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Chapter 21 of Principles of Strategic Management (978-0-7546-4474-3) by Tony Morden

Resource Stretch and Leverage

Chapter 21

This chapter analyzes the related concepts of “resource stretch” and “resource leverage”. These strategic concepts may be used to formulate, to lead, and to realise an increasingly ambitious rate of enterprise performance. The concepts may be used to achieve significantly more output than at present with the knowledge and capability at the disposal of the organization.

The chapter recaps the concept of strategic intent introduced in Chapter 11. It describes Hamel and Prahalad’s concept of strategy as resource stretch. It analyzes Hamel and Prahalad’s concept of strategy as resource leverage, and it summarizes five major resource leverage strategies.

The copyrights of the material upon which this chapter is based are held variously by Gary Hamel and C.K. Prahalad, Harvard Business School Press, and the President and Fellows of Harvard College. Their permission to reproduce this copyright material is gratefully acknowledged.

Antecedents and Parallels

Hamel and Prahalad (1994) conceptualize strategy formulation in terms of core competencies (described in Chapter 20), and in terms of resource stretch and leverage, described in this chapter. Hamel and Prahalad’s discussion of stretch and leverage has such antecedents and parallels as:

Strategic Intent

Hamel and Prahalad’s conceptualization of strategic intent was described in Chapter 11. Strategic intent is used to define and to communicate a sense of direction about the longer-term strategic position that the leadership of the enterprise wishes to achieve through its processes of objective setting and strategy formulation. Strategic intent comprises:

  • a sense of direction – that is, a meaningful, consistent, and unifying sense of purpose and pattern that is to be maintained over time.
  • a sense of discovering – that will provide opportunities to meet new challenges and explore the unfamiliar.
  • a sense of destiny – that will create meaning, enthusiasm, inspiration, and commitment on the part of managers, employees, and stakeholders.

Hamel and Prahalad contend that strategic intent may imply the use of resource stretch. This means that (i) the present management and use of resources, and (ii) the current operating capabilities of the enterprise may both be deemed inadequate to meet the requirements of strategic intent. Both will need “stretching” in order to meet the needs specified by that strategic intent.

Strategy as Stretch

Stretch is the gap between:

  • the knowledge, resources, willpower, capability, and competence currently available to the enterprise; and
  • enterprise aspirations, and the degree to which its leadership desires to be more productive, more inventive, or more creative in the way in which the organization carries out its activities.

 

The degree of stretch that is deemed to be required by the organization is defined by:

  • the strategic intent; and
  • the nature of the challenges to the enterprise that are likely to face the organization in achieving that strategic intent, as established (i) by the forecasts and future scenarios that may affect the activities of that organization; and (ii) by external or competitive comparisons and benchmarks, for instance as defined by criteria of “excellence”, “world class”, “best value”, or the ambition to be “number one” in the sector, etc.

 

Enterprise Challenges

Hamel and Prahalad conceptualize stretch in terms of focusing attention, effort, and willpower on challenges from which new capabilities or sources of competitive advantage may be built. Hamel and Prahalad comment that it is the job of leaders in the enterprise ‘to focus the organization’s attention on the next challenge, and the next after that. The first might be quality; the next, cycle time ... the next, mastery of a particular technology; and so on. In establishing the capability-building agenda, top management provides employees with a clear view of the next advantage to be constructed’ (p. 136).

The definition and communication of corporate challenges thus provide a focal point for the building or enhancement of capability and competence in the near to medium-term future; and are an operational means of staging the acquisition of new competitive advantages.

Challenges are also seen as a means for harnessing and directing the intellectual and emotional energy that should flow from a proper commitment to the strategic intent of the enterprise. In this, Hamel and Prahalad define corporate challenges as milestones on the path from today to tomorrow.

They however note a caveat that ‘employees are unlikely to rise to a particular challenge if they don’t believe they will benefit proportionately from the firm’s success. For challenges to take root, an atmosphere of “shared pain, shared gain” must prevail’ (p. 143). Relative compensation levels for instance send powerful messages. Great disparities (and perceptions of top management greed) may kill off enthusiasm and commitment to the strategic intent.

