Strategy Evaluation for the Outback Chain of Restaurants

Case Study: Outback Steakhouse 1

Case Study: Outback Steakhouse

Robert K. Cameron

Capella University School of Business and Technology


Abstract

Outback Steakhouse was selected as our case study company, and was

evaluated from the perspective of four distinct business strategic theories: (a) rational

thought, (b) disruptive innovation, (c) resource-based view of the firm (RBVF), and (d)

technology leadership. Three questions were posited. First, was there evidence this

case company was already using some aspect of these four strategic theories? Second,

how well was the case company executing these theories if they were being used?

Finally, if the case company was not using one or more of the four strategic theories,

should they be?


Introduction

In this paper I will critically assess strategic theories and how they support

mitigating risk and improving the competitive advantage of organizations. The principle

mechanism for our review will be assessing which business strategies might lead to

improved competitive advantage. I have selected Outback Steakhouse as our case

study company, and will complete an evaluation from the perspective of distinct

business strategic theories presented in four research questions. I will ascertain

whether there is evidence our case company is employing or has employed aspects of

these four strategic theories. Second, I will determine how well our case company is

executing these four theories. Finally, if our case company is not using one or more of

the specified business strategic theories, should they be?

Research Questions

1. Has Outback Steakhouse employed aspects of their strategy as rational thought,

to include strategic planning and decision-making? Should they?

2. Has Outback Steakhouse employed aspects of their strategy as disruptive

innovation? Should they?

3. Has Outback Steakhouse employed aspects of their strategy from a resource-

based view of the firm (RBVF)? Should they?

4. Has Outback Steakhouse employed aspects of their strategy using technology

leadership to establish a competitive advantage? Should they?

.


Discussion

Just Who Is Outback Steakhouse?

The Outback family of restaurants began in 1988 as a joint venture between four

men, opening the first restaurant in Tampa, Florida. Maggie Overfelt (2005) wrote an

article for CNN Money quoting Outback co-founder Chris Sullivan’s purpose for starting

the restaurant as “If we wanted an environment where there was ownership at the

restaurant level, we had to create it ourselves.” If there is a key difference between

Outback Steakhouse and its competition, this is it: Managing partners must invest in

their restaurants by putting up $25,000 of their own funds as a joint venture. The four

partners commenced an initial public offering (IPO) of its common stock in 1991

(Thompson, Strickland, & Gamble, 2005) and have maintained this entrepreneur-centric

model.

The founding Outback partners decided in 1993 to add additional restaurant

formats with the addition of Carrabba’s Italian Grill to the Outback brand. Next, they

purchased partnerships in Roy’s (1999), Fleming’s Prime Steakhouse (1998), Bonefish

Grill (2001), Cheeseburger in Paradise (2002), and finally Paul Lee’s Chinese Kitchen

(2003). Table 1 provides an overview of each restaurant along with a description taken

from the Outback Complete Annual Report 2004 ("Outback Complete Annual Report

2004", 2004).

A key competitor for Outback is Applebee’s Restaurant. Applebee’s differs in

philosophy from Outback primarily in its business model which underpins store

expansion primarily through franchises rather than joint ventures. Franchising is

certainly a more traditional way of expansion, and Applebee’s has been


Brand ThemeNumber of

Stores

Outback Steakhouse

From its signature "Bloomin Onion" to steaks, chops, ribs, chicken and seafood, this dining experience contains quality food in a casual, Australian-themed atmosphere. Service is paramount with "No Rules. Just Right" 881

Carrabba's Italian GrillFeatures Italian hospitality and an exhibition kitchen with hearty handmade dishes. 168

Bonefish GrillAlways market fresh fish from the world over, prepared over a wood-burning grill with a full array of sauces and toppings. 63

Fleming'sFine dining in a stylish contemporary setting, with steak, chops, fresh-grilled fish, seafood and chicken. Menu is complimented by a wine list of over 100 varieties. 31

Roy'sExciting and innovative Hawaiian fusion cuisine incorporating fresh local ingrediants, european sauces and bold Asian spices with a focus on fresh seafood. 18

Cheeseburger in ParadiseJimmy Buffet's song comes to life in a Key West style setting. Great food, cocktails and live music every night. 10

Paul Lee's Chinese KitchenFresh food prepared in Chinese Woks in a warm, relaxed setting. Separate kitchen dedicated to take-out. 2

Lee Roy Selmon'sFamily sports theme with generous portions of soul-satisfying comfort food. 2

Table1. Outback Family of Restaurants

successful by achieving a total growth of 1671 stores by the end of 2004. In

comparison, Outback, with all seven restaurant brands, had a total of 1175 stores at the

end of 2004. Applebee’s began four years before Outback according to the

Discoverapplebees Website ("Discoverapplebees Website", 2006). Table 2 provides

comparative financial data between Outback and Applebee’s. Financial results from the

two different expansion approaches (joint venture v. franchising) are evident from this

table – net income for Outback per store was $133,000 in 2004 while for Applebee’s it

was $66,000. However, net profit margins are significantly lower for Outback. Figure 1

presents five years of stock price activity for both companies.


Table 2. Comparative Financial Data (in thousands $)

Outack Family of Restaurants 2000 2001 2002 2003 2004

Net sales ($) 1,851,700$ 2,066,300$ 2,294,514$ 2,665,777$ 3,201,750$ Net Income ($) 127,430$ 122,310$ 147,235$ 167,255$ 156,057$ Net Profit Margin 6.9% 5.9% 6.4% 6.3% 4.9%Total Stores 956 1,055 1,175 Net Income per Store 154$ 159$ 133$

ApplebeesNet sales ($) 690,152$ 651,119$ 724,616$ 867,158$ 976,798$ Net Income ($) 63,020$ 63,298$ 80,527$ 94,349$ 110,865$ Net Profit Margin 9.1% 9.7% 11.1% 10.9% 11.3%Total Stores 1,286 1,392 1,496 1,585 1,671 Net Income per Store 54$ 60$ 66$

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$40

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Sto

ck P

rice

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se ($)

Outback

Applebee's

Figure 1. Historical Stock Price of Outback and Applebee’s

The founders of Outback invested a great deal of energy and thought into

developing a core culture for the company that would compliment the original concept of

ownership at the individual store level. To this end they developed a manifesto called

the Principles and Beliefs (P&B). Whether they were aware or not, the Outback

founders were implementing an ethical perspective called stakeholder theory (Freeman,


1984; Freeman & Evan, 1990; Freeman & Liedtka, 1991; Freeman & Philips, 2002;

Freeman, Wicks, & Parmar, 2004; Goodpaster, 1991; Ogden & Watson, 1999). This

ethical theory was predicated on the notion that there existed various stakeholders that

have legitimate claims on the firm, and are worthy of consideration by the firm for their

own sake. The P&B identified five specific stakeholders, beginning with Outbackers

(e.g., store workers) and included customers, suppliers, community and partners.

