In the field of
management
Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a Government agency, government body. It is the art and science of managing resources of the business.
Management includ ...
, strategic management involves the formulation and implementation of the major goals and initiatives taken by an
organization
An organization or organisation (English in the Commonwealth of Nations, Commonwealth English; American and British English spelling differences#-ise, -ize (-isation, -ization), see spelling differences), is an legal entity, entity—such as ...
's managers on behalf of stakeholders, based on consideration of
resources
Resource refers to all the materials available in our environment which are technologically accessible, economically feasible and culturally sustainable and help us to satisfy our needs and wants. Resources can broadly be classified upon their av ...
and an assessment of the internal and external
environments in which the organization operates.
[qn, date=June 2018] Strategic management provides overall direction to an enterprise and involves specifying the organization's
objective
Objective may refer to:
* Objective (optics), an element in a camera or microscope
* ''The Objective'', a 2008 science fiction horror film
* Objective pronoun, a personal pronoun that is used as a grammatical object
* Objective Productions, a Brit ...
s, developing
policies and
plan
A plan is typically any diagram or list of steps with details of timing and resources, used to achieve an objective to do something. It is commonly understood as a temporal set of intended actions through which one expects to achieve a goal.
...
s to achieve those 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 in the context of complex environments and competitive dynamics.
Strategic management is not static in nature; the models can include a
feedback loop
Feedback occurs when outputs of a system are routed back as inputs as part of a chain of cause-and-effect that forms a circuit or loop. The system can then be said to ''feed back'' into itself. The notion of cause-and-effect has to be handled c ...
to monitor execution and to inform the next round of planning.
Michael Porter
Michael Eugene Porter (born May 23, 1947) is an American academic known for his theories on economics, business strategy, and social causes. He is the Bishop William Lawrence University Professor at Harvard Business School, and he was one of t ...
identifies three principles underlying strategy:
* creating a "
unique and valuable
position">arketposition"
* making trade-offs by choosing "what not to do"
* creating "fit" by aligning company activities with one another to support the chosen strategy
Corporate strategy involves answering a key question from a
portfolio
Portfolio may refer to:
Objects
* Portfolio (briefcase), a type of briefcase
Collections
* Portfolio (finance), a collection of assets held by an institution or a private individual
* Artist's portfolio, a sample of an artist's work or a c ...
perspective: "What business should we be in?" Business strategy involves answering the question: "How shall we compete in this business?"
Management theory
Management science (or managerial science) is a wide and interdisciplinary study of solving complex problems and making strategic decisions as it pertains to institutions, corporations, governments and other types of organizational entities. It is ...
and practice often make a distinction between strategic management and operational management, with
operational management concerned primarily with improving
efficiency and controlling costs within the boundaries set by the organization's strategy.
Application
Strategy is defined as "the determination of the basic long-term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals."
[Chandler, Alfred ''Strategy and Structure: Chapters in the history of industrial enterprise'', Doubleday, New York, 1962.] Strategies are established to set direction, focus effort, define or clarify the organization, and provide consistency or guidance in response to the environment.
Strategic management involves the related concepts of
strategic planning and
strategic thinking
Strategic thinking is a mental or thinking process applied by an individual in the context of achieving a goal or set of goals. As a cognitive activity, it produces thought.
When applied in an organizational strategic management process, strate ...
. Strategic planning is analytical in nature and refers to formalized procedures to produce the data and analyses used as inputs for strategic thinking, which synthesizes the data resulting in the strategy.
Strategic planning may also refer to control mechanisms used to implement the strategy once it is determined. In other words, strategic planning happens ''around'' the strategic thinking or strategy making activity.
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
Iteration is the repetition of a process in order to generate a (possibly unbounded) sequence of outcomes. Each repetition of the process is a single iteration, and the outcome of each iteration is then the starting point of the next iteration. ...
and each provides input for the other.
Formulation
''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, technological, legal and environmental landscape (
PESTLE
Mortar and pestle is a set of two simple tools used from the Stone Age to the present day to prepare ingredients or substances by crushing and grinding them into a fine paste or powder in the kitchen, laboratory, and pharmacy. The ''mortar'' () ...
);
*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 (
Porter's 5 forces); 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 capabilities 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
Value or values may refer to:
Ethics and social
* Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them
** Values (Western philosophy) expands the notion of value beyo ...
for investors?
The answers to these and many other strategic questions result in the organization's strategy and a series of specific short-term and long-term goals or objectives and related measures.
Implementation
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
Marketing management is the organizational discipline which focuses on the practical application of marketing orientation, techniques and methods inside enterprises and organizations and on the management of a firm's marketing resources and ac ...
," which take over once strategic management decisions are implemented.
Definitions
In 1988,
Henry Mintzberg
Henry Mintzberg (born September 2, 1939) is a Canadian academic and author on business and management. He is currently the Cleghorn Professor of Management Studies at the Desautels Faculty of Management of McGill University in Montreal, Quebec, ...
described the many different definitions and perspectives on strategy reflected in both academic research and in practice. 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 directed course of action to achieve an ''intended'' set of goals; similar to the strategic planning concept;
* Strategy as pattern – a consistent pattern of past behavior, with a strategy ''realized'' over time rather than planned or ''intended''. Where the realized pattern was different from the intent, he referred to the strategy as ''emergent'';
* Strategy as position – locating brands, products, or companies within the market, based on the conceptual framework of consumers or other stakeholders; a strategy determined primarily by factors outside the firm;
* Strategy as ploy – a specific maneuver intended to outwit a competitor; and
* Strategy as perspective – executing strategy based on a "theory of the business" or natural extension of the mindset or ideological perspective of the organization.
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".
Michael Porter
Michael Eugene Porter (born May 23, 1947) is an American academic known for his theories on economics, business strategy, and social causes. He is the Bishop William Lawrence University Professor at Harvard Business School, and he was one of t ...
defined strategy in 1980 as the "...broad formula for how a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals" and the "...combination of the ''ends'' (goals) for which the firm is striving and the ''means'' (policies) by which it is seeking to get there." He continued that: "The essence of formulating competitive strategy is relating a company to its environment."
Some complexity theorists define strategy as the unfolding of the internal and external aspects of the organization that results in actions in a socio-economic context.
Michael D. Watkins claimed in 2007 that if mission/goals answer the 'what' question, or if vision answers the 'why' questions, then strategy provides answers to the 'how' question of business management.
Historical development
Origins
The strategic management discipline originated in the 1950s and 1960s. Among the numerous early contributors, the most influential were
Peter Drucker
Peter Ferdinand Drucker (; ; November 19, 1909 – November 11, 2005) was an Austrian-American management consultant, educator, and author, whose writings contributed to the philosophical and practical foundations of the modern business co ...
,
Philip Selznick Philip Selznick (January 8, 1919 – June 12, 2010) was professor of sociology and law at the University of California, Berkeley. A noted author in organizational theory, sociology of law and public administration, Selznick's work was groundbreakin ...
, Alfred Chandler,
Igor Ansoff
Harry Igor Ansoff (, 12 December 1918– 14 July 2002) was a Russian American applied mathematician and business manager. He is known as one of the fathers of strategic management.
Biography
Early life
Igor Ansoff was born in Vladivostok, Rus ...
, and Bruce Henderson.
The discipline draws from earlier thinking and texts on '
strategy' dating back thousands of years. Prior to 1960, the term "strategy" was primarily used regarding war and politics, not business.
Many companies built
strategic planning functions to develop and execute the formulation and implementation processes during the 1960s.
[Henry Mintzberg-The Fall and Rise of Strategic Planning-Harvard Business Review-January 1994](_blank)
/ref>
Peter Drucker
Peter Ferdinand Drucker (; ; November 19, 1909 – November 11, 2005) was an Austrian-American management consultant, educator, and author, whose writings contributed to the philosophical and practical foundations of the modern business co ...
was a prolific management theorist and author of dozens of management books, with a career spanning five decades. He addressed fundamental strategic questions in a 1954 book ''The Practice of Management'' writing: "... the first responsibility of top management is to ask the question 'what is our business?' and to make sure it is carefully studied and correctly answered." He wrote that the answer was determined by the customer. He recommended eight areas where objectives should be set, such as market standing, innovation, productivity, physical and financial resources, worker performance and attitude, profitability, manager performance and development, and public responsibility.
In 1957, Philip Selznick Philip Selznick (January 8, 1919 – June 12, 2010) was professor of sociology and law at the University of California, Berkeley. A noted author in organizational theory, sociology of law and public administration, Selznick's work was groundbreakin ...
initially used the term "distinctive competence" in referring to how the Navy was attempting to differentiate itself from the other services. He also formalized the idea of matching the organization's internal factors with external environmental circumstances. This core idea was developed further by Kenneth R. Andrews in 1963 into what we now call SWOT analysis
SWOT analysis (or SWOT matrix) is a strategic planning and strategic management technique used to help a person or organization identify Strengths, Weaknesses, Opportunities, and Threats related to business competition or project planning. It ...
