Stress-Test Your Strategy

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Please read the following Harvard Business Review Article: (attached below)

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Stress-Test Your Strategy The 7 Questions to Ask

by Robert Simons

November 2010

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AILLUSTRATION: JASON FORD
Robert Simons is the Charles
M. Williams Professor of Busi-
ness Administration at Harvard
Business School. This article is
adapted from his book Seven
Strategy Questions: A Simple
Approach for Better Execution
(Harvard Business Review Press,
2010).

AN ECONOMIC DOWNTURN can quickly expose the shortcomings
of your business strategy. But can you identify its weak points in
good times as well? And can you focus on those weak points that
really matter?

A stress test—an assessment of how a system functions under
severe or unexpected pressure—can help you home in on the most
important issues to address, whatever the economic climate. By
asking tough questions about your business, you can identify
confusion, ine� ciency, and weaknesses in your strategy and its
implementation.

As Peter Drucker once warned, “The most serious mistakes are
not being made as a result of wrong answers. The truly dangerous
thing is asking the wrong questions.” For the past 25 years I have
researched the drivers of successful strategy execution in a variety
of companies and industries. Through this work I have identi� ed
seven questions that all executives should ask—and be able to an-
swer. Master this list, and you will keep the fundamentals of your
strategy execution on track.

by Robert Simons

Stress-Test
Your Strategy
The 7 Questions to Ask

November 2010 Harvard Business Review 93

HBR.ORG

1
The questions may seem obvious, but the choices

they represent can be tough, and their full implica-
tions are not always immediately clear. The � rst two
questions compel you to set strict priorities. The next
two assess your ability to focus on those priorities by
designating critical performance variables and con-
straints. Questions � ve and six investigate whether
you are using techniques that will enhance creative
tension and commitment. The � nal question deals
with your ability to adapt your strategy over time.

Let’s take a look at each question, so that you can
see how you—and your strategy—measure up.

Who Is Your Primary Customer?
Choosing a primary customer is a make-or-break de-
cision. Why? Because it should determine how you
allocate resources. The idea is simple: Allocate all
possible resources to meet and exceed your primary
customer’s needs.

Consider McDonald’s, whose 32,000 restaurants
feed more than 58 million customers each day. The
company’s growth over its 50-year history has been
described as the greatest retail expansion in the his-
tory of the world.

What was the fast-food chain’s key to success?
A clear choice of a primary customer and an under-
standing of when that choice needed to change. In
the 1980s and 1990s, McDonald’s considered its pri-
mary customers to be not the people who ate in its
restaurants but multisite real estate developers and
franchise owners. By focusing most of its resources
on those customers through centralized real estate
development, franchising, and procurement func-
tions, it opened as many as 1,700 new stores a year.

But by 2003 same-store sales were declining.
Worldwide markets were saturated, and people were

2

tiring of the chain’s standardized fare. This crisis
prompted the new CEO at the time, Jim Cantalupo,
to make a tough decision: “The new boss at McDon-
ald’s is the consumer,” he announced.

The company’s subsequent changes in resource
allocation reveal the profound implications of this
decision. Consumers’ tastes di� er widely by region
and throughout the many countries in which Mc-
Donald’s operates. To satisfy these varying tastes,
McDonald’s reallocated resources from centralized
corporate functions to regional managers, who were
encouraged to customize local menus and store
amenities. In the United Kingdom, McDonald’s now
serves porridge for breakfast; in Portugal, it offers
soup; in France, it sells burgers topped with French
cheese. The Paris design center provides franchisees
with nine di� erent design options, allowing them to
customize the decor for their clientele.

As of last January, McDonald’s had delivered 81
consecutive months of increasing same-store sales
around the world. Its customer satisfaction scores
rose each year from 2005 to 2009 (they faltered
slightly in early 2010, as more upscale customers be-
gan to choose McDonald’s over pricier alternatives).
It’s no accident that McDonald’s was one of only two
companies in the Dow Jones Industrial Average to
end 2008 with a gain in stock price.

Unlike McDonald’s, many companies resist
choosing just one customer. Executives often at-
tempt to avoid the adjective “primary” by announc-
ing, “We have multiple customers.” This is a sure
recipe for underperformance. Allocating resources
to more than one customer results in confusion and
less-than-optimal service.

