Hambrick and Fredrickson's Strategy Diamond
Developing a Cohesive Strategy
What's your company's strategy? Is it to be "bigger and better," "increase revenue" or "go global"? If so, you may not have a strategy at all...
"Strategy" may be a familiar word to you. It's often used in business and, yet, it's probably one of the most misused and misunderstood terms around. Here's why: aspiring to become "the best…" or "the most successful…," or to "go global" are not strategies, they're goals.
So, what does "strategy" actually mean? And how do you develop an effective one for your organization?
This article explores these questions and more, by thinking about strategy using Hambrick and Fredrickson's Strategy Diamond.
About the Tool
Your company's strategy is central to what it can accomplish. Put simply, "strategy" is a statement of how your company plans to succeed in its market, however that is defined.
Professors Donald Hambrick and James Fredrickson have studied strategic planning extensively. They published their Strategy Diamond, shown in figure 1 below, in the November 2001 edition of "The Academy of Management Executive."
Figure 1 – Hambrick and Fredrickson's Strategy Diamond
The model shows the main elements of a strategy, and how they fit together. According to it, your strategy should include the following five elements:
- Arenas – Where will you be active?
- Vehicles – How will you get there?
- Differentiators – How will you win in the marketplace?
- Staging – What will your sequence of moves be?
- Economic logic – How will you generate revenue and make a profit?
These elements work together to form a cohesive, whole strategy.
This is just one approach that you can use to develop your business's strategy. Our article on Lafley and Martin's Five-Step Strategy Model looks at a different but equally valid process – choose the one that best suits your situation.
Applying the Strategy Diamond
Let's look at each of these elements in turn, focusing on the way that you'd use it to develop the strategy for a business unit.
The first step in developing your strategy is to define the arenas, or areas, that your organization will compete in.
Start by listing the product categories that you want to be active in.
Next, look at the market segments that you want to pursue, and estimate the size of these to ensure that they are big enough to be worth targeting. Also, identify and list any core technologies that your organization will focus on, and describe any other aspects of the arenas that are important to your organization.
Once you have identified the arenas that you want your business to be active in, the next step is to decide what "vehicles" you will use to win in them.
A vehicle is the approach you'll use to participate in your targeted arena. This could be to use internal product development, joint ventures or strategic alliances, franchising, acquisitions, or licensing agreements.
For example, if you want to compete in a new technology arena, your chosen vehicle might be to (a) invest in internal research and development, (b) form an alliance with another company that already has the technology, or (c) buy a company that has the technology you need. In this case, your potential vehicles are (a) investment and growth, (b) alliances, or (c) acquisitions.
Differentiators give your organization the competitive edge it needs to thrive in the arenas you've chosen – these define why customers will buy from you and not from your competitors. They can come from the product or service itself, or from branding, marketing, pricing, customization, quality, customer service, or some other factor.
You can start to understand differentiators by identifying competitors in your chosen arenas. Then, conduct a USP Analysis to identify your unique selling proposition, and carry out a Core Competence Analysis to determine how you'll sustain this.
Staging describes the plan you have to implement your strategy, including the timing and sequencing of major activities.
The ideal sequence can be influenced by factors such as resources, urgency and credibility. It may be necessary to achieve certain thresholds in particular arenas, vehicles and differentiators to attract the further resources you need to achieve the final goal.
Start thinking about staging by conducting a VRIO Analysis to clarify the resources that are available to you. (In this context, resources can be people, knowledge, technology, financial assets, market position, brand awareness, suppliers and more.) When you understand the tools at your disposal, you'll be in a better position to plan your sequence wisely.
Next, think about timing: are there certain windows of opportunity that dictate your sequence of events, or do other circumstances require you to pursue one of your elements before the others? Then, work through the other aspects of conventional business planning and project planning to define how you'll realize your strategy.
Finally, once you have considered all of the other elements in the Strategy Diamond, turn your attention to economic logic. Put simply, this is how you're going to generate ongoing profits for your organization.
For example, consider whether you plan to use economies of scale to push down prices, or if you'll justify a premium price by offering a superior product.
If you plan to compete on cost, you need to know how you will sustainably drive your costs down so that they are lower than those of your competitors. If you plan to compete on technology or differentiation, you need to know how you will sustain your competitive edge, so that you can make robust profits.
Professors Donald Hambrick and James Fredrickson developed their Strategy Diamond to give organizations a clear overview of the essential elements of strategy. The model has five elements, which address the following key questions:
- Arenas – Where will we be active?
- Vehicles – How will we get there?
- Differentiators – How will we win in the marketplace?
- Staging – What will our sequence of moves be?
- Economic logic – How will we get our returns?
When the five elements are aligned and mutually reinforcing, your organization will be in a position to perform extremely well.