Walter kiechel the lords of strategy the secret intellectual history of the new corporate world

Table of Contents Title Page Copyright Page Dedication Preface Chapter - Strategy as a Case to Be Cracked Horsemen of the Corporate Apocalypse Toward a Greater Taylorism History of an Idea in Three Stages The Fiercening of Capitalism The Intellectualization of Business Chapter - Bruce Henderson Defines the Subject Early Wonderings The Mysteries of Market Segmentation How to Retail Business Ideas The Foundation Story The Primordial Ooze from Which Strategy Emerged Chapter - The Experience Curve Delivers a Shock How Your Costs Should Decline Black & Decker Uses the Tool TI’s Ride Down the Curve Ends Badly Chapter - Loading the Matrix Debt and Cash as Imperatives Only Connect One of the “Duller Things” Gives Rise to the Matrix Adding the Stars Pushing Back on the Division Heads The Rule of Three and Four Chapter - What Bill Bain Wanted The Classic Strategy Study Revealed Greater Taylorism Done Beautifully Looking for the Best Best Practices Chapter - Waking Up McKinsey What Are We Going to Do About Fred? Bringing Rocket Science to the Firm From the Tower of Babel to the Shores of Vevey Homage to Bruce Henderson Chapter - Michael Porter Encounters the Surreal What Harvard Had Instead of Strategy Where the Five Forces Came From Pushback Across the Charles Becoming an Unstoppable Force On to Revolutionizing HBS That Pesky Question About People Chapter - The Human Stain The Origins of Excellence The Case Against Strategy The Mysterious Sources of Honda’s Strategy Chapter - The Paradigm That Failed? The Myth That Readers Most Frequently Fall For Chapter 10 - Struggling to Make Something Actually Happen Flying Beyond the Seagull and Pushing Henderson Out What You Can Learn from Your Mother Chapter 11 - Breaking the World into Finer Pieces Finding the Limits of the Experience Curve McKinsey Assembles to Disassemble Michael Porter Forges the Value Chain Chapter 12 - The Wizards of Finance Disclose Strategy’s True Purpose Making a Market in Corporate Control Prophets of Destruction Bain & Company Flies Too Close to the Sun Where’s the Money? Chapter 13 - How Competencies Came to Be Core Time as the Measure of All Things The Imperative to Innovate, the Wisdom to Hold Fast Where Core Competencies Come From Reengineering Flashes and Crashes The Eclipse of Capabilities Chapter 14 - The Revolution Conquers the World McKinsey Exceeds Fred Gluck’s Expectations What BCG Learned in Europe The Golden Horde Taking Share of the Chief Executive Brain Chapter 15 - Three Versions of Strategy as People The Lure of the Entrepreneurial Networks and the Need for New Ontology Wealth Creation on Steroids Chapter 16 - And Where Was Strategy When the Global Financial System Collapsed? Spreading the Obloquy Around A More Embarrassing Picture A Still Newer Breed of Business Intellectuals Consider the Alternative Coda: The Future of Strategy Notes Acknowledgements Index About the Author Copyright 2010 Walter Kiechel III All rights reserved Printed in the United States of America 14 13 12 11 10 No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher Requests for permission should be directed to permissions@hbsp.harvard.edu, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163 Library of Congress Cataloging-in-Publication Data Kiechel, Walter The lords of strategy : the secret intellectual history of the new corporate world / Walter Kiechel III p cm ISBN 978-1-59139-782-3 (hardcover : alk paper) Business planning I Title HD30.28.K496 2009 658.4’012—dc22 2008050381 The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Publications and Documents in Libraries and Archives Z39.48-1992 for Genie Dunstan and we rose up like wheat, acre after acre of gold —Anne Sexton Preface Three Common Beliefs to Be Discarded Bruce Doolin Henderson achieved executive position at an early age—he was the second youngest vice president in Westinghouse’s history—but he was fired from that job and every job thereafter, something he bragged about Then, in 1963, he founded the Boston Consulting Group, which changed the world The Financial Times would say of him, on his death in 1992, “few people have had as much impact on international business in the second half of the twentieth century.” Have you ever heard of Bruce Henderson? What he and his consulting firm did was to launch the corporate-strategy revolution Revolutions seem to occur every day in the world of business, or so you would believe if you listen to journalists acclaiming the latest technological wonder or to the authors of most new books on management But the rise of strategy qualifies as the genuine, consciousness-transforming article Strategy’s coming to dominance as the framework by which companies understand what they’re doing and want to do, the construct through which and around which the rest of their efforts are organized, eclipses any other change worked in the intellectual landscape of business over the past fifty years Understanding the strategy revolution requires getting beyond three common beliefs The first is that at bottom, ideas don’t really matter that much in business To be sure, skeptics admit, an idea for a great new product can make a huge difference, for a mass-produced automobile, say, or a personal computer But ideas for how to think about a business, or analyze its dynamics? Those of little faith in