Strategic Management
Processes
Strategic management
is a combination of three main processes which are as follows:
Strategy formulation
- Performing a situation analysis,
self-evaluation and competitor analysis: both internal and external; both
micro-environmental and macro-environmental.
- Concurrent with this assessment, objectives
are set. These objectives should be parallel to a timeline; some are in
the short-term and others on the long-term. This involves crafting vision
statements (long term view of a possible future), mission statements (the
role that the organization gives itself in society), overall corporate
objectives (both financial and strategic), strategic business unit
objectives (both financial and strategic), and tactical objectives.
- These objectives should, in the light of the
situation analysis, suggest a strategic plan. The plan provides the
details of how to achieve these objectives.
Strategy implementation
- Allocation and management of sufficient resources
(financial, personnel, time, technology support)
- Establishing a chain of command or some
alternative structure (such as cross functional teams)
- Assigning responsibility of specific tasks or
processes to specific individuals or groups
- It also involves managing the process. This
includes monitoring results, comparing to benchmarks and best practices,
evaluating the efficacy and efficiency of the process, controlling for
variances, and making adjustments to the process as necessary.
- When implementing specific programs, this
involves acquiring the requisite resources, developing the process,
training, process testing, documentation, and integration with (and/or
conversion from) legacy processes.
Strategy evaluation
- Measuring the effectiveness of the organizational
strategy. It's extremely important to conduct a SWOT analysis to figure
out the strengths, weaknesses, opportunities and threats (both internal
and external) of the entity in question. This may require to take certain
precautionary measures or even to change the entire strategy.
General approaches
In general terms,
there are two main approaches, which are opposite but complement each other in
some ways, to strategic management:- The Industrial Organizational Approach
- based on economic theory — deals with issues like
competitive rivalry, resource allocation,
economies of scale
- assumptions — rationality, self discipline
behaviour, profit maximization
- The Sociological Approach
- deals primarily with human interactions
- assumptions — bounded rationality,
satisfying behaviour, profit sub-optimality. An example of a company that
currently operates this way is Google
The strategy hierarchy
In most (large)
corporations there are several levels of strategy. Strategic management is the
highest in the sense that it is the broadest, applying to all parts of the
firm. It gives direction to corporate values, corporate culture, corporate
goals, and corporate missions. Under this broad corporate strategy there are
often functional or business unit strategies.Functional strategies include marketing strategies, new product development strategies, human resource strategies, financial strategies, legal strategies, supply-chain strategies, and information technology management strategies. The emphasis is on short and medium term plans and is limited to the domain of each department’s functional responsibility. Each functional department attempts to do its part in meeting overall corporate objectives, and hence to some extent their strategies are derived from broader corporate strategies.
Many companies feel that a functional organizational structure is not an efficient way to organize activities so they have reengineered according to processes or strategic business units (called SBUs). A strategic business unit is a semi-autonomous unit within an organization. It is usually responsible for its own budgeting, new product decisions, hiring decisions, and price setting. An SBU is treated as an internal profit centre by corporate headquarters. Each SBU is responsible for developing its business strategies, strategies that must be in tune with broader corporate strategies.
The “lowest” level of strategy is operational strategy. It is very narrow in focus and deals with day-to-day operational activities such as scheduling criteria. It must operate within a budget but is not at liberty to adjust or create that budget. Operational level strategy was encouraged by Peter Drucker in his theory of management by objectives (MBO). Operational level strategies are informed by business level strategies which, in turn, are informed by corporate level strategies. Business strategy, which refers to the aggregated operational strategies of single business firm or that of an SBU in a diversified corporation refers to the way in which a firm competes in its chosen arenas.
Corporate strategy, then, refers to the overarching strategy of the diversified firm. Such corporate strategy answers the questions of "in which businesses should we compete?" and "how does being in one business add to the competitive advantage of another portfolio firm, as well as the competitive advantage of the corporation as a whole?"
Since the turn of the millennium, there has been a tendency in some firms to revert to a simpler strategic structure. This is being driven by information technology. It is felt that knowledge management systems should be used to share information and create common goals. Strategic divisions are thought to hamper this process. Most recently, this notion of strategy has been captured under the rubric of dynamic strategy, popularized by the strategic management textbook authored by Carpenter and Sanders [1]. This work builds on that of Brown and Eisenhart as well as Christensen and portrays firm strategy, both business and corporate, as necessarily embracing ongoing strategic change, and the seamless integration of strategy formulation and implementation. Such change and implementation are usually built into the strategy through the staging and pacing facets.
Historical
development of strategic management
Birth of strategic management
Strategic management
as a discipline originated in the 1950s and 60s. Although there were numerous
early contributors to the literature, the most influential pioneers were Alfred D. Chandler,
Jr., Philip Selznick, Igor Ansoff, and Peter Drucker.Alfred Chandler recognized the importance of coordinating the various aspects of management under one all-encompassing strategy. Prior to this time the various functions of management were separate with little overall coordination or strategy. Interactions between functions or between departments were typically handled by a boundary position, that is, there were one or two managers that relayed information back and forth between two departments.
