Hardball and OODA loops: strategy for small firms

Allied Academies International Conference page 5 HARDBALL AND OODA LOOPS: STRATEGY FOR SMALL FIRMS Thomas M. Box, Pittsburg State University tbox@pittstate.edu Kent Byus, Texas A&M University – Corpus Christi kbyus@cob.tamucc.edu Chris Fogliasso, Pittsburg State University chrisfog@pittstate.edu Warren D. Miller, Beckmill Research wmiller@beckmill.com ABSTRACT This paper reviews (briefly) the field of strategic management and offers a prescription for a new approach to strategy for small firms. The authors believe this makes a potentially valuable contribution to the strategy literature because the current approaches to strategy – Porter’s Positioning School and Barney’s Resource Based View – are viewed by many as appropriate for large firms, but hard for the smaller firm to access.. This paper integrates the contributions of George Stalk, Senior Vice President at Boston Consulting Group and Col. John Boyd (United States Air Force – Retired). Stalk is the author of several articles and a book entitled Hardball: Are You Playing to Play or Playing to Win? Boyd was a strategy consultant to the Department of Defense and was credited for developing the United States Marine Corps’s Maneuver Warfare philosophy. INTRODUCTION Strategy as a concept, as an academic field of study, and as a playground for hordes of consultants, has a rich history and a body of literature dating back almost 2500 years. The earliest known writings on the subject date to the Warring States period of Chinese history (480–221 B.C). The author of The Art of War (frequently called The Art of Strategy), Sun Tzu, may have been one person or several (Wing, 1988). In any case, this short book of 5600 words is one of the most widely translated and read books in the world today. It remains the subject of continued study and has been used as a textbook in thousands of classes on strategic management. It was introduced to the west in 1772 by a Jesuit priest—Fr. P. Amiot. Tis translation was reputedly a favorite of Napoleon (Wing, 1988). English, German, and Russian translations appeared in the early 1900s. In 2007, the book is used at the United States Army’s Command and General Staff College and by various Marine Corps proponents of “maneuver warfare." The Art of War remains pertinent to strategy more than two millennia after it was written. Musashi’s Book of Five Rings, published originally in the 17th century, is another relevant guide to strategy and is also widely studied to this day. It, too, is used at the Army’s Command and General Staff College and as a text in many strategic management classes for business professionals in Japan, the United States, and Western Europe. Thus we see that the subject of strategy—certainly military strategy—has a long and distinguished written history. That raises a question: “Does military strategy have any application to business?” The view taken here is a resounding “Yes!” However, we acknowledge that there are substantive differences between military and business strategy. In the interest of “full disclosure”, we acknowledge that two of the authors are former Marines and one of the authors is a former Special Forces officer. Proceedings of the Academy of Strategic Management, Volume 6, Number 1 Jacksonville, 2007 page 6 Allied Academies International Conference Most published works about business strategy seem to apply to large organizations. That is no surprise. By their very nature, large businesses attract the attention of regulators, government agencies, the investing public, and authors and editors. By definition, large businesses are those that exceed the Small Business Administration’s definitions of small business: a headcount cap of 500 for manufacturing and mining firms and a revenue cap of $6.5 million for retailers. In this manuscript we focus on very small businesses (VSBs). We define a VSB as one employing fewer that 100 people. Of the 7.2 million business establishments in the United States in 2002, 7.03 million (97.6%) employed fewer that 100 people. A full 6.2 million (86.1%) actually employed fewer than 20 (Statistical Abstract of the United States, 2006). Three of the four authors of this manuscript have worked for, owned, and consulted with VSBs over the last twenty years. We understand their problems, and we, frankly, are more interested in them than in large organizations. It is our intent to offer to VSBs specific recommendations about designing, implementing, and controlling strategy. COMPETITIVE ADVANTAGE The starting point for designing a successful strategy for a VSB is to pick which source of competitive advantage the firm will emphasize. Michael Porter (1980) argued that there are really only two broad sources of competitive advantage: low-cost leadership and differentiation. Low-cost leaders generally emphasize large facilities, standardized products and services, extraordinarily “tight” cost controls, and, often, very routinized job design. They succeed by driving down unit cost and being able to offer customers low prices. In contrast, differentiators are different, just as their label implies. They identify the features and options in both product and customer service that customers want and need. They offer these features and options at premium prices. That is, they charge more than the cost of providing the features and options. This source of competitive advantage means the differentiators must absolutely have a keen grasp of what the customers need, want, and will pay for. Virtually without exception we recommend that VSBs become differentiators. The capital and operating costs required to be a successful low-cost leader are far beyond the reach of most VSBs. As one of the authors of this manuscript is fond of saying, “For VSBs, attempting to be a low-cost leader is tantamount to swimming through shark-infested waters in a cement wet suit.” Jack Welch (2005, 2006) sees things in