1. Strategy Is Destiny 1 STRATEGY IS DESTINY Caveat
A famous painting by Belgian surrealist René Magritte shows a huge briar pipe covering almost the entire canvas. Perplexing the viewer is the neatly painted text underneath the image: This is not a pipe. Beyond the facetious truth that this is a painting not a pipe, the incongruence makes some viewers look more carefully at the image: If not a pipe then what is it? It also gets some viewers to think harder about the meaning of “pipe.” A mental search for the essence.1
In some ways, this book is similar to Magritte’s painting. Intel Corporation is writ all over its pages, but: This is not Intel. No single account could capture Intel’s multifaceted reality. The longitudinal study of Intel’s evolution, however, illuminates the essence of strategy-making as adaptive organizational capability.
Strategy is destiny is the theme of this book. Destiny is an archaic idea of a fixed and inevitable future. Strategy, in contrast, is a modern idea, of an open-ended future to be determined by it.2
In reality the two ideas exist in perpetual tension. Successful and unsuccessful strategies shape a company’s destiny. But if strategy shapes destiny, destiny has ways of asserting itself and constraining strategy. New sources of strategy create the possibility of future destiny, and help the company evolve. Strategy as the means to gaining and maintaining control of a company’s present and future destiny is the common thread running through the study of Intel’s evolution.3
Strategy in the narrow sense involves planning the use of resources and the deployment of capabilities to achieve objectives and prevail in competition. In the broader sense, strategy also concerns the rational determination of a company’s vital interests, the purposes that are essential to its continued survival as an institution and define it in relation to other organizations, and its objectives. Strategy is therefore concerned with the external and internal forces that have the potential to materially affect the company’s destiny.4
Strategy has a strong thinking component. Strategic thinking is forward-looking and concerned with exploring multiple scenarios, alternatives, and options. It is externally focused and tries to anticipate states of nature and the behavior of the relevant actors in a situation. Incisive strategic thinking at its best requires considerable intellectual effort. But senior executives sometimes view strategy with skepticism, because great strategies are just that—great strategies. From the perspective of key players, strategy becomes real when significant resources are committed, when strategy is turned into action.5
Strategic action is consequential;
it involves resource commitments that cannot easily be undone and moves the company in a direction that is not easily reversible. This view provides a criterion for distinguishing between tactics and strategy: Actions are tactical if their outcome does not significantly affect subsequent degrees of freedom to act.
Strategy in large, established companies like Intel takes the form of strategy-making,
a complex process involving the thinking and action of key actors throughout the company.6
This implies that strategy-making processes can be usefully characterized in two dimensions. The first dimension concerns the degree of concentration of strategic decision-making. At one extreme strategic decision-making is highly concentrated in top management. At the other extreme it is widely distributed throughout the organization. The second dimension concerns the degree of simultaneity in strategic action to implement strategic decisions. At one extreme all organizational units act simultaneously. At the other extreme, organizational units all act in some sequence. These two dimensions give rise to four strategy-making processes. Rational actor model.
Many view the rational actor model as the ideal. A comprehensively rational leader is responsible for strategic decision-making and is able to get all the participants in the organization to simultaneously take action to implement his decisions.7
In this model, there is strong alignment between strategy and action. This model is probably most effective to respond to environmental dynamics that can be reasonably well anticipated and influenced. Bureaucratic model.
The rational actor model turns into the bureaucratic model if participants take action sequentially.8
In slow-moving environments this model may have advantages because it allows each part of the organization to optimize its operations in light of the overall strategy. In rapidly changing environments, however, this model will cause sluggish implementation of the overall strategy. Internal ecology model.
Distributed strategic decision-making and simultaneous strategic action define the internal ecology model.9
Strategy-making is shaped by strategic initiatives of differentially positioned participants, who all act simultaneously to try to commit the organization. This is a highly dynamic view of strategy-making in which coherence depends on the characteristics of the internal selection processes operating on the strategic initiatives. It may be most effective in highly uncertain, opportunity-rich environments. Garbage can model.
The internal ecology model turns into the garbage can model if the simultaneity of strategic action becomes sequential.10
In that case, organizational participants’ strategic actions depend on the sequence in which problems, solutions, and decision opportunities arise. The coherence of strategy-making in this model depends to a great extent on chance.
Organizational and strategic management researchers have long highlighted the difficulties leaders encounter in aligning organizational action in the pursuit of deliberate strategic intent. The cumulative evidence suggests relatively modest prospects for the rational actor model to apply. Studying the rare cases in which leaders achieve this improbable state of affairs may, however, produce insight that is useful for augmenting knowledge about strategy-making and strategic leadership. Viewing strategy-making in terms of the internal ecology model, on the other hand, is somewhat novel for strategy researchers, who find it difficult to see its potential normative implications.