, in which the strengths and weaknesses of the firm are assessed in light of the opportunities and threats in the business environment.
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." Chandler wrote that: "''Strategy is the determination of the basic long-term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals''."
Igor Ansoff
Harry Igor Ansoff (, 12 December 1918– 14 July 2002) was a Russian American applied mathematician and business manager. He is known as one of the fathers of strategic management.
Biography
Early life
Igor Ansoff was born in Vladivostok, Rus ...
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
In microeconomics, management and international political economy, vertical integration is a term that describes the arrangement in which the supply chain of a company is integrated and owned by that company. Usually each member of the suppl ...
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
In management literature, gap analysis involves the comparison of actual performance with potential or desired performance. If an organization does not make the best use of current resources, or forgoes investment in capital or technology, it ...
to clarify the gap between the current reality and the goals and to develop what he called "gap reducing actions". Ansoff wrote that strategic management had three parts: strategic planning; the skill of a firm in converting its plans into reality; and the skill of a firm in managing its own internal resistance to change.
Bruce Henderson
Bruce Doolin Henderson (April 30, 1915 – July 20, 1992) was an American businessman and management expert. He founded Boston Consulting Group (BCG) in 1963 in Boston, Massachusetts and headed the firm as the president and CEO until 1980. He c ...
, founder of the Boston Consulting Group
Boston Consulting Group, Inc. (BCG) is an American global management consulting firm founded in 1963 and headquartered in Boston, Massachusetts. It is one of the Big Three (or MBB, the world’s three largest management consulting firms by re ...
, wrote about the concept of the experience curve in 1968, following initial work begun in 1965. The experience curve refers to a hypothesis that unit production costs decline by 20–30% every time cumulative production doubles. This supported the argument for achieving higher market share and economies of scale
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
.
Porter wrote in 1980 that companies have to make choices about their scope and the type of competitive advantage they seek to achieve, whether lower cost or differentiation. The idea of strategy targeting particular industries and customers (i.e., competitive positions) with a differentiated offering was a departure from the experience-curve influenced strategy paradigm, which was focused on larger scale and lower cost. Porter revised the strategy paradigm again in 1985, writing that superior performance of the processes and activities performed by organizations as part of their value chain
A value chain is a progression of activities that a firm operating in a specific industry performs in order to deliver a valuable product (i.e., good and/or service) to the end customer. The concept comes through business management and was fir ...
is the foundation of competitive advantage, thereby outlining a process view of strategy.
Change in focus from production to marketing
The direction of strategic research also paralleled a major paradigm shift in how companies competed, specifically a shift from the production focus to market focus. The prevailing concept in strategy up to the 1950s was to create a product
Product may refer to:
Business
* Product (business), an item that serves as a solution to a specific consumer problem.
* Product (project management), a deliverable or set of deliverables that contribute to a business solution
Mathematics
* Produ ...
of high technical quality. If you created a product that worked well and was durable, it was assumed you would have no difficulty profiting. This was called the production orientation
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
. Henry Ford
Henry Ford (July 30, 1863 – April 7, 1947) was an American industrialist, business magnate, founder of the Ford Motor Company, and chief developer of the assembly line technique of mass production. By creating the first automobile that ...
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 F Drucker wrote in 1954 that it was the customer who defined what business the organization was in. In 1960 Theodore Levitt
Theodore Levitt (March 1, 1925 – June 28, 2006) was a German-born American economist and a professor at the Harvard Business School. He was editor of the ''Harvard Business Review'', noted for increasing the Review's circulation and popularizi ...
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
Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...
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.
Nature of strategy
In 1985, Ellen Earle-Chaffee summarized what she thought were the main elements of strategic management theory where consensus generally existed as of the 1970s, writing that strategic management:
* Involves adapting the organization to its business environment;
* Is fluid and complex. Change creates novel combinations of circumstances requiring unstructured non-repetitive responses;
* Affects the entire organization by providing direction;
* Involves both strategy formulation processes and also implementation of the content of the strategy;
* May be planned (intended) and unplanned (emergent);
* Is done at several levels: overall corporate strategy, and individual business strategies; and
* Involves both conceptual and analytical thought processes.
Chaffee further wrote that research up to that point covered three models of strategy, which were not mutually exclusive:
#Linear strategy: A planned determination of goals, initiatives, and allocation of resources, along the lines of the Chandler definition above. This is most consistent with strategic planning approaches and may have a long planning horizon. The strategist "deals with" the environment but it is not the central concern.
#Adaptive strategy: In this model, the organization's goals and activities are primarily concerned with adaptation to the environment, analogous to a biological organism. The need for continuous adaption reduces or eliminates the planning window. There is more focus on means (resource mobilization to address the environment) rather than ends (goals). Strategy is less centralized than in the linear model.
#Interpretive strategy: A more recent and less developed model than the linear and adaptive models, interpretive strategy is concerned with "orienting metaphors constructed for the purpose of conceptualizing and guiding individual attitudes or organizational participants." The aim of interpretive strategy is legitimacy or credibility in the mind of stakeholders. It places emphasis on symbols and language to influence the minds of customers, rather than the physical product of the organization.
Concepts and frameworks
The progress of strategy since 1960 can be charted by a variety of frameworks and concepts introduced by management consultants and academics. These reflect an increased focus on cost, competition and customers. These "3 Cs" were illuminated by much more robust empirical analysis at ever-more granular levels of detail, as industries and organizations were disaggregated into business units, activities, processes, and individuals in a search for sources of competitive advantage.
SWOT analysis
By the 1960s, the capstone business policy course at the Harvard Business School included the concept of matching the distinctive competence of a company (its internal strengths and weaknesses) with its environment (external opportunities and threats) in the context of its objectives. This framework came to be known by the acronym SWOT and was "a major step forward in bringing explicitly competitive thinking to bear on questions of strategy". Kenneth R. Andrews helped popularize the framework via a 1963 conference and it remains commonly used in practice.
Experience curve
The experience curve was developed by the Boston Consulting Group
Boston Consulting Group, Inc. (BCG) is an American global management consulting firm founded in 1963 and headquartered in Boston, Massachusetts. It is one of the Big Three (or MBB, the world’s three largest management consulting firms by re ...
in 1966. It reflects a hypothesis that total per unit costs decline systematically by as much as 15–25% every time cumulative production (i.e., "experience") doubles. It has been empirically confirmed by some firms at various points in their history. Costs decline due to a variety of factors, such as the learning curve
A learning curve is a graphical representation of the relationship between how proficient people are at a task and the amount of experience they have. Proficiency (measured on the vertical axis) usually increases with increased experience (the ...
, substitution of labor for capital (automation), and technological sophistication. Author Walter Kiechel wrote that it reflected several insights, including:
*A company can always improve its cost structure;
*Competitors have varying cost positions based on their experience;
*Firms could achieve lower costs through higher market share, attaining a competitive advantage; and
*An increased focus on empirical analysis of costs and processes, a concept which author Kiechel refers to as "Greater Taylorism
Scientific management is a theory of management that analyzes and synthesizes workflows. Its main objective is improving economic efficiency, especially labor productivity. It was one of the earliest attempts to apply science to the engineeri ...
".
Kiechel wrote in 2010: "The experience curve was, simply, the most important concept in launching the strategy revolution...with the experience curve, the strategy revolution began to insinuate an acute awareness of competition into the corporate consciousness." Prior to the 1960s, the word competition rarely appeared in the most prominent management literature; U.S. companies then faced considerably less competition and did not focus on performance relative to peers. Further, the experience curve provided a basis for the retail sale of business ideas, helping drive the management consulting
industry.
Importance-Performance Matrix
Completion of an ''Importance-Performance Matrix'' forms "a crucial stage in the formulation of operations strategy",[University of Cambridge]
Importance-Performance Matrix
Institute for Manufacturing, Department of Engineering, accessed 9 September 2022, referring to an original article: Nigel Slack, ''The Importance‐Performance Matrix as a Determinant of Improvement Priority'', International Journal of Operations & Production Management, Vol. 14 No. 5, pp. 59-75 and may be considered a "simple, yet useful, method for simultaneously considering both the importance and performance dimensions when evaluating or defining strategy". Notes on this subject from the Department of Engineering at the University of Cambridge
The University of Cambridge is a public collegiate research university in Cambridge, England. Founded in 1209 and granted a royal charter by Henry III in 1231, Cambridge is the world's third oldest surviving university and one of its most pr ...
suggest that a binary matrix
Matrix most commonly refers to:
* ''The Matrix'' (franchise), an American media franchise
** ''The Matrix'', a 1999 science-fiction action film
** "The Matrix", a fictional setting, a virtual reality environment, within ''The Matrix'' (franchis ...
may be used "but may be found too crude", and nine point scales on both the importance and performance axes are recommended. An importance scale could be labelled from "the main thrust of competitiveness" to "never considered by customers and never likely to do so", and performance can be segmented into "better than", "the same as", and "worse than" the company's competitors. The highest urgency would than be directed to the most important areas where performance is poorer than competitors.
