemust be intuitive toperceive correct strategy for an action, how can one gain the experiencewhich only previous action can provide? But prior to a given action?MinyuomotoMusashihadawaytodothisasWay(Dao)oftheWarrior,inhisABookofFiveRings.Thisbookhadbeen longpopularwithJapanesemanagementandbecamepopularwithAmericanmanagementreadersinthe1980s(Musashi,1982).

Musashiwasaliterateandhighlycultivatedwarrior,buthewasawarrior(Figure 1.3). Before he turned to writing, Musashi claimed he fought 60swordduelswithoutasingledefeat.ParaphrasingMusashi,wecanlistnineofhisadmonishmentstowarriors:

Figure1.3: MiyamotoMusashiWieldingTwoBokken.Source:WoodblockprintbyUtagawaKuniyoshi(http://www.kampaibudokai.org/Niten.htm).

ThisistheWayforwarriorswhowanttolearnmy(Musashi’s)strategy:

1. Donotthinkdishonestly.

2. TheWayisintraining.

3. Becomeacquaintedwitheveryart.

4. KnowtheWaysofallprofessions.

5. Distinguishbetweengainandlossinworldlymatters.

6. Developintuitivejudgementandunderstandingforeverything.

7. Perceivethingswhichcannotbeseen.

8. Payattentioneventotrifles.

9. Donothingwhichisofnouse.

Inwhatwaydohisprinciplescontributetoa“philosophyofaction?”

First, if one thinks dishonestly, one cannot be honest with oneself; and

withoutself-honestyonecannotthinkclearly.

Second thepath to theattitude (“Way,”“Dao”)mustbe in training if theattitudeisoneofaction;forwithouttraining,onecannotactwithskill.

Third and Fourth, action always occurs within a complicated, holisticcontext – a system, in which many skills or arts and professions may berequired to carry out an action. (This is why, for example, in innovationteams are necessary including personnel with technical, marketing,production,andfinancialskills.)

Fifth,actionalwaysrequiressomeresources, tools,orsuppliesandresultsin outcomes that either deplete or replenish and/or improve previousresources. Thus all action must be strategically judged in gain or loss ofgoals.

SixandSevenrefer totheimportanceof theintuitivefacility intheheatofaction.Actionsarecomplex,contradictorysituationsoffluxandmotion–inwhich totalities must be instantly synthesized comprehended. Hence awarrior’s (or a manager’s) intuitive ability is as important as his/heranalytical ability.Musashi’s precepts here argue that in the heat of battle,intuitionandperceptionarecriticalcognitivefunctions,andhencemustbetrainedandexercisedbeforebattle.

In the Eighth precept, Musashi emphasized that in action, a detail cansidetrackordefeatawholeproject.(Forexamplebugsinsoftwareprogramshave often destroyed a whole company’s product reputation. As anotherexample,onceapoorlymixedantifreezesolutioncaused thousandsofnewautomobilestoberecalled,harmingthecompany’sreputationforquality.)

FinallyhisNinthpreceptemphasizes that inaction,economy is important,for action consumes resources. Action must be focused, disciplined andeconomicallyexecuted.

In summary,we see from this example of a strategic vision for a Samuraiwarrior(Figure1.3)thatthepreceptsaresensiblewaystoprepareforandbehaveinbattle–theyareefficientandeffectiveguidestoaction.

DimensionsofVision

One can summarize the “way” of action in strategic thinking with three ideas in thedimension of vision: (1) perception, (2) preparation, and (3) commitment. Perceptionarises from experience. Preparation creates skills and abilities. Commitment assemblesresources. One can picture these component ideas as a cognitive space for “vision” inFigure1.4.

Figure1.4: DimensionsofVision.

Intheperceptionoffutureopportunities,one’sexperience iscritical towhatonecanforesee – what one can imagine. In the preparation for attaining a future opportunity,one’sskillsarecritical–thecapabilityofattainingafuture.Inthecommitmenttoattainafutureopportunity,one’sresourcesarecritical–themeansofattainingafuture.

Visionisbaseduponintuition,andhenceformeduponanexperientialbase.Perceptionisaboutwhatoneseesintheworld.Strategicperceptioniswhatoneseesinthefutureoftheworld.In thecaseofMoritaandIbuka, the immediateandstarkperceptioninJapanthenwasthelossofthewar,theterribledevastation,andthedesperateneedforsurvivalinto the future. The perception of the future which Morita and Ibuka shared was theopportunities in consumer electronics. Their commitment was to begin a high-techconsumer electronics company. The preparation to do so required the search for a firsthigh-techproduct,which they found in thewire recorder.Theirpolicywas to innovate,andtheirproductwouldnotbethewirerecorderbutaninnovativetaperecorder.

Inavisionaryperceptionoftheworld,towhatdoesonecommit?Astrategicvisionisnotonlyaperceptionofthefuturebutalsoacommitmenttoadirectionofactioninthefuture. In the Sony case, Morita’s and Ibuka’s strategic perception centered upon theapplied knowledge area of electronics (and later transistorized electronics) but theirstrategic commitment was to consumer electronics. Therefore, they had to matchperception to commitment – which they did first with tape recorders and then withtransistorizedconsumerelectronicproducts.

Once a strategic perception and commitment ismade in a strategic vision, thenoneneedstoprepareforfutureactioninthedirectionofthecommitment.Preparationusuallyrequiresacquiringknowledgeandskillsandresourcesforfutureaction.MoritaandIbuka

preparedforthecommitmenttoconsumerelectronicsbylicensingtechnologiesanddoingappliedresearchtodeveloptheappliedknowledgeintoproducts.Theybuilttheresourcesnecessarytopursuethisfirstbymanufacturingradioparts’kitsandthenbymanufacturingandsellingthetaperecorder.

ThecaseofSonyshowshowthecompanywasconstructedandguidedbyastrategicvision with strategic components of: (1) the perceptions and (2) commitment of theirfounderson the importanceofadvanced technologyapplied toconsumergoods,and(3)their preparation in developing corporate competency in innovation. Good strategic“vision” is thusa concrete ideationalprocess inaction–andnot somevague,nebulousthing–that“strategything.”Thecomponentsofstrategicvisionconstituteveryconcreteelementsfor“intuition”instrategyasformulatingcorporategoals.

With this idea of strategic vision as involving strategic perception, commitment,preparation,andpolicies,wecanbetterunderstand the rolesofanalysisand intuition instrategy:Instrategy, intuitionarises fromanexperientialbasisasastrategicperceptionandcommitment,–whichtogethercreatesavisionarygoal.Analysiscanthendetail theperception,commitment,preparation,andpoliciestoreachastrategicgoal.

StrategicVisionandCompetitiveness

The environment for competition continues to change as technology alters and as theworldindustrializes.Manystudentsofmoderneconomicchangehavenotedtherapidpaceoftechnologicalchangeandeconomicchange.

Forexample,KimClarkandT.Fujimotoemphasizedsomeofthechangingfeaturesofcompetition,amongwhichare:

– A continuing and growing worldwide dissemination of scientific and technicalknowledge.

– An increasing number of global competitors competing in different nationalmarkets.

–Atthesametime,thefragmentationofmassmarketsintomarketnichesandrapidlychangingcustomerpreferencesasawidervarietyofproductsareoffered.

–Acontinuingrevolutionincomputerandcommunicationstechnologiesthatprovidecorporatecapabilitiesofmorerapidresponsivenessandgreaterflexibility.

–Theproliferationofthenumberoftechnologiesthatmayberelevanttoanygivenproduct,includingmechanical,electronicandsoftwaretechnologiesandchoicesofmaterials(Clark&Fujimoto,1988).

In the light of the above changes, Clark and Fujimoto proposed five precepts forcorporatestrategy:

–Managersshouldunderstandthetechnologicalcoreofabusinessandenvisionthatasastrategicadvantage.

–Managersshouldtakeabroad,world-wideviewoftechnicalcompetence,seekingoutthebesttechnologywhereeveritcanbefound.

– Managers should focus upon time as the critical factor in using innovation forcompetitiveadvantage.

–Managersshoulddisciplinebusinessfunctionaroundthefunctionofproduction(inproductionthetechnicalknowledgeofthecompanyisfocusedintoavalue-addingactivitytothecustomer).

–Managersshouldintegrateallbusinessfunctionsthroughtheinformationsystemofthefirm.

We see that Clark’s and Fujimoto’s precepts for a strategic vision require deepeningmanager’sconcernsfortechnology,wideningtheirhorizonsontechnicalchange,focusingtheir attention on timeliness, and integrating technical activities around the science ofmanufacturing.

As another example, T. G. Eshenbach and G. A. Geistauts offered precepts forengineers.Theyarguedthattheperspectiveofengineersshouldbebroadenedtoviewtheircompaniesaskindsofsocio-technicalsystems:

–Thinkofthefirmasatotalsystem.

–Focusontheinteractionbetweenthefirmanditsenvironment.

– Concentrate on the firm’s most fundamental questions and issues, including thebasicmission,definitionofthebusinessandgoals.

–BeexplicitaboutvaluejudgmentsintechnologyassessmentsandR&Dcost/benefitanalyses.

– Emphasize anticipatory adaptive control for the firm to optimize long-runperformanceinthefaceofinherentuncertainty.

–Articulateaphilosophyofmanagementthatrepresentsapermanentcommitmenttointegrative,systematiclong-rangeplanning.

– Develop an ongoing planning process, wherein strategy is continuouslyreexamined.(Eshenbach&Geistauts,1987,p.63).

Wenote in this strategicphilosophy theemphasisuponperceiving thebusiness inasystems view, envisioning the firm as an economic value-adding transformation. Inaddition they emphasized that engineers should focus upon the interaction betweentechnologyandbusinessgoals.Theyalsoadvocatedanemphasisonanticipatoryattitudes,

formalized in a planning process. Technology planning processes in firms should bedesignedtofosterabusinessstrategicattitudeintheirresearchscientistsandengineerstoenablethemtocollaboratestrategicallywithbusinessmanagers.

Asathirdexampleofstrategicpreceptsformanaginginnovativefirms,LowellSteele(Steel, 1989, p. 345) offered what he thought a “technologically effective” enterpriseshouldbecapableof:

–takingasystemsviewoftechnology,

–beingawareofthedynamicsofmaturationoftechnologiesandindustries,

– being explicit about how the enterprise uses technology for a competitiveadvantage,

–articulatingaclearsenseofwhatarethebusinessesofafirm,

–knowingwhoareitscompetitors,

–beingawareofthechangingnatureofcompetition,

–beingrelentlessinitspursuitofexcellence.

For all the above examples of commentators on corporate strategic vision, theirpreceptsprovidetheelementsfortheirphilosophiesofaction,their“Way,”“Tao.”Clark’sandFujimoto’s“Way”drewfromtheperspectiveofthemanagerandemphasizedtheneedfor a manager to be aware of technology and commitment to globalization, time, andproduction.Eshenbach andGeistauts’ “Way”drew from theperspectiveof the engineerand emphasized the need for an engineer to be aware of the business system andcommitment toadaptivecontrolandlong-rangeplanning.Steele’s“Way”drewfromtheinterfaceof researchandbusiness andemphasizedneed for abalancebetweenbusinessand engineering views on an enterprise, with commitments to competitiveness andexcellence.

Which “Way” is best? They are all best, depending upon one’s experience of theworld,position,andcommitmenttoaction.Each“Way”seestheworldfromtheparticularexperientialbaseofaction.Fortechnologystrategy,themanagementpersonnelrequirea“Way”tobemoreawareofandattendanttotechnologyasacompetitivefactor.Technicalpersonnelrequirea“Way”tobemoreawareofandattendanttothebusinessimplicationsoftechnologyasapartoftheenterprise.Formulatingstrategicattitudesinthecorporationrequiresbringingeachgroupintoa“Way,”inorderforallgroupstocooperateinthetotalbusinessenterprise.

StrategicPrecepts

Management’s strategicprecepts about thenatureof theworld andabout thevalues for

action chose the focus of corporate perception, commitment, preparation, and policy.A“precept” isacommandorprinciple intendedasageneral ruleofaction. In thecaseofMusashi’s expressions of their principles of action, we see they are stated as precepts.Strategic visions are expressed as precepts.We summarize some of the preceptswhichhavebeensuggestedaboutstrategy:

A.OnIntuition

–Donotthinkdishonestly.

–Facerealityasitis–notasitwasorasyouwishitwere.

–Perceivethingswhichcannotbeseen.

–Payattentioneventotrifles.

–Dealwithuncertaintyandambiguity.

–Developintuitivejudgmentandunderstandingforeverything.

–TheWayisintraining.

B.OnAction

–Timeistheessence.

– Develop an ongoing planning process, wherein strategy is continuously re-examined.

–Emphasizeanticipatoryandadaptivecontrolinthefaceofinherentuncertainty.

–Controlyourowndestiny,orsomeoneelsewill.

C.OnBusiness

–Distinguishbetweengainandlossinworldlymatters.

–Thinkofthefirmasatotalsystem.

–Focusontheinteractionbetweenthefirmanditsenvironment.

–Articulateaclearsenseofwhatbusinessesafirmisin.

–Berelentlessinpursuitofexcellence.

–Disciplinetechnicalfunctionsaroundthescienceofproduction.

–Integrateoperationsaroundtheinformationsystem.

D.OnCompetition

–Knowwhoareyourcompetitors.

–Beawareofthechangingnatureofcompetition.

–Ifyoudon’thaveacompetitiveadvantage,don’tcompete.

E.OnTechnology

–Becomeacquaintedwitheveryart.

–KnowtheWaysofallprofessions.

–Takeasystemsviewoftechnology.

–Takeaglobalviewonthedistributionoftechnicalcompetence.

–Beawareofthedynamicsofmaturationoftechnologiesandindustries.

–Beexplicitabouthowoneusestechnologyforacompetitiveadvantage.

–Knowthetechnologicalcoreofacompanyandlinkittostrategicintent.

Summary

Strategic precepts about action instruct one about how to act in cases of exploratoryaction, as opposed to repetitive action. Strategic vision of a company needs to beexpressedinstrategicpreceptsthatfocusuponthechangeneededforthecompany’sfutureprosperity and survival. Precepts which merely reinforce current practices provide nostrategicguidancebeyondtheprecept–continuetodoasyouaredoing.Strategicvisionshouldbeexpressedasabriefsetofstrategicpreceptsastowhatkindofandhowchangeshouldbeimplemented.

TheoreticalPrinciples

1. Allactionsaredirectedtowardthefuture;andintelligentactionismostlikelytosucceed.

2. Correctvisionisnecessarytosurvivediscontinuities.3. Technologystrategyisabasiccomponentofcompetitivestrategy.4. Strategyiscognitivelymoresynthetic(intuition);whileplanningismoreanalytic

(thinking).5. Intuitionisprimarilybaseduponexperience.6. The“way”ofexperienceisperception,preparation,andcommitment.7. Strategicwisdomisexpressedintheformof“precepts”.

StrategicVenture

Introduction

Thelaunchingofanewbusinessisanadventureinvision—anewventure.Buttogainthenewventurevision,actionsmustbetakenovertime,insequence—aseriesoftactics.ThisisshownFigure2.1,asthelong-termtimedimensionofventureactionoccursovertimeasaseriesofsequentialtactics.

Figure2.1: ActionPlannedasaSequenceofMeans&EndsoverTime.

A long-termoutcomemayneed tobe attainedas a sequenceof actions, eachactionbeing a tactic of the actor (decision-maker). Strategy threads the sequence of tacticstogetherforpresentactionsintheshort-termsequencetoattainafutureinthelongterm.

Anewbusinessventurenicely illustrates theneedforsequentialstrategy—strategyoccurringinstepsoftime,strategyandtactics.Toillustratethis,wereviewthecaseofthefoundingofCiscoSystemsattheendofthetwentiethcentury,baseduponthenewscienceandtechnologyofcomputercommunications—theInternet.Thecaseisnotrecent;butthenallcases(evenrecentcases)eventuallybecomebusinesshistory.Theimportanceofusing a case in business history is to illustrate theory. In the cases of the Cisco andInternet, one sees the historic importance of business opportunities — when newtechnologiescreatenewindustries.Thishasbeenandwillcontinuetobe the‘impactoftechnological innovation on business’ — new business opportunities — new venturestrategy.

CiscoSystems

The decision makers in new ventures are the entrepreneurs who start thecompany.Andtheirfirsttwostrategicdecisionsare(1)thekindsofproductsthenewbusinesswillmakeand(2)whoarethecustomersfortheproduct.Thestepsofimplementingsuchstrategyarethetacticsnecessarytoachievesuccess.The tactics include (1) acquiring start-upcapital, (2)developmentofanewproduct/service,(3)buildingproductioncapabilities,and(4)initialsalesandgrowth.WewillexaminetheoriginofCiscoSystemstoillustratethetheoryofstrategicbusinessventures.

Cisco Systems began in theUSA as one of the companieswhich built itsbusiness strategy on the new technology of the Internet. Cisco had beenfounded by Sandy Lerner and Leonard Bosack. In 1977, they met andmarriedwhilebothwereatStanfordUniversity.Shewasagraduatestudentin statistics and computer science, and he was teaching in Stanford’scomputer science department (with amaster’s degree in computer sciencefromStanford).

Universitiesandindustrialfirmshavebothbeenimportantintheinnovationoftheinformationtechnologies.TheU.S.DepartmentofDefensefundedthebasic research in networking computers, through the Advanced ResearchProjects Network (ARPAnet); and ARPAnet had a major impact uponcomputerscienceinuniversities.Stanfordwasoneoftheuniversitiesonthecutting edge of innovation in computer networking in the early 1980s.Stanfordhadabout5000differentcomputersonitscampus,andtheneedforcomputerstotalktoeachotherwasstrong.Thencomputerscouldonlytalktoeachotherby‘goingoutside’throughARPAnet.Attheendof1979,theadjacent Xerox corporate research laboratory, Palo Alto Research Center(PARC)donatedtoStanfordacopyofitstheninnovative‘Altos’computernetwork,alongwithitsEthernetconnectivity.

Using PARC’s ethernet local-area-network information technology,Stanford’smedical school and computer science department each installedseparate networks. Networking engineers were working to connect thedifferent discrete local-area-networks, springing up at Stanford, byconstructing ‘bridges’ to extend networks. But the idea of a ‘router’ to‘route’ messages from ‘network’ to ‘network’ was an effective way formoving messages around and through networks. An engineer, WilliamYeager,wasworkinginStanford’smedicalschoolanddesigningroutersfortheschool’snetwork.In1980,hedevelopedaprototypeofarouter,usingaDECminicomputerwhichconnected thenetworkof themedical school tothenetworkofthecomputersciencedepartment.From1980to1982,many

efforts continued in Stanford to construct inter-communicating networksacross the campusEthernet—usingworkstations runningUnix operatingsystems.This projectwas calledStanfordUniversityNetwork (SUN).Butthe project ran only Unix systems and was not effective in connectingeverything.

JohnDixinterviewedWilliamYeager,andYeagerrecalledthebeginningofhis ‘router’project: “Thisproject started forme in Januaryof1980,whenessentially theboss said, ‘You’reournetworkingguy.Godosomething toconnectthecomputersciencedepartment,medicalcenteranddepartmentofelectricalengineering…Wehadmainframes,ofcourse,DEC10Systems,anumberofXeroxPARCLispmachines,Altosfileserversandprinters,andoverthenextyearorsoaddedDECVAXs,TexasInstruments’ExplorersandSymbolicsystems.Allofthesethingshadtobehookedtogether,becausewewerespreadacrossbuildingsoncampus,andpeopleweretiredofcarryingtapesaround.Ithoughtaboutthisforabit,andIsaid,wellreallywhatyouneed is an operating system. So while the cables were being pulled andtested,Idevelopedanetworkoperatingsystem[NOS]androutingcode[torunona]DECPDP11/05…It’simportanttorememberthePDP11/05onlyhad 56KB of user memory, and was diskless. The struggle was always abalancebetweenhowmanyinputbuffersyoucouldhave.Youreallyhadtosqueezethings,becausetherewasnodiskandifyouranoutofmemoryforinputbuffersyouweredeadinthewater.Soyouhadalloftheseconstraints,whichactuallyhadalot todowithhowgooditendedupbeing,becauseIhad to do a lot of work to both assure thememory allocation algorithmswouldneverrunoutofmemory,aswellasgetthingsscheduledright.Ispentan entire summer making sure the NOS scheduling and packet-switchingalgorithmswere optimal.All in allwe had the basic systems put togetherandworkinginaboutthreemonths,andatsixmonthsthefirstrouterwasinplaceinPineHallinatelephonecloset.PineHallwasmidwaybetweenthemedicalcenterandthedepartmentofcomputerscience.Itwasabouta2,000feetcablerunoneithersideoftherouter.”(Dix,2006)

YeagerhadmettheBosacksinStanford:“Inthespringof1985LenBosackand another guyknockedonmyoffice door and asked if they couldhaveaccesstosourcesfortheroutercode.Isaid,whatdoyouwanttodo?Theysaid,wewant to improve it, addmore features. I said,well thatwouldbegreat, because I have other research tasks to do, and I gave them thepasswordandawaytheywent.IhadnoideaCiscohadbeenfoundedin’84.I’d never heard of it. Right. So we had weekly meetings and they wereindeedworking on the sources…So I guess sometime in’86 I found outaboutCisco.We all found out aboutCisco andwhatLenwas up to.Andyeah, theyweredeveloping that codeonStanford time forCisco.But thiswasnotexactlybad,becauseotherthingshadhappenedlikethatatStanfordbefore.ButStanfordwasdeciding itwas timetoput its footdown.‘Guys,

you develop something on Stanford’s campus,wewant to profit from it’,right?… This was just kind of the general tenor. So I was called intoStanfordLegalandthelawyertoldmetobringmysourcesonpaper.Since[Len’s partner] was in the Double E department he had the Double Esources.AndIsatdown,andthe lawyersaid,‘Willyoudoacomparison’.AndIsaid,welllet’sstartwiththeoperatingsystem.That’ssortoftheheartandsoulofthis.Anditwasidenticalexceptforchangingvariablesnames.Isaid,canyouseethis?Shesaid,‘I’malawyerandIcanseethisisidentical’.…Well, thenStanford reallyput its footdownandLen [andhispartners,including Cisco co-founder Sandy Lerner] left the university to focus onCisco”.(Dix,2006)

ThustheinventionoftherouterconcepthadhappenedatStanfordbutCiscoinnovated the router product. Sandy Lerner Bosack had been director ofcomputer facilities inStanford’sbusinessschool;andLeonardBosackwasthedirectorofStanford’scomputersciencedepartment.Inconnectingtothecomputer science department, the Bosacks got to knowYeager. Together,with other colleagues, they began their own ‘bootleg’ experiments inconnecting networks, without sanction from higher university authorities,using the router concept. They ran coaxial cable from one building toanother across the campus; and they installed routers and servers forcomputers to communicate with each other and also externally with theARPAnet. Yeager added code to the Stanford routers to coordinate thenetwork and others added more code to the routers to provide additionalnetwork service. David Bunnell wrote: “The project was a success. Therouter enabled the connection of normally incompatible individualnetworks…Soonenough,thebootlegsystembecametheofficialStanfordUniversityNetwork.”(Bunnell,2000)

Thus to connect local area networks of computers to the internet ofcomputing,theBosacksandYeagerhaddevelopedadevice(softwareuponaminicomputer)which could connect networks to networks—a ‘router’.BeforewecontinuewiththecaseofCiscoSystems,letusbrieflyreviewtheinnovationoftheInternet.

OriginoftheInternet

As shown in Figure 2.2, the Internet is a technology for computer-to-computer networking and was implemented through the connection ofproductsfromseveralkindsofbusinesses:

Figure2.2: ImplementationofInternetTechnologyasProducts/Services.

(1)thesaleofpersonalcomputers(e.g.Dell),containingamicroprocessor(e.g.IntelCPU)andanoperatingsystem(e.g.MicrosoftWindows)andlatersmartphonesandtablets(e.g.Apple,Samsung);

(2)anInternetserviceprovider(e.g.Comcast,Verizon,SKT,etc.);

(3)aserverandrouter(e.g.Cisco,Dell,IBM,etc.);

(4)a local-areanetworkorwide-areanetwork inabusiness (e.g.Cisco,Erickson,etc.);

(5) an Internet back-bone communications system (e.g. AT&T, Verizon, Sprint,etc.);

(6)internetsearchservices(e.g.Google,Yahoo,Alibaba,etc.);

(7)retailservices(e.g.Amazon,eBay,etc.);

(8)socialnetworks(e.g.Facebook,YouTube,Twitter,etc.).

Asatechnologysystem,theInternetdevelopedoveraperiodfromthe1970sthrough the 1990s. This is a remarkable period, as the Internet created arenaissance in commerce, which some have called a ‘second industrialrevolution’.

The invention of this Internet technology historically traced back to anearliercomputernetworkcalledARPAnet.ARPAnet’sorigin,inturn,canbetracedtoDr.J.C.R.Licklider.Lickliderservedin1962inthegovernment

agency, Advanced Research Projects Agency, funding military researchprojectsfor theU.S.DepartmentofDefense.HeheadedresearchinARPAonhowtousecomputersformilitarycommandandcontrol(Hauben,1993).Lickliderbeganfundingprojectsonnetworkingcomputers;andhewroteaseriesofmemosonhisthoughtsaboutnetworkingcomputers,whichweretoinfluencethecomputerscienceresearchcommunity.

About the same time, a key idea in computer networking derived fromresearch of Leonard Kleinrock. Kleinrock had the idea of sendinginformation in packaged groups, packet switching. He published his firstpaperonpacketswitchingin1962andasecondin1964.Packetswitchingenabled computers to send messages swiftly in bursts of information —without tyingupcommunication linesvery longandthusvastly increasingcommunicationcapacitiesofnetworklines.

In 1965, Lawrence Roberts at the Massachusetts Institute of Technology(MIT)connectedacomputeratMITtooneinCaliforniathroughatelephoneline.In1966,RobertssubmittedaproposaltoARPAtodevelopacomputernetwork for a military need (defense) for protection of U.S. Militarycommunications under a nuclear attack. This was called the AdvancedResearch Projects Administration Network, or ARPAnet (and was todevelop,eventually,intotheInternet).

Robert W. Taylor had replaced Licklider as program officer of ARPA’sInformation Processing Techniques Office. Taylor had read Licklider’smemosandwasalso thinkingabout the importanceofcomputernetworks.He funded Robert’s ARPAnet project. Earlier, Taylor had been a systemsengineerattheMartinCompanyandnextaresearchmanagerattheNationalAeronautics and Space Administration (NASA), funding advances incomputerknowledge.Thenhewent toARPAandbecameinterested in thepossibilityofcommunicationsbetweencomputers.Inhisoffice,therewerethree terminals time-sharing computers in three different (research)programs that ARPAwas supporting. He watched communities of peoplebuilduparoundeachtime-sharingcomputers.Taylorwasstruckbythefactthateachtime-sharingcomputersystemhaditsowncommands.Hedecidedthat there should be one set of commands to communicate. Taylor’scontribution to the concept of the Internet was the need for standards incomputer-to-computer communications. And in 1965 in Washington D.C.while programmanager inARPA, Taylor proposed to the head ofARPA,CharlieHerzfeld, the idea for a communications computer network, usingstandardprotocols.

Nextin1967,ameetingwasheldbyARPAtodiscussandreachaconsensusonthetechnicalspecificationsforastandardprotocolforsendingmessagesbetweencomputers.Thesewerecalledthe‘InterfaceMessagingProcessor’(IMP).Usingthesetodesignmessagingsoftware,thefirstnodeonthenew

ARPAnetwas installedon a computer on the campusof theUniversity ofCalifornia at LosAngeles. The second nodewas installed at the StanfordResearch Institute, and the ARPAnet began to grow from one computerresearchsettingtoanother.By1969,ARPAnetwasupandrunning.TaylorleftARPAtoworkatXerox’sPaloAltoResearchCenter.

AstheARPAnetgrew,therewastheneedforcontrolofthesystem.Itwasdecided to control it through another protocol, called Network ControlProtocol (NCP); and this was begun in December 1970 by a privatecommitteeofresearcherscalledtheNetworkWorkingGroup.TheARPAnetgrew as an overall interconnected multiple sets of independent smallernetworks.In1972,anewprogramofficeratARPA,RobertKahn,proposedan advance of the protocols for communication as an ‘open architecture’accessible to anyone. These were formulated as the Transmission ControlProtocol/InternetProtocol(TCP/IP).Theybecametheopenstandards,uponwhichlatertheworld’sInternetwouldbebased.

While the ARPAnet was being expanded in the 1970s, other computernetworks were being constructed by other government agencies anduniversities. In1981, theNationalScienceFoundation (NSF)establishedasupercomputer centers program, which needed to have researchersthroughout theU.S.able toconnect to thefiveNSF-fundedsupercomputercenters (in order for researcher’s computers to use these supercomputers).NSF andARPA began sharing communication between the networks, andthepossibilityofatrulynationalInternetbegantobeenvisioned.In1988,acommitteeoftheNationalResearchCouncil,wasformedtoexploretheideaof an open, commercialized Internet. They sponsored a series of publicconferences at Harvard’s Kennedy School of Government on the‘Commercialization and privatization of the internet’. InApril 1995,NSFstopped supporting its own NSFnet ‘backbone’ of leased communicationlines; and the Internet was privatized. The Internet grew to connect over50,000 networks all over the world. On October 24, 1995, the FederalNetworkCouncildefined theInternetas: (1) logically linked togetherbyagloballyuniqueaddressspacebasedontheInternetProtocol(IP),andabletosupportcommunicationsusingtheTransmissionControlProtocol/InternetProtocol(TCP/IP)standards.

‘BigPicture’inBusinessStrategy—TheChallengeofTechnologyintheModernWorld

Thecaseswearereviewing—oftheoriginoftheInternettechnologyandthebusinessopportunities theBosacks’ found instartinga routercompany—areexemplarsofageneralandimportantpatterninmoderncivilization.Technologyhasbeenoneoftheprincipledriversofeconomicdevelopmentand business strategy for the last two hundred years in the modernindustrializedworld.Andthemodernhistoryoftechnologicalchangeandits

impactsonsocietyisahistorybothdramaticandruthless.Thedramaisthetotal transformation of societies in the world from feudal and tribal toindustrial.Theruthlessnessintechnologicalchangehasbeenitsforcewhichno society could resist and which has been called the ‘technologyimperative’.Forthelastfivehundredyears, technologicalchangehasbeenirresistible in military conflict, in business competition, and in societaltransformations.The‘technologyimperative’isthatsuperiortechnologyofacompetitorcannotbeignoredbyothercompetitors,exceptattheirperil.

Historically, there were two technological innovations that marked thebeginningofthemodernera:thegunandtheprintingpress.Thegunendedthe ancient dominance of the feudal warrior, and the printing presssecularizedknowledge.Thiscombinationoftheriseofthemercantileclassandthesecularizationofknowledgearehallmarksofmodernsocieties.Fromthefourteenthcenturythroughthetwentiethcentury,thepoliticalhistoriesofall the world are stories of the struggles between nations and peoples—whereinthedeterminingfactorsarecompetitivesuperioritiesmadepossibleby new technologies. But after the sixteenth century, a new societal forceappearedintheworld—thecreationof‘science’.Scientificknowledgethendrovefurthertechnologicalinnovation.Althoughtheinnovationsofthegunandprintingpresswerenotmadeonasciencebasis,afterwardsalltheothermajornewtechnologiesintheworldhavebeenmadeuponasciencebasis.Continuing technologicalprogress in theworldhasbeenmadepossiblebytheoriginandgrowthofscience.Figure2.3summarizesthemajorhistoricalmilestonesofchangesinscience,technologyandeconomy.

Figure2.3: TimeLinesofScience,Technology,Economy.

SciencebeganintheEuropeancivilizationinthecenturyofthe1600swhenNewtoncombinednewideasofphysics(duetoCopernicus,Brahe,Kepler,andGalileo)withnew ideas inmathematics (due toDescartes andothers)and invented the mathematical theory of space, time and forces (theNewtonianparadigmofphysics).Inthenextcenturyofthe1700s,thesenewideaswere furtherdeveloped into thenewscientificdisciplinesofphysics,chemistry, andmathematics. The centuries of the 1800s and 1900s founddramatic advances in these disciplines, along with the founding of thescientificdisciplineofbiology.Bytheendofthe1900s, thephysicsofthesmall parts ofmatter and the largest spaces ofmatterwas established, thechemistry of inanimate and animatematterwas established, themolecularbiology of the inheritance of life was established, and the computationalscienceofmindandcommunicationwasbeingextended.Andallthisbeganandoccurredinaninternationalcontextfromtheverybeginningsofscience,sothatonecanseethefourhundredyearsoftheoriginanddevelopmentofscienceasaperiodoftheinternationalizationofscience.

In contrast to this international context of science, the economic andtechnologicaldevelopmentsoccurredwithinpurelynationalcontexts.Eachnation industrialized on a national basis and in competition with othernations. From about 1765 to about 1865, the principal industrializationoccurred in theEuropeannationsofEngland,France, andGermany.From

1865 to about 1965 (the second hundred years) other European nationsbegan industrializing; but the principal industrialization shifted to NorthAmerica.

By the middle of the twentieth century in the 1940s, the U.S. industrialcapacitywasalonesolargeandinnovativeastobeadeterminingfactorintheconclusionoftheSecondWorldWarofthatcentury.Forthesecondhalfof the twentieth century,U.S. industrial prowess continued, andEuropeannations rebuilt their industrial capabilities that had been destroyed by thatwar.From1950totheendofthetwentiethcentury,severalAsiancountriesbegan emerging as globally-competitive industrial nations: Japan, Taiwan,SouthKorea,Singapore.

It was only after the death of Mao Zedong that economic reforms werebegun in China, by Deng Xiaoping. Then China began to rapidlyindustrialize,quicklybecomingamajormanufacturingnationintheworldinthetwenty-firstcentury.AlsoIndia,throwingoffdecadesofsocialismbeganto further industrialize, particularly in the information technologies. Allother Asian countries were also moving toward globally-competitivecapability: Vietnam, Thailand, Philippines, Malaysia, Indonesia. (One cannotethathistoricallyAsianindustrializationactuallybeguninJapanin1865— but was diverted principally to amilitary-dominated society. After thesecondworldwar,are-industrializationofJapanoccurred.)

In summary, there was a pattern of three hundred years of worldindustrialization inwhich different regions of theworld began to developglobally-competitiveindustrialindustries:

(1)firsthundredyears(1765–1865)—Europe,

(2)secondhundredyears(1865–1965)—NorthAmerica,

(3)thirdhundredyears(1965–2065)—Asia.

Alongwithindustry, thepatternsofdevelopingtechnologicalprogressalsooccurreduponanationalbasis,withtechnologyviewedasanationalasset.However, the pace with whichmodern technology became internationallytransferred increased in the second half of the 1900s, so that when thetwenty-first century began, a new pattern of change in the modern worldemergedasthebeginningoftheglobalizationoftechnologicalinnovation.

Thusbythetimethetwentiethcenturyended,therewasintheworldawide-spread appreciation that science& technologywas critical to internationaleconomic competitiveness. World markets and industrial production hadbecomeglobalaffairs.In1980,globaltradehadalreadyaccountedforabout17% of total economic activity, increasing by 2000 to 26%, worldwide

(Kahn, 2001). The economic mechanism of the global trade were multi-national firms: “Global trade increased rapidly throughout the 1990s, asmultinationalcompaniesshippedproductsthroughaglobalsupplychainthatminimized costs and maximized efficiency with little regard for nationalborders (Kahn, 2001, p.A4).And the Internetwas one technologywhichwascontributingsignificantlytothisglobalizationoftheworld.

CaseContinuedCiscoSystems

Back to the case of Cisco Systems. With the experience of connectingnetworks together on the Stanford campus, Sandy and Leonard Bosackunderstood the importance of ‘routers’ for connecting computer networkstogether. Next they went to Stanford’s administration with a proposal tobuildroutersforsaleundertheschool’sstructure.Bunnellwrote:“Although(Stanford’s) Office of Technology Licensing was cognizant of theopportunity thecouplehadoffered, theywereunable to takeanyaction tosupportthedevelopmentofLenandSandy’srouterbusinessinanytimelessthan a year or two… The decision makers did not give Len and SandypermissiontocontinuetheirbusinessoncampusortouseschoolresourcesformakingroutersforcolleaguesatXeroxLabsandHewlettPackard.Livid,thecoupledecided togatherup their technology,quit their jobs,and leaveStanfordtostarttheirownbusiness.”(Bunnell,2000)

In 1984, they had started their own router business (financed with theircredit cards and mortgage on their home) — naming the new company‘Cisco Systems’. Sandy Bosack took a day-time job at Schulmberger tosupportthem,whilethenewbusinesswasstarted.Forayearandahalf,theyworkedoutoftheirhome,alongwithcolleaguesKirkLougheed,GregSatz,andRichardTroiano.Theywrotecode,assembledcomputerhardwareandtestednewprototypesofrouters.Theysoldroutersbyword-of-mouthande-mail to universities and big corporations, which needed to hook togethertheir networks.Nocerawrote: “The building of these early systemswas acollaborativeeffort,withthecustomersoftenworkingsidebysidewiththeCisco engineers. (Sandy) Lerner was so intense about keeping customershappythatshegaveherself thetaskofsettingupCisco’scustomer-supportgroup,labelingitthe‘customeradvocacy’group.”(Nocera,1995)

Theypricedtheroutersbetween$7,000to$50,000dollars.IntheyearfiscalyearendingJuly1987,theyhadaprofitof$83,000dollarson$1.5millionsales. Cisco was then moved to a business building in Menlo Park,California(thecityinwhichStanfordUniversityis located).ThetimingofCisco was opportune. By 1985, university and corporate demands forcomputernetworkingwasexploding,andcompanieswouldpayupfrontfortheuniqueproduct.Ciscowasthereforeabletogrowoncashflow,withoutexpensivedebtsforproductionexpansion.

InnovationandFinanceinStrategy—TheDot.comBubble

Partofthe‘bigpicture’instrategy(theenvironmentofstrategicdecision-making)isnotonly technology innovation but also financial innovation. In addition to technology, afinancialsystemisalsoapartoftheenvironmentinwhichbusinessstrategyisformulated.Technological innovation and financial developments interact in the economies ofindustrializedsocieties.Forexample,theinnovationofanewtechnology,theInternet,hadprovided strategic opportunities for new businesses, such as Cisco and also impactedinvestments in the U.S. economy. It had also provided investment opportunities for awholenewrangeofbusinesses,butalsoalteredexistingindustries.Itwasanotherstrategicrevolution in industrial/commercial technologies.For example in the last decadeof thatcenturyanewstockmarketboomexploded from1995, the so-called ‘dot.comfinancialbubble’.

TechnologicalinnovationoftheInternetanditsimpactoncommercemadethatdecadeaveryinterestingandchallengingtime—evenscandalous—assummarizedbyJosephNoceraandTimCarvell: “The Internetdecadehas seen theunscrupulous rewarded, thedimwittedsuckered, the ill-qualifiedenrichedatapacegreater thanatanyother timeinhistory. The Internet has been a gift to charlatans, hypemeisters, and merchants ofvapour…anddespite all that, it still changeseverything.” (Nocera&Carvell,2000,p.137)

Thegrowthof the Internethadbeenexcitingand rapid.Forexample in1996 in theUnitedStates, 14%of the population used the Internet,which jumped to 22% in 1997,31%in1998,38%in1999,and44%in2000(Elliott&Rutenberg,2000). In2000, theaverage monthly hours spent on line per user was 19 hours. U.S. consumer spendingonlinegrewfromafewmillionin1996to$3billiondollarsin1997,$7billionin1998,$19billionin1999,and$36billionin2000.Ofthe$36billionspentin2000,$11.0billionwasfortravel,$7.7billionforPCs,$2.4billionforclothes,$13.4billionforbooks,and$13.4billionforothermerchandise.TheInternetstimulatedaneconomicexpansionintheUnitedStateseconomy.Thispatternoftechnologicalinnovationstimulatinganeconomicexpansionhasbeenageneralpatterninmoderneconomies.

Modernprogress in technologyarises fromresearch,andadvancedresearchrequireslargeandsustainedfunding.Andinadditiontoresearchfunding,technologicalinnovationalso requires intensive capital funding for commercialization of the new technology.Acoincidenteventinthemiddleofthe1990swasaderegulationofthetelecommunicationsbusinessintheUnitedStates.InthisandthenewInternet,manyentrepreneurssawnewbusinessopportunities.Theylaunchednewtelecommunicationbusinessesandmanynewbusinesses in electronic commerce (or “dot.combusinesses”).These telecommunicationanddot.combusinessesconnecttechnologicalinnovationtobusinessinnovation.

Excited by innovations and business opportunities of the Internet, venture capitalfundspouredhugeamountsofcapitalintohundredsofideasfornewdot.combusinesses,andimmediatelytookmanyofthesepublicasIPOs(initialpublicofferings).From1997to 2000, the excitement over the Internet and the new dot.com businesses drove stock

marketstonewhighs.BusinesspunditsthenwrotethattheInternetwascreatinga“neweconomy”,forwhichoneneednotneedworryaboutprofitabilityofanewbusinessbutmarketgrowth. In theyear2000 this stockbubbleburst.The so-called “neweconomy”fell back to the principles of the old economy, which always required profitablebusinesses.Manynewunprofitabledot.combusinessescollapsed.TheNASDAQaveragedropped65%early in2000.Following the Internetstockbubblebursting in2000, therewasarashofmajorcorporatefailures—duetothegreedandmisdeedsstimulatedbythebubble. Some of the failed companies included Enron, WorldCom, Global Crossing,Andersen,andsoon.

Historically,theInternetstockbubblewasjustoneofthemanyexamplesoffinancialenthusiasmabouttechnologicalinnovation.Anotherexampleofanearlierfinancialbubblewas theU.S. railroad bubblewhich occurred a hundred years earlier in the late 1800s.Thereareimportantstrategiclessonsthatonecanlearnaboutinnovationinbusinessandcapitalfromhistory:

First,scientificresearchisnecessarytoinventnewbasictechnologies.

Second,newbasictechnologiescreateneweconomicopportunities.

Third,thepathtowealthineconomicopportunitiesisusuallyrocky.

Forth,howeverrockytheentrepreneurialpath,economicdevelopmentfromtechnologicalinnovationbecomesapermanentfeatureofsocietalstructures(despitethatstockbubble,theInternetandelectroniccommercewasintheworldtostay).

Fifth,technologicalinnovationandeconomicdevelopmentisneithersimplenorinevitable.

Sixth,ifprogressintechnologyistooccurandbesuccessfullyimplementedinbusinessopportunities,technologicalinnovationneedstobecarefullymanaged.

Sinceallhumansarebiologicalanimals,requiringthesatisfactionofphysicalneedstosurvive(suchasair,water,food,clothing,shelter,safety,etc.),technologyisessentialtohumanityastheknowledgeofhowtoobtainthethingsfromnatureneededtosatisfythephysicalneedsofhumansocieties.Ofcourse,therearemanyotherneedsofsocietyotherthan physical (such as social needs for communication, justice, education, etc.).Technology also affects the capability of society for fulfilling its social needs (forexample, military technology or communications technology). Accordingly, ourconceptionofnatureincludeshumansocietyitself.Fromabiologicalperspective,humansocietycanbeconceivedasoneexampleofthesocialnatureofanimals(ascomparedtobeesocietyorwolfsociety).Inthisbroadsenseofnature(asboththephysicalandsocialaspectsof thehumananimal), technology is theknowledgeof themanipulationofbothphysicalandsocialnaturetosatisfyhumanpurpose.Technologyprovidestheknowledgebasesforallthefunctionalcapabilitiesofasociety.

New functional capabilities in a society occur through the process of innovation.Figure2.4sketcheshowaprocessofknowledgecreation, innovationprocess, linksnew

knowledgeofnaturedowntotheutilityofnewproductsbaseduponnewtechnology.

Figure2.4: TheInnovationProcess.

Things exist naturally in ‘nature’, such as iron ore, silicon atoms, etc. Scientistsperformresearch todiscoverwhatexists innatureandhow itexists.Technologists takethenaturalphenomenadiscoveredbyscienceandtheninventhowtousenatureforhumanpurposes. For example, the Bessemer process in the 1700swas invented tomake steelfrom iron ore using coal ‘coke’ for heating the ore. This invention was a key to theindustrial revolution of the 1800s, driving theworld’s economic development over thatcentury.Inthe1960s,technologistsinventedhowtoinscribeelectroniccircuitsoncircularslabsofsilicon, inventingtheintegratedcircuitsemiconductorchip(ICchip)—therebyrevolutionizingelectronicsandtheelectronicsindustry.

Theinnovationprocess—fromnaturetoutilitythroughscience,technology,and commercialization — is the basic knowledge process of moderncivilization.Itisthe‘bigpicture’ofthestrategicprocessfornewhigh-techventure.

Summary

Strategic thinking isabout trying toanticipateandbringabouta ‘desirable future’—inthelong-termthroughaseriesofshort-termactions.Allactionisdirectedtoafuture;andintelligent action ismore likely to be productive than unintelligent action.A long-termoutcomemayneedtobeattainedasasequenceofactions,eachactionbeingatacticoftheactor (decision-maker). Strategy threads the sequence of tactics together for presentactions in the short-term sequence to attain a future in the long term. Technologicalinnovation and capital innovation together create business opportunities in the ‘bigpicture’oftheenvironmentofbusinessstrategy.

TheoreticalPrinciples

1. Strategyisimplementedinasequenceoftacticsleadingtowardthemission.2. Entrepreneurialstrategyisproperforthelaunchingofnewbusinesses.3. Technologyprogressisamajorsourceofentrepreneurialopportunity.

StrategicManagement

Introduction

Strategic management is focused upon the continuing competitiveness of firm into thefuture.Startingupanewbusinessisstrategically“entrepreneurial”andcontinuingtogrowthebusinessagainstcompetitionisstrategically“professional.”Thusinstrategicthinking,therearetwomanagementstyles,entrepreneurialandprofessional.InthepreviouscaseofCisco,we sawhow theBosacks started the company as entrepreneurs.But it happenedthat another kind of management, professional managers grow the company into acompetitive giant. We continue the case of Cisco, but focusing upon the kind ofmanagementneededtomakeasuccessoutofanewventure–strategicmanagement–theprofessionalmanager.

CiscoSystems

Aftertheentrepreneursstartacompany,thenextstepinanewventureistheintroduction of “venture capital” for financing. The Bosacks sought outventure capital to grow the company against competition. The networksmarketwasgrowinghotby1987,andseveralcompetitorsbeganenteringtheroutermarket.Aspecialincentivetothegrowthofthemarketthatyearwasa decision by the U.S. Congress to transform the government-sponsoredARPAnet/NSFnettoacommercialInternet.

TheBosackssawthatthiscommercializationwouldgreatlyincreasedemandfor routers.Theyknew thatCiscoSystemsneeded togrowvery rapidly todominate the market. They decided to seek venture capital to assist inexpansion.Theypitchedtheircompanytoaboutsevenventurecapitalfirmswithoutsuccessuntil theyfoundDonValentine,whothenwas thefounderandgeneralpartneratSequoiaCapital.

ButValentine’stermsweretough.JosephNocerawrote:“DidValentinecutan almost obscene deal for himself? Of course he did; he’s a venturecapitalist.Inreturnforjust$2.5million(moneythatCisconeverevenspent)as its own revenues continued to grow, Valentine’s venture fund receivedclose toone-thirdof thecompany’sstock…(LearnerandBosackretained35%ofthestock.)Inadditiontostock,Valentinestipulatedthathebeabletoshapethecompany’smanagementteam”(Nocera,1995).

DonValentineimmediatelylookedforanewCEOforCiscoandfoundJohnP.Morgridge.DavidBunnellwrote:“(Valentine)wantedsomeonewhowasan industryveteran,aproven leader,a fiscalconservative,andagrown-uppresence. Ironically, the best place to find such executives is often at acompany that is failing. Companies in trouble shed their best executivesfirst”(Bunnell,2000,p.16).

In1988,JohnP.Morgridgewas54yearsoldandpresidentofafailingPCcompany calledGrid Systems. The companywas selling a top-of-the-lineand high-priced portable computer without any major proprietaryperformance advantages and thus was losing out to competitors (andwasthenbeingsold toanothercompany).MorgridgeacceptedValentine’sofferto runCisco, receiving a stock option of 6%of the company. Previous toMorgridge’stwoyearstintatGrid,hehadspentmanyyearsasasalesmanatHoneywell.

Conflictbeganrightawaybetweenthefoundersandthenewmanagement.DavidBunnellwrote:“Morgridge,asthenewboss,foundhimselfsparringwiththecompany’sfounderseverystepoftheway.Ciscowasbecomingarealcorporation,andSandyinparticularwasnotthecorporatetype.Sandyhadalwaysbeenaself-proclaimedrebelandiconoclast”(Bunnell,2000).

OneofthethingsMorgridgedidtotrytoimprovecooperationwashiringacompany psychologist to improve relations. But the differences betweenentrepreneurs and professional managers about the culture of theorganizationwere unbridgeable.However in 1989, they all agreed to takethe company public, as that year Cisco had $4.2 million in profits andgrowing. The first quarter of the fiscal year of 1990, profits had alreadysoaredto$2.5million.OnFebruary16of1990, thestockopenedat$18ashareandclosedthatdayat$22.50.Buttensionscontinued.JosephNocerawrote:“…theIPOhadmade(SandyLearnerBosack)rich,butwithherrolediminished andher companymoving further away from its roots, shewasdeeply unhappy. Increasingly, she began lashing out. This she largelyconcedes—‘Iwasscreamingaboutalotofthings,’shesays—butherviewis that therewerea lotof thingsgoingwrongatCisco,andher screamingwasnecessary. ‘Yes,’sheadds, ‘I’mguiltyofstanding insomeone’sofficeandnottakingnoforananswerwhenacustomerneededsomethingdone’”(Nocera,1995).

Inthesummerof1990,theconflictcametoahead.Nocerawrote:“…AllthetopexecutivesexceptMorgridgewenttoValentineandsaidinessence,eithershegoesorwego.ForValentine,ofcourse,thatwasaneasycall… .(Len)Bosackwalkedoutwithhiswife”(Nocera,1995).InthecontracttheBosacks had signed with Valentine, there were no protections on theiremployment with the company they had founded. They had agreed to aprovisionwhichgavetherighttoValentinetopurchasetheBosack’sshares.

RobertCringleyquotedSandyLearner.Shesaid:“Itwasnotmyintentiontoget rich.My intention was to not be poor.We worked 20 hours per day,saying the check is in themail over and over to our vendors. In 1987wefinally got money from our seventieth or eightieth venture capitalist … .ThenIwasfiredbytheventurecapitalistsinAugust1990,andLenwalkedout in support ofme.After financing the business on our credit cards forthreeyears,wehadafour-yearvestingagreement!Withsomehassling,wewerefinallyallowedtovest,gotthestockandsoldit”(Cringley,1997).

InDecemberof 1990, they sold their two-thirds shares ofCisco for about$170million.Theywerebothmulti-millionaires.(Hadtheyhungontomostoftheirsharesuntilthelate1990s,theycouldhavebeenbillionaires.)SandyandLenBosack divorced soon after leavingCisco.They putmuch of themoney into two charitable funds. Leonard Bosack moved to Redmond,Washington,andstartedanewventureproducingnetworkequipment.Sandypurchasedamansionof50roomson275acresinChawton,England–thatonce belonged to Jane Austen’s brother. She restored and converted thehouseintoaJaneAustenstudycenterforearlyEnglishwomen’sliterature.In 1995, Sandy had also founded a cosmetics start-up company, UrbanDecay: “Under the tagline ‘Does pinkmake you puke?’UD’s line of nailpolishes and lipsticks come in an array of volatile colors with suggestivenames likebruise, frostbite, gash, toxin, asphyxia, andoil slick” (Bunnell,2000).

EntrepreneurialManagement

In strategy, there are the twomanagement styles, of entrepreneurs and ofprofessionalmanagers.From1984to2000,Ciscohadthreechiefexecutives– Sandy Bosack, John Morgridge, and John Chambers. Sandy LearnerBosack was an entrepreneur focused upon innovation, new productdevelopment,customersales,andsatisfaction.Morgridgewasaprofessionalmanager focused upon rationalizing and keeping large organizationscompetitive.

The difference between the concepts of entrepreneurship andmanagementgoesdeepintomanagementtheory.Thereis“entrepreneurship”forstartingand growing businesses as entrepreneurship, and there is “professionalmanagement” for growing and running a large business. Differentmanagement styles are appropriate in strategy implementation during thedifferentstagesofacompany’slife–entrepreneurshipduringthecreationofa new company and professional management for its growth into largecompany.

About entrepreneurship, the business literature has focused upon threethemes:

1. There is an emotional theme. The entrepreneur is a kind of businesshero/heroine; and like all such, they have qualities to be admired – initiative,daring,courage,commitment.Thesevirtuesareespeciallyadmiredinturbulentbusinessconditions,wheninitiativeisrequiredfororiginofabusinessordrasticchangeforsurvival.

2. In many of the stories of successful entrepreneurs, problems of change ofleadershipoccur,particularlyaftertheorganizationhasgrownlargeandrequiresrationalization. Then a professional manager is sought to take over after theentrepreneur.

3. Within an organization, some entrepreneurship should always be encouraged,supported,andrewardediftheorganizationistocontinuetobeinnovative.Yetbalancing rewards for entrepreneurship against rewards for professionalmanagementinalargeorganizationisadifficultproblem.

Forexample,HowardStevensonandDavidGumpertcomparedmanagerialstylesalongtwodimensions:(1)desireforfuturechange,and(2)perceivedability tocreatechange.Theynoted thatentrepreneursaskquestions, suchas:Whereistheopportunity?HowdoIcapitalizeonit?WhatresourcesdoIneed?HowdoIgaincontroloverthem?Whatstructureisbest?Incontrast,professional managers more concerned with stability than change adopt abureaucraticstyleofstrategywhichasksdifferentkindsofquestions.Whatresources do I control? What structure determines our organization’srelationshiptoitsmarket?HowcanIminimizetheimpactofothersonmyabilitytoperform?Whatopportunityisappropriate?(Stevenson&Gumpert,1985).

Sinceentrepreneurialvisionandriskisadistinctivemanagerialstyle,manyhave studied the psychology of entrepreneurs, hoping to learn why somepeople are more likely than others to become successful entrepreneurs.Researchershavelistedseveralattitudesandvaluestheyfoundtypicaloftheentrepreneur, such as a desire to dominate and surpass, a need forachievement, a desire to take personal responsibility for decisions, apreferencefordecisionswithsomerisk,aninterestinconcreteresultsfromdecisions, a tendency to think ahead, and a desire to be their own boss(Vesper,1989).

In attempting to describe entrepreneurial style, others have used a“sociological perspective.” For example, James Quinn viewed theentrepreneur style as a kind of role encouraged by an “individualentrepreneurial system” – which is to say a capitalistic system thatencourages and supports individual initiative. Quinn identified severalcharacteristics of an entrepreneurial system that encourages technologicalinnovation:(1)Fanaticismandcommitment,(2)Chaosacceptance,(3)Lowearlycosts,(4)Nodetailedcontrols,(5)Incentivesandrisks,(6)Longtime

horizons,(7)Flexiblefinancialsupport,(8)Multiplecompetingapproaches,and(9)Needorientation(Quinn,1988).

Quinn saw the single-minded dedication of the entrepreneur as a kind offanaticism,andaneconomicororganizationalsystemmusttoleratethekindof ruthless, dedicated purpose required of an entrepreneur. The context ofsuch single-mindedness will appear chaotic and disorganized, because theentrepreneurisfixedonthegoalandwillusewhatevermeansorexpediencywhichproceeds toward thatgoal.Theeconomicandorganizational systemshould tolerate this kind of apparent chaos, which includes little detailedcontrolintheearlyphaseofanewventure.Theoriginatorsofnewventuresoperate in an opportunistic, cost-cutting, short-cutting way to a single-minded,clear-cutgoal.

Quinn also argued that the economic or organizational systemwishing tofoster entrepreneurship should provide appropriate rewards for the riskstaken in entrepreneurship.Moreover, these rewardsmust be structured forlong-termhorizons,sinceittakestimeforanythingreallynewtobecomeasuccess.At some pointwhen a new thing takes off, observers often thinkhowquicklyandrapidlythesuccessfulinnovationgrew,notappreciatingthelong,painfulstarts,falsestarts,andbuilduptothetake-offstage.

Because of the experimentation and learning that goes into new ventureaction,itisalsoimportantforthesystemtoprovideflexibilityinfinancingfrommanysourcesandformultipleandcompetingapproaches.Intheearlydaysofanyradicalinnovation,newwaysarebeingtriedoutandonlydownthelinewillanoptimalconfigurationemergeforastandarddesignofanewtechnology.Customerneedsshouldalwaysbethefocusofentrepreneurship.Systemsthatencourage thefulfillmentofneedsofamarketplacestimulateinnovation which lasts and is economically important. Thus forentrepreneurship, the psychological attitudes and the economic andorganizationalenvironmentareallimportant.Thevaluesoftheentrepreneurarerisk-taking,vision,andambition.Thevaluesofasystemthatencouragesentrepreneurshipshouldallowcommitment,risk-taking,andprovidealong-term,need-orientedenvironment.

One of the things a professional manager does is to ensure a growingorganizationhasmanagementdepthtohandlethegrowingnumberofpeopleintheorganizationandnumberofcustomersandthenumberofcompetitors.In1988asthenewCEOofCisco,Morgridge’sfirststrategyimplementationwastoinstillacultureoftightcontrolcapableofbuildingthroughaperiodof rapid growth. His earlier experience at Honeywell had taught him thatgrand schemes were seldom attained, and it was the yearly planning that

madethingsattainablefortightcontrol.Accordingly,heintroducedplanninginto Cisco but didn’t use a long-term basis, such as a “five year plan.”Bunnell quotedMorgridge. He said: “At Cisco, we build a one-year planwith80to90percentassurancewe’llmeetorexceedourgoals,soit’snotastretch. Then we modify the plan, because we’re conservative” (Bunnell,2000).

Morgridge continued to build on Cisco’s culture of working closely withcustomers, primarily large businesses. His sales people were technicallycompetent and could fix customerproblems.Morgridgekeep expendituresin control, providing modest salaries to employees with stock options. In1991,MorgridgehiredJohnChambersasseniorvicepresidentofworldwideoperations. Morgridge and Chambers and Ed Kozel (chief technologyofficer) together re-examined the issues of Cisco culture. They studiedlessons fromGeneralElectric (GE), IBM,andHewlett-Packard.FromGE,theywoulduseJackWelch’smanagementphilosophyforeachmarkettobedominantasnumberoneortwoornottocompete.FromIBM,theywoulduse the business approach to provide complete application solutions tocustomers but would avoid IBM’s rigidity to adaptation of new productlines. From Hewlett-Packard’s history, they saw the need to periodicallyreinvent theorganizationwithnewproductsasnew technologiesemerged.Cisco leadership then formulated a strategy. Bunnell wrote: “… (Thestrategic plan) consisted of four areas of focus for future development.Provide a complete solution for businesses,make acquisitions a structuredprocess, define the industry-widenetworking softwareprotocols, and formtherightstrategicalliances”(Bunnell,2000).

ThestrategicchallengethatCiscoleadershipsawwastheneedtocontinueto ride thewaveof Internetexpansionasa fast-movingplayer.Todo this,theyneededtocontinuetoaddnewtechnologiesandnetworkproducts;andthey decided to do this through business acquisitions (externally acquiredtechnology). And they needed to participate in defining the softwareprotocols so that their products continued to fit into the emerging Internetsystem.

In 1995,Morgridgemovedup toChairmanof theBoard ofDirectors andmadeJohnChambersthenextCEOofCisco.Chambers’historywasthathehadalawdegreefromWestVirginiaUniversityandanMBAfromIndianaUniversity.After graduation, he took his first job in sales at IBMback in1977.Hewas to see IBM’sdecadeof strategicerrorsof thedecadeof the1980s. IBM failed then to fully exploit the rise of the PC and computernetworkingtosuccessfullyreinventIBM’scomputerbusinesses.

