• Academy ol Management Executive, 2001. Vol. 15, No. 4

Are you sure you havea strategy?

Donald C. Hambrick and James W. Fredrickson

Executive OverviewAfter more than 30 years of hard thinking about strategy, consultants and scholars

have provided an abundance of frameworks for analyzing strategic situations.Missing, however, has been any guidance as to what the product of these tools shouldbe—or what actually constitutes a strategy. Strategy has become a catchall term usedto mean whatever one wants it to mean. Executives now talk about their "servicestrategy," their "branding strategy," their "acquisition strategy," or whatever kind ofstrategy that is on their mind at a particular moment. But strategists—whether theyare CEOs of established firms, division presidents, or entrepreneurs—must have astrategy, an integrated, overarching concept of how the business will achieve itsobjectives. If a business must have a single, unified strategy, then it must necessarilyhave parts. What are those parts? We present a framework for strategy design,arguing that a strategy has five elements, providing answers to fivequestions—arenas: where will we be active? vehicles: how will we get there?differentiators: how will we win in the marketplace? staging: what will be our speedand sequence of moves? economic logic: how will we obtain our returns? Our articledevelops and illustrates these domains of choice, particularly emphasizing howessential it is that they form a unified whole.

Consider these statements of strategy drawn fromactual documents and announcements of severalcompanies:

"Our strategy is to be the low-cost provider."

"We're pursuing a global strategy."

"The company's strategy is to integrate a setof regional acquisitions."

"Our strategy is to provide unrivaled cus-tomer service."

"Our strategic intent is to always be the first-mover."

"Our strategy is to move from defense to in-dustrial applications."

What do these grand declarations have in com-mon? Only that none of them is a strategy. Theyare strategic threads, mere elements of strategies.

But they are no more strategies than Dell Comput-er's strategy can be summed up as selling direct tocustomers, or than Hannibal's strategy was to useelephants to cross the Alps. And their use reflectsan increasingly common syndrome—the catchallfragmentation of strategy.

After more than 30 years of hard thinking aboutstrategy, consultants and scholars have providedexecutives with an abundance of frameworks foranalyzing strategic situations. We now have five-forces analysis, core competencies, hypercompeti-tion, the resource-based view of the firm, valuechains, and a host of other helpful, often powerful,analytic tools.' Missing, however, has been anyguidance as to what the product of these toolsshould be^—or what actually constitutes a strategy.Indeed, the use of specific strategic tools tends todraw the strategist toward narrow, piecemeal con-ceptions of strategy that match the narrow scope ofthe tools themselves. For example, strategists whoare drawn to Porter's five-forces analysis tend tothink of strategy as a matter of selecting industriesand segments within them. Executives who dwell

48

2001 Hambrick and Fiediickson 49

on "co-opetition" or other game-theoretic frame-works see their world as a set of choices aboutdealing with adversaries and allies.

This problem of strategic fragmentation hasworsened in recent years, as narrowly specializedacademics and consultants have started plyingtheir tools in the name of strategy. But strategy isnot pricing. It is not capacity decisions. It is notsetting R&D budgets. These are pieces of strate-gies, and they cannot be decided—or even consid-ered—in isolation.

Imagine an aspiring painter who has beentaught that colors and hues determine the beautyof a picture. But what can really be done with suchadvice? After all, magnificent pictures require farmore than choosing colors: attention to shapes andfigures, brush technique, and finishing processes.Most importantly, great paintings depend on artfulcombinations of all these elements. Some combi-nations are classic, tried-and-true; some are inven-tive and fresh; and many combinations—even foravant-garde art—spell trouble.

Strategy has become a catchall term used tomean whatever one wants it to mean. Businessmagazines now have regular sections devoted tostrategy, typically discussing how featured firmsare dealing with distinct issues, such as customerservice, joint ventures, branding, or e-commerce. Inturn, executives talk about their "service strategy,"their "joint venture strategy," their "branding strat-egy," or whatever kind of strategy is on their mindsat a particular moment.

Executives then communicate these strategicthreads to their organizations in the mistaken beliefthat doing so will help managers make toughchoices. But how does knowing that their firm is pur-suing an "acquisition strategy" or a "first-moverstrategy" help the vast majority of managers do theirjobs or set priorities? How helpful is it to have newinitiatives announced periodically with the wordstrategy tacked on? When executives call everythingstrategy, and end up with a collection of strategies,they create confusion and undermine their own cred-ibility. They especially reveal that they don't reallyhave an integrated conception of the business.

When executives call everythingstrategy, and end up with a collection ofstrategies, they create confusion andundermine their own credibility.

Many readers of works on the topic know thatstrategy is derived from the Greek strategos, or "theart of the general." But few have thought much about

this important origin. For example, what is specialabout the general's job, compared with that of a fieldcommander? The general is responsible for multi-ple units on multiple fronts and multiple battlesover time. The general's challenge—and the val-ue-added of generalship—is in orchestration andcomprehensiveness. Great generals think aboutthe whole. They have a strategy; it has pieces, orelements, but they form a coherent whole. Businessgenerals, whether they are CEOs of establishedfirms, division presidents, or entrepreneurs, mustalso have a strategy—a central, integrated, exter-nally oriented concept of how the business willachieve its objectives. Without a strategy, time andresources are easily wasted on piecemeal, dispar-ate activities; mid-level managers will fill the voidwith their own, often parochial, interpretations ofwhat the business should be doing; and the resultwill be a potpourri of disjointed, feeble initiatives.

