This chapter starts with a definition of strategy and goes on to describe the fundamentals of strategy in more detail. It concludes with a review of the process of strategy formulation.
STRATEGY DEFINED
Strategy is about deciding where you want to go and how you mean to get there. A strategy is a declaration of intent: ‘This is what we want to do and this is how we intend to do it.’ Strategies define longer-term goals but they are more concerned with how those goals should be achieved. Strategy is the means to create value. Agood strategy is one that works, one that guides purposeful action to deliver the required result.
Strategy has been defined in other ways by the many writers on this subject, for example:
Strategy is the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals. (Chandler, 1962)
Strategy is a set of fundamental or critical choices about the ends and means of a business. (Child, 1972)
Strategy is concerned with the long-term direction and scope of an organization. It is also crucially concerned with how the organization positions itself with regard to the environment and in particular to its competitors… It is concerned with establishing competitive advantage, ideally sustainable over time, not by technical manoeuvring, but by taking an overall long-term perspective. (Faulkner and Johnson, 1992)
Strategy is the direction and scope of an organization over the longer term ideally, which matches its resources to its changing environment, and in particular, to its markets, customers and clients to meet stakeholder expectations. (Johnson and Scholes, 1993)
Business strategy is concerned with the match between the internal capabilities of the company and its external environment. (Kay, 1999)
A strategy, whether it is an HR strategy or any other kind of management strategy, must have two key elements: there must be strategic objectives (i.e. things the strategy is supposed to achieve), and there must be a plan of action (i.e. the means by which it is proposed that the objectives will be met). (Richardson and Thompson, 1999)
The emphasis (in strategy) is on focused actions that differentiate the firm from its competitors. (Purcell, 1999)
THE CONCEPT OF STRATEGY
The concept of strategy is based on three subsidiary concepts: competitive advantage, distinctive capabilities and strategic fit.
Competitive advantage
The concept of competitive advantage was formulated by Michael Porter (1985).
Competitive advantage, Porter asserts, arises out of a firm creating value for its customers. To achieve it, firms select markets in which they can excel and present a moving target to their competitors by continually improving their position.
Porter emphasized the importance of: differentiation, which consists of offering a product or service ‘that is perceived industry-wise as being unique’; and focus – seeing a particular buyer group or product market ‘more effectively or efficiently than competitors who compete more broadly’. He then developed his well-known framework of three generic strategies that organizations can use to gain competitive advantage. These are:
- innovation – being the unique producer;
- quality – delivering high-quality goods and services to customers;
- cost leadership – the planned result of policies aimed at ‘managing away expense’.
A distinction has been made by Barney (1991) between the competitive advantage that a firm presently enjoys but others will be able to copy, and sustained competitive advantage, which competitors cannot imitate. This leads to the important concept of distinctive capabilities.
Distinctive capabilities
As Kay (1999) comments: ‘The opportunities for companies to sustain… competitive advantage [are] determined by their capabilities.’ A distinctive capability or competence can be described as an important feature that in Quinn’s (1980) phrase ‘confers superiority on the organization’. Kay extends this definition by emphasizing that there is a difference between distinctive capabilities and reproducible capabilities. Distinctive capabilities are those characteristics that cannot be replicated by competitors, or can only be imitated with great difficulty. Reproducible capabilities are those that can be bought or created by any company with reasonable management skills, diligence and financial resources. Most technical capabilities are reproducible.
Prahalad and Hamel (1990) argue that competitive advantage stems in the long term when a firm builds ‘core competences’ that are superior to its rivals and when it learns faster and applies its learning more effectively than its competitors.
Distinctive capabilities or core competences describe what the organization is specially or uniquely capable of doing. They are what the company does particularly well in comparison with its competitors. Key capabilities can exist in such areas as technology, innovation, marketing, delivering quality, and making good use of human and financial resources. If a company is aware of what its distinctive capabilities are, it can concentrate on using and developing them without diverting effort into less-rewarding activities. It can be argued that the most distinctive capability of all is that represented by the knowledge, skills, expertise and commitment of the employees of the organization. This belief provides the basis for the philosophy of strategic human resource management.
