Strategy & Managing Strategy

Explain the various kinds of strategic option and demonstrate the basis for the selection of a particular strategy in different situations.

Business level strategies: Porter (1980, 1985) focuses on competitive strategies and presents a relatively straightforward view of competitive options within its product markets. He identifies two generic strategies: • The first of these is competing on the basis of cost leadership. Firms pursuing this must aim to be the lowest cost producer, but still be able to compete in terms of product function and quality. A good example of firms achieving this would be Toyota through its entire production system, one of the first to incorporate just-in-time methods as part of its lean manufacturing strategy. In the supermarkets sector this is the approach taken by Lidl and Aldi. • The second of Porter's generic competitive strategies is differentiation. Firms pursuing this strategy must aim to produce goods and services that have certain unique dimensions that make them attractive to customers. In aiming at product differentiation, competitive advantage can only be achieved by maintaining cost parity or cost proximity. Dyson developed a new form of carpet cleaner that challenged and outsold traditional vacuum cleaners. Both these strategies have a broad scope and can apply to a range of products and markets. However, when cost leadership cannot be achieved because costs are simply too high or when product differentiation is difficult across a range of products, Porter offers a third strategic option: • Focus is a strategy relating to niche products and niche markets. It occurs when the organization focuses on a single or set of related niche products or aims for a specific market segment. A holiday company that specializes in safari holidays to up-market camps in African countries has such a focus. In this case, cost and price are less important to the customer than the exclusivity of the product. Nespresso machines and coffee pods would be another example. Bowman & Faulkner (1996) expanded on Porter's ideas and developed the strategy clock. Corporate level strategies: One of the early models of corporate strategy options was offered by Igor Ansoff (Ansoff, 1968). He presented a number of growth options based on products and markers (which he refers to as missions): • Growth based on existing products in existing markets requires a product penetration strategy • Growth based on new products in an existing market requires a product development strategy • Growth based on seeking new markets for existing products requires a market development strategy • Growth based both on new products in new markets requires a diversification strategy. Diversification strategies: As a corporate strategy, diversification is one of the most far reaching growth strategies open to management in that it represents an attempt to change the nature of the business by increasing its portfolio of products and/or markers. We can identify two types of diversification: related and unrelated. Related diversification can be classified into backward, forward and horizontal integration. - Related diversification occurs when the new business is related in some way to the old one. Several firms have sought to gain greater control over the source of raw materials or the supply of components by some form of backward integration. Japanese manufacturing firms depend on a network of subcontractors for the supply of components. In many cases the larger company has a controlling financial interest in the supplier. In the restaurant business it is becoming more common for some restaurant owners to grow their own herbs and vegetables and bake their own bread, to ensure both the quantity and the quality of the supply. This also provides the restaurant with an additional promotional strategy. Some universities have widened access by setting up pre-degree courses, giving students without the traditional entry qualifications the opportunity to feed into the mainstream degree programs. In the UK the cooperative movement provides numerous examples: owning farms, operating the production facilities and supplying goods to the retail stores. - Forward integration occurs when producers diversify to control the onward processes of delivering their goods to the consumer, as in the case of a manufacturer setting up a transport or retail operation or a group of actors leasing a theatre to stage their own work. Another example might be an oil company who own and operate oil rigs, refineries and petrol stations. An integrated system of backward and forward integration is known as vertical integration. - Horizontal integration occurs most commonly when a firm adds to its portfolio of products by acquisition. A related strategy to horizontal integration is the move for economies of scope. This occurs when the product range is extended to incorporate similar items, as with the case of a firm supplying fitted kitchens diversifying its operation to include fitted bathrooms and bedrooms as well. - Unrelated diversification: occurs when management expands its business into a different product market Joint ventures, mergers and acquisitions

Summarise evidence that clear goals benefit strategy workshops, and understand how you can use this to develop your skill of setting clear goals

Goal-setting theory predicts that having clear goals affects the outcomes of a task, research on strategy workshops confirms this and the chapter offers an opportunity to develop the skill of setting clear SMART goals.

