Module 1 – Introduction to Strategy, Planning, and Structure
1.2 – What is Strategic Planning?
Is there a pay off to the company from the resources devoted to strategic planning? Which is more appropriate, the informal approach, or the structured formal plan?
One description of strategy is “A pattern in a stream of decisions, the pattern may not be comprehensive, unified or integrated.” The problem with strategy is the complexity of the business environment, however, evidence suggests that the most successful companies got that way because of effective strategies.
Strategy is about the unknowable and the unpredictable. There are no simple answers.
1.2.2 – Strategy in the Business Context
Central question: is strategy a rational process, in the sense that it was carefully thought out by senior management and then put into practice, or is it emergent in the sense that it develops over a period as the result of many influences from all levels in the organisation.
1.2.3 – Three Approaches to Strategic Planning
Strategy can be regarded as:
- a purely planning exercise
- a course of action which emerges over time
- as the outcome of the resources which are available to the company
The Planning Approach:
Definition: once a set of objectives have been determined, the business environment analysed and forecast made, a plan can be worked out by senior management which is then passed down for implementation.
Assumptions:
- The future can be predicted accurately enough to make rational choices.
- It is possible to detach strategy formulation from everyday management (new information are available every day)
- It is possible to forego short-term benefit in order to gain long-term advantage – In a situation of uncertainty and lack of knowledge about the future, it might be preferable to reap short-term benefits instead of long-term objectives.
- The strategies proposed are capable of being managed in the way proposed – Change management cannot be taken for granted.
- The CEO has the knowledge and power to choose among options- It is necessary to achieve consensus and agreement at all levels of the org. Compromises are inevitable during implementation.
- Strategies do not need to be altered – false
- Implementation is a separate and distinctive phase that only comes after a strategy has been agreed – False, we have to evaluate the feasibility of different courses of actions at every step.
Emergent Strategy:
Definition: startss from the premise that people are not totally rational and logical. Strategy is not planned before the event but emerges over time in an unpredictable manner and hence may appear to have little structure.
The decision maker is rational given the information at his disposal, but is quite aware that more information is likely to be available. The term “satisficing” was invented to reflect the fact that decision makers collect information and defer selecting a course of action until the costs of further delay and information collection are considered to be greater than the potential benefits of searching out a better option.
It can ge argued, however, that:
- just because the world is complex and changing, does not mean that decision makers should simply7 sit back and let things happen.
- The company can still be directed along the general lines of a broad mission.
- There is need for eficient resource allocation (not randomly)
- Compromises are a constraint, not a barrier to action.
- Investments might take time to reach fruition, therefore a degree of long term planning is inevitable.
- The act of attempting to plan makes the basis for management action clear.
Resource Based Strategy
Emphasis on the internal resources available to the company. It is primarily concerned with the search for competitive advantage and its source rests within the organisation’s resources. Examples: total quality management
1.2.4 – Rittell’s Tame and Wicked Problems
The old Soviet economy tried to plan everything. What is the basic premise is wrong, i.e., it is not possible even in principle to plan an economy or a company with any degree of precision?
Property / Tame / WickedAbility to formulate the problem / Can be written down / No definitive formulation
Relationship problem x solution / Can be formulated independently of solution / Understanding problem is same as solving it.
Testability / Either true or false / Solutions good or bad relative to each other
Finality / Clear solution / No clear end and no obvious test
Tractability / Identifiable list of operations can be used / No exhaustive identifiable list of operations
Level of analysis / Can identify root cause / Never sure whether a problem or a symptom
Reproducibility / Can be tested over again as in a lab / Only one try; no room for trial and error
Replicability / May occur often / Unique.
1.2.5 – The Origins of Strategy and Tactics
We can visualise business strategy as a set of decision rules which guide the company’s resource allocation process, taking into account both the short and long run, with the emphasis on allocating resources in uncertain conditions to achieve future objectives. The company which uses a form of strategic planning does not simply react to events in the present, but considers what should be done now in order to ahieve future objectives.
1.3 – The Process of Strategy and Decision Making
The selection of a course of action depends on the availability and interpretation of information, analysis, intuition, emotion, political awareness and many other factors.
It is possible to have a structured analysis of the strategy, providing managers with insights into events.
1.3.1 – Strategy Dynamics
Strategy is a dynimic process, as the environment is always changing.: competitive environment, product life cycles, customer changes, government regulations, etc.
The Mythical Company – example:
The CEO asks:
1) How well are we performing?
2) What should we be doing in the future?
3) How can we achieve successful change?
In response, the functional areas write their reports on how they each see things:
1) Accounting Report
2) R&D Report
3) Marketing Report
4) Finance Report
5) Economic Report
6) Production Report
7) Manpower Report
The CEO then needs to integrate and synthesize these inputs, and decide on vision and direction.
Strategy and Crises - How can you follow any strategic plan when you keep getting hit with pressing problems of the day? It must be accepted that no plan can be inflexible, and that it should be modified as additional information becomes available. Crises events can be regarded as sources as new information.
