Strategic management involves the formulation and implementation of the major initiatives taken by a company's top management on behalf of owners, based on consideration of resources and an assessment of the internal and external environments in which the organization competes.
In management theory and practice, a distinction is often made between operational management and strategic management. Operational management is concerned primarily with responses to internal issues such as improving efficiency and controlling costs. Strategic management is concerned primarily with responses to external issues such as in understanding customers' needs and responding to competitive forces. Widely-cited Harvard Business School professor Michael Porter identifies three principles underlying strategic positioning: creating a "unique and valuable position", making trade-offs by choosing "what not to do", and creating "fit" by aligning company activities to with one another to support the chosen strategy. Dr. Vladimir Kvint defines strategy as "a system of finding, formulating, and developing a doctrine that will ensure long-term success if followed faithfully."
Strategic management provides overall direction to the enterprise and is closely related to the field of Organization Studies. In short, it entails specifying the organization's objectives, developing policies and plans designed to achieve these objectives, and then allocating resources to implement the plans. Academics and practicing managers have developed numerous models and frameworks to assist in strategic decision making and in understanding infinitely complex macro-economic environments. Strategic management is not static in nature; the models often include a feedback loop to monitor execution and inform the next round of planning.
- 1 Definition of strategic management
- 2 Historical development of strategic management
- 3 Strategic management concepts: 1980 to present
- 4 Strategic thinking
- 5 Limitations of strategic management
- 6 Strategic analysis
- 7 Other topics
- 7.1 Influence of military strategy on business strategy
- 7.2 Strategy as problem solving
- 7.3 Quality
- 7.4 Reengineering
- 7.5 Traits of successful companies
- 7.6 Strategic change
- 7.7 Creative vs analytic approaches
- 7.8 Non-strategic management
- 7.9 Organizational capability
- 7.10 Information- and technology-driven strategy
- 7.11 Japanese influence on strategy
- 8 See also
- 9 Further reading
- 10 References
- 11 External links
Definition of strategic management
Strategic management involves the formulation and implementation of the major initiatives taken by a company's top management on behalf of owners, based on consideration of resources and an assessment of the internal and external environments in which the organization competes.
Strategic management is often described as involving two major processes: formulation and implementation of strategy. While described sequentially below, in practice the two processes are iterative and each provides input for the other.
Formulation of strategy involves analyzing the environment in which the organization operates, then making a series of strategic decisions about how the organization will compete. Formulation ends with a series of goals or objectives and measures for the organization to pursue.
Environmental analysis includes the:
- Remote external environment, including the political, economic, social and regulatory landscape;
- Industry environment, such as the competitive behavior of rival organizations, the bargaining power of buyers/customers and suppliers, threats from new entrants to the industry, and the ability of buyers to substitute products; and
- Internal environment, regarding the strengths and weaknesses of the organization's resources (i.e., its people, processes and IT systems).
Strategic decisions are based on insight from the environmental assessment and are responses to strategic questions about how the organization will compete, such as:
- What is the organization's business?
- Who is the target customer for the organization's products and services?
- Where are the customers and how do they buy? What is considered "value" to the customer?
- Which businesses, products and services should be included or excluded from the portfolio of offerings?
- What is the geographic scope of the business?
- What differentiates the company from its competitors in the eyes of customers and other stakeholders?
- Which skills and resources should be developed within the firm?
- What are the important opportunities and risks for the organization?
- How can the firm grow, through both its base business and new business?
- How can the firm generate more value for investors?
The answers to these and many other strategic questions result in a series of specific short-term and long-term goals or objectives and related measures.
The second major process of strategic management is implementation, which involves decisions regarding how the organization's resources (i.e., people, process and IT systems) will be aligned and mobilized towards the objectives. Implementation results in how the organization's resources are structured (such as by product or service or geography), leadership arrangements, communication, incentives, and monitoring mechanisms to track progress towards objectives, among others.
Running the day-to-day operations of the business is often referred to as "operations management" or specific terms for key departments or functions, such as "logistics management" or "marketing management," which take over once strategic management decisions are implemented.
Historical development of strategic management
The strategic management discipline originated in the 1950s and 1960s. Among the numerous early contributors, the most influential were Alfred Chandler, Philip Selznick, Igor Ansoff, and Peter Drucker. The discipline draws from earlier thinking and texts on 'strategy' dating back thousands of years. Many companies built strategic planning functions to develop and execute the formulation and implementation processes during the 1960's.
Alfred Chandler recognized the importance of coordinating management activity under an all-encompassing strategy. Interactions between functions were typically handled by managers who relayed information back and forth between departments. Chandler stressed the importance of taking a long term perspective when looking to the future. In his 1962 ground breaking work Strategy and Structure, Chandler showed that a long-term coordinated strategy was necessary to give a company structure, direction and focus. He says it concisely, “structure follows strategy.”
