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THE CONCEPT OF STRATEGY THE CONCEPT OF STRATEGY AND STRATEGIC AND STRATEGIC MANAGEMENTMANAGEMENT

G. Tyge Payne, PhD

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Strategic Management

Strategy: The unifying theme that gives coherence and direction to the decisions of an organization

Strategic Management: Consisting of the analysis, decisions, and actions an organization undertakes in order to create and sustain competitive advantages.

Or, the Strategic Management Process is:The full set of commitments, decisions, and actions required for a firm to create value and earn above-average returns. (Hitt, Hoskinson, & Ireland, 2004, p. 4)

Strategic Management basically seeks to answer the question: How and why do some firms outperform others?

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Other Definitions of StrategyOxford Dictionary: The art of war, especially the planning of

movements of troops and ships etc., into favorable positions; plan of action or policy in business or politics etc.

Chester I. Barnard: Strategy is intended to focus on the interdependence of the adversaries’ decisions and on their expectations about each other’s behavior.

Alfred D. Chandler Jr.: The determination of the long run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.

Kenneth Andrews: Strategy is the pattern of objectives, purposes or goals and the major policies and plans for achieving these goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be.

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The Origins of Strategy

Know the other and know yourself: Triumph without peril.

Know Nature and know the Situation: Triumph completely.- Sun Tzu (~360 B.C.)

• Business strategy is a relatively young field of study – but its roots go back to early military strategy.

• Strategy comes from the Greek word strategos, which is formed from stratos, meaning army, and –ag, meaning to lead.

• Carl von Clausewitz wrote in the early 1800’s that “tactics…[involve] the use of armed forces in the engagement, strategy [is] the use of engagements for the objects of war.”

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More Recent Historical Development of Business Strategy

• Not until very large companies with the ability to influence the competitive environment within their industries did strategic thinking in the business world begin to be articulated. – Alfred Sloan, CEO of GM, 1923 – 1946 - One of the first to analyze competition,

Ford, and devise a strategic plan based on its strengths and weaknesses.– Chester Barnard, Senior Executive of New Jersey Bell, 1930s - Argued managers

should pay attention to “strategic factors” which depend on “personal or organizational action.”

• Wartime (WWI and WWII) efforts also impacted strategic thinking and use of formal strategic tools and concepts:– Allocation of scarce resources– Use of quantitative analysis in planning– The concept of “learning curves”– The concept of “distinctive competence” - first mentioned by Philip Selznick, a

sociologist, in a debate about whether or not to combine the military forces into a single unit (i.e., no Army, Navy, Air Force, Marines, just the US Military).

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• It wasn’t until the 1950’s that strategy was truly introduced in business schools as a way of analyzing the competitive environment and setting organizational goals and objectives to fit that environment.

• These concepts serve as the foundation of strategic management study:– Previous “Business Policy” perspectives looked at maintaining a “balance in

accord with the underlying policies of the business as a whole.” – Harvard– Kenneth Andrews’ SWOT Analysis was developed – still in use today.– Theodore Levitt’s “Marketing Myopia” argued that when companies fail it

typically is because firms focus on the product rather than the changing patterns of consumer needs and tastes.

– Igor Ansoff argued, in response to Levitt, that a firm’s mission should exploit an existing need in the market, rather than using the consumer as the common thread in business. “In reality a given type of customer will frequently have a range of product missions or needs.” Corporate Strategy, 1965.

