F

5. Synergy ond capob¡lity Proliles

Lorrcpt ol enler ¿nd |lp , , = t "fiat Obiotrte.
in er¡ e"t. ót". rrJ nona-.n¿ t snq9\ Stdrlup a ;el
and opc¡ótñt rF¡'r S,a'netd ¿nd piat.flccls A
75
I
hda?ra lo' artudtian al s]ñ. ay Stpne¡h: dntl \.ea\.
competence and coñpetitít. ttuf'L¿s uses of

6. Concept of St¡otegy
'Ihe conlnlon ttuc¿¿ ¿nd the cancept al the fuñ s búsine$
t03 Structure of
Concept .f sttutegCan+ónents al stt¿r¿4): pto¿ ct-
ndtlet Stoeth tecta\ ..mq¿titire ¿.lentdee, ón¿
scaPe,
qneryl sttdt.ly ¡ceds fot ¿ifrient ,tes af funú
Business Decisions
I nJ¿¡.6v icc. .rr: S!¡rtptr. poLicr. dn.l ap.,J\\t

. . , The straleeic aim of ¿ busine!! lisl to eJrn

Why F¡rlns DiY€rsify 122 a .et,rm - cap;ial. ánd if in lny p11icr¡r:rr c1{c
Difretenccs nt nún¿Benoú dttitü¿.s to\t¿td stt¿lcey 'th¿
ttiiect sig¡ll Cúidetines lat sttatesic ¿n¿lrsn Aedúns the retum in tlte long rtn is not sat¡f¡ctory, then
I^r .1r,.!ftn,an If¿ar:.!r,r¡ ¡rrl,J. rl cr.'.airg,,.t drc dcficiency should bc corrected or thc activity
/r¡ r.,.1!.. Dd."r(nio;r dft.¡rdr¡v.r' hoirc tat. ;edtut, abandoned for a fno¡e f¡!'or¡ble onc.
.oi,r, r|ic, .n,d .ur;l ¡ ¡¿¡c J¡,.,r,f-.r/¡on Cantdbutión P. sr-oÁN, J¡.
to lbt t^., Ad,!¡/d;r, rnJ ti, n-riat ol ca étanp¡dte ^rrnED

8. The Approisol t39

I.¡a|-l .trl.Lt.l cua.nt lo'e.ast. ñJu ¡d po¡cnti¿|. J¡cng¡hs
¿n,r r.aü(r! ... h\i,J ¡or-r't. tatJl 4ri D;tt.ilcJuó The Problem
g"p Ltda.i n Btp t\h.trut ¿tt,rtrL ftik¡id lar
r!.r'.¡ JñJ,lrrL riLx Fclin¿ J¡t tÉt ol tJ .t¡t:. ¿rana ic As every expcrienccd executive knows, a major part of a
dn,l canir 1at'? thIr,¡,"..üc .¡ x¡dü.¡\-, dc.ctt.l,lc h:¡ ar
iIJLtr¡p.. ,- ,Ji,-, tÍ.r¡t. n J.o itn S,n.,gr;¡,t managert timc is occupied ilr a daily process of naking nu-
9. Choice of Sliotegy
"¿,u.rü¡c
172 merous and divc¡se decisions. 'l}e denrands on the decisioD
Ptad t ¡ ,nrh.t p, t'loLto, C' tcal ñd\ r.d\ibititl maker's timc always seem to exceed his capacity; decisions of
v, J d/r,radfl,¿\ o..,"8 to¡ tb¡' ¿nt! Ldc,.4¿inty
Rtles"¡r,rg
lo¡ decisio Cantpetit¡¿ ^ dAflntuEe Sr ¿t,f great potcntiál import comc mixcd with trivial but timc,con-
4,nban.nt ól .t ¿t"É. rcn ,q.\. rttc' rt io\,rh suming dcmands; thc nature of decisions is mdtifaceted and
s"ñn'd'\. tlt rtdl no,, ol^cq+ ,1,.";ox\. chd'dct.nr¡ia of p
d¿¿btitt \r¿¡rh ñ.th.¿ continually lariable. This diversity gel)erally tencls to iDcrease
t0. Uses of Strotegy 207 q¡ith the level of responsibili$ and bccomcs particularly pro-
An avear\, .t th¿ boot P¡¡i(| etrtLdtion A tótdt nounced for thc top cxccutive of the 6rm. OD a single day hc
p|¿a.t,L t ¿nr\,o,4 ptonai E ¡htuera¡k ¿nd o¡g¿nta.
l&nal thuct ¡c may be called upon to decide on a future course of the 6rm's
Relerences business, to ¡econcile an o¡g¡nizational conflict l¡etween two
227
Name IniLex 237 executives, and to rcsolvc a host of day-to-day oper¿ting
Subiect Index 239 problems.
I
2 CorPorate Strctegl
Ir seelü€ to uflde¡stand this very comPlex decisioD process
we can proceed aloflg two comPlementary lines. The 6rst, and
by far the more ambitious ore, is to discover how peoPle in
general, and executives irr particular, male decisions, either
individually or in groups. Give¡ tl€ altematives and tleir
consequences, wh¡t kind of grouP interactions are they in_
volved in, what mental Process do they go through, and wiat
¡ules do they apply in arriving at the Pref€rred choice? This
direction, which goes under the general neme of ¿leciston
flreory, has received much attention for many years from di-
verse scientifi c disciplinesr philosophy, psychologJ, mathem¡t-
ics, and economics. It is a tcstimony to the difficulty o{ t¡is
problcm that all of th€se eftorts have produced very fcw
practical rcsults to date.
The other direction is to study the alternatives and thcir
consequc¡ccs to seek an understanding of the naturc and t¡e
structurc of decisions-to identify the problem, to enumerate
and define the cont¡ollable and uncont¡ollable variables, to
establish relationships among th€m, to single out important
decisions and to prescribe rulcs for arriving at them. This is a
somewhat less ambitious task, for it doe¡ not attemPt to
penetrete the decision makels mind. Rather, it seeks to
study the nature of his iob and thus improve decision making
through improving his insights into thc ántecedents and thc
consequences of maior decisions. Inst€ad of studying the
mind of the manager, this approach explores üe business
firm.
Study of the firm has been tl€ long-time concem of the
economics profession. Unfortunately for our Present purPose,
tlre so¡alled mic¡oeconomic tieory of the finrr, which occu_
pies much o{ the €conomists' thought and attention, sheds
Sttuctu¡e of B],l'iness Deciüots j
relatively litde light on decision-making processes in a real-
world Frm ( t ).1 A very recent significant contribution to ün-
dentanding decision processes has been made by Cyert and
Marclr. They have formdated, a behayioral theory of the frfm
(2) which combines economic analysis with social b€havio¡
and is addressed explicitly to busin€ss decisions within a firm.
However, the class of decisions studied by them is limited and
different froú the class of interest to us, namely, strategic
decisions.
This book is in the tradition of the microeconomic and the
behavioral theories in the sense that it is primarily concerned
with the nature of the firm and not with the decision mal€r's
mind. We shall have much to say about tl¡e characteristics of y'
decisions and the process of seárch for altematives and very
little, beyond a brief review of the curre¡t knowledge, alout
the utility function applied at the ultimate "mornent of
truth" in selectingthe preferred alternative.
-
Since the¡e is no adequate theory of the strategic decisio¡ ,-
p¡ocess, we have to start by constructing out own flodel of
the firm. The purpose of this chapter is 6rst to outlire such e
model and then to single out the pdncipal classes of business
decisions. Follorving this we shall discuss some special cherac-
te¡istics of one of these classes-the strategic decisions-
which is fhe corc subjcct of tLis book.
Classes of Decísions
The adjecüve "business" has tnditionally meánt that the
frrn is a¡ economically or "money" motivated purposir¿ so-
cial organization. This implies that a set of obiectives o¡ pur-
poses can be identiEed itr most Erms, €ither in explicit form as
1Nunb6 in paÉnüess Éfer to refeÉnc€ et end of bool.
 F
Coúatute Sttdtegf
a part of the 6rnl's business plan, or implicitl,v through past
historv a¡cl individual motivations of the key personnel. Tra-
ditionally the r¡easurc of success in a busincss firn has bccn
profit-thc cxcess of returns to the fi¡m over the costs
i¡rcu¡red-and it is this neasure that has distinguishcd a busi-
ncss firnl froln other foflrs of social orga¡ization such as the
govcrn rcnt? the chnrch, the anncd forces, nonprofit fouüdr-
iions, etc.
As rvill bc seen in Chapter J, thc ¡olc of proñtability as thc
corncrstone of busircss has ¡cccntly bee subjcctcd to sh¡ry
qucstioning. Furlhe¡, mc¡sur€ cDt of profitabilitv preseDts
solnc dimcult thcorctic¿ll as !\cll ¡s pr¿ctic¡l problcurs- Ilo\\.
cvcr, for thc purpose of discussirrg busi css dccisions rve ccd
onll wh¡t mathcmitici¡ns ',vor¡ld c¡il I "wcak" assurtrption,
u¡urcly, that, horvcvcr Drc¡surcd arxl horvcvcr v¡ri¡blc, a scL
of objcctivcs cxn bc ¡scribo¿l to cach finr), ¡nci that this sci is
tlc lürjo¡ guiclcpost iD thc dccision proccss.
1'Lc sccold lrrjor chtr¡ctcristic \rüich is esscntial to an
urdc*trndilg of dccision rnaking is that a fir:I sccks its ob-
jcctivcs throUgh tllc mcdiuol of profit rcl, Drorc spccific¡lly¡
throngh convcrsion of its rcsorrrccs itrto goods and/or sen-
iccs and thc¡ obtaüring x retum on tlrese bv selling tbcm to
costoDrcrs. Thcre ¡re thrcc trpcs of basic rcsourccs: phrsical
(invcntory, phnt), monct¿r) (moncy, crcclii), and hur¡an.
All three are useci up in thc convcrsio¡ process: plant bccoDres
o}solcte, noney gets spcnt, and e\ecutives get old- In thjs
rcspectJ sürr,¡ival of thc firm depends on pto6t; unless profits
ere gencrAted and used for replaccmcnt of rcsources, the 6rm
\\'ill eventually run down.
Irorn :l decision viewpoint the oveull problcm of the busi,
Structure af Business D.cisíans
ness of the 6fm is fo canfrgltre dnd direct the Íesautce colTrer' //
sion prccess ilt such 1dl ds to optímize the dttainnrcnt af the
obieatir¿s. Sincc this c¡lls for a great many distinct and differ-
€nt dechions, a study of the ovcrall dccision proccss can be
facilitated by dividing the total decisiort "space" il1to several
distinct cateSories. Our approach will bc to construct thrcc
c¿tegories callcd rcspectivcly strdtegic, d(Iministrdtí1)e, a:nd
operdting, e c\1 rel¡ted to a differe¡t aspcct of the rcsoúrcc
conversion PrñClr\\'
OperJtir)g d(crsion' usuJll) ab.orb llrc bull of thc firnr's
energy and attcntion. 'l he objcct is to mxxirnize the eficieDcy
of the 6nD s re.orrr(c Lor)vL$rur) |rocL'.. or. ir) i]]orc con\cr)-
tional languegc, to r'¡axi )izc profihbility of currcnt opcr4-
tions. Tlrc Írajor dccision ¡rcrs ¿rc rcsolrrcc :llloc¡iion (buclg-
eting) amorg fuDction¡l arc¡s and procluct lincs, schccluling
of operations, rDo¡itoring of pcrfornraücc, ancl ePplyirg cou-
trol actioDs. Thc key dccisiol]s involvc pricing, cst¡blishjDg
marketing str¡tcg), sctting production schcclulcs a cl invcn-
tory levels, ancl dcciding on rcl¡tivc c)ipcllditurcs i support of
R&D, markcting, and opcratioDs.
Slqtegic decisions ' arc priü:trilv conccrfled with extenr¡l,
r¿ther lhau Intcnr.rl. lrohJc-r. o'tlrc fir-r arrd 1rcLrfic.r1ly
with selectio¡ of thc product-¡nix $,Iich thc fi¡nr rvill procluce
and t¡rc rn.rrkct, to \l.iclr it \^ill scll.'lo u.c Jn LngiDecrirg
term, the strategic problem is colcc¡ned r¡'ith cstablishing an
"impedance nratch" between tie fiInl end its environnrcnt or,
'Herc.\eL, '1 ,rm tr".e.. m"rn pe.r:.,n8 o - o.Le
rle 6h ,nd
', ; e D.clh r',¡ d'0 ,.nt non,
h¡een lh:,
o¡ irs poirr.. rr,e u.,.,,,J). r .J .., r1rrn6 d. r., n.,. b.. .. r. L.to¡r.. r
 a7
6 Corpotate St¡¿tegt
in more usual terms, it ¡ the problem of deciding what busi-
ness the 6rm is in and what kinds of businesses it will seek to
enter.
. Speciñc questions addressed in üe skategic problem are:
,,/' what arc the firm's objectives and goals; shoul<l the ñrm seek
to diversify, in what areas, how vigorously; and how should
the firm develop ¿nd exploit its present product-market
positioI¡.
A very iúportant featu¡e of the overall business decision
process becomes accentuated in the strategic problem. This is
the fact that a large majori$ o¡ decisio¡s must be made
within the framework of a limited total ¡esourcre. Regar¿lless
of how large or small the ñrm, strategic decisions deal with a
choice of ¡esou¡ce commitments among altemativcs; empha-
sis on current business will preclude diversification, over-
emphasis on divenification will le¿d to neglect of present
.
products. The obiect is to produce a resou¡ce allocatior¡ pat_
' tem which will offe¡ the best potentiel for meeting the 6rm's
obiectives.
Ad-ministrative decisions are concemed with structuring the
ñrm's ¡esou¡ces in a way which creates a maximum perform_
ance potential. One part of the administraüve poblem is con-
cemed with organiz:ltion: structu¡ing of authority and re-
sponsibility ¡elationships, wo¡k flows, info¡mation flows, dis_
tribution channels, and Iocation of facilitieJ. The other part is
concerned with acquisition a¡d development of resources:
development of rawmaterial sources, personnel tmining and
developmert, 6nancing and acquisiüon of faciüties and
equipment.
StnEture of Busi¡'l'ss Decisiotlt 7
h*rdAbns lmong Deci.sion Classes
The characteristics of the th¡ee cl¿sses of decisioris a¡e
summarized in Table l l. While distinct, üe decisions are
iste¡dependent and comPl€mentary. The strutegic decisior$
assure that t¡e 6fm's Prod[cts and markets are well chosen,
that ad€quate demand exists, and that the 6rm is capable of
capturing a share of tie demand. Strategy imPoses oPeEting
r€quilementsi p¡ice{ost decisions, timing of outPut to meet
üe demand, responsiveness to changes in customer [eeds and
technological and process charactedstics. The administmtive
structure must provide the climate for meeting these, e.9., a
st¡ateg¡c environment which is charactetized by ftequent and
¡¡¡predictable demand fluctuetions requi¡es that martetingand
manufactu¡ing be closely coupled organizationally for rapid
¡esponse; ar enüronment which is highly technical requires
that the research and development department wort iri close
cooperetion üth p€rsonnel.
sales
,/
In this sense "structure follows str¿tegy"-prod uct-mgrket
"/
char¿cteristics create operating needs, and these, in tum, de-
termhe the st¡ucture of authority, reJponsibility, work flows,
end info¡mation fows within tle firm. A. D. Chandler (3)
has illustrated this relationship of strategy end st¡ücture
through a historical analysis of American business. As the
country's economy developed, difierent strat€ic opportuni-
ties became alailable to business. A¡ firms took advantage of
these opportunities and thus changed their previous strate-
ges, operating inadequacies developed which dictated new
foÍls of o¡ganization. Chandler t¡aces t}¡e development of
üe modem concept of centralüed policy making with decen-
 S¡ructlrc ol ¿lsincss Dccisio's
gh tralized oPerxtions control to its stretegic ¡nd oPc¡ating
6F: 9. .E? i. antecedents. Alfred P. Sloan in his mcmoirs (4) has diag-
ES? -
flosed onc of tle major reqüiremeuts which stratcgy has
im-
.9
9lti¿i¿ :í9r!É
3 e.9,:: ;¡
Y
Dosed on \lruclurc: fo organi/c llrc Frllr's min¡gemcnl
jll a
ptsé.9E p€ I
3:3 lvav rvhich ¡srr,re*, ¡ropcr b:lanre of ,llcnlion lrclween f|e
o !a
.EÓ
=
3g::!e?
E-.:6 !: ! 5hategic and opcrating decisions.
i¿ !*3,2 2 Sr¡ch balance is dificult to achievc. In ost firms evcryoue
Á a2 a-83' '2.É,3 á¿.¿i.t ó in the orgenization is conccrncd $'ith a nryriad of rccurring
operating problcnrs. Nl¡¡r¡genent fro¡¡ toP to botton con-
! i- tinually seeks to i provc eficieDcy, to ctlt costs, to scll lllore,
ú8 4 ÉL e:t- to advertisc bctter. Problcnrs arc ¡utom¡ticllly gcDcrated at
:; T:E
::: :€ E¡e
¿.f all levels of rraD¡genrcnt, an¿ thosc \\,hich arc beyond the
3
! ?e2!3
:!t !! Ei2*'L
5; scope of lo\\'cr m:lDrgcmcnt authority bccone thc co ccrn of
-g
o üE ^ :L.-.)F. a a 94 y :c top ¡n¡gcnrcnt. lhc volu¡rc of such dcc¡ions is grc¿t aDd
;F !á!
E;6e;= 9:.+ú '- ? í ¿V=:2 É i
E
constant, p¡rtictll¡rly l¡cc¡nsc of thc üccd for d¡ily monitor-
r: tEPs€€ci-E
et *í á ¿ Fa > ing and coDtrol. In flct onc of thc lrrjor conccrirs of toP nran-
a c:7,¡ =¡ 6-6 !
:€
F o -dr': agement is to avoi¿l ovcrlo:rd by cst:rblishing dccisiorl Priorities
and by dclegating as much as possiblc to lowcr Drlr¡gcrs.
By contrast, str¡tcgic decisions arc not sclf_rcgeDerativc;
E.:: they makc no e tofl:ltic cleir¡s on top ln:l1r.lgcr)rcrrt atten'
¡: l3i' i tion. Unlcss :rctively pursucd, they may rcnrain hiddcn bchind
t
H
! -:
I z1? -si Si ?
the oper¡tions probiens. Fimrs are gerlcrally very slow in /
E di¿
ü::;:E: : l: 2i. tecognizing conditions uDder Íhich conccrD with the oPer^t-
qn9d 3E¿2Cá\p
¿ b E ; S É.: ing problem must givc way to a concem \rith the strategic.
F 4 5Éí!É5E ñ{ñ ó Usually whcn such conditions occur, operáting Probie s
neither ceasc nor slecken- On the contrary, they ePpcar to
É
intensify. Thc last promotional campaign has failed to in'
9
crease salcs. Could the advcrtising approach be wrong? The
E
I last cost reduction effort las failcd to bring costs in line with
I z Pdce¡. Heve we taken the propc¡ app¡oach towa¡d increased

