Strategic Management - Introduction I
2. Strategic planning and Challenges [Introduction II]
“The art of war is of vital importance to the State... It is a matter of life and death, a road either to safety or to ruin. Hence it is a subject of inquiry, which can on no account be neglected.” (Sunzi, 2006)
Replace “art of war” with strategy and you have a better idea what strategy is about. The company which has the best applied strategy will succeed. The company without any kind of strategy, plan, concept or goal will vanish.
So let’s first define what is considered as strategy, second show its implementation in a business environment and third take a look at the real challenge.
Good Strategy/Bad Strategy: the difference and why it matters
a. What is Strategy?
Maybe the easiest way to explain strategy is to use chess as an example. If you “just play” by the means of just react to the opponents moves, it will probably be a lucky throw if you occasionally win. Good players calculate a lot of moves in advance. They have a tactic. They have a strategy.
The Harvard Professor Michael Porter tried to answer this question 1996. Strategy is nowadays different from former time definitions. Positions change. A competitive advantage can be temporary when competitors are copying very quickly. This is why he pointed out that strategy is not operational effectiveness.
Operational effective is a company which does basically the same things like its competitors, but better (faster, cheaper or higher quality). But this is not strategy. On the first glance it might be the key to be successful in business. Well, maybe on the short run. But on the long run it is important to take positions. Porter emphasized 3 kinds of positioning:
- variety-based, the company focuses on a specific product or service (example: Persil produces only washing powder since decades)
- needs-based, the company covers more needs of customers than its rivals (example: Apple offers computers, smartphones and maybe cars in the future)
- access-based, segmenting customers by a certain criteria (e.g. geography, demography) example: Amazon accesses its customers only via internet. Starbucks can only be found in big cities, airports, train stations but not on the countryside.
To reach a sustainable strategic position, trade-offs are sometimes necessary. Especially when two activities are divergent. For example offering products to the lowest price and the best quality on the market. Here the company would have to decide where to focus on and which activity should be stopped. In the end all activities have to lead into the same direction.
It is “how” to combine these activities. According to Porter the right combination (fit) makes it more complicated for competitors to copy the business model. The right set of activities could be a strength of a company. The coherent direction should be found in all actions. So the company is not just gaining a competitive advantage, it is also keeping it.
In a nutshell strategy is combining a unique set of activities to gain unique valuable position (Porter, 1996). It is combining, integrating and synthesizing a company’s sources to achieve a common goal.
b. The seven keys of Strategic Management
After defining strategy we will introduce the key issues of strategic management shortly.
Strategic Planning will be covered deeply in the second part of this paper. However, for successful planning it is important to understand the meaning of strategy and its implications. Planning is a progress but also a loop. The more intensive we are working on a certain part of our plan, the more feedback loops we will experience to other components of the plan.
Corporate strategy should include all sets of activities in a company. All operations should be coherent. It is important that a company knows its competitive advantage in the value chain.
--- Example: OTIS elevators ---
The OTIS elevator company is the world leading elevator and escalator manufacturer. It is moving the whole earth population every five days. Now we could assume the company produces the best elevators and escalators. That’s why it’s competitive advantage is the high developed product itself. But this is just the half of the truth. Surprisingly its competitive advantage is Service.
In the elevator market the profit is generated in sales and service. But the cash cow is definitely service. This is why OTIS focused on improving service. In the 80’s OTIS started to use information technology intensively with the purpose to enhance its customer service and improve responsiveness to their service requests. The result was OTISLINE a centralized dispatching unit to access to all customers and associated products/maintenance data. It drastically improved responsiveness to customer callbacks. Through this they set a new industry standard for service. They started in a variety-based position and took a more and more needs-based position.
Bob Smith a former Executive Vize President explained OTIS differentiation strategy: “When elevators are running really well, people do not notice them… Our objective is to go unnoticed.”(Stoddard and McFarlan, 1986) OTIS achieved this goal, due to high quality products and service contracts which include permanent maintenance (also in advance). (Pearlson and Saunders, 2012)
Interactive reasoning; in a business environment usually no company is absolutely isolated and could make profit without a counterpart. So all kind of actions are followed by reactions. Signals play an important role. Concluding to the signaling theory there are usually asymmetric information between principal and agent. This is why the principal is deducting conclusions from signals given by the agent (Spence, 1973). An important signal to shareholders is the dividend policy of a company (Bhattacharyya et al., 2008).
Strategic decision making is enormously significant and a source of failures as long it is difficult for humans to make a decision under circumstances which are not clear (uncertainty). It is challenging to estimate the outcome of a project or the consequences of a tactical decision. From a financial point of view it might be easy on the first glance. Take the project with the biggest prospect return, with the highest expected net present value. But it is more. No formula can measure future cashflow profiles. However, when it comes to decisions under uncertainty errors occur. These errors could lead to fatal consequences for a company. Also choices are not always rational and benefit maximizing. Sources of errors are emotions, limited computing performance and a lot of biases and behavioral anomalies.
Strategy Evaluation & Control; we described strategy as a way to achieve a goal due a combination of unique activities on the way to a unique strategic position. But as mentioned above are actions followed by reactions. Competitors are watching carefully. This makes it important to back-check the own strategy. The conditions might have changed. Sometimes the strategy has to be adapted too.
Business Strategy; often mentioned are Porters 3 generic strategies:
- Cost leadership, produce cheaper than competitors and offer to the lowest price (example: Aldi, a German discounter has the biggest market share in Germany and is commonly known for good grocery products to a low price. Nowadays the company is expanding through Europe.)
- Differentiation, make a difference, offer better or other values to your customers(example: Netflix.com customers can watch movies and TV shows online. Netflix also offers self-produced TV shows which seems to find more and more popularity.)
- Focus, concentrate on a narrow market (niche), this could be reached through segmentation; (Inside the target market cost leadership or differentiation strategy)[example: Rolls Royce sells luxury cars to a small high income target group.]
External Relations influence outside the company variables. Commonly known are public relations. But also international and government relations (lobbying).
Ted Cruz is a candidate for the president elections in 2016. For a campaign money is always helpful. This is why candidates have their Political Action Committees (PAC). These PACs support their candidates and organize the fundraising.
Recently the hedge funds-friendly Ted Cruz got a donation of 31 Mio USD from Robert Mercer the co-CEO of the hedge fund Renaissance Technologies(11 et al., n.d.; Lichtblau and Stevenson, 2015).
Mercer changed the political game. If Cruz would become president he could help his donator.