In answering the question “What is Strategic Management?”, Nigel explores the origins and development of the concept of strategic management and sets out the key elements to the process.
In this article:
- The origins of strategic management
- Strategic Management Definition
- What is strategic management?
- The strategy study and key tools
- Successful implementation of strategy
- A strategic management culture
- Engagement with investors
Strategy derives from the ancient Greek word strategos which was used to describe the leadership created by the council of generals in planning how to deploy their army (stratos) to achieve their objectives. The military association continued in the very different society of ancient China where Sun Tzu wrote his Art of War which is still read today.
Over the years successful leaders have passed on their experience and their followers, initially warriors and latterly political leaders, have researched this body of wisdom to guide their own paths to success. In recent years this has been translated into the context of the business world and academics have built a body of knowledge, experience, and drawn up rules and guidelines to help business leaders improve their chances of success in achieving their business goals.
A major thrust in this thinking was a belief that more and more analysis was the key to success, exemplified by Igor Ansoff with his 1965 book, Corporate Strategy. Every student of management is now familiar with the Ansoff Matrix. More recently, Michael Porter became highly influential with his work on competitor analysis and competitive strategy.
Arguing against this general approach, but not against analysis per se, was Henry Mintzberg, with his belief in the emergence of strategy as opposed to the reliability of conclusions drawn from analysis alone. He believes that since “no plan survives the first contact with the enemy”, successful strategies “emerge” from the experience gained and adaptation of the original plans.
Most practical business managers would have considerable regard for Mintzberg’s caution when assessing the viability of a major change in current strategy.
There are some lasting truths in the body of knowledge that has been built up since the time of ancient Athens. So, for instance, Sun Tzu said that war, or conflict, can be measured in five ways: the way, the weather, the terrain, the leadership, and discipline. We can interpret these as follows:
- the way is the goal towards which we are striving
- the weather, we would represent as the time frame and the state of the market within which, guided by our strategic plan, we are progressing towards the goal
- the terrain is about assessing difficulties and risks associated with implementing our strategy
- leadership is about courage, wisdom, integrity and an ethical approach
- discipline means the rules and the appropriateness of the supporting organisation and accountability of individuals within that organisation
Sun Tzu would surely have approved!
One of the difficulties facing someone needing to conduct a strategic planning exercise – particularly if attempting this for the first time – is where to start. Reading the literature, readers can find themselves faced with a profusion of ideas, but many similar approaches, and all referring to the same tools. It may be thought that, beyond describing the tools, authors pursue their own spin in order to differentiate themselves from other authors. In the process they simply cloud the whole process and drift into theory. The practitioner has to work out his or her own methodology if he or she is tasked with persuading a company to cooperate in a strategy study and to follow it through to a successful conclusion.
Beyond this, to put in place an on-going culture of strategic management you need more than a set of analytical tools to deal with a range of organisational issues at various stages in the implementation process or when facing difficult human resource issues. They all have to be related and put in context as part of an on-going set of procedures.
Our approach to strategy and strategic management is based on a practical methodology, developed with clients and incorporating our own corporate governance module. Our key idea is the simple one that we start with a desired goal and see if it’s feasible to get there from where we are now. If it’s not, we work out what feasible goal is acceptable to the key stakeholders. Having agreed an achievable goal, we define the resource requirements and devise an appropriate implementation plan. This plan embraces the five golden rules of good corporate governance and a strategic management culture.
Our approach, set out in detail in Part 3 of our Good Corporate Governance course, is comprehensive and practical and easy to follow.
Producing a Strategic Management Definition is both easy and difficult. It is simplistic to say that strategic management is the process of managing strategic decision making. This raises questions of how strategic management differs from operational management, and it is easy to get drawn into semi-philosophical discussions about the aspects of strategic management which distinguish it from other types of management.