Examples abound of firms that have sufferedbecause they lacked a coherent strategy. Once atowering force in retailing. Sears spent 10 sadyears vacillating between an emphasis on hardgoods and soft goods, venturing in and out of ill-chosen businesses, failing to differentiate itself inany of them, and never building a compellingeconomic logic. Similarly, the once-unassailableXerox is engaged in an attempt to revive itself,amid criticism from its own executives that thecompany lacks a strategy. Says one: "I hear aboutasset sales, about refinancing, but I don't hearanyone saying convincingly, 'Here is your future.'"^-

A strategy consists of an integrated set of choices,but it isn't a catchall for every important choice anexecutive faces. As Figure 1 portrays, the company'smission and objectives, for example, stand apartfrom, and guide, strategy. Thus we would not speakof the commitment of the New York Times to be Amer-ica's newspaper of record as part of its strategy. GE'sobjective of being number one or number two in allits markets drives its strategy, but is not strategyitself. Nor would an objective of reaching a particularrevenue or earnings target be part of a strategy.

Similarly, because strategy addresses how thebusiness intends to engage its environment,choices about internal organizational arrange-ments are not part of strategy. So we should notspeak of compensation policies, information sys-tems, or training programs as being strategy.These are critically important choices, whichshould reinforce and support strategy; but they donot make up the strategy itself.^ If everything im-portant is thrown into the strategy bucket, then thisessential concept quickly comes to mean nothing.

We do not mean to portray strategy developmentas a simple, linear process. Figure 1 leaves out

50 Academy of Management Executive November

Strategic Analysis

• industry analysis• customer/marketplace trends• environmental forecast• competitor analysis• assessment of internal

strengths, weaknesses,resources 1

Mission

fundamentalpurpose

• values

Objectives f

• specific targets

StrategyThe centralintegrated,externally orientedconcept of how wewill achieve ourobjectives

SupportingOrganizationalArraagements

• structure • rewards• process • people•symbols • activities• functional policies

and profiles

FIGURE 1Putting Strategy in Its Place

feedback arrows and other indications that greatstrategists are iterative, loop thinkers.^ The key isnot in following a sequential process, but rather inachieving a robust, reinforced consistency amongthe elements of the strategy itself.

The Elements of Strategy

If a business must have a strategy, then the strat-egy must necessarily have parts. What are thoseparts? As Figure 2 portrays, a strategy has fiveelements, providing answers to five questions:

• Arenas: where will we be active?• Vehicles: how will we get there?• Differentiators: how will we win in the market-

place?• Staging: what will be our speed and sequence of

moves?• Economic logic: how will we obtain our returns?

This article develops and illustrates these do-mains of choice, emphasizing how essential it isthat they form a unified whole. Where others focuson the inputs to strategic thinking (the top box inFigure 1), we focus on the output^the compositionand design of the strategy itself.

Arenas

The most fundamental choices strategists makeare those of where, or in what arenas, the businesswill be active. This is akin to the question PeterDrucker posed decades ago: "What business willwe be in?"^ The answer, however, should not beone of broad generalities. For instance, "We will bethe leader in information technology consulting" ismore a vision or objective than part of a strategy. Inarticulating arenas, it is important to be as specificas possible about the product categories, marketsegments, geographic areas, and core technolo-gies, as well as the value-adding stages (e.g., prod-uct design, manufacturing, selling, servicing, dis-tribution) the business intends to take on.

For example, as a result of an in-depth analysis,a biotechnology company specified its arenas: thecompany intended to use T-cell receptor technol-ogy to develop both diagnostic and therapeuticproducts for battling a certain class of cancers; itchose to keep control of all research and productdevelopment activity, but to outsource manufactur-ing and a major part of the clinical testing processrequired for regulatory approvals. The companytargeted the U.S. and major European markets as

Hambiick and Fiediickson 51

Where will we be active?(and with how much einphasis?J

Which product categories?Which market segments?Which geographic areas?Which core technologies?Which value-creation stages?

Whaf will be our speed and sequenceof moves?

• Speed of expansion?• Sequence ot initiatives?

How will we obtain our returns? ^

• Lowest costs through scale advantages?• Lowest costs through scope and replication advantages?• Premium prices due to unmatchable service?• Premium prices due to proprietary product features?

How will we ge( (here?

• Internal development?• Joint ventures?• Licensing/franchising?• Acquisitions?

How wi/I we win?

• Image?• Customization?• Price?• Styling?• Product reliability?

FIGURE 2The Five Major Elements of Strategy

its geographic scope. The company's chosen are-nas were highly specific, with products and mar-kets even targeted by name. In other instances,especially in businesses with a wider array ofproducts, market segments, or geographic scope,the strategy may instead reasonably specify theclasses of, or criteria for, selected arenas—e.g.,women's high-end fashion accessories, or coun-tries with per-capita GDP over $5,000. But in allcases, the challenge is to be as specific as possible.

