• What is Strategic Management?


  •   
  • FileName: haberberg_ch02.pdf [read-online]
    • Abstract: What is Strategic. Management? L E A R N I N G O U T C O M E S. After ... to: Explain the differences between strategic and non-strategic decisions, and. between ...

Download the ebook

CHAPTER TWO
What is Strategic
Management?
LEARNING OUTCOMES
After reading this chapter you should be able to:
‹ Explain the differences between strategic and non-strategic decisions, and
between functional, business-level, and corporate-level strategy
‹ Distinguish between different modes of strategy-making and identify
which modes are prevalent in a particular organization
‹ Explain the concepts of fit, distinctiveness, and sustainability and their
importance in assessing the viability of a strategy
‹ Discuss the role that risk, uncertainty, and trade-offs play in strategic
decisions
‹ Contrast the objectives of different stakeholder groups and explain the
manner in which they influence strategy, and how this might vary
between different cultures
‹ Discuss the role of corporate social responsibility (CSR) and business
ethics in corporate strategy
‹ Explain how strategies can go wrong.
2: WHAT IS STRATEGIC MANAGEMENT? 47
INTRODUCTION
This chapter builds on our understanding of what an organization is from Chapter 1. Knowing what
an organization is, and why it exists, helps us to understand how managing strategy effectively can
vary in different contexts. Because different organizations have different priorities, how strategy is
managed, and the strategies that are appropriate, will differ.
In addition, as we saw in Section 1.6.1, organizations have various stakeholders, each of whom
may have different things that they want from the organization. In this chapter, we go more deeply
into the nature of some of these stakeholders and their likely influence on the strategy develop-
ment process, and discuss some of the ways that strategy comes about in organizations as they
compete to have their objectives adopted.
We also introduce you to some of the ways in which the strategy process can go wrong, leading
to poor performance, and in some cases the demise of the organization.
2.1 Strategy—basic concepts
In Chapter 1 we defined strategy, but this left some questions unanswered. In this section, we
look at two of them:
• How can you tell the difference between strategic decisions and what are often called
‘tactical’ or ‘operational’ decisions?
• Can unplanned, opportunistic, or forced decisions or actions really be called strategies?
2.1.1 Strategic decisions
Not all decisions made within an organization contribute equally to its strategy. A strategic
decision can be distinguished from other types of decision in three ways:
• Magnitude: Strategic decisions are big decisions. They affect an entire organization
or a large part of it, such as a whole division or a major function. And they entail a
significant degree of interaction with the world around it—the organization’s com-
petitors, suppliers, and customers.
• Time-scale: Strategic decisions set the direction for the organization over the medium
to long term. But they will have a short-term impact as well—the medium term may
finish in several years’ time, but it starts at the end of this sentence! What constitutes
medium or long term will depend on the organization and the industries in which
it operates. In a fast-moving industry, such as computer software or consumer goods,
18 months may be a long time to think ahead. In capital goods industries like electric-
ity generation or oil production, where new facilities take several years to plan and
bring on stream, 10–15 years may be a realistic time horizon. It is helpful to measure
time-scales in terms of product life-cycles, with the short term being one product
life-cycle and the medium term two. For most industries, this gives a time horizon for
the strategist of around 3–5 years.
• Commitment: Strategic decisions involve making choices, and committing resources
in ways that cannot be reversed cheaply or easily. This may mean investing large
amounts of money in buildings or high-profile, long-term, marketing campaigns, or
large amounts of management time in changing the way an organization operates. We
go into more depth on this topic in Section 2.5.
48 ONE: CORE CONCEPTS
It is not always easy to tell what is and what is not a strategic decision. When a clothing
company launches a new line of clothing, as H&M did when it started a new designer brand
in conjunction with Madonna, that is not necessarily a strategic decision. Companies like
H&M launch new product ranges all the time, and are not surprised if some of them do not
find favour with the customer. The investment in advertising and new manufacturing skills
may be tens of thousands of euros, but this may be small change to a firm like H&M. The
failure of that one product is unlikely seriously to affect its profits or future viability. This is
a short-term decision requiring little commitment.
