E2: Chapter 1 - The Nature of Strategic Management

Objectives:

• Compare and contrast the approaches in STRATEGY FORMULATION
• Discuss concepts in an emergent thinking in STRATEGIC MANAGEMENT
• Explain and discuss the relationships between DIFFERENT LEVELS OF STRATEGY
• Discuss the nature of COMPETITIVE ENVIRONMENTS

Contents:

1.1 Introduction to the nature of strategic management
1.2 The concept of strategy

• 1.2.1 Common themes in strategy
1.3 Levels of strategy

1.4 A model of the rational strategy process

• 1.4.1 Mission, objectives and goals
• 1.4.2 The link between mission, goals and objectives
• 1.4.3 The goal structure
• 1.4.4 External environmental and competitive analysis
• 1.4.5 Internal analysis/position audit
• 1.4.6 Corporate appraisal (SWOT)
• 1.4.7 Strategic options and choice
• 1.4.8 Strategy implementation
• 1.4.9 Review and control

1.5 Criticisms of the rational model of strategy formulation
1.6 A formal top-down strategy process

• 1.6.1 Benefits of the formal top-down approach to strategy
• 1.6.2 Drawbacks of the formal top-down approach to strategy

1.7 Strategy and small businesses
1.8 Achieving competitive advantage – alternative perspectives: resource-based view versus the positioning view

• 1.8.1 Competitive advantage and economic theory
• 1.8.2 The positioning approach
• 1.8.3 Resource-based view
• 1.8.4 Principles of resource-based theory
• 1.8.5 The implications of the resource-based view for strategy development

1.9 Alternative approaches to formulating strategy

• 1.9.1 Emergent strategies
• 1.9.2 Logical incrementalism

1.1 Introduction to the nature of strategic management

Strategic Management

• Decisions that organizations make about their future direction and the development and implementation of strategies which will enhance COMPETITIVENESS of the organizations
• Aim is to establish the purpose of the organization and guide the managers on how to implement those strategies to achieve the goals

1.2 The Concept of Strategy

Strategy

• A course of action, including specification of resources required, to achieve a specific objective. Strategy refers to how to be unique, how to have an advantage or how to sustain that advantage over time. 

• Let's use Apple as an example. Apple strategy is how they can make iPhone the no. 1 smartphone in the world, or how iPad the no. 1 tablet over time

• Strategic plan is statement of long-term goals along with a definition of the strategies and policies which will ensure achievement of these goals.
• Strategic plan is a roadmap to grow your business. Included in a strategic plan are:
• Executive Summary
• Brief description of the business
• Company mission statement
• SWOT
• Goals
• KPIs
• Target customers
• Industry analysis
• Competitive analysis and advantage
• Marketing plan
• Team
• Operations Plan
• Financial Projections
• Corporate strategy is the pattern of major objectives, purposes and goals and essential policies or plans for achieving those 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.

 1.2.1 Common themes in strategy

V-alue to the stakeholders
O-rganization's resources are used to meet the environmental challenges
C-hallenges are faced (competitors and customer requirements)
A-ctivities and actions required to meet the objectives
L-ong term direction of the business

1.3 Levels of strategy

Typically, strategies occur at different levels of the organization. This is where the levels of strategy appeared and built the hierarchical levels of strategy.

Corporate Strategy - the strategy focused on the overall purpose and scope of the organization. In simple terms, this is about knowing what type of business should the organization should be in.

What are the good examples of events or issues encountered at this level of strategy?

• decisions on acquisitions, mergers and sell-offs or closure of business units (i.e., Hewlett-Packard bought Autonomy and EDS)
• relations with key external stakeholders such as investors, the government and regulatory bodies (i.e., Apple CEO Tim Cook meets the Chinese officials)
• decisions to enter new markets or embrace new technologies (i.e., Microsoft bought Nokia)
• development of corporate policies on issues such as public image, employment practices or information systems (i.e., Pannone, a Manchester-based law firm, pays for its employees divorces)

Business Strategy - the strategy that is concerned with how an operating or strategic business unit

approaches a particular market.

A SBU or strategic business unit is a division within a larger organization, that has a degree of autonomy, typically being responsible for developing and marketing its own products or services. 