Theoretical Background of the Four Strategic Perspectives

Research Question Number One – What Does The Literature Say about Strategy as

Rational Thought as an Approach?

Adam Smith (Smith, 1776) may have provided one of the first applications of

strategy as rational thought with his proposition that people in business were guided

best through pursuing his or her own interests, security and gain - unknowingly being

guided by “an invisible hand”. In this context self interest by individuals was purely

rational – that is, the routine actions of people are structured in order to maximize their

own economic utility. This line of business thinking continues today with noted authors

such as Milton Friedman who, with his seminal New York Times Magazine article

(1970), famously proposed that “there is one and only one social responsibility of

business – to use its resources and engage in activities designed to increase its profits

so long as it stays within the rules of the game, which is to say, engages in open and

free competition without deception of fraud.” The rational, economic man became the

rational, economic organization.

One of the useful characteristics of rational choice theory (RCT) is that it readily

lends itself to economic modeling. Since World War II, game theory has played a strong


role in applications of rational agency to maximize utility. In fact, business strategy, from

Shapiro’s (1989) perspective, is founded on game theory. He proposed that game

theory “…is the only coherent way of logically analyzing strategic behavior” (Shapiro,

1989, p. 125). This certainly would include analyzing different investment strategies,

strategic and tactical deployments, and other non-cooperative economic interactions.

Carilli & Dempster (2003) provided an excellent framework and historical

summary of the rational model. They applauded the seminal work of John von

Neumann and Oskar Morganstern with their 1944 publication The Theory of Games and

Economic Behavior. The authors posited that since Neumann and Morganstern’s work

was published, a significant portion of economic and financial theory has been

predicated primarily on theories of risk within the context of maximizing utility. These

theories model agents as purely rational, meaning they; (a) have unconstrained access

to information, and (b) make choices based on the notion of RCT. Morrell (2004) noted

that the term rational within RCT is more akin to detached reckoning than to reason.

Organizational decision-making strategy based on RCT was best illustrated with

strategies maximizing shareholder value as the primary or possibly singular focus of the

firm rather than adding other, less utilitarian forms of value into society.

Both theory and research over the past twenty years has certainly challenged the

notion that people (and by extension organizations) are in fact purely rational. Dean &

Sharfman (1993) investigated both rationality and political behavior as the basis for

decision-making. They suggested that much, if not most, current theories of managerial

behavior were based to some extent on the supposition of rational behavior. In this

context then they saw rational behavior as purposeful, logical and always directed


towards the achievement of one’s goals. As previously stated, economists have used

this assumption of rationality applied to individuals actively seeking to maximize the

utility of whatever of value that was in play, whether it was financial, personal reputation,

or career.

The concept of bounded rationality allowed the insertion of intuition and minimal

achievement of objectives into decision-making. Research conducted by Dean and

Sharfman (1993) was primarily focused on decision-making based on the desire to

make the best choice possible given various realities and constraints. This idea of

bounded rationality was very different than simply maximizing utility. After conducting

independent research using 25 firms, the authors concluded that rationality and political

behavior are independent variables contributing to strategic decisions. A separate study

by Eisenhardt & Zbaracki (1992) came to similar conclusions.

Hitt and Tyler (1991) performed a study of executives in different industries and

found that management approaches to strategic decision-making were both rational and

intuitive in nature. However, they concluded that rational objective criteria dominated the

executive decision process. Schilit (1998) also agreed that rational objective criteria was

the way decisions should be made. He initially proposed that logical strategic planning

should have at least three characteristics: (a) rationality; (b) some utility to maximize;

and (c) a single, clear goal. However, he found this process was not typically observed.

Many managers sought some minimum level of sufficiency, and did not seek out

alternatives once this minimum condition was met.

Glazer, Steckel, & Winer (1992) initiated a study predicated on rational thinking

and bounded rational thinking as a starting point, but concluded by introducing a new


concept they called local rationality. That is, when additional information was present,

the decision maker will have a tendency to process this additional information without

necessarily fully appreciating the relevance. Conclusions from both of these studies

(Glazer et al, 1992; Schilit, 1998) violated Carilli & Dempster’s (2003) requirement for

rational decision-making by concluding that these agencies do not possess unrestricted

access to relevant information. Indeed many do not even attempt to find all of the

relevant information. Such conclusions were not likely to dissuade the economist from

using rational agency models, but it should give pause to managerial decision-making

theorists as to how organizations should approach strategic thinking.

Organizational strategy based on rational decision-making as a fundamental

principle appears to be untenable in that managers do not behave rationally as

individuals. However, rational agency models do appear useful as tools to understand

market behaviors and to predict consequences of certain financial or economic

decisions.

Research Question Number Two – What Does the Literature Say about Strategy as

Disruptive Innovation as an Approach?

Disruptive innovation as an economic concept was first proposed by Joseph

Schumpeter, a 19th century Austrian economist (Elliott, 1980). Schumpeter’s work is

relevant to this discourse of disruptive innovation (he actually called it creative

destruction) because of his clear insight into the economic instabilities resulting from the

entrepreneurial drive of individuals and organizations. Elliott (1980) reviewed economic

theories proposed by Karl Marx and Joseph Schumpeter, comparing and contrasting

their views on capitalism. Elliot showed that Schumpeter had concluded that capitalism,


because of its organic, inherently destructive process, would eventually evolve into

socialism. He compared this conclusion to Marx’s idea that capitalism would ultimately

stop working due to simple economic failure. Apparently Schumpeter acknowledged

traditional economics emphasizing the quasi-static processes of supply and demand as

accurate, but incomplete. He asserted that capitalism could not, by its very nature, be

anything but dynamic. According to Elliott (1980), Schumpeter described this dynamic

as having three characteristics: (a) it is intrinsic in nature, and is not the result of

external stimuli; (b) it is markedly non-linear; and (c) it is revolutionary in that it simply

destroys the old paradigm and replaces it with entirely new conditions. Schumpeter

made the analogy that capitalism doesn’t simply add stagecoaches to the existing

stagecoach population as supply and demand would have it; rather it completely

eliminates stagecoaches in their entirety by introducing the railroad.