Both the internal ecology and rational actor models informed the study of Intel’s evolution. Strategy-making during Intel’s first epoch resembled the internal ecology model, as multiple new business opportunities emerged from the company’s competencies in the new semiconductor technologies and competed for its resources, transforming the company. During the second epoch, Intel’s strategy-making resembled the rational actor model. This was a rare case in which a company leader successfully set strategic intent and created a process for its relentless and successful pursuit. At the start of its third epoch, Intel was struggling to combine the discipline of the rational actor model with the strategic renewal capacity of the internal ecology model.
Complex organizations such as Intel usually face other complex organizations in the external environment. The study of strategic interaction involving such organizations is somewhat different from the study of strategic interaction in well-structured situations.11
Well-structured situations have clearly defined, if sometimes probabilistic, payoffs associated with particular combinations of the players’ strategic moves that are drawn from a predetermined set of options. Such strategic interaction situations lend themselves well to the quantitative methods of decision theory and game theory. In complex organizations, however, the strategic interaction situations are usually not well structured, the strategies of different actors in the organization may not be well aligned, payoffs in competitive interaction are not always given, and strategic action is not limited to a predetermined set of options. The study of strategic interaction involving complex organizations is therefore likely to be relatively untidy, raising questions that supersede those addressed in more structured approaches.
STRATEGY-MAKING AND EVOLUTIONARY ORGANIZATION THEORY Evolutionary Perspective
How strategy comes about and how strategy-making helps companies to gain and maintain control of their destiny are fundamental questions for scholars interested in the study of complex business organizations and for reflective practitioners interested in improving their company’s chances of success. To begin answering these questions, it is useful to dissect strategy-making into its key parts and their interrelationships, and to identify the forces that determine how it functions. To do so, this book adopts the perspective of evolutionary organization theory.12
Evolutionary organization theory uses four generic processes—variation, selection, retention, and competition—to explain how organizations emerge and evolve.13
Dissecting strategy-making in terms of these key processes serves two purposes: First, it facilitates integrating strategy-making as adaptive organizational capability into evolutionary organization theory. Second, it illuminates facets of strategy-making that other theoretical perspectives do not contemplate.14
Internal Ecology of Strategy-Making
Each company is an ecology within which strategic initiatives emerge in patterned ways. Top management drives most initiatives but leaders throughout the organization also drive initiatives. These initiatives compete for limited organizational resources to increase their relative importance.15 Variation
comes about as individuals (or small groups) seek expression of their special skills and career advancement through different strategic initiatives. These initiatives draw on existing and/or new competencies and routines and take shape if they are able to draw the company’s resources to their development. Selection
works through administrative and cultural mechanisms that regulate the allocation of resources and attention to different strategic initiatives. Retention
concerns the initiatives that survive in the external environment and grow to become important within the company. It also takes the form of organizational-level learning about the factors that account for the company’s success. Internal competition
arises from different strategic initiatives struggling to obtain resources necessary to grow and increase in importance in the company. Internal competition between strategic initiatives can be more or less tightly linked to the external competition
that these initiatives encounter.
Evolutionary Research Lens: Three Conceptual Frameworks
At the pure theoretical level, the processes of variation, selection, retention, and competition are general, abstract, and nonexperiential. At the level of pure practice, on the other hand, common language describing strategy-making is particular, concrete, and experiential. Business leaders do not use the terminology of pure theory to think and talk about strategy-making and find it difficult to relate to the abstract mathematical and statistical models ideally constructed by such theory. Scholars, on the other hand, find it difficult to gain deeper insight when limited to common language and like to do more than produce a coherent and complete narrative of strategy-making practice. Conceptual frameworks help bridge the gap between pure theory and pure practice.16
They are specific, substantive, and suggestive. The boxes-and-arrows charts used to represent them (such as figure 1.1
in this chapter) can be more readily understood and related to by both business leaders and scholars. The three approaches are summarized on the following page.
This book uses three conceptual frameworks as tools for studying the role of strategy-making in Intel’s evolution. These three different but related tools form the evolutionary research lens and give it strong “zooming” capability. The zooming capability is useful to examine variation, selection, retention, and competition processes at different levels of analysis and to study the interplay between the different levels. The evolutionary research lens is shown in figure 1.1
Strategy-Making Theory Practice
- Mathematical and statistical models
- Boxes-and-arrows charts
Think of the evolutionary research lens in terms of video recording. Tool I shows the big panoramic scenes, which contain everything, but it does not focus on the details. Tool II zooms in on key parts of the scenes, showing how actors move in relation to each other. Tool III zooms in further on the specific actions of the protagonists and on details of the environment that shape action.
