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CHAPTER 1
INTRODUCTION: WHAT IS
STRATEGIC MANAGEMENT?
What is Strategy?
The term ‘strategy’ proliferates in discussions of business. Scholars and consultants have provided myriad models and frameworks for analysing strategic choice (Hambrick and Fredrickson, 2001). For us, the key issue that should unite all dis- cussion of strategy is a clear sense of an organization’s objectives and a sense of how it will achieve these objectives. It is also important that the organization has a clear sense of its distinctiveness. For the leading strategy guru, Michael Porter (1996), strategy is about achieving competitive advantage through being different
- delivering a unique value added to the customer, having a clear and enactable view of how to position yourself uniquely in your industry, for example, in the ways in which Southwest Airlines positions itself in the airline industry and IKEA in furniture retailing, in the way that Marks & Spencer used to. To enact a successful strategy requires that there is fit among a company’s activities, that they complement each other, and that they deliver value to the firm and its customers. The three companies we have just mentioned illustrate that industries are fluid and that success is not guaranteed. Two of the firms came to prominence by taking on industry incumbents and developing new value propositions. The third was extremely successful and lost this position. While there is much debate on substance, there is agreement that strategy is concerned with the match between a company’s capabilities and its external environment. Analysts disagree on how this may be done. John Kay (2000) argues that strategy is no longer about plan- ning or ‘visioning’ – because we are deluded if we think we can predict or, worse, control the future – it is about using careful analysis to understand and influence a company’s position in the market place. Another leading strategy guru, Gary Hamel (2000), argues that the best strategy is geared towards radical change and creating a new vision of the future in which you are a leader rather than a follower of trends set by others. According to Hamel, winning strategy = foresight + vision.
Two Approaches to Strategy
The idea of strategy has received increasing attention in the management literat- ure. The literature on strategy is now voluminous and strategic management texts grow ever larger to include all the relevant material. In this book our aim is not to cover the whole area of strategy – that would require yet another mammoth tome
- but to present a clear, logical and succinct approach to the subject that will be of use to the practising manager. We do not attempt a summary of the field, rather we present what we see as a useful framework for analysing strategic problems based on our own experience of teaching the subject on a variety of courses and to a variety of audiences over the years. Our premise is that a firm needs a well defined sense of its mission, its unique place in its environment and scope and direction of growth. Such a sense of mission defines the firm’s strategy. A firm also needs an approach to management itself that will harness the internal energies of the organization to the realization of its mission. Historically, views of strategy fall into two camps. There are those who equate strategy with planning. According to this perspective, information is gathered, sifted and analysed, forecasts are made, senior managers reflect upon the work of the planning department and decide what is the best course for the organization. This is a top-down approach to strategy. Others have a less structured view of strategy as being more about the process of management. According to this second per- spective, the key strategic issue is to put in place a system of management that will facilitate the capability of the organization to respond to an environment that is essentially unknowable, unpredictable and, therefore, not amenable to a planning approach. We will consider both these views in this text. Our own view is that good strategic management actually encompasses elements of each perspective. There is no one best way of strategy. The planning approach can work in a stable, predictable environment. Its critics argue that such environments are becoming increasingly scarce, events make the plan redundant, creativity is buried beneath the weight and protocols of planning and communication rules. Furthermore, those not involved in devising the plan are never committed to its implementation. The second approach emphasizes speed of reaction and flexibility to enable the organization to function best in an environment that is fast-changing and essentially unpredictable. The essence of strategy, according to this view, is adaptability and incrementalism. This approach has been criticized for failing to give an adequate sense of where the organization is going and what its mission is. Critics speak disparagingly of the ‘mushroom’ approach to management. (Place in a dark room, shovel manure/money on the seeds, close the door, wait for it to grow!)
Elements of Strategy
Definitions of strategy have their roots in military strategy, which defines itself in terms of drafting the plan of war, shaping individual campaigns and, within these,
management style – top-down or bottom-up, autocratic or democratic? Why is the organization structured in a particular way? What is the link between strategy and structure?
TASK
Apply these questions to your own organization or to an organization that you know. (We will return to them later!)