Some of these issues were analyzed in their leadership context in Chapter 17 of this book.

Stretch

The gap between resources and aspirations is stretch. Where current resources and capabilities are unlikely to be adequate to meet the requirements of enterprise strategic intent, they will need stretching in order to meet the demands of that intent.

Hamel and Prahalad comment that ‘we believe that it is essential for top management to set an aspiration that creates, by design, a chasm between ambition and resources ... managers must create a misfit between resources and ambitions. Medium term challenges should demand more of the organization than what it currently believes is possible’ (p. 146).

A firm’s strategic intent should represent an ambition that stretches far beyond the current resources and capabilities of the enterprise. A commitment to achieving that strategic intent may have to override the day-to-day constraints of strategic and business planning, capital budgeting (etc). ‘The goal of strategic intent ... is to fold the future back into the present ... unless senior management is willing to commit to a goal that lies outside the planning horizon, there can be no strategic intent. The future will be discovered by someone else’ (p. 146).

Hamel and Prahalad comment that the stretch implied in meeting corporate challenges may force enterprise management to abandon the ‘orthodoxy of conventional wisdom’ and an ‘installed base of thinking’; and to involve and empower employees ‘close to the action’ in identifying issues and solving problems that arise. Stretch implies doing things differently and resourcefully, ‘by fundamentally rethinking processes, roles, and responsibilities’ (p. 137), or by re-engineering them.

The process of stretching aspirations and resources may be charted against, and compared with external market, competitor, or comparator benchmarks. Hamel and Prahalad comment that ‘without external benchmarks, it is all too easy for employees to believe that it is top management, rather than competitive reality, that is applying the pressure for improvement’. At the same time, the enterprise and its competitors should be judged both on the resources available to them; and on the resourcefulness (creativity or imagination) with which they use these resources. Staff skill and enterprise resourcefulness may more than offset an apparent lack of resources and capability.

Hamel and Prahalad conclude that ‘a view of strategy as stretch ... helps bridge the gap that exists between those who see strategy as “a grand plan, thought up by great minds”, and those who see strategy as a pattern in a stream of incremental decisions. Strategy as stretch is strategy by design in the sense that top management does have a relatively clear view of the goal line and a broad agenda of the capability-building challenges that lie between today and tomorrow. Strategy as stretch is strategy by incrementalism to the extent that top management cannot predetermine every single step of the journey to the future. Strategy as stretch recognizes the ... paradox that while leadership cannot be entirely planned for, neither does it happen in the absence of a clearly articulated and widely shared aspiration.

Where fit is achieved by simply paring down ambitions, there will be no spur for such ingenuity and much of the firm’s strategic potential will remain dormant. Tests of realism and feasibility must not be prematurely applied. Stretch and the creativity it engenders are the engine and fuel for corporate growth and vitality. This is why the genesis of the strategy process must be a purposefully created misfit between where the firm is and where it wants to be’ (pp. 146-147).

Strategy as Leverage

Hamel and Prahalad suggest that enterprise management ‘must find a way to close the gap between resources and aspirations that (the) strategic intent opens up’. This is achieved ‘by leveraging resources, by travelling the maximum distance down the road to leadership, using the least possible amount of fuel. The goal is to challenge managers to become more ingenious both in multiplying the impact of the firm’s resource base and enlarging it’ (p. 147).

Using Resources

Hamel and Prahalad conceptualize the enterprise as a portfolio of knowledge, competencies, assets and resources (whether capital, technical, human, financial, operational or managerial).

They comment that a limitation to the level of knowledge and resource that is available to the enterprise is not necessarily an impediment to progress; nor are copious resources a guarantee of continued success. There may be significant differences between the impact that individual enterprises in any particular sector can generate with a given base of knowledge and resources. Some enterprises will be more creative, imaginative, inventive, resourceful and productive than others in the use of their knowledge, capability, and competence.

