MBA 810
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CORPORATE STRATEGY
Conceptual Framework of Corporate Strategy
Strategy literarily means a plan, stratagem, subterfuge, policy, approach, tactic, etc. Corporate
Strategy can consequently, be used interchangeably as terms such as, business policy,
competitive strategy, strategic management, etc.
A corporate strategy, therefore,involves a clearly defined, long-term vision that organizations set,
seeking to create corporate value and motivate the workforce to implement the proper actions to
achieve customer satisfaction.
It is a continuous process that requires a constant effort to engage investors in trusting the
company with their money, thereby increasing the company’s equity.
It is the identification of the purpose of the organization and the plans and actions to achieve the
purpose. The purpose is however, dynamic as the organization grows and becomes larger and
able to seek new customers to broaden its range of products. Corporate strategy will also entail
finding market opportunities, experimenting and developing competitive advantages over time.
The concept can be seen as the linkage between the management process of the organization’s
internal resources and its external relationship with its stakeholders (customers, suppliers,
competitors, forces in socio-political environment), as we will see later.
Organizations that manage to deliver customer value unfailingly are those that revisit their
corporate strategy regularly to improve areas that may not deliver the planned results. Corporate
strategy is hierarchically the highest strategic plan of the organizations, which defines the
Business goals and ways of achieving their within strategic management process.
The role of corporate strategy is to ensure that the value of the enterprise as a whole is more than
the sum of its parts. Corporate strategy is an ongoing process — particularly given today’s
volatile competitive environments. Consistently delivering value creation that outpaces peers
demands that organizations enhance their capabilities and regularly revisit their strategies.
Developing a winning corporate strategy requires a relentless focus on value creation, and
thoughtful attention in three important areas, namely resources management, environmental
sustainability and value creation.
Elements of Corporate Strategy
There are two main elements in the concept of corporate strategy
a. Corporate Level Strategy
At this level, basic decisions need to be taken over what business the organization is
really into, or should be into? What should the culture and leadership of the organization
be? In this wise, corporate strategy will be seen as the pattern of major objectives,
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purpose or goals and essential policies or plans for achieving those goals, which is stated
in such as a way as to define what business the company is in or is to be in.
Specifically, at this level, these questions are relevant:
- What business are we into? What business should we be into?
- What are our basic vision and direction for the future?
- What is our culture and leadership style?
- What is or should be our attitude to strategic change in the future?
b. Business Level Strategy
At this level, the strategy of the firm is the match between its internal capabilities and its
external relationship, describing how it responds to its stakeholders, and the socio and
economic environment within which it operates, as noted before. It will involve
competing for customers, generating value from resources at its disposal, and the
underlying principle of sustainable competitive advantages.
Specifically, the business level strategy involves:
- How do we compete successfully and what is our competitive advantage like?
- How can we innovate regularly to meet the changing and dynamic business
environment?
- Who are our customers and who are they supposed to be?
- What value do we add? Where, why and how?
Main Areas of Corporate Strategy
1. Resources Strategy – organizations need to develop strategies tooptimize the use of its
resources (human skills, investments and capital). It is also important to investigate the
sustainable competitive advantages that will allow the organization to survive and
prosper against competition.
2. Environmental strategy – the environment covers every aspect that is external to the
organization itself, which include economic, social, political, customers, suppliers, etc.
Organizations therefore, need to develop strategies best suited to their strength and
weaknesses in this regards. There is need to note that the environment at the global level
is too unstable that it may be impossible to plan a long-term corporate strategy for it, as
there is always a tendency for conflict between the organizational plans and tactics and
the ever-changing and unpredictable environment.
3. Ability to add value - there is need to add value to resources supplied to the organization
beyond dealing with environmental challenges and management of such resources. For
any organization to survive or a longer period, it must continue to add value and create
value through its operations and deliver credible output in a way to satisfy the needs of
customers and beat competitors. Adding value must be continuous and consistent.
Corporate Strategy is both an art and a science
It becomes pertinent and correct to say therefore that Corporate Strategy is both an art and a
science. No single strategy will apply in all cases. While most organization would like to build
on their skills, they will be influenced by their past experiences and culture and constrained by
their background, resources and environment as corporate citizens (art). Nevertheless, as is not
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without logic, or the application of scientific models (methods) and the use of evidences
(science). At the end of the process, however, there is a place for the application of business
judgment of the operators.
Types of Corporate Strategy
1. Expansion strategy: Increasing the scope of business definition of single or more than one
business. For Example - ADAG Communications, Infrastructure, Financial services,
Entertainment, Power, Natural resource, Petrochemical ,Health care, BPO
2. Stability Strategy: Marginal change in business definition to improve its performance.
For example - a hospital brings new heart surgical technology (change in technology).
New drugimproved with new supplements (change in product or customer function), a
bank provides special treatment to its agricultural sector account holders (new approach
to customer group)
3. Retrenchment Strategy: Total or partial withdrawal from one or more businesses. For
Example - Only specialty treatment 9e.g. surgery) by a hospital instead of general
treatment earlier.
Reasons for developing Corporate Strategy
Strategic management is basically needed for every organization and it offers several benefits.
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Universal Strategy: refers to a complex web of thoughts, ideas, insights, experiences,
goals, expertise, memories, perceptions, and expectations that provides general guidance
for specific actions in pursuit of particular ends. Nations have, in the management of their
national policies, found it necessary to evolve strategies that adjust and correlate political,
economic, technological, and psychological factors, along with military elements.
Keeping pace with changing environment: The present day environment is so dynamic
and fast changing thus making it very difficult for any modern business enterprise to
operate. Because of uncertainties, threats and constraints, the business corporation is
under great pressure and is trying to find out the ways and means for their healthy
survival. Under such circumstances, the only last resort is to make the best use of
strategic management which can help the corporate management to explore the possible
opportunities and at the same time to achieve an optimum level of efficiency by
minimizing the expected threats.
Minimizes competitive disadvantage: this adds up to competitive advantage. For
example, a company which is in the same line of business with other smaller companies,
realized that merely by merging with these companies which make fast moving consumer
goods alone will not make it market leader but venturing into retailing will help it reap
heavy profits. This action can later emerged to a retail giant and become a market leader
in its environment. Similarly, two large groups of companies can realize that mere
takeovers do not help and there is a need to reposition their products and reengineer their
brands, which eventually worked for them.
Clear sense of strategic vision and sharper focus on goals and objectives: Every firm
competing in an industry has a strategy, because strategy refers to how a given
objectivewill be achieved. Strategy’ defines what it is we want to achieve and charts our
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course in the market place; it is the basis for the establishment of a business firm; and it is
a basic requirement for a firm to survive and to sustain itself in today’s changing
environment by providing vision and encouraging definingmission.
Motivating employees: it is noteworthy that the labor efficiency and loyalty towards
management can be expected only in an organization that operates under strategic
management. Every guidance as to what to do, when and how to do and by whom etc, is
given to every employee. This makes them more confident and free to perform their tasks
without any hesitation. Labor efficiency and their loyalty which results into industrial
peace and good returns are the results of broad-based policies adopted by the strategic
management
Strengthening Decision-Making: Under strategic management, the first step to be taken
is to identify the objectives of the business concern. Hence a corporation organized under
the basic principles of strategic management will find a smooth sailing due to effective
decision-making.
Efficient and effective way of implementing actions for results: Strategy provides a
clear understanding of purpose, objectives and standards of performance to employees at
all levels and in all functional areas. Thereby it makes implementation very smooth
allowing for maximum harmony and synchrony. As a result, the expected results are
obtained more efficiently and economically.
Improved understanding of internal and external environments of business: Strategy
formulation requires continuous observation and understanding of environmental
variables and classifying them as opportunities and threats. It also involves knowing
whether the threats are serious or casual and opportunities are worthy or marginal. As
such strategy provides for a better understanding of environment.
THE IMPORTANCE OF CORPORATE STRATEGY
The importance of a corporate strategy hinges on its being an effective means to allocate a
company’s resources, establish business expectations and improve a company’s competitive
position, as well as increase shareholder value to something beyond the sum of its physical
assets.
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Allocates Company Resources: A corporate strategy is a tool a company uses to limit the
allocation of its resources to the best available business investment opportunities. During
strategic planning and budgeting processes, a company assesses the performance of each
business unit. Based on its findings, the company acquires and divests assets and revises
resources allocations. Leaders allocate company resources according to the desirability of
each business unit’s market opportunities, which determines its planning priorities.
Establishes Expectations: A company conveys its corporate strategy to individual
business units to drive performance and establishes the expectations of internal and
external stakeholders, or those with an interest in the success of a company. Corporate
objectives focus on key areas, such as market standing, productivity and profitability, for
which measurable objectives are set, such as achieving a particular market share or
financial return on investments. It’s through expectations that stakeholders align their
activities with strategic goals and assume particular roles to ensure a corporate strategy is
carried out successfully.
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Improves competitive position: The corporate strategy is concerned with a company’s
growth and profit performance. Consequently, the strategy decides the businesses in
which a company competes and how the business units structure and manage their
activities to improve a company’s competitive position.
Adds shareholder value: Relying on a company strategy, business units can increase
investor value to something beyond the sum of its physical and intellectual assets. By
making rational strategic choices about the business a company plans to pursue, the
allocation of its resources, the use of organizational capabilities and business unit
competitive advantages, the probability increases that business unit activities succeed in
increasing a company’s value.
Corporate Strategy Framework
In developing corporate strategy, the first task is therefore to assess the current level of fit
between the characteristics of the parent company and its businesses.
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What is different and unusual about the parent?
How do most senior managers think about their roles?
What “mental maps“do they have regarding business success, appropriate responses
to problems, and the nature of unexploited opportunities in the businesses?
What systems and processes link the parent with its businesses and how are they used
in practice?
Understanding the characteristics of the businesses is equally important. In contrast to
traditional portfolio matrix views, our focus is not on the businesses per se (such as
whether they are in growth areas or have advantaged positions), but on the influence,
positive and negative, that a parent is likely to have on them. All businesses will have
some improvement opportunities, but which of these opportunities could be realized
only with the help of a parent?
What is the underlying reason why business-level managers need help in addressing a
particular opportunity?
What is the nature of the help they need?
Successful parents have clear insights regarding these questions, but there is no magic formula.
Different parents have different insights. However, successful parents all seem to focus on a
small and internally consistent set of insights that enable them to become specialists. This
contrasts significantly with less successful parents, which are less focused and less clear about
their own roles. While they attempt to add some value through budget reviews, an informed
second opinion, or the pursuit of general synergies, in reality their intervention is often unhelpful
or distracting. Without specific insights about how it can add value, the parent is likely to destroy
it. But simply having insights is not enough. The fit must extend from intention to behavior.
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Arthur D. Little Corporate Strategy Framework
EXAMPLES/TYPES OF CORPORATE (BUSINESS) STRATEGY
In his 1980 book "Competitive Strategy", Professor Michael E. Porter laid out three different types of
strategies in business: differentiation, overall cost leadership, and focus. Any of these corporate or
business strategies can be effective in the long term, but each has its own priorities for resource
allocation.
Cost leadership is a strategy that companies implement by providing their products and services
as low as consumers are willing to pay, thereby remaining competitive and realizing a volume of
sales that allows them to be the leaders in the industry. It is an easy business strategy to explain, but
it's difficult to implement. The whole goal here is to be the cheapest provider of your product or service.
Examples of cost leaders in UK are Wal-Mart, McDonalds and IKEA, all of which offer lowpriced yet quality goods, by sourcing its products from emerging market, thus having a high
profit margin.These companies focus on providing a wide range of goods. It is possible to buy almost
anything there, at rock-bottom prices. For most small business professionals, this strategy is out of reach.
It works for large companies because they are selling on a massive scale.
Product differentiationrefers to the effort of organizations to offer a unique value proposition to
consumers. Typically, companies that manage to differentiate their products from the
competition are gaining a competitive edge, thereby realizing higher profits. Often, competitors
employ cost leadership and other strategies to directly compete with them, yet customer
satisfaction and loyalty are the factors that eventually make or break a strategy.
Companies undertaking this strategy must prove to the customers that they are different (and better) than
the competition, as they are less concerned with price. They can command higher prices for products or
services because they stand out in some way; they are worth the extra money. The long-term strategy is to
cut costs in the areas that don't contribute to your differentiation, so you can remain cost competitive.
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Focus: Unlike differentiation and cost leadership strategies, a niche business strategy focuses on one
small portion of the market. You're fulfilling a need that perhaps fewer people have, but there is less
competition from other businesses. The marketing efforts are targeted, which can make them easier to hit.
Other examples or types of innovative growth and corporate strategies deal with the firm's rate of
the new product development and business model innovation. It asks whether the company is on
the cutting edge of technology and business innovation. These can take four basic forms, namely:
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Horizontal integration - This term describes a type of ownership and control. It is a
strategy used by a business or corporation that seeks to sell a type of product in numerous
markets. Horizontal integration occurs when a firm is being taken over by, or merged with,
another firm which is in the same industry and in the same stage of production as the merged
firm, e.g. a car manufacturer merging with another car manufacturer or a bigger bank taken over
a smaller one. In this case both the companies are in the same stage of production and also in the
same industry. This process is also known as a "buy out" or "take-over". The goal of horizontal
integration is to consolidate same companies and monopolize an industry [horizontal monopoly].
A term that is closely related with horizontal integration is horizontal expansion. This is the
expansion of a firm within an industry in which it is already active for the purpose of increasing
its share of the market for a particular product or service.
Vertical integration - This term describes a style of management control. Vertically integrated
companies in a supply chain are united through a common owner. Usually each member of the supply
chain produces a different product or (market-specific) service, and the products combine to satisfy a
common need as contrasted with horizontal integration. Vertical integration has also described
management styles that bring large portions of the supply chain not only under a common ownership, but
also into one corporation (e.g. a conglomerate embarking on producing its inputs itself rather than buy it
from suppliers).