The technique is also used in relation to marketing
Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...
, where the variable "importance" is related to buyers' perception of important attributes of a product: for attributes which might be considered important to buyers, both their perceived importance and their performance are assessed.
Corporate strategy and portfolio theory
The concept of the corporation as a portfolio of business units, with each plotted graphically based on its market share (a measure of its competitive position relative to its peers) and industry growth rate (a measure of industry attractiveness), was summarized in the growth–share matrix
The growth–share matrix (aka the product portfolio matrix, Boston Box, BCG-matrix, Boston matrix, Boston Consulting Group analysis, portfolio diagram) is a chart created in a collaborative effort by BCG employees: Alan Zakon first sketched it ...
developed by the Boston Consulting Group around 1970. By 1979, one study estimated that 45% of the Fortune 500 companies were using some variation of the matrix in their strategic planning. This framework helped companies decide where to invest their resources (i.e., in their high market share, high growth businesses) and which businesses to divest (i.e., low market share, low growth businesses.) The growth-share matrix was followed by G.E. multi factoral model, developed by General Electric
General Electric Company (GE) is an American multinational conglomerate founded in 1892, and incorporated in New York state and headquartered in Boston. The company operated in sectors including healthcare, aviation, power, renewable en ...
.
Companies continued to diversify as conglomerates until the 1980s, when deregulation and a less restrictive antitrust environment led to the view that a portfolio of operating divisions in different industries was worth more as many independent companies, leading to the breakup of many conglomerates. While the popularity of portfolio theory
Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversificatio ...
has waxed and waned, the key dimensions considered (industry attractiveness and competitive position) remain central to strategy.
In response to the evident problems of "over diversification", C. K. Prahalad and Gary Hamel
Gary P. Hamel (born 1954) is an American management consultant. He is a founder of Strategos, an international management consulting firm based in Chicago.
Biography
Hamel graduated from Andrews University in 1975, and from Ross School of Bus ...
suggested that companies should build portfolios of businesses around shared technical or operating competencies, and should develop structures and processes to enhance their core competencies.
Michael Porter also addressed the issue of the appropriate level of diversification
Diversification may refer to:
Biology and agriculture
* Genetic divergence, emergence of subpopulations that have accumulated independent genetic changes
* Agricultural diversification involves the re-allocation of some of a farm's resources to ...
. In 1987, he argued that corporate strategy involves two questions: 1) What business should the corporation be in? and 2) How should the corporate office manage its business units? He mentioned four concepts of corporate strategy each of which suggest a certain type of portfolio and a certain role for the corporate office; the latter three can be used together:[Harvard Business Review-Michael Porter-From Competitive Advantage to Corporate Strategy-May 1987](_blank)
/ref>
#Portfolio theory: A strategy based primarily on diversification through acquisition. The corporation shifts resources among the units and monitors the performance of each business unit and its leaders. Each unit generally runs autonomously, with limited interference from the corporate center provided goals are met.
#Restructuring: The corporate office acquires then actively intervenes in a business where it detects potential, often by replacing management and implementing a new business strategy.
#Transferring skills: Important managerial skills and organizational capability are essentially spread to multiple businesses. The skills must be necessary to competitive advantage.
#Sharing activities: Ability of the combined corporation to leverage centralized functions, such as sales, finance, etc. thereby reducing costs.
Building on Porter's ideas, Michael Goold, Andrew Campbell and Marcus Alexander developed the concept of "parenting advantage" to be applied at the corporate level, as a parallel to the concept of "competitive advantage" applied at the business level. Parent companies, they argued, should aim to "add more value" to their portfolio of businesses than rivals. If they succeed, they have a parenting advantage. The right level of diversification depends, therefore, on the ability of the parent company to add value in comparison to others. Different parent companies with different skills should expect to have different portfolios. See Corporate Level Strategy 1995 and Strategy for the Corporate Level 2014
Competitive advantage
In 1980, Porter defined the two types of competitive advantage an organization can achieve relative to its rivals: lower cost or differentiation. This advantage derives from attribute(s) that allow an organization to outperform its competition, such as superior market position, skills, or resources. In Porter's view, strategic management should be concerned with building and sustaining competitive advantage.
Industry structure and profitability
Porter developed a framework for analyzing the profitability of industries and how those profits are divided among the participants in 1980. In five forces analysis
Porter's Five Forces Framework is a method of analysing the operating environment of a competition of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, ...
he identified the forces that shape the industry structure or 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. These forces affect the organization's ability to raise its prices as well as the costs of inputs (such as raw materials) for its processes.
The five forces framework helps describe how a firm can use these forces to obtain a sustainable competitive advantage, either lower cost or differentiation. Companies can maximize their profitability by competing in industries with favorable structure. Competitors can take steps to grow the overall profitability of the industry, or to take profit away from other parts of the industry structure. Porter modified Chandler's dictum about structure following strategy by introducing a second level of structure: while organizational structure
An organizational structure defines how activities such as task allocation, coordination, and supervision are directed toward the achievement of organizational aims.
Organizational structure affects organizational action and provides the foundat ...
follows strategy, it in turn follows industry structure.
Generic competitive strategies
Porter wrote in 1980 that strategy target either cost leadership In business strategy, cost leadership is establishing a competitive advantage by having the lowest cost of operation in the industry. Cost leadership is often driven by company efficiency, size, scale, scope and cumulative experience (learning cu ...
, 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. Porter's generic strategies detail the interaction between cost minimization strategies, product differentiation strategies, and market focus strategies.
Porter described an industry as having multiple ''segments'' that can be targeted by a firm. The breadth of its targeting refers to the ''competitive scope'' of the business. Porter defined two types of ''competitive advantage
In business, a competitive advantage is an attribute that allows an organization to outperform its competitors.
A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled ...
'': lower cost or differentiation relative to its rivals. Achieving competitive advantage results from a firm's ability to cope with the five forces better than its rivals. Porter wrote: " hieving competitive advantage requires a firm to make a choice...about the type of competitive advantage it seeks to attain and the scope within which it will attain it." He also wrote: "The two basic types of competitive advantage ifferentiation and lower costcombined with the scope of activities for which a firm seeks to achieve them lead to three ''generic strategies'' for achieving above average performance in an industry: cost leadership, differentiation and focus. The focus strategy has two variants, cost focus and differentiation focus."
The concept of choice was a different perspective on strategy, as the 1970s paradigm was the pursuit of market share (size and scale) influenced by the experience curve. Companies that pursued the highest market share position to achieve cost advantages fit under Porter's cost leadership generic strategy, but the concept of choice regarding differentiation and focus represented a new perspective.
Value chain
Porter's 1985 description of the value chain
A value chain is a progression of activities that a firm operating in a specific industry performs in order to deliver a valuable product (i.e., good and/or service) to the end customer. The concept comes through business management and was fir ...
refers to the chain of activities (processes or collections of processes) that an organization 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 technology 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. Porter also wrote that strategy is an internally consistent configuration of activities that differentiates a firm from its rivals. A robust competitive position cumulates from many activities which should fit coherently together.
Porter wrote in 1985: "Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firm's relative cost position and create a basis for differentiation...the value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation."
Interorganizational relationships
Interorganizational relationships allow independent organizations to get access to resources or to enter new markets. Interorganizational relationships represent a critical lever of competitive advantage.
The field of strategic management has paid much attention to the different forms of relationships between organizations ranging from strategic alliance A strategic alliance (also see strategic partnership) is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations.
The alliance is a cooperation or collaboration which aims ...
s to buyer-supplier relationships, joint venture
A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and economic risk, risks, and shared governance. Companies typically pursue joint ventures for one of four rea ...
s, networks, R&D consortia
A consortium (plural: consortia) is an association of two or more individuals, companies, organizations or governments (or any combination of these entities) with the objective of participating in a common activity or pooling their resources for ...
, licensing
A license (or licence) is an official permission or permit to do, use, or own something (as well as the document of that permission or permit).
A license is granted by a party (licensor) to another party (licensee) as an element of an agreeme ...
, and franchising.