Our Model of Strategy
Our working model of the strategic management process is set out in figure 1.1. This is a model that works for us in terms of organizing our thinking about strat- egy and our attempts to understand the strategic issues facing particular firms. We do not suggest that it is the only model that is useful or that this is the best. (We just think it is!) Hopefully, in the course of your reading of this book, and other work on the subject, you will be critically analysing the various models suggested
Environmental analysis General environment Operating environment Competitive positioning Directions for development
Strategic history
Current strategy
Stakeholder analysis
Strategic vision
Chosen strategy
Realized strategy
Organizational analysis Structure Values Culture Resources
Strengths Weaknesses
OpportunitiesThreats
Figure 1.1 The strategic management process
and the concepts upon which they rest. You may come to this text with your own model, developed out of your own experience. We suggest that you try working with our model and examine the extent to which it complements or contradicts your own and others. The result of such a critical appraisal will be a model with which you are comfortable and find useful in practice. If you feel that the model you develop is far superior to our own, please tell us about it! Remember, there is no one best answer in strategic management. If a firm chooses a particular strategic direction and it works in the way that very successful firms like IBM or, on a smaller scale, Body Shop have, the fact that it is successful does not mean that the choice of strategy was optimal, that it was the best. Another strategic decision might have led to even greater success. Conversely, if a firm makes a choice that leads to disaster, this does not necessarily mean that it could have made a better choice (though, with better decision making, it hopefully could have done). The environmental conditions in its industry might have been such that this was the best choice, but that no choice, given its size or history, or the power of its competitors, could have changed its fate. We will now explain our model, which provides the basis of subsequent chapters. Current strategy (italics indicate terms in the model) has its roots in the strategic history of a firm and its management and employees. We mention both man- agement and employees here because, though in many cases senior management is the source of strategic decisions, it is the employees at the point of production or delivery of a product or service who are responsible for the actual imple- mentation of a strategy. (Of course, in the final analysis it is management who are ultimately responsible for the performance of employees.) Current strategy is the result of the interaction of intended strategy and emergent strategy. The organization’s actual strategy (its realized strategy ) can be the direct result of strategic planning, the delib- erate formulation and implementation of a plan. More often it is the outcome of the adaptation of such a plan to emergent issues in the environment. In some cases actual strategy can be very different from the strategy as planned or the firm may not have a very clear plan in the first place. In such cases the strategy can be described as emergent in the sense that strategy emerges from an ongoing series (sometimes described as a pattern or stream) of decisions. Managers can decide that they are happy with their current strategy. They can take this decision in two ways. In a proactive sense they can scan their environ- ment and the potential for change within their own organization and decide that to carry on doing what they are doing and what they are good at is the best way to face the future. In a less active, and far less satisfactory, way they can proceed on the basis of tradition – ‘This is the way we have always done it. It has worked so far. That’s good enough for us’ – or inertia. Or management may decide that change is necessary. Again this can come about in a variety of ways. They may scan their environment and decide that there are major changes occurring in their busi- ness world to which they have to adapt. Or they might decide, through internal analysis, that they have the ability to develop a new way of doing business that will redefine the nature of the business they are in. Another stimulus to change can be the new manager appointed to a senior position who wants to leave his or her mark on the company and changes strategy primarily for this self-centred reason.
opportunities and threats. A concept that bridges internal and external analyses is that of stakeholders , the key groups whose legitimate interests have to be borne in mind when taking strategic decisions. These can be internal groups, such as managers themselves and employees, or the owners of the firm, shareholders. They can also be external groups: the stock market if it is a quoted company, banks, consumers, the government. Senior management’s task is to try and align the various interest groups in arriv- ing at its chosen strategy in the light of the creation of an appropriate strategic vision for the organization. Increasingly important here is the issue of corporate respons- ibility, how the organization defines and acts upon its sense of responsibility to its stakeholders. The broad responsibility to society at large is important here in, for example, such areas as ‘green’ (ecological) issues. Sometimes the various interest groups may be at odds with each other and management will have to perform a delicate political balancing act between them. Having chosen a strategy, there is the issue of implementation. Very few schemes go totally (or even approximately) according to plan. The business envir- onment changes, new issues emerge – green ones, for example. Some demand to be taken on board so that in many, perhaps the majority, of cases emergent strategy asserts itself to the extent that the realized strategy differs markedly from the chosen/planned strategy. In time, the realized strategy becomes a part of the firm’s strategic history... and the strategy process continues.
