A Review of ‘Strategy as Stretch and Leverage

A Review of ‘Strategy as Stretch and Leverage’ – By Gary Hamel and C. K. Prahalad This review will focus on the article ‘Strategy as Stretch and Leverage’ by Gary Hamel and C. K. Prahalad (1993). This review will identify the arguments made in the article and then place it within the context of one of the key debates in strategy academia. The review will then investigate the underlying assumptions made and evaluate the strengths and weaknesses of the article. The main argument of the article is that companies focus too much on evaluating their environment and creating strategy based on those factors.

Hamel and Prahalad (1993) suggest a different approach to developing strategy that focuses on the mind-set of managers in order to achieve success. Using the example of small firms that seek to topple the industry leader they refer to this approach as stretch, where the firm sets aspirations and targets in the long term that are beyond their resource capabilities, and leveraging, where the firm undertakes incremental activities, which allows them to achieve this unrealistic goal.

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This approach requires a radical change in the way traditional managers think and operate, Hamel and Prahalad (1993) claim that “long term competitiveness depends on managers’ willingness to challenge continually their managerial frames. ” Having defined the key argument of the article, the next step is to place it within one of the major debates in strategy academia. Upon further review of the article it becomes clear that Hamel and Prahalad (1993) touch upon several of the key strategy debates, however the article fits best into the Organisation vs.

Environment (Cheng and Bennett, 2007) debate. The organisation vs. environment debate revolves around the shaping of organisational strategy. Academics that favour the environmental side of the debate, argue that “firm performance is primarily determined by outside factors such as industry structure” (Kim et al. , 2008) i. e. the environment shapes the organisations strategy. The most commonly used approach to environmental analysis for the purpose of strategy development is the Five Forces Model (Porter, 1979) which analyses all of the environmental factors that can affect the organisation.

The other side of the argument is that organisational strategy is shaped by the internal resources and competencies of the organisation i. e. : “a company’s value propositionincluding its capabilities, assets, and cultural DNA” (Day, 2004). An example of this approach can be found in work by Duncan et al. (1998) who created a four stage approach of analyzing an organisation with the view of creating a strategy based on the results. Hamel and Prahalad (1993) appear to have positioned themselves on the organization side of the environment vs. rganization strategy debate. They do however recognise the role that the environmental view of strategy formation can play. They describe the strategy frame that focuses on “the relationship between the company and its competitive environment” as “not wrong, only unbalanced. ” (Hamel and Prahalad, 1993).

This was a new approach to the debate, suggesting that a combination of the two views could provide better results. This provoked further research into the idea, writers such as Barney (1991, 1995) aimed to expand the knowledge of the strengths and weaknesses (i. . the internal factors) side of the SWOT analysis tool used in Porter’s (1981) work to analyse the external factors that influence a firms success. Having recognised the environmental side of the debate, Hamel and Prahalad (1993) go on emphasising their view that an organisation approach to formulating strategy should take priority. The theme throughout the article involves emphasising the point that, despite considerably less resources, a smaller organization can compete and even overtake a large, well established competitor.

In order to do this the authors recommend the use of stretch and leveraging, both of which focus on the internal approach of the business to the outside world and are driven through management mind-sets. This argument that managers, as a unique internal resource of the business, can create a valuable strategic position for a company is supported by Mosakowski (1998) who said that managerial prescriptions can increase long term revenues as their nonunique choices can create unique resources.

Throughout the writing of the article Hamel and Prahalad (1993) base their arguments on several assumptions. The primary assumption made is that “Creating stretch, a misfit between resources and aspirations, is the single most important task senior management faces” (Hamel and Prahalad, 1993). Having established this core assumption the authors then use this as a platform to emphasise the necessity of a resource leveraging strategy in order to bridge the gap between the inflated expectations and the resource base of the company.

Following on from this the authors make their second assumption whilst describing the advantages of stretch and leverage driven strategy to smaller businesses. Hamel and Prahalad (1993) argue that larger companies lack of ambition, and as a result their policy of downsizing acts as a de-motivator. There is support for the downsizing being demotivating argument from Minnick and Ireland (2005) who say “For employees adversely affected by these changes, the effects can be demoralizing. The final key assumption made in the article is that concentrating and leveraging resources towards a single focal point is more effective than spreading them. Based on this assumption the authors argue that focusing on a single goal or competency at one time, as in the example of Komatsu provided, allows smaller firms to gain a competitive advantage in the long term over more established rivals in the market.

This fits into the organization driven strategy argument which emphasizes the role of firm specific resources and knowledge in achieving competitive advantage (Wang et al. 2009). Having established the core assumptions of Hamel and Prahalad’s (1993) article the next stage is to analyse the strengths and weaknesses of the article and therefore it’s applicability to real world strategy development. A key strength of Hamel and Prahalad’s (1993) article is that they were among the earlier authors to recognise that both sides of the environment vs. organisation driven strategy debate have merit and that a combination of the two approaches may result in increased firm performance.

