Strategic Management Creating Competitive Advantages Chapter 1 Review Questions
For the better part of a decade, strategy has been a business buzzword. Height executives ponder strategic objectives and missions. Managers down the line crude out product/market strategies. Functional chiefs lay out "strategies" for everything from R&D to raw-materials sourcing and distributor relations. Mere planning has lost its glamor; the planners accept all turned into strategists.
All this may have blurred the concept of strategy, but information technology has as well helped to shift the attention of managers from the technicalities of the planning process to substantive issues affecting the long-term well-being of their enterprises. Signs that a existent change has been taking place in business's planning focus have been visible for some time in the performance of some large, circuitous multinational corporations—General Electric, Northern Telecom, Mitsubishi Heavy Industries, and Siemens A.G., to name iv.
Instead of behaving like large unwieldy bureaucracies, they have been nimbly leap-frogging smaller competitors with technical or market innovations, in truthful entrepreneurial style. They have been executing what appear to be well thought-out business strategies coherently, consistently, and oft with surprising speed. Repeatedly, they have been winning marketplace shares abroad from more traditionally managed competitors.
What is the source of these giant companies' remarkable entrepreneurial vigor? Is it the result of their substantial investments in strategic planning, which appear to have produced something similar a quantum leap in the sophistication of their strategic planning processes? If and so, what lessons can be drawn from the steps they accept taken and the feel they have gained?
To explore these questions, we embarked on a systematic examination of the relation betwixt formal planning and strategic performance beyond a broad spectrum of companies (run across the sidebar). We looked for common patterns in the development of planning systems over time. In particular, we examined their evolution in those giant companies where formal planning and strategic decision making appeared to be well-nigh closely and finer interwoven.
Our findings indicate that formal strategic planning does indeed evolve along like lines in different companies, admitting at varying rates of progress. This progression can exist segmented into iv sequential phases, each marked by articulate advances over its predecessor in terms of explicit formulation of issues and alternatives, quality of preparatory staff work, readiness of top direction to participate in and guide the strategic decision process, and effectiveness of implementation (come across the Exhibit).
Exhibit Four Phases in the Evolution of Formal Strategic Planning
The four-stage model evolution we shall be describing has already proved useful in evaluating corporate planning systems and processes and for indicating means of improving their effectiveness.
In this article, we draw each of the iv phases, with special emphasis on Phase 4, the stage we take called to telephone call strategic direction. In order to highlight the differences between the four stages, each will exist sketched in somewhat bold strokes. Obviously, not all the companies in our sample fit the pattern precisely, simply the generalizations are broadly applicative to all.
Phase I: Basic Financial Planning
About companies trace the origins of a formal planning system to the almanac budgeting procedure where everything is reduced to a financial problem. Procedures develop to forecast revenue, costs, and majuscule needs and to identify limits for expense budgets on an annual basis. Information systems written report on functional performance as compared with monetary targets.
Companies in Phase I often display powerful business organization strategies, but they are rarely formalized. Instead, they be. The simply concrete indication that a business strategy exists may exist a projected earnings growth rate, occasionally qualified past certain debt/disinterestedness targets or other explicit financial objectives.
The quality of Phase I strategy depends largely on the CEO and the top squad. Practice they really know their visitor's products and markets and have a good sense of what major competitors will do side by side? Based on their noesis of their own cost structure, can they estimate what the affect of a product or marketing change will be on their plants, their distribution organization, or their sales strength? If so, and if they do not plan for the concern to grow beyond traditional limits, they may not demand to set up an expensive planning apparatus.
Phase II: Forecast-based Planning
The complexities of near big enterprises, all the same, need more explicit documentation of the implicitly understood strategies of Phase I. The number of products and markets served, the caste of technological sophistication required, and the complex economical systems involved far exceed the intellectual grasp of any one managing director.
The shoe usually pinches commencement in financial planning. Equally treasurers struggle to estimate capital letter needs and merchandise off alternative financing plans, they and their staffs extrapolate past trends and attempt to foresee the future impact of political, economic, and social forces. Thus begins a 2d phase, forecast-based planning. Most long-range or strategic planning today is a Stage II system.
At first, this planning differs from annual budgeting but in the length of its time frame. Very shortly, however, the existent world frustrates planners by perversely varying from their forecasts.
In response, planners typically reach for more advanced forecasting tools, including trend assay and regression models and, eventually, estimator simulation models. They achieve some improvement, merely non plenty. Sooner or afterwards plans based on predictive models neglect to betoken major environmental shifts that not only announced obvious afterward the fact, just also have a great and unremarkably negative bear upon on corporate fortunes.