TOOL I: DYNAMIC FORCES DRIVING COMPANY EVOLUTION
Tool I in figure 1.1
focuses on the big picture. It helps examine strategy-making at the industry-company interface level of analysis, and the coevolution of industry-level and company-level forces.17
Basis of Competitive Advantage in the Industry
Most industries contain several viable positions that companies can occupy. External forces determine the basis of competition in each of these positions. Consistent with the tenets of traditional industry structural analysis, these forces encompass customers, competitors, suppliers, new entrants, and substitution. In high-technology industries, however, additional forces also play an important role and merit separate and distinct consideration. Nonmarket forces, such as government regulation, are also potentially important.
Distinctive competencies concern the differentiated skills, complementary assets and routines that a company possesses to meet the basis of competitive advantage in the industry. They form the basis of the capabilities that a company can deploy. Distinctive competencies are intrinsic to a company’s identity and character. For instance, they very much determine the generic corporate strategy—differentiation or cost leadership—that a company will pursue. Taken seriously, they are not easy to change. Deep competencies, on the other hand, are also likely to be a wellspring of new opportunities. Figure 1.1.
An Evolutionary Lens on Strategy-Making. (SOURCES: *Adapted from R. A. Burgelman, “Fading Memories: A Process Theory of Strategic Business Exit,” Administrative Science Quarterly
39 (1994), p. 31
. †Adapted from R. A. Burgelman, “A Model of the Interaction of Strategic Behavior, Corporate Context, and the Concept of Strategy,” Academy of Management Review
8 (1983), p. 65
. ‡Adapted from R. A. Burgelman, “A Process Model of Internal Corporate Venturing in the Diversified Major Firm,” Administrative Science Quarterly
28 (1983), p. 230
Official Corporate Strategy
Official corporate strategy concerns top management’s statements about the company’s intended strategy. These remarks reflect top management’s beliefs about the basis of the company’s past and future success. Key beliefs concern product-market domain, the relative importance of different distinctive competencies for competitive advantage, core values that help determine what the company will and will not do, and financial and other objectives. These are the most important drivers of a company’s strategy.
Strategic action is what the company actually does—the consequential actions that it engages in. Strategic action, position, and competencies mutually support each other.18
Strategic action without position has limited ability to be exercised and without distinctive competencies is powerless. Position without strategic action is unlikely to fully exploit advantage and without distinctive competencies is precarious, because most positional advantages erode and eventually vanish. Distinctive competencies without strategic action are aimless and without position cannot be fully leveraged. Through strategic action that links position and distinctive competencies in novel ways, a company can attempt to proactively change the basis of competitive advantage in the external selection environment. Often, of course, strategic action must react to the changing external selection environment. Strategic action in large companies is usually distributed over different levels of management and different, specialized groups.
Internal Selection Environment
In principle, there needs to be alignment between the basis of competition and distinctive competencies and between official strategy and strategic action, but in dynamic environments this alignment is likely to come under severe pressure. The internal selection environment plays a crucial role in helping the company find new ways to reestablish alignment between the dynamic forces.
As Andy Grove pointed out in the foreword, Tool I became known at Intel as the rubber band framework. Tool I was particularly helpful in explaining why Intel was defeated in its original core business and why the company eventually exited from several semiconductor memory businesses (see chapters 3 and 4). It was also helpful in explaining Intel’s enormous success in the microprocessor business (chapter 8) and the challenges to its continued success that arose in the late 1990s (chapter 10).
TOOL II: EVOLUTIONARY FRAMEWORK OF THE STRATEGY-MAKING PROCESS
Tool II in figure 1.1
zooms in on the strategy-making process at the company-level of analysis. Tool II gives substance to the variation, selection, retention, and competition processes by conceptualizing strategy-making in terms of induced and autonomous processes. Induced and autonomous strategic action correspond to variation; the structural and strategic contexts correspond to internal selection; and the concept of corporate strategy corresponds to internal retention. Competition involves the internal struggle of different businesses for corporate resources and the external struggle for survival in the competitive environment.
Induced Strategy Process
The induced strategy process (the lower loop in Tool II) resembles the traditional top-driven view of strategic management, but is different in five important ways. Concept of corporate strategy.