A good example of business unit is the PPS or Printing and Personal Systems Group of Hewlett-Packard. This is a merged business units of IPG and PSG.

Management of the SBU will be responsible for winning customers and beating rivals in its particular market. Consequently, it is at this level that competitive strategy is usually formulated. 

The considerations at this level will include:

• marketing issues such as product development, pricing, promotion and distribution;
• how should it segment the market – should it specialize in particular profitable segments.

The fundamental measure of winning customers:

• Am I creating a customer?
• Am I creating more customers?
• Are my customers becoming more loyal?
• Am I creating value to the customers?

Functional Strategy - The functional (sometimes called operational) level of the organisation refers to main

business functions such as sales, production, purchasing, human resources and finance.

Functional strategies are the long-term management policies of these functional areas. They are intended to ensure that the functional area plays its part in helping the SBU achieve the goals of its corporate strategy.

Example of Functional Strategies are:

• Marketing strategy that deals with pricing, promotion, selling and distribution
• R&D strategy that deals on product innovation and process improvement
• HRM strategy that deals on the people in the organization
• Financial strategy that involves financial planning
• Information Management strategy is about the alignment of information management within an organization with its business and corporate strategies to gain strategic advantage

1.4 A model of the rational strategy process

Formal or Rational Strategy approach - the traditional approach to strategic management.

Rational strategy process seeks to answer questions concerning where the organisation is now, where it should go in the future, and how it should get there.

First step: What are the mission and objectives of the organization? This is where the strategy will start, with its existing strategy. The mission will is the ultimate purpose of the organization's existence, like what business it is in.

Second step: Gather information from external and internal analysis.

External analysis assesses if the strategy of the organization fits on its environment. These represent the threats and opportunities and the competition that the organization faces. PEST framework helps in the analysis of the macro or general environment and the 5 forces model in analyzing the competitive environment.



Internal analysis is about the organization's internal resources and capabilities. What the company is good at as compared to the competitors? This will involve resource audit - financial resources, human skills, physical assets, technologies and so on.

For an organization to survive and prosper, it depends on the adequacy and sustainability of 'resources' and 'competences.' Resources are what the organization has while Competences are the activities and processes
through which the organisation deploys its resources effectively. Michael Porter's Value Chain helps to identify the internal position of an organisation.



After gathering the information from external and internal analysis, it's time to do the SWOT analysis or Corporate Appraisal. SWOT stands for Strengths, Weaknesses, Opportunities and Threats.

At this stage, management will assess the ability of the business, following its present
strategy, to reach the objectives they have set.

They will draw on two sets of information:
(a) Information on the current performance and resource position of the business. This
will have been gathered in a separate internal position audit exercise.
(b) Information on the present business environment and how this is likely to change
over the period of the strategy. This will have been collected by a process of external
environmental analysis and competitor analysis.



Third step: What are the Strategic Options and Choices?

After doing the SWOT analysis, management needs put all the options that will lead to having a choice. Strategic Choice is basically a process of choosing alternative strategic options generated by the SWOT analysis. Management needs to seek to identify and evaluate alternative courses of action to ensure that the business reaches the objectives they have set.

The strategic choice process involves making decisions on:

• What basis should the organisation compete and on what basis can it achieve competitive advantage (How does Apple managing the competition with Samsung?)
• What are the alternative directions available and which products/markets should the organisation enter or leave? (By launching an iPad, this became the alternative directions of Apple that took the market by surprise)
• What alternative methods are available to achieve the chosen direction? (Apple's alternative methods will probably include making a thinner or smaller iPad for those consumers who are particular with the sizes.)

After evaluation and coming up with alternative strategic options, the management will decide how they are going to execute - by taking advantage and leveraging on the strengths and opportunities, at the same time minimizing and preventing the weaknesses and threats. This is called the Strategic Direction.

Strategic Direction will include options to penetrate the market, develop a new product, develop a new market and diversify.

These directions entail to come up with methods how to do either options. These are the Strategic Methods, which will bring different ideas on how to perform the Strategic direction. It can be through internal development, acquire a new company or merge to another company that will help to penetrate the market or diversify, or strategic alliance.

