Lecture notes - Strategy Making

University Degree Business and Administrative studies

Lecture Notes 1

Student Learning Objectives

Upon completion of this lecture you will be able to:

Reading Assignments

Text Handout 1

1. What is Strategy and it is Important

(Complete) Pages read all

Handout 2

2. Strategy Paper

(Complete) Pages read all

Handout 3

3. Everything CIOs Need to Know About Strategy

(Read about all famous strategist)

Comprehensive Case Study

4. Coke and Pepsi Hundred year war.

Short Cases

5. Jet Blue in US Airline industry

6. Block buster Video to Netflix competitive Advantage

Teaching Outline

Introductory Points

What is Strategy?

Today strategy is one of the most commonly used words in management studies, but its use was not, and is not, limited to that area. Thinking and writing about strategy has a history stretching back far earlier than management studies, a history which is interesting in its own right. It has been one of the most debated concepts, both in its definition and significance.

The history goes back to Greek and Chinese military thinkers, whose insights it has recently become fashionable to quote. The ancient Greeks associated the term strategos with Alexander the Great. The word “strategy” is actually derived from Greek word strategia meaning “generalship”, from stratos meaning “army” and ag “to lead”

The military origins of strategy

Though the literature specifies ‘strategy’ is derived from the Greek word for the ‘art of the general’, but this definition would seem to reveal more about the etymology than the meaning. What we can conclude, is that strategy has been a preoccupation of generals and statesmen for millennia. Cummings (1995) described the strategoi in Greek society of the fifth century BC who were the collective leadership responsible for decisions on behalf of the community and suggested that their roles were: to have vision, to articulate this vision effectively and to communicate it to the citizens for approval. Somewhat after the Greeks (about 400 BC) invented the strategy, Sun Tzu produced his treatise on military strategy, The Art of War, (about 500–600 BC) in China. This remarkable document did not begin to influence the development of strategic thought in Western nations for many centuries, but still seems modern in many of its proposals to this day. For instance, Sun Tzu proposed that the most successful general was one that could win before the fighting had to start (amazingly applies so true to the present); superior manpower, position, technology and so on would prevail (competitive advantage); avoid what is strong, like water avoids high places (the indirect approach).

Strategic thinking, in the sense of systematized and institutionalized military thinking, was revived by German military thinkers during the nineteenth century. In war the overall aim is obvious, the military defeat of the enemy, but the means of achieving that aim need to be carefully articulated. A clear distinction is made between strategy and tactics. For example, Carl von Clausewitz (1984) distinguished tactics from strategy: ‘tactics … [involve] the use of armed forces in the engagement, strategy [is] the use of engagements for the object of war’ (quoted in Ghemawat, 1999). Strategy involves both the formulation of the overall aim as specific military objectives and the successful implementation of these objectives. It therefore involves both the marshalling of a wide range of resources to the task and their deployment in a way which maximizes their effectiveness, but also the simultaneous anticipation of what the enemy will do, given its own resources and its likely knowledge of the enemy’s resources. The strategy needs to be efficiently implemented, which involves careful preparation, good training and the use of effective tactics. More attention is often concentrated on the effective use of tactics by, for example, Julius Caesar, Alexander the Great or Napoleon than on their ability to get the strategy right, the core of which is the repeated concentration of strength in the right place at the right time.

The origins of strategy in business

The military link has continued through to the present day. Many still see a parallel between military strategy and business strategy, drawing a further parallel between tactics and management. The influence of this view clearly underpins the assumptions of the classical approach to today’s strategy.

While the business enterprise remained small and of low capital intensity and while the invisible hand of Adam Smith appeared to rule economic life, strategy remained dormant as an idea relevant to the business world. When, in the early20th century, the large modern business corporation emerged and, alongside it, the visible hand of deliberate business policy, strategy began its life as a practical application to the business world of a simple principle, shaping one’s own fate. As enterprises grew larger, they began to try to control market forces and impose their stamp upon their environment. The first real practitioner in any systematic way was probably Alfred Sloan of General Motors and the first academic commentator was Alfred Chandler (1962), who chronicled, using a number of comparative treatments, the history of the modern business enterprise. Alfred Chandler’s main achievement was to explore the implications for strategy of the emergence of the modern corporation. In particular he traced in some detail the interaction between strategy and organizational structure.

Strategy and planning

Strategy is related to planning. Its rise and fall in popularity is linked with the change in attitude to planning. During the twentieth century the techniques of formal and systematic planning became popular in both communist and capitalist economies. It is fitting that the total mobilization of resources for two world wars provided a model of how planning might work. Business planning has quite a long history, both as a practical matter and as a subject of teaching, notably in American business schools. The case study approach, pioneered by Harvard Business School, highlighted the way in which, in the same industry, different outcomes for enterprises reflected different strategies and different planning models.

Stages of development of strategy

Theory often evolves to cope with a changing world, although the development of such theory tends to lag behind practice. An interesting interpretation of the history of the strategy concept sees it developing over the period from 1945 to the present in four stages, which are defined by the changing problems imposed on enterprises by an evolving socioeconomic environment

Stage 1

From 1945 to the mid- to late 1960s, the economic context was a relatively stable one, simple to understand, but expansionary. Most economies had been exhausted by war. In 1945, levels of production were well below pre-war levels. During this period overall demand in the world economy tended to be greater than overall supply. There was considerable demand. There was also a backlog of unexploited technology. The immediate aim of enterprises was the meeting of that demand. Satisfying precise consumer requirements did not matter too much; almost any output was better than none.