On the one hand, scholars drawing on organizational economics
Organizational economics (also referred to as ''economics of organization'') involves the use of economic logic and methods to understand the existence, nature, design, and performance of organizations, especially managed ones.
Organizational eco ...
(e.g., transaction costs theory) have argued that firms use interorganizational relationships when they are the most efficient form comparatively to other forms of organization such as operating on its own or using the market. On the other hand, scholars drawing on organizational theory (e.g., resource dependence theory
Resource dependence theory (RDT) is the study of how the external resources of organizations affect the behavior of the organization. The procurement of external resources is an important tenet of both the strategic and tactical management of any c ...
) suggest that firms tend to partner with others when such relationships allow them to improve their status, power, reputation, or legitimacy.
A key component to the strategic management of inter-organizational relationships relates to the choice of governance
Governance is the process of interactions through the laws, norms, power or language of an organized society over a social system ( family, tribe, formal or informal organization, a territory or across territories). It is done by the gove ...
mechanisms. While early research focused on the choice between equity and non equity forms, recent scholarship studies the nature of the contractual and relational arrangements between organizations.
Researchers have also noted, although to a lesser extent, the dark side of interorganizational relationships, such as conflict, disputes, opportunism and unethical behaviors. Relational or collaborative risk can be defined as the uncertainty
Uncertainty refers to epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to physical measurements that are already made, or to the unknown. Uncertainty arises in partially observable ...
about whether potentially significant and/or disappointing outcomes of collaborative activities will be realized. Companies can assess, monitor and manage collaborative risks. Empirical studies show that managers assess risks as lower when they external partners, higher if they are satisfied with their own performance, and lower when their business environment is turbulent.
Core competence
Gary Hamel
Gary P. Hamel (born 1954) is an American management consultant. He is a founder of Strategos, an international management consulting firm based in Chicago.
Biography
Hamel graduated from Andrews University in 1975, and from Ross School of Bus ...
and C. K. Prahalad described the idea of core competency
A core competency is a concept in management theory introduced by C. K. Prahalad and Gary Hamel.Prahalad, C.K. and Hamel, G. (1990)The core competence of the corporation", Harvard Business Review (v. 68, no. 3) pp. 79–91. It can be defined ...
in 1990, the idea that each organization has some capability in which it excels and that the business should focus on opportunities in that area, letting others go or outsourcing them. Further, core competency is difficult to duplicate, as it involves the skills and coordination of people across a variety of functional areas or processes used to deliver value to customers. By outsourcing, companies expanded the concept of the value chain, with some elements within the entity and others without. Core competency is part of a branch of strategy called the ''resource-based view The resource-based view (RBV) is a managerial framework used to determine the strategic resources a firm can exploit to achieve sustainable competitive advantage.
Barney's 1991 article "Firm Resources and Sustained Competitive Advantage" is widely ...
'' of the firm, which postulates that if activities are strategic as indicated by the value chain, then the organization's capabilities and ability to learn or adapt are also strategic.
Theory of the business
Peter Drucker
Peter Ferdinand Drucker (; ; November 19, 1909 – November 11, 2005) was an Austrian-American management consultant, educator, and author, whose writings contributed to the philosophical and practical foundations of the modern business co ...
wrote in 1994 about the "Theory of the Business," which represents the key assumptions underlying a firm's strategy. These assumptions are in three categories: a) the external environment, including society, market, customer, and technology; b) the mission of the organization; and c) the core competencies needed to accomplish the mission. He continued that a valid theory of the business has four specifications: 1) assumptions about the environment, mission, and core competencies must fit reality; 2) the assumptions in all three areas have to fit one another; 3) the theory of the business must be known and understood throughout the organization; and 4) the theory of the business has to be tested constantly.
He wrote that organizations get into trouble when the assumptions representing the theory of the business no longer fit reality. He used an example of retail department stores, where their theory of the business assumed that people who could afford to shop in department stores would do so. However, many shoppers abandoned department stores in favor of specialty retailers (often located outside of malls) when time became the primary factor in the shopping destination rather than income.
Drucker described the theory of the business as a "hypothesis" and a "discipline." He advocated building in systematic diagnostics, monitoring and testing of the assumptions comprising the theory of the business to maintain competitiveness.
Strategic thinking
Strategic thinking
Strategic thinking is a mental or thinking process applied by an individual in the context of achieving a goal or set of goals. As a cognitive activity, it produces thought.
When applied in an organizational strategic management process, strate ...
involves the generation and application of unique business insights to opportunities intended to create competitive advantage for a firm or organization. It involves challenging the assumptions underlying the organization's strategy and value proposition. Mintzberg wrote in 1994 that it is more about synthesis (i.e., "connecting the dots") than analysis (i.e., "finding the dots"). 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.
General Andre Beaufre wrote in 1963 that strategic thinking "is a mental process, at once abstract and rational, which must be capable of synthesizing both psychological and material data. The strategist must have a great capacity for both analysis and synthesis; analysis is necessary to assemble the data on which he makes his diagnosis, synthesis in order to produce from these data the diagnosis itself--and the diagnosis in fact amounts to a choice between alternative courses of action."
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.
Classic strategy thinking, and vision have some limitations in a turbulent environment and uncertainty. The limitations relate to the heterogeneity and future-oriented goals and possession of cognitive capabilities in classic definition. Strategy should not be seen only from the top managerial hierarchy visions. The newer micro foundation framework suggests that people from different managerial levels are needed to work and interact dynamically to result in the knowledge strategy.
Strategic planning
Strategic planning is a means of administering the formulation and implementation of strategy. Strategic planning is analytical in nature and refers to formalized procedures to produce the data and analyses used as inputs for strategic thinking
Strategic thinking is a mental or thinking process applied by an individual in the context of achieving a goal or set of goals. As a cognitive activity, it produces thought.
When applied in an organizational strategic management process, strate ...
, which synthesizes the data resulting in the strategy. Strategic planning may also refer to control mechanisms used to implement the strategy once it is determined. In other words, strategic planning happens ''around'' the strategy formation process.
Environmental analysis
Porter wrote in 1980 that formulation of competitive strategy includes consideration of four key elements:
#Company strengths and weaknesses;
#Personal values of the key implementers (i.e., management and the board)
#Industry opportunities and threats; and
#Broader societal expectations.
The first two elements relate to factors internal to the company (i.e., the internal environment), while the latter two relate to factors external to the company (i.e., the external environment).
There are many analytical frameworks which attempt to organize the strategic planning process. Examples of frameworks that address the four elements described above include:
*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 technological. Common variations include SLEPT, PESTLE, STEEPLE, and STEER analysis, each of which incorporates slightly different emphases.
*Industry environment: The Porter Five Forces Analysis
Porter's Five Forces Framework is a method of analysing the operating environment of a competition of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, ...
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: SWOT analysis
SWOT analysis (or SWOT matrix) is a strategic planning and strategic management technique used to help a person or organization identify Strengths, Weaknesses, Opportunities, and Threats related to business competition or project planning. It ...
is one of the most basic and widely used frameworks, 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.
Scenario planning
A number of strategists use scenario planning
Scenario planning, scenario thinking, scenario analysis, scenario prediction and the scenario method all describe a strategic planning method that some organizations use to make flexible long-term plans. It is in large part an adaptation and gener ...
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
Pierre is a masculine given name. It is a French form of the name Peter. Pierre originally meant "rock" or "stone" in French (derived from the Greek word πέτρος (''petros'') meaning "stone, rock", via Latin "petra"). It is a translation ...
, scenario planning is about insight, complexity, and subtlety, not about formal analysis and numbers. The flowchart to the right provides a process for classifying a phenomenon as a scenario in the intuitive logics tradition.
Some business planners are starting to use a complexity theory approach to strategy
Complexity theory and organizations, also called complexity strategy or complex adaptive organizations, is the use of the study of complexity systems in the field of strategic management and organizational studies. It draws from research in th ...
. 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.
Measuring and controlling implementation
Once the strategy is determined, various goals and measures may be established to chart a course for the organization, measure performance and control implementation of the strategy. Tools such as the balanced scorecard
A balanced scorecard is a strategy performance management tool – a well structured report, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from ...
and strategy maps help crystallize the strategy, by relating key measures of success and performance to the strategy. These tools measure financial, marketing
Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...
, production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
, organizational development, and innovation
Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed entit ...
measures to achieve a 'balanced' perspective. Advances in information technology and data availability enable the gathering of more information about performance, allowing managers to take a much more analytical view of their business than before.
Strategy may also be organized as a series of "initiatives" or "programs", each of which comprises one or more projects. Various monitoring and feedback mechanisms may also be established, such as regular meetings between divisional and corporate management to control implementation.