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Vertical integration is one method of avoiding the hold-up problem. A vertical integration often
results to a vertical monopoly.Vertical integration is the degree to which a firm owns its
upstream suppliers and its downstream buyers. That is, it is typified by one firm engaged in
different parts of production or rendition of services (e.g. growing raw materials, manufacturing,
transporting, marketing, and/or retailing, or one-stop financial service provider).
There are three varieties: backward (upstream), forward (downstream), and balanced (a
combination of both upstream and downstream) vertical integration.
A company exhibits backward vertical integration when it controls subsidiaries that produce
some of the inputs used in the production of its products. For example, an automobile company
may own a tire company, a glass company, and a metal company. Control of these three
subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their
final product.
A company tends toward forward vertical integration when it controls distribution centers and
retailers where its products are sold
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Diversification - This is a form of corporate strategy for a company. It seeks to increase
profitability through greater sales volume obtained from new products and new markets.
Diversification can occur either at the business unit level or at the corporate level. At the
business unit level, it is most likely to expand into a new segment of an industry that the business
is already in. At the corporate level, it is generally very interesting entering a promising business
outside of the scope of the existing business unit.
There are three types of diversification: concentric, horizontal, and conglomerate.
Concentric diversification - means that there is a technological similarity between the industries,
which means that the firm is able to leverage its technical know-how to gain some advantage.
For example, a company that manufactures industrial adhesives might decide to diversify into
adhesives to be sold via retailers. The technology would be the same but the marketing effort
would need to change. It also seems to increase its market share to launch a new product that
helps the particular company to earn profit. This can also help the company to tap that part of the
market which remains untapped, and which presents an opportunity to earn profits.
Horizontal diversification adds new products or services that are often technologically or
commercially unrelated to current products that may appeal to current customers. In a
competitive environment, this form of diversification is desirable if the present customers are
loyal to the current products and if the new products have a good quality and are well promoted
and priced. Moreover, the new products are marketed to the same economic environment as the
existing products, which may lead to rigidity and instability. In other words, this strategy tends to
increase the firm's dependence on certain market segments. For example, a company that was
making notebooks earlier may also enter the pen market with its new product.
It can also occur when a firm enters a new business (either related or unrelated) at the same stage
of production as its current operationsinvolving marketing new products through existing
channels of distribution, at same stage of the production process.
Conglomerate diversification (or lateral diversification), involves a company marketing new
products or services that have no technological or commercial synergies with current products
but that may appeal to new groups of customers. The conglomerate diversification has very little
relationship with the firm's current business. Therefore, the main reasons of adopting such a
strategy are first to improve the profitability and the flexibility of the company, and second to get
a better reception in capital markets as the company gets bigger. Even if this strategy is very
risky, it could also, if successful, provide increased growth and profitability.
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Intensification - This strategy helps a firm to achieve marketing objectives such as
building a brand and increasing sales. Unifying your various marketing tactics into a powerful
marketing strategy intensifies your efforts in a way that can propel your startup or small business
ahead of larger competitors. Intensifying your marketing strategy lets you leverage on your target
customers and speed up your progress toward the objectives you want to achieve.
Specifically, this means aligning every marketing tool in your arsenal to deliver your brand’s
story in a way that speaks directly to your target audience and creates a consistent customer
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experience. Most of your marketing tools will fall into a few categories based on the results
they’re each meant to achieve, including building your brand’s image, conveying a message,
satisfying customers, and shaping customer opinion of your brand. Such tools can include
websites, social media pages, advertising, sales brochures, trade shows, customer relations,
corporate identity, media relations, pricing or product packaging. Using all of your tools to
deliver the same brand story is important.
These Growth Opportunities emerge from changes in market trends, segment dynamics changing
and also internal brand or operational business challenges.The Marketing team can then
prioritize these Growth Opportunities and begin to develop strategies to exploit the opportunities
that could include new or adapted products, services as well as changes to the 7Ps.
BUSINESS STRATEGY
This is used interchangeably with corporate strategy. A business strategyis the means by which
an organization sets out to achieve its desired objectives. It can simply be described as long-term
business planning. Typically a business strategywill cover a period of about 3-5 years
(sometimes even longer).
A business strategy is a set of guiding principles that, when communicated and adopted in the
organization, generates a desired pattern of decision making. It is therefore about how people
throughout the organization should make decisions and allocate resources in order to accomplish
key objectives. A good strategy provides a clear roadmap, consisting of a set of guiding
principles or rules, that defines the actions people in the business should take (and not take) and
the things they should prioritize (and not prioritize) to achieve desired goals.
Elements of Business Strategy
The aim of every business is to be sustainable and to stand out from the crowd and attract
customers. A coherent business strategy will help you understand the performance of a company,
what drives that performance, how it can be increased, as well as protecting the company against
future risks. All business is risky and no business plan can truly determine exactly what will
happen in the future.
Your market may seem safe now, but what about in five years? How will your business cope if
competitors dramatically lower their prices? Or valuable employees lose morale therefore lower
performance? Every business needs a safety net of protocol to help them make those tough
decisions. What a documented strategy can do is give your business the extra support and
guidance it needs if put to test. Here are some of the key elements for a good business strategy:
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Creating the key objectives and goals of your business for the short and long term and creating a
message employees and colleagues can stand behind.
Reflecting critically on the real weakness of your business internally and externally.
Evaluating the possible risks your business may encounter i.e. weakness in product/service
performance compared to the competition.
Evaluating future market changes that will or may effect your customer and anticipating those
changes.
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Describing your financial features and requirements. For example, displaying your costs, return
on investment (ROI), and Profits and losses, and what future investment may be needed.
Once you have created your business strategy it is important to then monitor its success. You can
make sure your business strategy is on schedule and progress is always on track by using this
planning document as a bench mark.
CORPORATE STRATEGY VS BUSINESS STRATEGY
The fundamental differences between corporate and business strategy are highlighted below.
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Corporate Strategy
Corporate Strategy is the one expressed
in the mission statement of the
company, which describes the business
type and ultimate goal of the
organization
Formulated by top level managers, i.e.
board of directors, CEO, and managing
director.
It is deterministic and legislative.
Business Strategy
Business Strategy can be viewed as the
strategy designed by the business
managers to improvise the overall
performance of the firm
Focuses on the entire organization,
comprising of various business units or
divisions
Stresses on increasing profitability and
business growth
Corporate Strategy uses extroverted
approach, which links the business with
its environment.
Strategies mostly used are Expansion,
Stability and Retrenchment
Mostly concerned with a particular unit or
division
Framed by middle-level management
which comprises of division, unit or
departmental managers
The nature of business strategy is
executive and governing.
It is a long term one approach
It is a short term strategy.
Focuses on the business selection in Aimed at selecting the business plan to
which the company wants to compete in fulfill the objectives of the organization.
the marketplace.
Focuses on competing successfully in the
market place with other firms
Business Strategy has an introverted
approach, i.e. it is concerned with the
internal working of the organization
Strategies which are employed by the
organization includes, cost leadership,
focus and differentiation
HISTORICAL CONTEXT OF CORPORATE STRATEGY
Corporate strategy developed early in the 20th Century in the US and Europe by managers of companies
rather than by academics, when they began to explore and define the management task in perspectives.
F. W. Taylor was known for the US and Henri Fayol in France. They were industrialists holding senior
positions in industry for some years. Henry Ford, in the period 1908 -1915 developed strategies by
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experimenting to produce goods more cheaply and fulfil growing market demand, which is still relevant
today. These experiments include:
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Innovative technology
Replacement of men by machines
Search for new quality standards
Constant cost-cutting through factory re-designs
Passing on the cost reductions in the form of reduced prices.
Also, Henry Ford did not believe in major model variations and market segmentation, and the importance
of middle and senior management. He sacked many of his senior managers and ultimately left his
company in chaos after his demise, unlike Alfred Sloan and others who were successful beyond 1920s in
General Motors by developing other strategic models such as:
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Tailoring car models for specific market niches
Rapid model changes
Structured management teams and reporting structures along modern trends
Separation of day-to-day management from the task of devising longer-term strategy
The economic depression occasioned by the 1st World War of the 1930s brought about the need for a new
order in international currency and desire for larger companies to gain economies of scale mostly in North
America.
In the mid-20th century, the second world war of 1940s brought about specialist demands for military
equipment coupled with more destruction across mostly Europe, Japan, leaving out North and South
America, while the middle East and Far East remained largely outside the scope of industrial
development, and made development of strategies more relevant. The period late 1940s to 50s
engendered the beginning of real corporate strategy development, accompanied with the reconstruction of
industry across Europe and Asia (particularly Japan).
By late 1950s down to 1920s, corporate strategy concepts began to evolve, and the early concepts of what
become one of the main approaches to corporate strategy (prescriptive corporate strategy) emerged. It
was argued by Igor Ansolf that, there are environment factors which accelerated the development of
corporate strategy, which he identified as:
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The accelerated rate of change – taking advantages of new opportunities
The greater spread of wealth – corporate strategy needed to find ways of identifying the
opportunities provided by the spread of increasing wealth
Thus, in the late 1970s to 80s, the second approach to corporate strategy development (emergent
corporate strategy) became prominent.
In the 21st century, the major oil price surge was experienced as a result of increased need for energy and
the Middle Eastern success in organising an oil price cartel. Hence, the business environment was subject
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to a sudden and largely unpredicted change that caused some corporate strategists to reconsider the value
of prediction in corporate strategy. The trend has the effect on corporate strategy in the following areas:
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Free market competition
Asia-Pacific competition and increased wealth beyond the North America and Europe, to
countries such as China and Japan due to lower labour costs and greater wealth provoked by cost
cutting
Global and local interest due to complexity in cultural and social norms and internationalisation
of business.
The need to empower and involve employees in strategic decisions through high level of training
and skill acquisition
Greater speed of technical change and rise of new forms of communications such as internet,
which revolutionalize strategy development
Collapse of some companies for ethical reasons, e.g. Enron, Worldcom palaver, which led to a
renewed emphasis on ethical issues in the development and conduct of corporate strategy.
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CORE AREAS OF CORPORATE STRATEGY
The three core areas of corporate strategy are:
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Strategy analysis
Strategy development
Strategy implementation
Strategy analysis involves the examination and analysis of the organization’s mission and
objectives. Corporate strategy, normally provides value for the people involved in the
organization (i.e. the stakeholders); but it is often the senior/top managers who develop the
organization’s overall objectives in the broadest possible terms. Examination is conducted on the
objectives and the relationship of the organization with its environment, while analyzing the
resources as well.
Strategy development will explore all strategic options to be developed and a selection of best
option(s) would be made. To be successful, the strategy is likely to be developed or built on the
particular skills or specifics of the organization and the special relationships that it has or it can
develop with external stakeholders such as suppliers, customers, distributors and government.
For many organizations, this will mean developing advantages over competition that are
sustainable over time. There are usually many options available and one or more will have to be
selected.
In strategy implementation process, the selected options now have to be implemented. There
may be major difficulties in terms of motivation, power relationships, government negotiations,
company acquisitions and many other matters. All strategies must be capable of implementation.
Thus, if a viable corporate strategy is to be developed, each of these areas should be carefully
explored. It is necessary to separate the corporate strategy into the three core sequential areas
above. It is important to note that many organizations would have had some existing
relationships with customers and suppliers that are well developed, and other potential
relationships. It is therefore expedient to say that the core areas might be simultaneous, by
implementing some ideas while analyzing and developing others.
Some of the issues relating to these three core areas are defined below:
1. Mission Statement/vision
A mission statement is the definition of business that the organization is in, as against the
value and expectations of the stakeholders.
A mission statement stems from the articulation of an organization’s corporate mission,
which can be thought of as a definition of what the organization is, or what it does [the
business]. This definition should not be too narrow, otherwise it will compress the
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development of the organization; or be too rigorous or too wide, and otherwise it may
become meaningless.
It is often suggested that the definition should cover three dimensions:
a.
Customer groups to be served,
b.
Customer needs to be served, and
c.
Technologies to be used.
Thus, the definition of a typical ICT firm's "corporate mission" for instance may be: "We
are in the business of handling accounting information (i.e. customer need) for the larger
Nigerian organizations (i.e. customer group) by means of punched cards (the
technology)" A statement such as “we are in business to become a leading African
industrialist” is also an example of mission statement. A Corporate mission statement is a
written declaration of an organization's core purpose and focus that normally remains
unchanged over time. Properly crafted mission statements serve as filters to separate what
is important from what is not, clearly state which markets will be served and how, and
communicate a sense of intended direction to the entire organization.
Corporate Vision - Similarly, there is need to also identify the "Corporate Vision." If the
organization in general, and its chief executive in particular, has a strong vision of where
its future lies, then there is a good chance that the organization will achieve a strong
position in its markets (and attain that future). This will not be the least because its
strategies will be consistent and will be supported by its staff at all levels. A Corporate
vision statement is an inspirational description of what an organization would like to
achieve or accomplish in the mid-term or long-term future. It is intended to serves as a
clear guide for choosing current and future courses of action
A mission is different from a vision in that the former is the cause and the latter is the
effect; a mission is something to be accomplished whereas a vision is something to be
pursued for that accomplishment.
2. Objectives/goals – These state more precisely what is to be achieved and when the result
is to be accomplished, which is often quantified. For example, a board member can aspire
as a goal to become the chairman of the board of directors at the age of 30.
3. Strategies – this is the plan or pattern that can integrate an organization’s major plan,
goals or policies and action sequences into a unified or cohesive whole. Examples can
include a plan to obtain a PhD degree from a leading University in the world, or to attain
a key functional directorship of a chosen company by the age of 35.