The role of strategy in such a context was to mobilize economic resources in an orderly fashion to support a rapid expansion in supply, at first in order to implement recovery from the war and later to use already existing technology to meet the required investment and consumer demand. During this period long-range planning was still accepted as at the heart of any strategy, since economic priorities were clear. Strategy consisted of budgets and programs put together in one overall plan. The main problem was to plan financially in order to integrate the enterprise internally around the broad aim of profit satisficing within the framework of the plan.

As a separate branch of management studies, strategy was born in 1965 with the publication of two significant books: Learned, Christensen, Andrews and Guth’s Business Policy: text and cases (1965) (wherein Andrews wrote the text and the other authors wrote the cases) and Ansoff ’s Corporate Strategy (1965). Work in these areas was clearly well developed. The basic design school model (Figure below), most closely associated with the name of Andrews, is a prescriptive conception. It is intended as a practical guide for dealing with a complex environment in which there are external as well as internal contexts relevant to the enterprise. The approach is best encapsulated in the SWOT model (Strengths, Weaknesses, Opportunities, Threats), probably the most commonly applied method in strategy making. It is often reproduced in flow charts which separate out the key steps in strategy making.

Stage 2

From the late 1960s to the late 1970s, there was more rapid and extensive change, but change of a reasonably predictable kind. Most developed economies were now operating close to the frontier of best-practice technology. Inflationary forces began to emerge, particularly cost inflation involving various commodities and labor, but were still under broad control. Prioritization became less significant as supply began to catch up with and even run ahead of demand. The consumer became more discriminating. The need to satisfy the consumer in order to make a profit rose in importance. Strategy became more concerned with directing resources into the most promising areas. It began to change its nature, as a changing environment prompted the first efforts to cope with that outside environment, including the choice of desired products and markets. Where an enterprise positioned itself became important.

Further development of strategic thinking resulted from the work of the new consultancies. In the words of the founder of the Boston Consulting Group, BCG was in ‘the business of selling powerful oversimplifications’ (Ghemawat, 1999), which is true of all consultancies. This work was for the most part based on simplified concepts or partial models which only dealt with parts of a broad strategy, although any recommendations made often involved quite sophisticated modeling. The notion of the experience curve, the growth/share matrix and the profit impact of marketing strategies (PIMS) are well-known examples of the new methods.

Another consultancy, McKinsey’s Group, in conjunction with General Electric, a company which pioneered and developed many different techniques of strategy making, developed the notion of the strategic business unit. Both this and the growth/share matrix marked the entry of portfolio analysis into the area of strategy making. Such techniques were highly relevant to conglomerate and diversified companies in choosing their business units. The practice of some kind of portfolio analysis became common among American enterprises. All these techniques soon came under attack for being overly mechanistic and static in their view of a rapidly changing business world.

Stage 3

Between the mid-1970s and the mid-1980s change became discontinuous. This was the era of the oil price shocks and the later debt crisis in the developing world. Inflation accelerated and growth slowed. The rate of growth temporarily decelerated as the easy gains of the 1950s and 60s were exhausted. In the era of stagflation, inflationary forces temporarily concealed the tendency of supply to run ahead of demand.

The main need of any good strategy was now to allocate resources, including cash flow, in order to develop a competitive advantage, which, in turn, was necessary in ...

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Stage 3

The main need of any good strategy was now to allocate resources, including cash flow, in order to develop a competitive advantage, which, in turn, was necessary in order to yield the profits that generated the investment funds required. The focus fell on the portfolio of an enterprise’s products and services and the nature of competitive behavior in the markets. Strategy was increasingly being made at various levels, including business, functional and corporate levels.

In the area of strategy, the 1980s were dominated by Michael Porter, who has done more to develop the theory and application of strategy than any other theorist or practitioner. He published Competitive Strategy in 1980 and followed it up with a series of long books, representing a comprehensive approach to the subject. Many of his insights were encapsulated in neat diagrams and summaries which have had a wide and continuing influence, such as the five forces of competition and the competitive diamond, both discussed later in this course.

Porter’s originality was to insert the Andrews’ approach into the framework of an academic discipline; economics. For the first time an academic was willing to generalize. Porter sought to position the enterprise, and/or its strategic business units, in its strategic environment, principally its competitive environment. It was a matter of selecting the appropriate arenas for business activity and a desired mix of products, markets and functional activities. He therefore concentrated his attention on the environmental side of Andrews’ analysis. Paradoxically for many readers, this would have the effect of reducing the significance of strategy by assuming away the unique identity for an individual organization.

Stage 4

Finally, during the 1980s, change became not only discontinuous but rather more unpredictable, with new and more complicated dimensions added, as the communications/information revolution began to bite and other demands on business emerged. In the 1990s, growth once more accelerated but in a context in which there were the beginnings of deflationary tendencies. Overcapacity emerged in various sectors of the economy.

It became necessary for strategy to manage and integrate problems in many different areas, including government deregulation, contrasting economic circumstances, rapidly changing technology and new conservationist and environmental demands. Strategy had to expand to embrace these new areas, including a return to a proper consideration of the enterprise’s available resources to meet these various requirements.

The 1990s saw the focus of interest shift once again, this time, as might be anticipated, to a greater attention to the other half of the Andrews’ concern, the internal resource position of the enterprise. There was an explosion of articles on the ‘resource-based view’ (RBV) of strategy. The elaboration of this view was not associated with one particular commentator. The debate considered specific capabilities, competencies and even the management of technology as well as resources in general. Various researchers began to explore the context in which the process of strategy making itself occurs, focusing on the social and political constraints on strategy making.