However, for a relatively small clothing company with only one established line of prod-
ucts, as H&M was in 1968, launching itself into the men’s and children’s clothing markets
certainly was a strategic decision. In absolute terms, the smaller firm might have spent less
on these new product launches than H&M would today on its product extension. But,
measured in relation to the size of the firm, the degree of impact of commitment is far
higher. Similarly, when an aircraft manufacturer such as Airbus or Boeing decides to launch
a new product, that is a strategic decision. The investment in design, new manufacturing
facilities and marketing will be millions of euros or dollars. The product will be expected to
make returns over ten years or more—the Boeing 747 has been in service for over thirty
years. If this type of product fails in the market-place, it will hit the organization’s reputation
as well as its financial security. Customers, banks, and shareholders may start to have doubts
about the future of the company, which will affect the sales of their other products, and also
their ability to raise funds. So, these are examples of long-term, high-commitment decisions.
Worked Example 2.1 Identifying strategic and non-strategic decisions in H&M
H&M was founded by Erling Persson in 1947 in Västerås, Sweden. • For other companies, that have not previously expanded
It started off life as a retailer of women’s clothing, Hennes. In internationally, and H&M in the 1960s when it opened its
1968 it acquired another Swedish clothing retailer, Mauritz first store abroad (in Norway), this would almost certainly be
Widfors, which sold menswear, and changed its name to Hennes a strategic decision; for H&M nowadays it is arguably not
& Mauritz. always. Expanding into new geographic areas is part of its
current strategy—it opens new shops regularly. Sometimes
• This was a strategic decision: it involved a major outlay
these are in countries where it already has a presence,
of capital, it increased the size and complexity of the busi-
sometimes in totally new markets. But expanding geo-
ness; and it involved most of the company. And it brought
graphically into a smallish country like Slovenia may be
Hennes into contact with a whole new customer segment
considered an incremental development of its existing
—men!
European business. Even entry into a major market like
In 1974 it went public and was quoted on the Stockholm stock Canada, one of the world’s largest economies, might only be
exchange. an incremental move if it were done slowly, using logistics
already in place to serve the US. On the other hand, at the
• This is not a strategic decision. It was a means of obtaining
point at which expansion in Canada (or any other market)
funds for expansion. The expansion may well have been a
involves major investments in warehouses or in a country-
strategic decision, but going public in itself was not. Sim-
wide campaign of major store openings, it does become a
ilarly, later statements that H&M makes about expansion
strategic decision.
being financed entirely from the firm’s own internal funds
are an indication of how it intends to implement any strat-
egies it adopts, but are not themselves strategies. Practical dos and don’ts
Each year, for the past several years, H&M has expanded into a In exams or case study analyses you will often be asked to develop
new international market or markets. a strategy (or strategic options which we discuss in much ‹
2: WHAT IS STRATEGIC MANAGEMENT? 49
The recent opening of H&M’s Shanghai
store; expanding into new geographic
areas is part of its strategy. H&M AB
‹ more detail in Chapter 12) for an organization. The key things if things don’t work out as planned, or perhaps because it is
to look for when trying to decide whether your recommendations something entirely new.
can be considered strategic are: • Is your recommendation likely to affect what the organiza-
• Scope and scale—is your suggestion going to affect a signi- tion as a whole does over the long term? What the long term
ficant part of the organization’s activities and value chain. means varies from industry to industry, but anything over
two years can probably be thought of as a strategic decision.