4. Plans/Programmes – The specific actions that can follow from the strategies above,
specifying a step to step sequence of actions for achievement. Examples can be plans to
obtain relevant degree at a specific time; to take the next two years to get commercial
14
banking experience; to identify five major top business schools by next two summers;
and to obtain admission into any of the schools in the following year.
5. Controls – The process of monitoring the proposed plans as they proceeds and adjusting
where necessary, involving modification of the strategies as time goes on.
6. Reward – the reward of the successful strategy, adding value to the organization and to
all stakeholders, leading to high compensation and career satisfaction.
From the aforesaid definitions, can be derived two important qualifications, thus:
i.
ii.
The importance of judgment and values in arriving at the mission and objectives
shows that corporate strategy is not a precise science.
Corporate strategy may be highly speculative and involve major assumptions as it
attempts to predict the future of the organization, which may be difficult, as a result
of presence of a largely false and perhaps unrealistic sense of direction.
PROCESS, CONTENT AND CONTEXT
It has been discovered that, in most situations, corporate strategy is not simply a matter of taking
a strategic decision and then implementing it. It often takes a considerable time to make the
decision itself and then another delay before it comes into effect. There are two reasons for this.
1. People are involved, such as managers, employees, suppliers and customers. Any of these
people may choose to apply their own business judgment to the chosen corporate
strategy, thereby influencing the initial decision and the subsequent actions that will
implement it.
2. The environment may change radically as the strategy is being implemented. This will
invalidate the chosen strategy and mean that the process of strategy development needs to
start again.
For this reason, there is therefore the need to draw an important distinction in strategy
development between process, content and context. In that case every strategic decision will
involve:
a. Content – the main actions of the proposed strategy in the market place
b. Context – the environment where the strategy operates and is developed including the
technological changes
c. Process – how the actions link together or interact with each other as the strategy unfolds,
against what may be a changing environment. It is the means by which the strategy will
be developed and achieved.
In most corporate strategy situations, the content and context are reasonably clear. It is the way
in which strategy is developed and enacted, that is, the process which usually causes the most
difficult problems. Processes need investigating and are indistinguishable and unrealistic as they
15
involve people and rapidly changing environments. Likewise, during the implementation period,
the process can influence the initial strategic decision, and therefore becomes the most difficult
parts of strategic development.
CORPORATE STRATEGY APPROACH
There are two basic approaches to corporate strategy development process, namely the
prescriptive and emergent approaches.
The prescriptive approach to corporate strategy is the one whose objective has been defined
in advance and whose main elements have been developed before the strategy commences. That
is, the three core elements are linked together sequentially. This makes it essentially linear and
rational process starting with where-we-are now and then developing new strategies for the
future.
The emergent approach is a strategy whose final objective is unclear and whose elements are
developed during the course of its life, as the strategy proceeds. In other words, the strategy
emerges, adapting to human needs and continuing to develop over time. It is evolving,
incremental and continuous; and therefore cannot be easily or usefully summarized in a plan for
implementation.
From the foregoing, both approaches can make a contribution and are not mutually exclusive. In
many respect, they can be said to be like the human brain with both rational and emotional sides,
which are needed for the brain to function properly, as corporate strategy is for the business
likewise.
Consequently, the prescriptive approach takes the view that the three areas of strategic analysis,
development and implementation are linked together sequentially and therefore possible to use
the analysis area to develop a strategy which is then implemented. The emergent approach, on
the other hand, takes the view that the three core areas are essentially interrelated while regarding
the analysis area as being distinctive and in advance of the other two elements. Corporate
strategy is then developed by an experimental process involving trial and error. It is not
appropriate to make a clear distinction between the strategy development and implementation
phases as they are closely linked, one responding to the results obtained by the other.
DEVELOPING MODELS OF CORPORATE STRATEGY
Based on the two approaches discussed above, it is possible to develop models to aid in
understanding the way that corporate strategy operates. Thus, the analytical phase of both
approaches can be divided into three parts:
a. Analysis of the environment – examining what is happening or likely to happen outside
the organization, such as economic and political developments, issues with competition,
etc.
16
b. Analysis of resources – exploring the skills and resources available inside the
organization, e.g. human resources, equipment, finance, etc
c. Identification of vision, mission and objectives – this involves developing and reviewing
the strategic direction and the more specific objectives, e.g. the maximization of profits or
returns on capital, or social services.
The third element above can come first depending on the strategist, as it is often argued that
vision, mission and objectives are put in place first, before analysis can start, in the context of the
environmental and competitive resources of the organization.
Strategic Development and Implementation – Prescriptive Approach
The next step that follow the steps in the analysis above is the formal consideration of the
options available to achieve the agreed objectives. This is followed by a rational selection from
the options according to identified criteria, in order to arrive at the strategy. Then, the decisions
feedback into the resources and the environment of the organization, will follow. The resources
might be for instance, new factories and new products; while the environment might be new
customers attracted by the new strategy in place.
Strategic Development and Implementation – Emergent Approach
Essentially, this takes a much more experimental view of the choice of strategy, and its
implementation, as mentioned earlier. It seeks to learn by trial, experimentation and discussion,
as strategy developed. There is no final, agreed strategy but rather a series of experimental
approaches that are considered by those involved and then developed further. In other words,
strategies emerge during a process of crafting and testing. There is no clear distinction in the
emergent approach between the two stages of developing the strategy and its implementation.
WHAT MAKES GOOD STRATEGY
Giving the absence of agreement on the definitions of corporate strategy and the difficulty of
developing it successfully, it is relevant to explore what makes good corporate strategy. To some
people it might appear that there is one obvious answer to this, that is, good strategy delivers
the purpose set out for the strategy in the beginning. However, the following questions can
weigh further this assertion:
i.
ii.
Was the purpose itself reasonable? Perhaps the purpose may be so easy that any
old/existing strategy would achieve successfully and stresslessly.
What do we do when it is difficult to define clearly the purpose beyond some general
objectives of survival or growth? This may make it difficult to test whether a good
strategy has been developed.
17
iii.
Since the whole purpose of strategy is to explore what we do in the future, can we
afford to wait until it has been achieved before we test whether it is good or not?
Therefore, we need some more robust tests of good strategy obviously. This can be in two major
areas.
a. Application related – that is, those that relate to the real world of the organization and
its activities
b. Academic rigour – those that rely on the disciplines associated with the basic principles
of research, to determine originality, logical thought and scientific methods.
TEST OF GOOD STRATEGY – APPLICATION RELATED
This will entail:
1. The value-added test, which is to deliver increased value added in the market place.
This might involve increased profitability, but might also be visible in gains in longerterm measures of business performances such as market share, innovative ability and
satisfaction for employees.
2. The consistency test, which is consistent with the circumstances that surround a business
at any point in time. It will take into account its ability to use its resources efficiently, its
environment, which may be changing rapidly or slowly, and its organizational ability to
cope with the circumstances of the time
3. The competitive advantage test, a good strategy will increase the sustainable
competitive advantage of the organization. The organizations that traditionally may not
be seen as competing in the market place, like charities or government institutions, can be
considered as competing for resources. For instance, charities can compete with others
for new funds, while government institutions can compete for the share of the available
government funds.
Test of Good Strategy – Academic rigour related
These are tests which are more fundamental to the basic principles of originality, logical thought
and scientific methods.
1. The originality test – often, the best strategy often derives from doing something totally
different, and has academic validity. It needs to be used with considerable caution or it
becomes just another excuse for wild and illogical ideas that have no ground in the topic
2. The purpose test – it is logical to examine whether the strategies that are being proposed
make some attempt to address whatever purpose has been identified for the organization,
including the aspirations and ambitions of the leaders of the company along with its
stakeholders.
18
3. The logical consistency test – to determine whether the recommendations flow in a clear
and logical way from the evidence used, the confidence and trust we have in the evidence
itself (which might be unreliable as it has come from the competitors).
4. The risk and resources test – to determine whether the risk and resources associated
with the strategies are sensible and acceptable, as they may require resources that are
substantially beyond those available to the organization like finance, people and skills.
5. The flexibility test – which is to determine if the proposed strategies lock the
organization into the future regardless of the way the environment and the resources
might change. Do they allow some flexibility, depending on the way the competition in
the economy, the management, the employees and other materials factors develop?
19
ANALYSIS OF THE EXTERNAL COMPETITIVE ENVIRONMENT
INTRODUCTION
In strategy, environment means everything and everyone outside the organization, including competitors,
customers, government, etc. Therefore, an understanding of the competitive environment is an essential
element of the development of corporate strategy. It becomes important, thus, to study the environment
surrounding the organisation for three main reasons.
i.
ii.
iii.
Most organisations compete against others – a study of the environment will provide
information on the nature of competition as a step to developing sustainable competitive
advantage
Most organisations will perceive opportunities that might be explored and threats that need to
be contained. Such opportunities and threats may come from competitors, government
decisions, changes in technology, social development and many other unpredictable factors.
There are opportunities for networking and other linkages leading to sustainable cooperations, which may strengthen an organisation in its environment by providing mutual
support.
However, there are problems of determining the connections between the organisation’s corporate
strategy and its environment. These include:
a. The prescriptive against emergent debate – problems may arise from the fundamental
disagreement about the corporate strategy processes. Some prescriptive strategists take the view
that, in spite of the various uncertainties, the environment can usefully be predicted for many
markets, while some the emergent strategists believe that the environment is so turbulent and
chaotic that prediction is likely to be inaccurate and serve no useful purpose.
b. The uncertainty – whatever view is taken about prediction, all corporate strategists regard the
environment as uncertain. New strategies have to be undertaken against a backdrop or condition
that cannot be guaranteed and this difficulty must be addressed as corporate strategies are
developed.
c. The range of influences – it is conceivable, at least in theory, that every element of an
organisation’s environment may influence corporate strategy. One solution to the problem posed
by such a wide range of factors might be to produce a list of every element. This would be a
strategic mistake, however, because organisations and individuals would find it difficult to
develop and manage every item. In corporate strategy, the production of comprehensive lists that
include every major eventuality and have no priorities has no value. A better solution is to
identify the key factors for success in the industry and then to direct the environment analysis
towards these factors.
THE MAIN ELEMENTS OF ENVIRONMENTAL ANALYSIS
When analysing the environment, it is useful to draw a distinction between two types of results from the
analysis. These are:
20
a. Proactive outcomes – the environmental analysis will identify positive opportunities or negative
threats. The organisation will then develop strategies to exploit the opportunities and cope with
the threats. For instance, a cross-financing co-operation can be developed to identify new market
opportunities.
b. Reactive outcomes – the analysis will highlight important strategic changes over which the
organisation has no control, and reactive opportunity if the changes happen, e.g. government
policy changes.
BASIC STEPS IN ENVIRONMENTAL ANALYSIS
1. ENVIRONMENT BASICS
This will include markets definition and size; market growth and market share. In analysing the
strategic environment, it is important to determine the size of the market to assist in defining the
strategic task. From this point, markets are usually described in terms of annual turnover or sales,
which may be large or small, depending on the type of market focus. What is large to a promoter may
be small to another, based on the strategic opportunities in such markets. This will depend on the
extent to which other products constitute real substitutes (which must be included in the definition).
In establishing the size of the market, as above, it is also a common practice to estimate how much the
market has grown over previous period (year). The importance of growth relates to the organisational
objectives, which must take into account the argument about market definition discussed above.
In addition to this, a large share of a market is strategically beneficial, because it may make it possible
to influence prices and reduce costs through scope for economies of scale, thereby increasing
profitability. It may be difficult to precisely establish market share, as it may not depend on
occasional high sales during the introductory stage of the products. Other strategic circumstances
may make a product market dominant, without necessarily representing a measure of the precise share
of the market.
2. DEGREE OF TURBULENCE IN THE ENVIRONMENT
Special attention is needed on the basic conditions surrounding the organisation, and the nature and
strength of the forces driving strategic change (the dynamics of the environment). This is because, if
the forces are exceptionally turbulent, they may make it difficult to use some of the analytical
techniques. Also, the mature of the environment may influence the way that the organisation is
structured to cope with such changes. There are two measures of turbulence in the environment:
i.
Changeability – the degree to which the environment is likely to change. For instance, there
is low changeability in the liquid milk market and high changeability in the various internet
markets. This measure can include complexity (the degree to which the organisation’s
environment is affected by forces such as internationalization, technological, social and
political complications) and novelty (the degree to which the environment presents the
organisation with new situations).
ii.
Predictability – the degree with which such changes can be predicted. For instance, change
can be predicted with some degree of certainty in the mobile telephone market compared to
biogenetics (something having to do with life) market. This measure can also be in form of
rate of change of the environment (from slow to fast) as well as in form of visibility of the
21
future (in terms of the availability and usefulness of the information used to predict the
future). It is then possible to build a spectrum or range that categorises the environment and
provides a rating for its degree of turbulence, e.g. qualified in the form of repetitive,
expanding, changing, discontinuous, and surprising, etc.
When turbulence is low, it may be possible to predict the future with confidence, when it is
higher. Such predictions have little meaning; when it is high, the environment may be difficult to
study. The changeability elements influencing the organisation may contain many and complex
items and the novelty being introduced into the market place may be high. For instance, new
services, new suppliers, new ideas, new software and new payment system were all being
launched for the internet at the same time. Turbulence was high and predicting the specific
outcomes of such development was virtually impossible.
3. ANALYSING THE GENERAL ENVIRONMENT
There are two techniques available to explore the general environment. These are the PESTEL
model and the Scenarios-based model.
a. PESTEL Model – This is acronym for Political, Economic, Socio-cultural, Technological,
Environmental and Legal aspects of the environment. As we have noted, there is no simple rules
governing an analysis of the organisation’s environment, each analysis will be guided by what is
relevant for that particular organisation. PESTEL analysis is as good as the individual or group
preparing it. Listing every conceivable item under each aspect has little value and betrays a lack
of serious consideration and logic in the corporate strategy process. It would be better to have
few well-thought out items that are explored and justified with evidence, than a lengthy
“laundry” list of items.