In 1957, Philip Selznick introduced the idea of matching the organization's internal factors with external environmental circumstances.[4] This core idea was developed into what we now call SWOT analysis by Learned, Andrews, and others at the Harvard Business School General Management Group. Strengths and weaknesses of the firm are assessed in light of the opportunities and threats from the business environment.
Igor Ansoff built on
Peter Drucker was a prolific strategy theorist, author of dozens of management books, with a career spanning five decades. His contributions to strategic management were many but two are most important. Firstly, he stressed the importance of objectives. An organization without clear objectives is like a ship without a rudder. As early as 1954 he was developing a theory of management based on objectives.[6] This evolved into his theory of management by objectives (MBO). According to Drucker, the procedure of setting objectives and monitoring your progress towards them should permeate the entire organization, top to bottom. His other seminal contribution was in predicting the importance of what today we would call intellectual capital. He predicted the rise of what he called the “knowledge worker” and explained the consequences of this for management. He said that knowledge work is non-hierarchical. Work would be carried out in teams with the person most knowledgeable in the task at hand being the temporary leader.
In 1985, Ellen-Earle Chaffee summarized what she thought were the main elements of strategic management theory by the 1970s:[7]
- Strategic management involves adapting the
organization to its business environment.
- Strategic management is fluid and complex.
Change creates novel combinations of circumstances requiring unstructured
non-repetitive responses.
- Strategic management affects the entire
organization by providing direction.
- Strategic management involves both strategy
formation (she called it content) and also strategy implementation (she
called it process).
- Strategic management is partially planned and
partially unplanned.
- Strategic management is done at several
levels: overall corporate strategy, and individual business strategies.
- Strategic management involves both conceptual
and analytical thought processes.
Growth and portfolio theory
In the 1970s much of
strategic management dealt with size, growth, and portfolio theory. The PIMS study was a long term study, started in the
1960s and lasted for 19 years, that attempted to understand the Profit Impact
of Marketing Strategies (PIMS), particularly the effect of market share.
Started at General Electric,
moved to Harvard in the early 1970s, and then moved to the Strategic Planning
Institute in the late 1970s, it now contains decades of information on the
relationship between profitability and strategy. Their initial conclusion was
unambiguous: The greater a company's market share, the greater will be their
rate of profit. The high market share provides volume and economies of scale.
It also provides experience and learning curve advantages. The combined effect
is increased profits.[8] The studies conclusions
continue to be drawn on by academics and companies today: "PIMS provides
compelling quantitative evidence as to which business strategies work and don't
work" - Tom Peters.The benefits of high market share naturally lead to an interest in growth strategies. The relative advantages of horizontal integration, vertical integration, diversification, franchises, mergers and acquisitions, joint ventures, and organic growth were discussed. The most appropriate market dominance strategies were assessed given the competitive and regulatory environment.
There was also research that indicated that a low market share strategy could also be very profitable. Schumacher (1973),[9] Woo and Cooper (1982),[10] Levenson (1984),[11] and later Traverso (2002)[12] showed how smaller niche players obtained very high returns.
By the early 1980s the paradoxical conclusion was that high market share and low market share companies were often very profitable but most of the companies in between were not. This was sometimes called the “hole in the middle” problem. This anomaly would be explained by Michael Porter in the 1980s.
The management of diversified organizations required new techniques and new ways of thinking. The first CEO to address the problem of a multi-divisional company was Alfred Sloan at General Motors. GM was decentralized into semi-autonomous “strategic business units” (SBU's), but with centralized support functions.
One of the most valuable concepts in the strategic management of multi-divisional companies was portfolio theory. In the previous decade Harry Markowitz and other financial theorists developed the theory of portfolio analysis. It was concluded that a broad portfolio of financial assets could reduce specific risk. In the 1970s marketers extended the theory to product portfolio decisions and managerial strategists extended it to operating division portfolios. Each of a company’s operating divisions were seen as an element in the corporate portfolio. Each operating division (also called strategic business units) was treated as a semi-independent profit center with its own revenues, costs, objectives, and strategies. Several techniques were developed to analyze the relationships between elements in a portfolio. B.C.G. Analysis, for example, was developed by the Boston Consulting Group in the early 1970s. This was the theory that gave us the wonderful image of a CEO sitting on a stool milking a cash cow. Shortly after that the G.E. multi factoral model was developed by General Electric. Companies continued to diversify until the 1980s when it was realized that in many cases a portfolio of operating divisions was worth more as separate completely independent companies.
