Strategy is power, but power corrupts

Written by Don Sull

When people talk about strategy, they rarely mention power. Yet power, as my colleague Alejandro Ruelas-Gossi and I have argued, is central to traditional views of strategy. And the quest for power sets in place an insidious dynamic that undermines a firm’s ability to grow, and can threaten its very survival.

Strategy is dominated by two schools of thought—industry structure and the resource-based view of the firm—and both link value creation to power. In the industrial structure framework first laid out by Professor Michael Porter, firms try to erect barriers to entry that keep rivals out. Once they have built these competitive barricades, firms can set prices above what the could charge in a more competitive market, an ability known as “market power.” A powerful firm can leverage its market power to pay suppliers less and create further obstacles to future entry.

Seen through the resource-based view, firms create and sustain value to the extent they control resources or competencies that create value (by cutting costs or increasing customers’ willingness to pay), are rare, and difficult to substitute. Power, in this view, arises from dependence. Coca-Cola exercises power over its bottlers, because these distributors depend on Coca-Cola. Owning a resource, in this case one of the most valuable brands in the world, is the source of both the bottlers’ dependence and Coke’s power.

The conventional strategic wisdom views power as a good thing for the firm that wields it. Powerful firms—Coca-Cola, Royal Dutch Shell, Microsoft, or Novartis—can capture more economic value by squeezing suppliers and distributors or hiking prices. Strategic power helps firms sustain value into the future by fending off established rivals or new entrants that might compete away profits. No wonder powerful firms are so attractive to investors like Warren Buffett, who described his ideal company as an economic castle protected by an unbreachable moat.

Executives crave strategic power as much or more than investors, because it makes their life much easier. First, managers can get things done by the raw exercise of power over employees, distributors, suppliers and even customers who are dependent on the firm. Second, strategic power provides greater certainty about future revenues and profits. Finally, strategic power allows firms to weather changes in the marketplace without having to respond immediately. General Motors’ market power in the 1950s allowed the automaker to survive decades of changes in technology, regulations, competition and consumer preferences before finally succumbing to bankruptcy.

The GM example hints that strategic power is not an absolute good. The obvious risk of over reliance on strategic power is that no positional or resource advantage lasts forever. The personal computer disrupted IBM’s stranglehold on mainframes, just as the tablet threatens Microsoft’s dominance in PC operating systems.

Over time, strategic power also tends to corrode a company’s culture. When speaking to customers with high switching costs, company representatives often lecture customers on what they should want, rather than listening to what they do want. Sony lost to the iPod, in part, because it forced users of its digital music players to use its proprietary ATRAC software rather than the MP3 standard that customers wanted. In selecting partners to work with, power-drunk executives prefer vassal organisations whose dependency renders them easy to control. Leaders who can exert hierarchal control to get things done within their own company often apply the same heavy-handed tactics to corporate partners.

The very market power that companies use to protect their established business hinders them from seizing new opportunities. To grow revenues, companies must often enter new market segments in which they lack power, as Microsoft discovered in the game box, mobile phone and Internet search segments. To seize an emerging opportunity, these companies must also assemble a new set of resources or competencies that they do not already control. The iPod’s success depended not on hardware and software alone, but on the cooperation of record labels and producers of complementary products such as speakers and carrying cases. Owning its own record label hampered Sony from striking a deal with other music companies.

My next post will discuss an alternative view of strategy that is less dependent on power and is well suited to growth.

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