Four criteria have been proposed by Barney (1991) for deciding whether a resource can be regarded as a distinctive capability or competency:
- value creation for the customer;
- rarity compared to the competition;
- non-imitability;
- non-substitutability.
The concept of distinctive capability forms the foundation of the resourcebased approach to strategy as described later in this chapter.
Strategic fit
The concept of strategic fit states that to maximize competitive advantage a firm must match its capabilities and resources to the opportunities available in the external environment. As Hofer and Schendel (1986) conclude: ‘A critical aspect of top management’s work today involves matching organizational competences (internal resources and skills) with the opportunities and risks created by environmental change in ways that will be both effective and efficient over the time such resources will be deployed.’
THE FUNDAMENTALS OF STRATEGY
Fundamentally, strategy is about defining intentions (strategic intent) and achieving strategic fit by allocating or matching resources to opportunities (resource-based strategy). The effective development and implementation of strategy depends on the strategic capability of the organization, which will include the ability not only to formulate strategic goals but also to develop and implement strategic plans through the processes of strategic management and strategic planning.
Strategic intent
In its simplest form, strategy could be described as an expression of the intentions of the organization – what it means to do and how or, as Wickens (1987) put it, how the business means to ‘get from here to there’. As defined by Hamel and Prahalad (1989), strategic intent refers to the expression of the leadership position the organization wants to attain and establishes a clear criterion on how progress towards its achievement will be measured.
Strategic intent could be a very broad statement of vision or mission and/or it could more specifically spell out the goals and objectives to be attained over the longer term.
The strategic intent sequence has been defined by Miller and Dess (1996) as:
1. a broad vision of what the organization should be;
2. the organization’s mission;
3. specific goals, which are operationalized as:
4. strategic objectives.
Resource-based strategy
The resource-based view of strategy is that the strategic capability of a firm depends on its resource capability. Resource-based strategy theorists such as Barney (1991) argue that sustained competitive advantage stems from the acquisition and effective use of bundles of distinctive resources that competitors cannot imitate.
As Boxall (1996) comments: ‘Competitive success does not come simply from making choices in the present; it stems from building up distinctive capabilities over significant periods of time.’ Teece, Pisano and Shuen (1997) define ‘dynamic capabilities’ as ‘the capacity of a firm to renew, augment and adapt its core competencies over time’.
Strategic capability
Strategic capability is a concept that refers to the ability of an organization to develop and implement strategies that will achieve sustained competitive advantage. It is therefore about the capacity to select the most appropriate vision, to define realistic intentions, to match resources to opportunities and to prepare and implement strategic plans.
The strategic capability of an organization depends on the strategic capabilities of its managers. People who display high levels of strategic capability know where they are going and know how they are going to get there. They recognize that, although they must be successful now to succeed in the future, it is always necessary to create and sustain a sense of purpose and direction.
Strategic management
The purpose of strategic management has been expressed by Rosabeth Moss Kanter (1984) as being to ‘elicit the present actions for the future’ and become ‘action vehicles – integrating and institutionalizing mechanisms for change’. Strategic management has been defined by Pearce and Robinson (1988) as follows: ‘Strategic management is the set of decisions and actions resulting in the formulation and implementation of strategies designed to achieve the objectives of an organization.’
Strategic management has been described by Burns (1992) as being primarily concerned with:
- the full scope of an organization’s activities, including corporate objectives and organizational boundaries;
- matching the activities of an organization to the environment in which it operates;
- ensuring that the internal structures, practices and procedures enable the organization to achieve its objectives;
- matching the activities of an organization to its resource capability, assessing the extent to which sufficient resources can be provided to take advantage of opportunities or to avoid threats in the organization’s environment; l acquiring, divesting and reallocating resources;
- translating the complex and dynamic set of external and internal variables that an organization faces into a structured set of clear future objectives,
which can then be implemented on a day-to-day basis.