In choosing arenas, the strategist needs to indicatenot only where the business will be active, but alsohow much emphasis will be placed on each. Somemarket segments, for instance, might be identified ascentrally important, while others are deemed sec-ondary. A strategy might reasonably be centered onone product category, with others—while necessaryfor defensive purposes or for offering customers a fullline—being of distinctly less importance.

Vehicles

Beyond deciding on the arenas in which the busi-ness will be active, the strategist also needs todecide how to get there. Specifically, the meansfor attaining the needed presence in a particularproduct category, market segment, geographicarea, or value-creation stage should be the result

of deliberate strategic choice. If we have decidedto expand our product range, are we going toaccomplish that by relying on organic, internalproduct development, or are there other vehi-cles—such as joint ventures or acquisitions—that offer a better means for achieving our broad-ened scope? If we are committed to internationalexpansion, what should be our primary modes,or vehicles—greenfield startups, local acquisi-tions, licensing, or joint ventures? The executivesof the biotechnology company noted earlier de-cided to rely on joint ventures to achieve theirnew presence in Europe, while committing to aseries of tactical acquisitions for adding certaintherapeutic products to complement their exist-ing line of diagnostic products.

The means by which arenas are entered mattersgreatly. Therefore, selection of vehicles should notbe an afterthought or viewed as a mere implemen-tation detail. A decision to enter new product cat-egories is rife with uncertainty. But that uncer-tainty may vary immensely depending on whetherthe entry is attempted by licensing other compa-nies' technologies, where perhaps the firm hasprior experience, or by acquisitions, where thecompany is a novice. Failure to explicitly considerand articulate the intended expansion vehicles

52 Academy of Management Executive November

can result in the hoped-for entry's being seriouslydelayed, unnecessarily costly, or totally stalled.

Failure to explicitly consider andarticulate the intended expansionvehicles can result in the hoped-forentry's being seriously delayed,unnecessarily costly, or totally stalled.

There are steep learning curves associated withthe use of alternative expansion modes. Researchhas found, for instance, that companies can de-velop highly advantageous, well-honed capabili-ties in making acquisitions or in managing jointventures.^ The company that uses various vehicleson an ad hoc or patchwork basis, without an over-arching logic and programmatic approach, will beat a severe disadvantage compared with compa-nies that have such coherence.

Differentiators

A strategy should specify not only where a firm willbe active (arenas) and how it will get there (vehicles),but also how the firm will win in the marketplace—how it will get customers to come its way. In a com-petitive world, winning is the result of differentiators,and such edges don't just happen. Rather, they re-quire executives to make up-front, conscious choicesabout which weapons will be assembled, honed, anddeployed to beat competitors in the fight for custom-ers, revenues, and profits. For example, Gillette usesits proprietary product and process technology todevelop superior razor products, which the com-pany further differentiates through a distinctive,aggressively advertised brand image. GoldmanSachs, the investment bank, provides customersunparalleled service by maintaining close rela-tionships with client executives and coordinat-ing the array of services it offers to each client.Southwest Airlines attracts and retains custom-ers by offering the lowest possible fares andextraordinary on-time reliability.

Achieving a compelling marketplace advantagedoes not necessarily mean that the company has tobe at the extreme on one differentiating dimen-sion; rather, sometimes having the best combi-nation of differentiators confers a tremendousmarketplace advantage. This is the philosophyof Honda in automobiles. There are better carsthan Hondas, and there are less expensive cars thanHondas; but many car buyers believe that there isno better value—quality for the price—than aHonda, a strategic position the company hasworked hard to establish and reinforce.

Regardless of the intended differentiators—im-age, customization, price, product styling, after-sale services, or others—the critical issue for strat-egists is to make up-front, deliberate choices.Without that, two unfortunate outcomes loom. Oneis that, if top management doesn't attempt to cre-ate unique differentiation, none will occur. Again,differentiators don't just materialize; they are veryhard to achieve. And firms without them lose.

The other negative outcome is that, without up-front, careful choices about differentiators, topmanagement may seek to offer customers across-the-board superiority, trying simultaneously tooutdistance competitors on too broad an array ofdifferentiators—lower price, better service, supe-rior styling, and so on. Such attempts are doomed,however, because of their inherent inconsistenciesand extraordinary resource demands. In selectingdifferentiators, strategists should give explicitpreference to those few forms of superiority thatare mutually reinforcing (e.g., image and productstyling), consistent with the firm's resources andcapabilities, and, of course, highly valued in thearenas the company has targeted.

Staging

Choices of arenas, vehicles, and differentiatorsconstitute what might be called the substance of astrategy—what executives plan to do. But this sub-stance cries out for decisions on a fourth element—staging, or the speed and sequence of major movesto take in order to heighten the likelihood of suc-cess.'^ Most strategies do not call for equal, bal-anced initiatives on all fronts at all times. Instead,usually some initiatives must come first, followedonly then by others, and then still others. In erect-ing a great building, foundations must be laid,followed by walls, and only then the roof.

Of course, in business strategy there is no uni-versally superior sequence. Rather the strategist'sjudgment is required. Consider a printing equip-ment company that committed itself to broadeningits product line and expanding internationally.The executives decided that the new productsshould be added first, in stage one, because theelite sales agents they planned to use for interna-tional expansion would not be able or willing torepresent a narrow product line effectively. Eventhough the executives were anxious to expandgeographically, if they had tried to do so withoutthe more complete line in place, they would havewasted a great deal of time and money. The lefthalf of Figure 3 shows their two-stage logic.