To the prescriptive strategists, although the items in a PESTEL analysis rely on past events and
experiences, the analysis can be used to predict the future, as, the past is history and corporate
strategy is concerned with the future action, but the best evidence about the future may derive
from what happened in the past. Thus, prescriptive strategists suggest that it is worth attempting
the task because major new investments make these hidden assumptions, using a well formalised
PESTEL analysis.
On the other hand, for the emergent corporate strategists, the future is so uncertain that prediction
is useless. If this view is held, a PESTEL analysis will fulfil a different role in interpreting past
events, and their interrelationships. In practice, some emergent strategists may give words of
caution, but still be tempted to predict the future. However, when used wisely, the PESTEL
analysis has a vital role in corporate strategy.
The sample checklist is stated below; it is vital to select amongst the items and explore the chosen
areas for in-depth analysis.
i.
-
Political Future
Alignment amongst the Political parties at national, state and local levels
Legislation on taxation, employment, national income, etc
22
-
Relationship between government and the organisation that can influence other issues of the
organisation, and hence forming a part of future corporate strategy
Government ownership of industries as it affects its attitude to monopolies and competition,
etc.
ii.
-
Economic Future
Total GDP and GDP per head (per-capita income)
Inflationary trends
Consumer expenditure and disposable income
Interest rate trends and dynamics
Currency fluctuations and exchange rates
Investment (state, private enterprises, national and foreign companies)
Cyclicality (recurring and circulating)
Unemployment
Cost of energy, transport, communication, raw materials, etc
iii.
-
Socio-cultural Future
Shift in value and culture
Change in lifestyle
Attitude to work and leisure
Green environment (responses to issues of climate change)
Education and health
Demographic changes
Income and wealth distribution policy, etc
iv.
-
Technological Future
Government and foreign investment policy issues
Identification of new research initiatives
New patents and products
Speed of change and adoption of new technologies
Level of expenditure on Research and Development by organisation’s rivals
Developments in nominally unrelated industries that might be applicable, etc
v.
-
Environmental Future
Green issues that affect the environment generally
Level and types of energy consumed, ant their effects (Are they renewable?)
Rubbish, waste and its disposal
Sustainable environment issues, etc
vi.
Legal Future
- Law on competition and other government policies
- Employment and safety laws
- Product safety and copyright issues, etc
23
b. SCENARIOS-BASED ANALYSIS
A scenario is a model of a possible future environment for the organisation, whose strategic
implication can then be investigated. Scenarios are concerned with examining or peering into the
future, not predicting the future. Prediction takes the current situation and extrapolates it
forward, while scenarios take different situations with alternative starting points to explore a set
of possibilities. That is, a combination of events is gathered together into a scenario and then
explored for its significant strategic relevance. The organisation then explores its ability to
handle this scenario, not necessarily expected to happen, but because it is a useful exercise in
understanding the dynamics of the strategic environment.
To build scenarios, you are guided by the following steps:
-
4.
Start from unusual viewpoint like taking the stance of a major competitor, a substantial
change in technology, a radical change of government or the outbreak of war
Develop a qualitative description of a group of possible events or a narrative that shows how
events will unfold
Explore the outcomes of this description/narrative of events by building two or more
scenarios of what might happen.
Include the inevitable uncertainty in each scenario and explore the consequences of this
uncertainty for the organisation concerned
Test the usefulness of the scenario by the extent to which it leads to new strategic thinking
rather than merely the continuance of the existing strategy.
Recall that the objective of scenario building is to develop strategies to cope with uncertainty,
not to predict the future.
ANALYSIS OF THE STAGES OF MARKET GROWTH
The nature of corporate strategy will change as industry move along the life cycle. According to Prof
Michael Porter from Harvard University business school, the industry life cycle can be described as the
grandfather of various concepts for predicting industry evolution. That is, an industry or a market segment
within an industry, goes through four basic phrases of development, each of which has implications for
strategy development.
These phrases include introduction, growth, maturity and decline. However, other writers had included
the pre-production stage before the introduction stage (which may not really be part of the life cycle of
product per se).
The pre-production state covers the feasibility and pre-design studies, material acquisition, product
design, plant installation and setting up of distribution network, as well as operational preparation
including training of operators, engineers, planning processes and developing control systems which
needed appropriate decision making.
The introduction stage attempts to develop interest in the product of the organisation. As the industry
moves towards growth, competitors are attracted by its potentials and thus enter the market from a
strategic perspective, and then competition and growth are enhanced. As all the available customers are
satisfied by the product, growth slows down and the market becomes matured. Although growth has
24
slowed, new competitors may still be attracted into the market, however, each company then has to
compete harder for its market share, which becomes more fragmented or disjointed (that is, broken down
into smaller parts); and then sales enter a period of decline.
Therefore, to explore the strategic implications of all these, it is useful to start by identifying what stage
an industry has reached in terms of its development. For each stage in the cycle, there are number of
commonly accepted strategies as highlighted below:
At the introduction phase:
i.
ii.
iii.
iv.
v.
Customer strategy will focus on early catch up of customers to experiment with the product
and there is need to explain the nature of innovation
Research and development (R & D) strategy will be high
Company strategy will seek to dominate the market by ensuring product quality
The impact on profitability will be high except for new investment in other product categories
The competitor strategy will show keen interest in new category and attempt to replicate new
products
In the Growth Phase:
i.
ii.
iii.
iv.
v.
Customer strategy is focussed on growing group of customers and improve quality and
reliability of product necessary for growth
R & D strategy will seek extension before competition
Company strategy will react to competition with aggressive marketing initiatives
The impact on profitability at this stage will be high, with mild decline in price as
competition become very keen.
Competitors strategy will be on market entry, bringing about an attempt to innovate and
invest more
In the Maturity Phase:
i.
ii.
iii.
iv.
v.
Customer strategy will be on mass market, trials of products & services, brand switching will
slow down
R & D Strategy will decline, obviously
Company strategy will react to cost of increased market share to move to market leadership
and effective efforts will be made to reduce costs
The impact on productivity is that income will be put under pressure because of need for
continuing investment, continuing distribution and competitive pressure
Competitor strategy will be on advertisement competence, lower product differentiation and
lower product re-branding.
In the Decline Phase:
i.
ii.
iii.
There will be no need for R & D strategy any longer
Customer strategy will be on maximizing customer knowledge of the product or service, and
consider appropriate price techniques rather than innovation
Company strategy will focus on cost control basically
25
iv.
v.
Price competition and low growth may lead to losses or need to cut costs drastically to
maintain existing profit level.
Competition will be based primarily on price and initiating efforts to exit the market/industry
The strategic template set above is the conventional view to growth of our market or industry. The
unconventional strategic view argues that, it is the mature industry alone that often requires new growth
as well as Research & Development or some other strategic initiatives. This therefore, suggests that, even
in the matured stage of a market, heavy investment is often necessary to remain competitive in the
market.
It is important to note in the development of strategy that, there are two consequences of the industry life
cycle that can have a significant impact on industries. These are:
a. Advantage of early entry – it is evident from experience and research that first company into a
new market has the most substantial strategic advantage. Despite the risks associated with
pioneer firms, there are also long-term advantages that deserve careful consideration in strategic
development
b. Industry Market share fragmentation – in the early years, market that are growing fast attract new
entrants, naturally and inevitably. As markets reach maturity, each new company is fighting for
market share and the market then becomes more fragmented and segmented. The important
implication of this is that matured markets need revised strategies in relation with a segment of
the market.
The concept of industry life cycle has suffered some criticism in the recent past. Some of the arguments
include:
-
-
-
5.
That, it is difficult to determine the duration of some life cycles, and to identify the precise stage
an industry has reached become knotty. For instance, many old time companies had survived for
decades and yet we can’t determine which stage in the life cycle they are.
That, some industries miss stages or that cannot be clearly identified in their current stages,
particularly as technology improves
That, companies themselves can instigate or prompt change in their products and can, as a result,
alter the shape of the growth curve. For instance, the rapid development in the camera products
(miniaturization and electronic storage replacing the use of films of the past), that makes it
difficult to determine the current stage in the cycle.
At each stage of evolution, the nature of competition may be different. It is evident that some
industries have few competitors, while some others have many regardless of the stage in the life
cycle. This may be a far more important factor in determining the strategy to be pursued,
therefore.
KEY FACTORS FOR SUCCESS IN AN INDUSTRY
In a strategic analysis of the environment, there is an immense range of issues that can potentially be
explored, creating a problem for most organisations, which have neither the time nor the resources to cope
with such an open-ended task. This analysis can be narrowed down by analysing the key factors that
26
make an industry succeed, and then using these to focus the analysis on particularly important
environmental matters.
The key factors for success (also nick-named KFS, are those resources, skills and attributes of the
organisations in the industry that are essential to deliver success in the market place (that is, profitability,
except in a non-profit making organisation). KSF are common to all the major organisations in the
industry and do not differentiate one company from another, but may vary in some specialised industries.
Some of these factors may vary around issues such as general levels of wages in the country, government
regulations and attitudes to workers redundancy (e.g. salary cut, retrenchment, etc) and trade union
strength to fight labour force redundancies.
It is therefore important to identify the KFS for a particular industry, often times. Many elements relates
not only to the environment, but also to the resources of organisations in the industry. It is also required
to examine the type and nature of resources and the way they are employed in the industry and then to use
this information to analyse the environment outside the organisation. KFS requires an exploration of the
resources and skills of an industry before they can be applied to the environment.
ANALYSIS OF THE COMPETITIVE INDUSTRY ENVIRONMENT (THE PORTER’S
CONTRIBUTION)
6.
An industry analysis will usually begin with a general examination of the forces influencing the
organisation. The objective of such a study is to use this to develop the competitive advantage of the
organisation, to enable it to defeat its rival companies. Much of this analysis was structured and presented
by Prof. M. Porter. His contribution to the understanding of the competitive environment bears wide
implications for many organisations in both the private and public sectors.
This type of analysis is often undertaken using the structure proposed by Porter in what is referred to as
the Porter’s Five Forces Model. Porter identified five basic forces that can act for or against an
organisation, viz:
a.
b.
c.
d.
e.
The bargaining power of the suppliers
The bargaining power of the buyers
The threat of potential new entrants
The threat of substitutes
The extent of competitive rivalry
The objective of this is to investigate how the organisation needs to form its strategy in order to develop
opportunities in its environment and protect itself against competition and other threats. He described his
analysis as concerned with forces driving industry competition.
a. The Bargaining Power of the Suppliers
27
This is concerned with the fact that every organisation has suppliers of raw materials or services used
to produce the final products or services. Porter indicated that suppliers exerts power under the
following conditions:
-
If there are only a few supplier, it may be difficult to switch from one to another when a supplier
starts to exert power
If there are no substitutes for the resources they offer, especially when the supplies are important
for technical reasons and vital to smooth production of the products
If suppliers prices form a large part of the total costs of the organisation, any increase in price will
hit the value-added unless the organisation is able to raise price in compensation
If the supplier can potentially undertake the value-added process of the organisation by
integrating forward (i.e. to control distribution centres and retailers of its products), which
could pose a real threat to its survival.
b. The Bargaining Power of the Buyers (Customers)
This is relevant under the following conditions:
-
-
If the buyers are concentrated and few in number, then the organisation has little option but to
negotiate with them and this will put such organisation in a weak position, especially when
government contracts or public works are involved.
If the product from the organisation is undifferentiated from other competing organisations, the
buyer can easily switch loyalty with no problems, especially if the quality of the buyer’s products
is unaffected
If backward integration is possible (by controlling subsidiaries that produce some of the
-
inputs used in the production of its products), that is, if the buyer’s bargaining power is
increased if he is able to backward-integrate, and take over the role of the organisation.
If the selling price from the organisation is not important to the total cost of the buyer
-
c. The Threat of the Potential New Entrants
This happens when the profit margins are attractive and the barriers to entry are few. The attraction
of high profitability is clear and so the major strategic issue is only that of the barriers to entry into a
market. The sources of the barriers are as listed below:
-
-
-
Economies of scale (i.e. unit costs of production reduces as the absolute volume per period is
increased); the implication of this is that, any new entrant has to come in on a large scale in order
to achieve the low cost level of existing players. This is a barrier and of high risk.
Product differentiation, i.e. branding, customer knowledge, special orders, special levels of
services, etc, may create barriers by forcing new entrants to spend more funds or simply take
longer to become established in the market
Capital requirement, that is, entry into some markets may involve major investment in
technology, plants, distribution of service outlets and other areas, the ability to generate such
finance and the risk associated with such will deter some companies from entry.
28
-
-
-
-
Switching costs, that is, when a buyer is satisfied with one exiting product or service, it becomes
naturally difficult to switch that buyer to a new entrant. The cost of making the switch will fall
on the new entrant and thus create a barrier to entry. In addition to the cost of persuading
customers to switch, organisations should expect that existing companies will retaliate with future
aggressive actions to drive out new entrants. For instance, in the computer industry, Microsoft
had continued to upgrade, and reduce price to retain customers who may want to switch to Apple.
Access to distribution channels: it is not enough to produce a quality product, it must be
distributed to the customers through channels that may be controlled by companies already in the
market, which is another source of barrier.
Cost disadvantages independent of scale (that is, when an established company knows the
market well; when it has the confidence of the major buyers; when it has invested heavily in
infrastructure to service the market; and has specialist expertise); it becomes an intimidating task
for new entrants to gain a foothold in the market. Korean and Malaysian companies, for instance,
attempting to enter the European car market met resistance from the well-entrenched companies
like Ford, Volkswagen and Renault.
