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.
Phases in the strategic planning process
The process we described in the previous section of this chapter starts with the strategy analysis and strategy formulation phase, and results in concrete plans ready for implementation. This process is often referred to as the strategic planning process.5 However, this representation does not always describe how the strategy formation process works in practice.
In general, firms pass through several stages in their planning processes, in response to increasing size, diversity and environmental complexity.
Jeffrey Harrison and Caron St John (1998), both well-known strategy professors, see firms pass through four stages:
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Phase 1 – Basic financial planning: in this phase, organizations focus on meeting budgets and developing financial plans.•
Phase 2 – Forecast-based planning: organizations start to look outward to the external environment for trends and developments that may impact on the future. SWOT analyses are popular strategy tools in this particular phase.•
Phase 3 – Externally-oriented planning: it is only in this phase that organizations start to think strategically. That is, they devise strategies in response to markets and competitors.•
Phase 4 – Strategic management: in the final phase, organizations manage all their resources and take into account their stakeholders in an attempt to develop sustainable competitive advantage and to ‘create the future’.Start-up firms seldom exhibit the ‘strategic management’ planning process associated with phase 4. These firms generally start with an entrepreneur who sees an opportunity to successfully launch a product or service in the market. This entrepreneur might develop an informal sense of direction and only a few, short-term goals, but probably neglects the rest of the strategic planning process. It is only after the firm has become successful and has grown larger that the entrepreneur (or his/her successor) may attempt to formalize various aspects of strategic planning.
Many companies stick to the second phase. They perform many ‘strategic’
exercises – a SWOT analysis is one of their favourites – to examine some general environmental trends and to analyse their particular strengths and weaknesses. But these exercises often lead to strategic reports that are never consulted. In the ‘externally-oriented planning’ phase, firms begin to think strategically. They understand what kind of value they deliver to the customers and analyse how they compete in the market. They are aware that they need to position themselves in the market and that the organization should support this positioning. That is, they try to align their strategy with their managerial and operational processes. In the final phase, companies know well what makes them successful, and they manage their core assets, core processes and competences in such a way
that they foresee and ‘proact’ rather than react to competitors’ moves. Or, to put it into Gary Hamel’s (2000) words, these companies are able to ‘lead the revolution’.
Strategic planning and the formation of strategies
Strategic planners primarily pay attention to the strategy analysis and the strategy formulation phases. Strategy implementation is often considered to be the major responsibility of the functional managers. This explains why academicians separate the strategy formulation phase (including strategy analysis) from the strategy implementation phase. This separation is often found in companies as well, where the strategy staff (the
‘thinkers’) report and operate – somewhat disconnectedly – from the line and operational managers (the ‘doers’).
Strategic planning reached its heyday in the 1960s when the industrial conglomerates started to emerge, but it fell into disrepute in the 1970s and 1980s. After all, people wondered whether strategic planning resulted in better strategies. Not everybody was convinced of that. One of the most famous opponents of this strategic planning approach is Henry Mintzberg (1994; Mintzberg et al., 1998). Strategic planning, he argues, is an analytical process aimed at programming already identified strategies. Its outcome is a plan, not a strategy. He continues: ‘Nobody in the history of the world has ever created a strategy through an analytical process’ (Mintzberg et al., 1998: 12).
Constantinos Markides (1999b) partially agrees with Mintzberg’s statement: ‘Behind every successful company, there is a superior strategy.
The company may have developed this strategy through formal analysis, trial and error, intuition, or even pure luck’ (1999b: 6). Markides believes that strategic planning can yield good strategies, but he is convinced that there are many other ways in which appropriate strategies can be developed.
One reason for the negative connotations of strategic planning is the fact that these planning exercises easily degenerate into rather mechanical long-term extrapolation exercises. A typical reaction is to consider strategy as an annual event: ‘It’s September, it must be time for strategy.’ Of course, if strategy is such a routine procedure, routine results will be obtained, and the basic ingredient of a good strategy – insight into how to build a competitive advantage – rarely emerges from formal planning procedures and planning meetings. Henry Mintzberg even claims that formalized strategic procedures have in fact often ‘ruined strategic thinking’.
Formulating and planning strategies can be very relevant, but this ignores the importance of spontaneous strategy development. Many successful strategies arise from local experimentation and from grabbing unexpected opportunities. McCarthy, Mintzberg and Markides formulate this as follows:
Good strategies grow out of ideas that have been kicking around the company, and initiatives that have been taken by all sorts of people in the company. It’s not just the great, brilliant coup all the time. That means that a lot of very effective, so-called strategists or chief executives don’t come up with the brilliant new strategy. They bring out the energy in people by creating systems that encourage and stimulate people. (McCarthy et al., 2000: 35)
Every manager sets some direction and some performance goals. Some of these goals are realized, others are not. Intentions that are fully realized are called deliberate strategies; those that are not realized are unrealized strategies. However, some of the realized strategies were not intended at all;
these are called emergent strategies. Henry Mintzberg believes in a balance between deliberate and emergent strategies:
Few, if any, strategies are purely deliberate, just as few are purely emergent. One means no learning, the other means no control. All real-world strategies need to mix these in some way: to exercise control while fostering learning.
