The Concept of Strategy and Strategic Management
THE CONCEPT OF STRATEGY AND STRATEGIC MANAGEMENT G. Tyge Payne, PhD 1 Strategic Management Strategy: The unifying theme that gives coherence and direction to the decisions of an organization Strategic Management: Consisting of the analysis, decisions, and actions an organization undertakes in order to create and sustain competitive advantages. Or, the Strategic Management Process is: The full set of commitments, decisions, and actions required for a firm to create value and earn aboveaverage returns. (Hitt, Hoskinson, & Ireland, 2004, p. 4) Strategic Management basically seeks to answer the question:
How and why do some firms outperform others? 2 Other Definitions of Strategy Oxford Dictionary: The art of war, especially the planning of movements of troops and ships etc. , into favorable positions; plan of action or policy in business or politics etc. Chester I. Barnard: Strategy is intended to focus on the interdependence of the adversaries’ decisions and on their expectations about each other’s behavior. Alfred D. Chandler Jr. : The determination of the long run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.
Kenneth Andrews: Strategy is the pattern of objectives, purposes or goals and the major policies and plans for achieving these goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be. 3 The Origins of Strategy Know the other and know yourself: Triumph without peril. Know Nature and know the Situation: Triumph completely. – Sun Tzu (~360 B. C. ) • Business strategy is a relatively young field of study – but its roots go back to early military strategy. • Strategy comes from the Greek word strategos, which is formed from stratos, meaning army, and –ag, meaning to lead. Carl von Clausewitz wrote in the early 1800’s that “tactics…[involve] the use of armed forces in the engagement, strategy [is] the use of engagements for the objects of war. ” 4 More Recent Historical Development of Business Strategy • Not until very large companies with the ability to influence the competitive environment within their industries did strategic thinking in the business world begin to be articulated. – Alfred Sloan, CEO of GM, 1923 – 1946 – One of the first to analyze competition, Ford, and devise a strategic plan based on its strengths and weaknesses. Chester Barnard, Senior Executive of New Jersey Bell, 1930s – Argued managers should pay attention to “strategic factors” which depend on “personal or organizational action. ” • Wartime (WWI and WWII) efforts also impacted strategic thinking and use of formal strategic tools and concepts: – – – – Allocation of scarce resources Use of quantitative analysis in planning The concept of “learning curves” The concept of “distinctive competence” – first mentioned by Philip Selznick, a sociologist, in a debate about whether or not to combine the military forces into a single unit (i. . , no Army, Navy, Air Force, Marines, just the US Military). 5 More Historical Development • It wasn’t until the 1950’s that strategy was truly introduced in business schools as a way of analyzing the competitive environment and setting organizational goals and objectives to fit that environment. • These concepts serve as the foundation of strategic management study: – Previous “Business Policy” perspectives looked at maintaining a “balance in accord with the underlying policies of the business as a whole. – Harvard – Kenneth Andrews’ SWOT Analysis was developed – still in use today. – Theodore Levitt’s “Marketing Myopia” argued that when companies fail it typically is because firms focus on the product rather than the changing patterns of consumer needs and tastes. – Igor Ansoff argued, in response to Levitt, that a firm’s mission should exploit an existing need in the market, rather than using the consumer as the common thread in business. “In reality a given type of customer will frequently have a range of product missions or needs. Corporate Strategy, 1965. – BCG developed the “experience curve” and portfolio analysis concepts. – McKinsey & Company’s development of SBUs and the nine-block matrix. – Mintzberg’s “Deliberate, Emergent & Realized Strategies” – Porter’s Generic Strategies 6 The Evolution of Strategic Management 1950s DOMINANT THEME 1960s-early 70s Corporate planning Mid-70s-mid-80s Positioning Late 80s –1990s Competitive advantage 2000s Strategic innovation Budgetary planning & control Financial control MAIN ISSUES Planning growth &diversification Selecting sectors/markets.
Positioning for leadership Industry analysis Segmentation Experience curve Portfolio analysis Focusing on sources of competitive advantage Reconciling size with flexibility & agility KEY CONCEPTS & TOOLS Capital budgeting. Financial planning Forecasting. Corporate planning. Synergy Resources & Cooperative capabilities. strategy. Shareholder Complexity. value. Owning E-commerce. standards. — Knowledge Management— Alliances & networks Self -organiz ation & virtual organization 7 MANAGEMENT IMPLICATIONS Coordination & control by Budgeting systems Corporate planning depts. reated. Rise of corporate planning Diversification. Restructuring. Global strategies. Reengineering. Matrix structures Refocusing. Outsourcing. Ansoff’s Product / Mission Matrix* Present Product Present Mission Market Penetration New Product Product Development New Mission Market Diversification Development *Categories define the common thread in an organization’s business/corporate strategy. 8 BCG’s Growth-Share Matrix High Share High Growth Star Low Share Question Mark ? Slow Growth Cash Cow Bark!! Dog 9 In St tend ra ed teg y Forms of Strategy
Mintzberg’s Critique of Formal Strategic Planning: Mintzberg’s Critique of Formal Strategic Planning: •The fallacy of prediction ––the future is •The fallacy of prediction the future is unknown unknown •The fallacy of detachment — impossible to •The fallacy of detachment — impossible to divorce formulation from implementation divorce formulation from implementation •The fallacy of formalization –inhibits flexibility, •The fallacy of formalization –inhibits flexibility, spontaneity, intuition and learning. spontaneity, intuition and learning. De lib era te S tra teg y Unrealized Strategy Realized Strategy Emergent Strategy *Normally emergent strategy comes from learning and dissemination within the organization. 10 Porter’s Generic Strategies Competitive Advantage Lower Cost Differentiation Strategy 1 Strategy 22 Strategy Broad Target Competitive Scope Narrow Target Cost Leadership Strategy 3A Strategy 3A Differentiation Differentiation Strategy 3B Strategy 3B Cost Focus Cost Focus Differentiation Differentiation Focus Focus 11 Why is SM, as a field of study, necessary? Why are all these theories/tools needed ? • • • • • • • • Provides a framework for thinking about the “business” Creates a fit between the organization and its external environment.