We define Strategic Management as the process of administering a company or business such that it continuously formulates, adjusts and implements strategies. In our definition of Strategic Management we stress an inclusive approach to corporate governance which broadens the strategy process to embrace the interests of all key stakeholders, not just the shareholders. Our holistic approach weights the input of the most important stakeholders by assessing their relative importance to the goals of the on-going business.
Beyond this strategic management definition are expressions such as Portfolio Strategy, which is concerned with the collection of businesses contained under a corporate umbrella, and whether the corporate strategy requires acquiring new businesses or parting with existing ones to achieve its objectives.
After that, the definition of Corporate Strategy simply means looking at things at the corporate level as opposed to Business Strategy which looks at things at the business unit level, in situations where there is more than one business unit within the corporation.
In addressing the question of types of strategy – whether planning driven or learning driven (emergent) – it is simplest to collect them under the same definition, above, on the basis that they all serve the same purpose, albeit by different means.
Johnson & Scholes, in their classic book, Exploring Corporate Strategy, say that strategic decisions are concerned with:
- the scope of the company’s activities
- matching those activities to the environment within which it is operating
- matching the activities to its resource capabilities
- allocation of major resources
- taking account of the impact on operational decisions
- considering the values, goals and expectations of those influencing strategy
- the long term direction
- assessing the implications of change
They describe strategy as having three main elements: strategic analysis, strategic choice and strategy implementation. Strategic management is an iterative process and can be represented as a loop. Hence:
Strategic analysis covers:
- the environment
- expectations, objectives and power
Strategic choice covers:
- generation of options
- evaluation of options
- selection of strategy
Strategy implementation is all about:
- resource planning
- organisation structure
- people and systems
Strategic management is an on-going process and the creation of a new strategy or review of an existing strategy is hard work. Extensive analysis is required. Generating the strategic options is challenging. Considering the implementation aspects is difficult. The whole process is complex and every company is unique.
The main steps in a strategy study are:
- establishing the desired goal
- conducting detailed analysis:
- external analysis: to understand the current industry structure and competitive forces and to evaluate the company relative to its competitors and determine opportunities and threats
- internal analysis: to evaluate strategic capabilities and potential strengths and weaknesses
- stakeholder analysis: to ascertain the views of the main stakeholders
- agreeing the outline strategy
- generate strategic options
- understand consequences and capabilities
- select a best fitting strategy
- preparing the implementation plan
- establish deliverables
- instigate project control
- write business plans
- undertake strategic management development
- build a review model
Some of the useful Strategy tools are:
- for the external analysis
- industry structure analysis using Porter’s model of the five competitive forces
- drivers of change analysis using PEST (Politics, Economics, Technology, Social/demographics)
- using value added analysis to compare generic strategies used by competitors
- for the internal analysis
- Porter’s value chain analysis
- Kaplan and Norton’s balanced scorecard
- for agreeing a strategy
- Porter’s generic strategies (Cost leadership, Differentiated, Focus)
- Mintzberg’s emergent strategies
- SWOT analysis
- scenario planning
- Ansoff’s growth matrix (Market, Product, Existing, New)
- BCG’s product portfolio matrix (Star, Cash cow, Question mark, Dog)
Successful implementation of a strategy almost inevitably implies successful deployment of a strategic management approach. One of the most dramatic relaunched strategies was that of Steve Jobs at Apple. Clearly Apple’s strategy was tightly linked to his changing goals as the new products came on stream, and the manufacturing and distribution resources were in place to support the extraordinary sales growth. Similarly, their premium pricing strategy was linked to an outstanding degree of consumer satisfaction with the products which enabled it to be successful. One of the characteristics which has enabled Apple to grow to a dominant position in its industry is the way it has, almost without exception, delivered on its promises and kept up a rate of innovation that has left its competitors trailing in its wake. Its strategic decisions have been implemented supremely well, and in a swiftly changing business environment. It has, thus far, shown an ability to recover quickly from the occasional stumble. Strategy implementation is clearly top priority for Apple’s management.
