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Concept of Stretch, Leverage and Fit in Strategic Management & Ways of Resource Leveraging

CONCEPTS OF STRETCH, LEVERAGE AND FIT


What is Stretch, Leverage and Fit ?


There is a major mismatch between the available resources of an organisations and the kind of growth expectations that it has. To bridge this gap, organisation needs to stretch and be innovative in the utilization of available resources so that the maximum benefit can be derived by the organisation.

The process by which the organisation does this is called leveraging of its resources. Leveraging means to emphasis on the resources of an organisation to achieve its strategic intent or objective. This involves an accumulation and utilisation of organisational learning, experiences, competencies and capabilities so that the limited resources are utilised in the fulfillment of the organisation's objectives.

The strategic fit is the conventional way of perceiving a strategy. It involves techniques like SWOT analysis, which examines the external environment of organisation in order to identify the opportunities and threats on the basis of which its internal strengths and weaknesses are assessed. Strategy is a compromise between the opportunities present in the external environment and organisation's internal capabilities.

According to Hamel and Prahalad, strategy is based on the concepts of stretch and leverage rather than being a strategic fit. They also stated that size is not a sole criterion for becoming a successful firm. On the other hand, there are many large companies like Pan America which is no more operative while there are many small companies who have being conquering over big like General Motors by Toyota and Electrolux by Samsung. Size often comprises of several problems like self-righteousness and resistance to change. 

For example, (Stretch, Leverage and Fit ExamplesNokia was reluctant to operate as an android operating system and this helped Samsung to emerge and capture the whole market. Strategic intent defines what the firm wants to achieve through its strategy. It consists of three important concepts : 
1) Strategic stretch 
2) Strategic leverage 
3) Strategic fit

Stretch


What is Strategic Stretch ?

The concept of stretch was propounded by Gary Hamel and C. K. Prahalad. It has now become a cornerstone in modern strategic management thinking. According to them, the conventional concept of strategic fit is an incomplete strategy for a firm. Though in the long-term, the strategy of the organisation should be consistent and "fit" its internal capabilities, but the essence of strategy is not how to bring about a fit between the resources and strategy, rather it is the manner in which an organisation utilises its resources. The concept of stretch measures the gap between the existing knowledge, resources, capabilities, competencies and willpower of the organisation and the kind of aspirations and goals that it has. It also measures the extent to which the leadership of the organisation can innovate, create and be productive so as to meet out the organisational objectives.

The amount of stretch that is required by the organisation follows from its strategic intent. It is also affect by the type of challenges faced by the organisation to achieve the strategic intent if its strategic intent is to be realised. These can be ascertained by : 
  • Conducting future forecasts and scenario building of organisation's external environment, and
  • Drawing comparisons or benchmarks based on external factors e.g., yardsticks like "best of class", "excellence". "world class", "market leader", etc.
The idea behind 'stretch' being a strategy is that the leadership cannot be planned and it requires a shared ambition. While setting out the goals and aspirations, the top management of the firm deliberately creates a gap between the resources available and the targets set. It aims at loose fit between resources and capabilities instead of a tight one. It therefore wants the organisation to exceed its own expectations and beliefs. Broadly, stretch is a strategy which is created in a way that the top management of the organisation has a clear idea of the desired goals and plans to be achieved. It also focuses on the capabilities to be built in order to face challenges in the present and future scenario.

Leverage


What is Strategic Leverage ?

Leverage is the act of concentrating, complementing, safeguarding and recovering the scarce resources of an organisation in such a manner that the organisation can stretch those resources so as to attain the ultimate goal. Hamel and Prahalad have said that the organisation needs to find a way to bridge the gap between the resources and ambitions which are a result of its strategic intent. The way the organisation can do this is by leveraging its resources. The main challenge of leveraging is to encourage the managers to constantly innovate and derive the maximum output from the available resources and also expanding the organisation.

