Book Notes: Lords of Strategy

The Lords of Strategy by Walter Kiechel is an outstanding history of strategy as a discipline, the consulting industry in general, and the broader intellectualization of business since the 1950s. It seems hard to believe that “strategy” is a concept that only entered the business lexicon in the 1960s and that the now multi-billion dollar consulting industry is a relatively new creation. Peter Drucker’s 1964 book, Managing for Results, had been titled Business Strategies, “but he and his publisher had been persuaded to change it because everyone they asked told them that strategy ‘belongs to military or perhaps political campaigns but not to business.'” This is the backdrop to a book about the key concepts that together describe how a company competes, wins, and survives.

Kiechel is an intense thinker who conveys his analysis with great eloquence. Formerly managing editor of Fortune and Editorial Director (top position) at Harvard Publishing, he brings to bear formidable mental horsepower along with personal experience interacting with several of the key characters in the book (Bill Bain, Michael Porter, Tom Peters, etc). A winning combination. My only complaints have to do with the at times over-detail on certain esoteric concepts and his frequent unnecessary five dollar words. (I looked up: garrulous, apostasy, legerdemain, billet, obloquy, peroration, avuncular, obstreperous.)

Overall, this is a top flight book on the recent history of business that I recommend widely. Below are direct-quote highlights.

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Strategy’s coming to dominance as the framework by which companies understand what they’re doing and want to do, the construct through which and around which the rest of their efforts are organized, eclipses any other change worked in the intellectual landscape of business over the past fifty years.

Year to year, companies made plans, mostly simple extrapolations of what they had been doing. Plans, not strategy—the latter word making only scattered appearances in the corporate vocabulary before 1960.

Menand’s masterly account of American thought after the Civil War as told through the biographies of four of its protagonists. In his preface, Menand identifies what they shared in their attitude toward ideas: If we strain out the differences, personal and philosophical, they had with one another, we can say that what these four thinkers [Oliver Wendell Holmes, William James, Charles S. Pierce, and John Dewey] had in common was not a group of ideas, but a single idea—an idea about ideas. They all believed that ideas are not “out there” waiting to be discovered, but are tools—like forks, knives, and microchips—that people devise to cope with the world in which they find themselves. They believed that ideas are produced not by individuals, but by groups of individuals—that ideas are social. They believed that ideas do not develop according to some inner logic of their own, but are entirely dependent, like germs, on their human carriers and environment. And they believed that since ideas are provisional responses to particular and unreproducible circumstances, their survival depends not on their immutability but on their adaptability.

The argument of this book is that precisely the same thing went on with the invention of corporate strategy, except that it didn’t spring full-blown from a single, godlike forehead but instead was assembled from the spoils of many an intellectual and business battle. This is a story not of paradigm shift, but of the bit-by-bit creation of the first comprehensive paradigm that pulled together all the elements most vital for a company to take into account if it is to compete, win, and survive.

Greater Taylorism, the corporation’s application of sharp-penciled analytics this time not to the performance of an individual worker—how fast a person could load bars of pig iron or reset a machine—but more widely to the totality of its functions and processes.

The tamer, more conventional way of framing this tension is to see the history of strategy as a struggle between two definitions, strategy as positioning and strategy as organizational learning. The positioning school, led by Harvard’s Porter, sees strategy making as the choice of where you want to compete, in what industry and from what spot within that industry, and how—on price, with distinctive products, or by finding a niche. The organizational-learning school, by contrast, maintains that no company that’s already up and running can choose its strategy as if it had a blank slate. Almost gleeful in its derision of the positionists—at least its leading spokesman, McGill’s Henry Mintzberg is—the learning school also argues that virtually no strategy ever works as originally planned. The point, they say, is for the company to set off in one direction, learn from the response it gets from markets and competitors, and then adjust accordingly.

This, despite the fact that over three-quarters of the largest American companies, and comparable percentages in countries like France, currently use the services of BCG, McKinsey, Bain & Company, or some combination of them.

you can find evidence everywhere over the past five decades that increasing numbers of people have come to understand business not just by doing it—as it was done in the past, as company lore said it was to be done—but rather as framed and mediated by ideas.

[Business book industry] now marshals eight thousand new titles a year. The number of MBA degrees pursued and granted increased from less than 4,000 a year in the United States in 1948 to over 140,000 today. And finally, of course, there is the rise of the strategy consulting industry, which currently takes in over $5 billion a year worldwide for nothing more than its ideas, analysis, and general smarts.

Ah, strategy. The word goes back to the Greek stategos, for “the office or command of a general,” according to the Oxford English Dictionary. The inner eye pictures a grizzled, helmeted Homeric figure arraying his forces before the enemy hoplites come over the hill. (Once they’re in sight it’s all tactics, according to the standard military usage.) The faint whiff of battlefield command that still hangs about the word is one reason for the term’s popularity among corporate chiefs.

businesses should expect their costs to decline systematically, at a rate that can be accurately predicted. (You can always do it for less.) Different companies making the same product may have very different costs—heresy to many economists at the time—and your cost position should reflect your share of the market.

