Strategic Management

Neil Ritson
Ventus: 2008

The author claims that "this compendium provides a comprehensive overview" of topics in strategic management.

(EN: This "compendium" is a 56-page booklet that I expect will skip across the surface, providing scant detail and omitting much, but I've chosen to read it as a refresher and overview, as it provides a good outline of topics, without much discussion of the details.)

The Basis of Strategy

Strategy is implemented within a "structure," which itself is defined as the schematization of "power relationships" between managers and their subordinates, reflecting the functions that an organization performs.

(EN: This chapter provides information about organizational management, which I expect is pertinent to strategy, but seeks rather oblique at present.)

Functional Structure

Most often, an organization's structure reflects its main activities (production, sales, accounting), in which specific activities are departmentalized. The structure of an organization is usually expressed in a hierarchical organization chart.

The principles that support organization in this manner include:

There are, however, some disadvantages - chiefly, that the organization develops into "silos" that:

In all, an organization structured in this manner becomes "mechanistic." It can be highly efficient in performing routine and pre-defined tasks, but fails to capitalize on new opportunities or succeed in reacting to problems it has not previously encountered.

Divisional Structure

A "divisional" structure, at the smallest level, creates a team of specialists who work together to operate all aspects of a business pertaining to a specific area, such as a product or geographic area.

This can overcome some of the effects of departmental silos, as each member of a team contributes their expertise to the accomplishment of an organizational goal, and works more cooperatively with other experts to achieve the desired outcome.

However, it also causes some of the advantages of functional specialization to be lost: there is often duplication of effort, inconsistent practices, employees do not develop specialized skills, and coordination and control can be difficult.

However, there is a limitation on the size and scope of teams. When the responsibilities of a team become too broad, the team begins to form into a self-contained business unit with a functional structure. For example, the "division" that serves a given territory develops its own internal departments (accounting, sales, production).

Matrix Structure

A "matrix" structure is an attempt to compromise between functional and divisional structures. An employee may report to a functional area (such as accounting) but may be assigned to a specific division.

There are disadvantages to this approach: primarily, that each employee has two sets of priorities (one to their function, another to their division) that may be in conflict, and the resolution of this conflict undermines the advantages of one form or another.

Structural Challenges

In all, it seems that no single structure is the "right" solution to every need, which is evidenced by the shifting nature of corporate structures at the present time. During the past few decades, the structure of companies has been in constant flux.

Companies have grown through merger and acquisition, which have required two organizations to alter their structures to work together. It is also increasingly common for companies to enter into joint ventures of various species, requiring employees of each firm to work in an organization that is independent of all participating companies, yet responsible to each participating company.

Companies have also sought to shrink though various measures, such as downsizing and outsourcing, which often occurs in the wake of a merger as a means of eliminating redundancies, or may be a reaction to temporary economic conditions, seeking to reduce the workforce as a means of improving financial performance.

Formulating Strategy

The author aligns the term "strategy" with its etymology ("stratos" meaning "multitude" and "agos" meaning "leadership") and its original applications in the military - suggesting that strategy is the demesne of top leadership of large organizations. He concedes that the term has been blurred over time, such that anyone who does planning of any kind lays claim to "strategy."

Process of Strategy

The process of strategy can be described as a linear flow:

  1. Identify a future state (objective to be achieved, problem to be overcome)
  2. Determine the tasks necessary to reach the desired future state
  3. Determine the resources necessary to perform those tasks
  4. Organize or obtain the necessary resources
  5. Task the resources with achieving the objectives
  6. Monitor progress and adjust as needed (EN: This is often described as "tactics" but is worth mentioning, as it is often the step in which plans go awry)

Levels of Strategy

The author provides a pyramid diagram which places "mission" at the top, followed by objectives, then strategies, then tactics, then programs, then actions. This illustrates the relationship of the parts (how one is derived from and supports the other), but it also indicates the stratification of an organization (with the board setting objectives, top management defining strategy, middle management defining programs, lower management dealing with tactics, and employees performing actions)

From there, the author mentions academic approaches to strategy, which define three levels: corporate strategy (determining what line of business a firm should be in), organizational strategy (determining the high-level needs to succeed), and operational strategy (determining specific actions or initiatives that must be undertaken).