Notwithstanding, Phase Ii improves the effectiveness of strategic conclusion making. It forces management to confront the long-term implications of decisions and to give thought to the potential concern impact of discernible electric current trends, well before the effects are visible in electric current income statements. The problems that forecast-based plans address—eastward.g., the impact of inflation on future capital letter needs or the inroads foreign manufacturers may make in domestic markets—often lead to timely business decisions that strengthen the visitor'southward long-term competitive position.
I of the almost fruitful by-products of Phase II is effective resource resource allotment. Under the pressure of long-term resource constraints, planners larn how to set upward a circulatory flow of capital and other resource among business units. A principal tool is portfolio analysis, a device for graphically arranging a diversified company'southward businesses forth 2 dimensions: competitive force and market attractiveness.
As practiced by Phase Two companies, however, portfolio analysis tends to exist static and focused on current capabilities, rather than on the search for options. Moreover, it is deterministic—i.e., the position of a business on the matrix is used to determine the appropriate strategy, according to a generalized formula. And Stage II companies typically regard portfolio positioning as the end product of strategic planning, rather than as a starting point.
Stage II systems also do a good job of analyzing long-term trends and setting objectives (for example, productivity improvement or better majuscule utilization). Just instead of bringing primal business organization bug to the surface, they oft bury them under masses of data. Moreover, Phase II systems can motivate managers in the wrong direction; both the incentive compensation program and informal rewards and values are ordinarily focused on short- or medium-term operating performance at the expense of long-term goals. In sum, Stage II planning all too easily becomes a mechanical routine, every bit managers only re-create last year'due south program, make some performance shortfall adjustments, and extend trend lines another 12 months into the time to come.
Phase III: Externally Oriented Planning
In an surroundings of rapid alter, events can render market place forecasts obsolete almost overnight. Having repeatedly experienced such frustrations, planners begin to lose their organized religion in forecasting and instead try to understand the basic marketplace phenomena driving alter. The result is often a new grasp of the key determinants of business success and a new level of planning effectiveness, Phase Three.
In this phase, resource allotment is both dynamic and creative. The Phase 3 planners at present expect for opportunities to "shift the dot" of a business concern on a portfolio matrix into a more attractive sector, either by developing new business organization capabilities or by redefining the market to better fit their companies' strengths. A Japanese conglomerate with an underutilized steel-fabricating capacity in its shipyard and a faltering high-ascension concrete smokestack business combined them into a successful pollution command venture.
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In the search for new ways to ascertain and satisfy customer needs, Phase Iii strategists endeavour to wait at their companies' product offerings and those of their competitors from the viewpoint of an objective outsider. For example, i heavy equipment manufacturer assigned a strategy team to reverse-engineer the competitor's product, reconstruct its manufacturing facilities on paper, and estimate the manufacturing toll for the competitor'south product in the competitor'south plant. The team members discovered that pattern improvements had given the competitor such a commanding advantage in production price that there was no indicate in trying to compete on price. Only they also plant that their own production's lower maintenance and fuel costs offered customers clear savings on a life-cycle cost ground. Accordingly, the sales force was trained to sell life-cycle cost advantages. Over the adjacent iii years, the company increased its market share by thirty% and doubled its net profit.
Another strategy, derived from an external perspective, was devised by a U.S. industrial article manufacturer. When sales in ane of its major product lines declined swiftly post-obit the introduction of a new, cheaper competitive production, it decided to detect out the reason. Through field interviewing with customers, it discovered that the sales slide was nearly over, something competitors had non realized. Since sales of the product had dropped off to a few cadre markets where no cost-effective alternative was available, information technology decided to put more back up behind this product line, just as the competition was closing its plants.
The manufacturer trained the sales force to service those distributors who continued to carry the line and revised prices to pick up competitive distribution through primary benefactor arrangements. It fifty-fifty resisted the move of the trade clan to reduce government-mandated condom requirements for treatment the newer products. By the time its strategy was obvious to competitors, the manufacturer had firmly established a distribution lead in a small merely attractive product/market place segment.
The SBU Concept
A distinguishing characteristic of Phase Three planning in diversified companies is the formal grouping of related businesses into strategic business units (SBUs) or organizational entities large and homogeneous enough to exercise effective control over about factors affecting their businesses. The SBU concept recognizes ii singled-out strategic levels: corporate decisions that impact the shape and direction of the enterprise as a whole, and concern-unit decisions that bear upon only the individual SBU operating in its own surround. Strategic planning is thus packaged in pieces relevant to private conclusion makers, and strategy evolution is linked to strategy implementation as the explicit responsibility of operating management.