The account above indicates how strategy was cumulative in its build-up of techniques. No strategic method from earlier stages was discarded. Rather they were all improved and used where and when appropriate. As a result, the complexity of strategic management increased enormously. No exact blueprint for strategy making emerged from this history, rather a proliferation of different views about how it should be done.

A careful analysis shows that the difference between strategic methods is much less than often appears, once the changing conditions and fashions of different decades and the changing circumstances for which the different approaches are valid are allowed for. Much has been accomplished in a relatively short history. There is already a good base to build upon in constructing an integrated approach to strategy making.

Please read the “Strategy Paper” Handout provided you in the class to get different views of strategists.

There are countless definitions of strategy in the business strategy literature, but no single definition has captured widespread acceptance. Strategy means something different to every person who uses the concept. There are countless books and articles using different definitions of the term. A powerful concept can have, perhaps should have, a measure of ambiguity in its meaning but it cannot mean all things to all people; it requires some degree of precision in its definition. I came to conclusion that “strategy” was one of the most abused words in business lexicon. It is frequently used wrongly, to imply importance, to demand respect and sometimes to gain immediate attention.

Simplifying the Concept of Strategy

In its simplest conception strategy is regarded as a unifying idea which links purpose and action. For de Wit and Meyer (1998), strategy is any course of action for achieving an organization’s purpose(s). In the words of Chandler, the first modern business strategy theorist, strategy in the area of business is defined as ‘the determination of the basic, long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for those goals’ (Chandler, 1962). To advance a little further and say that strategy is ‘a coordinated series of actions which involve the deployment of resources to which one has access for the achievement of a given purpose.’

Strategy therefore combines the articulation of human goals and the organization of human activity to achieve those goals. The setting of goals involves the identification of opportunity. Strategy is a process of translating perceived opportunity into successful outcomes, by means of purposive action sustained over a significant period of time. At a minimum there must be a clear intent translatable into specific objectives and some defined and effective means of achieving these objectives by deliberate action involving the use of resources to which one has access.

Strategy comprises thinking about action in two different ways: vertical (rational) thinking and lateral (intuitive) thinking. It deals with convergent problems, that is, those with one solution, and divergent problems, that is, those with a number of possible solutions. Strategy demands from the strategist(s) both creativity – lateral thinking, often applied to divergent problems, and rationality – vertical thinking, often applied to convergent problems. This means that, in the area of business, strategy combines a vision and managerial effectiveness in realizing that vision, referred to as operational effectiveness, and therefore both the harnessing of intuition and the application of reason. In the business world, strategy is about successful entrepreneurship and good management. There is therefore an inherent contradiction in strategic thinking, which makes its full meaning hard to grasp. These two strands of strategic thinking are both essential parts of a strategic orientation and both must be included in any analysis of strategy making

Different Strategic Perspectives

These notes introduces the four main elements of strategy and the two main ways of engaging in strategic thinking. A strategic approach also involves a number of distinctive perspectives, which follow from the analysis above. Any strategy lacking the following perspectives is unlikely to be successful:

Strategy involves looking into the future, not simply focusing on the present or extrapolating what has happened in the past. It involves intent, which both establishes a future direction or destination, and the importance of time because that intent cannot be realized immediately.
Strategy tries to achieve a balance between flexibility and stability and so avoid either the straitjacket of excessive rigidity or the anarchy of repeated and random changes of direction.
Strategy emphasizes asking pertinent question(s) as much as providing the answer(s). This means the finding of a problem worthy of serious consideration as much as the resolution of marginal problems thrown up by current operations. Others may be happily unaware that a problem exists or that such a question can even be asked. In this way the strategist moves from known into unknown territory.
Strategy is complex, dealing in highly intricate systems of cause and effect. It is concerned with what have been called, rather aptly, ‘wicked problems of organized complexity’ (de Wit and Meyer, 1998).
Strategy is itself holistic in that it recognizes the many interconnections between superficially different aspects of business activity and different problems. Strategy integrates all the functional business activities – marketing, finance, human resource management, information systems – and gives them coherence.
Strategy is rooted in particular historical experiences – it is always path-dependent, reflecting the experience through which an organization has reached its present situation.
Strategy is interactive. The quality of a strategy reflects the degree to which it takes account of the strategies of other players – competitors, governments and cooperators.

Organizational strategy and Competitive strategy

The strategy in a Business and management perspective can easily be divided into Organizational strategy and Competitive strategy. The Organizational strategy is the overall big picture.

Organizational Strategy is the art and science of informed action to achieve a specific vision, an overarching objective, or a higher purpose for a business enterprise.

Another definition of organizational strategy is as follows:

“A strategy is defined as a pattern, of purposes, policies, programs, actions, decisions, or resource allocations that define what an organization is, what it does, and why it does it. Strategies can vary by level function, and by time frame.” (Bryson, 1995)

Good strategy captures opportunity for improvement, achieves new excellence in operations, builds stronger organizations, helps reduce risk and realizes inspirational visions. Good strategy inspires your colleagues and strengthens your organization’s capabilities.

Competitive Strategy

The definition of competitive strategy used by Grant (1999) states boldly, “strategy is about winning”, by which (I think) he means strategy is about being successful. Clearly, some are more successful than others are and success can be short-lived. Manchester United is the most successful English soccer team of the 1990s but they were not always at the top of the league. Similarly, Dalda was noted as the best ‘high quality cooking Ghee’ in the Pakistan for a number of years but in the mid 1990s they experienced a downward change in fortunes (due to new entrants in the industry) from which they are trying to emerge.