The marketing revolution
The 1970s also saw
the rise of the marketing
oriented firm. From the beginnings of capitalism it was assumed that
the key requirement of business success was a product of high
technical quality. If you produced a product that worked well and was durable,
it was assumed you would have no difficulty selling them at a profit. This was
called the production orientation
and it was generally true that good products could be sold without effort,
encapsulated in the saying "Build a better mousetrap and the world will
beat a path to your door." This was largely due to the growing numbers of
affluent and middle class people that capitalism had created. But after the
untapped demand caused by the second world war was saturated in the 1950s it
became obvious that products were not selling as easily as they had been. The
answer was to concentrate on selling. The 1950s and 1960s
is known as the sales era and the guiding philosophy of business of the time is
today called the sales
orientation. In the early 1970s Theodore Levitt and others at Harvard argued
that the sales orientation had things backward. They claimed that instead of
producing products then trying to sell them to the customer, businesses should
start with the customer, find out what they wanted, and then produce it for
them. The customer became the driving force behind all strategic business
decisions. This marketing orientation, in
the decades since its introduction, has been reformulated and repackaged under
numerous names including customer orientation, marketing philosophy, customer
intimacy, customer focus, customer driven, and market focused.
The Japanese challenge
By the late 70s
people had started to notice how successful Japanese industry had become. In
industry after industry, including steel, watches, ship building, cameras,
autos, and electronics, the Japanese were surpassing American and European
companies. Westerners wanted to know why. Numerous theories purported to
explain the Japanese success including:- Higher employee morale, dedication, and
loyalty;
- Lower cost structure, including wages;
- Effective government industrial policy;
- Modernization after WWII leading to high
capital intensity and productivity;
- Economies of scale associated with increased
exporting;
- Relatively low value of the Yen leading to
low interest rates and capital costs, low dividend expectations, and
inexpensive exports;
- Superior quality control techniques such as
Total Quality Management and other systems introduced by W. Edwards Deming
in the 1950s and 60s.[13]
In 1981 Richard Pascale and Anthony Athos in The Art of Japanese Management claimed that the main reason for Japanese success was their superior management techniques.[14] They divided management into 7 aspects (which are also known as McKinsey 7S Framework): Strategy, Structure, Systems, Skills, Staff, Style, and Supraordinate goals (which we would now call shared values). The first three of the 7 S's were called hard factors and this is where American companies excelled. The remaining four factors (skills, staff, style, and shared values) were called soft factors and were not well understood by American businesses of the time (for details on the role of soft and hard factors see Wickens P.D. 1995.) Americans did not yet place great value on corporate culture, shared values and beliefs, and social cohesion in the workplace. In
One year later The Mind of the Strategist was released in
Also in 1982 Tom Peters and Robert Waterman released a study that would respond to the Japanese challenge head on.[16] Peters and Waterman, who had several years earlier collaborated with Pascale and Athos at McKinsey & Co. asked “What makes an excellent company?”. They looked at 62 companies that they thought were fairly successful. Each was subject to six performance criteria. To be classified as an excellent company, it had to be above the 50th percentile in 4 of the 6 performance metrics for 20 consecutive years. Forty-three companies passed the test. They then studied these successful companies and interviewed key executives. They concluded in In Search of Excellence that there were 8 keys to excellence that were shared by all 43 firms. They are:
- A bias for action — Do it. Try it. Don’t
waste time studying it with multiple reports and committees.
- Customer focus — Get close to the customer.
Know your customer.
- Entrepreneurship — Even big companies act and
think small by giving people the authority to take initiatives.
- Productivity through people — Treat your
people with respect and they will reward you with productivity.
- Value-oriented CEOs — The CEO should actively
propagate corporate values throughout the organization.
- Stick to the knitting — Do what you know
well.
- Keep things simple and lean — Complexity
encourages waste and confusion.
- Simultaneously centralized and decentralized
— Have tight centralized control while also allowing maximum individual
autonomy.
Gaining competitive advantage
The Japanese
challenge shook the confidence of the western business elite, but detailed
comparisons of the two management styles and examinations of successful
businesses convinced westerners that they could overcome the challenge. The
1980s and early 1990s saw a plethora of theories explaining exactly how this
could be done. They cannot all be detailed here, but some of the more important
strategic advances of the decade are explained below.Gary Hamel and C. K. Prahalad declared that strategy needs to be more active and interactive; less “arm-chair planning” was needed. They introduced terms like strategic intent and strategic architecture.[18][19] Their most well known advance was the idea of core competency. They showed how important it was to know the one or two key things that your company does better than the competition.[20]
Active strategic management required active information gathering and active problem solving. In the early days of Hewlett-Packard (H-P), Dave Packard and Bill Hewlett devised an active management style that they called Management By Walking Around (MBWA). Senior H-P managers were seldom at their desks. They spent most of their days visiting employees, customers, and suppliers. This direct contact with key people provided them with a solid grounding from which viable strategies could be crafted. The MBWA concept was popularized in 1985 by a book by Tom Peters and Nancy Austin.[21] Japanese managers employ a similar system, which originated at Honda, and is sometimes called the
Probably the most influential strategist of the decade was Michael Porter. He introduced many new concepts including; 5 forces analysis, generic strategies, the value chain, strategic groups, and clusters. In 5 forces analysis he identifies the forces that shape a firm's strategic environment. It is like a SWOT analysis with structure and purpose. It shows how a firm can use these forces to obtain a sustainable competitive advantage. Porter modifies
In 1993, John Kay took the idea of the value chain to a financial level claiming “ Adding value is the central purpose of business activity”, where adding value is defined as the difference between the market value of outputs and the cost of inputs including capital, all divided by the firm's net output. Borrowing from Gary Hamel and Michael Porter, Kay claims that the role of strategic management is to identify your core competencies, and then assemble a collection of assets that will increase value added and provide a competitive advantage. He claims that there are 3 types of capabilities that can do this; innovation, reputation, and organizational structure.
