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Global Strategic Planning

Global strategic planning is a process adopted by organizations that operate


internationally in order to formulate an effective global strategy. Global Strategic
Planning is a process of evaluating the internal and external environment by
multinational organizations, and make decisions about how they will achieve their
long-term and short-term objectives.

GSP is different from normal domestic strategic planning, because, in this case,
organizations consider internal as well as external environments. In fact, the
external environment is more crucial to consider when you are operating at a global
level because at a domestic level competition is very directional and optimized, but
at international level the competition is crucially important to be considered;
otherwise survival is not at all possible at global level.

Corporate and global strategic planning

At this site the strategic planning I am talking about goes by the description
corporate strategic planning. It would be more helpful if common usage was
corporate planning rather than strategic planning. This usage would make it
clearer that we are not talking about planning for any unit other than the entire
organization as a corporate whole.

Strictly speaking, corporate strategic planning therefore cannot be carried out in, or
done for, a part or unit of an organization. However, in a number of practical cases,
such as very large corporations, and some government agencies, with large
subsidiaries or divisions, they have corporate or strategic planning functions in their
major divisions as well as at corporate headquarters. This is especially so in the
case of enterprises which operate on a global scale, such as multinational
corporations.

Corporate headquarters role in global strategic planning


The task of these planners at the corporate center, or group headquarters, is to
arrange a global strategic planning process to enable two important things.

Firstly the global strategic planning process should enable the corporate
management team to determine the corporate objectives for the entire group as a
corporate whole.

Secondly the global strategic planning process should lead the top management
team to design or select a suitable strategic structure for the group as a whole.

Neither of these results can be satisfactorily achieved from within any subsidiary
company - they must be carried at the corporate centre.

In deciding what the overall strategic design of the corporation should be, the
central planners must decide what role each major part of the group should play
within the group over the longer term. This implies that, when a proposed group
structure has been approved, the corporate management team has to instruct each
subsidiary company to take whatever actions are required to implement this
strategic structure. But if that is the case it implies that part or all of the overall
strategic structure is decided at the corporate centre. This may leave very little
strategic planning to be done at the subsidiary or divisional level.

To make this clearer let is consider an actual example.

The kind of decisions involved in


global strategic planning
The names have been changed to protect the innocent. Consider a multinational
company, Macro Engines Global Inc. (MEG), which manufactures small engines for
many applications especially in agriculture. They have manufacturing and assembly
plants in seventeen nations across the world.

In 1992 Macro Engines Global Inc. decided to extend its business by diversifying into
making the appliances and vehicles that were powered by its engines. In effect they
were deciding to go into competition with some of their best customers! This
included many kinds of pumps, small compressors, and a range of agricultural
machines such as brush cutters, and rotor tillers.

They decided that they would start in some of the countries where they already
operated. However, on the assumption that any diversification is more risky than
continuing in an existing field of business, the top management of MEG decided not
to invest any additional capital in the countries which were experiencing increasing
political instability. The headquarters corporate management team believed that the
reduced political risks would very roughly balance the increased diversification risk
for the group as a whole.

They had agreed in the most recent corporate strategic planning exercise that total
riskiness of the corporation was to be left unchanged or slightly reduced.

These decisions, which were taken at the corporate centre in the interests of the
corporation as a whole, and which were designed to affect the overall group
strategic structure, inevitably also impacted the structure of each of the national
subsidiaries. Thus the Malaysian subsidiary rapidly became a diversified
manufacturer of a range of agricultural machines, as intended. By contrast, the Sri
Lankan engine assembly plant was shut down in 1994.

The two decisions, invest in Malaysian expansion, and close down the Sri Lankan
operation, were taken at the corporate headquarters, and they included very little in
the way of detail. Nonetheless each decision impacted the structure of each
subsidiary down in considerable detail and for many years into their future.

Of course there was much of planning still to be done in each subsidiary, including
in the first case, planning for production facilities, human resources, acquisitions
and finance, and the second decommissioning plant, selling assets, redeploying or
terminating employees. In general, these actions are not corporate global strategic
planning, they are facilities planning, manpower planning, acquisition planning,
human resources planning, and so on. However, it is vital to realize that these
individual decisions are consequent actions following the larger corporation wide
decision to diversify the product range, and to balance the risk profile associated
with this move. This was a corporate global strategic planning decision, the kind of
decision that could only be made at the corporate headquarters level.