Government policy: government had often enacted legislations, often, to protect companies and
industries especially in telecommunication, power, health, energy, etc locally. Efforts from
international organisations to remove such monopolies have not yet fully succeeded, even in the
face of improved technology.
d. The Threat of Substitutes
Substitutes usually render a product in an industry redundant, and result to loss of sales and profits.
More often, substitutes do not entirely replace existing products, but will introduce new technology or
reduce the cost of producing the same product. There is therefore, the need to analyse the possible
threats of obsolescence; the cost of providing some extra aspect of the service that will prevent
switching and the likely reduction in profit margin if prices come down.
e. The Extent of Competitive Rivalry
Higher competitive rivalry may occur in the following situations:
-
-
-
When competitors are almost of equal size and one competitor decides to gain share over the
others, which then increases rivalry significantly and bring down profits. When there is a
presence of dominant company, there may be less rivalry because the larger company is often
able to stop quickly any move by its smaller competitors.
If a market is growing slowly and a company wishes to gain dominance, then a company takes its
sales from its competitors by increasing rivalry
Where fixed costs or the cost of storing finished products in an industry are high, the companies
may attempt to gain market shares in order to achieve break-even or higher levels of profitability,
even through price cuts to achieve high volume of turnover.
If extra production capacity in an industry comes in large increments, companies may be tempted
to fill that capacity by price reduction, even if temporarily.
29
-
If it is difficult to differentiate products/services, competition is essentially price-based and
sometimes also performance-based; and it is difficult to ensure customer loyalty. Markets in
basic pharmaceutical products have become increasingly subject to such pressures.
When it is difficult or expensive to exit from an industry, due perhaps, to legislation on
redundancy costs or cost of closing dirty plants, there is likely to be excess production capacity in
the industry and increased rivalry.
If entrants have expressed a determination to achieve a strategic stake in that market, the cost of
such an entry would be relatively unimportant when related to the total costs of the company
concerned and the long-term advantages of a presence in the market.
-
-
The summary of the above analyses is the effort to provide answers to some questions, as well as confirm
the actions to be taken for a way forward in the process of developing strategies. The questions are:
i.
ii.
iii.
iv.
Are there cases for changing the strategic relationship with suppliers?
Are we forming a new strategic relationship with large buyers?
What key factors for success are available to drive an industry and influence its strategic
development?
Are there any major technical developments that rivals are working on that could
fundamentally alter the nature of the environment?, etc.
Nevertheless, the Five Forces Model had been criticized in the following senses:
-
The analytical framework is essentially static, whereas competitive environment is constantly
changing
It assumes that companies’ own interests come first and this is generally not the case
It assumes that buyers/customers have no greater importance than any other aspects of the microenvironment, which other commentators had faulted
The analysis largely ignores the human resources aspects of strategy, making little attempt to
recognise/resolve aspects of the micro-environment that might connect people with their own and
other organisations.
The analysis proceeds on the basis that once such an analysis has been concluded, the
organisation can then formulate a corporate strategy to handle the results (which is mostly a
prescriptive approach) and giving no consideration for the emergent approach.
-
-
However, despite all these criticism, the approach still provides a very useful starting point in the analysis
of the environment of business, with real merit, because of its logical and structured framework.
7.
ANALYSIS OF THE CO-OPERATIVE ENVIRONMENT (THE FOUR LINKS MODEL)
Most organisations cooperate with others, even though they compete with one another, in certain areas.
This can be through informal supply relationships or through formal and legally binding joint ventures.
This step were not analysed in strategy development until recently. However, it has now become
increasingly clear that co-operation between the organisations and others in its environment is also
important for some basic reasons, including:
-
Helping in the achievement of sustainable competitive advantage
30
-
Opening up new markets and increasing business opportunities
-
Producing lower costs
-
Delivering more sustainable relationship with those outside the organisation
It should be noted that an extreme form of co-operation, such as, collusion between competitors to rig the
market, is illegal in most countries, and it is not our focus here. There are many other forms of cooperation that are highly beneficial, and should form part of any analysis of the environment, such as joint
ventures, alliances, etc.
The basic cooperative linkages between the organisation and its environment can usefully be explored
under four headings. This is to explore and establish the strength and nature of the co-operation that
exists between the organisations and its environment, often referred to as he “Four Links Model”. These
are:
i.
i.
Informal co-operative links and network
ii.
Formal co-operative links
iii.
Complementors
iv.
Government links and network
Informal Co-operative Links and Networks
These are the instances where organisations link together for a mutual or common purpose
without a legally binding contractual relationship. This has been recognised as providing an
important means of understanding the strategy of the firm. Sometimes, this may happen by
accident or by design. They include many forms of contracts like trade groups (formal) and
informal contracts involving people of like-minded individuals from a variety of industries meet
at a social function for a mutual purpose (e.g. local Chamber of Commerce and Industry).
The analysis will assess the opportunities that such links and networks present, as well as the
strengths and weaknesses.
ii.
Formal Co-operative Linkages
This can take many business forms but are usually bound together by some form of legal
contracts. Compared to informal linkage, discussed above, they have a higher degree of formality
and permanence with the organisations.
They are shown in alliances, joint ventures, joint
shareholdings and many others deals that exist to provide competitive advantages and mutual
support over many years. The benefits of such linkages are obvious and include provision of
cheaper essential products and services than others who are not part of the linkage. The strength
and weaknesses should therefore be measured in terms of their depth, longevity and degree of
mutual trust. Threats may still develop from competitors group as well.
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iii.
Complementors
These are companies whose products add more values to the products of the base organisation,
than they would derive from their own products by themselves. For instance, computer hardware
companies are worth little without the software that goes with them, as one product complements
the other.
There are real benefits from developing new complementors opportunities that
enhances both parties and contribute further to the links that exist between them. Complementors
come, typically, from different industries with different resources and skills that work together to
present new and sustainable joint offerings to customers. The analysis should focus on the
strengths and weaknesses of the relationship.
Threats still arise from competitor’s own
complementors.
iv.
Government Links and Networks
This is in respect of the relationships that many organisations have with a country’s national
parliament, regional assemblies and the associated government administrations, which may
extend beyond national boundaries. It may be formal (like government negotiations on
investment, legal issues and tax matters, etc), or informal (through representation on
government/industry organizations in connection with investment and trade).
Government links and network can be vital in tax and legal matters, such as the interpretation of
compensation law. Equally, government can be important customer of organisations, for instance,
in defence equipment pharmaceuticals. Many organisations have come to devote significant time
and efforts to developing and cultivating such relationships through lobbying and other related
activities. Because of the nature and role of government, it may need to remain relatively remote
in its legislative and regulatory dealings with outside organisations. It is important to evaluate the
degree of co-operation or hostility between government and outside bodies. The threats and
opportunities posed by government activities may form a significant part of organisation’s
corporate strategy development as a result.
This model was criticised on the following grounds that:
-
The model may not have the precision and clarity of the “Five Forces Model” and other
competitive analysis (e.g. networks may come and go; complementors may come to disagree;
alliances may fall apart; and democratic government may fail to be re-elected, etc).
-
all linkage relationship lack the simplicity of the bargaining power and competitive threats
analyses of the five forces models
32
However, it can be justified on the following grounds:
-
developing linkages is likely to involve, at least, in part, emergent approach to strategy
development
8.
-
it may provide opportunity to experiment and develop new and original strategies
-
it may deliver sustainable competitive advantages
-
Companies have now come to recognise that co-operation provide new strategic opportunities.
ANALYSIS OF ONE OR MORE IMMEDIATE COMPETITORS IN DEPTH
The analysis of some immediate and close competitors, also known as, Competitors profiling, is
useful in environmental analysis. Broad survey of competitive forces for sustainable competitive
advantage is done by selecting a few companies for more detailed examination. This is because;
it becomes more precise and meaningful when given a specific comparison. Moreover, some rival
companies will have strategic resources (that set them apart and make them formidable opponents
that needed to be identified).
Competitor profiling is the basic analysis of a leading competitor, covering its objectives,
resources, market strength and current strategies. In many markets, where there are usually more
than one competitors, and will not be possible to analyse all of them, it will be necessary to make
a choice from those representing direct threats, whether for customers or resources.
It is,
however, time consuming, but it is vital to the development of corporate strategy.
Subsequently, the following aspects of the competitor’s organisations chosen will be explored.
i.
Objectives. This will depend on whether the competitor is seeking sales, market share or
profit growth. The cautious examination of the company’s annual reports and press
statement will be helpful in ensuring that the company is not bluffing or using some other
competitive technique, hiding under the objective.
ii.
Resources. The scale and size of the company’s resources is an important indicator of its
competitive threat. It is wisdom to investigate the state of its technology, whether
inferior or superior; over-manning at the plant; and its financial position.
iii.
Past records of performance. This is direct evidence that the company is publicly
available through financial statement and stockbroker reports
iv.
Current products and services. Many companies buy competing products/services to tear
them apart for profiling, in order to analyse customers, quality, performance, after sales
services, promotional materials, and going as far as interviewing former employees, etc.
33
v.
Links with other organisations. Joint membership, alliances and other forms of cooperations may deliver significant competitive advantages.
vi.
Present strategies. Attitudes to subjects like innovations; leading customers; finance and
investment, human resources management, market share, cost reduction, produce range,
pricing and branding, all deserve investigation in competitor profiling.
One of the dangers in competitor’s profiling is to see companies as essentially static, but
companies are practically unchanging all the time. It is therefore should a continuing exercise to
profile. The emergent approach should be adopted to deliver useful insight into rapidly changing
environment, using SWOT Analysis.
9.
ANALYSIS OF CUSTOMER AND MARKET SEGMENTATION
Customers should be regarded as crucial in corporate strategy as they keep the organisation in
existence and deliver its profits. There are three useful dimensions to an analysis of the customer.
i.
Identification of the customer and the market
ii.
Market segmentation and its strategic implications
iii.
The role of customer service and quality.
According to Levitt (1960), some organisations went into decline fast because they had become
too heavily product-oriented. It is therefore important to define accurately the customers and the
competitors. That is, strategies must be developed to identify customers and competitors,
otherwise competitors can creep in to steal customers without the company realising it until it is
too late. This will include profiling both existing and potential customers.
Therefore, most markets have now moved beyond mass marketing to targeted marketing, by
identifying market segmentation and its strategic implications. This will involve the seller to
identify market segments, select one or more of these and then develop products or services
targeted specifically at the segment selected. Market segmentation is the identification of specific
parts of a mass market and the development of different event offerings that will be attractive to
those segments. This is important for strategy for the following reasons:
-
Some segments may be more profitable and attractive than others
-
Some segments may have more competition than others
-
Some segments may be growing faster and offer more development opportunities than others.
There is therefore, the need to distinguish the broad target segments (large numbers of customers
and demand) from the narrow target segment (small niches in the market place).
34
It is usual to prioritise the customer analysis over all the other areas of analysis, followed by the
immediate competitors, before consideration should be given to the broader environment
surrounding the organisation or considered as a circular process. The process must not be limited
to examination of past events, but strictly emergent approach, that is, breaking out of the current
pattern to examine alternative routes and ideas.
LESSON 4
ORGANISATIONAL STRUCTURE AND CORPORATE STRATEGY
There is the need for an organisation, management team and people (organisational structure) to
deliver a well-considered corporate strategy. Whether the strategy is first planned and then the
structure of organisation is developed to implement that strategy or the other way around, should
not be an issue of contention. The recommended view now is that it is preferable to consider both
elements at the same time. Nevertheless, the argument about what element comes first must be
understood.
In the past, it was considered that the strategy was decided first and the organization structure
will then follow. However, recent research has questioned this approach and adopted the view
that strategy and structure are interrelated. Prior to early 60s, Alfred Chandler Jr. studied how
some leading US corporations had developed their strategies in the first half of the 20th Century,
and drew some major conclusions from this empirical evidence, and stated that the organisation
first needed to develop its strategy and after this, to devise the organisation structure that
delivered that strategy. According to him, there is a difference between devising or
implementing a strategy. He defined strategy as the determination of the basic long-term goals
and objectives of an enterprise, and the adoption of courses of action and the allocation of
resources necessary for carrying out these goals.
In other words, the task of developing the strategy is placed at the centre of the organisation,
while the job of implementing it falls on the various functional units of the organisation.
Therefore, chandler’s conclusion was that strategy must be developed before considering the
structure needed to carry it out. That is, new strategy might require extra resources, or new
personnel or equipment which would alter the work of the enterprise, making a new
organisational structure necessary.
35
However, since after 20th century, the business environment has changed substantially. The
workplace, the relationships between workers and managers, the skills of employees have altered
greatly, and all these had made the old understanding of organisational structure no longer
fashionable.
Prof. J. B. Quinn suggested that building organisation structure followed by formulating plans to
achieve the chosen strategy might have grossly oversimplified the process for the reasons that:
-
Simple strategic solutions may be unavailable where the proposed changes are complex
or controversial.
The organisational structure may be unable to cope with the obvious solution for reasons
of its culture, the people involved or the political pressures
Organisational awareness and commitment may need to be built up over time, making it
impossible to introduce an immediate radical change
Managers may need to participate in the change process to learn about the proposed
changes and to contribute specialist expertise in order to develop the strategic change
required.
Quinn suggested that strategic change may need to proceed incrementally (in small stages),
referred to as logical incrementalism. His contention is that it may be difficult to define the final
organisation structure, which to him, may need to evolve as the process of logical
incrementalism moves forward. If this argument is accepted, it will mean that any idea of a
single, final organisation structure based on defined strategy is dubious.