In 1957, Philip Selznick formalized the idea of matching the organization's internal factors with external environmental circumstances. This core idea was developed into what we now call SWOT analysis by Learned, Kenneth R. Andrews, and others at the Harvard Business School General Management Group. Strengths and weaknesses of the firm are assessed in light of the opportunities and threats in the business environment.
Igor Ansoff built on Chandler's work by adding concepts and inventing a vocabulary. He developed a grid that compared strategies for market penetration, product development, market development and horizontal and vertical integration and diversification. He felt that management could use the grid to systematically prepare for the future. In his 1965 classic Corporate Strategy, he developed gap analysis to clarify the gap between the current reality and the goals and to develop what he called “gap reducing actions”.
Peter Drucker was a prolific strategy theorist, author of dozens of management books, with a career spanning five decades. He stressed the value of managing by targeting well-defined objectives. This evolved into his theory of management by objectives (MBO). According to Drucker, the procedure of setting objectives and monitoring progress towards them should permeate the entire organization.
- Strategic management involves adapting the organization to its business environment.
- Strategic management is fluid and complex. Change creates novel combinations of circumstances requiring unstructured non-repetitive responses.
- Strategic management affects the entire organization by providing direction.
- Strategic management involves both strategy formation (she called it content) and also strategy implementation (she called it process).
- Strategic management is partially planned and partially unplanned.
- Strategic management is done at several levels: overall corporate strategy, and individual business strategies.
- Strategic management involves both conceptual and analytical thought processes.
Change in focus from production to marketing
The 1970s also saw the rise of the marketing oriented firm. From the beginnings of capitalism it was assumed that the key requirement of business success was a product of high technical quality. If you produced a product that worked well and was durable, it was assumed you would have no difficulty profiting. This was called the production orientation. Henry Ford famously said of the Model T car: "Any customer can have a car painted any color that he wants, so long as it is black."
Management theorist Peter Drucker wrote in 1954 that it was the customer who defined what business the organization was in. In the early 1970s Theodore Levitt and others at Harvard argued that instead of producing products then trying to sell them to the customer, businesses should start with the customer, find out what they wanted, and then produce it for them. The fallacy of the production orientation was also referred to as marketing myopia in an article of the same name by Levitt.
Over time, the customer became the driving force behind all strategic business decisions. This marketing concept, in the decades since its introduction, has been reformulated and repackaged under names including market orientation, customer orientation, customer intimacy, customer focus, customer-driven and market focus.
Strategic management concepts: 1980 to present
Types of strategy
In 1988, Henry Mintzberg looked at the changing world around him and decided it was time to reexamine how strategic management was done. He examined the strategic process and concluded it was much more fluid and unpredictable than people had thought. Because of this, he could not point to one process that could be called strategic planning. Instead Mintzberg concludes that there are five types of strategies:
- Strategy as plan – a direction, guide, course of action – intention rather than actual
- Strategy as ploy – a maneuver intended to outwit a competitor
- Strategy as pattern – a consistent pattern of past behaviour – realized rather than intended
- Strategy as position – locating of brands, products, or companies within the conceptual framework of consumers or other stakeholders – strategy determined primarily by factors outside the firm
- Strategy as perspective – strategy determined primarily by a master strategist
In 1998, Mintzberg developed these five types of management strategy into 10 “schools of thought” and grouped them into three categories. The first group is normative. It consists of the schools of informal design and conception, the formal planning, and analytical positioning. The second group, consisting of six schools, is more concerned with how strategic management is actually done, rather than prescribing optimal plans or positions. The six schools are entrepreneurial, visionary, cognitive, learning/adaptive/emergent, negotiation, corporate culture and business environment. The third and final group consists of one school, the configuration or transformation school, a hybrid of the other schools organized into stages, organizational life cycles, or “episodes”.
Portfolio theory refers to decisions regarding the business or industry in which the organization competes, or which products and services should be offered. In the 1970s much of strategic management dealt with size, growth, and portfolio theory. This was summarized in the growth–share matrix developed by a consulting firm. The long-term PIMS study, started in the 1960s and lasting for 19 years, attempted to understand the Profit Impact of Marketing Strategies (PIMS), particularly the effect of market share. It started at General Electric, moved to Harvard in the early 1970s, and then moved to the Strategic Planning Institute in the late 1970s. It now contains decades of information on the relationship between profitability and strategy. Their initial conclusion was unambiguous: the greater a company's market share, the greater their rate of profit. Market share provides economies of scale. It also provides experience curve advantages. The combined effect is increased profits.
The benefits of high market share naturally led to an interest in growth strategies. The relative advantages of horizontal integration, vertical integration, diversification, franchises, mergers and acquisitions, joint ventures and organic growth were discussed.