A spectrum of global strategic planning

In devising an approach to global strategic planning either one has to accept that
the corporate centre should decide the role of the parts or one argues that it should
not. If one adopts the former view then corporate strategic planning as defined
elsewhere on this site cannot be practised in the parts; if one adopts the latter view
then one must accept that it leads the organization directly to the true
conglomerate.

In practice we usually see a compromise somewhere along a spectrum between


these two extremes. The area of compromise stretches all the way from simply
setting Return on Capital (RoC) targets for the subsidiaries to deciding the details of
their role within the group.

At one extreme the centre will set the same ROC target for all the subsidiaries, and
leave it entirely to them to determine sales revenue targets, geographic scope of
operations within their country of activity, nature of business, human resources
policies, and so on.

At the other extreme all these decisions will be centralized. Some companies
encourage direct competition between their subsidiaries in the same products and
markets; others rigidly specify the boundaries for each subsidiarys products and
markets.

Regardless of where the global strategic planning process is on this spectrum of


possibilities, there is one thing we should make really clear, and that is the locus of
ultimate responsibility, and the effect this has on the sequencing of the stages of
the global strategic planning process.

Top-down

The approach I take to corporate strategic planning is essentially top-down. This


means, I believe, that a corporate strategic plan should never be built up by adding
together the plans of the individual constituent parts of an organization.

This does not mean that the overall or global strategic planning should exclude
involvement of people from the parts, and have no regard for their information, and
ideas. That would be an unhelpful, unwise or even absurd.

It is vital to understand that there may come a time when a part that does not fit
the corporate strategic intent may be have to be wound up, sold off, or merged in
with another part of the overall organization. So sometimes a part may have to be
discarded, so the corporate or global strategic planning process, cannot be built on
a prerequisite that the corporate entity has to accommodate all the parts whether
they fit or not. Top-down means the strategy is right for the whole; the dog wags the
tails.

In practice, global strategic planning is a special case of planning for a group of with
multiple divisions. It is essential to start a corporate plan for a group with a group
corporate strategic plan. This will answer such questions about the group as
whether the number, size and activities of each subsidiary is appropriate, whether
the groups geographical spread is sensible, whether it is effectively structured, and
so on. These are all matters that affect the group as a corporate whole. Only when
these group issues have been addressed should the divisions, and then their
individual profit or accountability centres, start to prepare their plans.

Their plans will, needless to say, be made with the outputs of the group or global
strategic planning process clearly in view. Part of the result of the group or global
strategic planning will be a statement of the intended role for each country division
or profit centre in the group, and so the output of the global level plan becomes part
of the input of the country one not the other way round. Top-down, not bottomup; the tails do not wag the dog.

Top-down means starting the process for a group before starting for a division.

The approach that is most influential on my thinking on strategic planning is that of


John Argenti. The system developed by him comes in a number of versions and
there is a version specially designed to suit the group structure we have been
looking at. This Group Version of the Argenti Process of Strategic Planning has a
number of sections on the coordination of several planning teams at Group, at
Division and at Profit Centre levels.

global-group-strategy
For more information go to Argenti versions.

Global strategic planning is becoming relevant to organizations of all sizes.


In essentials the global strategic planning process for a huge a huge multinational
or international non-profit agency is no different in principle to planning in a small
firm in a single country. As I have said elsewhere corporate strategic planning is
concerned with the big elephant sized issues facing the organization, so the crux is
what we mean by big.

Big applies to the issues challenging the organization, and also to the small
number of decisions that constitute the strategic structure of the organization. Big
refers to issues that could impact the overall performance of the organization in a
significant way. For example in the case of a business an issue that is likely to
impact profits by 20% or more is a big issue. Decisions taken to address the issues
are big decisions. They are also decisions with links to other considerations.

These decisions are designed to achieve the fundamental purpose of the


organization in the form of a range of performance targets, and to do this within the
limits of a code of corporate conduct, and importantly within a range of tolerable
and management risk.

This set of overall guides to strategic decision making, in terms of performance,


conduct and risk profile can only be decided at the top most level of the
organization.

The corporate strategic plan of all organizations, large or small, national or


multinational, must specify at least some aspects of this, and which aspects are and
which are not specified is itself an important decision.

In order to select a set of strategies or design a strategic structure it is seldom


necessary to delve into great detail. The Strengths, Weaknesses, Opportunities, and
Threats (SWOT) analysis for example, need contain very little detail.