Other researchers posit that formal organisation structure should be part of the day to day
responsibilities and work of managers, as well as being part of the strategy process that comes to
play at the implementation of complex and controversial strategic change. To critics of strategy
design before organisation structure, strategy and structure are interlinked, as it may not be
optional for an organisation to develop its structure after it has developed its strategy.
Organisations must learn to adapt to radical environmental changes and its changing resources;
and as the strategy develops, so does the structure. Likewise, if the strategy process is emergent,
then the learning and experimentation involved may need a more open and less formal
organisation structure.
There was a suggestion in recent times, that the impact of the process and organisation on
strategy has been constantly underplayed. The contribution of employees in invigorating the
organisation and promoting innovation may often be underestimated. The quality of management
and the organisation structure itself will all have an impact on strategy and may be a source of
competitive advantage. Therefore, it cannot be said that people and process issues will arise after
the strategy has been agreed. Companies that perform better may first be because of the way they
are organised and conduct their business rather than their strategy.
In summary, the main criticisms of the strategy before organisational structure are:
36
-
-
Structures may be too rigid, hierarchical and bureaucratic to cope with the newer social
values and rapidly changing environment of recent times
The type of structure is just as important as the business area in developing the
organisation strategy. It is the structure that will restrict, guide and formulate the strategy
options that the organisation can generate. Therefore, strategy and organisation structure
are interrelated and need to be developed together.
Value chain configurations that favour cost cutting or alternatively, new market
opportunities may also alter the organisational structure required.
The complexity of strategic change needs to be managed, implying that more complex
organisational considerations will be involved.
The role of top and middle level management in the formation of strategy may also need
to be reassessed. The work of the leaders in empowering middle management may need a
better approach, by considering organisation’s culture and structure.
STRATEGIC FIT
This is referred to as the matching process between strategy and structure. That is, organisations
need to adopt an internally consistent set of practices in order to undertake the proposed strategy
effectively. This will additionally cover:
i.
ii.
iii.
iv.
v.
The strategic planning processes
Recruitment and training
Reward system for employees and managers
The actual work to be undertaken
The information system and processes
It is therefore, necessary to revisit strategy, even when the implementation process is formally
under consideration. It is unlikely, in view of dysfunctional changing business environment, that
there will be a perfect fit between the organisation’s structure and its strategy. As the
environment changes, the strategic fit will also have to change, even though a minimal degree of
fit is required for an organization to survive, especially if the fit is close early on, in the strategic
development process.
BASIC PRINCIPLES FOR BUILDING ORGANISATIONAL STRUCTURE
Five basic principles can be identified.
1. Consistency with mission and objectives
The organisational structure is essentially developed to deliver its missions and
objectives. Building the organisation structure must begin at this point. The basic
questions here are:
37
-
What kind of organisation are we? Commercial, non-for-profit making, service-oriented,
government administration, etc.
Who are the major stakeholders? Shareholders, managers, employees, etc.
What are the purposes and objectives?
What does the purpose tell us in broad terms about how we might structure our business?
These questions are attended to in the light of the uniqueness of each organisation in size,
products/services, people, leadership style and culture.
2. The Main elements of organisation design
It is important to remember that many organisations have existing structures and that the
primary task of organisation design is usually not to invent a totally new organisation, but
to adapt the existing one. There are nine (9) basic determinants of organisation design,
namely:
a. Age – older organisations tend to be more formal
b. Size – as organisations grow, there is usually an increasing need for formal methods
of communication and greater co-ordination, suggesting that more formal structures
are required
c. Environment – rapid changes in any of the five forces acting on the organisation (as
discussed previously) will need a structure that is capable of responding quickly.
Depending on the complexity of the work undertaken by the organisation, its ability
to respond to the environment may be difficult to organise and coordinate.
d. Centralization/decentralization decision - there are four main areas that need to be
explored regarding the choice of how much an organization wish to control from the
centre, the:
- Nature of business (eg economies of scale)
- Style of the chief executive (a dominant leader will centralize obviously)
- Need for local responsiveness
- Need for local service
e. Overall work to be undertaken - value chain linkage across the organisation will
clearly need to be coordinated and controlled. They may be especially important
where an organization has grown and become more diverse. Divisional and matrix
structures may be needed, with the precise details depending on the specific
requirements and strategies of the organisation.
f. Technical contents of the work - the work to be undertaken, in standardized mass
production, controls the workers and their actions; although, this can sometimes be
flexible.
g. Different tasks in different parts of the organisation - tasks of operation/production
are not the same with that of sales and marketing. Hence, different organisations have
38
different balances of such functions, which is reflected in the way the organization
structure is designed.
h. Culture - this reflects in the degree to which the organization accepts change, the
ambition if the organisation and its desire for its experimentation.
i. Leadership - the style, background and beliefs of the leader may have an important
effect on organisation design. This will be true in innovative and missionary
organisations.
In bringing all the above elements together, there is a danger of overcomplicating the
consideration and arguments. There is therefore, the need for simplicity in designing the
proposals, as structure needs to be understood and operated after it has been agreed.
Responsibility and power need to be controlled and monitored and this needs to be built
into the organizational structure.
3. External environment and internal organization
According to H. Mintzberg (1979), there are four main characteristics of the environment
that influence organization structure.
a. Rate of change – when the organization operates in a more dynamic environment it
needs to be able to respond quickly to the rapid changes that occur. In static
environments, however, change is slow and predictable and does not require
excessive sensitivity on the part of the organization. In dynamic environments, the
organization structure needs to be flexible, well-coordinated and able to respond
quickly to outside influences. The dynamic environment implies a more flexible
organic structure.
b. Degree of complexity – some environments can be easily monitored from a few key
data movements. Others are highly complex, with many influences that interact in
complex ways. One method of simplifying the complexity is to decentralize
decisions in that particular area. The complex environment will usually benefit from
a decentralized structure.
c. Market complexity – some organizations sell a single product or variation of one
product. Others sell ranges of products that have only limited connections with each
other and are essentially diverse. Therefore, as markets become more complex, there
is usually a need to divisionalise the organization as long as synergy or economies of
scale are unaffected.
d. Competitive situation – with friendly rivals, there is no great need to seek the
protection of the centre. In deeply hostile environments, however, extra resources and
even legal protection may be needed from the central. As markets become more
hostile, the organization usually needs to be more centralized.
39
Therefore, Mintzberg developed six major types of organizational structures that combine
the environment, the internal characteristics of the organization (age, size, etc); the key
part of the organization in delivering its objectives; and the key coordinating mechanism
that binds it together, as named below:
-
Entrepreneurial organization (simple/dynamic led by the owner)
Machine organization (High growth or cyclical, a techno-structure)
Professional organization (stable, complex closed to outsiders, controlled by
professionals with standardized skills or core competence
Divisionalised structure (with diverse environmental analyses and standardized
outputs).
Innovative organization (complex and dynamic with mutual adjustment mechanism)
Missionary organization (simple and static with new ideology and standardized
norms)
Mintzberg configuration is important because it throws more light on the types of
organization needed to deliver types of strategy. This configuration had been criticized in
the light of the emerging possible organizational combinations as stated below:
-
-
-
4.
The version of divisionalised structure is so vague and can be limited in value
It might also be said that some companies do not just standardize one variable such as
work or processes, but several, and that the distinctions that draws between them may
not reflect reality
There may be connections between the innovative and entrepreneurial organization
types, that is, the way some entrepreneurial organization grow may involve a strategy
of innovation
The categorization regards manufacturing as a machine rather than an innovative
organization.
The Strategy to be implemented
Every organization is to some extent unique as far as its past, its resources and its
situation are concerned. The key factors for success and the major strategies chosen by
whatever process will depend on the situation at that time. It is difficult to specify clear
and unambiguous rules to translate strategy into organizational structures and people
processes. Five steps are recommended to assist this process:
-
Identify the tasks and people that are crucial to the strategy implementation
Consider how such tasks and people relate to the existing activities and routines of the
organization
Use key factors for success – Ohmae’s three Cs of Customer, Competition and
Corporation (already discussed earlier) to identify the chief areas around which the
organization needs to be built
40
-
5.
Assess the level of authority needed to action the identified strategies
Agree the level of co-ordination between the units in the organization necessary to
achieve the strategy.
Consequences for employment and morale
People implement strategies, not plant, machinery nor financial resources. New
organization structure can provide new and interesting opportunities for managers and
employees. Alternatively, structures may deliver a threat to their scope for work and
possibly even their employment. Developing new organizational structures without
considering the consequences for those who will be affected is clearly unsatisfactory.
TYPES OF ORGANISATIONAL STRUCTURE
These include:
i.
ii.
iii.
iv.
v.
vi.
Small organization structure
Functional organization structure
Multi-divisional structure (M - Form Structure)
Holding company Structure (H- Form Structure)
Matrix organization structure
Innovative organization structure
Small Organizational Structure
This will consist of the owner/proprietor and the immediate small team surrounding that person.
In this case, often there will be limited resources. Individuals will need to be flexible and
undertake a variety of tasks. The informality of the structure will allow fast responses to market
opportunities and customer service requirements.
Problems may be caused by the duplication of roles; confusion of responsibilities and muddled
decision making, which may be make it unrealistic to draw up a clear organisation structure.
Depending on management style of owners or leader, there may be many people or only the
leader contributing to the organisation’s strategy. Example of this exist in small family business,
specialist local business centre, etc.
Functional Organisational Structure
This is based on locating the structure around the main activities that have to be undertaken by
the organisation, such as, production, marketing, human resources, Research and development,
finance and accounting. This structure normally develop from the small organisation structure as
the company grows. Experts in a functional area are grouped together, so that economies of scale
can operate. This structure is simple and have clear responsibilities. It has central strategic
control; functional status is recognised. However, this structure presents a problem of
41
coordination, as emphasis is always on parochial functional areas in strategy development, rather
than company-wide view. It encourages inter-functional rivalry, and slows down strategic
change.
Multi-divisional Structure (M-Form)
This is structured around separate divisions formed on the basis of products, markets or
geographical areas. Developed in the early 1920s by the future head of General Motors, Alfred
Sloan, and recorded by Alfred Chandler. As organisations grow, they may need to subdivide
their activities in order to deal with the great diversity that can arise in products, topography and
other aspect of the business. The focus is on business area. The structure eases functional coordination problems; it allows for measurement of divisional performance and can train future
senior managers. However, it breeds expensive duplication of functions, competition of divisions
against each other, decreased interchange between functional specialists and problems of overrelationship with central services.
Holding/Corporate Company Structure (H-Form)
A holding company is a company that owns various individual businesses and acts as an
investment company with shareholdings in each of the individual enterprises. The holding
company strategy is often referred to as a corporate strategy across the range of individual
businesses. Further growth in organisations may lead to more complex arrangements between
different parts of the organisation and outside companies. For instance, a joint venture with new
organisation outside the group, alliances, partnership, and other forms of cooperation may be
agreed. The original company can then become a holding company and take over the role of
allocating funds to the most attractive profit opportunities. The arrangement allows for the
complexity of modern ownership of companies, taps expertise and gain cooperation, enhances
new market entry and spread risk for conglomerate. However, and it breeds little control at the
centre. There is also the risk of lack of cooperation within partners or loss of interest from any
one partner; and it reduces synergy or economies of scale. This strategy allows organisations to
develop rapidly and to exploit new opportunities.
Matrix Organisational Structure
This is a combination of two forms of organisations such as product and geographical structures,
that jointly operate on all major divisions. For example, Royal Dutch/ Shell Oil, may need to
take strategic decision, not only for its oil, gas and chemical products, but also for countries such
as the UK, Germany, the United States and Singapore, under this arrangement. There is
therefore, the need to set up an organisation which has responsibilities along both products and
geographical dimensions. This structure can result to close co-ordination where decisions may
conflict, adapting to specific strategic situations, instead of bureaucracy. This structure allows for
direct discussion and increased managerial involvement. However, it is complex, slows down
decision making, it is fraught with unclear definition of responsibilities, production of high
42
tension between those involved, especially when the teamwork involved in some parts of the
organisation is not strong.
Innovative Organisational Structures
These structures are characterised by their creativity, lack of formal reporting relationships and
informality. There is need to therefore, have strong teams that combine expertise with different
skills and knowledge, working without much hierarchy with open style of operation. It therefore
allows strategy to develop anywhere and everywhere.
LESSON 5 - CORPORATE STRATEGY
RESOURCES ANALYSIS AND VALUE ADDED
The fundamental role of resources in an organisation is to add value. All organisations need to
ensure that they do not consistently lose value in the long term or they will not survive. For
commercial organisations, adding value is essential for their future, not so for non-for-profit or
charitable organisations, but may just be a part of the reasons for existence;other purposes being
concentrated on social, charitable or other goals.
Resources can add value by working on the raw materials that enter into the factory gate and
turning them into finished products
ValueAdded can be referred to as basic economic concept determining the difference between
the market value of the output of an organisation and the cost of its inputs (i.e. Output minus
inputs).For non-for- profit organisation, the adding value concept can still be relevant but, very
difficult to measure, defined or quantified. Value adding can be in terms of:
-
Raising the value of outputs (sales, etc) delivered to the customers
Lowering the cost of inputs (wages & salaries; material costs, etc) into the company
Either of this may be easy to state but more difficult to achieve, that is each way involves costs,
which will be set against gains made. For example, seeking to reduce cost and improve on
volume may require having to acquire a new machine or technology.A strategic analysis of value
added needs to take place at the market/industry level of the organisation and not at the corporate
or holding company level; especially when it is calculated at the level of individual product.
43
VALUE CHAIN AND VALUE SYSTEM
Value added concept can be used to develop the organisation’s sustainable competitive
advantage through two major routes – value chain and value system. The approach was
developed by Prof. Michael Porter in 1985.