From his IBM days, Chambers learned lessons both of “what-to-do” and“what-not-to-do.” A “to-do lesson” was IBM’s efforts to make customerssatisfied.Anothergoodlessonwasasalesperson’sneedtosellinformation

technology atall themultiple levels of the customer organization.A thirdgood lesson was how important software was to IBM’s successfulmainframehardwarebusiness.Intheinformationtechnologybusiness,oftenit is the software and not the hardware that can provide the proprietaryadvantage.

ButChambersalsolearnedsomelessonsofwhat-not-to-do,someofthebadpractices at IBM. One bad practice was IBM’s relative neglect of smallbusinesses.Fromthis,Chamberssawthe importanceofsellingnotonly tobigbusinessesbutalsotosmallbusinesses.AlsoChamberslearnedtoavoidtheoverlyrestrictivecommand-and-controlstructureofIBM,whichmadeitdifficultforIBMtomaketimelyandappropriatedecisions–andalsostifledinitiativeandentrepreneurshipwithinIBM.

DuringthoseyearsoftroubleatIBM(andbeforegoingtoCisco),Chambershad decided tomove to another company,which unfortunatelywas to getevendeepertroublethanIBM.In1983,ChambersjoinedWangLaboratoriesInc., which had pioneeredword-processingwork stations. However, thesewere soon made obsolete by word-processing software on the newlyemergingPC.In1986,thefounderofthebusiness,AnWangretired,justasthe company was trying to find new markets using minicomputertechnologies. In1990,AnWangcameback from retirement to try to savethe troubled company. He asked Chambers to become the senior vicepresidentofU.S.salesandfieldserviceoperations.Unfortunately,AnWangdied soon after. Then Chambers had to try to control the company’scontinuingdecline.Hepresidedover five layoffsof4,000people, as salesfellfrom$3billionayearto$42million.Chambers’stockoptionsinWangbecame worthless. From both the IBM and Wang experiences, the mostimportant lessonChambers learnedwas toadapt to theflowof technologyadvancesininformationtechnology–nevertoresistthem–buttogetaheadof,rideon,andexploitprogressinnewinformationtechnologies.ChambersquitWangin1991andjoinedCiscoasseniorvicepresident.

WhenChamberswasmadeCEOofCisco,herationalizedawayofkeepingCisco advancing in information technology. JosephNocera wrote: “WhenCisco’stechnologystartedtobecomedatedintheearly1990s,thecompanysawitcomingandadapted…Routerswerestillahotticket,buttherewereat least two new networking technologies…Onewas called switching –primarily a box which some small companies were already starting tomanufacture.TheotherwassomethingcalledasynchronoustransfermodeorATM”(Nocera,1995).

Chambers formalized the acquisition of new companies as a strategy tocontinuetogetnewtechnologiesandnewproductlinesintoCisco.ThentheinformationtechnologychallengewasintyingLANintoWAN.Althoughin1995, thefastEthernet technologywasstill thepreferredLANtechnology,

for WAN networking, asynchronous transfer mode (ATM) switches werebecoming preferred by customers. ATM was a hardware-based switchingtechnology that transmitted data faster than routers and could be used toconnect a finite number of LANs together, with resulting high speedcommunicationbetweenLANs.Moreover,ATMalloweddigitalemulationsof traditional switch-basedphonenetworks and couldbridgebetweendatacommunicationsand telephonecommunications.ThusEthernet technologywas hooking up computers intoLANs,ATM technology hooking togetherLANsintoWANs,androuterswerehookingallintoInternet.

Earlier Chambers had learned the need for Cisco to move rapidly intechnology.JustbeforehispromotiontoCEO,hehadvisitedoneofCisco’slargest customers, Boeing. Joseph Nocera wrote: “… One dayChambers…wasvisitingalong-timeCiscocustomeranddiscoveredtohishorrorthatCiscowasabouttolosea$10millionordertoacompetitorthatwas manufacturing switches. ‘What do I have to do to get that order?’Chambers remembers asking the man. ‘Start making switches,’ the manreplied.SoCiscodid.ItboughtastartupcalledCrescendoCommunications”(Nocera,1995).

After Chambers became CEO, he launched a program of technologyprogress through the acquisition of new-technology businesses to keepCisco’sproductsuptodate.Becausethestockmarketgrewthroughoutthe1990s and Cisco’s stock soared with very high price/earnings ratios,Chambers’ could use Cisco’s highly valued stock to acquire othercompanies.IthadbeeninSeptember1993,whenCiscohadacquireditsfirstcompany, Crescendo Communications. Over the next two decades from1993 to2013,Ciscoacquired149companies.Someof thecompanieshadtechnologies in switching, some in Internet phoning, and otherimprovementsinInternettechnologies.

When the seconddecadeof the twenty-first centurybegan,Ciscowas stillacquiringnewtechnologiesas theInternetcontinuedtoevolve.Then“big-data”and“cloudcomputing”werenewInternettechnologies.In2014,Ciscoacquired new businesses for “cloud computing.” Quentin Hardy wrote:“Even for the world of globe-spanning computer systems, Cisco is goingbig. OnMonday Cisco Systems announced it would spend $1 billion oncreation of an ‘Intercloud,’ which promises to bridge multiple cloud-computingsystemsopentothepublic–likethoseofferedbyAmazonWebServicesandGoogleComputeEngine–theprivatecloudsofbigcompaniesand specialty cloud services for business. Cisco, the networking giant, isbuilding out its own data centers for the system and says it will offerIntercloud clients a high level of security and reliability. It also hopes toenlist a dozen or so large telecommunications companies and servicesconsulting companies as partners. Other money will go toward newtechnologyandaspecializedsalesorganization”(Hardy,2014).

In2014,cloudcomputinghadbecomethenextbigInternetidea,inpart toaddress the problem about security on the world’s Internet. Hardy wrote:“NickEarle,seniorvicepresidentforcloudsalesatCisco(said)onereasonfor themove (to thecloud)was the revelationsofhowmuch theNationalSecurity Agency (NSA) was spying on just about everyone.” Companieshavesaidthatthe“NSAnews”ischangingpoliciesaroundthemovementofdataoverexternalnetworks.“ThankstotheNSA,therearelotsofcountriesthatwon’tlettheirdataout,”hesaid.“…AnotherreasonwastherealizationthatcompanieslikeAmazonandGooglewereessentiallyrunningtheirownsystems,whiletherewasroomformoreinteroperabilityandopenstandards.CiscoisbuildingitsIntercloudonOpenStacksoftware,anopen-source,andcloud-computing.”

Alsoon the Internet, a newkindof connectivitywasoccurring, called theInternet of Things. Kim Young-won reported: “John Chambers, thechairman of Cisco, the world’s leading networking company, saidmanufacturingpowerhousesintheITsector,includingSamsungElectronics,shouldconstantlyseekchangeinorder tosurvivein theInternetofThingsera.At apressmeetingof the InternetofThingsWorldForum,Chamberssaid:‘Everycompany, includingCisco, ifwedon’tchangewewillget leftbehind.’ Vowing to maintain solid business ties with Korean companiesincludingSamsungandLG,ChamberspraisedSouthKoreanPresidentParkGeun-hye’s deep understanding of the importance of the IT and thegovernment’s efforts to embrace the technology as part of its creativeeconomy policy” (Kim, 2014). In the world of information technology,technological change continued.Chamber’s strategicmanagement focuseduponkeepingCiscoonthecuttingedgeofInternettechnologies,throughtheacquisition of new high businesses with new technologies for Internetcommunications.

ProfessionalManagement

The idea of a manager as a “professional” had been emphasized by Peter Drucker(Drucker,2003).Aprofessionalmanageristrainedinmanagementskillsandperformsforthe good of both an organization and for society. Drucker wrote: “The fact is, that inmodernsociety there isnoother leadershipgroupbutmanagers. If themanagersofourmajor institutions,andespeciallyofbusiness,donot takeresponsibilityfor thecommongood,nooneelsecanorwill”(Drucker,1973).

Theideaofamanagerasaprofessional,rationalizeroforganizationalpractices,goesbackinsociologicalliteraturetoMaxWeber.Weber,introducedtheideaofabureaucraticmanager as akindof rational, efficient, honest administrator (Weber, 1947).Weberhadstudied thenewgovernment agencieswhichhadbeen emerging inGermany in the late1800s. He called these organizations “bureaucracies” and formulated the idea of

“bureaucratic rationality” as a kind of organizational effectiveness and operationalefficiency.Themanagerofsuchrationalitywasa“bureaucrat.”

Webercalledanearlierformofofficeasa“prebendal”office,maintainedby“feudal”holdersofauthority.Afeudalofficeholderexercisedauthorityinthenameofasovereignrulerinordertoperformsomegovernmentalfunction(suchastaxcollecting,publicorder,etc.).Thenatureoftheofficeandthepersonalpropertyandinterestsofthefeudalofficeholder were not separated. The first characteristic that Weber noted about a modernbureaucratized office is that the public property and authority of the office should beseparated from the private property of the office holder. For example, in the U.S.government, thereare federal lawswhich forbidofficeholders fromacceptinggifts thatwouldcreateconflictofinterestinexercisingtheresponsibilitiesoftheoffice.AsanotherexampleintheUnitedStatesintheprivatesector,therearefederallawsagainst“insidertrading”instockheldbytop-levelofficialsofpubliccorporations.

The second characteristic that Weber noted about a modern bureaucratizedorganizationisthatthedecisioncriteriabywhichdecisionsaremadeshouldbeexplicitlywrittendownandtheproceduresbywhichactivitiesareconductedshouldbeformalized.Thisexplicitnessofdecisionsandformalizationofproceduresintroducedakindofformalorder, “rationality,” into the operations of a bureaucracy. Moreover, this rational ordershould be governed by the goal of attaining efficiency and effectiveness in operations.Modernmanagementrationalizesrulesforjudgingcorporateperformance,suchasprofits,profitmargins,return-on-investment,economic-value-added,earningsperemployee,andsoon.

Asanexampleofbureaucraticrationalityingovernment,theU.S.federalgovernmentagency of the NSF uses formal “peer review” procedures for judging which scientificresearch proposals to fund. It is bureaucratic policy of the agency to require all NSFscienceadministrators(sciencebureaucrats)touse“peerreview”proceduresinevaluatingproposalsforresearchgrants.Scienceadministratorssendproposalsoutoftheagencytoexternalscientistswhoare“peers”oftheresearchproposers.Theirpeer-reviewevaluationisseenasprovidinganobjectivescientificreviewofthescientificmeritoftheproposal.Scienceadministratorsarethenallowedtofundonlytheproposalsthatareratedofhighestqualitybypeerreview.Thisruleof“peer-review”isNSF’srationalprocessforselectingscienceprojectsforfunding.Peerreviewbyknowledgeexpertsinaresearchfieldisheldby NSF and its clientele of the scientific community as being the most rational andeffectiveprocedureforselectingscience-discipline-focusedresearchproposalsforgrants.The peer-review policy is a rational procedure for ensuring scientific quality andobjectivityinprojectselectionandfundingbytheagency.

InfluencedbyWeber’sstudies,theideaofrulesandrationalityinlargeorganizationsgot to be called by the name of “bureaucracy.” And in Weber’s view, the concept ofbureaucratic management indicated a positive view of the administration of largeorganizations – “bureaucrats”were some of the good people in society.However, laterstudents of bureaucracy uncovered a “dark side” to this idea. RobertMerton began tostudy the inefficiencies of large organizations. He pointed out that when procedures

became formalized tobe rational, they alsobecame rigid and inflexible– and thereforesomewhatirrational.Whileformalityofprocedurespromotesefficiency,atthesametimeformalizationpromotesrigidityandinflexibility.SoMerton(andothersthatfollowedhim)gavetheideaof“bureaucracy”abadname.Thisviewbecamepopular–sointhesecondhalf of the twentieth century, calling a manager a “bureaucrat” came to be popularlyviewedasaninsult.

Sowhowasright?WasWeberorMertonright?Areprofessionalmanagersrationalorinflexible?Arebureaucracies inherentlyefficientor inefficient?Theanswer is thatbothwereright.Theformalizationofdecision-makingandproceduresinalargeorganizationisessentialtoprovidingrationalityandefficiencyinoperatingrepetitiveactivities.Yetatthesame time, organizational formalization does create rigidity and inflexibility in policiesanddecision-making.

Likethemanyinherentcontradictionsofreallifeinbusiness(suchasoptimizingbothprofit and value-added-to-the-customer orminimizing inventory andmaximizing sales),there is an inherent contradiction in the style of professional management in largeorganizations–betweenformalizationofprocessesforrationalefficiencyandrigidityofprocesses for irrational inflexibility of operations. All large organizations, business orgovernmental,dooperateasbureaucracies.All largeorganizations require formalizationofdecision-makingandprocedures.Alllargeorganizationsmustbecome,tosomedegree,bureaucratized.Theconceptof“Weberianrationality” inorganizations is the ideaof the“benefits”ofbureaucracy;whiletheconceptof“Mertonianirrationality”inorganizationsistheideaofthe“inflexibility”inorganizations.

Insummary,theentrepreneurisabusiness-starter,highrisk-taker,anopportunist,andado-it-all-yourselfer.Incontrast,aprofessionalmanagerisanorganizationbuilder,arisk-minimizer, aplanner, adelegator, andadeveloperoforganizationalgrowth. In strategy,thestyleofstrategicmanagementisimportant:(1)entrepreneursareessentialinstartingbusinesses and (2) professional managers are essential to growing businesses towardcompetitivedominance.

LeadershipandDecisionStrategy

Aprofessional,withhonorableethics,canguideorganizationstowardprivateandpublicgoods in thefuture.Thiscanbe illustrated indecision theory,withbothbusinessvaluesandcustomervalues,asshowninFigure3.1asseeninthecaseofCisco.

Figure3.1: StrategicDecisionandStakeholdersinCisco.

From the perspective of the Cisco business firm, their long-term values were forprofits,ascontinuingprofitabilityovertheyears.Theeffectivenessofattaininggoalswithprofitable values lay in their continuing sales. Tomake continuous sales, Cisco had toefficiently keep up in technology, advance in technical capability. For these, Cisco’stactics,yearafteryear,wastoacquirenewcompanies innovatingnewtechnology.Fromthe complementary perspective of Cisco’s customers, Corporate and Governmentalorganizations, their values centered on continually obtaining good service fromCisco’sproducts.Theirgoalsattainedweremeasuredintheeffectivenessoftheirapplicationsofinformation technology. So advances in their capability in information technologyweretheirtactics,measuredbythesuccessofimprovingtheefficiencyofperformanceoftheirinformationsystems.

For strategic decisions in any business, there are always two perspectives whichshouldbeconsideredinstrategy–thecomplementaryperspectivesofthebusinessandofthecustomer.Thissoundsobvious–atruism.Allbusinessesneedcustomerstosurvive–satisfied customers who will return again and again to purchase the business’sproducts/services.Strategic thinking foranewbusinessventure thus illustrates theneedandimportanceofbothstrategicdirectionandtacticalplanning,satisfyingtheprofitvalueofthecompanyandtheproductvalueofitscustomers.

StrategyandTacticsforNewVenturesandGrowth

Wenext look at thekindsof goals,whichnewventure and its growthmust temporallymeet, as tacticalgoals (milestones) in thedirectionofa successful competitive strategy.We next review the tactical goals,milestone challenges a successful new venturemustmeet.AsweseeillustratedintheCiscocase(Figure3.2), thereareseveralcriticalgoalsthatanynewbusinessventuremustpassthroughalongthewaytocommercialsuccess:(1)Acquisition of Start-up Capital, (2) Development of New Product and/or Service, (3)

EstablishmentofProduction/DeliveryCapabilities,and(4)InitialSalesandSalesGrowth.Thesearethetacticalgoalsofentrepreneurialmanagement.

Figure3.2: Cisco’sNewVenture“Action”asaSequenceofMeansandEndsoverTime.

Goal1.AcquisitionofStart-upCapitalCapital is the resource necessary to begin and operate a productive organization withpotentialprofitabilityuntilrevenuescansustaintheoperationandprovideprofits.Start-upcapital isrequiredforestablishinganeworganizationandhiringinitialstaff,developingand designing the product/service, funding production capability and early productioninventory,fundinginitialsaleseffortsandearlyoperations.Start-upcapitalcanbeintheformof: (1) the founder’spersonalwealth,borrowing, sweat equity (e.g.,TheBosack’shome mortgage, credit cards, and Sandy Learner’s job at Schulberger), or (2) venturecapital investments fromindividuals (called investment“angels”or fromventurecapitalfirms,e.g.,SequoiaCapital).

Start-up capital is seldom sufficient for rapid growth, and therefore further capitalrequirements are usually necessary for commercial success. This is why the Bosacks’approached Sequoia Capital. And often, as was the Bosacks’ case, this is how thefounders’losecontrolofanewbusinesstotheventurecapitalist.

Goal2.Product/ServiceDevelopmentA new firm is high-tech when its initial competitive advantage is in offering thetechnologyadvantageofnewfunctionality, improvedperformance,ornewfeaturesoverexistingproducts/services.Sometimesnewhigh-tech firms canbe startedwith alternatehigh-tech production processes for existing types of products or services.But usually anew high-tech product or service provides better competitive advantageswithwhich tostartnewhigh-techfirms.Thenexteventisdevelopinganddesigningthenewproductorservice. This requires capital and will be a major cost on the start-up venture capital.Ordinarily development and design should be far along before start-up capital can be

attracted.However,developmentproblemsordesignbugsthatdelaytheintroductionofanewhigh-techproductorservicemakeseriousproblemsinstartingafirm,becausesuchdelayalsoeatsintoinitialcapital.Moreover,ifthedelayistoolongthatcompetitorsenterthe market with a similar new high-tech product/service, then the first entry into themarketadvantageislost.InthecaseofCisco,theBosacks’majordevelopmentworkwasdone at StanfordUniversity.When theywent into business, they already had a productprototypedevelopedand ready for final engineeringdesign toproduceandsell thenewrouters.ThisiswhyCiscowasaquickfinancialsuccess,foundedin1985andprofitableby1986.

Goal3.Production/DeliveryCapabilitiesThe third event is to establish the capability to produce thenewproduct/service. In thecaseofaphysicalproduct,parts/materialsmaybepurchasedorproducedandtheproductassembled. The decision to purchase parts/materials or produce them depends uponwhetherotherscanproducethemandwhetherornotthereisacompetitiveadvantagetoin-house production. Establishing in-house production capability of parts/materials willrequiremore initial capital than purchase but is necessarywhen the part/material is theinnovativetechnologyintheproduct.Moreover,theestablishmentofanynewproductioncapabilitywill alsocreateproductionproblems,problemsofqualityand schedulingandon-timedelivery.Capitalwillalsoberequiredto“debug”anynewproductionprocess.Inthe case of Cisco, the early design and production of the routerswere financed by theBosacks’personalsavingsandbyadvancepaymentsfromcustomersfortheiruniqueandurgentlyneededproduct.LatertheperceivedneedformorecapitalforexpansionduringrapidgrowthmotivatedtheBosackstofindandhaveValentineinvestintheircompany.

Goal4.InitialSalesandSalesGrowthInitial salesandgrowthare thenextcriticalevent.The larger the initial salesand fastersales growth, the less room there is for competitors to enter. An important factorinfluencing initialmarket size and growth is the application of the new product/serviceandit’spricing.Anothermarketingproblemistoestablishadistributionsystemtoreachcustomers.Distributions systems vary by type, accessibility, and cost to enter. Planningthe appropriate distribution system for a newproduct/service, the investments to utilizesuch,anditscostinfluenceonproduct/servicepricingisimportantforthesuccessofnewventures.

Generally, reaching industrial customers costs less than to reach generalmarkets ofconsumers. This is one of the reasonswhy large fractions of successful new high-techventures are those in which industrial customers provide the initial market. These areusuallyindustrialequipmentsuppliersororiginalequipmentmanufacturerssellingtolargemanufacturingfirms.Thisallowsanewfirmtogetofftoafaststartbuteventuallylimitsthe size of the firm and makes the firm vulnerable as only a “part supplier” to acommercial customer (who later may choose to integrate vertically downward byproducingitsownparts).Moreover,asmallfirmwithonlyafewindustrialcustomersis

sensitivetocancellationofordersfromanyoneofthem,whichimmediatelycanimperilsurvival.

Inthebusinessandconsumermarkets,adistributionsysteminfrastructurewillusuallyconsistofwholesaleandretailnetworks.Intheseaccesstothecustomerwilldependonwholesalerandretailerwillingnesstohandlethebrandofferedbyanewfirm.Establishingbrandidentityandcustomerrecognitionofthebrandisthenanimportantproblemandamajor barrier for a small new firm to overcome.Moreover, in some retailing systems,under-the-counter-practices (suchasbuying shelf spaceand/orgenerousholidaygifts topurchasing agents)may also be barriers to overcome.E-retail businessesmay take lesscapital to start, particularly if collection can be outsourced (such as by PayPal) anddistribution canbeoutsourced (such as byAmazon).As amarket grows, the long-termsuccessofanewhigh-techventurebecomesincreasinglydependentongainingaccesstoandmaintainingaccesstonationalandinternationaldistributionsystems.

InthecaseofCisco,theBosackssoldtootheruniversitycustomersliketheirformeremployer Stanford University. Research connections between universities and earlyadapters of the new network connection technology sent Cisco corporate customers byword-of-mouth. Then when the U.S. Congress made the ARPAnet/NSFnet public, therapidgrowthofthemarketwasenvisionedbytheBosacks.

Buttherearemoretacticalgoalswhichthegrowingcompanymustcontinuetomeetovertimetowardastrategicsuccess(Figure3.3):

Figure3.3: Cisco’sNewVenture“Action”asaSequenceofMeansandEndsoverTime.

(5)DevelopingCapitalLiquidity,

(6)ProductionandDistributionExpansion,

(7)OrganizationalandManagementDevelopment,

(8)MeetingCompetitiveChallengesandProductDiversification,

(9)AcquiringNewTechnology.

Thesearethetacticalgoalsrequiring“professionalmanagement.”

Goal5.CapitalLiquidityThefirst tworoundsof funding inanewhigh-techbusinessventure requirescapital forgetting started (usually founders investment) and first round capital funding (usually aventureangel)andasecondroundforproductionexpansion(usuallyventurecapital)andthengoingpublicasanIPO.TheIPOprovidescapitalliquiditysothatthefoundersandventurecapitalistscancashinstockforgainingwealthfromthenewventure.Inthecaseof Cisco, the IPO of Cisco in 1990 was successful and provided the founders with apersonalfortune,eventhoughtheylostcontrolofthecompany.Theventurecapitalfirm,SequoiaCapital, leverageditsmodest$2.5millioninvestment intobillionsofdollarsbythelate1990s.

Goal6.ProductionandDistributionExpansionAs the newmarket grows and sales are successful, then production expansionmust beplannedandimplementedinatimelymannerorsaleswillbelosttocompetitorsbecauseof delivery delays. Production expansionwill usually require a second round of capitalraising,fortheinitialcapitalseldomprovidesenoughforexpansion.

Theexceptioniswhenproductioncanbeoutsourced.Therapidgrowthofthemarketand high margin of Cisco’s unique products allowed Cisco to finance productionexpansionfromcashflow.Cisco’shardwareproductswerestandardkindsofcommodity-typeminicomputers,allofwhosepartscouldbeoutsourced.Ciscousedoutsidevendorstoproducetheirphysicalproduct.AllofCisco’sproprietaryadvantagelayinitssoftwareandnot in its hardware. This meant that Cisco did not need much capital for hard-goodproductionfacilities.

Goal7.OrganizationalandManagementDevelopmentAs an organization grows in size to handle the growth in sales and production, it isimportant for the firm todeveloporganizational structures and culture and to trainnewmanagement. This is an important transition, as the early entrepreneurial style oforganization and openness and novelty of culture needs to mature toward a stable butaggressive large organization. In a small firm, coordination is informal and planningcasual.Inalargefirm,bothcoordinationandplanningneedsformalization.IntheCiscocase,thetransitionfromthemanagementandorganizationalstylesofthefounderstothetraditional control of experienced strategic managers occurred abruptly (and ratherviolently)whentheventurecapitalisttookcontrolofCiscoandinstalledprofessionalandseasonedmanagers.

Goal8.MeetingCompetitiveChallengesIn a very few areas and rare cases, a patent on a new product or process is basic and

inclusiveenoughtolockoutallcompetitorsforthedurationofthepatent.Thisistrueinthedrugindustryandoccasionallyelsewhere.However,mostnewhigh-techventuresarelaunchedwithonlypartialprotectionfromcompetitionbypatents,andcompetitorssoonenterwith ame-too products. Theme-too products/services are likely to be introducedwithimprovedperformanceorfeaturesand/oratlowerprice.Theentranceofcompetitorsintothenewmarketisthecriticaltimefornewventures.Theymustatthattimemeetthecompetitive challenges or go into bankruptcy. Thus a new firmmust upgrade its first-generation products with new products to keep ahead of competition in productperformance and features. It alsomust continually lower its cost of production tomeetpricechallengesbycompetitors.Anditmustdiversifyitsproductintolinestodecreasetherisk that a single product problem will kill the firm. The round of capital raised forproductionexpansionneedsalso toprovideforproductandproduction improvement. InthecaseofCisco, theBosacks soughtventure capitalboth to expandproductionand tocontinuetoimprovetheirproducttomeetcompetitivechallenges.

Goal9.AcquiringNewTechnologyIn a high-tech industry, technological progress continues, and a first mover firm mustcontinue todeveloporacquirenewtechnology.Thiscanbedone throughestablishingacorporateresearchanddevelopment(R&D)laboratoryandbyacquiringsmallernewfirmswith innovative technology. InCisco,Chambers’ strategywas primarily to acquire newtechnologybyacquiringnewfirmswithinnovativetechnology.

Wecanseeillustratedinthiscasethreeof theimportant lessonsof thelifestagesofnewhigh-techbusinessventures.

Firstly, different managerial styles are important to beginning and growing a newventure.TheBosacksdisplayedtheappropriateentrepreneurialstylesofbeingvisionary,committing to and working hard to get a new high-tech business started. Later, theprofessionalmanagementexperiencesandstylesofMorgridgeandChamberssuccessfullygrewthenewbusinessintoalarge,competitivefirm.

Secondly,theinitialsuccessandrapidgrowthofthemarketforCisco’srouterscamefrom a new basic innovation of the Internet which was providing a new economicfunctionalcapabilitytotheUnitedStatesandtheworld.High-technewventurescanonlybelaunchedintheopportunitiesofinnovationofnewfunctionalcapabilities.

Thirdly, the professional managers, Morgridge and Chamber, successfully paidattentiontoalltheaspectsrequiredtomakeanewventureintoalarge,dominantfirminanewindustry.Theysimultaneouslymanagedfor:(1)developingcapitalliquiditythroughan IPO, (2) developing large-scale production capacity, (3) developing a nationaldistributioncapability, (4)developing themanagement talent togrow thenewfirm,andcontinuingtoadvancethenewtechnologies(throughacquisitions).

Summary

Forstartingnewbusinessesandgrowingbusinesses,strategicthinkingiskindoflikewhatany biological organism must achieve to stay alive – survive and grow. For example,LowellSteeleofGEwrote: “To surviveover the long term, a companymust have twostrategic capabilities – the capability to prosper and the capability to change” (Steele,1989). The long-term problem for any company is survival – requiring two adaptivecapabilitiesofprosperingandchanging.

The failure to prosper imperils corporate survival because –when expenses exceedincomeovera longenoughperiod,anycompanywill fail inbankruptcy.Profitability isnecessary for any long term.Also prosperitymay require not just profitability but alsogrowth. Modern stock markets often value asset-growth over short-term dividends. Incorporate takeovers, continual corporate growth in earnings and sales is necessary formanagementtoretaincontrol.Thiscombinationofcontinuingprofitabilityandcontinualgrowth presents a tough strategic problem– because allmarkets eventuallymature andgrowth in a company’s business is limited by growth of its markets. The need forcontinualcorporategrowthhas(1)createdthedrivingforceforcorporatediversificationbutalso(2)therootcauseofthedissolutionoflargecompanies.Successfulmanagementofaportfolioofdifferentbusinessesinthesamecompanyisabigchallenge.

Andtomaintaincorporateprosperityovertime,periodicchangeinbusinessstrategyisnecessary.Anyfirmmustadapttochangingtimes.TheCEOofGEinthelasttwodecadesofthetwentiethcentury,JackWelch,hadbeenquotedasemphasizing:“Controlyourowndestiny,orsomeoneelsewill” (Teitleman,2001).Thefailure tocontroldestiny–as thefailuretoperformappropriatechangeattherighttime–imperilsfuturesurvival.Businessexists in competition; and to survive, it must always be competitive. When itsproducts/services become obsolete, it cannot compete. Change requires an ability toanticipate the external dynamics of the environments in which a company operates –markets, competition, innovation, government regulation, economic conditions,globalization, etc. Change also requires an ability to alter a company’s directions – forexample,inproducts,production,marketing,organization,personnel,businesses,etc.

Lowell Steele emphasized that “change” should be the focus of strategic thinking:“Strategy is concerned overwhelminglywith questions of change. Howmuchmust theenterprisechangeinordertosurviveandtocontinuetoprosper?Howmuchchangecanitfinanceandmanage?Howfastcan it change?Theseareprofoundlydifficultquestions”(Steele,1989).

Strategy in organizations should provide a long-term direction for organizationalactivity.Tactical thinkingisabout theshort-termfuture,aswhatactionsnowneedtobeperformedtogointhedirectionofalong-termstrategy.Tacticsoccurovertime,andareintegratedtogetherinaplan;andastrategicplanisaclearlayingoutoftheactionstobeperformednowandcoordinatedovertimetoreachthegoalsofthestrategy.

TheoreticalPrinciples

1. While entrepreneurial management is necessary to starting a new business,professionalmanagementisnecessarytogrowthebusinesscompetitively.

2. Tacticalmilestonesarestepsinachievingalong-termstrategy.

StrategyTheory

Introduction

In any practice, theory is important, particularly in professional practices, such asmanagement, medicine, engineering. Theory generalizes practice, from one situation toanother,fromonecasetoanother.Inmanagementpractice, theoryhasoftenbeencalled“managementprinciples,”withtheseprovidingthegeneralizationthatappropriatelessonsinsuccessfulpracticecanbetransmittedfromonecommercialcontexttoanother.

Forexample,DavidBesanko,DavidDranove,andMarkShanleynicelyexpressedtheimportance of theoretical principles in management: “There is a keen interest amongserious observers of business to understand the reason for profitability and marketsuccess… .However,observersofbusinessoftenuncriticallyleaptotheconclusionthatthekeystosuccesscanbeidentifiedbywatchingandimitatingthebehaviorsofsuccessfulfirms.Andthisisoftencalled‘benchmarking’or‘bestpractices’… .However,uncriticallyusing currently successful firms as a standard for action assumes that the successfuloutcomes are associated with identifiable key success factors, and by imitating thesefactors,otherfirmscanachievesimilarsuccessfulresults”(Besankoetal.,2000).

Forexample,intheearlybusinessschoolpracticeofthecasestudies,pioneeredbytheHarvard Business School, the conclusion of such a case often ended only in “bestpractice” – and not in an analysis of theory. A case study of “best practices” is notmethodologically complete until the case is analyzed against theory – either validatingtheoryorextendingtheoryorinvalidatingtheory.

Theimportantmethodologicalconceptisthatoneneedsacriticalanalysisofthekeysuccess factors in any strategy; which is precisely the purpose of “theory.” Uncriticalimitationofapriorsuccessbyadifferentcompanymaynotprovetobeusefulforsuccessin a new situation. In any action, no two situations nor two actors are ever absolutelyidentical.Actionisalwaysaparticularsetoffactorsandactivities–allofwhichtogetherexplain a particular success (or failure). Teasing out of a “benchmarking” casewhat isreally general and transferable is what critical analysis is intended to accomplish –businesstheory.Theoreticalprinciplescanbeconstructedfromacriticalanalysisoverarangeof“benchmarked”cases– inorder toabstractandgeneralize thekey factors forsuccessfulpractice.

Usually, thepresentationof theoryproceedswith theexpositionof techniquesof thetheory; however, in the case of strategy theory, this has not been easy. Historically,strategytheoryhadnotsynthesizedbutsimplydividedpiecemealinto“strategyschools.”HenryMintzbergandJosephLampelexpressedthishistoricalproblem:“Wearetheblindpeople and strategy formation is our elephant. Each of us, in trying to cope with the

mysteriesofthebeast,grabsholdofsomepartorother….Consultantshavebeenlikebiggame hunters embarking on their safaris for tusks and trophies, while academics havepreferred photo safaris — keeping a safe distance from the animals they pretend toobserve.Managers takeonenarrowperspectiveoranother—thegloriesofplanningorthewondersoflearning,thedemandsofexternalcompetitiveanalysesortheimperativesofaninternal‘resource-based’view.Muchofthiswritingandadvisinghasbeendecidedlydysfunctional,simplybecausemanagershavenochoicebuttocopewiththeentirebeast”(Mintzberg&Lampel,1999).

Backin1999,MintzbergandLampelhadsummarizedthehistoryofstrategytheoryasdividinginto10differentschoolsaboutstrategy:

School1–DesignSchool

This school focused upon the formulation of strategy – as matching externalconditions to internal opportunities of the organization – achieving clear, simplestrategiesthatcanbeimplementedbyallintheorganization.(ThisschooldatesfromSelznickthroughChandlerandAndrews.)

School2–PlanningSchool

Thisschoolemphasizedstrategyformulationasformalanddecomposableintosteps–characterized by checklists and supported by formal techniques. (This school datesfromAnsoff’swritingsin1965.)

School3–PositioningSchool

This school emphasized strategy as general positions selected from analyzes ofindustrial situations. (This school dates fromPorter’swritings in 1980.)The role ofanalysis in specifying the industrial situations uses techniques such as value chainanalysis,gametheoreticalstructuring,etc.

School4–EntrepreneurialSchool

Thisschoolfocusedprimarilyupontheroleofthechiefexecutiveinstrategyandsawstrategyformulationprimarilydependupon thecognitivefunctionof intuition in theexecutive.Thisschoolshiftsthefocusofstrategytheoryfrom“planning”to“vision.”

School5–CognitiveSchool

This school focused upon the cognitive base of strategy, adding to the analyticalconcepts of the planning school an emphasis on intuition. It emphasized the role ofinformation and knowledge structures in formulating strategy – and included aconstructivistviewofthestrategyprocessthatseesstrategiesascreativeconstructsofwhatrealitycouldbecome.

School6–LearningSchool

This school viewed strategy as a kindof learningprocess inwhich formulation andimplementation interact for the organization to learn from past planning andexperience. (This school dates from the writings of Lindblom, Quinn, Bower, and

Burgelman.)

School7–PowerSchool

Thisschool focusedon thepower relationships in thesituations inwhichstrategy isformulated. They saw strategy formulation as involving processes of bargaining,persuasion,andconfrontationamongtheactorsinanorganization.Alsoexternally,anorganization can use strategy as one of its tools of power to negotiate strategicpartnerships.

School8–CulturalSchool

Thisschoolemphasized theroleofculture(asopposed topower) in theformulationand implementation of strategy. (This school dates from writings by Rhenman andNormannandfromHedbergandJonsson.)

School9–EnvironmentalSchool

Thisschoolfocusedupontheenvironmentsoforganizations–seeingorganizationsasprincipallyreactingtoandrespondingtothreatsandopportunitiesintheirenvironmentitincludesapproachessuchas“contingencytheory”thatclassifiesresponsesexpectedoforganizationsfacingparticularenvironmentalconditions.

School10–ConfigurationSchool

This school focused upon the nature of organizational structure as influential uponstrategy. For example, it saw formal planning as prevailing in organizations with“machine-type” structure in conditions of relative stability; and it seesentrepreneurshipasprevailinginorganizationinsituationsofstart-uporturnaround.Itemphasizedthattheconditionsof“stasis”or“transformation”impactingtheformsofstrategyprocesseswithintheorganization.

Scanningthesebriefsummaries,wecanseethatalltheseschoolscanbegroupedintothosewhichemphasizethecomponentideasinanystrategyandthosewhichemphasizedintheprocessofstrategyformulation:

(1)ComponentIdeasinStrategy

– Herein lie the schools which emphasized the “ideas” and “cognitiveactivities” in formulating strategy: the Design School, Planning School,PositioningSchool,EntrepreneurialSchool,andCognitiveSchool.

(2)StrategicProcessesofStrategyFormulation

– Herein lie the schools which emphasized the “processes” for strategyformulation: the Learning School, Power School, Cultural School,EnvironmentalSchool,andConfigurationSchool.

LowellSteele isonestrategic theoristwhohadidentifiedthetwokindsofemphasesonstrategy–“strategy”as the ideationalcontentof strategyand“strategicplanning”astheprocessof formulating strategy: “Strategy is the arrayofoptions andprioritieswith

which one elects to compete (offer superior value to the customer) and to survive(sustaining a level of financial performance that will continue to attract capital and toretain the autonomy of a business) … . Strategic planning addresses the continuedviabilityofstrategy;itprobestheneedforchange…”(Steele,1989).

Ideaswithina strategy,“strategic issues”provide the“content”ofa strategicplan–whatfactorsofchangeshouldbeanticipatedandhowaddressed?Strategicplanningistheway these content ideas are formulated and arrived at – “strategic processes” are theproceduresforformulatingplanswithinanorganization.

ThusfromMintzbergandLampelandSteele’swritings,onecanconcludethatatheoryofstrategyneedstocoverboth(1)thecomponentideasinastrategyand(2)theprocessofstrategyformulation.

Furthermore, in addition to the distinction between strategy content and process,LowellSteelehadalsoemphasizeditwasimportanttoseetheimplementationofaplanasanother part of strategy practice: “Strategic management is the implementation ofmodifications in the fundamentals of how one competes and survives… (controlling)actionsandbehaviorrequiredtoimplementchange”(Steele,1989).

Accordinglytocharacterize thewholeofstrategytheory,oneneedstocover thekeyideas(principles)of“strategicplan,”“strategyprocess,”and“strategyimplementation.”

SteveJobs’FirstExerciseinStrategy–AppleComputer

To illustrate strategy theory, we will examine the career of Steve Jobs(1955–2011).Heisuniqueasanentrepreneurandprofessionalmanagerasstrategicallymanagingthreesuccessfulventures:(1)thefoundingofApple,(2) the growth of Pixar into a major movie studio, and (3) the rescue ofApplewiththeinnovativeproductsoftheiPadandiPhone.

Jobsusednewtechnologyandstrategytosucceednotoncebut thrice–anunusual strategic record. By the time of his death, he had been widelyrecognizedasanoutstandingbusinessleaderandstrategicinnovator.

Veryearly,Jobsdisplayedstrategicvisionwhenasayoungman,heandafriend,SteveWozniak,startedahistoricallyimportantcompanyinthethennewPCindustry.In1976,Wozniakhadvisitedanindustrialtradeshowforconsumer electronics (called WESCON) and purchased one of the first“computers-on-a-chip,”theMOS6502microprocessor.

Astechnicalbackgroundtothispurchaseofacentralprocessingunit(CPU)semiconductingICchip,anelectricalengineeratMOSTechnology,ChuckPeddle, had designed an IC chip, the 6502, which could perform all theinformation processes of a computer, but on one small chip. This was

technology progress, when the previous many transistors of a computer,could nowbe inscribed into one single IC chip.Then, alongwith anotherearly chip, the Zilog Z80, these new CPU chips would “power” theemergence of the PC industry, so that any person (not just a bigorganization) could own a fully-operational computer. And Jobs andWozniak’sproduct,theApplePC,wasoneofthefirstproductsinthisnewcomputerindustrialsegment–PCs.

Wozniak had been an electronics engineer,working atHewlett-Packard inPaloAlto,California.Forhisownengineeringinterestandathome,hehaddesignedandconstructedaPC.HetalkedaboutittohisbossesatHewlett-Packard,buttheyshowednointerestbecausetheycouldnotimaginealargenewmarket for PCs. Then no large company envisioned it. It was left toindividual entrepreneurs, such as Wozniak and Jobs, to launch the PCindustry. In the spring of 1976, Wozniak attended meetings of a localamateur computer club, called the Homebrew Computer Club. WhatWozniak showedwas only a partly complete computer – no keyboard, nocase,nopowersupply,noexternalmemory,noprinter,nosoftware,etc.Yettwoofhisfriendsin theclubwereimpressed,SteveJobsandPaulTerrell.JobsformedacompanywithWozniaktoproducethecomputer,andTerrellorderedthefirst50unitstosellinhisByteShop(Ahl,1984).ThisiswhenandwhereJobsgothisfirstimportantlesson,whatwecancalla“strategicbusiness vision.” The concept of “strategic vision” denotes the ability toimaginewherea futurecouldgo fromonlypartialandmeagerevidence inthepresent.

To grow their new business venture in 1977, Jobs andWozniak obtained$40,000dollarsofventurecapitalfromA.C.MikeMarkkula.Markkulawasanelectricalengineerwhohadbecomewealthyinanotherearlystart-upinthe electronics industry of the 1960s–1970s, Intel. Markkula also offeredmanagement assistance (and actually dominated theAppleBoard until thelate1990s).

Appleusedaproductstrategyofhavingan“openarchitecturepolicy.”ThisallowedothercompaniestowritesoftwareormakeperipheralequipmentfortheApple.This“openarchitecture”policyisanexampleofa“technologystrategy.”

WeseeinthiscaseofJobs’earlybusinessexperienceanimportant“businessprinciple” (theory) that strategicvisionbegins in“experience”butprojectsbeyond present experience into a possible (and desirable) future.A visionandexperientialexcitementaboutPCsasanewartifactwassharedbySteveJobs,SteveWozniak,andotheramateurcomputerenthusiastsofthetime.Asgroup, these enthusiasts had experience with computation with themainframe computer and minicomputer. Their visions were to have theirown“personal”computerstouseandplaywith.Thisrequiredanewkindof

computerof lowcost,madepossiblebyadvances inappliedknowledge intheformofthe“microprocessor”chip.

With such strategic vision,many of the “amateurs” became entrepreneursand started new companies that were to form the beginnings of a newindustry, the PC industrial sector of the computer industry. In the case ofApple, Jobs and Wozniak started this company, helped financially andmanagerially by Mike Markkula. Since the PC was of little value to themarket without software applications, Apple’s strategy to open theiroperating architecture to software developers facilitated the growth of thesoftwaresuppliersorApple.

At first, Jobs’newcompany“Apple”didwell,gaininga27%shareof thevery new PC market in 1981. But in 1982, IBM entered the market andimmediatelygaineda27%shareofthePCmarket,matchingApple’sshare.IBMhad enteredwith a technically superior product using a 16-bitword-length microprocessor, allowing memory address to 640 K (compared toApple’s8-bitmicroprocessorwhich limitedmemoryaddress to64K).ButmeanwhileastheIBMPCwaspricedhigherthanApple,Applescontinuedto sell. This gave the company time to respond to the IBM’s technicalchallenge.

StrategyasComponentandProcess

Someoftheschoolsonstrategyemphasizedthecomponentideasinstrategy(the “ideas” and “cognitive activities” in formulating strategy), and thesewere the Design School, Planning School, Positioning School,EntrepreneurialSchool,andCognitiveSchool.Otherschoolsonstrategyhademphasized the process for strategy formulation, and these were theLearning School, Power School, Cultural School, Environmental School,andConfigurationSchool.

Lowell Steele identified that there were these two kinds of emphases onstrategy – “strategy” as the ideational content of strategy and “strategicplanning”as theprocessof formulatingstrategy.Steelewrote:“Strategy isthearrayofoptionsandprioritieswithwhichoneelects tocompete (offersuperiorvaluetothecustomer)andtosurvive(sustainingaleveloffinancialperformancethatwillcontinuetoattractcapitalandtoretaintheautonomyof a business)…. Strategic planning addresses the continued viability ofstrategy;itprobestheneedforchange…”(Steele,1989).

The ideas within a strategy, “strategic issues” provide the “content” of astrategic plan – what factors of change should be anticipated and howaddressed?Strategicplanningisthewaythesecontentideasareformulated.Strategic processes are the procedures for formulating plans within anorganization. From Mintzberg’s and Lampel’s analysis and from Steele’sanalysis,wemayconcludethatatheoryofstrategyneedstocoverboth(1)

the component ideas in a strategy and (2) the process of strategyformulation.

StrategyProcessasTop-DownandasBottom-UpPerspectives

Intermsofprocess,thereisanimportantdimensiontotheprocess(topandbottom–strategicviewsfromthetopoftheorganizationandstrategicviewsfrom the bottom).As illustrated in Figure4.1, these different perspectivescreatedifferentviewsandevendifferentkindsoflogicsinstrategicthinking:

Figure4.1: TwoPerspectivesonStrategicLogic.

–a“bigpicture”viewwitha logicofproceedingfromthegeneral to thespecificchangesofthefuture,

–an“operationalreality”viewwitha logicofproceedingfromthespecific tothegeneralchangesofthefuture.

Inthelogicofstrategicthinking,onecanalwayslooktowardthefuturebydescribing the“bigpictureofeverything”and thendeducinghowchangestherecanimpactupontheparticularsituationofone’sownfutureaction.Forexample, in this way one can see one’s self as a member of a generaleconomicclass,culturalclass,generation,andaskhowone’sparticularlifeisimpactedbytrendsandchangeshappeningtothesegeneralcategoriesofpeopleand life.This is the“deductive”approach to strategy–going fromthegeneraltrendstotheparticulardescriptionsoffuturelife.

Alsoandconverselyinthesamelogicofstrategicthinking,onecanalwayslookatchangesintheparticularsituationofone’sfutureandthengeneralizethatsimilarchangesarehappeningtootherslikeone’sself.Forexample,inthiswayonecangeneralizechangesinone’sownlifeasanexemplarofthekindsofgeneralcategoriesofotherpeopleandlives.Thisisthe“inductive”approach to strategy – going from the particular examples to the generaldescriptionsoffuturelife.

At the topofanorganization, information to see the“bigpicture” ismorereadilyavailabletherethanatthebottomofanorganization.Conversely,atthebottomofanorganization,informationtoseethe“realityofoperations”ismorereadilyavailabletherethanatthetopoftheorganization.

Afamousandbitterexampleofthesedifferencesininformationbetweenthebig-picture-of-the-world and the reality-of-operationswas thedifference inperspectivebetween thegenerals and the soldiers in the tragicFirstWorldWar inEurope in theearly twentiethcentury.From1914 to1918, thewarstagnatedinto“trench”warfare,withthegeneralsonbothsidesplanningonemoregreatbattletowinthewar.Eachbattleresultedinthousandsofdeathwithnosubstantialgaininterritoryorweakeningoftheabilityoftheeitherarmytofight.Theviewfromthegeneral’sperspectivewas themassingofartillery and soldiers for an attack. But the view from the soldier’sperspectivewas that thecombinationof thenewmachinegunandartillerymadeeveryattackimpossibletowin–resultingonlyintheslaughteroftheattackers.Fromthebigpicture,theviewofthewarwassimplythemassingoftheattackforces.Butfromtherealityofthetrenches,theviewofthewarwassimplydevastationanddestruction–undersustainedandwitheringfireofthemachinegunswhichwouldfinallyhaltallattacks.Afterfouryearsofthis trench war, both the German/Austrian armies and the British/Frencharmiesweretooexhaustedtowin,andanewfresharmyofAmericanswasbrought into battle to finally finish the war. But all during that war, theperspectiveofthegeneralsinallarmieswasthatthefailureoftheirmassedattackswasduetolackof“spirit”intheirsoldiers.

Not only is the experiential base of the twoperspectives of top-down andbottom-up different, so too are the logics appropriate to top-down andbottom-up strategy.The top-downperspectiveof strategyuses adeductivelogic that begins with the great and goes down toward the small. Informulatingstrategy,topleadershipshouldlookaroundattheenvironmentsofthefirmanditsbusinessesto:

1. Scantheenvironmentsofafirmtoidentifymajorfuturetrendsandchangesingovernment,theeconomy,territorialmarketsandcompetitors,andinthescientificandtechnologicalculture;

2. Interpretthechangesasthreatsandopportunitiestothebusinessesofthefirm;

3. Analyzethepresentfirm’sactivitiesintermsofstrengthsandweaknessestofacesuchthreatsorseizesuchopportunities;

4. Redefinethemissionsofthefirm’sbusinessestomatchthefutureoperationstofuturethreatsandopportunities;

5. Setgoalsandtargetsforbusinessestomeetinapropertimehorizon.

Incontrast,attheoperatinglevelsofbusinessesinafirm,managersshouldlook to the strategic immediacy of the business’s markets, competitors,operations,andknowledge:

1. Examinethetrendsinsalesinthemarketsofthebusinessesofthefirmandidentifyinnovationswhichcanalterthesemarkets.

2. Benchmarkafirm’sproductsandprocessesagainstcompetitors’productsandprocessesandidentifychangesneededtomaintainorsurpassanycompetitor’scurrentadvantages.

3. Investigateprogressininformationtechnologyandintheknowledgebasesofthebusiness’sproductandproductionprocesses.

4. Re-examinecurrentoperationsandcontrol,andidentifyinnovationsinoperationsandcontrolofoperationsneededtoadapttochangesinmarket,competition,andnewinformationandknowledgecapabilities.

5. Formulateabusinessplan,withtargetsformarketshareandprofitsalongwithrequiredinvestmentsandresourcesneededtoachievetheplan.

These different perspectives of the “big picture” and “trench-reality” arebothvital toagoodstrategyprocess,andthereforewhat iscritical togoodstrategy formulation is the interactionof theseperspectives.Nowalthoughthetop-downandbottom-upperspectivesinstrategicthinkingareextremelyimportant to formulating good strategy, yet because of the hierarchy ofauthority, coordinating them is extremely difficult to achieve in a largeorganization.

Inlargeorganizations,theseperspectivesbecomequitedifferentbecauseofthehierarchicalnatureofauthority.Forexampleinadiversifiedfirm,thereareusuallyatleastfourlevelsofmanagementhierarchy:

1. FirmLevel

–Board,CEO,andFirmExecutiveTeam

2. BusinessLevel

–PresidentandBusinessExecutiveTeam

3. DepartmentLevel

–DepartmentHeadandStaff

4. OfficeLevel

–OfficeManagerandAssistant

Thehierarchicallevelsofauthorityinafirmusuallybeginatthetopofthefirm level with a board of directors and a CEO. The CEO and his/herexecutive team are responsible for the strategy of the whole firm. Thisstrategyincludeswhatbusinessesareandshouldbewithinthefirm,andtheoverall financialperformanceof the firm.Theplanningscenarioneededatthis level should include anticipationof change in all the industries of thefirm’s businesses. The bottom-up input to the firm’s strategy should beprovidedbytheparticipationofthebusiness’spresidentstotheCEOinthestrategyprocess.

Atthenextorganizationallevel,belowthatofthefirm,isthebusinessunit,anditspresidentisresponsibleforstrategyforthebusinessasawhole.Partof the business’s planning scenario is the industrial context of the firm(economy and government) as well as the territories and cultures in themarketstowhichthebusinesssells.Anotherpartofitsplanningscenarioisgoalsandtargetsspecifiedforitbythefirm-levelstrategy,thestrategicfirmmodel.Theoutcomeofstrategicplanningforthebusinesswillbeastrategicbusinessmodelspecifyingchangesforitsfuturepolicies.

Thefinaltwolevelswithinacompany,departmentandoffice,arelevelsinwhichmanagersshouldprovidebottom-upinformationtothebusinesslevelin formulating the strategic business model. Policies of this model thenprovidetheguidanceforplanningandimprovingoperationsandactivitiesofthedepartmentsandoffices.

Since it is organizationally natural for the bottom of the organization tolistenmore closely to the top than for the top to listen to thebottom, twokinds of misunderstanding are common in strategic thinking in largeorganizations:

–Themanagersof operatingunits frequentlydonot think that the top executivesunderstandthestrategicproblemsandchallengesinoperations.

–The topexecutives frequentlydonotbelieve theoperatingunitsare tryinghardenoughtoimplementthestrategicplanstheyformulate.

This is the first challenge of strategic thinking in large organizations, toencourage real and accurate communication of strategic perspectivesbetweenthetopandthebottom.

Therefore, in a rational strategyprocess,oneneeds to formalize these twoperspectivesastwoviewsofafirm’stotalities,thoseoftheenvironmentsofthe firm and those of the operations of the firm.The top-to-down-looking

perspective looks at the “big picture” and formulates strategic policies forlong-term direction. The bottom-to-top looking perspective looks at thespecific“nutsandbolts”ofthecompany’soperationstotrytocarryoutthedesirablelong-termdirection.Thecriticalprobleminthestrategyprocessofany organization is to facilitate a positive, constructive, and creativeinteractionbetweenthetwoperspectivesinstrategicthinking.

Moreover, thisproblem is exacerbatedby theperiodic andnon-continuousrequirements of strategic thinking. The actual process of formulatingstrategy is recurrent, exploratory, and interactive with the differentexperientialbasesofthetopmanagementandoflowermanagementlevels.While the results of strategic planningmay look as if created by a linearprocess(eitherlinearinatop-downdeductivelogicorlinearinabottom-upinductive logic), the strategic process is non-linear and recursive andinteractivewithdifferentexperientialbasesofthecompanytopandbottom.

Forexample,ArthurA.ThompsonandA.J.Stricklandnicelysummarizedtherecurrentnatureofthestrategyprocess:

The march of external and internal events guarantees that a company’svision,objectives,strategy,andimplementationapproacheswillhave toberevisited, reconsidered and eventually revised. This is why the task ofevaluatingperformanceandinitiatingcorrectiveadjustmentsisboththeendandthebeginningofthestrategicmanagementcycle.

–ThompsonandStrickland(1998)

Since the strategic management process is interactive and cyclic, theinformationflowmustberecurrentlybothbottom-upandtop-downbetweentheviewsoftheenvironmentandthebusiness.Thecyclicnatureofstrategicplanningisalsocoupledintothebudgetcyclicofanybusiness,goingfromyearlyplanningtoyearlyplanning.

Inamulti-businessfirm,therearetwokindsofthetop-downandbottom-upperspectives:

–firmtobusinessperspectives

–businessestobusinessdivisionsperspectives.

This makes the top-down and bottom-up communications in a multi-businessfirmevenmorechallengingthaninasinglebusinessfirm.

Using an interactive approach to the strategy process is important in thepracticeofstrategicmanagement–becausetheprinciplecauseoffailureinthe strategy of large organizations has been often due to a lack of properinternal interaction between the two strategic perspectives – particularlyduring“competitivediscontinuities”(whichwewilldiscusslater):

–inadequatetop-downperspectiveofinnovativechangesinenvironments,

– inadequate bottom-up perspectives of the need for new business models forinnovativechange,

–inadequatecommunicationbetweenexecutivelevelsandoperationallevelsaboutneededstrategicchange.

How can leadership in a large organization avoid these common kinds ofmistakes in strategy processes? Good interactions between the strategicperspectives from the top and from the bottom are necessary to create apotentially profitable vision of the future – a strategic vision of thechallenges, opportunities, and direction of the future business and howoperationsneedtochangetosucceedinthatfuture.

Theplanningprocessinalargeorganizationcanusetwokindsofstrategictechniquestoassistthis:

1. Astrategictechniqueforeffectivelysummarizingthechangesintheenvironment’sfuture(i.e.,the“bigpicture”)iscalleda“planningscenario.”

2. Astrategictechniqueforeffectivelysummarizingthedesirablechangesinoperationsforsuchafutureenvironmentiscalleda“strategicbusinessmodel.”

AppleComputer(Continued)

Intermsofthestrategyschools,wecannotethatSchool6,LearningSchool,viewed strategy as a kind of learning process in which formulation andimplementationinteractfortheorganizationtolearnfrompastplanningandexperience. In the case of Jobs, he andWozniak learned how to build acomputerandacomputercompanyfromtheirexperienceinsodoing.Thisisakindof“bottom-up”approachtoastrategyprocess,learningfrombelow,fromexperienceoftheactivityofoperations.

Also in the School 9, the Environmental School had focused upon theenvironmentsoforganizations–seeingorganizationsasprincipallyreactingto and responding to threats and opportunities in their environment itincludes approaches suchas “contingency theory” that classifies responsesexpected of organizations facing particular environmental conditions. ThisappliedtoJobsandWozniak’slookingtothenewtechnologyofcomputingand to Wozniak’s attending the consumer electronics trade show andpurchasing one of the first “computers-on-a-chip,” the MOS 6502microprocessor. Wozniak was obtaining information from the largerenvironment of technology, formulating strategy “top-down” from the bigpictureofwhatwashappeningintheworld.

For example, in the caseofApple, strategic informationcame toWozniakandJobs fromoutside theirgroup (top-down information)and from inside

their group (bottom-up information). There are two such sources ofinformation in any strategy process, from the environment and from thebusiness.We can diagram this concept – that component ideas in strategycome both from experience (bottom-up) and from the big picture of theenvironment (top-down) – as two strategic perspectives, Figure 4.2. TheApplecompanywasbegunastrategicvisionasaPCcalledApple2.ThisPCvisionwascreatedbythebottom-upstrategyofJobsandWozniakaboutthecurrentstateofcomputertechnologyinwhichtheycouldpurchaseCPUas an IC chip. Also to obtain capital to operate and grow Apple, Jobsapproached Mark Markkula, and they together formulated a top-downstrategy to build a company,AppleComputer.Markkula provided venturecapital.

Figure4.2: (a)Bottom-upStrategicVisionofJobsandWozniak;(b)Top-downandBottom-upStrategicVisionafterMarkkulaProvidesVentureCapital.

We see how the bottom-up strategy focused upon the technology andproduct; while the top-down strategy focused upon the company andfinances.Intermsofstrategytheory,theideasof“technology,”“product,”“company,”“finances”arecomponentideasofstrategy.Thetop-downandbottom-upperspectivesareprocessdirectionsintheformulationofstrategy.

Jobs and Wozniak were certainly entrepreneurs in the spirit of the“EntrepreneurialSchool”whichfocusedupontheroleofthechiefexecutive

(Jobs) in strategy and saw strategy formulationprimarily dependupon thecognitivefunctionofintuitionintheexecutive(tomakePCs).Thisfocusofstrategytheoryon“vision”certainlydescribesJobs’visionaryabilitytoseetheproductsofnewtechnologies.

Thecapabilityofboth JobsandWozniak to see their strategyasmatchingexternal conditions to internal opportunities of the organization does fit adescription of strategy, as emphasized by the “Design School.”We recallthat in 1976,Wozniak had visited an industrial trade show for consumerelectronics(calledWESCON)andpurchasedoneofthefirst“computers-on-a-chip,”theMOS6502microprocessor.Andfromthis,hedesignedhisfirstPC,whichbecametheApple1.

MarkkularecruitedMikeScott toserveasCEOforApple,andMikeScotthad been at National Semiconductor. In the face of the new competitivechallengeoftheIBMPC,Appleneededtointroduceanext-generationPC,based upon a 16-bit word-length central processor, as IBM had used.Wozniak tookup the taskofupgrading theAppleII tokeep itmarketable.Scott began the development of a business product model for businesscustomers, the Apple III with a 16-bit microprocessor to compete withIBM’sPC.ButScott’sproductdevelopmentleadershipwaspoor.TheAppleIIIwasslow tomarketand fullofbugsandwithoutanysuperiority to theIBMPC.

Next Steve Jobs asserted strategic leadership, knowing that Apple needednewtechnology.ButsinceAppledidnotperformresearch,Jobshadtolookoutside.Jobsheardofoutstandingresearchbeingdoneincomputerscienceby the then giantXerox in its PARC laboratory. Jobs visited it and saw atechnologicalvisionofthefuturePC–PARC’s“Altos”distributedcomputersystem.TheAltosresearchprojectinPARChaddevelopedtheworld’snext-generation PC system – with a graphic interface, mouse, LAN, computerconnection to a laser printer, object-oriented software operating system –nearlyeverythingaPCwastobecomeinthe1990shadbeeninventedbackthen in the late 1970s. Lawrence Tesler was a researcher at PARC whohelped develop the world’s first object-oriented programming language,SmalltalkinordertoprogramAltos’soperatingsystem.BroUttalwrotethatTeslerlatercommentedonthevisitoftheAppleteamtoPARC:“Theireyesbuggedout”(Uttal,1983).

