Strategy Introduction - Strategic Management

Our aim in this chapter is to explore some basic approaches of strategy formulation. We will also have a look at the one of the earliest tools of strategic thinking, gap analysis. Strategy is the direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations.

Strategy at Different Levels of a Business
Strategies exist at several levels in any organisation - ranging from the overall business (or group of businesses) through to individuals working in it.

Corporate Strategy - is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated explicitly in a "mission statement".

Business Unit Strategy - is concerned more with how a business competes successfully in a particular market. It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc.

Operational Strategy - is concerned with how each part of the business is organised to deliver the corporate and business-unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc.

Strategy formulation:
Strategy formation creates strategy, designing new businesses and organizations to carry out those businesses. Formation involves exploration, the search for new advantages and business possibilities. Strategy formation creates a theory of business and its accompanying hypotheses. Strategy formation, or creation, is an aspect of strategic management. The BAi strategic management construct labels this aspect create art.

Formulating strategy is certainly the least understood and most controversial aspect of strategic management. Hamel's two poignant observations highlight the difficulty of nailing down strategy creation, or creating strategy on demand.

  • First, there is not a process to produce the seminal idea that makes the strategy unique and valuable.
  • Second, revolutionary strategies have always been the product of lucky foresight.

But there is hope. There are techniques to generate, nurture, and capture ideas. The field of people who have the opportunity for lucky foresight can be greatly expanded and utilized to produce innovative strategy. The management systems can be put in place to stimulate, reward, and adapt to entrepreneurial behavior. If it is true that inspiration is 99% perspiration as Edison said, management must make the investment in order to have the opportunity to harvest the 1% which is of inestimable value.

The create art aspect of strategic management depends on complimentary divergent and convergent thinking. Strategy is deliberate and emergent. Strategic insights can come from just about anywhere. The create art activities are the most dynamic, with the tension of the simultaneous need for freedom to explore and create coupled with the need to produce a coherent strategy, or approach to competitive advantage, to be acted upon. The more business leaders know about the formulation of strategy, business design, and causality, the more they can incorporate the types of thinking and activities which produce innovation into the architecture of the business.

Formulating strategy is hardly a formula. Strategy comes about from many mental frameworks and thought patterns. Strategic thinking is a combination of types of thinking and ways of viewing the world. Development is necessary to build uniquely competitive competencies. Idealized design takes the mind into the realm of creativity and innovation. The recognition of constraints and their management is woven into the design process. There are pitfalls to be avoided. Businesses all have an architecture, and a design, whether understood or not, to be considered in designing a business organization.

The strategic planning process involves the identification of alternatives, the collection of information, evaluation and selection of alternatives, and, finally, the strategic decisions themselves. Much more will be said on these subjects: forthe moment it is fair to assume that the applications of these stages during theprocess would have reduced the smallholder’s problems to something he couldmanage – a choice between a few real opportunities. Part of the disciplined thinking which must accompany the development of strategy is to assess the extent of the problem. One very useful and simple technique to assist in this is gap analysis. This sets out the targets the company is trying to achieve, what is expected from current operations, and what the ‘gap’ is between expectations and requirements. Filling the gap is what strategy is about. All this can more easily be demonstrated with a simple diagram (Figure).

Gap-analysis

The diagram measures absolute levels of profit on the vertical axis and periods of time on the horizontal axis (it could also be used to measure return on investment ratios or sales). Line A shows the progression of the company’s primary, or profit, objective. This measures what the business intends to achieve. Line D measures what the company expects to achieve from its current operations, assuming no basic strategic changes are made. A strategic planning tool used to calculate the difference or 'gap' between desired projections and current or forecasted operational reality. The details of the process showing the current position and where the company wants to be are plotted on a graph. The axes of the graph show the desired indicator for judging the gap (market share, sales, profitability etc.), against time. Analysis of the chart allows businesses to decide on the resources and strategy needed to achieve the company's objectives.

Plotting the chart
First, the desired results are plotted. In this example the corporate objective is £60m in sales over a given time period. The current forecast models are then used to work out, if nothing strategic changes over that same time, what the outcome will be (in this example £30m in sales). This presents the first gap, i.e. the difference between the upper and lower lines, known as the 'operations gap'.