Strategic management means that managers are looking ahead at what they need to achieve in the middle or relatively distant future. It deals with both ends and means. As an end it describes a vision of what something will look like in a few years’ time. As a means, it shows how it is expected that the vision will be realized. Strategic management is therefore visionary management, concerned with creating and conceptualizing ideas of where the organization should be going. But it is also empirical management, which decides how in practice it is going to get there.
The focus is on identifying the organization’s mission and strategies, but attention is also given to the resource base required to make it succeed. Managers who think strategically will have a broad and long-term view of where they are going. But they will also be aware that they are responsible first for planning how to allocate resources to opportunities that contribute to the implementation of strategy and, second, for managing these opportunities in ways that will add value to the results achieved by the firm.
THE FORMULATION OF STRATEGY
The formulation of corporate strategy can be defined as a process for developing a sense of direction. It has often been described as a logical, step-by-step affair, the outcome of which is a formal written statement that provides a definitive guide to the organization’s long-term intentions. Many people still believe and act as if this were the case, but it is a misrepresentation of reality. This is not to dismiss completely the ideal of adopting a systematic approach as described below – it has its uses as a means of providing an analytical framework for strategic decision making and a reference point for monitoring the implementation of strategy. But in practice, and for reasons also explained below, the formulation of strategy can never be as rational and linear a process as some writers describe it or as some managers attempt to make it.
The systematic approach to formulating strategy
In theory, the process of formulating strategy consists of the following steps:
1. Define the mission.
2. Set objectives.
3. Conduct internal and external environmental scans to assess internal strengths and weaknesses and external opportunities and threats (a SWOT analysis).
4. Analyse existing strategies to determine their relevance in the light of the internal and external appraisal. This may include gap analysis, which will establish the extent to which environmental factors might lead to gaps between what could be achieved if no changes were made and what needs to be achieved. The analysis would also cover resource capability, answering the question: ‘Have we sufficient human or financial resources available now or that can readily be made available in the future to enable us to achieve our objectives?’
5. Define in the light of this analysis the distinctive capabilities of the organization.
6. Define the key strategic issues emerging from the previous analysis. These will be concerned with such matters as product-market scope, enhancing shareholder value and resource capability.
7. Determine corporate and functional strategies for achieving goals and competitive advantage, taking into account the key strategic issues. These may include business strategies for growth or diversification, or broad generic strategies for innovation, quality or cost leadership; or they could take the form of specific corporate/functional strategies concerned with product-market scope, technological development or human resource development.
8. Prepare integrated strategic plans for implementing strategies.
9. Implement the strategies.
10. Monitor implementation and revise existing strategies or develop new strategies as necessary.
This model of the process of strategy formulation should allow scope for iteration and feedback, and the activities incorporated in the model are all appropriate in any process of strategy formulation. But the model is essentially linear and deterministic – each step logically follows the earlier one and is conditioned entirely by the preceding sequence of events; and this is not what happens in real life.
The reality of strategy formulation
It has been said (Bower, 1982) that ‘strategy is everything not well defined or understood’. This may be going too far but, in reality, strategy formulation can best be described as ‘problem solving in unstructured situations’ (Digman, 1990) and strategies will always be formed under conditions of partial ignorance.
The difficulty is that strategies are often based on the questionable assumption that the future will resemble the past. Some years ago, Robert Heller (1972) had a go at the cult of long-range planning: ‘What goes wrong’, he wrote, ‘is that sensible anticipation gets converted into foolish numbers: and their validity always hinges on large loose assumptions.’
More recently, Faulkner and Johnson (1992) have said of long-term planning that it:
was inclined to take a definitive view of the future, and to extrapolate trend lines for the key business variables in order to arrive at this view. Economic turbulence was insufficiently considered, and the reality that much strategy is formulated and implemented in the act of managing the enterprise was ignored. Precise forecasts ending with derived financials were constructed, the only weakness of which was that the future almost invariably turned out differently.