Trying to accommodate multiple kinds of cus-
tomers led to trouble at Home Depot. After taking

The Seven Questions

Who is your
primary
customer?

How do your core
values prioritize
shareholders,
employees, and
customers?1Who is your 1Who is your primary 1primary customer?1customer? What critical performance variables are you tracking? What strategic boundaries have you set?

WHO IS A
“CUSTOMER”?
Don’t use the word

“customer” to refer
to anyone inside the
organization. Internal
people are never a
company’s primary
customers, and treat-
ing them as such may
cause you to lose sight
of your true focus.

3 What critical 3 What critical 3performance 3performance 3variables are 3variables are 3you tracking?3you tracking?3
94 Harvard Business Review November 2010

STRESS-TEST YOUR STRATEGY

2

Idea in Brief
How do you identify
the weakest parts of
your strategy? Ask-
ing tough questions
about your business—
seven key questions in
particular—will help
you understand where
confusion and ineffi –
ciency lie.

Have you identifi ed a pri-
mary customer? Who is fi rst
among your stakeholders—
shareholders, employees, or
customers? Have you nar-
rowed down which perfor-
mance variables you track?
Set critical boundaries? Do
you generate creative ten-
sion? Promote coordination
among your employees? And

fi nally, what questions keep
you up at night, thinking
about how the future will
change your business?

over as CEO in 2000, Bob Nardelli concluded that
the consumer home improvement business was sat-
urated, and shifted signi� cant resources away from
consumers in order to cater to professional contrac-
tors. Consumers would no longer be the primary cus-
tomers—but it wasn’t clear that professional contrac-
tors were � lling that role, either. Home Depot laid o�
customer service employees—the ones walking the
aisles in orange aprons at its 1,900 stores—and spent
the savings on an $8 billion acquisition spree, snap-
ping up 30 wholesale housing-supply companies.

The acquisitions nearly doubled company rev-
enue, but even so there weren’t enough resources
to meet the needs of two such different types of
customers (there never are), and neither group was
well served. During Nardelli’s tenure Home Depot’s
consumer satisfaction scores suffered the biggest
drop of any U.S. retailer ever. At the same time, the
wholesale supply operation was not getting the sup-
port required to obtain the e� ciencies needed for a
low-margin business.

It took a new CEO, Frank Blake, to refocus the
business. In 2007 he announced that home owners

would again be the primary customers. Home Depot
sold its wholesale businesses, increased the number
of orange aprons on the floor, and rehired master
trade specialists to o� er consumers how-to advice.
Consumer satisfaction scores and same-store sales
and pro� ts have begun to rebound.

Of course, your choice of primary customer may
change over time—recall what happened at McDon-
ald’s. But you need to recognize that such a change
will probably require restructuring your business.

The flip side of maximizing resources for your
primary customer is that you should minimize the
resources devoted to everything else—including all
external stakeholders and all internal units that do
not create value for your primary customer. They
should receive enough to meet the needs of their
constituents, but no more.

How Do Your Core Values
Prioritize Shareholders,
Employees, and Customers?
Companies that execute strategy well de� ne their
core values to reflect the relative importance of
shareholders, employees, and customers. Value

How are you
generating
creative tension? 6 How committed are your employ-ees to helping each other? 7What strategic uncertainties keep you awake at night?

2
creative tension?5How are you 5How are you generating 5generating creative tension?5creative tension?

November 2010 Harvard Business Review 95

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3

statements that list aspirational behaviors aren’t
enough. Core values must indicate whose interests
come � rst when di� cult trade-o� s must be made.

At some companies, customers come � rst. At oth-
ers, it may be shareholders. At yet others, it may be
employees. There is no right or wrong choice. Each
choice is based on a different theory of value cre-
ation. But making one and communicating it e� ec-
tively are essential.