>.
l

l0 CoQor¿Ie Sttuteg Sttuctu¿ al Businex Decisiois ll

effciency? Competition has cut pdces to a point below our tleory of decision making witlin a firm mrrst include thc
costs. Should we mcct them and go into the red, or shouid we i¡te¡¿ctions among the major clesses of decisions On the
hold the line? othe¡ hand, Table I-l suggcsts that €ach class has distinctive
The immediate dcmands on management time and eFot chaÉctenstrcs 3nd that they are better studicd separately As
rais€d by such opcrating problcms can readily obscurc the fact a 6rst step toward a ünified t}¡eory, partial theo¡ies of the
that the basic ills lie not in the firm but in its environme¡r rcspective oPcrating, administrative, and strategic decision
Even wlen a continuous downward trend in profitability or class€s n¡ust be undcrstood. Cyert and March have made an
obvioüs signs of narkcd s¡turatio¡ strongly point to the need important contribuüon to study of the 6rst class; Chandler's
to revamp the entirc producfmarkct position, a natl¡ral tcnd- r¡,ork sheds important light on the second. Our purposc in this
ency rs lo sccli remedics in opcr¿tlon:rl ir proveorcnts: co\t book is to construct a practical framework fo¡ the thi¡d. As ¿
red[ction, conso]idation, a new advcrtising nra¡agcr, and, the step toward a unified theory the final chaPter of this book will
most popular rcmcdy of thcm all, reorg¡nization of thc conr- discuss the role of strategy within tle overall st¡ucture of
pany. yct the main problem m¡y bc that thc dcmancl for decisions.
^ndproducts is on a rapid dccline.
the 6rm's
Since strategic problems are harder to pinpoint, they re-
quirc spccial attention. Unlcss specific provisions arc made for
conccm with stratcgy, the 6rnr may misplace its eftort in pur.
suit of operating emciency at times when attention to stra-
tegic opportunities (or threats) can produce a more radical
and ü¡n)ediate improvcment i¡¡ the firm's p€rfor ance.
Two kinds of provisions are rcqüired. Onc is to provide an
adnrinistrative cnvitonment in which a proper balance of
menegement rttention can be maintained. This is the core
subiect of Chandler's book. With one exception in Chapter 8
we shall not deal with problems of organization. The other is
to provide managemcnt with a method of analysis which is
focuscd on the search for stretegic dccision nee¿ls and oppor-
tunitics. This feature is the corne$tone of the problern-
solving method which.rve shalt develop in this book.
It is clear from prcccding re¡¡arks that a compr€hensive
 F
A Model for
Strategic Decision¡
Tle!€ ¡¡c morc thi¡gs in he¡ven ¡nd errtl¡,
Horatio, tlrn arc ¿rcxnt of h roLri philosoplry.
Tlrc P¡ohlem
'l'hc cllcl pro<luct of st¡rtcgic clccisions is clcccptivcly sim-
plc; a corubürltion of prodrcts and ur¡rkch is sclcctccl fo¡ thc
firn. 'l'his cornbination is arrivcd ¡t by aclditirlrr of ¡rcw
product' xrkcts, divcsh¡cnt fro somc olcl oncs, and crpan-
sio¡ of thc prcscrlt position. Thc cha¡)gc frorn prcvious pos-
ture rcquircs a redistribltion of the firnis resources-a p:rt-
tcnr of dir'€shncnts ¡nd invcst ents i¡r conpany acquisitions,
product ¿levclopmcnt, markeiing outlcts, ¿drcrtising, etc.
first glaDcc, st¡ategic clecisio¡ls rescnlble capital-inrestment ^t
dccisions, rvhich dcal in x si¡nilar nanner with ¡esource alloer,
tion to fixed asscts and machincry. Since a rvell dcvcloped
theory is a|ailablc for capit¡l i¡lvcstmcnt decisions, it is üseful
to start tLe discussion l:l reviewing thc appiicAbility of tlis
thcor) to the stratcgic problem.
12
A Madel fo¡ Stldtegic Decísions lJ
This analysis rvill show that thc rcscDblaDce is more suPer-
6cial thar real and that th€ diffe¡ences bctwccn the two t)?cs
of decisions are so gtcat as to tequire Dew concePts alrd
methodology for the strategic Problcm.
A frarnelvork cortaining süch co¡cepts an¿ methodology
will be describcd at th€ end of this cirPtcr as an introduction
to the detailed analyses in latcr chaPte$
Capital lnvestment Theory (CI'l)'
Capital i¡v€shneDt analysis sta¡ts with identification and
enurneration of fixcd asset and cqüiPDent ProPosals for thc
next budgct pcriod. For each proposal, positive (revcnues)
a¡¡d negative (costs) cash flows arc computccl ovcr thc lifc-
time of thc projcct. For propcr conrperison, thcsc fiows Drust
be merginal to thc othcr flows rvithin tbc firm: only aclclitional
revenues a¡d costs gcDciatcd by thc projcct ust be corlsid-
ered. If it tums out that the lifctirnc of sorlc Projccts ex-
ceeds thc budget pc¡iod, thc pcriod is extcndcd for purposc of
analysis. It is csscntial to thc traditio¡al capital invcsh¡cnt
theory that all of the projects rvhich will become availablc
during the forthcoming budget period bc anticipated at dcci-
sion timc.
With the projccts enümentcd ¡nd the flovs deternined,
the worth of each project is eváluatcd with respect to both its
net payofi to the finn ¡D¿l the eDtailed ¡isk.? Thrcc common
*iI
'Fo¡ tbe ete of ltc!il!, in the folloNing !¡gcs we occasionrllj' ¡s€
CIT to denote c.pil¡l investnent thcorJ.
'I¡ tnditio¡¡l capital i¡rcstncnt tücory, tirc p¡oblen of ¡¡I n la¡dlcd
htl¡er srperÍcialll. \lüch is lcft to ih€ intuitne jüdg¡rcnt of tle dccisiot
 F
14 Cotqoftte St¡qtegt
, / methods fo¡ evaluaüon are the payback period, the intemal
¡,¿te of discount and the net preseflt worth ( 5 ) .
With individual evaluations in hand, the preferred projecb
can be chosen \ several techniques such as cutoft rate of
discount for relatively simple problems, and linear program-
ming for more complex ones.
At first glance, this procedure for plant ánd equipment de-
cisions appears applicable to deciding what markcts to enter
or what prodúcts to develop, In fact, some witers have er-
tended capital investment theo¡y to apply to the entire spec-
trum of business i¡vestment dechions (6). Our objective in
. this chapter is to see where product market invest͡ents difier
from capital investm€nts and what modifications in the
method a¡e needed fo¡ a p¡actical approach to strategic
decisions.
It willpresently be seen that fo¡ the purpose of establishing
the dimensions of the stretegic problem, we s¡all use CIT as a
"whipping boy." This should not be int€rpreted as cliticism
of the capital investment theory in its use for cápital
decisions.
Steps ín Problem Sobíng
Simon has shown (7) that solutioD of any decision problem
in business, science, or alt can be viewed in foursteps.
l. Petceptían of de.ision nced or opportunity. Simon calls
this lhe intellígence ph^se,
2. Formulation of altemative coulses of action.
3. Eyalu¿tion of the altematives for their respective co¡tri-
butions.
4. Choice of o¡e or more altematives for implementation.
A Modzl lot Strcte,ic Decinonr \t
A comparisor v/ith the Preceding section shows that caPital
iDv€stnent theory is conceñed with the last two stePs, evalu-
aúo¡ and choice. Perception of the Deed for decision a¡d
formulaüon of altematives are assumed to take place prior to
aud outside of the framework of analysis.t As one wnte¡ Puts
it, "to solve (the 6$t two steps) there is simply no substitute
for reflection.... Thete is ¡o magic wand we can wave to
produce altemaüves" ( 8).
1, Perceptíon of Need. As suggested in Chapter l, per-
cepüon of need is a maior issue in strategic decision making.
:
A method which fails to provide for the choice between con-
ü¡uing concem with tle oper¿ting p¡oblem as against atten-
tjon to the strategig leevel a key part of the p¡oblem to
iotuition and judgment. A 6rm, say, in the healy chemicals
iodustry needs a mechanism for monitoring the trends in the
retum on investment (which ha! been declining over the past
ten ye¡rs) and the r¿te of gowth in demand (which has been
slowing dow¡ ) ; it needs a mechanism for tecognizing whether
the tiñe has arrived to diversify. All of this should take place
balore individual diveni6catio¡ opportuDities are sought and
anallzed.
Thus, CIT is incomplete fo¡ ou¡ pu¡poses. This is a ma1'or .,
deficiency. Our requirement is for a method which provides
for continuing intelligence activity and for diagnosis of the
need for st¡ategic actioD.
2. Search for Alternatfies. T¡aditional capital investment
theory requires tlat all of the altematives be known at deci-
sioD time. In the strategic p¡oblem this is a rare situation. At
ñán'
'ID fáct, t}¡¡ f@tue;s cleÉcteristic of ¿ great naiority of sGelled
¿g.De¡t sieDd models.
 F
16 CorParate Sttdtegl
the beginning of any planning period onlv a ferv of the alte¡-
Dativcs will bc knoÑ,n i[ sülicie¡t dct¡il to pemit const c,
tion of cash flows. Usually, thcsc will includc the fimr's trad;
tion¿l product-nu¡tets, current R&l) projccts, and perh¡ps
some nanes of firrns rvhich arc knorvn to be interested in a
nlcrgcr- Other altenl¡tivcs will prescnt thc tsch.cs throughout
the planning pcriod iu a co tiDütl strclrn: prodnct iDventiors
in thc firm's labo¡¿torics, new arket opportunitics, fir ts
avaihl¡le for acquisition, :lnd joint-vcnLure opportunitics. In
st¡rtcgic dccisions nlch conditions of partial ig ortncc about
futurc opporirnlitics Arc thc rulc r¡thcr th.rn thc cxception; a
mcthod which f¡ils to providc for thcm is not ad¿lresscd to a
busincss fir¡r
Unclcr conditions of p:rrtial ignorance a firm is confrontcd
with two problcnrs. Thc fi¡si is low to condtlct xn actile
sca¡ch for ¿ttr¡ctivc opportu itics.'¡ Thc sccon¿l problcln is to
alloc¡tc thc 6rm's lirnitcd rcsorrrccs among thc opportu¡itics
whicl llrvc bccn u covc¡ccl tnd thc possiblv nlorc attractire
oncs rvhich arc "just uround tbc cornc¡." This is thc cl¡ssic
"biftl in hr d vcrsus two in thc br$h" dilcmrra which is cor)r,
rirolr lo ir.rr) rc..l-\r'orld Jc-i,iülr .iturtioil\.
Capil¡l illvcshDcnt thcory is silc t hcre, since it assutncs
tllat dll of the decision alternativcs can be enunrcrated and
their ortcolncs mcasurcd. A pr:rctical lnethod for stratcgic
decisions must, thcrcforc, broAden this thcory br' adding pro,
visions for search ¿nd for project cv:llú¡tion under pA¡tiel
ignorance.
''1o üc su(, thc 6¡m ce¡ take a conplet.ll pssnr lttiiLr¿e a¡d wait for
ópportüDlics to .o¡rc Lo it. Ilo\aek¡. it $rll be sho\rn i¡ Ch¡ptc¡ 6,
that fo! nost fi¡¡s thn luds !o r¡coo¡dü¡nted, nÉ6cient, .nd potentially
cost ly nrnagemcnt practices.
A lot Strdt.S;c Decisialls 17
^ta¿el
3. Proiect Erdlutttiall. CIT uscs lo g tenr Pro6tabiliiy
ovcr
the lifetime of the Proiect as the yardstick for
evAlüation
Efiorts to rPPlt sLrch a sirrgle yardstick to the strategic Prob-
lem run into thcorctical as $'cll as Practjc,l .li{trcultics.
On the conccPhral lcvcl, vie$'Poi¡ts h¿ve becr eclvanccd by
thc solc
business writers ard econo ists that Proht is rlot
objective of n busincss finn an¿l that lr "veck)r" of obicctivcs,
only one of rvLosc conponcnls is Pro6t, should Lc uscd.n
Such a vector is usuallv conposcd of conflictirrg ol)iccti!'cs;
whcn thc fimr's Pcrft)rm¡ncc is oPtir¡izcd orl onc, it is ¿lc'
graded on othcrs. For cxamplc, if ollc of thc objcctivcs is a
bigh dcgrec of $orkcr s¡tisfaction, this clrr) usu¡lly bc ¡ttairlcd
only at thc c)ipcnsc of Pro6t to thc stockl)ol.lcrs. CI'I wlticlt
uses the singlc y¡rdstick is noi cquiPPcd to Lrrndlc cithcr tlc
mult\)licity of objcctivcs or thc Problcm of conflict bctwcclr
tbelrr.
On thc pr¡cticál l$,cl it turns ort th¿t, cvclr for thc
profitabilit) courpoDcnt of thc vcctor, attcnrPts to colluutc
cash flows for longlivcd projccts rrc frustrxtcd by thc rapicl
decrcase in rcliability of d¡ta for long-tcn¡ Projcctions Sincc
busi¡rcss firr¡s arc particularly intcrcstcd ill Projccts whicll
have a long profitablc lifc, cepit¡l irrvcstmc¡t thco¡y türns out
to bcleast rcli¡ble i¡r a nlost ilnporttnt sitllation.
Further, on thc practical lclel, liurit:rtions of data trsually
lead to cadr florvs $'hich are qpical of x product-n¡rket arca,
not oncs th¿t are spccific for the oPPo¡tuúities in qucstion.
Horveve¡, ¡'hat the fi¡nr Deeds is not tyPicAl bnt pdrticül¡1r
flows rvhich rvill rcflect thc u¡rique comPetitive advaDtages of
the product markct opportunity, such as supcrior quality, tirn'
'Tlis viepoint s,ill be discu$ed at le¡gth ¡r ChaP l.
 V
18 Cotpotute Sfidtegl
ing of product introduction, customer appeal, and compeü-
tors' reactions. While CIT implicitly requires that
such
efiects be taken into account, it p¡ovid€s no method fo¡ do-
iIlg so.
A related and equally important difficulty is encountered in
efforts to make proiect projecüons marginal to other proiects
in the 6rm's product'market postüre. This ¡equires tlat cash
proiections take account of the joint economies and disecono-
mies between the p¡oject and present operations of the 6rm
on the one hand, and between the proiect and all other proj-
ects under consideration o¡ the other. A5 every practicing
manager knows, joint efiects are just as difficult to r€duce to
dollars as uniqueness is; the task becomes prohibitive fot
"breakthrough" types of product. At tle same time, as we
shell discuss later, proper use of ioint eflects and of unique