However, unlike those in other organizations, those engaged in global strategic


planning do have to examine one area in thorough and painstaking detail. This is
the complex web of international trade and financial legislation and practice. All
other details may be left to decision by local managements who know the local
conditions; what they may not know and what the central management may not
know either is the regulations governing trade between the various nations in which
the multinational proposes to operate. Some illustrations of the need to have this
local knowledge at work follow.

Culture and International Business


Chevrolet made a marketing blunder, and missed out on sales revenue, when it
introduced the Chevy Nova to Mexico. In Spanish, No va means it doesnt go.

The American Motor Corporation, trying to tap into Puerto Rican ideas around
images of strength and virility called one of its vehicles the Matador. The
prospective customers interpreted Matador as killer. In a land where the road
toll was very high this was not a good marketing move.

In addition to getting corporate headquarter to set strategic guidance on matters


such as currency, trade regulation, the corporate central staff need to listen very
carefully to its people who know the cultural conditions first hand in the local
markets!

It is therefore imperative to conduct an evaluation of names prior to introducing a


product on the market.

Lost in translation
It is not just product names that need evaluation for cultural relevance and
appropriateness. Translation errors are behind a lot of blunders in global trade. The
Coors slogan Turn it Loose, turned into Drink Coors and Get Diarrhea.

As is obvious, these mistakes and others like them can result in a devastating loss
of revenue for companies in todays global marketplace. Hence, it is very important
to know its culture before conducting international business with a country.

Technology addressing the international problem in global strategic planning


As I said earlier, the aspect of global strategic planning that requires special
treatment is the complex web of international trade and financial legislation and
practice.

I believe this international problem to be the primary difference in principle


between global strategic planning for the international enterprise and strategic
planning for a national organization.

The problem can, to some extent, be addressed by the more extensive use of
information and communications technologies in which the great burden of
calculating the effect of international financial regulations will become more
manageable.

Revolutionary changes in technologies provided the mechanisms that propel the


growth of international business. The intensification of competition at both domestic
and international levels has driven firms to look beyond their domestic markets for
new opportunities. The progressive removal of barriers to trade and capital
movements has stimulated greater flows of exports, imports and capital.

Multinational operation requiring global strategic planning is therefore, no longer


the sole province of the larger corporations. Quite small and many medium sized
enterprisers can operate on an international stage.

Global strategic planning is the processes of examining a multinational


organizations internal and external environments to develop its strategic plan. By
looking at the internal environment, the business is able to leverage its strengths
and overcome its weaknesses. In evaluating its external environment, the business
examines the political, environmental, social and technological events that can offer
it opportunities or become potential threats. Multinational organizations that do not
go through the global strategic planning processes are more likely to face
unexpected challenges and be unprepared to compete with competitors in new
international markets.

One major aspect of the global strategic planning process is conducting an internal
audit to find out the businesss strengths and weaknesses. While this may seem
unnecessary, a business may find that it does not have the structure or technology
to support its efforts of competing in the international marketplace. It may have to
create additional departments, hire more human resources, or invest in new
technologies. By having an outside organization analyze its current business
processes, the business can gain a fresh perspective of its situation. This internal
audit includes looking at a company's human capital, technology, structure,
communication methods and policies.

Background/History
STRATEGIC MANAGEMENT-History and Development

Until the 1940s, strategy was seen as primarily a matter for the military. Military
history is filled with stories about strategy. Almost from the beginning of recorded
time, leaders contemplating battle have devised offensive and counter-offensive
moves for the purpose of defeating an enemy. The word strategy derives from the
Greek for generalship, strategia, and entered the English vocabulary in 1688 as
strategie. According to James 1810 Military Dictionary, it differs from tactics, which
are immediate measures in face of an enemy. Strategy concerns something done
out of sight of an enemy. Its origins can be traced back to Sun Tzus The Art of War
from 500 BC.

Over the years, the practice of strategy has evolved through five phases (each
phase generally involved the perceived failure of the previous phase):

Basic Financial Planning (Budgeting)


Long-range Planning (Extrapolation)
Strategic (Externally Oriented) Planning
Strategic Management
Complex Systems Strategy:
Complex Static Systems or Emergence
Complex Dynamic Systems or Strategic Balance

Basic Financial Planning (Budgeting)

James McKinsey (1889-1937), founder of the global management consultancy that


bears his name, was a professor of cost accounting at the school of business at the
University of Chicago. His most important publication, Budgetary Control (1922), is
quoted as the start of the era of modern budgetary accounting.