Explain the concepts and assess the value of resource analysis, core competence, value chain and portfolio analysis.

Resource analysis: At the beginning of this section we explained the importance of the current resource position so the formulation of management strategy. The resource based view developed by Barney (1991) goes further and sees the may in which a firm uses its resources as a source of significant competitive advantage. Resource analysis clearly covers physical resources such as land, plant and machinery, financial resources and human resources. The analysis should also cover the key relationships in the operating system. These exist between the firm and its suppliers and the firm and its customers, as well as the relationship between parts of the same operating system. Barney (1991) calls the latter organizational resources. In many firms, resource analysis is accompanied by the use of a variety of accounting ratios such as return on capital employed, profitability and soon, Different ratios have more relevance at different stages of the firm's development than at others, so that while profitability may be appropriate for established firms, productivity and sales may be more useful for newly established companies and cash flows may be more significant when from are in decline. A fuller discussion of accounting ratios can be found in Chapter 14. The value of resource analysis lies not only in assessing the viability of a strategic proposal but also in assessing the ability of the organization to adapt to change. Can the firm deal with changes in demand or can it withstand increased competition on a global scale? Has it the financial backing to invest in new technology? Do employees possess the necessary skills and is the age profile of its staff sufficiently balanced to ensure succession? Competing through resources is a dominant theme in the resource based view. Core competences: The idea of core competences is associated with the work of Hamel and Prahalad (1990, 1994) and Kay (1993). Core competences refer to those activities of a firm that make a difference and give the firm a competitive edge. This could be the development of efficient and effective intemal operating systems, as with Toyota and the Toyota production system, whose core competences became a model for other car manufacturers to follow. In certain specialist markets, such as fine wine, a merchant may build its reputation on good customer relationships and continuing business. A university may develop a reputation in particular subject areas. It can build on that reputation through the attraction of students, bringing increased revenue and maintaining that reputation through the attraction of leading academics in the field. To Hamel and Prahalad, core competences represented the integration of knowledge, skills and technology to give the customer added value in terms of cost and customer value, differentiation from competitors or innovation of new products and processes. They also argue that the core competences should not be tied to a specific range of applications such as an existing product range. They should be extendable beyond their current application so give the firm a sustainable competitive advantage over time. Kay (1993) identified three areas of core competence. First, architecture refers to relationships both within and around the firm, including those with customers and suppliers. A key component of architecture is information exchange between the various parties. Second, reputation refers to the quality of a firm's goods and services and for such qualities as the dependability and speed of delivery. The third area of core competence is innovative ability, defined as the ability to develop products and processes to gain competitive advantage through differentiation. The notion of core competences enables a firm to focus its competitive advantage around its resources rather than focusing exclusively on the market. However, it is important that such core competences are difficult to copy by a rival firm, otherwise the basis for competitive advantage is eroded. Toyota maintained a competitive advantage for many years despite attempts by its competitors, both inside and outside Japan, to copy its production system. While some core competences do lend themselves to measurement and analysis, as with stockholding and retention, many others are vague and may only be assessed subjectively. Value chain: describes the full range of activities which are required to bring a product or service from conception, through the intermediary phases of production, delivery to final customers and final disposal after use. The concepts owes much to the work of Porter (1985) who identified five primary activities which contribute towards adding value for the customer: • Inbound logistics refers to those activities concerned with the receiving, storage and handling of goods from suppliers and transporting them within the organization. • Operations transform the goods into the final product and may comprise a number of different stages, extending across a number of specialist departments. For example, in a brewery there might be a specialist bottling facility. • Outbound logistics deal with storing finished items and distributing them to customers. In the case of services it is concerned with all those processes involved in bringing the service to the customer or the customer to the service. • Marketing and sales help to identify customer needs and, through advertising and promotion, make potential customers aware of products and services. • Services cover all those processes involved in before and after sales activities such as requirements planning and the provision of customer help lines. The five primary activities are supported by four other types of activity, referred to by Porter is support activities: • Procurement/Purchasing deals with those activities engaged in the acquisition of the resource inputs to the primary activities. In manufacturing this can occur at a number of stages. Buyers are responsible for obtaining dependable supplies at high quality and at the best possible price. The transport department is responsible for ensuring the most cost effective delivery of goods to customers, which may involve subcontracting to another firm, or using the post or rail services. This is something that many large organizations outsource. • Technology development occurs in all primary activities. It covers product and process development, which can occur in inbound and outbound logistics as much as in operations. It also involves the development of know how throughout the organization and the transfer of such know how via training. • Human resource management is concerned with staffing planning, recruitment, selection, training and reward systems which support all activities. • Firm infrastructure relates to the systems used throughout the organization. It can include materials planning, logistics, operations planning, finance and budget systems as well as the overall strategic plan. This includes (critically these days), the IT infrastructure that under-pins the operation of the business. The value chain has drawn criticism for focusing attention on the improvement of existing resources and the linkages between them, when a more radical approach may be required. However, analysis of the value chain can draw attention to weaknesses M the resource profile and the way the primary activities link together. The concept supports the Business in Context model by viewing the firm's activities as a set of interactions. While the focus is upon internal of arrangements, the model incorporates elements that mast outside the internal system of the organization, namely suppliers and customers. In doing to it raises the impracticality of defining elements purely in terms of internal or external. Portfolio analysis: a technique that can be used by firms operating in number of markets and or with a number of different products. The technique enables management to assess the relative attractiveness of products and markets to assist decision making on future directions and resource allocation. There are several methods and models available. the most lemma of which are probably the Boston Consulting Group matrix and the General Electric lousiness screen.