Evaluation
A key component to strategic management which is often overlooked when planning is evaluation
Evaluation is a
systematic determination and assessment of a subject's merit, worth and significance, using criteria governed by a set of standards. It can assist an organization, program, design, project or any other intervention or initiative to ...
. There are many ways to evaluate whether or not strategic priorities and plans have been achieved, one such method is Robert Stake's Responsive Evaluation.
Responsive evaluation
provides a naturalistic and humanistic approach to program evaluation
Program evaluation is a systematic method for collecting, analyzing, and using information to answer questions about projects, policies and programs, particularly about their effectiveness and efficiency. In both the public and private sectors, s ...
. In expanding beyond the goal-oriented or pre-ordinate evaluation design, responsive evaluation takes into consideration the program's background (history), conditions, and transactions among stakeholders. It is largely emergent, the design unfolds as contact is made with stakeholders.
Limitations
While strategies are established to set direction, focus effort, define or clarify the organization, and provide consistency or guidance in response to the environment, these very elements also mean that certain signals are excluded from consideration or de-emphasized. Mintzberg wrote in 1987: "Strategy is a categorizing scheme by which incoming stimuli can be ordered and dispatched." Since a strategy orients the organization in a particular manner or direction, that direction may not effectively match the environment, initially (if a bad strategy) or over time as circumstances change. As such, Mintzberg continued, "Strategy nce establishedis a force that resists change, not encourages it."
Therefore, a critique of strategic management is that it can overly constrain 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.[de Wit and Meyer, Strategy Process, Content and Context, Thomson Learning 2008] I.e., a "...repetitive learning cycle ather thana 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 Collingridge, 1993. p. 140]
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.
Woodhouse and Collingridge 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. 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.
]
Strategic themes
Various strategic approaches used across industries (themes) have arisen over the years. These include the shift from product-driven demand to customer- or marketing-driven demand (described above), the increased use of self-service approaches to lower cost, changes in the value chain or corporate structure due to globalization (e.g., off-shoring of production and assembly), and the internet.
Self-service
One theme in strategic competition has been the trend towards self-service, often enabled by technology, where the customer takes on a role previously performed by a worker to lower costs for the firm and perhaps prices. Examples include:
*Automated teller machine
An automated teller machine (ATM) or cash machine (in British English) is an electronic telecommunications device that enables customers of financial institutions to perform financial transactions, such as cash withdrawals, deposits, fun ...
(ATM) to obtain cash rather via a bank teller;
*Self-service at the gas pump rather than with help from an attendant;
*Retail internet orders input by the customer rather than a retail clerk, such as online book sales;
*Mass-produced ready-to-assemble furniture transported by the customer;
*Self-checkout at the grocery store; and
*Online banking and bill payment.
Globalization and the virtual firm
One definition of globalization
Globalization, or globalisation (English in the Commonwealth of Nations, Commonwealth English; American and British English spelling differences#-ise, -ize (-isation, -ization), see spelling differences), is the process of foreign relation ...
refers to the integration of economies due to technology and supply chain process innovation. Companies are no longer required to be vertically integrated (i.e., designing, producing, assembling, and selling their products). In other words, the value chain for a company's product may no longer be entirely within one firm; several entities comprising a virtual firm may exist to fulfill the customer requirement. For example, some companies have chosen to outsource production to third parties, retaining only design and sales functions inside their organization.
Internet and information availability
The internet has dramatically empowered consumers and enabled buyers and sellers to come together with drastically reduced transaction and intermediary costs, creating much more robust marketplaces for the purchase and sale of goods and services. The Internet has enabled many Internet-based entrepreneurs to tap serendipity as a strategic advantage and thrive. Examples include online auction sites, internet dating services, and internet book sellers. In many industries, the internet has dramatically altered the competitive landscape. Services that used to be provided within one entity (e.g., a car dealership providing financing and pricing information) are now provided by third parties. Further, compared to traditional media like television, the internet has caused a major shift in viewing habits through on demand content which has led to an increasingly fragmented audience.
Author Phillip Evans said in 2013 that networks are challenging traditional hierarchies. Value chains may also be breaking up ("deconstructing") where information aspects can be separated from functional activity. Data that is readily available for free or very low cost makes it harder for information-based, vertically integrated businesses to remain intact. Evans said: "The basic story here is that what used to be vertically integrated, oligopolistic competition among essentially similar kinds of competitors is evolving, by one means or another, from a vertical structure to a horizontal one. Why is that happening? It's happening because transaction costs are plummeting and because scale is polarizing. The plummeting of transaction costs weakens the glue that holds value chains together, and allows them to separate." He used Wikipedia as an example of a network that has challenged the traditional encyclopedia business model. Evans predicts the emergence of a new form of industrial organization called a "stack", analogous to a technology stack, in which competitors rely on a common platform of inputs (services or information), essentially layering the remaining competing parts of their value chains on top of this common platform.
Sustainability
In the recent decade, sustainability—or ability to successfully sustain a company in a context of rapidly changing environmental, social, health, and economic circumstances—has emerged as crucial aspect of any strategy development. Research focusing on sustainability in commercial strategies has led to emergence of the concept of "embedded sustainability" – defined by its authors Chris Laszlo and Nadya Zhexembayeva
Nadya Zhexembayeva (russian: link=no, Надя Жексембаева) is an author, educator and business owner. She has written four and contributed to six books about business, strategy, reinvention and sustainability. In 2009, Dr. Zhexembaye ...
as "incorporation of environmental, health, and social value into the core business with no trade-off in price or quality—in other words, with no social or green premium." Their research showed that embedded sustainability offers at least seven distinct opportunities for business value In management, business value is an informal term that includes all forms of value that determine the health and well-being of the firm in the long run. Business value expands concept of value of the firm beyond economic value (also known as econom ...
and competitive advantage
In business, a competitive advantage is an attribute that allows an organization to outperform its competitors.
A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled ...
creation: a) better risk management, b) increased efficiency through reduced waste and resource use, c) better product differentiation
In economics and marketing, product differentiation (or simply differentiation) is the process of distinguishing a product or service from others to make it more attractive to a particular target market. This involves differentiating it from co ...
, d) new market entrances, e) enhanced brand and reputation, f) greater opportunity to influence industry standard
''Industry Standard'' is the sixth studio album by the Dixie Dregs, released in 1982. This was the second of two albums released under the moniker The Dregs, and is their only album featuring vocals (by Alex Ligertwood of Santana and Patrick Si ...
s, and g) greater opportunity for radical innovation. Research further suggested that innovation driven by resource depletion
Resource depletion is the consumption of a resource faster than it can be replenished. Natural resources are commonly divided between renewable resources and non-renewable resources (see also mineral resource classification). Use of either ...
can result in fundamental competitive advantages for a company's products and services, as well as the company strategy as a whole, when right principles of innovation are applied. Asset managers who committed to integrating embedded sustainability factors in their capital allocation decisions created a stronger return on investment than managers that did not strategically integrate sustainability into their similar business model.
Strategy as learning
Learning organization
In 1990, Peter Senge
Peter Michael Senge (born 1947) is an American systems scientist who is a senior lecturer at the MIT Sloan School of Management, co-faculty at the New England Complex Systems Institute, and the founder of the Society for Organizational Learning ...
, who had collaborated with Arie de Geus at Dutch Shell, popularized de Geus' notion of the "learning organization
In business management, a learning organization is a company that facilitates the learning of its members and continuously transforms itself.Pedler, M., Burgogyne, J. and Boydell, T. 1997. ''The Learning Company: A strategy for sustainable develop ...
". The theory is that gathering and analyzing information is a necessary requirement for business success in the information age. 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
Geoffrey Moore (born 1946) is an American organizational theorist, management consultant and author, known for his work '' Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers''. (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
Interoperability is a characteristic of a product or system to work with other products or systems. While the term was initially defined for information technology or systems engineering services to allow for information exchange, a broader defi ...
requires compatibility between users. Examples include Internet Explorer
Internet Explorer (formerly Microsoft Internet Explorer and Windows Internet Explorer, commonly abbreviated IE or MSIE) is a series of graphical web browsers developed by Microsoft which was used in the Windows line of operating systems ( ...
'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.
Integrated view to learning
Bolisani & Bratianu (2017) have defined knowledge strategy as an integration of rational thinking and dynamic learning. Rational planning contains a three-step process where the first step is to collect information, the second step is to analyze the information and the third step is to formulate goals and plans based on information. Emergent planning also contains three steps to the opposite direction starting from practical experience, what is analyzed in the second step, and then formulated to a strategy in the third step. These two approaches are combined to the “integrated view” with the Bolisani and Bratianu research implications. To start the planning process for knowledge and KM strategy creation, company can prepare a preliminary plan with the basis of rational analysis from internal or external environments. While creating rational and predictive plans, company can similarly utilize practical adapted knowledge for example learning from the ground. The idea behind the integrated view is to combine the general visions of knowledge strategy with both the current practical understanding and future ideas. This model will move the decision-making process in a more interactive and co-creative direction.