Provides a process of coping with change and organizational renewal Fosters anticipation, innovation, and excellence Facilitates consistent decision-making Creates organizational focus Acts as a process of organizational leadership. Finally and most importantly: To help the organization to succeed (outperform) against its competition!! 12 Strategy, Survival and Success • The ultimate goal of the organizations is to be successful – success is: • • • Survival (long-term success) Achievement of Goals Above average returns/Profitability (probably most important, because it determines the ability to achieve the above two) Strategy can help achieve success, but it doesn’t guarantee it—certain features of strategy directly contribute to success: 1. 2. 3. 4. Goals that are simple, consistent, and long-term. Profound understanding of the competitive environment. Objective appraisal of resources. Effective implementation. • These observations concerning the role of strategy can be made in relation to most human endeavors be it warfare, chess, politics, sport or business. 13 Competition and Competitive Advantage • Competition provides the rationale for strategy – without competition, strategy is of no concern. The essence of strategy is the interdependence of competitors—or the establishment of sustainable competitive advantage over rivals. • The study of strategy involves how we go about identifying, establishing, and sustaining competitive advantage. 14 Thinking Strategically: The Three Big Strategic “Analysis” Questions 1. Where are we now? What is our situation? 2. Where do we want to go? – Business(es) we want to be in and market positions we want to stake out – Buyer needs and groups we want to serve – Outcomes we want to achieve . How will we get there? 15 Differing Perspectives of the Strategic Management Process I/O Model External Environment Industry Attractiveness Strategy Formulation Assets/Skills Assessment Implementation RBV Model Resources Capability Sustainable CA Strategy Formulation Implementation 16 Four Assumptions of the I/O Model 1. The external environment is assumed to possess pressures and constraints that determine the strategies that would result in above-average returns. 2.
Most firms competing within a particular industry are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources. 3. Resources used to implement strategies are highly mobile across firms. 4. Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behaviors. 17 Our Approach to Studying the Strategic Management Process • Both the I/O and RBV perspectives are useful to managers and essential to understanding the strategic management process. One essentially takes an outward-in (I/O) perspective while other takes an inward-out (RBV) perspective. 18 Strategic Control (6) Strategic Control (6) Formulating Directions Formulating Directions –Develop Vision/Mission (1) Develop Vision/Mission (1) -Set Objectives (2) -Set Objectives (2) Strategic Analyses (3) Strategic Analyses (3) External Environment Competitor/Stakeholder Internal Organization Strategy Formulation (4) Strategy Formulation (4) -Formulate and Consider -Formulate and Consider Alternatives Alternatives -Make Strategy Choice -Make Strategy Choice
Organizational Culture Stakeholder Influence Values / Ethics Opportunities and Threats from Economic, Political, Technological etc Sources Opportunities and Threats from Competition and Key Stakeholders Organizational Culture Stakeholder Influence Values / Ethics Implementation (5) Implementation (5) Context of Strategy (type of organization, culture, values, life cycle competitive position) 19 Birnbaum’s Strategy 21 Process • • • • Examine the Current Business Model Go Beyond the Current Business Model Design a “Grand Strategy” Develop a Compelling Vision Assure Enablers of Strategy • • • • • • Intellectual Capacity Processes Organizational Structures Technologies External Relationships Capital Resources Strategic Formulation and Implementation Similar to Internal and Competitive Analysis Similar to Internal and Competitive Analysis Basic Decision to Make Major Change or Not • Set Objectives to Measure Success • Design a Monitoring Process
Related Issues to Monitor Implementation Process 20 Hambrick & Fredrickson, 2001 21 The Strategy Concept Levels of Analysis • Where to Compete? • How to Compete? • How to Contribute? Corporate Strategy Business Strategy Functional Strategy Choice of Products Choice of Markets Choice of Competitors 22 INDUSTRY ATTRACTIVENESS RATE OF PROFIT ABOVE THE COMPETITIVE LEVEL Which businesses should we be in? CORPORATE STRATEGY How do we make money? COMPETITIVE ADVANTAGE How should we compete? BUSINESS STRATEGY 23