To innovate Xerox’s research strategy into a product strategy, Jobs hiredTesler sevenmonths later.Theybegan theproductdevelopmenteffort thatwas to finally result in Apple’s successfulMacintosh PC. Kathy Rebello,PeterBurrows, and IraSagerwrote: “TheApple II office computerwas abug-infested flop.AndLisa, precursor to theMac,was an expensive dud.Job’s masterpiece, however, the 1984Mac, was a stunner… It was alsoseverelyunderpoweredandlimitedinexpendability.Themarketbalked,and

in May, 1985, Jobs was pushed out of daily operations” (Rebello et al.,1996).

Jobs’ visionary ability continued as “information technology” strategy.Hesaw the future of the PC in the Xerox Altos system. And at Apple, JobsimplementedthefeaturesoftheAltoscomputertechnologyindesigningtheApple Macintosh PC. At first, the Macintosh had slow sales, but a newsoftwarevenderintroducedanewfunctionalitytousetheMac’sfeaturesandlaunched desktop publishing. This was the business vision Jobs’ had notforeseen, but he got lucky.This application saved theMac by bringing incorporatecustomers.Intheinformationindustry,acommerciallysuccessfulnewbusinessapplicationisoftencalleda“killerapplication.”

In the information technology of that time in the 1980s, computerapplications in graphics were then the cutting edge of strategic vision(complementing the earlier progress in computer applications incomputation and text).With the desktop publishing application,Mac wasfinally succeeding. In 1987, Apple was saved and had a market niche incorporate computing – the desktop publishing niche. It was not amarket,Steve Jobs had envisioned. Apple then was using what is called a“technology-leader”businessstrategy;andJobsstrategicstrength thenwasin this kind of strategy. However, any business operated in a technology-leader strategymust stay ahead of competition or its competitive strengthwillerode.AndthisiswhathistoricallylaterhappenedtoApple.

InthecaseofApple,thepresidentofthecompany,ScotthadbeenselectedbyMarkkula, theventure capitalist.ButScott hadnot put a good strategyprocessinplaceinApple,becausehisplantocounterIBMnewPCwasnotinnovative.ThenJobs,asfounder,usedbottom-upstrategytosearchfornewtechnologyandvisitedXerox’sPARC.There in theAltocomputersystem,Jobs saw the technological strategy for all future PCs. Jobs went back toApple and launched the Macintosh product as a product to incorporatePARC’snewtechnology(Figure4.3).

Figure4.3: StrategyProcess–fromVisiontoPlan.

Visonandplanningprovidewaystointegratetheformulationofastrategy.We see an aspect of the planning process was that Apple planned newproducts.The“EnvironmentalSchool”hadfocusedupontheenvironmentsoforganizations;andintheApplecase,itsstrategyfocushadchangedtothecompetitive entry of IBM into the PC market – and environment ofcompetitors. Also in the “Cognitive School” which focused upon thecognitive base of strategy, they emphasized the role of information andknowledge structures in formulating strategy; and this certainly describesJobs strategic need to find new technology as a competitive factor. Jobsfound this in Xerox’s PARC research for the Alto computer. Also the“Planning School” emphasized strategy formulation as formal process,which certainly began in Apple, after IBM presented its competitivechallenge.

Historically,onecanaskaquestionaboutXerox’sstrategyatthetime.WhydidXerox not produce its ownproduct as theAltosPC system?WhydidXeroxshowthenewtechnologytoApple?ItisclearinretrospectthatXeroxexecutivesdidnotunderstand thepotentialof thePCmarket.At the time,Xeroxwas only focused upon protecting its copiermarket from Japanesecompetitors.Xerox executivesmade a big strategicmistake! In the1980s,Xeroxbeganitsdeclinefromadominantcompanyintoanichecompany–allbecauseXeroxexecutivescouldnotenvisionthestrategicimportanceof

PARC’s PC innovations. Xerox executives at the time failed in strategicvision–even though their research labgave themthe right,complete,andamazingvisionforthePC.

Yet even forApple, Jobs “strategic plan”was incomplete. Then Jobs stillhad not fully understood the competitive advantage of “applicationsoftware”forthePC.Hehadnotfullygraspedthattothecustomer,thePCwasonlya“platform”–asoftwaredeliverysystem.WhatreallycountedforaPCcustomerwas thesoftwareapplication.Thenfor the“Mac,” theonlydistinctive software application at the time was the desktop publishingmarket.

AsApple’sMacintoshcomputerwaspioneeringthemarketnicheofdesktoppublishing, the major part of the PC industry was following an IBM-PCbrand strategy. In this “brand strategy,” firms were using a “technology-follower” strategy; but this was working because of the major cost ofsoftware in information technology. Itwas turning out that continuity andavailabilityofsoftware,asopposedtothehardwarepartofthePCsystem,was really behind customer demand. And in the brand-name technology-followercompetitivestrategy, twocompanieswerereapingthe lion’sshareofIBM’sbrand-namerecognition–MicrosoftandIntel.

Here is an important lesson about business strategy and information-technologystrategy.In1987,theMicrosoftsoftwarewastechnologicallyfarbehindtheMacsoftware.YetbecauseofthemarketingcloutofIBManditsclones,theMicrosoftMS-DOSoperatingsystemcontinuedtodominatePCmarketshare.TheCEOofMicrosoft,BillGates,wassuccessfullyexecutingabusiness strategy–using IBM’smarket reputation tobuild theMS-DOSworld. It would not be until Microsoft’s operating system release ofWindows95in1995,whenMS-DOSinformationtechnologywouldfinallybegin catching-up with the Xerox/PARC/Apple/Macintosh informationtechnology.

In 1987, after the Macintosh was beginning to succeed in the desktopapplicationmarketniche,JobsbecamechairmanoftheboardofAppleandlookedforanewpresidenttosucceedhim.HepickedJohnSculley,whohadmany years ofmarketing experience at PepsiCo.Yetwithin a year, therewere policy clashes in Apple’s team.Markkula backed Sculley, and JobsresignedfromApple.

Sculley’sleadershipofAppleprovidedApplewithbothapoorinformationstrategyandapoorbusinessstrategy.KathyRebello,PeterBurrows,andIraSager wrote: “But Apple (under Sculley) entered the 1990s with anoverpricedproductlineandabloated,over-perkedexecutivestaff.MicrosoftWindows was gaining ground and Apple’s rate of innovation wasslowing … .Determined to catch the next technology wave, Sculley puthimself in charge of research and development – and came up with the

Newtonpersonaldigitalassistant,amarketingandtechnicalfiasco”(Rebelloetal.,1996).

Wenote thatSculley’sproduct ideadid latersucceed inanotherconnectedproduct, called the Palm Pilot. In June of 1993, theBoard ofApple firedSculley. Markkula next chose Michael Spindler, who then headed thesuccessfulEuropeandivisionofApple tobecomeCEO.Rebello,Burrows,and Sager wrote: “Michael Spindler started off with a 2,500 employeelayoff, thefirstmovetowardanew,low-marginbusinessmodel”(Rebello,Burrows,&Sager,1996).

HeproducedinexpensiveMacsfor thehomemarketandintroducedanewhigherpowermaclinewithanewchip,thePowerPCchip,jointlydevelopedwithIBM.Butin1995,Applestumbleddramatically,whenSpindler’slargeinventoryof lowerpricedandlowerpoweredMac’swere ignoredfor theirPowerPC line, and yet therewere not enough produced for theChristmasseason sale. Rebello, Burrows, and Sager wrote: “The (1995) Christmasquarterwasadisaster…January1996broughtnewsofalastquarterlossof$69million.Laying off 1,300workers is just the first step in an overhaulthatcouldincludeSpindler’sousterand/orevenasaleofApple”(Rebelloetal.,1996).

Markkula called an emergency meeting for January 31, 1996, at the St.RegisHotelinNewYorkCity.Spindlerwassurprisedattherequestforhisresignationandarguedformore time.ArmstrongandElstromwrote:“Theboardwasfirm:Spindlerhadcontributedmuchoverhis16yearsatApple,but directors hadbeen surprisedbyplunginggrossmargins, throwing intoquestionmanagement’scredibility”(Armstrong&Elstrom,1996,p.29).

TheAppleBoardnextselectedGilAmeliofromNationalSemiconductortoreplaceSpindler.Ameliohad transformednationalSemiconductor from itsworst loss in 1991 of $151million to a best year profit in 1995 of $262million.Ameliofinallybeganshoppingforanewoperatingsoftwaresystem.Steve Lohr: “Apple was known to be casting about for a new operatingprogram, the software that serves as the computer’s master-control panel.Apple’s in-house development effort, code-namedCopland, had collapsed.For Apple, shopping for an operating system was a humiliation akin toGeneralMotor’shavingtobuyenginesfromanothercompany”(Lohr,1997,p.16).

YetwhenMicrosoftcaughtup,Applewasfailing,declininginmarketshareand losingmoney.HowdidApple come to lose its competitive edge as atechnology leader? Why had it simply “thrown away” a 10-year lead ininformationtechnology?Theanswerwasleadershipvision(or,inthiscase,failureofleadershipvision).IncontrasttoJobs’earlyvisionaryleadershipinApple,allthesubsequentCEOsofApplefailedinvisionaboutinformationtechnologystrategy.

PlanningScenariosandStrategicBusinessModels

ThestrategyprocessseemedtohaveneverimprovedinAppleafterJobsleftApple. Figure 4.4 generalizes how strategic vision connects to a strategicplan–bymeansoftwootherstrategicconceptsof:“planningscenarios”and“strategicbusinessmodels.”

Figure4.4: StrategyProcess.

PlanningScenarios

Strategic thinking needs to grasp the “big picture” of changes in theenvironmentsofacompany.Aplanningscenarioisaformatfordescribingthe future environment of a business. For example in 2000, themagazine“Worth”hadinterviewedtwoCEOs,RaymondGilmartinCEOofMerckandKoichiNishimuraCEOofSolectron,aboutstrategy,andtheycommented:

Gilmartin – Part of leadership is saying in touch with what’s going onoutsideyourcompany….Youneedtogatherinformationtoseethepatterns,totellifyou’reonthewrongtrack,totakerisksandmakedecisionsthatgoagainstthegrain.

Nishimura–Getting it rightcomesfrompatternrecognition.Youintegrateinformationandyougo“humm.”

–Worth(2000,p.183)

Gatheringinformationandconstructingpatternsoftrendsandchangesintheenvironmentsofbusinessisthepurposeofscenarioplanninginthestrategyprocess.Tosystematicallygatherinformationandcreateinsightful“humm”

patterns,thestrategytechniqueofscenarionarrativeisuseful.

All strategy is based upon assumptions about the future and its businessopportunities and challenges. A modern technique for exploring andexpressingthese“picturesofthefuture”iscalledascenario,andwhenusedforplanning,aplanningscenario.Scenarioplanningusesscenarionarrativesandsocietalmodels.Scenarionarrativesprovideamethodfordescribingandthinkingaboutthepossibleimpactsofthefutureuponacurrentbusiness.Afuture scenario consists of anticipations and/or surprises and plans for thefuture,ascanbethoughtaboutinthepresent.

StrategicBusinessModel

Strategicthinkingalsoneedstothinkaboutwhatkindofbusinessmodelcanmeetthechallengesandexploitthefutureopportunitiesintheenvironmentsof the company. So the second “strategic totality” to be considered in theplanning process is the future of the business (or businesses) of thecorporation.The strategic techniqueeffective for this is a “model”ofhowone’s companynowoperatesbut should change tooperate in the future isimportant in strategic thinking, a “strategic business model.” Strategicmodelsof thebusinessofacorporate summarize the futurepoliciesof thecompanywhichwillprepareittoperforminthefuture.

The strategic importance of the concept of a “businessmodel”was nicelyexpressed by Geoffrey Colvin, commenting on the troubles Xerox washaving in 2000: “Thequote of the year for 2000 comes fromXeroxCEOPaulAllaire…He gets theDistinguished ServiceCross for extraordinaryexecutiveheroismbecausehetoldanalystsinaconferencecall,‘Wehaveanunsustainable business model.’ In the past CEOs of big, establishedcompaniesdidn’t say things like that.Theydidn’t tell thepeoplewho ratetheir stock that theway theymakemoney doesn’t work anymore…Thelargestfactoflifeinbusinesstodayisthatvirtuallyeverycompany…hastochange its business model to make it sustainable in the Internet worked,infotech-basedworld”(Colvin,2001,p.54).

A business model is an abstraction of a business, identifying how thatbusinessmakesmoney.Businessmodelsareabstractedabouthowinputstoan organization are transformed to value-adding outputs. A strategicbusiness model abstracts the basic value-adding transformation thatdescribeshowabusinessmakesitsmoney.

Apple’sStrategyProcessafterJobs’Departure

IfwediagramApple’sfailureinstrategyaftertheexitofSteveJobs,onecansee that it lay in never grasping onto the new technology change of theInternet(Figure4.5).

Figure4.5: StrategyProcessFailuresinApple–afterJobs.

AfterJobsleftApple,noneoftheCEOswereinnovativeaboutnewproductpossibilitiesprovidedbythenewInternet technology.TheydidnotbuildastrongR&DcapabilityinAppletocreatenewtechnologyandproducts.Asaconsequence,Apple failed tobeatMicrosoft,which finally in1995caughtupwithAppleinPARC’sPCtechnology.AsaconsequencetheAppleshareofthePCmarketcontinuedtodeclinethroughthedecadeofthe1990s.

WhenSteveJobshadbeenoustedfromApple,Jobssetupanewcompany,“Next,” todevelopanext-generationPC.But thehardware,which “Next”produced, was not a commercial success. Only its operating system wasadvanced. It was an example of an object-oriented-program operatingsystem,whichJobshadearlierseenbackin1980atXerox’sPARC.Butthenhe had not innovated this in theMacintosh.He finally innovated it in hisnewPC,the“Next.”Jobswasstilldisplayingexcellentvisionininformationtechnology strategy but not yet as good a visionary ability in businessstrategy.“Next”developedgoodsoftwarebutsoldfewhardwareplatforms.Jobsscaledbackstrategyfor“Next,” to focusuponbuildingInternetsites.Then Jobs turned his entrepreneurial skills elsewhere – toward newtechnologyinthemovieindustry.Heboughtanewhigh-techbusinesscalled“Pixar,”innovatingnewcomputerizedanimationtechnology.

Jobs’StrategyinPixar

Goingback to theanimation technologyearly in the twentiethcentury, thenewmovieindustryhadbegunwhencinemacameraswereinvented(akindofinformationtechnology).Handdrawnanimationwasinnovated,andWaltDisneypioneered in theearlycartoonfilms.Soundwasadded in theearly1930s.Inthe1970s,videowasaddedtocinematicinformationtechnologies.Then in the 1980s, computer-aided graphics began to be added to thecinematictools.

In the late 1970s, a film director, George Lucas had made a commercialsuccess in his science fiction film for youth, Star Wars. He had usedextensive animation in the film. Meanwhile, computer-aided graphicstechnologies were being developed by government agencies, usingminicomputer platforms. By the middle of the 1980s for graphicsapplications,researcherswereusing“parallel-processingcomputers”–smallcomputers that used not one CPU but several CPUs within the samecomputer.This technologygreatly spedup the ability to computerprocesspicturesbycomputers.

Lucas had such a parallel-processing minicomputer built for this studio,“Industrial Light and Magic.” This was the first of this new kind ofcomputer in a movie studio. It was the first parallel-processing computercommerciallydevotedtographicsandanimation.Withit,Lucaschangedhisstudio to an animation company, called “Pixar.” It performed services forproducing animation sequences using the new information technology ofcomputerized animation. However, Pixar was losing money, and in 1986,Lucas sold it to Steve Jobs, for $10 million. But Pixar continued to losemoney,alsoforJobs.Over thenext fiveyears,Jobs investedanadditional$50millioninPixar,whichatthetimewasabout25%ofhistotalwealth.

Yet information technology for animation was still rapidly progressing atPixar;and inPixar,Jobshadacquiredaverygood information-technologyteam.Forexample,hehadakeyengineerinEdCatmull.Asakid,Catmullhad loved animated films but had little drawing talent. He had technicalskills,andhestudiedcomputers.In1975,hewasemployedatavocationalschool (New York Institute of Technology in Old Westbury, New York),whereheteamedwithartiststotrycomputer-assistedanimation.Butatthetime,computersdrewveryslowly.Inthe1980s,thisteamleftNewYorkandwent to work for Lucas at his Industrial Light and Magic Studio in SanRafael,California.

In 1991, Disney gave Pixar a three film contract. This was Pixar’s firstventure from contract animation to producing full-length animated films.Thefirstfilmitwastoproducewascalled“ToyStory.”

Jobs’ business strategy for Pixar would transform it from an “animationcontractor” into amajormovie studio. For this new business vision, Jobsnext raised additional capital for Pixar, from investors such as Seagram’s

CEO, EdgarM. Bronfman, investment bankerHerbert A. Allen, Disney’sCFORobertMoore,andmovieagentMichaelOvitz.

The “Toy Story” film which Pixar was producing and Disney was todistribute, would give Pixar only a small percentage of the profits. Then“ToyStory”becameabigchildren’sfilmhit in1995.JobsthentookPixarpublic, at the height of “Toy Story’s” success. The initial price of $22quicklywent to $33. Itwas reported that then Jobs called one of his bestfriends, Lawrence J. Ellison who was CEO of the high-tech databasecompany, Oracle, to tell him he had company in the billionaires’ club(Burrows&Grover,1998).

In1998with“ToyStory’s”success,JobswasabletocutabetterdealwithDisney.Forthenextfiveyears,Pixarwouldgetanequalshareoftheprofitswith Disney (after a 12.5% distribution fee), and also Pixar had theassistance of Disney’s powerful marketing and distribution capabilities.Profits in the children’smovie industry comenotonly from filmsalesbutalsofrommerchandisingdeals.In1999,Pixarhadmadeabout$53.8millionfrom Toy Story; but was anticipating more than $200 million inmerchandising royalties, video sales, and box-office receipts from asuccessfulnewmoviecalled“ABug’sLife.”Forthatfilm,manycompanieshad cut merchandising deals with Disney (such as Mattel Inc. andMcDonald’sCorp).

Toproducefull-lengthfeaturechildren’sfilms,suchas“ToyStory”and“ABug’sLife,”Pixardevelopedboththeproductioncapabilitiesofafullstudioand also focused upon the technology of computerized animation. First, astorylineandascriptweredevelopedbyPixar’steam,andnextapprovedbyPixarandbyDisney.Pixar’slandscapeartistspaintedlushbackgroundsforthescenesinthefilmandanimatorsdrewthecharacters.Character-sculptorscreated3-Dcomputerizedmodelsofcharactersforthefilm.

For example, a cartoon character, Flik (from “A Bug’s Life”) was firstsketched by an artist and then the sketch computerized as a “wireframe”model (upon which the computer can next develop a solid-surfacerepresentation,usingcomputerizedpolygonmathematical equations).Thenthe character was rendered with texture, and appropriate lighting in eachscene.Withinthecomputerized-graphictechnology,modeledcharactersareplaced in landscapes and animated through the motions required by thescript.Humanvoice-oversarefinallyadded.

Whatthetechnologyofcomputer-animationprovidedwas(1)muchcheaperandfasterfilmproductionwithmanyfeweranimatorsand(2)flexibilitytoalter and hone the story. Such films cost one-third less than traditionallyhand-animatedfilms,usingone-thirdthestaff.

Moreover since everything is digitally stored, it is easily digitally altered.For example, thePixar film“ABug’sLife”was completely changed after

more thanayear’sworkon itwasexpended.Thestoryhadbegunaboutatroupeofcircusbugsthattriestorescueacolonyofantsfromgrasshoppers.PeterBurrowsandRonaldGroverwrote:“Butbecauseofaflawinthestory– why would the circus bugs risk their lives to save strange ants? – co-directorAndrewStantonrecastthestorytobeaboutFlik,theheroicantwhorecruits Flea’s troupe to fight the grasshoppers. ‘You have to rework andrework it,’ says Lasseter. Indeed, one scene was rewritten 30 times”(Burrows&Grover,1998).

OneofPixar’sbusinessstrengths–anditsvaluetothegiantDisney–wasthe ability to develop and apply computerized animation technology. Forexample, in one scene in “A Bug’s Life,” the director Lasseter wasdissatisfiedwiththecrowdsofantsinthemovie’sscenes,whoallhad“look-alike”faces.Pixar’sengineer,WilliamReeves,developednewsoftwarethatrandomlyapplieddifferentphysicalandemotionalcharacteristicstoeachantinascene.Asanotherexample,thewritersofthescriptbroughtamodelthathadbeencreatedofoneofthebutterflies(calledGypsy)toshowthePixar’sresearchersandaskedthemtowritesoftwaretomaketheanimatedbutterflyshowhairspressingdownandpoppingbackupwhenthebutterflyrubsherantennas.Theydidthat.

It was the original vision of Pixar (which Lucas founded and Jobsdeveloped) that the technology strategy and the production strategywouldcontinuetomakepossiblecheaperanimationwithhigherquality–attentiontothevisualdetailsofanimatedfilms.Thismadetheintegratedtechnologyand business strategy of Pixar a valuable studio, then ahead of othercompetinganimationstudiosinanimationtechnology.BurrowsandGroverwrote: “(Pixar) has turned out ever more lifelike short films, including1998’s Oscar-winning Geri’s Game, which used a technology calledsubdivision surfaces.” This makes realistic simulation of human skin andclothing possible. “They’re absolute geniuses,” gushes Jules Roman, co-founderandCEOofrivalTippettStudio.“They’re thepeoplewhocreatedcomputeranimationreally”(Burrows&Grover,1998).

PartofthebusinessstrategyofPixarwastocontinuetodevelopitscreativeand talented staff. Each new employee first spent 10weeks in training atwhat they called “Pixar University,” which included courses in liveimprovisation,drawing,andcinematography.

Butmovieproductionisartandstory-telling.Thepersoninchargeof“story-telling”inPixarwasJohnLasseter.HewasborninWhittierCaliforniaandloved cartoons since childhood. He decided to become an animator as afreshman in high school, after reading a book on themaking ofDisney’sfamous children’s film, SnowWhite.After graduating from theCaliforniaInstituteoftheArts,LasseterwasatfirstemployedbyDisney.In1984,hejoinedPixar. Lasseterwas creditedwith helpingPixarmake the transition

from short-subject films to full-length films. In the partnership betweenPixar andDisney,Disney insisted that Pixar signLasseter to a seven-yearcontractandpaidhalfhissalary.

Jobs’vision forPixar in1999was that it shouldgrow into amajormoviestudio, rivaling Disney. Burrows and Grover wrote: “Jobs says, ‘I thinkPixarhastheopportunitytobethenextDisney–notreplaceDisney–butbethenextDisney.’SohowwillJobsachievehisdream?Notsurprisingly,he’stappingintohisSiliconValleyrootsandusingcomputerstoforgeauniquestyleofmoviemaking”(Burrows&Grover,1998).

Yet over time, competitors always acquire new technology for their ownsurvival. In 1999, even Disney was improving its own technical staff incomputerizedanimationtechnology.Aboutonehundredoftheiremployeeswere working on Disney’s first completely computer-animated film,“Dinosaurs.”Pixarwouldbeindirectcompetitionwithitsstrategicpartner,Disney.

“Basics”ofaBusiness

The ideational components of a strategy can provide a systematic way topose the strategic questions about “basics” of a business – therebyestablishing the basis for a strategic business model. A strategic businessmodel is how a firmwillmakemoney, not only in the present, but in thefuture. Strategy is about what changes need to be made in the currentbusiness operations, in the current businessmodel, to be profitable in thefuture.LowellSteelehaslistedsomeofthebasicquestionsaboutthemodelof any business (Steele, 1989). The basics of any business consists ofanswerstothefollowingstrategicquestions:

(1)Whatisthe“totality”oftheenterprise?

Whatbusinessesareandshouldbethoseofthefirm?

(2)Whatisthe“vision”ofabusiness?

Whoareitscustomers?Howshouldabusinessprofitablyaddvalueinitsproducts/servicestoitscustomers?

(3)Whatisthecompetitive“environment”ofthebusiness?

Howshouldthebusinesscompeteagainstcompetitorsforthecustomerssales?

(4)What“changes”willorshouldoccur,whichcanaffectthecurrentbusinessesoftheenterprise?

All strategic thinking is based upon a concept of the enterprise, but thatconcept may not always be clear nor adequately articulated. It is thecompletenessofconsideringallthebasicstrategicissueswhichcanassistin

the construction of an effective and successful businessmodel. Figure 4.6summarizesJobs’businessmodelforPixar,whichheevolvedovertime:

Figure4.6: StrategyProcessinPixar.

(1)Thestrategic“totality”ofthePixar’sbusinessenterpriseshouldexpandfromacontractanimationhousetoafullmoviestudio;

(2)Thestrategic“vision”ofPixar’snewproductsof fullmovies should focusontheanimatedchildren’sfilmmarket;

(3) The strategic “environment” of Pixar focused upon themarket dominance ofDisney;

(4) The strategic “changes” in the practices of Pixar would require the scriptingcapabilityforafullmovie,budgetcontrol,anddistributioncapability;

(5) The strategic “control” over production and distribution of full-length featurefilmsandmerchandisingwouldbeaccomplishedinabusinesspartnershipwithDisney;

(6) The “information strategy” required Pixar to continue as an informationtechnologyleaderforacompetitiveedge.

Wecansee in thiscaseofPixar that Jobs’businessmodel focusedaroundknowledge and markets – the knowledge of computers and story-tellingapplied to the market of children movies. The business model usedcompetition,Disney,todistributeitsfull-lengthmoviesproducedbyPixar’scomputerizedanimationoperations.

Jobs’“bigpicture”wasalwaystoseeknewtechnologytoapplytobusinessproducts–firstintheApplePC,thenintheMacintoshPC,andtheninPixarparallel-processedgraphics.

Theplanningscenarioforthe“bigpicture”andthestrategyforthebusinessmodel had become central to Jobs’ growing skill in strategic thinking –whichhewasdevelopingwithinPixar.Onecanseeinthispartofthecasethat Jobs’ grew in ability for leadership vision beyond clever technologystrategytowardincreasinglycleverbusinessstrategy.

InPixar,Jobseffectivelyintegratedtechnologyandbusinessstrategy,whichwassomethingthatwasneverwelldoneatApple.Thisintegrationrequiredhim to reformulate Pixar’s business mission and to create a strategicbusiness alliance with Disney to implement it.When Jobs had purchasedPixar he still was operatingwith a strategy predominantly on informationtechnology. Pixar was at the cutting edge of computational graphics (anadvanced area then of information technology), but not making money.LucashadbeenlosingmoneyatPixar;andafterJobspaid$10millionforit,Pixar continued to lose money – requiring Jobs to invest another $50million.Itwasthisexperienceofcontinuingtolosemoney(andyethavinganexcitinginformation-technologystrategy)whichstimulatedJobstocomeupwithanewbusinessvisionforPixartobecomeamajormoviestudio.

SteveJobs’ThirdExerciseinStrategy–Apple’siPodandSmartPhones

It was back in July 10, 1997, when Apple’s then CEO, Gilbert Amelioresigned,afteronly18monthsonthejob,thentheAppleBoardofDirectorsaskedSteve Jobs tocomeback to runApple. Jobs learned thatApplewasshopping for anewoperating system,heproposedNext’s system to them.He met with executives of Apple on December 2, 1996 in Cupertino,California, and explained that adoptingNext’s operating systemwould beApple’sbestchoiceofanewsystem.SteveLohrwrote:“OnDec.20,1996,Apple’s C.E.O. and chairman, Gilbert F. Amelio, announced that thecompanywould buyNext Software Inc. For $400million. For that price,Apple(getsanadvancedoperationsystemsoftwareand)alsogetsStevenP.Jobs … So Jobs becomes the computer era’s prodigal son: his return toAppleaftermorethanadecadeinexileisanextraordinaryactofcorporate

reconciliation, a move laden with triumph, vindication and opportunity”(Lohr,1997).

Back incontrolatApple, Jobsbegandevelopinganewproductmodel forApple computers: Jobs then cut Apple’s product lines down to four – alaptopanddesktopforconsumersandalaptopanddesktopforprofessionalusers.HeorderedApple’sdesignteamtoredesignthecasetolookexciting.HealsoreplacedaboutthreequartersofApple’smanagementteam.ThenewMacintosh, labeled iMac, eventually added digital video publishing as anapplication,which includedvideoeditingsoftware.Stillafter thecompanyturnedprofitablein1999andJobsbecamepermanentCEOagainofApple,themarketshareofAppleinthePCmarketremainedsmall.MichaelKrantzwrote:“Will itbeenough?Apple’s12%home-computermarket share isabig improvement over 6%, but it still leaves theMax on themargins…”(Krantz,1999).

In 2000 with Jobs back in charge of Apple, Jobs again turned to newtechnology,thistimetheInternet.Jobsnextdevelopedthenewproductsandservices of Apple’s iPod product and iTunes music service. Thiscombination revived Apple’s fortunes from the decline of Apple; and inJanuary2007,Applereportedquarterlyrevenueof$7.1billiondollars,withtheiPodproviding48%oftherevenue.YetApplehadnotinventedeitherofthetechnologiesforthegoodortheservice.Thetwoearlierinventionswerethat of the MP3 digital audio player and of the Internet music-swappingsoftware by Napster. Jobs’ commercially successful innovation was theirintegrationasaproductandservice.

The MP3 player was a portable music player to play digitally recordedmusic.Previously,portablemusicplayers,suchasSony’sWalkmanplayers,usedelectronicanaloguesignalstorecordmusic.ThefirstpatentsondigitalaudioplayerswerefiledbyBritonKramer,expiringin1988.Earlyin1998,SaeHan Information Systems in South Korea produced the first mass-produceddigitalplayerasits“MPMan”;andEigerLabsdistributedthemtothe North American market. A few months later in September 1998,DiamondMultimediaproducedtheirRioPMP300player.

OnthisearlyhistoryoftheMP3player,EliotVanBuskirkwrote:“AskevenseasonedMP3buffsaboutthefirstMP3player,andthey’realmostcertaintonametheDiamondMultimediaRioPMP300.Iftheyreallyknowtheirstuff,they’lleventellyouthatitcameoutinlate1998.They’rewrongeitherway,although you shouldn’t be too harsh on them – their mistake isunderstandable.TheDiamondRio’s false status as the firstMP3player ispracticallycementedintechnologylore… .Mosttech-savvytypeswronglythink Diamond’s device was first because, like nearly every other majordevelopmentindigitalmusic,theRiobroughtwithitaspectacularflurryoflegalwranglingandtheattendantmediaexposure.Backinthosedays,you

were nobody in the digital-music business unless the labels sued you”(Buskirk,2005).

In1998,thattheRecordingIndustryAssociationofAmerica(RIAA)filedalawsuit against Diamond Multimedia, alleging that the Rio MP3 playerencouragedcopyingmusic illegally.Buta federalcourt inCalifornia ruledthattheplayerdidnotinfringeanymusiccopyrights(Clampet,1999).Alsoin the same year an MP3 player with a hard drive to store music wasinnovatedbyCompaq’sSystemResearchCenter:“Herecomestheirony.In1998,Compaq’sengineersmadethefirsthard-drive-basedMP3playerandlicensed it to a Korean company (Hango) that didn’t domuchwith it. In2001,thefirstiPodcameout”(Buskird,2005).

The delivery of music over the Internet was the next technology, widelypioneeredbyaprogramcalled“Napster”developedbyShawnFanning.Hewasacollegestudent,studyingcomputerscienceatNortheasternUniversityinBostoninthefallof1998.Earlierhehadworkedsummersforhisuncle,John Fanning, whose company, Netgames, was developing online games.Shawnwasboredbycollegeandspenthistimeathisuncle’soffice.HehadanideaforasearchenginetofindandsharemusicfilesovertheInternet.HebeganprogrammingNapster software.Heandhisunclesawacommercialpotential in the idea. Shawn dropped out of college and completed a testversion of the software. His uncle incorporated a new company. StevenBruell, Dennis Berman, andMike France wrote: “Napster was an instantsuccess. On June 1 of last year (1999), to test the beta version of thesoftware, Shawn gave it to some 30 friends he met through online chatrooms… . In just a fewdays,Napsterwasdownloadedby3,000 to4,000people”(Bruelletal.,2000).

Withthisevidence,JohnFanningbegantoraisecapitalinAugust1999.Thedemand for Napster soared and Napster hired its first CEO in EileenRichardson, who was a venture capitalist in Boston. Bruell, Berman, andFrancewrote:“…Napsterragedacrossthecollegecircuitlikeaforestfire.CollegestudentswerediscoveringNapster,andtheycouldn’tgetenoughofit.AtOregonStateUniversity,Napsterwas takingup10%of theschool’sInternet bandwidth by October, 1999 … . That fall, it became clear thatNapsterhadawhalebythetail”(Bruelletal.,2000).

It became clear to others that the vast trading of music for free on theInternet had serious business implications. One of these was the RIAA,whichhadearliersuedDiamondMultimediaSystems,Inc.,themanufactureof MP3 music players. Bruell, Berman, and France wrote: “From latesummer,1999,uptowhentheRIAAsuedNapsteronDec7,1999,thetwosideswereengagedindiscussionsabouttheservice.Peoplefamiliarwiththesituation describe the talks, which involved executives from Napster andvarious record companies as a clash of cultures and monster ego … .

(Eventually) Napster’s relationship with the RIAA had deteriorated to thepointofwarfare”(Bruelletal.,2000).

AlsoitbecamecleartoothersthatthevasttradingofmusicforfreeontheInternet had serious business implications. On December 7, 1999, RIAAsuedNapster.Months later on July 26, 2000, a Federal judge of theU.S.DistrictCourtinSanFranciscoruledagainstNapsterforcopyrightviolation.Bruell,Berman,andFrancewrote:“Thehearinglastedabouttwohours.Bythe time it was over, Napster had been legally eviscerated. Judge PateldismissedvirtuallyeveryNapsterargument,grantingtheinjunction(againstNapster) … . The sweep and strength of her ruling stunned the Napsterteam… .Napster’sworstnightmarehadcometrue…”(Bruelletal.,2000).That suit againstNapsterwas justone exampleofwhatwouldbe amajorstrategicissueabouttheInternet–protectionofcopyrightedmaterial.

Thus Steve Jobs knew a service providing copyright-protected music forpaymentcouldflourishover theInternet.Hehadhishardwareengineeringchief, JonRubinstein, assemblea teamofengineers todesign the iPod. Inthe teamwereTonyFadellandMichaelDhueyandJohahanIve.The iPodwas to be anMP3 digital audio playerwith a hard drive for storage. Theteamdevelopedtheproductinayear,andtheiPodwasdisplayedinOctober2001, with a 5 GB hard drive that could store at least a thousand songs.Apple adapted software from Portal Player’s. The brand name iPod wassuggestedbyVinnieChieco,afreelancecopywriter,whowasconsultedbyApple about a name. But it turned out that this name had already beentrademarkedbyJosephyGrasso,whothenassignedittoApplein2005.

ApplealsoestablishedanInternetservice,iTunesStore,tosellmusicfortheiPod. Songs are downloaded for a price from the Internet by a computer(e.g.,MacLaptop)andloadedontotheiPod.Earlier,SteveJobshadlearnedthedifferenthardware,software,andservicebusinesses.Heinnovatedtheirintegration–asameanstorevitalizethecompanyhefoundedthreedecadesearlier.

And Jobs’ understanding of services as a business model for the Internetcontinued. New products as hardware platforms for Internet servicesfollowed.In2005,Appleentered thecellularphonemarketwitha“smart”phone– the iPhone.And in2010,Apple introducedan iPodTouch.Thesenew products were expected to generate over 50% of Apple’s profits by2011.

ThesuccessoftheiPhonewasduetoapplicationssoftwaredownloadedontothephone.Appleprovideda“store”inwhichapplicationsoftwarecouldbeapprovedfordownloading.Forexample,JennyWorthamreported:“AppleistighteningitsalreadyfirmgriponwhatsoftwarecanrunontheiPhoneandits othermobile devices, as shown by its recent changes to the rules thatoutsideprogrammersmust follow.The company is locked in abattlewith

other cell phone makers, particularly those using Google’s Androidoperatingsystem,forthelatestandbestapplicationsthataddfunctionstoaphone”(Wortham,2010).

Apple’s new hardware products were designed to provide platforms uponwhichtodownloadandrunsoftwareapplications–aserviceplatform.Thetechnology of the Internet provided Jobs with new opportunities of newproductsandservices,asshowninFigure4.7.

Figure4.7: StrategyProcessinNewApple.

Summary

Strategy theory focuses upon both the process and content in formulating strategy.Theprocess involves two strategic perspectives, top-down and bottom-up. The top-downstrategic perspective focuses upon the financial aspect of operations. The bottom-upstrategicperspectivefocusesupontheexperientialbasisofoperations.

In the top-down perspective, the content ideas are expressed as a big picture of anorganization’s environment, as a “planning scenario.” Within a planning scenario, keycomponentideasoftheenvironmentincludegovernmentpolicies,technologicalprogress,

economicdevelopments,andculturalchanges.

In the bottom-up perspective, the content ideas are expressed as organizationalexperience in competition, a strategic business model. Within a business model, keycomponent ideas include operations (products and services), competition, market, andknowledge.

TheoreticalPrinciples

1. Strategicchangeisperiodicallynecessarytosurviveandprosper.2. Strategydividesintocontent(strategicissues)andintoprocess(strategicplanning).3. Strategicperspectivedividesintotop-downperspective(executiveperspective)and

bottom-upperspective(operationalperspective).4. Thestrategyprocessrequiresformulationofthe‘bigpicture’asastrategicscenario

andthe‘operationspicture’asastrategicbusinessmodel.

StrategicBusinessModel

Introduction

Theideaofhowabusinessmakesmoneypresentlyiscalleda“businessmodel.”Howitwillcontinuetomakemoneyinthefutureisits“strategicbusinessmodel.”Thebottom-upstrategicperspectiveisprincipallyinformedbyexperiencefromoperations.

HistoricalEvent:Ford’sInnovationoftheModelT

Allorganizationsaregoaldirected, innovatingproductive transformations toreachthesegoals.Allbusinessesmakeprofitsbyaddingvalue topurchasedresources, transformingthemintogoodsorservices.Theproductionsystemofthefirmis thecoordinatedsetofactivities(system)whichdirectlyaddsvalue.Forabusiness,this“goal-seeking”hasbeencalledthe“conceptoftheenterprise,”andits“productivetransformations”constitutethe“enterprise system.”Abusinessmodel is howanorganization’s enterprise systemearnsprofits in a market against competitors.We review the history of “enterprise systems”(businessmodels)whichoccurredintheU.S.automobileindustryinthefirsthalfofthetwentiethcentury.

In the late 1800s, a new auto industry was created by putting an engine onto thebicycle technology.Thebicyclehadbeen invented in themiddleof the1800sby takingadvantageofthenewhigh-strength,lightweight,andlow-coststeelsthenproducedbythesteel industry,usingBessemer’s invention.Thegasolineenginewas invented in the late1800s,and thensomebicyclemanufacturersaddedenginesontoa four-wheeledbicycleframe.WilliamAbernathywrote: “AlanNevins observes that the (automobile) industrywasbornfromtheconsumer’sdesirefora lightpersonal transportationvehicle,adesirestimulated by the bicycle boom of the 1890s… . Men with experience in the bicycleindustrywere the first to see the possibilities of the automobile as ameans of personaltransportation. Their technological orientation led them to improve the automobile’sperformance through lightweight designs, high-strength materials, and low-friction ballbearingsratherthanincreasedmotorpower”(Abernathy,1978).

The year 1896marked the beginning of theU.S. automobile industry because thenmore thanoneautowasproducedfromthesameplan,whenJ.FrankDuryeamadeandsold13identicalcarsinSpringfield,Massachusetts.Duringthenextfewyears,manynewautomobile firms were founded and a variety of auto configurations were offered(Abernathy, 1978). Races were held between the three principle configurations ofautomobiles in steam, electric, or gasoline power. In 1902, a gasoline-powered car

defeatedelectricandsteamcarsataracetrackinChicago,establishingthedominanceofthe gasoline engine. Thereafter, this enginewas to become the core technology for theautomobile.Also in1902, theOldsMotorWorks constructed and sold2,500 small twocylinder gasoline cars priced at $650. The next six years in the United States saw thegrowthofmanysmallautomobile firmssellingdifferentversionsof thegasolineengineauto.

Other choices about configuration weremade. In 1903, Buick relocated the enginefromthereartothefrontofthecar.Thebicycle-likedrivechainwasreplacedbyadirectdriveshaft,connectingthefront-placedenginetorearwheels.In1904,Packardpatentedthe four-position transmissionwith positions in the shape of anH,which subsequentlybecame the standard for manual transmissions. Ford redesigned the earlier one-piecedesignedblock-and-headenginesintwoseparatepiecesforeaseofcastingandmachining.By 1907, the automobile system began to lookmore likemodern designs than like theearlycarriage/bicycleswithrear-mountedengine.

The next key event in the history of the U.S. auto industry was Henry Ford’sintroductionofthenowfamousModelT.WhileHenryFordwasproducingautomobiles,hewasracinghiscarstoestablishareputationforperformance.Hiscarswereexpensive,as were all other cars, principally for the well-to-do. But Ford had in mind a largeuntappedmarket–acarforpeoplelivingonfarms.Around1900,halfofAmericansstilllivedonthefarm.Fordwantedtobuildapractical,highqualityautomobilepricedat$450dollars.Hiscommercialstrategywasprice,andhistechnicalstrategywasdurability.Theruralapplicationrequiredaninexpensive,reliableanddurablecar,whichalsohadahighclearance for dirt roads and also easymaintainability bymechanically-minded farmers.Thekeytohistechnicalinnovationwouldbeintheweightandstrengthofthechassisoftheautomobilestructure.

Materialcostsintheearlyautomobilewereaverylargepartofitscost.IfFordcouldreduce the weight of the model T by at least one-half of competing designs, thattechnologywouldproduceanenormouscompetitiveadvantageforhisgrandstrategyofa“carforthepeople.”Ford’sinnovationfordecreasingtheweightoftheautomobilewouldbe tousehigh-strengthsteel for thechassis,madeof theelementvanadiumasanalloy.HenryFordlearnedofthisnewsteelwhenattendinganautomobilerace.

Inoneof theunfortunateaccidents thatday,a racingcar imported fromFrancewaswrecked. Allen Nevins and Frank Hill described this: “In 1905 (Ford) saw a Frenchautomobilewreckedinasmash-up.Lookingoverthewreck,hepickedupavalvestem,verylightandtough… .itprovedtobeaFrenchsteelwithvanadiumalloy.Fordfoundthatnone(intheU.S.)couldduplicatethemetal.(Ford)foundasmallsteelcompanyinCanton,Ohio(and)offeredtoguaranteethemagainstloss.Thefirstheatwasafailure… .the second time the steel came through.Until then (he) had been forced to be satisfiedwith steel running between 60,000 and 70,000 pounds tensile strength.With vanadiumsteel,thestrengthwentto170,000pounds”(Nevins&Hill,1953).

Makingthechassisofthissteelmeantthathecouldreducetheweightofthechassisby nearly a half and get the same strength. It was a technological breakthrough that

allowedFordtoimagineaninnovativenewproductdesign.CharlesSorensen,whohelpedForddesigntheModelT,laterwrotethatFordhadtoldhim:“Charlie,thismeansentirelynewdesignrequirementsandwecangetabetter,lighterandcheapercarasaresultofit”(Sorensen,2006).

Fordused thenewvanadiumsteel to fabricate the chassis of the automobile,whichreduced theoverallweightof themodelT toabouthalf thatofexistingautomobiles. Inaddition,Fordalsoinnovatedinthedesignbymountingthemotortothischassiswithathree-point suspension. The prior practice had been to bolt the engine directly to theframe,andoftencylinderblocksofthoseenginesweretwistedbytheenormousstrainthatoccurredwhentheautomobilebouncedoveraholeorrut.

FordalsodesignedtheModelTtobea“bestofbreed.”Heusedtheotherbestideasinother contemporary automobiles. For example, he replaced the then traditional dry-cellbatteriesforstartingthecarwithamagnet-poweredignition(onecrankedtheModelTtostartit).TheModelTbecamea“designstandard”forautomobiletechnology.Abernathywrote: “For eighteen years the design of the Model T chassis was not significantlychanged.Duringthisperiodtheindustry’sproductionofpassengercars increasednearlysixtyfold,from64,500carsannuallyto3,700,000…Fordmaintainedabouta50percentmarketsharethrough1924”(Abernathy,1978).

AsshowninFigure5.1,Ford’sModelTwastherightproductattherighttimefortherightmarket at the right price.Performance, timing,market, price – these are the fourfactorsforcommercialsuccessininnovation.

Figure5.1: HenryFord’sEnterprise.Sources:http://loc.gov/picture/resource/cph.3c11278;

http://content.lib.utah.edu/cdm4/item_viewer.phd?CISOROOT=/USHS_Shipler&CISOPTR=2629&CISOBOX=1&REC=2;

http://toolkit.archives.gov/exhibits/twww/.

HenryFord(1863–1947)wasborninMichigan,U.S.In1879atage16,hebecameanapprenticemachinistinDetroit.In1891atage28,Fordwashiredas an engineer with the Edison Illuminating Company. He beganexperimentingwithgasolineenginein1893,buildinghisfirstcarin1896atage 33.Receiving backing from awealthy individual, Ford resigned fromtheEdisonCompanyandfoundedtheDetroitAutomobileCompanyin1899(whichlasteduntil1901).NextFordbuiltasuccessfulracingcarandstartedanewcompanyin1901.FordintroducedtheModelTin1908.

BusinessModels

Organizationsareestablishedtoperformarepetitiveactivityofaddingvaluetoresourcesinorder toproduceproducts, thus transformingpurchased resources intosolidproducts.Thisvalue-addingtransformationcreatesprofits.Businessprocessesaredesignedwithinthe organization to order these repetitive activities as business operations controlled bybusinessprocedures.Thedesign(orredesign)ofthetypesandsequenceofactivitiesandthe procedures to control these activities form the “operational processes” of anorganization.Oneway to picture this value-adding operationwas imagined byMichaelPorter(Porter,1985)asseeingabusinessasan“enterprisearrow,”asshowninFigure5.2.

Figure5.2: MichaelPorter’sValue-Added(Open-System)ModelofaBusinessEnterprise.

The production or delivery system of the firm is the coordinated set of activities(system)whichdirectlyaddsvalue.Forabusiness,thisgoal-seekinghasbeencalledthe“conceptof theenterprise,” and itsproductive transformationsconstitute the“enterprisesystem.”The figure also comparesPorter’s arrowasbeing the sameas anopen-systemmodel of a business. Resources as inputs are transformed into outputs production. ButPorter’s arrow-picture addsoverhead functions to thedirect production (transformation)centerof theopen-systemmodel.This isa fundamentalway to lookatanybusiness.Amodel of a business’s “enterprise system” can be constructed as (1) overhead activitiesabove a (2) transforming open-system; and the open-system portion acquires material,capital, and personnel resources from the economy, transforms these into goods and/orservices,andsellsthegoods/servicesintothemarketsoftheeconomy.

For example, the production linewhichFord established for themanufacture of theModelTconsistedofaseriesofprocesses,asdepictedinFigure5.3.

Figure5.3: AutomobileManufacturingProductionSystemFlow.

These connected production processes together performed a value-addingtransformation of manufacturing the Model T (in Porter’s enterprise arrow). Fordpurchased both manufactured components and materials for their own manufacturingprocessesfromvarioussupplyingvendors.

Ford purchased components such as electrical parts, bearings, glass, radiators,batteries,andsoon.Fromothersuppliers,Fordalsopurchasedprocessedmaterials,suchassteelsheetsandrolledsteel,nonferrousmetalproducts,oils,paint,andsoon.Purchasedcomponentsandmaterialsweresubjectedtoacceptanceinspection.

Next materials went through various production processes to be formed into parts(suchasforging,casting,machining,stamping,plasticmolding).Inaddition,someofthe

purchasedcomponentsalsowentthroughfurtherprocessingtobefinishedascomponents(suchasheattreatmentoradditionalmachining).

Materials, components, and parts eventually were all used for three subassemblysystemsinfabricatingtheautomobile:

(1)powersubsystems—engine,axles,transmission,steeringassembly,etc.

(2)chassissubsystems—frame,suspension,brakes,etc.

(3)bodysubsystem—body,seating,windows,doors,etc.

Variousplatingandpaintingprocessespreparedthepowerandchassissubsystemsforfinalassembly,andthebodywaspaintedforfinalassembly.Thenfinallythethreemajorfabrication subsystemswere attached together as an automobile. After adjustments andinspection,theproductemergedasacompletedautomobile.

All these manufacturing operations connected together describe the actualtransformationinPorter’ssymbolic“value-addingarrow”.

GeneralMotorsandFordStrategicRivalry

The business model of an enterprise cannot be a static and unchanging,because of competition.As competitors alter products/services, a strategicenterprise must stay ahead of competition – envisioning a future andimplementing a strategic plan to improve operations/services in the futurebefore competitors do.Historically, FordMotor, after dominating theU.S.automobile market with its then innovative Model T car, lost marketdominancetoGeneralMotors(GM).Goodorbadstrategicleadershipisthereasonbehindcompetitiveadvantageinthelongrun.

WenextlookatbusinesscompetitionbetweenFordMotorsandGM,intheUnitedStatesinthetwentiethcentury.Duringthe80yearsfromthe1927to2007,GMgainedmarketdominanceoverFord.ButthenGMlostdomesticmarketdominancetoforeigncarmakersinthe1970s,evengoingbankruptin2007.How?Aftergoodstrategic leadershipunderSloan,his successorsthenprovidedbadstrategicleadership,endinginbankruptcy.

While Henry Ford innovated the Model T and built an efficient massproductionline,whichmadeFordthelargestautomobilemanufacturerintheworld. But another automotive entrepreneur,William Durant, was puttingtogetherasecondbigautomobilecompany.HeassembledGMbyacquiringmanysmallerautocompaniesandautopartscompanies.AsDurantdidnothaveFord’sinnovativevision,Durant’sbusinessstrategywastoassembleas

manydifferentmakesaspossibletocoverthemarket–sincehesawtheautomarket as fickle. In 1908, William C. Durant managed the Buick MotorCompany and then was trading his successful stock in it to acquireadditional auto firms. Yet in 1910, a group of bankers took control awayfromDurant,criticizinghisexpansionastoorapid.

Durantthenfoundedanothersuccessfulcompany,Chevrolet,andheuseditsstock to regain control of GM. But in only four years, GMwas again introubleandneededrescuingasecondtime.GM’sautoinventorieswerehighandcash ran short.GMneeded toborrow$83million inOctober1920 topaysalariesandsupplies.TheduPont familywouldrescueGM, investingthe necessary money, but only if Durant resigned. Durant resigned, andPierre DuPont was elected president. The du Pont family then held thecontrollinginterestinGM.

PierreS.duPonthadledthegrowingU.S.chemicalfirmofDuPontandhadretired.ButasthechemicalfirmwasproducinggreatprofitsfortheDuPontfamily,andithadinvestedinDurant’sGM.TheretiredPierreduPontsoonappointed Alfred P. Sloan to succeed him, stating: “I greatly admire Mr.SloanandhisbusinessmethodsandlookuponhimasoneofthemostablepartnersinthemanagementofGeneralMotorsCorporation”(Forbes,1924,p.760).

Sloanhadbeen trainedasanelectricalengineerat theMITandafterwardsbuiltandoperatedHyattRollerBearingCompany.HesoldbearingstobothFordMotor andCadillac. In 1916, he soldHyatt toDurant, continuing aspresident of Hyatt which operated as a GM subsidiary. When DuPontreplacedDurant,SloanwaspromotedtopresidentofGM.Sloan’schallengewastorevampGMtomakeitintoaprofitablecompetitorandovertakeFordMotors.AlthoughHenryFordhadbeenageniusinthedevelopmentofautodesignandproduction,hehadanautocraticmanagementstyleandneglectedto groom management talent to succeed him. Sloan had experience inmanagingproductionandrunningabusinessand,itwouldturnout,geniusinbuildinganefficientandeffectivelargeorganization.

WilliamDurant(1861–1947)wasborninBoston,MassachusettsintheU.S.In1885,hestartedacartcompanywithapartner.By1890,hisDurant-DortCarriageCompanywasanestablishedmanufacturerofcarriages.In1904,asthecarriagemarketwasbeing replacedby thenew“horseless-carriage”oftheautomobile,Durantwashiredby thenewBuickAutomobileCompanyas its generalmanager. The companywas in financial trouble andDurantreorganized it, obtaining control. Durant then formed General Motors tocontainBuick and purchasedmore companies, startingwith suppliers andthenotherautomobilecompanies,acquiringOldsandCadillac.

PierreS.duPont(1870–1954)wasbornat“Nemours,”theDuPontfamilyestateinWilmington,Delaware,andnamedafterhisgreat-great-grandfather

–whoimmigratedfromFrancetoAmericain1870andfoundedtheDuPontgunpowdercompany.Hebeganmanagementbyworkingasteelfirmpartlyownedbyhisfamily.In1902,PierreandtwocousinspurchasedtheE.I.duPontdeNemoursandCompany, tokeep it in familycontrol.Heservedascompany president until 1919, implementing more modern businesspractices.

AlfredSloan(1875–1966)wasborninNewHaven,Connecticut,U.S.A.HeattendedMassachusetts InstituteofTechnology,graduatingas an electricalengineerin1895.HebecamepresidentandownerofHyattRollerBearings;and in 1916 Durant purchased the company, retaining Sloan as manager.PierreduPontthenappointedSloanaspresidentofGM.

Sloan had taken over a confused and cumbersome organization fromDurant’spreviousmanagement.SinceSloanwas apart ofDurant’s earlierteam,heknewhowmuchGMneededbettermanagement.Sloansetouttoemphatically improve the organization. Also Sloan had the assistance ofanother talented manager, Donaldson Brown, whom Pierre du Pont hadbrought into GM from du Pont. Brown served as GM’s vice president offinance.Together,SloanandBrownbegantoredesignGM,startingwithitssystemoffinancialcontrol.

DonaldsonBrown(1885–1965)wasborninBaltimore,Maryland.In1902,hegraduatedfromPolytechnicInstitute,withaBachelorofSciencedegree.In1903,hetookatpostgraduatecourseinelectricalengineeringatCornellUniversity.NexthesoldelectricalmachineryforGeneralElectric.In1909,he became a sales person of explosives for E. I. du Pont de Nemours &Companyforfouryears.In1912,hewaspromotedasananalyst totheduPont office inWilmington and then in 1918 became assistant treasurer. In1921,hewasappointedvicepresidentoffinanceinGeneralMotorsandtotheBoardofDirectors.

In Sloan’s extensive redesigning of GM’s business practices, he wouldchange several areas of GM’s policies about: information, product,innovation,marketing,production,organization,finance,anddiversification.Altogether,thisnewsetofpolicieswouldtransformGM’spreviousmodelofa business under Durant as a conglomerate into a tightly coordinatedenterprisesystemforautomobileproductionandmarketdominance.

InformationPolicyThe first business policy that Sloan and Brown implemented in GM was systematic,detailed,anduniformperformance-reporting,acrossall thedivisionsof thefirm.Duranthadbeenprimarilyconcernedforthestockpriceofthefirm,sinceahighstockpricehadenabledhimtoacquirecompaniesforassemblingGM.However,theduPont’swerelong-terminvestorsandnotstockspeculators,sotheywereprimarilyconcernedwithdividends.

Sloan also held significant holdings from his sale of Hyatt to GM, and he thought:“Naturally,IliketoseeGeneralMotorsstockregisteragoodpriceonthemarket,butthatisjustamatterofpride…Whathascountedwithmeisthetruevalueofthepropertyasabusinessreturnoninvestment”(Sloan,1941,p.103).

Andthisviewofthevalueofabusinessasthereturn-on-the-investmentisoneofthegreateternalstrategictruthsofbusiness–applicableasitwastheninthat“oldeconomy”ofhard-goodproductionofthetwentiethcentury,suchasautomobiles,andlatereventotwenty-first’s century of “new economy” of information services. From du Pont,Donaldson Brown had brought with him a financialmodel he had developed there formeasuringreturnofinvestment:R=T×P.

Thisreadsthatthewaytocalculatethe(R)rate-of-return-on-invested-capitalisas themultiplicationof therate-of-turnover-of-invested-capital (T) timesthe percent-of-profit-on-sales (P). This formula emphasizes thatmanagement should monitor how quickly capital was returned frominvestments in theproductionofcarsandhowlargewas thepercentageofprofitbeingmadeonsalesofcars.

BrownmeasuredthecapitalturnovervariableTintermsoffixed-capitalvariablessuchasplant and equipment and working-capital items such as cash balances, in-process, andfinished inventory and accounts receivable. These were reported in terms of a ratio tosales, whose inverse-ratio expressed the rate of turnover T. This analysis allowedmanagementtosee,asBrownwrote:“…aspecificdisclosureofcausesandeffectsforthereturnoninvestment….Effectivecontrol,orlackofit,foranyitemoneithersideoftheequation(TorP)couldbeidentified,thusmakingpossibleeffortstoimproveconditions”(Brown,1957,p.27).

These two quantities, of production-investments-return and productionprofit-margins, becameSloan’smeasuresof internalperformanceonGM’sproductionoperations–Sloan/Brown’smanagementideas.

Sloan’sinformationpolicyrequiredthatalldivisionsinGMadoptandreportinformationin this standardizedanalysis.Such informationwasusednotonly to controlbut also toplan operations. Sloan wrote: “By means of our accounting system, we can lookforward…andcanalterourproceduresorpoliciestotheendthatabetteroperationmayresult.Inonecaseweareinprinciple,lookingbackward–intheothercase,forward.Weareable toforecastouroperationsfourmonthsaheadwithacertainty thatwouldhardlyseempossible”(Sloan,1929,pp.92–96).

Sloan’sinformationpolicywasaimedatcontrolandplanningofoperationsproveditsvalueintheonsetofthedepressionin1930.Inthelatespringandsummerof1929,GMhad been charting the decline in car sales, respondingwith reduced production to keepinventories low. Brown wrote: “… dependable forecasting and planning were ofoutstandingimportanceduringthosedifficultyears.Productionbyalldivisionswasheld

inreasonablebounds”(Brown,1957,p.71).

Inthedecadesfrom1900to1930,morethanahundredautocompanieswerebegunbut less than a dozen survived the great depression of the 1930s. Sloan’s informationstrategyhadbeenaimedatcreatingafirm,responsivetochangeandtomarketneedsandconditions.AboutGM’ssurvivalofthegreatdepressionofthe1930s,Sloanwrote:“Wehad simply learned how to react quickly. This was perhaps the greatest payoff of oursystemoffinancialandoperatingcontrols”(Sloan,1964).

ProductPolicySloan also needed to rationalize the products ofGM.Durant had acquired a variety ofautomobile companies assembled tominimize sales risk.Durant expressed his strategy:“Thebusinessofanindividualmanufacturerwashazardousbecausethemodelonwhichhestakedhischancesofsalesmightprove tohavesomemechanicaldefector thebodydesignmightfailtostrikethefancyofthebuyingpublic… .Iwasforgettingeverykindofthinginsight,playingsafeallalongtheline”(Crow,1945;Epstein,1928).

However, Durant’s diversification strategy had not yielded financial safety. Theautomobilesoverlappedinfeaturesandprice:

Chevrolet (4cylinder) $775–$2,075

Sheridan (4cylinder) $1,685

Olds (4cylinder) $1,445–$2,145

Olds (6cylinder) $1,395–$2,065

Oakland (6cylinder) $1,395–$2,065

Scripps-Booth (6cylinder) $1,545–$2,245

Buick (6cylinder) $1,795–$3,295

Cadillac (8cylinder) $3,790–$5,690

Durant’sGMproductshadbeencompetingasmuchbetweenthemselvesaswithothercompetitors.In1924,Sloanreorganizedtheproductsintocomplementarypricelines:

Chevrolet (4cylinder) $510

Olds (6cylinder) $750

Oakland (6cylinder) $945

Buick (6cylinder) $1,295

Cadillac (8cylinder) $2,985

InnovationPolicyAnother policy of Sloan’s was to add new features and performance improvements toimproveproductquality.Ford’sModelThadanopenbodyandwoodenframeontopofasteelchassis.SloanhadallGMautosconstructedasclosedbodiesentirelymetal.Otherimprovements were added, such as brakes on all four wheels. With this strategy ofinnovatingproductimprovements,SloancouldpricetheGMautosatthetopoftheirpricebracketsasqualityproducts.HethenreducedpricedowntowardthatoftheModelTassoonasproductionvolumesloweredunit-costs-of-production.