According to Hamel and Prahalad, stretch and leverage are complementary in nature. While stretch is aspirational in nature, leverage is a way to utilize the capabilities and resources of the organisation to achieve the desired objectives. Just like human necessity leads to inventions and discoveries, similarly, the organisational stretch leads it to leveraging of resources.

Hamel and Prahalad clearly distinguish between a strategy, which is based on strategic intent and the one without it. An organisation which is deprived of strategic intent and objectives is unable to exploit its resources effectively; even abundant resources and capabilities are spent foolishly by the organisation. Stretch and leverage are the opposites a strategy based on carelessness.

An organisation which has high ambitions but lacks resources realizes that it cannot copy its affluent competitors. Such organisations may have to :
  • Be more innovative and creative in their approach and must discard conventional methods of working,
  • Bring out the maximum of the available resources, and
  • Be proactive in carrying out new areas of competitive
Hamel and Prahalad define resource leverage as an act of getting more value of the existing resources. It also involves creativity. They comment that it is relentless search for newer ways of doing activities which consumes fewer resources. It is not just about downsizing the workforce or limiting the cash flow, rather finding out new ways to increase the level of output and simultaneously enlarging the workforce base. In viewpoint of Hamel and Prahalad, these strategies are unimaginative, lazy, out-dated and short-termed.

Fit


What is Strategic Fit ?

The 'Fit' concept is considered as the basis of conventional method of organisational strategy. This concept is evolved by the 'positioning school' and more profoundly by Michael Porter. This school believes that competitive strategy originates from the set of activities that the organisation indulges in.

The better the linkages between the various activities, the more successful the organisation will be in creating a sustainable competitive advantage. Such organisations can create a unique positioning in the industry which is totally different from other organisations.

The positioning concept considers three things which are absolutely critical in the creation of a sustainable competitive advantage :
  • The relationship the organisation has with the competitive environment,
  • The distribution of resources between various competitive resources, and 
  • The long-term perspective.
The concept of fit as a strategy is practiced by the school of positioning where techniques such as SWOT analysis is used to scan the environmental opportunities and organisational capabilities. In a sense, a strategy based on fit is often a compromise between the external opportunities available to the organisation and its internal capabilities.

On the other hand, stretch and leverage belong to the learning school of strategy where the organisation does not limit its achievements to its internal capabilities but instead tends to challenge itself by setting tougher targets. Strategic intent can work under both schools of thought. Under a fit strategy, the strategic intent of the organisation is realistic, whereas in the case of stretch and leverage, the strategic intent of the organisation is idealistic.

Ways of Resource Leveraging


Leveraging Resources in Strategic Management :

With the changing dynamics of the world, organisations need to devise methods for the development of some specialized skills which would help the organisation to create innovative and world class products to develop the global infrastructure for expansion and establish a competent and efficient management. According to the concepts of leveraging and stretch, core competence concept defines that it is all about doing more with scarce resources and to invest in those core competencies where organisation has more potential to expand worldwide.

In this new age, it is not adequate that an organisation possesses an abundance of resources to dominate its industry, nor it is a drawback for a company with lesser resources to change the rules of the game and create a competitive advantage. In this new global marketplace, it is more important that the organisation develops a set of core skills or competencies in which it is the best in the world. It needs to focus on these. 

This also follows from the strategy of stretch and leverage. Companies like General Motors, Philips, Nokia which were all market leaders with abundant resources lost their market share against the challengers like Honda, Samsung, Sony, etc. Xerox successfully defended its market share against IBM but lost out to the much smaller Canon, which had only 10% of the market share. The reason behind Canon's success was the change in the rules of the game prevailing in the copier industry.

Therefore, the focus of the organisation should be on leveraging and stretching its existing resources. This can be done through the process of concentrating, accumulating, complementing, conserving and recovering of resources. These factors are explained below in detail.

Concentrating


Concentrating involves positioning of scarce resources in a few strategic areas recognized by the management in accordance with the company's mission and vision. This activity requires a great amount of focus and convergence by the organisation.