The executives of a regional title insurance com-pany, as part of their new strategy, were committed

2Q01 Hambiick and Fiediickson 53

Printing equipment manufacturer with plans toexpand internationally and broaden theproduct line

Regional title insurance company withplans to expand nationally by acquisitionand build a superior, prestigious brand

Wide

Geographicscope

Narrow

Target

Ul

Stage 1

National

Geographicscope

Regional

,• Target

Curiently

Narrow Wide

Product-line breadth

FIGURE 3Examples of Strategic Staging

Weak Strong

Brand power

to becoming national in scope through a series ofacquisitions. For their differentiators, they plannedto establish a prestigious brand backed by aggres-sive advertising and superb customer service. Butthe executives faced a chicken-and-egg problem;they couldn't make the acquisitions on favorableterms without the brand image in place; but withonly their current limited geographic scope, theycouldn't afford the quantity or quality of advertisingneeded to establish the brand. They decided on athree-stage plan (shown in the right half of Figure 3):1) make selected acquisitions in adjacent regions,hence becoming a super-regional in size and scale;2) invest moderately heavily in advertising andbrand-building; 3) make acquisitions in additionalregions on more favorable terms (because of the en-hanced brand, a record of growth, and, they hoped,an appreciated stock price) while simultaneouslycontinuing to push further in building the brand.

Decisions about staging can be driven by a num-ber of factors. One, of course, is resources. Fundingand staffing every envisioned initiative, at theneeded levels, is generally not possible at the outsetof a new strategic campaign. Urgency is a secondfactor affecting staging; some elements of a strategymay face brief windows of opportunity, requiringthat they be pursued first and aggressively. A thirdfactor is the achievement of credibility. Attainingcertain thresholds—in specific arenas, differentia-tors, or vehicles—can be critically valuable for at-tracting resources and stakeholders that are neededfor other parts of the strategy. A fourth factor is thepursuit of early wins. It may be far wiser to success-fully tackle a part of the strategy that is relativelydoable before attempting more challenging or unfa-miliar initiatives. These are only some of the factorsthat might go into decisions about the speed andsequence of strategic initiatives. However, since the

concept of staging has gone largely unexplored inthe strategy literature, it is often given far too littleattention by strategists themselves.

Economic logic

At the heart of a business strategy must be a clearidea of how profits will be generated—not justsome profits, but profits above the firm's cost ofcapital.^ It is not enough to vaguely count on hav-ing revenues that are above costs. Unless there's acompelling bas i s for it, customers and competitorswon't let that happen. And it's not enough to gen-erate a long list of reasons why customers will beeager to pay high prices for your products, alongwith a long list of reasons why your costs will belower than your competitors'. That's a sure-fireroute to strategic schizophrenia and mediocrity.

It is not enough to vaguely count onhaving revenues that are above costs.Unless there's a compelling basis for it,customers and competitors won't let thathappen.

The most successful strategies have a centraleconomic logic that serves as the fulcrum for profitcreation. In some cases, the economic key may beto obtain premium prices by offering customers adifficult-to-match product. For instance, the NewYork Times is able to charge readers a very highprice (and strike highly favorable licensing ar-rangements with on-line information distributors)because of its exceptional journalistic quality; inaddition, the Times is able to charge advertisershigh prices because it delivers a large number ofdedicated, affluent readers. ARAMARK, the highly

-54 Academy oi Managemeni Executive November*

profitable international food-service company, isable to obtain premium prices from corporate andinstitutional clients by offering a level of custom-ized service and responsiveness that competitorscannot match. The company seeks out only thoseclients that want superior food service and arewilling to pay for it. For example, once domesticairlines became less interested in distinguishingthemselves through their in-flight meals, ARA-MARK dropped that segment.

In some instances, the economic logic mightreside on the cost side of the profit equation.ARAMARK—adding to its pricing leverage—usesits huge scale of operations and presence in mul-tiple market segments (business, educational,healthcare, and correctional-system food service)to achieve a sizeable cost advantage in food pur-chases—^an advantage that competitors cannot du-plicate. GKN Sinter Metals, which has grown byacquisition to become the world's major powdered-metals company, benefits greatly from its scale inobtaining raw materials and in exploiting, in coun-try after country, its leading-edge capabilities inmetal-forming processes.

In these examples the economic logics are notfleeting or transitory. They are rooted in the firms'fundamental and relatively enduring capabilities.ARAMARK and the New York Times can charge pre-mium prices because their offerings are superior inthe eyes of their targeted customers, customershighly value that superiority, and competitors can'treadily imitate the offerings. ARAMARK and GKNSinter Metals have lower costs than their competitorsbecause of systemic advantages of scale, experi-ence, and know-how sharing. Granted, these leadsmay not last forever or be completely unassailable,but the economic logics that are at work at thesecompanies account for their abilities to deliverstrong year-in, year-out profits.