– BCG developed the “experience curve” and portfolio analysis concepts.– McKinsey & Company’s development of SBUs and the nine-block matrix.– Mintzberg’s “Deliberate, Emergent & Realized Strategies”– Porter’s Generic Strategies

More Historical Development

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DOMINANTTHEME

1950s 1960s-early 70s Mid-70s-mid-80s Late 80s –1990s 2000s

Budgetary Corporate Positioning Competitive Strategicplanning & planning advantage innovationcontrol Financial Planning Selecting Focusing on Reconcilingcontrol growth &- sectors/markets. sources of size with

diversification Positioning for competitive flexibility &leadership advantage agility

Capital Forecasting. Industry analysis Resources & Cooperativebudgeting. Corporate Segmentation capabilities. strategy.Financial planning. Experience curve Shareholder Complexity. planning Synergy Portfolio analysis value. Owning

E-commerce. standards. — Knowledge Management—

Coordination Corporate Diversification. Restructuring. Alliances && control by planning depts. Global strategies. Reengineering. networksBudgeting created. Rise of Matrix structures Refocusing. Self -organizsystems corporate Outsourcing. ation & virtual

planning organization

MAINISSUES

KEY CONCEPTS

&TOOLS

MANAGE-MENT

IMPLIC-ATIONS

The Evolution of Strategic Management

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Ansoff’s Product / Mission Matrix*

MarketPenetration

MarketPenetration

ProductDevelopment

ProductDevelopment

MarketDevelopment

MarketDevelopment

DiversificationDiversification

PresentProduct

NewProduct

PresentMission

NewMission

*Categories define the common thread in an organization’s business/corporate strategy.

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BCG’s Growth-Share Matrix

StarStarQuestion

MarkQuestion

Mark

CashCowCashCow

DogDog

HighShare

LowShare

HighGrowth

SlowGrowth

??

Bark!!

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Deliberate Strategy

Forms of Strategy

RealizedStrategy

IntendedStrategy

UnrealizedStrategy

EmergentStrategy

**Normally emergent strategy comes fromlearning and dissemination within the organization.

Mintzberg’s Critique of Formal Strategic Planning:•The fallacy of prediction – the future is unknown•The fallacy of detachment -- impossible to divorce formulation from implementation•The fallacy of formalization --inhibits flexibility, spontaneity, intuition and learning.

Mintzberg’s Critique of Formal Strategic Planning:•The fallacy of prediction – the future is unknown•The fallacy of detachment -- impossible to divorce formulation from implementation•The fallacy of formalization --inhibits flexibility, spontaneity, intuition and learning.

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Porter’s Generic Strategies

Strategy 1

CostLeadership

Strategy 2

Differentiation

Strategy 2

Differentiation

Strategy 3A

Cost Focus

Strategy 3A

Cost Focus

Strategy 3B

DifferentiationFocus

Strategy 3B

DifferentiationFocus

Competitive Advantage Lower Cost Differentiation

CompetitiveScope

BroadTarget

NarrowTarget

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• Provides a framework for thinking about the “business”• Creates a fit between the organization and its external

environment.• Provides a process of coping with change and organizational

renewal• Fosters anticipation, innovation, and excellence• Facilitates consistent decision-making• Creates organizational focus• Acts as a process of organizational leadership.• Finally and most importantly: To help the organization to succeed (outperform) against its competition!!

Why is SM, as a field of study, necessary? Why are all these theories/tools needed ?

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Strategy, Survival and Success• The ultimate goal of the organizations is to be

successful – success is:• Survival (long-term success)• Achievement of Goals• Above average returns/Profitability (probably most important,

because it determines the ability to achieve the above two)

• Strategy can help achieve success, but it doesn’t guarantee it—certain features of strategy directly contribute to success:

1. Goals that are simple, consistent, and long-term. 2. Profound understanding of the competitive environment. 3. Objective appraisal of resources.4. Effective implementation.

• These observations concerning the role of strategy can be made in relation to most human endeavors be it warfare, chess, politics, sport or business.

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Competition and Competitive Advantage

• Competition provides the rationale for strategy – without competition, strategy is of no concern.

• The essence of strategy is the interdependence of competitors—or the establishment of sustainable competitive advantage over rivals.

• The study of strategy involves how we go about identifying, establishing, and sustaining competitive advantage.