Use the genetic strategies matrix to compare business-level strategies

Strategic choices are cost leader when a firm aims to compete on price rather than, say, advanced features or excellent customer service. Differentiation. Or a focus strategy on a narrow market segment.

Illustrate the alternative ways In which managers deliver a strategy

Strategy can be delivered by internal (sometimes called organic) development by rear-ranging the way resources are deployed. Alternatives include acquiring or merging with another company, or by forming alliances and joint ventures.

Show how ideas from the chapter add to your understanding of the integrating themes

- Since entrepreneurs typically lack the resources they need, a common solution is to form alliances with other businesses. - Sustainable performance in the environmental sense only works In the economic sense if It is part of the organisation's strategy: i.e., that it makes business sense as well as environmental sense. There are many examples of companies that have done this. - International expansion and diversification strategies often fall, probably when managers underestimate the complexity of oversees operations. - Pye (2002) found that directors were more likely to be taking responsibility for strategic direction of the business as well as for their narrower governance responsibilities - emphasising the benefits of the process as much as the final outcomes.

Use simple models assess the general immediate competitive environments of an organization and demonstrate the limitations of such models.

General environment: the state of the economy, the labour market, changing technology, government policy, and social and cultural influences Immediate competitive environment: Factors that have direct bearing on the firm's competitive position i.e. porter's five forces model. An analysis of both these environments will enable management to arrive at some assessment of the opportunities and threats facing the organization The strength of a model like Porter's is that it focuses on the immediate operating environment of the business and avoids prescription by enabling managers to examine the forces acting upon their firm. Porter also intended managers to consider how the forces might change over time. The five forces model has been very influential. However, a number of questions have been raised: • The analysis depends upon a level of knowledge about competitors, which may not be so easy to obtain, as with competing supermarkets. • As we have seen earlier in the chapter, the model portrays a rational approach to strategy that may not match reality. • The model sees customers as one of several factors when several current approaches elevate the customer to a more central role. • Potter also views buyer-supplier relationships in terms of power and that they pose a threat, when, in some industries, the prevailing trend is towards greater partnership and long term relations. • The model assumes that once the analysis has been made, an appropriate strategy can be found. We have already noted that strategy is much more complex.