The Imperative of Strategic Comprehensiveness

By this point, it should be clear why a strategy needsto encompass all five elements—arenas, vehicles,differentiators, staging, and economic logic. First, allfive are important enough to require intentionality.Surprisingly, most strategic plans emphasize one ortwo of the elements without giving any considerationto the others. Yet to develop a strategy without atten-tion to all five leaves critical omissions.

Surprisingly, most strategic plansemphasize one or two of the elementswithout giving any consideration to theothers.

Second, the five elements call not only for choice,but also for preparation and investment. All fiverequire certain capabilities that cannot be gener-ated spontaneously.

Third, all five elements must align with and sup-port each other. When executives and academicsthink about alignment, they typically have in mindthat internal organizational arrangements need toalign with strategy (in tribute to the maxim that"structure follows strategy"^), but few pay muchattention to the consistencies required among theelements of the strategy itself.

Finally, it is only after the specification of allfive strategic elements that the strategist is in thebest position to turn to designing all the othersupporting activities—functional policies, organi-zational arrangements, operating programs, andprocesses—that are needed to reinforce the strat-egy. The five elements of the strategy diamond canbe considered the hub or central nodes for design-ing a comprehensive, integrated activity system."^

Comprehensive Strategies at IKEA and BrakeProducts International

IKEA: Revolutionizing an industry

So far we have identified and discussed the fiveelements that make up a strategy and form ourstrategy diamond. But a strategy is more than sim-ply choices on these five fronts: it is an integrated,mutually reinforcing set of choices—choices thatform a coherent whole. To illustrate the importanceof this coherence we will now discuss two exam-ples of fully elaborated strategy diamonds. As afirst illustration, consider the strategic intent ofIKEA, the remarkably successful global furnitureretailer. IKEA's strategy over the past 25 years hasbeen highly coherent, with all five elements rein-forcing each other.

The arenas in which IKEA operates are well de-fined: the company sells relatively inexpensive,contemporary, Scandinavian-style furniture andhome furnishings. IKEA's target market is young,primarily white-collar customers. The geographicscope is worldwide, or at least all countries wheresocioeconomic and infrastructure conditions sup-port the concept. IKEA is not only a retailer, butalso maintains control of product design to ensurethe integrity of its unique image and to accumulateunrivaled expertise in designing for efficient man-ufacturing. The company, however, does not man-ufacture, relying instead on a host of long-termsuppliers who ensure efficient, geographically dis-persed production.

200 i Hamhtick and Fiediickson 55

IKEA is not only a retailer, but alsomaintains control of product design toensure the integrity of its unique imageand to accumulate unrivaled expertise indesigning for efficient manufacturing.

As its primary vehicle for getting to its chosenarenas, IKEA engages in organic expansion, build-ing its own wholly owned stores. IKEA has chosennot to make acquisitions of existing retailers, andit engages in very few joint ventures. This reflectstop management's belief that the company needsto fully control local execution of its highly inno-vative retailing concept.

IKEA attracts customers and beats competitorsby offering several important differentiators. First,its products are of very reliable quality but are lowin price {generally 20 to 30 percent below the com-petition for comparable quality goods). Second, incontrast to the stressful, intimidating feeling thatshoppers often encounter in conventional furniturestores, IKEA customers are treated to a fun, non-threatening experience, where they are allowed towander through a visually exciting store with onlythe help they request. And third, the companystrives to make customer fulfillment immediate.Specifically, IKEA carries an extensive inventoryat each store, which allows a customer to take theitem home or have it delivered the same day. Incontrast, conventional furniture retailers showfloor models, but then require a 6- to 10-week waitfor the delivery of each special-order item.

As for staging, or IKEA's speed and sequence ofmoves, once management realized that its ap-proach would work in a variety of countries andcultures, the company committed itself to rapidinternational expansion, but only one region at atime. In general, the company's approach has beento use its limited resources to establish an earlyfoothold by opening a single store in each targetedcountry. Each such entry is supported with aggres-sive public relations and advertising, in order tolay claim to the radically new retailing concept inthat market. Later, IKEA comes back into eachcountry and fills in with more stores.

The economic logic of IKEA rests primarily onscale economies and efficiencies of replication. Al-though the company doesn't sell absolutely iden-tical products in all its geographic markets, IKEAhas enough standardization that it can take greatadvantage of being the world's largest furnitureretailer. Its costs from long-term suppliers are ex-ceedingly low, and made even lower by IKEA'sproprietary, easy-to-manufacture product designs.

In each region, IKEA has enough scale to achievesubstantial distribution and promotional efficien-cies. And each individual store is set up as a high-volume operation, allowing further economiesin inventories, advertising, and staffing. IKEA'sphased international expansion has allowed exec-utives to benefit, in country after country, fromwhat they have learned about site selection, storedesign, store openings, and ongoing operations.They are vigilant, astute learners, and they putthat learning to great economic use.

Note how all of IKEA's actions (shown in Figure4) fit together. For example, consider the strongalignment between its targeted arenas and itscompetitive differentiators. An emphasis on lowprice, fun, contemporary styling, and instant fulfill-ment is well suited to the company's focus onyoung, first-time furniture buyers. Or consider thelogical fit between the company's differentiatorsand vehicles—providing a fun shopping experi-ence and instant fulfillment requires very intricatelocal execution, which can be achieved far betterthrough wholly owned stores than by using acqui-sitions, joint ventures, or franchises. These align-ments, along with others, help account for IKEA'slong string of years with double-digit sales growth,and current revenues of $8 billion.