For example, NEC is one of the world's top producers of computers and communication, which achieved all its success through strategic focus on the aim, specific skills and capabilities required for it and following up the aim constantly. On the other hand, IBM, which had great resources at its disposal, loss its market share in computer and telecommunication business due to the lack of concentration or strategic focus on its available resources. Convergence plays a crucial role in side-lining the diversions and maintains the focus on strategic areas. The organisation must also inhibit the involvement of Therefore, its limited resources only to those areas which focus on the key goals. It should give priority to the improvements made for the organisation.

Organisations which concentrate their resources in their core areas of business perform better than those organisations which over-diversify. However, when the value creating opportunities reduce in the existing business, then the company must enter into new business ventures.

Accumulating 


Leveraging through resource accumulation can be done by using extraction and borrowing methods. Extraction means making the maximum use of the organisational knowledge and insight about customers, competitors, suppliers, and technology for creating value and developing new products. The process of extraction involves learning ability which is largely based on the knowledge of employees, motivation level of people, their ability to perform and constant bench marking.

Another way of accumulation can be done through borrowing the resources from other companies. A perfect example of this can be Japanese companies. In fact, a Japanese manager has a philosophy that "you (in the west) chop down the trees and we (in Japan) build the houses". In other words, Americans work hard to discover and invent a new technology, while Japanese borrow and exploit those technologies to develop a new product. In management, this is known as imitative innovation. One of the first companies which employed this strategy was Sony which borrowed the transistor and charge coupled device technologies developed by AT&T's Bell Laboratories. Therefore, it is beneficial for organisations to borrow the best technologies from the global marketplace in order to leverage its resources. Once these skills and technologies are acquired, it should be internalised by the organisation to obtain best results.

Complementing


Organisations can also leverage their resources through complementing; this involves the process of blending and balancing. Blending refers to the combination of assorted functional skills such as R&D, production, sales and marketing.

For example, companies like GM or Ford were conquered by Honda on the basis of its engine performance because Honda Company was able to blend its diverse technologies more effectively than GM and Ford. Blending can also be carried out by company's creativity to imagine a perfect integration for developing a new product. Sony's Walkman is a classic example where it was able to create a new product - the Walkman by blending two products the headphone and the audio player.

Another approach of complementing is balancing. The organisation must have a balance between all its competencies such as strong product development skills, ability to manufacture products at a lower cost and world class quality, and a great sales and marketing set-up which allows the organisation to distribute its products properly. The failure of any one aspect can lead to the strategic weakness of the organisation. Hence, organisation should invest in areas where it is weak, so as to balance all the resources efficiently.

Conserving


Leveraging can also be done through conserving resources. For this purpose, recycling and co-opting are used specifically. The Japanese strongly believe in recycling technology. They have a common saying "no technology is ever abandoned; it is reserved for future use". This can be demonstrated through examples of Japanese companies like Sharp and Honda. Sharp uses its liquid crystal display technology across several products like calculators, mini TVs, laptop, computers, projectors, etc. Recycling is not just limited to technology but also extended to brands. In this manner, the brand equity is leveraged to the maxim level by the organisation.

Co-option is a strategy based on co-operation wherein two or more companies join hands for developing a new technology to fight against the common enemy. Hence, co-option enables to use resources of other companies and helps to increase one's own influence.

Recovering


Another source of leveraging for an organisation is the tendency of recovering its resources. Reducing the time duration of activities can enable the company to work much faster than its competitors like rapid new product development (3M), fast order processing (Dominos) and easy product launching (Hindustan Lever), etc. This allows the company to enjoy the competitive advantage at pre-empt slower levels. The lead time between expenditure incurred on the resources and the results obtained by them is very critical and often a source of leveraging.

For example, the Japanese companies have a very fast product development and deployment strategy. This lets them to recover the investment made in new product development very quickly and also to launch new products within a very short time in the marketplace.

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