After choosing the strategic direction and method of achieving that, the next step is to evaluate. The evaluation stage considers each options available and assesses if these fit the mission or objectives of the organization.

Fourth step: Implementation stage of strategy

This stage is actually the most tedious part of the rational strategy process. This is where the detailed plans, policies and programs are formulated. This will also involve the acquisition of required resources that will make the strategy happen. There are two (2) decisions that management will focus on:

(1) Tactical programmes and decisions - these are essentially about implementing some of the key elements of the strategy like developing new products, recruitment or downsizing of staff or investing in new production capacity.

(2) Operational programmes and decisions - these cover the day-to-day matters such as meeting
particular production, cost and revenue targets.

Fifth step: Review and Control

After the implementation, it doesn't stop there. This will be an on-going process that will require reviewing both the implementation and the overall continuing suitability of the strategy.

It will consider two aspects:
1. Does performance of the strategy still put the business on course for reaching its strategic
objectives?
2. Are the forecasts of the environment on which the strategy was based still accurate, or have unforeseen threats or opportunities arisen subsequently that might necessitate a reconsideration of the strategy?

1.5 Criticisms of the rational model of strategy formulation

I - nvolvement in the strategy. Senior management should not be the only people involved in setting strategy. Senior management are too detached and lack understanding of the details. Also, they will most likely not to consider the the social processes, values and cultures of the staff in the division.

S - tep-by-step. Strategy formulation is not a simple step-by-step process. In reality, it is much more of a jumbled-up process and can include considerable backtracking and revisiting of earlier stages in the model.

N - ot something decided in advance by managers. Apply Mintzberg's model of Managing. Strategy is often recounted by managers long after the event. Strategy emerges as a pattern from the piecemeal decisions of management. Another name for this view is adaptive because it sees the organisation as

adapting to the circumstances around it.

O - rganizations are incapable of having objectives. Organization is a collection of people, with people has a variety of goals. These objectives may be in conflict with the other and change from time to time. It is also inevitable that the objective of the organization will please the stakeholders group.

R - ational process of strategy shouldn't apply. The excessive rationality in decision-making will rob a manager of the motivation and commitment necessary to implement the strategy successfully.

E - ventually, organizations follow the strategies that aren't set. Management suffered from bounded rationality during the strategy formulation. This means that they cannot have perfect knowledge of the future and so any strategies developed will fail to take into account all eventualities.

1.6 A formal top-down strategy process

Features:

A-ssigned Team.  A designated team responsible for strategy development. This will include strategic planning unit reporting to top management, groups of managers and business consultants
F-ormal collection of information for strategy purposes. This includes environmental scanning reports, specially commissioned reports, management accounting information and research reports.
T-eam working together for the decision-taking. Collective decision-taking by the senior management team.
E-ngage a process for the communication and implementation. A process of communicating and implementing the business strategy.
R-egular review and control of the strategy. Management will monitor the success of the strategy by receiving regular reports on performance and on environmental changes.

Benefits:

A-voids Short-Termist Behavior. Management will focus on long-term development of the business 

I - ssues are Identified. Management is proactive and keeps ahead of the change when the business environment in the plans and decisions are considered.

G-oal Congruence. This is basically about the coordination of each team player that will make the strategy successful.

I-mproves stakeholder perceptions of the business. This gives a clear idea on where the business is going, which gives confidence to the stakeholders that the organization is progressing and will become successful.

C-ontrol has basis. Provides a basis for strategic control. This includes essentially the implementation and completion stage of the strategy. It ensures that there is someone looking after the development of the strategy, has clear programmes and policies, and targets and reports enabling review of success of the strategy.

E-nsures continuity and develops future management potential. This relates to the fact that formal strategy formulation is a collective process.

Drawbacks:

D-ynamic. It is too infrequent to allow the business to be dynamic.(for example by continuing to make a product no one wants)

E-ntrepreneurial spirit. There is loss of entrepreneurial spirit. 

D-ifficulties of implementation. 

U-ncertain business environments. Successful implementation requires the participation of middle and junior management, together with operative staff. There is a danger that the formal process will not build the support of these people and hence will be misunderstood or resisted.