The 1980s also saw the widespread acceptance of positioning theory. Although the theory originated with Jack Trout in 1969, it didn’t gain wide acceptance until Al Ries and Jack Trout wrote their classic book “Positioning: The Battle For Your Mind” (1979). The basic premise is that a strategy should not be judged by internal company factors but by the way customers see it relative to the competition. Crafting and implementing a strategy involves creating a position in the mind of the collective consumer. Several techniques were applied to positioning theory, some newly invented but most borrowed from other disciplines. Perceptual mapping for example, creates visual displays of the relationships between positions. Multidimensional scaling, discriminant analysis, factor analysis, and conjoint analysis are mathematical techniques used to determine the most relevant characteristics (called dimensions or factors) upon which positions should be based. Preference regression can be used to determine vectors of ideal positions and cluster analysis can identify clusters of positions.
Others felt that internal company resources were the key. In 1992, Jay Barney, for example, saw strategy as assembling the optimum mix of resources, including human, technology, and suppliers, and then configure them in unique and sustainable ways.[22]
Michael Hammer and James Champy felt that these resources needed to be restructured.[23] This process, that they labeled reengineering, involved organizing a firm's assets around whole processes rather than tasks. In this way a team of people saw a project through, from inception to completion. This avoided functional silos where isolated departments seldom talked to each other. It also eliminated waste due to functional overlap and interdepartmental communications.
In 1989 Richard Lester and the researchers at the
- Simultaneous continuous improvement in cost,
quality, service, and product innovation
- Breaking down organizational barriers between
departments
- Eliminating layers of management creating
flatter organizational hierarchies.
- Closer relationships with customers and
suppliers
- Intelligent use of new technology
- Global focus
- Improving human resource skills
A large group of theorists felt the area where western business was most lacking was product quality. People like W. Edwards Deming,[26] Joseph M. Juran,[27] A. Kearney,[28] Philip Crosby,[29] and Armand Feignbaum[30] suggested quality improvement techniques like Total Quality Management (TQM), continuous improvement, lean manufacturing, Six Sigma, and Return on Quality (ROQ).
An equally large group of theorists felt that poor customer service was the problem. People like James Heskett (1988),[31] Earl Sasser (1995), William Davidow,[32] Len Schlesinger,[33] A. Paraurgman (1988), Len Berry,[34] Jane Kingman-Brundage,[35] Christopher Hart, and Christopher Lovelock (1994), gave us fishbone diagramming, service charting, Total Customer Service (TCS), the service profit chain, service gaps analysis, the service encounter, strategic service vision, service mapping, and service teams. Their underlying assumption was that there is no better source of competitive advantage than a continuous stream of delighted customers.
Process management uses some of the techniques from product quality management and some of the techniques from customer service management. It looks at an activity as a sequential process. The objective is to find inefficiencies and make the process more effective. Although the procedures have a long history, dating back to Taylorism, the scope of their applicability has been greatly widened, leaving no aspect of the firm free from potential process improvements. Because of the broad applicability of process management techniques, they can be used as a basis for competitive advantage.
Some realized that businesses were spending much more on acquiring new customers than on retaining current ones. Carl Sewell,[36] Frederick Reicheld,[37] C. Gronroos,[38] and Earl Sasser[39] showed us how a competitive advantage could be found in ensuring that customers returned again and again. This has come to be known as the loyalty effect after Reicheld's book of the same name in which he broadens the concept to include employee loyalty, supplier loyalty, distributor loyalty, and shareholder loyalty. They also developed techniques for estimating the lifetime value of a loyal customer, called customer lifetime value (CLV). A significant movement started that attempted to recast selling and marketing techniques into a long term endeavor that created a sustained relationship with customers (called relationship selling, relationship marketing, and customer relationship management). Customer relationship management (CRM) software (and its many variants) became an integral tool that sustained this trend.