The emphasis on direction is important for organizations. The need to know what the organizational objectives are and how they are to achieve them are fundamental to success. But success is based on some pre-determined measure in relation to others over time in a similar activity. That is why the key word in the above statement by Johnson and Scholes is ‘advantage’ which really implies ‘competitive advantage’ (Porter, 1985). The emphasis is on strategic positioning so that an organization outperform others operating in the same activity. Together, the elements of strategy combine to steer a business in the right direction and reach its ultimate destination faster and more effectively than its competitors.

Strategy and Business Model

A company’s strategy consists of the combination of competitive moves and business approaches that managers employ to please customers, compete successfully, and achieve organizational objectives.

A company’s business model deals with whether the revenue-cost-profit economics of its strategy demonstrate the viability of the enterprise as a whole.

Excellent execution of an excellent strategy is the best test of managerial excellence—and the most reliable recipe for organizational success.

Whose Job is Strategy?

Is it the responsibility of the board of directors, the CEO, the whole senior management or the entire organization?

Initially, strategy making assumes the existence of at least one strategist, commonly the CEO, who takes responsibility for the successful formulation and implementation of strategy. However, in practice, strategy making is usually done by a large number of people, not just a few. It is often a group activity, involving cooperation. The main people involved in strategy making process are called the Strategic managers.

Strategic managers

Managers are the lynchpin in the strategy-making process. It is individual managers who must take responsibility for formulating strategies to attain a competitive advantage and for putting those strategies into effect. They must lead the strategy-making process. The strategies that made Wal-Mart so successful were not chosen by some abstract entity know as the company; they were chosen by the company’s founder, Sam Walton, and managers he hired. Wal-Mart’s success, like the success of any company, was based in large part upon how well the company’s managers performed their strategic roles.

In most companies, there are two main types of managers: general managers, who bear responsibility for the overall performance of the company or for one of its major self-contained subunits or divisions, and functional managers, who are responsible for supervising a particular function, that is, a task, activity, or operation, such as accounting, marketing, R&D, information technology, or logistics. A company is a collection of functions or departments that work together to bring a particular product or service to the market. If a company provides several different kinds of products or services, it often duplicates these functions and creates a series of self-contained divisions (each of which contains its own set of functions) to manage each different product or service. The general managers of these divisions then become responsible for their particular product line. The overriding concern of general managers is for the health of the whole company or division under their direction; they are responsible for deciding how to create a competitive advantage and achieve high profitability with the resources and capital they have at their disposal. The Figure shows the organization of a multidivisional company, that is, a company that competes in several different businesses and has created a separate self-contained division to manage each of these. As you can see, there are three main levels of management: corporate, business, and functional. General Managers are found at the first two of these levels, but their strategic roles differ depending on their sphere of responsibility.

General Managers

Functional Managers

Levels of Strategy

A. The corporate level consists of the CEO, board of directors, and corporate staff. The CEO’s role is to define the mission and goals of the firm, determine what businesses the firm should be in, allocate resources to the different business areas of the firm, and formulate and implement strategies that span individual businesses.

B. The business level consists of the heads of the individual business units (divisions) and their support staff. Business unit (divisional) CEOs’ role is to translate general statements of intent at the corporate level into concrete strategies for individual businesses.

C. The functional level consists of the managers of specific business operations. They develop functional strategies that help fulfill the business- and corporate-level strategic goals. They provide most of the information that makes it possible for business and corporate-level general managers to formulate strategies. They are closer to the customer than the typical general manager, and therefore functional managers may generate important strategic ideas. They are responsible for the implementation of corporate- and business-level decisions.

We can now turn our attention to the process by which managers formulate and implement strategies.

Note: Many writers have emphasized that strategy is the outcome of a formal planning process and that top management plays the most important role in this process. Although this view has some basis in reality, it is not the whole story. Most valuable strategies often emerge from deep within the organization without prior planning. Nevertheless, a consideration of formal, rational planning is a useful starting point for our journey into the world of strategy.

Accordingly, we consider what might be described as a typical formal strategic planning model for making strategy. The formal strategic planning framework has five main processes, which are further divided into more steps (The complete Strategic Management Model to be discussed later):

1. Select the corporate mission and major corporate goals.

2. Analyze the organization’s external competitive environment to identify opportunities and threats.

3. Analyze the organization’s internal operating environment to identify the organization’s strengths and weaknesses.

4. Select strategies that build on the organization’s strengths and correct its weaknesses in order to take advantage of external opportunities and counter external threats. These strategies should be consistent with the mission and major goals of the organization. They should be congruent and constitute a viable business model.

5. Implement the strategies.

The components are organized into two phases. The first phase is strategy formulation, which includes selection of the corporate mission, values, and goals; analysis of the external & internal environments; and the selection of appropriate strategies.

The second phase is strategy implementation, which includes corporate governance and ethics issues as well as the actions that managers take to translate the formulated strategy into reality.

The mission Statement is a formal statement of what the company is trying to achieve over a medium- to long-term time frame. The mission states why an organization exists and what it should be doing.

External analysis identifies strategic opportunities and threats that exist in three components of the external environment: the specific industry environment within which organization is based, the country or national environment, and the macro environment. Internal analysis identifies the strengths and weaknesses of the organization. This involves identifying the quantity & quality of an organization’s resources. Together, the external and internal analyses result in a SWOT analysis, delineating a firm’s strengths, weaknesses, opportunities, and threats. The SWOT analysis is then used to create a business model to achieve competitive advantage by identifying strategies that align, fit, or match a company’s resources to the demands of the environment. This model is called a fit model.

Strategic choice involves generating a series of strategic alternatives, based on the firm’s mission, values, goals, and SWOT analysis, and then choosing those strategies that achieve the best fit. Organizations identify the best strategies at the functional, business, global, and corporate levels.