There are limitations to the SBU concept. Many enterprises, such as vertically integrated companies in process-oriented industries, cannot be neatly sorted out into discrete business organization units because their businesses share important corporate resources—sales, manufacturing, and/or R&D. In other situations, strategy may dictate a concerted thrust past several business units to meet the needs of a shared customer group, such as selling to the automotive manufacture or building a corporate position in Brazil. In still other cases, the combined purchasing power of several SBUs or the freedom to transfer technologies from one business concern to another can be more valuable than the opportunity to make turn a profit-oriented decisions in discrete business units. For instance:
- A major chemic company found that several of its competitors, who had grown large plenty to integrate astern into feedstock production, were beginning to gnaw at its historic competitive edge every bit a fully integrated producer. Part of the reason was that by licensing sure technology to the contest, the company had given away a raw-material price reward that it could not match with its own, older plants. The basic trouble, still, was that its product managers were preoccupied with competitive threats in but a handful of the many product/market segments they served. Decisions that seemed to brand sense at the individual business concern-unit level were calculation upwardly to deep trouble for the visitor as a whole.
- A major supplier of industrial equipment divided its electric utility business into two SBUs, a power generation business concern and a power manual business organisation. Much also late, top direction discovered that neither SBU had considered pollution control equipment to be part of its legitimate charter. As a result, the company found itself unable to bid on that business organization—which accounted for a full quarter of electrical utility capital spending.
The most significant fashion in which Stage Three differs from Phase Ii is that corporate planners are expected to offer a number of alternatives to superlative management. Each choice is unremarkably characterized by a different chance/advantage contour or gives priority to a different objective (for example, greater employment security at some toll to ROI). This alter is quite pervasive; in fact, 1 simple way of determining whether a visitor has advanced to Phase III is to ask managers whether their boss would regard presenting strategy alternatives every bit a sign of indecisiveness.
The "alternate strategies" approach becomes both the strength and the weakness of Phase Three planning, for it begins to impose a heavy—sometimes unacceptable—burden on acme management. As the organizational adequacy for detailed product/market place and business-unit planning spreads through the system, the number of issues raised, alternatives surfaced, and opportunities adult expands alarmingly. Top managers soon recognize that explicit choices are beingness made by planners and managers deep down in the system without summit-level participation—and that these decisions could significantly affect their company's long-term competitive strength and well-being. This knowledge unsettles top direction and pushes it to a heavier interest in the planning process, Phase IV.
Phase IV: Strategic Management
Stage IV joins strategic planning and management in a single process. Only a few companies that we studied are clearly managed strategically, and all of them are multinational, diversified manufacturing corporations. The claiming of planning for the needs of hundreds of different and rapidly evolving businesses, serving thousands of product/markets in dozens of singled-out national environments, has pushed them to generate sophisticated, uniquely constructive planning techniques. However, information technology is not and so much planning technique that sets these organizations apart, but rather the thoroughness with which management links strategic planning to operational decision making. This is largely achieved past three mechanisms:
one. A planning framework that cuts across organizational boundaries and facilitates strategic conclusion making well-nigh customer groups and resources.
2. A planning process that stimulates entrepreneurial thinking.
iii. A corporate value system that reinforces managers' delivery to the company'south strategy.
Planning Framework
Equally noted previously, many Phase 3 companies rely on the SBU concept to provide a planning framework—oft with disappointing results. However, in that location are frequently more than levels at which strategically important decisions must be made than the two implicit in SBU theory. Moreover, today's arrangement structure may non be the platonic framework in which to plan for tomorrow's business, and a strategically managed company may conform its planning procedure on equally many as five distinct planning levels:
1. Product/marketplace planning—The everyman level at which strategic planning takes identify is the product/market unit, where typically production, cost, sales, and service are planned, and competitors identified. Product/market planners often take no control over unlike sets of manufacturing facilities and so must accept a predetermined gear up of business economics.
2. Business concern-unit planning—The bulk of the planning endeavor in most diversified make-and-sell companies is done at a level where largely self-contained businesses command their own market position and cost construction. These individual business-unit plans become the edifice blocks of the corporate strategic plan.
3. Shared resources planning—To reach economies of calibration or to avoid the problem of sub-critical mass (eastward.grand., in R&D facilities), resources are shared. In some cases, the consignment of resource priorities to dissimilar business units or the development of a plan to manage a corporate resource every bit a whole is strategically important. In resource-based or procedure-oriented industries, strategies for shared resource units often determine or constrain business concern-unit strategy.
