Analysis of Strategy Formation Essay
Analysis of Strategy Formation
Strategy is difficult to define. There are many popular and debated definitions available. One idea is that strategy is top management’s plan to attain outcomes consistent with the organization’s mission and goals (Mintzberg, Ahlstrand, & Lambel, 1998). Another definition is that strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage (Hitt, Ireland, & Hoskisson 2013).
Some argue that strategy cannot be defined at all because many professionals including researchers, practitioners, and theorists all have different thoughts on what strategy is, how it is formulated, and how it is implemented (Dewit & Meyer, 2010). However, all of these ideas have something in common: a strategy is a roadmap for getting from here to there. It is important to understand that strategy is not a single concept, but rather a process made up of many pieces. For this paper, I will define strategy as a roadmap or blueprint for obtaining a competitive advantage.
In this analysis of strategy formation I will examine the most important issues involved in strategy formation and explain why they are important, define how corporate-level strategies relate to business-level strategies and functional-area tactics and how these pieces support each other, and finally, I will outline the primary inputs to strategy formulation in a firm. But, before we answer these questions it is important to share a brief history of strategy. The word strategy originated from the Greek work strategos.
Strategos was coined when Kleisthenis developed a fresh set of organizational structure in ancient Greece in order to promote a better army. The direct definition of the singular stratos means to lead (DeWit &Meyer, 2010). Essentially the concept is derived directly from a need for a higher organizational structure, change and leadership development. Warfare was pas the point of simply winning a battle but instead was focused upon the coordination of units and tactical approaches to battle (DeWit & Meyer, 2010).
When we look at how strategy is formed today we also see a parallel in that firms must coordinate corporate-level, business-level and functional-level tactical issues in order to successful formulate a strategy. By coordinating the approach a strategy helps to gain a competitive advantage for firms just as it does for armies on the battlefield. Now that we understand the history behind strategy formation we will discuss the most important points of strategy formation and discuss what makes them important.
Strategy formation can be arduous because planners love to plan out every single details of a plan and press everything into an orderly, mechanistic process (DeWit & Meyer, 2010). It is critical for strategies to follow a mechanistic process with vision and end goal in mind while having a big picture mentality that takes change management and flexibility into account as the unknowns’ surface. Without a proper plan to learn and address needed adjustments the plan can become easily outdated and ineffective.
Strategy formation is described as being a new way to understand old problems, however, strategic planning and formation can lead to analysis paralysis if overly complex and planned out (DeWit & Meyer, 2010). Flexibility is an important piece of strategy formation and as strategists we must avoid being married to a specific set of ideas, but rather be open to learning, experimentation, balancing risks and rewards while working towards to vision that creates a competitive advantage.
This pattern in a stream of decisions works to get a company to its strategic goal and vision (Dewit & Meyer, 2010). A good approach to this is letting the strategies emerge in the process, rather than focusing on the strategy formation in the beginning. Outside of recognizing the importance of change and emergence there are many other important variables in strategy formation. For example, many organizations develop strategies based on rigid changes like their core competencies, resources, demographics, and market demand.
But, there are also many other softer pieces can be equally important when formulating a strategy. According to DeWit and Meyer the most cited key issues in strategy formation are: 1) overall organization structure of its basic management style; 2) relationships with the government or other external interest groups; 3) acquisition, divestiture, or divisional control practices; 4) international posture and relationships; 5) innovative capabilities or personnel motivations as affected by growth; 6) worker and professional relationships reflecting changed social expectations and values nd 7) past or anticipated technological environments (DeWit and Meyer, 2010). These key components help give us a good framework for the most important parts of strategy formation, but they don’t make up everything. Many managers are comfortable with the planning piece of strategy formation, but lag when it comes to actually putting the plan into action (Hrebiniak, 2005).
For many organizations putting the strategy in place is the easy part and creating a winning strategy doesn’t actually get you from here to there. A solid planned, documented and even inspiring plan of action doesn’t gain a competitive advantage in and of itself. It is the execution of that strategy that makes all the difference in the company achieving that completive advantage.
Here are some key challenges that corporations face when executing on a strategy: 1) the culture of the organization and how it was not appropriate for the challenges ahead; 2) incentives and how people have been rewarded for seniority or “getting older” and not for performance or competitive achievement (the sacred cows); 3) the need to overcome problems with traditional functional “silos” in the organizational structure and 4) the challenges inherent in managing change as the division adapted to new competitive conditions (Hrebiniak, 2005).