The call-to-action message, shocking to many at the time, was that you couldn’t truly understand how you were doing in a business or likely to do unless you understood exactly how you stood vis à vis your competitors. How did your share of the market compare to theirs? Were your costs lower or higher? If you didn’t have any cost advantage, how else might you differentiate your product? With the experience curve, the strategy revolution began to insinuate an acute awareness of competition into the corporate consciousness.

Early Perspectives explicated this logic with daunting clarity: a company will probably need to sell a new product for less than cost until volume builds.

The theme that strategy is about choice, that a company must pick a strategy that distinguishes it from its competitors, was to become a constant in Porter’s work over the decades that followed. It would secure him the place as head of the “strategy as positioning” school.

crucial problems in strategy were most often those of execution and continuous adaptation: getting it done, staying flexible.” (Or, as Jack Welch approximated the point more pungently in his 2005 book Winning, “In real life, strategy is actually very straightforward. You pick a general direction and implement like hell.”)

Asked to explain the success of In Search of Excellence, Peters cites, besides other factors, the book’s abundance of exemplary tales. This was a first among business books, he maintains, arguing—mostly accurately—that “Peter Drucker doesn’t tell stories.” The ability to tell a story well, one rooted in the frustrations and occasional epiphanies in corporate life, launched Peters into celebrity on a circuit that steadily grew on the pattern of his success, that of the management author cum speaker.

There are observers who maintain that much of what goes on in business organizations comes down to a struggle between those who see the enterprise largely through the lens of the numbers—sales figures, costs, budgets—and those who focus instead primarily on people, their energies, ambitions, and limitations. A gross oversimplification, of course, but one that approximates the argument between the two schools of strategy.

After a little more back-and-forth, the final estimate would emerge: fewer than 10 percent of their clients, in the consultants’ judgment, were fully successful at putting their corporate strategies to work.

In a magisterial McKinsey staff paper, “Perspectives on Strategy,” John Stuckey, for two decades a leader of the Firm’s practice in that area, makes an observation fundamental to the issue of implementation. Once you have designed your strategy, he writes, and aligned your organization around it, “the task of executing the strategy remains,” obviously. He goes on, in words that probably should be framed and hung on the wall of every corporate conference room where these matters are deliberated: “This means more than just running the business: It generally means changing the business.” It was precisely the question of how to do this

Today, there are still those who argue that the single-minded focus on the shareholder need not have prevailed, indeed should not have prevailed.

There is a theory—Canadian scholar Danny Miller lays it out nicely in a 1991 book, The Icarus Paradox—that when companies truly get into the deepest trouble, it’s usually not because of their weaknesses but rather because of their strengths. Or more specifically, it’s because they tend to overdo the very energies, inclinations, and expertise that brought them success.

The Financial Times recently reported that “around 500,000 students will graduate with MBAs globally this year”;

the brightest young business minds from the real work of management into the ranks of parasitic consulting. I wrote an article or two along these lines myself. This, I now realize, was a monumentally stupid argument—though some continue to make it—for at least two reasons. First, it is premised on the assumption that the fresh-caught MBA will remain a consultant the rest of his or her life. The odds are dauntingly against this. The up-or-out policies of the consulting firms, a reflection of their structure—the income of the seniors being dependent on the firm’s ability to bill out teams of lesser-paid juniors—dictate that no more than one out of eight or ten who start will survive the progressive weeding process and eventually make partner. While 25 percent of Harvard’s MBAs may go into consulting in any given year, only 11 percent of HBS alumni say they continue to work in the industry. It’s probably more accurate to view a two- or three-year initial stint in consulting as akin to the postdoctoral program a newly minted PhD scientist might embark on, as an opportunity to develop and hone analytical skills originally acquired in school.

Some observers widened the discussion to argue that “intellectual capital” constituted the “new wealth of organizations,” as posited by the subtitle of the best book on the subject, Tom Stewart’s Intellectual Capital. But unlike the financial variety, intellectual capital beyond the tradable was damnably difficult to measure, anatomize, or capture, no easier than core competencies.

Haas quotes TPG’s Coulter: “Every day you don’t sell a portfolio company, you’ve made an implicit buy decision.”

no one has yet produced proof that being acquired by a PE outfit consistently results in downsizing any more ruthless than what has become the general corporate norm.

Laws in every state prohibit automakers from selling a car directly to you or me; the sale has to go through a dealer, which the car companies came to regard as their real customer, with predictable, dismal effects. Costs? Easier to buy a few more years of peace with the United Auto Workers—kick the can down the road a little farther—even if it means that it costs us a few thousand more to make each vehicle than it does those devils from abroad. Competitors? Per the quotation from Henry Ford II in the preface, what do foreigners with their little “shitboxes”—his term—know about making real cars?

In March 2009, Jack Welch—of all people—told the Financial Times that “on the face of it, shareholder value is the dumbest idea in the world.” The man once viewed as the poster CEO for value creation went on to explain: “Shareholder value is a result, not a strategy,” and, more surprisingly, “Your main constituencies are your employees, your customers, and your products.”