1. Functional-level strategy is directed at improving the effectiveness of functional operations within a company, such as manufacturing, marketing, materials management, research and development, and human resources.

2. The business-level strategy of a company encompasses the overall competitive theme that a company chooses to stress, the way it positions itself in the marketplace to gain a competitive advantage, and the different positioning strategies that can be used in different industry settings.

3. More and more, to achieve a competitive advantage and maximize performance, a company has to expand its operations outside the home country. Global strategy addresses how to expand operations outside the home country.

4. Corporate-level strategy must answer this question: What businesses should we be in to maximize the long-run profitability of the organization? The answer may involve vertical integration, diversification, strategic alliances, acquisition, new ventures, or some combination.

Strategy implementation consists of a consideration of corporate governance and business ethics, as well as actions that should be taken, for companies that compete in a single industry and companies that compete in more than one industry or country.

Strategy as an Emergent Process

The formal planning process implies that all strategic decision making is rational, structured, and led by top management. However, some criticisms of the formal planning process include the charge that the real world is often too unpredictable, that lower-level employees often play an important role in the formulation process, and that successful strategies are often the result of good luck rather than rational planning.

Critics of formal planning systems argue that we live in a world in which uncertainty, complexity, and ambiguity dominate, and in which small chance events can have a large and unpredictable impact on outcomes. In such circumstances, they claim, even the most carefully thought out strategic plans are prone to being rendered useless by rapid and unforeseen change. In an unpredictable world, there is a premium on being able to respond quickly to changing circumstances and to alter the strategies of the organization accordingly.

A dramatic example of this occurred in 1994 and 1995 when Microsoft CEO Bill Gates shifted the company strategy after the unanticipated emergence of the World Wide Web (See Case Strategic Shift at Microsoft). According to critics of formal systems, such a flexible approach to strategy making is not possible within the framework of a traditional strategic planning process, with its implicit assumption that an organization’s strategies need to be reviewed only during the annual strategic planning exercise.

Serendipity and Strategy

Business history is replete with examples of accidental events that help to push companies in new and profitable directions. What these examples suggest is that many successful strategies are not the result of well-thought-out plans but of serendipity, that is, of stumbling across good things unexpectedly. One such example occurred at 3M during the 1960s. At that time, 3M was producing fluorocarbons for sale as coolant liquid in air-conditioning equipment. One day, a researcher working with fluorocarbons in a 3M lab spilled some of the liquid on her shoes. Later that day when she spilled coffee over her shoes, she watched with interest as the coffee formed into little beads of liquid and then ran off her shoes without leaving a stain. Reflecting on this phenomenon, she realized that a fluorocarbon-based liquid might turn out to be useful for protecting fabrics from liquid stains, and so the idea for Scotch Guard was born. Subsequently, Scotch Guard became one of 3M’s most profitable products and took the company into the fabric protection business, an area it had never planned to participate in Serendipitous discoveries and events can open up all sorts of profitable avenues for a company. But some companies have missed out on profitable opportunities because serendipitous discoveries or events were inconsistent with their prior (planned) conception of what their strategy should be. In one of the classic examples of such myopia, a century ago the telegraph company Western Union turned down an opportunity to purchase the rights to an invention made by Alexander Graham Bell. The invention was the telephone, a technology that subsequently made the telegraph obsolete.

Intended and Emergent Strategies

Henry Mintzberg’s model of strategy development provides a more encompassing view of what strategy actually is. According to this model, illustrated in Figure below, a company’s realized strategy is the product of whatever planned strategies are actually put into action (the company’s deliberate strategies) and of any unplanned, or emergent, strategies. In Mintzberg’s view, many planned strategies are not implemented because of unpredicted changes in the environment (they are unrealized). Emergent strategies are the unplanned responses to unforeseen circumstances. They arise from autonomous action by individual managers deep within the organization, from serendipitous discoveries or events, or from an unplanned strategic shift by top-level managers in response to changed circumstances. They are not the product of formal top-down planning mechanisms. Mintzberg maintains that emergent strategies are often successful and may be more appropriate than intended strategies.

Richard Pascale has described how this was the case for the entry of Honda into the U.S. motorcycle market. When a number of Honda executives arrived in Los Angeles from Japan in 1959 to establish a U.S. operation, their original aim (intended strategy) was to focus on selling 250-cc and 350-cc machines to confirmed motorcycle enthusiasts rather than 50-cc Honda Cubs, which were a big hit in Japan. Their instinct told them that the Honda 50s were not suitable for the U.S. market, where everything was bigger and more luxurious than in Japan. However, sales of the 250-cc and 350-cc bikes were sluggish, and bikes themselves were plagued by mechanical failure. It looked as if Honda’s strategy was going to fail. At the same time, the Japanese executives who were using the Honda 50s to run errands around Los Angeles were attracting a lot of attention. One day they got a call from a Sears, Roebuck buyer who wanted to sell the 50-cc bikes to a broad market of Americans who were not necessarily motorcycle enthusiasts. The Honda executives were hesitant to sell the small bikes for fear of alienating serious bikers, who might then associate Honda with “wimpy” machines. In the end, however, they were pushed into doing so by the failure of the 250-cc and 350-cc models. Honda had stumbled onto a previously untouched market segment that was to prove huge: the average American who had never owned a motorbike. Honda had also found an untried channel of distribution: general retailers rather than specialty motorbike stores. By 1964, nearly one out of every two motorcycles sold in the United States was a Honda.