Elliott referenced Karl Marx’s book Grundrisse: Introduction to the Critique of

Political Economy where Marx proposed that capitalism retained a “universalizing

tendency” that transcended both technology as well as geography (as cited in Elliott,

1980, p. 48). Elliott stated that Marx believed such an economic engine was

unprecedented in history, and contained an “endless and limitless drive to go beyond its

limiting barrier. Every limit appears as a barrier to be overcome” (as cited in Elliott,

1980, p. 48). Competition, which most of us would rightly hold in high esteem, in and of

itself tends to drive out margins resulting in the commoditization of products and

services. Disruptive innovation (e.g., creative destruction) effectively changed the

economic market conditions, recreating margins again. Moreover Schumpeter, in his

book Capitalism, Socialism, and Democracy, posited that business cycles representing


contraction or expansion of economies were not anomalies to be controlled. They were

in fact the very engines of growth driving the inefficient or the cautious out of the market

engulfed in a “perennial gale of creative destruction” ("University of Southern California

Santa Barbara Website - Capitalism, Socialism and Democracy transcript"). Moreover,

Schumpeter proposed that profits were the normal outcome of innovations. Elliot, who

clearly found much truth in Schumpeter’s view of capitalism’s inherent creative

destruction, disagreed with the conclusions of both Marx and Schumpeter that

capitalism’s destiny was its own demise.

Disruptive innovation (or creative destructive) might have remained within the

province of economic scholarship had it not been for Clayton Christensen and his book

The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (C. M.

Christensen, 1997). This work originated in Christensen’s doctoral dissertation (Clayton

Magleby Christensen, 1992) where his study's purpose was to understand how forces

external to the firm, principally customers, could affect the internal decision-making

strategies of the firm. After his dissertation work, Christensen later collaborated with

Joseph Bower in a paper (Bower & Christensen, 1995) that suggested successful

companies fail by keeping close to their customers. In a time where focus on customers

had taken on an almost mystical premise for corporate success, this was a radical

departure to say the least.

Christensen’s book (1997) extended his earlier work by claiming that companies

were failing not through incompetence but because they had done a superb job

managing. Established, successful companies became vulnerable to a particular strain

of innovation of which very little was taught in business school. Christensen thus


distinguished between sustaining technologies that good companies foster with

disruptive innovations that could destroy these same good companies.

Christensen (1997) also made much of the fact that sustaining technology

innovations could outstrip customer demands and not provide any competitive

advantage – market followers would do as well as market leaders. Only companies that

truly understood how their customers were using their products could be in a position to

detect changes in the market. Unfortunately, this might not be enough. Companies

might be accurately sensing the needs of their customers even as they allowed these

same good customers to lead them into market vulnerabilities from disruptive

innovations that seemed to come out of nowhere.

Christensen said that “Generally disruptive innovations were technologically

straightforward, consisting of off-the-shelf components put together in a product

architecture that was often simpler than prior approaches” (Christensen, 1997, p. 16).

The results of these product characteristics were that a firm’s primary customers did not

want these less capable products, so that new innovations were ignored by the firm.

Unfortunately, these disruptive innovations created previously undetected markets that,

upon maturation, subsumed the legacy firm’s higher end market altogether. A significant

factor in these existing firms’ refusal to acknowledge these disruptive innovations was

the trepidation of undermining their existing high-end products. Christensen’s key

finding was that disruptive innovations were not the leading edge technology usually

envisioned by companies as their primary threat. Moreover, the norm for the sources of

new disruptive innovations that essentially wiped out entire product lines were new

competitors rather than incumbents. “It was as if the leading firms were held captive by


their customers, enabling attacking entrant firms to topple the incumbent industry

leaders each time a disruptive technology emerged” (Christensen, 1997, p. 26).

In 2003 Christensen updated his ideas on destructive innovation with a paper

(Christensen & Raynor, 2003b) and a new book with coauthor Michael Raynor entitled

The Innovator's Solution: Creating and Sustaining Successful Growth (Christensen &

Raynor, 2003a). In his first book, Christiansen (1997) presented to us the innovator’s

dilemma. In this new book he and coauthor Raynor explored the solution to the

innovator’s dilemma.

The authors purported that “To succeed predictably, disruptors must be good

theorists. As they shape their growth business to be disruptive, they must align every

critical process and decision to fit the disruptive circumstance” (Christensen & Raynor,

2003a, p. 18). The notion that theory must under gird management strategy was a

consistent theme through much of Christensen’s work. Their paper (Christensen &

Raynor, 2003b) more fully described how theory was formulated and how it should be

used by management. They made several excellent points about the difference

between causation and correlation. The authors’ rationale would strongly debunk the

basic premises of Jim Collins’ two best-selling books Good to Great and Built to Last

(Collins, 2001; Collins & Porras, 1994). They strongly criticized what they called

circumstance contingency as applied to good theories. In other words, it was not simply

cause and effect that must be described in good theory, but how different circumstances

would work to produce dissimilar outcomes for the underlying causal theory. They

provided an example of two independent researchers looking to explain high

performance firms. Both researchers developed theories that, if accomplished well,


would produce success. Unfortunately, these two theories appeared to be in opposition

to each other. Rather then debunking one or both of these theories, the authors

suggested that a foundation had been laid to move towards a useful theory. Under what

circumstances would theory one be successful, and under what circumstances would

theory one fail? Next, the same questions must be applied to theory two. It was this

iterative process that was the foundation of good theory development.