Actually getting the strategy to produce the desired results can clearly be more difficult that forming it in the first place. Execution is not the last important point of strategy formation to discuss; the stakeholders also play a fundamental role in the formation of a strategy. A stakeholder is any individuals, groups or organizations that can affect the firm’s vision and mission, are affected by the strategic outcomes achieved, and have enforceable claims on the firm’s performance (Hitt, Ireland, & Hosskisson, 2010).
These stakeholders can be divided into categories. Capital Market Stakeholders are the banking partner and suppliers of capital. Product Market Stakeholders are customers, suppliers, host communities, and union groups. Lastly, are the Organizations Stakeholders, which are comprised of employees, manager, and non-managers. These categories are divided from top to bottom in order of importance, which means that Capital Market Stakeholders have the highest level of influence and the Organizational stakeholders have the least. All takeholders are not created equal. The more critical and valued a stakeholder’s participation, the greater the firm’s dependency on it; greater dependence, in turn, gives the stakeholder more potential influence over a firm’s commitments, decisions, and actions (Ireland, Hoskisson and Hitt, 2008). A shift to more emergent characteristics in the strategy making process combining stakeholder considerations and strategic conversations during strategy formation with select stakeholders is what makes the difference in a balanced strategy (Booth and Segon, 2008).
The key point is the degree to which the stakeholder’s goals align with each other, and how those aligned elements are being addressed by the strategists in the organization. Strategic leaders are responsible and accountable for realizing the expectations of each of the many stakeholders. This accountability to the stakeholders plays an important part in developing the strategy. It can also impact the expectations of each of the stakeholders. For example, the vision and mission of the strategic leaders is shared with all of the stakeholders and their confidence or lack of confidence is a direct result of those strategic leaders.
The expectations and composition of our stakeholders has a significant and direct affect in our organizations strategic formation. Of course, without security and surprise, a solid plan, execution strategy, flexibility, clear objectives, concentration, and coordinated and committed leadership, a strategy can still fail. Surprise strategy must make use of speed, secrecy and intelligence to attack unprepared opponents at unexpected time, while forcing the opponent to react to your company and not the other way around (Concept Paper #1). Security addresses keeping the core competencies, operations points and resource safe from the competition.
For example, if our strategy is based on the talent of our human capital, we must work to keep the working conditions safe and happy so the competition doesn’t work to recruit our talent for their own strategy. We have outlined the most important points of strategy formation and discussed what makes them important, so now it is now time to define how corporate-level strategies relate to business-level strategies and functional-area tactics, and how these pieces support each other. Functional-area tactics are short-term activities each functional area within the firm undertakes to implement the grand strategy (Pierce & Robinson, 2012).
Pierce offers three characteristics that differentiate functional area tactics from business-level and corporate-level tactics: 1) time horizon, focus on immediate activities; 2) specificity, business strategies provide general direction, functional area tactics specify activities and how they are expected to be achieved and 3) participants, general managers are responsible for business strategies, operating managers establish short-term objectives and functional tactics that lead to business-level success (Pierce & Robinson, 2012).
These activities are put in place as a means of achieving a business-level strategy and so their relationship is one of vision versus direct action to achieve that vision. . A business level strategy is a carefully designed methodology that aids companies in implementing and carrying through with actions designed to meet the financial and other goals set by that business (wiseGEEK, 2013).
Whether a firm has a competitive advantage or not, depends on the business system or business-level strategy that is has developed to relate itself to its business environment and if the configuration of resources (inputs), activities (throughput) and product/service offerings (output) intended to create value for its customers – it is the way a firm conducts its business (Dewit & Meyer, 2010).
Business strategy can be further understood as the decisions a firm makes about its alternatives when competing in a specific market and how those alternatives works to bring their core competencies to the surface through cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated leadership/differentiation. According to Hitt et. l, the risks associated with cost leadership are 1) loss of competitive advantage to new technology; 2) failure to detect changing customer needs; 3) the ability of competitors to imitate the cost leader’s competitive advantage through their own distinct strategic actions (Hitt, Ireland, & Hoskisson 2013).