Explain why the process, content and context of strategy matters, and how the issues vary between sectors

Process: People, usually senior managers, talk and email and argue about present and future strategy —their strategy process. In this sense, strategy is something that people do (Johnson et al. 2007). Understanding this perspective implies finding out who creates strategy, what information they gather, what tools they uw and how they organise it. Content: The current strategy is the starting point of, and a new one emerges from, the strategy process—so in this sense strategy is something that organisations have (Johnson et al. 2007). Something stimulates managers to question current strategy, such as a hostile takeover bid or an idea for a new service. They then try to identify what can give their enterprise an edge, to redefine their competitive strategy and support it with suitable resources. This includes deciding what to offer, to which markets, using what resources. Context: The organisation's context affects the issues those managing strategy will face. Not-for-profit (NFP) or public-sector organisations share some characteristics with commercial businesses they need to attract and retain enthusiastic and capable staff) and differ in others (their performance criteria and sources of funding). Whatever their context, strategists hope to enhance performance by clarifying and unifying purpose, linking short-term actions to long-term goals and measuring performance.

Use the product/market matrix to compare corporate-level strategies

Strategy can focus on existing or new products, and existing or new markets. This gives four broad directions, with options in each - such as market penetration, product development, market development or diversification.

Illustrate the links between strategy, goals. structure, ownership. size and culture at the level of the firm.

The goals of an organization set targets for strategy to follow. The process of goal setting and strategy formulation is greatly influenced by ownership variables. Structure follows strategy. Such considerations of structure are inevitably linked to size. An important element in the core management strategies is the creation of an organizational culture, with an emphasis upon shared values

Compare planning, learning and political views on strategy

Table 8.3. Planning: Is appropriate in stable and predictable environments; while the emergent approach more accurately describes the process in volatile environments, since strategy rarely unfolds as intended in complex, changing and ambiguous situations. A political perspective may be a more accurate way of representing the process when it involves the interests of powerful stakeholders. It is rarely an objectively rational activity, implying that strategy models are not prescriptive but rather frameworks for guidance. Learning: Mintzberg (1994) regards formal strategic planning as a system developed in stable times to suit the central bureaucracies typical of Western manufacturing industry in the mid-twentieth century. It worked well then, but rather less so when events require a quick response. He therefore distinguished between intended and emergent strategy (Figure 8.2). This shows an intended plan, some parts of which are realised (deliberate strategy) — but also that some parts are not (unrealised strategy). Other moves or investments occur that were not intended when the plan was made—local managers deal with local problems, and their solutions become established as the way to do things. Mintzberg describes these as 'emergent strategies', which result from: actions taken one by one, which converged In time In some sort of consistency or pattern. (p. 25) The realised strategy is a combination of surviving parrs of the intended strategy, and of the emergent strategy. Political view: While the learning view reflects the logic that planning can never give complete foresight, the political view adds dimensions of power, conflict and ambiguity. Drawing on his experience in the public sector, Lindblom (1959) drew attention to political influences on strategy, especially as value judgements influence policy, and how stakeholders conflicting interests frustrate attempts to agree strategy. He concluded that strategic management is not scientific, comprehensive or rational, but an iterative, incremental process with much bargaining between the players. He notes 'successive limited comparisons' whereby 'new' strategy is made by marginal adjustments to existing strategy that are politically acceptable! Policy is not made once and for all; it is made and remade endlessly... [through] ... a process of successive approximation to some desired objectives.

Strategy

The determination of 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 (Chandler, 1962) It comprises of a vision, mission statement, goals, strategies and objectives • Corporate strategy deals with decisions about the organization as a whole. In diversified multi-product companies, it is the overall strategy that covers all activities. The corporate strategy of a firm like Samsung or a university such as University College London will give direction and aim to add value to the entire organization. Corporate level decisions can include whether to enter a new market, whether to expand the organization by acquisition and decisions about the total range of products and services. • Business strategy deals with decisions that are linked to specific products and markets that can be differentiated from other products and markets in the same organization. Decisions at this level are about competing in a specific product-market. Such strategies can apply to stand-alone businesses as strategic business units (SBUs). Business strategies in Samsung would apply to specific product areas such as televisions or mobile phones or even specific geographic markets. In University College, each department such as dentistry or management would have its own business strategy. Obviously, business strategies should relate to the overall corporate strategy. • Functional strategy is concerned with the various activities of business; innovation, operations, marketing, HRM, and finance and accounting. The functional strategies of each of these activities determine how they will deliver the corporate and business strategies.