Strategic management in the public sector and the not-for-profit
company
Most of what we will say in this book concerns the business firm looking to profit as the source of its survival. We would, however, contend that much of what we say can be applied to the public-sector organization or the not-for-profit firm. Similar principles of internal and external analysis apply.
The Growth Vector
Strategic management involves decisions concerning what a company might do, given the opportunities in its environment; what it can do, given the resources at its disposal; what it wants to do, given the personal values and aspirations of key decision makers; and what it should do, given the ethical and legal context in which it is operating. A firm needs a well defined sense of where it is going in the future and a firm concept of the business it is in. We can think of these in terms of the firm’s ‘product–market scope’ and ‘growth vector’. This specifies the particular products or services of the firm and the market(s) it is seeking to serve. A firm’s ‘growth vector’ defines the direction in which the firm is moving with respect to its current product–market scope. The key components of the ‘growth vector’ are set out in figure 1.2. One qualification is necessary here. The use of the growth
vector assumes that the firm is indeed growing. This is obviously not always the case, and strategic decision making may therefore involve ‘downsizing’ and with- drawal from some areas of business. The growth vector illustrates the key decisions concerning the directions in which a firm may choose to develop. Market penetration comes about when the firm chooses as its strategy to increase its market share for its present product markets. If the firm pursues product development it sets out to develop new products to complement or replace its current offerings while staying in the same markets. It retains its current mission in the sense of continuing to attempt to satisfy the same or related consumer needs In market development the firm searches for new markets with its existing products. If a strategy of diversification is chosen, the firm has decided that its product range and market scope are no longer adequate, and it actively seeks to develop new kinds of products for new kinds of markets. Let us illustrate the growth vector with an example concerning product–market strategy options in retailing. A retailing firm might decide to consolidate its posi- tion in its current markets by going for increased market share, perhaps through increased advertising. It might choose to develop new markets, perhaps expand- ing geographically into other areas, or even overseas, but retaining its current product range. It might choose to develop new retail products but stay in the same line of business – for example, increase its product range in clothing. It might choose to redefine the nature of these products. For example, the running shoe market was radically altered and expanded by redefining running shoes as leisure items, not merely as sports equipment. Finally, the firm might choose to move into
Figure 1.2 Product, mission and market choices. Source : adapted from Ansoff (1965)
Mission Statements
The concept of mission has become increasingly fashionable in discussions of strategy. Indeed, some analysts go as far as asserting that a good ‘mission statement’ can provide an actual worthwhile alternative to the whole task of corporate plan- ning. The definition of a firm’s strategic mission encapsulated in the mission statement can be thought of as the first stage of the strategy process. Management guru Peter Drucker, the source of much contemporary thinking about the busi- ness mission, argues that asking the question ‘What is our business?’ is the same as asking the question ‘What is our mission?’ A business is defined by its mission. Only a clear definition of the mission of the organization makes possible clear and realistic business objectives, because the mission defines the purpose of the firm in terms of its enduring sense of its reason for being. The mission defines the long-term vision of the organization in terms of what it wants to be and whom it wants to serve. A firm’s mission should be clear and con- cise and distinguish it from any other firm. The mission statement has to be backed up with specific objectives and strategies, but these objectives and strategies are far more likely to be acted upon when there is a clear sense of mission informing action. A good mission statement will contain the following:
- the purpose of the organization – a statement of the principal activities of a business or organization;
- its principal business aims – its mission as regards the position it aims to achieve in its chosen business;
- the key beliefs and values of the company;
- definitions of who are the major stakeholders in the business;
- the guiding principles that define the code of conduct that tells employees how to behave.