Strategy as Leverage

Hamel and Prahalad describe stretch and leverage as the two sides of the same coin. Stretch relates to aspiration. Leverage relates to the use of capabilities and resources to achieve these aspirations. Just as necessity begets invention and resourcefulness, so does stretch give rise to resource leverage. Creativity and inventiveness are the offspring of resource scarcity.

Hamel and Prahalad argue that in the absence of proper strategic intent, aspiration and focus, ‘abundance is likely to be little more than a licence for carelessness in strategic decision-making ... resource abundance and the attendant ability to make multiple bets and to sustain multiple failures too often substitute for disciplined and creative strategic thinking’ (p. 154). This is the opposite of stretch and leverage.

An enterprise that instead has a surfeit of ambition and a dearth of resources will quickly discover that it cannot imitate the advantages of more affluent competitors. Such an enterprise may have:

  • to challenge the “orthodoxy” of the organization, to eliminate inflexible thinking, and to change established ways of doing things; and:-
  • creatively to get the most from the limited resources it has; and also:-
  • to proactively create new forms of competitive advantage for itself.

 

Doing More With What You Have

Resource leverage is defined by Hamel and Prahalad in terms of doing more (or adding more value) with what you have. This can be contrasted with Rosabeth Moss Kanter’s (1990) dictum for the post-entrepreneurial corporation that enterprise management will need to “do more with less”.

Hamel and Prahalad contend that leverage-based efficiency gains come primarily from ‘raising the numerator’ (such as revenue and profit) in productivity ratios, rather than from reducing the ‘denominator’ (such as capital employed or employee headcount).

Hamel and Prahalad argue that with the objective of ‘reducing the buck for a given bang’ rather than ‘increasing the bang for a given buck’, denominator-driven corporate restructuring programmes are more about cutting resources than leveraging them. An inefficient firm that downsizes, without improving its capacity for resource leverage, will find its productivity gains will be at best temporary in duration. It may instead embark on a destructive downward spiral of resource and capability attrition towards “corporate anorexia”, entropy, and the potential for institutional decline and market vulnerability.

Resource leverage, on the other hand, implies creativity. Hamel and Prahalad comment that ‘it is about the continual search for new, less resource-intensive means of achieving strategic objectives’ (p. 159). Slimming down the work force and cutting back on investment are however intellectually less demanding for senior management than discovering ways to grow output on a static or slowly growing resource base: ‘cutting the buck is easier than expanding the bang’ (p. 159) for a leadership that is unimaginative, orthodox, short-termist in outlook, or just pure lazy.

Achieving Resource Leverage

Hamel and Prahalad identify five major resource leverage strategies, as follow.

Concentrating Resources

Convergence – the pursuit over a long period of time of a clear strategic intent and an agreed objective will require the effort and willpower of the enterprise to converge consistently, collectively, and synergistically on that intent and that goal. Such convergence may not be possible where there are multiple, inconsistent, and competing objectives. Convergence requires that the enterprise decide how best its resources can be combined and orchestrated to achieve a stretch objective. Such convergence also requires a consistent pattern of direction over time, with an effective leadership “hand on the wheel” steering the same course.

Focus – which is the concentration of effort and resources on a very few objectives at any one time. Peters and Waterman (1982) call this “chunking”. Focus in this sense implies concentrating a critical mass of willpower, effort, and work on the issue to hand until it is satisfactorily resolved; then (and only then) moving on to the next issue. Otherwise, effort will be diluted and dissipated. This is the opposite of resource leverage. Hamel and Prahalad comment (pp. 162-164) that:-• ‘put simply, the bigger the ... task and the smaller the resource base, the more critical is operational focus’.

  • ‘as a rule of thumb, no ... group of employees can attend to more than two key operational improvement goals at (any one) time’.
  • ‘mixed messages and conflicting signals prevent a sufficient head of steam from developing behind any improvement task’.
  • ‘(to divide) meagre resources across a wide range of medium-term operational goals is a recipe for mediocrity across a broad front’.

