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1
THE CONCEPT OF STRATEGY THE CONCEPT OF STRATEGY AND STRATEGIC AND STRATEGIC MANAGEMENTMANAGEMENT
G. Tyge Payne, PhD
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Strategic Management
Strategy: The unifying theme that gives coherence and direction to the decisions of an organization
Strategic Management: Consisting of the analysis, decisions, and actions an organization undertakes in order to create and sustain competitive advantages.
Or, the Strategic Management Process is:The full set of commitments, decisions, and actions required for a firm to create value and earn above-average returns. (Hitt, Hoskinson, & Ireland, 2004, p. 4)
Strategic Management basically seeks to answer the question: How and why do some firms outperform others?
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Other Definitions of StrategyOxford Dictionary: The art of war, especially the planning of
movements of troops and ships etc., into favorable positions; plan of action or policy in business or politics etc.
Chester I. Barnard: Strategy is intended to focus on the interdependence of the adversaries’ decisions and on their expectations about each other’s behavior.
Alfred D. Chandler Jr.: The determination of the long run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.
Kenneth Andrews: Strategy is the pattern of objectives, purposes or goals and the major policies and plans for achieving these goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be.
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The Origins of Strategy
Know the other and know yourself: Triumph without peril.
Know Nature and know the Situation: Triumph completely.- Sun Tzu (~360 B.C.)
• Business strategy is a relatively young field of study – but its roots go back to early military strategy.
• Strategy comes from the Greek word strategos, which is formed from stratos, meaning army, and –ag, meaning to lead.
• Carl von Clausewitz wrote in the early 1800’s that “tactics…[involve] the use of armed forces in the engagement, strategy [is] the use of engagements for the objects of war.”
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More Recent Historical Development of Business Strategy
• Not until very large companies with the ability to influence the competitive environment within their industries did strategic thinking in the business world begin to be articulated. – Alfred Sloan, CEO of GM, 1923 – 1946 - One of the first to analyze competition,
Ford, and devise a strategic plan based on its strengths and weaknesses.– Chester Barnard, Senior Executive of New Jersey Bell, 1930s - Argued managers
should pay attention to “strategic factors” which depend on “personal or organizational action.”
• Wartime (WWI and WWII) efforts also impacted strategic thinking and use of formal strategic tools and concepts:– Allocation of scarce resources– Use of quantitative analysis in planning– The concept of “learning curves”– The concept of “distinctive competence” - first mentioned by Philip Selznick, a
sociologist, in a debate about whether or not to combine the military forces into a single unit (i.e., no Army, Navy, Air Force, Marines, just the US Military).
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• It wasn’t until the 1950’s that strategy was truly introduced in business schools as a way of analyzing the competitive environment and setting organizational goals and objectives to fit that environment.
• These concepts serve as the foundation of strategic management study:– Previous “Business Policy” perspectives looked at maintaining a “balance in
accord with the underlying policies of the business as a whole.” – Harvard– Kenneth Andrews’ SWOT Analysis was developed – still in use today.– Theodore Levitt’s “Marketing Myopia” argued that when companies fail it
typically is because firms focus on the product rather than the changing patterns of consumer needs and tastes.
– Igor Ansoff argued, in response to Levitt, that a firm’s mission should exploit an existing need in the market, rather than using the consumer as the common thread in business. “In reality a given type of customer will frequently have a range of product missions or needs.” Corporate Strategy, 1965.