4. Shared concern planning—In some large companies, a distinct level of planning responsibility is required to devise strategies that encounter the unique needs of sure manufacture or geographic customer groups or to plan for technologies (e.g., microprocessors, fiber eyes) used by a number of business organization units.
5. Corporate-level planning—Identifying worldwide technical and marketplace trends not picked up by business-unit of measurement planners, setting corporate objectives, and marshaling the financial and human resources to come across those objectives are finally the responsibleness of corporate headquarters.
For corporations involved in only a few, closely related product/markets, a ii- or three-level planning framework may be entirely adequate. Even when additional planning levels are required, these companies demand not insert another level of organizational hierarchy in order to plan shared resource or customer sector issues. Experience suggests, all the same, that it is important to recognize such bug where they exist and to assign explicit planning responsibility to an appropriate individual or group in the organization.
Otherwise, critical business decisions can skid between the cracks, and the corporation every bit a whole may find itself unable to capitalize on its strategic opportunities. Considering the choice of a framework for planning will tend to influence the range of alternatives proposed, few strategic planning choices are more important. The definition of a strategic planning framework is, therefore, a pivotal responsibility of summit direction, supported past the corporate planning staff.
Planning Process
While planning as comprehensively and thoroughly as possible, Phase IV companies as well try to keep their planning process flexible and creative.
A principal weakness of Phase II and III strategic planning processes is their inescapable entanglement in the formal corporate calendar. Strategic planning easily degenerates into a mind-numbing bureaucratic exercise, punctuated by ritualistic formal planning meetings that neither inform meridian management nor assist business managers to become their jobs done. Division managers accept been known to attempt to escape from the burden of "useless" annual planning past proposing that they fold their businesses into other SBUs, at to the lowest degree for planning purposes.
To avoid such problems, one European conglomerate has ordained that each of its SBUs initially study its business thoroughly, lay out a detailed strategy, and and then replan as necessary. It has institute that well-managed businesses in relatively stable industries can ofttimes be quite comfortably with routine monitoring against strategic goals every quarter and an intensive strategic review every iii to 5 years. The time saved from detailed almanac planning sessions for every business organization is devoted to businesses in fast-changing environments or those not performing according to the corporate blueprint.
Because it is hard to institutionalize a process that can reliably produce creative plans, strategically managed companies challenge and stimulate their managers' thinking by:
- Stressing competitiveness—The requirement for thorough understanding of competitors' strategies recently has been the planning keynote of a U.S. electric products company well known for its commitment to planning. Pinnacle management comes to the planning meetings prepared by its staff to bore in on a few central issues or events. "If, as you say, our competitors are only three years away from introducing microprocessors in their command units, why are they already talking almost it in their almanac reports?" the president might ask. "What cost savings could our customers achieve with microprocessor-controlled equipment?" or "Who are our competitors' leading engineers?" It takes only one such grilling session to make division managers aware of gaps in their competitive information.
- Focusing on a theme—Several major companies periodically reinvigorate their planning processes by request their managers to fundamental annual plans to a specified theme. International business, new manufacturing process technology, the value of our products to customers, and culling channels of distribution have all been used successfully. This approach has obvious limitations: information technology doesn't work with business organization units in problem, and it should be avoided until the value of formal planning is well established.
- Negotiating objectives—Several companies are trying to negotiate strategically consistent objectives betwixt corporate headquarters and business concern-unit general direction. "Nosotros want two years and $35 million in additional investment to evidence to yous we can brand this into a 35% gross margin business," said the new full general manager of a sectionalisation in problem. "During that time we will make nix profit, but nosotros'll strengthen our market share by three points and reduce cloth waste at our Atlanta institute from 10% to iii%. Alternatively, y'all tin can accept $four meg per twelvemonth at the bottom line next twelvemonth and $half-dozen million the twelvemonth after that. No investment, and but minimal share loss. But be prepared to sell out the whole division, because after that information technology'south all downhill." Faced with clear options, corporate direction could suggest ideas and concessions that would promise them most of their share growth and some profitability for much less cash delivery up forepart.
- Demanding strategic insights—Avoiding contest by an indirect approach is the essence of creative and innovative strategy: a reformulation of a product's function, the development of new manufacturing methods or distribution channels, or the discovery of dimensions of competition to which traditional competitors are blind. One fashion to generate this kind of thinking is to ask each business managing director to describe the specific business advantage he or she intends to achieve. Top direction reviews each business concern plan skeptically. Equally 1 CEO tells division heads: "If you can't tell me something almost your business organisation I don't already know, yous probably aren't going to surprise our competitors either." This technique relies heavily on the corporate planning staff, who are charged with demonstrating to uncreative business-unit of measurement planners that in that location are new ways of looking at old businesses.