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Thinking Strategically:The Three Big Strategic “Analysis” Questions

1. Where are we now? What is our situation?

2. Where do we want to go?

– Business(es) we want to be in and market positions we want to stake out

– Buyer needs and groups we want to serve

– Outcomes we want to achieve

3. How will we get there?

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Differing Perspectives of the Strategic Management Process

External EnvironmentExternal Environment

Industry AttractivenessIndustry Attractiveness

Strategy FormulationStrategy Formulation

I/O ModelI/O Model

Assets/Skills AssessmentAssets/Skills Assessment

ImplementationImplementation

ResourcesResources

CapabilityCapability

Sustainable CASustainable CA

RBV ModelRBV Model

Strategy FormulationStrategy Formulation

ImplementationImplementation

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Four Assumptions of the I/O Model

1.1. The external environment is assumed to possess The external environment is assumed to possess pressures and constraints that determine the strategies pressures and constraints that determine the strategies that would result in above-average returns.that would result in above-average returns.

2.2. Most firms competing within a particular industry are Most firms competing within a particular industry are assumed to control similar strategically relevant assumed to control similar strategically relevant resourcesresources and to pursue similar strategies in light of those and to pursue similar strategies in light of those resources.resources.

3.3. Resources used to implement strategies are highly Resources used to implement strategies are highly mobilemobile across firms.across firms.

4.4. Organizational decision makers are assumed to be Organizational decision makers are assumed to be rational and committed to acting in the firm’s best rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behaviors.interests, as shown by their profit-maximizing behaviors.

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Our Approach to Studying the Strategic Management Process

• Both the I/O and RBV perspectives are useful to managers and essential to understanding the strategic management process.

• One essentially takes an outward-in (I/O) perspective while other takes an inward-out (RBV) perspective.

19Imp l

eme n

t at i

o n (

5 )Im

p lem

e nt a

t io n

(5 )

Str

ateg

ic C

ontr

ol (

6)S

trat

egic

Con

trol

(6)

Formulating Directions- Develop Vision/Mission (1)

-Set Objectives (2)

Formulating Directions- Develop Vision/Mission (1)

-Set Objectives (2)

Organizational CultureStakeholder Influence

Values / Ethics

Strategic Analyses (3)Strategic Analyses (3)

Strategy Formulation (4)-Formulate and Consider

Alternatives-Make Strategy Choice

Strategy Formulation (4)-Formulate and Consider

Alternatives-Make Strategy Choice

Opportunities and Threatsfrom Economic, Political, Technological etc Sources

Opportunities and Threatsfrom Competition and

Key Stakeholders

Organizational CultureStakeholder Influence

Values / Ethics

Internal OrganizationInternal Organization

Competitor/StakeholderCompetitor/Stakeholder

External EnvironmentExternal Environment

Context of Strategy(type of organization, culture, values,

life cycle competitive position)

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Birnbaum’s Strategy 21 Process

• Examine the Current Business Model• Go Beyond the Current Business Model• Design a “Grand Strategy”• Develop a Compelling Vision• Assure Enablers of Strategy

• Intellectual Capacity• Processes• Organizational Structures• Technologies• External Relationships• Capital Resources

• Set Objectives to Measure Success• Design a Monitoring Process

Similar to Internal and Competitive Analysis

Similar to Internal and Competitive Analysis

Basic Decision to Make Major Change or Not

Related Issues to Monitor Implementation Process

Strategic Formulation and Implementation

21Hambrick & Fredrickson, 2001

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The Strategy ConceptLevels of Analysis

CorporateStrategy

BusinessStrategy

FunctionalStrategy

Choice of ProductsChoice of Markets

Choice of Competitors

• Where to Compete?

• How to Compete?

• How to Contribute?

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RATE OF PROFIT ABOVE THE

COMPETITIVE LEVEL

How do we make

money?

INDUSTRY

ATTRACTIVENESS

Which businesses

should we be in?

COMPETITIVE ADVANTAGE

How should we compete?

CORPORATE STRATEGY

BUSINESS STRATEGY