A case in point is Merck’s costly decision to
withdraw Vioxx, its blockbuster Cox-2 pain sup-
pressant, from the market. On September 24, 2004,
then-CEO Ray Gilmartin got a call from the head of
Merck’s research labs, informing him that the pre-
liminary results of an ongoing clinical study indi-
cated that Vioxx caused unexpectedly high num-
bers of heart attacks and strokes after 18 months of
continuous use. Gilmartin had three options: Merck
could carry the study through to its planned con-
clusion to gather more data. It could ask the FDA to
approve a “black box” label warning doctors and pa-
tients about the newly discovered risks. Or it could
take the drug o� the market, forgoing $2.5 billion in
annual revenue.

On September 30—six days after the phone call—
Gilmartin convened a press conference to announce
the worldwide withdrawal of Vioxx. He explained
his decision by citing the company’s core value:

“Merck puts patients � rst.”
In contrast, Pfizer executives put shareholders

� rst when faced with a similar situation. After dis-
covering that Celebrex—the Cox-2 inhibitor Pfizer
acquired when it bought Pharmacia—sometimes
caused cardiovascular problems, they decided to
keep manufacturing the drug. But they did so re-
sponsibly, adding a black box warning that allowed
patients and doctors to make fully informed deci-
sions. Shareholders thus avoided losing billions of
dollars in pro� ts.

A third option is to put employees � rst—a choice
that can actually keep customers and shareholders
content as well. As the former Southwest CEO Herb
Kelleher has argued, “If employees are treated well,
they’ll treat the customers well. If the customers are
treated well, they’ll come back, and the sharehold-
ers will be happy.” To drive this point home, Kelleher
regularly appeared in national newspaper ads under
the caption “Employees first. Customers second.
Shareholders third.” Other companies have made
and communicated a similar choice.

Each of these rankings worked because the com-
pany made a clear decision and implemented it
consistently. This is not always the case. Confusion
about core values was at the root of the recent Fan-
nie Mae debacle. Company executives, acting at poli-
ticians’ behest, dedicated $1 trillion to democratizing
home ownership by o� ering mortgages to disadvan-
taged customers. However, they were also trying to
maximize shareholder value. To boost short-term
pro� ts, they built up and sold increasingly risky loan
portfolios—until the housing market collapsed, leav-
ing taxpayers with a $100 billion bailout bill.

What Critical Performance
Variables Are You Tracking?
Many managers complain that they’re overwhelmed
by how many things they’re asked to keep track of in
all-inclusive lists of performance measures. It’s not
uncommon for companies to create scorecards with
30, 40, or more variables, in the mistaken belief that
adding measures results in a more complete—and
therefore better—scorecard. Information technol-
ogy enables us to gather more and more data at lower
and lower cost. But we cannot keep tracking so many
variables. E� ective managers monitor only a small
number—those that could cause their strategy to fail.

The problems generated by trying to track too
much data became evident at Citibank in the late

The seven questions are intended to be
tools for stimulating engagement. Everyone
in your business, from the CEO to the front
line, must be actively involved in discus-
sions about the key factors that will enable
the successful execution of your strategy.
Therefore, how you ask the questions is
crucial. These commonsense principles will
help you involve your whole team.

Ask the Whole Team
You must pose the questions
face-to-face. “Look me in the
eye” interaction is essential.
You cannot get real engage-
ment remotely or by e-mail.
You must be able to see the
subtle body language that can
tell you when to challenge,
probe, and push and when
to off er encouragement and
support.

Discussions must cascade
down the organization, not
stay stuck at the top. The
tone you set will echo through-
out the business.

3
96 Harvard Business Review November 2010

STRESS-TEST YOUR STRATEGY

4
1990s, after executives introduced a new scorecard
in their consumer bank. In addition to traditional
� nancial measures, the card included new metrics
for such things as strategy implementation and cus-
tomer satisfaction.

As one district manager was pondering the award
level for her top branch manager, con� icting signals
from the new scorecard stopped her short. Although
the branch manager had delivered outstanding fi-
nancials, his customer satisfaction scores were sub-
par. The system would not permit a full bonus unless
every measure was rated at par or above. Making an
exception for one person could destroy the integrity
of the system. But the branch manager might leave for
a competitor if the scorecard undervalued his contri-
bution. In the end his manager fudged the scorecard
to ensure that he received an acceptable bonus. Be-
cause of similar problems involving other employees,
the bank soon dropped the new scorecard.