The concept of strategy—the official corporate strategy—is the theory that top management has about the basis for its past and future successes. It provides a shared frame of reference for managers at operational and middle levels in the company, and expresses top management’s strategic intent.19
It reflects organizational learning about the company’s distinctive competencies (what it is good at), product-market domain (where it can win), core values (what it stands for), and objectives (what it strives to achieve). Induced strategic action.
Not surprisingly, top management wants to create a strategy process to direct the strategic actions of operational and middle-level managers. Induced strategic action involves initiatives on the part of operational and middle-level managers that fit with the concept of corporate strategy and leverage the organizational learning that it embodies. Induced strategic action is oriented toward gaining and maintaining leadership in the company’s core businesses. Examples of induced strategic action are efforts to increase market penetration, new product development, new market development, and strategic capital investment projects for the existing businesses. Structural context.
When a company is small, the link between strategic action and the concept of corporate strategy is readily maintained, simply because there are few key players and they all know each other well. As a company grows larger this is no longer so. Strategy-making becomes increasingly distributed over differentiated groups (functional, product, geographical) and multiple levels of management, all of which take strategic action simultaneously. This provides an important source of internal variation, as individuals who possess data, ideas, motivation, and resources all strive to undertake specialized initiatives. But it also implies that unless a company is able to establish mechanisms to maintain a level of coherence, the corporate strategy will eventually be unrealized. Structural context comprises the administrative and cultural mechanisms that top management can use to maintain the link been strategic action and the existing corporate strategy. Structural context encompasses organizational structure, planning and control systems, resource allocation rules, measurement and reward systems, among other administrative arrangements, as well as cultural aspects such as recruitment and socialization processes and more or less explicit principles of behavior. Structural context is a key part of the internal selection environment that operates on strategic action. Familiar external environment.
The induced-strategy process takes place in the company’s familiar external environment (E
in Tool II in figure 1.1
). Ideally, through this process top management can proactively influence the external environment to the company’s advantage. This is reflected by the causal arrow going from process to environment. More frequently perhaps, that causal arrow goes from the environment to process forcing companies to respond to strategic change. Top management’s role is to be alert to opportunities and threats that arise from environmental change, and to adjust the induced strategy process accordingly. Creating alignment.
The induced strategy process aims to align strategy and action. Through this process, a company’s strategic actions are joined over time, distinct patterns of company-level strategy are realized, the organization’s character is maintained, and the company successfully reproduces itself over time in its familiar environment. In a sense, the induced strategy process is a company’s genotype—its genetic inheritance and makeup. This has important implications, because a strong induced strategy process is also likely to manifest strong strategic inertia. Resistance to change is a very old idea in organization theory. The induced strategy process provides a tool for elucidating further the rational roots of resistance to corporate change.
Autonomous Strategy Process
The autonomous strategy process (the upper loop in Tool II) is less well understood. Autonomous strategic action.
Autonomous strategic action involves initiatives of individuals or small groups that are outside the scope of the corporate strategy at the time that they come about. Autonomous strategic action is significantly different from induced strategic action in the technology employed, customer functions served, and/or customer groups targeted. Autonomous strategic initiatives typically involve new combinations of competencies that are not currently recognized as distinctive or centrally important to the firm. They often come about because a company’s competencies are fungible and lead to new businesses that are different from the company’s core business. Autonomous strategic initiatives may be complements or substitutes from the perspective of the core business. So-called disruptive technologies, for instance, often spring up as autonomous initiatives in established companies.20
While autonomous strategic action often emerges fortuitously and is difficult to predict, it is not random because it is rooted in and constrained by the company’s set of distinctive competencies at any given time. Emerging external environments.
If genotype is a metaphor for a company’s induced strategy process, mutation is one for its autonomous strategy process. Like most mutations, most autonomous initiatives do not survive because they cannot continue to obtain resources. But like some mutations, some autonomous initiatives are important for the company’s continued evolution. This is so because the autonomous-strategy process typically takes place in unfamiliar, emerging environments (e
in Tool II in figure 1.1
). Many of these emerging environments never grow to become important, but some do and may extend (complements) or even replace (substitutes) the company’s familiar environment (E
in Tool II). Strategic context.
At the time it comes about, the relation of autonomous strategic action to the firm’s current strategy remains indeterminate: top management is not sure about its strategic importance and whether the company has the competencies to successfully pursue it. To resolve the indeterminacy, the strategic context for the autonomous initiative must become defined. Strategic context determination serves to evaluate and select autonomous strategic actions outside the regular structural context, usually through the interactions of various types of champions and top management. In contrast to the structural context, strategic context determination processes select initiatives for which the official strategy becomes fully articulated after the fact. Strategic context is thus also part of the internal selection environment.