Strategic gap analysis
Once the gap has been identified, the process of strategic planning begins to form a plan or strategy on how to close the gap and achieve the desired corporate objective. There are two methods that can be employed to close the gap: strategic changes such as market development, penetration, diversification and product development, or tactical changes such as price shifting and discounts.

Overall
The strategic planning gap is used by the highest level strategists within an organisation and can be used for human resources, business direction, business processes or information technology. The analysis process allows companies to analyse and challenge their business strategies, identify underutilized resources or misplaced foci, and to establish benchmarks for themselves and their products or services. Once these have been identified, the cyclical process of strategic and tactical changes to achieve the desired result can begin.

The corporate appraisal should also provide the information on which lines B and C are prepared. Line B shows the effects of proposed profit improvement projects on profits and illustrates the extent to which line D can be moved towards line A – a partial closing of the ‘gap’. Line B may also include profit targets to be achieved from an improvement strategy: that is, the actual means may not at this stage be known, only that the target is likely to be realistic. One way of helping line B to be realistic is to consider line C. The gap between lines B and A is the ‘strategic gap’. This is the area to which. corporate top management must give attention, for it will only be filled if the company enters into new strategies. In the diagram, line D shoots rapidly downwards towards oblivion. This is by no means an inevitability, and the direction and shape of this line, and the nature of the improvement and strategic gaps, will be unique to each individual company.

Gap analysis is thus used to help the organisation to ‘stretch’ itself towards its objectives. Occasionally, closing the gap may be impossible, either because of shortage of ideas or shortage of resources. Perhaps the objective for the fifth year is achievable, but only at the expense of unacceptable losses in the early years. In these circumstances, and provided the objectives have been carefully thought out, the answer may be to re-examine the company’s continued role as an independent business unit. Possibly the shareholders would be better served by a merger with another company.

Gap-analysis-with-control

The diagrams are designed as an aid to thought – and possibly of presentation and it is possible, and sometimes desirable, to dispense with the drawing and analyse the figures alone. Exactly the same results can be achieved. So far the discussion of the ‘gap’ has provided an indication of the strategic task. Before turning to the ways in which strategy might be further identified and analysed, it is worth considering the philosophical approaches to planningdefined by Ackoff.

He sees three distinct philosophies which – for want of better terms – he calls ‘satisficing’, ‘optimising’, and ‘adaptivising’, although in practice mixtures of the three pure forms also occur. ‘Satisficing’ plans aim to do well, but not as well as possible, to do enough to satisfy, but not to do more than this, although it may be possible to do better. Objectives set by ‘satisficing’ planners are always feasible the ‘stretching’ effect of a good system of objectives is avoided. Strategies always try to avoid conflict, and rarely involve organisational change or major variations from the past. ‘Satisficing’ planners produce ‘one-point’ plans, i.e. their plans contain only one set of strategies and forecasts and make no provision for the possibility that things might go wrong: an artificial certainty is given to all planned actions. As it is assumed that the organisation is flexible enough to cope with the unexpected, there are seldom formal systems for monitoring and controlling the plans.

Ackoff sums up ‘satisficing’:
Not surprisingly, satisficing planning seldom produces a radical departure from the past. It usually yields conservative plans that comfortably continue most current policies, correcting only obvious deficiencies. Such planning therefore appeals to organisations that are more concerned with survival than with development and growth.

‘Satisficing’ planning adds little to the company’s knowledge of itself or its markets. The ‘optimising’ planner takes a completely different view of his job. He aims always to choose the best possible course of action, and relies very heavily on operational research techniques and mathematical models. The optimiser is only as good as the models he produced.‘Adaptivising’ is accompanied by the belief that the main value in planning lies in the process and not the plans themselves. The adaptiviser believes that another main purpose of his plans is to prevent crises from arising – to adapt the organisation and systems so that difficulties are avoided, and so that management does not have to spend most of its time resolving the problems caused by past inadequacies and inefficiencies.

Ackoff’s analysis is useful in understanding management behaviour, and it is important to know the various approaches to strategic planning as this can often help shed a new light on the way a company plans and acts.

One simple way of looking at strategic options has appeared in many books and articles – with modifications and variations – although it can be traced back to Igor Ansoff, and has been called the Ansoff matrix.

The Ansoff Growth matrix is a tool that helps businesses decide their product and market growth strategy. Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend on whether it markets new or existing products in new or existing markets.The variant in Figure derives from this source, although the terminology used is different.

Analysis-of-strategic-ailternatives


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