Every organisation consists of activities that link together to develop the value of the business
(purchasing/supplies, manufacturing, distribution, and marketing of goods and services). All
these activities taken together form the value chain of the organisation. The value chain
identifies where the value is added in an organisation and links the process with the main
functional parts of the organisation. It is used for developing competitive advantage because
such chain is unique to an organisation.
The value system thus shows the wider routes in an individual organisation that add value to
incoming suppliers and outgoing distributors and customers. In other words, when organisations
supply, distribute, buy from or compete with each other, they form a broader group of value
generation. That is, linking the industry value chain to that of other industries.
The Value Chain
This concept links the value of the activities of an organisation with its main functional parts. It
then attempts to make an assessment of the contribution that each part makes to the overall added
value of the business. It is used in accounting analysis before Prof. Porter, suggested that it could
be applied to strategic analysis. Prof. Porter links two areas together, thus, the added value that
each part of the organisation contributes to the whole organisation, and the contribution to the
competitive advantage of the whole organisation that each of these parts might then make. In a
company with more than one product areas, the analysis should be conducted at the level of each
product groups and not at corporate strategy level. The analysis will examine how each part
might be considered to contribute towards the generation of value in the company and how this
differs from competitors.
According to Prof. Porter, the primary activities of the company are:
i.
ii.
iii.
In-bound logistics – the areas concerned with receiving the goods from suppliers,
storing them until required by operations, handling and transporting them within the
company
Operations – the production area of the company, which may further be split into
units. For example, in hotel business, it can include the reception, room service, bar,
restaurant, etc.
Out-bound logistics – where final products are distributed to the customers, including
transport and warehousing
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iv.
v.
Marketing & Sales – this will analyse customers’ wants and needs and brings to the
attention of the customer the products or services the company has for sale, e.g.
advertising and sales promotion units.
Services – before or after a product or service has been sold, there is often a need for
pre-installation or after sales service including training, attention to customers’
enquiries, etc
Each of the above categories will add value to the organisation in its own way. They may
undertake this task better or worse than competitors, with higher standards of service, lower
production costs, faster and cheaper outbound delivery and so on; so as to provide the areas of
competitive advantage for the organisation.
Support Activities for Value Chain Dynamics
a. Procurement – there will be separate department (or group of managers) responsible for
purchasing goods and materials that are then used in the operations of the company. The
department’s function is to obtain the lowest prices and highest quality of goods for the
activities of the company.
b. Technology development – may be an important area for new products in the company.
It may cover existing technology, training and knowledge that will allow a company to
remain efficient.
c. Human resources management – recruitment, training, management development and the
reward structures are vital elements in all organisations.
d. Firm infrastructure – this will include the background planning and control system, e.g.
accounting and finance, corporate strategy, etc.
All these support activities add value, just as the primary activities do, but it is difficult to link
with one particular part of the organisation.
The problem with value in strategic development however, is that it is designed to explore the
existing linkages and value-added areas of the business. It works with existing structure and not
outside as real competitive strategy is supposed to be.
THE VALUE SYSTEM
Organisations are part of a wider system of adding value. This involves the supply and
distribution value chains of the organisation and that of the customer. These linked together
isknown as value system. Every organisation, except in rare cases, buys-in or acquire some of
its activities such as advertising, product packaging design, management consultancy, electricity,
etc. Likewise, manycompanies do not distribute their products or services directly to the final
consumers/customers, but engage the services of travel agents, wholesalers, retailers, etc. The
use of the best suppliers and distributors deliver real competitive advantage. Therefore, a
resource analysis extending beyond the organisation itself is necessary in the value system.
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Value chain and value system analyses can be complex and time consuming for the organisation,
hence, the use of the key factors for success (discussed earlier on) is relevant, as they are the
factors that add value to the products or services; and should be correctly identified from the start
of analysis. In essence, value system will not normally concern itself with totally new strategic
opportunities, but with existing linkages.
In developing competitive advantage in relation to value chain and value system, common
items/services may be linked (e.g. raw material and distributors), as they are also often unique to
that organisation. The linkages might therefore, provide advantages over competitors who do
not have such linkages, or who are unable to easily develop them. Porter suggested that, value
chains and systems may not be sufficient in themselves to provide the competitive advantage
needed by companies in developing their strategies. Competitors can often imitate the individual
moves made by an organisation; but may be difficult for competitors in imitating the special and
unique linkages that exist between elements of the value chain and the value systems of the
organisation.
There is therefore the need to search for special and unique linkages that either exist or might be
developed between elements of value chains and systems associated with the company.These
linkages may include:
-
-
Common raw materials used in a variety of end-products
Common services, such as communications or media buying where a combined contract
could be negotiated at a lower price than a series of individual local deals
Linkages between technological development and production to facilitate new production
methods used in various parts of a group (direct telecom links between large retail store
chains and their suppliers).
Computer reservation systems that link airlines with ticket agents
Joint ventures, alliances and partnerships that often rely on different members to the
agreement, bringing their special areas of expertise to the relationship.
Challenges to Value Chain/System Linkages
Some of the challenges associated with value chain, value system and its linkages are stated
below:
i.
ii.
iii.
They all have a broad perspective across the range of the company resources
It is vague to identify the precise nature and scope of the advantages such resources
possess, against competitors, as sustainable advantage is not the primary target
Value-added analysis is focussed on assets that can clearly be measured, but some of
the organisation’s most valuable assets may be difficult to quantify (e.g. branding,
specialist knowledge, etc) or impossible to value (e.g. human resources assets like
leadership, strong team building, etc)
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Despite the above challenges, value added is still very essential in strategy development,
especially, when defined in broad terms, rather than by the narrow (outputs minus inputs)
manner used in the economic analysis.
It is important to state that, unless organisations add some values to their inputs, their very
existence may be in question.
INSIGHTS INTO STRATEGIC MANAGEMENT
Introduction
In the field of management, strategic management involves the formulation and implementation of the
major goals and initiatives taken by an organization's managers on behalf of stakeholders, based on
consideration of resources and an assessment of the internal and external environments in which the
organization operates. Strategic management provides
- overall direction to an enterprise and involves specifying the organization's objectives,
- developing policies and plans to achieve those objectives, and
- 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 ofteninclude a feedback circle to monitor
execution and to inform the next round of planning.
Management theory and practice often make a distinction between strategic management and
operational management.
Operational management concerned primarily with improving efficiency and controlling costs within the
boundaries set by the organization's strategy.This is the running of the day-to-day operations of the
business or the specific terms for key departments or functions, such as logistics management or
marketing management, which take over once strategic management decisions, are implemented.
On the other hand, Strategic management involves the related concepts of strategic planning and
strategic thinking. 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 or creates 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.
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Strategic management is often described as involving two major processes: formulation and
implementation of strategy. In practice, the two processes are iterative or symmetric, and each provides
input for the other.
Origins of Strategic Management
The strategic management discipline originated in the 1950s and 1960s. Among the numerous early
contributors, the most influential were Peter Drucker, Philip Selznick, Alfred Chandler, Igor Ansoff, 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.
Peter Drucker in a 1954 book, The Practice of Management 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.
Philip Selznick (1957)and Kenneth R. Andrews (1963)formalized the idea of matching the organization's
internal factors with external environmental circumstances and the SWOT analysis, in which the
strengths and weaknesses of the firm are assessed in light of the opportunities and threats in the
business environment.
Alfred Chandler (1962) recognized the importance of coordinating management activity under an allencompassing strategy, whereinteractions between functions were typically handled by managers who
relayed information back and forth between departments; and further showed that a long-term
coordinated strategy was necessary to give a company structure, direction and focus.
Igor Ansoff (1965) built on Chandler's work by developing a grid or network that compared strategies for
market penetration, product development, market development and horizontal (firms in the industry
and stage of production) and vertical (supply chain of different product under same ownership)
integration and diversification. He felt that management could use the grid to systematically prepare for
the future and developed gap analysis to clarify the gap between the current reality and the goals and
confirmed 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 (1965, 1968), wrote about the concept of the experience curve (a hypothesis that unit
production costs decline by 20–30% every time cumulative production doubles, to support the
argument for achieving higher market share and economies of scale).
Michael Porter (1980, 1985)wrote that companies have to make choices about their scope and the type
of competitive advantage they seek to achieve, whether lower cost or differentiation; which he revised
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by writing that superior performance of the processes and activities performed by organizations as part
of their value chain is the foundation of competitive advantage, thereby outlining a process view of
strategic change in focus from production to marketing
Management theorist, Peter F. Drucker (1954) wrote that it was the customer who defined what
business the organization was in. Theodore Levitt (1960) argued that instead of producing products and
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. Over time, the customer became the driving force behind all
strategic business decisions. This marketing concept, in the decades since its introduction, has been
reformulated and repackaged under names including market orientation, customer orientation,
customer intimacy, customer focus, customer-driven and market focus.
Strategy and Strategic Management
Strategy has been practiced whenever an advantage was gained by planning the sequence and timing of
the deployment of resources while simultaneously taking into account the probable capabilities and
behaviour of competition.
In 1988, Henry Mintzberg described the many different definitions and perspectives on strategy,
reflected in both academic research and in practice, by examining the strategic process and concluded it
was much more fluid and unpredictable than people had thought; and therefore, he could not point to
one process that could be called strategic planning. Instead Mintzberg concludes that there are five
types of strategies:
a. Strategy as a plan – a directed course of action to achieve an intended set of goals; similar to the
strategic planning concept;
b. Strategy as a pattern – a consistent pattern of past behaviour, 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;
c. Strategy as a 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 (a function of the environment of operation)
d. Strategy as a ploy – a specific manoeuvre intended to outwit a competitor; and
e. Strategy as a 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 the above five types of management strategy into 10 “schools of
thoughts” and grouped them into three categories.
1. The first group is normative group, consisting of the three schools of informal design &
conception; the formal planning; and analytical positioning.
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2. 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, and corporate
culture/business environment.
3. The third and final group consists of one school, the configuration or transformation school (a
hybrid of the other schools organized into stages, or organizational life cycles).
In summary, Michael Porter (1980) defined strategy 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 goals for which the firm is striving and the means (policies) by which it is seeking to
get there. According to him, the essence of formulating competitive strategy is relating a company to its
environment. Some complex theorists defined strategy as the unfolding of the internal and external
aspects of the organization that result in actions in a socio-economic context. In recent years, virtually
all firms have realized the importance of strategic management.
However, the key difference between those who succeed and those who fail is that the way in which
strategic management is done and strategic planning is carried out. This will make the difference
between success and failure. Of course, there are still firms that do not engage in strategic planning or
where the planners do not receive the support from management. These firms ought to realize the
benefits of strategic management and ensure their longer-term viability and success in the marketplace.
It is therefore pertinent to discuss the four edged sword of Strategic Management process, namely
Strategy formation, implementation, planning and evaluation.
Formulation of Strategy
This involves analysing 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 analysis as discussed earlier)
- Industry environment, such as the competitive behaviour 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 as discussed earlier), and
- Internal environment, regarding the strengths and weaknesses of the organization's resources
(i.e., its people, processes and technology).
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?
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-
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 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 of Strategy
The second major process of strategic management is implementation, which involves decisions
regarding how the organization's resources (i.e., people, process and technologies) 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.
Strategic Thinking and Planning
Strategic thinking 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. 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.
Strategic thinking is a mental process, abstract and rational, which must be capable of creating 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 judgment, synthesis is
required in order to produce from these data the judgment itself--and the judgment in fact amounts to a
choice between alternative courses of action.
It was 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 2008/2009 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
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make decisions to improve the quality of their decisions in the future? Eleven (11) forces were identified
to be incorporated into the processes of decision making and strategic implementation. The forces,
which cut across all sectors and industries, are: Time; Opposing forces; Politics; Perception; Holistic
effects; Adding value; Incentives; Learning capabilities; Opportunity cost; Risk and Style
Strategic planning is a means of administering the formulation and implementation of strategy. It 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 strategy formation process.
Scenario Planning - A number of strategists use scenario planning techniques to deal with change. Peter
Schwartz (1991) posited that strategic outcomes cannot be known in advance. Therefore, 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 (Case study style)..
Evaluation of Strategy
A key component to strategic management which is often overlooked when planning is evaluation.
Strategy Evaluation is as significant as strategy formulation because it throws light on the efficiency and
effectiveness of the comprehensive plans in achieving the desired results. The managers can also assess
the appropriateness of the current strategy in today’s dynamic world with socio-economic, political and
technological innovations. It is the final phase of strategic management.
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. 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.
The significance of strategy evaluation lies in its capacity to co-ordinate the task performed by
managers, groups, departments etc, through control of performance. Strategic Evaluation is significant
because of various factors such as - developing inputs for new strategic planning, the urge for feedback,
appraisal and reward, development of the strategic management process, judging the validity of
strategic choice etc.
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The process of Strategy Evaluation consists of following four steps:
Fixing benchmark of performance - While fixing the benchmark, strategists encounter questions such as
- what benchmarks to set, how to set them and how to express them. In order to determine the
benchmark performance to be set, it is essential to discover the special requirements for performing the
main task. The performance indicator that best identify and express the special requirements might
then be determined to be used for evaluation. The organization can use both quantitative and
qualitative criteria for comprehensive assessment of performance. Quantitative criteria include
determination of net profit, ROI, earning per share, cost of production, rate of employee turnover etc.
Among the Qualitative factors are subjective evaluation of factors such as - skills and competencies, risk
taking potential, flexibility etc.
Measurement of performance - The standard performance is a bench mark with which the actual
performance is to be compared. The reporting and communication system help in measuring the
performance. If appropriate means are available for measuring the performance and if the standards are
set in the right manner, strategy evaluation becomes easier. But various factors such as managers
contribution are difficult to measure. Similarly, divisional performance is sometimes difficult to measure
as compared to individual performance. Thus, variable objectives must be created against which
measurement of performance can be done. The measurement must be done at right time else
evaluation will not meet its purpose. For measuring the performance, financial statements like - balance
sheet, profit and loss account must be prepared on an annual basis.
