Saturday, January 15, 2011

‘Practice’ to Theory: The Evolution of Strategy

[A shorter version of this review was published in Business Standard]

The Lords of Strategy [The Secret Intellectual History of the New Corporate World]

Walter Kiechel III

Harvard Business Press, 2010

pp.347. Price Rs.995.

Writing a book on history of business is not a fancy that many have taken to. This is not glamorous for academics as it does not fetch much visibility and consulting opportunities. Therefore to find a well-researched and well-written book on history of strategy is refreshing. The book also gives a flavor of the overarching themes that the corporate world was engaged in the last five decades. Having picked the theme, how does one make it interesting for the reader? This is possibly the fundamental difference between a seasoned journalist and an academic. Kiechel makes the book engaging with remarkable aplomb.

The first aspect in getting this across is to make it personal, replace references with anecdotes, remove painful footnotes, and use a simple and straight language. He weaves the strategy story around four personalities and their organisations. This is the style that Michael Lewis adopted in his recent book The Big Short which was about financial sector crisis. Three of the personalities Kiechel talks about are with consulting practices and the fourth is located in the Mecca of business – Harvard.

What hits us hard in this book is that the frontier contribution about business came neither from cutting edge innovative businesses themselves nor from the academics putting out their grand models. This is a story of somebody in-between – in the consulting practice – having to constantly remain in business and thus show results for the theorization and at the same time not having the pressures of having to publish esoteric stuff in ‘A’ category academic journals – desperately seeking tenure. History indicates that consulting firms were not translating models handed out by the academics into action. Instead, they were reinventing themselves to remain relevant, pushing practice and building models around that. They were putting ideas across in their own pamphlets not waiting for an academic endorsement.

While understanding costs, and assuming that experience of working in a particular product will drive down costs, got the honorable status of a strategy, it is also some sort of dark humor that the period of ascent of strategy [driven by the understanding of cost data] coincided with the loss of cost and management accounting as a discipline in the academic world, particularly with the accounting fraternity. Over a period of time costing and control systems have actually shrunk in terms of popularity and offering in the core in MBA curricula!Through the stories of the lords of Strategy Bruce Henderson of BCG, Bill Bain of Bain& Co, Fred Gluck of McKinsey and Michael Porter of HBS, Kiechel takes us through the evolution of the thought, how strategy was conceived to be different from the annual planning exercise and how it fundamentally changed how corporations looked at their business following a single pursuit: how do we carry on and grow the business with greatest amount of efficiency. The paradigmatic shift that occured in the first phase of strategy – though articulated as obsession with costs/efficiency and a riding on the experience curve, in spirit it the shift was actually towards organized use of data as a competitive weapon.

Given that consultants as a class are usually seen with disdain, somebody parasitic who live off the clients – as caricatured brilliantly in Sidin Vadukut’s recent book Dork, this book not only debunks the myth and demonstrates how the consulting firms, led by Henderson pushed the frontiers to build the theory. Even in the section where Michael Porter is featured, Kiechel reveals how it took time for Porter had to face resistance to establish himself as an insider in the erstwhile Business Policy course in HBS and get his ideas through.

While BCG used this in the growth share matrix to place the entire portfolio of a corporation in a measurable and actionable format – holding a mirror to the corporation, Bain took it further where not only the mirror was held, but also offer a customized implementable solution – the mirror being an instrument in a beauty parlour. It is interesting to note that the early version of the growth share matrix was expressed in the form of financial service products – bond for the celebrated cash cow, savings account for the star, mortgage for the dog and wildcat for the question mark [p.58]. The growth-share matrix that emerged was a killer idea that continued to evolve.

The ultimate endorsement for the cutting edge work in strategy evolved by the early practitioners came as the academic world embraced the models with BCG Matrix, McKinsey’s 9 Box matrix and even Tom Peters’ and Waterman’s 7S model, all finding place in the academic curriculum at some point or the other with all seriousness and rigour, being applied to case analysis and discussions.

While the book traces the quirks in the four dominant personalities and how they went about their business, it also traces the dominant paradigms of management thought in the past half century. We can see the movement from using data to understand costs, gaining efficiency [translated as reduced costs, and a competitive weapon to win more customers], to the consultants delivering measurable value [Bain], to benchmarking performance with the stock market. Once Kiechel is through with the four towering personalities, he then quickly deals with the others who come in and disappear on the horizon – personalities like Tom Peters, Waterman, Prahalad, Hamel, Mintzberg, Senge and so on. The fact that what they propounded does not engage the attention of either the reader or the author might be because of the fact that none of these formulations seem to have withstood the test of time.

The larger set of questions that the book subtly raises are about the relevance of consultants and the models they propounded in the context of the new era where businesses are run on a different set of rules. Kiechel engages with two issues that the personalities did not consider in their formulations. The role of capital and the role of people. While the BCG matrix propounded that the cash cows will fund the stars and the question marks, the effective means of raising external capital for even more accelerated growth was not fitted into the matrix. Same is the case with people oriented strategy. While the consulting firms themselves seem to have had a people oriented strategy [ultimately the assets of the consulting firm were taking the next elevator], this was possibly not adequately transferred to the clients. With these perspectives coming, the corporate world looks more complex.

