“Strategy is not pricing. It is not capacity decisions. It is not setting R&D budgets”. (Donald C. Hambrick and James W. Fredrickson, 2005).
Strategy is an integrated and comprehensive concept that comprises of different elements, and the absence of any element can affect the success of strategic ambitions. Hambrick and Fredrickson coined these elements into a framework and called it Strategy Diamond. This article summarizes their framework of strategy formulation based on Strategy Diamond.
What does Strategy mean?
Hambrick and Fredrickson observed that “Strategy has become a catchall term used to mean whatever one wants it to mean.” While defining Strategy plainly they stated that the word ‘strategy’ is derived from the Greek ‘strategos,’ meaning ‘army leader’ or in other words “the art of the general.” The job of a general is different than the job of a field commander. A “general is responsible for multiple units on multiple fronts and multiple battles over time.” But field commanders are concerned with the mission of their relevant fronts only. So ‘the general’ on the whole knows what exactly he is achieving by setting forces at all fronts. In other words, general has the coherent strategy which all field commanders are executing at their respective fronts for the same purpose.
Likewise, the CEO of the company has a coherent strategy and the top management of different departments are working in their respective areas to achieve the strategy of CEO.
So, what constitutes a coherent strategy?
There are five elements that constitute a coherent strategy: Arenas, Vehicles, Differentiators, Staging and Economic Logic. Together they form a strategic framework known as Strategy Diamond.
Strategy Diamond
Prerequisites of Strategy Diamond
Some prerequisites need to be developed before working on strategy as they support the strategy formulation process. These include creating vision, mission and values of the company and internal and external analyses. Also, there are certain “organizational arrangements” such as structure, processes, policies, and people that need to be aligned with the strategy.
What are the Elements of Strategy Diamond?
1. Arena: Where will we be active?
What to offer, whom to offer, and how to offer, are the starting points which Hambrick and Fredrickson labelled as Arenas. Here companies decide their offerings and target segments.
2. Vehicles: How will we win in the marketplace?
After deciding the arenas, the next question is “how to get there.” If a company decides to venture a new arena or in other words new category or product or market, then it is important to determine whether the company should develop it internally or pursue for acquisition or merger.
3. Differentiators: How will we get there?
The third significant element of a strategy is Differentiators. The Arena gives a company the playing field, Vehicle gives a company the means to go there, and Differentiator distinguishes a company amongst the other players in the arena.
A company can differentiate itself either through product, price, processes, or any other value creation aspect that can attract the customer. Gillette (superior razor products), Goldman Sachs (unparalleled customer service), and Southwest Airlines (lowest possible fares) are the best examples of how to outperform through their differentiated products or services that their competitors couldn’t.
4. Staging: What will be our speed and sequence of moves?
While first three elements build the substance of the strategy, the fourth element, Staging, asks companies to plan the speed and the sequence of the major tasks. There is no universal sequence that guides the companies in staging. Depending on the resources (people, cash flow, capital, etc.) companies need to come with an intelligent plan to determine which tasks need to be done first or how to divide plan in phases.
Consider an example of a printing equipment company that decided to expand. The expansion means increase in product range and increase in geographical presence. Now which task needs to be done first? Should the company first develop new range or first open new offices in other countries? There are resources and costs involved in these decisions. The strategist of this company decided to first expand the product range by adding new products in the first stage. And then, in the second stage, expand geographically by opening new offices internationally. Had they first opened the offices, the company would not have been able to impress the customers with narrow range of products.
Below diagram shows the strategic staging of this company.
Now consider another example of a company that adopted different strategic staging keeping in view its resources and limitations. A regional insurance company decided to expand to national level through a series of acquisitions. But they faced a challenge: the acquisitions with favorable terms required a strong brand image, and with their current limited regional presence it was difficult to launch the kind of advertising campaign needed to establish the strong brand. So, the company devised a three-stage plan:
1) make acquisitions in adjacent regions to elevate their presence to a super-regional level;
2) invest moderately in advertising and brand development;
3) make additional acquisitions in new regions under improved terms (due to the strengthened brand, growth record, and anticipated stock appreciation), while simultaneously continuing to enhance the brand's presence.
Below diagram shows the three-stage plan of this company.
5. Economic logic: How will we obtain our returns?
Finally, the most important element of any strategy is to define how to generate profits. That is why it is at the center of the model. Here companies plan how to generate positive returns and maximize the profits. What steps are required to ensure strong gross margins by using effective pricing models? And how to control expenses in order to obtained desired profitability?
All five elements are imperative to build a comprehensive and integrated strategy. Mostly companies focus on one or two elements and ignore the others which creates the gaps and may result in challenges in the later stages.
Testing the Quality of Your Strategy
To check if company executives have made a comprehensive strategy, there is a checklist that Hambrick and Fredrickson have suggested.
Source: Article by Donald C. Hambrick and James W. Fredrickson, “Are You Sure You Have a Strategy?” Academy of Management Executive 19, no. 4 (2005).
https://tinyurl.com/4f44tjad