1.3.7 – Elements of Strategic Planning
Apart from recognizing that forward thinking of some sort is important, it is possible to extract some lessons of general applicability from the dynamic approach discussed above.
1) Individual managers used a structure of thought to tackle problems within their area.
2) Managers applied this structure to the analysis of data.
3) The CEO integrated the different types of analysis presented by the managers in order to arrive at a decision.
4) A system of evaluation was devised to monitor the allocation of resources.
5) Finally, a door was left open to modify the strategy as needed.
1.3.8 – Structure
In order to make sense out of the complexity of life it is necessary to impose an intellectual structure on events and processes. A theoretical structure makes it possible to tackle new problems in a systematic manner; the lack of general principles which can be applied to seemingly different issues leads to inconsistency.
Example of structures: finance, accounting, OB, economics, marketing.
The CEO imposed a general structure on the information presented to him by thinking in terms of the company’s strengths and weaknessess: the threats posed by changes in market conditions and the opportunities existing in related markets.
b
The information the functional managers provided was in the form of analyses based on their individual areas of expertise. The following issues were important:
- Do not confuse rigor with numbers – the use of theories and concepts to clarify problems and evaluate potential solutions can be independent of the precise numerical quantities. There is nothing to be gained by attempting to be highly accurate.
- Precision is not essential
- Data can be expressed as: relative orders of magnitude, positive or negative, quantitative or qualitative.
It is important for managers to determine the direction of change and the rough order of magnitude. There are likely to be significantly diminishing returns at the margin to the effort devoted to analytical detail.
1.3.10 – Integration
Integration is an essential component of strategy because the implications of specific recommendations is one area can have implications for other aspects of company operations. The CEO must understand how each of the functions think about things in order to integrate and provide constructive criticism—though he may not be best at doing a financial analysis himself.
1.3.11 – Evaluation
Performance must be evaluated, and in order to monitor performance it is necessary to devise measures which generate information on how well objectives are being attained.
There are many measures, make sure the measure used is relevant.
It is not possible to express all targets in quantitative terms (standards of service, corporate image, etc). Sometimes absolute measures are less important than measures relative to the competition.
1.3.12 – Feedback
If a company does not monitor, react to and learn from feedback its strategies will quickly cease to be aligned with actual events.
1.4 – Business Unit and Corporate Strategy
There is a difference between corporate and business strategy. Firm: group of SBUs which are coordinated and directed by a corporate headquarters. An SBU is an operating division of a company which serves a distinct product-market segment or a well-defined set of customers or a geographic area. The SBU is given the authority to make its own decisions within corporate guidelines.
The strategic questions addressed by SBU’s are:
1) What is the market?
2) Which segments are products aimed at?
3) What is the competition?
4) Can a sustainable competitive advantage be achieved?
Corporate strategy is concerned with the portfolio of SBUs, ensuring that they do not behave in a way which is detrimental to each other, and allocating resources among them.
1.4.1 – Allocating Corporate Resources
How should companies allocate resources among SBUs? Two example of approaches are:
- allocate capital to groups on the basis of the total capital cost to each group of identified value creating investments. Each group then allocates amont its SBUs.
- Allocate capital directly to the individual SBUs using the ratio of value added.
1.4.2 – Development of Corporate Strategies
How does corporate add value to the SBUs? The costs should be less than the benefits.
There are four ways by which the parent might add value:
- Stand-alone influence: parenting activities include agreeing and monitoring performance targets, approving major capital expenditures, selecting SBUs managers. It can extend to product-market strategies, HR management. It can be argued that the more the parent extends its influence into the affairs of the individual businesses, the more likely it is hat it will destroy value; this is the “10 per cent versus 100 per cent paradox”: why should a parent manager working part t ime do better than a business manager working full time?
- Linkage influence: emcourage relationships to capitalise on synergy. But, why should the parent company do better than the SBU?
- Functional and services influence: provide functional leadership and cost effective services. But it can create a supplier insulated from outside competition and it is not guaranteed that it will be as efficient as the market. This is the “beating the specialists” paradox.
- Corporate development activities: buying and selling business, creating new businesses, redefining businesses. But since the majority of corporately sponsored acquisitions, new ventures and business redefinitions fail to create value, the odds against success are long: this is the “beating the odds” paradox.
1.5 – Is Strategic Planning only for Top Management?
1.5.1 – Company Benefits of Strategic Planning
1) The individual manager is able to see where his subunit fits into the overall system of objectives.
2) The manager will better understand which of his potential proposals are likely to contribute to the overall plan/
3) Managers can better understand more clearly the strategies they are employing by participating in the strategy process.
1.5.2 – Individual Benefits of Understanding Strategic Planning
1) The manager will achieve a better understanding of where the company is going, and what it is attempting to achieve.
2) Submitted proposals will become more consistent and relevant.