Strategy as adapting to change
In 1969, Peter Drucker
Peter Ferdinand Drucker (; ; November 19, 1909 – November 11, 2005) was an Austrian-American management consultant, educator, and author, whose writings contributed to the philosophical and practical foundations of the modern business co ...
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
Technology is the application of knowledge to reach practical goals in a specifiable and reproducible way. The word ''technology'' may also mean the product of such an endeavor. The use of technology is widely prevalent in medicine, science, ...
, globalization
Globalization, or globalisation (English in the Commonwealth of Nations, Commonwealth English; American and British English spelling differences#-ise, -ize (-isation, -ization), see spelling differences), is the process of foreign relation ...
, cultural pluralism
Cultural pluralism is a term used when smaller groups within a larger society maintain their unique cultural identities, whereby their values and practices are accepted by the dominant culture, provided such are consistent with the laws and valu ...
and knowledge capital.
In 1970, Alvin Toffler
Alvin Eugene Toffler (October 4, 1928 – June 27, 2016) was an American writer, futurist, and businessman known for his works discussing modern technologies, including the digital revolution and the communication revolution, with emphasis on t ...
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
In economics and industrial design, planned obsolescence (also called built-in obsolescence or premature obsolescence) is a policy of planning or designing a good (economics), product with an artificially limited Product lifetime, useful life o ...
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
Creativity is a phenomenon whereby something new and valuable is formed. The created item may be intangible (such as an idea, a scientific theory, a musical composition, or a joke) or a physical object (such as an invention, a printed Literature ...
, 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
Historically there have been differences among investigators regarding the definition of organizational culture. Edgar Schein, a leading researcher in this field, defined "organizational culture" as comprising a number of features, including a ...
.
In 1989, Charles Handy
Charles Brian Handy CBE (born 25 July 1932) is an Irish author/philosopher specialising in organisational behaviour and management. Among the ideas he has advanced are the " portfolio career" and the " Shamrock Organization" (in which professi ...
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
In a variety of contexts, exogeny or exogeneity () is the fact of an action or object originating externally. It contrasts with endogeneity or endogeny, the fact of being influenced within a system.
Economics
In an economic model, an exogeno ...
shocks) in the business environment. The point where a new trend is initiated is called a "strategic inflection point" by Andy Grove
Andrew Stephen Grove (born András István Gróf; 2 September 193621 March 2016) was a Hungarian-American businessman and engineer who served as the third CEO of Intel Corporation. He escaped from Communist-controlled Hungary at the age of 20 ...
. Inflection points can be subtle or radical.
In 1990, Richard Pascale 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 migration
In marketing, value migration is the shifting of value-creating forces. Value migrates from outmoded business models to business designs that are better able to satisfy customers' priorities. Marketing strategy is the art of creating value for th ...
s 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
Clayton Magleby Christensen (April 6, 1952January 23, 2020) was an American academic and business consultant who developed the theory of "disruptive innovation", which has been called the most influential business idea of the early 21st century. ...
(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 ongoing, 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
David John Teece (born September 2, 1948) is a New Zealand-born US-based organizational economist and the Professor in Global Business and director of the Tusher Center for the Management of Intellectual Capital at the Walter A. Haas School of ...
pioneered research on resource-based strategic management and the dynamic capabilities In organizational theory, dynamic capability is the capability of an organization to purposefully adapt an organization's resource base. The concept was defined by David Teece, Gary Pisano and Amy Shuen, in their 1997 paper ''Dynamic Capabilities ...
perspective, defined as "the ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments".[, doi=10.1002/(SICI)1097-0266(199708)18:7<509::AID-SMJ882>3.0.CO;2-Z
] 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.
In 2000, Gary Hamel
Gary P. Hamel (born 1954) is an American management consultant. He is a founder of Strategos, an international management consulting firm based in Chicago.
Biography
Hamel graduated from Andrews University in 1975, and from Ross School of Bus ...
discussed strategic decay, the notion that the value of every strategy, no matter how brilliant, decays over time.[Hamel, Gary ''Leading the Revolution'', Plume (Penguin Books), New York, 2002.]
Strategy as operational excellence
Quality
A large group of theorists felt the area where western business was most lacking was product quality. W. Edwards Deming
William Edwards Deming (October 14, 1900 – December 20, 1993) was an American engineer, statistician, professor, author, lecturer, and management consultant. Educated initially as an electrical engineer and later specializing in mathematical ...
, Joseph M. Juran
Joseph Moses Juran (December 24, 1904 – February 28, 2008) was a Romanian-born American engineer and management consultant. He was an evangelist for quality and quality management, having written several books on those subjects. He was the brot ...
, A. Kearney, Philip Crosby and Armand Feignbaum
Armand refer to:
People
* Armand (name), list of people with this name
*Armand (photographer) (1901–1963), Armenian photographer
*Armand (singer) (1946–2015), Dutch protest singer
*Sean Armand (born 1991), American basketball player
*Armand, ...
suggested quality improvement techniques such total quality management (TQM), continuous improvement
A continual improvement process, also often called a continuous improvement process (abbreviated as CIP or CI), is an ongoing effort to improve products, services, or processes. These efforts can seek " incremental" improvement over time or "breakt ...
(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
Scientific management is a theory of management that analyzes and synthesizes workflows. Its main objective is improving economic efficiency, especially labor productivity. It was one of the earliest attempts to apply science to the engineeri ...
, 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
In marketing, customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or life-time value (LTV) is a prognostication of the net profit
contributed to the whole future relationship with a customer. The prediction model can have ...
(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) is a process in which a business or other organization administers its interactions with customers, typically using data analysis to study big data, large amounts of information.
CRM systems data collectio ...
). Customer relationship management (CRM) software became integral to many firms.
Reengineering
Michael Hammer and James Champy
James (Jim) Champy (born 1942) is an Italian American business consultant, and organizational theorist, known for his work in the field of business process reengineering, business process improvement and organizational change.
Life and work
Cha ...
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
Richard Lester Liebman (born January 19, 1932) is an American retired film director based in the United Kingdom.
He is best known for directing the Beatles' films '' A Hard Day's Night'' (1964) and '' Help!'' (1965), and the superhero films ' ...
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.
Other perspectives on strategy
Strategy as problem solving
Professor Richard P. Rumelt described strategy as a type of problem solving in 2011. He wrote that good strategy has an underlying structure called a ''kernel''. The kernel has three parts: 1) A ''diagnosis'' that defines or explains the nature of the challenge; 2) A ''guiding policy'' for dealing with the challenge; and 3) Coherent ''actions'' designed to carry out the guiding policy.
President Kennedy outlined these three elements of strategy in his Cuban Missile Crisis Address to the Nation of 22 October 1962:
#Diagnosis: "This Government, as promised, has maintained the closest surveillance of the Soviet military buildup on the island of Cuba. Within the past week, unmistakable evidence has established the fact that a series of offensive missile sites is now in preparation on that imprisoned island. The purpose of these bases can be none other than to provide a nuclear strike capability against the Western Hemisphere."
#Guiding Policy: "Our unswerving objective, therefore, must be to prevent the use of these missiles against this or any other country, and to secure their withdrawal or elimination from the Western Hemisphere."
#Action Plans: First among seven numbered steps was the following: "To halt this offensive buildup a strict quarantine on all offensive military equipment under shipment to Cuba is being initiated. All ships of any kind bound for Cuba from whatever nation or port will, if found to contain cargoes of offensive weapons, be turned back."
Active strategic management required active information gathering and active problem solving. In the early days of Hewlett-Packard (HP), Dave Packard
David Packard ( ; September 7, 1912 – March 26, 1996) was an American electrical engineer and co-founder, with Bill Hewlett, of Hewlett-Packard (1939), serving as president (1947–64), CEO (1964–68), and chairman of the board (1964–68 ...
and Bill Hewlett
William Redington Hewlett ( ; May 20, 1913 – January 12, 2001) was an American engineer and the co-founder, with David Packard, of the Hewlett-Packard Company (HP).
Early life and education
Hewlett was born in Ann Arbor, Michigan, where his ...
devised an active management style that they called ''management by walking around The management by wandering around (MBWA), also management by walking around,"What is management by walking around (MBWA)",
BusinessDictionary.com, 2010, webpage: . refers to a style of business management which involves managers wandering aroun ...