Types of Strategy

The author outlines some of the modes of strategy formulation.

Deliberate Strategy describes the precise intentions of an organization, which are explicitly defined by an organization well in advance of execution. It is a methodical and formal process of planning a course of action.

Emergent Strategy is a strategic initiative that arises from the course of doing business - a happy accident that leads the company in a positive direction that was not intended. The example given is a salesman who discovers an unexpected product application, and opens new markets for the company.

Opportunistic Strategy is similar to emergent strategy, but it arises due to external factors rather than internal ones. This is generally considered to be entrepreneurialism - an unforeseen opportunity arises and the organization must react quickly in order to capitalize upon it. Many organizations see the value of opportunism, but are mired in policy and procedure or are unwilling to empower lower-level employees to move nimbly enough to capitalize on opportunities.

Imposed Strategy also describes the influence of external factors - but in this instance, the company does not have an option in altering its course. Government regulation and disaster (ecological or economic) may compel a company to change its course in reaction.

Finally, when all of the above factors are considered, the terms "Realized Strategy" or "Unrealized Strategy" are often used to indicate the parts of the deliberate strategy that were or were not accomplished.

Other Approaches to Strategy

The author concedes that "muddling" is a common form of strategy: managers make on-the-spot decisions as issues arise, without the guidance of a grand plan (or in some instances, ignoring a plan that exists) to do what is expedient.

Logical instrumentalism casts "muddling" in a more structured light: that strategy can be formed by the sum of these on-the-spot decisions. It enables managers to be creative in seeking solutions, and by learning fro experience and sharing "best practices," a company is managed from the bottom-up.

There is also the "adaptive mode" of strategy, which describes an organization that is reacting to external forces - government regulations, market changes, competitive pressures - without a detailed plan. In times of turbulence and change, any deliberate strategy is no longer applicable by the time it can be communicated, so the lower levels of management (and even individual employees) are empowered to do whatever is necessary.

These practices are, of course, largely denigrated by the proponents of strategy and managers who insist or having rigid top-down controls. However, there are instances in which top-down strategies simply fail, and if no latitude is provided to adapt or muddle, the organization will suffer grievous damage.

It is also noted that the trend toward bottom-up management, soliciting ideas from the front-line employees and leveraging their knowledge and experience has been very productive for many organizations.

However, it is noted that muddling and adapting are largely reactive methods of strategy, focused on continuing existing practices rather than discovering new ones. As such, it is often effective in overcoming obstacles, but very seldom leads to growth in new directions.

Schools of Strategy

The author divides approaches to strategy into three "schools" of thought: planning, positioning, and resource-based.

The Planning School

This school of thought is based entirely in deliberate strategy. Considerable effort is placed on information-gathering and data analysis to derive strategies that are implemented in a top-down manner. This is typically done in mature, stable markets.

An example of the planning school is the Ansoff matrix, which is a four-square diagram that defines strategy as being expansion (existing product in an existing market), market development (existing product in a new market), product development (new product in an existing market), or diversification (new product to a new market).

The Positional School

The positional school focuses less on specific data and more on the "position" a company wants to achieve within a market, such that it is capable of capitalizing on opportunity in general.

The Boston Consulting Group is an example of positioning, which characterizes lines of business according to their market share and growth: a "star" product (high market share and high growth), a cash cow (high market share but low growth), a problem child (low market share in high growth) or a dog (low market share and low growth).

The Resource-Based School

This school focuses first on the capabilities of the organization and takes an inside-out approach. Instead of seeking to change the company to take advantage of opportunities that arise, the company seeks to choose opportunities that suit its current capabilities.

Stakeholder Theory

Another approach to developing corporate strategy is considering the stakeholders - individuals and organizations that will be impacted by a decision - and assessing whether a course of action will have a positive or negative effect on their condition.

Broadly, stakeholders are categorized as internal, connected, or external. (EN: I will follow this in my notes, though it occurs to me that this may not be the best taxonomy.)