Analysing Variance - While measuring the actual performance and comparing it with standard
performance there may be variances which must be analysed. The strategists must mention the degree
of tolerance limits between which the variance between actual and standard performance may be
accepted. The positive deviation indicates a better performance but it is quite unusual exceeding the
target always. The negative deviation is an issue of concern because it indicates a shortfall in
performance. Thus, in this case the strategists must discover the causes of deviation and must take
corrective action to overcome it.
Taking Corrective Action - Once the deviation in performance is identified, it is essential to plan for a
corrective action. If the performance is consistently less than the desired performance, the strategists
must carry a detailed analysis of the factors responsible for such performance. If the strategists discover
that the organizational potential does not match with the performance requirements, then the
standards must be lowered. Another rare and drastic corrective action is reformulating the strategy
which requires going back to the process of strategic management, reframing of plans according to new
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resource allocation trend and consequent means going to the beginning point of strategic management
process.
LIMITATIONS TO STRATEGIC MANAGEMENT
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, “Strategy (once
established) is 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. 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.
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 polished strategic plans. Strategy
should be seen as laying out the general path rather than precise steps, i.e.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.
EMBEDDED 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 corporations and leaders who have integrated
sustainability into commercial strategy has led to emergence of the concept of "embedded
sustainability"
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It is defined by its authors (Chris Laszlo and Nadya Zhexembayeva) as "incorporation of environmental,
health, and social value into the core business with no trade-off in price or quality, that is, without social
or green premium.
Their research showed that embedded sustainability offers at least seven distinct opportunities for
business value and competitive advantage creation:
a)
Better risk-management,
b)
Increased efficiency through reduced waste and resource use,
c)
Better product differentiation,
d)
New market entrances,
e)
Enhanced brand and reputation,
f)
Greater opportunity to influence industry standards, and
g)
Greater opportunity for radical innovation.
Research further suggested that innovation driven by resource depletion 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.
CORPORATE STRATEGY – A REVIEW OF THEORIES AND PRACTICE
Two basic sets of theories on corporate strategy can be categorised into two, namely:
a. Prescriptive Theories
b. Emergent Theories
Prescriptive Theories of Corporate Strategy
There are four main theories that can be identified this category:
i. Industry and environment-based theories
This concept derives from the assertion that organisations are rational, logical and driven by the
need for profitability, relating to:
-
The 18th century Scottish economist, Adam Smith, and his view that man was
rational, logical and motivated by profit making
The concept of military warfare that show how the competitive war can be won
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-
The Industrial organisational model of above average returns to a company deriving
from the concept that the most important determinant of company profits was the
external environment.
It was the view of Prof. M. Porter amongst other earlier writers in the 60s (Igor Ansoft, Alfred
Chandler, Alfred Sloan, etc) in this area that, the industry in which a firm chooses to compete is
the prime determinant of its long-run profitability. For all of them, strategy involves formal,
analytical processes that set out documents subject to discussion and agreement by the Board of
Directors of an organisation, resulting in a strategic corporate plan. This type of plan will
involve predicting the general economic and political situation; exploring industry characteristics
(economies of scale and degree of concentration); analysis of resources available and
recommending a set of strategies to meet the requirements.
This strategy will primarily be driven by the objectives of maximizing the organisation’s
profitability in the long term, by seeking and exploring opportunities in particular industries.
The theory argued that the purpose of strategy is to develop sustainable competitive advantage
over others. Because of motive, primarily, for profit maximization, and ignoring other motives
like social, cultural, government and other considerations, the theory was popular with the
Western and Anglo-American countries as against European countries. However, it must be said
that no country will outrightly sacrifice other factors for profit motive, as the companies must
surely survive and grow. It is a matter of degree or extent.
To the critics of these theories, the key strategic task should be an indication of how the
companies should develop its own resources and skills, even though the need for competitors are
important, but the emphasis on competitive industry comparison may be misleading. Also, the
markets are so powerful that seeking sustainable competitive advantage for the majority of
companies is not realistic; only the largest companies with significant market share can achieve
and sustain such advantages.
ii.
Resources-based theories of strategy
These theories concentrate on the chief resources of the organisation as the principal source
of successful corporate strategy. That is, the source of competitive advantage lies in the
organisation’s resources. This will not translate to the fact that all the resources of an
organisation will deliver competitive advantage, including such things as the brand name.
The resources must be able to deliver above average Profits in the particular industry. So
looking for opportunities rather than for the problems is important and basic, as resources is
the basis for profit growth.
Resources based strategy is premised on operation or manufacturing strategy with emphasis
on Total Quality Management (TQM). This area was hitherto considered to be too ordinary
and insufficiently concerned with overall corporate strategy from 1960s to 1990s, but has
now been given better attention in the last 20 years. The resource-based strategy
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development has emerged as one of the key prescriptive routes in recent years, as a reaction
against the strong emphasis in markets and profit maximizing motive of the 1980s. The
emphasis on this approach is on organisation’s own resources such as fixed assets, human
resources, and their interaction in the organisation to deliver competitive advantage,
compared to resources such as accounting skills and technology. The knowledge of the
organization is also a key resource, such as its procedures, its technical secrets, its contracts
with others outside the organisation. This will also deliver significant and sustainable
advantages to many organisations. This cannot be over-emphasised.
iii.
Game-based Theories of Strategy
These theories focus on an important part of the prescriptive process, that is, the decision
making that surrounds the selection of the best strategic option. The theories attempt to
explore the interaction between an organisation and others as the decision is made (i.e. the
game) rather than treating this as a simple “options-and-choice” model. It is based on
mathematical model of options-and-choice together with the theory of chance.
The theory begins by recognising that a simple choice of the best strategy will have
implications for other companies (suppliers and competitors). The consequences for others
will be unknown at a time the initial choice is made by the organisation itself. Thereafter,
attempt is made to model the consequences of such a choice and thereby allowing for the
choice itself to be modified as the game progresses. This will include competitors and other
organisations that might be willing to co-operate with the organization. It considers that the
options-and-choice prescriptive model oversimplifies the options and choices available.
The application of game theory to strategy is relatively new, because the complex world of
strategy decisions is difficult to model adequately using the mathematical theory that lies at
the foundation of game theory. However, it will still remain only a partial view of a limited
part of the strategic process.
iv.
Co-operation and Network Theories of Strategy
In a cooperative strategy, at least two companies work together to achieve an agreed
objective. These theories seek clearly defined, prescriptive strategies, but they stress the
importance of formal relationship opportunities that are available to organisations.
These theories have arisen in recent times due to the realisation that organisations can deliver
better value to customers and create competitive advantages over rivals, by cooperating with
other companies. Various forms of co-operation are possible with the underpinning principles
that such activities deliver growth by developing links that are external to the organisations
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(as mentioned under the four link model); which may include strategic alliances, joint
ventures, and other forms of co-operation. This strategy can be said to be valuable because:
-
They may allow companies to adopt new technologies earlier than their rivals by
gaining and getting the technologies from an external company or other countries.
They may allow companies to move into restricted markets more quickly
They may allow the alliance to gain and increase its market power
One form of co-operation that has been used increasingly around the world is the “franchise
operation”. A franchise is a form of co-operative strategy in which a firm (the franchisor)
develops a business concept and then offers it to others (Franchisees) in the form of a contract
relationship to use the business concept. Typically, a franchisee obtains a tried-and-tested
business formula in return for payment of a percentage of its sales and agreeing to tight controls
from the franchisor over the product range, price, structure, etc. A Nigerian example is Mr
Biggs.
The main challenge with these strategies are that they are fragile and will risk collapse if the
contract terms have not been carefully developed or one of the partners misrepresents the
benefits that it brings to the agreement. Also, some of the co-operations are illegal and unethical
in most countries, as the activities involve collusion to reduce competition in the market place,
thus increasing prices of goods on sale, and thereby increasing or growing illegal profit. This
type of activities does not form part of the proper development of theories of strategic cooperation and networking.
Emergent Theories of Corporate Strategy
When strategies emerged from a situation rather than been prescribed in advance, it is less likely
that they will involve a long-term strategic plan. That does not mean that there is no planning,
but rather that such plan are more feasible, feeling their way forward as issues clarify and the
surrounding environment changes.
To understand the background to emergent theories of strategy, it is useful to look back to the
1970s. At that time, prescriptive strategies with detailed corporate plans were widely used.
Suddenly, oil prices rose sharply as a result of a new, strong Middle East oil price consortium.
Many industrial companies around the world were hit badly in an entirely unpredictable way and
the prescriptive plans were thrown into confusion, and emergent strategies were sought. Today,
the economic bubble associated with new internet companies has also highlighted the uncertainty
of the environment. For this reason, some strategists argue that the whole basis of prescriptive
strategy is false, claiming that at periods of relative certainty, organisations may be better served
by considering strategies as an emergent process.
Four sets of emergent strategy theories are discussed:
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i.
Survival-Based Theories
These have regards to the survival of the fittest company in the market place as being the prime
determinant of corporate strategy. It concerns how to survive in an environment subject to
shifting and changing. It is therefore, expedient to allow strategies to emerge in the process
rather than resulting to prescriptive solution.
Industry and environmental based approaches are concerned with selecting the optimal strategy
to maximise the organisation’s profitability and then implementing that strategy. Critics have
long known that this simple economic model is far from reality. A survey carried out by Hall &
Hitch in the 1930s, showed that companies did not set output at the theoretical maximum level,
where, Marginal Cost (MC) is equal to Marginal Revenue (MR), because decisions were not
necessarily rational and that it was unclear what the revenue and cost relationships were.
The competitive jingle of the market place will ruthlessly weed out the least efficient companies
eventually. Survival-based strategies are needed in order to prosper in such circumstances. Under
these theories, it is the market place that matters more than a specific strategy, so efficiency is
the key strategy. Likewise, what most companies needed to survive was differentiation. Products
or services that were able to offer some aspect not easily available to competitors will survive,
even though true differentiation may not be entirely possible as it takes too long to achieve and
the environment changes too often. Therefore, it was suggested that these theories should rely
on running really efficient operations that can withstand changes in the environment. This is by
pursuing a number of strategic initiatives at any one time and let the market place select the best.
It is better to experiment with many different approaches and sees which emerge as the best
naturally, rather than prescribing strategies. However, other strategy writers believe major
acquisitions, innovative new products, plant investment to improve quality radically, would all
be a subject of much anxious debate and little action, i.e. bold strategic step would be completely
ignored.
ii.
Uncertainty-Based Theories
These theories use mathematical probability concepts to show that corporate strategy
development is complex, unstable and subject to major fluctuations, thus making it impossible to
undertake any useful prediction in advance. Therefore, setting clear objectives for corporate
strategy is a useless exercise. Hence, strategy should be allowed to emerge and change with the
fluctuations in the environment. In other words, the development of long-term strategic planning,
even as early as in the 70s, was regarded by some theorists as having little value.
This is further supporting the need for survival-based strategies that seek to keep all options open
to the last possible opportunity but also to uncertainty-based strategies. Even as demonstrated by
chaotic system (relevant in scientific experiments), it is simply not possible to predict sufficiently
accurately many years ahead. Miller and Friesen (1982) found that significant corporate strategy
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occurs in revolutionary ways, whereby, there are sudden major shifts in the whole strategy and
organisational structure of the company. In real sense, because of rapidly changing environment,
the apparent accuracy of mathematical models of discounted cash flows and cash projections is
largely spurious in this case. This confirms the criticism of the prescriptive approach in term of
planning for the future from now. In other words, it justifies that business strategy has to emerge
rather than trying to aim for the false certainties of the prescriptive approach. This argument is
also applicable to the resources of the organisation which undergo gradual change rather than
revolutionary change.
Organisations need a basic non-chaotic structure if they are to avoid dissolution, as business
strategy need to identify and estimate risk and put actions in place to mitigate the risks.
iii.
Human Resources–Based Theories
These theories emphasise the people element in strategy development process and highlight the
motivation, the politics and cultures of organisations and the desires of individuals. They have
particularly focussed on the difficulties that can arise as new strategies are introduced and
confront people with the need for change and uncertainty.
Organisations consist of individuals and groups of people, all of whom may influence or be
influenced by strategy as they may contribute to the process, make acquiesce (consent) or even
resist the process, but are still affected by it. It has been argued that organisations in fact, in
reality, have limited strategic choice, as smart strategists appreciate that they cannot be smart
enough to think through everything in advance (Mintzberg, 1990; 1994). Even the process of
trial and error have been advocated to adopt the optimal strategy,
iv.
Innovation & Knowledge-Based Theories
The generation of new ideas and sharing of these ideas through knowledge as a main important
aspect of strategy development is the premise or basis of these theories, during the 1990s.
Innovation to them means the development and exploitation of any resources of the organisation
in a new and radical way, not just inventing new products or producing processes. The way that
knowledge of the organisation is used to generate new and radical solution has come to be
recognised as an important contributor to strategy development. These theories involve tackling
a problem that has arisen with other existing theories. It helps to overcome the difficulty of
every company’s assumed knowledge of other theories and that no such theories can deliver new
competitive advantage. The willingness to explore new ideas, share knowledge and build new
business activities through innovative approach to business strategy is the ore of these theories.
Thus, this has been made easier today because of internet and telecommunication technology
(ICT).
Finally, the basic distinction between the prescriptive and emergent theories of corporate
strategies was the issue of one being too simplistic; and to border about this distinction would
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serve no useful purpose. Many strategy theories rely on much more detailed insights than this
simple difference (like the game theory for instance). What is often required therefore is to
examine what precisely makes good strategy (see previous notes on this). You can then apply it
to the basic distinction mentioned above.
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