characte¡istics are pdmary competitive tools i¡ a fi¡m which
aspi¡es to be a better-than-average business competito¡. Again
CIT assumes that ioint effects will be taken carc oÍ otltsíde
the method.
Requirements and Background for the
New Method
The preceding discussion shows that, to be applicable as a
practical metlod fo¡ product-ma¡ket decisions, capital invest,
ment theory must be broadened, amended, and supple-
mented. It must be bloadened to monitor the business eDü-
ronment and to search for new product,market entries unde¡
conditions of partial ignorance. It must b€ amended to deal
with multiple conflicting obfectives. It must be supplemented
to identify unique p¡odüct-market oppo¡tunities and joint
efiects. Since all of these requirements ate far-reaching and
A Mod¿l to¡ Strategic Decisions 19
below ¡nd will be used
fundamental, they are recorded
of a
,irughoot this book as a checldisi in the developmeni
sF¡tegic decision melhod
The method mus¿:
t. include all four, Éthe¡ tllan the last two, st€Ps of the
Ernphasis should be oo
zener¡lized Problem_solving sequence
í1¡e 6nt two stePs, monitoring
lhe enüronment for changes
a¡d sea¡ching for attractive Product
oPPortunities'
2. Handle allocation of the Erm's resources betw€en opPo¡-
con-
tunitie.s in hand and probable future oPPo¡tunities under
ditions of Partial ignorance.
3. Evaluate ioint efiects (synergy) resulting from addition
of ¡ew product_matt€ts to th€ 6n¡.
4. Single out oPPortunities with outstanding comPetitive
advartages.
5. Handle a vector of Pote¡tially antaSonistic objectives'
6. Evaluate the long-t€rm Potential of P¡ojects even
though cash-flow proiections are un¡eliable.
This is an imPosing list of r€qui¡ements, which suggests
that capital investment theory in its traditionel form applies
to protluct-market decisions only undet very special condi
üons, i.e., when these rcqui¡ements can be neglected fo¡ one
rcason or another. This conclusion \tas reached by a majodty
of the business commudty in the eatly days of current inter-
est in the strategic problem of the firm. As a result, business
ma¡age¡s began to develop pracücal approaches which bore
little resemblance to CIT Proiect evaluation schemes found
in textbooks on economics and 6nance. With time tles€ aP-
proaches found their way into business Publications and thus
have provided insights into the true nature of strategic busi-
ness decisions.
Practicel insighti into "how we did it" have been sr¡m-
 20 Coúorute SttuteTl
marized in nuny plrblications, in many ceses with the support
of the Amedcan Nlanrgcment Issocirtion (9). Among thc
many contributors of an¡lytic insights into imporiant scg_
ncnts of the p¡obieDr e¡e Anderscn (t0), Ansotr (ll),
Drucker (12), Gilno¡c and Brendenburg (ll), Khe (11),
Levitt (15), Novick (16), Sraüdt (17), Stciner (18), Tilles
(19), ard Wcsion (20). A talentcd and prophctic Frclch,
nrau, llenri ¡¡rlol (21), anticipaicd inrginatircly ancl
soundly urost of the rore tcccnt anal),scs of modcrn ¡r$incss
Pmcticc.
Rcccntly thrcc inDortellt books h¡vc ttkcn I riov of thc
blrsincss finlt l.hich is closcly rchtc¿l to our prcscnt intcrcst.
Within x histo¡ic.rl pcrspcctivc Chandlcr (22) has rnahzccl
tlc rcl.ltionship arlong thc firnis crvirounrcnt, its busincss
st¡ltcgy, atxl its org¡nizdtionirl str¡cturc. Slo¡ (23) has prc_
scutccl ¡ highly illurli ating history o[ somc fortr yc¡¡s of
stratcgy formuhiion ¡¡d inrplcnrcntation in tLc rvor)d's larg-
cst fimr. Cycrt ¡ud N,l¡¡ch (2+) Dr.rdc ¿ ¡raio¡ stcp to\\rKl
<lcvclopr¡cIt of a tlcory of Lhc finrr fronr ihc clccision ur¡kcr's
Poirt of vicw.
Asiclc froul diflcrcnccs of vie\\,point an¿l conccpts, thcse
thrcc clTorts conrltcmcnt one ¡üother, sirce cach conccrns
itsclf witir a dificrent ¡spcct of the total clccision problc:r.
Chancllcr's primary intcrcst ¡ in the adrninistrative problcm
nnd its relatiorship to the strategic. Cyert and Nferch conccrn
thensclves cxclusivelv with the operaLi¡lg problelr; their 6rnr
kecps its organiation intact and its product-market posturc
constant. By contrast, the prescnt book takes a comprchensive
view of the strategic problem $ith oüly a minor aside to the
administrativc problcm.
A NIadel fot Strataeic Dccisians 2l
Suci are the antecedents to this book in nratters dealing
with the ¡atu¡e of the 6rnl and its function within thc busi-
¡€ss en\iron¡rcnt- Lr thc area of nrethoclology our deLrt is to
three primarv sources. The first goes back to thc results of
fla y years of thought and siudy iD thc United Siatcs irilitary
seÍiccs which have led to thc dcvclopnlcnt of a doctri¡e aD¿
metbodolog] (25) of military decisioD making- The sccord,
nro¡c recent sourcc is thc busincss world. an outgrowth of
^s
conccrn $,ith rapidll' changing busincss cnvironrlent, aü i -
crersing nu¡rbcr of firnrs h¡ve begun to scek aüalytic ap-
pro¡c¡cs to thc stratcgic dccision ü)¡kiug. Tlrcsc cfiorts h¡vc
led to somc pl¡blications on mcthodology (26, 27). How-
evcr, it ¡ safc to ¡ssumc th¡t thc rclativc )rcw¡css of iutcrest,
as wcll as conrPctitivc coüsidcr¡tions, havc so flr kcpt Dra¡y
usc[u] urctlrodol!,f,icrl irriglrrs fronr Itrl'lic !i.\t.
Thc third sourcc of n)cthodological irxight is thc work of
H. A. Simou a¡d A. Ncwcll (28, 29). Although thcir prir¡rary
intcrcst is in human thought proccsscs, thcy h:lvc dcvclopcd a
generel rncthodologl for problcm solvirrg $üich foclrscs on
the phases of intclligcrlcc an¿l scarch, thr$ provicliDg x nrcarls
for rttacking busiDcss probl€ms iD which thcsc two phascs are
also of primrry importance. Nlore recentiy, Rcitman (30)
hes rcsteted Simon's fo¡orul¡tion i¡r sornewLat broader tc¡nrs
which have a direct applic¡tioll to the strategic dccisioD
Ploblenr.
In summary, both thc conceptoal founclation an<1 tools of
methodolog) are now at h:rnd fo¡ an attenpt at a coDlprchcn-
sive "stratcgic decision theort of thc firm," which \\'ill meet
the reqoircnrents for a practical, nonn¡tjvc nrcthod steted
earlier in this scction. Thh book represents such an attenlpt.
22 CaúoÁte Stftteey
Structure of the New Method
As an altemative frame of reference to capital inv€stment
tlreory we could have used pottfotio selectíon theory. Wh e
CIT deals with selection of physical assets for the 6¡m, po¡t-
folio selection concerns selecting securities, eithe¡ fo¡ an indi-
üdual investor or fo¡ an inv€stment 6rm.
H, Markowitz (31) has writteü th€ definitive work on port-
folio selection. His work shows ar¡ even greater divergence
from the strat€gic problem than we found to hold for CIT.
However, a more recent approach taken by Clarkson (32 ) has
many feátures in common with the present problem. A com-
patison of Clarkon's m€thod with this book shows that our
app¡oach, when simplified for application to an investmcnt
trust, has a close similarity to Cla¡kson's.
Clarkson's fo¡mulation is signiñcant to this discussion, be-
cause it sheds light on yet another requirement which is not
ever¡ suggested by capital investment theo¡y. This is the fact
that, unlike CI"f, t\e decísion rules for sedrch dnd evóIud-
tion of ptoducts dnd. mükets arc not the sdme for alt firms. ln
application to personal investment policies Cla¡lcon shows
that a person's profession, adequacy of current €amings, tax
bmcket, and legal restrictions on estate all aftect the choice of
the prefened portfolio of secu¡ities. This preference will
naturally undergo changes as the above conditions change in
the cours€ of t}re investor's life. Similarl¡ the decision rules
for product'mark€t selection va¡y from 6rm to Erm and,
uithin a 6rm, from one time period to another. This is a
direct consequence of rcquirements 1 and 5 listed in the pre-
ceding section.
A Model tat Sttdtegic Deciiont 23
Since objectives arc no longer a simPle yardstick, tley will
€ry ftoÍi ore tyPe of firm to another dePending on the 6m's
pást profitability, its ProsPects, and its slage in the Jifc rycle.
i'or example, an infant firm trying to gain a toehold will focus
atteDtion on cur¡ent Proitability, whereas a large 6rm en-
tre¡ched i¡ the marketplace will tum attention to long'term
groi¡th prospects. Since a firm has to search for oPPortunities,
it will also tend to adapt sea¡ch ¡ules to the Pa*icular oPPor-
tu¡ihes which confront it. Thus a ñrm with la¡ge 6xed invest-
¡nents will nerrow its search to oPPoltunities to which this
irvestment can be applied, while a frmr with highly liquid
assets may ¡ange wide in scarch of new product-markets.
The fact tlut decision rules vary is the foundation for ou¡
approach to the problem. OuI conceñ must be not only with
erdlüdtion o[ projects for grven ¡ules, which is the main con-
c€m of ClT, but ako with fatmulatio¡t of the rules for €ach
individual firm. Further, the focus of inte¡est is on the fo¡mu-
lation aspect. While project evaluation is quite similar to
CIT, formulation of decision rules ¡equircs a novel aPProec}.
Fo¡mulation of ruleJ plays a determining role in tle overall
process beeruse, as Simon has shown (33), it tends to prede-
termine the 6nal choice of the individual product-markets. It
is clear, for example, that if a 6rm decides to confi¡e search to
its traditional industry, this decision will heavily predeter-
mine the future pattem of profitability even befo¡e individual
Products and markets are identified.
We shall deat with tüe strategic p¡oblems on two levels aDd
i¡ two steps. On the first level we shall consider the character-
istics of the 6¡m's total position, to deive decision ¡ules
for sea¡ch and evaluatiol of oppo¡tunities. Drucker and Levitt
 tt-
21 Corpoftte Srtutegl
(34) have rptly ch.rracterized this step as deciding rvhat kind of
busincss the firm is i¡ a¡d what kind of business it should be
in. Two decision ml€s in their totxliiy dcscribc this concept.
One, which scts the lardsticks for the firr¡'s perfornratcg
deals \dth the obiectivcs of the 6rm. The other, rvhich dcfines
thc dcsirable chtilcteristics of products and marlets, de¡ls
with the product-narkct s¿¡dúeg),. TLe hvo scts of rulcs hr\'c a
means<nds relatiorship; obicctives set thc go¡ls, and strategy
scts tlc path to the goals.
O¡r tl¡c sccond lcvcl thc rlrlcs are ¿pplicd to irrlividull op,
portunitics ühcncver thcy occur and houcvcr thcy conrc
abont. Ilcrc thc ap1>roach is sonrcrvh¡t siruil.rr to CIT. Thc
difforcnccs r¡c in (1) application of str¡tcgv to scrccn thc
oppo¡tunilics, (2) usc of a vcctor of objcctircs, ¡ncl (l) usc
of nddiiiollrl qualitativc yardsticks to rcfi¡rc Dcasurenrcnt of
profit¡bility.
Outline of the Adaptbe Search Metlrcd for
Str ata gy 11 ntulcttiott
or
As tüc title i¡rciietcs, thc mcthod uscs a search procedure
in rrriv;rg at a strxtcgy.'fhis is acconplishccl through;r..cas-
c¡dc" approacl: at thc ontset possiblc dccisio ¡ulcs erc
fomnlatcd in gross tcrms and are thcn successi,"cly refincd
through sc\cral stages as tbc solution proceeds. This gir.cs thc
appcar¿rnce of soiving thc problein seleral ti¡ncs ovcr, but
with successiveli,- morc precise rcsults. Thc first step ¡ to dc-
cidc behvccn the t\'o major altcmati\es: to di\e¡sify or not to
di,,crsify thc fin¡.'lhe second step is to choose A broad
product nlarket scope for ihc 6¡m front a l¡t of broad indus-
Dec^ioñs 2,
A l\lodel lot SttdteCíc
trial categories. The third is to ¡efine thc scoPe in tcnns of
4haracteristics or product-mlrkcts lvithin it.0
For example, a finr in the l¡asic cbcmicals irdustry nlay
analyze its pást PcrfoúI¡nce aDd ProsPects all¿l arrivc at a
¿lecision to seck diversification- As the second stcP it would
decidc that a closcl,v rclated industry is thc n:rtural dircctioü
to follorv and pick ferlilizcrs ¡s its prcferrcd ercl. This would
be follou'cd by:r dctailcd analisis of the firn in lrl¡tio¡ to thc
co rpetitive ch¡ractcistics of lcrtilizcr fir s. Thc cnd Prodüct
would l¡c sPccific dccisioD rulcs such ¿rs tlc comPctitile aDd
ioint cfiect iDtcr¡ctior)s dcsircd for thc rlew Product crltry.
Thr:s anucd Nith a conccPt of thc busirlcss it wisLcs to bc'
come, thc firnr \\,ould conlnrcl)cc sc¡rch, crcaltio¡, ¡ncl cvalLrir-
tioD of opportLrnitics.
inrpori rt clil¡lcicristic of tl)is Proccss is fccd_
^nothcr
back. Sincc ihc c¡sc¡dc is x proccss of scrrch for thc bcst
solution, i¡lforrn.ltion rlrv dcvclop llt l¡tcr sttgcs which casts
doubt on prcvious dccisiorts.
Thus thc chcDric¡l finD u)¡! ¿liscovcr th¡t it <locs not have
as good a nr¡tch Nith tlrc fc¡tilizc¡ busirrcss as appe.rrcd on
prelirüinrry rough cr¡nrirration. lt will tLcD rccxarrrinc thc
previous cboice of thc pro¿lllci-ut¡rkct scoPc.
Thc proccdure rvitlrin c¡ch stcP of thc casc¡dc is similar.
(l) A set of objcctivcs is cstablishcd. (2) T'hc difTerelce
(üc "gap") bct\\'een thc current position of thc 6rm and the
obiecüves is estirlatcd. (3) One o¡ rno¡e courses of actiou
"Tlris epPlo¿cl¡ of s¡ccssnc convdge¡c on th. \.l1rioD drofl¡l be..n_
tEsted $itl tlc moú unrl ndhod ür ñanagoncDi sciencc nr whicli an
efiort ¡ nu<lc !t the [^i st38e to c¡¡ cnte all of lhc final altcmatives and
üe¡ to co¡st¡uct an et¡luatión schcDc to con?¡rc tlem
 ttF