Internal Stakeholders

The internal stakeholders include the corpus of the organization: its employees, in various roles.

It is generally expected that employees are motivated by financial self-interest (to perpetuate and increase the income they receive from the company) and are motivated by purely economic desires - i.e., obtaining the greatest return on the least investment.

There are also other motivations such as non-financial rewards (job satisfaction and a sense of professional identity), political motivations (the desire to increase personal power within the organization), parasitic motivations (the desire to purse personal goals, using the resources of the organization). These are not always contrary to the goals of the organization.

Connected Stakeholders

Connected stakeholders are defined as external parties that have an interest in obtaining a benefit from interacting with the company.

Customers are the chief connected stakeholder. They seek to obtain a benefit from using the products or services of the company that meets or exceeds the value they provide in return.

Suppliers are another important stakeholder, which provide the company with the goods and services it needs to produce its own products or to support its operations.

Shareholders or owners are those who provide the funding needed by the organization and expect their investment to be repaid, along with a premium that may be interest or a share of profits.

Competitors are also considered a connected stakeholder. While they often have no direct interaction with the firm, the actions they take in the marketplace has a significant effect on an organization.

External Stakeholders

External stakeholders are defined as those who are not directly affected by the company, but wish to exert indirect influence over it.

The primary external stakeholder is government, which seeks to impose regulations and restrictions that prevent the organization from doing some things while compelling it to do others.

The author also lists "pressure groups" as an external stakeholder, which operates in the same manner but does not have formal power. Whereas government can use force or threat of force to compel compliance, pressure groups can merely threaten (though the force may be applied by those over whom they have influence, such as consumers).

External Analysis

External analysis is an examination of the environment of a business. Primarily, this examines competitors in the industry, the influences upon the market, and the effect of regulation.

Constant attentiveness to the environment is necessary as a method of providing early indications of coming changes that will pose problems or create opportunities for the firm, with the goal of gaining knowledge fare enough in advance to provide sufficient time to prepare for them.

The "macro-environment" is considered to be forces that affect all firms in all industries, which are generally considered to be of four kinds (the acronym "PEST" is used):

The "near" environment considers the elements of the firm's immediate market, and is generally schematized according to Porter's "five forces" model:

  1. Competitors - The number of competitors and their actions in the market drives a company to react in order to retain existing customers and attract new ones
  2. New entrants - Companies must consider the threat of new entrants: in any industry where profit margins are high and the barriers to entry are low, there is the threat that firms that are not presently competitors will be attracted
  3. Substitutes - The discovery that another product can be substituted for the firm's (it's significantly different, but serves the same needs) can cause the markets to merge
  4. Suppliers - Because a company depends on suppliers to provide it with the things it needs to create its own product, the balance of negotiating power between firm and supplier is delicate
  5. Customers - Depending on the number of firms in a market, there can be a shift in the negotiating power between a firm and those who purchase its goods.

(EN: Porter's model is purely economic. The influence of these five factors can shift the supply and demand curves for a given good, requiring the firm to react.)

Internal Analysis

The internal analysis of accompany assesses its resources and operations, generally with an eye toward efficiency and inefficiency, but also as a baseline. The current state of an organization is the starting point that the company must deviate from in order to effect any change.

Value-Chain analysis considers the flow of goods and services through a firm. In a fundamental sense, a company procures materials, performs functions upon them (which may be one function or a sequence of functions), then resells the processed goods. The same model has been applied to service companies, though it is less evident in that a "service" is intangible and more difficult to subdivide.

Human resources are the key component in internal analysis. Except in very rare instances, all firms that compete in an industry can obtain the same material goods from suppliers, and it is only the employees of one firm that differentiate it from others.

Typical factors for analysis are the size of workforce, the cost of salaries, the skills and capabilities of the workers, the need for training and development, the need to maintain motivation and morale, organizational structure, recruitment and selection processes, and employee retention.

Another key factor is corporate culture: the attitudes and behaviors that are evident in the relationships among employees. Culture can often be witnessed in the ideas expressed by employees, the ritual activities of the organization, the style of management, differences in attitudes in divisions or groups, dependencies among parts of the company, the status granted to individuals, and the features of the physical environment.