The conventional explanation for Honda’s success is that the company redefined the U.S. motorcycle industry with a brilliantly conceived intended strategy. The fact was that Honda’s intended strategy was a near disaster. The strategy that emerged did so not through planning but through unplanned action in response to unforeseen circumstances. Nevertheless, credit should be given to the Japanese management for recognizing the strength of the emergent strategy and for pursuing it with vigor.

The critical point demonstrated by the Honda example is that successful strategies can often emerge within an organization without prior planning in response to unforeseen circumstances. As Mintzberg has noted, strategies can take root virtually wherever people have the capacity to learn and the resources to support that capacity.

In practice, the strategies of most organizations are probably a combination of the intended (planned) and the emergent. The message for management is that it needs to recognize the process of emergence and to intervene when appropriate, killing off bad emergent strategies but nurturing potentially good ones. To make such decision, managers must be able to judge the worth of emergent strategies. They must be able to think strategically. Although emergent strategies arise from within the organization without prior planning—that is, without going through the steps (Strategic Planning Process discussed earlier) in a sequential fashion—top management still has to evaluate emergent strategies. Such evaluation involves comparing each emergent strategy with the organization’s goals, external environmental opportunities and threats, and internal strengths and weaknesses. The objective is to assess whether the emergent strategy fits the company’s needs and capabilities. In addition, an organization’s capability to produce emergent strategies is a function of the kind of corporate culture that the organization’s structure and control systems foster. In other words, the different components of the strategic management process are just as important from the perspective of emergent strategies as they are from the perspective of intended strategies.

Despite criticisms, research suggests that formal planning systems do help managers make better strategic decisions. A study that analyzed the results of twenty-six previously published studies came to the conclusion that, on average, strategic planning has a positive impact on company performance. Another study of strategic planning in 656 firms found that formal planning methodologies and emergent strategies both form part of a good strategy formulation process, particularly in an unstable environment.

For strategic planning to work, it is important that top-level managers plan not just in the context of the current competitive environment but also in the context of the future competitive environment. To try to forecast what that future will look like, managers can use scenario planning techniques to plan for different possible futures. They can also involve operating managers in the planning process and seek to shape the future competitive environment by emphasizing strategic intent.

Scenario Planning

One reason that strategic planning may fail over the long run is that strategic managers, in their initial enthusiasm for planning techniques, may forget that the future is inherently unpredictable. Even the best-laid plans can fall apart if unforeseen contingencies occur, and that happens all the time in the real world. The recognition that uncertainty makes it difficult to forecast the future accurately led planners at Shell to pioneer the scenario approach to planning.

In the scenario approach, managers are given a set of possible future scenarios for the development of competition in their industry. Some scenarios are optimistic and some pessimistic, and then teams of managers are asked to develop specific strategies to cope with each different scenario. A set of industry-specific indicators are chosen and used as signposts to track the development of the industry and to determine the probability that any particular scenario is coming to pass. The idea is to get managers to understand the dynamic and complex nature of their environment, think through problems in a strategic fashion, and generate a range of strategic options that might be pursued under different circumstances. The scenario approach to planning has spread rapidly among large companies. According to one survey, over 50 percent of the Fortune 500 companies use some form of scenario planning.

Decentralized Planning

A serious mistake that some companies have made in constructing their strategic planning process has been to treat planning as an exclusively top management responsibility. This ivory tower approach can result in strategic plans formulated in a vacuum by top managers who have little understanding or appreciation of current operating realities. Consequently, top managers may formulate strategies that do more harm than good. For example, when demographic data indicated that houses and families were shrinking, planners at GE’s appliance group concluded that smaller appliances were the wave of the future. Because they had little contact with home builders and retailers, they did not realize that kitchens and bathrooms were the two rooms that were not shrinking. Nor did they appreciate that working women wanted big refrigerators to cut down on trips to the supermarket. GE ended up wasting a lot of time designing small appliances with limited demand.

The ivory tower concept of planning can also lead to tensions between corporate-, business-, and functional-level managers. The experience of GE’s appliance group is again illuminating. Many of the corporate managers in the planning group were recruited from consulting firms or top-flight business schools. Many of the functional managers took this pattern of recruitment to mean that corporate managers did not think they were smart enough to think through strategic problems for themselves. They felt shut out of the decision-making process, which they believed to be unfairly constituted. Out of this perceived lack of procedural justice grew an (us-versus-them) mindset that quickly escalated into hostility. As a result, even when the planners were right, operating managers would not listen to them. For example, the planners correctly recognized the importance of the globalization of the appliance market and the emerging Japanese threat. However, operating managers, who then saw Sears as the competition paid them little heed. Finally, ivory tower planning ignores the important strategic role of autonomous action by lower-level managers and serendipity.

Correcting ivory tower approach to planning requires recognizing that successful strategic planning encompasses managers at all levels of the corporation. Much of the best planning can and should be done by business and functional managers who are closest to the facts; in other words, planning should be decentralized. The role of corporate-level planners should be that of facilitators who help business and functional managers do the planning by setting the broad strategic goals of the organization and providing the resources required to identify the strategies that might be required to attain those goals.

Strategic Intent

The formal strategic planning model has been characterized as the fit model of strategy making. This is because it attempts to achieve a fit between the internal resources & capabilities of an organization and external opportunities & threats in the industry environment. Hamel and Prahalad have criticized the fit model because it can lead to a mindset in which management focuses too much on the degree of fit between the existing resources of a company and current environmental opportunities, and not enough on building new resources and capabilities to create and exploit future opportunities. Strategies formulated with only the present in mind, argue Prahalad and Hamel, tend to be more concerned with today’s problems than with tomorrow’s opportunities. As a result, companies that rely exclusively on the fit approach to strategy formulation are unlikely to be able to build and maintain a competitive advantage. This is particularly true in a dynamic competitive environment, where new competitors are continually arising and new ways of doing business are constantly being invented.

