Stakeholders are the second category of ‘influences’ on organizational goals. Companies are increasingly adopting a broader perspective, focusing on stakeholders rather than on shareholders. Managers are becoming aware that they need to understand the concerns of shareholders, employees, customers, suppliers, lenders, and society at large, when developing the objectives and the business strategies of the organization.
Only in this way will the firm be able to survive in the longer term. Such a stakeholder approach emphasizes actively managing the business environment, relationships and the promotion of shared interests.
Furthermore, the interests of key stakeholders must be integrated into the very purpose of the firm, and stakeholder relationships must be managed in a coherent and strategic fashion (Freeman and McVea, 2001). How this can be done has already been described in greater detail in Chapter 2, where we introduced the concept of stakeholder-driven management.
So far, we have viewed organizational purposes as being concerned with the expectations of stakeholders – in particular, those who have formal rights through the corporate governance framework and those stakeholders who are most interested and powerful in other ways. Johnson and Scholes (1999) complete their framework by providing answers to the following questions:
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Which purposes shouldbe prioritized? And why?•
Which purposes areprioritized? Why?Ethical considerations are the main guidelines for answering the first question. Ethical issues can be found on several levels. On the macro level, ethics define the extent to which an organization will strive to exceed its minimum obligations to stakeholders. The concept of business ethics is also relevant on the individual level, where it can be applied to both employees and managers.
The question ‘Which purposes are actually prioritized above others?’ is related to a variety of factors in the cultural context of the organization.
Power and stakeholders are not the only influences on the mission and objectives: company culture – ‘the way we do things around here’ – is a more subtle, but equally important, issue. Therefore, it is important to understand an organization’s culture, since it is the filter and shaper through which all employees develop and implement their strategies (Lynch, 1997).
summarizes the steps necessary to go from vision to action. Because missions and vision are designed to appeal to all levels of the organization, they must be written with a high degree of abstraction and generality.
These inspirational beliefs are typically too vague to provide much concrete guidance and need to be translated into more concrete business objectives. Business strategy and strategic management play a crucial role in this process. As you can see in Figure 6.1, Simons relied on four (of the five) Ps of strategy, as identified by Henry Mintzberg.3In order to provide further insights on how the process of moving from vision to action can be improved, we need to outline very briefly what strategy and strategic management are all about.
Strategy analysis
Figure 6.1 indicates that a firm’s mission (and vision) provides the overarching ‘perspective’ for the business strategy and all the firm’s activities. The strategy of the company and its business units flows directly from its mission but is also influenced by the external and internal
Figure 6.1 Hierarchy of business strategy Source: Adapted from Simons (2000: 18)
environment in which the firm and its business units operate. The analysis of the competitive market dynamics (external analysis) seeks to formulate an answer to the following question: What changes are going on in the environment, and how will they affect the organization and its activities?
The internal analysis identifies firm-specific resources and capabilities, which should provide special advantages or yield new opportunities. The analysis of the external environment should identify Opportunities and Threats for the company; the internal analysis should identify internal Strengths and Weaknesses. The SWOT analysis combines all these elements and provides the context within which successful strategies can be developed.
Strategy formulation
In the strategy formulation (sometimes referred to as the strategy development) phase, the strategist seeks to formulate different strategic options and courses of action to reach the vision and the objectives formulated in the strategy analysis phase. With the mission and vision providing the overall perspective, and the SWOT analysis providing the context, the next step is to focus on how to ‘position’ the company (and its main business units) in the market.
The question of how to compete and where to position the company in the market is a central point of discussion in strategic management.
