8.2 Strategic Management

Strategy is the consistent application of the business model as a long-term goal. Put in more detail: 'Strategic management is an ongoing process that evaluates and controls the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment, or a new social, financial, or political environment.' {1}

Formulation

Strategy is commonly formulated in stages. First comes an analysis of the competition, market situation and competition. Then objectives are set, short and long-term, with appropriate implementation dates. The strategy is then formulated as: {3}

1. Vision statements: long-term future of company.
2. Mission statements: the company's role in society.
3. Overall company objectives: both financial and strategic.
4. Business unit objectives: both financial and strategic.
5. Tactical objectives.

Strategy will take into account:

1. Competitive stance vis-à-vis the market and competition.
2. Effectiveness: will it work, can it be made to work, and how?
3. Suitability: is it for us, does it make economic sense, how would we benefit?
4. Feasibility: results of cash flow modeling, break-even forecasting and resource deployment analysis.
5. Acceptability: how acceptable to shareholders, employees and customers? What are the risks involved?
6. Direction of action: towards growth, consolidation, diversification, or harvesting?

Strategy may be based on economics (competitive rivalry, resource allocation, economies of scale, etc.) or sociology (behavior of employees, customer and shareholders), or (commonly) a mixture of both.

History

Business strategy is not written in tablets of stone, but evolves in response to new studies, perceived opportunities and threats, and apparent excesses or oversights of previous strategies. Not all theories have been progressive, universally accepted or even helpful. One decade has sometimes to undo the harm the planning of the previous one inflicted. Managements can be found embracing mixtures of theories, some not contemporary or mutually compatible. Charismatic CEOs leave; new competitors appear on the horizon; the world suddenly looks different. Reorientations take time to filter down and be implemented.

Some Landmark Studies

Strategic management is an immense field of research, with many contending theories and areas of dispute. What is given here is a brief summary, providing some intellectual foundation for the many business models that exist and can be seen operating in the case studies. {2}

Peter Drucker. His 1964 Concepts of the Corporation, looked at General Motors, General Electric, IBM and Sears Roebuck and concluded the most successful companies were centralized and goal-setting.

Alfred Sloan: reorganized General Motors in 1921 but his My Years with General Motors was not published until 1963.

Alfred Chandler, active from the late 1950s. His 1962 book, Strategy and Structure argued that corporations should develop their strategy before their organizational structure: form should follow purpose.

Theodore Levitt's Marketing Myopia of 1960 in the Harvard Business Review looked at corporate strategy from a radical and broad perspective.

H. Igor Ansoff's Corporate Strategy framed the mindset of a generation with a detailed blueprint for planning a firm's objectives, expansion plan, product-market positions and resource allocation, indeed so thoroughly that the resulting corporate strategy departments gave 'strategic planning' a bad name.

Bruce Henderson founded the Boston Consulting Group (BCG) in 1964, which blended market analysis and research together with financial theory to produce the micro-economic analysis of competitors and their relative costs: a concept that forms the bedrock of all subsequent strategy. His experience curve and growth/share matrix remain two of the most powerful tools in strategy.

Henry Mintzberg's The Nature of Managerial Work (1973) and H. Igor Ansoff's Strategic Management (1979) set the tone for the 70's.

Michael Porter's Competitive Advantage: Techniques for Analyzing Industries and Competitors (1980) argued that the profitability of corporations was determined not only by a firm's relative competitive position (as Henderson had shown), but also by the structural characteristics of the corporation, which could be described in clear, micro-economic terms.

Ohmae's The Mind of the Strategist: the Art of Japanese Business described how Japanese companies combined combined analysis, intuition and willpower in the pursuit of global dominance.

Gary Hamel and C.K. Prahalad's 1989 Strategic intent article argued that successful companies were both ambitious and committed to change the ground rules of business. Their later book The Core Competence of the Corporation argued that the key to strategy was a firm's distinctive skills, technologies and assets, and its collective learning ability.

Many others elaborated on this 'resource-based' view of strategy: that the resources a firm enjoys, its people and knowledge, are more important than its market positions, and that the most successful companies leverage their unique set of competencies across their business units.

Goold, Campbell and Alexander's Corporate-Level Strategy (1994) saw the corporate center as a 'parent', which should develop parenting skills until the divisions stood on their own feet.

Treacy and Wiersema subsequently elaborated the value discipline concept of Porter. Companies succeed through relentless pursuit of one particular characteristic appreciated by customers, of which there were three to choose from:

1. Operational excellence.
2. Ease of purchase and use at a low price.
3. Solutions tailored to individual customers.

Phases of Strategic Thinking

Several overlapping and sometimes blending phases of strategy formulation can be recognized. {2}

1. Planning in Large Multiproduct Companies: 1950s-60s

Aimed to produce large, multiproductfirms, although accompanied by decentralization and diversification into attractive but often unrelated businesses.

2. Planning in Large Multi-product Companies: 1965-75s

Adopted the Boston Consulting Group's (BCG) micro-economic approach, concentrating on areas where market leadership was possibly, and divesting in others. In detail:

1. Focus on cash rather than profits.
2. Aim for cost advantage over competitors.
3. Force competitors to withdraw from the company's main profit segments.
4. Use debt to finance growth.
5. Reinforce market leadership.
6. Raise returns for stockholders.
7. Avoid overextending the product line or building in too much complexity or overhead.
8. Use excess cash flow to diversify into new areas.

Though not central to BCG's world-view, companies also tended to build large central planning departments in conglomerates, and diversify excessively: both caused problems later.

3. Retreat from Strategic planning: mid to late 1970s

Central planning retreated into pragmatism as:

1. Micro-economic techniques for analyzing competitive advantage became more powerful.
2. Central planning and conglomerate diversification became intellectually tarnished.
3. Oil price hike of 1973 and stock market crash of 1974 hit the more progressive companies.

4. Creative Reaction to BCG school excesses: from 1973 to present

Focused more on the intuitive, adaptive and creative aspects of strategy, making managers less reflective planners and more face-to-face communicators and decision-makers.

5. Rigorous micro-economic analysis: from 1980s to present

Elaboration of the BCG framework of competitive advantage to include.
1. Threat from new entrants.
2. Bargaining power of customers and suppliers.
3. Threat from substitutes.

The overall message was that companies should find markets and market niches it could dominate, erecting barriers against competition by low costs or product/service differentiation.

6. Skills and capabilities: from 1990s to present.

Focus has shifted to a company's skills and capabilities (its core competencies) in expressing its vision and mission statements. Corporate strategy is more seen as the definition, creation, stimulation and reinforcement of competencies across many market segments. Drawing on works of military strategy, these approaches observe that plans give way in practice to the judgment of frontline officers making snap decisions. The battle plan must always be complemented by the instincts of the leaders. Similarly, a good strategy should give managers the general direction and focus, while remaining open-ended and not over-planned. People are more valuable than plans, which is why strategy should be developed by company executives and not outside consultants.

Other influences have been:

1. Integration of strategic analysis and cost reduction through business process re-engineering.
2. Improved data-gathering and analysis on competitors to better select acquisition candidates
3. Unlocking customer value.
4. Cutting times in developing and delivering products to customers.
5. Concentrating on fewer products and relying more on outsourcing.

In short, the key today is seen as:

1. Differentiating the company from its competitors.
2. Developing skills and positions that no competitor can approach.
3. Specializing in areas that fostered a superior better technology, product or service, or a lower cost position.

Questions

1. What is strategic management?
2. How is strategy formulated, and what does it take into account?
3. Describe five landmark studies in strategic management.
4. Management studies continually evolve. Discuss.

Sources and Further Reading

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