Strategy formulation is not necessarily a rational and continuous process, as was pointed out by Mintzberg (1987). He believes that, rather than being consciously and systematically developed, strategy reorientation happens in what he calls brief ‘quantum loops’. A strategy, according to Mintzberg, can be deliberate – it can realize the intentions of senior management, for example to attack and conquer a new market. But this is not always the case. In theory, he says, strategy is a systematic process: first we think and then we act; we formulate and then we implement. But we also ‘act in order to think’. In practice, ‘a realized strategy can emerge in response to an evolving situation’ and the strategic planner is often ‘a pattern organizer, a learner if you like, who manages a process in which strategies and visions can emerge as well as be deliberately conceived’.
Mintzberg was even more scathing about the weaknesses of strategic planning in his 1994 article in the Harvard Business Review on ‘The rise and fall of strategic planning’. He contends that ‘the failure of systematic planning is the failure of systems to do better than, or nearly as well as, human beings’. He went on to say that: ‘Far from providing strategies, planning could not proceed without their prior existence… real strategists get their hands dirty digging for ideas, and real strategies are built from the nuggets they discover.’ And ‘sometimes strategies must be left as broad visions, not precisely articulated, to adapt to a changing environment’. Other writers have criticized the deterministic concept of strategy, for example:
Business strategy, far from being a straightforward, rational phenomenon, is in fact interpreted by managers according to their own frame of reference, their particular motivations and information. (Pettigrew and Whipp, 1991)
Although excellent for some purposes, the formal planning approach emphasizes ‘measurable quantitative forces’ at the expense of the ‘qualitative, organizational and power-behavioural factors that so often determine strategic success’… Large organizations typically construct their strategies with processes which are ‘fragmented, evolutionary, and largely intuitive’. (Quinn, 1980)
The most effective decision-makers are usually creative, intuitive people ‘employing an adaptive, flexible process’. Moreover, since most strategic decisions are event-driven rather than pre-programmed, they are unplanned. (Digman, 1990)
Goold and Campbell (1986) also emphasize the variety and ambiguity of influences that shape strategy: ‘Informed understandings work alongside more formal processes and analyses. The headquarters agenda becomes entwined with the business unit agenda, and both are interpreted in the light of personal interests. The sequence of events from decision to action can often be reversed, so that “decisions” get made retrospectively to justify actions that have already taken place.’
Mintzberg (1978, 1987, 1994) summarizes the non-deterministic view of strategy admirably. He perceives strategy as a ‘pattern in a stream of activities’ and highlights the importance of the interactive process between key players. He has emphasized the concept of ‘emergent strategies’, and a key aspect of this process is the production of something that is new to the organization, even if this is not developed as logically as the traditional corporate planners believed to be appropriate.
Kay (1999) also refers to the evolutionary nature of strategy. He comments that there is often little ‘intentionality’ in firms and that it is frequently the market rather than the visionary executive that chose the strategic match that was most effective. Quinn (1980) has produced the concept of ‘logical incrementalism’, which suggests that strategy evolves in several steps rather than being conceived as a whole.
Afourfold typology of strategy has been produced by Whittington (1993).
The four types are:
1. Classical – strategy formulation as a rational process of deliberate calculation. The process of strategy formulation is seen as being separate from the process of implementation.
2. Evolutionary – strategy formulation as an evolutionary process that is a product of market forces in which the most efficient and productive organizations win through.
3. Process based – strategy formulation as an incremental process that evolves through discussion and disagreement. It may be impossible to specify what the strategy is until after the event.
4. Systemic – strategy as shaped by the social system in which it is embedded. Choices are constrained by the cultural and institutional interests of a broader society rather than the limitations of those attempting to formulate corporate strategy.
The reality of strategic management
Tyson (1997) points out that, realistically, strategy:
- has always been emergent and flexible – it is always ‘about to be’ and it never exists at the present time;
- not only is realized by formal statements but also comes about by actions and reactions;
- is a description of a future-orientated action that is always directed towards change;
- is conditioned by the management process itself.
The reality of strategic management is that managers attempt to behave strategically in conditions of uncertainty, change and turbulence, even chaos. The strategic management approach is as difficult as it is desirable, and this has to be borne in mind when consideration is given to the concept of strategic HRM as described in Chapter 3.