James Gilmore and Joseph Pine found competitive advantage in mass customization.[40] Flexible manufacturing techniques allowed businesses to individualize products for each customer without losing economies of scale. This effectively turned the product into a service. They also realized that if a service is mass customized by creating a “performance” for each individual client, that service would be transformed into an “experience”. Their book, The Experience Economy,[41] along with the work of Bernd Schmitt convinced many to see service provision as a form of theatre. This school of thought is sometimes referred to as customer experience management (CEM).
Like Peters and Waterman a decade earlier, James Collins and Jerry Porras spent years conducting empirical research on what makes great companies. Six years of research uncovered a key underlying principle behind the 19 successful companies that they studied: They all encourage and preserve a core ideology that nurtures the company. Even though strategy and tactics change daily, the companies, nevertheless, were able to maintain a core set of values. These core values encourage employees to build an organization that lasts. In Built To Last (1994) they claim that short term profit goals, cost cutting, and restructuring will not stimulate dedicated employees to build a great company that will endure.[42] In 2000 Collins coined the term “built to flip” to describe the prevailing business attitudes in
Arie de Geus (1997) undertook a similar study and obtained similar results. He identified four key traits of companies that had prospered for 50 years or more. They are:
- Sensitivity to the business environment — the
ability to learn and adjust
- Cohesion and identity — the ability to build
a community with personality, vision, and purpose
- Tolerance and decentralization — the ability
to build relationships
- Conservative financing
The military theorists
In the 1980s some
business strategists realized that there was a vast knowledge base stretching back thousands of
years that they had barely examined. They turned to military strategy for guidance. Military
strategy books such as The Art of War by Sun Tzu, On War by von Clausewitz,
and The Red Book by Mao Zedong became
instant business classics. From Sun Tzu they learned the tactical side of
military strategy and specific tactical prescriptions. From Von Clausewitz they
learned the dynamic and unpredictable nature of military strategy. From Mao
Zedong they learned the principles of guerrilla warfare. The main marketing
warfare books were:- Business War Games by Barrie James, 1984
- Marketing Warfare by Al Ries and Jack Trout, 1986
- Leadership
Secrets of Attila the Hun by Wess Roberts, 1987
There were generally thought to be four types of business warfare theories. They are:
- Offensive
marketing warfare strategies
- Defensive
marketing warfare strategies
- Flanking
marketing warfare strategies
- Guerrilla
marketing warfare strategies
By the turn of the century marketing warfare strategies had gone out of favour. It was felt that they were limiting. There were many situations in which non-confrontational approaches were more appropriate. The “Strategy of the Dolphin” was developed in the mid 1990s to give guidance as to when to use aggressive strategies and when to use passive strategies. A variety of aggressiveness strategies were developed.
In 1993, J. Moore used a similar metaphor.[43] Instead of using military terms, he created an ecological theory of predators and prey (see ecological model of competition), a sort of Darwinian management strategy in which market interactions mimic long term ecological stability.
Strategic change
In 1970, Alvin Toffler in Future Shock described a
trend towards accelerating rates of change.[44] He illustrated how
social and technological norms had shorter lifespans with each generation, and
he questioned society's ability to cope with the resulting turmoil and anxiety.
In past generations periods of change were always punctuated with times of
stability. This allowed society to assimilate the change and deal with it
before the next change arrived. But these periods of stability are getting
shorter and by the late 20th century had all but disappeared. In In 1997, Watts Waker and Jim Taylor called this upheaval a "500 year delta."[46] They claimed these major upheavals occur every 5 centuries. They said we are currently making the transition from the “Age of Reason” to a new chaotic Age of Access. Jeremy Rifkin (2000) popularized and expanded this term, “age of access” three years later in his book of the same name.[47]
In 1968, Peter Drucker (1969) coined the phrase Age of Discontinuity to describe the way change forces disruptions into the continuity of our lives.[48] In an age of continuity attempts to predict the future by extrapolating from the past can be somewhat accurate. But according to Drucker, we are now in an age of discontinuity and extrapolating from the past is hopelessly ineffective. We cannot assume that trends that exist today will continue into the future. He identifies four sources of discontinuity: new technologies, globalization, cultural pluralism, and knowledge capital.
In 2000, Gary Hamel discussed strategic decay, the notion that the value of all strategies, no matter how brilliant, decays over time.[49]
In 1978, Dereck Abell (Abell, D. 1978) described strategic windows and stressed the importance of the timing (both entrance and exit) of any given strategy. This has led some strategic planners to build planned obsolescence into their strategies.[50]
In 1989, Charles Handy identified two types of change.[51] Strategic drift is a gradual change that occurs so subtly that it is not noticed until it is too late. By contrast, transformational change is sudden and radical. It is typically caused by discontinuities (or exogenous shocks) in the business environment. The point where a new trend is initiated is called a strategic inflection point by Andy Grove. Inflection points can be subtle or radical.