Explain the strengths and weaknesses of the various approaches to strategy and how they interact.

The rational approach: This is the classical approach to strategy and is typified by the work of Ansoff (1968), Andrews (1971) and Porter (1980, 1985). Strategy formulation is portrayed as a scientific and rational process, assisted by techniques such as technological forecasting, portfolio analysis, environmental impact analysis and sensitivity analysis. The aim of such techniques is generally profit maximization. The rational approach owes much to the development of contingency theory. Analyses are made of a firm's environment to assess likely opportunities and threats, and of its internal resource position to identify strengths and weaknesses. This process is sometimes referred to as SWOT analysis There are disadvantages with this kind of approach: • It assumes that information is readily available to the strategist and an accurate assessment can be made of its likely effect on the firm. In reality, knowledge is often imperfect. • The environment of modern business is often complex and dynamic. This makes assessment of opportunities and threats difficult. • Complexity and lack of information do not just apply to the environment. Managers can often be unaware of the real strengths and weaknesses of their own organization. • In scanning the environment, managers are often collecting the same information as rival firms. Asa result, similar strategies occur and there may be a lack of truly innovative solutions. The focus is on the environment rather than on the creation of distinctive competences and on the needs of the individual customer. • The process of making decisions becomes both subjective and political, attracting the criticism of being pseudo-science. Despite these criticisms, the rational approach can be useful in that it collects relevant data, it can give direction, it has face validity and, as Whittington (2000) argues, it can serve as a form of group therapy. The approach is popular and is the basis of many texts. It can be a useful starting point, provided managers are aware of its limitations. The flexible approach: The complexity and volatility of the environment may mean that a detailed SWOT analysis is both difficult and inappropriate. Profit maximization may be an inappropriate strategy. The environment may be changing so rapidly that many of the historical and current data are meaningless. This kind of situation led the oil companies, such as Shell, to adopt a different approach to strategy formulation known as scenario planning. The approach recognizes that uncertainty can never be eliminated, but it can be reduced by plotting scenarios, each responding to different visions of the future. Managements are therefore prepared for a number of possible changes that may occur. Writers such as Williamson (1991) argue that, under such conditions, the best that managers can hope for is to maximize the chances of survival by cutting costs to become more efficient (survival of the fittest) and by playing the market. A good example of the latter is offered by Whittington (2000) citing Sony, who, in the 1980s, produced 160 different models of the Walkman for the US, but kept only about 20 models on the market at any one time (survival of the most popular). Others argue that this approach is wasteful and that attention should be paid to understanding the needs and want of the consumer, the difficulty here is that the consumer may not know what they need and want until it becomes available. Sony's initial estimates for the size of the Walkman market was a few thousand, ultimately the device changed the way the world listened to music and millions of them were sold globally. The creative approach: This takes the flexible approach one step further by stressing the importance of imagination in the strategic process. The idea that such an approach to strategy formulation is actually better has been taken up by management writers in the 1980s. Peters and Waterman believe that the more formal approaches to strategy formulation with the emphasis on complex environmental and organizational analysis can lead to 'paralysis through analysis' (Peters and Waterman, 1982, p. 31). Managers using the rational approach to make strategic decisions in a specific product market will invariably have access to precisely the same information as their competitors. The resulting strategies are often too conservative, insufficiently adventurous and are similar to those of competitor companies and as a result too slow to recognize and respond to environmental change. A creative approach offers more chance of achieving competitive advantage. Moreover, the more complex and changing the business environment and the more difficult the problems facing managers, the more creative they need to be. The behavioural approach: There is strong support for the view that strategy formulation is far from being a rational, logical process (Cyert and March, 1963; Mintzberg and Quinn, 1991). Instead, strategic choice is the product of the organization's dominant coalition, invariably senior management, and is based upon its values, ideologies and personalities, and upon organizational power and politics. The process