The IKEA example allows us to illustrate thestrategy diamond with a widely familiar businessstory. That example, however, is admittedly retro-spective, looking backward to interpret the compa-ny's strategy according to the framework. But thereal power and role of strategy, of course, is inlooking forward. Based on a careful and completeanalysis of a company's environment, market-place, competitors, and internal capabilities, se-nior managers need to craft a strategic intent fortheir firm. The diamond is a useful framework fordoing just that, as we will now illustrate with abusiness whose top executives set out to develop anew strategy that would allow them to break freefrom a spiral of mediocre profits and stagnantsales.

Brake Products International: Charting anew direction

The strategy diamond proved very useful when itwas applied by the new executive team of BrakeProducts International (BPI), a disguised manufac-turer of components used in braking and suspen-sion systems for passenger cars and light trucks. Inrecent years, BPI had struggled as the worldwideauto industry consolidated. Its reaction had been acombination of disparate, half-hearted diversifica-tion initiatives, alternating with across-the-board

56 Academy of Management Executive Novembei'

Staging

• Rapidinternalionalexpansion, by region

• Early tootholdsin each country;fill in later

Economic Logic

• Economies oi scale (global,regional, and individual-storescale)

• Efficiencies from replication

Arenas

• Inexpensive contemporary iurniture• Young, white-collar customers• Worldwide

VehicJes

• Organic expansion• Whollyowned stores

Difie rentiaiors

• Very reliable quality• Low price• Fun, nonthreatening shopping experience• Instant fulfillment

FIGURE 4IKEA's Strategy

expense cuts. The net result, predictably, was notgood, and a new management team was broughtin to try to revive performance. As part of thisturnaround effort, BPI's new executives developeda new strategic intent by making critical decisionsfor each of the five elements—arenas, vehicles,differentiators, staging, and economic logic. Wewill not attempt to convey the analysis that gaverise to their choices, but rather (as with the IKEAexample) will use BPI to illustrate the articulationof a comprehensive strategy.

For their targeted arenas, BPI executives com-mitted to expanding beyond their current marketscope of North American and European carplants by adding Asia, where global carmakerswere rapidly expanding. They considered widen-ing their product range to include additionalauto components, but concluded that theirunique design and manufacturing expertise waslimited to brake and suspension components.They did decide, however, that they should applytheir advanced capability in antilock-brakingand electronic traction-control systems to de-velop braking products for off-road vehicles, in-cluding construction and farm equipment. As anadditional commitment, executives decided toadd a new service, systems integration, thatwould involve bundling BPI products with otherrelated components, from other manufacturers,that form a complete suspension system, andthen providing the carmakers with easy-to-han-

dle, preassembled systems modules. This initia-tive would allow the carmakers to reduce assem-bly costs significantly, as well as to deal with asingle suspension-system supplier, with sub-stantial logistics and inventory savings.

The management team identified three majorvehicles for achieving BPI's presence in theirselected arenas. First, they were committed toorganic internal development of new genera-tions of leading-edge braking systems, includingthose for off-road vehicles. To become the pre-ferred suspension-system integrator for the ma-jor auto manufacturers, executives decided toenter into strategic alliances with the leadingproducers of other key suspension components.Finally, to serve carmakers that were expandingtheir operations in Asia, BPI planned to initiateequity joint ventures with brake companies inChina, Korea, and Singapore. BPI would providethe technology and oversee the manufacturing ofleading-edge, high-quality antilock brakes; theAsian partners would take the lead in marketingand government relations.

BPI's executives also committed to achievingand exploiting a small set of differentiators. Thecompany was already a technology leader, par-ticularly in antilock-braking systems and elec-tronic traction-control systems. These propri-etary technologies were seen as centrallyimportant and would be further nurtured. Execu-tives also believed they could establish a preem-

2001 Hambiick and Fiediickson 57

inent position as a systems integrator of entiresuspension assemblies. However, achieving thisadvantage would require new types of manufac-turing and logistics capabilities, as well as newskills in managing relationships with other com-ponent companies. This would include an exten-sive e-business capability that linked BPI withits suppliers and customers. And finally, as oneof the few brakes/suspension companies with amanufacturing presence in North America andEurope—and now in Asia—BPI executives con-cluded that they had a potential advantage—what they referred to as "global reach"—thatwas well suited to the global consolidation of theautomobile industry. If BPI did a better job ofcoordinating activities among its geographicallydispersed operations, it could provide the one-stop, low-cost global purchasing that the indus-try giants increasingly sought.

// BPI did a better job of coordinatingactivities among its geographicallydispersed operations, it could provide theone-stop, low-cost global purchasing thatthe industry giants increasingly sought.