As also pointed out by Hitt et. al. , there are also differentiation strategy risks such as 1) a customer group’s decision that the differences between the differentiated product and the cost leader’s goods or services are no longer worth a premium price, 2) the inability of a differentiated product to reate the type of value for which customers are willing to pay a premium price, 3) the ability of competitors to provide customers with products that have features similar to those of the differentiated product, but at a lower cost, and 4) the threat of counterfeiting, whereby firms produce a cheap imitation of a differentiated good or service (Hitt, Ireland, & Hoskisson, 2013).
Previously, we have identified how business-level strategy impacts functional tactical strategy and now I will address corporate-level strategy and how it, respectively, relates to these levels. A corporate strategy is what makes the corporate whole add up to more than the sum of its parts and typically comprises four concepts: portfolio management, restructuring, transferring skills, and sharing activities (Porter, 2008). Portfolio management and diversification are central strategies for any medium or large business.
Market analysis demonstrates that many organizations that are medium sized and larger are made up of multiple businesses and offer several product lines that can cross industries and regions. Organizations can have very different financial characteristics and face different strategic options depending on how they are placed in terms of growth and relative competitive position (Dewit and Meyer, 2010). A portfolio strategy requires firms to grow through investment in existing businesses, acquiring new businesses and withdrawing from failing ones.
As porter points out another form of corporate strategy is philanthropic involvement. When it comes to philanthropy, executives increasingly see themselves as caught between critics demanding over higher levels of “corporate social responsibility” and investors applying pressure to maximize short-term profits (Porter, & Kramer, 2002). It doesn’t end there though, another piece to corporate-level strategy is corporate governance.
Corporate governance is concerned with identifying ways to ensure that decisions (especially strategic decisions) are made effectively and that they facilitate a firm’s efforts to achieve strategic competitiveness by maintaining a harmony between the top-level managers and the shareholder’s interests (Hitt, Ireland, & Hoskisson, 2013). We must also point out that mergers and acquisitions play a significant role in corporate-level strategy. Corporate-level strategy is made up of many pieces, but overall it shares the same goals as the other levels, to increase value by creating a competitive advantage.
We have discussed the various elements to corporate-level strategy and now we will discuss how it related to business and functional/tactical-level strategy. Since corporate-level strategy is the highest level of decision-making and encompasses the end objective of the organization, allocation of resources, stakeholder’s goals and acquisitions is it always value-oriented, whereas, business-level and functional-level strategy is more relevant to each individual business entity.
Corporate strategy is not the sum total of business strategies of the corporation but it deals with different subject matter; while the corporation is concerned with and has impact on business strategy, the former is concerned with the shape and balancing of growth and renewal rather than in market execution (Bhasin, 2010). Although there are different levels to organizational strategy they all relate and impact one another from the top down. Now that we understand the various levels of decision-making we will now turn to the various inputs to strategy formation for a firm.
Before we conclude this analysis, it is important to review the different schools on strategy and those schools perceive strategy formation. There are 7 main school of strategy starting with the Design School. In short, the design school looks to create a fit between capabilities and opportunities or possibilities; it resulted in the famous SWOT analysis. Second, the Planning School also uses a SWOT like the design school to take into account internal strengths and weaknesses and external opportunities and threats.
Although the design school doesn’t delineate the steps like the planning school does. It is this dividing into delineating steps that sets the planning school apart. The three phases of this school are: Objective Setting, Strategy Evaluating, and the Operationalization phase (Concept Paper #4). Third, in the Positioning School we see that the strategy formation is really driven by analyzing the market and deliberately implemented by those analytics.
Forth, The entrepreneurial school is more of a singular vision of strategy from 1 person, namely the entrepreneur, rather than a collective approach as we have learned about in previous schools. Fifth, the Learning School of thought approaches strategy formulation in two separate models: 1) the grassroots model approaches strategy as emergent; 2) whereas, the hothouse model formulates strategy deliberately. Sixth, the Cognitive School states that in order to understand how strategies emerge from under other ircumstances we must look into the mind of the actual strategists. And finally, the last school is the Configuration School, as pointed out in Concept Paper #11, different dimensions of an organization cluster together under particular circumstances and conditions to define “states”, “models” or “ideal types”. It was important to review these various schools because when we look at the big picture of strategy formation and analyze how it is made up and why it is important we can glean important points from each of the seven school.