Other research indicated that a low market share strategy could still be very profitable. Schumacher (1973), Woo and Cooper (1982), Levenson (1984), and later Traverso (2002) showed how smaller niche players obtained very high returns.
By the early 1980s the paradoxical conclusion was that high market share and low market share companies were often very profitable but most of the companies in between were not. This was sometimes called the “hole in the middle” problem. Porter explained this anomaly in the 1980s.
The management of diversified organizations required additional techniques and ways of thinking. The first CEO to address the problem of a multi-divisional company was Alfred Sloan at General Motors. GM employed semi-autonomous “strategic business units” (SBU's), with centralized support functions.
One of the most valuable concepts in the strategic management of multi-divisional companies was portfolio theory. In the previous decade Harry Markowitz and other financial theorists developed modern portfolio theory. They concluded that a broad portfolio of financial assets could reduce specific risk. In the 1970s marketers extended the theory to product portfolio decisions and managerial strategists extended it to operating division portfolios. Each of a company’s operating divisions were seen as an element in the firm's portfolio. Each operating division was treated as a semi-independent profit center with its own revenues, costs, objectives and strategies.
Several techniques were developed to analyze the relationships between elements in a portfolio. B.C.G. Analysis, for example, was developed by the Boston Consulting Group in the early 1970s. Shortly after that the G.E. multi factoral model was developed by General Electric. Companies continued to diversify until the 1980s when it was realized that in many cases a portfolio of operating divisions was worth more as separate completely independent companies.
The experience curve is a hypothesis dating from the late 1960's that direct per unit costs decline by 20-30% every time cumulative production doubles. It has been empirically confirmed at some firms at various points in their history. Costs decline due to a variety of factors, such as the learning curve, substitution of labor for capital (automation), and technological sophistication. Firms could achieve a competitive advantage through lower cost per unit and higher market share. The experience curve was very influential in portfolio theory; businesses with higher market share moved along the experience curve faster than their competition, giving them a cost and profitability advantage.
Generic competitive strategies
Strategy theorist Michael Porter argued that strategy target either cost leadership, differentiation, or focus. These are known as Porter's three generic strategies and can be applied to any size or form of business. Porter claimed that a company must only choose one of the three or risk that the business would waste precious resources. W. Chan Kim and Renée Mauborgne countered that an organization can achieve high growth and profits by creating a Blue Ocean Strategy that breaks the trade off by pursuing both differentiation and low cost.
Porter discussed the concepts of competitive advantage and the value chain in a 1985 book. Competitive advantage refers to the attribute(s) that allow an organization to outperform its competition. These attributes may be personnel, resources, processes, systems, or combination. In Porter's view, strategic management should be concerned with building and sustaining competitive advantage.
Porter's description of the value chain refers to the chain of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market. These include functions such as inbound logistics, operations, outbound logistics, marketing and sales, and service, supported by systems and infrastructure. By aligning the various activities in its value chain with the organization's strategy in a coherent way, a firm can achieve a competitive advantage.
James Gilmore and Joseph Pine found competitive advantage in mass customization. Flexible manufacturing techniques allowed businesses to individualize products for each customer without losing economies of scale. This effectively turned the product into a service. They also realized that if a service is mass-customized by creating a “performance” for each individual client, that service would be transformed into an “experience”. Their book, The Experience Economy, along with the work of Bernd Schmitt convinced many to see service provision as a form of theatre. This school of thought is sometimes referred to as customer experience management (CEM).
Gary Hamel and C. K. Prahalad declared that strategy needs to be more active and interactive; less “arm-chair planning” was needed. Their most well known advance was the idea of core competency, the idea that each organization has some functional area in which it excels and that the business should focus on opportunities in that area, letting others go.
Strategic thinking involves the generation and application of unique business insights to opportunities intended to create competitive advantage for a firm or organization. It is more about synthesis than analysis. According to Mintzberg, it is about "capturing what the manager learns from all sources (both the soft insights from his or her personal experiences and the experiences of others throughout the organization and the hard data from market research and the like) and then synthesizing that learning into a vision of the direction that the business should pursue." Mintzberg argued that strategic thinking is the critical part of formulating strategy, more so than strategic planning exercises.
Will Mulcaster argued that while much research and creative thought has been devoted to generating alternative strategies, too little work has been done on what influences the quality of strategic decision making and the effectiveness with which strategies are implemented. For instance, in retrospect it can be seen that the financial crisis of 2008–9 could have been avoided if the banks had paid more attention to the risks associated with their investments, but how should banks change the way they make decisions to improve the quality of their decisions in the future? Mulcaster's Managing Forces framework addresses this issue by identifying 11 forces that should be incorporated into the processes of decision making and strategic implementation. The 11 forces are: Time; Opposing forces; Politics; Perception; Holistic effects; Adding value; Incentives; Learning capabilities; Opportunity cost; Risk and Style.