 

Targeting – by which the enterprise targets effort and willpower on those activities which will yield the greatest benefit in terms of:-

  • the potential improvement in customer perceptions of enterprise product or service offer that these activities represent.
  • their relative opportunity cost.
  • their relative competitive or comparative advantage.
  • their relative value addition.

 

Hamel and Prahalad comment that resources may be most effectively leveraged when they are targeted in the areas that make the most difference to customers and stakeholders.

Accumulating Resources

Mining – Hamel and Prahalad comment that some organizations exploit their accumulated knowledge and experience more effectively than others. The authors contend that ‘each new experience, each success or failure, must be seen as an opportunity to learn’ (p. 165).

Some organizations are more adept at learning, absorbing, and applying new ideas than others. They are more open to new perceptions and conceptualizations; and less reluctant to challenge received wisdoms, orthodoxies, or ‘installed bases of thinking’.

Borrowing – by which the enterprise variously gains access to, acquires, or internalizes competencies and resources from outside. It can do this through its network of relationships, and its architecture. This may for example involve:-

  • the use of subcontractors in a de-integrated value chain, so as to exploit the internal sources of competitive advantage, excellence, creativity, and innovation of these subcontractors.
  • inward licensing processes.
  • strategic alliances (described in Chapter 27).
  • other strategies of co-operation and partnership, such as sharing development activities with key competitors, customers, or suppliers.
  • participating in international research consortia (that is, borrowing foreign taxpayers’ money).
  • ‘harvesting the technology seeds planted in another nation’ (p. 167).
  • making use of more attractive factor markets (such as carrying out labour-intensive activities like bulk software programming in the Czech Republic, or locating call centre operations in India). Hamel and Prahalad comment that borrowing can be used to multiply resources at any stage of the value chain. They also note that if borrowing is used, then the organization’s absorptive capacity will be as important as its creative capacity. There will be no place for the negative “not invented here” syndrome described in Chapter 19.

Complementing Resources

Blending – by which resources are combined or integrated in ways that multiply the relative value of each. Hamel and Prahalad give the combined example of (i) technological integration; (ii) functional and operational integration; and (iii) the conceptualization, creation, specification, and development of new products or processes. Blending may create synergies amongst resources (for example on a cross-functional basis). Or it may yield benefits from new permutations and combinations of those resources that create new functionalities or new values (for instance by new combinations of technologies or the process of hybridization).

Kay comments similarly that the effectiveness of sources of competitive advantage is improved where they are represented in combination, such that the resources they represent are blended together. Kay in particular suggests that the more that enterprise architecture supports and complements innovation, corporate reputation, brand management or the maintenance of strategic assets, the more value will these sources of competitive advantage be capable of generating.

Balancing – by which a balanced array of resources and competencies are put in place that permit all necessary activities to be carried out with equal effectiveness. Hamel and Prahalad give as example the combined ‘capacity to invent, make, and deliver’ (p. 169), not just any one or two disproportionately. Hamel and Prahalad note that ‘the leverage impact comes when, by gaining control over complementary resources, the firm is able to multiply the profits it can extract out of its own unique resources’ (p. 170). Kay also deals with this issue in commenting on the need for mutually supporting sources of competence and competitive advantage, and in particular the need for a firm’s activities to be supported by, and balanced with its relationship architecture.

Hamel and Prahalad note that ‘a firm that has a strong product development capacity but is relatively weak in terms of brand or distribution or lacks the disciplines of cost and quality is unlikely to gain much of the profit stream that will ultimately accrue to its innovation. Although it can enter partnerships with firms that do possess critical complementary resources, the innovator is likely to find itself in a poor bargaining position with such firms when it comes to divvying up profits ... in the international drinks industry, IDV, Seagrams, and Guinness once saw themselves as primarily brand creators and managers. Yet they now realize that to fully leverage the equity of brands like Smirnoff, Johnny Walker, and Chivas Regal, they must control distributors ... this realization has set off a frenzied competition to buy up and consolidate distributors around the world’ (p. 170).