Apart from avoiding this sort of dilemma, there
is a simple but often overlooked reason to measure
just a few variables: Management attention is your
scarcest resource. As you add metrics to your score-
cards, you incur an opportunity cost, in that people
have less time to focus on what really matters. Think
of Amazon, where inconvenience for buyers tops the
list of factors that could cause strategy to fail. Execu-
tives there focus relentlessly on making purchasing
as easy as possible: They concentrate on revenue per
click and revenue per page turn, not on long lists of
measures that have little to do with the customer’s
purchasing experience. At Nordstrom customer
loyalty is key, so executives keep their attention on
sales per hour and revenue per square foot. At Mar-
riott the crucial metrics are associate satisfaction,
guest satisfaction, revenue, and RevPAR (revenue
per available room).

There’s another reason to limit your focus: If you
add too many measures to your scorecards, you will

drive out innovation. In the old McDonald’s—the one
that prioritized franchise growth and standardized
food—� eld consultants visited each store to measure
its compliance with prescribed operating standards.
They analyzed 500 metrics, producing a 25-page re-
port on each store. With all the constraints imposed
by these measures, store managers had no opportu-
nity to innovate or respond to consumer preferences.
Standardized mediocrity was the result.

What Strategic Boundaries
Have You Set?
Every strategy carries the risk that an individual’s
actions will push the business o� course. The risk in-
tensi� es when managers feel pressure to hit growth
and pro� t targets.

There are two ways to control such risk: You can
tell people what to do, or you can tell them what not
to do. Telling people what to do helps assure that
they won’t make mistakes by engaging in unauthor-
ized activities. This is the prudent approach if safety
and quality are paramount concerns—if, say, you’re
running a nuclear power plant or overseeing a space
launch. In such cases you want employees to follow
standard operating procedures to the letter.

However, if innovation and entrepreneurial
thinking are important, you should follow a di� er-
ent course: You should hire creative people and tell
them what not to do. In other words, you should give
them freedom to exercise their creativity—within
de� ned limits.

Steve Jobs followed this principle when he de-
clared that Apple would not develop a PDA. He later
argued that without such discipline, the company
wouldn’t have had the resources to develop the iPod.

“People think focus means saying yes to the thing
you’ve got to focus on,” he later said. “But that’s not
what it means at all. It means saying no to the hun-
dred other good ideas.”

Ask the Whole Team
Your operating managers
are key to the process. Staff
groups can play a useful role
in data input, facilitation, and
follow-up, but operating man-
agers are the ones who can
commit to action and who are
responsible for results.

The debate must be about
what is right, not who is right.
People should check titles and
offi ce politics at the door. You
should encourage everyone
to take risks, state unpopular
opinions, and challenge the
status quo.

You must root every discus-
sion in the challenge “What
are you going to do about it?”
Think of the seven questions
as a means to an end. Their
purpose is to inspire decisions
and, ultimately, action.

4
the branch manager had delivered outstanding fi-
nancials, his customer satisfaction scores were sub-

a competitor if the scorecard undervalued his contri-

to ensure that he received an acceptable bonus. Be-
cause of similar problems involving other employees,

November 2010 Harvard Business Review 97

HBR.ORG

5

Setting clear boundaries also lets organizations
avoid the waste and risk that inevitably accompany
undisciplined growth. To take one dramatic exam-
ple, Wells Fargo weathered the 2008–2009 � nancial
crisis because it strictly forbade its employees to
venture into structured investment products and
low-documentation mortgage loans. Unlike most of
its competitors, Wells Fargo also refused to court fu-
ture business from Warren Bu� ett by lending money
to Berkshire Hathaway at below-market rates. This
decision actually won Bu� ett’s respect. “I got a big
kick out of that, because that was exactly how they
should think,” he told Fortune. “The real insight you
get about a banker is…what they don’t do. And what
Wells didn’t do is what de� nes their greatness.”

But remember: Boundaries are powered by
punishment, not rewards. You must be willing to
discipline—and fire, if necessary—anyone caught
stepping over the line. If you follow up forcefully
and consistently, word will travel throughout your
organization, reinforcing the importance of your
prohibitions.