Limitations of strategic management
In 2000, Gary Hamel coined the term strategic convergence to explain the limited scope of the strategies being used by rivals in greatly differing circumstances. He lamented that successful strategies are imitated by firms that do not understand that for a strategy to work, it must account for the specifics of each situation.
But in the world where strategies must be implemented, the three elements are interdependent. Means are as likely to determine ends as ends are to determine means. The objectives that an organization might wish to pursue are limited by the range of feasible approaches to implementation. (There will usually be only a small number of approaches that will not only be technically and administratively possible, but also satisfactory to the full range of organizational stakeholders.) In turn, the range of feasible implementation approaches is determined by the availability of resources.
Another critique of strategic management is that it can overly constrains managerial discretion in a dynamic environment. "How can individuals, organizations and societies cope as well as possible with ... issues too complex to be fully understood, given the fact that actions initiated on the basis of inadequate understanding may lead to significant regret?"
Some theorists insist on an iterative approach, considering in turn objectives, implementation and resources. I.e., a "...repetitive learning cycle [rather than] a linear progression towards a clearly defined final destination." Strategies must be able to adjust during implementation because "humans rarely can proceed satisfactorily except by learning from experience; and modest probes, serially modified on the basis of feedback, usually are the best method for such learning."
Woodhouse and Collins claim that the essence of being “strategic” lies in a capacity for "intelligent trial-and error" rather than strict adherence to finely-honed strategic plans. Strategy should be seen as laying out the general path rather than precise steps.
Frameworks for analysis
Formulation and implementation of strategy have resulted in a variety of frameworks to direct and inform analysis. The difficulty of fully comprehending and responding to the complex issues faced by an organization has led to a proliferation of such frameworks. Each attempts to organize a number of issues and make them more readily understandable.
- External environment: PEST analysis or STEEP analysis is a framework used to examine the remote external environmental factors that can affect the organization, such as political, economic, social/demographic, and government regulation. Common variations include SLEPT, PESTLE, STEEPLE, and STEER analysis, each of which incorporates slightly different emphases.
- Industry environment: The Porter Five Forces Analysis framework helps to determine the competitive rivalry and therefore attractiveness of a market. It is used to help determine the portfolio of offerings the organization will provide and in which markets.
- Relationship of internal and external environment: One of the most basic and widely-used frameworks is the SWOT analysis, which examines both internal elements of the organization — Strengths and Weaknesses — and external elements — Opportunities and Threats. It helps examine the organization's resources in the context of its environment.
- Determining objectives and measures: The Balanced Scorecard attempts to measure the performance of an organization from the perspective of various stakeholders. While often used in a performance management or operational management context, the balanced scorecard is also valuable to strategic management in helping to define and maintain competitive advantage.
Many other frameworks are commonly used in management and taught in business schools.
Porter also developed a framework for analyzing the profitability of industries. In five forces analysis he identified the forces that shape the industry environment. The framework involves the bargaining power of buyers and suppliers, the threat of new entrants, the availability of substitute products, and the competitive rivalry of firms in the industry. The framework helps describe how a firm can use these forces to obtain a sustainable competitive advantage. Porter modifies Chandler's dictum about structure following strategy by introducing a second level of structure: while organizational structure follows strategy, it in turn follows industry structure. Porter's generic strategies detail the interaction between cost minimization strategies, product differentiation strategies, and market focus strategies. Although he did not introduce these terms, he showed the importance of choosing one of them rather than trying to position your company between them. He also challenged managers to see their industry in terms of a value chain.
A number of strategists use scenario planning techniques to deal with change. The way Peter Schwartz put it in 1991 is that strategic outcomes cannot be known in advance so the sources of competitive advantage cannot be predetermined. The fast changing business environment is too uncertain for us to find sustainable value in formulas of excellence or competitive advantage. Instead, scenario planning is a technique in which multiple outcomes can be developed, their implications assessed, and their likeliness of occurrence evaluated. According to Pierre Wack, scenario planning is about insight, complexity, and subtlety, not about formal analysis and numbers.
Some business planners are starting to use a complexity theory approach to strategy. Complexity can be thought of as chaos with a dash of order. Chaos theory deals with turbulent systems that rapidly become disordered. Complexity is not quite so unpredictable. It involves multiple agents interacting in such a way that a glimpse of structure may appear.
Information systems allow managers to take a much more analytical view of their business than before. One such system is the balanced scorecard. It measures financial, marketing, production, organizational development, and new product development factors to achieve a 'balanced' perspective.
Influence of military strategy on business strategy
In the 1980s business strategists realized that there was a vast knowledge base stretching back thousands of years that they had barely examined. They turned to military strategy for guidance. Military strategy books such as The Art of War by Sun Tzu, On War by von Clausewitz, and The Red Book by Mao Zedong became business classics. From Sun Tzu, they learned the tactical side of military strategy and specific tactical prescriptions. From von Clausewitz, they learned the dynamic and unpredictable nature of military action. From Mao, they learned the principles of guerrilla warfare. Important marketing warfare books include Business War Games by Barrie James, Marketing Warfare by Al Ries and Jack Trout and Leadership Secrets of Attila the Hun by Wess Roberts.