26 Caryorcte Strateey

(stntegy) is proposed. (4) These are tested for their "gap

reducing properties." A cou¡se is acc€pted if it substantially
closcs the gap; if it do€s not, new altematives are tried.?
To conti¡ue our simple exrmple, the chemicals firm may
choose 12 percent annual rate of retum on investment (ROl) r¡
8ó¡
as its sole objective (this is highly unlikely in real life, but
helps the example; see Chapter 3). It finds that past history
and cuEent trends show that 8 percent ROI is the best that
can be attained with maximum effort in the chemical busi-
ness. The gap is 4 pc¡cer¡t. T¡ends in the fertilizer industry .9;
É! a
E
indicate an everage 14 percent ¡etum for the industry. To
attein a 12 percent av€rage, a ce¡tain size of acquisition is
needed. A test is made to see whether an acqr:isiüon of such
size witl¡in a reasonable period of time is within the firm's
resources. If the answe¡ is yes, the fertilizer industry is se,
lected; but the result is proüsional, b€cause later stag€s of
analysis may show that the chemicel 6rrn's chances of doing
ds weII as lhe avetage in the fertilizer industry are ¡ot very
geat, or that a much la¡ge¡ i¡vestment will be needed than
was originally anticipated.s a
The example points to anothe¡ feature of the method
which introduces the word "adaptive" into th€ title. --.qÉ tÉt
Suppose that the 6(m cannot find eny indüstry through +¿ c
w¡ich it cafl attain a 12 p€rc€nt ROI. In that case the goal
tAgain a comp¡¡ison wjth no¡e süal m.nagemeut science app¡oac}¡es
slows á dificrc¡ce. In the ádapüvc ss¡ch metlod tlE 6m is ,tatisfisi¡e
€thq tlr¡¡ "optimizi¡9" its ¡ch¿eior- Hencc ro assup¡e ¡ o¡rrined th¡t
th€ dccisioo tu14 *lected rc?¡GeDt in á¡y sse "üe be$ oI alt po$ibtc

'The pr¡tine beuty ol tlis esmple shotrld nor deeire üe Édc¡, it ¡

úercly nlust¡atjve- Máry were the tin6 vhen tne aút¡or wished that str¿€gn
!¡obtms wfte t¡¡ clercüt ¿nd sinple.
21