As Prahalad and Hamel note, again and again, companies using the fit approach have been surprised by the ascent of competitors that initially seemed to lack the resources and capabilities needed to make them a real threat. This happened to Xerox, which ignored the rise of Canon and Ricoh in the photocopier market until they had become serious global competitors; to General Motors, which initially overlooked the threat posed by Toyota and Honda in the 1970s; and to Caterpillar, which ignored the danger Komatsu posed to its heavy earthmoving business until it was almost too late to respond.

The secret of the success of companies like Toyota, Canon, and Komatsu, according to Prahalad and Hamel, is that they all had bold ambitions that outstripped their existing resources and capabilities. All wanted to achieve global leadership, and they set out to build the resources and capabilities that would enable them to attain this goal. Consequently, top management created an obsession with winning at all levels of the organization that they sustained over a ten- to twenty-year quest for global leadership. It is this obsession that Prahalad and Hamel refer to as strategic intent. They stress that strategic intent is more than simply unfettered ambition. It encompasses an active management process, which includes “focusing the organization’s attention on the essence of winning; motivating people by communicating the value of the target; leaving room for individual and team contributions; sustaining enthusiasm by providing new operational definitions as circumstances change; and using intent consistently to guide resource allocations.” Thus, underlying the concept of strategic intent is the notion that strategic planning should be based on setting an ambitious vision and ambitious goals that stretch a company and then finding ways to build the resources and capabilities necessary to attain that vision and those goals. As Prahalad and Hamel note, in practice the two approaches to strategy formulation are not mutually exclusive. All the components of the strategic planning process (discussed earlier) are important.

In addition, say Prahalad & Hamel, the strategic management process should begin with a challenging vision, such as attaining global leadership that stretches the organization. Throughout the subsequent process, the emphasis should be on finding ways (strategies) to develop the resources and capabilities necessary to achieve these goals rather than on exploiting existing strengths to take advantage of existing opportunities. The difference between strategic fit and strategic intent, therefore, may just be one of emphasis. Strategic intent is more internally focused and is concerned with building new resources and capabilities. Strategic fit focuses more on matching existing resources and capabilities to the external environment.

SUMMARY

The introductory topic of our Lecture Notes stressed the complexity of meaning in the use of the term strategy and the broad range of activities which are relevant to strategy making. It also emphasized the variety of very different perspectives from which strategy making has been analyzed, some broad and others narrow. It is highly desirable that any definition be inclusive, not exclusive; it should take into consideration all these different points of view. Whatever strategy is in theory, it is also a practical activity. As a practical activity strategy making is constrained both by the interests of different stakeholder groups, who between them determine the strategic intent and therefore the strategic objectives, and by the social and political contexts, both external and internal, in which the relevant decision making occurs.
The first section proposed a starting definition for strategy, but indicated that it is difficult to give a definition which is free of ambiguity. However it stressed that there are always two sides to strategy, the one involving the application of reason, the other the exercise of intuition in creative acts of imagination. Strategy making is not one application rather than the other.
The next section went on to consider the history of the use of the term strategy, particularly over the last thirty to forty years, and to analyze changing interpretations of exactly what constitutes strategy. It linked the development of strategy with the changing problems thrown up by the external environment. It traced the development of the concept from an emphasis on the external environment to one which stresses the internal. It noted that the treatment has tended to move away from over-simplified interpretations which stress one factor.
General Managers are responsible for the overall performance of the organization or for one of its major self-contained divisions. Their overriding strategic concern is for the health of the total organization under their direction.
Functional managers are responsible for a particular business function or operation. Although they lack general management responsibilities, they play a very important strategic role.
Formal strategic planning models stress that an organization’s strategy is the outcome of a rational planning process.
The major components of the strategic management process are defining the mission, vision, and major goals of the organization; analyzing the external and internal environments of the organization; choosing a business model and strategies that align an organization’s strengths and weaknesses with external environmental opportunities and threats; and adopting organizational structures and control systems to implement the organization’s chosen strategies.
Strategy can emerge from deep within an organization in the absence of formal plans as lower-level managers respond to unpredicted situations.
Strategic planning often fails because executives do not plan for uncertainty and because ivory tower planners lose touch with operating realities.
The fit approach to strategic planning has been criticized for focusing too much on the degree of fit between existing resources and current opportunities, and not enough on building new resources and capabilities to create and exploit future opportunities.
Strategic intent refers to an obsession with achieving an objective that stretches the company and requires it to build new resources and capabilities.
In spite of systematic planning, companies may adopt poor strategies if their decision-making processes are vulnerable to groupthink and if individual cognitive biases are allowed to intrude into the decision-making process.

Discussion Questions

Q1. 1 Define the following terms: vertical thinking, lateral thinking, a convergent problem, a divergent problem, satisficing, a metatheory, an eclectic theory, a stakeholder?

Answers

Vertical thinking thinking that uses logic and remains within an existing theoretical framework

Lateral thinking thinking that moves beyond logic and makes unexpected theoretical connections

A convergent problem a problem with only one or one obviously best solution

A divergent problem a problem with a number of possible solutions

Satisficing aiming to achieve a satisfactory level for a performance indicator rather than a maximum level

A meta-theory a theory which embraces more than a single discipline, Linking together different areas

An eclectic theory a theory which take different parts from other theories and combines them

A stakeholder someone with an interest in the strategy of an organization particularly its objectives and outcomes

Q2. How is a business model different from a strategy?