Sloanestablishedaresearchlaboratory,directedbyCharlesF.Kettering,toinventanddevelopimprovements.Sloanwrote:“Wearesearchingforthefactsthatwemay…addvaluetotheperformanceandeffectivenessofourproducts…”(Sloan,1927).Atthetimeof founding the laboratory, GM was being innovative. Leslie wrote: “Compared tocompetitors, like Ford, whose engineering departments were dominated by self-taughtmechanics,GM’sresearchunitwasquiteprogressive”(Leslie,1983).

Inadditionto innovationofproduct improvements,Sloanaddedapolicyfordesign-styling.In1927,SloanhadCadillacintroducealowerpricedcarbetweentheCadillacandtheBuick,whichwascalledtheLaSalle.TheLaSallehadabodystyledbyHarleyEarl,aLosAngelescustom-bodydesignerhiredbyFisherBody;andasSloanwrote:“Thecarmade a sensational debut inMarch1927…The first stylists’ car to achieve success inmassproduction”(Sloan,1964).

Earl’s intention in styling was to lengthen and lower the American automobile inappearance.Alsoavarietyofcolorscouldbepaintedoncarsin1927,thankstoadvancesinpainttechnologythatdecreasedthedryingtimeofcoloredpaints.Thecombinationofprice bracketing of automobiles, product improvements, styling, and colors devastatedFord’sshareofthemarket.

MarketingPolicyGM’s strategywas to sell automobiles through independent but franchised dealers.TheGMFinanceCommittee(establishedbyduPontandcontinuedbySloan)decidednottoestablish company-owned dealerships. The amount of capital needed for 20,000 retailoutletswouldhavebeenastronomical;andthenumberofemployeesintheoutletswouldhave been too large to manage. Franchising dealerships avoided the large capital andmanagementproblemsofretailingtheautomobilestocustomers.

StillsomecontroloverretailingbyGMcouldstillbeestablishedthoughthefinancingagreement.Therewerestillmarketchallengesinfinancingboththeautoinventoryandthepurchaseofautomobiles.Bankswerereluctanttoextendloanstodealersforinventoryandto customers for automobile purchase. John J. Raskob, then chairman ofGM’s financecommitteesuggested to starta financecompany, limited to financing thepaperof thosewho dealt with GM cars, and this was established as the General Motors AcceptanceCorporation(GMAC).

ProductionPolicySloan’smissionwastooptimizereturn-on-investmenttoshareholders.Therefore,apolicyabout production was necessary to make money from the product variety for the automarket. Sloan’ policy for lowering production costs was to standardize as much aspossible parts and production across all operating divisions. It was from Sloan’s priorexperiencewithmass-productioninrunningHyattthathisproductionpolicywastostriveforthelargestpossibleproductionrunswithlowestproductcosts.Thiswouldprovidethelargestmargins.

BecauseGMboughtpartsfromoutsidefirms,thestrategyforpartstandardsrequiredGM to foster standardization across parts industry. For example, Sloan created GM’sGeneralpurchasingCommitteewhichpublishedaBookofStandardParts.Bairdwrote:“Itcontained196pagesdescriptiveofstandardparts,100pagesonmaterials,andabout50pagesofmiscellaneous information”(Baird).The internalproductionofstandardizedparts and external purchase of standardized parts lowered GM’s production costs byfosteringacompetitivemarketinitssuppliers.

OrganizationPolicySloan’s organizational policy was to have a decentralized product and productioncapability while yet tightly coordinated these from a central financial authority. Kuhnwrote: “Sloan started this trend toward centralization simply because he had inheritedfromhispredecessor…agroupofdivisionmanagersalmosttotallyignorantoffinancialmatters. Durant’s ‘automobile men’ … often accumulated dangerously excessiveinventories through inattention, poor forecasting, or even inflationary speculation. TheSloan-Brown team imposed strict financial controls over divisional operations” (Kuhn,1986).

This organizational policy beganwhen Pierre DuPont took control of GM.He andSloanspentmanyoftheirearlydaysatGMvisitingandevaluatingthedifferentdivisions,whichDurant had assembled intoGM.After Sloan became president, he continued hisinspectiontripsandvisiteddealershipstogainfirst-handimpressionsofoperations.

ThenSloanandBrown institutionalizedyearlyandmonthly formalizedperformancereviews of divisional operations. The central control over divisions used the detailedperformance information from divisions to review past performance and to comparecurrentperformanceagainstplannedperformance.

Sloan reorganized GM’s Executive Committee to exclude most of the divisionmanagers in order to carry out this centralized oversight of distributed divisionaloperations. Sloan then established an Operations Committee to which all generalmanagersof thedivisionsbelongedalongwithall thegeneralofficerson theExecutiveCommittee.ThepurposeoftheOperationsCommitteewastocoordinateimplementationofcentralizedpoliciesoftheExecutiveCommittee.

FinancialPolicyThe Finance Committee, established by DuPont, focused investment upon operationswhichpromotedthehighestreturn.Fromthiscommitteecameseveralstrategicinvestmentdecisions,whichfocusedGMinvestmentprincipallyuponproductionassemblyandsomepartsproduction.Autoassemblywas thehighestvalue-addingoperationandcreated thelargest profit margin. Parts production was not as profitable but critical; and so aninvestment decision was to finance limited part production capability and purchaseremainingrequirementsfromoutsidesuppliers.

DiversificationPolicyGM’s diversification policy under Sloan remained focused upon the production oftransportationproductsandtheirparts.GMproducedautos,trucks,andtractors.Thefirstacquisition Sloan made was to acquire its principle body supplier, Fisher BodyCorporation. Sloan secured control of Fisher by purchasing 60% of the stock andthereafterpurchasedtheremaining40%.SloanmovedseveraloftheFisherbrothersintocorporateanddivisionalpositions.

Forthebasiccommodityindustriesthatprovidedmaterialsforthepartsproducers,adeliberate decision was made by the Finance Committee to not invest in these basiccommodities(suchassteelandchemicals).Thefinancialinvestmentinbasiccommoditieswouldbehighandthemarginslowerthanfromtheautomobilebusinessandtheseveralcompetitivesuppliersalreadykeptcommoditypriceslow.

CompetitivePolicySloan’s competitive strategy proved successful because the automobile market waschanging inAmerica, andSloan’s new strategies adaptedGM to exploit these changes.Themarketchanges thatSloansawandexploited inhisnewstrategies includedmarketfactorssuchasinstallmentselling,used-cartrade-ins,closedbodyautomodels,improvedroads,increasingurbanization,risingprosperity,andchangingfashions.Sloan’sbusinessmodel was to adjust GM’s operations and control to better match the product to thechangingdemandsofthemarket.

StrategicPolicyMatrix

Allbusinessesconsistofatransformativeactivityandcontrolofthatactivity.Accordingly,businesspoliciesmustbe formulated forcontrolling theactivity.Figure5.4summarizesthe list of policies that are required to manage a business enterprise (a managedorganizationalsystem).

Figure5.4: StrategicBusinessPolicies.

The four basic activities of any business are product, production, marketing, andorganization.

–Allbusinessesmustdesignaproductandproduceit.(Theproductcanbeahard-good,software,orservice.)

–Allproductsmustbeproducedinvolume.(Theproductioncanbemanufacturing,production,orservicedelivery.)

–Allproductsmustbemarketedandsoldforthebusinesstoobtainrevenue.

–Allbusinessmustconstructanorganizationtocarryouttheactivitiesofproductdesign,production,andmarketing.

These four modes of control activities must be controlled by management of theorganization;andthefourmodesofcontrolarefinance,diversification,information,andinnovation.

– All businesses control activities through finance, buying resources and sellingproductsandmeasuringperformanceasprofits.

–Allbusinessescontrolthenatureofthebusinessactivitythroughdiversification,definingthesetofbusinessescarriedonbythefirm.

–All businesses control operations through information, structuring the planning,scheduling,coordination,andaccesstoactivities.

–Allbusinessescontrolchangeinoperationsthroughinnovation,introducingnewmeanstoperformactivitiesthroughimprovedprocessesandtechnologies.

–Allbusinessescontrolqualityandcostofproduction.

Goodbusinessleadershipformulatespoliciesthatmeetopportunitiesanddemandsofamarket.Sloan’s strategy forGM toovertakeFord’smarket leadership requiredSloan to

formulate policies in several different areas of the complex management problem ofrunningalargefirmThesepoliciestogetheralteredhowGMdidbusiness,reformulatingthe business model from Durant’s aggregation of companies to Sloan’s streamlined,rationalized,andcontrolledbusinessmodelofan integratedsetofautomobiledivisions.Sloan’sbusinessmodelwas an enormous success for avery longperiodof time.GM’soverwhelmed theU.S. automobilemarket from1926 to1976, a competitivedominancelasting50years.In1976,GMproduced55%ofallpassengercarssoldinNorthAmerica.

Theinteractionbetweenstrategicpolicies(forthedifferentactivitiesandcontrol)canprovide a competitive advantage. Accordingly, the set of strategies (strategic policies)withinabusinessmodelshouldbeexaminedastotheirinteractions.Aformaltechniquefor doing this is to constructmatrices of strategy interactions. Figure5.5 shows a two-interactionmatrixmodelofstrategicpolicies–strategicpoliciestakeninpairs.

Figure5.5: StrategicPoliciesMatrix.

Eachstrategycategoryislistedbothverticallyandhorizontallyinthematrix.Thewaytoreadstrategicmatrixistothinkoftheitemontheverticallistasakindofstrategicforceand the item on the horizontal list as a kind of strategic effect. For example, Sloan’sstrategy for facilitating credit would be an entry along the finance row of the strategymatriximpactingthediversificationcolumn,sothattheentryintheboxof(finance-rowand diversification-column) would be GMAC, the strategic move of establishing theGeneralMotorsAssuranceCorporation.Thestrategicpoliciesmatrixprovidesatechniquefor systematically identifying and formulating the interactions of all strategies inoperatingandcontrolbusinessactivities–andtounderstandthesepolicyinteractions.

TypesofStrategicBusinessModels

For a conglomerate holding company, Porter’s one value-added output (sales) does notwork.Aconglomeratecompanyhastwovalue-addedoutputs(profitsandcapital).Thus,oneneedstomakebusinessmodelsasenterpriseswithtwovalue-addedoutputsandwith

twoinputs.

Thisneedforatwo-inputandtwo-outputbusinessmodelbecameempiricallyevidentin the success of someof the dot.combusinesses begun in the1990s, such asAmericaOnline (AOL), Amazon, Google, etc. For example, Mutaz M. Al-Debei, Ramzi El-Haddadeh,andDavidAvisonwrote:“TheBusinessModel(BM)concepthasbecomeoneofthemostimportantdomainsinthefieldofInformationSystems(IS),thankstorecentrapidadvancesinInformationandCommunicationTechnologies(ICTs)…theemergingworldofdigitalbusiness iscomplex,dynamicandenjoyshigh levelsofuncertaintyandcompetition. For instance, designing a business model for a Cellular Network andTelecommunication Operator (CNTO), as a part of a value network, is a complexundertaking and requires multiple actors to balance the varied and often conflictingrequirements. Moreover, rules that governed the traditional world of business arequestionedinthisemergingworldofdigitalbusiness.Forexample,ahugeinvestmentwasneededtoestablishatraditionalbusiness.Traditionally,thisinvestmentwasconsideredastrategic barrier to entry. However, Internet andmobile technologies have offered newwaysofdoingbusiness, such as e-commerce,whichdonothave suchahighbarrier toentry…Traditionalbusinessmanagersaremoreexperienced in translating thebusinessstrategy directly into business processes. In the more complex and sometimes uniquedigital business, the businessmodel needs to be explicit and aBMwhich offers a newlayerofappropriateinformationandknowledgetosupportdigitalbusinessmanagershasbecomeanecessity”(Al-Debei,E-Haddadeh,&Avison,2008).

Wenextreviewhowtogeneralizethetypesofstrategicbusinessmodelsavailabletostrategic thinking in the Internet world. Michael Porter had used only one input of“resources”andoneoutputof“sales”toconstructhisbusinessmodel.Onecanconstructvalue-added business models with two inputs and two outputs, using four operationalissuesofanyenterprise(asinputsoroutputs):

–Resources

–Sales

–Profits

–Capital.

Resourcesandsalesprovidetheissuesfor thedirectproductiontransformationsofabusiness operation. For example, in manufacturing operations, material resources aremanufactured intophysicalproductsforsale. Inserviceoperations, requestsforservicesare transacted into service sales. Profits and capital measure the value of the businessoperations.Profitsisameasureofbusinessefficiency,thedifferencebetweenpricesandcostsofsoldproducts/services.Capitalisameasureoftheassetvalueofthebusiness.

Howmany different types of “business models” can one use to construct strategicbusinessmodels in formulatingstrategy?Onecan listall the logicallypossible typesby

taking all possible combinations of the four categories (resources, sales, profits, andcapital)two-at-a-timeasinputsandasoutputs(Figure5.6).

Figure5.6: TwoInputsandTwoOutputsValue-AddedBusinessModelsofanEnterpriseSystem.

Withthisapproach,onecanconstructsixdifferentmodelsfortodescribeabusinessasillustratedinFigure5.7.

Figure5.7: TypesofStrategicBusinessModels.

The strategic business, strategic enterprise, strategic market, or strategic learningmodels are appropriate for looking at a company consisting of a single business. Thestrategicfirmmodelisappropriateforlookingatacompanyconsistingofseveraldifferentbusinesses.Thestrategicinnovationmodelmaybeusedonlyovertheveryshorttermofacompanybutneveroverthelongtermbecauseitfailstofocusuponoptimizingfinancialperformance.Thesetypesareusefulinprovidingdifferentmodelsofabusinessforfutureoperations–dependinguponwhatkindofperformanceonewantstooptimizeinbusinessstrategy.

StrategicFinanceModelIn the case of Sloan’s strategic restructuring of GM, we saw that Sloan’s strategicemphasis was upon maximizing profits and optimizing capital worth – accordingly astrategicfinancemodelcharacterizeshowSloanstrategicallyviewedGM.

FromSloan’s corporate perspective, the strategic policieswere aimed at controllingtheimpactofalltheindependentmanufacturingdivisionsofGMuponGMCorporationasa strategic whole – in a rational (i.e., bureaucratic) set of uniform policies – that alltogethertheoperationsoftheGMmanufacturingdivisionswouldoptimizeGMcorporateprofits and capital appreciation. Sloan continued his strategic perspective on GMwithfurther policies that emphasized “styling” and annualmodel change to continue to use“sales”asaninputtoGM’soverallcompetitiveposition.

Of course, this strategic perspective of Sloan for thewhole ofGMwould not havebeen an appropriate business model for each of GM’s divisional managers. Strategicmanagement of the GM divisions required a different strategic model for effectivestrategic focusofadivision–and thiswouldbeastrategicenterprisemodel (whichwewillnextdescribe).

A type of strategic model useful for viewing a corporation with an intention tomaximize both profits and capital can be called a strategic finance model.A strategicfinancemodelprovidesaperspectiveforoptimizingbothshort-termprofitsandlong-termcapitalappreciation–byrationalizingsalesandresourceutilization.Inthisperspective,the totality of the corporation is focused upon optimizing profits and capital, financialstrategydominatesinthestrategicpoliciesset.Astrategicfinancemodelofacompanyisausefulperspectivetouseinviewingthetotalityofafirmwhenfinancialstrategyistobethedominantstrategicpolicy.

StrategicEnterpriseModelTheproductionfunctionofabusinessneedstoviewitsbusinessinamodelthatcanshowhowtooptimizeproductionefficiency.Astrategicenterprisemodel isuseful,because ittreats sales and profits as outputs and capital and resources as inputs. A strategicenterprisemodel provides a perspective for optimizing both short-term sales and long-termprofits–byrationalizingcapitalandresourceutilization.

Becausethisperspectiveonthetotalityofthecorporationisfocuseduponoptimizingsalesandprofits,productandproductionstrategiesdominateinthestrategicpoliciesset.Astrategic enterprise model of a company is a useful perspective to use in viewing thetotality of a firm when product/production strategies are to be the dominant strategicpolicies.

Thiskindofmodel isuseful to thinkstrategicallyabouthowtochangeandimproveproduction operations of a business, since the heart of the model’s description oftransformationprocessesisasproduction.Themodelisstrategicallyimportanttouseformanufacturing operations and hard-good production. It is also important for hard-goodlogistics–suchasinretailorphysicalservices.

An illustration of the use of an enterprise model to focus upon strategic issues ofoperationswasinacaseofamanufacturingproblemthatoccurredinthe1980sbetweentwo strategically allied auto companies, Ford andMazda. Taguchi andClausingwrote:“ConsiderthecaseofFordvs.Mazda…whichunfoldedjustafewyearsago.Fordownsabout25%ofMazdaandasked theJapanesecompany tobuild transmission foracar itwassellingintheUnitedStates.BothFordandMazdaweresupposedtobuildtoidenticalspecifications.FordadoptedZeroDefectsas itsstandard.Yetafter thecarshadbeenontheroadforawhile,itbecameclearthatFord’stransmissionsweregeneratingfarhigherwarranty costs andmanymore customer complaints about noise” (Taguchi&Clausing,1990).

Thedifferenceinwarrantycostswastracedbacktoaproblemof“tolerancestack-up”in manufacturing assembly of the transmissions. Every physical part in a hard-goodproductisproducedwithinaspecifiedtoleranceofthegeometricaldimensionsofthepartdesign.Thistoleranceprovidesatargetmeanvalueforaphysicaldimensionsothatsomepartswillendwithspecsnearthemeanandotherswithspecsnearthetolerancelimit.Thetoleranceisnecessarybecausenophysicalmanufacturingprocessevermakesaphysicalpart exactly identical to another part – because of uncontrollable variations in theproductionprocess(e.g.,variationinprocessspeed,temperature,vibration,masking,toolwear,etc.).Nowtheseuncontrollablegeometricvariationswillberandomindimensionalvariation. Therefore, the part features will all vary a tiny bit, within the tolerancesspecifiedforandcontrolledforinthephysicalformationofthepart.

At the time,Fordmanufacturingwasusingastrategicmanufacturingpolicycalleda“Zero Defects” quality standard, which meant that all parts would be within tolerancelimits.Yet thispolicydidnot take intoaccountaneffect that sometimesoccurredwhenassembling parts into a product – called “tolerance stack-up” – when all parts in aparticularassemblywereallnearthetolerancelimit.Fordwasusingthispolicytocontrolfor having all parts for an automobile transmission produced within tolerances. Fordwouldnotuseadefectivepart thatwouldbeoutof tolerance limits, and thereforeFordassumed all its transmissions would have no defects due to defective parts. Using thispolicy left Ford engineers very puzzled why Ford’s transmissions were having morewarrantycostsandcomplaintsthanMazda’stransmission.

Bothtransmissionswereidenticallydesigned–inastrategicpartnershipbetweenFord

andMazda.Withidenticalproductdesigns,whywereproductsdifferinginqualityinuse?Fordengineersdisassembledandmeasuredallthepartsinsamplesoftransmissionsmadebybothcompanies.What theyfoundwas that theparts in transmissionsmadebyFordswereallwithinspecifications.ButthepartsintheMazdagearboxeswereallonthemeantargets of the specification! This meant that the differences in the accuracy of theproduction processes at Ford and at Mazda was their reason that Mazda’s identicallydesignedtransmissionsworkedbetterovertimethandidFord’stransmissions.Moreover,in producing these transmissions with more accurately machined gears, Mazdatransmissionswerealsobeingproducedwithlessproductionscrap,reworking–aswellashavingthelowerwarrantycosts.

AlthoughtheFordgearboxcomponentswereallwithintolerances,manywereneartheouter limits of the specified tolerances. These many small deviations tended toaccumulate,“stack-up.”Forexample, in theFord transmissionaslightly largerdiameter(from its target diameter) of one gearmight come up against another gear also with aslightly largerdiameter fromits target,and thenwhen the twogearspressed together inoperation,theywerepressedslightlyharderthandesigned(andharderthantheequivalenttwo gears in Mazda’s transmissions). The Ford-made transmissions were wearing outearlierthanweretheMazda-madetransmissions;becausetheformer’stransmissionswithmore out-of-target-but-within-spec gears were wearing out faster than the latter’stransmissions.Whenstrategicoperationspoliciesmatter,anenterprisemodelencouragesthestrategicattentiontooperationspolicies.

StrategicResponseModelAstrategicperspectiveappropriatetoenteringanestablishedmarketdominatedbyalargecompetitormayrequireutilizationofresourcesandnon-optimizationofprofitsinordertooptimize short-term sales to acquire a significant share of a market. Over time,establishing one as a dominant player in amarketwill then optimize long-term capitalvalue.

For example, market share began to dominate strategic thinking in manufacturingcompetitionofthe1980s,–becausehard-goodmanufacturinginthingslikeautomobileshadenteredamature-marketindustriallifestage,andinthatstagecompetitorswerebeingweeded out.The only strategicway to survive over the long termwas to establish andmaintain a significant market share (usually at least 20–30% of a market). Thus, thestrategicemphasisontimeinrespondingtomarketchangesasacompetitivefactorthenbecame possible because of progress in information technology in the productivecapabilities of hard-goodmanufacturers.Through computer-aided design and computer-controlled flexible manufacturing, manufacturing firms could move faster in productdevelopment.

Toemphasize thegoalsofoptimizingmarketshare inmaturemarkets, it isuseful toseethetotalityofacompanyfromtheperspectiveofastrategicmarketmodel.Astrategicresponse model provides a perspective for optimizing short-term sales and long-termcapital appreciation–by rationalizingprofits and resourceutilization.This perspective

focuses upon optimizing sales and profits, and marketing strategy dominates in thestrategicpoliciesset.Astrategicresponsemodelofacompanyisausefulperspectivetouse in viewing the totality of a single-business firm when market strategy is to be thedominantstrategicpolicy.

In the late1980s,manyobserversof thenew impactof information technologies incompetinginmarketsthroughnewproductsemphasizedtheimportanceofthe“responsetime”capabilitiesinacompanytoaggressivelycreatemarketshare.Anillustrationofthisat the timewas theresponsiveoperationsofToyota.BowerandHoutdescribedToyota:“…let’slookatToyota,aclassicfast-cyclecompany….(The)heartoftheautobusinessconsistsoffourinterrelatedcycles:productdevelopment,ordering,plantscheduling,andproduction. Over the years, Toyota has designed its organization to speed information,decisions,andmaterialsthrougheachofthesecriticaloperatingcycles,individuallyandaspartsofthewhole.Theresultisbetterorganizationalperformanceonthedimensionsthatmattertocustomers–cost,quality,responsiveness,innovation”(Bower&Hout,1988).

ForToyota’sproductdevelopment,self-organizingandmultifunctionalteamsfocusedupon a particularmodel series.They accepted full responsibility for thewhole cycle ofproductdevelopment–makingthestyle,performance,andcostdecisionsandestablishingschedulesandreviews.Inaddition,theproduct-developmentteamsselectedandmanagedthe supplier input, bringing suppliers early into the design process.As a result in 1988Toyotawas thencapableofa three-yearproductdevelopmentcycle. Incomparison, theaverage car development cycle ofU.S. automobilemanufacturers at that timewas fiveyears.

A fast response time was used not only for product development but also forproductioncontrol inToyota.ToyotadealersinJapanwereconnectedonlinetoToyota’sfactoryschedulingsystem.Assoonasanorderwastaken,theinformationontheselectedmodel and optionswere entered immediately into the scheduling information. Toyota’spurpose of integrating in real-time sales informationwith production schedulingwas tominimize sharp fluctuations in the daily volume of production, while also minimizinginventories. Toyota could produce on each production line a fullmix ofmodels in thesameassemblysystem,utilizingflexiblemanufacturingcells.

Bower and Hout saw that Toyota’s attention to responsiveness pervaded itsorganization:“MuchofToyota’scompetitivesuccessisdirectlyattributabletofast-cyclecapability ithasbuilt into itsproductdevelopment,orderingscheduling,andproductionprocesses. By coming up with new products faster than competitors do, it puts othermanufacturersonthemarketingdefensive….Bycontinuouslybringingoutavarietyoffreshproductsandobservingwhatconsumersbuyordon’tbuy,itstayscurrentwiththeirchangingneeds andgives product development an edgemarket research cannotmatch”(Bower&Hout,1988,p.112).

Time could be strategically used as a sustainable competitive advantage, and in the1980ssuchpolicieswerecalled“fast-cyclecompanies.”Speedinguptheresponsetimeofcompanies to changes in customer needs and the economic environment requiredmorethansimplyworkingfaster.Itrequiredworkingdifferently–thinkingaboutwhyittakes

time to respond, whether responses are correct and how to respond more quickly andcorrectly. The sustainable competitive advantage from attending to “time”was throughbetter and more quickly satisfying customers. Fast-cycle companies developed newproducts sooner than competitors, processed customer orders into deliveries faster thancompetitors,weremoresensitivetocustomerneedsthancompetitorsandmadedecisionsfasterthancompetitorsonhowtoaddvalueintheirproducts/servicestothecustomer.Astrategic responsemodel is useful to strategically think about the policies that facilitatebusinessresponsiveness.Thecompetitiveimportanceofastrategicresponsemodelliesinafirm’sabilitytorespondtomarketchangesfasterthancompetitors:correctingproductmistakes,refiningproductsuccesses,emulatingcompetitors’productsuccesses.

StrategicLearningModelThisformofabusinessmodel,thatemphasizedresourcegrowthandprofitsasabusinessoutputs,hasbeencalleda“learningorganizationmodel.”Thelearningmodelemphasizestheoptimizationofresourcestrategyforincreasingmarket-shareinnewmarkets.

Theprimaryresourceofanorganizationistheknowledgeandskillsofitsemployeestosatisfycustomersandbuildmarketshare.Asthesametimeasincreasingresourcesforsuccessful market growth, it views profits as another measure of success in satisfyingmarkets. Strategically, it views as an input the valuable knowledge gained in theorganizationofthesalesinformationinmeetingcustomers’needsanddesiresforproductsand services. It also strategically views capital as an input to improve the company’sability to be responsive to market changes. A strategic learning model provides aperspective foroptimizingbothshort-termresourcesand long-termprofitpotential–byrationalizingsalesgrowthandcapitalutilization.

Becausethisperspectiveonthetotalityofthecorporationisfocuseduponoptimizingresource and profit capabilities, information strategy dominates in the strategic policiesset.Astrategiclearningmodelofacompanyisausefulperspectivetouseinviewingthetotalityofasingle-businessfirmwheninformationstrategyistobethedominantstrategicpolicy.

In2000,AOLmergedwithTimeWarner.ThefounderofAOL,Case,hadastrategytobuildaudienceforAOL,understandingthatthiswouldbeAOL’smostimportantresource.Hewouldlaterturntoprofits.AtthetimeAOL’sstockclimbedtoahighof$115ashare,over 100 times earnings. Case wanted AOL to be a first mover in the new Internetbusiness of connection services. A first mover in a new industry was the first tostrategicallymakefourkindsofmoves:(1)continuetoadvancethenewtechnologies,(2)developlarge-scaleproductioncapacity,(3)developanationaldistributioncapability,and(4)developthemanagementtalenttogrowthenewfirm.

Case focused upon (1) and (3), developingAOL’s user interfaces and developing anationalmarket.In1996,Cases’nextchallengeswerein(2)and(4),productioncapacityandmanagement talent. In 1996,membership soaredwhenAOL replaced is $2.95-per-hourusagechargewitha flat rateof$19.95permonth.ThenAOL’scapacitycouldnot

handlethesuddenlylargertraffic,andAOLhadtorespondbyexpandingcapacity.

As the AOL organization and operations grew, Case needed to build an efficientorganizationandcontrolcosts,andtodothishehiredagoodprofessionalmanager,BobPittman.PittmanhadquitcollegetoworkinradioandhadbecomeastarprogrammeratNBCinhistwenties.Hethenco-foundedMTV,whichheleftin1986.

Pittmanattackedcosts, reducingpersonnel inpartsofAOL thatwere losingmoney.Pittman used AOL’s size to bargain connect time for AOL with Internet backboneprovidersfrom95centsperhourto50centsperhour.Hespentlessonmarketing.Buthealsoknewthatcostcuttingalonenevercreatessubstantialprofitsbutalsoneedsincreasedrevenues.Hefoundanewwayfromworkingwithanotherbusinessperson,DanBorislow,who was building a long-distance telephone company called Tel-Save. Borislow’scompetitorswerebundlingservicesonthesamecustomerbill–servicesfor local, long-distance,cellulartelephoning,andInternetaccess.Borislow’sideaforapproachingAOLwastoaddthebillingitselfintothesamebundledservices.ThiswouldallowTel-Savetosign up new customers, bill them, and charge their credit cards – all online. Borislowcouldseethat thiscouldcuthiscostsdramatically.Thenitcostonedollar tosendoutabill and thirty-five cents to cash a check. Borislow found that he saved 50% by doingbusinessthroughAOL’sonlineservicesandcouldunderpricehiscompetition.

Borislow paid $100million to AOL for exclusive access for three years for phoneservicessoldonAOLtocustomers.AlsoBorislowobtainedashareinfutureprofitsfromthelong-distancebusiness.AndAOLthanbeganaflurryofbusinessdeals,forusingAOLasaccesstocustomers.Forexample,PreviewTravelpaid$32milliontobecomeAOL’stravelagentservice,N2Kpaid$18milliontobecomethesoleAOLmusicretailer.

Wesee in thisexampleof theearlygrowthofAOL,a strategicbusinessmodel thatfirst focusedstrategyuponbuildinga largemarketofcustomersasanasset,acorporateresource, and then next focused upon transforming this asset into profits through dealswithbusinessesthatusedAOLforaccesstocustomers.

TheearlygrowthofAOL in the1990s illustrateda strategicmodelofbusiness thatoptimizesbothprofitsandresourcegrowthasoutputs.LaterAOL’shighmarketvaluewasused by its CEO, Steve Case, to acquire TimeWarner in 2000, thus increasingAOL’sresourcesbyadding to itscapabilities themediacontentgiantand itscableassets.CasefosteredAOL’senormousstockvaluebygrowingthelargestaudiencethenreachablebythenewInternetfromasinglesite.AOLhadabout11millionpayingsubscribersin1998,reachingaboutasmanyhomesasdidthecablebusinessesofTimeWarner.Case’sstrategyhadbeen tobuildaudience,understandingfromthebeginning that thiswouldbeAOL’smostimportantresourceandthenitcouldbeturnedintoprofits.AtthetimeAOL’sstockclimbedtoahighof$115ashare,over100timesearnings.Thisstrategicbusinessmodelfirst focused strategy upon building a large market of customers as an asset and thenfocusedupontransformingthisassetintoprofitsthroughdealswithbusinessesthatusedAOLforaccesstocustomers.

StrategicInnovationModel

Onecan temporarilyuse a “strategic innovationmodel” tobuild earlygrowthof anewbusiness–butnotfortoolong.Thismodelusescapitaltofinanceearlymarketgrowth.Astrategic innovation model provides a perspective for optimizing both short-termresources and long-term sales – by rationalizing the use of profits and capital toimplementinnovation.

Becausethisperspectiveonthetotalityofthecorporationisfocuseduponoptimizingresourcesandsales,innovationstrategydominatesinthestrategicpoliciesset.Astrategicinnovationmodelofacompanyisausefulperspectivetouseinviewingthetotalityofasingle-business firm (or a new division of a firm) when innovation strategy is to betemporarilythedominantstrategicpolicy.

Foraviablestrategiccorporatemodeloverthelongterm,eitherprofitorcapitalmustbeoneoftheoutputsofthemodeltobeoptimized–ortheenterprisewilleventuallyrunoutofworkingcapital.Therefore,thestrategicinnovationmodelcannotprovideaviablelong-termstrategicmodel.

An example of using this strategicmodel for a time occurred in themiddle 1990s,whenJeffBezosbuiltearlymarketdominancebyAmazon.JeffBezos,wasapioneerofretail electronic businesses, establishing Amazon as the first dot.com business to sellbooks over the Internet. The excitement of that kind of idea and the rapid growth ofInternetnewmarketingintriguedinvestorsinthelastyearsofthe1990s;andlargesumsofcapital were invested in start-up electronic businesses. Amazon’s early strategy was togrowwithoutregardtoprofitabilityand,ofcourse,suchstrategywasboundeventuallytoend.OnJune24,2000,Morgensonwrote:“SharesofAmazon.com,theInternetindustry’sbellwether stock, plummeted 19 percent in heavy trading yesterday as investors grewnervous about the company’s financial health and its prospects for profitability”(Morgenson,2000).

AmazonwentpublicinMay1997andin1998,itsstockbeganasharpclimbfromtheteenstoover$100asharein1999.In2000,itdeclinedto$34,afterthemarketbegantodiscountitsearlierhighlyinflatedpricesofthenewdot.comcompaniesstartedinthelastthree years of the twentieth century. Amazon’s stock performed on the basis of rapidgrowthofcustomers,sothatby2000ithadovera20millionbaseofcustomerswhohadpurchasedbooksfromAmazon.Amazon’sstrategyhadbeentouseprofitsandcapitalasinputstooptimizesalesandresources–growingitsmarketshareofelectronicbooksales.

In Juneof2000, a credit analyst atLehmanBrothers,RaviSuria,wrote a reportonAmazon’s $2 billion in bonds issuedduring the last fewyears, after he had scrutinizedAmazon’s firstquarter resultsof2000.Suria said:“Whatwe think trulypushedaweakcredit off the cliff was the inept working capital management during the last holidayseason. Because the company does not generate positive cash flow on each piece ofmerchandise that it sells, Amazon has had to rely on obliging investors to finance itsoperations. But as Internet companies have begun to fail, themarket has become a lotmoreselective”(Morgenson,2000,p.B1).

Whatwasreallyevidentwasthatoverthelong-termanycompanyhastobeprofitable.Morgensonwrotethatananalyst,Suriasaid:“ForAmazontobeasuccessfulbusiness,it

mustbeabletogeneratethecashoperatingprofileofasuccessfulretailer.Itisessentiallythisyardstickthatweusetoanalyzethecompanyandastherestofthisreportshows,wefinditwoefullylacking”(Morgenson,2000).

Thegeneralperceptionthate-commercebusinesseshadtomakemoneyeventuallyhadcreatedthesharpdeclineine-commercestocks,withAmazon’ssharepricedecliningby45%.OnthedaySuriaissuedhisreport,Amazon’sbondsvaluesfellanother10%.InJulyof that same year Amazon posted continuing losses in its operations. Hansell wrote:“Amazon.comsaidyesterday(July26)thatithadlost$317millioninthesecondquarteroftheyear….Thecompany,thelargestonlineretailer,postedsalesof$578million,up84percentfromayearearlier”(Hansell,2000).

In2000,Amazon’scombinedbook,music,andvideobusinessintheUnitedStateshad$385millionsalesinthatlastquarter,withamodestprofitof$10milliononthosesales(but with the company still losing $317 million overall for that quarter). Amazon’scontinuinglosseswasstill fromitsrapidbusinesses’expansions.ItsGermanandBritishunits lost $25 million on sales of $73 million. New businesses in selling toys andelectronicshadlost$40milliononsalesof$31million.Amazon’stotallossesfortheyear2000were$1.4billiondollars,comparedtolossesin1999of$0.7billionandin1998of$0.1billion(Norris,2001).

ThusBezos’ early strategy forAmazon to rapidly build amarket had succeeded inpart.Amazonhadbusinesswitha totalof22.5millioncustomers,perhapsabout8%ofU.S. households – in the three years from 1997 to 2000. Still in the long run allcompanies, even dot.com businesses, had to pay attention to the fundamentals of anybusiness – profits. Amazon had lost money because it had focused upon strategies ofbuildingmarket sharewithout focusing upon strategies for building efficient operationsandprofits. It hadnotused a completekindof strategy set (as, e.g.,Sloanhaddone inbuildingGM).Forthisreason,Amazonneededtochangeitsstrategicfocusfrommarketsharetoreturn-on-investment.Amazonthenneededtochangeitsstrategicbusinessmodelfromitsearly“strategicinnovationmodel”toa“strategicfinancemodel.”

StrategicFirmModelAdiversifiedfirmcanuseprofitsfromsalesbyitsbusinessestogrowcapitalandprovidecorporate level resources. The diversified firm has responsibility for seeing that itsbusinessesarewellmanagedforprofitsfromtheirbusinessestocontinuetofuelcorporateprosperity.Astrategic firmmodelprovidesaperspective foroptimizingboth short-termresources and long-term capital appreciation – by rationalizing sales and profitutilization.

Becausethisperspectiveonthetotalityofthecorporationisfocuseduponoptimizingresources and capital, diversification strategy dominates in the strategic policies set.Astrategicfirmmodelofacompanyisausefulperspectivetouseinviewingthetotalityofamulti-businessfirmwhendiversificationstrategyistobethedominantstrategicpolicy.

The earlier strategic business, enterprise, learning, and innovation models are

appropriateonly fordescribinga single-business company. If a companyhasmore thanonebusiness,thenafirm-levelstrategicmodelisnecessarytocaptureafirm’stotality,asopposedtothetotalitiesofeachofitsbusinesses.Astrategicfirmmodelneedstoconceiveof a firm as a strategic unity, even though the firmmay be composed of a portfolio ofbusinesses. And a strategic firm model must emphasize the optimization of financialvaluationstrategyinordertoincreasethestock-marketvaluationofthefirmandreturn-on-investmentofshareholders.

An example of a successful use of a strategic firmmodel in the 1980s was in theJapanesefirmNEC.C.K.PrahaladandGaryHamelcomparedNECin1990toasimilarU.S. firmof the time,GTE:“Consider the last tenyearsofGTEandNEC. In theearly1980s,GTEwaswell positioned to become amajor player in the evolving informationtechnology industry…. In1980,GTE’ssaleswere$9.98billion….NEC, incontrast,wasmuchsmaller,at$3.8billion…YetlookatthepositionsofGTEandNECin1988.GTE’s 1988 sales were $16.46 billion, and NEC’s sales were considerable higher at$21.89billion”(PrahaladandHamel,1990).

Butitwasmorethantherelativelevelsoftheirsalesthatchanged.NEChademergedas aworld leader in the information technologies,whereasGTEhadnot: “GTEhas, ineffect, become a telephone operating company with a position in defense and lightingproducts….NEChasemergedastheworldleaderinsemiconductorsandasafirst-tierplayer in telecommunicationsproductsandcomputers.Ithasconsolidateditspositioninmainframecomputers….NECistheonlycompanyintheworldtobeinthetopfiveinrevenue in telecommunications, semiconductors, and mainframes. Why did these twocompanies,startingwithcomparablebusinessportfolios,performsodifferently?Largelybecause NEC conceived of itself in terms of ‘core competencies’ and GTE did not”(Prahalad&Hamel,1990).

PrahaladandHamelviewed thedifferencesasarisingfromNEC’ssuperiorstrategiccapability. NEC created a corporate level committee to plan core corporate technicalcompetenciesand tooversee thedevelopmentofcoreproducts for thebusinessesof thefirm.Thiscommitteeestablishedgroupsacrosstheindividualbusinessestocoordinatetheresearch anddevelopment efforts for core products.This committee,whichNECcalledthe C&C Committee (Computers & Communications) identified three directions oftechnologies in computers, components, and communications: “Top managementdeterminedthatcomputingwouldevolvefromlargemainframestodistributedprocessing,components from simple ICs toVLSI, and communications frommechanical cross-barexchangeto…digitalsystems”(Prahalad&Hamel,1990).

ThestrategicvisionoftheC&CCommitteeforesawtheconvergenceoftechnologiesincomputing,communications,andcomponentsbusinesses.Theyjudgedthattherewouldbegreatopportunitiesforanycompanytoserveallthreemarkets.Theywereanticipatingthat the two previously different industries, of computing and communications, weregoingtocometogetherintoasingleandmorecomplexindustry.Thecomponentsforthetwo businesses were to become increasingly more complex, common to the two andinterrelated.Withthistechnologicalvision,NECpositioneditselffora“restructuring”of

the industries; and GTE did not. In this restructuring, NEC saw that the competitivefactorslaynotonlyinthesystems-integratorsectorsbutalsointhemajor-devicessectorsandinthecomponents-and-partssectors.SoNECstrategicallypositioneditselfinallthreesectors.

In contrast, GTE had been managed only as a conglomerate, a diversified set ofbusinesseswithoutcorecorporatecompetencies:“Nosuchclarityofstrategic intentandstrategic architecture (as atNEC)appeared to exist atGTE.Although senior executivesdiscussedtheimplicationsoftheevolvinginformationtechnologyindustry,nocommonlyacceptedviewofwhichcompetencieswouldberequiredtocompeteinthatindustrywerecommunicatedwidely.Whilesignificantstaffworkwasdonetoidentifykeytechnologies,senior line managers continued to act as if they were managing independent businessunits.Decentralizationmadeitdifficulttofocusoncorecompetencies.Instead,individualbusinesses became increasingly dependent on outsiders for critical skills” (Prahalad &Hamel,1990,p.81).

Seniormanagement ofGTE had failed to develop the corporate strategic insight tofullyexploittheevolvingmarketandcompetitiveopportunitiesininformationtechnology.They failed to develop strategic technical competencies common to its severalindependentlyrungbusinesses.

Astrategicfirmmodelviewssalesandprofitsofitsbusinessportfolioasinputstothefirm.As strategic outputs, it provides centralized resources (such uniformmanagementpractices, executive education, performance measures, corporate research, etc.) to eachandallofitsbusinessesofthefirm.Italsoprovidesinvestmentcapitaltoitsbusinessesforimproving operations and for acquiring new businesses or launching new businessventures.

Summary

Thefirstdecisioninmodelingthetotalityofthefutureofacompanyistochoosewhichdominantvalueistobeoptimizedforstrategicsurvivalandprosperity.Thechoicesofastrategicmodelofacompanyprovidedifferentwaystothinkaboutoptimizingacompany,accordingtowhatkindofperformanceonestrategicallydesires.

Accordingly, different types of strategic businessmodels can be used to help selectdominantstrategicvalues forastrategicplanand toexamine the interactionofstrategicpoliciesofatotalcompanywithintheplan.

TheoreticalPrinciples

1. Thefourfactorsofproductsuccessare:performance,innovation,marketfocus,competitivepricing.

2. Sixkindsofstrategicbusinessmodelscanbeconstructedfromthecombinationofthefactorsofcapital,profit,sales,resources.

3. Strategicbusinessmodelsareimplementedbythetechniqueofastrategicpolicymatrix.

DiversificationStrategy

Introduction

Wewillusethedifferentstrategicbusinessmodelstoexplainthedifferentstrategiesusedbyaconglomerate (aholdingcompany)and itsportfoliobusinesses.Wefocusupon thechallenge of strategy in a multi-business company — diversification strategy. Aconglomerate firm has a strategic perspective in which the businesses owned by thecorporationcanbeconceivedofasakindof“businessportfolio”ofthecorporation.Inthelastpartofthetwentiethcentury,thisterm“portfolio”becamepopularasawaytoviewthe strategic management of a diversified firm. Lowell Steele wrote: “Multi-businessstrategy focuses first and foremost onportfoliooptimization—whatmixof sourcesofrevenue is desired andwhat allocation of resourceswill best bring about this preferredmix. (Yet) multi-business strategy must include other components, such as corporateorganizationandculture,managementstyle,theconventionsthatguidebehavior,andtheacquisitionordevelopmentofnewresources thatwillbe required to support adifferentbusiness portfolio” (Steele, 1989). Previously, we have been examining the issues forformulatingstrategyinasinglebusinessfirm.Allthesekindsofissuesapplytoeachandeverybusinesswithinamulti-businessfirm.Buthowdoesstrategylooklikeatthetopofamulti-businessfirm,adiversifiedfirm?

Forasingle-businesscompany,itscompetitivesituationisprincipallyinthecustomermarketplace,whereinitprovidesvaluedirectlytocustomers,againstcompetingproductsand services. In contrast, the competitive situation for a multiple-business company isprincipally in the capital market, wherein it provides value directly to investors. Thestrategicmodelofaconglomeratefirmandofitsindividualbusinessesdiffers.

DeclineofGM

Inthe1970s,GM’sdominantmarketshareoftheU.S.automarketofover50% was challenged. Then a significant share of the U.S. market beganbeingearnedbyforeignautoproducers.Duringthatdecade,gasolinepricesjumpedduetotheformationofaglobaloilcartel.Americanproducersdidnotmeet the demand for fuel-efficient cars. In 1980,U.S. auto producersfacedadesperatetimewithobsoletemodels,highproductioncosts,andlowproductionquality.During the1980s, the foreign shareof theU.S.marketclimbedtoonethird,andtherewerethreeremainingU.S.basedautofirms:GM,Ford,andChrysler.In1998,ChryslerwasboughtbytheGermanfirm

of Daimler-Benz. By the year 2000, foreign-based automobile firms (i.e.,Japanese and European) had captured over a third of the U.S. market,becauseofGM’s lowerquality.Thiswas themajor cause ofGM’s loss ofdominance—poorqualityinautodesignandmanufacturing.HowdidGMleadersallowthis?

In 2008 after a global meltdown in the world’s financial markets, GMenteredbankruptcy.IthadtakenthreedecadesofseveralCEOsinGM(fromthe 1969 through 2009) to bankrupt the company. GM’s CEOs hadmaximizedshort-termprofitsandneglectedtodevelopthefuel-efficientcarsandtrucksthatwouldhavesavedthecompany.In2008,BillVlasicwrote:“Just two months after celebrating its 100th birthday (in 2008), GeneralMotors is facing thegrimprognosis that itmaynot survive to seeanotheryearunlessitisrescuedbyabailoutfromthefederalgovernment.SharesinGM sank to their lowest point in 65 years, to $2.92, onTuesday, the dayafterthecompanyrevealedinafederalfilingthatits‘abilitytocontinueasagoingconcern’ is insubstantialdoubtbecause itmayrunoutofmoneybytheendoftheyear.GMsaiditmightbeunabletopayitssuppliers,meetitsloan covenants or cover health care obligations in its labor contracts. TheextentofGM’sfinancialcrisis,revealedingreaterdetailinitsfilingthanitacknowledgedbefore,isprovingtobefarworsethaninvestorsandanalystsexpectedjustlastweek.Onlyanemergencyfederalbailoutseeminglystandsbetween GM and a bankruptcy filing, according to industry analysts”(Vlasic,2008).

Antony Currie, Rob Cox, and Martin Hutchinson wrote: “What droveGeneral Motors into bankruptcy? It’s tempting to blame the broaderfinancialcrisis,whichtorpedoedtheUnitedStateseconomy,draggeddowncar sales and shut carmakers out of the capital markets. That overridingfactorcertainlyprecipitatedthedemiseofAmerica’slargestcarmaker,butitwasnottheultimatecause.Insolvencyhas,infact,beenloomingoverG.M.forseveralyears.InApril2005,forexample,whilemarketswereworryingabout rating agencies downgrading the carmaker’s debt, GM’s onerousunfunded health care and pension liabilities looked to have punched amultibillion-dollarholeinitsbalancesheet.Eventhen,somesuggestedthatafilingforChapter11protectionmightbetheonlywaytogetGMbackontrack”(Currie,Cox,&Hutchinson,2009).

Forthe20yearsfrom1985to2005,GMhadbeenprofitable—payingitsexecutives largebonuseseachyear,whilenot fulfilling its legalandmoralobligations to its workers (in not fully funding their health and pensionbenefits,astheexecutiveshadagreedtodointheirlaborcontracts).Norhadthe U.S. government enforced regulation to ensure that large U.S.corporationsfullyfundedtheirpensionobligations.Whenprofitable,GMdidnotmeetitslaborobligations;andwhenunprofitable,GMblamedlaborforitsfinancialdifficulties.

AlsoGMexecutiveshadnotshownanypoliticalwilltoencouragetheU.S.governmentto“fix”thepensionorhealthcaresystems—withadequateandproperlyfundednationalplans.GMhadencouragedaU.S.systemofprivatecompanypensionplansandprivatecompanyhealthinsuranceplans—evenwhileGMexecutives sawsuchplansasunworkable forGMover the longterm. About their obligation to GM workers, GM leadership had no“integrity.”Currie, Cox, andHutchinsonwrote: “That’s not to sayG.M.’sexecutivessatbackanddidnothing.InthelastfouryearstheyhavehalvedtheunionworkforceintheUnitedStates;laidoffwhite-collaremployeesindroves; renegotiated labor contracts and health care expenses; and soldbusinesseslikeAllisonTransmissionandGMAC,thefinancialservicesarm,toraisecash”(Currie,Cox,&Hutchinson,2009).GM’sexecutiveshadnotfulfilled their obligations to laborwhen profitable, andwhen unprofitable,theyfiredlabor—halvingtheirworkforceandincreasingunemploymentintheUnitedStates.

Only cutting labor while maintaining executive bonuses was not really asolution toGM’sbasicproblem.Currie,Cox, andHutchinsonwrote: “Butnoneofthatwasenough.G.M.waslosingmarketsharefasterthanitcouldshrinkitsoperations,evenbeforetheprecipitousdeclinesofthemorerecentcreditcrisis”(Currie,Cox,&Hutchinson,2009).

In 2008, Roger Lowenstein wrote: “Who shot General Motors? Thecompany’s stock is at its lowest level in 50 years. The automaker isweighing yet another round of layoffs— and maybe even a fire sale ofvenerable brands like Buick and Pontiac. Once General MotorsmanufacturedhalfthecarsontheAmericanroad,butnowitsellsbarely2in10…TheimmediatecauseofGM’sdistress,ofcourse,isthesurgingpriceofoil,whichhasputachillonthesaleofgas-guzzlingsportutilityvehiclesand trucks. The company’s failure to invest early enough in hybrids isanother culprit. Years of poor car design is another” (Lowenstein, 2008).GMhadfailedtodevelopandsellfuel-efficientcars.

Finallyin2008,theU.S.governmenthadto“bailout”GM.DavidE.Sanger,Jeff Zeleny, and Bill Vlasic wrote: “President Obama will push GeneralMotors into bankruptcyprotectiononMonday,making a riskybet that bytemporarilynationalizing theonetime iconofAmericancapitalism,hecansaveatleastadiminishedautomakerthatiscompetitive.Thebankruptcyisamoment of reckoning for an industry that was once at the heart of theAmerican economy…GM’s bankruptcy petition culminates a remarkablefour months of confrontation between Washington and Detroit that isexpectedtoresultinadrasticdownsizingofthecompany.Italsoplacesthegovernment in uncharted territory as a business owner, as it takes a 60percent ownership stake in the company during its restructuring” (Sanger,Zeleny,&Vlasic,2009).

But despite the government help, GM’s executives were not contrite.MichelineMaynardwrote:“GeneralMotorsdidnotapologizeforanythinginitsfirst triptoCongressmorethantwoweeksagotopleadforafederalrescue.The company’s only problem, it insisted,was the current financialcrisis. ‘What exposes us to failure now is not our product lineup, or ourbusiness plan, or our long-term strategy,’ Rick Wagoner, GM’s chiefexecutive,saidinhistestimony”(Maynard,2009).

TheU.S.CongresscalledtheGMexecutivesback.Maynardwrote:“Onitsreturn visit to a skeptical Congress this week, however, General Motorsbowed its head. ‘GM has made mistakes in the past,’ Mr. Wagoner toldCongressandnamedthreemistakes:agreeingtoexpensiveunioncontracts,notinvestingenoughinsmallercarsandfailingtoconvertitsplantssotheycould build more than one type of vehicle. It was an unusual concessionfromacompanythathasrarelyfelttheneedtoapologizeforanything,givenits bragging rights as theworld’s largest automakerwith operations in 35countries,andasacompanythathasbuilt445millionvehiclesandsatatopcorporateAmerica formuch of its 100-year history. But themistakesMr.Wagoneracknowledgeddonotbegin toexplainwhyGeneralMotors findsitself on the brink of insolvency, begging Congress for financial help”(Maynard,2009).

RickWagonerwasCEOofGMatthetimeofitsbankruptcyandhumiliationbeforeCongress.AboutWagoner’sstrategicleadership,Maynardwrote:“Inrecentyears,despitemanychallenges tohis leadershipofGeneralMotors,Rick Wagoner had managed to keep a firm grip on his job, like handswrappedtightaroundasteeringwheel.Duringhistenureaschiefexecutive,beginningin2000,thecompany’sstockhasfallenfrom$70asharetolessthan$4now,and itsmarketsharehas fallenroughly10percentagepoints.There have beenmany challenges to his authority,most notably from theinvestor Kirk Kerkorian in 2006 and from angry members of Congressduringhearings last fall.Throughout theattacks,hehadmanaged to retaintheunwaveringsupportofhisboard.Foratime,itseemedhemightbecometherarechiefexecutivewhogetsanotherchance,thistimetotrytofixmanyoftheproblemsthatoccurredonhiswatch.Butheappearstohavemethismatch in President Obama, whose calls for sacrifices from all sidesapparently included a call forMr.Wagoner to step down. In a statementearly Monday, Mr. Wagoner said he had been urged to ‘step aside’ byadministrationofficials,‘andsoIhave’ ”(Maynard,2009).

In1977,WagonerhadgraduatedfromHarvardBusinessSchoolandjoinedGM’s financial division. In 1992, the CEO of GM, Robert Stempel, wasforcedtoresignduringafinancialcrisisthenatGM.WagonerbecameGM’schief financial officer. Two years later at the age of 40,Wagoner becamepresident of GM’s North American operations. John Smith, then chiefexecutive of GM, was Wagoner’s mentor and appointed Wagoner chief

executive,ashe,Smith,resignedin1998.

Maynard wrote about Wagoner’s principle focus on finance: “Like Mr.Smith, Mr. Wagoner aggressively expanded GM’s operations outside theUnitedStates.Thecompanynowsells65percentof itsvehiclesoverseas,thanks toMr.Wagoner’s push into markets like China, Russia and LatinAmerica.However,GM’ssalesslumpathomeled to it losing its longtimetitlelastyearastheworld’slargestautocompany,replacedbyToyota.‘It’sapretty unceremonious ending,’ said John Casesa, an industry analyst andmanaging partner of the Casesa Shapiro Group. ‘G.M. lost its way inthe’70s, but the companydidn’t know it until 20years late.Theholewasmuchdeeperthanhe(Wagoner)realizedwhenhebecameC.E.O.’And,Mr.CasesasaidthatMr.Wagoner’sfinancebackgroundmighthavebeenapoorfit:‘Themostsuccessfulautocompaniesarerunbypeoplewhocameoutofthe revenue-generating functions — manufacturing, design, marketing —making cars and selling cars. Mr. Wagoner … skipped the wholeapprenticeshipthatmostautoC.E.O.’sexperience’ ”(Maynard,2009).

ButwhydidMr.Wagoner’sfinancialskillsnotenablehimtoforeseeGM’sfinancialfuture?From1998to2008inWagoner’sdecadeasaleader,GM’sstockhadfallenthatdecadeby$50dollarsashare.GM’smarketshareoftheU.Scarmarketalsofellfrom33%in1994downto19%in2008.Adeclinein market share should have been a clear indication of a problem in acompany’s product lines. But it wasn’t until six years had passed afterWagoner took charge of GM North American operations that finally herealizedGM’sproductswere a problem. In2002, thenhehiredRobertA.Lutz to plan new product models. Foresight and strategy are two majorrequirements forgood leadership,butneitherappeared tohavebeenGM’sexecutives’strengths.

BillVlasicsummarized:“WhenGMcollapsedlastyear(2008)andturnedtothegovernmentforanemergencybailout,itscentury-oldwayofconductingbusinesswaslaidbare,withallitsflawsinplainsight…Forallitsfinancialtroubles and shortcomings as an automaker, no aspect of GM hasconfounded its critics as much as its hidebound, command-and-controlcorporateculture…IntheoldGM,anychangestoaproductprogramwouldbe reviewed by asmany as 70 executives, often taking twomonths for adecision to wind its way through regional forums, then to a globalcommittee,andfinallytotheall-powerfulautomotiveproductsboard…Inthepast,GMrarelyheldbackaproducttoaddtheextratouchesthatwouldimproveitschancesinafiercelycompetitivemarket…Evenasitlaborstochange its culture,GMmust convince consumers that it is building bettercars…”(Vlasic,2009).

Sloan had used a complete set of new strategies to alter thewayGMdidbusiness in order to overtake and supplant Ford as the leader in the U.S.

automobile market. This set of strategies taken together provided a newmodel for the way GM operated and controlled its businesses — a newbusinessmodel. However, strategy requires periodic readjustment tomeetnew challenges, competition, and marketplace changes. The GM CEOsuccessorstoSloanfailedtobringGMstrategiesuptodateinaproperwayas the world changed. Competition requires both proper strategies andproper balance between strategies in the different areas of a company’soperations.ThefailureofGM’sleadersafterSloanwasduetounbalancedstrategy,inwhichfinancialstrategywasoveremphasizedattheexpenseofproductstrategyasqualityandmarketstrategyasfocus.

Rick Wagoner announced his resignation in March 2009. GM filed forbankruptcy. U.S. President Obama announced that the U.S. governmentwouldguaranteewarrantiesonGMcarsduringabankruptcy.InMay2009,the U.S. Treasury advanced a loan of $360million to GM for operationsduringbankruptcy.InJune2009,GMfiledforbankruptcy,reporting$82.3billioninassetsand172.8billionindebt.

Laterin2013,theU.S.governmentsoldthelastofitsGMsharesitreceivedin part for its “bailout” of the company. James Healey wrote: “U.S.taxpayers no longer own any of automakerGeneralMotors. TheTreasurysold the lastof its remaining31.1millionGMshares today. Itstartedwith500million shares in2010.The taxpayer loss on theGMbailout is $10.5billion.TheTreasurydepartment said it recovered$39billion fromsellingitsGMstake,andhadput$49.5billionoftaxpayermoneydirectlyintotheGM bailout. The total bailout rises to $51 billion, including another $1.5billion thatTreasuryput intoprograms tokeepGMsuppliersafloatand tomakesureowners’warrantieswerehonored(plussomeintotheoldGMACfinancecompanythat’snowknownasAlly—separatefromamuchlargerAlly bailout)…TheGMbailout saved 1.2million jobs, $39.4 billion taxrevenue”(Healey,2013).

StrategicBusinessModelforaDiversifiedFirm

But what is the businessmodel for a diversified firm? Since financial markets are theprinciple strategic focus for a multi-business firm (as opposed to strategic focus oncustomersforasingle-businessfirm),theirstrategicbusinessmodelsfundamentallydiffer.Wecannowusetwobusinessmodelstounderstandthestrategicrelationshipsbetweenadiversified firm and its portfolio businesses, as shown in Figure 6.1.At the diversifiedfirmlevel,astrategicfinancemodelshowsitsemphasisonthemarketvalueofthefirm.Incontrast,strategicenterprisemodelsforeachofitsbusinessesshowstheiremphasisonsalestocustomers.Adiversifiedfirmcanuseprofitsfromsalesbyitsbusinessestogrowcapitalandprovidecorporate level resources.Thediversified firmhas responsibility forseeingthatitsbusinessesarewellmanagedforprofitsfromtheirbusinessestocontinueto

fuelcorporateprosperity.

Figure6.1: StrategicBusinessModelsinaDiversifiedFirm.AnAppropriateStrategicModelforaDiversifiedFirmLevelisa“StrategicFirmModel.”ForaBusinessinits

Portfolio,anAppropriateModelisa“StrategicEnterpriseModel.”

Becausethisperspectiveonthetotalityofthecorporationisfocuseduponoptimizingresources and capital, diversification strategy dominates in the strategic policies set.Astrategicfirmmodelofacompanyisausefulperspectivetouseinviewingthetotalityofamulti-businessfirmwhendiversificationstrategyistobethedominantstrategicpolicy.Astrategicfirmmodelprovidesaperspectiveforoptimizingbothshort-termresourcesandlong-termcapitalappreciation—byrationalizingsalesandprofitutilization.