This idea provoked a lot of academic research for example Ghoshal and Bartlett (1994), who were later supported by evidence presented by Spanos and Lioukas (2001), found that a firm’s success is dependant upon industry and firm-specific effects. Another key strength of the article is that Hamel and Prahalad (1993) provide a starting point for organisations to begin implementing the stretch and leverage strategy they recommend, these are referred to as core competencies. Core competencies are seen as “the critical basis for sustainable competitive advantage” (Clardy, 2008) and a company’s awareness f them provides the basis of the 5 resource leveraging methods described in the article. This prescribed method of leveraging resources provided by Hamel and Prahalad (1993), coupled with the real world examples of success using this strategy would suggest that it is an easily applicable approach to utilise in the formulation of business strategy in the real world. There is also vast theoretical backing for the claims made in the article after it formed the basis of several further research pieces such as Poh-Lin and Roth (1999).

There are however parts of the article that require further development and explanation. For instance throughout the article Hamel and Prahalad (1993) refer to “late-comers” to the market as the organisations that should utilise stretch and leverage. The article doesn’t define whether they are referring to existing players in the market that aren’t market leader, or whether they’re referring to new start-ups. This information is crucial to the article’s main point as, if they are referring to new start-ups, it could be suggested that they would not be focused on long term goals, i. e. ot stretching, as statistics show with a failure rate of more than half within three years (Beresford and Saunders, 2005) they would be more focused on survival. There are also potential weaknesses in the assumption the authors make regarding the focus of resources on a single target rather than spreading over multiple projects. Hamel and Prahalad (1993) quote the example of NEC as a demonstration of this proposal. There is support for the argument that focusing on one aspect provides success, however Ching-Pu and Chen (2009) also note the increased risk of this approach which can be demonstrated with an industry example, IBM.

In the past IBM was renowned for being a high quality technology product supplier but since 2000 has recently adapted to become an on-demand service supplier (Bulik, 2005), a change which has had positive effects on business performance allowing IBM to deliver growing dividends to shareholders even through the recession. This change was provoked by the difficulties IBM faced in the early 1990’s when their lack of significant diversification from hardware left them reeling after the PC revolution gave millions of people access to computers and the client/server revolution which sought to link those PCs together (IBM. om). There are also limitations on the applicability of the article to the real world, which is particularly highlighted in today’s economic situation. Hamel and Prahalad (1993) don’t discuss how their stretch and leverage approach would be affected by an economic downturn. In a downturn the tendency of organisations is to reduce spending and investment into projects (Latham, 2009). This would adversely affect the plausibility of several of the leveraging approaches that are suggested e. g. Co-option and Borrowing and may limit the effectiveness of the strategy as a whole.

Despite the potential limitations of the assumptions made in the article, Hamel and Prahalad (1993) still make a valid point in terms of the combined organisation and environment approach to creating strategy being the most effective determinant of performance, as supported by Spanos and Lioukas (2001). The lack of discussion on how this theory would work in downturn limits its usefulness in practice, especially in the current climate, however the use of real world examples presents a strong case for managers utilising this approach during times of economic growth.

Reference

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Beresford, R. , Saunders, M. N. K. (2005) ‘Professionalization of the business start-up process’, Strategic Change, Vol. 14 Issue 6, pp 337-347 Bulik, B. (2005) ‘Brands: IBM’, B to B, 90(13), pp 26-27 Cheng, J. , Bennett, D. (2007) ‘Success Strategies in the Chinese Chemical Industry: A Survey and Case Study Investigations’, Journal of Chinese Economic & Business Studies, Vol. Issue 2, pp 91-112 Ching-Pu, C. , Chen, H. (2009) ‘A proposed perspective inspired by entropy on diversification, corporate performance and risk’, International Journal of Organizational Innovation, Vol. 2 Issue 1, pp 53-68 Clardy, A. (2008), ‘The strategic role of Human Resource Development in managing core competencies’, Human Resource Development International, Vol. 11 Issue 2, pp183-197 Day, G. S. (2004) ‘Which way should you grow? ’ Harvard Business Review, Vol. 82, Issue 7/8 pp24-26 Duncan, W. J. , Ginter, P. M. , Swayne, L. E. 1998)

‘Competitive advantage and internal organizational assessment’, Academy of Management Executive, Vol. 12 Issue 3, pp6-16 Ghoshal, S. , Bartlett, C. A. (1994) ‘Linking Organizational context and managerial action: The dimensions of quality management’, Strategic Management Journal, Vol. 16 pp 91112 Hamel, G. , Prahalad, C. K. (1993) ‘Strategy as Stretch and Leverage’ Harvard Business Review, Vol. 71 Issue 2, pp75-84 IBM, History of IBM Available at: http://www03. ibm. com/ibm/history/history/history_intro. html (Accessed 28th October 2010) Kim, Y. J. Song, J. , Koo, C. (2008) ‘Exploring the effect of strategic positioning on firm performance in the e-business context’, International Journal of Information Management, Vol. 28 Issue 3, p203-214 Latham, S. (2009) ‘Contrasting Strategic R

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