BPI's executives approached decisions aboutstaging very deliberately. They felt urgency onvarious fronts, but also realized that, after sev-eral years of lackluster performance, the firmlacked the resources and credibility to do every-thing all at once. As is often the case, decisionsabout staging were most important for those in-itiatives where the gaps between the status quoand the strategic intent were the greatest. Forexample, executives decided that, in order toprovide a clear, early sign of continued commit-ment to the major global auto manufacturers, acritical first step was to establish the joint ven-tures with brake manufacturers in Asia. They feltjust as much urgency to gain a first-mover ad-vantage as a suspension-system integrator.Therefore, management committed to promptlyestablish alliances with a select group of manu-facturers of other suspension components, and toexperiment with one pilot customer. These twosets of initiatives constituted stage one of BPI'sstrategic intent. For stage two, the executivesplanned to launch the full versions of the sys-tems-integration and global-reach concepts,complete with aggressive marketing. Also in thissecond stage, expansion into the off-road vehiclemarket would commence.

BPI's economic logic hinged on securing pre-

mium prices from its customers, by offering themat least three valuable, difficult-to-imitate bene-fits. First, BPI was the worldwide technologyleader in braking systems; car companies wouldpay to get access to these products for their newhigh-end models. Second, BPI would allowglobal customers an economical single sourcefor braking products; this would save customersconsiderable contract administration and quali-ty-assurance costs^savings that they would bewilling to share. And third, through its allianceswith major suspension-component manufactur-ers, BPI would be able to deliver integrated-sus-pension-system kits to customers—again savingcustomers in purchasing costs, inventory costs,and even assembly costs, for which they wouldpay a premium.

BPI's turnaround was highly successful. Thesubstance of the company's strategy {shown inFigure 5) was critically important in the turn-around, as was the concise strategy statementthat was communicated throughout the firm. Asthe CEO stated:

We've finally identified what we want to be,and what's important to us. lust as impor-tantly, we've decided what we don't want tobe, and have stopped wasting time and effort.Since we started talking about BPI in terms ofarenas, vehicles, differentiators, staging, andeconomic logic, we have been able to get ourtop team on the same page. A whole hostof decisions have logically fallen into placein support of our comprehensive strategicagenda.

Of Strategy, Better Strategy, and No Strategy

Our purpose in this article has been elemental—toidentify what constitutes a strategy. This basicagenda is worthwhile because executives andscholars have lost track of what it means to engagein the art of the general. We particularly hope tocounter the recent catchall fragmentation of thestrategy concept, and to remind strategists thatorchestrated holism is their charge.

But we do not want to be mistaken. We don'tbelieve that it is sufficient to simply make thesefive sets of choices. No—a business needs notjust a strategy, but a sound strategy. Some strat-egies are clearly far better than others. Fortu-nately, this is where the wealth of strategic-analysis tools that have been developed in thelast 30 years becomes valuable. Such tools asindustry analysis, technology cycles, valuechains, and core competencies, among others.

58 Academy of Management Executive November

Arenas

• North American, European, andAsian passenger-car andlight-truck makers

• Brakes and suspension-systemcomponents

• Suspension-system integration• Braking systems for off-road

vehicles

Staging

• Stage 1: Asian JVs andalliances withsuspension-componentcompanies

• Stage 2: Aggressivelydesign and marketsystems-integrationoffering; commenceoff-road vehicle market

Economic Logic

• Preferred supplier status and premium pricing,due to leading-edge technology

• Preferred supplier status and premium pricing,by providing customers global solutions

• Premium pricing by providing customersintegrated kits

Vehicles• Internal development of

new, leading-edgebraking products

• Strategic alliances withsuspension-componentmanufacturers

• Joint ventures with brakecompanies in Asia

Diflerentiators

• ABS design technology• Electronic traction control

technology• Systems integration capability• E-business capability with

suppliers and customers• Global reach

FIGURE 5BPI's Strategy

are very helpful for improving the soundness ofstrategies. When we compare these tools andextract their most powerful central messages,several key criteria emerge to help executivestest the quality of a proposed strategy. Thesecriteria are presented in Table 1." We strongly en-courage executives to apply these tests throughoutthe strategy-design process and especially when aproposed strategy emerges.

There might be those who wonder whether strat-egy isn't a concept of yesteryear, whose time hascome and gone. In an era of rapid, discontinuousenvironmental shifts, isn't the company that at-tempts to specify its future just flirting with disas-ter? Isn't it better to be flexible, fast-on-the-feet,ready to grab opportunities when the right onescome along?

Some of the skepticism about strategy stemsfrom basic misconceptions. First, a strategy neednot be static: it can evolve and be adjusted on anongoing basis. Unexpected opportunities neednot be ignored because they are outside thestrategy. Second, a strategy doesn't require abusiness to become rigid. Some of the best strat-

egies for today's turbulent environment keepmultiple options open and build in desirableflexibility—through alliances, outsourcing, leasedassets, toehold investments in promising technolo-gies, and numerous other means. A strategy can helpto intentionally build in many forms of flexibility—ifthat's what is called for. Third, a strategy doesn'tdeal only with an unknowable, distant future. Theappropriate lifespans of business strategies have be-come shorter in recent years. Strategy used to beequated with 5- or 10-year horizons, but today a ho-rizon of two to three years is often more fitting. In anyevent, strategy does not deal as much with preor-daining the future as it does with assessing currentconditions and future likelihoods, then making thebest decisions possible today.