Strategic context determination provides top management with the opportunity to evaluate the adaptive potential of autonomous strategic initiatives in an informed way. From an evolutionary point of view, only after it has become reasonably certain that an autonomous initiative is viable can top management legitimately amend corporate strategy. Such amendment, in turn, integrates the autonomous activities with the induced strategic process. The willingness of managers at operational and middle levels to engage in autonomous strategic action is influenced by their assessment of the probability that the strategic context determination process can be activated and successfully completed. Strategic contexts can also dissolve as autonomous strategic action leads new business opportunities to directly compete with existing ones for limited resources. This internal competition may lead to new businesses replacing existing ones, causing strategic business exits through abandonment or divestment. Creating linkage.
A key function of the strategic context is to link new business opportunities to the corporate strategy, thereby amending it. Lacking these created linkages, new business opportunities may be able to linger on for some time in the shadow of the core business but they will become resource starved and forgo the opportunity to demonstrate their full potential.
Simultaneity of Induced and Autonomous Processes
The induced strategy process is variation reducing. The autonomous strategy process is variation increasing. Strategic intent (induced strategy) and internal entrepreneurship (autonomous strategy), by themselves, are not sufficient for continued adaptation. Strategy-making as adaptive organizational capability involves keeping both processes in play simultaneously at all times, even though one process or the other may be more prominent at different times in a company’s evolution.
Rationality of the Internal Ecology of Strategy-Making
A company rationally tolerates autonomous strategic initiatives because such initiatives explore and potentially extend the boundaries of the company’s competencies and opportunities. They generate learning about variations in markets and technologies. Autonomous strategic action engages new environmental niches in which competition or institutional pressures are as yet less strong. Through such initiatives a company can also enter new niches opened up by others that might eventually pose a threat to the current strategy, for instance when they involve disruptive technologies. Through the autonomous strategy process, myopically purposeful initiatives by individuals may help the company find out what its strategic intent could be. On the other hand, autonomous initiatives can potentially have a dissipating effect on the company’s resources and distinctive competencies. Resources can be spread thin if too many autonomous initiatives are supported, perhaps at the expense of the mainstream businesses. Distinctive competencies can also be diluted or lost if an autonomous initiative is not internally supported and important talent decides to leave the firm—with or without the help of venture capital. Most dangerously, autonomous strategic initiatives may undermine the existing competitive position of a company without providing an equally secure new position.
As Andy Grove pointed out in the foreword, Tool II became known at Intel as the blue (induced-strategy) and green (autonomous-strategy) framework. Tool II was particularly helpful in explaining Intel’s transformation from memory company to microprocessor company (chapter 5) and in showing how Andy Grove created strong alignment between strategy and action during his tenure as CEO (chapter 6). It also helped explain the process of strategic inertia associated with Intel’s success in the microprocessor business (chapter 9). Finally, Tool II provided a useful framework for identifying the strategic leadership challenges facing Intel in the late 1990s (chapter 11).
Related Evolutionary Ideas Emergent and deliberate strategy.
Induced and deliberate strategies are similar, but the induced strategy process provides more detail on what is involved in getting the organization to actually implement corporate strategy.21
The link with autonomous strategic initiatives, on the other hand, is more complicated. Autonomous initiatives involved in generating and developing a new business opportunity usually involve deliberate actions taken by leaders below top management. The deliberate actions taken by these leaders help develop new competencies and help create a new strategic position that may open up a new business opportunity for the corporation. Thus, a strategy that emerges at a high level of the corporation often has its roots in deliberate actions by leaders at lower levels in the corporation. Exploration and exploitation.
The autonomous strategy process dissects exploration into autonomous strategic initiatives and the process of strategic context determination.22
The latter serves to select viable autonomous initiatives and link them to the corporate strategy thereby amending it. The autonomous strategy process thus goes beyond exploration. It is also concerned with turning the results of exploration into new exploitation opportunities. Ambidextrous organizations.
Ambidextrous organizations are designed to handle both incremental and revolutionary change.23
The idea is closely related to the framework of induced and autonomous strategy processes. Yet there are two important differences: First, induced and autonomous initiatives do not necessarily map onto incremental and radical technological change. Change in the induced strategy process, while incremental, can be very large. For instance, developing a new microprocessor is incremental for Intel but involves hundreds of millions of dollars in development costs and billions in manufacturing investments. In the induced strategy process, incremental simply means change that is well understood—doing more of what the company knows how to do well. Change through the autonomous process, on the other hand, can be radical but is initially usually rather small. However, it always involves doing things that are not familiar to the company—doing what it is not sure it can do well. Second, change through the autonomous strategy process usually comes about fortuitously and unexpectedly. Initially senior and top management have no clear understanding of its strategic importance for the company and how it relates to the company’s distinctive competencies. Resolving this indeterminacy is the most difficult challenge facing autonomous strategic initiatives. This highlights the importance of the strategic context determination process. Strategy-making and self-organization.