invariably involves negotiation between senior management and other groups. The most overt of these processes take place at shareholders' meetings. However, the most significant negotiations generally take place between competing factions within management itself, over such issues as the allocation of scarce resources, and are consequently much more difficult to observe. Behavioural analyses of the strategy formulation see management values and objectives as more than individual inputs to the planning process. They influence the way the environment is perceived and hence the choice of opportunities and threats and the assessment of strengths and weaknesses. Because of the bargaining processes involved, the outcomes of the behavioural approach to strategy are likely to be satisfactory rather than seeking to maximize the result. The Incremental or emergent approach: This approach has much in common with the behavioural approach. Strategy is not a carefully prepared plan with clear goals, but a process by which managers in the organization gradually come to terms with the environment. Limited objectives are constantly modified in the light of experience and through the process of negotiation between interested parties. As a consequence, strategies are continually being changed. The incremental approach has been put forward as a more realistic and more effective method of dealing with complex and changing situations. The concept originated from the work of Lindblom (1959) in an article appropriately titled 'The science of muddling through'. Although his work was mainly concerned with large public sector organizations such as hospitals and universities, there are strong parallels with larger private sector firms. Mintzberg (1990) has sympathy with this perspective and sees many strategies emerging as opposed to being consciously planned. This gives rise to notions of strategic learning as management builds up a repertoire of strategies based on what has worked in the past while attempting to deal with the four parameters that are said to govern modern business: uncertainty, ambiguity, paradox and chaos (Colonne, 2017). Absence of strategy: The view that strategy formulation isn't a conscious management activity. There may be several reasons for this. In some cases managers may have a simple view of what the organization does. If it produces good quality, reliable products that sell and make profit then there may be no incentive to develop a strategy to do things differently. Porter (1996) argued that apart from Sony, Canon and Sega, most Japanese firms lacked a strategy beyond firms imitating and emulating each other. Japanese firms had grown in global markets on the basis of operational efficiency through such approaches as lean production. However, as global competitors adopted similar methods, the competitive advantage of the Japanese was eroded. Porter's view was that such firms had no unique strategic position. It may be the case that managers are complacent and reluctant to rock the boat or they may have myopic vision and hence a limited view of options (see Levitt, 1960, and a discussion of the concept of 'marketing myopia' in Chapter 12). It may be that managers are too distracted by the daily business of survival and see themselves too weighed down by resource constraints to contemplate strategic options. In the last scenario, management becomes an endless round of firefighting with no time for strategic contemplation. Perhaps we should also consider whether Porter's view is a product of cultural imperialism and the short termism that dominates the US business landscape. The various approaches we have identified reveal a mixture of rational and non-rational approaches to the formulation of management strategy. Nevertheless, strategies are more than management hunches played out in an information vacuum. More likely, managers select what information is appropriate for their purposes, and this invariably involves consideration of both environmental and organizational variables. Management values and organization politics are important not only in the choice of strategy but in the selection of information upon which that strategy is based. All six of the approaches we have identified may operate together in the same firm. The following illustration reveals this mixed approach to strategic decision making.

Explain how tools for external and Internal analysis help managers develop strategy

• External analysis can use Porter's five forces model and the PESTEL framework to identify relevant factors. • Internally, managers can use the value chain to analyse their current organisation. • The two sets of information can be combined in a SWOT diagram.

Summarise evidence on how managers develop strategies

• The evidence is accumulating that companies in turbulent environments follow a strategy process that is relatively informal, with shorter planning meetings and greater responsibility placed on line managers to develop strategy rather than on specialist planners. • Formulating strategy and designing the organisation appear to be done as closely linked practical activities. • Sull uses the 'strategy loop' to describe how managers continually develop and renew their strategy.