this regard don’t usually state their views flat out What they say instead is, “Business is mostly a matter of common sense.” (How eager we are to believe in the democracy of commerce.) Or, “You can have the best idea in the world, but if you can’t execute ” (Action trumps cerebration every time, supposedly.) This lack of enthusiasm for the power of ideas extends more widely than one might suspect Most people familiar with the field would probably agree that the leading journal of management ideas aimed at practitioners is Harvard Business Review But fewer than percent of the sixty-five thousand living alumni of the Harvard Business School subscribe to that venerable publication On its op-ed pages, the Wall Street Journal routinely mounted closely argued exegeses of economic, political, and policy concepts Comb through the newspaper’s archives for the past four decades, though, and try to find comparably detailed coverage of the experience curve, say, or the value chain, or time-based competition If you want to make a management consultant squirmingly uncomfortable, even one who churns out articles and books, just ask whether he or she thinks of himself or herself as an intellectual Bruce Henderson would probably have pleaded guilty, but not because he was besotted with ideas for their own sake He was, instead, obsessed with figuring out how the world works For him, this meant identifying both the principles that explain how companies compete and the means of microeconomic analysis with which to arrive at those principles More particularly, he sought to understand how one company achieves an advantage over others Henderson represents the first of the breed that will drive this history, the intellectual as corporate warrior, firebrand, entrepreneur, maverick, and impresario He wanted to use the concepts he dug from the messy back-and-forth of competition to change the world of business, beginning with his clients’ behavior and performance In this, his aspirations were utterly representative of the strategy revolution as a whole Its course features a rowdy parade of ideas and analytical techniques jostling each other down the historical road, the ones further back often sneering at those in the van, but all clamoring for the attention and money of corporations In other words—and maybe this helps ward off the dread specter of intellectualism—these were almost always ideas sharp with a purpose, namely, to solve a problem bedeviling a company The secret intellectual history of the new corporate world is as much about the challenges companies faced, from competing with the Japanese in the 1970s to surviving a crisis in the global financial system in the twenty-first century, as it is about the conceptual solutions devised in response Our story is, in that sense, an account of how the economy and the world we live in today have become what they are Stock markets rise, fall, rise again, then come crashing down, as they have done recently Nations wax and wane in their prosperity Wars break out on distant frontiers Through it all, strategy has enjoyed a remarkable constancy, the preferred if ever-evolving framework by which companies understand what is happening to them and how they should react To say that fifty years ago, before Henderson, there was no such thing as corporate strategy is to invite incredulity What you mean, goes up the cry, haven’t well-run companies and their leaders always had strategies? What about Rockefeller with Standard Oil, Ford with his motor company, the Watsons and IBM? Which is as much to say, how could strategy possibly have an intellectual history? Another common belief to be overcome To be sure, smart enterprises throughout history have had a sense of how they wanted to make money They typically knew a lot about the products or services they sold, a middling amount about their customers—often considerably less than they now—and as little or as much about competitors as their closeness to a monopoly position necessitated (Think of the American auto companies’ obliviousness to the growing threat posed by the Japanese through the 1980s From his elevated perch as CEO, Henry Ford II dismissed the Toyotas and Datsuns arriving in his market as “those little shitboxes.”) Year to year, companies made plans, mostly simple extrapolations of what they had been doing Plans, not strategy—the latter word making only scattered appearances in the corporate vocabulary before 1960 What companies didn’t have before the strategy revolution was a way of systematically putting together all the elements that determined their corporate fate, in particular, the three Cs central to any good strategy: the company’s costs, especially costs relative to other companies; the definition of the markets the company served—its customers, in other words—and its position vis vis competitors If an enterprise had different lines of business, it might view these in historical terms—“First we got into radio, which led us into television”—or as a capital allocation puzzle But it wouldn’t think of the array as a portfolio of businesses, each of which might be grown or harvested, bought or sold, in service to a larger corporate purpose Most dangerous of all, the prestrategy worldview lacked a rigorous sense of the dynamics of competition—“If we this, the other guy is likely to that.” It was like trying to large-scale engineering without knowing the