Corporate Value System
The value system shared by the company's pinnacle and middle managers provides a tertiary, less visible linkage betwixt planning and action. Although the leadership styles and organizational climates of companies that tin exist called strategically managed vary considerably, and in even 1 visitor a great bargain of diversity can be found, 4 common themes emerge from interviews with personnel at all levels in strategically managed companies:
1. The value of teamwork, which leads to task-oriented organizational flexibility.
2. Entrepreneurial drive, or the commitment to making things happen.
3. Open communication, rather than the preservation of confidentiality.
4. A shared belief that the enterprise can largely create its own future, rather than be buffeted into a predetermined corner by the winds of environmental change.
Teamwork on chore force projects is the rule rather than the exception in strategically managed companies. Instead of fearing these uniquely dangerous expeditions beyond the security of the organizational thrust, managers learn to live with the ambivalence that teams create in render for the excitement and variety of new challenges.
The resulting continual reorganization tin appear bizarre from exterior the organization. For example:
- Observers trying to brand sense of top management personnel changes in one highly successful telecommunications company were left scratching their heads, as commencement the chairman stepped downward to become president and then he was further demoted to become CEO of a major subsidiary. Who was running the visitor, observers asked. Which private was responsible for their brilliantly executed strategy? No ane. The whole team at the superlative was and so strong that no single manager deserved sole credit. The changes in title visible to the public were more an indication of the successful execution of phases of the company's strategy than they were signals of the rise or fall of a unmarried private'southward career.
Entrepreneurial drive amongst managers and technical personnel at all levels is a valued form of beliefs in strategically managed companies. One arrangement's top management was eager to go in on the ground floor of a synthetic fuel equipment business. Six levels down from peak management, an applications engineer in the specialty metals division was faced with a notice of a substantial cost overrun on an expensive piece of test equipment.
Instead of cancelling the gild to source the equipment from a less costly supplier and thereby incur a six-month delay, the engineer went to the dominate, and eventually to the boss's dominate, to notice out whether the delay to execution of the company'due south strategy was worth the price savings. As a result, the engineer did overrun the project budget, only the examination equipment was available when needed.
Confidentiality well-nigh the company's strategy is one of the hardest things for top management to give upward. And yet information technology is impossible for a company to be strategically managed without the interest of wide niches of relatively inferior people in many aspects of the company'south strategic plans. It is not necessary for meridian managers to divulge everything, but as a minimum, junior managers should know the strategic purposes their actions serve.
In retrospect, ane chairman confided that he had overestimated the value of confidentiality. "We had a good idea for a strategy for our specialty concern. Merely we couldn't implement it without letting everyone in the company know about it. Nosotros took the run a risk; at present I doubtable everyone in the industry knows what nosotros're doing. But they can't get their act together to overtake us. We're moving too fast."
A shared commitment to creating their own time to come is the underlying ethic of strategically managed companies. Instead of marginal improvements—a few more than shares of market or a few percentage points of price reduction—managers set for themselves ambitious goals that if accomplished will lead to a sustainable competitive advantage for their company. For example:
- A Japanese television manufacturer, faced with rising textile and labor costs, ordered its engineers to reduce the number of component parts in its colour TV sets by xxx%. Innovative design approaches have since enabled the manufacturer to increase volume substantially while halving the number of workers in its assembly found.
- A machine tool manufacturer has undertaken to change the style a whole industry buys its machinery. Into a sales environment where close personal relations on the found floor and with the procedure engineers was formerly the cardinal to success, information technology is systematically injecting a summit-management-oriented, technically and financially argued sales approach.
At the aforementioned time, it is radically upgrading its research and evolution capabilities, adding calculator-aided engineering, software development, and systems engineering support. "Very little of our product advantage has patent protection," concedes the CEO. "But if we can persuade the industry to purchase on productivity rather than on price and delivery, the premium we can charge for engineering science value will fund enough research to keep united states iii to iv years ahead." Using this approach the manufacturer has already congenital one of the v largest machine tool companies in the world.
As the economic organization becomes more complex and the integration of single business units into multinational, diverse organizations continues, ways must be establish to restore the entrepreneurial vigor of a simpler, more individually oriented company structure. Strategic management, linking the rigor of formal planning to vigorous operational execution, may show to exist the reply.
A version of this article appeared in the July 1980 issue of Harvard Business organization Review.
Source: https://hbr.org/1980/07/strategic-management-for-competitive-advantage
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