– BCG developed the “experience curve” and portfolio analysis concepts.– McKinsey & Company’s development of SBUs and the nine-block matrix.– Mintzberg’s “Deliberate, Emergent & Realized Strategies”– Porter’s Generic Strategies
More Historical Development
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DOMINANTTHEME
1950s 1960s-early 70s Mid-70s-mid-80s Late 80s –1990s 2000s
Budgetary Corporate Positioning Competitive Strategicplanning & planning advantage innovationcontrol Financial Planning Selecting Focusing on Reconcilingcontrol growth &- sectors/markets. sources of size with
diversification Positioning for competitive flexibility &leadership advantage agility
Capital Forecasting. Industry analysis Resources & Cooperativebudgeting. Corporate Segmentation capabilities. strategy.Financial planning. Experience curve Shareholder Complexity. planning Synergy Portfolio analysis value. Owning
E-commerce. standards. — Knowledge Management—
Coordination Corporate Diversification. Restructuring. Alliances && control by planning depts. Global strategies. Reengineering. networksBudgeting created. Rise of Matrix structures Refocusing. Self -organizsystems corporate Outsourcing. ation & virtual
planning organization
MAINISSUES
KEY CONCEPTS
&TOOLS
MANAGE-MENT
IMPLIC-ATIONS
The Evolution of Strategic Management
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Ansoff’s Product / Mission Matrix*
MarketPenetration
MarketPenetration
ProductDevelopment
ProductDevelopment
MarketDevelopment
MarketDevelopment
DiversificationDiversification
PresentProduct
NewProduct
PresentMission
NewMission
*Categories define the common thread in an organization’s business/corporate strategy.
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BCG’s Growth-Share Matrix
StarStarQuestion
MarkQuestion
Mark
CashCowCashCow
DogDog
HighShare
LowShare
HighGrowth
SlowGrowth
??
Bark!!
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Deliberate Strategy
Forms of Strategy
RealizedStrategy
IntendedStrategy
UnrealizedStrategy
EmergentStrategy
**Normally emergent strategy comes fromlearning and dissemination within the organization.
Mintzberg’s Critique of Formal Strategic Planning:•The fallacy of prediction – the future is unknown•The fallacy of detachment -- impossible to divorce formulation from implementation•The fallacy of formalization --inhibits flexibility, spontaneity, intuition and learning.
Mintzberg’s Critique of Formal Strategic Planning:•The fallacy of prediction – the future is unknown•The fallacy of detachment -- impossible to divorce formulation from implementation•The fallacy of formalization --inhibits flexibility, spontaneity, intuition and learning.
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Porter’s Generic Strategies
Strategy 1
CostLeadership
Strategy 2
Differentiation
Strategy 2
Differentiation
Strategy 3A
Cost Focus
Strategy 3A
Cost Focus
Strategy 3B
DifferentiationFocus
Strategy 3B
DifferentiationFocus
Competitive Advantage Lower Cost Differentiation
CompetitiveScope
BroadTarget
NarrowTarget
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• Provides a framework for thinking about the “business”• Creates a fit between the organization and its external
environment.• Provides a process of coping with change and organizational
renewal• Fosters anticipation, innovation, and excellence• Facilitates consistent decision-making• Creates organizational focus• Acts as a process of organizational leadership.• Finally and most importantly: To help the organization to succeed (outperform) against its competition!!
Why is SM, as a field of study, necessary? Why are all these theories/tools needed ?
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Strategy, Survival and Success• The ultimate goal of the organizations is to be
successful – success is:• Survival (long-term success)• Achievement of Goals• Above average returns/Profitability (probably most important,
because it determines the ability to achieve the above two)
• Strategy can help achieve success, but it doesn’t guarantee it—certain features of strategy directly contribute to success:
1. Goals that are simple, consistent, and long-term. 2. Profound understanding of the competitive environment. 3. Objective appraisal of resources.4. Effective implementation.
• These observations concerning the role of strategy can be made in relation to most human endeavors be it warfare, chess, politics, sport or business.
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Competition and Competitive Advantage
• Competition provides the rationale for strategy – without competition, strategy is of no concern.
• The essence of strategy is the interdependence of competitors—or the establishment of sustainable competitive advantage over rivals.
• The study of strategy involves how we go about identifying, establishing, and sustaining competitive advantage.