The four types of business warfare theories are:
- Offensive marketing warfare strategies
- Defensive marketing warfare strategies
- Flanking marketing warfare strategies
- Guerrilla marketing warfare strategies
The marketing warfare literature also examined leadership and motivation, intelligence gathering, types of marketing weapons, logistics and communications.
By the twenty-first century marketing warfare strategies had gone out of favour in favor of non-confrontational approaches. In 1989, Dudley Lynch and Paul L. Kordis published Strategy of the Dolphin: Scoring a Win in a Chaotic World. "The Strategy of the Dolphin” was developed to give guidance as to when to use aggressive strategies and when to use passive strategies. A variety of aggressiveness strategies were developed.
In 1993, J. Moore used a similar metaphor. Instead of using military terms, he created an ecological theory of predators and prey(see ecological model of competition), a sort of Darwinian management strategy in which market interactions mimic long term ecological stability.
Strategy as problem solving
Active strategic management required active information gathering and active problem solving. In the early days of Hewlett-Packard (HP), Dave Packard and Bill Hewlett devised an active management style that they called management by walking around (MBWA). Senior HP managers were seldom at their desks. They spent most of their days visiting employees, customers, and suppliers. This direct contact with key people provided them with a solid grounding from which viable strategies could be crafted. Management consultants Tom Peters and Robert H. Waterman had used the term in their 1982 book In Search of Excellence: Lessons From America's Best-Run Companies. Some Japanese managers employ a similar system, which originated at Honda, and is sometimes called the 3 G's (Genba, Genbutsu, and Genjitsu, which translate into “actual place”, “actual thing”, and “actual situation”).
A large group of theorists felt the area where western business was most lacking was product quality. W. Edwards Deming, Joseph M. Juran, A. Kearney, Philip Crosby and Armand Feignbaum suggested quality improvement techniques such total quality management (TQM), continuous improvement (kaizen), lean manufacturing, Six Sigma, and return on quality (ROQ).
Contrarily, James Heskett (1988), Earl Sasser (1995), William Davidow, Len Schlesinger, A. Paraurgman (1988), Len Berry, Jane Kingman-Brundage, Christopher Hart, and Christopher Lovelock (1994), felt that poor customer service was the problem. They gave us fishbone diagramming, service charting, Total Customer Service (TCS), the service profit chain, service gaps analysis, the service encounter, strategic service vision, service mapping, and service teams. Their underlying assumption was that there is no better source of competitive advantage than a continuous stream of delighted customers.
Process management uses some of the techniques from product quality management and some of the techniques from customer service management. It looks at an activity as a sequential process. The objective is to find inefficiencies and make the process more effective. Although the procedures have a long history, dating back to Taylorism, the scope of their applicability has been greatly widened, leaving no aspect of the firm free from potential process improvements. Because of the broad applicability of process management techniques, they can be used as a basis for competitive advantage.
Carl Sewell, Frederick F. Reichheld, C. Gronroos, and Earl Sasser observed that businesses were spending more on customer acquisition than on retention. They showed how a competitive advantage could be found in ensuring that customers returned again and again. Reicheld broadened the concept to include loyalty from employees, suppliers, distributors and shareholders. They developed techniques for estimating customer lifetime value (CLV) for assessing long-term relationships. The concepts begat attempts to recast selling and marketing into a long term endeavor that created a sustained relationship (called relationship selling, relationship marketing, and customer relationship management). Customer relationship management (CRM) software became integral to many firms.
Michael Hammer and James Champy felt that these resources needed to be restructured. In a process that they labeled reengineering, firm's reorganized their assets around whole processes rather than tasks. In this way a team of people saw a project through, from inception to completion. This avoided functional silos where isolated departments seldom talked to each other. It also eliminated waste due to functional overlap and interdepartmental communications.
In 1989 Richard Lester and the researchers at the MIT Industrial Performance Center identified seven best practices and concluded that firms must accelerate the shift away from the mass production of low cost standardized products. The seven areas of best practice were:
- Simultaneous continuous improvement in cost, quality, service, and product innovation
- Breaking down organizational barriers between departments
- Eliminating layers of management creating flatter organizational hierarchies.
- Closer relationships with customers and suppliers
- Intelligent use of new technology
- Global focus
- Improving human resource skills
The search for best practices is also called benchmarking. This involves determining where you need to improve, finding an organization that is exceptional in this area, then studying the company and applying its best practices in your firm.