Strategy is not primarily about planning. Itis about intentional, informed, and integratedchoices. The noted strategic thinkers Gary Hameland C.K. Prahalad said: "[A company's] leadershipcannot be planned for, but neither can it happenwithout a grand and well-considered aspiration,"^^We offer the strategy diamond as a way to craftand articulate a business aspiration.

2001 Hambtick and Fiediickson

Table 1Testing the Quality of Your Strategy

Key Evaluation Criteria1. Does your strategy fit with what's going on In the

environment?Is there healthy profit potential where you're headed? Doesyour strategy align with the key success factors of yourchosen environment?

2. Does your strategy exploit your key resources?With your particular mix of resources, does this strategygive you a good head start on competitors? Can youpursue this strategy more economically than competitors?

3. Will your envisioned differentiators be sustainable?Will competitors have difficulty matching you? If not, doesyour strategy explicitly include a ceaseless regimen olinnovation and opportunity creation?

4. Are the elements oi your strategy internally consistent?Have you made choices oi arenas, vehicles, differentiators,and staging, and economic logic? Do they all fit andmutually reinlorce each other?

5. Do you have enough resources to purBue this strategy?Do you have the money, managerial time and talent, andother capabilities to do all you envision? Are you sureyou're not spreading your resources too thinly, only to beleft with a collection of feeble positions?

6. Is your strategy implementable?Will your key constituencies allow you to pursue thisstrategy? Can your organization make it through thetransition? Are you and your management team abie andwilling lo lead the required changes?

Acknowledgments

We thank the following people for helpful suggestions: RalphBiggadike, Warren Boeker, Kathy Harrigan, Paul Ingram, XavierMartin, AtuI Nerkar, and Jaeyong Song.

Endnotes

' Porter, M. E. 1980. Competitive strategy. New York: The FreePress, provides an in-depth discussion of the five-forces model.Hypercompetition is addressed in D'Aveni, R. A. 1994. Hyper-

competition. New York: The Free Press. The resource-basedview of the firm is discussed in Barney, J. 1991. Firm resourcesand sustained competitive advantage. 7ourna/ of Management.17: 99-120. See Brandenburger, M,, & Nalebuff, R. J. 1995. Theright game: Use game theory to shape strategy. Haivaid Busi-ness fievieiv, July-August: 57-71, fora discussion of co-opetition.

'̂ Bianco, A.. &. Moore, P. L. 2001. Downfall: The inside story olthe management fiasco at Xerox. BusinessWeek, 5 March 2001.

^ A widely applicable Iramework lor strategy implementa-tion is discussed in Galbralth, J. R,, & Kazanjian, R. K. 1986.Strategy implementation: Sttuctuie, systems and process, 2nded. St. Paul: West Publishing. A similar tool is offered in Ham-brick, D. C, & Cannella, A. 1989. Strategy implementation assubstance and selling. The Academy of Management Executive,3(4): 278-285,

•* This observation has been made for years by many con-tributors, including Quinn, J, B. 1980. S(ra(egies for change:Logical incrementalism. Homewood. IL: Richard D. Irwin Pub-lishing; and Mintzberg, H. 1973. Strategy making in three modes.Cahfotnia Management fleview, 15: 44-53.

^Drucker, P, 1954. The piactice of management. New York:Harper & Row.

^ Haleblian, ]., & Finkelstein, S. 1999. The influence of orga-nizational acquisition experience on acquisition performance:A behavioral learning perspective. Adminisfrative ScienceQuaiterly. 44: 29-56.

' Eisenhardt, K. M., & Brown, S. L. 1998. Time pacing: Com-peting in markets that won't stand still. Harvaid Business Re-view, March-April: 59-69, discusses "time pacing" as a compo-nent of a process of contending with rapidly changingenvironments.

^The collapse of stock market valuations for Internet com-panies lacking in profits—or any prospect oi profits—marked areturn to economic reality. Profits above the firm's cost of cap-ital are required in order to yield sustained or longer-termshareholder returns.

^ Gaibraith & Kazanjian, op. cit,, and Hambrick & Cannella,op. cit.

'"Porter, M. E. 1996. What is strategy? Harvard Business Re-view, November-December: 61-78,

" See TiUes, S. 1963. How to evaluate strategy. Harvard Busi-ness Beview, July-August: 112-121, for a classic, but more lim-ited, set of evaluative tests.

'̂ See Hamel, G.. & Prahalad, C. K. 1993. Strategy as stretchand leverage. Harvard Business Review, March-April: 84-91.

Donald C. Hambrick is the Sam-ue! Bronfman Professor of Dem-ocratic Business Enterprise atthe Graduate School of Busi-ness, Columbia University, Heholds degrees from the Univer-sity of Colorado (B.S.). HarvardUniversity (MBA), and the Penn-sylvania State University (Ph.D.).An active consultant and execu-tive education instructor, he alsoserved as president of the Acad-emy of Management, Contact:dch2@coiumbia.edu.

James W. Fredrickson is a pro-fessor of strategic managementand Chevron Oil CentennialFoundation Fellow in the Mc-Combs School of Business ofthe University of Texas at Aus-tin. He was previously on thefaculties of Columbia Univer-sity and the University of Pitts-burgh, and holds a Ph.D. fromthe University of Washington.Contact:james.iredricison@bus.utexas.edu.