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Thinking Strategically:The Three Big Strategic “Analysis” Questions
1. Where are we now? What is our situation?
2. Where do we want to go?
– Business(es) we want to be in and market positions we want to stake out
– Buyer needs and groups we want to serve
– Outcomes we want to achieve
3. How will we get there?
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Differing Perspectives of the Strategic Management Process
External EnvironmentExternal Environment
Industry AttractivenessIndustry Attractiveness
Strategy FormulationStrategy Formulation
I/O ModelI/O Model
Assets/Skills AssessmentAssets/Skills Assessment
ImplementationImplementation
ResourcesResources
CapabilityCapability
Sustainable CASustainable CA
RBV ModelRBV Model
Strategy FormulationStrategy Formulation
ImplementationImplementation
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Four Assumptions of the I/O Model
1.1. The external environment is assumed to possess The external environment is assumed to possess pressures and constraints that determine the strategies pressures and constraints that determine the strategies that would result in above-average returns.that would result in above-average returns.
2.2. Most firms competing within a particular industry are Most firms competing within a particular industry are assumed to control similar strategically relevant assumed to control similar strategically relevant resourcesresources and to pursue similar strategies in light of those and to pursue similar strategies in light of those resources.resources.
3.3. Resources used to implement strategies are highly Resources used to implement strategies are highly mobilemobile across firms.across firms.
4.4. Organizational decision makers are assumed to be Organizational decision makers are assumed to be rational and committed to acting in the firm’s best rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behaviors.interests, as shown by their profit-maximizing behaviors.
18
Our Approach to Studying the Strategic Management Process
• Both the I/O and RBV perspectives are useful to managers and essential to understanding the strategic management process.
• One essentially takes an outward-in (I/O) perspective while other takes an inward-out (RBV) perspective.
19Imp l
eme n
t at i
o n (
5 )Im
p lem
e nt a
t io n
(5 )
Str
ateg
ic C
ontr
ol (
6)S
trat
egic
Con
trol
(6)
Formulating Directions- Develop Vision/Mission (1)
-Set Objectives (2)
Formulating Directions- Develop Vision/Mission (1)
-Set Objectives (2)
Organizational CultureStakeholder Influence
Values / Ethics
Strategic Analyses (3)Strategic Analyses (3)
Strategy Formulation (4)-Formulate and Consider
Alternatives-Make Strategy Choice
Strategy Formulation (4)-Formulate and Consider
Alternatives-Make Strategy Choice
Opportunities and Threatsfrom Economic, Political, Technological etc Sources
Opportunities and Threatsfrom Competition and
Key Stakeholders
Organizational CultureStakeholder Influence
Values / Ethics
Internal OrganizationInternal Organization
Competitor/StakeholderCompetitor/Stakeholder
External EnvironmentExternal Environment
Context of Strategy(type of organization, culture, values,
life cycle competitive position)
20
Birnbaum’s Strategy 21 Process
• Examine the Current Business Model• Go Beyond the Current Business Model• Design a “Grand Strategy”• Develop a Compelling Vision• Assure Enablers of Strategy
• Intellectual Capacity• Processes• Organizational Structures• Technologies• External Relationships• Capital Resources
• Set Objectives to Measure Success• Design a Monitoring Process
Similar to Internal and Competitive Analysis
Similar to Internal and Competitive Analysis
Basic Decision to Make Major Change or Not
Related Issues to Monitor Implementation Process
Strategic Formulation and Implementation
21Hambrick & Fredrickson, 2001
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The Strategy ConceptLevels of Analysis
CorporateStrategy
BusinessStrategy
FunctionalStrategy
Choice of ProductsChoice of Markets
Choice of Competitors
• Where to Compete?
• How to Compete?
• How to Contribute?
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RATE OF PROFIT ABOVE THE
COMPETITIVE LEVEL
How do we make
money?
INDUSTRY
ATTRACTIVENESS
Which businesses
should we be in?
COMPETITIVE ADVANTAGE
How should we compete?
CORPORATE STRATEGY
BUSINESS STRATEGY