Strategies, in other words, have to form (emergent strategies) as well as be formulated (deliberate strategies) . . .
For, after all, perfect realization implies brilliant foresight, not to mention an unwillingness to adapt to unexpected events, while no realization at all suggests a certain mindlessness. The real world inevitably involves some thinking ahead as well as some adaptationen route. (Mintzberg et al., 1998: 11)
An effective strategy must not only seek to exploitthe firm’s external opportunities and internal competences creatively, but it must also endeavour to strengthen its business context by exploring for new opportunities and renewing its competences (Chakravarthy and White, 2002). For a long time, strategy researchers have focused on the exploitation side: strategy in the traditional view has been about closing the gap and creating a fit between external demands and internal capabilities. The emergence of the Resource-Based Viewin the mid-1990s has made academicians pay attention to the exploration side of management. According to this new stream of strategic thinking, the source of competitive advantage comes from selecting and developing the appropriate capabilities (Prahalad and Hamel (1989) call these capabilities core competences). Capabilities are developed by opening the gap between the current reality and some future vision. This calls for planning processes capable of greater creativity and flexibility, capitalizing more quickly on opportunities and more rapid implementation (Liedtka, 2001).
Exploration and exploitation require two different mindsets and different management processes. These differences can create tensions within an organization. To become successful, firms need to balance these two approaches. Therefore, we completely agree with the following statement by Jeanne Liedtka, a strategy professor at the University of Virginia:
Closing the gap, correcting the lack of alignment, is necessary for increasing stability and efficiency and fostering high performance. Yet we know that disequilibrium is the driver of learning and innovation. When we reduce variation, we increase the performance of the system in the short term. In the long term, we risk depriving the system of the new information that it needs to move forward. This is the ‘adaptation paradox’ – or as Karl Weick explains it, the observation that ‘adaptation precludes adaptability’ . . .
In this view, strategy-making is ideally a process of continuous adaptation that straddles the tension between offering too much or too little direction, between relying too heavily on or disrupting too precipitously the status quo, between collaborating to create new value systems and competing for a larger piece of the system’s profits, and between reaping the benefits of autonomy and losing the benefits of scale and scope. (Liedtka, 2001: 77)
In this short overview, we have approached the strategy process from both a rational and an evolutionary perspective. In the rational approach, the focus is on planning and decision-making (not tackled here in this section). In the evolutionary perspective, action-taking is the driver of strategy. Strategy process researchers also look at the strategy process from two additional perspectives. In the political perspective, researchers investigate the roles of power and politics (defined very broadly here) in resolving goal conflicts. The administrative perspective on strategy process focuses on how the organizational context of a firm influences its decision-making and action-taking (Chakravarthy and White, 2002). We will not discuss the political perspective for the rest of this book. But, as outlined in the introduction to the second part of this book, we will discuss extensively how the administrative context influences the Integrated Performance Management and the strategy process.
Integrated Performance Management, the strategy formation process and strategy dynamics
In today’s environment, where everything evolves and changes so quickly, integrating strategy formulation with managing its execution is critical.
This is at the core of the Integrated Performance Management process.
Ultimately, Integrated Performance Management (and a good strategy formation process) should help companies to improve, consolidate or change their strategic position. If this is the case, we are convinced that the company will be able to survive in the longer term and satisfy all the stakeholders’ needs. Many strategy process researchers have tried to link the strategy process with financial performance. However, the financial performance of a company is influenced not only by its strategy, but also by its business context. At times, the general macro-economic climate and the industry context are thought to explain more of the variance of stock prices than the strategy itself.
We believe that successful firms are those that continuouslydevelop and implement good strategies. Unfortunately, a position’s uniqueness does not last forever. Competitors will imitate attractive positions, others will
develop new and even better positions (e.g., by developing a better substitute product or by improving the operations capabilities). This calls for a dynamic view of Integrated Performance Management and the strategy process – they should arm companies against their competitors’
moves.
There are several frameworks that show how companies react in a changing competitive environment. The typology developed by Raymond Miles and Charles Snow (1978) is one of the more famous ones in the strategy literature. Their typology is based on how companies respond to a changing environment and align environment with their organization.