The theory of self-organization and of organizations as chaotic systems is a useful perspective in organization theory and strategic management.24
Self-organizing systems discover answers to their problems through experimentation. Because prediction is difficult in dynamic environments, the organization develops a catalog of responses and stimulates learning through experimentation. Similarly, ideas of deterministic chaos concern organizations that experience counteracting forces that produce nonlinear dynamics. Some forces push the organization toward stability and order; other forces push the system toward instability and disorder. Strategy-making as adaptive organizational capability balances variation-reduction (induced) and variation-increasing (autonomous) processes at any given time and over time. Punctuated equilibrium.
The punctuated equilibrium view of company evolution posits that organizations evolve through long periods of incremental change punctuated by discontinuous, frame-breaking change.25
While there are many examples of sudden radical changes, punctuated equilibrium views beg the question of where these sudden radical changes come from. Truly exogenous shocks such as large meteorites hitting the earth and destroying existing ecosystems are always a possibility but fortunately a remote one. Many radical changes—technological or otherwise—are the cumulative result of continuous small changes over a long period of time. Sometimes these changes originate in the company’s autonomous strategy process and sometimes outside of the company altogether. Often they happen inside and outside simultaneously. Companies always want to spot such changes sooner rather than later. The introduction of intracompany variation, selection, retention, and competition processes to study strategy-making provides a tool for identifying the underlying—more continuous and finer grained—strategic leadership activities that eventually, through sheer accumulation, cause lumpy radical strategic change.
TOOL III: PROCESS MODEL OF INTERNAL CORPORATE VENTURING
Zooming in still closer to the process, Tool III is useful to examine, at the intracompany level of analysis, the fine-grained strategic leadership activities involved in the autonomous-strategy process.
The Basic Structure of the Process Model
The process model of internal corporate venturing, shown in figure 1.1
, is a matrix-like framework that documents the simultaneous as well as sequential strategic leadership activities of different levels of management (the rows in the matrix) in the different levels of strategy-making (the columns).26
The model considers three generic levels of management: (1) venture team, (2) middle/senior management, and (3) corporate management. The model also considers two generic levels of strategy-making: (1) corporate-level strategy-making and (2) business-level strategy-making. Corporate-level strategy-making encompasses the determination of the structural and strategic contexts (overlaying processes). Business-level strategy-making encompasses definition and impetus (core processes). The process model documents the set of strategic leadership activities involved in linking the business-level strategy-making and the corporate-level strategy-making. The model is descriptive, not prescriptive. It serves as a diagnostic tool to better understand key problems that are encountered as well as generated by the organization’s strategic leaders who are involved in entering a new business.
Major Forces Simultaneously at Work in the Process Model
There are two major opposing forces simultaneously at work in the process model. One force derives from the structural context
part of the process. Creating the structural context is top management’s responsibility; so the first force is to a large extent a top-down force. A second force derives from the definition
part of the process. Definition revolves around initiatives driven by strategic leadership activities of operational and middle-level managers. The definition of new business entry usually, although not necessarily, originates at levels below top management. So, the second force is to a large extent a bottom-up force. Forces associated with impetus
and strategic context
integrate the top-down and bottom-up forces. Impetus is gained if operational-level champions are able to draw resources to their initiative and establish a beachhead in the market with their product or service. The strategic context for the new business initiative can be determined by middle/senior-level champions who convince top management to incorporate the new business into the corporate strategy and to put the full support of the company behind it. An important contribution of the process model is to clearly show that the bottoms-up and top-down forces are opposing forces, and that they are in play simultaneously. The process model provides a tool for representing the simultaneity.
Tool III was particularly helpful to examine the strategic leadership activities involved in the development of Intel’s chipset venture (chapter 7) and ProShare, Hood River, and networking ventures (chapter 9).
The tools of the evolutionary research lens helped answer specific research questions. Tool I helped explain why the basis of competition in Intel’s core business and its distinctive competencies diverged over time and why the company’s strategic actions diverged from its stated strategy. It also helped explain how Intel overcame these divergences and managed to adapt. Tool II helped explain how Intel’s induced- and autonomous-strategy processes took shape over time and why strategy could lead to inertia. It also helped explain how autonomous initiatives were selected and retained in Intel’s corporate strategy. Tool III helped explain how the activities of leaders situated in different positions in the organization combined in the autonomous process and where and why the process was likely to break down. This book addresses these and related questions, shedding additional light on how Intel attempted to control its destiny in an extremely dynamic environment. The analysis informs two important subjects of evolutionary organization theory—organizational ecology and organizational learning—as well as the practice of strategic leadership.