How Are You Generating
Creative Tension?
As a business leader, one of your primary jobs is to
make outside market pressures felt inside your busi-
ness. This can motivate employees to think and act
like winning competitors, rousing them from com-
fortable ruts. The bigger your business, the more in-
sulated people are from market pressures, and the
more imperative this becomes.

Here is a menu of techniques that can generate
creative tension and spur innovation. In this instance,
unlike when de� ning a primary customer or ranking
your responsibilities, you needn’t choose just one;
choose whichever and however many are right for
your company. In fact, the more innovation you de-
sire, the more techniques you should consider.

Assigning stretch goals. The most common
way of motivating people to innovate is to set stretch
goals—sometimes called challenge goals or big hairy
audacious goals. Conducting business as usual or
making incremental improvements is not enough.
The only way to meet aggressive targets is to do
something completely di� erent.

Ranking according to performance. Many
high-innovation organizations rank employees on
the basis of demonstrated performance. The rank-
ings a� ect who is promoted, who is placed on pro-
bation, and who is asked to leave. The challenge, of

course, is to prevent the competition from becoming
negative and destructive.

GE’s Jack Welch is unapologetic when he argues
the merits of this approach. The ranking system at
GE was “very controversial,” he has said. “Weed out
the weakest.…It’s been portrayed as a cruel system.
It isn’t. The cruel system is the one that doesn’t tell
anybody where they stand.”

You can take this approach a step further by rank-
ing the performance of teams and business units.
This will unquestionably produce adrenaline to com-
pete—and to innovate. Nike’s CEO, Mark Parker, likes
to � re up friendly rivalries by posting each footwear
division’s performance scores after every season.

“People see each other’s scores, and they huddle and
really look at how they can make it better next sea-
son,” he has explained.

Setting spans of accountability that are
greater than spans of control. If you want peo-
ple to innovate, try holding them accountable for
measures that are broader than the resources they
control. This is the well-worn path followed by every
successful entrepreneur, and you can use it to foster
entrepreneurial behavior within your business.

Tom Siebel, of Siebel Systems, understood this
principle well when he based his managers’ bonuses
on customer satisfaction measures, even though no
one manager controlled all the resources needed to
make a customer happy. His action forced the man-
agers to innovate their way to success. As one busi-
ness unit head put it, “To do my day-to-day job, I de-
pend on sales, sales consulting, competency groups,
alliances, technical support, corporate marketing,
� eld marketing, and integrated marketing commu-
nications. None of these functions report to me.…
Coordination happens because we all have customer
satisfaction as our � rst priority.”

Allocating costs. The way in which you charge
corporate overhead costs can also stimulate creative
tension. Jamie Dimon, the CEO of JPMorgan Chase,
insists on full allocation of overhead—everything
from legal to marketing expenses—to the parts of
the business that use them.

The purpose here is twofold. The most obvious
goal is to generate accurate cost data. But often the
more important one is to motivate managers to be-
come actively involved in discussions about the
value of corporate services provided. When operat-
ing managers have skin in the game, they will gener-
ate ideas about how units can work together to do
things better, faster, or cheaper.

55make outside market pressures felt inside your busi-55like winning competitors, rousing them from com-55fortable ruts. The bigger your business, the more in-5
creative tension and spur innovation. In this instance,

on customer satisfaction measures, even though no
one manager controlled all the resources needed to
make a customer happy. His action forced the man-
agers to innovate their way to success. As one busi-
ness unit head put it, “To do my day-to-day job, I de-
pend on sales, sales consulting, competency groups,
alliances, technical support, corporate marketing,
� eld marketing, and integrated marketing commu-
nications. None of these functions report to me.…
Coordination happens because we all have customer
satisfaction as our � rst priority.”

98 Harvard Business Review November 2010

STRESS-TEST YOUR STRATEGY

6

� rst loyalty of every member is to the unit—to help-
ing those in it no matter what.

The same principle can apply to businesses. Em-
ployees of Southwest Airlines, for example, take
pride in a rigorous selection process that admits
fewer than 2% of the 100,000 annual applicants. To
reinforce their identi� cation with the company, em-
ployees from di� erent departments are encouraged
to interview job candidates and veto those they feel
would not be a good fit. Applicants who are hired
know they are part of an elite team whose members
go above and beyond to help one another.