Having completed this candid assessment of competing theories, scholars could

be ready to provide decision-makers with a useful theory. With this new theory,

managers might first determine what circumstances they currently found themselves in,

and how this new theory could help improve their decisions and strategy. However, this

was not the end: Theory development never ends.

Christensen and Raynor (2003b) introduced the notion of failures as valuable

contributors to improve theories. The effective theorist strove to find where theories

failed when predicting success. Only when they understood why, could their theory

could move to the next level. Studying the successes of their theories was akin to self-

congratulation. Trying to “break” a theory might be one of the most effective activities a

researcher or theorist could do. The authors offered advice to the discerning manager

regarding theories – if researchers implied that what they proposed might universally be

applied to business, steer clear.

Christensen and Raynor (2003a) further differentiated between sustaining

innovation and disruptive innovation, moving deeper into theoretical distinctions

between the two. They purported that understanding these two forms of innovation was

fundamental for managers to make use of the theory of disruptive innovation.


Sustaining innovation was what many think about when speaking of innovation. It

was this sustaining form of innovation that was typically taught in business schools

using established notions of innovation such as that proposed by Utterback (1994).

Sustaining innovation incrementally improved an existing product or service line of

business, and included both nominal improvements as well as genuine breakthrough

advances. Existing competitors had the advantage in sustaining innovation that scaled

in degree to the market power and resources available to these competitors.

Disruptive innovation was not sustaining in nature at all. Christensen and Raynor

(2003a) categorized two kinds of disruptive innovation; (a) new market, and (b) low end

disruptions. New market disruptions occurred when a firm’s initial market entry targeted

regions of non-consumption – that is, market segments where no consumption of similar

products or services were taking place. Such innovations were allowed to enter markets

unchallenged by existing competitors because initially they did not feel threatened.

When this disruptive innovation grew to the point that incumbent firms began to lose

customers, these customers typically were lost from the low end, less profitable portion

of the market spectrum. Incumbents responded by simply innovating incrementally and

increasing their market share at the higher end where margins were more attractive

anyway. In comparison, low end disruption actually occurred within an existing

competitor’s market sector, but again in the least attractive and smallest margin

customer segment. Whereas incumbents typically ignored the incursion of a new market

disruption, they responded differently to a low end disruptive innovator by abdicating

this low end market segment. Again, they moved to the more upscale, higher margin

customers.


Eventually incumbents began to over-serve this higher end market, providing

value and features that were simply not required by customers. Christensen and Raynor

(2003a) provided an example of full-service department stores whose business model

was based on inventory turnover of three times per year with gross margins of 40%,

resulting in a 120% annual return on capital invested in inventory (ROCII). Innovative

disruptors such as Wal-Mart came into the low end of the market with a business model

that, through heavy discounting, could achieve ROCII’s of 120% by turning over

inventory 5 times a years but with only 23% gross margins. Customers really did not

need embellishments such as competent sales staff or attractive floor layouts. Rather

than struggle to obtain the ability to discount at the level of Wal-Mart, these department

stores went upscale by carrying higher margin items such as cosmetics and high

fashion clothing that could achieve 150% ROCII’s. They essentially fled the low end

market, not realizing that this discounted business model, with the structures and

systems in place to achieve great efficiencies in the value chain, would eventually follow

the incumbents up into their market safe haven.

Christensen and Raynor (2003a) postulated three questions for both types of

disruptive innovations that potential innovators must address in searching for their

solution. The first two questions were specific to the type of disruptive innovation while

the third question was common to both. For the new market disruption, interested

managers should: (a) determine if there was a sizable group of people who wanted

some product or service but were currently doing without because of price; and (b) if

they could afford them, did they have to experience aggravating inconvenience in order

to obtain them? For low end disruptions, the two questions were; (a) was there a sizable


group of people who were currently being over-served by a product or service who

would happily purchase significantly less performance if the price was reduced, and (b)

could structures and processes be brought to bear to support a business model that

could produce these lower prices? The third question common to both innovative

disruptions was whether the contemplated innovation was truly disruptive to all existing

competitors? If the innovation could be made to be a sustaining innovation for at least

one existing competitor, their incumbency status would provide significant leverage for

them to ultimately incorporate the innovation and thus win the competition. In summary,

anything failing these three questions was a sustaining rather than disruptive innovation.

Christensen and Raynor (2003a) concluded with additional advice to executives

who desired solutions to the innovator’s dilemma. Among these were to: (a) never

approve a strategy that would look attractive to existing competitors; (b) ignore

strategies where customers were already being served with good products (e.g., target

the non-consumers); (c) determine that if non-consumers could not be found, was there

a group of significant size being over-served?; and (d) disapprove any strategy requiring

heavy manipulation of consumer interests – you must discover what they want but are

unwilling to pay for at current prices or is too inconvenient.

Many authors agreed with Christensen’s general concept of disruptive

innovation. Hamel and Välikangas (2003) have liberally applied Christensen’s disruptive

innovation to modern business strategy. They highlighted that out of the 18 companies

described as “built to last” by Jim Collins (Collins & Porras, 1994), only six have

outperformed the Dow during the last decade. Collins’ concept of momentum may not

be as applicable to success as it once was. Disruptive innovation could actually be the


bane of momentum. To Hamel and Välikangas the new operative word was resilience,

which they defined as the capacity to rapidly change strategy and business models

almost continuously as environments and markets changed. They recommended

proactive change rather than reactive response. So-called corporate turnarounds were

not actions worthy of praise – they were in fact failures in corporate resilience. Their

tribute to the characteristic of resilience produced what we might call corporate agility –

a strategy relentlessly adapting to the environment, requiring anticipation in order to “get

ahead” of the changes coming. A resilient company must sense the coming change,

create agile strategies, and apply resources faster than their competition.

A strong theme running throughout Hamel and Välikangas’ paper (2003) was the

corrupting influence of denial, somewhat akin to Collins’ notion from his book Good to

Great (Collins, 2001) of confronting the brutal facts. Inattention in this area could put the

firm on a track to disaster. They recommended senior managers get closer to where

change was coming from, and not be so willing to accept second hand data. To

accomplish this, senior managers must break out of hierarchical encumbrances with

novel organizational structures such as a parallel executive committee made up of

people at least 20 years younger than the formal committee.