laws of physics As a set of ideas, strategy sought to remedy all these deficiencies And the effort was spearheaded by, of all people, management consultants—Henderson and his ilk For many readers, entertaining this fact will entail reconsidering an even more cherished belief: that consultants are at best hangers-on of only occasional, limited usefulness—in the ancient, tired joke, someone who borrows your watch to tell you the time, which, of course, is not always a bad thing to be reminded of—or at worst, rapacious parasites whose slightest presence in the corporate body indicates gullibility, weakness, and insecurity on the part of its leadership There are many sorts and conditions of consultants, and even the best can be fairly hermaphroditic creatures, one minute exhibiting a professor’s passion for the great clarifying concept, the next displaying sales skills worthy of a street hustler Among my contentions is that it was this very combination of natures that animated Henderson and his confreres to launch the strategy revolution Today, the revolution reaches everywhere business is done in the world In its origins, though, in the people and institutions that forged it, the movement strikes me as having a distinctively American quality, particularly in its approach to ideas One inspiration for this work is a wonderful book, The Metaphysical Club, Louis Menand’s masterly account of American thought after the Civil War as told through the biographies of four of its protagonists In his preface, Menand identifies what they shared in their attitude toward ideas: If we strain out the differences, personal and philosophical, they had with one another, we can say that what these four thinkers [Oliver Wendell Holmes, William James, Charles S Pierce, and John Dewey] had in common was not a group of ideas, but a single idea—an idea about ideas They all believed that ideas are not “out there” waiting to be discovered, but are tools— like forks, knives, and microchips—that people devise to cope with the world in which they find themselves They believed that ideas are produced not by individuals, but by groups of individuals—that ideas are social They believed that ideas not develop according to some inner logic of their own, but are entirely dependent, like germs, on their human carriers and environment And they believed that since ideas are provisional responses to particular and unreproducible circumstances, their survival depends not on their immutability but on their adaptability Bruce Henderson was a management consultant, not a jurist or a philosopher, but his idea about the ideas underlying the strategy revolution tallies point for point with those of Menand’s thinkers Does that put him and his fellow lords somehow, ever so slightly, into their intellectual tradition? Most readers will find this too far a reach, but let it at least raise the possibility that we might afford the ideas of the consultants and business thinkers a leaf or two from the wreaths of dignity we hang around the busts of a Holmes or Dewey For better or for worse, in their approach to ideas, Henderson and his fellow revolutionaries embody a new strain of intellectual in business, one standing in slap-in-your-face contrast to the stereotype of the double-domed, ineffectual solipsist This book will argue their case, warts, major moral disfigurements, and all As far as I know, the volume in your hands represents the first booklength treatment of the strategy revolution Know what it aims to be and what not It’s an exercise in journalism more than scholarship, albeit what I think of as the journalism of ideas That’s the sort I’ve been most interested in for thirty years, first at Fortune and then at Harvard Business Publishing As a work of journalism, the book is based as much or more on over one hundred interviews— none shorter than an hour and some lasting days—as on texts cited and uncited (For notes on the sources, a selective bibliography, and photographs please go to thelordsofstrategy.com.) With the main exception of Bruce Henderson, whom in my various earlier incarnations, I interviewed three times before his death, most of the lords of strategy are all still alive today, able and usually willing to talk Finally, this book is an essay as much as a history, by which I mean an account incorporating the personal observations of the author, including a few of his speculations and prejudices No selfrespecting academic would, I suspect, allow himself or herself the kind of generalizations you’ll find Nardelli, Robert National Association of Food Chains National Bank of Detroit National Semiconductor National Steel Navarro, Peter NEC networking “The New Industrial Engineering” (Davenport and Short) New Industrial State (Galbraith) nine-box matrix Nohria, Nitin Nooyi, Indra North Carolina National Bank Norton Company Noyce, Robert Nucor Nueschel, Dick O’Neal, Stanley O’Shea, James Oetinger, Bolko von Ohmae, Kenichi Oliver Wyman Only the Paranoid Survive (Grove) operational effectiveness operations research Oracle Organization Man, The (Whyte) organization studies state of organizational learning Organizations (March and Simon) Owens Illinois Parnes, Anthony Pascale, Richard A Passion for Excellence (Peters and Austin) “Patterns of Winning and Losing” (Peters) Patton, Archibald Penrose, Edith people orientation software dealing with in strategy Perry, Nancy