Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
It is difficult to achieve decentralized decisions and consistent strategic action across a large diversified company, but some companies have done so by employing a strategic principle. A strategic principle is defined as a memorable and actionable phrase that condenses a company's strategy that is communicated throughout the organization (See the illustration below). The purpose of this paper is to describe how a strategic principle is created and used to help companies maintain strategic focus.
Distillation and Communication
The point of having a corporate strategic principle is so that everyone in an organization works towards the same strategic objective. It is important to note that a strategic principle is not a mission statement. A mission statement is an aspirational statement about a company's culture. A strategic principle, on the other hand is an actionable statement about a company's strategy. For example, GE's strategic principle, "Be number one or number two in every industry in which we compete, or get out" is action oriented.
Three Defining Attributes
To be effective, a strategic principle should:
Enforce trade-offs between competing resource demands,
Test the strategic soundness of a particular action, and
Set clear boundaries for employee decisions while allowing them the freedom to experiment.
For example, America Online's strategic principle is "Consumer connectivity first - anytime, anywhere." This helped the company decide to allocate its resources to improve connectivity at its web site rather than maintaining its network infrastructure. It also helped AOL to test possible business moves against its strategy, and to focus on experimenting with various marketing techniques, e.g., mailing 250 million AOL diskettes to consumers nationwide, rather that using traditional advertising.
Needed Now More Than Ever
Four situations make a strategic principle necessary for success:
Decentralization - As decentralization becomes more common, a mechanism to ensure consistent strategic action increases.
Rapid growth - Rapid growth means less-experienced managers will need a principle to counteract their shortage of experience.
Technological change - Technological changes require fast reactions and a guiding principle is usually needed.
Institutional turmoil - For example, changes in leadership can bring changes in strategy, but a strategic principle can help the company stay on track.
Strategic Principles in Action
Southwest Airlines's strategic principle is "Meet customer's short-haul travel needs at fares competitive with the cost of automobile travel." In 1983, the company initiated a service to Denver, but pulled out of Denver three years later because the higher costs associated with delays (added taxi time and circling because of bad weather) would drive up ticket prices and conflict with its strategic principle. AOL's focus on enabling customer connections, "anytime, anywhere" has helped it with hundreds of acquisitions and deals, e.g., the Motley Fool financial site for do-it-yourself investors.
Creating a Strategic Principle
An effective strategic principle must isolate and capture the characteristics of a company that differentiates it from its competitors. It must represent a plan for how the company can effectively allocate its resources to create value in a unique way that is summarized in a brief phrase that captures the company's point of differentiation. Potential phrases should be questioned and tested. Does it capture the company's long term strategy? Is it clear, concise, and memorable? Does it promote and guide action? In other words, does it have the three defining attributes, i.e., does it enforce trade-offs between competing resource demands, test the strategic soundness of a particular action, and set clear boundaries for employee decisions while allowing them the freedom to experiment? After considerable testing and feedback from others to insure that an effective strategic principle has been created, it should be communicated throughout the organization.
When Rethinking is Required
A company's strategy should be reviewed and updated periodically, but the strategic principle is not likely to change unless there are significant shifts in the industry environment, e.g., technological changes or new legislation.
A mission statement is crucial for disseminating a company's values and culture. A strategic principle serves the same purpose for disseminating a company's strategy. An effective strategic principle gives employees a directive broad enough to promote enterprising behavior, but specific enough to align their behavior with the company's strategy.
Note: Before a company can develop a strategic principle it has to know what its strategy is, and many don't. A helpful way to determine if a company has a unique strategy is to develop a strategy canvas comparing the company's value curve with those of competitors. Part of this technique includes developing a "tag line" that is essentially the same as a strategic principle. See Kim, W. C. and R. Mauborgne. 2002. Charting your company's future. Harvard Business Review (June): 77-83. (Summary).
Other Related summaries:
Johnson, M. W., C. M. Christensen and H. Kagermann. 2008. Reinventing your business model. Harvard Business Review (December): 50-59. (Summary).
Kaplan, R. S. and D. P. Norton. 1996. Using the balanced scorecard as a strategic management system. Harvard Business Review (January-February): 75-85. (Summary).
Kim, W. C. and R. Mauborgne. 1997. Value innovation: The strategic logic of high growth. Harvard Business Review (January-February): 103-112. (Summary).
Kim, W. C. and R. Mauborgne. 1999. Creating new market space: A systematic approach to value innovation can help companies break free from the competitive pack. Harvard Business Review (January-February): 83-93. (Summary).
Kim, W. C. and R. Mauborgne. 2004. Blue ocean strategy. Harvard Business Review (October): 76-84. (Summary).
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Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press. (Summary).
Porter, M. E. 1987. From competitive advantage to corporate strategy. Harvard Business Review (May-June): 43-59. (Summary).
Porter, M. E. 1996. What is a strategy? Harvard Business Review (November-December): 61-78. (Summary).
Porter, M. E. 2001. Strategy and the internet. Harvard Business Review (March): 63-78. (Summary).
Porter, M. E. and M. R. Kramer. 2006. Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review (December): 78-92. (Summary).
Porter, M. E. and M. R. Kramer. 2011. Creating shared value: How to reinvent capitalism and unleash a wave of innovation and growth. Harvard Business Review (January/February): 62-77. (Summary).