Trust. When you trust your colleagues, you’re
willing to make yourself vulnerable—to put your
reputation on the line to support them. Trust is vital
if you want people to work collaboratively. At Nucor,
the industry-leading steel company, employees are
encouraged to propose innovations to improve ef-
� ciency. Nucor shares the resulting savings with its
employees, rather than increasing production tar-
gets. This policy has built trust among the workers,
who are con� dent that they and the executives are
working together toward the same goals.

Fairness. The final requirement for collabora-
tion is fairness. Disparities in compensation among
peers pose the most obvious challenge: Nothing is
more certain to kill the desire to help a colleague. In
themselves, inequities in pay are easy to � x; far more
insidious are perks signaling that those at the top are
more deserving than everyone else. To guard against
this danger, Southwest’s highest executives work out
of small interior o� ces that have been described as
only slightly nicer than janitors’ closets.

Vertical pay inequity is also an issue; if you want
people to commit to helping one another, you must
share rewards fairly up and down the organization.
Southwest has operated with a rule that executive
pay increases cannot be larger, proportionately, than
other employees’ raises. And in bad times executives
take pay reductions along with everyone else. An
industry analyst once calculated that as a result of
these practices, Southwest generated 10 times more
revenue for every dollar of executive compensation
than some of its big U.S. competitors.

If you want your employees to embrace your vi-
sion of shared success, you must be perceived as put-
ting fairness and equity above self-interest. When
Sam Palmisano took over as IBM’s CEO, he asked
the board to reallocate half of his bonus to the ex-
ecutives who would be leading his new, team-based
strategy. And early last year, when he announced

Creating cross-unit teams and matrix ac-
countability. Another way of forcing employees
to think outside the box is to assign them to a sec-
ond box. New perspectives emerge when people are
forced out of their routines. When they attend cross-
unit team meetings, employees not only serve as
emissaries for their home units but also return with
ideas and innovations from their new colleagues.

You can push this approach to an extreme by
adopting a matrix design, in which every manager
has two bosses. One may be a regional head, the
other a product market head. Everyone in the matrix
is then accountable for con� icting priorities. Many
global companies, including ABB, Novartis, and P&G,
have at one time or another used this approach.

As with each of these techniques, you must be
careful to balance the benefits and costs. On one
hand, you will generate creative tension as people
present and negotiate multiple points of view. On the
other hand, you risk having the added bureaucracy
slow down decision making. When P&G adopted a
matrix structure, global product leaders had to get
approval from the relevant regional head whenever
they wanted to introduce a new product. Too many
people had veto power. So in 2005 P&G abandoned
the matrix in favor of global business units.

How Committed Are Your Employees
To Helping Each Other?
Although you want your employees to achieve their
personal best, they must also work together toward
shared goals. To create the high levels of commit-
ment that requires, leaders must build an organiza-
tion that has the following four attributes:

Pride in purpose. If people are proud of their
organization’s mission, they will assume shared
responsibility for its success. The sort of pride em-
bodied in the Marine Corps slogan “Semper � delis”
(“Always faithful”) is echoed in Merck’s “Putting pa-
tients � rst” and Amazon’s “Earth’s most customer-
centric company.” In each case the tagline inspires
and motivates members of the organization.

Group identifi cation. Belonging to an elite or-
ganization is itself a source of pride, one that carries
with it a sense of responsibility toward others in the
group. In the Marines (“The few. The proud”), the

6
As with each of these techniques, you must be

One way to force employees to
think outside the box is to assign
them to a second box.

HBR.ORG

November 2010 Harvard Business Review 99

77
that 250,000 IBM employees would be getting raises,
he added, “The executives won’t—but that’s � ne. We
make enough money!”

What Strategic Uncertainties
Keep You Awake at Night?
At the root of every failed strategy is a set of assump-
tions about the future that eventually proved false.
We assumed housing prices would never fall simul-
taneously across the country. We assumed asset di-
versi� cation would eliminate risk. We assumed the
migration to digital media would be slow and orderly.
We assumed customers wouldn’t accept fewer fea-
tures in exchange for a lower price.