a similar way. He describes the starting point for strategy as being the definition of the “big aha.” This is the source of competitive advantage. Welch describes this as “a significant meaningful insight about how to win.” Having chosen differentiation, a VSB must determine how it will be different from its competitors. There are many bases for differentiation: the product, the “bundle” of services surrounding the product, terms and conditions of sale, pricing and discount decisions, promotional activities, communications modes and customer service. We suggest that a VSB pick no more than a couple of differentiating factors to emphasize. However, this requires that the VSB must really understand the needs, wants, and desires of its customer, current and prospective. In a large business, the task of identifying the customer’s needs and wants would typically fall to the folks in marketing research. This is a luxury that most VSBs don’t have; however, we offer several simple steps to accomplish the same thing: 1. List your “top five” customers. Rank the top five on the basis of annual profits, not annual revenue. This information may require your bookkeeper or accountant to do a little “digging.” In terms of profitability, include only direct costs – no allocations with accounting games embedded. Jacksonville, 2007 Proceedings of the Academy of Strategic Management, Volume 6, Number 1 Allied Academies International Conference page 7 2. Meet with each of the top five at a breakfast or lunch and ask a very straightforward question, “How can we better serve you?” Explore their responses with them, and record the answers. 3. Develop (from the answers in 2, above) a carefully designed, one-page written questionnaire that will allow you to “tap” the ideas of a wider group of customers. This is a step that you may want to have someone do for you—like a marketing professor at a nearby college or a small research firm. 4. Administer the survey to at least 250-300 firms. Included should be existing customers, former customers, and future (potential) customers. A response rate (for a well-designed survey) should be 10% to 20%. 5. Carefully analyze the responses. This step is usually best accomplished by a marketing professor or, again, a small research firm. 6. Using the results, decide which differentiating factors will become your goals for the firm. 7. Share the goals with all members of the firm—yes, including the hourly employees. Decide how you will measure the accomplishment of the goals, and start recording and publicizing (internally) the results on a monthly basis. Understand that the results of the survey and analysis described above become the source of your competitive advantage. This is what you will do. This is how you differentiate yourself from the majority of your competitors. It is worth noting that one of the authors of this manuscript has been doing this sort of analysis for his clients for a number of years with great success. Doubling or tripling annual revenue and profits is easily achievable in a short period of time. Implementing this competitive advantage means that you create incentives and sanctions that reward (and penalize) employees for doing the right (and wrong) things. The basic idea is to align the behaviors inside the firm with the expressed wants of the customers. HARDBALL ATTITUDE As in most sports, how you play the “game” separates winners from losers in most industries. We concur with Stalk and Lachenauer (2004) that a hardball attitude is necessary for above industry results. Today, we see much in the business literature suggesting that softball is the appropriate attitude, such things as servant leadership, organizational learning, two-way dialogue, Maslow’s Needs Hierarchy, and Re-imagining. Although these nostrums are appealing, they are neither necessary nor sufficient for achieving above-industry results. It should be pointed out that adopting a hardball attitude does not mean moving beyond the boundaries of ethical conduct of business. Stalk and Lachenauer (2004) describe the following as a Hardball Manifesto: 1. Focus relentlessly on competitive advantage. It is notable that many companies talk about competitive advantage but have great difficulty articulating and measuring what their competitive advantage is. We suggest that the VSB can determine what their competitive advantage should be by completing the survey described above. Then having understood what the competitive advantage should be, they are in a position to implement and measure it. Keep in mind that capitalism is a contact sport that changes over time. That means that sources of competitive advantage also change over time. Dealing with those changes can be facilitated by employing Boyd’s OODA-loop thinking (described below). 2. Strive for “extreme” competitive advantage. This simply means continuing to refine, enhance, and develop existing competitive advantages. An example of this would be Toyota’s Production System (Womack & Jones, 1996). Toyota is clearly the world’s most Proceedings of the Academy of Strategic Management, Volume 6, Number 1 Jacksonville, 2007 page 8 Allied Academies International Conference efficient automobile company at this time. In addition, it is the most profitable with a market cap that is double the combination of the market caps of GM, Ford, and DaimlerChrysler. For years, Toyota has invited competitors to tour its factories and facilities with the certain knowledge that the competitors could not match Toyota’s efficiencies or replicate its organizational culture.. 3. Avoid attacking directly. Hardball players avoid massive frontal assaults on their competitors. Even if they have the strength, they prefer the economies of force inherent in the indirect attack (Stalk & Lachenauer, 2004). This is a key characteristic of Maneuver Warfare as practiced by the United States Marine Corps (Clemons & Santamaria, 2002; Dettmer, 2006; Richards, 2002). Southwest Airlines has historically used this ploy as it moves into new markets. By avoiding head-on competition with the major carriers, it consistently carves out a profitable niches in underserved markets. 