persistence, myth of personal computing Perspectives (BCG) “Perspectives on Strategy” (Stuckey) “Perspectives on Strategy: The Real Story Behind Honda’s Success” (Pascale) Peters, Thomas departure from McKinsey early life of education of at McKinsey message of Pfeffer, Jeffrey Pierce, Charles S Planning, stages of Porter, Michael early career at Harvard Business School early life of education of intellectual underpinnings of on operational effectiveness recognition of self-evaluation of success at Harvard Business School and value chain positioning, strategy as Practice of Management (Drucker) Prahalad, C K background of and core competencies Prism (ADL) private equity firms challenges to modus operandi of scope of action of strategy dependency of Procter & Gamble Profit from the Core (Zook) “Profit from the Learning Curve” (Hirschmann) Purcell, Philip quantitative view ascendency of Quarterly (McKinsey) Quinn, James Brian railroads, rise of Reed, John reengineering, business process eclipse of growth of Reengineering the Corporation (Hammer and Champy) “Reengineering Work: Don’t Automate, Obliterate” (Hammer) Rees, Helen Reeves, Martin regulatory capture Reichheld, Fred Relevance Lost (Johnson and Kaplan) The Renewal Factor (Waterman) “A Resource-Based View of the Firm” (Wernerfelt) Rio Tinto Rise and Fall of Strategic Planning (Mintzberg) risk management RJR Nabisco Robinson-Patman Act Rockefeller, John D Rockwell Rogers, Everett Rollins, Kevin Romney, Mitt Ronson, Gerald Roux, Olivier Royal Dutch/Shell Royal Insurance “The Rule of Three and Four” (Henderson) Rumelt, Richard S curve Sahlman, Bill Saunders, Ernest downfall of at Guinness Schaubert, Steve Schlitz Schwartz, Jonathan SCP schema Searching for a Corporate Savior (Khurana) Sears SEC second industrial revolution securitization semiconductors Senge, Peter Seven C framework Seven S framework criticisms of and seven C framework share-momentum graph shareholder capitalism complications of forces contributing to property rights and rise of and strategy revolution Shepherd, William Shleifer, Andrei Shulman, Larry Siegel, Marty Siemens and BCG history of Simon, Herbert Skilling, Jeffrey Sloan, Alfred Smith, Adam Southwest Airlines Stalk, George, Jr Stanley Tools Staples Sterling Drug Stern Stewart & Co Stevenson, Howard Stewart, Tom Stigson, Björn Stone, Nan strategic gap analysis “Strategic Intent” (Prahalad and Hamel) strategic management Strategic Planning Associates Strategos strategy adaptive nature of CEOs and constancy of criticisms of early history of and economic crisis of 2008, and entrepreneurship future of globalization of implementation of innovation and integration of human factors with in late twentieth century for mature companies people-oriented philosophy of purpose of relevance of rise of schools of Strategy and the Business Landscape (Ghemawat) Strategy in Poker, Business, and War (McDonald) “Strategy as Revolution” (Hamel) Strategy and Structure (Chandler) “The Structural Analysis of Industries” (Porter) The Structure of Scientific Revolutions (Kuhn) Stuckey, John Sun Tzu Surfing the Edge of Chaos (Pascale) sustainable-growth equation Swissair SWOT analysis Taylor, Frederick Winslow technology, disruptive effects of The Territorial Imperative (Ardrey) Texas Instruments (TI) Bain and BCG and in calculator industry downfall of in integrated circuit industry Thatcher, Margaret Thomas, L G 3LP Advisors 3M Thriving on Chaos (Peters) Tierney, Tom Tilles, Seymour Tilly, Charles “Time: The Next Source of Competitive Advantage” (Stalk) time-based competition Towers Perrin Toyota TPG (Texas Pacific Group) Trane Turner Communications TXU Union Carbide Bain and BCG and and Weyerhaeuser United States Army UPS value chain components of development of implications of strengths of value-based management criticisms of examples of Vanguard Group variety-based positioning Vishny, Robert Volcker, Paul VRIN paradigm W.L Gore Waite, Tom Wal-Mart Waterman, Robert H departure from McKinsey at McKinsey message of Watson Wyatt Wealth of Nations (Smith) Webber, Alan Weick, Karl Weil, Lorne Weill, Sanford Welch, Jack Wernerfelt, Birger Westinghouse Weyerhaeuser “What Is Strategy?” (Porter) When Giants Learn to Dance (Kanter) Whip Inflation Now Whitman, Meg Who Says Elephants Can’t Dance? (Gerstner) Whole Foods Whyte, William, Jr Willard, Ralph Wilson, Perry Winning (Welch) Wittgenstein, Ludwig Wolbach, William Wommack, William Wordworks, Inc World Economic Forum World War II, and operations research Yanmar Young, Lew Zakon, Alan Zook, Christopher About the Author In the course of a thirty-year career as a journalist, Walter Kiechel III has served as the editor of Fortune and as editorial director of Harvard Business Publishing He is also the author of Office Hours: A Guide to the Managerial Life ... Massachusetts 02163 Library of Congress Cataloging-in-Publication Data Kiechel, Walter The lords of strategy : the secret intellectual history of the new corporate world / Walter Kiechel III p cm ISBN... part of our story The narrow framing also runs the risk of dodging the question “Where are the people in the history of corporate strategy? ” It’s a question this book hopes to begin answering The. .. than the history of the successive concepts that made up the strategy revolution The early history of strategy is fairly linear,” observes Pankaj Ghemawat, a Harvard Business School professor