Only three things in life are certain: death, taxes,
and the fact that today’s strategy won’t work tomor-
row. At some point your products will become obso-
lete, your customers’ tastes will change, or technol-
ogy will render your business model uncompetitive.
Today’s successes will be tomorrow’s old news. The
question is not if, but when.

To adapt successfully, you must constantly moni-
tor the uncertainties that could invalidate the as-
sumptions underpinning your current strategy. Your
entire organization must continually scan the com-
petitive environment for changes and send intel-
ligence up the line. And because everyone watches
what the boss watches, if you want your employees
to focus on specific issues, focus on those issues
yourself.

The most powerful way to signal what’s impor-
tant to you is to use your business control systems as
interactive tools. Pay close—and visible—attention
to the data they produce, and use them to generate
questions that will activate the search for informa-
tion throughout your business.

By using its P&L system interactively, Goldman
Sachs avoided the mortgage-backed securities de-
bacle that brought most of its competitors to their
knees. A Goldman executive has described the pro-
cess this way: “We look at the P&L of our businesses
every day. We have lots of models that are important,
but none are more important than the P&L, and we
check every day to make sure our P&L is consistent
with where our risk models say it should be. In De-
cember [of 2006] our mortgage business lost money
for 10 days in a row. It wasn’t a lot of money, but by
the 10th day we thought that we should sit down
and talk about it.” The talk quickly turned into ac-
tion: Goldman issued an order to reduce exposure
to mortgage-backed securities and hedge remaining

positions against future losses. This early move al-
lowed the � rm to prosper as competitors were forced
to liquidate.

Depending on your business, the system you
choose to use interactively could be a pro� t plan, a
new-business booking system, or a project manage-
ment system. Any performance measurement sys-
tem will do as long as it contains easy-to-understand
information, requires face-to-face interaction among
operating managers, focuses dialogues on strategic
uncertainties, and generates new action plans.

Once you’ve chosen a system, you must not
only ask your employees to challenge deeply held
assumptions, including your own, but also reward
those who have the courage to tell you bad news.
When Alan Mulally arrived at Ford as the CEO, he
discovered that executives were afraid of admitting
failure. Their presentations at Thursday morning
meetings highlighted only successes (color-coded
green), never problems (color-coded yellow and
red). Mulally asked how everything could be so rosy
when the company was losing billions. Mark Fields,
the head of the Americas division, � nally gave a pre-
sentation noting technical problems with the new
Ford Edge. Everyone waited to see how the new
boss would react. “The whole place was deathly si-
lent,” Mulally recalled in an interview with Fortune.

“Then I clapped, and I said, ‘Mark, I really appreciate
that clear visibility.’ And the next week the entire set
of charts were all rainbows.”

A Checklist for Executing Strategy
Executing strategy successfully requires making
tough, often uncomfortable choices based on simple
logic and clear principles. But we frequently avoid
making choices, in the mistaken belief that we can
have it all. Instead of focusing on one primary cus-
tomer, we have many kinds of customers. Instead
of instilling core values, we develop lists of desired
behaviors. Instead of focusing on a few critical mea-
sures, we build overloaded scorecards.

There is no magic bullet that can zero in on the
pitfalls of your business strategy. There is only one
route to success: You must engage in ongoing, face-
to-face debate with the people around you about
emerging data, unspoken assumptions, difficult
choices, and, ultimately, action plans. You and they
should be able to give clear, consistent answers to
the seven questions posed above. Only then can you
be con� dent that your strategy is on track.

HBR Reprint R1011G

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reader feedback at hbr.org.

100 Harvard Business Review November 2010

STRESS-TEST YOUR STRATEGY

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Chapter 5,6 of Strategic Management: Text and Cases

Gregory Dess

Chapter 5   Business-Level Strategy Creating and Sustaining Competitive Advantages

Summary:

How and why firms outperform each other goes to the heart of strategic management. In this chapter, we identified three generic strategies and discussed how firms are able not only to attain advantages over competitors but also to sustain such advantages over time. Why do some advantages become long-lasting while others are quickly imitated by competitors?