É-
 tD-
28 Co+atute Sb¿te'y
will h¿vc to be ¡evised downrva¡d. Or e mo¡e happy event,
suppose the fcrtilizer cntry looks so promising that evcn 15
percentwoüld bc rcasonable. Up goes thc goal.
Tirus the method has rvhat Rcitman (35) calls "open con-
straiDt" propcrty; both the obiectives and thc cvaluatio of
the present position are subiect to rcvision as a result of in-
sights obtaiied iir thc proccss of solutio¡.
To suur:Iarizc bricfly, the aclapiive seatch mcthod was dc,
scribe¿ above in its application to formulatio¡ of a product,
nrarkct strrtcgy for a busincss finn. Its srlicnt chxractcristics
arc (1) a "cascadc" proccdurc of succcssivc narrotving and
rcfining tlrc dccision rulcs, (2) fecdback bchvccn strgcs in
thc c¡sc¡dc, (i) a gap-rcductiol proccss witlin cach siitgc,
and (4) adaptation of both objcctivcs ¡nd startiDg-poürt
cvaluation.o
Thc co¡ccpts of sti¡tcgy aDd of objcctivcs arc thc kcys to snc,
ccssful applic¡tion of thc mcthocl. Thcrcforc, thc ncxt fcrv
chapters rvill explore how rcal-rvorld producL,markct decisions
rclatc to thcsc co¡lccpts. 'I hcn, e clccision fforv diagranr $,ill be
constrrcted $hich applics the ad¡ptivc scarch method to tbc
problem in hand. AlthoLgh sonlcwh¡t prenaturcly, rve rvould
like to give the reader a sirnplificd schematic of this diagram
as a lreans for relati¡rg r,arious chaptcrs to thc 6¡al product.
This schcur¡tic is shown in Figure 2 l, whcrc for simpiicity all
feedback rclations have been olnittcd.
slor Do¡e detáiled d¡cu$ion of úethodolosy scc (16) to (40).
6l
e)
Obiectives
with rcgárd to an individü:t enierprise, the
...
ouesnono{ pr06l ;. of SÍ!11 i, t|'orJ,rLe J\ rn
;onomic indic¡tor of its (fficic[(!.
-,,",,,,,",,,,,
",-,.;
We, as busnrcss pcoplc, can ful6ll our oblig¡-
tio¡ to socicty iD tlc cvcr¿¡)- proccss of rütrtrnrg
our busincsscs. . . . BusnrcssncD dronld bc proud
of thc cont¡ibution thcy ¡rc nr¡hrg.. . Doi ,pol'
ogetic becausc they ¡re nalitrg ¡]oncy.
The Problem
In Chapter I we dcscribcd a business firm as r lrutposita
o¡ganization whose behavior is dircctcd toward identifiable
end pu¡poses or objcctivcs. Wlen madc explicit within the
6rm, objectives lxcomc multime tools iÍ appmisal of pcr-
fomrance, control, coordin¡tion, ¡s rvell as all phases of the
decision proccss. Their potentiel pcrl'asiveness is such that
obiectives heve becn sed as a basis fo¡ an integrated view on
tie entire management process $hich has bccomc lnown as
"rranagemcot by obiectives" (4i ). Our interest in this book
102 Carparute Srtrdteef
4. LvaLatiat¡ a[ lnd;r'durl Opp]Iuuiti.\. On¡c *,llclr h¡r
uncovercd a promising acquisitio¡r or :l new product, ¿
r
final evaluation must be nade. A pa¡t of tbis eraluation is
a ¡lcesurenent of sy ergy as a contdbuting factor to po
6
tenti¡l joi¡t profitrbilit,v. 'I'his requires conpietion of
T¡blc 5.2 prcscntcd earlier i¡r this chaptcr. Profiles of tLc
finn rnJ Lri ihL rcqru.iiiorr ¡re corslru\lcd :rrrd sup.rir r. Concept of Strategy
poscd. Thcn:
d. Thc rcsulting p¡ttcrn is compared \ritl the competiii|c
St!.icsv is \\,]¡err ]or ¡¡c out of ennnuDition,
profilc of a successful competibr in the ñrnr's o\'n busi but kccp riq]rt on fi¡ins so tl,at thc c¡cmy won't
ncss clevclopcd i¡r itcur (l ) above to dctcrnrinc [¡ct]rcr tno\. u¡kDown
^utl¡or
thc p¡iicnl of rcinforccrrcnts will rlrakc.lnv signi6c:r L
cnr)lril'ulioI| lo Ilrc l,:,rcrl firrr) \ cnr¡l\iiti\c fo ilr,'
Thc rcsrrlis ciur bc usc¿l io dctcrminc lhc entrics ir) thc The Prcblem
lrnt 'cor,-ihllrioll to lirRrrf in l.rl,lL B ' During thc past tcll ycars tllc idc¡ of stratcgy has rcccivcd
ó. 'flc strpcrimposctl profilcs arc simil¡rly comparcd \iith
incrcasing rccognition in Dr¡D¡gcnrcnt litcllturc Nu¡lcrous
a pronlc of a succcssful firm i¡ thc ncw cntn\ indLrstn,
papcrs h¿vc ¡ppc¡rcd dcnling with product lirrc str¿tcgy, nlar-
thus givi¡g matcrhl for thc li¡c ir thc trblc l¡bclccl
lrctiDg str:ltcgl, di\,crsification stratcgl, an¿l busi¡css strategy
"contribntio¡ to nclv entrl."
(74). 'Llis iutercst grcrv ortt of a rcalization th¡t I firm needs
c. l:iu.rll¡ .'r r, rrn po.c(l l)rofil.' rrc cnrrp..rc(l \ illr lrfr:c.rl
a Ñcll-dcfiDcd scopc and growth dircction, th¿t oljcctivcs
profiles dcvclopcd undcr (Z) abvc to scc whcthcr tle
alone do not ncct th¡ nccd, ancl th¡t ¡ddition¡l decisioü
combir¡rtion of tle tlr) firms'skills rvill proridc an cn,
rules are rcquircd if tbc firlll is to have ordc l' and Profiteble
try inlo an irxlLrstry rvhich neithcr coukl cntcr abole.
growth. Such dccision nrlcs and guiclcliDes Lavc becn broadly
1l,i' 1,ruridc, d-LrÍor tl,e liDc in l.rblc 5.1 l¿5clLd defincd as stralegl or, somctiDres, as thc ¿oncePt af the frrrn's
óusirrcss (75 ).
This procedurc of using paircd profiles to fill in Tablc 5.2 is
It I'illbc ¡ccalled f¡orn discussion iD ChaPter 2 that caPital
labo¡ious ¡nd should bc uscd pri¡Darily at the "short st¡okcs"
investnent thcory makcs no use of tle coDcePt of stretegy.
of an acquisition. For a preliminaw anallsis, profilcs cán usu-
The need for it arises from charactcristics rvhich are peculiar
rllybe di'¡erled rvitlr rrrd f:ble 5.2 hllcd in on en i\ebrll'
to thc strategic problem: thc fact thrt a firm nccds dircctioD
judgment basis.
and focus in its search for and creation of new oPPortunities
I03
r04 Corqorate Strdteg
and the fact tllat it is to the 6rm's a¿vantage to seek ent¡ies
with strorg sJnergistic Potefltial.
The f$t two sectrons of this chapter are devoted to devel-
oping a concept of strategy which (l) proüdes a broad con-
cept of tie 6rm's business, (2) sets forth specific guidelines
by which the 6rm can conduct its search, and (3) supple-
ments the frm's objectives with decision ¡ule¡ which ¡a¡¡ow
the 6rm's selection process to the most attractive oPPort¡¡ni'
ties.
Next, üe question is raised whether, and urde¡ what c!¡-
ditions, ¿ 6¡m needs to have a strategy. Ir¡ the third section an
answer is ptovided which relates the t'?e of P¡efeÍed st¡ategy
to the type of ñfm.
Definitions of stÉtegy found i¡ busine¡s lite¡ature are
difierent f¡om ou¡s and a¡e someümes used interchangeably
with the term "poliry." The last section compares these de[-
nitions and lelates them to difterent degreei of unce¡tainty
unde¡ which business decisions a¡e mede.
Concept of the Fir¡n's Business and the
Common Thread
Obiectives set the Pe¡formance levels which a 6rm seets to
achieve, but they do not describe the business of the 6¡m,
unless statements such as "the 6¡m is in 20 percent ROI
business" o¡ in "fleúble position business" are const¡ucted to
provide the description. Levitt (76) has suggested that a more
defrnitive description of the 6¡m's role in üe enviro¡ment is
requisite for growth and success. Such description should e¡-
compass a b¡oad scope of natural extensions of the frm's
product-mark€t position, derived f¡om some core chaIacte!'
Concept oI Str¿teg lot
of the present business. Thus ¡ail¡oads would view them-
ielves in the "tra¡sPortatíon busiuess" a¡d petroleum com-
paries io the "energy business."
' While plausible, such busüless corcepts leave Some unan-
swe¡ed questions. Does it follow from üis concept that lail-
ro¿¿ls should be in the long-haul trucking industry? The an-
iwer would seer¡ to be yes. But how about taxicab or ¡ental
ca¡ business? These are also t¡ansPo¡tatio¡ industJies, but at
.frst glance would seem to have little in common with rail-
ioads. It is ha¡d to see where the skills, facilities, and experi-
ar¡ce of Érlroad companies have enything to conhibute to the
¡atter areas. Consider the energy business for Petroleum com-
p¿nies. Does it follow that they should dive$ify into fabrica'
tion of u¡a¡ium fuel fo! atomic Power Plarits, build t}¡€ Powel
plarits, or ¡etail elect¡icity? The respective management, tech-
nical, production, and marketing skills ate all difierent.
'Wl¡e¡e is the common core capability?
TJre weakness with concepts such ás "tra¡sPo¡tation busi- /'
oess" or "energy business" is that they ere too broad and do
¡ot provide what the investmerit community calls a "com'
¡lon th¡ead"-e relatior¡ship between p¡es€nt and future
pEáo"tñáitets which would enable outsiders to Perceive
where the fi¡m is heading, and the inside marugement to give
it guida¡ce.
A separate question i$ how strong the common thread
Dust be. Ro,'al Little has built the successful Textron Corp.
composed of consumer electronics, textiles, helicoPte$, worl
shoeJ, and satellite motots, etc.-ell witlout a strongly appar-
€nt common thread. Pete¡ Grace took his comPany from
barrarlas and shipping into chemicals, also with aPParert suc-
106 Corporute Strdteg/
The Du Pont Company, howwer, has built itr great
cess.
success by closely following a very cle¿r\ defned common
thread.
In seeking answe¡ these questions it is useful to review
to
how firms usually identify the nature of thei¡ business. Some
úrms are identified by the chamcteristics of thei! p¡oduct line.
Thus there ale "transistor companies," "machine tool com-
panies," and "automobile companies." Others are described
by the technology which u¡de¡lies the product line, such as
"steel companies," "aluminum companies," and "glass com-
panies." Each may sell a wide range of difierent products to
difterent users, but a common üread is proüded by a manu-
facturing and/or engineering techDologj¡.
Firms are also desc¡ibed in terms of tl¡eir markets. Here it is
useful to make a disti¡ctiori between custome$ and missions.
A mi¡sion is an existin gprcdrct need; e. arstom¿t is the actual
blqet on the productr the economic uriit (such ás an indi-
vidual, a hmil¡ a business 6rm) which posseses both the
need and the money with vhich to satisfy it.
The usefulness of this disü¡ction lies in the fact tlat some-
times the customer is erroneously identiEed as the com¡non
th¡ead of a fi¡m's business. In rcálity a given type of custome¡
will frequendy have a Énge of unrelated prodr¡ct missions or
needs. He would not necessa¡ily satisfy them tlrough t}le
same purchasing channels, no¡ üse the same approach to buy-
ing. Thus, üe individual consume¡ 6lls his food needs at tlre
supe¡market and his entertainment needs at a teleüsion
dealer's. Since the product technology, tle distribuüon chan-
nels, and the customer motivatioD are difiereng no strong
Conce\t ol Sü^tegl 107
attemPt to