Traits of successful companies
Like Peters and Waterman a decade earlier, James Collins and Jerry Porras spent years conducting empirical research on what makes great companies. Six years of research uncovered a key underlying principle behind the 19 successful companies that they studied: They all encourage and preserve a core ideology that nurtures the company. Even though strategy and tactics change daily, the companies, nevertheless, were able to maintain a core set of values. These core values encourage employees to build an organization that lasts. In Built To Last (1994) they claim that short term profit goals, cost cutting, and restructuring will not stimulate dedicated employees to build a great company that will endure. In 2000 Collins coined the term “built to flip” to describe the prevailing business attitudes in Silicon Valley. It describes a business culture where technological change inhibits a long term focus. He also popularized the concept of the BHAG (Big Hairy Audacious Goal).
Arie de Geus (1997) undertook a similar study and obtained similar results. He identified four key traits of companies that had prospered for 50 years or more. They are:
- Sensitivity to the business environment — the ability to learn and adjust
- Cohesion and identity — the ability to build a community with personality, vision, and purpose
- Tolerance and decentralization — the ability to build relationships
- Conservative financing
A company with these key characteristics he called a living company because it is able to perpetuate itself. If a company emphasizes knowledge rather than finance, and sees itself as an ongoing community of human beings, it has the potential to become great and endure for decades. Such an organization is an organic entity capable of learning (he called it a “learning organization”) and capable of creating its own processes, goals, and persona.
Will Mulcaster suggests that firms engage in a dialogue that centres around these questions:
- Will the proposed competitive advantage create Perceived Differential Value?"
- Will the proposed competitive advantage create something that is different from the competition?"
- Will the difference add value in the eyes of potential customers?" – This question will entail a discussion of the combined effects of price, product features and consumer perceptions.
- Will the product add value for the firm?" – Answering this question will require an examination of cost effectiveness and the pricing strategy.
In 1969, Peter Drucker coined the phrase Age of Discontinuity to describe the way change disrupts lives. In an age of continuity attempts to predict the future by extrapolating from the past can be accurate. But according to Drucker, we are now in an age of discontinuity and extrapolating is ineffective. He identifies four sources of discontinuity: new technologies, globalization, cultural pluralism and knowledge capital.
In 1970, Alvin Toffler in Future Shock described a trend towards accelerating rates of change. He illustrated how social and technical phenomena had shorter lifespans with each generation, and he questioned society's ability to cope with the resulting turmoil and accompanying anxiety. In past eras periods of change were always punctuated with times of stability. This allowed society to assimilate the change before the next change arrived. But these periods of stability had all but disappeared by the late 20th century. In 1980 in The Third Wave, Toffler characterized this shift to relentless change as the defining feature of the third phase of civilization (the first two phases being the agricultural and industrial waves).
In 1978, Derek F. Abell (Abell, D. 1978) described "strategic windows" and stressed the importance of the timing (both entrance and exit) of any given strategy. This led some strategic planners to build planned obsolescence into their strategies.
In 1983, Noel Tichy wrote that because we are all beings of habit we tend to repeat what we are comfortable with. He wrote that this is a trap that constrains our creativity, prevents us from exploring new ideas, and hampers our dealing with the full complexity of new issues. He developed a systematic method of dealing with change that involved looking at any new issue from three angles: technical and production, political and resource allocation, and corporate culture.
Peters and Austin (1985) stressed the importance of nurturing champions and heroes. They said we have a tendency to dismiss new ideas, so to overcome this, we should support those few people in the organization that have the courage to put their career and reputation on the line for an unproven idea.
In 1989, Charles Handy identified two types of change. "Strategic drift" is a gradual change that occurs so subtly that it is not noticed until it is too late. By contrast, "transformational change" is sudden and radical. It is typically caused by discontinuities (or exogenous shocks) in the business environment. The point where a new trend is initiated is called a "strategic inflection point" by Andy Grove. Inflection points can be subtle or radical.
In 1990, Richard Pascale (Pascale, R. 1990) wrote that relentless change requires that businesses continuously reinvent themselves. His famous maxim is “Nothing fails like success” by which he means that what was a strength yesterday becomes the root of weakness today, We tend to depend on what worked yesterday and refuse to let go of what worked so well for us in the past. Prevailing strategies become self-confirming. To avoid this trap, businesses must stimulate a spirit of inquiry and healthy debate. They must encourage a creative process of self-renewal based on constructive conflict.
In 1996, Adrian Slywotzky showed how changes in the business environment are reflected in value migrations between industries, between companies, and within companies. He claimed that recognizing the patterns behind these value migrations is necessary if we wish to understand the world of chaotic change. In “Profit Patterns” (1999) he described businesses as being in a state of strategic anticipation as they try to spot emerging patterns. Slywotsky and his team identified 30 patterns that have transformed industry after industry.