If a company has more than one business, then a firm-level strategic model isnecessarytocaptureafirm’stotality,asopposedtothetotalitiesofeachofitsbusinesses.Astrategic firmmodelneeds toconceiveofa firmasastrategicunity,even though thefirm may be composed of a portfolio of businesses. And a strategic firm model mustemphasizetheoptimizationoffinancialvaluationstrategyinordertoincreasethestock-marketvaluationofthefirmandreturn-on-investmentofshareholders.

DiversifiedFirm-LevelStrategyInteractionsAt the firm level, acorporateplanningscenario summarizes the anticipated changes inthefutureforboththefirmasawholeandallofitsportfoliobusinesses.Asindicatedbytheconnectinglines, the formulationof theplanningscenario influences the formulationofthestrategicbusinessmodels—strategicfirmmodelandstrategicenterprisemodelsofeachportfoliobusiness.As indicatedby theconnected line, theprojectedrevenues fromeachofthestrategicenterprisebusinessmodelsfeedtherevenueinputofthestrategicfirmmodel.Inturn,theresourceoutputofthestrategicfirmmodelprovidescapitalinputs to

thestrategicenterprisemodelsoftheportfoliobusinesses.

Stilllookingatthefirmlevelandasindicatedbytheconnectedarrows,thecorporateplanning scenario stimulates changes in the strategic firm model; and from this thecorporatestrategicplanisformulated.Financialprojectionsforthefirm’sfuturearethenderivedfromthecorporatestrategicplan,whichthenareusedtoinformthestockmarketandinfluencethesharepriceofthefirm.

When executives of a diversified firm have substantial stock bonuses, then thecorporate strategic planwill likely be strongly influenced by desires to see rising shareprices in theshort term.This isoneof the importantcomplexities in strategicplanning.Howexecutivesarerewardedwillinfluencethecorporatestrategicplanintermsofgoalsandtimeframesoftheplan.

Informulatingtheplanningscenario,inputsarerequiredfromCorporateResearchandfrom the Business Research Labs of each portfolio business. It is the responsibility ofresearch labs at both the corporate and business levels to be anticipating and preparingnewtechnologiesfor thefuturesof thebusinessesof thefirm.Ifa firmdoesnothaveastrong corporate research laboratory and also strong research laboratories for eachportfolio business, the firm as a whole cannot derive a competitive advantage frominnovation and portfolio businesses can be “blind-sided” by changes in obsolescingtechnologies.

Business-LevelStrategyInteractionsIn thebusiness-unit level of strategic planning, eachportfolio businesswill formulate astrategic enterprise model of its business in each particular industrial context. Asindicatedby the connecting arrows,both thebusinessmodels and the industrial contextwillinfluencetheformulationofthecorporateplanningscenario.

Aftertheformulationofeachstrategicenterprisemodel,theneachportfoliobusinesswill create a long-term strategic plan and a short-term operational plan for its businessfuture.Atthediversifiedfirmlevel,ashort-termoperationalplanisnotneededsinceallbusinessoperationsareperformednotatthefirmlevelbutattheportfoliobusinesslevels.What is needed at the firm level is the strategic plan to review and approve of theinvestmentneedsoftheportfoliobusinessesastheseneedsariseinthefuture.

Also at the business level, the rewards for the portfolio business executives andmanagersmaydifferfromtherewardsforfirm-levelexecutivesinthatstockoptionsinthefirmmayormaynotbesubstantialportionsof thebusinessmanagers’remuneration.Totheextentthatbusinessmanagersarerewardedprincipallywithsalariesandbonuses,theywill likely have a balanced interest in both the short-term and long-term futures of thebusiness.Butsincetheycannotcontroltheownershipfeatureofthebusinesses’long-termfutures,theyendureuncertaintyabouthowlongtheirjobtenuremaylast—particularlyifandwhenthebusinessmaybesoldbythefirm.This isoneof thesourcesofconflict ininterestsandperspectivesbetweenfirm-levelexecutivesandbusiness-levelexecutives.

Thusastrategicproblemofadiversifiedcorporationisthatfirm-levelexecutivesare

removed by at least one level from direct experience in any of its acquired businesses.Firm-levelexecutivesmustdependupontheoperatingexecutivestheportfoliobusinessesto know a business is doing the right job and doing it right. Successful strategicmanagement of a diversified firm lies (1) directly in the skills and dedication of theoperatingexecutivesofthefirm’sbusinessesand(2)indirectlyinthestrategicpoliciesandinvestmentsof thefirm-levelexecutives.Cooperationandmutual trustbetween the twolevelsofexecutivesareessential;andyettheremaybeinherentconflictsinthelong-termandshort-terminterestsofthetwosetsofexecutives.

Insummary,strategicplanninginaconglomeratefirmiscomplexnotonlybecauseofthe many conceptual units in the process but also due to the differing interests andperspectivesbetweenthefirmandportfoliobusinessexecutives.

OpportunityCostsofStayinginaBusiness

An area of major strategic decisions in diversified firms is whether or not to makeinvestments in improving the existing businesses in the firm.Over time, all businessesrequireperiodicinvestmentinordertocontinuebeingcompetitive.Investmentsneedtobemadeinimprovingproductsandservices,improvingproductionanddelivery,improvingcommunications and control. Accordingly, the diversified firm must yearly makedecisions about investments in its existing businesses. These investments are kinds of“opportunitycosts”ofcontinuingtokeepagivenbusinesscompetitive.

One standard way of judging opportunity costs is to use a discounted cash-flowapproach.Adiscountedcash-flowcalculation judges thevalue in thepresentofa futurereturn. Itdoes thisbycomparinganexpected future returnofaparticular investment toone alternatively invested in a financialmarket with a known rate-of-return (such as asavings account). For example, suppose one invests $1,000 dollars in a businessimprovementexpectedtoreturn10%inoneyear(1,000+0.1×1,000=1,000+100=1,100).One can compare this to the alternative of depositing instead that same $1,000dollarsintoabank’ssavingsaccountforoneyearat5%(1,000+0.05×1,000=1,000+50=1,050).Thediscountedcashvalueoftheinvestmentinthebusinessimprovementisthedifferenceofthereturnfromtheinvestmentcomparedtothereturnfromthealternate“safe”market investment, which in this examplewould be $1,100 − $1,050 = $50. Theactualformulaforcalculatingadiscountedcashvalueis:DPV=FV/(1 + r)n.This reads:Discounted Present Value (DPV) equals Future Value (FV) divided by compoundedinterestofras(1 + r)n.

NowthiswayoflookingattheDPVofaninvestmentcanbevalidaslongasonedoesnot care which business produces the return-on-the-investment. This is a purely“financial”perspective,aperspectiveentirelyappropriatetobeinginabankingbusiness(since banks care not in what business they invest, only the risk and return of theinvestment).However, in any particular business, a decision not to invest in improvingthis business may in the future eventually result in the loss of the entire business.

Accordingly, one should not evaluate a proposed investment in improving an existingbusinessonlyonthebasisofadiscountedcash-flowcalculation.Onealsoshouldlookatthe potential impact of the business improvement investment (or lack of it) upon thebusiness survivability. What will the investment contribute to keeping the businesscompetitiveinthefuture?

Intheconceptoftheindustriallifecycle,thatasanindustrymaturestechnologically,itsmarketsaturates,becomingareplacementmarketandamarketgrowingonlythroughdemographics of the market. As this is happening, the companies in the industryconsolidate(orfail)untilonlyahandfulofcompaniessurviveintheindustry.The“magicrule” (which is to say a rule-of-thumb through experience) is that only about fivecompanies will ultimately survive in any mature industry. This rule suggests that theminimummarket share a business needs to keep going for long-term survival is about20%.

Thus a Discounted-Present-Value strategy used by conglomerated firm asapplied to a business in its portfolio could actually allow the portfoliobusinesstogo“outofbusiness”—duetoalackofinvestmentstomaintainproductivity,evenas its rivals fight the fivesurvivingbusinesspositions inthematureindustry.

For example, we saw that the U.S. automobile manufacturers declined in numberduring the twentieth century, until in the 1990s only three major U.S. automakers hadsurvived—GM,Ford,andChrysler.Beginningfromabout1970through1990,GMlostitsoncedominant50%ofthemarketoftheU.S.Automarketdownto34%bytheendofthecentury(asforeignautomarkets inthelastquarterof thetwentiethcenturyacquiredabouta thirdof theU.S.Automarket).During thatsameperiod,Fordhungontonearly20%oftheU.S.market;whileChryslerstruggledaroundthe9–10%level.

According to the“market-share-survival” ruleof thumbover the longrun,onlyGMandFordwouldremainindependent,whileChryslerwasatrisk.Anditdidhappenthatinthe 1998, Daimler-Benz acquired Chrysler. In 2007, Daimler-Benz sold Chrysler toCerberusCapitalManagement.After theU.S.bankingcrisisof2008,Chrysler filed forbankruptcyonApril10,2009.OnJune10,2009,Chrysleremergedfromthebankruptcyunder the United Auto Workers pension fund, Fiat, and the U.S. and Canadiangovernments as principal owners. InMay 2014, Chrysler was wholly acquired by FiatS.p.A.

Inevaluatingfinancialinvestmentsforimprovementsinthebusinessesofadiversifiedfirm,managementshouldstrategicallylookattheopportunitycostsoftheinvestmentsinawaywhichevaluates impactof the investmentupon thebusiness’s ability tomaintain asurvivable20%marketshareintheindustry.Therearethreekindsofopportunitycosts—(1) costs to grow market share above 20%, (2) costs to maintain market share at asurvivable20%,and(3)costsofallowingthebusinesstodeclineintothelong-termnon-survivablerangeof10%.Adecisiontoallowadeclinesuchas(3),theopportunitycostsofmarket-sharedecline,isareallystrategicdecisiontobeginexitingfromthatbusiness.

StrategicManagementinaDiversifiedFirm

In a previous chapter, we reviewed the early history of GM and how Sloan’s strategicmanagement enabled GM to become dominant in the U.S. auto industry. But, as wereviewed,afterwardsduetothestrategicmis-managementofGMbySloan’ssuccessors,GMdeclinedintobankruptcy.

TheprinciplereasonforGM’sdeclinewasonetrendinSloan’sstrategythathadbeenoverly emphasized by his successors— the financial perspective. Arthur Kuhn wrote:“Sloan had kept GM’s management narrowly focused on stockholders’ interest at theexpenseoflabor,consumers,andthegeneralpublic…Sloan’semphasisonrate-or-returnperformancewouldeventuallythrusttoomanyfinanciallyorientedexecutivesintoGM’stop corporate decision-makingpositions,menwithout knowledgeof automobile design,productionandmarketing”(Kuhn,1986).

Later GM leaders’ preoccupation with financial strategy had exacerbated a lack ofattention to other business policies, such as labor relations, safety, and product quality.GMleaders’antagonisticattitudetowardlaborfosteredcontinuinglabortroublesforGM(thatgreatlycontributedtothedeteriorationofGM’scapabilityforefficient,high-quality,andlow-costproduction).GMleadersresistedprovidingleadershipinautomobilesafetyand environment (eventually fostering U.S. government intervention to mandate safetyandenvironmentalstandardsfortheautoindustry).GM’sdifferentautomobilebrandslostdistinctiveness, quality, competitiveness, and performance — particularly compared toimported foreign-produced automobiles. By the 1970s, GM had failed to competeeffectivelyinthelow-endautomobilemarket.Italsolostqualityleadershipinthemiddleand high end. German automobile makers dominated high-end sector quality; whereasJapanese automobile makers dominated lower and middle sector quality. The holdingcompany strategy as a focus on finance had not encouraged the portfolio companies tomaintainqualityandbranddistinctiveness.

Aswe saw in the GM decline and bankruptcy, the leadership of a diversified firmneeds toattend toprovidingadequate resources to itsportfoliobusinesses tokeep themcompetitive. Otherwise market share of its portfolio firms decline. Profits decline, andeventuallythewholefirmcangobankrupt.

ThedecisiontomaintainaportfoliobusinessortobuyorsellabusinessarestrategicdecisionsbyaCEOofadiversifiedfirm—whichhavemajorimpactsuponthepresidentsof the businesses in the firm’s business portfolio. There are six critical factors forsuccessfulstrategicmanagementthatneedtoberecognized:

(1)Theneedforrelationshipsoftrustbetweenlevelsofmanagement;

(2)Theimpactofunequalpowerrelationshipsbetweenaholdingcompanyandthebusinessesofitsportfolio;

(3)Theeffectoflong-termandshort-termdifferencesofcontroloverfinancesbetweenthefirmanditsportfoliobusinesses;

(4)Thepossibleresultsofdifferingincentivesandrewardsforlevelsofmanagement;

(5)Theinherentconflictsofinterestofdifferentlevelsofmanagement;

(6)Theinfluenceofexternalforcesonbusinessvaluation.

RelationshipsofTrustInadiversifiedfirm,firm-levelexecutivemustdependuponthebusiness-levelexecutivesreportinguponthem.Theymustdependuponthemforboththeircommitmenttosuccessandintegrityinoperations.

Inadiversifiedfirm,aconstructiveandpositiveinterdependenceofreasonabilityandcommitment-to-success between the firm-level executives and business-operatingexecutivesiscriticaltolong-termcorporatesuccess.

UnequalPowerRelationshipsThiskindof“truism”shouldbeobviousandthereforepracticedbyallmanagement.Whyis thisnotalwayspracticed?Because thereareunequalpowerrelationshipsbetween thetop-levelofthefirmanditsoperatinglevelsofportfoliobusinesses:

(1)Afirmcanbuyorsellanyofitsportfoliobusinesses.

(2)Butaportfoliobusinesscannotbuyorsellitsownerfirm.

(3)Butthelong-termsuccessofafirmisdependentuponthesuccessesofitsportfoliobusinesses.

And as in any unequal power relationship, trust can be abused. It is important for theleadershipofadiversifiedfirmnottoabusethetrustofitsoperatingbusinessmanagersinthe short term, because the success of the firm in the long term depends upon thecontinuingshort-termsuccessesoftheportfoliobusinesses.

Theleadershipofadiversifiedfirmhasboththeresponsibilityandnecessityforbeingagoodcaretakerofthebusinesseswhichafirmhastheprivilegeofowning—bothfortheshort-termgoodofeachofitsbusinessesandforthelong-termgoodofthefirm.

Long-TermandShort-TermDifferencesofControlThis statement may at first appear to look suspiciously like a goody-goody kind of“ethical”imperative.Butitisn’t.Itisreallyonlyaverypracticalandbasicimperativeforrunning any diversified firm. It emphasizes the basic difference of perspective andcapabilityinanydiversifiedfirm.

In a diversified firm, short-term financial control is always in the operations itsportfoliobusinessesandlong-termfinancialcontrolisinthestrategicplanofthefirm.

Top leadershipofalldiversified firmshave limitedcontrolof their short-term futureandmorecontroloftheirlong-termfuture;whileincontrast,theportfoliobusinesseshavelimitedabilities tocontrol their long-termfuturesbutmorecontrolover theirshort-termfutures.

DifferingIncentivesandRewardsInthelate1980sintheUnitedStates,practicesofexecutivepaybegantoturnfromlargeexecutivesalariesandperksandbonusestosubstantialsalariesandperksandverylargestockoptions.

Itwasestimatedthatin1987,only2%ofthetotalvalueoftheU.S.stockmarketwasheldasemployee-ownedstockor stockoptions;butby1994, thisportionhadgrown to5%andby1999to9%(Rosenberg,2000,p.C1).Thiswasnearlyafive-foldincreasetoalmostone-tenthofthetotalstockmarketvaluebeingownedbyemployees.Thiswaytorewardexecutivesofpublicly-ownedbusinessesprovidedamajorchangeintheincentiveto the executives of firms on the short-term versus long-term perspective on businessperformance.Itincreasedtheimportanceofgrowingandmaintainingthesharevalueofafirmintheshortterm.

Incentivesandrewardscandiffer fordifferent levelsofmanagement inadiversifiedfirm.Theexecutivesat thefirmlevelmayberewardedwithstockoptionsthatmotivateshort-termshare-pricevalue;whiletheoperatingmanagersofthebusinessesofthefirmsmayberewardedbysalariesandbonusesfortheoperatingprofitsofthefirms,whichcanbestructuredtomotivateforbothshort-andlong-termperspectives.

InherentConflictsofInterestSuchdifferencesinrewardsforthefirm-levelexecutivesandthebusiness-levelmanagerscan create inherent conflicts of interest in that the firm is trying to optimize short-termcapital value, whereas the business-level managers try to optimize longer-termcompetitiveness and profitability. Extreme conflict can occur when the firm does notprovideproperinvestmentcapitalbackintoitsbusinessestohelpmaintaintheirlong-termcompetitiveness.

ExternalForcesonBusinessValuationStocks create a valueof a return from investment either (1) throughdividendspaidoutannually by the companyor (2) by any increase in the price of the stock.Accordingly,earningsofacorporationcanbeusedforpayingoutdividends,investmentsforimprovingbusinesses, or acquisitions.Earnings used for dividends provide an immediate return totheshareholder,whileearningsusedforimprovementoracquisitionsmayprovidefuturecapital accumulation to raise share value. There is an important trade-off in optimizingshareholdervalueofacompany,betweenhowearningsareusedfor(1)immediatereturn-on-investmentor (2) future return-on-investment.Economically, this trade-off shouldbe

madetobalanceappropriatelyshort-andlong-termshareholdervalueandshort-andlong-term competitiveness of the company.However, external forces canmake an importantinfluenceonthisbalancing,particularlywhenagovernment’staxpoliciesunwittinglybiasthis balance. And in the U.S. Corporate world of the twentieth century, Federalgovernment tax policy had biased corporate strategy strongly against returninginvestmentsinstocksviadividends.

Governmentpoliciescanoftenmakeanimportantimpactupontheenvironmentsofabusiness. In theUnitedStates at the closeof the twentieth century,Federalgovernmentincome tax policy had a major external impact upon business policies. The Federalgovernmenttaxedreturns-on-investmentfromstocksveryunequallyasdividendsorstockappreciation.Wealthyindividualswhoownedstockwouldhaveanydividendsfromtheirstockstaxedata topincometaxrateof36%intheyear2000.Incontrast,anygainsonsalesoftheirstocksheldatleastoneyearwouldbetaxedatalowercapitalgainstaxrateof28%.Thistaxratedifferenceof36 − 28=8%hadineffectcreateda22%taxpenaltyonreceivedstockreturnsbydividendsratherthatappreciation.Onecanseehowgovernmentpolicy of the United States in the last part of the twentieth century encouragedcorporations to pursue strategieswhich aimed at continually increasing stock prices, asopposed to traditional business practice of sharing earnings with investors throughdividends.Thusearningswereoftenusedtobuygrowththroughacquisitions,evenwhenacompanycouldnotproperlymanageacquiredbusinesses.

ThetaxpoliciesoftheUnitedStatesbiasedtwentieth-centurycorporatestrategyawayfrom traditional dividend strategies toward quick capital-gain strategies — making itdifficult to properly run companies in mature industries with little growth but steadyearnings—asall successfulcompanieseventuallybecome.When the twentiethcenturybegan, the corporate situation in the United States was one where the U.S. Federalgovernmentunwittinglybiasedtheeconomicplayingfieldthroughtaxpolicywherein:

(1)onlycompaniesinnewandgrowingindustries(suchasCisco)couldbeproperlyrunandrewardedwithhighprice/earnings(P/E)ratiosbythefinancialstructure,and

(2)companiesinmatureindustries(suchasSunbeam)couldnotbeproperlyrunandatthesametimerewardedbyreasonableP/Eratiosbythefinancialstructure.

ReasonsforCorporateDiversification

InthesecondhalfofthetwentiethcenturyintheUnitedStates,corporatediversificationwas a major emphasis in strategic thinking. The reasons for thinking about corporatediversificationwereaboutgrowthandsurvival.Therewerefourmotivationstodiversity.

1.GrowthbyInnovation

Launchingnewproduct linesandnewbusinesses, financedbycashflowsfrom

existingbusinesses.

2.GrowthbyAcquisitions

Growth by buying businesses with lower P/E ratios, as encouraged highvaluationbyfinancialmarketsofgrowingfirms.

3.SurvivingEconomicCycles

Economic recessions affected different industries differently, and businesses indifferentindustriescansoftenthelosses.

4.ImprovingCoverageofMarkets

Extendingcoverageofnichesinamarketmightimproveoverallmarketshare.

Wenextexamineeachofthesediversificationmotives.

1.GrowthbyInnovation

 Historically, one firm that used innovation to strategically diversifywas theEthyl Corporation. Originally, Ethyl began as joint-venture firm between GMand Exxon to produce the lead antiknock gasoline additive (which had beeninvented atGM for high-compression gasoline engines butwhichGMdid notwishitselftoproduce).Ethylfirstsoldantiknockgasolinein1923,andfornearly40 years it was a one-product company. In 1962, Ethyl was acquired by theAlbemarlePaperManufacturingCo,underpressuretodiversifyforsurvival.

 AtthetimeofthemergerofEthylwithAlbemarlePaper,FloydD.Gottwald,Jr.waselectedExecutiveVicePresidentofthenewlymergedEthylCorporation.HehadoriginallyjoinedAlbemarlePaperManufacturingCompanyin1943asachemist, and advanced to president ofAlbemarle. Later he commented on themergerthatsetEthyltodiversifying:“WhenAlbemarlepurchasedEthylin1962,Ethylwasclearlyaone-productcompanywithawealthofpentuptalentrestlesstoexertitself.Underthepreviousjointowners,GMandExxon,therehadbeenvirtuallynoopportunityforcommercializationofthemanypossibilitiesthathademergedfrom40yearsof researchon improvingor findingabetterantiknock.Forgoodreasonsoftheirown,thepreviousownershadpreferredtokeepEthylaone-product company. Our change of perspective in 1962, as we sought todiversify,couldnothavebeenmoredramatic…”(Gottwald,1987).

 What businesses to acquire?Ethyl chose to diversify toward areas inwhichthey had a strong underlying research base. The Ethyl research program hadgrownoutoftheiroriginalfocusonleadantiknockcompounds(whoseoriginalrights they had acquired from GM). Ethyl developed chemical skills andinnovations by branching out from their original chemistry of lead antiknockcompounds.Italsohaddoneresearchonaluminumalkylschemicals.Thiskindof research branching focused their original business acquisitions. And thoseacquisitionsstimulatedfurtherinnovationthroughresearchbranching.

 As Ethyl began acquiring businesses, they were originally focused by theirexistingresearchbaseinchemicalsandpaper.In1963forplastics,theyacquiredVisqueenfilm.In1967forpaper,theyacquiredOxfordpaperandin1968IMCOContainer.

 Theyhadaresearchprograminaluminum,whicheventuallydidn’tworkout.ButthishadmotivatedthemtoacquiretheWilliamL.BonnelCompanyin1966andtheCapitalProductCorporationin1970.Andafterthoseinitialacquisitionsofthe1960s,Ethylcontinuedacquiringbusinessesinthe1970s.FloydGottwaldwrote:“Aswereached themid-1970sandEthyls’ successseemedassured,ouracquisition program entered phase two — broadening the base. In 1975, weacquiredtheEdwinCooperDivisionofBurmahOiltogiveaddedstrengthtoourexisting lube additive lines.HarwickeChemical, purchased in 1978, expandedour insecticide business to include synthetic pyrethroids. In 1980,we acquiredSaytech, Inc. to extend Ethyl’s basic bromine position into flame retardants”(Gottwald,1987).

 The result of this diversification programover 20 years dramatically alteredthestructureofEthyl’sbusinesses.ThediversificationprogramatEthylhadalsolookedatmanyotherbusinesseswhichitchosenottoacquire.Inthesecases,thebusinesseshadno relation toEthyl’s researchstrengths.An important factor inEthyl’sacquisitionprogramwasnotonlydid theyhaveafinancialstrategybutalso a plan for innovation, basedupon science theyunderstood.Moreover, thediversification was fortunate in timing, since later in the 1970s the U.S.governmentlegislatedtheremovalofleadadditivesoutofgasoline,asahealthhazard,whichwouldhavedestroyedEthylifundiversified.

2.GrowthbyAcquisitions

 Another early reason for corporate diversification was to enable a firm toescape from theconfinesofa low-growthor low-return industry.Forexample,thefirstU.S.conglomerate,Textron,wascreatedbyRoyalLittleforthisreason.In 1923, Little founded a company called Special Yarns Corp. in Boston,Massachusetts. The 1930s depressionwas hard, and the company struggled tostayalive.Afterthewar,thetextilebusinessturnedouttobehighlycyclic,witha low return on capital. One of the reasons for this was that the industryexpanded production capacity by reinvesting profits, reluctant to pay out highdividends or taxes (Little, 1984).On June 30, 1952, Roy Little held a specialstockholders’ meeting to change the articles of association to buy businessesoutside of textiles. His first acquisition was the Burkart Manufacturing Co.(which had begun by making horse blankets in St. Louis and then turned tomaking auto seat stuffing). Little then bought two more companies in 1954,Dalmo Victor andMBManufacturing. In 1955, Little bought Homelite Corp.TextronwasoneofthefirstconglomeratesintheUnitedStates.

 Highstockvaluationsfacilitatefinancing“growth”bycorporateacquisitions.

For example, in the United States, a decade of widespread corporateconglomerationoccurredinthelate1950sandearly1960swhentherobuststockmarket provided growing companies with high P/E ratio valuations — thatenabledsuchcompaniestobuyothercompanieswithnogrowthandmuchlowerP/Estockvaluations.

 Forexamplein1954,LittonIndustriesbeganfromacompanycalledElectro-DynamicsCorp(whichwastakenoverbyRoyAshandTexThornton).AshandThorntonchangedthenametoLittonIndustriesandacquiredatleast20differentbusinesses,usinghighP/E ratios(ashighas47atone time).Thenin theearly1960s, they acquired two companies with problems, Ingalls Shipbuilding andRoyalMcBee.In1968,Litton’squarterlyearningsdeclinedforthefirsttime.Foralongtimethereafter,thesharesweredown,andfinallythecompanyreturnedtobeingastrongperformer.

3.SurvivingEconomicCycles

 Another reason for diversification was to counter the financial impacts ofcommon business cycles. Different businesses are affected differently in arecession.Oneexampleofamergerputtogetherspecificallytocountertheeffectof business cycles was the formation of the Martin-Marietta Company in the1950s.Martin was then an aircraft firm andMarietta a constructionmaterialsfirm,sellingcementandcrushedconcrete.Themerger followedanassumptionthat defense anddomestic economies areoftenonopposite business cycles. Inthe1970swhendefensewasboomingandconstructionwasdown,ahostileraidwasmadeonMartin-Marietta.Toavoidbeingboughtup, the companyboughtoutitsownstockandcompiledanenormousdebt.Thenlatertoreducethatdebt,Mariettawassoldoff.After theendof thecoldwar in the late1980s, theU.S.defenseindustrybeganstrategicchanges,andMartinmergedwithLockheedtoformLockheedMartin.

4.ImprovedCoverageofMarkets

 Another reason for diversification was to cover a market or acquire newtechnologiestopreservemarketshare.Exampleswehaveseenofthisweretheearlier cases ofDurant’s assemblage in the early 1920sofmanydifferent automodel business into GM. Another example was Cisco’s acquisitions ofnetworkingcomponentcompaniesinthe1990s.

StockMarketValuationofBusinesses

The difference between a single-business firm and a multi-business firm is that (1)strategy for a single-business firms focuses primarily upon its customers, while (2)

strategyforamulti-businessfirmsfocusesprimarilyuponthefinancialmarkets.Sinceforadiversifiedfirm, thefinancialmarketprovidesits immediateperformancecontext, it isusefultoreviewthecriteriaformarketvaluationofstocks.

The traditional criteria for valuing share price are called its price-to-earnings ratio(P/E).Themeaningof this lies in its inverseratioE/P.This isameasureof thepresentreturn-on-an-investmentinastockatapricePasthefractionofannualearningsEatthatprice (E/P). For example, consider a company with a P/E ratio of 10. Suppose thecompany’ssharepriceisP=$200dollarsandthecompanyearnedE=$20dollars thatyear.ThestockvaluationwouldbeP/E=10.Thiscanbeinterpretedasthepresentreturn-of-the-investmentisa10%return—baseduponinvertingtheP/EratioasE/P=10/100=10% return. The inverse of the P/E ratio calculates the present rate-of-return of thecompany’sperformance.

Thismeasureisfineforaconstantrateofearningsinacompany;butitundervaluesacompanyifitsearningsarecontinuallygrowing.Oneneedstovaluethecompanynotatapresent rate-of-return but at a future rate-of-return.Accordingly, a growing company isvaluedatahigherP/Eratiothanaconstantratesalescompany.JustwhatP/Eratioforagrowingcompanyisreasonabledependsupontherateofgrowth.Forexample,aP/Eratioof20meansthatthepresentrate-of-returnofacompany’sshareisE/P=1/20=5%.Sothecompanymustdoublepresentearningsinthefuturetogainafuture10%return.AP/Eratio of 40wouldmean that the present rate-of-return of a company’s sharewasE/P =1/40 = 2.5%. So the companymust quadruple present earnings in the future to gain afuture10%return.

Figure6.2illustratesthisgeneralcriterionofgrowthasafactorinstockvaluationbyinfluencing P/E ratios for four general patterns in businesses — growing businesses,steadybusinesses,cyclicbusinesses,anddecliningbusinesses.

Figure6.2: GrowthasaGeneralFactorinMarketValuationofBusiness.

Area1—BusinessesGrowinginBothSalesandProfits–SharesarevaluedwithhighP/Eratios.

(Dependinguponthestateofthemarket,highP/Eratiosofgrowingfirmshavevariedintherangefrom20to200intheU.S.marketinthesecondhalfofthetwentiethcentury.)

Area2—BusinessesConstantinSalesandProfits–SharesarevaluedwithmodestP/Eratios.

(Depending upon the state of themarket,modestP/E ratios of growingfirms have varied in the range from 7 to 17 in the U.S. market in thesecondhalfofthetwentiethcentury.)

Area3—BusinesseswithCyclicSalesinEconomicCycles–SharesarecyclicallyvaluedwithmodestP/Eratios.

(Depending upon the state of the market and the economy and thedividend policies of a business,modestP/E ratios of cyclic firms havevariedintherangefrom7to17intheU.S.marketinthesecondhalfof

thetwentiethcentury.)

Area4—BusinesseswithDecliningSales–Sharessteadilydeclineinprice.

(End games of declining businesses have frequently ended withacquisitionbyanothercompanyorinbankruptcy.)

Insummary,thecriticalvariableforthevaluationofacompany’ssharepricehasbeentheP/Eratioassignedbythemarketinagivenstateofthemarket.AndthisP/Eratiohashadagreatrangeofvariation,particularlyfornewlygrowingbusinessesduringtimesofastockmarket boom. This is one reasonwhy growth became the single most importantstrategicperformancevariablefordiversifyingfirmsinthelatetwentiethcentury.

When a diversified firm acquires a new business, it also is entering the industry inwhich thebusinessoperates.Thecompetitiveconditionsand lifestagesof theparticularindustryofabusinesswillconstraintheopportunitiesandprofitabilityofthebusiness.Anindustrial life cycle is the pattern shown by all new industries which originate uponinnovationofanewcoretechnology.Marketsofthenewindustrygrowandthenmatureas the rates of innovation in industry slowdown. In a new industry, the rapid businessgrowthispossible.Inamatureindustry,marketsizeisstable,andgrowthforabusinessinamaturemarketmustcomefromthemarketshareofacompetitor.Moreover,inamatureindustrywithexcesscapacityformarketdemand,profitmarginswillbelimitedbystrongpricecompetition.

Toproperlyanalyzebusinessportfolios,oneneedstoaddakindofindustrial-contextanalysis to the previous technique of analyzing a business portfolio in terms ofmarketposition.Wecandothisbyembeddingthemarket-positionanalysiswithinalargerspaceofindustrial-contextanalysis,asdepictedinFigure6.3:

Figure6.3: Industry-ContextAnalysisofaBusinessPortfolio.

–Thelargerspaceofindustrialcontextcanbecharacterizedbythetwodimensionsof“stage-in-industrial-life-cycle”and“size-of-industry.”

–Any businessmay be located in context (1) as towhether or not its industrialcontextisinanewindustryorinamatureindustryand(2)astowhetherornotthatindustryissmallorlarge.

Multiple-space analysis of a business portfolio allows businesses in a company’sdiversificationportfoliotobecomparednotonlyalongdimensionsofmarketpositionbutalsoalongdimensionsofindustrialcontext.Whatindustriesdoesafirmstrategicallywishtoenter?Whatbusinessesinthisindustryshouldthefirmacquire?Whataretherisks?

Area1—BusinessesinLargeMatureIndustries

ConsiderArea 1, inwhich a business exists in amature industry of largemarketsize.Thereinnobusinesscanexperiencelargemarketgrowthexceptat theexpenseofcompetitors.Accordingly,mostbusinessessurviving inalarge,matureindustrywilleitherhavelargemarketshareandbeadominantplayer or have smallmarket share and beatrisk. A dominant playerwillnecessarilybealow-costandhigh-qualityleaderinitsindustry,inordertomaintainorgainmarketshare.Forexample,werecallthatinthelastpartofthe twentieth century, GeneralMotors was no longer a low-cost or high-quality leader in automobile manufacturing and lost market share fromabove 50% to 29%. The Japanese automobile leaders in cost and qualitywereToyota andHonda,who gainedmarket share at the cost ofGM andbecamedominantplayers.

Other firms with small market shares in large, mature industries arecontinually at risk and are eventually bought up or go bankrupt. Forexample,theChryslerautomobilefirm’smarketsharedeclinedtoless10%oftheU.S.automarketinthe1960s,nearlywentbankruptin1981andwasacquiredbytheGermanautofirmDaimlerin1998.

Strategically, itmakes good sense for a large diversified firm tomaintainbusinessesintheirportfoliowhoaredominantplayersinlargeindustries—becausethecashflowandreturn-on-assetscanbeverylargeforthese.Forexample,JackWelchatGeneralElectricinthelastdecadesofthetwentiethcenturymanagedthediversifiedGEthroughthestrategicpoliciesofowningonlybusinessesinlargemarketsandhavingtheirmanagersbe“numberoneor number two” in the industry. Upon becoming CEO, Welch sold offbusinessesofGE thatwere (1) insmall,mature industryor (2)werenotadominantnumberoneortwoplayerinalarge,matureindustry.

Area2—BusinessesinSmallMatureIndustries

ConsiderArea2, inwhich a business exists in amature industry of smallmarketsize.Businessesinmatureindustriesofrelativelysmallsizestillfacecompetitionforoccupyingpositionsintheniche.Forlongtermsurvivalinaniche, a business alsomust be a low-cost, high-quality leader. Businesseswithsmallmarketshareeveninasmallmarketareatriskforbankruptcy.

However, it can make good strategic sense for a smaller firm to own aportfolioofniche leaders inmature industriesofsmallmarkets.Thesecanprovide substantial cash flowand return-on-assets investments. It doesnotmakegoodstrategicsenseforaverylargefirmtoownaportfolioofnicheleaders—becausethecontributiontorevenueofevenanicheleadercannotmatch the attention required to monitor or invest in the business. It is atruism that running a business in a niche industry requires just as muchattention as running a business in a large industry.Management attentiondemandsinanybusiness,smallormediumorlarge,areequallygreat.

Area3—NewBusinessesinNewIndustries

Consider Area 3, in which a business exists in a new industry of smallmarket size. New business ventures are of two kinds, high-tech newbusinessesandlow-technewbusinesses.High-technewbusinessesoccurinnewindustriesfoundeduponbasicinnovationsandinitiallyhaveonlysmallmarket size (and later the market grows larger). (Examples in the latetwentieth century were information technology businesses andbiotechnology businesses.) Low-tech new businesses occur in existingindustries,andoftenareregionallylocalizedkindsofbusinesses.(Examplesinthelatetwentiethcenturywereregionalservicebusinessesandfranchisedservicebusinesses,suchasfastfoodorautoservicebusinesses.)

In a new industry, all new high-tech ventureswhen they begin are at risk

unlesstheirmarketsharerapidlygrowstoearlymakethemprofitable.(Forexample, there were many business failures of new e-commerce retailbusinesses when profitability was not established early.) Early sales andearlyestablishmentofasignificantmarketshareisimportanttothesurvivalofanewhigh-techventure.Foradiversifiedfirmtoenteranewhigh-techindustry,itcanmakestrategicsensetoacquireanewlyestablishedbusiness.Buttwostrategiccriteriashouldguidesuchacquisitions:

(1)thenewhigh-techventureshouldbeaninnovativetechnologyleader,

(2) themanagement of the newhigh-tech venture should have shownmanagerialcapabilitiestomakesignificantsalesandtoestablishprofitability.

Theacquisitionofanewhigh-techventurebyanexistinglargefirmshouldpay strategic attention not only to acquiring a new technology but also amanagement team capable of successfully commercializing the newtechnology.

Area4—NewBusinessesinNewLargeIndustries

ConsiderArea4, inwhichabusinessexists inanewindustryof largeandgrowingmarketsize.Inanindustriallifecycleofanewindustryentersitsrapidmarketgrowthphase,manycompetitorsenterandlaterdie.The“firstmover” in a new industry is the business which first makes appropriateinvestmentsin:

(1)continuingtoadvancethenewtechnologies,

(2)developinglarge-scaleproductioncapacity,

(3)developinganationaldistributioncapability,and

(4)developingthemanagementtalenttogrowthenewfirm.

Acquisitionofafirstmoverinanewindustryforanexistinglargebusinessis usually difficult because of the high stock evaluation such companiesusuallyobtaininthestockmarket.Usually,suchfirmsgoontobecomeverybigfirmsintheirownrightoracquireolderlargebusinesses.Forexample,the earlier case ofCisco Systemswas an example of a firstmover in thecomputernetwork equipmentbusiness thatgrew to a large firm, acquiringmanyothernewhigh-techventuresalongtheway.

Summary

For a diversified firm, financial markets are the principle strategic focus for a multi-businessfirm,whilethesingle-businessfirmsfocusstrategicallyoncustomers.Oneneedstousetwobusinessmodelstounderstandthestrategicrelationshipsbetweenadiversifiedfirmand itsportfoliobusinesses.At thediversifiedfirmlevel,astrategic financemodelshowsitsemphasisonthemarketvalueofthefirm.Incontrast,strategicenterprisemodels

foreachofitsbusinessesshowstheiremphasisonsalestocustomers.Adiversifiedfirmcanuseprofits from sales by its businesses to growcapital andprovide corporate levelresources. The diversified firm has responsibility for seeing that its businesses arewellmanagedforprofitsfromtheirbusinessestocontinuetofuelcorporateprosperity.

TheoreticalPrinciples

1. Thereare‘opportunitycosts’tokeepanybusinesscompetitive,evenbusinessesintheportfolioofdiversifiedfirms.

2. Integrityandtrustbetweenaholdingcompanyanditsportfolioofbusinessesisessentialtothestrategicsurvivaloftheholdingcompnay.

StrategyScenarios

Introduction

Nowweexaminehowtoformulatea“bigpicture”fortop-downstrategicperspective—astrategic scenario. Strategic scenarios systematically and intuitively explore andsummarizethepictureofthefutureenvironmentsinwhichacompanyexpectstooperateandwithinwhich a strategic businessmodel is formulated.Alsowe recall that the top-down strategic perspective has a logic that begins with the general and moves to thespecific,suchas:

(1)Scanningtheenvironmentsofafirmtoidentifymajorfuturetrendsandchanges;

(2)Interpretingthechangesasthreatsandopportunitiestothebusinessesofthefirm;

(3)Analyzingthepresentfirm’sactivitiesintermsofstrengthsandweaknessestofacesuchthreatsorseizesuchopportunities;

(4)Redefiningthemissionsofthefirm’sbusinessestomatchthefutureoperationstofuturethreatsandopportunities;

(5)Settinggoalsandtargetsforbusinessestomeetinatimehorizon.

3M’sStrategicStories

In1998,GordonShaw(thenexecutivedirectorofplanningat3MinStPaul,Minnesota)andhiscolleagues,RobertBrownandPhillipBromely,reportedon an approach to strategic planning that emphasized the importance oftelling“stories” tocommunicate, so that thestoriesgetat thestructuresoffutureevents:“At3M,wetell…storiesabouthowwefailedwithourfirstabrasiveproductsandstoriesabouthowweinventedmaskingtapeandWet-or-dry sandpaper … . We train our sales representatives to paint storiesthroughwordpictures so that customerswill seehowusing a3Mproductcan help them succeed … . Stories are a habit of mind at 3M, and it’sthrough them — through the way they make us see ourselves and ourbusinessoperationsincomplex,multidimensionalforms—thatwe’reabletodiscoveropportunitiesforstrategicchange.Storiesgiveuswaystoformideasaboutwinning”(Shawetal.,1998).

They concluded “stories” would be a better way to think out and presentstrategy:“Overthecourseofseveralyearsoverseeingstrategicplanningat

3M,Gordon Shaw became uncomfortably aware that 3M’s business plansfailedtoreflectdeepthoughtor to inspirecommitment.Theywereusuallyjustlistsof‘goodthingstodo’thatmade3Mfunctionallystrongerbutfailedtoexplainthelogicorrationaleofwinninginthemarketplace.Hebegantosuspectthatthefamiliar,bullet-listformatoftheplanswasabigpartoftheproblem”(Shawetal.,1998).

Many companies have used the format of lists of bullets in writing andpresentingplanning information.Bullet listshelp reduce thecomplexityofbusiness situations to a few points and help to focus discussion. Shaw,Brown, and Bromely thought that strategy presented in the apparentsimplicityofalistofbulletsalsolostmanyofthesubtleissuesofstrategy,as issuesneitherpresentednordiscussed.The formof the language in thepresentationofaplanningreportexpressesthedepthofthinkingunderlyingtheplan.Abulletformatdoesnotshowwhetherthestrategicthinkinggoingintotheplanwasshalloworprofound,becausethebulletsthemselvesdonottellthewholestoryofthestrategyunderlyingtheplan.Theywrote:“Bulletsallowustoskipthethinkingstep,geniallytrickingourselvesintosupposingthatwehaveplannedwhen, infact,we’veonlylistedsomegoodthings todo”(Shawetal.,1998).

Theythoughtthatitwastheformatofthestrategicplansummarizedasalistof bullet-sized points that in itself encourages intellectual laziness instrategy.First,theyjudgedthatastrategyexpressedasalistofbulletsonlyresults in presenting the strategy as issues that are too generic, onlysummarizingalistofgood-things-to-dothatwouldapplytoanybusiness.Abullet-list format could result in a plan that really failed to focus onspecifics,specificsofhowthebusinesscouldwininitsselectedmarkets.

Shaw et al. gave an example of a selection from a planning documentsubmitted by a 3M business unit, in which planners had proposed majorstrategies, listed in bullets as to both reduce costs and increase customerchoice:

–Reducehighdeliveredcosts,

–Reduceinternationalparentheadcountbythree,

–Exploresalescostreductions,

–Determinevisionfortraditionalproductsandappropriatestaff,

–Continuetoreducefactorycosts,

–Refineunitcostmanagementsystem,

–Reduceprocessandproductcosts,

–Acceleratedevelopmentandintroductionofnewproducts,

–Increaseresponsiveness.(Shawetal.,1998)

What would have been important, in presenting this plan, would be thespecifics of how these strategic directions were to be accomplished. Thebulletswere sogeneric as tobe applicable to anymanufacturingbusiness.Themanagerspresentinginthisformatfailedtodiscusstheimportantissuesofplanning—whicharespecificallyhowtoaccomplishthings.

Moreover,inadditiontofacilitatingatoogeneric-levelofstrategicthinking,Shaw et al. judged that a bullet-list strategy encouraged a kind of one-dimensionalthinking—onedimensionalintermsoftherealcomplexityofstrategic relationships. Since a list can only logically present themembership,sequence,orpriorityofasetofthings,alistwillfailtopresent(1)theinteractionsbetweenthefactorsofthelistand(2)thestructureofthebusiness activities underlying the list. A bullet list fails to examine theinterrelationshipsoffactorsinabusiness.

Toillustratethislackofsophisticationaboutstrategicinterrelationships,theyofferedanexampleof typicalkindsofmajorobjectives inastandardfive-yearstrategicplan:

–Increasemarketsharebyxpercent.

–Increaseprofitsbyypercent.

–Increasenew-productintroductionstoalargernumberzperyear.

Shaw et al. pointed out that the trouble with this strategy list is that itneglectstodiscusshowtheseobjectives tietogether.Forexample, is it thecase that improved marketing by itself can increase market share (fromwhich improved profits will follow and from which funds for increasingnew-product introductions will be available). This is one of the possiblesequential causal assumptions implicit in this list. Or alternatively, will ittake both increased new-product introductions and increasedmarket sharetogether to increase profits? A bullet list does not make explicit therelationshipsbetweenpointsofthelist.

Shaw, Brown, and Bromely’s criticism of the bullet-list format forpresentingstrategicplansisthatitcancreateanillusion.Itmaycreatethatstrategy has been thought out, when in reality it hasn’t. A plan expressedonly as a list of bullets will leave unstated the critical assumptions abouthowthebusinessdoesorshouldwork.Consequently,abulletplancangivean illusion of clarity, when in fact the future remains obscure. Theyemphasized that thinking one is clear about the future,when the future isstillobscurecanbeaveryexpensiveillusioninbusiness.

Instead,theysuggestedtellinga“scenariostory”inthreestages:(1)setting

thestage,(2)introducingthedramaticconflict,and(3)providingresolution.They argued that the format of a strategic scenario needed to first set thestrategy stage, defining the current situation in an insightful and coherentway. This setting of the stage should include analyzing an industry’sdynamics, the forces that drive change, and the factors providingcompetitive success in the industry.Next in the planning scenario story, astrategic planner should introduce the dramatic conflict, as to whatchallengesacompanymustfaceinthatsituation?Whatwillbetheobstaclesto success and threats of failure? Then the story should conclude byproposingaresolutionofthechallengesinaconvincingway.Theplanningscenario should indicate thedirectionsof how the company canovercomeobstaclesandwin.

This case illustrates how the planning format itself, in the presentation ofstrategic planning, can either impede or facilitate thinking about strategy.The technique for thinking about and capturing the uncertainty andambiguityaboutthefutureimpactsuponbusinessiswhatShawetal.calledtheconceptofthestrategicstory,astrategyscenario.

CaseHouseofMitsui

Weillustratetheconceptofanarrative“planningscenario”byreviewingafamous case in business history, that of the long-lived firm of Mitsui inJapan. It shows the complexity of issues involved in long-term businesssurvival.Thisisparticularlycomplexwhenasocietyinwhichthefirmexistsundergoesgreatchange.Mitsuiisoneoftheworld’soldestandcontinuouslyoperationalmodern firm.But its form has changed over time and in pacewith the changing history ofmodern Japan— transforming from a feudalsocietyintoanindustrialnation.Allcountries,orterritories,ofthemodernworldhavemade(orarestillmaking)thisimportantsocietaltransitionfromfeudal/tribal societies to industrialized societies. In Japan, this changeoccurred quickly and successfully and dramatically in only 100 years—fromthesecondhalfof thenineteenthcentury through thefirsthalfof thetwentiethcentury.Duringthistime,oneparticularmerchantclan,theHouseof Mitsui, became a giant, global, commercially powerful moderncorporation,MitsuiGumiInc.

Wewillsummarizethiscaseasanarrativestory,ascenario(butonelookingbackward rather than forward — a historical scenario). This narrativeprovides a very dramatic illustration of long-term changes over time in abusiness’s environment that a businessmust face. Changing environmentscreate business opportunities and challenges and threats to success andsurvival. The historian John Roberts has nicely summarized the scenariodrama for Mitsui in the middle of the twentieth century: “At the end ofWorldWarIIin1945,Japanwasashambles…(andyet)notimewaslostonself-pity,regretoverthemistakeofwagingahopelesswar,orhatredof

the conquerors. With resilience, determination, and accommodation, thenation quickly lifted itself from the ashes of defeat … she became theworld’sthirdgreatindustrialpower…”(Roberts,1989).

The firmofMitsui traced itshistoryback toa foundingsamurai family in1600s, then surviving as a family-controlled enterprise through theeighteenth, nineteenth, and twentieth centuries. Its history mirrored thehistory of the economic and social system of modern Japan. During thesocietalchange,MitsuiemergedasamajorcorporateentityinJapan,oneofthe powerful combines, zaibatsu, as an economic form for industrializingJapan. The zaibatsu, with government encouragement, also served asinstruments of national policy in the building of a modern, industrializedJapan.

In1616,thefounderofthehouseofMitsui,Sokubei,gaveuphisstatusasasamuraitobecomeamerchant,achonin.Hebeganasmallbrewerytomakesakeandsoysauce.

Then his wife and children added a small draper’s shop and moneyexchange.Fromthis,thefollowinggenerationscontinuedtobuild,creatingintheearly1900s,agiantzaibatsu,ahugeconglomeraterunningmosttypesof commerce and industry, includingbanking, insurance, shipping, foreigntrade, retail merchandising, construction, engineering, mining, brewing,textiles,chemicals,paper,glass,electronics,optics,andrealestate.

Sokubei’s action of changing from samurai to chonin was due to hisperception that the times were changing — after the ascendancy ofTokugawaIeyasuasshogunin1616andafteracenturyofcivilwar.Militarystability in feudal times promoted commerce and economic prosperity.During the previous century, there had been continual wars between thefeudal lords of Japan. But gradually, some local warlords increased theirareasofcontrolandfeudalunitywasstrengthened,whichalsofosteredthegrowthofinternalcommerce.Theamountsandqualityofexchangedgoodsandservicesincreased.Withthisthetraditionalbarteringriceforhandicraftsand other commodities was increasingly supplanted by the use ofmoney.Thefeudallords,daimyo,hadalsotoborrowmoneytomeettheexpensesofwarfare. Lending the money to the daimyo was a group of commonersprosperous from trade. These formed a newmerchant class, chonin, whogrew in numbers and was given official status in the feudal society ofTokugawa.

By1568,OdaNobunaga,awarlord,hadsubduedmostofJapan.Uponhisdeath, his two best generals, Toyotomi Hideyoshi and Tokugawa Ieyasu,faced off as rivals. In 1600, a final battle at Skeigharaa, establishingTokugawa’s superiority. The opposing armies of Toyotomi and Tokugawahadmarshaled60,000samuraiintothebattle.Tokugawa’sarmywon,taking40,000headsastrophy.

TokugawaIeyasu(inFigure7.1)wastheundisputedwarlord,shogun,overall Japan;andheestablishedagovernment thatwas to lastuntil1863, theTokugawaShogunate.

Figure7.1: TokugawaIeyasu.Source:http://budostudies.com/philosophy/—Publicdomainimage.

WhenTokugawa retired fromhis rule as shogunate, he left a testament toguidehissuccessors:

Lifeislikewalkingalongalongroadshoulderingaheavyload;thereisnoneedtohurry.

Onewhotreatsdifficultiesasthenormalstateofaffairswillneverbediscontented.

Patienceisthesourceofeternalpeace;treatangerasanenemy.

Harmwillbefallonewhoknowsonlysuccessandhasneverexperiencedfailure.

Blameyourselfratherthanothers.

Itisbetternottoreachthantogotoofar.

–TokugawaIeyasu(1604)(http://en.wikipedia.org/wiki/Testament_of_Ieyasu)

Sokubei had been a lower ranking samurai, who could not partake in the

success and rewards in the new regime. There was no powerful lord,daimyo, to whom the Mitsui family owed allegiance and from whom,conversely, fortune would come to guarantee the family’s continuingexistenceassamurai.Sokubeihadtothinkabouthisfamily’sfuturewithoutproper feudal ties to the new regime. He traveled to Edo, the capital ofTokugawa’snewgovernment(Figure7.2).

Figure7.2: NihonbashiinEdo(byHiroshige)—ThisBridgewasattheCenterofEdo’sCommerce.Source:http://www.sessakai.com/skmpepe50.htm—Publicdomainimage.

InEdo, he saw prosperity in themerchant class and decided to become amerchant. Since hiswifewas from awealthymerchant family,merchantswerefamiliartohim.Uponhisreturn,hegatheredhishouseholdtogether—hiswifeShuho,hischildren,hisretainers,andservants.Hetoldthemhewasgivingup the family’s traditional status as samurai.OrlandRussell quotedSokubeiassaying:“Agreatpeace isathand.Theshogunrules firmlyandwithjusticeatEdo.Nomoreshallwehavetolivebythesword.Ihaveseenthatgreatprofitcanbemadehonorably.Ishallbrewsakeandsoysauce,andweshallprosper”(Russell,1971).

Sokubei’sfamilyhouseofMitsuibeganbrewingsake;andpeoplecalledhisshop,“LordEchigo’ssakeshop,”becauseSokubei’sfatherhadbeencalledLordEchigo. Itwas unusual to them that a former samurai had become ashopkeeper,achonin.At first,businesswasslow.Sokubeiwasnotagoodshopkeeper, displaying the aloofness and disdain proper to a samurai.Buthis wife Shuho, the daughter of a successful merchant, was friendly andclever.Shegrewthebusiness.Withoutthefeudalpretensionsofaristocratic

class,Shuhoconversedwithherpeasantcustomers.Shegainedthefavorofservants, as customers, by offering tea or tobacco when they came onerrands.Sometimes,customersspentmorethantheyhadcash.Shuhowouldloanmoney,acceptingsomevaluableasasecurity.Inthisway,Shuhobeganthefirstexpansionofthefamilybusiness,fromsakeandsoysaucetopawnbrokering.Sooninterestontheloansbecamemoreprofitablethanbrewing.Sokubeidiedin1633,andShuhocontinuedtorunthefamilybusiness.

ShuhosenthereldestsontoEdowithcapitaltoopenadraper’sshop,calledEchigoya, which prospered. (Even today, it’s descendent in Tokyo,MitsukoshiDepartmentStore, still standsnear that original location in thecentralNihonbashidistrict.)

The youngest and the third son, Hachirobei, was sent to Edo to help theeldestson.Aftertraining,heopenedasecondshopinEdo.ThenHachirobeitook over managing the draper shops, while the eldest son began a clothpurchasingsystem.(Themiddlesonhadreturnedhometohelphismother.)Thus thesecondgenerationof thehouseofMitsuiwasestablished,withagrowingclothmerchantbusinessinthecapitalofJapan.

Thecustomersforclothwerethearistocracy,andHachirobeihadhisoldestson serve the Tokugawa government (called the bakufu). In 1689,Mitsuiwas assigned to be purveyors of apparel to the shogun of the time,Tsunayohi. However, the business of selling to the aristocracy requiredcapital, since aristocracy paid when they pleased. Earlier in 1683,Hachirobei had established amoney exchange, ryogaeya, and expanded tolocations not only in Edo but also in Kyoto. Thus the second and thirdgenerations of Sokubei — beginning with Hachirobei and his sons —establishedatradingandfinancialhouse,withtiestothegovernment.ThistradeandfinancewastobethebasicfoundationofthefuturefirmofMitsui.

Hachirobeihadinheritedhismother’sbusinessabilityandbeganbuildingaclan business. Hachirobei kept the houses of his sons in this larger clanestablishment, forming the Mitsui clan into one economic unit. All sonscontinuedtheirbusinessesasapartof thehouseofMitsui,butobedient toonehead,theirfather.Thisclanbusinesswasevolvingintoacorporatebody,whichwouldbecalled“Mitsui-gumi.”Asaclangroupofbusinesses,itwasstructurally a partnership wherein all Mitsui shops and exchange housesweremanagedindependently—butthecapitalofallwaspooledandundercentralizedauthority.

Hachirobei’s eldest son, Takahiri, also proved to be a good leader andestablishedagreatmainheadquarters,Omotokata,toguidetheMitsui-gumi.He imposed good business practices on allMitsui businesses, including adouble-entry bookkeeping system. A central financial reserve wasestablished to help the house survive periodic vicissitudes and financialcrisesinthegovernment.Itwasimportantbecausetherelativelynewmoney

systemthatwasevolvingwasunstablewithfrequentre-coinagesbyfeudallords. By pooling the family resources, the pool was big enough for thefamilytosurvivesuchchanges.

ThechoninprinciplesofHachirobei’smother,Shuho,passeddownthroughthegenerational linesof theclanofMitsui.AcentenaryafterHachirobei’sbirth,agrandson,Toakahairaredraftedhisfather’swillandpreparedahouseconstitution,withsuchbusinessprinciplesas:

Thriftisthebasisofprosperity,butluxuryruinsaman.

Bediligentandwatchful,oryourbusinesswillbetakenawaybyothers.

Farsightedness is essential; do not miss great opportunities by pursuingtrivialonescloseathand.

Avoid speculation of all kinds, and do not touch upon unfamiliar lines ofbusiness.

–Russell(1971)

WhileJapanhadbeenfirmlyruledbytheTokugawashoguns,itwasisolatedfromtherestoftheworld.Thethirdshogun,Iemitsu(1623–1651)closedthecountry to all foreign trade and forbade Japanese to leave the country.Herequired all daimyo to spend severalmonths of each year inEdo, leavingtheir families there as hostages. This was expensive and increased thedemandformoney-lending.

Mitsui businesses prospered during the Tokugawa peace until the 1860s,whenviolent changewas to impact the stable,peaceful, isolatedkingdom.EuropeannavieswerebeginningtodominateAsia,forcinguneventradeandEuropean colonialism on the region. Japan’s isolation was coming to aforced end in 1853,with the arrival intoEdoBay ofU.S.warships underCommodorePerry(Figure7.3).

Figure7.3: LandingofCommodorePerry.OfficersandMenoftheU.S.SquadronMeettheJapaneseImperialCommissionersatKurihamaYokosuka,March8,1854.Source:https://en.wikipedia.org/wiki/File:Commodore_Perry_expedition_LOC_LC-USZ62-

3319.jpg—Publicdomainimage.

Perry encountered a feudal society, with samurai wearing armor made ofsilk, leather, and thinplatesofmetal.Swords and lances and thebowandarrowwere still themainweapons.While guns alsowere being used, thegunswereantiquatedflintlocksandmusketswhichhadseenserviceinpastEuropeanwars.Thefeudal lordsofJapan,daimyo,weredividedabout theAmericans. If they refused contact, theWestwould force it upon thembyconquestwith superiormilitaryarms. If theyengaged in trade, their stableworld would end. On March 31, 1854, the government signed the firstdiplomatic treaty with a Western nation, the Treaty of Kanagawa, givingAmerican ships access to two ports and the reception of a U.S. consul(Figure7.4).

Figure7.4: TreatyofKanagawa.Source:https://diyscholar.wordpress.com/2010/03/11/a-great-art-history-class-from-ucsd/—Imageinpublicdomain.

Thedoorwasopened, and thedaimyobeganvisitingWesterncountries tosee the new world. A U.S. steamship with side wheel transported eightysamurai to San Francisco, where they were shown western science,technology, government, and military weapons. Yet in Japan, nationalfeelings weremostly for continued isolation and hatred of the foreigners.Patriotsblamedtheshogunforadmittingtheforeigners;andpoliticalturmoilcontinued into the 1860s, finally resulting inmajor governmental change.Twomajorfamilies,theSatsumaHanandChoshuHan,reachedagreementthattherulinghouseoftheTokugawamustbeoverthrown(Figure7.5).

Figure7.5: SamuraioftheSatsumaClan.Source:http://diletant.ru/blogs/5628/2466/—Imageinpublicdomain.

Thisalliancewasmadebetweenfourleadersofthesehouses,Okubo,Saigo,Komatus,andKidoKoin.TheywerethepersonswhoweretoestablishthenewgovernmentwhichwouldbecalledtheMeijiRestoration.(ButitcouldmoreaccuratelybecalledtheMeiji“revolution”—arevolutionofJapanesesociety thatwas tobe imposed from the topby theSat-Chooligarchy.) InJulyof1877,theseleadersofthisSat-Choalliancemetandsignedapacttocarry out a coup d’état. They proceeded to overthrow the old Tokugawashogunate and establish the ancient imperial family as symbolic rulers ofJapan, with the Sat-Cho group running this new imperial government(Figure7.6).