The three generic strategies—overall cost leadership, differentiation, and focus—form the core of this chapter. We began by providing a brief description of each generic strategy (or competitive advantage) and furnished examples of firms that have successfully implemented these strategies. Successful generic strategies invariably enhance a firm’s position vis-à-vis the five forces of that industry—a point that we stressed and illustrated with examples. However, as we pointed out, there are pitfalls to each of the generic strategies. Thus, the sustainability of a firm’s advantage is always challenged because of imitation or substitution by new or existing rivals. Such competitor moves erode a firm’s advantage over time.

We also discussed the viability of combining (or integrating) overall cost leadership and generic differentiation strategies. If successful, such integration can enable a firm to enjoy superior performance and improve its competitive position. However, this is challenging, and managers must be aware of the potential downside risks associated with such an initiative.

We addressed the challenges inherent in determining the sustainability of competitive advantages. Drawing on an example from a manufacturing industry, we discussed both the “pro” and “con” positions as to why competitive advantages are sustainable over a long period of time.

The concept of the industry life cycle is a critical contingency that managers must take into account in striving to create and sustain competitive advantages. We identified the four stages of the industry life cycle—introduction, growth, maturity, and decline—and suggested how these stages can play a role in decisions that managers must make at the business level. These include overall strategies as well as the relative emphasis on functional areas and value-creating activities.

When a firm’s performance severely erodes, turnaround strategies are needed to reverse its situation and enhance its competitive position. We have discussed three approaches—asset cost surgery, selective product and market pruning, and piecemeal productivity improvements.

Chapter 6

Corporate-Level Strategy Creating Value through Diversification

Summary:

A key challenge for today’s managers is to create “synergy” when engaging in diversification activities. As we discussed in this chapter, corporate managers do not, in general, have a very good track record in creating value in such endeavors when it comes to mergers and acquisitions. Among the factors that serve to erode shareholder values are paying an excessive premium for the target firm, failing to integrate the activities of the newly acquired businesses into the corporate family, and undertaking diversification initiatives that are too easily imitated by the competition.

We addressed two major types of corporate-level strategy: related and unrelated diversification. With related diversification the corporation strives to enter into areas in which key resources and capabilities of the corporation can be shared or leveraged. Synergies come from horizontal relationships between business units. Cost savings and enhanced revenues can be derived from two major sources. First, economies of scope can be achieved from the leveraging of core competencies and the sharing of activities. Second, market power can be attained from greater, or pooled, negotiating power and from vertical integration.

When firms undergo unrelated diversification, they enter product markets that are dissimilar to their present businesses. Thus, there is generally little opportunity to either leverage core competencies or share activities across business units. Here, synergies are created from vertical relationships between the corporate office and the individual business units. With unrelated diversification, the primary ways to create value are corporate restructuring and parenting, as well as the use of portfolio analysis techniques.

Corporations have three primary means of diversifying their product markets—mergers and acquisitions, joint ventures/strategic alliances, and internal development. There are key trade-offs associated with each of these. For example, mergers and acquisitions are typically the quickest means to enter new markets and provide the corporation with a high level of control over the acquired business. However, with the expensive premiums that often need to be paid to the shareholders of the target firm and the challenges associated with integrating acquisitions, they can also be quite expensive. Not surprisingly, many poorly performing acquisitions are subsequently divested. At times, however, divestitures can help firms refocus their efforts and generate resources. Strategic alliances and joint ventures between two or more firms, on the other hand, may be a means of reducing risk since they involve the sharing and combining of resources. But such joint initiatives also provide a firm with less control (than it would have with an acquisition) since governance is shared between two independent entities. Also, there is a limit to the potential upside for each partner because returns must be shared as well. Finally, with internal development, a firm is able to capture all of the value from its initiatives (as opposed to sharing it with a merger or alliance partner). However, diversification by means of internal development can be very time-consuming—a disadvantage that becomes even more important in fast-paced competitive environments.

Finally, some managerial behaviors may serve to erode shareholder returns. Among these are “growth for growth’s sake,” egotism, and antitakeover tactics. As we discussed, some of these issues—particularly antitakeover tactics—raise ethical considerations because the managers of the firm are not acting in the best interests of the shareholders.

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