Most companies and their business units compete with a variety of players in a particular industry. In every industry, there are viable positions that companies can occupy. According to Constantinos Markides (1999b), a strategy professor at the London Business School, the essence of strategy is selecting one position that a company can claim as its own. A strategic position is the sum of a company’s answers to the following questions:
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Whom should the company target as customers?•
What products or services should the company offer the targeted customers?•
How can the company do this efficiently? (Abell, 1980)Although these questions are straightforward, the answers most often are not. Strategy involves making tough choices in these three different dimensions. Successful companies choose a strategic position that differs from that of its competitors. According to Markides, the most common source of strategic failure is the inability to make clear and explicit choices in these three dimensions. These ideas are clearly in line with Michael Porter’s theory of generic competitive strategy: ‘the essence of strategy is choosing to perform activities differently in a sustainable way’ (Porter, 1985: 12). Competitive strategy is about being different. A company must either deliver greater value to customers (differentiation strategy) or create comparable value at a lower cost (cost leadership). A failure to choose
between cost leadership or differentiation will result in inferior performance, which is the so-called stuck-in-the-middle hypothesis.
Porter’s generic strategies have been regarded as the dominant paradigm for a long time. In the early 1990s, Michael Treacy and Fred Wiersema (1993, 1995) developed a somewhat similar framework based on how value is created for customers. Like Porter, Treacy and Wiersema argue that companies become successful by narrowing their business focus, not by broadening it. The market leaders have focused on delivering superior customer value in line with one of the following three value disciplines:
operational excellence, customer intimacy or product leadership (see Figure 6.2). Treacy and Wiersema define customer value as the sum of the benefits minus the costs incurred by the customer from the product (‘what we sell’) and the service (‘how we do business’) that are provided.4Their research has shown that customers can be classified in three clusters according to the type of customer value they prefer: best total cost, best products and best total solution. They also found that market leaders focus their strategy and align their whole organization on one of these three value disciplines.
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Operational excellence describes a specific strategic approach to the production and delivery of products and services. The objective of a company following this strategy is to lead its industry in price and convenience. Companies pursuing operational excellence are indefatigable in seeking ways to minimize overhead costs, to eliminate intermediate production steps, to reduce transaction and other friction costs and to optimize business processes across functional and organizational boundaries.Figure 6.2 Customer value and market leadership Source: Treacy and Wiersema (1995: 21)
The standard example is Dell Computer, the market leader in the personal computer industry. Dell Computer invented a totally different and far more efficient operating model than competitors, such as Compaq and IBM. By selling to customers directly and cutting dealers out of the distribution process, Dell has been able to undercut Compaq and other PC makers and still provides high-quality products and service. In addition, Dell has created a disciplined, extremely low-cost culture, which stresses its position as an operational excellence company. (Treacy and Wiersema, 1993: 85–6)
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Customer intimacy describes a strategy in which a company continually tailors and shapes products and services to fit an increasingly fine definition of the customer. This might be more expensive, but customer-intimate companies are willing to make investments in order to build customer loyalty for the long term.These companies look at the customer’s lifetime value to the company, not at the value of any single transaction. Customer- intimate companies have decentralized marketing operations in order to increase the responsiveness of the various stores or distribution centres. MLP, a German financial services provider, is a very good example.
MLP Holding, as the company is known today, started its business activities as a trading company in 1971 focusing on the lucrative target group of academics (doctors, economists, engineers, natural scientists, and lawyers) as an independent insurance broker. MLP has achieved a very good position in this market, because it has developed distinct know-how in these occupational groups. MLP consultants must complete a strict assessment exam prior to starting with MLP. 94 percent of MLP consultants have a university or college degree, and more than half of them are economists.