Answer: A company’s strategy consists of the combination of competitive moves and business approaches that managers employ to please customers, compete successfully, and achieve organizational objectives.

A company’s business model deals with whether the revenue-cost-profit economics of its strategy demonstrate the viability of the enterprise as a whole.

Q3. What are the strengths of formal strategic planning? What are its weaknesses?

Answer: A formal strategic planning process results in a systematic review of all the external and internal factors that might have a bearing on the ability of the company to meet its strategic objectives. Formally identifying strengths, weaknesses, opportunities, and threats is a good way of alerting strategic managers to what needs to be done if the firm is to fulfill its strategic mission.

However, like any rational process, strategic planning is limited by the fallibility of human decision-makers. In particular, strategic managers may fall victim to the phenomenon of groupthink and to their own cognitive biases. Thus supposedly rational decisions can turn out to be anything but rational. This hazard can be minimized, however, if the organization uses decision-making techniques such as devil’s advocacy or dialectic inquiry.

In addition, in a complex and uncertain world characterized by rapid change, strategic plans can become outdated as soon as they are made. In such circumstances, the company’s plan can become a policy straitjacket, committing it to a course of action that is no longer appropriate. Change is something that cannot be insured against. Consequently, flexible, open-ended plans are perhaps the best way of giving the company room to maneuver in response to change. Moreover, consistent vision and strategic intent are probably more important than detailed strategic plans. The strategies that a company adopts might need to change with the times, but the vision can be more enduring.

Q4. Discuss the accuracy of this statement: Formal strategic planning systems are irrelevant for firms competing in high-technology industries where the pace of change is so rapid that plans are routinely made obsolete by unforeseen events.

Answer: Formal strategic planning systems are not at their best in situations with rapid and unpredictable change. Formal systems are time-consuming, and may not be able to provide answers quickly enough when time is very short. Also, formal systems depend upon detailed estimates and forecasts, which are very difficult to do well when conditions are chaotic.

Nevertheless, formal systems may still be useful in some ways, even in these challenging environments. For example, formal systems are often associated with detailed and directive plans, but they may also be used to prepare flexible, open-ended plans that are more appropriate for rapidly changing environments. Also, the activities of formal planning—gathering data, preparing forecasts, generating and considering multiple alternatives, and so on—are themselves good preparation for making strategic choices, and thus could be useful in any type of environment.

Q5. Compare business strategy and military strategy.

Answer: Business and military strategy are similar in many respects. Many of the ideas developed in business strategy were first formulated as military strategy. Both military and business organizations have competitors. A fundamental difference between military and business strategy is that business strategy is formulated, implemented, and evaluated with the assumption of competition, while military strategy is based on an assumption of conflict.

Q6. What is a paradigm?

Answer: A mind-set that presents a fundamental way of thinking, perceiving and understanding of the world. It is consensus on shared practices based on some body of accepted theory

Q7. What is a Planning?

Answer: The process of planning is simply anticipating and preparing for the future:

· we do it all the time (human nature)
· setting goals (must be measurable)
· developing a plan (of action)

Q8. Why is strategic planning important to an organization?

Answer: Firms must continually strive for strategic and operational excellence. Failing to think strategically about a business is inviting disaster. Strategic planning creates a blueprint for business owners to follow to achieve specific objectives.

Q9. What is a competitive advantage? Why is it important for an organization to establish one?

Answer: A competitive advantage is an aggregation of factors that sets a company apart from its competitors and that gives it a unique position in the market.

Q10. What is a Core Competency? How can an organization attain Core Competency?

Answer: Core Competency represents the collective learning of organization, especially hard- to-coordinate diverse skills, which integrate multiple streams of technologies. They are unique set of capabilities a company develops in key areas, such as superior quality, customer service, innovation, team-building, flexibility, responsiveness, and others that allow it to vault past competitors. Core Competency provides roots for competitive advantage.

Q11. What is a sustainable competitive advantage? How organization achieves it?

Answer: A company achieves sustainable competitive advantage when an attractive number of buyers prefer its products or services over the offerings of competitors and when the basis for this preference is durable.

Q12. Describe the four basic strategies (most frequently used and dependable strategic approaches) to setting a company apart from rivals? Under what conditions is each successful?

Answer: Four of the most frequently used and dependable strategic approaches to setting a company apart from rivals, building strong customer loyalty, and winning a sustainable competitive advantage are:

1. Cost leadership: strive to be the low-cost leader. The most successful conditions are when buyers are sensitive to price changes, competing firms sell the same commodity products, and companies can benefit from economies of scale.

2. Differentiation: seeks to build customer loyalty by positioning goods or services in a unique or different fashion. Key concept is to be special at something important to the customer.

3. Focus: select one (or more) segments(s), identify customers' special needs, wants, and interests, and approach them with a product or service specifically designed to excel in meeting these needs, wants, and interests. Key concept is to create the perception of value in the customer’s eyes.

4. Core Competency Developing expertise and resource strengths that give the company competitive capabilities that rivals can’t easily imitate or trump with capabilities of their own. This is the most ideal situation for an organization. It is what all organization strive for but very few attain.

Q13. What is are KSF (Key Success Factors) of an industry? How critical are those for an organization?

The Key success factors are relationships between a controllable variable and a critical factor that influence a company’s ability to compete in a specific industry or market. It is the Identification specific competencies, capabilities, and process that an organization must do well to be successful in a particular industry. The success and failure of a company, first lies in fulfilling these factors. KSF are keys to unlocking the secrets of competing successfully in a particular market segment.