In 2000, Malcolm Gladwell discussed the importance of the tipping point, that point where a trend or fad acquires critical mass and takes off.[52]
In 1983, Noel Tichy recognized that because we are all beings of habit we tend to repeat what we are comfortable with.[53] He wrote that this is a trap that constrains our creativity, prevents us from exploring new ideas, and hampers our dealing with the full complexity of new issues. He developed a systematic method of dealing with change that involved looking at any new issue from three angles: technical and production, political and resource allocation, and corporate culture.
In 1990, Richard Pascale (Pascale, R. 1990) wrote that relentless change requires that businesses continuously reinvent themselves.[54] His famous maxim is “Nothing fails like success” by which he means that what was a strength yesterday becomes the root of weakness today, We tend to depend on what worked yesterday and refuse to let go of what worked so well for us in the past. Prevailing strategies become self-confirming. In order to avoid this trap, businesses must stimulate a spirit of inquiry and healthy debate. They must encourage a creative process of self renewal based on constructive conflict.
In 1996, Art Kleiner (1996) claimed that to foster a corporate culture that embraces change, you have to hire the right people; heretics, heroes, outlaws, and visionaries[55]. The conservative bureaucrat that made such a good middle manager in yesterday’s hierarchical organizations is of little use today. A decade earlier Peters and Austin (1985) had stressed the importance of nurturing champions and heroes. They said we have a tendency to dismiss new ideas, so to overcome this, we should support those few people in the organization that have the courage to put their career and reputation on the line for an unproven idea.
In 1996, Adrian Slywotsky showed how changes in the business environment are reflected in value migrations between industries, between companies, and within companies.[56] He claimed that recognizing the patterns behind these value migrations is necessary if we wish to understand the world of chaotic change. In “Profit Patterns” (1999) he described businesses as being in a state of strategic anticipation as they try to spot emerging patterns. Slywotsky and his team identified 30 patterns that have transformed industry after industry.[57]
In 1997, Clayton Christensen (1997) took the position that great companies can fail precisely because they do everything right since the capabilities of the organization also defines its disabilities.[58] Christensen's thesis is that outstanding companies lose their market leadership when confronted with disruptive technology. He called the approach to discovering the emerging markets for disruptive technologies agnostic marketing, i.e., marketing under the implicit assumption that no one - not the company, not the customers - can know how or in what quantities a disruptive product can or will be used before they have experience using it.
A number of strategists use scenario planning techniques to deal with change. Kees van der Heijden (1996), for example, says that change and uncertainty make “optimum strategy” determination impossible. We have neither the time nor the information required for such a calculation. The best we can hope for is what he calls “the most skillful process”.[59] The way Peter Schwartz put it in 1991 is that strategic outcomes cannot be known in advance so the sources of competitive advantage cannot be predetermined.[60] The fast changing business environment is too uncertain for us to find sustainable value in formulas of excellence or competitive advantage. Instead, scenario planning is a technique in which multiple outcomes can be developed, their implications assessed, and their likeliness of occurrence evaluated. According to Pierre Wack, scenario planning is about insight, complexity, and subtlety, not about formal analysis and numbers.[61]
In 1988, Henry Mintzberg looked at the changing world around him and decided it was time to reexamine how strategic management was done.[62][63] He examined the strategic process and concluded it was much more fluid and unpredictable than people had thought. Because of this, he could not point to one process that could be called strategic planning. Instead he concludes that there are five types of strategies. They are:
- Strategy as plan - a direction, guide, course
of action - intention rather than actual
- Strategy as ploy - a maneuver intended to
outwit a competitor
- Strategy as pattern - a consistent pattern of
past behaviour - realized rather than intended
- Strategy as position - locating of brands,
products, or companies within the conceptual framework of consumers or
other stakeholders - strategy determined primarily by factors outside the
firm
- Strategy as perspective - strategy determined
primarily by a master strategist
In 1999, Constantinos Markides also wanted to reexamine the nature of strategic planning itself.[65] He describes strategy formation and implementation as an on-going, never-ending, integrated process requiring continuous reassessment and reformation. Strategic management is planned and emergent, dynamic, and interactive. J. Moncrieff (1999) also stresses strategy dynamics.[66] He recognized that strategy is partially deliberate and partially unplanned. The unplanned element comes from two sources: emergent strategies (result from the emergence of opportunities and threats in the environment) and Strategies in action (ad hoc actions by many people from all parts of the organization).