This means that the consultant has the same (or similar) education as his client, so it is easy for him to put himself in his client’s position and recognize both his requirements and his problems. The MLP consultant is the reflection of his customer – he is of a similar age as well. This means that he advises many clients when they are in a situation similar to his own: e.g., starting a career, safeguarding against risks, building up a capital stock, investing in property and/or career, forming assets, and providing for a pension. As a result, he accompanies his client and his target group for a lifetime. This successful concept guarantees long-term customer relationships and that new clients can be won continually. (Lautenschläger, 1999: 8)
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The third value discipline, product leadership, is about producing a continuous stream of state-of-the-art products and services. Product leaders focus on their innovation potential and try to minimize time- to-market. Speed is central and marketing new ideas is core. Product leaders must relentlessly pursue new solutions to the problems that their own latest product or service has just solved. Johnson & Johnson, a pharmaceutical company, is a good example, as is illustrated by this story:In 1983, the president of Johnson & Johnson’s subsidiary Vistakon, Inc., a maker of specialty contact lenses, heard about a Copenhagen ophthalmologist who had conceived of a way of manufacturing disposable contact lenses inexpensively. What was unusual was the way Vistakon’s president got his tip. It came from a J&J employee whom he had never met who worked in an entirely different subsidiary in Denmark. The employee, an executive for Janssen Pharmaceutica, a J&J European drug subsidiary, phoned Vistakon’s president to pass along the news of the Danish innovation. Instead of dismissing the ophthalmologist as a mere tinkerer, these two executives speedily bought the rights to the technology, assembled a management team to oversee the product’s development, and built a state- of-the-art facility in Florida to manufacture disposable contact lenses called Acuvue. (Treacy and Wiersema, 1993: 90)
After determining the mission, vision and desired strategic positioning, the preparation of ‘plans’ and performance goals (or objectives) represent the formal means by which managers communicate the strategy throughout the organization and coordinate internal resources to ensure that the strategy is achieved. These strategic plans indicate the destinations or ends that the organization seeks to achieve. Objectives and performance goals tell where the company or the strategic business unit (SBU) is going and whenit wants to get there. Performance goals denote a desired level of accomplishment against which actual results can be measured (Simons, 2000). A clear financial objective, for example, reads as follows: ‘The company (or SBU) has as its objective 25 per cent profit before tax and 15 per cent return on stockholders’ equity and long-term debt.’ Objectives can be set in two areas:
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Financial objectives (e.g., earnings per share, return on investment, cash flow). These objectives are usually quantified.•
Strategic objectives (e.g., greater customer satisfaction, employee job satisfaction). Some of these objectives are more difficult to quantify.Strategy implementation
Next, the performance goals and plans should be translated into concrete actions. This is the domain of the functional managers: they develop new products, expand the operating capacity, introduce new marketing initiatives and develop appropriate human resources programmes.
However, in the traditional strategy books, the strategy implementation phase is the least developed one. Most textbooks pay attention to the importance of having the right organizational structures (‘Structure follows strategy’), strategic planning (including the resource allocation process) and strategic control, some people issues (covering commitment, culture and leadership), and they introduce a chapter on ‘change’. Then the work of the strategist is finished and it is up to the marketer, the operations manager and the controller to finish the job. In many companies this is still the way that people look at strategy and its
implementation. Later in this chapter, we show that there are other ways to look at this process.
The corporate level
The discussion of SWOT and strategy formulation has focused on the business unit level. Recall that at this level, managers are concerned with how to compete in a particular industry and how to position the business in the competitive arena. Corporate strategy is relevant when an organization has several business units, competing in different product or geographic markets. Managers at the corporate level are concerned with the strategic scope of the organization, and corporate strategy addresses the main concerns of the multidivisional firm. Diversification, the use of mergers and acquisitions versus internal development and the development of organization-wide competences are all issues that need to be addressed by the managers at the corporate level. One of the central discussions at the corporate parent is how to coordinate and stimulate cooperation between the various business units and how to create synergies.
Setting goals at the corporate level is important for two reasons. First of all, it is at the corporate level that the broad goals are defined.
Traditionally, these goals have been more financial in nature. They define the boundaries for the performance goals at the business unit level. For example, Jack Welch, CEO of General Electric, has communicated clearly to his employees that he will not support investments in any business that cannot attain a number one or number two position in its market. As such, these corporate goals can be considered as strategic boundaries for the strategic business units. (We discuss these boundary systems in greater detail in Chapter 9.)
Second, specific goals must be developed to evaluate the value of the corporate centre. Nowadays, we see the corporate centre being put under increasing pressure to provide parenting valuefor its business units. Michael Goold and Andrew Campbell, professors at Ashridge College, have developed the concept of ‘parenting advantage’ and have clearly explained how corporate value can be created (Goold et al., 1994; Goold and Campbell, 1998). Then, clear and well-specified goals for concrete actions at the corporate centre should be formulated.