Not everyone fully embraced Christensen’s characterization of disruptive

innovation. Gilbert (2003) argued that the term disruptive innovation was a misnomer –

it had the connotation of ruin, but in fact was the driver for total market growth. He did

not believe that firms coming into the overall market with a disruptively innovative

venture were as proximate a threat as Christensen proposed. There was in fact usually

time for existing companies to detect and respond to these threats. First, they were


typically moving into a market that was currently underserved rather than taking on an

entrenched incumbent. Second, it really could take many years for these disruptive

innovations to find their footing into markets already being served by existing firms.

However, Gilbert (2003) did agree it was the very nature of this roundabout way of

entering existing markets that could make these disruptive innovations so dangerous.

Gilbert (2003) outlined three stages of disruption. First, a new unchallenged

market niche was created that did not represent any obvious threat. Next, this new

market was expanded as economies of scale and market efficiencies were gained.

Third, enough growth was achieved where existing markets were severely diminished.

While a disruptive innovation did not always destroy existing products and services,

they invariably took growth away. Gilbert found the silver lining by suggesting existing

firms could make use of these disruptive innovation characteristics in order to create

their own new growth.

Garvin (2004) took issue with Christensen and developed his own primer

regarding what every manager seeking growth should know. First, growth really was

about starting new businesses. Unfortunately, most new businesses fail. Established

firms were simply not structured for starting new businesses. In fact, the principle

enemy of a new business venture was the existing corporate culture itself. To combat

this, Christensen (2003a) had advised management to insulate innovators from the

main corporate culture in various kinds of independent organizations. Gavin discredited

this solution by rejecting any notion that a firm could genuinely insulate a disruptive

innovation from the main culture of the firm. He further posited that initiating a new

business was by its very nature experimental. Any successful new business would have


three distinct stages: (a) experimental, (b) expansion, and (c) integration. Gavin (2004)

concluded that it was unlikely a single management team and style could transition

successful through all three. Ignoring Christensen’s warnings about recognizing the

entrance of a disruptive innovator, Gavin recommended that firms stay close to their

existing business, market and customers.

Denning (2005) reviewed six leading innovation theories, one of which was

Christensen & Raynor (2003a). Although he made note of their contribution as to why

businesses failed with innovation, Denning very much disagreed with Christensen’s

presented solution essentially for the same reason that Garvin (2004) did. Yes, big

companies were ill-suited to nurture innovation, but hiding innovators away

organizationally could not solve these very real problems. Rather, Denning suggested

hiring someone else to innovate outside the firm either by sponsorship or acquisition.

Christensen and his colleagues (Christensen, Roth, & Anthony, 2004) continued

to find new ways to think about disruptive innovation by introducing a third book in the

series entitled Seeing What's Next: Using Theories of Innovation to Predict Industry

Change. In this book the authors attempted to provide managers methods by which to

search for disruptive innovation opportunities.

The authors (Christensen et al, 2004) presented a remarkable example of

disruptive innovation in its infancy with non-traditional education and their story of the

University of Phoenix (UoP). UoP began in 1976 as a disruptive innovator by identifying

and serving what had been essentially non-consumers of education – working adults

who were unable or unwilling to attend traditional institutions of learning. UoP’s original

business model was based on leasing facilities and providing quick, intense courses


tailored for this originally non-consuming but very willing market. The rise of the internet

became a sustaining innovation, but was not itself disruptive. By 2003 UoP had 150,000

students, 50,000 of them online. Very few traditional universities or colleges have yet to

successfully respond to this disruption. The asymmetries of motivation were clear in

those traditional institutions; (a) had no reason to grow, (b) had a high-cost business

model and price points using fixed campuses, (c) had top-notch faculty with research

agendas, and (d) sought a specific market segment of students for their own sake.

Research Question Number Three – What Does the Literature Say about Strategy from

a Resource-Based View of the Firm (RBVF) as an Approach?

Some scholars (Ekeledo & Sivakumar, 2004) posited that the resource-based

theory of the firm (RBVF) might be the most productive business strategy theory yet

developed. A firm’s assets and capabilities were the genuine underpinnings of its

business strategy.

Ghemawat (2002) provided an excellent historical overview of evolving business

strategy based on resource allocation. He referenced Kenneth Andrews’ seminal work

The Concept of Corporate Strategy for the development of an analysis based on

strengths, weaknesses, opportunities, and threats (SWOT). “…SWOT, was a major step

forward in bringing explicitly competitive thinking to bear on questions of strategy” (as

cited in Ghemawat, 2002, p. 41). The next evolution was Michael Porter’s five forces

competitive model. While these areas of strategic thought certainly were foundational to

RBVF, there were scholars (Peteraf & Barney, 2003) that distinguished between the

later, larger body of RBVF and these earlier works.


Michael Porter (1979) moved resource allocation strategy forward by broadening

a business’s perspective beyond SWOT. Porter’s competitive forces model focused on

an industry rather than a single firm within an industry. He was an economist rather than

a management theorist, and as such viewed strategy fundamentally as a method of

dealing with competition within an industry. One of Porter’s great contributions to

strategic thinking was to transform management philosophy into seeing an industry as

being made up of four competitive forces in addition to the collection of interacting

competitive players vying for market share. These four additional forces were the

bargaining clout of customers and suppliers, along with the threat of substitute products

and new entrants into the industry. Porter’s assumption was that an identifiable industry

almost by definition had certain structural, economic and technical characteristics that, if

understood, could bring clarity into the realm of strategic management.

Porter (1979) identified several issues that potential entrants must consider when

deciding to enter into a new industry or market. First, there were economies of scale. An

entrant must consider whether a market could be entered into gradually without a cost

penalty, or were the existing economies of scale such that an irrecoverable cost penalty

would be incurred without a large scale movement into the market. Product or service

differentiation must be considered and understood. An entrant must understand the

strength of existing brand loyalties of market players, and consider the cost of

establishing marketing strategies that could erode these loyalties effectively. What were

the requirements for capital? Were the capital costs scalable in market entry, or were

they largely irrecoverable fixed costs? Did the incumbent have cost advantages that

were not duplicable? Indeed, did existing players retain certain cost advantages such as


key patents, possession of critical raw materials, or learning curve requirements that

must be overcome with no clear economical way to do so? What about distribution

channels? Were there distribution channels available to a new entrant or were they

primarily controlled by existing players? Clearly certain external forces such as

regulatory protection must be considered. Other features of industries such as liquor

licensing or environmental constraints might represent high barriers to entry.