Figure7.6: SaigoTakamoriSurroundedbyHisOfficersduringthe1877SatsumaRebellion.Source:http://www.komeijuku.com.ar/articulos_iaido_samurai_detalle.php?

vid=25—NewsarticleinMondeIllustre,1877.

They overthrew the old Tokugawa shogunate and established the ancientimperialfamilyassymbolicrulersofJapan,withtheSat-Chogrouprunningthis new imperial government. After the successful coup, a new imperialgovernmentwasestablished(Figure7.7).

Figure7.7: ATeenagedEmperorMeijiMeetingwithForeignRepresentativesattheEndoftheBoshinWar,1868–1870.Source:https://historyofjapan.wordpress.com/tag/meiji-

restoration/feed/

Thefirstneedofthenewgovernmentwasformoney.SincetheMitsuihadlong-standingbusinessrelationshipswiththeSatsumaandChoshuclans,thehouseofMitsuiwas immediatelycalledupon forcontributions.Asamurai

messengerfromthecoupwassent toMitsuiand told themof theneedforfinance.Late into the night,Mitsuimen counted outmoney, filling chestswith a treasure of two thousand ryo. In themorning, the samurai soldierscarriedthisofftothenewImperialgovernment.

Scenarios,Forecasts,andExtrapolation

Strategic scenarios use forecasts of trends within strategic “stories” to envision“adventures”ofthebusinessinthefuture.Thefuturewillbeanadventurebecauseitwillbeatimeinwhichnoonehasyetexperienced.Experienceisalwaysofthepresent,withmemoriesandstoriesofthepast.Thefutureconsistsofanticipationsand/orsurprisesandplansforthefutureconceivedinthepresent.Allexistenceisalwaysinthepresent.Itisinintelligence that the past and future exist.Scenarioplanning is about planninga futureadventure,anexplorationintothefuture.

Scenarios depict the trends that provide opportunities for success and threats tosurvival.Theplotofanygoodadventureisthedepictionofafortuneorsuccesstobewonby a hero or heroine and the challenges and opposition to their course of pursuing thefortune,withaneventualsuccessfulconclusion thoughcourage, skill,and luck.Foranybusiness, thefacingofanuncertainfuture isakindofadventure. In theshort-termtimehorizon, there is usually a greater certainty about the nature of the market, efforts ofcompetitors,successofproductsandservices,profitability,andbalanceoffinances.Itisinthelong-termtimehorizon,wheremuchchangeispossibleanduncertaintycanbeabouteverything. Thus short-term planning, operational planning, can be detailed as arecurrenceof current operations—aprojectionof thepresent.But long-termplanning,strategic planning, cannot be so detailed for it may not be a recurrence of currentconditions—butchange,majorchange—anadventureintothefuture.

Scenariosprovideastrategictechniqueforanticipatingchangesintheenvironmentofabusinessorfirm.Allbusinessesoperateinacomplexsetofenvironments,includingtheenvironments of industrial and commercial structures, markets, government regulation,financial and economic systems, international competition, and environmental systems.Whatstrategyneedstodoisrecognizetrendsandanticipatepatternsofchangesintheseenvironments, for they can influence both the kinds of businesses that maintain futureviabilityandthekindsofconditionssuchbusinesseswillencounterinthefuture.

Forecasts and trends startwith the patterns of the present andproject these into thefuture. All forecasts and trends are therefore an extrapolation of the present. And allextrapolationsdependuponthe“structures”underlyingthetrendsandforecasts.

The rawest sort of extrapolation consists of simply fitting near-term event data torecenteventdata,whentheunderlyingformofthecurve,thegenericpatternoftheclassofevents,isunknown.Thiscanbedonebyarbitrarilyfittingstraightlinestoserieswhichappeartobemonotonicallyincreasingordecreasing.Iftheseriesappearstobeperiodic,one can arbitrarily fit sinusoidal curves. If the series appears to have no underlying

pattern,onecantaketheextrapolateusingtheaverageofthelastthreepoints.Onecanuseeven more sophisticated running average methods, such as the Box-Jenkins methods.However,nomatterhowcleveroneisinfittingcurvesoraveragingpoints,oneisstillleftwith the basicweakness in forecasting about the structures underlying the extrapolatedpatterns. The underlying structural features dominate major changes in forecasts —changesintheunderlyingstructuresofsocietalactivities.Forecastswhichpresumeafixedunderlying structure for events (e.g., econometric models) or forecasts which use nounderlying structure or form (e.g., time-seriesmethods) are about equally accurate andequallyinaccurateintherealmofeconomics,whentheunderlyingeconomicstructuresdonotchange.

Inanextrapolation(trendorforecast)ofeconomicactivities,suchastheaccuracyofextrapolation depends upon the underlying forms or structures of the events one isextrapolating. Any forecast (whatever the extrapolation technique) will be much moreimprovedbyunderstandingtheunderlyingformsandstructuresoftheextrapolation.Fourgeneralclassesofstructuralfeaturesunderpinevents:

(1)Structuresofcurrenttechnologicalcapabilities,

(2)Structuresofeconomicactivitiesandmarkets,

(3)Structuresofnatureandnaturalpotential,

(4)Structuresofdemographicsandcultures.

Wheneverunderlyingstructuresalter,forecastsbasedprincipallyuponextrapolationwillbeinerror.Forecastsextrapolatepresenttrendsbutshouldbeusedwiththeidentificationofcriticalstructuralvariables,thatifchangedwouldinvalidatetheforecastsextrapolation.

Sincetrendsareonlyidentifiablepatternsofchangeandforecastsareonlyattemptstoquantitatively anticipate the direction of change in the trend, what is important tounderstandinstrategicscenarioplanningisthatanyforecastingattempttoanticipatethefuturecanproceedwithdifferentlevelsofsophistication:

(1)extrapolation,

(2)genericpatterns,

(3)structuralfactors,

(4)planningagenda.

Whenaforecasterhasalmostnoknowledgeabouttheeventsexcepthistoricaldataonpast occurrence, then the forecaster can do littlemore than extrapolate the direction offutureeventsfrompastevents.Extrapolationforecastingconsistsoffittingatrendlinetohistoricaldata.

Whenaforecasterhassomeknowledgeaboutthegeneralpatternofaclassofeventsbutlittleknowledgeaboutthespecificexemplarofthatclassathand,thentheforecaster

canuse thegenericpattern to fit theextrapolationof thespecificexemplarcase.Fittinggenericpatterntoanextrapolationhasmoreknowledgethanmereextrapolationbecauseoneknowsbeforehandtheformofthecurvetobeextrapolated.

Inadditiontoknowingthegenericpatternofanevent,knowingsomethingaboutthekindsoffactorsthatinfluencethedirectionsandpaceoftheeventsprovidesthebasisforevenbetteranticipation.Extrapolationsfrompastdataalwaysassumethatthestructureofthefutureeventsissimilartothestructureofthepastevents.Changesinstructuralfactorswill render extrapolation meaningless and create the most fundamental errors offorecasting.

Thedeepestlevelofforecastingrequiresunderstandingnotonlythegenericpatternoftheclassofeventstobeanticipatedandalsounderstandingthestructureoftheeventsandthenproceedstointerveneinthefuturebyplanningtobringaboutadesiredfutureevent.A research agenda provides an anticipatory document required to bring about atechnologicalfuture.

Accordingly, experts should know about the underlying structures in forecasts andsensitivetofactorswhichalterstructures.Butexpertsdonotnecessarilyhavequantitativemodels of structures. Consequently, some experts will be accurate sometimes andsometimesnot.Thetroublewithusingonlyexpertstoforecastisthatthereisnowayinanticipationofaneventtocalibratethereliabilityandaccuracyofanygivenexperts.Theaccuracyofexpertsinforecastingcanonlybejudgedinhindsight,andevenpastaccurateperformanceisnoguaranteeofaccuratefutureperformance.

Summary

Strategyscenariosshouldbepresented innarrative format tohelp thinkingbycapturingthe issues of strategy in their specificity, complexity, and interrelationships. Planningscenariosarebusinessstories,butparticularkindsofstories,storiesoffuturestrategy:

–storiesofthebusinessenvironmentsofthefuture;

–storiesofthemarketopportunitiesandperilsofcompetitionintheunknownadventureofthefuture;

–storiesofchangeandsurvivalinthefuturetimetowardwherebusinesshasyetgone.

Strategic stories provide a view into the future, relevant to planning. This viewencompassesthechangeslikelytooccurinthebusinessenvironmentsofthefirm,inthecompetitors to the firm’s businesses, in themarkets of the firm’s businesses, and in thetechnologies the firm uses. A common form of describing future change is called a“forecast.”Forecastsareextrapolationsofpastandcurrenttrendsintothefuture.Forecastsarebasedupon“structures”ofactivities,whosepatternisbeingextrapolated.Thusinthestrategicstorywhatoneislookingforinascenarioaboutthefuturearethetrends,forces,

patterns of change, opportunities, and threats of the future. The future has not yetoccurred, and therefore one cannot predict what has not yet occurred when humaninterventioncanalterthefuture.

TheoreticalPrinciples

1. Senariosdepictthetrendsforopportunitiesorthreats.2. Theaccuracyofforecastsdependsuponthestabilityofunderlyingstructure.

ChangeinSocieties

Introduction

We will continue the case of the house of Mitsui in its strategic change from a clanbusinessintoamoderncorporateconglomerateof theformofa“keiretsu.”Butnowweneed to understand the nature of society as a set of interacting systems. The MeijiRestorationbysamuraiclanssetinmotionpoliciestocompletelychangeJapanesesociety.Itwas in this transformationofawholesociety that theMitsuiGumichangeditselfandassistedinthemodernizationofJapanesesociety.Incontinuingthestory,wewillseehowsocieties change in their systems of social interactions, and these systems underlie thescenariosofsocietalevolution.

TheMeijiRestoration

AsJapanesesocietychangedforSokubeiandShuhoin1616,sotoofortheirprogeny, Japanese society again changed in 1868, by the “MeijiRestoration.”Thenthenationalproblemfacing theMeijireformerswas tojump the social conditionsof Japan froma feudal structuredirectly intoamodern industrial structure. Their competitors in Europe needed sixcenturies(fromthe1300stothe1900s)tocreatethistransition,movingfromfeudalism through mercantilism into laissez-faire enterprise to industrialcapitalism.

The political agenda of the Meiji government was to modernize Japan,rapidly catching up with the Western nations in military and economicmight. The new government understood that they could not redress theunfairtreatiesthathadbeenforceduponthembymilitarilysuperiorforeigngovernments, until Japan caught up to the new industrial “civilization.”Japan had to adjust to European and American standards; and theMeijigovernment began the task of “westernizing” the country, economically,politically,andculturally.

ThefirstsocialreformsoftheMeijigovernmentweretoestablishuniversaleducationforaliteratesociety,toabolishthecastestructureofthesamuraistatus, create modern governmental structures and a modern militaryorganization, and foster international trade and industrialization throughtheimportandimprovementofforeigntechnologies.Atthecenterofpower

ofthenewimperialgovernmentwasthisSat-Chooligarchy(Figure8.1).

Figure8.1: TheMeijiOligarchywastheGroupofLeadersRulingtheChangeinJapaneseSocietyduringthePeriodoftheMeijiRestoration.ŌkuboToshimichi(1832–1878)wastheSonofaSatsumaSamuraiSaigōTakamori(1827–1877),whohadJoinedForceswithChōshū,Tosa,andHizentoOverthrowtheTokugawaShogunate.Sources:

http://www.britannica.com/biography/okubo-toshimichi/images-videos/okubo-thoshimichi/101108;

http://historyofjapan.files.wordpress.com/2013/10/takamori_saigo.png;http://www.ndl.go.jp/portrait/e/datas/23.html?c=0;http://www.jref.com/history/okuma-

shigenobu—Imagesinpublicdomain.

An important leader in the Meiji Restoration was Inoue Kaoru from theChoshuHan.Inouehadbeenborntoalow-rankedsamuraifamilyinYuda.As a youngman, Inoue was a leader of the antiforeign movement in thisnativearea.In1863,InouewasoneoffiveyoungmenfromChoshusenttoEngland foreducation,at theUniversityCollege inLondon.Onreturning,he joined the alliance fighting the Tokugawa government. Afterwards in1871, InoueservedasViceMinisterofFinance, reorganizing the financialsystemofgovernmentinJapan.Hereformedthelandtaxsystemandendedgovernmentstipendstoex-samurai.HetookastronginterestinMitsuiandencouragedthemtostartabank(Figure8.2).

Figure8.2: InoueKaoru(1836–1915).Source:http://photoguide.jp/txt/Robert_Walker_Irwin—Imagesinpublicdomain.

Inoue Karou appointed Mitsui as agents for the government mint, toexchange new coins for old money. Thus Mitsui’s old money-exchangebusinessnowpositioned themasagents in thenewgovernment’s financialstructure.

Meanwhile,Mitsuineededtorestructure.Fortunately,atthattime(over200years after the founding ofMitsui-gumi by Sokubei, Shuho, and their sonHachirobei), Mitsui continued to find competent leaders, promoting onmerit, not just on kinship. A very important merit appointment forMitsuiwasRizaemonMinomura.MinomurahadnotbeenbornaMitsui.HewasborninEdoin1821,andhisfatherhadbeenaronin,asamuraiwithoutamaster. At the age of 19, he became an apprentice to amerchant in Edo.Eventually,hewenttoworkforMitsui.Therehewasrecognizedbytheclanfor his exceptional merit and promoted. Finally, he was promoted to runMitsui-gumi.

WhenMinomuratookcontrolofMitsui,thefirstthinghedidwastoseparatethe textile branches from themoney exchanges.He anticipated a new law(theNationalBankAct), and formedoneof the first banks in Japan, as a

partnership between Mitsui and another house, Ono. This new bank wascalled the Dai-Ichi Kokuritsu Ginko (First National Bank). The financialexchangetraditionsofthefeudalhouseofMitsuievolvedintoanewformoffinancialservices,amodernbank.

AlsoInoueKaorucontinuedtobeafriendoftheHouseofMitusiandtookactive interest in Minomura’s transformation of Mitsui. Inoue also sawMitusi as a conglomeration of semi-independent operations; Inoue andMinomura, together revised theMitsui’s charter towarda form thatwouldevolvetowardamoderncorporateform.

Inoue’s interest in Mitsui was a part of the general pattern of the Meijigovernment policies which encouraged the development of Japan’s tradeand industry — to provide the economic basis of a modern state with amodernmilitary.InoueencouragedMitsuitoexpanditstradingcapabilities.The government organized a Tokyo Commerce and Trade Company tofacilitate foreign trade as a joint enterprise between the government andMitsui. Mitsui aggressively expanded its retail shops and bankingoperations.Minomuraconsolidated tradingactivities inanewcompanyofMitsui,calledMitsui-gumiKokusan-kata(NationalProductsCompany).

At first, Mitusi’s National Product Company supplied silk and grain toforeigntradersandimportedblanketsforthearmy.In1876astradegrew,itwasreorganizedastheMitsuiBussanKaisha(knownabroadasMitsuiandCompany).Then itsmainexportswerecoal fromastate-ownedcollieryatMiikeinKyushuandsurplusrice,andnextthegovernmentsoldthecollierytoBussan.Inthisway,Mitsui’sBussanbeganexpandingintoproductionaswellastrade.Asthetwentiethcenturyapproached,theHouseofMitsuiwasbeingorganizedintothestructureofamoderncorporation,withoperationsof banking, retail, trade, and production. It was becoming the foremostzaibatsuinJapan.

After Minomura’s retirement from heading Mitsui, Masuda Takashi wasappointedthenewheadofMitsui.MasudaTakashi(1848–1938)continuedtransformingMitsuiintoazaibatsu(acorporateconglomeratewithabankat the center). Takashi added production capabilities inmining. TheMeijigovernmenthadinheritedthemineraldepositsfromtheshogunate,andthemines continued to be state-owned until the 1880s. Then the Meijigovernment began a policy of privatization of industry. They sold miningpropertiesat nominal prices to financial houses.Thepolitical connectionsbetweengovernmentofficialsandfinancialhousesinfluencedthesales.Inatightpoliticalgame,thehousesofMitsubishiandMitsuibidfortheMeiikemines,andMitsuiwon.

DanTakuma,ayoungmanagerinMitsui,improvedproductiontechniquesintheMiikeminestomakethemimmenselyprofitable.MitsuinextacquiredtheKamiodamines(whichwere literallymountainsof leadandzincore laced

withsilver,cadmium,andcopperandshowingevenanoccasionalglintofgold).OthercoalminesandirondepositsinthecountrycametobeownedbyMitsui.Mineralsproductionprovidedtherevenuebaseforthesubsequentgrowth of the powerfulMitsui zaibatsu.Mine resources provided a strongcashflowintimesofpeaceandintimesofwar.

**********

The partnership betweenMitsui and the government, particularly throughInoue’sinterestinMitsui,hadhelpedMitsuigrowandprosper.Atthetime,thegrowthofallfinancialhousesinthemodernizingJapanwashelpedwithpolitical connections. The Meiji government saw the financial houses astools of national policy to build the new industrial Japan. Later heads ofMitsui continued reforms in the organization and management of Mitsui,suchasimprovingsalariestooffsettheinflatingcostofliving,introducingapromotionalsystembaseduponmerit,beginningtwice-yearlybonusesasanincentive,andestablishingapensionfund.

MasudaTakashi.Source:http://www.mitsuipr.com/history/column/12/—Imagesinpublicdomain.

DanTakuma.Source:http://www.mitsuipr.com/history/column/12/—Imagesinpublicdomain.

SystemsAnalysisoftheTransformationofMeijiJapan

Beforewecontinuethestory,weneedtoreviewthetheoryofasocietyasasetofsocietalsystems.Inasociety,itssocialstructuresandprocessescanbemodeledasfourkindsofsystems.Atopologicalsystemsmodelofasocietyisconstructed,usingtwosociologicaldichotomiesfromMaxWeber(Weber,1947).Weberhadwrittenthatinanyandallsocialinteractions in a society, participants can hold four kinds of expectations about thatinteraction:(1)utilityoridentityand(2)reciprocityorauthority:

(1)Utilityinarelationship—asausefulvalueforaparticipantintheinteraction(suchasbuyingorsellinggoods);

(2)Identityintherelationship—asanidentificationofonepartywiththeotherpartyasbelongingtosomesamegroupandsharingthevaluesofthegroup(suchasbelongingtothesamefamilyorsamepoliticalparty).

(1)Reciprocityintherelationship—asamutualandequaladvantageforeachpartyintherelationship;

(2)Authorityintherelationship—asoneofthepartiesintherelationshipcanmakedecisionsabouttherelationship(suchonebeingajudgeandtheotheraplaintifforonebeingamayorofacityandtheotheracitizen).

As shown in Figure 8.3, the two dichotomies can define taxonomy of societal

interactions(Betz,2000).

Figure8.3: TaxonomyofSocietalInteractions.

EconomicInteractionsarethesocialinteractionswhichanticipatebenefitsofbothutilityandreciprocity.Twoparticipantseachexpectfromtheirinteractionbothusefulness(utility)andthatutilityshouldbefair(reciprocal)inmutualbenefit.Forexample,inaneconomicsystem,twoparticipantsinamarket,asbuyerandseller,expect(1)bothtobenefitfromthesale(productforthebuyerandpricetotheseller)and(2)thatthesaleshouldbefair(acompetitivepriceforaqualityproduct).

CulturalInteractionsarethesocialinteractionswhichanticipatebenefitsofbothidentityandreciprocity.Thereintwoparticipantseachexpecttoshareamutualidentityintheirinteractionandalsoexpectactionsthatarereciprocalinmutualbenefit(fairness).Forexample,twoparticipantsinachurchaspriestandcongregantbothexpecteachtobelieveinthesamereligiousfaith(asmembersofthesamechurchorsynagogueormosque)andsharereligiouspractice.

PoliticalInteractionsarethesocialinteractionsthatanticipatebenefitsofbothidentityandauthority.Thereintwoparticipantsexpecttoshareamutualidentityintheirinteractionbutalsoexpectactionstobedecidedbytheoneparticipantsuperiorinsocietalauthorityandperformedbytheinferiorparticipant.Theparticipant-superior-in-authorityissaidtoholdpoliticalpowerovertheotherparticipant.Forexample,apoliticalofficeholdersuchasajudgeinacourtoflawcansentenceanotherparticipantinatrial(havingbeenbroughtintocourtasanarrestedoffender)toasacrificeoflifeorfreedomorproperty.Thejudgehaslegalpoweroverthedefendantinatrial.

TechnologicalInteractionsarethesocialinteractionsthatanticipatebenefitsofbothutilityandauthority.Thereintwoparticipantsexpectfromtheirinteractionusefulness(utility)andalsothatutilityisbaseduponanaction(technicalprocess)whichcaneffectivelycreatetheutility—amethodologicalauthoritywhichguaranteesthetechnicaleffectivenessoftheusefulaction.Forexample,asbusinesspersonmighthireanengineertodesignafactorytoproducethebusinessperson’sproduct.(Oneexampleisthatofachemicalengineerhiredtodesignchemicalprocessesforproducingchemicals.)Inthisinteraction,theengineer’susefulactionindesigninga

factoryisbaseduponhismethodologicalauthorityofengineeringknowledge.

Next,thistaxonomycanbeexpressedasatopologicalgraph,whicheachsub-systemdepictedasoneplanestackeduponanother(Figure8.4).

Figure8.4: TopologicalGraphofSocietalSystems.

WeapplythesocietalsystemsanalysistothestasisofJapanesesocietyatthetimeoftheMeiji Restoration. Earlier under the Tokugawa shogunate, the government, bakufu,createdtheconditionsforpeace;andinpeace,economicprosperityoftengrows.However,theisolationofthecountryfromtheworldalsocausedthecountrytofallseriouslybehindin the advance in technology in theWesternnations from the1600s through the1800s.This left Japan in a militarily weak state, subject to the dictates of militarily superiorcountries.Thereformsby thenewgovernmentunder theformerclanhousesof theShoand the Chu began the transformation of Japan into a modern industrial and militarypower(Figure8.6).

Figure8.5: TopologicalGraphofSocietalSystems:Political,Economic,Cultural,andTechnologicalSub-systems.

Figure8.6: JapaneseSocietalSystemsattheTimeoftheMeijiRestoration.

TechnologicalSystemModern sciencehadbegun inEurope in the seventeenthcentury.Thoughout the1700sand1800s,Europeadvancedinscientificresearchandintechnologicalinnovation,soasto leave the rest of theworld far behind.When theU.S. naval force arrived in Edo in1854, the samurai warrior caste in Japan was shocked at how far behind they weremilitarily,andthattheJapanesegovernment,theBakufu,hadallowedtheJapanesenationtolagbehindtheEuropeansandAmericans.Someyoungsamurai,suchasInoueKarou,went toEurope foreducation.After theMeijiRestorationgovernment tookpower, theyestablisheduniversalprimaryeducationforthepopulation.Theyfoundeduniversitiesforhigher education and research. Students were sent to Europe for doctoral degrees inscience, to staff the universities. European and American companies were invited intoJapan to build industries and government infrastructure. The new industrial Japanesehouses,suchasMitsui,acquiredandcopiedWesterntechnologies.

PoliticalSystemAftertheevidentfailureoftheTokugawashogunatetomodernizethemilitary,twoclans,SatandCho,formedanewnationalparty.Theyledtheinsurrection,establishinganewnationalgovernmentcalledthe“MeijiRestoration.”Merchantsprovidedamajorsourceoffunding for the new national government, in the form of taxes and loans; and thegovernment encouraged the merchants to expand and commercially flourish, adoptingwestern industrial technologies. A national military of an army and a navy wasestablished; the old Samurai warrior force abolished. In 1873, universal militaryconscriptionwasintroduced,whichindoctrinatedanewgenerationinthemilitarypatrioticvaluesofthenewJapan,withloyaltypledgedtotheEmperor(Figure8.7).

Figure8.7: JapaneseSoldiersReadingtheImperialRescripttoSoldiersandSailors.Source:http://ww2db.com/imape.php?image_id=13156—Imageinpublicdomain.

CulturalSystemCulture consists of theways people identifywith each other, bonding into groups. TheMeiji government abolished the feudal castes, eliminating the Samurai with specialprivileges.TheShintoreligionwasencouragedasanationalreligion,emphasizingloyaltyto theemperor.Universalprimaryeducation spread literacy to all populationsof Japan,enablingemploymentinthenewindustrialfactoriesemerginginthenation.

EconomicSystemPreindustrial Japanhada typical feudaleconomyofanagriculturalbasecultivatedbyapeasantry caste,with taxes in the formof rice products collected by the ruling samuraicaste.Peasantsalsogrewsilkwormsandwovesilkforgarments,andminedandrefinedironforweaponry.Thepeasantswhomigrated to themerchantcasteofchoninsuppliedproducts to the aristocratic caste. Under the new Meiji government, chonin merchantfamilieswereencouraged tobecomecapitalists.They led the industrializationofJapan,establishing trading and production companies and banks. The chonin families, whosucceeded in the industrialization, established the zaibatsu houses, such as Mitsui andMitsubishi. National resources, such as mines, were privatized, with Mitsui acquiringimportantmines.

MeijiRestorationandtheHouseofMitsui

Theprinciple strategic focusof thenewJapanesegovernmentof theMeijiRestorationwastogainmilitarypotencyintheinternationalworld.JosephPittauquotedForeignMinsterOkumaShigenobucommentsin1897:“Ifweenquirewhatpointsarepracticallymost important in the foreignpolicyoftheMeijiEra,wefindthattoattainanequalfootingwithotherPowers,asdeclared in the Imperial Edict at the Restoration, has been the impulseunderlyingallthenationalchangesthathavetakenplace”(Pittau,1967).

By 1900, progress in Japan’s new military powers became evident to theinternationalcommunityatthetimeoftheBoxerRebellioninChina.China’srulershadchosenastrategyofisolationandthusfallenpreytoexploitationofChinabyWesterncountries,partitioningChinain“spheresofinfluence.”TheBritish forciblyopenedChina, to tradeofopium(grownin theBritishcolony of India) for tea (grown inChina and sold by British traders at ahigh profit in England). The French, Germans, Russians, and Americansjoined in the “open China policy.” Then Chinese rebels (backed by theEmpressinthe“BoxerRebellion”)triedtoejecttheWesterninvaders;andWesternpowerssentintroopstosuppresstherebellion.

Incontrast toChina,JapanhadembracedWestern technology,aspiring toequal military might. And the Meiji Restoration government pursued notonlythebuildupofmilitarypowerbutalsothe“colonialism”characteristicof the Western nations, as an economic basis upon which to build“industrialization.” (Then the global scenario of the world was military-backedeconomiccolonialism.)

During the Boxer rebellion, the Russians moved forces into Manchuria.Russia completed their Trans-Siberian Railway and seized Port Arthur. AJapanese secret society, the Black Ocean Society, murdered the Koreanqueen; and the Korean king took refuge in the Russian legation. TheJapanese government sought an alliance with the British government,againstRussianexpansion.ThisalliancewassignedinJanuary1902,withBritain acknowledging Japan’s “special interests” in Korea and assertingBritain’s “special interest” in China. This alliance was the first time inmodernhistorythatanAsiancountrywasacceptedasafullmilitaryallybyaEuropeanpower.From theJapaneseperspective, it should legitimate, inEuropeaneyes,Japan’sclaimtopartsoftheAsiancontinent.

This was important because Southeast Asia had been subjugated by theBritish, French, and Dutch. Now Japan joined them, as they all werecontending(alongwithGermanyandRussia)incontroloverChina.Russiawanted control ofManchuria, as did Japan. Japan and Russia next tried

negotiating forcontrolofbothManchuriaandKorea.But thenegotiationsfailed, and onFebruary 6, 1904, they broke diplomatic relations. Russiantroops crossed theYaluRiver fromChina intoKorea.AtPortArthurnearthenorthernborderofKorea,JapaneseboatslaunchedatorpedoattackatRussian ships in the harbor.OnFebruary 10, Russia and Japan declaredwar.

For fivemonths, theJapanesearmybesieged theRussiangarrisonatPortArthur, and the Russians withdrew. Loses were great, with the Japaneselosing60,000soldiers.FightinginManchuriawasalsointense.AttheBattleofMukden, a total of 750,000 soldiers engaged,with the Japanese losing40,000 soldiers, but again victorious. Mitsui’s Bussan was the principalsupplier for the Japanese army and was also developing the shippingcapabilitytosupplythearmyovertheseas.ThefinalbattlebetweenRussianand Japan occurred at sea, in the Tsushima Straits between Korea andJapan(Figure8.8).

Figure8.8: DefeatoftheRussianFleet1905.Sources:http://yellowlegs-and-others.com/Events/BattleofTsushimaStrait.html;http://brilliantmaps.com/russo-

japanese-war/.Mapsource:Tosaka—http://m.qulishi.com/news/201412/22366_10.html

—Imagesinpublicdomain.

Russia’sBalticFleethadbeensentouttheNorthSea,throughtheAtlantic,aroundAfricaintotheIndianOceanintotheSouthChinaSea,appearingoffthecoastofIndochinainMay1905.ObservedbyintelligenceofficersoftheJapaneseNavy,informationwassenttotheJapanesefleetthattheRussianfleetwaslikelytopassthenarrowpassagebetweentheislandofTsushimaandtheKoreancoast.Japaneseshipslayinwaitthere.TheRussianadmiralignoredwarningsofapossibletrap,didnotevenmakeanyreconnaissance,andsailedtheRussianfleetintotheambush.EarlyonthemorningofMay27,1905,thebattleshipsofthenewJapanesenavy,commandedbyAdmiralTogo, appeared on the horizon and immediately opened fire upon theRussian Baltic Fleet. In two days, the Japanese warships devastated theRussian fleet, destroying many ships and 18,000 Russian sailors. TheJapanesefleetlostonlythreetorpedoboatsand116sailorskilled.

Russiahad lost thewar.Japannowbegan toget themilitaryandpoliticalrespect of the world and also was firmly committed to a military path ofnational development. On September 5, 1905, the Portsmouth TreatybetweenRussiaandJapan(1)recognizedJapan’s“paramount interest” inKorea, (2) yielded control of the southern section of the ManchurianRailway,and(3)provideda leaseon thestrategicLiotungPeninsula.Thisopened the way to the Japanese colonialization of Korea and its laterpenetration into Manchuria, which placed Japan on the edge of China.Japanese military expansionism plans for the twentieth century were thuslaidoutbythetreaty.AlthoughRussiahadyieldedsomeofitspowerinAsia,other Western nations (e.g., England, France, Germany, and the UnitedStates)hadnotyieldedpower.Inthisway,thefirststepwastakendownthepath that would eventually lead Japan into the SecondWorldWar of thetwentiethcentury.

This territorial conquest stimulated an economic boom in Japan. Forexample, ship building to carry goods across the sea expanded rapidly.Commercial ship building also developedmilitary production capabilities.In1910,theworld’slargestwarshipatthetimewasfinishedinashipyardinYokosuka.ThusJapanese industrializationwascreating themilitarypowerfor externalaggressive expansion;and theadditionofnew territorieswasproviding economic opportunities for continued growth. As a historicalpattern,thisindustrializationofJapanwasfollowingexactlythesamepathas the industrialization of Europe during the previous century. Japanwasdeveloping military technology to acquire new colonial territories foreconomicexpansion.

During this time, the firmofMitsuiwas evolving into a large commercialand industrial combine, a zaibatsu. A zaibatsu was a financial clique ofcompanies, controlled by a Japanese banking family. In 1909, Mitsui

formallytransformeditself intoaholdingcompany,azaibatsuof thename“MitsuiGomeiKaisha.”Itwascapitalizedat50millionyenandcontained15companies inbanking,mining,andcommerce.Moreover,asJapanstillremained behind Europe in the progress of technology, zaibatsu, such asMitsui,madestrategicallianceswith foreign firms toacquireandusenewtechnology.Therelationshipofzaibatsutothegovernmentwasstrong.Forexample,InoueKaoruoftheMeijigovernmenthadcontinuedtoseeMitsuiasnotonlyaprivate familyholdingcompanybutalsoasan instrumentofnationalpolicy.KaoruaskedMitsuitoenterthemunitionsindustrytomakeweaponsfortheJapanesemilitary.MitsuiestablishedNipponSeiko,JapanSteelWorks, in a joint venture with Britain’s two largest makers of arms,VickersandArmstrong.

One can see how similar, at the time, were the societal patterns betweenEuropeandJapan. Itwas thisdesire forcolonies (as theway toeconomicexpansion)whichledtotheFirstWorldWarinEurope.Germany,Austria-Hungary,andTurkeywerealliedagainstEngland,France,andRussia.Theconflict began generally in colonial ambitions between Germany andEngland, particularly over the continent of Africa. After that war, Europewas in turmoil, particularly with a communist revolution in Russia and adestabilizing inflation in Germany. Meanwhile, Japan had furtherprogressed to new strength and prosperity. By the late 1920s,Mitsui hadbecome the dominant zaibatsu controlling capital of over 500million yenand130companies.

AftertheFirstWorldWarandlaterinNovember1921,nextoccurredakeypolitical event for the Japanese military. This was an internationalarmamentconferenceaboutbattleships,seeFigure8.9.

Figure8.9: ProgressinBattleshipTechnology1850–1906.Source:http://www_militaryfactory.com/ships/—Imagesinpublicdomain.

Agreements between theUnited States,Britain, andFrance set naval shiptonnageratiosfortherespectivenavies,whichleftJapanesenavyrestrictedtohalf the total tonnageof theU.S.andBritishnavies.This infuriated theJapanesemilitaryandgovernment.Thenaddingracial insult to injury, theUnitedStatesgovernmentpassedanimmigrationlawin1924thatexcludedfurther Japanese immigration. These incidents strengthened politicalpositionsofthemilitarycliqueforfurtherexpansionistpolicy.

Mitsui personnel supported expansionist views. For example in 1926,Yamamoto Jotaro was the obanto (head) of the Mitsui Bussan empire inManchuria;andhewasgivenahighpostintheTanakacabinetinJapan.In1927,YamamotowasappointedpresidentoftheSouthManchurianRailwayand began to build five new railway lines. In 1928, hewas invited to theImperial Palace to present his “new economic plan,” which included theconstructionofimprovedrailwayandharborworksinKorea,amajorplant

formaking fuel oil from coal inManchuria, and expansion of agricultureand forestryand industry inManchuria. Japanesenationalprosperitywasdeeply tied to the colonial expansionism inManchuria andKorea.Mitsuiwasprosperingintheexpansionism.In1931,theJapaneseArmytookallofManchuria. Japan’s empire now included Korea and Manchuko (Figure8.10).

Figure8.10: TheJapaneseEmpirein1939.Source:http://en.academic.ru/dic.n5f/enwiki/201051—Imageinpublicdomain.

As theU.S.depressiondeepened in1933,depressionbecameaworldwidephenomenon.OneimpactoftheearlierinflationandsubsequentdepressioninGermanywas tobring theNazis intopower inGermany,which laid thepath to the SecondWorldWar. Also the world depression severely hit theJapanese economy, which depended upon exports to finance the neededimportsofnew technologyproductsandknow-how.Thedepression furtherconcentratedeconomiccontrolinJapaninthefewzaibatsufamilies.In1931to fight the effect of the depression, the government passed the ImportantIndustriesControlLaw,whichorganizedlargeproducersintocartels.Bythemid-1930s,theeightzaibatsugroupswouldcontrol50%ofJapan’sfinancialcapital. Government policies became focused upon national“preparedness,”whichmeantgettingreadyforwar.

The Japanese government was fostering a culture of an extreme form of“nationalism”andfinallyeliminatedanyvestigesofdemocracyinthepre-SecondWorldWarperiod.Thezaibatsusupportedthemilitaryexpansionist

policy. They cooperated with the government in activities that restrictedtheir economic power, such as helping to suppress labor movements. Thegovernmentestablishedapolicestate,similartothedictatorialgovernmentsofHitler inGermany andMussolini in Italy. Security and thought-controlpolice,theKepeitia,expandedinscopeandactivities.Schoolchildrenwereindoctrinated in “moral education,” which consisted of Shinto mythology(the state religion), worship of the emperor, and racist superiority.Newspaperswerecontrolledandenlistedtopromotemilitarism.Dissenterswere warned; and if they persisted dissenting, they were arrested andtortured and imprisoned and even executed. About 60,000 people werearrestedfor“dangerousthoughts”between1928and1937.

The reformation of Japanese society into Western industrialization thatbegan in the 1860s grew by the 1930s into amilitary-oriented, industrialstate. A modernized military-ruled Japan, replacing the earlier feudalmilitaryrule;butthecountrywasstillunderamilitaryrule.

Control over the government by the military was finalized in 1936–1937,beginningwith theappointmentofHirotaKokiasprimeminister,whodidthe Army’s bidding. Government policy aimed toward a “total defense”economywithadominationofAsiaunderJapanesehegemony(asaGreatEastAsiaAssociation).ThusJapanesegovernmentpolicyhadbecomeoneofinternationalexpansionism,aftertheearliermodeloftheWesternnationsandinasimilarpatterntothefascistgovernmentsofGermanyandItalyofthe1930s.

By1937bothintheWestandintheEast,fascismasaformofgovernmentandmilitaryexpansionism in the formof colonializationwere thepatternsleadingtoconflictwithdemocraciesintheSecondWorldWar.InEurope,theGermanNazigovernmentunderHitlerbeganaseriesofaggressivemovesintotheRhineland, thenCzechoslovakia,andthenPoland.TheinvasionofPolandresultedinadeclarationofwarbyGreatBritainonGermany.AndtheSecondWorldWarbeganalittleover30yearsaftertheFirstWorldWar.In1937,theJapaneseArmybeganaseriesofaggressivemovesinAsia,firstinvadingChinathatwouldleadtotheSecondWorldWarinthePacific.

Laisse-FaireTheory—IndustrializationandDemocracy

“Laissez-Faire Theory” has sometimes been offered as an economic prescription fordemocracy. The assumption is that a free-market economywill automatically lead to ademocracy.ButonecanseeinthehistoryofJapanthatthisdidnotoccur.

Over the 300 years from 1700 to 2000, the world changed from thinking about anation as an international empire (e.g., theBritishEmpireor the JapaneseEmpire) to anation of global corporations (e.g., Korean chaebols or Japanese keiretsu or U.S. and

Britishglobalcorporations).This“national”conceptevolvedinthe1800sand1900s,butin problematic ways.What is the social basis of a “nation?” How does an “industrialeconomy”work?Whatisa“people”whichconstitutethenation?Whataretherightsofthe“state”versusthoseofthe“individual?”Thesocietalstrugglesforanswershavebeenthe principle themes in modern political theory. As the social sciences emerged, thedisciplinesofeconomics,sociology,politicalscience,andanthropologyhavestudiedthesesame ideas. Not only did society change in the industrial revolution, but the thinking-about-society changed — now focused toward the basic concepts of nation,industrialization,democracy,capitalism,andglobalcivilization.

Ideasaboutanation,aboutofsociety,aboutthestate—allhadbeencentralreasonsintheviolentwarsofthetwentiethcentury.TheFirstWorldWarwastriggeredby“Serbian”nationalists assassinating a future emperor of the Austro-Hungarian Empire. Germans,French,British,Russian,Italianpeopleswenttowarfortheirnations.TheSecondWorldWarwaswagedbynationsasanaxisoffascistdictatorshipsversusalliesofdemocracies(withtheexceptionofthecommunistSovietUnion).Andthealliedvictoryoverfascismthen devolved into a “Cold War” between capitalist democracy and communistdictatorships. This chilling episode of a cold war never erupted into a “hot” war,fortunately.The atomic bombwas invented in theSecondWorldWar, and anyhotwarthereafter portended the destruction of everything in a nuclear Armageddon. Thus thehistory of the modernization of Japan was a first episode in Asia of the continuingindustrializationoftheworld.Thisisthe“bigpicture”ofthemodernworld—scenariosof nationalism, industrialization, democracy-versus-dictatorship, war, and militarytechnology.

HouseofMitsui

TheimmediatepoliticalinterestsforthebeginningoftheJapanese/Chinesewar in 1937 arose from economic competition between two cliques ofmilitary/economic groups — the Manchurian clique involving a newzaibatsuofNissanandtheolderzaibatsu(includingMitsui)witheconomicinterests in China. The newNissan zaibatsu was officially named NipponSangyo and consisted of Hitachi Ltd., Nippon Mining, Nippon MarineProducts, Nissan Motors, Nissan Chemical Industries, and hundreds ofsubsidiaries.TheJapaneseArmyinManchuriawasheadedbyGeneralTojoHidekiandformedanalliancewithNissan,whosemanagerscontrolledtheManchurian Heavy Industries. The economic power of the new NissanzaibatsuinManchurialedtheolderzaibatsutocooperateinexploitingthetradeandresourcesinChina.Inturn,thisextensionoftheoldzaibatsuintoChinaalarmed the newNissan zaibatsu-centeredmilitary clique, and theydecidedtoinvadeChina.

The military clique fabricated a shooting incident between Japanese and

ChinesetroopsattheMarcoPoloBridgeontheoutskirtsofPeking.Onthispretext, Japan declared war upon China. The Japanese army quicklyoverranChinaalongthecoastandintotheinterior.From1937to1940,thewarcontinued inChinaat lowgearandbenefitted theJapaneseeconomy.ThecostofJapan’soccupationwasbornebythesubjugatedChinese.Japanobtained an inflow of raw materials from China at a low cost that wereexchangedforarelativelyhigher-pricedJapanesemanufacturedgoods.

Thiskindofexchangeof therawmaterialsandagriculturalproducts froman occupied non-industrialized country for manufactured products of anoccupying industrialized country was the heart of “colonialism.” TheEuropean nations had used this form of colonial exchange to drive theindustrializationofEurope,andithadledtotheEuropeanFirstWorldWar.Firmsinindustrializingcountriesbenefittedfromvictoriouswars,producingmilitaryproducts for theirgovernments.Thiswasalso true for the firmofMitsui,whoprosperedinproducingmunitionsandweaponsfortheJapanesemilitary.

However,Japan’sresourceneedscouldnotbecompletelymetbyitscolonialoccupation of Manchuria, Korea, and northern China. It still lackedsufficient petroleum, with only 8% of the nation’s needs produceddomestically.Thisledthemilitary-dominatedgovernmenttonextlaunchaninvasionofnorthernIndochina(thenaFrenchcolony) inSeptember1940.TheUnitedStatesrespondedwithanembargoonthesaleofscrapironandaviationfueltoJapan.Inresponse,thewarministerofJapan,GeneralTojo,then proceeded to plan a totalwar, and in the summer of 1941, Japanesearmy expanded their occupation into southern Indochina. This area hadsupplied raw materials to Western nations such as rubber, tungsten, tin,copra,silk,jute,andshellac.

The United States continued its embargo upon strategic fuels and rawmaterials, ending its tradewith Japan, and Japan then had to give up itsnew colonies or go towarwith Britain and theUnited States. Japan, theformer landof thesamurai,chosewar. Itsmilitary forcesbombedtheU.S.NavalbaseinHawaiiand,inaseriesofsuccessfulinvasions,conqueredtheBritishcoloniesofSingaporeandHongKongandtheAmericandependencyof the Philippines. Thus began the Second World War of the twentiethcenturyinthePacific,betweenJapan(alliedwithGermany)andtheUnitedStates(alliedwithGreatBritain).

After the initial Japanese military successes of 1941, the fortunes of warturned upon the Japanese military. By the end of 1942 and beginning of1943, the Japanese forceswere ondefense.TheUnited States forceswerebeginningtomoveinexorably,stepbystep,acrossthePacifictowardJapan.Thewarhadtobefoughtwiththemilitarytechnologyoftheairplane.Therangeoffighteraircraftwaslimited,andsoislandsheldbyJapaneseforces

in the Pacific had to be taken, one-by-one — for the Allied forces toeventually extend the rangeof theirair-mightacross thePacific to Japan.Figure8.11showsthemajorbattlesinthePacific.

Figure8.11: ConflictinthePacific1942–1945.Source:http://ww2db.com/image.php?image_id=12735.

By1945, theUnitedStateshadcaptured islandscloseenough toJapan toextensively bomb Japanese cities. For example, on May 25, 1946, 500American B-29 long-distance bombers dropped incendiary bombs,destroyingmostofcentralTokyoandadjacentresidentialareas.FinallyonAugust1945,theUnitedStatesbombersdroppedaterriblenewweapon,theatomicbomb,firstuponHiroshimaandnextonNagasaki.These15kilotonsofexplosions(inlightandair-pressurewaves)instantlyobliteratedacentralmile circle of each city, killingmore than a 100,000 civilians andmakingthousandsmoresickwithnuclearradiation,anewdeadlyperilintheworld(Figure8.12).

Figure8.12: AtomicBombs.Source:http://www.archives.gov/research/military/ww2/photos/images/ww2-l63.jpg.

The news of this final turn of the terrible war spread shockingly and inpuzzling confusion throughout the Japanese nation. In Mitsui,communications between Tokyo headquarters and branches in Hiroshimawere suddenly cut off onAugust 6, andheadquarterswas thenaware thatsome kind of catastrophe had happened. Two days later news came fromManchuriathattheSovietArmyhadinvaded.OnAugust8,therewasnewsofanothergreatcataclysmicexplosionatNagasaki.

TheEmperorandgovernmentalsowerestrugglingwiththisnews,andtheEmperor decided upon a surrender. Still, some army personnel werecommitted to national suicide, and after an aborted army coup onAugust15,theemperorwasabletobroadcasttohispeoplethatthewarwasended.TheEmperorannounced thathehadaccepted theAlliedJointdeclarationforunconditionalsurrender.Heexplainedtohispeople:“Wedeclaredwaron America and Britain out of our sincere desire to ensure Japan’s self-preservationandthestabilizationofSoutheastAsia…Butnowthewarhastastednearlyfouryears.Despitethebestthathasbeendonebyeveryone—the gallant fighting ofmilitary and naval forces…Thewar situation hasdevelopednotnecessarilytoJapan’sadvantage”(Roberts,1989).

StrategicDecisionsandSocietalChange

Looking back historically at Japanese society, one can see four strategic decisions byleaders,whichimpactedthecourseofsociety—bigpictures,planningscenarios.

AfirststrategicdecisionbytheTokugawashogunatewastoisolateJapanduringthe1600sand1700s.ButitwasduringthesecenturiesthatEuropewasmakinghugeleapsinscience,technology,andindustrialization.Bythetime,theAmericanshipsarrivedin1855,Japanwastotallybehindinindustrialstrengthandmilitarymight.TheAmericanswereinapositionofpowertoforcetheopeningofJapantotheWesternnations.Inretrospect,“nationalisolation”wasabadstrategicdecision—leadingovertimetonationalweakness.

AsecondstrategicdecisionbytheShoandChuclanswastooverthrowtheBakufugovernment.TheysetupanewMeijigovernmenttoreformJapanesesociety—eliminatingfeudalcastes,introducinguniversaleducation,establishinguniversities,importingWesterntechnologiesandscience,encouragingtheentrepreneurialgrowthofprivatefinancialandtradinghouses(zaibatsu).Inretrospect,“nationalreform”wasagoodstrategicdecision—leadingovertimetonationalstrength.

AthirdstrategicdecisionbythezaibatsuinJapanwastofollowthemilitarystrategyforempire.ThisatfirstproducedwealthbutledtotheeliminationofdemocracyinJapan.Theindustrialleadershadsurrenderednationalleadershipentirelytothemilitary.Inretrospect,“militarygovernment”wasabadstrategicdecision—leadingovertimetoaseriesofwars,withincreasinglymorepowerfulrivalnations.

AfourthstrategicdecisionbythemilitarygovernmenttoengageinwarwithdevelopedandindustrializedWesternnations,ledtoJapan’sparticipationintheSecondWorldWaragainsttheAlliednationsandtothetotaldefeatofJapan.Inretrospect,“nationalwars”wasabadstrategicdecision—leadingovertimetonationalcatastrophe.

Of course, summarizing a history of national policy decisions in this way oversimplifiesthesituationsofasocietyatthedifferenttimes.However,intermsof“strategicdecisionsandplanningscenarios,”itillustratedthepointthat—howleadersthinkabouta“bigpicture”oftheirsocietycanhaveamajorimpactuponhistory.Strategicdecisionsbyleaderscanalterthedirectionofasociety’shistory;andsuchdecisionsdependedupontheunderstanding,atthetime,ofthe“bigpicture”oftheirnation.

StudyContinuedHouseofMitsui

Returning to the historical scenario of the case ofMitsui, we pick up thenarrativeafter theSecondWorldWar.TheUnitedStatesPresidentTrumanorderedAmerican forces underGeneralMacArthur to occupy the country

and begin democratizing the Japanese economy, including dissolving thezaibatsu: “To this end, it shall be the policy of the SupremeCommander…TofavoraprogramforthedissolutionofthelargeindustrialandbankingcombinationswhichhaveexercisedcontrolofagreatpartofJapan’s trade and industry” (President’s Directive on September 6, 1945—http://ibiblio.org/hyperwar/Dip/AxisInDefeat/index.html).

ThisnewsshockedthecommercialleadersofJapan,asitwouldcompletelyalter the country’s economic structure. The officials in the zaibatsu hadsimplyassumedthattheywouldleadthereconstructionofthenation’swar-ravagedeconomy.ButGeneralMacArthurimmediatelyissuedorderstothefourlargestzaibatsu—Mitsui,Mitsubishi,Sumitomo,andYasua—toplanthedismantlingoftheirholdingcompanies.In1945,the10largestzaibatsuheld35%ofthenation’spaid-upcapital,55%ofbankassets,71%ofloans,and67%oftrustbankdeposits.Mitsuithenwasprobablytheworld’slargestprivatebusinessorganization,withthe11branchesofthecontrollingMitsuifamily having a wealth of about 600 million yen and owning about 336companies.

The American SupremeCommander for the Allied Powers (SCAP)movedintoaction.OnOctober8,1946,U.S.ArmytruckswithU.S.Militarypolicearrived at Mitsui headquarters to seize Mitsui financial valuables. Theyloaded42woodencasesthatcontainedMitsui-ownedstocksandbondsofavalueof1.2billionyen.AtotherMitsui locations, theyalsoseizedanother260 million yen worth of certificates. These impounded certificates madetheirownerspowerless in theboard roomsof theirowncompanies.SCAPorderedapurgeoftheleadersfromgovernmentandindustryinJapan.Morethan220,000 leadersof themilitary,bureaucratic,political,andeconomiccliques who had been running Japan were banished from their positions.SCAPdraftedanewconstitutionforJapan,vestingstatepowerinthe“willofthepeople”andprovidingabillofrightsmakingallequalunderthelawandenfranchisingwomen.ThenewDietin1946createdasteeplygraduatedtaxonpersonalassets(https://history.state.gov/milestones/1945-1952/japan-reconstruction).

The Mitsui clan was hard hit by these changes. SCAP began carving upzaibatsugroups.TheMitsuiBussanwasdividedinto170companiesandtheMitsubishi Shoji into 120 companies.But disagreementwithinWashingtonpoliticsovertheconcentrationofeconomicpowerinJapanquicklyalteredpolicies,andthezaibatsubandswerenotmadesubjecttode-concentration.Eventually,42holdingcompaniesweredissolved.Yetthelargestbankswerestillintact,suchasFuji,Mitsubishi,Sumitomo,Snawa,andDai-Ichi.Theseprovided nuclei to replace the old holding companies, the zaibatsu, toreconstructfinancialandindustrialgroupingsinthepostwareconomy.Buttheseneweconomicgroupingsofcompaniesaroundthebanksturnedouttohavesimilarmembershipandsizeastheprewarzaibatsu.

Effectively,theinstitutionalframeworkandfinancialsystem,centeredonthezaibatsu,survivedtheAmericanoccupation.MoreoveraftertheKoreanWarbegan (with theNorthKorean communist army invasion of SouthKorea),this old/new structure of zaibatsu was encouraged by the Americans torebuild. The United States army intervened with United Nations allies tosaveSouthKoreaandusedJapanasabaseforpursuingKoreanWar.ThishelpedrevivetheJapaneseindustryandeconomy.

SCAPwasthentoldtoreorganizeJapanforstrengthratherthan“peaceanddemocracy.” In 1951, more than 2,500 former imperial army and navyofficers were moved back into positions of leadership. Also former high-echelon zaibatsumanagerswere let back into running companies.Despitethedisasterofthewar,Japan’sinfrastructurewasbackinplace.EconomicprogressinpostwarJapanrestoredthenationtooneofthemightyindustrialnationsof theworld.When theAlliedoccupationof Japanended in1952,economic opportunity was booming. Older companies regrew, and newcompanies started. Entrepreneurship and opportunity in Japan flourishedagaininanewgeneration.

In thecaseofMitsui, theorganizations thathadbeencontrolledbyMitsuiHonshadrewbacktogethertopromoteanewMitsuiGroup.Promotingthiscohesiveness were former Mitsui financial institutions and mining andchemical production companies and real estate. For example, one specialMitsuimanagerwasTashiroShigeki,whoheadedToyoRayon.HeknewthatJapan needed to produce the new synthetic fabrics invented in theUnitedStates,suchasNylon.HetraveledtoDuPontandnegotiatedforalicensetoproduce Du Pont’s Nylon. Tashiro also bought licenses to polyester fiberinnovationsfromBritain’sImperialChemicalIndustries.HebegantobuildTorayintoacompanythatwouldbecometheworld’sthird-largestproducerofsyntheticfibers.

This example illustrates the pattern of economic reconstruction of Japan.Entrepreneurial managers reached out to the global world for advancedtechnology, brought it home, implemented it, and improved it and becameworld-class manufacturing and financial institutions. Even the name ofMitsuiBussanwaseventuallyrestored.OnAugust5,1958,membersofa15Mitsui companies met and witnessed a business agreement among thecompanies that restoredMitsui BussanKaisha (Mitsui&Company, Ltd.).OnceagainMitsuiwasJapan’slargesttradingfirm.Forexample,in1985,the Mitsui Group comprised 69 companies, with 400,000 thousandemployeesandtransactionsof42trillionyen.TheHouseofMitsuifromthe1600shadspawnedalong-lastingfirm.

ScenarioRelevancyMatrix

Howcanoneusescenarios in thecontextofbusinessplanning?Werecall thatplanningscenariosarestories told in thepresentof thefuture.While thecaseofMitsui,wehavejustsummarized,isastoryofthepasttoldinthepresent.Thisisabigdifference—thedifference of a planning perspective on the future and the historical perspective on thepast.Storiesofthepastandthefuturearebothkindsofstories,scenariostories,butoneofa“creating”thetimes(thefuture)andoneof“recreating”thetimes(thepast).

ThecaseofMitsuihasbeentoldasanhistoricalstory—ascenariostoryofthepast—withcharacters,plot,action,anddrama.Butitwasanarrativelookingbackward,fromahistorian’sperspective.Whatdidtheparticipantsofthetimeseeoftheirhistory?Itwascertainlynot this“neat”historicalstudy,seeingthepastbackwardsfromthefuture.Theparticipants at the time seeonly apresent, apresentof confusionanduncertainty.Howthen could they have told the story of Mitsui as it unfolded? We have clues to thisperspectiveoftheparticipantsfromthewritings,orstories,theytoldoftheirtime.

The participants living in times of great societal change cannot see the present andfutureoftimesoftrends,challenges,andopportunities.Alltheycanbecertainofintheirtimewasthatthe“timeswerechanging.”Butthislessonistrueofalltimesofchange.Allthe participants in any historical period can see of change are the directions of change(trends), the needs to change (challenges), or the freedom to change (opportunities).Uncertaintyaboutthefutureisthenatureoflivinginatimeofchange.Onemayusethemodelofsocietalchangetoenvisiontheinteractionsofsystemsofasocietyinthefuture.Thestrategictechniqueistofirstconstructa“scenariomodel”ofthestructuresofsocietythat show trends of changing and within which will be found the challenges andopportunitiesofthefuture(Figure8.13).

Figure8.13: StrategicScenarioModel.

All this historical scenario about theHouseofMitsui, theTokugawa shogunate, theMeijiRestoration,theindustrializationandmilitarizationofJapan,thepostwarrecovery,andthegrowthofJapanintoamighty,modernindustrialgiantprovidedthe“bigpicture”ofthechangingsocietyinwhichMitsuifoundeconomicopportunities.

Ifonecouldgobackto1722knowingallthatwastounfold,onecouldhavewitnesseda significant celebration of the House of Mitsui on the first hundredth anniversary ofHachirobeiTakatoshi’sbirth.WerecallthatHachirobeiwastheyoungestsonofSokubeiandShuhoandhadbegunthebuildingofhouseofMitsui.HachirobeiwassenttoEdobyhismotherShuho,toassisthiselderbrotherinthefirstMitsuidraper’sshopinEdo.ThenHachirobeiopenedasecondshopinEdoandwentontolaythefoundationoftheclan’sbusinessempire.A100yearslatertheHouseofMitsuicelebratedhisbirthbypublishinghis“will”asacodeofconductforMitsuimanagers.ItwascalledCodeofRegulationsfortheHouseofMitsui,andinpartread:

The(following)articlesaretheinstructionswhichIleaveasmywill.Theseinstructionsaretobeobeyedstrictlyandwithoutfail.IntheseventhyearofKyoho,theYearofWaterandtheTiger,theeleventhmonth,firstday.

–ThemembersoftheHouseshallpromotethecommonwelfarewithoneaccord.

–Unless amerchant is diligent and attentive, his businesswill be taken over byothers.

–Farsightednessisessentialtothecareerofamerchant.

–Allkindsofspeculation…shallbestrictlyforbidden.

–Donotforgetyouareamerchant.Youmustregarddealingswiththegovernmentalwaysasidelineofyourbusiness.

–TheessentialroleofthemanagersistoguardthebusinessoftheHouse.

– In order to select worthy managers, keep an eye on the young … and trainpromisingcandidates….

We can see in this case, of the very long evolution of theHouse ofMitsui, how abusiness needed to change to adapt from the oldworld of a feudal society to the newworldofindustrializedsociety.TheclanbusinessoftheHouseofMitsuievolvedintothecorporate firm of a holding combine, under the name of Mitsui Gumi. This is thetheoreticalpointaboutstrategicchange.Inthegreattransitionfromafeudalsocietytoamodern industrialized society, many strategic changes were needed for the business tosurviveovertime.

Summary

The“bigpicture,”strategicscenario,inthestrategyofanyorganization,isthesocietyinwhich it is embedded and the societies of theworldwhich interact.Aprojectionof thepresentintothefuturerequireslookingattrendsandpossiblechangesinallthesystemsofasociety—economic,political,cultural,andtechnological.

Technological change has driven societal changes over the last 300 years andcontinues to do so in the future. Even in terms of decades (and not over a 100 years),modern societies change and the business and economic environments of corporationschange.Missing the “big picture” (strategic scenario) is a serious strategic flaw.And astrategicscenariowhichactuallyoccurswillbecomehistory.

Mitusibeganasafamily-/clan-orientedhouseofbusinessinatimeofstablepoliticalorganization and peace. To prosper, it diversified into both retail of value-added goods(silkcloth)and finance.Whenoutsidepolitical forceswith superiormilitary technologydroveawholetransitionofthesocietyintheMeijiRestoration,Mitsuineededtobecomea modern corporate organization. In becoming a holding company (a zaibatsu),MitsuiGumi diversified into banking, retail, trade, and production.Always the political formsandideologyofthechangingsocietyinvolvedtheleadershipofMitsuiinparticipationinthepoliticalandcommerciallifeofthecountry.AstheJapanesegovernmentaggressivelyexpandedterritorialconquests,Mitusiexploitedcommercialadvantagestothefirmofthecolonialismpoliciesandmilitaryadventuresofthegovernment.

