Strategy

by Lawrence Freedman

  Sun Tzu’s discovery by business strategists generated a whole library offering insights from the master. Mark McNeilly in Sun Tzu and the Art of Business promised explanations of “how to gain market share without inciting competitive retaliation, how to attack a competitor’s weak points, and how to maximize the power of market information for competitive advantage.”13 The value of Sun Tzu was seen to spread wider. One book suggested that careful study of The Art of War would help “preserve your marriage vows, and attain the marital bliss that you and your partner deserve to help with marriage.”14 Following The Art of War elevated the strategist. Instead of encouraging managers to be mini-Napoleons, it urged them to use their wit and outthink their opponents. It was also far less dependent on the Clausewitzian “business-is-battle” metaphor.

  Sun Tzu and Liddell Hart appealed to business strategists for the same reason they appealed to military strategists. They required intelligence, imagination, and nerve. There was no skill in outspending a weak opponent, other than possibly getting round anticompetitive regulation. The real skill was in creating new products and developing new services—even new markets that the most likely competitors had missed. Sun Tzu added a degree of moral complexity, illustrated by his supposed attraction to the fictional rogue trader who used insider information to get rich, and the gangster who got rich through extortion and intimidation. As with the tricksters of classical times, this could prompt admiration about their cunning but a deep unease about how this was used to better those who led more virtuous lives. The ability to deceive and outwit an external foe might be celebrated, but there was still something inappropriate about using these tactics at home to gain an unfair advantage.

  Another reason for the fascination with Sun Tzu was that it might provide a clue to Asian thinking. Japan, the country defeated so decisively in the Pacific War, had gained a remorseless competitive advantage by adopting business methods that Americans might once have known but appeared to have forgotten. The Art of War suggested a distinctive philosophical outlook, a reliance on patience and intelligence, gaining advantage through a superior grasp of dynamic situations and an ability to conceal one’s own capabilities and intentions while seeing through those of the opponent. By comparison, American managers had become myopic, fixated on finance and the short term, while their opponents thought long term and focused on products. Miyamoto Musashi, a swordsman of the seventeenth century, was a key Japanese figure. When close to death he set down his philosophy for his disciples in The Book of Five Rings (Go Rin No Sho). Although he did participate in a variety of battles, his main skill was in dueling, an art he practiced constantly after opening his account at the age of 13. Musashi’s approach to dueling allowed for a degree of trickery (for example, arriving late to unnerve his opponent or early to catch him by surprise), but there was no doubting his strength and skill. He could fight with a sword in each hand and was still able to throw his short sword. During his life he is said to have fought at least sixty duels without defeat. Although Musashi claimed that his philosophy was relevant to all forms of combat, the duel provided a distinctive perspective, especially when it came to its objective, which was simply to cut down the opponent.

  In terms of an overall approach, there was a lot in common with The Art of War, which Musashi almost certainly had read.15 Musashi described strategy as “the craft of the warrior,” to be enacted by commanders. He explained the importance of his insights by noting that “there is no warrior in the world today who really understands the Way of Strategy.” He urged the development of the sort of intuitive wisdom that comes from hard study of everything that could possibly be relevant (“Know the smallest things and the biggest things, the shallowest things and the deepest things”), stressed staying calm in all circumstances, urged flexibility and a change in tactics (as an evident pattern would enable the opponent to identify vulnerabilities), and was wary of head-on clashes. In order to strike when the enemy was not properly focused, he urged getting to the high ground, checking whether the opponent was left- or right-handed, and trying to push him into difficult terrain. Timing was important, which meant varying pace and staying alert. His preference was to attack first, but attention had to be paid to whether the enemy’s strength was waxing or waning.

  Whether, as some claimed, a winning Japanese business strategy could be adduced from all of this was less clear. The Book of Five Rings was not intended for a general reader but for those being trained in a particular martial arts style and attuned to its distinctive spiritual foundations. One authority described it as being “terse to the point of incomprehensibility” and suggested that its “unintelligibility” allowed “the text to function as Rorschach inkblots within which modern readers (businessmen, perhaps) can discover many possible meanings.”16 To the extent that Musashi was taken seriously in Japan it was as likely to be less as a source of strategic insight and more as something of a role model, as a Samurai hero celebrated for his humility, inner peace, courage, strength, and ruthlessness.