Porter (1979) illuminated the various relationships existent within his forces

model. For example, suppliers had increased bargaining if they were more concentrated

than the industry being served, were highly differentiated, and there were high switching

costs. Buyers had increased bargaining power basically with inverse characteristics of

suppliers. Substitute products retained power inverse to an industry’s product level of

differentiation or switching costs.

Of course, potential market entrants must consider the classic economic forces

of intensity of inter-industry rivalry that had typically been considered by firms prior to

Porter’s strategic management contributions. Key factors here were whether the

industry was growing or stagnant, whether product capacity was structured to yield

large purchases, and whether barriers to exit were high. Only when management had

completed an assessment of all of these forces was it ready to look at its own strength

and weaknesses (SWOT) relative to each force.

Many scholars fully embraced Porter’s economic forces model. Some even

posited that additional forces should be added to Porter’s original five such as

stakeholders (Freeman, 1984) or even the internet (Evans & Smith, 2004). Others found

fault with it. Coyne & Subramaniam (1996) described shortcomings of Porters five


forces model, which they did acknowledge as the leading description of industrial

macroeconomics, as being inadequate to address upwards of half of the real strategic

challenges being faced by managers. They identified three assumptions inherent in

Porter’s (1979) model; (a) the industry contained a host of entities (buyers, sellers, etc.)

that functioned at a distance, (b) industry winners were those who could erect structural

barriers against entrants and existing competitors, and (c) there existed high certainty

as to what participants would do. Coyne & Subramaniam (1996) characterized this view

as economically rational. The failure of Porter’s model was that there were industrial

firms existing in more cooperative relationships that could not be incorporated into this

rational model. Still other scholars such as Ghemawat (2002) argued that resource

allocation based on a mechanistic application derived from past experience would leave

a firm unable to deal with the real competitive threats of the future. Ghemawat

discussed Porter’s development of his five forces model as more akin to a framework

for management consideration than a truly descriptive model.

There existed a dichotomy of cost-based or differentiation-based competitive

choices that firms must make – Porter argued in his book Competitive Strategy that

allowing oneself to wander in between these two extremes would lead to unsatisfying

performance (as cited in Ghemawat, 2002, p. 61). Ghemawat (2002) challenged simple

valuations as differences between rates of return and the cost of capital because of the

uncertain time horizon for sustaining advantage. Moreover, Ghemawat argued that

competitive advantage normally diminished over time simply due to commoditization

from competitive pressures.


Wernerfelt (1984) developed a seminal paper in the RBVF literature by defining

resources as anything that was related to either strengths or weaknesses of the firm in

some semi-permanent fashion. He provided examples of brands, efficient processes,

and skilled personnel. He believed it was critical that a firm position itself with its

resources in such a way as to increase the difficulty of a competitor catching up. In 1984

when Wernerfelt wrote his paper, product portfolio theory was dominant. Rather than

seeing one’s business as a portfolio of business products as Henderson argued in his

book Henderson on Corporate Strategy, (as referenced in Wernerfelt, 1984), he

suggested a matrix based on resources as the portfolio constituents. Wernerfelt argued

that resources were a more useful cross-business perspective than financials.

When Wernerfelt (1995) was asked 10 years later to comment on where the

literature had taken the community, he concluded that strategies not based on a

resource view of the firm were simply not likely to be successful. Commenting even 10

more years hence on applying RBVF to corporate strategy, Wernerfelt (2005) asked the

rhetorical question regarding which specific industries should the firm consider

competing on. His answer to his own question was straightforward – compete in those

industries in which the firm’s resources were competitive. Wernerfelt (2005) made an

insightful comment regarding empirical underpinnings of RBVF that the theory had

completely outrun the ability to test due to difficulties in externally identifying firm

resources.

Barney’s (1991) influential paper on strategic resources creating sustained

competitive advantage has been cited literally thousands of times. He concluded that

assumptions implicit in early strategy work from Kenneth Andrews and Michael Porter


were; (a) homogeneity within an industry with respect to resources and strategy viability,

and (b) that resources were highly mobile. The RBVF assumed essentially just the

opposite: (a) firms competing within the same industry could be heterogeneous with

respect to the resources they possessed; and (b) these resources might not be mobile

between these firms, thus further sustaining the industry heterogeneity.

Barney (1991) defined competitive advantage as that position a firm enjoyed

when it had a strategy that created value not being duplicated by existing firms.

Moreover, a sustained competitive advantage was one that met this criterion in addition

to the qualifier that other competitors could not duplicate this strategy. Barney did not

propose this sustained advantage would continue in perpetuity: rather he clarified his

definition of this coveted state as being subject to industry revolutions he called

“Schumpeterian Shocks” (Barney, 1991, p. 103). These revolutions essentially

redefined what resources contributed to value and which ones no longer did. Short of

these revolutions however, a truly sustaining competitive advantage was not easily

subject to attack from competing firms through strategy duplication.

The key to achieving sustained competitive advantage according to Barney

(1991) was through resources that had these attributes; (a) they must be valuable, (b)

they must be rare, (c) they cannot be imitated, and (d) there cannot be valuable

substitutes for these resources that were not both rare and imitable. In a later paper

Barney (2001) argued that RBVF was fully consistent with neo-classical

microeconomics which had the assumption of an elastic supply for the factors of

production. In other words, factors of production (i.e., resources) were available at

prices inverse to their availability. Under RBVF, however, factors of production were


inelastic. Once retained by the firm, they provisioned the firm to obtain above-normal

profits.

Peteraf & Barney (2003) proposed an economic theory that attempted to place

RBTF within the context of a larger body of theory. The authors considered RBTF as an

efficiency-based theory rather than externally based. It was “…not a substitute for

industry-level analytic tools, such as 5-forces analysis and game theory…Rather, it is a

complement to these tools” (Peteraf & Barney, 2003, p. 312). They identified

imprecision within the larger scholarly community regarding the definition of competitive

advantage. The authors suggested that a firm possessed a competitive advantage if it

could create more economic value than its marginal competition. Moreover, they

defined economic value as the apparent value attributed by the customer to the firm

relative to the actual cost incurred for the product or service to the firm.