The decade of 90s laid excessive focus on the capital structuring of the corporate. With the maturity of the stock markets, complex instruments coming in, the retail investor edged out through complex considerations that left the spreadsheet specialists to act on behalf of both the informed investor [wealth management?] and the lay investor [mutual funds] there was an increasing decoupling between the entrepreneur and the supplier of capital. If we look at the earlier decades, while the basic model was to have all the factor providers as fixed pay off agents and the suppliers of capital being eligible for all the residual claims. The underlying assumption was that risk capital came bundled with entrepreneurship. However, with leveraged buy outs, private equity and venture financing gaining more currency, we find that the suppliers of capital and the entrepreneurs were decoupled. The entrepreneurs [who possibly did not have their own capital, but had capability and ideas] getting compensated not only through a fixed pay offs [managerial compensation], but were compensated through sweat equity and other sophisticated instruments that gave them a share in the upside of the business. This business model moves the primacy away from capital towards ideas. These ideas seem to work faster, quicker and in more concrete terms in non-capital intensive services sector. Thus none of the models propogated by the four towers was appropriate.

The second fundamental change was that the business itself being fungible. Divisions could be sold, chopped and peddled. A company like Dell could be termed to be in the business of selling computers, but basically could be a logistics firm. A company like Proctor and Gamble may aim to increasingly “outsource” its product development [p.323]. This fundamentally changes the way we look at a corporate and its function. In this changed environment, would the consulting practice be in formulating models or the core would be redefined as facilitating deals? From the days of Hendersen where the function was in pushing the froniters of how businesses to run to being a part of the ‘conspiracy’ in deal making the role had fundamentally changed. Not only do the firms get entrenched in the internal workings, but also consider “regulatory capture” as a valid approach to taking businesses to the next frontier. Take this passage from the book:

The Firm’s ability to insinuate itself into local elites drives its competitors slightly berserk with envy. In their eyes, McKinsey partners seeking to open a new office arrive in town bearing letters of introduction to the local corporate gentry from their counterparts elsewhere, satisfied clients typically. Somehow, given their backgrounds and polish, the partners are soon invited to join the most exclusive clubs. They play golf in such environs. They being holding small dinners, perhaps at the club, perhaps in their swank homes – just a few congenial people like yourself, to kick around some issues we may have in common. They become active in local not-for-profits, almost certainly at the board level. And mysteriously, the son or daughter of a local corporate chieftain, attending business school far away, may find his or her interest in joining the Firm as a junior consultant heartily reciprocated.”[p.258]

The consulting practice that gave us a new paradigm in management thought now gets business possibly not through a superior thought process but through a process of “networking”. Suddenly Sidin’s book no longer looks like a spoof.

In a way [and possibly rightly so] Kiechel remains loyal to the four personalities who lord over the book and not to the firms that they set up or headed. He does discuss their successors – both the persons and the ideas but does not seem to be bullish about these being lasting. He does talk about the concept of the raison-d’etre for a corporation to exist through two quotes:

‘I’m saddened and offended by the idea that companies exist to enrich their owners. That is the very least of their roles; they are far more worthy, more honourable, and more important than that.’ [Michael Hammer, p.323]

‘On the fact of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy. Your main constituencies are your employees, your customers, and your products.’ [Jack Welch, p.324]

In the process of moving from manufacturing set up where the basic concepts of strategy emerged, towards a dominant service sector, we have seen the horizons shrink. The service industry has lesser capital deployment, works on the power of intellect, has lesser entry barriers both in terms of capital and infrastructure. The ideas are emerging from that paradigm.

However, we have to realize that the logic of a service industry. The service delivery cycles produces results that are not only measurable but also quick, thereby shrinking the business horizons. When ideas that emanate from the service industry with shorter horizons are employed on more fundamental businesses like power generation and distribution, the result will be Enron. This is the danger that Kiechel alludes to when he discusses the role of strategy in the light of the global financial crisis. He leaves us with a pessimistic note on the role of strategy in future. Clearly as a person who is documenting the history of strategy he possibly is not into theorization himself. But when we think what this book tells us – it is the shrinking horizons of the corporation and the resultant behavior to convert as much into measurable cash as possible. In this situation both Hammer and Welch [quoted above] look horribly outdated. However, what they said is possibly more relevant and current than ever before.

All in all I found this book to be a delightful read, thought provoking, and written with a journalistic flair that escapes the traps of an abstracting academic. It is time for us to pause, re-look at the four towers [Charminar!] that shaped strategy and see if the logic of how they were doing their work is still relevant, albeit in a different context. We certainly do not want the comic Sidin to be prophetic and prescient.


Shweta said...

Wow! Wonderful blog indeed.
Tumba kushi aytu,tumba dina odoke aytu..thank you.

ಎಂ.ಎಸ್.ಶ್ರೀರಾಮ್ said...

Thanks for you nice comments..