In 1997, Clayton Christensen (1997) took the position that great companies can fail precisely because they do everything right since the capabilities of the organization also define its disabilities. Christensen's thesis is that outstanding companies lose their market leadership when confronted with disruptive technology. He called the approach to discovering the emerging markets for disruptive technologies agnostic marketing, i.e., marketing under the implicit assumption that no one – not the company, not the customers – can know how or in what quantities a disruptive product can or will be used without the experience of using it.
In 1999, Constantinos Markides reexamined the nature of strategic planning. He described strategy formation and implementation as an on-going, never-ending, integrated process requiring continuous reassessment and reformation. Strategic management is planned and emergent, dynamic and interactive.
J. Moncrieff (1999) stressed strategy dynamics. He claimed that strategy is partially deliberate and partially unplanned. The unplanned element comes from emergent strategies that result from the emergence of opportunities and threats in the environment and from "strategies in action" (ad hoc actions across the organization).
David Teece pioneered research on resource-based strategic management and the dynamic capabilities perspective, defined as “the ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments". His 1997 paper (with Gary Pisano and Amy Shuen) "Dynamic Capabilities and Strategic Management" was the most cited paper in economics and business for the period from 1995 to 2005.
Creative vs analytic approaches
In 2010, IBM released a study summarizing three conclusions of 1500 CEOs around the world: 1) complexity is escalating, 2) enterprises are not equipped to cope with this complexity, and 3) creativity is now the single most important leadership competency. IBM said that it is needed in all aspects of leadership, including strategic thinking and planning.
Similarly, Mckeown argued that over-reliance on any particular approach to strategy is dangerous and that multiple methods can be used to combine the creativity and analytics to create an "approach to shaping the future", that is difficult to copy.
A 1938 treatise by Chester Barnard, based on his own experience as a business executive, described the process as informal, intuitive, non-routinized and involving primarily oral, 2-way communications. Bernard says “The process is the sensing of the organization as a whole and the total situation relevant to it. It transcends the capacity of merely intellectual methods, and the techniques of discriminating the factors of the situation. The terms pertinent to it are “feeling”, “judgement”, “sense”, “proportion”, “balance”, “appropriateness”. It is a matter of art rather than science.”
In 1973, Mintzberg found that senior managers typically deal with unpredictable situations so they strategize in ad hoc, flexible, dynamic, and implicit ways. He wrote, “The job breeds adaptive information-manipulators who prefer the live concrete situation. The manager works in an environment of stimulous-response, and he develops in his work a clear preference for live action.”
In 1982, John Kotter studied the daily activities of 15 executives and concluded that they spent most of their time developing and working a network of relationships that provided general insights and specific details for strategic decisions. They tended to use “mental road maps” rather than systematic planning techniques.
Daniel Isenberg's 1984 study of senior managers found that their decisions were highly intuitive. Executives often sensed what they were going to do before they could explain why. He claimed in 1986 that one of the reasons for this is the complexity of strategic decisions and the resultant information uncertainty.
Zuboff claimed that information technology was widening the divide between senior managers (who typically make strategic decisions) and operational level managers (who typically make routine decisions). She alleged that prior to the widespread use of computer systems, managers, even at the most senior level, engaged in both strategic decisions and routine administration, but as computers facilitated (She called it “deskilled”) routine processes, these activities were moved further down the hierarchy, leaving senior management free for strategic decision making.
In 1977, Abraham Zaleznik distinguished leaders from managers. He described leaders as visionaries who inspire, while managers care about process. He claimed that the rise of managers was the main cause of the decline of American business in the 1970s and 1980s. Lack of leadership is most damaging at the level of strategic management where it can paralyze an entire organization.
Dr Maretha Prinsloo developed the Cognitive Process Profile (CPP) psychometric from the work of Elliott Jacques. The CPP is a computer based psychometric which profiles a person's capacity for strategic thinking. It is used worldwide in selecting and developing people for strategic roles.
According to Corner, Kinichi, and Keats, strategic decision making in organizations occurs at two levels: individual and aggregate. They developed a model of parallel strategic decision making. The model identifies two parallel processes that involve getting attention, encoding information, storage and retrieval of information, strategic choice, strategic outcome and feedback. The individual and organizational processes interact at each stage. For instance, competition-oriented objectives are based on the knowledge of competing firms, such as their market share.
In 1990, Peter Senge, who had collaborated with Arie de Geus at Dutch Shell, popularized de Geus' notion of the "learning organization". The theory is that gathering and analyzing information is a necessary requirement for business success in the information age. (See organizational learning.) To do this, Senge claimed that an organization would need to be structured such that:
- People can continuously expand their capacity to learn and be productive.
- New patterns of thinking are nurtured.
- Collective aspirations are encouraged.
- People are encouraged to see the “whole picture” together.
Senge identified five disciplines of a learning organization. They are:
- Personal responsibility, self-reliance, and mastery — We accept that we are the masters of our own destiny. We make decisions and live with the consequences of them. When a problem needs to be fixed, or an opportunity exploited, we take the initiative to learn the required skills to get it done.
