THE CONCEPT OF STRATEGY AND STRATEGIC MANAGEMENT G. Tyge Payne, PhD
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 above-average returns. (Hitt, Hoskinson, & Ireland, 2004, p. 4) Strategic Management basically seeks to answer the question: How and why do some firms outperform others? Strategic Management
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. Other Definitions 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.” The Origins of 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.e., no Army, Navy, Air Force, Marines, just the US Military). More Recent Historical Development of Business Strategy
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 More Historical Development
The Evolution of Strategic Management 1950s 1960s-early 70s Mid-70s-mid-80s Late 80s –1990s 2000s Budgetary Corporate Positioning Competitive Strategic planning & planning advantage innovation control Financial Planning Selecting Focusing on Reconciling control growth &- sectors/markets. sources of size with diversificationPositioning for competitive flexibility & leadership advantage agility Capital Forecasting. Industry analysis Resources & Cooperative budgeting. Corporate Segmentation capabilities. strategy. Financial planning. Experience curve Shareholder Complexity. planning Synergy Portfolio analysis value. Owning E-commerce. standards. — Knowledge Management— Coordination Corporate Diversification. Restructuring. Alliances & & control by planning depts. Global strategies. Reengineering. networks Budgeting created. Rise of Matrix structures Refocusing. Self -organiz systems corporate Outsourcing. ation & virtual planning organization DOMINANT THEME MAIN ISSUES KEY CONCEPTS& TOOLS MANAGE-MENT IMPLIC- ATIONS
Present Product New Product Market Penetration Product Development Present Mission Market Development Diversification New Mission Ansoff’s Product / Mission Matrix* *Categories define the common thread in an organization’s business/corporate strategy.
High Share Low Share Star Question Mark High Growth Cash Cow Dog Slow Growth BCG’s Growth-Share Matrix ? Bark!!
Forms of Strategy Intended Strategy • Mintzberg’s Critique of Formal Strategic Planning: • The fallacy of prediction –the future is unknown • The fallacy of detachment -- impossible to divorce formulation from implementation • The fallacy of formalization --inhibits flexibility, spontaneity, intuition andlearning. Deliberate Strategy Realized Strategy Unrealized Strategy Emergent Strategy **Normally emergent strategy comes from learning and dissemination within the organization.
Competitive Advantage Lower Cost Differentiation Strategy 1 Cost Leadership Strategy 2 Differentiation Broad Target Competitive Scope Strategy 3A Cost Focus Strategy 3B Differentiation Focus Narrow Target Porter’s Generic Strategies
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 itscompetition!!
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: 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. Strategy, Survival and Success
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. Competition and Competitive Advantage
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 • 3.How will we get there?
Differing Perspectives of the Strategic Management Process I/O Model RBV Model External Environment Resources Industry Attractiveness Capability Strategy Formulation Sustainable CA Assets/Skills Assessment Strategy Formulation Implementation Implementation
1. The external environment is assumed to possess pressures and constraints that determine the strategies that would result in above-average returns. 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. 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. Four Assumptions of the I/O Model
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. Our Approach to Studying the Strategic Management Process
Formulating Directions - Develop Vision/Mission (1) -Set Objectives (2) Organizational Culture Stakeholder Influence Values / Ethics Opportunities and Threats from Economic, Political, Technological etc Sources Strategic Analyses (3) Strategic Control (6) External Environment Opportunities and Threats from Competition and Key Stakeholders Competitor/Stakeholder Internal Organization Organizational Culture Stakeholder Influence Values / Ethics Strategy Formulation (4) -Formulate and Consider Alternatives -Make Strategy Choice Implementation (5) Context of Strategy (type of organization, culture, values, life cycle competitive position)
Birnbaum’s Strategy 21 Process Similar to Internal and Competitive Analysis • 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 • Set Objectives to Measure Success • Design a Monitoring Process Similar to Internal and Competitive Analysis Basic Decision to Make Major Change or Not Strategic Formulation and Implementation Related Issues to Monitor Implementation Process
The Strategy ConceptLevels of Analysis • Where to Compete? • How to Compete? • How to Contribute?
INDUSTRY ATTRACTIVENESS Which businesses should we be in? CORPORATE STRATEGY RATE OF PROFIT ABOVE THE COMPETITIVE LEVEL How do we make money? COMPETITIVE ADVANTAGE How should we compete? BUSINESS STRATEGY