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Case Study: Outback Steakhouse 1

Case Study: Outback Steakhouse

Robert K. Cameron Capella University School of Business and Technology

Case Study: Outback Steakhouse 2 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?

Case Study: Outback Steakhouse 3 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 resourcebased 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?

Case Study: Outback Steakhouse 4 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 Sullivans 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 Carrabbas Italian Grill to the Outback brand. Next, they purchased partnerships in Roys (1999), Flemings Prime Steakhouse (1998), Bonefish Grill (2001), Cheeseburger in Paradise (2002), and finally Paul Lees 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 Applebees Restaurant. Applebees 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 Applebees has been

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Table1. Outback Family of Restaurants Brand Outback Steakhouse Carrabba's Italian Grill Bonefish Grill Fleming's Roy's Cheeseburger in Paradise Paul Lee's Chinese Kitchen Lee Roy Selmon's Theme
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" Features Italian hospitality and an exhibition kitchen with hearty handmade dishes. Always market fresh fish from the world over, prepared over a wood-burning grill with a full array of sauces and toppings. Fine 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. Exciting and innovative Hawaiian fusion cuisine incorporating fresh local ingrediants, european sauces and bold Asian spices with a focus on fresh seafood. Jimmy Buffet's song comes to life in a Key West style setting. Great food, cocktails and live music every night. Fresh food prepared in Chinese Woks in a warm, relaxed setting. Separate kitchen dedicated to take-out. Family sports theme with generous portions of soul-satisfying comfort food.

Number of Stores

881 168 63

31

18 10 2 2

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. Applebees began four years before Outback according to the Discoverapplebees Website ("Discoverapplebees Website", 2006). Table 2 provides comparative financial data between Outback and Applebees. 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 Applebees 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.

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Table 2. Comparative Financial Data (in thousands $) Outack Family of Restaurants Net sales ($) Net Income ($) Net Profit Margin Total Stores Net Income per Store Applebees Net sales ($) Net Income ($) Net Profit Margin Total Stores Net Income per Store

2000 2001 2002 2003 2004 $ 1,851,700 $ 2,066,300 $ 2,294,514 $ 2,665,777 $ 3,201,750 $ 127,430 $ 122,310 $ 147,235 $ 167,255 $ 156,057 6.9% 5.9% 6.4% 6.3% 4.9% 956 1,055 1,175 $ 154 $ 159 $ 133 $ $ 690,152 $ 63,020 $ 9.1% 1,286 651,119 $ 63,298 $ 9.7% 1,392 $ 724,616 $ 80,527 $ 11.1% 1,496 54 $ 867,158 $ 94,349 $ 10.9% 1,585 60 $ 976,798 110,865 11.3% 1,671 66

$60 $50 $40 $30 $20 $10 $0


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Stock Price Close ($)

Outback Applebee's

Figure 1. Historical Stock Price of Outback and Applebees 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,

Case Study: Outback Steakhouse 7 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

Case Study: Outback Steakhouse 8 role in applications of rational agency to maximize utility. In fact, business strategy, from Shapiros (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 Morgansterns 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

Case Study: Outback Steakhouse 9 towards the achievement of ones 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

Case Study: Outback Steakhouse 10 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 & Dempsters (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). Schumpeters 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,

Case Study: Outback Steakhouse 11 because of its organic, inherently destructive process, would eventually evolve into socialism. He compared this conclusion to Marxs 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 doesnt 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 Marxs 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

Case Study: Outback Steakhouse 12 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 Schumpeters view of capitalisms inherent creative destruction, disagreed with the conclusions of both Marx and Schumpeter that capitalisms 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 Innovators Dilemma: When New Technologies Cause Great Firms to Fail (C. M. Christensen, 1997). This work originated in Christensens 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. Christensens 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

Case Study: Outback Steakhouse 13 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 firms 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 firms 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. Christensens 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

Case Study: Outback Steakhouse 14 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 innovators dilemma. In this new book he and coauthor Raynor explored the solution to the innovators 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 Christensens 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,

Case Study: Outback Steakhouse 15 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 selfcongratulation. 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.

Case Study: Outback Steakhouse 16 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 firms 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 competitors 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.

Case Study: Outback Steakhouse 17 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 ROCIIs 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% ROCIIs. 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

Case Study: Outback Steakhouse 18 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 innovators 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 Christensens general concept of disruptive innovation. Hamel and Vlikangas (2003) have liberally applied Christensens 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

Case Study: Outback Steakhouse 19 bane of momentum. To Hamel and Vlikangas 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 Vlikangas 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 Christensens 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

Case Study: Outback Steakhouse 20 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

Case Study: Outback Steakhouse 21 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 Christensens 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 Christensens 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. UoPs original business model was based on leasing facilities and providing quick, intense courses

Case Study: Outback Steakhouse 22 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 firms 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 Porters 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.

Case Study: Outback Steakhouse 23 Michael Porter (1979) moved resource allocation strategy forward by broadening a businesss perspective beyond SWOT. Porters 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 Porters 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. Porters 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

Case Study: Outback Steakhouse 24 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 industrys 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 Porters 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 Porters economic forces model. Some even posited that additional forces should be added to Porters 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

Case Study: Outback Steakhouse 25 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 Porters (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 Porters 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 Porters 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.

Case Study: Outback Steakhouse 26 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 ones 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 firms 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. Barneys (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

Case Study: Outback Steakhouse 27 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

Case Study: Outback Steakhouse 28 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 theoryRather, 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

Case Study: Outback Steakhouse 29 destructive innovation concepts prior to Christensens 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 Wernerfelts (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 firms 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 Mans 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

Case Study: Outback Steakhouse 30 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 CFOs 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.

Case Study: Outback Steakhouse 31 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 firms 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 sciencebased 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 Study: Outback Steakhouse 32 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 Outbacks 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 Outbacks P&B culture document, adhered

Case Study: Outback Steakhouse 33 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

Case Study: Outback Steakhouse 34 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 companys 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 Applebees. 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.

Case Study: Outback Steakhouse 35 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 companys 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 companys 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 firms 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

Case Study: Outback Steakhouse 36 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 Flemings and Roys 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. Outbacks very strong culture, along with their managerowner model, is a very highly differentiated component of their product and may be the

Case Study: Outback Steakhouse 37 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 Outbacks 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.

Case Study: Outback Steakhouse 38 References

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