co¡nmon üread is available to a fi¡m which would
iell both food and televrsion sets. Similarly, the DePartment
of Defense is a customer fol a very wide mnge of missions'
A c¡mpary which suPplies weapon systems for combat mis-
gions of tl¡e Army would have a better common thread in
'suppl],rng control systems to industry than in selling rePlace-
Ee.¡t parts for A'fmY truclis,
In selecting a useful range of missioris of a Particular cus-.'/
ptoduct
tomer, e 6rm [eeds to 6n¿ a commofl thread either in
chancteristics, technolosv. o¡ similarity of needs. Thus agri-
cultural rnachinery 6rms supply ¿ Í¡nge of üeeds of the
fa¡mer. All of these a¡e related pa s of his oveÉll mission of
ülling and harvesting the soil. Similarl¡ a home appliance
ma¡ufacturer ofte¡s efiort-saving Products for the home which
may mnge from washing machines to electronic irons.
In this persPective it is easy to see why the telm "transPor-
tatio¡ busi¡ess" fails to supply the common thread Fi¡st, tl¡e
range of possible missio¡s is very broad: inkaurban, iflterur-
ba¡, intÉcontiner¡tel, and intercontlnental transPortation;
thlough the media of land, air, wate¡, uflderwatet; fo¡ moviDg
passe¡ge¡s, and/of cargo. Second, the range of customen is
vide: the individual, famil¡ business frrm, o¡ govemment
o$ce. Thi¡d, the "product" varies: car, bus, t¡ain, sliP, ai¡-
plane, helicopter, taxi, t¡uck The number of practical combi'
Bations of the variables is large, a¡d so is the nümb€r of com-
mon threeds.
lvhile such a concePt of business ¡ too broad to be u$eful,
the tnrlitional irlentiication of a firm ¡vith a Pe4gde!¡ldue '/
@ has become too naÍow. Today a great many frrms 6nd
108 CotPordte Stflteg,
Conce2t of Stt¿teEY 109
thenrseives in a number of rlifie¡ent indust¡ics. Furthc¡more.
statistics and ccononic forccasts are gcnerally available. Ilorv-
the boundaries of indr$tries arc continuall\,- changing, and
eve., mariv indust¡ies offer a range of products, missiorls, tech-
new ones arc bcing born. Ior examplc, radio, telerisioD,
nologies, and customers $üich is so broad as to makc the
tra sistor, honle appiiance, A d Atomic energy are all indus-
trics which did not exist 6fty years ago. Thc need is fo¡ a
co ro threrd ven tcnuous. For cxample, the electronics
i¡dústry ra¡ges from high growth in tcchnologically sophisti
conccpt of business r'"hich on the onc hand rvill gi\,c lp:glfic
catcd arcas, such as oPtical clcctronics, to low_growth con_
g!(]Irce for thc fi¡I and on thc other hand rvill prtxide rooDr
fg gtg$lr. Wc sh¿ll descibe sLrch x corccpt in thc nc\t su rer orie¡ted product n rkets, such es radio aDd telcv¡ion
scctioll.
To ,orrr.l .r cor'lmon lh-cr(1. dr"ri¡ l.orr nf ll'( ¡roJucl'
markct scope frcqúcntly nceds to be rnad¡ in tcr¡rs snbindus'
Componerús of Strdtegy tncs uhich contriD ProduclDurkcts a¡d tccluologics with
To thc cxtcnt thc rcspcctivc obtcctivcs ¡nd goals ¿rc conso, sinrilar charactcristics.
naDt \yitl ¿ctu¡l pcrfomrancc, thcy clo proviclc a indircct
Anothcr Lrscfill spccificatior o[ com¡]or thrc¡cl is through
dcscril>tiol of ¡ colnllloll ihrcad.'flrus, a fir¡r rvhich h¡s thc Drcirns of thc grolt¿ñ tcclo/, \\'hich i dic.rtcs thc djrcciion
drown a consistcnt ratc ot high grorvth is risu¡lly rccognizcd
in \\üich thc finrr is nro\irrg \litlt rcsPcct to its ctlücnt
pro¿luct-rn¡rkct poshlrc. This caü bc illusir¡lcd b\' rrrcans of ¡
by tllc invcshncnt conrnlnnity as a "g¡owth finD," and a wcll-
clivcrsificcl onc as a "broaclly b¡scd" fi¡1. Both of thcsc
nr¡trix sho\\n in T¡blc 6.1. Múket peictr¡ttíon clcl],otcs i.
dcsc ptions c¡n bc collstructivcly rNcd b)- ¿nagemcnt ¡s growth dircction through thc inc¡casc of nlrkct shlrc for
guid¡üco in sclccting nc!v prodLrct- ¡tkct arcts. r^¡r.a 6.1 Crort¡l¡ V¿clat Cat¡4l,tc'lts
Ilovcvcr, this guidancc is vcry wcak ¿Dd ¡ssurcs 1lo co¡n.
¡ro1l tlrc¿d rvithin the fimr. Thus a "gro$th" firnr nrey bc
sirlultancously in phamaccutics, benting, end i[dustri¡l con
trols a¡c:rs u,hich h¡vc Do rclttionsh\r b onc ¡¡rothcr, c\ccpt
x'"
th:rt thcy rrrv all havc attr:lctile growlh prospccis.
A sonrcwh¡t lore positivc spccification of the comnrt¡n
thread is :rr¡ivcd at throngh thc nsc of t7:r' p/o¿1tct,núr1:eL
scope. This speciEes thc particular industries to which tle finn
confincs its proiluct-rnarkct position and it has thc advantagc
of focusing sc.rrcll on well-deEned a¡eas fo¡ wfiich comnron
 ll0 CotPorcte Strategy
the present product-markets. lr\ narket dewlopñent r'ew
missions are sought for the fifm's p¡oducts. Produci develop-
ment creales new products to replace current ones. Finally,
dbersification is disúnctive in the fact that both products and
missions are new to the firm. The common thread is clearly
indicated, in the 6rst t¡rce altematives, to be either the mar-
ketiúg skills or product technologj/ or both. In dive$ifcation
the common thread is less ¿ppar€nt and is certeinly weaker.
Specificatio¡ of the common thread through the growth
vector is complementary to t}le ptuduct-market scope, since it
gives the directions ryittir an industry as well as ¿c¡oss indus'
try boundaries which the firm proposes to punue. As we shall
see in the next chapter, it is a very useful tool i¡ arriving at
the basic diversification decisions.
,/ A third way to see a common thread is to isolate chamcter,
istics of unique opportunities within the 6eld delned by the
product-matket scope and the growth vector. This is the com-
pefitbe ddwntdge.lt seets to identify pa*icular properties of
individual product-markets which will give the 6rm a strong
competitive position. Tl¡us, a firm might seek acquisitions
which are large enough to give it a commanding position in
the new industry. Or it might iflsist on entries which enjoy
strong peteflt protection. O¡ it might consider only "break-
through" products which obsolete previously available prod-
ucts (just as the elect¡ic typewriter made the manual one
obsolet€ end was in tur[ made obsolete by the IBM rotary
head machine).
--> The triplet of specifications-the product-market scopg the
growth vector, and the competitive advantage--describes tlle
firm's product-market palh in ihe erterndl ent)ionment. '!he
Corce,t of St¿teel 1Il
lrst desc¡ibes üe scope of search, the s€cond the di¡ections
¡,ithio the scope, and tie üi¡d the characteristics of indi-
üdüal entries.
The¡e remains one other altemative for desc¡ibing the com-
mon tlr¡ead, and that is synerg. As described in a preceding
chapter, sl,rleryy is a measurc of the 6¡m's ability to make
good on a new product-market entry. The common thtead
be ogeressbe, requiri¡g that new entries make use of an
'¡¡¡ay
outstanding competeDce posse$ed by the 6rm (say, a na-
üo¡wide chain of letail outlets or leadership in comPutet
technology), or it may be defensive, req':iring that new eotries
supply some key competence which the firm lack. It ma¡ of
course, be both aggressive and defensive, Synergy is especially
useful as the common th¡ead in new growth areas whete in-
dustry boundaries are illdefined and changing, It is also a key
wliable in the choice of a dive¡sifrcation strategy.
The classification of common thread into Product'market
scope, g¡owth vector, compeütive adlantage, and synergy is
given added meaniDg when viewed in the light of the Erm's
search for profitability. The 6at triplet of specifications de-
scribes the 6rm's sea¡ch {.ot ínherently ptoñlable oPPortunities
in the extemal environment. The frrst sets the scoPe fo¡ the
$ee¡ch, the second the directions i{ithin the scoPe, and the
third tle cheracteristics of outstanding opportunities. The
l¡m may not ¡ealize the full proftabiüty potential or may
even lose mo[ey unless it has the capa]ilities requited for
success in the rew ventures. This is provided by üe fourth
criterion, synelgy.
The folrr characteristics áre thus complementa¡y, rathel
than mutually exclusive. We will call them, therefore, üe
 ll2 Cotqorde Strategt
components oÍ sttutegy.! ln conjunction with its objectives
the 6rm may choose one, two, or all of the strategy compo-
nents, For examplq a chemical firm may specify the fol-
lowing:
l. or]EcrwEs: ROI: Th¡eshold 10/e, goal15/6
s^LEs cRowru R^TE: Threshold 5%, goal
t0%
2. srn¡r¡cv
d. P¡oduct-ma¡ket scope: Basic chemicals and pharmacew
ticals
b. Crowth vector: Product developmeÍt and co¡ce¡tric
diverification
c. Competitive admntage: Paterit protectio¡, superior ¡e-
search comPetence
d. Synergy: Use of the firm's ¡e¡e¡rch capabilities and
duction technology
Thus strateg/ and objectives together describe the concept of
tie ñ¡m's business. They specify the amount of growth, the
a¡ea of growth, the directions for g¡o\a'th, the leadiDg
,t' strengths, and tl¡e pro6tability target. Fu¡thermore, they are
row stated operatiorially: in a form usable for guiding man-
agement decisions end acüons.8
ls Straegy Necessary?
To de6ne strategy is r¡ot to prove that it is necessary for
each fi¡m. The quesüon of the usefulness of sh'¿teg)¡ as a
1I¡ Chapte¡ 9 we shal add another conpondt: the "nák o. buy."
'This tem will be de6ned io the ¡ert c¡ápter.
"^ difierñt á¡d i¡teresting clasifi€tion of búsinN sb¡te8ics h$
devis.d by L. C. sorel (77). AnoDs his s1¡atesbs arc the following: "strit<e
while the nor ¡ hot," "tiúe is a gr€t heáler," "boÉ fron withir," "in
union tlere is stÉnglh," "dEv . ¡ed heEi¡g ac¡N tle rÉf," "pa$ the
buck," end "co¡swe yoúr gunpo*de¡."
Concept of St¿teg 113
máragement tool mus! therefore, be examined. We will do
is by Erst examining the altemative to strategy. This alter-
¡ative is to have no ¡:les beyond the simple decisio¡ to look
Jo! profitable prospects.4 Under these conditio$s the 6rm
do€s úot select formal objectives, performs no appraisals,
fo¡mulates no search and evaluation ¡ules. Instead, it would
ioform the busi¡ess world, as did Socony Mobil ComPany, of
ib inte¡est in "good" profitable oPPortuflities; it would evalu-
'ate €ach new opportur¡ity or the merits of its individual
I P¡oñtability.
in favor of this approach.
Seve¡al ¡easons can be given
l. The 6rm would save the hme, money, and executive
talent which are required for e thorough st¡ategic aDalysis. lt
will become evident in the follov/ing chaPters that such sav-
pre iDgs can be very considerable.
2. The 6eld of potentiál opportunities will be in no way -