Two papers (Hamel & Prahalad, 1989; Prahalad & Hamel, 1990) subsequently

pushed the resource-based view of the firm out of the realm of scholarly debate and into

the mainstream of strategic conversation. Prahalad and Hamel (1990) proposed that the

most powerful way for a corporation to compete in the global economy was with

recognizing and developing their own core competencies that sustained genuine

growth. Thus they expanded the concept of firm resources into something called core

competencies, which they defined as “the collective learning of an organization,

especially how to coordinate diverse production skills and integrate multiple streams of

technology” (Prahalad & Hamel, 1990, p. 82).

Prahalad & Hamel (1990) brought together many different ideas that have

become foundational to current strategic thinking. Moreover the authors introduced


destructive innovation concepts prior to Christensen’s work (Christensen, 1997) without

calling it such: “The critical task for management is to create an organization capable of

infusing products with irresistible functionality or, better yet, creating products that

customers need but have not yet imagined” (Prahalad & Hamel, 1990, p. 80). They

embraced Wernerfelt’s (1984) view of a resource portfolio of businesses rather than a

product portfolio of businesses – they called it a competency portfolio.

In their later best-selling book Competing for the Future, Hamel and Prahalad

further defined strategic intent with three distinctions (Hamel & Prahalad, 1994). First,

strategic intent required a clear sense as to the firm’s future course. This was a

description of leadership rather than one of management. Second, strategic intent was

under girded by an unfolding sense of new ideas and findings. This was the foundation

for innovation. Finally, strategic intent must have an inherent feeling of mission. This

idea tapped into the notion that people required a deep sense of meaning that Frankl

first described in his seminal work “Man’s Search for Meaning” (Frankl, 1959).

Research Question Number Four – What Does the Literature Say about Strategy Using

Technology Leadership to Establish a Competitive Advantage as an Approach?

When pursuing technology leadership, Wernerfelt (1984) suggested there were

counteracting forces at work. On one side, achieving a technical lead would allow a firm

to command greater returns and better sustain the interest of research personnel as a

stimulus for future success. On the other side competing firms could function as fast

followers by observing what the technology leader was doing and follow suite. This had

the effect of continual innovation pressures on the technology leader. Other authors

gathered evidence less equivocal. Sadowski & Roth (1999) performed an industry study


which showed technology leading firms were both more profitable and experienced

greater growth in revenue than other firms. They concluded that many firms have

ignored their potential to be technology leaders in lieu of other, less helpful strategies.

These successful companies had explicit technology strategies as a part of their overall

business strategies.

In order for technology leadership to be a successful component of corporate

strategy, there must be integrated connections throughout the corporate leadership to

effectively understand, manage, and deploy technology successfully. Roberts’ (2004)

survey emphasized the weak people linkages such as low participation of marketing

executives in connecting technologies to their markets. Roberts found that there existed

a distinct lack of understanding in general of marketing with respect to how technology

tied into strategic goals. In addition, his survey also showed similar weaknesses for

corporate CFO’s appreciation of the link between technology and business strategy.

Roberts also found reduced time horizons for R&D budget expenditures. Whether

companies were intentionally reducing strategic time horizons or not, their short term

R&D budgets had this effect. He also investigated how companies were leveraging their

technological skills and capacities globally, finding that successful U.S. firms were in

fact drawing from the technology centers of other geographic regions such as China

and Brazil. Moreover, U.S. firms were continuing to leverage their internal research

capabilities with academia. Corporations that actively strove to be technology leaders,

rather than simply achieving parity in technology or resigned to be technology followers

were more successful than their competition.


How does a firm initiate a competitive strategy that included technology

leadership as a fundamental component? Two authors have provided ideas for

consideration. Utunen (2003) stressed the criticality that a firm’s internal capacity for

measuring their own intellectual capital must precede any legitimate management of

technology. Bigwood (2004) introduced the concept of new technology exploitation as

an area between pure scientific research and new product development, and the

challenges to leadership inherent in managing new product development. Bigwood set

the stage for his recommendations by first identifying technology as “the use of science-

based knowledge to meet a need”, a definition he obtained from a paper by Papp called

Managing Technology as a Strategic Resource (as cited in Bigwood, 2004, p. 39).

Indeed, Bigwood characterized this idea of technology as a bridge between new

products under development and basic science. New technology exploitation was

iterative in nature rather than a linear process moving through well-defined milestones,

and as such must have an effective management process commensurate with this lack

of a clear timeline.


Case Analysis

We have previously reviewed some of the fundamental tenets highlighted in the

literature for each of these strategy theories. We now move to applying these theories to

Outback Steakhouse.

Question Number 1 - Has Outback Steakhouse employed aspects of their strategy as

rational thought, to include strategic planning and decision-making? Should they?

There was little evidence that Outback had employed strategy as rational thought

in their decision-making. Their founding principle of ownership at the individual store

level was not based on a review of economic theory or various tradeoff analyses that

might support a variety of opportunity cost assessments associated with this strategic

approach. Moreover, their notion that Outback’s culture should be cultivated to conform

to the tenets laid out in their Principles and Beliefs (P&B) policy was not based on a

rational view of maximizing utility to the firm. For example, there were obvious cost

implications in the P&B to the commitment of no probationary Outbackers – however,

this commitment reflected the founders’ adherence to the ethics of stakeholder theory

(Freeman, 1984). A rational-based strategic approach might perform a cost analysis to

determine if this commitment should continue. Even their slogan “No Rules, Just Right”

where patrons could order their food prepared anyway they desired, was a reflection of

the P&B commitment to the customer.

Outback did not adhere to strategic thinking based on rational thought. In fact,

they routinely violated many principles of management that might in fact be based on a

rational agency model. The first sentence of Outback’s P&B culture document, adhered


to across the entire company, presented a decidedly non-rational thesis: “We believe

that if we take care of Our People, then the institution of Outback will take care of itself.”