Organizational Ecology The radical view.
Organizational ecology emerged as a new theoretical approach in the mid-1970s.27
The key argument of the original formulation of the theory went as follows. Organizational change must be understood at the level of entire populations of similar organizations and as the result of replacement and selection rather than of adaptation. For instance, suppose one measured the average characteristics of companies in the semiconductor industry in 1960 and did so again in 1999. And suppose one found significant differences in average company characteristics. Organizational ecology would explain these changes in terms of incumbent companies exiting the industry (usually because of failure) and new companies (with different characteristics) entering the industry. Incumbent companies failed in the face of environmental change because organizational inertia prevents them from adapting. In short, organizational inertia causes companies to be selected against. The rates of founding and disbanding drive organizational change. The revised view.
During the 1980s, the organizational ecology argument was subtly modified because the original formulation begged the question of why companies would be inert in the first place.28
The revised theory posited that companies need to develop routines and procedures that make their behavior reliable, predictable, and accountable to key constituencies, such as customers, suppliers, employees, and industry analysts. These attributes allow companies to overcome the liabilities of being new, give them legitimacy, and lead them to be selected by the environment over firms that are not reliable, predictable, and accountable. But these very attributes make it difficult for companies to change in major ways after they have been selected. Hence, the new argument was that environmental selection leads to organizational inertia. There is strong empirical evidence in support of this theory of organizational inertia. The study of Intel’s exit from its original core business (chapters 2–5) adds to that evidence. Newer views.
New organizational ecology research continues to draw attention to important challenges that strategy-making faces. One such challenge concerns multibusiness companies, which often face pressures—inertial and/or political—to shield some of their businesses from the severity of competitive pressures that stand-alone businesses encounter.29
Multibusiness companies may thus be weakened overall unless their internal selection environment matches the competitive intensity of the external selection environment.
Another challenge involves a potential tradeoff between competitive advantage based on position and competitive advantage based on distinctive competencies.30
Companies that rely on positional advantage shield themselves from competitive pressures and do not need to develop strong distinctive competencies to succeed. But this makes them vulnerable to new competitors using novel strategies to attack their position. On the other hand, companies that rely on distinctive competencies to compete with similar others may be able to hone these competencies and become best in class. But such distinctive competencies become highly specialized and make the companies vulnerable to new competitors deploying different competencies.
Still another challenge faced especially by companies in opportunity-rich technological environments, even those with a well-functioning autonomous-strategy process, is that they will not be able to match the variation generated in their environment. Eventually, some variations may threaten the incumbent companies. As an example, witness the enormous variation spawned by the Internet in recent years, which no single established company could possibly match. To reduce this threat, established companies may have to complement the internal variation generated by their autonomous-strategy process with other approaches, such as corporate venture capital.31 An integrative view.
This book integrates strategy-making and organizational ecology. The argument runs as follows. Almost all companies start small and are subject to liabilities of newness (they are unknown, untested, lacking legitimacy, and so on). The major force faced by small, new companies is environmental selection. Most do not survive external selection pressures. Organizational ecology provides a useful theoretical framework within which the evolutionary dynamics of small companies can be more clearly understood. Some companies, however, do survive and become large and established. Although large, established companies continue to remain subject to the selection force of the external environment—and many succumb to it in the long run—these companies have gained the opportunity to substitute internal for external selection. Analogous to external selection, internal selection is concerned with a company’s entering new businesses and exiting from failing ones over time.
Chapters 2 through 5 of this book examine how internal selection combined with external selection to transform Intel from a memory company into a microprocessor company. They document the role of internal selection in strategy-making as adaptive organizational capability. They show that Intel faced the challenges identified by the newer ecological views, but also offer tools to help top management meet these challenges.
Organizational Learning Indeterminacy.
Adopting an evolutionary perspective implies that outcomes are viewed as indeterminate and can be explained only after the fact. As one evolutionary scholar put it, “We can say that some outcome has occurred because of some prior sequence of events, even though we could not
have foreseen, prior to the fact, that particular sequence unfolding.”32
This seems almost the exact antipode of the traditional view of strategy, which is to determine in advance the ensemble of strategic actions that will achieve desired outcomes. There is no conflict, however, with the perspective adopted in this book, which views strategy-making in established companies as a dynamic organizational learning process. Learning in the induced process.