  George Stalk, who was sent by the Boston Consulting Group (BCG) to work in Japan in the late 1970s, was less interested in the softer side of Japanese strategy than in its harder, tougher side. He developed his ideas in a 1988 Harvard Business Review article and then a book.17 This focused on the importance of time as a source of competitive advantage. He picked up on the similarity between his views, which stressed making decisions and implementing them faster than competitors, and those of John Boyd and his OODA loop, encouraging getting inside the decision cycle.18 This led to a line of argument (and language) familiar to anyone who had been following the military reform debate in the United States. In a competitive situation, he noted, strategic choice was limited to three options: seek peaceful coexistence with competitors, which was unlikely to lead to stability; retreat, which meant getting out of markets or limiting exposure through consolidation and focus; or attack, which was the only option that offered growth. But a direct attack through cutting prices and expanding capacity carried high risk, so the best option would be “indirect attack,” involving surprise, leaving competitors caught by the speed of the attack or by their inability to respond. He described how the Japanese did this by tightening up their “planning loops,” from the start of the development of a new product to getting it to the customer. This not only saved money but also left competitors struggling to catch up.19

  The serious question underlying the “business-as-war” literature was whether the two activities were sufficiently similar for military strategy to work in a business context. In some areas, where companies were competing hard for market share, trying to protect themselves from acquisitive predators, repulsing sneaky insurgents, or going on the offensive against a vulnerable establishment, the similarities could appear compelling. By and large, the case studies in this literature involved companies competing head-on (Coca-Cola versus Pepsi-Cola was a classic). Once companies could be represented as armies in battle they could be subjected to the same principles. American military strategists in the 1970s and 1980s began to explore the relevance of Sun Tzu and Liddell Hart, and contrast the virtues of maneuver warfare with unimaginative and costly attrition. Encouraged by John Boyd, they considered how to get inside the decision cycles of opponents to leave them disoriented and confused. With a certain lag, these themes were also picked up by business strategists. A number were certainly well aware of Boyd’s work.

  Military strategies were tested only occasionally in one-off encounters that might not always be as decisive as hoped but could be expected to change the terms of any future encounters. Business strategies were tested daily but did include opportunities that could be quite unique to one company and once exploited could create a durable advantage. It was not true that military strategy only involved states as fixed and unchanging entities. Though rare, states could disappear through takeovers and new ones come into existence through fragmentation. With business this was, however, far more normal and possibly its most important distinguish
ing feature. Companies could break up, be taken over, or simply go out of existence as new ones formed. This made the interaction of internal organization and external environment much more complex. The strategic literature, however, paid surprisingly little attention to this interaction. Arguably, the disciplinary divisions in the social sciences did not help. By and large, economics addressed questions of the relationship of firms to their markets. Its eventual forays into organizational structures were influential but generally disastrous. To understand organizations, sociology was much more helpful but provided few tools (and a disciplinary lack of interest) for analyzing relationships to operating environments. The division in the literature means that our account must follow the first of these strands, led by economics, before it can return to the second, led by sociology.

  CHAPTER 32 The Rise of Economics

  The ideas of economists and political philosophers, both when they are

  right and when they are wrong, are more powerful than is commonly

  understood. Indeed the world is ruled by little else. Practical men, who

  believe themselves to be quite exempt from any intellectual influence, are

  usually the slaves of some defunct economist.

  —John Maynard Keynes

  ECONOMICS CAME TO acquire an almost hegemonic position in strategic management. This was not because it was uniquely fitted for this intellectual purpose but because of deliberate decisions to adopt it as the foundation of a new science of decision-making and the active promotion of this new science by bodies such as the RAND Corporation and the Ford Foundation, both of which encouraged its embrace by business schools. As with Plato’s philosophy, a new discipline that offered eternal truths was created in part by disparaging and caricaturing what had gone before for its lack of rigor.

  The best place to start this story is with the RAND Corporation, which we identified in the last section as the home of game theory and the belief that a formal science of decision could be developed. This effort gained credibility because of the very special issues posed by nuclear weapons. The effort transformed thinking about not only strategy but also economics because it demonstrated the possibilities opened up by powerful computing capabilities for modeling all forms of human activity. Philip Mirowski has written of the “Cyborg sciences,” which developed along with computing, reflecting novel interactions between men and machines. They broke down the distinctions between nature and society, as models of one began to resemble the other, and between “reality” and simulacra. The Monte Carlo simulations adopted during the wartime atomic bomb project for dealing with uncertainty in data, for example, opened up a range of possible experiments to explore the logic of complex systems, discerning ways through uncertainty and forms of order in chaos.1 RAND analysts saw them as supplanting rather than supplementing traditional patterns of thought. Simple forms of cause and effect could be left behind as it became possible to explore the character of dynamic systems, with the constantly changing interaction between components parts. The models of systems, more or less orderly and stable, that had started to become fashionable before the war could take on new meanings. And even in areas where intense computation was not required there was a growing comfort in scientific circles, both natural and social, with models that were formal and abstract, not based just on direct observations of a narrow segment of accessible reality but also on explorations of something that approximated to a much larger and otherwise inaccessible reality. They could be analyzed in ways which the human mind, left on its own, could not begin to manage. As one of the first textbooks on operations research noted, this work required an “impersonal curiosity concerning new subjects,” rejection of “unsupported statements,” and a desire to rest “decisions on some quantitative basis, even if the basis is only a rough estimate.”