rcstricted. Objectives and str¿tegy limit the 6ekl of its search.
y'
Since stÉtegy is based on uncertairl end incomPlete krowl-
€dge, tle¡e is a chance that some atttactive oPPo*unities will
be missed. An oppo¡tunistic fi¡m lakes flo such chances.
3. The 6rm reaps the full adlentage of the "delay princi'
ple." By delalng commitment until a¡ oPPortunity is in
haud, it is able to act on the basis of the best Possible
information.
Counterposed to these a¡e some weighty disadvantages.
l. In the absence of st¡¿tegy, üere ate no n:les to gtttde the'/
sea¡ch fo¡ new opportunities, both inside and outside the
b€eD f¡m. I[temelly, üe research and develoPment dePartment
'EsDDIe: Conme¡l on d¡veñ6úri@ ,nribukd to á viePrcsidcnl
of
Socúr üob'lt Cenle¡ DiüsioD, lre ll 5¡d monE ¡o invest rn aoy ProPosal
tlqt shows prcmir of a substá¡ti¡l retuñ (78).
114 Coúorute Sfiategy
has no guidelines for its contribuüon to diversification. The
extemal acquisiüon depa¡tment similarly lacks focus. T'hus
the 6fm as a whole eithe¡ passively waits for oppo¡tunities, o¡
pursues a "buckshot" search technique.
2. Project decisions will be of poorer quality than in 6rms
with strategy. Without a focus for its efto¡ts, the stafi will lack
the depth of knowledge in any particular a¡ea needed fo¡
comp€te¡t analysis. Without strategy crite¡ia, it will lack
tools for recognizing outstanding opportunities. As a result
managers acting on such advice will be fo¡ced into extreme
forms of behaüo¡. CoDservativ€s will refuse to take what
under bette! infomation might be reásonable risks; en-
treprcneurs will plunge without appreciaüon of potentül
costs and dange$.
3. The firm will have no formal p¡oüsion for partial igno-
rance. No yardsticks will be available to judge whether a par-
ticula! oppottunity is a ra¡e one, or whether much better ones
are likely to develop in the future. Thus there will be a danger
of either p¡emature overcommitment of resources or of failu¡e
fully to utilüe the resou¡ces available within a budget period.
4, Without the bene6t of a periodic appraisal, the 6rm
would have no assu¡ance that its overall ¡esou¡ce allocation
pattem is effcient and thet some product lines are ¡ot
obsolete.
5. The 6¡m will lack an i¡temal ability to anticipate
change. Witlout a strategy, managers will either do nothing
or risk the danger of acting at cross-purposes. For example, the
director of marleting could assume that the $owth will be
attained through adding new products to üe existing product
Iine. He wil proceed to expand aÍd strengthen the present
concepr o¡ Süate*y 115
marketiüg organization. At the same üme, the director of
€lgin€ering codd assume that progress is to be made by
gliminating the obsolete product line and diversifying into
b¡and-new marl(ets. He would, therefore, take aPProPriate
action to cu¡tail support of existiDg Products and i¡itiate
developments for radically new missions. The Potential result
r¡ould be a marketing orga zation with ro products to sell
aod a product line without a ma¡keting caPability.
To summarize, the advar¡tages of not missiDg aIIy bets and
of not committirig the firm's ¡esou¡ces until tbe last moment
a¡e pitted egainst the disadvantages of i¡€ficient search, en-
hanced risk of maling bad decisions, and lack of contrcl ovet
ttre over¿ll ¡esource allocation p¿ttem.
It would seem that for most firms the advantages of
strategy will outweigh those of total flexibility, However,
strategy ¡equiremeúts will difter from one tyPe of 6rm to
ánother.
l. A tne of 6rm which needs t]¡e most comprehensive +=
sbategy is a fully integÉted opelating 6rm. Since its Product-
ma¡ket decisions have long lead times, it needs guidance for
R&D, and it must be able to anticipate change. Much of its
investment ¡ ireversible, since it goe"s into R&D, which can-
¡ot be recovered, and physical assets, which ale diÍEcult to
sell. It müst, therefor€, minimize the chanceJ of maliflg bad
decisions.
2. A holding company has less stringeút strategy rcquire-
ments. It does oot seel s]'n€¡gy among it subsidieries' úor
does it use intemal R&D as a primary source for dive$ifica-
üon. Each subsidiary operates indePerdendy, and tf€ com-
mon thread among them is primarily inancial. The holding
 Concept of St¡ateg ll7
t16 CotPorate Strategl
company does need obi€ctives with thresholdgoals type of 6rús iDto one of the slots- There are difierent degrees of inte-
' gration in operabng comPanies' some companies act as hold-
provisions for pa¡tial ignorance. Its strategj¡ wodd have no
synergy component or growth vector component. It would irg 6rms in some respects and oPemting in others, and some
include a compoúeot of competitive advantage, since it natu- iÍvestment 6rms do have industry exP€¡ts and do specialize in
rally prefers good, mther than average, acquisitions. Such a certain industries. Therefore, each individual firm v¡ill have to
firm may or may not have a well-defned product-market detemine its stÉtegy requirement using the classification as a
scope to help focus search and develop locál expert knowledge
guide. The following summary table may be useful fo¡ this
of some industries. If present, the scope will leduce the . PufPose.
chaDce of making bad acquisiüons. However, some holding
ñrms prefer to take the c}ance in favor of fully flexible choice.
Although potentially costly, divestment f¡om u¡desirable sub- r^ALz6.2 Sffdteg Requirements fot Difrarcnt Fitms
sidiaries is feasible and widely practiced.
3. At t1¡e other extrerne ftoÍ¡ a fully integrated firm is a
company which primarily buys and sells. This may be an in-
vestmerit t¡ust, a pension fund, or a real estate syndicate. Its
position differs from the holding company in that the "port-
folio" of holdings is widely diversified and is highly negotiable,
and the t¡ansfer cosh are relaüvely low (sales tax, commission
fees, etc. ). Bec¿use portfolios are widely divenified, such Erms
seldom have the depü of knowledge of indiüdual industries
to enable them to seek a specific competiüve edventage. Their
strategy-fomulation ¡equirements are usually con6ned to ob-
jectives which are established on the basis of generally availa-
ble industry data. Thus, for example, investment funds choose It can easily be seen f¡om the table that the oPeratiflg
betwee[ the role of a "grorü fund" a¡d t]at of e "cunent f,rm require* tle most comPlex stHtegy.6 The remainder of
earningsfund."
rl¡vgtsent tu¡tls ehich tráde i¡ üsted secu¡iti€s háve tle sdditioDal
The three t¡res of company above were described in what silE¡tase of l¡Ni¡8the ftrll 6eld of choi@. TheÉ is ¡o P¡¡tial ig'o6re
might be called "pwe form." Ir actuality there are various This and ld tm¡sfer costs pemit ¿n a¡P¡oach to the stÉtegic Plobld
wüich ¡ btrch siEpler ü¿n the p¡ese¡t flethod (79)
shadings of characteristics which make it difrcult to place
ll8 Co¡poftte Sttuttegl
ttre development will continue to deal with the more cromple¡
cese.
Strategy, Polícy, Programs, añ Operoting
Procedures
The concept of strategy is relative\ new to management
literaturc. Its histo¡ical origin lies in the military ¡¡t, where it
is a b¡oad, ¡ather vaguely deñned "gand" concept of a mili.
tary campaign tot opplicdtion of large-scale forces against an
enemy. Strategy is co¡trasted to tdcúics, which is a specific
schefie for etuPloymenÉ of allocated ¡esources.
The b¡idge to business usage was provided in 1948 by Von
Neumann and Morgenstem (80) in their now-fumous theory
of games. The theory provides a unifying viewpoint for all
types of conflict situations, regardless of whether their origin
is in war, politics, or business. The concept of strategy is given
two meanings. A pur¿ strategy is a move o¡ a speciGc series of
moves by a ñrm, such as a product development prog¡am in
which successive products and ma¡kets a¡e clea¡ly deline¿ted.
A gtdnd. ot ¡nixed, stt tegy is a statistical decision rule fo¡ decid-
ing which patticular pu¡e strategy t¡e 6rm should select in a
particular situation.
Although game tieory ias not resulted in many practical
applications, it has revolutionized ways of thinking about so-
cial problems in general and busioess in particula¡. One o[ the
consequences was the increasing use of the concept of strategr¡
in business literatule. As o¡e would expect, some business
write4 boÍowed from geme theory to deñn€ strategy as a set
of specific product-market entries (81), wtrile others have de-
6ned it in the milita¡y sense as the broad overall concept of
Concept ol Sréte*y r19
úe 6¡m's In the latter sense strategy is often
business (82).
6
with, or instead ot, the letm policy,
used interchaugeably
which has long been a standard part of familiar business
vocabularY.
I¡the business vocabulary, policy is also widely used in a
very difierent sense in manuals of organization and procedures
to denote a specifrc respoDse to specific repetitive situatior$,
e.g, "overtiúe ¡eimbursement policy," "foul weaüer policy,"
'tdücatio¡al refund policy," "inventory writeoÍI policy." A
conti¡¡gent event is recognized, such as a periodic need to
work overtime, or a snowsto¡m, What needs to be done and
the outcomes of such contingencies are ry¿r¡ ftnour¡; the con_
j
ünge¡cies a¡e repetitive, but the time of specific occutrences
caD¡ot b€ specified in adva¡ce, I¡ view of this, it is ¡ot worth-
while to require a new decision o¡ w}¡at should be done each
time overtime is needed or each time it snows. A better and
morc economical procedure is to prescribe, in advance, the
response to be ñade whenever a sPecified conting€ncy occu¡s.
This is done through a written statement of üe appropriate
policy and of accompanying procedures for its imPlemeDta-
üon. Since the management decisio[ is tlus made in advance
of the event, a rule fo¡ behavio¡ can be imposed on lower
levels of supervision. Thus economies of maügement are
¡e¿lized, ¿nd consistency of action is assured.
When compared witl our definition of strateg'y this mean-
-
Lrg of policy is seen to be distinct and difierent. Policy is a "'
conün¿ent decision, where strategy is a rlr¡e fot making d.eci'
sí,cr*. Thus while implementation of policy can be delegated+
downward, implementation of strategy cannol si[ce last-
'As fd eEnple iq "Stratesy of Product Policy" (83)
120 Cotqorate St¡¿tegl
Conc¿Pt ol Sttuteg 121