Drucker illustrates the importance of a sense of mission with his story of three people working on a building site. All three were doing the same job but when asked what their job was gave very different answers. One answered, ‘Breaking rocks,’ another answered, ‘Earning a living,’ the third answered. ‘Helping to build a cathed- ral.’ There is a similar story told about three climbers. When asked what they were doing, one answered, ‘Pitching camp,’ the second answered, ‘Collecting material for a film,’ the third answered, ‘Climbing Everest.’ There are no prizes for decid- ing who was most committed to his/her task and who would be most motivated to perform to the best of his/her ability. Drucker himself highlights the need to link a sense of mission with clear, achievable objectives. He makes the point when analysing the early success of Marks & Spencer:
Marks & Spencer redefined its business as the subversion of the class structure of nineteenth-century England by making available to the working and lower middle classes upper-class goods of better than upper-class quality, and yet at prices the working
EXHIBIT 1.1 MISSION STATEMENTS
A study of mission statements in the United States argued that every organization should have one to motivate its employees. It claimed that firms with clear motivating mission statements were likely to perform better than those without. Classic mission statements cited include the Peter Drucker example of the men on the cathedral building site, President Kennedy’s ‘Put a man on the moon,’ Canon’s ‘Beat Xerox’ and Komatsu’s ‘Encircle Caterpillar.’ The trouble is that most mission statements tend to provoke cynicism and confusion rather than clar- ity and commitment by trying to combine statements of objectives with statements of values.
Source : adapted from Financial Times , 3 April 1989.
and lower middle-class customer could well afford.... What made Marks & Spencer unique and successful... was its conversion of the definition of ‘what our business is, and should be’ into clear, specific, operationally effective and multiple objectives. (Drucker, 1974: 96)
In the twentieth-century computer industry Apple set as its mission ‘To make a contribution to the world by making tools for the mind that advance humankind’. Thornton’s, a UK premium chocolate manufacturer and retailer, talks about itself in this way: ‘Our aim is to delight our customers with exceptional products and caring service. Our goal is to be widely recognized as the best specialist retailer and manufacturer of quality confectionery.’ Tesco, a major UK supermarket chain, has talked about its mission with a similar stress on service and the customer: ‘The strategy is to make our stores, our products and our people the very best in the business in the opinion of our customers.’ Other companies have a different emphasis. Levi Strauss, for example, talks about its aspirations in terms of the kind of company it wants to create for its employees: ‘we want satisfaction from accomplishments and friendships, balanced personal and professional lives, and to have fun with our endeavors’. Missions can be extremely visionary and challenging. For example, during its heyday Body Shop proclaimed the following in its annual report: ‘Make com- passion, care, harmony and trust the foundation stones of business. Fall in love with new ideas.’
QUESTION
1 Do you agree with the view expressed in exhibit 1.1?
The recent emphasis in strategy upon a sense of mission demonstrates the need companies feel to clarify their purpose and their values. In the large complex organization a sense of mission can serve as unifying factor. The mission tells employees what the company is about. It can also serve to give other stakeholders a sense that the company is clear about what it is doing and where it is going. The danger with missions is that they can come to be seen as empty rhetoric if senior management does not live according to their principles. As the Ford case illustrates, strategy links with values when we consider mis- sion. Public and private-sector organizations are likely to think of these differently.
Figure 1.4 Ford Motor Company’s statement of mission, values and guiding principles
Queen’s Medical Centre, Nottingham, one of the United Kingdom’s biggest providers of hospital-based medical services, defines its strategic aims in the fol- lowing way:
- Provide quality services designed around the patient.
- Provide an environment in which the health care professional of tomorrow can be trained.
- Be knowledge organizations by promoting and investing in research and information.
- Be effective and supportive organizations for those working in both hospitals.
- Use our resources wisely.
Values support the achievement of these aims because ‘values... drive the way we work and deliver care’. Queen’s Medical Centre values include: care and service, striving for continuous improvement and supporting staff in delivering high- quality services and achieving a balance between their work and home lives.
CRITICAL VOICES
1 Some critics argue that the emphasis upon mission is misplaced, that mission statements are often more rhetoric than substance. Do you agree? 2 If a sense of mission is not the best way to give an organization a sense of direction, what is?
Identity
Mission and values are increasingly recognized as reflecting the identity of an organ- ization – its central, enduring and distinctive character, and that which makes it unique. There is evidence that those organizations that do survive and prosper over the longer term do have a clear sense of identity, although they are also skilful enough to know when an existing identity needs to change as a result of major changes in the environment. For example, US railroads needed to recognize that the future was perilous if they clung to the identity of a railroad company. They could perhaps have coped better with a changing environment if they had refashioned themselves as a transport businesses, competing with the roads and the airlines. Such a change might have required major change, for new transport technologies might well have rendered their railroad identity obsolete. Firms can change too slowly and become increasingly vulnerable to change or lose out on major opportunities. Xerox is a case in point. It had all the knowledge and tech- nical skills to become a major player in the computer industry but failed miserably (see chapter 8) because it could not see a way beyond its identity as a copier com- pany. Other firms struggle to create a new identity at times of change. The Boots
- a communication and management task of making the sense of mission come alive in the organization.