- Mental models — We need to explore our personal mental models to understand the subtle effect they have on our behaviour.
- Shared vision — The vision of where we want to be in the future is discussed and communicated to all. It provides guidance and energy for the journey ahead.
- Team learning — We learn together in teams. This involves a shift from “a spirit of advocacy to a spirit of enquiry”.
- Systems thinking — We look at the whole rather than the parts. This is what Senge calls the “Fifth discipline”. It is the glue that integrates the other four into a coherent strategy. For an alternative approach to the “learning organization”, see Garratt, B. (1987).
Geoffrey Moore (1991) and R. Frank and P. Cook also detected a shift in the nature of competition. Markets driven by technical standards or by "network effects" can give the dominant firm a near-monopoly. The same is true of networked industries in which interoperability requires compatibility between users. Examples include Internet Explorer's and Amazon's early dominance of their respective industries. IE's later decline shows that such dominance may be only temporary.
Moore showed how firms could attain this enviable position by using E.M. Rogers' five stage adoption process and focusing on one group of customers at a time, using each group as a base for reaching the next group. The most difficult step is making the transition between introduction and mass acceptance. (See Crossing the Chasm). If successful a firm can create a bandwagon effect in which the momentum builds and its product becomes a de facto standard.
Information- and technology-driven strategy
Many industries with a high information component are being transformed. For example, Encarta demolished Encyclopædia Britannica (whose sales have plummeted 80% since their peak of $650 million in 1990) before it was in turn, eclipsed by collaborative encyclopedias like Wikipedia. The music industry was similarly disrupted. The technology sector has provided some strategies directly. For example, from the software development industry agile software development provides a model for shared development processes.
Peter Drucker conceived of the “knowledge worker” in the 1950s. He described how fewer workers would do physical labor, and more would apply their minds. In 1984, John Naisbitt theorized that the future would be driven largely by information: companies that managed information well could obtain an advantage, however the profitability of what he called “information float” (information that the company had and others desired) would disappear as inexpensive computers made information more accessible.
Daniel Bell (1985) examined the sociological consequences of information technology, while Gloria Schuck and Shoshana Zuboff looked at psychological factors. Zuboff distinguished between “automating technologies” and “infomating technologies”. She studied the effect that both had on workers, managers and organizational structures. She largely confirmed Drucker's predictions about the importance of flexible decentralized structure, work teams, knowledge sharing and the knowledge worker's central role. Zuboff also detected a new basis for managerial authority, based on knowledge (also predicted by Drucker) which she called “participative management”.
Japanese influence on strategy
In 2009, industry consultants Mark Blaxill and Ralph Eckardt suggested that much of the Japanese business dominance that began in the mid-1970s was the direct result of competition enforcement efforts by the U.S. Federal Trade Commission (FTC) and U.S. Department of Justice (DOJ). In 1975, under the direction of Frederic M. Scherer, the FTC settled its anti-trust lawsuit against Xerox Corporation. The consent decree forced the licensing of the company’s entire patent portfolio, mainly to Japanese competitors. This action marked the start of an activist approach to managing competition by FTC and DOJ, which resulted in the compulsory licensing of tens of thousands of patent from some of America's leading companies, including IBM, AT&T Corporation, DuPont, Bausch & Lomb and Eastman Kodak.
Within four years of the consent decree, Xerox's share of the U.S. copier market dropped from nearly 100% to less than 14%. Between 1950 and 1980 Japanese companies consummated more than 35,000 foreign licensing agreements, mostly with U.S. companies, for free or low-cost licenses made possible by the FTC and DOJ. The post-1975 era of anti-trust initiatives by Washington D.C. economists at the FTC corresponded directly with the rapid, unprecedented rise in Japanese competitiveness and a simultaneous stalling of the U.S. manufacturing economy.
The 1980s also saw the widespread acceptance of positioning theory. Although the theory originated with Jack Trout in 1969, it didn’t gain wide acceptance until Al Ries and Jack Trout wrote their classic book Positioning: The Battle For Your Mind (1979). The basic premise is that a strategy should not be judged by internal company factors but by the way customers see it relative to the competition. Crafting and implementing a strategy involves creating a position in the mind of the collective consumer. Several techniques enabled the practical use of positioning theory. Perceptual mapping for example, creates visual displays of the relationships between positions. Multidimensional scaling, discriminant analysis, factor analysis and conjoint analysis are mathematical techniques used to determine the most relevant characteristics (called dimensions or factors) upon which positions should be based. Preference regression can be used to determine vectors of ideal positions and cluster analysis can identify clusters of positions.
In 1992 Jay Barney saw strategy as assembling the optimum mix of resources, including human, technology and suppliers, and then configuring them in unique and sustainable ways.
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