AftertheendoftheSecondWorldWarandtheoccupationbyforeignforces,Japan’s

commercialandgovernmentalstructuresofthecountrywererebuilt,withforcedguidancebyU.S.governmentagencies.Asanoccupationforce, theUnitedStatescanbecreditedwith contributing to the democratization of Japanese government institutions and thestimulus of Japanese industrial redevelopment, rather than merely punishing a formerenemy.Intherebuildingofthecountry,somepartsoftheformerMitsuicompanieswereresurrected,transformed,andrecombinedtoareconstitutedMitsui.ThepostwarmodelofreconstructionwasagaintheactiveseekingoutbyJapanesefirmsofnewtechnologyfromglobal sources and implementing and improving these into new businesses and sellinggoodsabroad.Thismodelofacquiringandinnovatingnewtechnology-basedproductsandaggressively competitive trade andmarketing produced a rapid economic recovery andcreatedinthesecondhalfofthetwentiethcenturyanindustrialgiantofJapanamongthecountriesoftheworld.AlthoughthechangeinJapanfromfeudaltoindustrialsocietywasdramatic, all human societies on Earth have had to transform from tribal and feudalsocietalformstoindustrializedformsfromthe1700sthroughthe2000s.

One can see how, over time, the societal contexts of all businesses change and allbusinessfirmsmustadapttonewsocietalenvironmentsorperish.Overthelongterm,allmodern societies change, and all industrial firms must adapt to changes. This is theimportanceofscenariosinstrategicplanning.

The worldwide trends of industrialization and colonialization had swept all nationsinto theworld scenario. From about 1765 to about 1865, the principal industrializationoccurredintheEuropeannationsofEngland,France,andGermany.From1865toabout1965 (the second 100 years) other European nations began industrializing; but theprincipal industrialization shifted to North America. By the middle of the twentiethcenturyinthe1940s,theU.S.industrialcapacitywasaloneaslargeandinnovativeastobeadeterminingfactorintheconclusionoftheSecondWorldWarofthatcentury.

For the second half of the twentieth century, U.S. industrial prowess continued togrow,andEuropeannationsrebuilttheirindustrialcapabilitiesthathadbeendestroyedbythewar.Butforthepatternofindustrializations,significanteventsoccurredinAsia.From1950 until the end of the twentieth century, severalAsian countries began emerging asgloballycompetitiveindustrialnations:Japan,Taiwan,SouthKorea,andSingapore.OtherAsiancountries,includingthePhilippines,India,China,andIndonesiawerealsomovingtowardgloballycompetitivecapabilities.

AsianindustrializationactuallybeganinJapanin1865withtheMeijiRestoration.Butit was diverted principally to amilitary-dominated society and production. It was onlyafter the Second World War in the reindustrialization of Japan that democracy, free-markets, and world-class industrialization actually occurred. So it was that the majorgrowth of world economies and industrialization for the second half of the twentiethcenturyandintothetwenty-firstwasprincipallyfocusedinAsia.

TheoreticalPrinciples

1. Structureandfunctioninasocietycanbepartitionedintofoursocietalsystems:economicsystems,politicalsystems,culturalsystems,andtechnologysystems.

2. Changesinthestructureandfunctioningofanyofthesystemswillimpactthefunctioningoftheothersystems.

3. The‘bigpicture’ofchangeinasocietycanbedepictedaschangesinthefoursystemsofasociety.

StrategicDishonor

Introduction

Historicallyinbusiness,notallstrategicdecisionshavebeengooddecisions,resultinginproductivity,competitiveness,prosperity,andsurvival.Infact,therehavebeenmanybadstrategicdecisions,resultinginsteadinbusinessdeclineandbankruptcy.Aswereviewedin decision theory, values are the connection between the goals of a decision and thefutureexperienceoftheoutcomeattainedbyaction.Andwesawthatthedifferentgroupsofstakeholdersinadecisioncanvaluethedecisiondifferently.Inbusinessdecisions,therearealwaystwogroupsaffectedbyaction—membersofthebusinessfirmandcustomersof the business firm.Agood strategic decisionneeds to includeboth values of the twogroups.

One would think that all CEOs and Directors have in mind good value for theircustomers,atalltimes.Unfortunately,thishasnotalwaysbeenthecase.Onekindofabadstrategicdecisionoccurswhenaleaderfocusesupononlyoneperspective,thevaluesoftheCEOandowners.Whenthishappens,companiescanget“flipped.”

PerilsofSunbeam

Onefamouscaseofbaddecisionshappenedinthe1980–1990stoSunbeam,aU.S.company.JohnByrnewrote:“SunbeamwasthecompanythatgrewupwithmodernAmerica.Itsingeniousinventorsdevisedthefirstautomaticcoffee-maker,thefirstpop-upelectrictoaster,andthefirst‘mix-master’…”(Byrne, 1999). Yet in the 1980s and 1990s, the once great Sunbeamwasharmednotjustoncebuttwicebypoortopexecutivemanagement.In1987,itwasforcedintobankruptcyandagainin1998.

ThestoryofSunbeamgoesbackovera100yearstotheturnofthetwentiethcentury.In1897,theChicagoFlexibleShaftCompanywasfoundedbyJohnStewartandThomasClarkandmadeagricultural toolswith flexibleshafts(suchassheep-shearingmachines). In theearly1900s, they introduced thebrandnameof“Sunbeam”fortheirnewlinesofelectricalappliancesforthehome (such as toasters, irons, and mixers). Later in 1946, the Chicagocompanyofficiallychangeditsnameto“Sunbeam.”

AnothersourceofSunbeam’smainapplianceproduct lineswas itselectricblankets,andthisinnovationtracedbacktothe1920stoaninventornamedPopRussell.Hehad the ideaof creating electrical heatingpads to replace

hotwaterbottlesthatwereextensivelyusedaround1900towarmcoldbeds(whennoonethenhadcentralheatingintheirhomes).Hestartedabusinesscalled Northern Electric Co and sold the innovative heating pads in drugstores.ThenacustomerwhoranatuberculosissanitariuminNewYorkStateaskedhimifhecouldmakeaheatingpadaslargeasablanket.Thecustomerhadpatientswhosleptoutsideinthecold(assleepinginthecoldwasthenthoughthelpfulintuberculosistreatment).Inthe1930s,Russellinventedanelectricblanket,consistingofstiffwirescoatedinasbestos.Amoreflexibleheating wire was developed during the SecondWorldWar to heat flyingsuitsofpilotsforflightathigh,coldaltitudes.

In the 1950s, Oster Company bought Northern Electric; and in 1980,SunbeamboughtOster.Sunbeamengineersinventednewelectricwiresforelectricblankets thatadjustedheat levelsbysensingbody temperatureandeliminatedthelumpythermostatspreviouslyusedinelectricblankets.Withthis innovationofanewgenerationofelectricblankets,Sunbeamcapturedthemarket,wipingoutcompetition.ThusSunbeamwasahealthycompanywith excellent home products. But in 1982, a terrible thing happened toSunbeam. It was purchased by a corporate conglomerate, AlleghenyInternational.

Allegheny International (AI)hadbeen recentlyput together in1982byanexperienced but inept business person named Robert Buckley, who soonmanagedAI intobankruptcy.WilliamSymondswrote:“TounderstandAI,youmustfirstknowitsboss.Thecompanyisundeniablythecreationoftheambitious 62-year-old Buckley. He grew up in New York, earned a lawdegree at Cornell University and gained his first extensive businessexperienceatGeneralElectricCo(GE).InnineyearsherosetomanagerofunionrelationsoftheSchenectady(N.Y.)plant”(Symonds,1986).

Fromthere,BuckleymovedtorunningStandardSteelandthentopresidentof IngersollMillingMachineCo. In1972hemoved toAlleghenyLudlumIndustries,which thenwasaspecialtysteelproducer located inPittsburgh,Pennsylvania. In 1975, Buckley decided to sell off the steel business andboughtSunbeamCorpandWilkinsonSwordGroup.In1982,hechangedthenameofAlleghenyLudlumIndustriestoAlleghenyInternational,withsalesof$2.6billiondollars.ItwasthepurchasesofSunbeamandWilkinsonthattripledAI’srevenueovertheearliersteelbusiness,butalsoaddedsubstantialdebt.

InsteadoflearninghowtomanageAI’snewacquisitions,Buckleywentonexpandinghisbusinessportfoliobyinvestinginrealestateandinenergy.HesetupanewrealtyunitandboughttheDoverHotelinmidtownManhattanin NewYork City and an office building in Houston (called the PhoenixTower). He built an elaborate corporate headquarters in Pittsburgh. Heinvestedinenergy,butendedupdrillingadrywell inTexas.Addedtothe

recent Sunbeam and Wilkinson acquisitions, these other real estate andenergy investments created substantial debt for AI and yet, in contrast toSunbeam,generatednoprofits.

Meanwhile,BuckleyhadgreatlyincreasedthecorporateoverheadofAI,byproviding extensive and expensive executive perks to himself and hiscorporateteam.AIboughtaTudorhomeinPittsburghforBuckley’suseandalso a condominium in Ligonier, Pennsylvania (that backed onto a mostexclusive golf course). AI also purchased a controlling interest in acondominium project in Florida (in which Buckley himself bought threeunits).Buckleyandhisexecutivesflewaroundthecountryandtheworldinafleetoffivebusinessjets.AIwasgeneroustoitscorporateexecutivesbyproviding$30million inpersonal loans to thematabelowmarket interestrate of 2%. Symondswrote: “EvenwhileAI’s executivewere sowing theseeds of their financial problems, their level of compensationwas stirringdiscussion inPittsburgh corporate circles. In 1984when it earned a paltry$14.9million,AIpaidBuckleyover$1millionincash,morethanthechiefsofthetwolargerPittsburghcompanies”(Symonds,1986).

In1981,AI’snetincomehadbeen$80millionbutdeclinedto$45millionin1982,$30million in1983, and$15million in1984.AI’s executiveswerelivingwellbutwerenotproperly“takingcareofbusiness.”Buckley’sbadinvestments in real estate andgas created substantial losses. In1985,AI’srealtyunitlost$63million,andtheenergyunitlost$30million.Intheyearof 1985, AI went from the previous year’s modest profit of $15 milliondowntoaverysteeplossof$110million.AI’sstockhaddroppedfrom$54ashareto$17.

As this occurred, why were AI’s board of directors not paying attention?Symondswrote: “Wherewas the AI boardwhile all this was happening?One possible explanation for its passivity and relative generosity is that anumberofoutsidedirectorshavefinancialtiestothecompany”(Symonds,1986).Oneexampleofanapparentconflictof interestwas thatoneof thedirector’s upon joining AI’s board in 1983 received a consultingarrangementfromBuckleyworth$50,000dollars(forservicesnottoexceedfivedays ayear).Another examplewas adirectorwhose consulting firmsreceived$163,000forworkdonein1985.

While AI’s board was not properly watching over the company’sperformance,therewasbadimpactonpoorSunbeam.Byrnewrote:“UndertheportlyBuckley,theappliancecompanywithsomeofAmerica’sbelovedbrandnamesbecameavictimofneglectandabuse.Sunbeamwascompelledto return nearly all of its profits to Allegheny’s corporate center inPittsburgh,andwasstarvedofcapital toupdate itsfactoriesandrefreshitsproductlines”(Byrne,1999).

In1986,Buckleywasfired.In1987,Alleghenyfiledforbankruptcy.Forthe

nexttwoyears,Sunbeammanagementhadtostruggleonunderthecloudofa bankrupt corporation— with the uncertainty of ownership, starved forresources, andnot evenknowingwhether therewasa long-term future forthe company. Would there be a happy ending to the story of Sunbeam?Unfortunately,notthenexttime.

BusinessModelandOrganizationalStructure

WecananalyzehowthebusinessmodelofBuckley’sAIranthecompanyasaholdingfirmwithportfoliobusinesses,suchasSunbeam.InChapter6,wehaddiagramed thebusinessmodelofadiversified firm;and this is shownagainforAIandSunbeaminFigure9.1.

Figure9.1: StrategicBusinessModelsinaDiversifiedFirm.AnAppropriateStrategicModelforaDiversifiedFirmLevel(AI)isa“StrategicFirmModel.”ForaBusinessinits

Portfolio(Sunbeam),anAppropriateModelisa“StrategicEnterpriseModel.”

Buckley was focused upon growing AI to increase its stock value andtherebyjustifylargersalariesandperksforhimandhisexecutives.Sunbeamsuffered fromyielding itsprofits toAI,withoutany return investment intoSunbeam to maintain its competitiveness in consumer markets. WhileBuckley’sAI focusedupon financialmarkets, in order to justify increasedexecutive pay and perks, Sunbeam’s focus on customers was ignored byBuckley.Buckley’sbusinessmodelofAI,asaholdingfirm,hadtheleadersoftheportfoliocompanies(e.g.,Sunbeam)withresponsibilitytocustomersbutwithout thepower (in resources) to continue to serve customersbetterthan competition. Under AI, Sunbeam began its decline as a competitivecompany.

AuthorityStructureofanOrganization

Thebusinessmodelof adiversified firmplaces thepresidentsofportfoliobusinesses under the authority of the CEO of the holding firm. In adiversified firm, there are usually at least four levels of managementhierarchy: (1)CorporateLevel—Board,CEO,andFirmExecutiveTeam,(2)BusinessLevel—PresidentandBusinessExecutiveTeam,(3)DivisionLevel—DivisionDirectorandAdministrativeStaff,and(4)OfficeLevel—Office/ProjectManagerandTechnicalStaff.ThisisshowninFigure9.2.

Figure9.2: LevelsofAuthorityinAI.

First,wehavedrawnthelineoforganizationalauthorityupwardsfromCEOtotheBoardofDirectors(ratherthannormallydownward).ThisisbecauseBuckley had coopted his board, selecting them to be under his influence(authority)—rather thanhimbeingunder theirauthority.This lasteduntilthefinancialcrisis,whenfinallytheBoardtookbacktheirauthorityin1986andfiredBuckleyforthemassivelossesinAI.Butitwastoolate,andAIfiledforbankruptcythenextyearin1987.

Theorganizationalterm“coop”means“totakeoverauthorityofalargerorrelatedgroup”; and it aptlydescribeshow someCEOscan actually “take-over” and unduly “influence” their corporate boards. This is possible bycarefullyselectingandhavingthemelectedbyshareholders.TheabilityofaCEO to select boardmembers, through control of proxy votes, places theCEO in power over board members — unless a crisis occurs, such asbankruptcy.UnderthepoweroftheCEO,selectedboardmembersmaynotperformhonorably,butaccordingtothewilloftheCEO.

The corporate reality in the United States is that most shareholders ofpublicallyheldcorporationsdon’tbothertovote.ACEOcansolicitandvotetheirsharesbyproxy,sinceonlythecorporationhasandmaintainsthelistoftheirshareholders.Byproxyvoting,manylargecorporations in theUnitedStatesareeffectivelyunderthecontroloftheirCEOandnotbytheirBoard(unless and until a hostile investor buys a significant portion of shares,usuallyatleast10%).TherealityofpowerinAIwastheCEOcontrolledtheBoard.

Buckley’sstrategywastousetherevenueandequityofAItoborrowmoneyfor more investments to increase revenue.We recall that Buckley boughtSunbeamandWilkinsonandtheninvestedinrealestateinNewYorkCity,Houston, and Pittsburgh. He invested in a dry well in Texas. All theacquisitionsandinvestmentsaddedenormousdebttoAIandgeneratedfewprofits. Why was Buckley pursuing such rapid expansion of AI’sinvestments?Hewantedmoresalaryandperks.Buckley’sstrategicfocusasongreedandnotonthesurvivalofAI,asshowninFigure9.3.

Figure9.3: StrategicGreedinBuckley’sAI.

Buckley had focused only on the perspective of his self-interest andexecutivesforperksandhighersalary.Hethoughthecouldachievethisbynewacquisitionsandinvestments.Buthepaidnoattentiontoefficiencyofhis acquisitions andwas ineffectual in his investments— only increasingcorporate debt, until the corporate outcomewas bankruptcy. The strategicperspectiveof customersnever enteredBuckley’smind; itwasnot part ofhis strategic thinking.Buckley’s strategic thinking turnedout tobeneitherpowerfulnorhonorable.Hedidnotknowhowtocompetitivelyrunalargediversifiedfirm.

In1989afterAI’sbankruptcy,twoinvestmentfundmanagers,MichaelPriceand Michael Steinhardt, saw a good business deal in the unfortunate

situationofSunbeam.TheyboughtupAI’sdebtcheaplyandtookcontrolofthe bankrupt company. With the assistance of investment bankers, PaulKazarian and Michael Lederman, they restructured the company as“Sunbeam-Oster.”

PaulKazarianthenmanagedthecompanyofSunbeam-Osterandreturneditprofitability.Heconsolidatedtheelevendivisionsofthecompanyintofour.He coordinated the selling of the all the company’s products to majorretailersandcoordinatedpurchasingoperations.UnderKazarian’sfirstyearof leadership, Sunbeam’s operating earnings became $96 million, turnedaroundfromthepreviousyear’slossof$95million(Byrne,1999).

In August 1992, Kazarian took the company public again, raising $250million by selling 24% of its common stock. Price and Steinhardt hadessentially acquired Allegheny for $1.50 a share, and the public offeringwent at $12.50 a share. Their initial investment of $130millionwas thenworth$1.1billion,buttheystillhad76%ofthestocktoselltorealizeitall.TheywantedSunbeamtobebuiltupforanevenlargersale—andquickly—butthiswouldtaketime.KazarianhadabitterfallingoutwithPriceandSteinhardtoverhowlongitmighttake,andKazarianleftSunbeam.

NextPriceandSteinhardthiredRogerSchipke,fromGE,torunSunbeam.Earlierinthiscareer,RogerSchipkehadmanagedGE’sappliancebusiness.Inthelate1970s,SchipkestrategicallyreengineeredGE’srefrigeratorlinetolowercostsandimprovequality.Hedidthiswithnewtechnology,inordertomeetcompetitioncominginfromAsiancountriesenteringtheU.S.homeappliance market. Schipke had spent 29 years at GE, running the largeappliancedivisionandhadgrownitfrom$2.5billionto$5.6billionduringtheeightyearshe led it.PriceofferedSchipkeabase salaryof$1millionandstockoptionstorunSunbeam.

WhenSchipkearrivedatSunbeamin1993,hefoundthingsstillintrouble.He saw Sunbeam had outdated manufacturing processes, poor financialcontrols,nomarketing,andagingproductlines.Noinvestmentswerebeingmade in Sunbeam’s future, and itwas being run as if itwere a leveragedbuyout,focusedonlywithpayingdowndebt.Schipkethoughtitwouldtaketime to rebuild Sunbeam. He saw the need to improve the company’soperations, planning to build a new $80 million manufacturing facility.Sunbeamneededtoimproveproductionanddevelopnewproducts.

OperationsStructureofanOrganization

Howcanonemodel theoperationsstructureofanorganization?Werecallthere are two organizational structures — authority and operations. Theauthority structure is posted by a corporation/business as an “organizationchart.”Buttheoperationsstructuredepictstheprocessflowofoperations(aswe saw earlier in automobile manufacturing). To model the operations

structure,onecanstartwiththevaluetransformationsofPorter’smodelandadd over and below the production, two other planes for overhead andcontroloperations,asshowninFigure9.4.

Figure9.4: OperationsStructureofaBusiness.

Figure 9.5 displays an operations structure for a manufacturing business,suchasSunbeam.

Figure9.5: OperationsStructureofSunbeamin1993.

The dotted boxes in the overhead plane indicated which operationalactivitiesinSunbeamhadbeenstarvedofresources,undertheleadershipof

BuckleyandofKazarianfrom1982to1993.Therehadbeennosignificantinvestments in thesupport functionsofPlane1 inSunbeam.Foradecade,Sunbeamhadbeenstarvedfornewproducts,productionimprovement,newtechnology, andmarketdevelopment.Competitorshadentered thatdecadewithproducts, lowprices,and improvedquality, takingmarketshareawayfromSunbeam.OperationshadnotbeenimprovedinSunbeamthroughnewinformationtechnologies,norhadpersonnelbeenimprovedinskillsandbytraining.ThefinancialdevelopmentofthefutureofSunbeamhadbeenput“onhold”asprofitshadbeensiphonedoffbyAI,withoutreturninganytoSunbeamforinvestmentinitsfuture.

Buckleyhadfailedtoseeanyofthis,becausehisstrategicperspectivewasonlycentereduponhisperks fromthegrowthof theholdingcompanyAI.ButKazarianhadrecognizedthisandarguedwithPriceandSteinhardtthatitwouldtaketimeandmoneytoprepareSunbeamforacompetitivefuture.Kazarian left Sunbeamwhen his partnerswould not agree to investing inSunbeam.PriceandSteinhardtwereonlyinterestedinreturn-on-investment,andnotinprovidingservicetoSunbeam’scustomers.

Schipkewas a competentmanager, unlikeBuckley and likeKazarian.Hetold“unwelcomenews”toSunbeams’owners.Schipkealsolearnedthatthemajor shareholders, Price and Steinhardt, were reluctant to invest inSunbeam’slong-termfuture.PriceandSteinhardtwantedtoentirelyselloutofSunbeam.Butitwasdifficulttosellmoreofthecompany.

In 1995 neither sales nor profitswere substantially up at Sunbeam, as theSchipke turnaround was taking time. Sunbeam’s market shares were stilldeclining(e.g.,blendersalesfellfrom41%marketsharein1993to38%in1995, foodmixers from 25% to 19%, toasters from 4% to 3%, gas grillsfrom49%to44%,foldingoutdoorfurniturefrom58%to44%).Thelong-termproblemsatSunbeam(fromits longdayswithAIandinbankruptcy)werecontinuingin itsdecline—theproblemofnot improvingSunbeam’soperations for over a decade. Price and Steinhardt became impatient withSchipke; andwithin twoyears of his arrival, they decided to replace him.Schipkeresigned.

Inmid-1996,PriceandSteinhardthiredAlDunlap,nottorunSunbeambuttoprepareitforsale.PriceandSteinhardtwantednolong-termstrategyforSunbeam.Theywereinvestors,notmanagers.Theywantedtofinishsellingtheir shares inSunbeam,by selling it to another company.Theywanted aCEOwhocouldquickly“flip” thecompany, that is, improve its “businessappearance” (e.g., profit growth). Itwas like selling a used car,when one

couldmerelywashandpolishthecaranddetail theinterior,withoutreallycheckingthemechanicsofthecar.

Sort of like a “used-car sales person,”Al Dunlap had the reputation of a“used-company” dealer. This was Al Dunlap’s reputation— an executivewho could get companies ready for sale.Hismost recent positionwas ashead of Scott PaperCo. In 18months he had beenCEOof Scott, he haddrivenitsstockpriceupby225%.Todothis,hecutcosts.Hefired11,000employees.Hecutinvestmentsinproductionimprovementandinresearch.HethensoldScotttoitsrivalKimberly-Clark.

But Kimberly-Clark was surprised by what it had bought. Going into themerger, in1995Dunlap’s financial figures forScotthadprojecteda fourthquarterincomeof$100million.YetKimberly-ClarkfoundScottreallywasto lose $60million on that quarter (a difference of $160million from theprojection). In thefirst threemonths,Kimberly-Clarkneeded tospend$30million on immediate and necessary plant and equipment maintenance,whichearlierDunlaphadcanceled.AlsothemarketshareofScottproductsbegandeclining.Theshort-termchangesDunlaphadmadeinScotttoboostits share price was having bad longer term consequences on Scott’scompetitivenessandprofitability.

Butthiswasthekindofshort-termthinga“used-business”dealercandotosell companies — pretty-up the “bottom-line” by short-term cost cuttingbefore the sale.Dunlap appeared to be good at selling “previously-ownedbusinesses.”HehadbegunfixingupcompaniesforsaleatLily-Tulip,fromwhich he personally gained $8 million. Next he worked for Sir JamesGoldsmith, a financier, for three years, also earning more millions. InAustralia, he left another investor, Kerry Packer, several million dollarsricher.Thenbriefly asCEOofScottPaper, its sale earnedhimpersonally$100million.Dunlaphadatrackrecordofgettingcompaniessold.Hewasrich.Hedidnothave tocontinue“flipping”businesses.Buthe thoughthewasgoodatitandgrewwealthydoingit.

SoPriceandSteinhardtthoughtthatDunlapwasjustthekindofCEOtheywanted! They were enthused and offered him incentives. Price offeredDunlapanannualsalaryof1million,$2.5millioninstockoptions,and12millionofrestrictedstock.OnJuly19,1996,whenDunlap’sappointmentasCEOofSunbeamwasannounced,itsstockwhichhadbeenat$12.50asharejumpedto$18.63ashare—sopowerfulwasDunlap’sreputationwiththeWallStreetcrowdasa“turn-aroundartist.”

Dunlapthensetabout“fixingup”Sunbeamforsale.Tofixupacompany,the first thingonecando iscutcostsby firingemployees.This isaneasy“fix,” as employees can always be fired. On November 12, Dunlapannounced toSunbeam’sboard thathewouldeliminatehalfofSunbeam’semployees, cutting 6,000 jobs. He would reduce manufacturing facilities

from53to39.ButhealsoreducedsalesbysellingsomelinesofSunbeam’sbusinesses(includingSunbeam’soutdoorfurnitureproducts,clocks,scales,and decorative bedding). By these cuts, he claimed he would save $225millionannually.

But cutting costs alonewould not prepare Sunbeam for sale. It is amuchharder fix, to increase sales. How did Dunlap plan to increase sales? Hepromisedtheboardtointroduceatleast30newproductsayearanddoublethecompany’srevenuefrom$1to$2billionayear.

But four days later after Dunlap announced to the Board his intention toincrease sales, yet the person Dunlap had just hired to do this quit. OnNovember16,1996,P.NewtonWhite,whowas theexecutiveDunlaphadjustbroughtintorunSunbeamforhim,abruptlyresigned.Later,observerssawWhite’sabruptdepartureshouldhavebeenseenasaclearsignaloftheenormousdifficultiestofixSunbeam.

AnyCEOmustimplementstrategythroughateamofoperatingexecutives,who report to theCEO.As inwar, thegeneral in commandcan strategizebattles,buthisgenerals lead the troops to implementabattleplan.Battlesfail not just in strategy but also in implementation. The lack of a goodoperatingexecutive,likeNewtonWhite,wouldturnouttobeamajorreasonforDunlap’s eventual failure at Sunbeam.Dunlap could not keep capableexecutivesworkingforhim,norwouldheallowthepeople,whostayedtowork for him, operate effectively. Within a month of becoming CEO,DunlaplostorfiredthreeoftheoperatingexecutivesatSunbeam,whohadbeen responsible for 90% of its sales. This is the first thing dishonorableleadershipaccomplishes—tolosecompetentexecutives.

LaterNewtonWhitecommentedonwhyhehadquitafteronlytwomonthsatSunbeam.HesawthatitwouldtaketwotothreeyearstobeginfixingupSunbeamandenormousamountofchangetoturnthecompanyaroundandhedidn’twanttostaythatlong.

Dunlap cut jobs, closed plants, and lost competent executives. ThosemanagerswhodidstayonwithDunlapwereundertremendouspressuretoincrease sales. Dunlap couldn’t sell the company merely by dramaticallycutting costs; he also had to dramatically increase revenue. But Dunlap’splanwasunrealistic.Inorder todoublerevenue,Sunbeamwouldhavehadto perform five times better than it had and better than its industrialcompetitors. Inoneyear,Sunbeamwouldhavehad to increase itsexistingoperatingmarginsto20%,comparedtoitsmarginsofonly$2.5%.

LeadershipIntegrityandRealisticTargets

We recall the two different perspectives in strategic thinking— from thevaluesoftheCEOandfromthevaluesofthecustomer—“top-down”and

“bottom-up” views. We apply this view on strategic perspectives toSunbeaminFigure9.6.

Figure9.6: StrategyPerspectivesinDunlap’sLeadershipofSunbeam.

The setting of any “targets” is an easy thing to do for leadership.Choosenumbersandtellthetroopstomeetthem.Butsetting“reasonabletargets”ismoredifficultbecauseitrequiresleadershiptoreallyunderstandsomeofthebottom-upperspective—whatrealisticallycananorganizationdo—whattargetsarerealisticandpossible.

What happenswhen theCEOdemands the impossible from subordinates?Subordinatesmustdotheimpossibleortheylosetheirjobs.Whatcantheydo?Theyquitorcheat.

InthecaseofSunbeam,thenewmanagerofsales,NewtonWhite,chosetoquit. Those who stayed under Dunlap, cheated. To meet Dunlap’sunreasonable demand for impossible sales numbers, managers beganresorting todevious schemes.Their jobsdependeduponmeetingDunlap’simpossiblenumbers.Theycouldn’ttellDunlapaboutproblems.JohnByrnewrote:“InameetingwithAl,youarenot there to tellhimanything,”saidBillKirkpatrick,whoworkedwithhimatbothScottandSunbeam.Youaretheretolisten.“Ifyoudidn’thityournumbers,hewouldtearalloveryou”(Byrne,1999).

Dunlap’s remaining subordinates created a sales fiction to boost apparentsales,byusinganunusualaccountingtechniquecalled“bill-and-holdsales.”

In November 1996, the gas grills division asked its major retailers topurchasemerchandise,whichtheywouldnotneedforsixmonths.ThedealSunbeam’smanagersofferedwasamajordiscounttotheretaileralongwiththe nice conditions that the retailers neither had to pay for nor receivemerchandise for six months after the billing. Sunbeam’s managers rentedwarehousespacesandstored themerchandise thereatSunbeam’sexpense.SotheybilledthesaleinNovemberandshippedthemerchandise;butnottothecustomernordidthecustomerhavetopayuntilthenextyear.AsByrnequoted, a Sunbeam executive later admitted: “More and more it becameimpossibletomakethekindsofnumbersthatAl(Dunlap)thoughtshouldbemade. Al was so concerned about revenue that we sacrificed margin”(Byrne,1999).

Alsointhisway,theysacrificedfuturesales.Therecouldbenomoresalesto that retailer that spring, because their “bill-and-hold”merchandise wasalready languishing in a rented warehouse. Dunlap’s pressure-for-the-impossible encouraged tactics by his executives effectively sacrificed thefutureofSunbeam—nofuturesalesthenextyear.

When a CEO’s idealism in strategy cannot be met by the realism inoperations, politics in the executive level can encourage fraud. And inbusiness records, suchunreasonableCEOstrategicpressurehasoccurred,notjustatSunbeam,butelsewhere—asforexampleinEnron(Betz,2000)andinLibor(Betz,2014).

At the top of Sunbeam, the CEODunlap had no interest in its long-termfuture,withonlya short-termgoalof“flipping” thecompany, selling it toanother company. First,Dunlap cut costs by firing employees and closingfactories.ThisdecreasedSunbeam’scapabilitytoproducemoreproductsforincreasing sales;butDunlap set sales targets forbig increases.He toldhisBoardthatsaleswereprojectedtoincreasedramatically.Buthehadnorealintentiontodoso—forhewasgoingtosellthecompanybeforethen.Allhehadtodo,sohethought,was“project”salesincreases,telleverybodyhewas going to increase sales. Dunlap knew that much publicity was about“appearances.”Howwashegoingtoincreasesales,ifhehadcutproductioncapacity? Dunlap ordered Sunbeam employees to develop many newproducts.Whichemployeesweregoingtodothis,sinceDunlaphadalreadyfiredhalfofthem?

Atthetop,Dunlapthoughthisstrategyonlyhadtolookgood—cutcosts,increasesales,innovatenewproducts,increaserevenues,andincreasesales.It sounded good. It sounded so good, that Sunbeams’ share price roseimmediately.WallStreetviewedDunlapasa“turn-around”artistofthebestsort!

Butwhatwashappeningdowninthetrenches,wheresalespersonnelhadto“gooverthetop”—gotothecustomerstomakemoresales—facingthe

reality of customers? In contrast, Dunlap was only facing the reality offinancialmarkets,WallStreet.Thisisthecontrastofatop-downviewversusbottom-up view. From the bottom perspective, Sunbeam’s sales managersknewexactlyhowmanysalestheyhadbeenmakingtotheircustomersandthattheircustomerswouldnotbuymanymoreintheshortterm.Howthento make Dunlap’s sales targets? How to dramatically increase sales thatyear?

Dunlap’s targets could only bemet by faking new sales.Dunlapmay nothaveknownabout the sell-and-hold scam.Hemighthave foundout, ifhehad asked his subordinates. But Dunlap didn’t ask subordinates, he onlygaveorders.Andsubordinatesdidnotvolunteerbadnewsuptotheboss.Noone below Dunlap could tell him anything. Communication in Dunlap’sleadershipstylewentonlyoneway,downandneverup.

Why would Sunbeam’s sales managers do this scam? They were notnormallydishonestpeople,butinthissituation,theymightatleastkeeptheirjobsforonemoreyear.Itwasnotexactlyillegal,justdishonest.Dunlaphadpromisedtosellthecompanysoonanyway.Whoknewwhethertheywouldhavejobsafterthecompanywassold?ForemployeesbelowtheCEOinanylargeU.S. company, survival goes year byyear.Only top executives haveany company guarantees about survival, with multi-year contracts andgoldenparachutesonexit.

InformationFlowsinAuthorityStructures

The reality of power in a firm creates problems about the propercommunication of strategy in the firm, particularly bottom to top.A largecorporation requires coordination of strategy and tactics between the topwiththebottomlevelsofmanagement.Butcoordinationisdifficultbecausethe top levelofexecutiveshasmuchmorepoliticalpowerover themiddleand bottom levels of management, and over all other employees. Thisdifference of power can make it difficult for bottom-level operationalpersonnel to tell “bad news” to top-level executives— such aswhy their“targets” can’t bemet because they are unrealistic. The common form ofexerciseofexecutivepowerisoften,asinthecaseofDunlapandSunbeam,“meet-my-targetsoryou’refired.”

For successful strategy, the idealism of a top-level strategic goal (target)needstobeimplementableintherealityofbottom-leveloperations.Forthis,strategic communication in a firm must be two-way, both top-down andbottom-up. Bottom-up communication may be hindered by the authoritystructureinanorganization,whereinpowerflowsdownward.

Atthetime,thestockmarketwasveryimpressedwithDunlap’sreputation.WhenitheardthatDunlapwascuttingcostsandincreasingsales,themarketbelieved him. Sunbeam’s stock climbed into the $30 range. Dunlap hadsucceededwith the stockmarket, but toowell.That pricewas toohigh tosell the company to another company.Desperately,Dunlap began lookingforanothercompanytobuyasanalternativewaytoboostSunbeam’ssalesandrevenues.HefocusedontheColemanCompany.

Earlier, Coleman had been acquired by conglomerate builder, RonaldPerelman,whoownedalargenumberofcompanies,suchasRevlonInc.andMarvelEntertainmentGroup.WhenColeman’smanagementhadattemptedto take Coleman private through a leveraged buyout in 1989, PerelmansteppedinandboughtColeman.Perelmanowned82%ofthestock,andhewaswillingtosellColemantoSunbeam,butnotcheaply.Coleman’sstockwasthensellingatalow$16ashare.Colemanhadlost$42millionin1996andwaslikelytohavealossof$2.5millionin1997.PerelmanhadinstalledJerryW.Levin,aformerRevlonchairmantoturnaroundColeman.

When Dunlap approached Perelman to sell Coleman, Perelman asked for$30ashare.Dunlapatfirstwasangryandthendesperate.Heagreedtotheprice. In March 1997, Perelman then sold Coleman for a 14% stake inSunbeam, which then translated into $1.6 billion value (because ofSunbeam’s then highly valued stock of $45 a share). Also, Dunlap hadSunbeammakecashoffersforSignatureBrandsandFirstAlert.Topayforall theseacquisitions,Sunbeam’sboardauthorizedthesaleof$500millionconvertiblebondsbySunbeam.

Next public perception of Sunbeam began to see reality, penetrate pastDunlap’sreputation.AteamofMorganStanleyofficialsneededtoperforma“due diligence” analysis of Sunbeam, in preparation for selling Sunbeambonds.Duediligence is an analysisof aCompany’s accounts to see if theaccounting is real and accurate. The Morgan Stanley team spoke withSunbeam’s managers, retailer customers, and auditors. They foundSunbeam’ssaleswerebelowprojections.Theylearnedthatsaleshadslowedbecause Sunbeam’s major customers, Wal-Mart and K-Mart, already hadlarge inventories on hand from Sunbeam’s previous fall’s “bill-and-hold”salesroutine.TheylearnedthatSunbeamcouldnotsellanymoreproductstothem for at least another year. This information would have to be madepublictoprospectivebuyersofthebonds.

After theMorgan Stanley teamdiscussed thiswith Sunbeam’s executives,oneofthemphonedDunlapandtoldhimthatSunbeamwouldhavetoissueadisclosureof the lowerprojected sales. JohnByrnewrote: “Dunlapkeptscreamingintothephone.HeknewtheannouncementwouldtankSunbeamstockandcouldevenjeopardizethesuccessofthedebentureoffering.Italsowouldn’thelphisreputationasaturnaroundmaster”(Byrne,1999).

An ambiguous press release was drafted, merely indicating that sales thenext quarterwould be lower than earlier estimates of about $290million.But the next morning, even this news caused the stock of Sunbeam todeclineby9% to$45a share.Worseyet forDunlap, stockanalystsbeganaskingquestionsaboutSunbeam.Thewholestorybegantounfold.

MatthewSchifrin,areporterforForbesmagazine,obtainedSunbeam’s10Kstatement, filedMarch6with theSecurities&ExchangeCommission.OnMay 4, 1998, Schifrin reported the first revealing story about Sunbeam’speril:“Sevenmonthsago,‘ChainsawAl’Dunlapdeclaredvictoryinturningaround…SunbeamCorp… .Butsince themiddleofMarch itsstockhasfallennearly50%from$52 toa recent$28.This turnaroundhasn’t turnedandisn’tlikelyto”(Schifrin,1998).

Schifrinhadsummarizedthestory.AfterDunlapwashiredinJuly1996,hehadfired6,000ofSunbeam’semployees(halfof the then12,000).DunlapcutbackonSunbeam’sproductofferings,focusingonlyonSunbeam’sgrills,humidifiers, and kitchen appliances. Dunlap had Sunbeam take amassivewrite-off in 1996 of $338 million (including $100 million of Sunbeam’sinventory).Schifrinwrote:“WallStreetsatbackandwaitedforamiracle.In1997Dunlapannouncedone.Sunbeamreportedrecordresults,withsalesup22%andearningspershareof$1.41—upfroma$2.37lossin1996.Asistherewontintheseheadydays,theanalystsdidn’tlookbeyondthereportedfigures.Iftheyhad,theymighthaveseenthatSunbeamwascomingapart”(Schifrin,1998).

Schifrinalsofound thatSunbeamhadboosted thesales figures for the lastquarter of 1997 by selling grills at a discount and as “bill and hold.” Helearnedthatthediscountsandbill-and-holdsaleshadaccountedformostofSunbeam’sapparentrevenuegains.Butthesereducedmarginandpreventedfuture sales.Theywere the reason for the very poor first quarter of 1998.Sunbeam’s customers had simply stopped ordering new grills. Schifrin’sarticlebeganthedenouementofSunbeamstory—thetaleofitslastperil.

MichaelPrice,Sunbeam’smajor shareholder (whohadhiredDunlap) readSchifrin’sarticle.HephonedSchifrinandsaid:“Ifyou’reright,itlookslikefraud”(Byrne,1999).

On June 4, 1998, Sunbeam’s executives gathered to review the secondquarter prospects of 1998.They saw that the companywould fail tomeettheir second quarter objectives. Then on June 6, a second article aboutSunbeam appeared in Barron’s financial weekly newspaper by JonathanLaing.LaingpointedoutthatWallStreetwasshockedbySunbeam’ssuddenreportingofalossof$44.6millionwithasalesdeclineof3.6%forthefirstquarterof1998andwrote:“Ina trice, theSunbeamcost-cuttingstorywasdead,alongwith‘ChainsawAl’Dunlap’s imageasthesuprememaximizerofshareholdervalue”(Laing,1998).

Sunbeam’sstockhadfallen50%fromitsrecentpeak.LaingfurtherdetailedtheresultsofDunlap’sbrutalmanagementstyleatSunbeam:“Manyofthenew products have bombed in themarketplace or run into serious qualityproblems.Moreover,Sunbeamhasrunintoallmannerofproduction,qualityand delivery problems …. Dozens of key executives, members of whatDunlap just months ago called his Dream Team, are bailing out” (Laing,1998).

Aboutearlier thereportedearningsfor1997,Laingwrote:“Sadtosay, theearnings fromSunbeam’ssupposedbreakthroughyearappear tobe largelymanufactured… .Sunbeamjammedasmanysalesasitcouldinto1997topumpboththetopandbottomlines….Thecompanyalsopumpedmillionsofdollarsofgoodsintoseveralnationalsmall-appliancedistributorsonsucheasypaymenttermsastocallintoquestionwhetherasaleevertookplace”(Laing,1998).

After Laing’s article about Sunbeam appeared, Sunbeam’s Board ofDirectors met early the next week. Finally, they began asking questionsabouttherealproblemsatSunbeam.Dunlapassuredthemthattherewasnotruth to thearticleand thatbill-and-holdasanaccounting techniquewasastandard industry practice.Next the board asked about the second quarterresults forSunbeam,but insteadof telling them thedismal truthabout themajorlossesforthepresentquarter,Dunlapbegantocomplainaboutattacksuponhimandofferedtoquit.Thissurprisedtheboard,andDunlapabruptlyleftthemeeting.JohnByrnewrote:“WhenDunlapstormedoutoftheboardmeeting, the four outside directors sat incredulous and quiet … HowardKristol broke the silence. Of all of them, he had known Dunlap thelongest… ‘Thatiscompletebullshit,’heblurtedout…”(Byrne,1999).

The four directors knew that something was really wrong, and theythemselves,asdirectors,hadabigproblem.Theydecidedtotalkagainlaterin theweek.OnSaturday, theymet againbutwithoutAlDunlap. Instead,theyinvitedDavidFanin,whoworkedasSunbeam’sattorney,tobriefthem.FaninhadloyallyworkedforDunlapforthelasttwoyears;buthehadtotellthe Board the truth. He told them that operations at the company hadseriouslydeteriorated,andsaleswerefarbelowprojectedtargets.HeaddedthatDunlapwasnotinrealcontactwiththebusinessandtalkedtonoone.

ThedirectorsdecidedthatDunlapneededtobereplaced.At2:20p.m.,theoutsidedirectorsmetagaininNewYork,andplacedaconferencecalltotheinsidedirectorsofSunbeam.DunlapwasinFlorida.Faninbegantheboardmeeting, with Dunlap on the phone. Peter Langerman, one of the outsidedirectors of the board, spoke first, as Byrne reported: “Al, the outsidedirectorshaveconsideredtheoptionsyoupresentedtous lastTuesdayandhave decided that your departure from the company is necessary” (Byrne,1999). Next another outside board member, Elson, moved to adopt a

resolution to removeDunlap fromall positionswith the company, and themotionwasadoptedwithallvotesintheroomaffirmingthemotion.Dunlapwasfired.

RonaldPerelman,whohad acquired a large share ofSunbeam through itsacquisition of Coleman, then appointed Jerry W. Levin as CEO to runSunbeam.Sunbeamlost$1.2billiondollarsbetween1998and2000.Totaldebt was $2.4 billion, and Sunbeam’s stock dropped to $1.75 in the year2000.ReportingtoPerelman,Levintriedhardtokeepthecompanygoing,repairing damage. But the debt load ofDunlap’s improvident acquisitionsproved too heavy, and on February 6, 2001, Riva Atlas and Jane Tannerreported: “The Sunbeam Corporation filed… for Chapter 11 bankruptcyprotection, the latest step in a nearly three-year effort to recover from anaccountingscandalandaseriesofacquisitions that left itwith$2.6billiondebt”(Atlas&Tanner,2001).

The case of Sunbeam illustrates the kinds of conflicts that can occursometimes between the short-term financial CEOs and owners of adiversifiedfirmandthelong-termsurvivalandcompetitivenessofthefirm’sbusinesses and products. Sunbeam’s perils resulted from successivemismanagementbytwoCEOs.FirstitsacquisitionbyAlleghenyplaceditinperil when Allegheny went into bankruptcy through profligate executivespending and foolish investments.Later rescued frombankruptcyby threeinvestors, Sunbeam was returned temporarily to modest health and wassuccessfullytakenpublic.ButtheimpatienceoftheinvestorstoselltherestoftheirsharesinSunbeamledthemtofinallyhireaCEOwithsimilarshort-term interests. He was expected to quickly boost the company’s apparentprofits and sales in order to sell the company. But his drastic cuts,unreasonable demands, and over-priced acquisitions finally resulted in asecondbankruptcyoftheonceproudandprosperouscompany.

Summary

Withpowerandhonor, leadershipshouldengage inethicalventures for thegoodof thepeople, the shareholders, the employees, the executives, the customers, and the society.Leadershipthatdoesnotcreateethicalventuresandonlydependsuponcoercionorfraudcontributestocorruptioninsocialstructuresandtoevilorganizationsandsocieties.

Only the leaderhas theauthority andpower to implement change; and subordinatesshouldobeytheirsuperiors.Competenceandintegrityinspirefollowerstomaketheirbestefforts to implement a leader’s strategy. Within a social structure, loyalty arises fromenthusiasmorcoercion.Loyaltyfrom“enthusiasm”arises in theperceptionoffollowersthattheleadernotonlyhaspowerbutalsoexercisespowerforthepublicgood.Loyaltyfrom “coercion” arises in the perception of followers that the leader has power and

exercisespoweronlyfortheprivateinterestoftheleader.

Foranhonorableandcompetentstrategy,top-downandbottom-upperspectivesneedto be communicated in an organization and agreement between leaders and followersneedstobereached.Thisbalancesatop-downidealismoffinancialgoalstoabottom-uprealismofcustomerservice.Firmleadershipandfirmcustomers—thesetwogroupsandtheirperspectivesneedtobeincludedinthelogicofthedecision.Businessesneedbothtomakeprofitsandprovideservicestocustomers.Astrategicdecisionisoftenbad,whenitonly focuses upon the interests (values) of only one group’s perspective, firm’s ownersand executives — and ignores the customers’ legitimate perspective for goodproducts/services.

TheoreticalPrinciples

1. Thestrategicbusinessmodelofaholdingcompanyfocusesuponthefinancialmarkets;whereasthestrategicbusinessmodelofaportfoliocompanyfocusesuponcustomermarkets.

2. Short-termexecutivegreedcandoomthelong-termfutureofacompany,whenexecutiveslackintegrity.

StrategicPlanning

Introduction

We review the strategic topic of “planning,” how a plan can implement a strategy.WebeginbyexaminingthecaseofthefoundingofPohangIronandSteelCompany(Posco).Itisahistoricalcaseinthe1960–1970s,andnicelyillustratesasuccessfulplanthatwasneeded to build an export-oriented steel industry in developing nation of SouthKorea.ThiscasewasfirstpublishedbytheauthorandParkWonKoointheproceedingsofthe2012PacificInternationalConferenceontheManagementofEngineeringandTechnology(Betz&Park,2012).

HistoryofPosco

ThesituationoftheplanningforPoscowentbackinhistoryto1945.Attheend of the Second World War, the country of Korea was liberated butdivided into two nations, North and South Korea. Russian troops hadoccupied the Korean territory north of the 38th parallel, and Americantroopsoccupiedsouthoftheparallel.RheeSyngmanwaselectedpresidentofthedemocraticrepublicinSouthKorea;whileKimIlSungwasselectedby the Soviet dictator, Joseph Stalin, to head the communist country ofNorthKorea.NorthKorean troops invaded SouthKorea in 1950, initiallyoverrunning the country down to Pusan (now called Busan). But nextAmerican troops invadedIncheon(justoutside thecapitalofSouthKorea)andcutofftheNorthKoreantroopsinthemiddleoftheirlinetothesouth(Figure10.1).

Figure10.1: U.S.ArmyInvasionofIncheononSeptember15,1950.Source:U.S.ArmyofficialKoreanWarimagearchiveNARAFILE#:111-SC-348438PG-USGov-Military-Army—http://www.newworldencyclopedia.org/entry/File:Inchon_landing_map.jpg—

Imagesinpublicdomain.

The North Korean army collapsed, and U.S. troops headed north to theborderbetweenChinaandKorea, theYaluRiver.Then theChinese troopsinvadedKorea and pushed theAmerican troops back to the 38th parallel.TheKoreanWarcontinuedfrom1951to1953,withthetwoarmiesofChinaand America stalemated around the 38th parallel. Finally an armisticebetweenNorthKoreaandChinaandSouthKoreaandAmericawassigned.Korea remaineddividedbetween aNorthKoreadictatorshipunderKim IlSungandaSouthKoreandemocracyunderRheeSyngman.

Afterliberationfrom40yearsofJapaneserulein1946andafterrepellinganinvasion by North Korea, in 1961 the Republic of South Korea was anundeveloped country — with no industrial base, only half the Koreanpopulation,andstilltechnicallyatwarwithNorthKorea.RheeSyngmanleda corrupt, ineffectual government, going into his fourth term in office aspresident.Studentprotestdemonstrationsforcedhimtoresign.Thenacoupby the South Korean army, led by General Park Chung Hee, seized thegovernment. Under pressure from the United States, Park restored thepresidential system and ran for the office in 1963, winning by a narrowmargin(Figure10.2).

Figure10.2: ParkChungHeein1957.Source:http://www.ohmynews.com/NWS_Web/View/at_pg.aspx?CNTN_CD=A0000203207—

Imageinpublicdomain.

To develop an export-oriented economy for South Korea, President Parkproposed a five-year economic development plan; and his slogan was“DevelopmentFirst,UnificationLater.”OWonCholwrote:“Duringtheeraof theexport-firstprinciple,1964–1970,PresidentParksetanannual40%growth in export as the standard…During theeraof the export-oriented-industrialization, 1973–1980, President Park set the 10 billion dollarmarkand the achievement of 40% annual growth in exports as the goals to beachieved”(OWonChol,2009).

Central to the industrialization plan was the national production of steel.Steel is widely used industrially — in machinery, building construction,bridgeconstruction,andmanyotherproducts.ThefirstindustrialrevolutionbeganinEnglandinthelate1700sanddevelopedonthebasisofthreenewtechnologies:coke-fueledsteelproduction,steamengine,andtextilefactory.Inexpensivesteelcontinuedtodrivetheindustrializationsaroundtheworldthrough railroads, steam ships, automobiles, skyscrapers, etc. Korea’sindustrializationwouldneeddomesticsteel,asimportedsteelwouldrequireearning foreignmoney tobuy the steel.Park envisioned thatKoreawouldhave to produce its own steel in order to build an export economy— inships,automobiles,tools,etc.

ButcouldanewKorean steel companysuccessfullycompete in theworldeconomyofsteel?JosephInnaceandAbbyDresswrote:“Duringthe1960s,steelwasagrowingcommoditytheworldover.From1960to1970,Japan’sannual steel production surged from 22 million tons to 93 million as thecountry’s economyexpanded… .U.S. steelmaking sector addednearly50

milliontonsofcapacity.ExpansionplansweretakingshapeintheEuropeanCommunity, and several developing countries outlined ambitionsprograms… .Thelackofasteelindustry,however,wasathorninthesideofthegrowingnation(ofKorea).From1961to1966,steeldemanddoubled,and in 1966, alone,Korea imported350,000 tons compared to 212,000ofdomesticproduction”(Innace&Dress,1992).

Koreawas importing over half of its steel needs. In 1965, President Parkvisited theUnitedStates. InnaceandDresswrote:“PresidentParkwent toPittsburgh…meeting senior executivesof theAmerican steel industry andwastreatedtoafirst-handtourofanintegratedsteelmill.Helikedwhathesaw”(Innace&Dress,1992,p.33).Parknexttriedtoarrangeinternationalfinancing for construction of an integrated steelmill inKorea.By the fall1967, he obtained a preliminary agreement with foreign banks and steelcompanies to provide $95.7 million in capital to build a steel company,alongwith$35millionfromKoreancapital.In1968,PresidentParkChungHeegavetheassignmenttobuildanewsteelplanttohisyoungercolleague,ParkTaeJoon,whowouldbuildthePohangIronandSteelCompany(whichwouldberenamedPosco).

ParkTaeJoonwasbornin1927inKyungsangProvinceinKoreaandmovedto Japan, when six years old, where his father was working. In 1945, heenrolledinWasedaUniversity’sCollegeofScienceandEngineering.Butthewar ended in 1946, and Park Tae Joon returned to Korea and joined themilitary, graduating in 1948 from theKoreaMilitaryAcademy.When theKoreaWarbeganin1950,ParkTaeJoonwaspromotedtotherankofMajor.In 1953, he was promoted to Chief of Staff of the Fifth Division of theKoreanArmy:“AlthoughParkdemonstratedmany talentsashemoveduptheladderinthemilitaryorganization,hewasrecognizedandrewardedforoneparticularskill—anuncannyabilitytomanageandmotivatepeople.OnFebruary 7, 1960, he was appointed Staff Officer of Army of PersonnelAffairs”(Innace&Dress,1992).

ParkTaeJoonhadnotparticipatedinGeneralPark’smilitarycouponMay16, 1961; but their relationship remained close. Innace and Dress wrote:“…therewasaverycloseandspecialbondbetweenParkTaeJoonandParkChungHee….The relationship began…when theywere in theMilitaryAcademy.ParkTaeJoonwasacadetandParkChungHeewasacompanycommander…theelderParktookaspecialinterestinhisprizedpupil.ThecommandersingledoutParkTaeJoonforunusualdutiesevenafterhehadgraduatedinJuly1948.Andin1961whenGeneralParkbecamethenation’sleader, he counted on Park Tae Joon for special assignments. ‘There aremanythings that I learnedfromhim’,saidPresidentPark, ‘particularlyhisknowledgeofeconomics’ ”(Innace&Dress,1992).

In1963,ParkTaeJoonretiredfromthemilitary;andin1964,PresidentPark

sentParkTaeJoon toJapan toobserve theJapanesesteel industry.Onhisreturn,ParkTaeJoonwasappointedpresidentoftheKoreaTungstenMiningCompany,thenonthevergeofbankruptcy.Heturnedthecompanyaroundtoprofitability.InNovember1967,PresidentParkestablishedagovernmentcommitteeforconstructingthesteelcompanyandappointedParkTaeJoonaschairofthecommittee.Thecommitteewastoformulateabusinessplanand to have construction blueprints designed for an integrated steelcompany. President Park Chung Hee then appointed Chairman Park TaeJoontobethemanagerofthenewsteelcompany,governmentsponsoredbutprivatelyrun.

Park Tae Joon decided to accept the management appointment but onlyunderconditions.InnaceandDresswrote:“ChairmanParkTaeJoonjotteddownthreeconditionshebelievedwereabsolutelyvital for thesteelmill’ssuccess. If these termsweregranted,hewouldaccept the job…Nervous,butfirminhisconvictionsandarmedwithhisnote,ChairmanParkmadehiswaytotheBlueHouse(homeofthepresidentofSouthKorea).Itwaswinterin late 1967, but the chill running down his spine was not from the coldalone. His pending meeting with the President filled him withapprehension…heenteredtheroomwherePresidentParkwaitedforhim.Hepresentedhis threeconditions…ThePresident read themoverslowly,President Park looked up at Park Tae Joon and smiled … he jotted hisinitials. The deal was done. The project would proceed according toChairmanPark’sterms”(Innace&Dress,1992).

These were the three conditions. First, that Posco as a private company(although initially financed by government) would have absolute controloverprocurementofequipment,goods,andservices.Nogovernmentagencywould procure anything for the company. Second, Posco would haveabsolute control over staffing. No government agencies would assignpersonnel to the company.Third, Poscowould notmake any donations topoliticalparties for theircampaigns.Politicalpartieswouldnotbeallowedto“squeeze”thecompanyforcampaignexpenses.

Asquotedin(Innace&Dress,1992)KraukJeung(oneoftheotherfoundersof Posco) later wrote: “This was a contributing criterion to his (Park TaeJoon)subsequentsuccesswiththefoundingofPosco.Hedemandedahighlevel of integrity and honesty from his people. He did not brook outsideinterference or tolerate ‘backdoor’ promotions…And by the time Poscowas founded,hegot thoseassurances inwriting fromPresidentPark foracorruption-free system for Posco so that there would be no outsideinfluences.”Integrityandhonesty—acorruption-freesystem—thesewerethemanagerialvaluesuponwhichParkTaeJoonwouldbuildPosco.

PlanFormat

Aplandocumentstheresultsofstrategicthinkinginanorganization,usingthefollowingcomponentideasinstrategy:

Mission

Stakeholders

ScenarioandKnowledge

Strategy

Competition

Objectives

Metrics

Tactics

Organization

Budget

“Mission” is the description in a plan of an organization of its long-termends— of the common purpose of its successive goals. In a business, amission statement is a statement ofwhat kind of business is the companyengaged. The “Stakeholders” state who will benefit from the plan. A“Scenario” imagines the unfolding of the future, with or without a plan.“Strategy” is the description in a plan of an organization of its long-timemeans — the “commonality” in a succession of tactics. Strategy is thedirectionofthesuccessivetacticsofactionthattiestheseactionstogetherinacoherentdirectiontoachievethemissionoftheorganization.

For stakeholders in the real world, action will always be opposed bycompetitors.Mission and strategy need to be formulated to overcome theexpectedoppositionofcompetitors.“Competition”isadescriptioninaplanofthecompetitorsandtheirstrategy—thosewhowillopposeandcompeteagainst the actor/decision-maker’s mission and strategy. Since in anorganization,themissionstatementofaplanisalwaysverygeneralinorderto encompass the different purposes of the stakeholders, it is usuallynecessary to make the mission more concrete by expressing thecommonality of successive goals as objectives and metrics of the plan.“Objectives”aregeneralaspectsoffutureoutcomes,goals,whichrealizethemissionoftheplan;and“metrics”aremeasuresofthedegreesofattainmentoftheobjectives.

Tacticsspecifythesequenceofactionsnecessarytoreachobjectivesnotallatoncebutovertime.Theorganizationofresponsibilitiesincarryingouttheplan and the resources required needed to be thought out and described.“Organization” in a plan assigns authority and responsibilities in carrying

outaplan.“Budget”inaplanestimatestheresourcesandbudgetsrequiredforperformanceofaplan.

Aplanisaprescriptionforfutureaction,orientedbyalong-termmissionbyimplementingshorter-termgoalsandtacticsforaccomplishingthemission.

PlanningPosco

In developing theplan for amajor steel producer in theKorean economy,PresidentParkassignedtheresponsibilityfortheplantoParkTaeJoon.Themission was to create a national steel production capability; and thestakeholders were the government and economy of South Korea. Poscowould be a private company, free from interference or control bygovernmentorpoliticalinterests.

Sofarinthiscase,wecanobservethreemanagementcriteriaconcerningtheentry ofKorea into the international commodity business of steel. First, anationalneedandagovernmentcommitment toestablishthesteel industrywere both vital to the industrial development of the nation. Second, therewasneedforthegovernmenttoprovideinitialfinancingfortheconstructionofthemanufacturingplant(becauseoftheenormousinvestmentrequiredtoenter the international steel industry in the 1960s). Third, the company(althoughgovernmentsponsored)wouldoperatefromthestartasaprivatecompany—managed as corruption-freewith integrity andhonesty.Thesewere planning criteria for the mission, stakeholders, and scenario uponwhichParkChungHee’sstrategywasbased.

Chairman Park Tae Joon’s first task in building the steel plantwas to getpeopletrainedinsteeltechnology.FromNovember1968toApril1969,twoteamswere sent to Fuji Steel of Japan to learn aboutmaking steel.Whentheyreturned,theywereputinchargeoftrainingprogramsinPoscototrainmore employees in the technology andprocesses of steelmaking.Also theareaofPohangwaschosenasthesiteforthenewplant.

But in 1968, the international steel community changed its mind abouthelping to finance Korea’s steel company. Innace and Dress wrote: “InNovember, a report issued by the World Bank … urged the Koreangovernment to give its priority to the machinery sector, instead of steel.Koreahadnoknowledgeofintegratedsteelmaking.SinceKoreawasnotina stable enough position to repay loans in the long-term, the machineryindustry was a much safer bet for the economy, and, of course, or itspotentialfinancialbackers”(Innace&Dress,1992).Followingthisreport,afinalmeetingwasheld inFebruary1969 inPittsburghby the internationalgroup; and they toldChairmanPark that group had changed itsmind and

wouldnothelpwith finance:“…aKoppersexecutivenotified theKoreandelegation, that theWest German and British governments were doubtfulabout the need for, the priority of, and the feasibility of the steel millproject…”(Innace&Dress,1992).