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Defenders are organizations with a narrow business scope. Top managers in this type of organization are highly expert in their organization’s limited area of operation but tend not to search outside their domains for new opportunities. Consequently, they seldom need to make major adjustments in their methods of operation and their structure. They devote primary attention to improving the efficiency of their existing operations.•
Prospectors are organizations that almost continually search for market opportunities, and they regularly experiment with potential responses to emerging environmental trends. Because of their strong concern for product and market innovation, these organizations are usually not completely efficient.•
Analysersare organizations that operate in two types of product–market domain, one relatively stable, the other changing. In their stable areas, these organizations operate routinely and efficiently through the use of formalized structures and processes. In the turbulent areas, top managers watch their competitors closely for new ideas and then rapidly adopt those that appear to be the most promising.•
Finally, reactors are organizations in which the top management frequently perceives change and uncertainty occurring in their organizational environments but is unable to respond effectively.According to Miles and Snow, these organizations lack a consistent strategy–structure relationship, and therefore seldom make adjustments of any sort until environmental pressures force them to do so (Miles and Snow, 1978: 29).
In an outstanding article on strategy process research, Bali Chakravarthy and Roderick White (2002) have come up with a new typology that classifies firms according to their strategy formation process. Imagine that a firm operates in a two-dimensional strategy space: S1and S2, for example, defined in terms of ‘cost leadership’ and ‘differentiation’ (see Figure 6.3).
The curved solid line represents a hypothetical strategy frontier, where those firms with the current best practice are positioned. Using this framework, Chakravarthy and White have identified four types of strategy dynamic or
strategy outcome: (1) improving/imitating, (2) consolidating, (3) innovating, and (4) migrating.
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If a firm is not on the strategy frontier, improving/imitating advances the firm’s strategic position towards the strategy frontier. Other firms that are on the strategy frontier, or those closer to it, provide the firm seeking improvement with ready benchmarks to follow.•
Firms that have reached the strategy frontier can start consolidatingand maintaining this position by monitoring their competitors and making incremental improvements.•
Firms can also start innovating, i.e., moving beyond established best practices and advancing the strategy frontier.•
Migratingis the fourth option and involves a change in a firm’s position along the existing frontier. While this is a significant change for a firm, it differs from innovating. According to Chakravarthy and White, a firm migrating from one generic strategy to another has exemplars: the position it seeks is not new. Other firms, elsewhere on the strategy frontier, provide benchmarks. This is a luxury that innovators do not have.It is intuitively clear that migrating and innovating are the more risky strategy dynamics, compared to improving, imitating and consolidating.
Or, in the words of the two authors: ‘These two dynamics place the current
Figure 6.3 Strategy dynamics
Source:Chakravarthy and White (2002: 186)
success of the firm at risk, in their search for greener pastures. Firms opting for innovation and migration not only seek a different market opportunity, they are also willing to redo their competence base’ (Chakravarthy and White, 2002: 186). They argue that different types of strategy process and different organizational contexts are required to drive these four strategy dynamics. As this chapter focuses on the goal-setting and strategy formation process, we investigate what types of strategy formation process have been recognized in the strategy literature. In the other chapters of Part II, we will focus on the various components of the organizational context.
Different types of strategy formation process
Different types of strategy formation process will emerge, depending upon the strategy dynamics that companies want to achieve. Companies that aim to consolidate their current position will have a totally different strategy process from companies that want to innovate and explore new territories. Are there any frameworks in the literature that has documented differences in the strategy-making process? And is there a link with the strategy dynamics developed by Chakravarthy and White?
The answer to the first question is definitely ‘yes’. Several authors have developed frameworks and typologies of strategy formation (or strategy- making) processes (Dess and Lumpkin, 2001). Stuart Hart (1992) has developed an integrative framework for strategy-making processes where he identified five modes of strategy formation processes. Hart’s framework is built around who is involved in the strategy-making process and in what manner. It is integrative because he looks at these different elements of the strategy formation process:
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The rationality in the strategy formation process, i.e., the extent to which the strategic process is comprehensive, exhaustive and analytical;•
The symbolic role of top managers in the strategy process: i.e., the extent to which leaders can articulate a clear strategic vision and motivate organizational members to adopt it;•
The extent and type of involvement of organizational members in the strategy-making process.These five modes of strategy-making can be described as follows (Hart, 1992).
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In the command mode, a strong individual leader or a few top managers exercise total control over the firm. Strategy-making is a conscious, controlled process that is centralized at the very top of the organization.The strategic situation is analysed, alternatives are considered, and the appropriate course of strategic action is decided upon. Strategies are deliberate, fully formed and ready to be implemented. The top manager is the commander, and the organization’s members are good soldiers