• Is your suggestion going to involve a significant commit-
If the organization can quickly reverse the decision then it is
ment of resources. This could mean a reallocation of exist-
unlikely to be strategic.
ing resources such as manpower or plant and machinery,
but may also involve the need to find new resources such as Finally, you may wish to recommend that the organization carries
finance or staff. Putting an absolute figure on this is difficult,
on doing exactly what it is already doing. This may not conform
but if your recommendation involves, say, the reallocation to some of our tests of ‘strategicness’, such as obtaining new
of more than 20 per cent of existing plant and machinery, orresources, but is nevertheless strategic because it involves the
using finance equivalent to 5 per cent or more of its share- whole organization, a large commitment of resources (the total
holders’ funds, then this is likely to be a strategic decision.
amount!) and certainly will affect what it does over the long term.
• Does your suggestion pose a significant risk to the organiza- Some opportunities for expansion or innovation may not exist in
tion as a whole? –perhaps because it involves a large com- a few years’ time, or might require massive investment to catch
mitment of resources that cannot be reallocated elsewhere up with competitors.
2.1.2Deliberate, emergent, imposed, and realized
strategies
In our definition of strategy at the start of Chapter 1, we referred to actions coming about
‘by accident or design’. This is, as we shall see, rather controversial. Surely a strategy is some-
thing thought out in advance by a chief executive and his or her top management team, and
50 ONE: CORE CONCEPTS
passed down the organization for carefully planned implementation. After all, the word
‘strategy’ is derived from the Greek term strategos, meaning a carefully formulated military-
style plan of campaign. Deliberate, planned, or intentional strategies of this kind occur
in organizations as well. But, as we suggested in Section 1.6, there has been increasing rec-
ognition that strategic direction of the whole organization can be shaped by opportunistic
decisions that can happen at any level in the organization. These have been termed emergent
strategies.
There are two significant problems with the deliberate/planned view of strategy
development:1
• Not all the strategies that the top team wants to happen will happen in practice.
Products may not sell because of changing customer tastes; economies may go into
recession; and political environments can change suddenly.
• The strategies that are actually implemented are often not those that are developed
through the planning processes.
And sometimes the strategies that an organization adopts are not what it would have
wanted to do itself, but have been forced on it.
Figure 2.1 illustrates this. Strategies that are decided on in advance by the leadership of
Deliberate strategy the organization are intended strategies. Those that are put into operation are deliber-
A strategy conceived by ate strategies. For example, H&M’s expansion into new geographical markets has hap-
senior managers as a planned pened in a systematic and deliberate way, and its move into the cosmetics business was
response to the challenges
clearly an intentional one. These were deliberate strategies that were carefully planned in
confronting an organization.
advance.
Often the result of a
systematic analysis of the Those intended or deliberate strategies that do not happen become unrealized strategies.
organization’s environment Strategies which are not intentionally planned, and which can come about from lower
and resources. levels in an organization, are emergent strategies. For example, an enterprising salesperson
may discover that a product that is intended to be sold to schools is also attractive to banks
Emergent strategy
A strategy that ‘emerges’ or hospitals, and passes this information on to some of his colleagues. This is recognized
from lower down the to be a good idea, and as a result the firm ends up entering the financial services or medical
organization without direct markets. New strategies can also be the unintended consequences of organizational policies
senior management such as control or rewards systems. For example, if branch managers are given profit
intervention. targets and start to cut corners on quality, then the company may ‘accidentally’ move
down-market.
Imposed
Inten strategy
d
strat ed
egy
Delib
erate
strat
egy
Unrealized Real
iz
strategy strat ed
egy
t
en
Figure 2.1 Strategy development erg gy
Em rate
processes (Mintzberg and Waters, 1985) st
2: WHAT IS STRATEGIC MANAGEMENT? 51
In the documentary film Super Size Me the filmmaker shows himself eating nothing but McDonald’s products for 30 days.