The importance of strategic management, and the consequences of its absence in business, is illustrated by some examples from my own experience.
A major oil company client set up a chemicals business, since a chemicals business was seen to provide added value to the oil refining business, “over the fence” as they put it. This was probably a decision of the accountants, or possibly the engineers who saw potential in the further use of technology to produce more complex products. However, despite a relatively large presence in bulk chemicals and a niche presence in speciality chemicals, it was always sub-scale by comparison with its competitors in the chemicals industry. It never achieved satisfactory size or profitability, as an impartial strategic appraisal would have predicted. The company never had its heart in the business and never backed it with resources to be able to compete at the highest level. Eventually new management bit the bullet and sold it off.
A large food retailer client was struggling to match its main competitors who were significantly larger. Its product range was inferior as were its profits. Its market position indicated a differentiated strategy but that required a major marketing budget which its relatively limited resources couldn’t adequately deliver. Its solution was a strategy that entailed an on-going process of acquiring smaller underperforming or insolvent chains of stores and surviving by releasing cash locked up in their non-high street freehold premises. It considered a diversification into financial services to provide a new trading line, but couldn’t pluck up courage. It limped along until taken over by a larger player and its name disappeared.
A major coal business, part of a multinational oil company based in southern Europe, was looking strategically at the most appropriate place for its international corporate headquarters. Detailed analysis showed that the most suitable location was in the Netherlands. However, the CEO was part-British and engineered the decision that London should be chosen. He was strongly Anglophile and quite determined that the company should relocate to London. So that’s where it went, despite the cost being a multiple of the recommended option.
An international business in the construction industry with a strong presence in Europe and the United States was persuaded by a strategy study that they should build a third leg of the business in the expanding markets in Asia. Of the two main markets in which to base themselves, China and India, the recommendation was that China held the most opportunities with fewer problems associated with decision-making. The Board, however, decided to proceed with the India option since its director responsible for Far East operations was Indian. The strategy rapidly ran into the sand.
The (retiring) senior partner of a major second tier firm of accountants commissioned a strategy study to advise on the way ahead, seeing their business threatened by the increasing dominance of the top tier firms. The study recommended a three-way amalgamation to catapult them into the top tier and give them the ability to compete as a major player. Anything less would still leave them vulnerable. The incoming senior partner and his peers lost their nerve and never got beyond a two-way tie-up, and even that split the partnership so that part of the firm went separately to a third firm. The consequence was that the firm’s name disappeared and even the newly combined firm remained stuck in the second tier. So the lack of courage to follow through the strategic imperative resulted in the worst of all worlds.
An entrepreneur built up a portfolio of newspapers and specialist magazines. This was later extended into broadcast media and the resulting creation became a major player in the media industry with both retail and business to business interests. The management style, however, was very decentralised and a significant part of the business was run by local “barons” answerable only to themselves as long as they delivered the required trading results. In due course the entrepreneur moved on and the business was run by professional managers. When results began to weaken due to the pressures in the regional newspaper world, attempts were made to introduce a new range of offerings to loyal readers. These attempts ran into resistance from the local barons whose different agendas put them in opposing camps even from each other. In due course the organisation became unmanageable and even the attempt to sell it as a single business had to be abandoned and it was broken up and sold in parts. Strategic management it was not, and successful strategy implementation was impossible.
Strategic management is now apparently being taken more seriously by the investing community. The recently introduced UK Stewardship Code encourages investing institutions to engage regularly with their investees, and investors are showing more interest in the strategy of their core investments. The head of corporate governance (Europe) at one of the largest asset managers in the world, told a recent conference that in their engagement meetings with company chairmen they split into two teams: the A team discussed corporate governance and the B team discussed strategy.
Active investors probably have the final word here, in that they will target organisations which seem to have lost their way. They understand the key importance of strategic management even if their prey have forgotten it.
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