Strategic theory as rational thought is a very useful concept that should be used

as a tool to investigate the impact of various avenues of economic activity and to give

insight into market forces. However, it is not a useful concept for primary organizational

strategy principally because people are not rational beings. Outback should continue to

ignore strategy as rational thought as it would be antithetical to the competitive

advantage already obtained by the Outback culture.

Question Number 2 - Has Outback Steakhouse employed aspects of their strategy as

disruptive innovation? Should they?

No, Outback has not employed aspects of their strategy as disruptive innovation.

Outback has been committed to sustaining innovations such as efficient and convenient

take-out services and call-ahead seating priority (Thompson, Strickland, & Gamble,

2005), which many other competitors have duplicated ("Applebees Website", 2006).

Innovations not duplicated by others within this industry segment are dinner-only service

(a key factor resulting in the lowest employee turnover in the industry), high employee

pay, and managing-partner ownership (Thompson et al, 2005).

There may be difficult times ahead for the industry. Some analysts ("Analyst

interview: casual dining restaurants: h davis - suntrust robinson humphrey", 2005)

believed that food commoditization in the casual dining segment was probably just five

years away. If this commoditization occurs, higher service quality and ambience at the

same price will become critical. Other analysts ("Roundtable forum: restaurants", 2005)

believed that overall there would be slower growth for the restaurant industry, but the


casual dining segment would remain strong. One of the biggest emergent challenges

was the cost of real estate. Moreover, these analysts commented specifically that the

Outback brand was facing commoditization pressures, and would experience a

significant challenge in overall sales. Clearly Outback may be confronted with market

pressures that might reduce margins. Because of this, they should be considering what

changes might be made to their company’s overall strategy in order to mitigate this

threat.

Given the nature of restaurants in general, it is difficult to envision how any

innovation could be genuinely disruptive. With product scalability constrained to

expansion of stores each in highly designated geographic areas, growth in total store

numbers was likely to continue. The commoditization pressures would primarily affect

same-store profitability.

While it is difficult to justify recommending disruptive innovation as a strategy that

Outback should pursue specifically, there are some possible strategies that might be

explored using the very sustaining innovations that other competitors have chosen not

to duplicate. Currently there are 1175 managing single-store partners in the Outback

family of restaurants – this is a resource not resident within their closest competitor

Applebee’s. These 1175 people understand their business, and have a significant stake

in the successful outcome of the Outback brand. The company might consider

implementing strategies to mine this rich resource ranging from simple solicitation of

inputs via memo to regional, professionally facilitated multi-day team sessions designed

to identify strategies for the future.


Question Number 3 - Has Outback Steakhouse employed aspects of their strategy from

a resource-based view of the firm (RBVF)? Should they?

There is a rich body of concepts inculcated within RBVF that the company’s

leadership had drawn upon in defining and establishing the Outback firm. The founders

clearly exercised all three aspects of strategic intent (Hamel & Prahalad, 1994). They

began with a strong notion of a future that included what they wanted in their new

company – specifically, manager ownership (Thompson, Strickland, & Gamble, 2005).

Second, they retained their sense of creation as they spent much of the 1990s

developing what came to be called the Principles and Beliefs (P&B) policy formulating

the Outback culture. Third, they displayed an unambiguous sense of mission with their

abiding focus on employees as the best method for insuring the company’s sustained

success.

The founders’ continuing determination to nurture and sustain the Outback

culture was the foundational component of their resource-based strategy. Bharadwaj,

Varadarajan, and Fahy (1993, p. 92) supported this culture focus with their proposition

that "the greater the ‘people’ intensity of a service industry, the greater the importance

of culture as a source of competitive advantage." Other scholars provided additional

support for a resource-based strategy using corporate culture to the highest possible

benefit. Barney (1986) concluded that a firm’s culture was a strong source of

competitive advantage. To this end he defined organizational culture as “a complex set

of values, beliefs, assumptions, and symbols that define the way in which a firm

conducts its business” (Barney, 1986, p. 657). According to Barney, in order for culture

to maintain a competitive advantage for the firm, it must have the following three


characteristics: (a) it must be valuable. In other words, it must help the firm engage in

activities that create value; (b) it must be very uncommon, at least within the market the

firm competed in; and (c) it must be very hard to imitate. Barney suggested there is

ample data suggesting that valuable and uncommon organizational cultures are virtually

impossible to imitate.

Outback had successfully migrated this culture advantage into the seven other

branded restaurants highlighted in Table 1. While each of these other restaurants

occupied their own distinctive segment within the overall high casual dining market, they

all retained most of the key components of the Outback culture: (a) joint venture

manager-ownership (chefs at Fleming’s and Roy’s also were joint venture partners at a

reduced level of investment); (b) fresh food prepared daily; and (c) commitment to

people through such strategies as dinner-only service (with the exception of

Cheeseburger in Paradise).

Other authors have looked at strategies for survival in a commoditized market.

There appears to be some justifiable trepidation that the high casual restaurant market

will become commoditized in the near future ("Analyst interview: casual dining

restaurants: h davis - suntrust robinson humphrey", 2005; , "Roundtable forum:

restaurants", 2005). However, Outback might already have what they will need to

compete in this emerging market. Hall (1980) said that low cost was not the only way to

compete in a mature market - profitability was also possible with a medium priced,

highly differentiated offering. Outback’s very strong culture, along with their manager-

owner model, is a very highly differentiated component of their product and may be the


avenue for competitive advantage that will allow them to continue to achieve satisfying

margins.

Question Number 4 - Has Outback Steakhouse employed aspects of their strategy

using technology leadership to establish a competitive advantage? Should they?

Given the point-of-sale service industry nature of the high casual restaurant

business, it was not surprising there was little evidence that Outback employed

technology leadership as a strategy. The underlying corporate philosophy for Outback is

organized around the concept of a single manager-owner for each store. Because of

Outback’s emphasis on preparation of fresh food daily, these manager-owners are fully

empowered to negotiate with local vendors rather than be supplied from a centralized

logistical system. This type of supply structure negates the need for automated data

systems, high bandwidth communications, and other types of technologies which help

to drive inefficiencies out of processes. Outback does not need to pursue a technology

leadership strategy.


References

Documents

Strategy Evaluation for the Outback Chain of Restaurants