Super Size Me
Those that are imposed on an organization are strategies about which the members of an
organization have little effective choice. When McDonald’s updated its range to incorporate
products with lower fat and salt content, and withdrew the ‘supersize’ option on some of its
products, this appeared to be in some way an imposed strategy. It had been (unsuccessfully) Imposed strategy
sued in the US courts by people who accused it of making them obese.2 And in a document- A strategy that an
ary film, Super Size Me, the filmmaker showed himself suffering unpleasant side-effects from organization’s managers
would not otherwise have
eating nothing but McDonald’s products for 30 days. Although the firm could legitimately
chosen, but is forced on
argue that it was not doing anything illegal or immoral, it seemed under considerable pres-
them.
sure to respond to the concerns of these newly voluble stakeholders.3 Other common types
of imposed strategy are those forced upon an organization by government policies.
The imposed strategies, plus some emergent strategies, plus those intended strategies that
Realized strategy
are, in the end, deliberately adopted, together constitute the realized strategies—i.e. what
The strategy the
the organization as a whole does in practice. organization actually ends
As Real-life Application 2.1 shows, it can often be very difficult for even experienced up implementing. It may be
academics and consultants to tell whether a realized strategy was originally deliberate or deliberate, emergent or
emergent. imposed.
52 ONE: CORE CONCEPTS
Real-life Application 2.1 Honda’s strategy—deliberate or
emergent?
In 1975, the Boston Consulting Group (BCG), an influential management consultancy specializing
in strategy, wrote a report for the UK government setting out alternatives for the British motorcycle
industry. Within that report4 they analysed Honda’s success in the US market. They painted a
picture of how Honda had cleverly planned its penetration into the USA with small motorcycles
sold to ordinary households, at a time when US producers focused on selling large machines to
motorcycle enthusiasts. Honda then used this initial breakthrough to build volume in the USA, and
gain reputation and economies of scale, which enabled them to gradually move up-market and to
expand internationally.
In 1980, Richard Pascale, a US academic, decided on a whim to interview the Japanese exec-
utives who had managed Honda’s US operations at the time. The picture they painted was very
different from the calculated strategy described by BCG. They suggested that Honda’s US success
was the result of a set of happy accidents. The managers had started by trying to sell Honda’s larger
bikes, which however were not robust enough for American road conditions. The move to smaller
motorcycles happened partly because there was nothing else for them to sell, partly because US
retailers had expressed interest after the Japanese managers had been spotted using the bikes to
travel around. Henry Mintzberg, a very influential Canadian academic and author, was most taken
with Pascale’s account, and used it extensively to support his ideas about emergent strategy.
According to him, Honda’s success came about because, rather than planning everything in
advance, they adapted to market conditions as they encountered them.5
Andrew Mair, a British academic who made a long study of Honda, did not dispute the details of
Pascale’s account. However, he found documents suggesting that it was always Honda’s intention
to market their smaller motorcycles in the US, and that the manufacturing capacity to support those
sales was planned well in advance. He suggests that the real basis of Honda’s success, in the US and
elsewhere, was not its use of avoidance of planning, but in its ability to handle ambiguity.6
Using Evidence 1.1 Assessing modes of strategy development
For the Honda case example above both Richard Pascale and Andrew Mair had access to real com-
pany data. When you are looking at a case study, whose data are much more superficial, you may
have even more difficulty in finding evidence of strategy processes. But there are some things you
should be looking for if you can.
First, you need to look at the organization over a period of time—you cannot assess whether a
strategy was planned or emergent until after it has happened! The fact that there is a planning pro-
cess in place does not necessarily mean that it will play a major role in the organization’s actual
strategy.
Then you need to compare actual organizational activities with those that were earlier expressed
as intentions by the CEO or chairman—usually these will be found in a company’s annual report
or the organization’s strategic plan. Or if you have access to real company information, memos or
letters are often good indicators of intentions.
Furthermore, you might look for indicators, such as systems to encourage employees to come
up with suggestions, that point to an organization where the top team are not considered as all-
seeing and all-knowing.