'' (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 consultant
Management consulting is the practice of providing consulting services to organizations to improve their performance or in any way to assist in achieving organizational objectives. Organizations may draw upon the services of management consultants ...
s Tom Peters
Thomas J. Peters (born November 7, 1942) is an American writer on business management practices, best known for ''In Search of Excellence'' (co-authored with Robert H. Waterman Jr.)
Life and education
Peters was born in Baltimore, Maryland. ...
and Robert H. Waterman
Robert H. Waterman Jr. (November 11, 1936 - January 2, 2022) was a non-fiction author and expert on business management practices.
He was best known as the co-author, with Tom Peters, of ''In Search of Excellence''. Waterman later directed his own ...
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
is a Japanese public multinational conglomerate manufacturer of automobiles, motorcycles, and power equipment, headquartered in Minato, Tokyo, Japan.
Honda has been the world's largest motorcycle manufacturer since 1959, reaching a producti ...
, and is sometimes called the 3 G's ( Genba, Genbutsu, and Genjitsu, which translate into "actual place", "actual thing", and "actual situation").
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.
Non-strategic management
A 1938 treatise by Chester Barnard
Chester Irving Barnard (November 7, 1886 – June 7, 1961) was an American business executive, public administrator, and the author of pioneering work in management theory and organizational studies. His landmark 1938 book, ''The Functions of the ...
, 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 stimulus-response, and he develops in his work a clear preference for live action."
In 1982, John Kotter
John Paul Kotter is the Konosuke Matsushita Professor of Leadership, Emeritus, at the Harvard Business School, an author, and the founder of Kotter International, a management consulting firm based in Seattle and Boston. He is a thought leader ...
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
Daniel Isenberg is a Professor of Entrepreneurship Practice at Babson College Executive Education where he established the Babson Entrepreneurship Ecosystem Project (BEEP). He is the author of the book ''Worthless, Impossible and Stupid: How Contr ...
'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.
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.
Strategy as marketing
The 1980s also saw the widespread acceptance of positioning theory. Although the theory originated with Jack Trout
John Francis "Jack" Trout (January 31, 1935 – June 4, 2017) was an American advertising executive and an owner of Trout & Partners, a consulting firm. He was one of the founders and pioneers of positioning theory and also marketing warfare th ...
in 1969, it didn't gain wide acceptance until Al Ries
Alfred Paul Ries (November 14, 1926 – October 7, 2022) was an American marketing professional and author. He was the cofounder and chairman of the Atlanta-based consulting firm Ries & Ries with his partner and daughter, Laura Ries. Along with ...
and Jack Trout
John Francis "Jack" Trout (January 31, 1935 – June 4, 2017) was an American advertising executive and an owner of Trout & Partners, a consulting firm. He was one of the founders and pioneers of positioning theory and also marketing warfare th ...
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
Multidimensional scaling (MDS) is a means of visualizing the level of similarity of individual cases of a dataset. MDS is used to translate "information about the pairwise 'distances' among a set of n objects or individuals" into a configurati ...
, discriminant analysis
Linear discriminant analysis (LDA), normal discriminant analysis (NDA), or discriminant function analysis is a generalization of Fisher's linear discriminant, a method used in statistics and other fields, to find a linear combination of features ...
, factor analysis
Factor analysis is a statistical method used to describe variability among observed, correlated variables in terms of a potentially lower number of unobserved variables called factors. For example, it is possible that variations in six observed ...
and conjoint analysis
Conjoint analysis is a survey-based statistical technique used in market research that helps determine how people value different attributes (feature, function, benefits) that make up an individual product or service.
The objective of conjoint an ...
are mathematical techniques used to determine the most relevant characteristics (called dimensions or factors) upon which positions should be based. Preference regression
Preference regression is a statistical technique used by marketers to determine consumers’ preferred core benefits. It usually supplements product positioning techniques like multi dimensional scaling or factor analysis and is used to create ...
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.
James Gilmore and Joseph Pine found competitive advantage in mass customization
In marketing, manufacturing, call centre operations, and management, mass customization makes use of flexible computer-aided systems to produce custom output. Such systems combine the low unit costs of mass production processes with the flexibili ...
. Flexible manufacturing
A flexible manufacturing system (FMS) is a manufacturing system in which there is some amount of Flexibility (engineering), flexibility that allows the system to react in case of changes, whether predicted or unpredicted.
This flexibility is gen ...
techniques allowed businesses to individualize products for each customer without losing economies of scale
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
. 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
Customer experience (CX) is a totality of cognitive, affective, sensory, and behavioral consumer responses during all stages of the consumption process including pre-purchase, consumption, and post-purchase stages. Pine and Gilmore described ...
(CEM).
Information- and technology-driven strategy
Many industries with a high information component are being transformed. For example, Encarta demolished Encyclopædia Britannica
The (Latin for "British Encyclopædia") is a general knowledge English-language encyclopaedia. It is published by Encyclopædia Britannica, Inc.; the company has existed since the 18th century, although it has changed ownership various t ...
(whose sales have plummeted 80% since their peak of $650 million in 1990) before it was in turn, eclipsed by collaborative encyclopedias like Wikipedia
Wikipedia is a multilingual free online encyclopedia written and maintained by a community of volunteers, known as Wikipedians, through open collaboration and using a wiki-based editing system. Wikipedia is the largest and most-read refer ...
. 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
Peter Ferdinand Drucker (; ; November 19, 1909 – November 11, 2005) was an Austrian-American management consultant, educator, and author, whose writings contributed to the philosophical and practical foundations of the modern business co ...
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
John Naisbitt (January 15, 1929 – April 8, 2021) was an American author and public speaker in the area of futures studies. His first book '' Megatrends: Ten New Directions Transforming Our Lives'' was published in 1982. It was the result of alm ...
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
Daniel Bell (May 10, 1919 – January 25, 2011) was an American sociologist, writer, editor, and professor at Harvard University, best known for his contributions to the study of post-industrialism. He has been described as "one of the leading A ...
(1985) examined the sociological consequences of information technology, while Gloria Schuck and Shoshana Zuboff looked at psychological factors. Zuboff distinguished between "automating technologies" and "informating 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".
Maturity of planning process
McKinsey & Company developed a capability maturity model in the 1970s to describe the sophistication of planning processes, with strategic management ranked the highest. The four stages include:
#Financial planning, which is primarily about annual budgets and a functional focus, with limited regard for the environment;
#Forecast-based planning, which includes multi-year budgets and more robust capital allocation across business units;
#Externally oriented planning, where a thorough situation analysis and competitive assessment is performed;
#Strategic management, where widespread strategic thinking
Strategic thinking is a mental or thinking process applied by an individual in the context of achieving a goal or set of goals. As a cognitive activity, it produces thought.
When applied in an organizational strategic management process, strate ...
occurs and a well-defined strategic framework is used.
PIMS study
The long-term PIMS study
The Profit Impact of Market Strategy (PIMS) program is a project that uses empirical data to try to determine which business strategies make the difference between success and failure. It is used to develop strategies for resource allocation and ...
, 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. The initial conclusion of the study was unambiguous: the greater a company's market share, the greater their rate of profit. Market share provides economies of scale
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
. 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
Horizontal integration is the process of a company increasing production of goods or services at the same part of the supply chain. A company may do this via internal expansion, acquisition or merger.
The process can lead to monopoly if a c ...
, vertical integration
In microeconomics, management and international political economy, vertical integration is a term that describes the arrangement in which the supply chain of a company is integrated and owned by that company. Usually each member of the suppl ...
, diversification, franchise
Franchise may refer to:
Business and law
* Franchising, a business method that involves licensing of trademarks and methods of doing business to franchisees
* Franchise, a privilege to operate a type of business such as a cable television p ...
s, mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
, 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.
Other influences on business strategy
Military strategy
In the 1980s business strategists realized that there was a vast knowledge base
A knowledge base (KB) is a technology used to store complex structured and unstructured information used by a computer system. The initial use of the term was in connection with expert systems, which were the first knowledge-based systems. ...
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
''The Art of War'' () is an ancient Chinese military treatise dating from the Late Spring and Autumn Period (roughly 5th century BC). The work, which is attributed to the ancient Chinese military strategist Sun Tzu ("Master Sun"), is com ...
'' by Sun Tzu
Sun Tzu ( ; zh, t=孫子, s=孙子, first= t, p=Sūnzǐ) was a Chinese military general, strategist, philosopher, and writer who lived during the Eastern Zhou period of 771 to 256 BCE. Sun Tzu is traditionally credited as the author of '' The ...
, ''On War
''Vom Kriege'' () is a book on war and military strategy by Prussian general Carl von Clausewitz (1780–1831), written mostly after the Napoleonic wars, between 1816 and 1830, and published posthumously by his wife Marie von Brühl in 1832. ...