Discouraged by this change, Chairman Park Tae Joon headed home. ButbeforereturningdirectlytoKoreawiththebadnews,hedecidedtopausefora couple of days in Hawaii and think. There he had an idea. Innace andDress wrote: “Park Tae Joon knew that Japan was obligated to payreparationscompensationtoKoreabecauseofitscolonizationofthecountryfor35years…Parkwonderedhowhecoulddivertsomeof thatJapanesecompensationtothesteelmillproject”(Innace&Dress,1992).Thismightbeasolution!

ChairmanParkreturnedtoKoreaandpresentedhisideatoPresidentPark—todivertsomeofthereparationmoniestotheproject.PresidentParkagreedwith the proposal, provided the Japanese government would agree.ChairmanParkflewtoJapantogaintheirapproval.InnaceandDresswrote:“UponarrivinginTokyo,ParkTaeJooncalledupontheConfucianscholarSeitoku Yasuoka, as well as the President of the Japan-Korea CulturalAssociation,NobuoYagi.Inparticular,YagihadconsiderablepowerwithinJapanesegovernmentandbusinesscircles…BothYasuokaandYagiagreedtohelpPark.TheyofferedtointroducehimtothePresidentoftheJapaneseIron and Steel Federation Yasuhiro Inayama, who was also President ofYawata Steel. Park gladly accepted, and ameetingwas quickly arranged”(Innace&Dress,1992).

InKorea,PresidentParkpersuadedthelegislaturetoapproveofapartialuseof the reparation funds for steel production. President Park’s governmentthen guaranteed the financial backing of loans for the steel project. TheJapanese government agreed. The Japanese government would provide$30.8million from the reparation fundand$42.9millionasagovernmentloan.TheExport-ImportBankofJapanwouldprovideanadditionalloanof$50million.ThetotalfinancingfromJapantoSouthKoreatobuildthesteelcompanyofPoscototaled$123.7million.ParkTaeJoonhadthecapital tobegintheconstructionofPosco’ssteelplant.

PlanningPosco(Continued)

In developing theplan for amajor steel producer in theKorean economy,PresidentParkhadassignedtheresponsibilityfortheplantoParkTaeJoon.Thesteel-productionplanwas:

MissionandStakeholders

The mission was to create a national steel production capability and the

stakeholderswere thegovernmentandeconomyofSouthKorea.Poscowouldbe a private company, free from interference or control by government orpoliticalinterests.

ScenariosandKnowledge

Compete in international steelmarkets and acquire technology and equipmentfromJapaneseindustry.

Strategy

Build a private steel company, with public assistance in initial financing, butwithout political interference in management. Posco would be a privatecompany,freefrominterferenceorcontrolbygovernmentorpoliticalparties.

Competition

International steel companies dominated national and international steelmarkets; and Posco would need to gain international market share from anationalmarket(Koreanmarket)base.

ObjectivesandMetrics

Competitivesteelpricedatinternationalrates.

Goals

Finance construction with Japanese aid and build steel production facility inPusanandbuildsteelproductioncapabilityintwostagesoffirststeelprocessingandnextblast-furnaceproduction.

OrganizationandResources

ParkTae Joonwas toorganize anewcompany,Posco, and initially finance itwith.

Budget

Initialbudgetof$123.7million,withgovernmentsubsidyof$30.8millionandJapaneseloansof92.9million.

Capitalisasignificantbarrierfornewentryintoaninternationalcommodityindustry. The Korean government could not afford to finance the newKorean steel industry without foreign loans. The European andAmericansteelcompaniesdidnotwanttoseeanothermajorsteelcompetitorentertheinternational market. In contrast, the Japanese government agreed to helpfinance the Korean steel project to improve the international relationshipbetween Japan and Korea (after that last half-century of occupation ofKorea).

The planning job of a leader is to: (1) formulate an executable plan, (2)acquire capital, (3) acquire technology, and (4) assemble a team of

personnel.With the financing accomplished, the project could begin. ParkhadarrangedtoacquiretechnologyandequipmentfromJapaneseequipmentmanufacturers and steel makers. He had engineering plans designed andchecked for the construction of a large integrated steel plant.Nowhe hadarrangedforfinancing.Thenexttasksweretoassembleandtrainpersonnel,prepareasite,andconstructtheplant.

Organizations are led by a chief executive (president), but the personnelunder the leader actually do the work. To be capable of doing the work,personnel must be trained (as earlier noted). Park assembled 40 initialmembers of his team and sent them for training. Innace andDresswrote:“HetoldeachofthemembersleavingfortraininginJapanthattheyshouldleave no stones unturned. He instructed the overseas training teams toacquire everybit andpieceof thehost nation’s technology….Upon theirreturn, the trainee-delegates were immediately put in charge of internaltrainingprograms”(Innace&Dress,1992).

ThesiteofPohangwaschosenbecauseitcouldhavegoodharborfacilities.Thefirstpartoftheconstructionwastoimprovetheharborforlargeships,eventuallyaslargeas250,000-toncapacityships—tobringinironoreandtake out steel products. The second part was to level land for theconstructionofthehugesteelworks.

Theconstructionofthesteelmakingcapacitywasplannedinstages,withthefirst stage to produce 600,000 tons of steel products annually. A steelprocessingplantwasfirstconstructedtoproducefinishedsteelproductsforsale.Steelslabsforthefirstyearwaspurchasedfromothersteelmakersandthenpressedandrolledintoproductswhichwouldbesoldtoindustry.ThisgavePoscoproductstoselltoobtainrevenueandprofitsafterthefirstyearof construction of the plant. Chairman Park had planned to achieve sales,revenue, and profitability quickly. This emphasis on “speed” (speed-of-construction and speed-to-market) was a distinguishing characteristic ofPark’smanagement style. In addition to technology-plan-capital-personnel,onecan see that also the ideasof“resources”and“market”wereessentialcriteriainParkTaeJoon’sleadership.

SinceSouthKoreadidnothaveironoredeposits,PoscohadtoimportironorefromAustralia.InnaceandDresswrote:“AustraliansaskedforahigherpricepertonthantheJapanesewerepaying…WhenquestionedaboutthepricetheyarguedthatJapanwasalreadyproducing100milliontonsofsteel,whileKoreawasplanningonlyonemilliontons….Parkdidnotlikethatatall…(It)wouldputPoscoinanunfaircompetitiveposition…Hedecidednottosignacontract…andbegantoexploreothermaterialsupplyoptions,intheUnitedStates,India,andsomeothercountries…TheAustralianrawmaterialsuppliersweregettinganxious…Andsoonafterwards,theyagreedtosupplyPoscoatthesamepriceperton…”(Innace&Dress,1992).

Asaprivatecompany,ChairmanParkkeptafocusoncontrollingcoststobecompetitive. Park’s strategic thinking consisted of several ideas, includingthoseoftechnology-plan-capital-personnel-resources-market.

AlsoPark thought strategically in the ideas of “speed” and “revenue” and“competition” and “profits” and “cost-control.” The demand in Korea forsteel was large enough for Posco to profitably sell products againstcompetitors when priced competitively. The strategic thinking in Park’sleadership in starting Posco included the management ideas of: integrity-technology-plan-capital-personnel-resources-market-speed-revenue-competiton-profit-costs. These were some of the “component ideas” inPark’sstrategy.

After the ground and harbor for the facilitywere ready, then constructionbeganonthefirstfacilityoftheintegratedsteelcriterion.InnaceandDresswrote:“ThefoundationworkforthehotstripmillwasstartedinApril1971,but sometime in July, it began falling behind schedule … (By August)constructionwas runningmore than threemonths late….ThatwaswhenPark stepped in.He returned immediately toKorea, andbyAugust 18, hewasinPohanginspectingthesite…OnAugust20,theChairmandeclaredastateofemergency.Hemobilizedall theconstructionsquads tofocus theirefforts on the hot strip mill foundation… . All managers at the level ofassistantdirectorwereorderedtotaketurnsservingas thechiefsupervisoroftheday.‘Wewererequiredtolay700cubicmetersofconcreteeachday,comehellorhighwater…’ ”(Innace&Dress,1992).

Steelequipmentisgiganticandveryheavyandsorequiresenormouslylargefoundations upon which to rest. Without a good foundation, the steelproduction equipment is not secure.ChairmanPark insistedon sticking toschedule.When the schedulewas not beingmet, Park declared a state ofemergency and had all Posco executives down on the construction sitepersonally supervising work. Everyone was involved to fix the situation.Park’sstrategicmanagementstylefocusedonkeepingscheduleandmakingexecutives personally deliver. Strategic thinking in Park’s leadership styleincludes the strategic planning ideas of: integrity-technology-plan-capital-personnel-resources-market-speed-revenue-competiton-profit-costs-schedule-supervision.

Another problem occurred. Innace andDresswrote: “With the foundationpoured, erection of the steel frame for the mill’s steelmaking plant wasbegun in the summer of 1972 … One morning, on one of his regularinspection tours, Park decided to go to the top of the steel-framedstructure…Fromthatperch,hespottedthatmanyoftheheadsoftheboltsremainedonthesteelframe.Thismeantthefasteningofthestructuralsteelwas loose in some spots and, as such, the building would not be able tosupport the equipment andmachinery inside themill…. Park called in a

team of his white-collar managers to assist with the trouble-shooting…Therewerehundreds(ofbolts)thatneedtobefixed.Haditnotbeenfor theChairman’ssharpeyes,aseriousaccidentcouldhavestrickenthemillshortlyafteritwasupandrunning”(Innace&Dress,1992).Tothecriteria in Park’s strategic thinking, one can add problem-detection-and-solving, or “solutions”: integrity-technology-plan-capital-personnel-resources-market-speed-revenue-competiton-profit-costs-schedule-supervision-solutions.

The first stage of Park’s construction of plants was completed on July 4,1972. The plant could finish steel slabs into sellable products; and Poscopurchasedsemi-finishedslabsfromothersteelproducerstomakesteelplate.It posted a profit in its first year of operations.Next, the second stage ofPark’s plan was begun, the construction of steelmaking furnaces (makingsteelfromironore).Butadditionalfinancingforthisstagewasneeded,andfurther financing solely by the Japanesewas not likely. Innace andDresswrote:“…ChairmanParkwanted todemonstrate thatPoscocouldexpandwithouttheJapanese,andthentheEuropeans…andmanyotherswantedapiece of the action … (Then also) Japanese companies (wanted to) beincludedinthenegotiationsforsecondstage….Proceedinginthisfashion,many of the facilities for the second stage were obtained at rock bottomprices”(Innace&Dress,1992).

Park used the latest technologies, and computerized process control ofproduction of steelwas installed.OnNovember 30, 1978, construction ofthe blast-furnace plant was completed (Figure 10.3). Innace and Dresswrote:“Asteelworksoperatesaroundtheclock,24hoursperday.Churningoutitsmoltenmetalononeendandsolid(steel)productsontheother,inaconstantprocessflow…Rawmaterialconveyorsrumblefromthedocksideyards, making their way to the steep incline … to the tops of the blastfurnaces…Onthefurnacedecks,workerswatchthesteadyflowofred-hotpigiron”(Innace&Dress,1992).

Figure10.3: GwangyangIronWorks.Source:Gimsominui.https://en.wikipedia.org/wiki/File:GwangyangIronworks.jpg(Copyrightedfreeuse)via

WikimediaCommons.

A third and fourth stage of expansion of production capacity occurredthrough1979.During its firstdecade,Poscohadexpandedproductionandwasearning largeprofits. It hadpaidoff the loans received fromJapan tostartthecompany.ButonOctober26,1979,PresidentParkChungHeewasassassinatedbyhisheadoftheKoreanCentralIntelligenceAgency.GeneralChunDoo-Hwan arrested and executed the assassins; and he assumed thepresidency.However,ChairmanParkTaeJooncontinuedinthemanagementof Posco and expanded its capacity. By 1991, Poscowas the third largeststeelcompanyintheworld,withacapacityofproducing17.5milliontonsof steel annually. Later Park Tae Joon also founded Postech University(Figure10.4).

Figure10.4: FirstPresidentofPOSTECHHogilKimwithFoundingChairmanTaeJoon

Park.Source:Pohangnews(http://en.wikipedia.org/wiki/Pohang_University_of_Science_and_Technology).

The combination of strategic thinking and strategic management in usingadvanced technology and in satisfying a national economic need and inbuildingacorporatecultureof integrity,competence,andspeed—allhadenabled Chairman Park to succeed. Park treated the mission andstakeholders and organization in an Asian culture of family andresponsibility. Innace andDresswrote: “The strength ofPosco’s corporatecultureisrootedinacommitmentearlyontoitsconceptofonefamily—acommunityspirit…Poscohasdemonstratedacaringconcernforthewell-beingofallitspeoplesincetheverybeginning”(Innace&Dress,1992).Tothe criteria in Park’s strategic leadership style, one can add “culture”:integrity-technology-plan-capital-personnel-resources-market-speed-revenue-competiton-profit-costs-schedule-supervision-solutions-culture.

StrategicLeadership

Strategic planning is a basic function of leadership, and not only the plan must beformulated but also implemented. In strategic leadership, six major criteria need to befocused upon and attended to: Technology, Capital, Market, Competition, Plan, andIntegrity.InFigure10.5,wesummarizetheseimportantstrategiccriteriainplanningandstrategicleadership.

Figure10.5: CriteriainStrategicPlanningandLeadership.

In the strategiccriterionofTechnology,an industrialcompetitive-entrymustuse themost-advanced technologies available to the industry— as newproductsmust performequallywellasanyproductsintheindustryandwithhighestquality.Second-ratequalitywillnotbuycompetitiveentry.Performanceandqualityestablishbrandreputationofthenewcompetitor.Buttoacquireandinstallthemost-advancedtechnology,manytechnicalproblemswill occur andmust be solved by the personnel.While advanced technologyequipment can be purchased, knowledge of how to use the technology for high qualitycannot be bought. It must be learned quickly by the personnel of the prime-movingcompany.Alsoresourcestobeprocessedtomakeaproductmustbetheaccessibletothenewcompany;otherwiseproductscannotbemade inquantity.Forstrategic leadership,technologyasadvancedasanyestablishedcompetitormustbeacquiredandlearnedandimplementedbythenewlyenteringfirm.Thefirmmustalsohaveaccesstotheresourcesneededforproduction.

InthestrategiccriterionofCapital,averylargeinvestmentisrequiredforcompetitiveentry,becauseestablishedfirmsintheindustryalreadyhavelargeproductioncapacityandmajormarketingcapability. Investment inproductionandmarketing isalways themajorinvestmentinhardgoods.Buteveninservices,investmentsmayberequiredinfacilities,deliverycapacity,andmarketing.Largeinvestmenttoenterthemarketsofanestablishedindustryisthebasisofwhateconomistshavecalled“barrierstoentry”(see,e.g.,MacAfeeet al., 2003). Financing a new entry into a major competitive commodity product isdifficult.

As we saw in Posco, without the South Korean government’s strategy andcommitment,financingforanewmajor integratedsteelmaker inKoreawouldnothavebeenpossible.Theinternationalbankingandsteelindustriesthoughtanotherinternationalsteel competitor unnecessary for the world (even if it were desirable for Korea). Forstrategic leadership, large initialcapital isneededto financeconstructionofproductionfacilities and make initial sales; successful entry into a commodity-type market isexpensive.

InthestrategiccriterionofMarket,nationalmarketswillbelargeforcommodity-typeproductsofa technology-mature industry.Foranewentry toacommoditymarket, it isdifficult to take market share from established competitors because they have theadvantagesofbrandrecognitionandestablisheddistributionandretailcapabilities.InthecaseofPosco,marketentrywaseasierbecausethefirstmarketfornewsteelproducerwasthegrowingmarketofSouthKorea.ThedemandforsteelinSouthKoreamadeiteasyforPoscotoinitiallysellallitssteelproducts,makingrevenueandprofitsfromthestart.Onlylater, after Posco had increased production capacity to a very large scale did it need tocompeteintheinternationalmarketforsteel.Forstrategicleadership,marketsneedtobegrowing, so that anewentry can initiallymarket sharewithouthaving to first displaceestablishedcompetitors.

InthestrategiccriterionofCompetition,possibleprofitsforanewentryareboundedbythepricesoftheexistingproductsofcompetitors.Entriesshouldnottrytoenterwithhigher prices but with lower prices.With established product prices as an upper price

barrier, profits are determined by costs. Initial low costs are necessary for profitability.Thus a focus upon low costsmust be accomplished first and early, because having thetimetolearnhowtolowercosts(calledthe“production-learning-curve”)isnotaluxuryavailabletoanewentrant.Foraprimemover,costtargetshavetobebuiltintoaninitialbusinessmodelandmet.Ifcompetitivecostscannotbeobtainedinitiallyinconstructingtheproductionfacilityandindesigningtheproduct,thenewentrywillnotsurviveagainstestablishedcompetition.Forstrategic leadership, initialcostsofproductionmustmatchorbelowerthantheproductioncostsofestablishedcompetitors—andatgoodorhigherquality.

In thestrategiccriterionofPlan,elementsof its initialbusinessplanshouldcontain:(1)productdevelopmentanddesign, (2)constructionofproductionplant, (3)customersandinitialsales,and(4)financialprojectionsofoperationswhenproductionbegins.InthecaseofPosco,itsfirstplannedproductsweresteelplatesrolledfromsteelslabsandsoldintheKoreanmarket.It’splansforconstructionofthefacilitieswasinfourstages:firstthe rolling mill for producing steel products, then the blast furnace for producing slabsteel, then expansion of facilities for increased production (in stages three and four).Because of the large but finite amount of financed capital, itwas essential to keep theconstructionoffacilitiesontimeandonbudgetinordertomakeitthroughthefirststageand second stage to an integrated steel plant. The customers for the first years wereKoreanindustriesand,forlateryears,internationalmarkets.Speedwasimportanttokeepto schedule. For this, finding and solving problems quicklywas necessary to finish theprojectontime.AdditionalfinancingwouldnothavebeenavailabletoPosco,untilafterPosco successfully finished stages one and two. Then it could hope to raise additionalfinancing for expansion of capacity in stages three and four. Close supervision of alloperations directly by senior levelmanagers, andwhile on-the-ground,was essential toquickly find and fix problems. Problems always occur in any project and can delayschedule.Forstrategicleadership,goodplansandquickimplementationisnecessarytoenteracommodity-typeindustry,competitiverightfromthestartinqualityandcost.

InthestrategiccriterionofIntegrity,fourlevelsinanorganizationneedtogethertoacthonestly, competently, and with responsible transparency. These are government,executive, management, and worker levels. At the governmental level, governmentregulationofanindustryisproperforsafetyandfinancialreporting.InthecaseofPosco,government planning for Korean export industry was necessary to create the initialfinancial investment for the construction of Posco facilities. It had been important thatPresidentParkChungHeeagreedtokeepgovernmentfrominterferingwithoperationofPoscoasaprivatebusiness.ChairmanParkTaeJoonhad the integrity torunanhonest,effectivebusinesswithproper care and support of itsworkers.At themanagerial level,Poscomanagers respected integrity andmanagedwith competent supervision, ensuringthatschedulesandtargetsweremet.Attheworkerlevel,employeesworkedhardandlonghours, receivingdecentsalariesandbelieving in the integrityofPosco’smission tohelpbuild theSouthKoreannation.Forstrategic leadership, integrity (honesty, competence,responsibility, hard work) is necessary in all employees for a new firm, to competeimmediatelywithestablishedcompetitors.

Strategicmanagementofanyenterprise shouldhaveadvanced technology, sufficientcapital, growing markets, high-quality-low-cost production, good plans andimplementation, and integrity. These six qualities must be embedded immediately in aneworganization—withnotimetolearnthemeventually.

BusinessPlansforNewVentures

The format of a strategic plan for a new venture differs from the format for strategicplanning in an ongoing operation. In the new business start-up, everything must beplanned de novo — from strategy to operations. In a continuing business, strategicplanningisonchangetocurrentoperations.

Allnewbusinessesneedabusinessplan,andventurecapitalists require suchbeforeconsideringaninvestment.Thebusinessplanexpressesindetailtheentrepreneurialvisionandplanforanewenterprisesystem.Thepurposesofthebusinessplanare:

(1)toidentifythecompletesetofpoliciesandstrategicassumptionsofthebusinessmodelofthenewbusiness,

(2)tochartthecourseandidentifytheresourcesneededforthenewventure,

(3)toattractventurecapital.

Aswesawabove,astrategicplanforanongoingoperationfocuseson(1)changesinstrategicdirectionand(2)planningthedetailsofthenexttermofoperations.Astrategicplanforanongoingoperationdoesnotcontain thestrategicbusinessmodel,but isbuiltupon it.Accordingly, the format of a business plan for an operating business using thecategoriesof:

Mission

Stakeholders

ScenarioandKnowledge

Strategy

Competition

Objectives

Metrics

Tactics

Organization

Budget

Incontrast,anewventurebusinessplanexplicitlycontainsthestrategicbusinessmodel.Accordingly, the format for anewventurebusinessplandiffers from that of a strategicplan of an ongoing organization. Thus in writing a business plan for a new venture,categoriesareusedinitsformatthatexplicitlylayoutthestrategicbusinessmodelforthenew start-up.A complete set of business policies for a strategic businessmodel shouldinclude:

–InnovationStrategy

–ProductStrategy

–ProductionStrategy

–MarketingStrategy

–DiversificationStrategy

–OrganizationStrategy

–InformationStrategy

–CompetitiveStrategy

–FinanceStrategy

Wecanusethesecategoriestoconstructtheformatofanewventurebusinessplan,whoseformatcoversthefollowingtopics:

1. ExecutiveSummary2. InnovationStrategy3. ProductStrategy4. ProductionStrategy5. MarketingStrategy,6. DiversificationStrategy7. OrganizationStrategy8. InformationStrategy9. CompetitiveStrategy10. FinanceStrategy

1.ExecutiveSummary

 Thisisaonepagesummaryofthehighlightsofthebusinessplan,writtenlastand placed first. Its purpose is to generate sufficient interest by a potentialinvestor to read the whole plan. The strategic concept of the new enterpriseshould be summarized as to how the business should provide functionalcapability to customers, who they are and their application needs. Then theconcept should identifywhat kind of product or service the new businesswillprovideforthatcustomer,andhowitwillprovidevaluetothecustomer.Aboutthis assumption of adding value to the customer, it is important to be very

explicit,forthepricingoftheproductorservicedependsonhowmuchvalueitprovides for the customer.Translating“value-added” into “price” isoneof themostcriticalassumptionsanentrepreneurwillmakeinabusinessplan.

2.InnovationStrategy

 The innovation strategy should identify and discusswhat new idea is beingbrought into the enterprise to provide new kinds of products/services or toimproveproductionordeliveryofcurrentkindsofproducts/services.Whentheinnovationisinproductorservice,thenthediscussionshouldindicatehowthatwillchangecustomer’sapplicationsorcreatenewapplications.Wheninnovationis in production or organization for an already existing and standardproduct/service, then the value-added must translate into significant costreductionandproductionquality improvement for the technological innovationto provide an entering competitive edge for a new business going up againstexisting competitors. One needs to address the continuing progress in theinnovation.Whatfurtherresearchneedstobedone,whowilldoit,andhowwillthenewbusinessacquireandimplementit.

3.ProductStrategy

 The next section should describe the concept of the new product or servicewhich initially the new business will produce and market. The technicalspecifications of the product/service should be detailed, alongwith the currentstate of the development and design of the product. If the product is still indevelopment,thenadevelopmentscheduleshouldbegiven,andtechnicalrisksinthedevelopmentidentifiedanddescribed.Carefulattentionshouldbepaidtoidentifyingthetechnicalrisksandschedulefortworeasons.Thefirstistomakesurethatsufficientcapitalisraisedtocarrythroughthedevelopmentandbeginmanufacturing.Thesecondreasonistoprotecttheentrepreneurbyduediligencefrom potential law suits by investors, if development fails or falls behindschedule.

4.ProductionStrategy

 The business plan must also envision how the new product/service will beproduced and the capital required to establish production. Production planningwill require judgments about what parts andmaterials to produce and how tofabricate or assemble the product or service. The trade-off judgments here arecapitalandlearningcostsofestablishingproductionversuslossofcontroloverproprietary knowledge and costs through purchasing. The advantages ofproducingin-housearethatcostsandqualitycanbecontrolledandaproprietarytechnology can be used in design and/or in manufacturing, but this comes atcapital costs. The disadvantages of outsourcing and purchasing parts and even

fabrication are that this cannot provide any competitive advantages overcompetitorswhocansourcethesamepartsandmaterials.Itisalsoimportanttoestimate thecapital required toexpandproduction.Foranewventurewhich isquickly successful, the most common way for an entrepreneur to continue todilute equity is to need second and third rounds of investments to expandproduction.

5.MarketingStrategy

 Themarketingstrategyneeds to identify thepotentialcustomers for thenewproduct/service and the applications context inwhich these customerswill usethe new product/service. The marketing strategy should also identify thecustomerrequirementsfortheproduct/serviceandthepricebracketforwhichthecustomer may pay for the product/service. The marketing strategy shouldidentifythedistributionchannelsforgettingtheproducttothecustomer,andthecosts and problems in setting up or entering these distribution channels. Themarketingstrategyshouldalsoplanthesalesforce,howtheyareorganizedandrewarded.Themarketingstrategyshouldidentifyefficientandeffectivemeansofadvertising and distributing information about the new product/service topotentialcustomers.

6.DiversificationStrategy

 It is also important in the business plan to identify not only the initialproduct/service but also a planned family of products and product lines andservices that the business will evolve. It is rare that a single product will besufficienttobuildasuccessfulcompany.Aproductfamilyandproductlinesareusuallynecessaryforlong-termcommercialsuccess.

7.OrganizationStrategy

 Whoaretheinitialmanagementteam?Theexperienceandcredentialsofthemanagement team for the new business should be described. This is veryimportant,becauseexperiencesofsuccessfulventurecapitalistshaveemphasizedthat what investors are basically investing in is the management. Theorganization of the business and operating procedures should be planned, andhowstaffwillberecruitedandtrainedshouldbeoutlined.

8.InformationStrategy

 Howwilltheenterpriseuseinformationtechnology?Whatwillbeits“bricks& clicks” balance? Inwhat parts of the operation can progress in informationtechnologyprovideacompetitiveadvantage?

9.CompetitionStrategy

 Thecompetitivestrategyshouldidentifythewaythenewbusinessintendstocompete and what are its planned competitive advantages. It is important tobenchmark competing products or products forwhich the new product/servicemay substitute. An important feature of such benchmarking is specifyingtechnicalperformanceandfeaturesofcompetingproductsandtheirprices.Theplan should show the rate of anticipated technology diffusion of the newproduct/service into the market, and critical assumptions which facilitate orhinderthatdiffusion.

10.FinancialStrategy

 The financial plan should be constructed to anticipate the cash flow of theoperation through the criticalmilestones of a new venture. The financial planshouldbeginwithasalesprojectionandplannedgrowthandpenetrationof themarket over the first five years of operation. For these sales projections, thefinancialplanshouldthenforecastincome,expenditures,andprofitsforthefirstfiveyearsofoperation.Inaddition,workingcapitalandbalancesheetsshouldbeconstructedforeachoftheseyears.Additionalneedsoffurtherfinancingshouldbeidentifiedanddiscussed.Thefinancialplanshouldshowprojectedreturn-to-investors as increase in equity. And finally, the financial plan should have a“cash-out”planforinvestorsandentrepreneurstogainliquidity.

Planningthenewbusinessadventureisimportantbecauseallactionrequiresakindofcompletenessofmeansforsuccessfullyattaininganend.Forexample,onemustproduceaproductbeforehavingsomethingtosell,andonemustselltheproducttoobtainrevenueandonemustcollecttherevenuetoobtainacashflowandonemustpayforproductionandsalesof theproduct—allofwhichtogethercancreateaprofitoninvestment.Thiscompletenessofperformingalltheactionsnecessaryforasuccessfulbusinessiswhatiscrucialtoplan.Forifnotplanned,itmaynothappen—andthenthebusinessfails.

Seldomdoesanythinggoentirelyasplanned,butwithoutsomeplanningnothingeverevengoes.Theplan should layoutwhatmustbedone tomakeanewbusinessgoandwhattheassumptionsareuponwhichtheplanisbased.Thenwhennothingevergoestoplanit isbecauseeither theplanwasnotfullyimplementedorsomeassumptionsof theplan turned out not to be valid. One needs to know both these things for successfulplanned action: (1) what needed to be done, (2) what assumptions need changing forrevisingplannedaction.Goodplanscontrol thecompletenessofasuccessfulactionandidentifythefaultyassumptionsinunsuccessfulaction.

SWOTAnalysisA particular technique called a “SWOT” analysis became popular in the practices ofstrategic planning in the United States in the 1990s. The acronym SWOT stood for a

strategiclistofStrengths,Weaknesses,Opportunities,andThreats.Thetechniqueisnotastrategic plan but a way to summarize the analysis in existing operations. The SWOTanalysis can be properly used to summarize the salient points of an ongoing operationwithintheScenariosandKnowledgesectionofastrategicplan.

ThereintheSWOTanalysiscansummarizesuccinctly(asalistofbullets)thepresentcapabilitiesofanoperationinlightoftheplanningscenario:

Strengths

–alistofthestrategicstrengthsofcurrentoperationsthatshouldbecontinued;

Weaknesses

–alistofthestrategicweaknessesofcurrentoperationsthatneedtobecorrected;

Opportunities

–alistofthebusinessopportunitiesthatneedtobeaddedbynewoperations;

Threats

–alistofthedangerspresentedbycompetitors.

Withinastrategicplanandasapartoftheplanningscenario,aSWOTanalysisisausefultechniqueforbrieflysummarizingtheimplicationsofaplanningscenariooncurrentoperationsofanongoingorganization.

Summary

Planning is a basic function of strategic leadership. Planning includes not only theformulationof aplanbut also the implementationof theplan. Implementinga strategicplan requires leadership across the six dimensions of Technology, Capital, Market,Competition,Plan,andIntegrity.

TheoreticalPrinciples

1. Thesuccessfulimplementationofaplanisasimportantasgoodplanning.2. Leadershipinimplementingagoodplanrequiresaccesstopropertechnology,

sufficientcapital,marketentry,competitiveoperations,andmanagementintegrity.

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Index

ABug’sLife(Movie),122,123

Acquiringnewtechnology,85–86

Acquisitions,growthby,198,200–201

Action,1

AdvancedResearchProjectsNetwork(ARPAnet),41,46,48

AI.SeeAlleghenyInternational(AI)

AlleghenyInternational(AI),273,275

levelsofauthorityin,278

strategicgreedinBuckley’s,280

Ally,186

Amazon,157,171–172

Amelio,GilbertF.,115,129

AmericaOnline(AOL),157,168–170

AmericanSupremeCommanderforAlliedPowers(SCAP),262,263

Analysis,26

AOL.SeeAmericaOnline(AOL)

Apple4.2,107

AppleComputer,94

iPodproduct,129

Macintoshcomputer,113

strategyprocess,118

computer-animationtechnology,123

afterJobs’Departure,118,119

Pixar,120,121

subdivisionsurfaces,124

ARPAnet.SeeAdvancedResearchProjectsNetwork(ARPAnet)

Asynchronoustransfermode(ATM),71,72

ATM.SeeAsynchronoustransfermode(ATM)

Atomicbombs,259

Austen,Jane,64

Bakufu,222

Bankruptcy,179,181,185

Bardeen,John,20

Barnard,Chester,8

BellLabs,21

Benchmarking,89

Berman,Dennis,131

Besanko,David,89

Bessemerprocess,58

Bestpractices,89,90

“Bigpicture”,98,127

“Bill-and-holdsales”technique,289–290

BlackOceanSociety,246

BM.SeeBusinessmodels(BM)

Bosack,Leonard,41,53,64,65

Bottom-upperspectives,98,99,105,106,108

Brattain,Walter,20

Briggs,KatharineCook,26

Bromely,Phillip,212

Brown,Donaldson,147–149,153

Brown,Robert,212

Bruell,Steven,131

Buckley,Robert,273–276,278–280,283–284

Bunnell,David,44,53,62,63

Bureaucracies,75

Bureaucraticrationality,75

Burrows,Peter,110,114

Busan.SeePusan

Businessmodels(BM),118,137,141–142,159

automobilemanufacturingproductionsystemflow,143–144

competitivepolicy,155

“conceptoftheenterprise”,142

diversificationpolicy,154

financialpolicy,154

GMandFordStrategicRivalry,144–148

informationpolicy,148–150

innovationpolicy,151–152

marketingpolicy,152

MichaelPorter’svalue-addedmodel,142–143

organizationpolicy,153–154

productpolicy,150–151

productionpolicy,152–153

SeealsoStrategicpolicymatrix

Businessplansfornewventures,324

businesspolicies,325

categories,324

executivesummary,326

financialstrategy,329–330

informationstrategy,329

innovationstrategy,326–327

marketingstrategy,328

organizationstrategy,328–329

productstrategy,327

productionstrategy,327–328

SWOTanalysis,330–331

“Businessportfolio”,177

Business-levelstrategyinteractions,189–190

Business(es)

constantinsalesandprofits,204

withcyclicsalesineconomiccycles,204

withdecliningsales,205

growinginbothsalesandprofits,203,204

inlargematureindustries,206–207

newbusinessesinnewindustries,208–209

newbusinessesinnewlargeindustries,209–210

principletheory,96

insmallmatureindustries,207–208

Buskirk,EliotVan,130

C&CCommittee.SeeComputers&CommunicationsCommittee(C&CCommittee)

Capital,79,160

liquidity,83

market,178

Casesa,John,183

CasesaShapiroGroup,183

CellularNetworkandTelecommunicationOperator(CNTO),159

Centralprocessingunit(CPU),95

CEOs.SeeChiefexecutiveofficers(CEOs)

Chambers,John,65,69,74

Chandler,A.,8

Chevrolet,145

Chiefexecutiveofficers(CEOs),3

Christensen,Clayton,10

Ciscosystems,40,53–54,61,68

ATM,71,72

bigpictureinbusinessstrategy,49–53

cloudcomputing,73

CrescendoCommunications,72

GE,69

GridSystems,62

Internet,44–49

InternetofThings,74

IPO,63

routerconcept,44

StrategicDecisionandStakeholdersin,78

SUN,42

“to-dolesson”,70

two-thirdsshares,64

U.S.DepartmentofDefense,41

inUSA,40

venturecapital,61

word-processingworkstations,71

Clark,Kim,32,33,35

Cloudcomputing,73

CNTO.SeeCellularNetworkandTelecommunicationOperator(CNTO)

CodeofRegulations,266

Cognitivefunctions,25

CognitiveSchool,91,112

ColemanCompany,293

Colvin,Geoffrey,118

Commitment,30–32

Competitiveness

changingfeatures,32–33

competitionstrategy,329

competitivediscontinuities,12

competitivepolicy,155

kindsofsocio-technicalsystems,33–34

preceptsforcorporatestrategy,33

strategicprecepts,35–37

andstrategicvision,32

Computer-animationtechnology,123

Computers&CommunicationsCommittee(C&CCommittee),174

“Conceptoftheenterprise”,137,142

Conductoffirms,10,11

ConfigurationSchool,92–93

Conglomeratecompany,157,177

Consciousoperationsofmind,25

Contingencytheory,92,107

Corporatediversification,reasonsfor,198

growth

byacquisitions,198,200–201

byinnovation,198,199–200

improvingcoverageofmarkets,198,202

survivingeconomiccycles,198,202

SeealsoStockmarket,v

aluationofbusinesses;Strategicmanagement

Corporateplanningscenario,188–189

Coverageimprovementofmarkets,198,202

Cox,Rob,179–180

CPU.SeeCentralprocessingunit(CPU)

CrescendoCommunications,72

Cringley,Robert,64

Culturalinteractions,240–241

CulturalSchool,92

Culturalsystem,244

Currie,Antony,179–180

Customermarketplace,178

Dai-IchiKokuritsuGinkoBank,236

DEC10Systems,42

Decisionstrategy,77–78

Decisiontheory,1,2

SeealsoStrategytheory

Deductiveapproachtostrategy,99

DesignSchool,91

Dimensionsofvision,30–32

Discontinuities

competitive,12

environmentalchange,andorganizationaldecline,10

executiveteam’sabilitytoenvision,11

leadershipinlargeorganizations,9

andstrategicvision,8

Discountedcash-flowapproach,190

DiscountedPresentValuestrategy(DPVstrategy),191

Disruptivechange,10

Distribution

expansion,83–84

systems,81

Diversificationpolicy,154

Diversificationstrategy,177,328

corporatediversification,reasonsfor,198–202

declineofGM,178–186

opportunitycostsofstayinginbusiness,190–192

stockmarketvaluationofbusinesses,202–210

strategicbusinessmodel,186–188

business-levelstrategyinteractions,189–190

diversifiedfirm-levelstrategyinteractions,188–189

strategicmanagementindiversifiedfirm,192–198

Diversifiedfirm-levelstrategyinteractions,188–189

Dix,John,42

Dopedatomsimpurities,22

dot.comfinancialbubble,54,55

functionalcapabilities,57

innovationprocess,58

neweconomy,56

technologicalinnovationandfinancialdevelopments,55

DPVstrategy.SeeDiscountedPresentValuestrategy(DPVstrategy)

Dranove,David,89

DreamTeam,296

Drucker,Peter,74

Duediligence,293–294

DuPont,Pierre,145–146,153

diversificationstrategy,150

GMproducts,151

Durant,William,145–147

Durant-DortCarriageCompany,146

E-retailbusinesses,82

E/Pratio,203

Earle,Nick,73

Echigo,Lord,221

Economic/economy

cyclesurvival,198,202

interactions,240

system,244–245

timelinesof,50

Efficiency,2

Electro-DynamicsCorp,201

EmperorShōwa,7

Enterprisesystem,137,143

value-addedbusinessmodelsof,160

Entrepreneur,65

Entrepreneurialmanagement,65

businessliteraturethemes,65–66

individualentrepreneurialsystem,67

managerialstyles,66

radicalinnovation,68

SeealsoProfessionalmanagement

EntrepreneurialSchool,91

Entrepreneurship,65

EnvironmentalSchool,92,112

EricSchmidtofNovell,4

Esaki,Leo,22–23

Eshenbach,T.G.,33,34

EthylCorporation,199

Executivesummary,326

Exploratoryaction,18

Externalforcesonbusinessvaluation,196–198

Fanning,John,131

Fanning,Shawn,131

Fast-cyclecompanies,167

FederalNetworkCouncil,48–49

Feeling,25

Financialmodel,148–149

Financialpolicy,154

Financialprojections,188

Financialstrategy,329–330

FirstWorldWar,255

FisherBodyCorporation,154

Fiveyearplan,68

Ford,Henry,141,145

FordStrategicRivalrywithGM,144–148

Ford’sinnovationofModelT,137–141

France,Mike,131

Fujimoto,T.,32,33,35

GE.SeeGeneralElectric(GE)

Geistauts,G.A.,33,34

GeneralElectric(GE),69,273

GeneralMotors(GM),144–148

declineof,178–186

GeneralMotorsAcceptanceCorporation(GMAC),152,157

Gilmartin,Raymond,116

Globalizationoftechnologicalinnovation,52

Globally-competitiveindustrialindustries,52

GM.SeeGeneralMotors(GM)

GMAC.SeeGeneralMotorsAcceptanceCorporation(GMAC)

Google,157

GridSystems,62

GTE,173–175

Gumpert,David,66

Gypsy,123

Hardy,Quentin,73

Healey,James,185

HenryFord’sEnterprise,141

Herzfeld,Charlie,47

High-frequencygermaniumtransistor,22

HomebrewComputerClub,95

“Horseless-carriage”,146

HouseofMitsui,216,245

atomicbombs,259

BattleshipTechnology,251

BlackOceanSociety,246

changingenvironments,217

China’srulers,246

commercialleadersofJapan,261–262

conflictinPacific,258

defeatofRussianFleet,1905,248

economicreconstructionofJapan,264

emperorandgovernment,258–259

Europeannations,256

fascism,254

FirstWorldWar,250

Ieyasu,Tokugawa,219

Japanesegovernment,253

Laissez-FaireTheory,254–255

landingofCommodorePerry,224

long-standingbusinessrelationships,228

MeijiRestoration,226

Mitsuibusinesses,223

“Mitsui-gumi”,222

Mitsui’sBussan,247

NihonbashiinEdo,220

politicalinterests,255–256

SaigoTakamori,227

SamuraiofSatsumaClan,226

SCAP,262,263

scenariorelevancymatrix,264–267

shogunrules,221

Tokugawarule,218–219

TreatyofKanagawa,225

U.S.depression,252

U.S.steamship,225

UnitedStatesforces,257

zaibatsu,249–250

SeealsoMeijiRestoration

Hutchinson,Martin,179

HyattRollerBearingCompany,146

Ibuka,Masaru,4,12–18,20,22,31

ICchip.SeeIntegratedcircuitsemiconductorchip(ICchip)

ICTs.SeeInformationandCommunicationTechnologies(ICTs)

Ieyasu,Tokugawa,219

IMP.SeeInterfaceMessagingProcessor(IMP)

Incentives,195–196

Individualentrepreneurialsystem,67

Inductiveapproachtostrategy,99

Industry-contextanalysis,205–206

InformationandCommunicationTechnologies(ICTs),159

Informationpolicy,148–150

Informationstrategy,329

Initialpublicofferings(IPOs),56

Initialsales,81–83

Innovation

growthby,198,199–200

policy,151–152

process,58

strategy,326–327

Insolvency,179–180

Instability,9

Integratedcircuitsemiconductorchip(ICchip),58

Intercloud,73

Interest,inherentconflictsof,196

InterfaceMessagingProcessor(IMP),47

Internationalizationofscience,51

Internet,44

ARPAnet,46

FederalNetworkCouncil,48–49

IMP,47

implementation,45

InternetofThings,74

NCP,48

stockbubble,56

InternetProtocol(IP),49

Intuition,25

IP.SeeInternetProtocol(IP)

iPhone,128,133

IPOs.SeeInitialpublicofferings(IPOs)

iTunesmusicservice,129

Jobs,Steve

firstexercise,94

AppleComputer,94

“openarchitecture”policy,96

strategicbusinessvision,95–96

WESCON,95

strategicstrength,110–111

thirdexercise,128

Apple’siPodproductandiTunesmusicservice,129,134

iPhone,133

MP3player,130

Napster,131

RIAA,132

visionaryability,108,110

Joon,ParkTae,305,306

Jung,Carl,25

Kahn,Robert,48

Kaoru,Inoue,236

Kazarian,Paul,280

Kerkorian,Kirk,182

Kettering,CharlesF.,151

Killerapplication,110

Kimberly-Clark,285

Kleinrock,Leonard,46

KnszoNagai,Dr.,17

KoiciNishimuraofSolectron,3

Kotter,JohnP.,8,9

Kozel,Ed,69

Kramer,Briton,130

Krantz,Michael,129

Kuhn,Arthur,193

LaSalle,151

Laissez-FaireTheory,254–255

Lampel,Joseph,90,94

Leadership,4,77–78

Learningorganizationmodel,167

LearningSchool,92

Lerner,Sandy,40,53,64

Licklider,Dr.J.C.R.,46

LockheedMartin,202

Lohr,Steve,129

Long-termandshort-termdifferencesofcontrol,195

Lougheed,Kirk,54

Lowenstein,Roger,181

Lucas,George,120

Magicrule,191

Management

principles,89

strategicprecepts,35

Managementhierarchylevels,102

Marketfactors,155

“Market-share-survival”ruleofthumb,192

Marketing

policy,152

strategy,328

Markkula,A.C.Mike,96

Martin-MariettaCompany,202

MassachusettsInstituteofTechnology(MIT),46

Maynard,Micheline,181–182

Mazda,163–165

Me-tooproducts/services,85

Meetingcompetitivechallenges,84–85

MeijiOligarchy,235

MeijiRestoration,226,244

Meijigovernment,234,236–237

MeijiOligarchy,235

Mitsuiandgovernmentpartnership,238

MitsuigumiKokusan-kataCompany,237

societalsystemsanalysis,233

strategicdecisionsandsocietalchange,260–261

systemsanalysisofMeijiJapantransformation,239

culturalsystem,244

economicsystem,244–245

JapaneseSocietalSystems,243

politicalinteractions,241

politicalsystem,244

societalinteractions,240

technologicalsystem,243–244

topologicalgraphofsocietalsystems,242

SeealsoHouseofMitsui

Meijirevolution,226

Mertonianirrationality,77

MicrosoftMS-DOSoperatingsystem,113

Mintzberg,Henry,25,90,94

MIT.SeeMassachusettsInstituteofTechnology(MIT)

“MitsuiGomeiKaisha”,249–250

“Mitsui-gumi”,222

MitsuigumiKokusan-kataCompany,237

ModelTinFord,137–141

MorganStanleyteam,293–294

Morgridge,JohnP.,62,63,65,69,70

Morita,Akio,4–8,12–18,20,22,31

MP3player,130

MPMan,130

Multi-businessstrategy,177

Multiple-spaceanalysis,206

Musashi,Miyamoto,27–30

Myers,IsabelBriggs,26

Myers-BriggsTypeIndicator,26

Napster,131

NationalAeronauticsandSpaceAdministration(NASA),47

NationalBankAct,236

NationalProductsCompany.SeeMitsuigumiKokusan-kataCompany

NationalScienceFoundation(NSF),48

NationalSecurityAgency(NSA),73

NCP.SeeNetworkControlProtocol(NCP)

NEC,173–175

NetworkControlProtocol(NCP),48

NetworkWorkingGroup,48

Networkingcomputers,46

Neweconomy,56

Nishimura,Koichi,116

Nobunaga,Oda,218

Nocera,Joseph,62,63,71,72

NorthernElectricCo,272

NSA.SeeNationalSecurityAgency(NSA)

NSF.SeeNationalScienceFoundation(NSF)

Openarchitecturepolicy,96

Open-systemmodel,142

Operationalreality,98

Opportunitycostsofstayinginbusiness,190–192

Organization

policy,153–154

strategy,328–329

Organizationalandmanagementdevelopment,84

OsterCompany,273

P/Eratio.SeePrice-to-earningsratio(P/Eratio)

Packetswitching,46

PalmPilot,114

PaloAltoResearchCenter(PARC),41

Parallel-processingcomputers,120

PARC.SeePaloAltoResearchCenter(PARC)

Peddle,Chuck,95

“Peerreview”procedures,76

Percent-of-profit-on-sales(P),149

Perception,30–32

Perelman,Ronald,297–298

PhoenixTower,274

Pixar,120,121,126,128

PixarUniversity,124

Plan,18,309

Planningscenario,106,116–117

PlanningSchool,91,112

PohangIronandSteelCompany(Posco),301

ChairmanPark,315

componentideas,316

GwangyangIronWorks,318

internationalsteelcommunity,310

NorthKoreanarmy,302

ParkChungHee,303

Park’sconstructionofplants,317–318

planning,308–310,312

budget,313–314

competition,313

goals,313

missionandstakeholders,312

objectivesandmetrics,313

organizationandresources,313

scenariosandKnowledge,312

strategy,312–313

POSTECHHogilKim,319

PresidentPark,305,307,311–312

steel,304

steelequipment,316–317

steelprocessingplant,315

strategicleadershipstyle,320

U.S.ArmyInvasionofIncheon,302

Politicalinteractions,241

Politicalsystem,244

Portablemusicplayers,130

Posco.SeePohangIronandSteelCompany(Posco)

PositioningSchool,91

PowerSchool,92

Precept,35–36

Preparation,30–32

Price,Michael,280,284–285,295

Price-to-earningsratio(P/Eratio),198,203

Productpolicy,150–151

Productstrategy,327

Product/servicedevelopment,80

Production

expansion,83–84

policy,152–153

production-learning-curve,322

production/deliverycapabilities,81

productivetransformations,137

strategy,327–328

Professionalmanagement,65,74

bureaucracies,75

“peerreview”procedures,76

Weberianrationality,77

SeealsoEntrepreneurialmanagement

Profits,160

businessesconstantin,204

businessesgrowingin,203,204

Projectplanningtools,19

Pusan,302

Quantumtunneling,23

Quinn,J.B.,8,67

Radio,23

Rate-of-return-on-invested-capital(R),149

Rate-of-turnover-of-invested-capital(T),149

Rationalstrategyprocess,104

RaymondGimartinofMerck,3

Rebello,Kathy,110,114

RecordingIndustryAssociationofAmerica(RIAA),130,132

Relationshipsoftrust,194

Repetitiveaction,18

Researchanddevelopment(R&D),85

Resources,160

“Responsetime”capabilities,166

Rewards,195–196

Robert’sARPAnetproject,47

Roberts,Lawrence,46

Romanelli,Elaine,10

Routerconcept,44

Routerproject,42

Rubinstein,Jon,132

Sager,Ira,110,114

Sakeshop,221

Sales,160

businessesconstantin,204

businessesgrowingin,203,204

businesseswithdeclining,205

growth,81–83

Samurai’sstrategicvision,27–30

Sanger,DavidE.,181

Satz,Greg,54

SCAP.SeeAmericanSupremeCommanderforAlliedPowers(SCAP)

Scenariorelevancymatrix,264

CodeofRegulations,266

evolutionofHouseofMitsui,267

strategicscenariomodel,265

strategictechnique,265

Schifrin,Matthew,294

Science,50

timelinesof,50

Scott,Mike,109,111

Secondindustrialrevolution,46

Sensation,25

Shanley,Mark,89

Shaw,Gordon,212

Shockley,William,20

Singlebusinesscompany,177–178

6502ICchip,95

Sloan,AlfredP.,146,147,153,185

competitivepolicy,155

diversificationpolicy,154

financialpolicy,154

informationpolicy,149–150

innovationpolicy,151–152

marketingpolicy,152

organizationpolicy,153–154

productpolicy,150–151

productionpolicy,152–153

SonyCorporation,4–8,12–18

Walkmanplayers,130

SpecialYarnsCorp,201

Spindler,Michael,114

StanfordUniversity,41

OfficeofTechnologyLicensing,53

StanfordResearchInstitute,47

StanfordUniversityNetwork(SUN),42

Start-upcapitalacquisition,79–80

Steelprocessingplant,315

Steele,Lowell,34,93,94,97

Steinhardt,Michael,280–281,284,286

Stempel,Robert,183

Stevenson,Howard,66

Stockmarketvaluationofbusinesses,202

businesses

constantinsalesandprofits,204

withcyclicsalesineconomiccycles,204

withdecliningsales,205

growinginbothsalesandprofits,203,204

inlargematureindustries,206–207

newbusinessesinnewindustries,208–209

newbusinessesinnewlargeindustries,209–210

insmallmatureindustries,207–208

industry-contextanalysis,205–206

multiple-spaceanalysis,206

P/Eratio,203,204,205

SeealsoCorporatediversification,reasonsfor;Strategicmanagement

Strategicbusinessmodel,106,117–118,137

businessmodels,141–155

fordiversificationfirm,186–188

business-levelstrategyinteractions,189–190

diversifiedfirm-levelstrategyinteractions,188–189

Ford’sinnovationofModelT,137–141

strategicbusinessvision,95–96

strategicpolicymatrix,155–157,158

types,157–175

Strategicdishonor,271

OsterCompany,273

Sunbeam’sperils,272–298

Strategicenterprisemodel,162,189

Fordvs.Mazda,163–165

strategicissuesofoperations,163

“tolerancestack-up”,163–164

Strategicleadership,320

integrity,323

investment,321

market,322

plan,322–323

strategicmanagement,324

strategicplanningand,320

Strategicmanagement,61,94

Ciscosystems,61,68

ATM,71,72

cloudcomputing,73

CrescendoCommunications,72

GE,69

GridSystems,62

InternetofThings,74

IPO,63

“to-dolesson”,70

two-thirdsshares,64

venturecapital,61

word-processingworkstations,71

criticalfactors,194

differingincentivesandrewards,195–196

externalforcesonbusinessvaluation,196–198

inherentconflictsofinterest,196

long-termandshort-termdifferencesofcontrol,195

relationshipsoftrust,194

unequalpowerrelationships,194–195

indiversifiedfirm,192–193

entrepreneurialmanagement,65

businessliteraturethemes,65–66

individualentrepreneurialsystem,67

managerialstyles,66

radicalinnovation,68

GMdeclineandbankruptcy,193–194

leadershipanddecisionstrategy,77–78

professionalmanagement,74

bureaucracies,75

“peerreview”procedures,76

Weberianrationality,77

strategyandtacticsfornewventuresandgrowth,79

acquiringnewtechnology,85–86

capitalliquidity,83

Cisco’sNewVenture“Action”,79,83

initialsalesandsalesgrowth,81–83

meetingcompetitivechallenges,84–85

organizationalandmanagementdevelopment,84

product/servicedevelopment,80

productionanddistributionexpansion,83–84

production/deliverycapabilities,81

start-upcapitalacquisition,79–80

SeealsoCorporatedi,v

ersification,reasonsfor;Stockmarketvaluationofbusinesses

Strategicplanning,12,93,98,301,320

businessplansfornewventures,324–331

strategicleadership,320–324

Strategicpolicymatrix,155,158

basicactivitiesofanybusiness,155,156

modesofcontrolactivities,156

Sloan’sstrategicpolicies,156–157

strategicbusinesspolicies,155

SeealsoBusinessmodels

Strategicventure,39

actionplannedassequenceofmeans&endsovertime,40

Ciscosystems,40,53–54

bigpictureinbusinessstrategy,49–53

Internet,44–49

routerconcept,44

SUN,42

U.S.DepartmentofDefense,41

inUSA,40

dot.comfinancialbubble,54,55

functionalcapabilities,57

innovationprocess,58

neweconomy,56

technologicalinnovationandfinancialdevelopments,55

strategyandtactics,39

Strategicvision,1,12,25

andcompetitiveness,32

changingfeatures,32–33

kindsofsocio-technicalsystems,33–34

preceptsforcorporatestrategy,33

strategicprecepts,35–37

decisiontheory,1,2

dimensions,30–32

anddiscontinuities,8

competitive,12

environmentalchange,andorganizationaldecline,10

executiveteam’sabilitytoenvision,11

leadershipinlargeorganizations,9

asexploration,18–20

intuitionand,25–26

leadership,4

long-termoutcome,2

relationshipofleadershipto,3

Samurai’sstrategicvision,27–30

SonyCorporation,4–8,12–18

strategicthinking,1

transistorizedproducts

BellLabs,21

holetoelectronconduction,22

radio,23

Sonyandtechnologicalinnovationof,20

VCR,24

Strategic/strategy,39,93,97

ascomponentandprocess,97–98

financemodel,161–162

firmmodel,160,161,173–175

formulationprocess,93

innovationmodel,161,170–172

issues,93,98

learningmodel,167–170

precepts,35–37

processes,93

responsemodel,165–167

thinking,1

Strategyscenarios,211,265

HouseofMitsui,216

changingenvironments,217

Ieyasu,Tokugawa,219

landingofCommodorePerry,224

long-standingbusinessrelationships,228

MeijiRestoration,226

Mitsuibusinesses,223

“Mitsui-gumi”,222

NihonbashiinEdo,220

SaigoTakamori,227

SamuraiofSatsumaClan,226

shogunrules,221

Tokugawarule,218–219

TreatyofKanagawa,225

U.S.steamship,225

scenarios,forecasts,andextrapolation,228–231

3M’sstrategicstories,212–216

Strategytheory,89

Apple’sstrategyprocess,118

ABug’sLifefilm,122,123

computer-animationtechnology,123

afterJobs’Departure,118,119

Pixar,120,121

subdivisionsurfaces,124

ToyStoryfilm,121

basicsofbusiness,125

bigpicture,127

strategyprocessinPixar,126,128

historyinschools,90–93

managementprinciples,89

planningscenarios,116–117

SteveJobsfirstexercise,94

AppleComputer,94

openarchitecturepolicy,96

strategicbusinessvision,95–96

WESCON,95

SteveJobs’thirdexercise,128

Apple’siPodproductandiTunesmusicservice,129,134

iPhone,133

MP3player,130

Napster,131

RIAA,132

strategicbusinessmodel,117–118

strategyascomponentandprocess,97–98

strategyformulationprocess,93

strategyprocessastop-downandbottom-upperspectives,98,99,108,111,116

Apple4.,2,107

business’splanningscenario,103

competitivediscontinuities,105

deductiveapproachtostrategy,99

Jobs’visionaryability,108

managementhierarchylevels,102

operatinglevelsofbusinesses,101–102

PalmPilot,114

periodicandnon-continuousrequirements,104

planningprocess,106

strategicplan,112

“technology-follower”strategy,113

visonandplanning,112

WESCON,109

Xerox’sresearchstrategy,110

theoreticalprinciplesinmanagement,89,90

StrengthsWeaknessesOpportunitiesThreatsanalysis(SWOTanalysis),330–331

Strickland,A.J.,104

Subdivisionsurfaces,124

SumitomoMetalsCorporation,14

SUN.SeeStanfordUniversityNetwork(SUN)

Sunbeam-Ostercompany,280

Sunbeam’sperils,272

AI’sboard,275

AlDunlap,284–287

authoritystructureoforganization,276–280

“bill-and-holdsales”technique,289–290

Buckley’sstrategy,279

businessmodelandorganizationalstructure,276

conflicts,298

Dunlap’sLeadershipofSunbeam,288,292–293

GE’sappliancebusiness,281

informationflowsinauthoritystructures,292

Kimberly-Clark,285

leadershipintegrityandrealistictargets,288

levelsofauthorityinAI,278

NorthernElectricCo,272–273

operationsstructure,282–284

Schifrin’sreport,294–296

strategicbusinessmodelsindiversifiedfirm,277

Sunbeam-Oster,280

Super-computercentersprogram,48

SWOTanalysis.SeeStrengthsWeaknessesOpportunitiesThreatsanalysis(SWOTanalysis)

Symonds,William,273

Synthesis,26

SystemsanalysisofMeijiJapantransformation,239

culturalsystem,244

economicsystem,244–245

JapaneseSocietalSystems,243

politicalinteractions,241

politicalsystem,244

societalinteractions,240

technologicalsystem,243–244

topologicalgraphofsocietalsystems,242

Tactics,39

Takashi,Masuda,238

Takuma,Dan,237–239

TaxpoliciesofUnitedStates,197

Taylor,RobertW.,47

TCP/IP.SeeTransmissionControlProtocol/InternetProtocol(TCP/IP)

Technological/technology,49

discontinuities,10

imperative,49

interactions,241

planningprocesses,34

system,243–244

timelinesof,50

“Technologicallyeffective”enterprise,34–35

“Technology-follower”strategy,113

“Technology-leader”businessstrategy,110

Tel-Save,169

Telecommunication,56

TexasInstruments(TI),23,24

Theoreticalprinciplesinmanagement,89,90

Thinking,25

Thompson,ArthurA.,104

3M’sstrategicstories,212

bullet-listformat,213

scenariostorystages,215–216

standardfive-yearstrategicplan,214

TI.SeeTexasInstruments(TI)

Time,importanceof,167

“To-dolesson”,70

“Tolerancestack-up”,163–164

Top-downperspectives,98,99,105,108

ToyStoryfilm,121

Toyota,166

Transistorizedproducts

BellLabs,21

holetoelectronconduction,22

radio,23

Sonyandtechnologicalinnovationof,20

VCR,24

TransmissionControlProtocol/InternetProtocol(TCP/IP),48,49

Troiano,Richard,54

“Truism”,194

Tushman,Michael,10

Unbalancedstrategy,185

Unequalpowerrelationships,194–195

U.S.DepartmentofDefense,41,46

U.S.industrialcapacity,51

“Used-business”dealer,285

“Used-company”dealer,285

Valentine,Don,62

Venturecapital,61

Videocassetterecorder(VCR),24

Virany,Beverly,10

Vlasic,Bill,179,181,184

Wagoner,Rick,182–183,185

WallStreet,286,291,295

Weber,Max,75,239

Weberianrationality,77

WESCON,95,109

Wilcox-Gaytaperecorder,14

“Wireframe”model,122

Word-processingworkstations,71

Wozniak,Steve,94,95

Xerox’sresearchstrategy,110

Yeager,William,41,42,43,44

Young-won,Kim,74

Zeleny,Jeff,181

“ZeroDefects”qualitystandard,163–164

ZilogZ80ICchip,95