Strategy in a Digital World: Have the Basic Principles Changed?

The work we’re collectively doing in Surrey Business School’s CoDE (Centre for the Digital Economy) raises serious questions about strategy and the basic assumptions we make.  If you relax these assumptions, then the prescriptions they’re advocating make less and less sense. We look into how you can interpret the principles of strategy into a new digitally connected world.

An article from a few years ago by Steve Denning contained an analysis of why Porter’s consulting company, Monitor, collapsed in a heap in 2012 with unpaid debts. The article questions Porter’s work and the relevance of “5 Forces” to a digital economy, and is rather pointed in its criticism:

“even a blindfolded chimpanzee throwing darts at the Five Porter Forces framework can select a business strategy that performs as well as that prescribed by Dr. Porter and other high-paid strategy consultants.”

This echoes Andrew Campbell’s recent HBR blog post, about the basic principles of strategy not changing for 30 years.

It’s very interesting to see Campbell make the argument that management principles haven’t changed in over 30 years, and his definition of what those principles are. It seems hard to disagree with these principles, as stated — but are they really what dominates management? And haven’t we seen that a focus on these ideas leads to short-termism, an avoidance of “outside-in” thinking, and a misunderstanding of how the impact of digital technology (speed, transparency, reach, interaction, etc.) have fundamentally shifted the basic of parameters of success for companies?

…or have we been drinking too much of our own Kool-Aid…?

So, what are the “principles of strategy” and what is their simple interpretation in a digital world?

According to Campbell, the basic principles of strategy are:

  1. If you want to earn above the cost of capital (in other words, if you want to create value), you must get a higher return on your efforts than the average competitor.
  2. To get a higher return than the average competitor, you must have an advantage, or you must compete in an unusually attractive sector.
  3. There are only two ways to get an advantage. Your prices must be higher, or your costs, including the cost of your balance sheet and the cost of taxes, must be lower.
  4. Unusually attractive sectors are those where the forces of competition are muted. Usually this is because there are few competitors. But there are other reasons, such as legislation or demand growing faster than supply.

We think the classic ‘design school’ strategists (Porter, Campbell, et al) are right in saying that the objectives of strategy haven’t changed (for example: competitive advantage – sustainable or otherwise; earning returns above the cost of capital, etc.).  But where we think they are mistaken/dated is in some of their underlying assumptions:

  • That the underlying forces are unchanged (examples where this simply isn’t true are economics of entry barriers, scaling, platforms, etc.)
  • That the boundaries of what constitutes an ‘industry’ – for which you can analyse five forces – are clear and fairly stable (e.g. what exactly is Biobeats’ ‘industry’? Its activities and implications reach into health care, insurance, behaviour, ethics, economics and business models, and the company’s originators had no idea where the concept would end up)
  • That you can ‘predict’ what your strategy should be primarily by analysing data about your situation using the appropriate frameworks

Find out more about Surrey Business School’s CoDE.

By Professor Alan W Brown and Dr Ben Shenoy