Some business planners are starting to use a complexity theory approach to strategy. Complexity can be thought of as chaos with a dash of order. Chaos theory deals with turbulent systems that rapidly become disordered. Complexity is not quite so unpredictable. It involves multiple agents interacting in such a way that a glimpse of structure may appear. Axelrod, R.,[67]
Information
and technology driven strategy
Peter Drucker had theorized the rise of the
“knowledge worker” back in the 1950s. He described how fewer workers would be
doing physical labour, and more would be applying their minds. In 1984, John Nesbitt theorized that the future would be
driven largely by information: companies that managed information well could
obtain an advantage, however the profitability of what he calls the
“information float” (information that the company had and others desired) would
all but disappear as inexpensive computers made information more accessible.Daniel Bell (1985) examined the sociological consequences of information technology, while Gloria Schuck and Shoshana Zuboff looked at psychological factors.[71] Zuboff, in her five year study of eight pioneering corporations made the important distinction between “automating technologies” and “infomating technologies”. She studied the effect that both had on individual workers, managers, and organizational structures. She largely confirmed Peter Drucker's predictions three decades earlier, about the importance of flexible decentralized structure, work teams, knowledge sharing, and the central role of the knowledge worker. Zuboff also detected a new basis for managerial authority, based not on position or hierarchy, but on knowledge (also predicted by Drucker) which she called “participative management”.[72]
In 1990, Peter Senge, who had collaborated with Arie de Geus at Dutch Shell, borrowed de Geus' notion of the learning organization, expanded it, and popularized it. The underlying theory is that a company's ability to gather, analyze, and use information is a necessary requirement for business success in the information age. (See organizational learning.) In order to do this, Senge claimed that an organization would need to be structured such that:[73]
- People can continuously expand their capacity
to learn and be productive,
- New patterns of thinking are nurtured,
- Collective aspirations are encouraged, and
- People are encouraged to see the “whole
picture” together.
- Personal responsibility, self reliance, and
mastery — We accept that we are the masters of our own destiny. We make
decisions and live with the consequences of them. When a problem needs to
be fixed, or an opportunity exploited, we take the initiative to learn the
required skills to get it done.
- Mental models — We need to explore our
personal mental models to understand the subtle effect they have on our
behaviour.
- Shared vision — The vision of where we want
to be in the future is discussed and communicated to all. It provides
guidance and energy for the journey ahead.
- Team learning — We learn together in teams.
This involves a shift from “a spirit of advocacy to a spirit of enquiry”.
- Systems thinking
— We look at the whole rather than the parts. This is what Senge calls the
“Fifth discipline”. It is the glue that integrates the other four into a
coherent strategy. For an alternative approach to the “learning
organization”, see Garratt, B. (1987).
Thomas A. Stewart, for example, uses the term intellectual capital to describe the investment an organization makes in knowledge. It is comprised of human capital (the knowledge inside the heads of employees), customer capital (the knowledge inside the heads of customers that decide to buy from you), and structural capital (the knowledge that resides in the company itself).
Manuel Castells, describes a network society characterized by: globalization, organizations structured as a network, instability of employment, and a social divide between those with access to information technology and those without.
Stan Davis and Christopher Meyer (1998) have combined three variables to define what they call the BLUR equation. The speed of change, Internet connectivity, and intangible knowledge value, when multiplied together yields a society's rate of BLUR. The three variables interact and reinforce each other making this relationship highly non-linear.
Regis McKenna posits that life in the high tech information age is what he called a “real time experience”. Events occur in real time. To ever more demanding customers “now” is what matters. Pricing will more and more become variable pricing changing with each transaction, often exhibiting first degree price discrimination. Customers expect immediate service, customized to their needs, and will be prepared to pay a premium price for it. He claimed that the new basis for competition will be time based competition.[83]
Geoffrey Moore (1991) and R. Frank and P. Cook[84] also detected a shift in the nature of competition. In industries with high technology content, technical standards become established and this gives the dominant firm a near monopoly. The same is true of networked industries in which interoperability requires compatibility between users. An example is word processor documents. Once a product has gained market dominance, other products, even far superior products, cannot compete.
Evans and Wurster describe how industries with a high information component are being transformed.[85] They cite Encarta's demolition of the Encyclopedia Britannica (whose sales have plummeted 80% since their peak of $650 million in 1990). Many speculate that Encarta’s reign will be short-lived, eclipsed by collaborative encyclopedias like Wikipedia that can operate at very low marginal costs. Evans also mentions the music industry which is desperately looking for a new business model. The upstart information savvy firms, unburdened by cumbersome physical assets, are changing the competitive landscape, redefining market segments, and disintermediating some channels. One manifestation of this is personalized marketing. Information technology allows marketers to treat each individual as its own market, a market of one. Traditional ideas of market segments will no longer be relevant if personalized marketing is successful.
The technology sector has provided some strategies directly. For example, from the software development industry agile software development provides a model for shared development processes.
Access to information systems have allowed senior managers to take a much more comprehensive view of strategic management than ever before. The most notable of the comprehensive systems is the balanced scorecard approach developed in the early 1990's by Drs. Robert S. Kaplan (Harvard Business School) and David Norton (Kaplan, R. and Norton, D. 1992). It measures several factors financial, marketing, production, organizational development, and new product development in order to achieve a 'balanced' perspective.