Another way of examining culture is to consider stories (what events people discuss), the rituals and routines they follow, the control systems in place, the organizational structures, the balance of power (among individuals and departments), and the visible symbols that express beliefs and attitudes.

SWOT Analysis

(EN: SWOT analysis tends to be a problem. By virtue of its order, strengths and weaknesses are identified first, then opportunities and threats derived from them, and the analysis ends up being myopic and introspective - and quite often damaging. In the present book, the author merely examines "what it is" and seems to steer clear of "how it's done," which may be for the best, all things considered.)

The SWOT analysis, which compares a lists of internal strengths and weaknesses against lists of environmental opportunities and threats, is often used to drive strategy.

Strengths are the factors in which a company performs well, either in terms of objective efficiency or in comparison to the performance of competitors. Of particular importance are the unique strengths of a company, as these form its competitive advantage.

Weaknesses are the converse of strengths: they are factors in which a company performs poorly, either against an objective standard or in comparison with competitors. They can be more difficult to identify strengths, for practical reasons (it is harder to inventory the things one does not have) and political ones (a company may not be willing to admit its weaknesses).

Opportunities represent developments in the external environment, primarily the market in which the company competes, that represent a potential for the company to increase profitability, decrease costs, increase share of customers in an existing market, or enter into new markets.

Threats represent the actions of external parties that can be detrimental to current operations. This may include the intrusion of regulators, the behavior of competitors, changes in the nature of the market, increasing power of suppliers or customers, or technological advances that obsolete current assets.

The author provides a diagram of the SWOT process, which lacks some essential detail. In this diagram, analysis is conducted to compile the lists, then the lists are used to identify the key issues. There is no indication of how the analysis should be done, or what logic or criteria are used to identify which issues are "key".

(EN: returning to the earlier note, this is where things often go astray, so it may be just as well that the author leaves these to the imagination.)

Generic Strategy

The author defines two generic strategies for competition: cost leadership (seeking to leverage organizational efficiencies to develop a product as cheaply as possible) and product differentiation (seeking to imbue a product with "unique" features that create customer preference, regardless of price).

In general, the decision is based on a fundamental formula for profitability: ((unit price minus cost to produce) times volume) minus overhead. Any phenomenon that influences one or more of these factors will have a significant impact on the profitability, hence sustainability, of the firm.

The author also discusses a broad versus narrow focus. A company with a broad focus produces many products and/or competes in many markets to mitigate its overall risk - such that failure in one line is compensated by success in others, and the company is more sustainable. A narrow focus seeks to provide a small number of products to a specific market niche.

In general, cost leadership is best suited to a broad focus and product differentiation to a narrow focus, but there are rare instances in which a company make seek cost leadership with a narrow focus or product differentiation with a broad focus.

It's also noted that companies may seek to use a hybrid strategy, though in such instance it is typical for a given strategy to be applied to a specific product, brand, or market - as when mixed strategies are applied to the same product in the same market, consumers are uncertain of a company's intention and may be reluctant to purchase.

The author also lists a handful of other generic strategies - such as diversification, globalization, acquisition, liquidation, and retrenchment. (EN: my sense is that these are tactics rather than strategies, but the author provides only a list of names and does not discuss in sufficient detail to agree or refute.)

Strategy Implementation

Strategy implementation describes the steps undertaken to act upon a given strategy. Worth noting: not all strategies are implemented - they may be abandoned because they are not feasible given resources, or because changes have occurred that renders them moot.

Implementing strategy generally requires obtaining the resources necessary to undertake the desired course of action. This may entail obtaining new resources or reassigning existing ones, either of which will require changes to an organization's structure and resources.

Change management has also been recognized as a critical factor of strategy implementation. Any change to the organization upsets the status quo, and must be managed carefully so that it can be implemented without disruption or resistance that can undermine the new strategy as well as harming existing business operations.

The author provides a bit more detail on topics related to change management: determining whether a change is an adjustment or a transformation, determining whether change can be implemented immediately or incrementally, and evaluating the impact of a change upon the organization in terms of the "forces" that will work to drive or resist it.