Yes, the overall goal of each school is the same as the goal of strategy formation as a whole, to gain competitive advantage and overall value for the corporation, but it is not always as easy as following one school of thought. For example, what might work in one situation won’t necessarily work in another so as strategists we must be able to take pieces from each school and put them in place where appropriate to achieve our desired outcome for that particular problem. Now that we have some big picture understanding of the different perspectives we will now discuss the primary inputs of strategy.
As we discuss the inputs it is first important to point out that there is a difference between emergent and intended strategy. Organizations always have an intended strategy but sometimes the inputs move them towards a more emergent strategy. While strategy formulation is the process by which an intended strategy is created, emergent strategies often come out of following a specific pattern in decision making. (DeWit & Meyer, 2010). The primary inputs are identifying, diagnosing, conceiving, and realizing; of course within this specific framework, there are more specific activities (DeWit & Meyer, 2010).
The first input of identifying is outlining a mission and agenda, this could also include a vision statement. Diagnosing is the internal an external assessments, such as the SWOT analysis. Next, conceiving is the brainstorming process by which the participants envision where there are trying to go and how they will get there. This is the key component an input of strategy formation, and for most groups it can be the most difficult because it requires creative out-of-the-box thinking. Lastly, but not least, is realizing and this is where the rubber meets the road.
It is here where specific activities must be undertaken to achieve the strategic plan. We have identified the most important issues involved in strategy formation and defined why they are important, differentiated between corporate/business/functional-level strategies and how they impact one another, discussed the various schools of thought on strategy formation, and finally outlined the primary inputs to strategy formation in a firm. Now it is time to dig in a little deeper and attempt to bring it all together and analyze what it means as a whole.
From a big picture mentality strategy formation must encompass the important items we outlined, while also taking into account the potential for change. Having a change management protocol for the organization as a whole, as well as, for each of the subsidiary organizations is critical in today’s global market economy. Outside of change, as strategists, we must also clearly understand our competitors, threats and regions. Things like technology can play a significant part in the ability to execute on strategy. Surprise and security are also equally important to strategy formation.
What this all tells us is what we discussed early on: strategy is very difficult to define as an individual concept. Rather than a singular concept see that strategy is more of a way of big picture thinking that is critical to achieving success in virtually any endeavor, not just business. Yes, you can get lucky and find success without strategy, but we could also win the lottery it doesn’t mean it is going to happen. A strategic way of thinking is also not just thinking it is an executable and traceable tool that can adjust and emerge as needed.
As a metaphor we can use going to the gym for physical fitness. Our strategic vision is losing weight, increasing heart health and gaining strength. But, how will we get from here (fat, high cholesterol and weak) to there (strong, heart healthy and thin)? We start by developing an action plan, outlining the inputs and potential threats (bad eating, etc), and we follow our plan daily and adjust as needed based on what emerges from the data we gather. This methodology can be applied to any goal, and large corporate business is no different.
Unless we execute by actually going to the gym, following and adjusting our strategy for maximum performance we will never achieve our goals, even if we are lucky. You cannot win heart health in a contest. The same goes for business you can’t accidentally win customers and keep them for extended periods of time with successfully executing on your strategy. As we continue and find success in the gym, we may choose to diversify and bring our success to our friend and family or co-workers. This portfolio diversification also applies to large organizations.
Additionally, our goals in the gym have stakeholders like our friends, family, employers, insurance companies, communities and any organizations to which we belong, not the mention, the world as a whole that benefits from our staying healthy. This philosophy our strategic way of thinking can be with us every second of everyday, and by thinking strategically in our lives and our roles in business we not only gain competitive advantage but maintain that advantage overtime. In closing, from the origins of the word strategy, and earlier, human beings have been strategizing.
We strategized how to hunt and now we still strategize how to hunt only we are not hunting mammoths, but we are hunted mammoth size endeavors that require mammoth sized strategies. As we create and execute a plan for how to get from here to there towards achieving and maintaining a competitive advantage, as strategists, we are constantly analyzing how to optimize our approach while limiting risks. Strategy as a way of thinking can also be approved upon and as humans we have the power and control to accomplish truly amazing things for our corporations and our world.