This is a theme we return to in chapter 6 when we consider Collins and Porras’s work on organizations that were built to last. An enduring company’s centre consists of core values (‘the organization’s essential and enduring tenets’) and pur- pose (‘the organization’s fundamental reasons for existence beyond just making money’).
Strategy Evaluation
Strategy can be neither formulated nor adjusted to changing circumstances without a process of strategy evaluation. Whether performed by an individual or as part of an organizational review procedure, strategy evaluation forms an essential step in the process of guiding an enterprise. For many executives strategy evaluation is simply an appraisal of how well a business performs. Has it grown? Is the profit rate normal? If the answers to these questions are affirmative, it is argued that the firm’s strategy must be sound. Despite its unassailable simplicity, this line of reasoning misses the whole point of strategy
- that the critical factors determining the quality of current results are often not directly observable or simply measured, and that by the time strategic opportun- ities or threats do directly affect operating results it may well be too late for an effective response. Thus strategy evaluation is an attempt to look beyond the obvious facts regarding the short-term health of a business and appraise instead those more fundamental factors and trends that govern success in the chosen field of endeavour. A strategy is a set of objectives, policies and plans that, taken together, define the scope of the enterprise and its approach to business. Rumelt suggests that three questions are central to the challenge of strategy evaluation:
1 Are the objectives of the business appropriate? 2 Are the major policies and plans appropriate? 3 Do the results obtained to date confirm or refute critical assumptions on which the strategy rests?
He further suggests that strategy must satisfy four broad criteria:
- Consistency. The strategy must not present mutually inconsistent goals and policies.
- Consonance. The strategy must represent an adaptive response to the external environment and to the critical changes occurring within it.
- Advantage. Strategy must provide for the creation and/or maintenance of a competitive advantage in the selected area of activity.
- Feasibility. The strategy must neither overtax available resources nor create insoluble problems.
A strategy must be evaluated against each of these criteria; if it fails to meet one or more of them, the strategy is flawed. We will have more to say about strategy evaluation in the chapters that follow.
The Book in Brief
Overall, the chapters that follow provide a brief history of the evolution of thinking about strategy. In chapters 2–4 we address the microeconomic aspects of strategic analysis, focusing on the structure of the firm’s business environment, its internal resources and the range of strategic options open to it. In chapters 4–5 we turn to the management process aspects of strategy, looking first of all at organizational issues such as structure and culture, then the management of strategic change. In chapter 7 we focus on current major debates in strategy – core competence and management; chapter 8 consists of ten case studies which you may like to read first. As in chapter 1, the following chapters are interspersed with examples, cases (historical and current) and questions. There is no ‘one best way’ of strategy. There is, therefore, no one right answer to the questions posed. Strategic management means coping with complexity and ambiguity. The examples, illustrations and ques- tions are meant to foster critical thought on the issues under discussion and to help you reflect critically on your own experience of strategy in action. Hopefully, you will finish the book a little closer to a ‘model’ of strategic management, a way of thinking about strategy with which you personally feel comfortable, and able to discuss with others engaged in the same difficult but crucially important task of improving their understanding of strategic issues facing their businesses.
EXHIBIT 1.2 STRATEGY
Inconsistency in strategy is not simply a flaw in logic. A key function of strategy is to provide coherence to organizational action. A clear and explicit concept of strategy can foster a climate of tacit co-ordination that is more efficient than most administrative mechanisms. Many high- technology firms, for example, face a basic strategic choice between offering high-cost products with high custom-engineering content and lower-cost products that are more standardized and sold at higher volume. If senior management does not enunciate a clear, consistent sense of where the corporation stands on these issues, there will be continuing conflict between sales, design, engineering and manufac- turing people. A clear, consistent strategy, by contrast, allows a sales engineer to negotiate a contract with a minimum of co-ordination – the trade-offs are an explicit part of the firm’s posture.
Source : Rumelt (1988).