2: WHAT IS STRATEGIC MANAGEMENT? 53
Table 2.1 Modes of strategy-making
Descriptors Style Role of top Role of
management organizational
members
Rational Analytical Boss Subordinate
Strategy driven by formal structure Evaluate and control Follow the system
and planning systems
Command Imperial Commander Soldier
Strategy driven by leader or small Provide direction Obey orders
top team
Symbolic Cultural Coach Player
Strategy driven by mission and a Motivate and inspire Respond to challenge
vision of the future
Transactive Procedural Facilitator Participant
Strategy driven by internal process Empower and enable Learn and improve
and mutual adjustment
Generative Organic Sponsor Entrepreneur
Strategy driven by organizational Endorse and sponsor Experiment and take
actors’ initiative risks
Muddling Political Umpire Onlooker
through Strategy driven by bargaining Arbitrate and enforce Bend with the wind
between powerful interest groups order
Externally Enforced choice Buffer Sensor
dependent Strategy driven by prescriptive Moderate pressures Detect and transmit
external pressures as far as possible key environmental
changes
Adapted from Hart (1992) and Bailey and Johnson (1995)
2.2 How strategy happens
Studies of how organizations actually go about developing and implementing strategies
have now, in Europe particularly, developed into a major stream of research relating to
micro-strategy and strategy as practice (see Section 2.2.6 below).7 Researchers have
identified several modes of strategy-making, summarized in Table 2.1. They also found that
few organizations were locked into a single way of strategizing: in most cases, a number of
modes tended to operate in parallel.8
2.2.1 The rational mode
Perhaps the most traditional view on strategy is that of a rational, thought-out, planned pro-
cess. Strategic planning involves a process of analysis, the setting of goals and targets as a
result, and the measurement of performance outcomes against these. Analytical tools,9
many of which we shall cover in this book, are used to identify suitable opportunities or
problem areas that need to be tackled, leading eventually to a final selection of strategy.
This style allows as much data as possible to be taken into account when devising strategy.
The organization’s functional and geographic units will submit data on their sales, costs,
quality, and other important aspects of performance, alongside their assessment of environ-
mental conditions and future market prospects. Central planning units may add their own
data about key markets, and sometimes consultants will be asked to gather or collate the
information.
54 ONE: CORE CONCEPTS
There then follows a period of contemplation, discussion and negotiation between the
team whose job it is to write the plan and the operational managers who will be expected to
implement it. Following this, the new plan will be written and communicated to unit man-
agers. These strategic plans set out what the organization intends to achieve over, typically,
a five-year period. They are often an important guide to what the senior management
believe are the priorities for the organization, and act as an aid to financial planning and bud-
geting for large-scale projects.
Although planning processes like this are less fashionable than in the 1970s, many large
firms or public sector units still have planning departments, and almost all organizations
will have some sort of strategic or business plan that sets in place what they intend to do and
how they will do it. Many strategy courses and textbooks (including this one, even though
we think that planning is not necessarily the most important element in strategic manage-
ment) implicitly or explicitly accept the importance of planning techniques.
Strategic plans have a role in helping an organization’s managers to make sense of what
is happening around them and plan for major items of expenditure, but they work best in
predictable, stable environments where things do not change much from one year to the
next. They are often too bulky to be used as a guide for managers in their day-to-day activit-
ies, and become out of date as soon as there is any major unexpected development in the
organization or its environment.10
2.2.2 The command mode
Another traditionally important view of strategy, the command mode, focuses on the role of
the leader or top management team.11 The earliest thinkers on strategy took it for granted
that strategy development was the prerogative of the chief executive who would make a
decision that had been evaluated against alternatives in a rational manner, its outcomes
assessed down to the last detail. In other words, they assumed strategy-making was a com-
bination of the command mode and the rational mode we discussed in the previous section.