The induced-strategy process, which is concerned primarily with exploiting existing business opportunities, deliberately drives strategic action in a more or less foreseeable pattern toward desired outcomes. Induced strategic action commits a company to a course of action that is difficult to reverse. Thorough preparation prior to deciding on such a course of action is important. Equally important is the work that comes afterward, because top management is keen to understand why strategic actions produce the results that the company obtains. Such understanding provides a basis for taking further strategic actions. Sometimes this work involves abandoning a course of action, for instance, exiting from a losing business. Learning in the autonomous process.
The autonomous-strategy process, which is concerned with exploring new business opportunities, involves somewhat more complex organizational learning. Here, strategic action at higher levels in the management hierarchy benefits from interpretation of the outcomes of strategic action at lower levels. The effectiveness of the process depends on correct interpretation of results at each level. The learning at a lower level becomes the stepping-stone for more-encompassing strategic action at the next managerial level.33
The study of Intel’s evolution illuminates strategy-making as organizational learning. Chapters 6–9 in particular show how Intel learned specific lessons from the defeat in its original semiconductor memory business which helped it develop its strategy for capitalizing on new opportunities in the microprocessor business. These chapters also document the tension between learning in the induced strategy process, with the concomitant benefits of a narrow business strategy34
focused on exploiting opportunities in the microprocessor business, and learning in the autonomous strategy process, which could potentially broaden the strategy and open up new business opportunities.35
Although this tension remained somewhat latent during Andy Grove’s extremely successful tenure as CEO, chapters 10–11 show that it became highly manifest during the early days of Craig Barrett’s tenure as CEO, as Intel was seeking new growth opportunities beyond microprocessors.
The study of the role of strategy-making in Intel’s evolution suggests that strategy-making as a multilevel process must continue to match the dynamics of the environment. This implies a first strategic leadership imperative: Leaders who want to maintain control of their company’s destiny must embrace strategy and learn to think strategically while in action. They must learn to “engage, then see.”36
They must also remain alert to the fact that their experience has decisively shaped their outlook by the time they reach top position37
and take steps to make sure that it does not become a trap.
The video-recording analogy was used earlier to suggest that the three tools of the evolutionary research lens could be used to zoom in on the strategy-making process, illuminating its workings in increasing detail and taking some of the mystery out of it. Each of the three tools helps identify key attributes of strategy-making as adaptive organizational capability. Tool I suggests that the divergence of forces that drive a company’s evolution will create strategic dissonance in the organization.38
Capitalizing on strategic dissonance is a second strategic leadership imperative. Tool II suggests that the induced and autonomous strategy processes are both important for organizational adaptation. Maintaining the effectiveness of both processes is a third strategic leadership imperative. Finally, Tool III suggests that the combined activities of differentially positioned leaders in the autonomous process determine whether and how fast the company can manage strategic change. Managing the cycle time of strategic change is the fourth strategic leadership imperative. Chapter 12 discusses these four strategic leadership imperatives, which promise to help top management guide their company toward its current destiny while preserving the capability to secure its future destiny.
Strategy shapes destiny, but strategy in turn is shaped by destiny. Strategy helps leaders understand and act upon the internal and external forces that affect the company’s destiny over time. Strategy in large established companies takes the form of strategy-making
because it involves the consequential actions of leaders throughout the organization.
The variation, selection, retention, and competition processes of evolutionary organization theory provide a useful perspective for analyzing strategy-making. Examining these processes at the intraorganizational level offers the opportunity to integrate strategy-making with evolutionary organization theory. It also highlights facets of strategy-making as adaptive organizational capability that escape other perspectives. In particular, it emphasizes the importance of identifying the entire set of planned and unplanned variations—successful and unsuccessful ones. Such alertness, in turn, helps identify implicit or hidden selection mechanisms, as well as unanticipated consequences of conscious efforts to change selection mechanisms in force at some point in time.
Variation, selection, retention, and competition are general, abstract, and nonexperiential generic processes. The research lens used to study the role of strategy-making in Intel Corporation’s evolution comprises three conceptual frameworks that are somewhat more specific, substantive, and suggestive of phenomena associated with strategy-making in companies. These three conceptual frameworks serve as tools to analyze variation, selection, retention, and competition processes at different levels of analysis and the interplay between these levels. The three tools together provide the evolutionary lens with a strong zooming capability. This offers the opportunity to move back and forth between studying detailed strategic leadership activities at the intracompany level of analysis, the role of induced and autonomous strategy processes at the company level of analysis, and the interplay between company-level and industry-level dynamic forces.