4. Know the caution zone. This means entering the grey area between what society considers acceptable behavior and what society considers unacceptable behavior. By doing this carefully, a firm may well be able to establish a new position that provides a distinct competitive advantage. Stalk and Lachenauer (1994) suggest three important considerations. First, does the action violate any existing laws? If yes, it should be eschewed. Second, is the action good for the customer? Third, will the action directly hurt competitors? The Hardball Manifesto is an system of beliefs about how to conduct the operations of the firm. By focusing on creating a competitive advantage, it moves the firm along the continuum of strategy from “me too” to unique and distinctive advantages that translate to above-normal profitability and growth. OODA LOOPS Colonel John Boyd was an Air Force fighter pilot who retired from active flying and eventually became a strategy consultant for the Department if Defense. While on flying status, he acquired the nickname “40-Second Boyd.” From a position of disadvantage, he bet other pilots that he could achieve a position of firing advantage in 40 seconds or less and would pay $40 if he didn’t. Despite flying simulated dog fights against the best pilots in the world—including graduates of the Top Gun schools—legend has it that he never lost the bet. Boyd also is credited with being a principal architect of the F-16, a light-weight, highly maneuverable fighter that revolutionized prevailing logic about how to design fighter aircraft. He was also instrumental in the development of the F-18 and the A-10. Boyd’s contribution to strategy is the OODA loop—a way of thinking about fast-cycle decision making that can yield competitive advantages in very short order. The acronym OODA stands for Observe, Orient, Decide, and Act and is shown in Figure 1. Jacksonville, 2007 Proceedings of the Academy of Strategic Management, Volume 6, Number 1 Allied Academies International Conference page 9 Figure 1 (Source: “The Essence of Winning and Losing,” J.R. Boyd, January 1996, http://www.d-n-i.net) According to Boyd, the key to victory is to create situations wherein one can make good decisions faster than one's opponents. The Observe phase means basic collection of data. Orientation is the analysis and synthesis of data to form a current perspective. Decision means determining the appropriate course of action, and Action is the physical manifestation of the preceding decision. It should be noted that the OODA loop is not unlike Deming’s PDCA cycle for resolving quality problems. Boyd’s OODA-loop ideas manifested themselves in what eventually came to be known as maneuver warfare. A popular anecdote credits Boyd for helping to develop the plan that led to the very impressive coalition victory in Desert Storm-Gulf War I. Maneuver warfare as a current doctrine in the United States Marine Corps embodies the principals of preparedness, flexibility, boldness, and moral courage (Warfighting, 1994). The urgency of fast-cycle decision making is, perhaps, best illustrated by Michael Dell’s observation, “Things happen in the morning that you have to react to in the afternoon. We have to be competitive 24 hours a day, 365 days per year, or else we lose business. A sense of urgency about communicating and problem solving is imperative” (Farrell, 2006). We recommend that a VSB focus on configuring (and frequently reconfiguring) its strategy by rapidly altering elements of its structure, people-related issues, procedures, marketing approaches, and products or services to correspond to those changes they perceive in the competitive environment. This is the Act step in the OODA-loop philosophy. It is also what Jack Welch (2006) means when he says the second step in effective strategy for “small fries” is to “implement like Hell.” CONCLUSIONS AND RECOMMENDATIONS This paper has recommended several things that VSBs can do to survive and prosper in the dynamic, competitive environment that surrounds all businesses in the 21st century. If one were to boil down the recommendations above into a parsimonious few, that list would contain these Proceedings of the Academy of Strategic Management, Volume 6, Number 1 Jacksonville, 2007 page 10 Allied Academies International Conference suggestions. First, determine your source of competitive advantage and enhance that competitive advantage on an ongoing basis. Never be satisfied with “business as usual.” Recognize that many competitive advantages erode over time as competitors “learn” and customers develop new needs, wants, and desires. Second, employ John Boyd’s OODA-loop philosophy to make better, faster decisions. Doing that means, to some extent, emulating the German Army’s Blitzkrieg strategy that was so successful in World War II. In Certain to Win, Chet Richards (2004) identifies two key attributes of Germany’s World War II Blitzkrieg strategy: “Fingerspitzengefülh” (intuitive feel, for complex and potentially chaotic situations) and “Schwerpunkt” (any concept that provides focus and direction to the operation). It is useful to remember that the German Blitzkrieg strategy was one of a series of successful lightning-fast thrusts against much larger, entrenched enemies. REFERENCES Clemons, E. K. and Santamaria, J.A. (2002). Maneuver Warfare: Can Modern Military Strategy Lead You to Victory? Harvard Business Review reprint R0204D. Dettm e r, H .W . (2 0 0 6 ). B usiness and the http://www.goalsys.com/sytemsthinking/2.html. B litz krie g. R e trie ve d June 15, 2006 from Eisenhardt, K.M and Sull, D.N (2001). Strategy as Simple Rules. Harvard Business Review reprint 5858. Farrell, A. (2006). 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