Conserving Resources

Recycling – the more often a particular skill or competence is used, the greater the resource leverage and the more the competence is developed. This point was made in Chapters 19 and 20. It is the principle that underlies Tatsumo’s mandala of creativity shown in Chapter 19. Hamel and Prahalad note for instance that ‘Honda has recycled engine-related innovations across motorcycles, cars, outboard motors, generators, and garden tractors’ (p. 171).

Co-opting – by which access to the resources of other enterprises is achieved through the relationship architecture of the enterprise on the basis of co-operation or partnership, in order to pursue a common objective. Such co-option may lead to such benefits as greater market access and scope; the achievement of critical mass; or the achievement of synergies; (etc). The principal of co-opting is fundamental to the establishment of the de-integrated value chains and network structures described in earlier chapters; and also to the establishment of the strategic alliances described in Chapter 27. Co-opting has become a classic Japanese strategy.

Protecting – by which the risk of value loss or damage to resources is avoided by the selection of appropriate competition strategies, as described in Chapter 22. Issues of value loss were also dealt with in earlier chapters of this book. The enterprise may choose, for example:-

  • to avoid head-on confrontations with powerful opponents.
  • to maintain strategies of defence or counter-attack.
  • to enter new markets via undefended or poorly served segments, or ‘loose bricks’ (as Honda did with its first small motorcycles).
  • to select strategic alliances and alliance partners with care, so that the relationship can be controlled and the transfer of competence between the partners equalized.

Recovering Resources

Expediting returns – by which the time between the expenditure of resources and the recovery of those resources (“return”) is minimized. A rapid recovery process acts as a resource multiplier. An enterprise that can do anything twice as fast as its competitors, with a similar resource commitment, enjoys a twofold leverage advantage. Hence the widespread strategy of shortening product or process development times, compressing operational time scales, and carrying out related activities in parallel or synchrony rather than in sequence.

Review Questions

  1. Recap the concept of strategic intent (Chapter 11).

  2. What is strategic stretch? On what basis may stretch objectives be established?

  3. What is resource leverage?

  4. Describe and comment on five major resource leverage strategies.

Techniques of Case Study and Analysis

  1. Identify the mission and strategic intent (if any) of the case company.

  2. Is there any evidence of stretch objectives in the case study?

  3. Is there any evidence of resource leverage strategies in the case study?

  4. Suggest stretch objectives that the case company could usefully establish for itself.

  5. Suggest appropriate resource leverage strategies that the case company could usefully establish for itself.

Project Assignments

  1. Using available information, suggest some actual examples of strategic stretch. Look at a variety of sectors whether business, commercial, service, public, or not-for-profit.

  2. Using available information from a variety of sectors, suggest some actual examples of resource leverage strategies.

References

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222 

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223 

Hamel, G. and C.K. Prahalad (1994) Competing for the Future, Harvard Business School Press, Boston, Mass.

224 

Hammer, H. and J. Champy (1993, 1995) Reengineering the Corporation, Nicholas Brealey, London.

225 

Johansson, H.J. , McHugh, P. , Pendlebury, A.J., and W.A. Wheeler (1993) Business Process Reengineering: Breakpoint Strategies for Market Dominance, Wiley, Chichester.

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Kanter, R.M. (1985) The Change Masters, Routledge, London.

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Kanter, R.M. (1990) When Giants Learn to Dance, Routledge, London.

228 

Kay, J. (1993) Foundations of Corporate Success, Oxford University Press, Oxford.

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Nonaka, I. (1991) ‘The knowledge-creating company’, Harvard Business Review, November–December.

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Nonaka, I. and H. Takeuchi (1995) The Knowledge-Creating Company, Oxford University Press, New York.

233 

Peters, T.J. (1989) Thriving on Chaos, Pan, London.

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Peters, T.J. and N. Austin (1986) A Passion for Excellence, Fontana, London.

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Peters, T.J. and R.H. Waterman (1982) In Search of Excellence, Harper & Row, New York.

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Tichy, N.M. and S. Sherman (1994) Control Your Destiny or Someone Else Will, Harper Business, New York.

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