'' by von Clausewitz, and '' The Red Book'' by Mao Zedong
Mao Zedong pronounced ; also romanised traditionally as Mao Tse-tung. (26 December 1893 – 9 September 1976), also known as Chairman Mao, was a Chinese communist revolutionary who was the founder of the People's Republic of China (PRC) ...
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
Alfred Paul Ries (November 14, 1926 – October 7, 2022) was an American marketing professional and author. He was the cofounder and chairman of the Atlanta-based consulting firm Ries & Ries with his partner and daughter, Laura Ries. Along with ...
and Jack Trout
John Francis "Jack" Trout (January 31, 1935 – June 4, 2017) was an American advertising executive and an owner of Trout & Partners, a consulting firm. He was one of the founders and pioneers of positioning theory and also marketing warfare th ...
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
In military tactics, a flanking maneuver is a movement of an armed force around an enemy force's side, or wikt:flank, flank, to achieve an advantageous position over it. Flanking is useful because a force's fighting strength is typically con ...
* Guerrilla marketing warfare strategies
Guerrilla marketing is an advertisement strategy in which a company uses surprise and/or unconventional interactions in order to promote a product or service. It is a type of publicity. The term was popularized by Jay Conrad Levinson's 19 ...
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
Theoretical ecology is the scientific discipline devoted to the study of ecological systems using theoretical methods such as simple conceptual models, mathematical models, computational simulations, and advanced data analysis. Effective models im ...
of predators and prey(see ecological model of competition
The ecological model of competition is a reassessment of the nature of competition in the economy. Traditional economics models the economy on the principles of physics (force, equilibrium, inertia, momentum, and linear relationships). This can be ...
), a sort of Darwinian
Darwinism is a theory of biological evolution developed by the English naturalist Charles Darwin (1809–1882) and others, stating that all species of organisms arise and develop through the natural selection of small, inherited variations that ...
management strategy in which market interactions mimic long term ecological stability
In ecology, an ecosystem is said to possess ecological stability (or equilibrium) if it is capable of returning to its equilibrium state after a perturbation (a capacity known as resilience) or does not experience unexpected large changes in its c ...
.
Author Phillip Evans said in 2014 that "Henderson's
Henderson's, better known as The Bomb Shop, was a bookshop at 66 Charing Cross Road, London known for publishing and selling both radical left and anarchist writing and modernist literature. The shop was founded in 1909, and was a father and s ...
central idea was what you might call the Napoleonic idea of concentrating mass against weakness, of overwhelming the enemy. What Henderson recognized was that, in the business world, there are many phenomena which are characterized by what economists would call increasing returns—scale, experience. The more you do of something, disproportionately the better you get. And therefore he found a logic for investing in such kinds of overwhelming mass in order to achieve competitive advantage. And that was the first introduction of essentially a military concept of strategy into the business world. ... It was on those two ideas, Henderson's idea of increasing returns to scale and experience, and Porter's idea of the value chain, encompassing heterogenous elements, that the whole edifice of business strategy was subsequently erected."
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[Mulcaster, W.R. "Three Strategic Frameworks," Business Strategy Series, Vol 10, No 1, pp 68–75, 2009.] 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.
See also
* Balanced scorecard
A balanced scorecard is a strategy performance management tool – a well structured report, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from ...
* Business analysis
Business analysis is a professional discipline of identifying business needs and determining solutions to business problems. Solutions often include a software-systems development component, but may also consist of process improvements, organiza ...
* Business model
A business model describes how an organization creates, delivers, and captures value,''Business Model Generation'', Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2010 in economic, soci ...
* Business plan
A business plan is a formal written document containing the goals of a business, the methods for attaining those goals, and the time-frame for the achievement of the goals. It also describes the nature of the business, background information on ...
* Concept-driven strategy
A concept-driven strategy is a process for formulating strategy that draws on the explanation of how humans inquire provided by linguistic pragmatic philosophy. This argues that thinking starts by selecting (explicitly or implicitly) a set of conc ...
* Cost overrun
A cost overrun, also known as a cost increase or budget overrun, involves unexpected incurred costs. When these costs are in excess of budgeted amounts due to a value engineering underestimation of the actual cost during budgeting, they are known ...
* Dynamic capabilities In organizational theory, dynamic capability is the capability of an organization to purposefully adapt an organization's resource base. The concept was defined by David Teece, Gary Pisano and Amy Shuen, in their 1997 paper ''Dynamic Capabilities ...
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* Integrated business planning
Integrated business planning (IBP) is a process for translating desired business outcomes into financial and operational resource requirements, with the overarching objective of maximizing profit and / or cash flow, while minimizing risk. The bu ...
* Marketing
Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...
* Marketing plan
A marketing plan may be part of an overall business plan. Solid marketing strategy is the foundation of a well-written marketing plan so that goals may be achieved. While a marketing plan contains a list of actions, without a sound strategic founda ...
* Marketing strategies
Marketing strategy allows organizations to focus limited resources on best opportunities to increase sales and achieve a competitive advantage in the market.
Strategic marketing emerged in the 1970s/80s as a distinct field of study, further buil ...
* Management
Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a Government agency, government body. It is the art and science of managing resources of the business.
Management includ ...
* Management consulting
Management consulting is the practice of providing consulting services to organizations to improve their performance or in any way to assist in achieving organizational objectives. Organizations may draw upon the services of management consultan ...
* Military strategy
* Morphological analysis
* Overall equipment effectiveness
Overall Equipment Effectiveness (OEE) is a measure of how well a manufacturing operation is utilized (facilities, time and material) compared to its full potential, during the periods when it is scheduled to run. It identifies the percentage of m ...
* Real options valuation
Real options valuation, also often termed real options analysis,Adam Borison (Stanford University)''Real Options Analysis: Where are the Emperor's Clothes?''
(ROV or ROA) applies option valuation techniques to capital budgeting decisions.Campbe ...
* Results-based management Results-based management (RBM) is a tool for monitoring and managing the implementation of strategy. It in many respects is similar to the Logical framework approach, a strategy implementation tool used extensively by Non-governmental organizations ...
* Revenue shortfall
When the actual benefits of a venture are less than the projected or estimated benefits, the result is known as a benefit shortfall.
If, for instance, a company is launching a new product or service and projected sales are 40 million dollars per ...
* Strategy (game theory)
In game theory, a player's strategy is any of the options which they choose in a setting where the outcome depends ''not only'' on their own actions ''but'' on the actions of others. The discipline mainly concerns the action of a player in a game ...
* Strategy dynamics
* Strategic planning
* Strategic Management Society
The Strategic Management Society (SMS) is a professional society for the advancement of strategic management. The society consists of nearly 3,000 members representing various backgrounds and perspectives from more than eighty different countries. ...
* Strategy map
* Strategy Markup Language
{{primary sources, date=April 2017
Strategy Markup Language (StratML) is an XML-based standard vocabulary and schema for the information commonly contained in strategic and performance plans and reports. StratML Part 1 specifies the elements of st ...
* Strategy visualization
* Value migration
In marketing, value migration is the shifting of value-creating forces. Value migrates from outmoded business models to business designs that are better able to satisfy customers' priorities. Marketing strategy is the art of creating value for th ...
* Six Forces Model
* Adversarial purchasing An adversarial relationship in purchasing and supply arises when identical or equivalent good or services are available from competing suppliers and buyers/sellers are trying to gain an advantage over each other. Low levels of trust are characterist ...
References
Further reading
* Cameron, Bobby Thomas. (2014)
Using responsive evaluation in Strategic Management
Strategic Leadership Review 4 (2), 22–27.
* David Besanko, David Dranove, Scott Schaefer, and Mark Shanley (2012) '' Economics of Strategy'', John Wiley & Sons
John Wiley & Sons, Inc., commonly known as Wiley (), is an American multinational publishing company founded in 1807 that focuses on academic publishing and instructional materials. The company produces books, journals, and encyclopedias, ...
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* Edwards, Janice et al
Mastering Strategic Management- 1st Canadian Edition
BC Open Textbooks, 2014.
* Kemp, Roger L. "Strategic Planning for Local Government: A Handbook for Officials and Citizens," McFarland and Co., Inc., Jefferson, NC, USA, and London, England, UK, 2008 ()
* Kvint, Vladimir (2009) ''The Global Emerging Market: Strategic Management and Economics'
Excerpt from Google Books
* Pankaj Ghemawhat - Harvard Strategy Professor
Competition and Business Strategy in Historical Perspective
''Social Science History Network''-Spring 2002
External links
*
Institute for Strategy and Competitiveness at Harvard Business School
- recent publications
The Journal of Business Strategies
- online library
{{DEFAULTSORT:Strategic Management
Systems thinking
Business terms
Management by type
Strategy