  In their landmark book of 1957, which gave the field renewed vigor, Duncan Luce and Howard Raiffa noted prematurely the decline of the “naive bandwagon-feeling that game theory solved innumerable problems of sociology and economics, or at the least, that it made their solution a practical matter of a few years’ work.”2 They urged social scientists to recognize that game theory was not descriptive. Instead it was “rather (conditionally) normative. It states neither how people do behave nor how they should behave in an absolute sense, but how they should behave if they wish to achieve certain ends.”3 Their injunction was ignored and game theory came to be adopted as more of a descriptive than normative tool.

  One reason for this was the development of the Nash equilibrium, named after the mathematician John Nash (whose struggle with mental illness became the subject of a book and a movie).4 This was an approach to nonzero-sum games. The idea was to find a point of equilibrium, comparable to those in physics when forces balance one another. In this case, players sought the optimum way to reach their goals. The equilibrium point was reached when the players adopted a set of strategies that created no incentive for any individual player to change strategy so long as the others stayed unchanged.5 Nash’s contribution came to be celebrated within economics as “one of the outstanding intellectual advances of the twentieth century.”6 But its value to strategy was limited. On the one hand, a lack of points of equilibrium led to chaos; on the other, too many points resulted in an indeterminate situation. As a contrast, Tom Schelling demonstrated the possibilities of using abstract forms of reasoning to illuminate real issues faced by states, organizations, and individuals. He encouraged people to think of strategy as an aid to bargaining, and he explored with great insight the awful paradoxes of the nuclear age. But he explicitly eschewed mathematical solutions and drew on a range of disciplines, thus abandoning any attempt to develop a pure, general theory. Mirowski found Nash’s non-cooperative rationalism wanting but also found Schelling’s more playful, allusive mode of analysis exasperating because of its lack of rigor. Schelling avoided the restrictive forms of game theory and the challenging mathematics of Nash in order to make paradoxical points about communication without communication and rationality without rationality.7 Mirowski understated Schelling’s importance as a conceptualizer and his recognition of the limits of formal theories when it came to modeling behavior and expectations. “One cannot, without empirical evidence,” Schelling observed, “deduce whatever understandings can be perceived in a non-zero-sum game of maneuver any more than one can prove, by purely formal deduction, that a particular joke is bound to be funny.”8 Schelling, however, had many more admirers than imitators. In economics Nash became part of the mainstream.

  The extraordinary boost from RAND’s budget and advances in computing put social science on a new footing. The effect was particularly striking with economics. Orthodox economics had faced a crisis during the great depression of the 1930s. This led to greater empirical rigor backed by improved statistical analysis. Many key figures had learned the analytical techniques in wartime operational research. Even where there were important differences in emphasis and approach, as for example between the Chicago School and the Cowles Commission (which had been set up in 1932 to improve the collection and statistical analysis of economic data), they had much in common. Notably, they were rooted in the neoclassical tradition, going back to Walras and Pareto, and assumed that the safest assumption was of individual rationality. As Milton Friedman, the most prominent Chicago economist, put it: “We shall suppose that the individual in making these decisions acts as if he were pursuing and attempting to maximize a single end.”9 Friedman considered the debate about whether people really acted so rationally, following complex statistical rules, irrelevant. It was an approximation that was productive for theory, leading to propositions that could then be tested against the evidence.

  Friedman and his colleagues were methodologically pragmatic, although dogmatic in their conviction that the market worked best when left alone by government. In this they were influenced by Friedrich Hayek, an Austrian who had acquired British citizenship in 1938 and had been teaching at the London School of Economics unt
il he was recruited to Chicago, though not by the economics department, in 1950. His most famous book, The Road to Serfdom, was published during the war and warned against the inclination to central planning that was gathering momentum under the combined influence of socialism and the wartime experience. Meanwhile, the Cowles Commission, influenced by John von Neumann and sponsored by RAND, was up for new methodological challenges and was more inclined to believe that robust models could support enlightened policy. Either way the assumptions and methods associated with game theory became part of a wider project to develop new forms of social science.

  Economics into Business

  The Ford Foundation was at the fore in exploring how management within big government and big business could become vital instruments of efficiency and progress. In the late 1940s, the Foundation moved from addressing the needs of the Ford Company’s own operations around Detroit to meeting a broader agenda. The deaths of both Henry and Edsel Ford led to a surge of money into the Foundation. The man chosen to head a study committee to set the objectives for the future was H. Rowan Gaither, then chairman of RAND and later to become the Foundation’s president. He was convinced that social science could and should be mobilized to serve the nation, and that this required managers who understood this science and could appreciate the possibilities for its application. He spoke to the Stanford Business School in 1958 about how “the Soviet challenge requires that we seek out and utilize the best intelligence of American management—and in turn put on management a national responsibility of unparalleled dimensions.”10