The
psychology of strategic management
Several psychologists
have conducted studies to determine the psychological patterns involved in
strategic management. Typically senior managers have been asked how they go
about making strategic decisions. A 1938 treatise by Chester Barnard, that was based on his own
experience as a business executive, sees the process as informal, intuitive,
non-routinized, and involving primarily oral, 2-way communications. Bernard
says “The process is the sensing of the organization as a whole and the total
situation relevant to it. It transcends the capacity of merely intellectual
methods, and the techniques of discriminating the factors of the situation. The
terms pertinent to it are “feeling”, “judgement”, “sense”, “proportion”,
“balance”, “appropriateness”. It is a matter of art rather than science.”[86]In 1973, Henry Mintzberg found that senior managers typically deal with unpredictable situations so they strategize in ad hoc, flexible, dynamic, and implicit ways. He says, “The job breeds adaptive information-manipulators who prefer the live concrete situation. The manager works in an environment of stimulous-response, and he develops in his work a clear preference for live action.”[87]
In 1982, John Kotter studied the daily activities of 15 executives and concluded that they spent most of their time developing and working a network of relationships from which they gained general insights and specific details to be used in making strategic decisions. They tended to use “mental road maps” rather than systematic planning techniques.[88]
Daniel Isenberg's 1984 study of senior managers found that their decisions were highly intuitive. Executives often sensed what they were going to do before they could explain why.[89] He claimed in 1986 that one of the reasons for this is the complexity of strategic decisions and the resultant information uncertainty.[90]
Shoshana Zuboff (1988) claims that information technology is widening the divide between senior managers (who typically make strategic decisions) and operational level managers (who typically make routine decisions). She claims that prior to the widespread use of computer systems, managers, even at the most senior level, engaged in both strategic decisions and routine administration, but as computers facilitated (She called it “deskilled”) routine processes, these activities were moved further down the hierarchy, leaving senior management free for strategic decions making.
In 1977, Abraham Zaleznik identified a difference between leaders and managers. He describes leadershipleaders as visionaries who inspire. They care about substance. Whereas managers are claimed to care about process, plans, and form.[91] He also claimed in 1989 that the rise of the manager was the main factor that caused the decline of American business in the 1970s and 80s. Lack of leadership is most damaging at the level of strategic management where it can paralyze an entire organization.[92]
According to Corner, Kinichi, and Keats,[93] strategic decision making in organizations occurs at two levels: individual and aggregate. They have developed a model of parallel strategic decision making. The model identifies two parallel processes both of which involve getting attention, encoding information, storage and retrieval of information, strategic choice, strategic outcome, and feedback. The individual and organizational processes are not independent however. They interact at each stage of the process.
Reasons why strategic plans
fail
There are many reasons
why strategic plans fail, especially:- Failure to understand the customer
- Why do they buy
- Is there a real need for the product
- inadequate or incorrect marketing research
- Inability to predict environmental reaction
- What will competitors do
- Fighting brands
- Price wars
- Will government intervene
- Over-estimation of resource competence
- Can the staff, equipment, and processes handle
the new strategy
- Failure to develop new employee and
management skills
- Failure to coordinate
- Reporting and control relationships not
adequate
- Organizational structure not flexible enough
- Failure to obtain senior management
commitment
- Failure to get management involved right
from the start
- Failure to obtain sufficient company
resources to accomplish task
- Failure to obtain employee commitment
- New strategy not well explained to employees
- No incentives given to workers to embrace
the new strategy
- Under-estimation of time requirements
- No critical path analysis done
- Failure to follow the plan
- No follow through after initial planning
- No tracking of progress against plan
- No consequences for above
- Failure to manage change
- Inadequate understanding of the internal
resistance to change
- Lack of vision on the relationships between
processes, technology and organization
- Poor communications
- Insufficient information sharing among
stakeholders
- Exclusion of stakeholders and delegates
Criticisms of strategic
management
Although a sense of
direction is important, it can also stifle creativity, especially if it is
rigidly enforced. In an uncertain and ambiguous world, fluidity can be more
important than a finely tuned strategic compass. When a strategy becomes
internalized into a corporate culture, it can lead to group think. It can also cause an organization
to define itself too narrowly. An example of this is marketing myopia.Many theories of strategic management tend to undergo only brief periods of popularity. A summary of these theories thus inevitably exhibits survivorship bias (itself an area of research in strategic management). Many theories tend either to be too narrow in focus to build a complete corporate strategy on, or too general and abstract to be applicable to specific situations. Populism or faddishness can have an impact on a particular theory's life cycle and may see application in inappropriate circumstances. See business philosophies and popular management theories for a more critical view of management theories.
In 2000, Gary Hamel coined the term strategic convergence to explain the limited scope of the strategies being used by rivals in greatly differing circumstances. He lamented that strategies converge more than they should, because the more successful ones get imitated by firms that do not understand that the strategic process involves designing a custom strategy for the specifics of each situation.[94]
Ram Charan, aligning with a popular marketing tagline, believes that strategic planning must not dominate action. "Just do it!", while not quite what he meant, is a phrase that nevertheless comes to mind when combatting analysis paralysis.
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