It is natural to expect top managers to play a significant role in deciding, at least, what the
overall intended strategy ought to be, so that the command mode is likely to feature in many
organizations. But research shows that it is not just the chief executive and the top manage-
ment team who shape strategy, while many top managers spend very little time thinking
‹ We examine different about it (less than 10 per cent, by one estimate). Much of senior managers’ time is devoted to
styles of leadership, and the other high-profile tasks, like communicating inside and outside the organization, and solv-
leadership role of middle ing operational problems. And not all leaders see it as their role to make strategy. Some, for
management, in Section example, believe that if they focus on bringing the right people into the organization, or on
17.1.
framing the right kinds of rules and values to help those people in their decisions, the strategy
will essentially take care of itself.12
So the extent to which the command mode influences strategic decision-making will depend
upon the nature of the firm, and the personality of the leader. In a small or a young firm, it
would be usual for the founding entrepreneurs to exert a dominant influence on strategy,
but this happens in larger firms as well. In H&M the influence of the founder remained
strong until his recent death. Sometimes, when a firm is drifting strategically, a new leader
arrives who finds that he has to impose his strategic view in order to turn the organization
around, as did Michael Eisner when he became CEO of the Walt Disney Company in 1984.13
Values
The philosophical principles 2.2.3 The symbolic mode
that the great majority of an
organization’s members hold We showed in Section 1.6.4 how the people in an organization come over time to share a set
in common. of core values. These values typically stem from, and are sustained by, the organization’s
2: WHAT IS STRATEGIC MANAGEMENT? 55
founder and leaders, but may be much more widespread than this. In the symbolic mode of
Vision
strategy-making, an organization possesses clear and compelling values that are so widely A description of what an
shared that they exert a major influence over which strategies are adopted. organization’s leaders aspire
The name ‘symbolic mode’ derives from the important role played by the symbols of to achieve over the
these values: the organization’s vision and mission. Although the definitions of values, medium/long term, and of
vision, and mission given here will be recognizable to most managers, the three concepts how it will feel to work in or
overlap, and different authors use conflicting terminology. Americans James Collins and with the organization once
this has taken effect.
Jerry Porras, who are two of the most prolific writers in this area, use ‘vision’ as an overall
term that encompasses mission and values. You may also encounter other terms, such as Mission
‘strategic intent’ (for vision) and ‘superordinate goals’ (for core values). The set of goals and purposes
Many organizations make great play of their mission and vision statements in their that an organization’s
members and other major
annual reports. Here are a sample:
stakeholders agree that it
exists to achieve. It is often
expressed in a formal, public
McDonald’s mission statement.
Vision for Diversity ‹ In Section 8.3.2 we
discuss the importance of
Mission
mission and vision to an
To leverage the unique talents, strengths and assets of our diversity in order to be the World’s organization’s
best quick service restaurant experience. competitiveness.
Vision
• Ensure that our employees, owner operators and suppliers reflect and represent the diverse
populations McDonald’s serves around the world.
• Harness the multi-faced qualities of our diversity—individual and group differences among
our people—as a combined, complementary force to run great restaurants.
• Maximize investments in the quality of community life in the diverse markets we serve.
• Expanding the range of opportunities for all our people—employees, owner operators and
suppliers—to freely invest human capital, ideas, energies, expertise and time.14
H&M
Fashion and quality at the best price.
H&M also expand on their values throughout their public communications, for example in a 61-page
corporate social responsibility report, and a 6-page code of conduct guide for its suppliers.15
EasyJet
Value airline and the new owner of Go, BA’s former venture into the value airline sector.
To provide our customers with safe, good value, point to point air services. To effect and to offer
a consistent and reliable product and fares appealing to leisure and business markets on a range
of European routes. To achieve this we will develop our people and establish lasting relationships
with our suppliers.16
If an organization’s mission, vision, and values are clear and inspiring, as is clearly the inten-
tion in the statements reproduced above, they will help drive the organization forward
by giving employees a shared objective to which all can aspire. It also gives them a clear
56 ONE: CORE CONCEPTS
reference point for their decisions, both short term and long term. This helps to avoid
unnecessary costs that might arise if objectives were constantly being renegotiated or if
policies on products, service levels, customers, and markets were continually being altered.
This means that fo


Use: 0.0197