C-omplicated and expensive for small businesses. The opportunity cost in terms of the time away from direct management of the operational parts of the business are likely to be too great.

E-xcludes the development of radical or innovative strategies. The need to retain consensus among the management team means that radical ideas are too often rejected.

1.7 Strategy and small businesses

The top-down process is not suitable for small businesses due to following reasons:

G-oals are different as compared to big companies. Small businesses often do not exhibit the economic rationality and single-minded pursuit of dividends and growth often associated with businesses governed by external shareholders.

R-esources are limited. Smaller firms lack the resources to invest in new strategic ventures

and rapid growth.

O-rganizational structure. Strategic implementation demands the setting up of an appropriate structure and selection of an appropriate team to carry it out.

S-cope of product/market choices are limited. Small-business managers typically consider a much narrower range of strategic options than do their large-business counterparts.

1.8 Achieving competitive advantage – alternative perspectives: resource-based view versus the positioning view

Positioning view sees competitive advantage stemming from the firm’s position in relation to its competitors, customers or stakeholders. It is sometimes called an outside-in view because it is concerned with adapting the organisation to fit its environment.

Criticisms of Positioning View, from resource based theorists perspective:

• The competitive advantages are not sustainable.
• Environments are too dynamic to enable positioning to be effective.
• It is easier to change the environment than it is to change the firm.

Resource-based view is based on competitive advantage stemming from some unique asset or competence possessed by the firm. This is an inside-out view of strategy because the firm must go in search of environments that enable it to harness its internal competences.

Resource-based theory raises a number of issues:

• Conflict with conventional product/market-based views of strategy
• Challenges the rational model of strategy
• RBT can lead to different conclusions.

1.9 Alternative approaches to formulating strategy

Emergent strategies

• According to Henry Mintzberg, real strategies are combination of planned strategy and unanticipated emergent strategies
• Defined as patterns or consistencies realized despite, or in the absence of, intentions’

Logical incrementalism

• Logical incrementalism is the term developed by Lindblom to describe how 
• government administrators ‘muddle through’ from year to year rather than carry out bold 
• strategic initiatives
• Accept that they cannot foresee the future and survive by muddling through, taking small steps based on what has been done and has worked in the past
• For Quinn, a manager must map where he or she wants the organisation to go and then proceed towards it in small steps, being prepared to adapt if the environment changes or if support is not forthcoming.

1.10 Stakeholders

Stakeholders - Those persons and organisations that have an interest in the strategy of an organisation

They include:
● shareholders and owners
● management
● employees
● customers/clients
● suppliers
● local community
● local and national governments
● trade unions
● media
● regulatory bodies
● pressure groups

The influence of stakeholders
Strategic decision-making requires managers to consider stakeholders when setting the mission and objectives of the firm. This is for two broad groups of reasons:

• Issues of stakeholder power. This view observes that, like it or not, management must recognise that stakeholders can affect the success of a strategy, depending on whether they support or oppose it.
• For example, customers refusing to buy products, shareholders selling their shares or staff striking would disrupt any strategy. The view concludes that management should consider stakeholders before setting strategic objectives.

• Issues of organisational legitimacy. This more radical view suggests that firms are required to be good citizens because they are only permitted to exist by society on sufferance of not abusing their power. Consequently, although working primarily for the shareholders, management must ensure that its decisions do not ignore the interests of other stakeholders.

Mendelow Matrix

Mendelow (1991) developed a framework to help analyse stakeholders power and interest

• To keep track of changes in the potential influence of different stakeholder groups. By plotting the matrix periodically, management can be alerted when a strategy may need to be changed to accommodate (or avoid a threat from) particular stakeholders.
• To assess the impact of a particular strategic development on stakeholders. For example, managers proposing a factory closure could use mapping to identify where opposition to closure may come from and how it might be managed.

Assessing interest of stakeholders

• Where their interests rest
• Powerful stakeholders will pursue their self-interest. Example of these are managers, whose interests are their career and pay, or employees who require higher pay and good working condition.
• How interested they are
• Not all stakeholders have the time or interest to follow management's decisions.
  Example of these are the high personal financial or career investment in what the business does or the absence of alternative.

1.11 Meeting the objectives of shareholders