minüte ex€cutive judgment will be required. Iri technical where the rvo¡d mcans "rules for decision under partial igno-
terms, usc¿l by nathenratical decision theo¡ists, speciEcation rence." Tlris coiocidcncc should not obscu¡e thc fect that ¡li
of strategy is fo¡ced unde¡ conditions of pdttidl ignordnce, four basic bpcs of deciion dcscribed above-stratcg)', Policy,
ivhen altematives cannot be a¡rangcd and examined in ad- progn¡r, and standi¡g oPerating procedrre-occur in all
vance, wlereas undcr conditions of rrsk (alterirativcs are all thrce classes of problcms; strategic, ldnri¡istrative, aDd oPer-
kno\yn and so are their probabilities) or uncettainty (alternn- ating. llorvever, sincc conditio s of Parti:ll ignorance arc
tives are knorvn but not thc probabilitics), the consequcnces dominant in the strategic, but rot the other two ProblcrDs,
of ¿lificrcnt altcrnatives cdn be a¡alyzed i¡r adv¡ncc and deci- the úse of simihr teruinology is not cntirely inaPProPriatc
sion made contingent on thcir occúrrcnce. The lo$e¡ lcvcl It should further bc made clclrr that all of thc basic typcs of
executive urerely nccds to rccognize the event a¡d thc¡ act iü decisions may apply on organizatio¡al levcls bclow the ñrnl as
accordancc with his instructiolls. a wholc. Thus, for cxamplc, fu¡ction:ll organizations, such as
As nrcntionc¿l prcviousJy, condition of ris( may me¡n ¡ssign- research, devclop¡)cnt, financc, and lnarkcti¡g, havc n strong
mcut of probability cithcr to thc occurl¿?¡ca of arr cvc¡t or to intcrf¡cc with thc outsidc cnvi¡onmcnt and will frcquently bc
its possiblc o1lúcolncs. Whcn tlc occur¡cncc is ccrtain, but thc faccd with conditio¡s of partial ignorcncc. UDdcr thcsc con¿li-
ontcornc is cithcr ccrtain or unccrlain, a diftcrcDt ki¡rd of dcci- tious thcy rvill rcquirc approPriutc str¡tcgics, such as ll&lf
sioD, callccl a progr¿rl, is possiblc; this is a tirrcltr¡scd action stmtcgy, fi Dancc stratcgy, markcting str¡tcgy.
scqucncc uscd to guide and coordinatc opcrations. \Mrcn thc
occúÍcncc of r¡ Altcmtivc ¡ not o \'ccrt¡in but also rq)cti"
tive, the decision takcs thc form oÍ stdn¿ing operatíng
p¡ocedure, ^
Thus, tlrc scvcral typcs of decisions conrnronly macle within
a fir¡l can be rank€d in the ordcr of incre:rsing levcl of igno,
rance: standing operating proccdures ancl progrrurs under
colditions of certainty o¡ pA¡tial isk, policics under condi-
tions of risk and únccrtainty, and stratcgics under conditio¡s
of partial ignora¡lcc.
There is en unfortunatc coincidence in our definitions. trVe
speak of "stÉtegic" dcchions,r rvlere "strategic" means "re,
lating to ñrrn's match to its environnent," and of "strategy,"
t P€¡háps a ¡cttc¡ tem wo¡ld \^re bcci entt.prcneuñ¿\.