Early efforts in corporate strategy were generally limited to the development of a


budget, with managers realizing that there was a need to plan the allocation of
funds. Later, in the first half of the 1900s, business managers expanded the
budgeting process into the future. Budgeting and strategic changes (such as
entering a new market) were synthesized into the extended budgeting process, so
that the budget supported the strategic objectives of the firm. With the exception of
the Great Depression, the competitive environment at this time was fairly stable
and predictable.

Long-range Planning (Extrapolation)

Long-range Planning was simply an extension of one year financial planning into
five-year budgets and detailed operating plans. It involved little or no consideration
of social or political factors, assuming that markets would be relatively stable.
Gradually, it developed to encompass issues of growth and diversification.

In the 1960s, George Steiner did much to focus business managers attention on
strategic planning, bringing the issue of long-range planning to the forefront.
Managerial Long-Range Planning, edited by Steiner focused upon the issue of
corporate long-range planning. He gathered information about how different
companies were using long-range plans in order to allocate resources and to plan
for growth and diversification.

A number of other linear approaches also developed in the same time period,
including game theory. Another development was operations research, an
approach that focused upon the manipulation of models containing multiple
variables. Both have made a contribution to the field of strategy.

Strategic (Externally Oriented) Planning

Strategic (Externally Oriented) Planning aimed to ensure that managers engaged in


debate about strategic options before the budget was drawn up. Here the focus of
strategy was in the business units (business strategy) rather than in the
organization centre. The concept of business strategy started out as business
policy, a term still in widespread use at business schools today. The word policy
implies a hands-off, administrative, even intellectual approach rather than the
implementation-focused approach that characterizes much of modern thinking on
strategy. In the mid-1900s, business managers realized that external events were
playing an increasingly important role in determining corporate performance. As a
result, they began to look externally for significant drivers, such as economic forces,
so that they could try to plan for discontinuities. This approach continued to find
favor well into the 1970s.

While the theorists were arguing, one large US Company was quietly innovating.
General Electric Co. (GE) had begun to develop the concept of strategic business
units (SBUs) in the 1950s. The basic idea-now largely accepted as the normal and
obvious way of going about things-was that strategy should be set within the
context of individual businesses which had clearly defined products and markets.
Each of these businesses would be responsible for its own profits and development,
under general guidance from headquarters.

The evolution of strategy began in the early 1960s, when a flurry of authoritative
texts suddenly turned strategic planning from an issue of vague academic interest
into an important concern for practicing managers. Prior to this strategy wasnt part
of the normal executive vocabulary.

Alfred Chandler (1918-) Influential figure in both strategy and business structureStrauss Professor of Business History at Harvard since 1971.

Chandler talks about the development of the management of a large company from
history; in particular from the mid nineteenth century to the end of the First World
War (what he calls the formative years of modern capitalism). During this period,
the typical entrepreneurial or family firm gave way to larger organizations
containing multiple units. A new form of management was needed because the
owner-manager could not be everywhere at once. In addition, a new breed of
manager was needed to operate in this environment the salaried professional.

He advised splitting the functions of strategic thinking and line management. In


Chandlers analysis, the effective organization now separates strategy and day-today operations. Strategy becomes the responsibility of managers at headquarters,
leaving the unit managers to concentrate on the here and now in decentralized
units. In effect, he was advising creating a line management who would carry out
plans developed by a more serious staff function elsewhere.

His influential book Strategy and Structure was published in 1962, appealing to
many large companies that were having difficulty in coping with their size. In recent
years it has come under heavy attack from critics, who maintain that strategy must
be a line responsibility, decided as close as possible

John Gardners Self-Renewal, published in 1964, which pointed out that


organizations constantly need to reassess themselves, had the earliest real impact
on managers. Like people, they need to keep renewing their skills and abilities
something they can only do effectively through careful planning.

Kirby Warren at Harvard looked in depth at what happened in a small number of


companies to see what worked well and what didnt. In several companies for
example, he found that the managers confused the strategic plan with its
components in particular, the marketing plan was often assumed to be the same
thing as the overall corporate plan.

Wickham Skinner (1924-) who was based at Harvard since 1960, pointed out that an
excessive focus on marketing Planning frequently led companies to forget about
manufacturing needs until late in the day, when there was little room for
manoeuvre. Skinner argued for a clear manufacturing strategy to proceed in parallel
with the marketing strategy. In many ways he was ahead of his time, for the
concept of technology strategy or manufacturing strategy had only begun to take
root in the 1980s and many manufacturing companies still have no one in charge of
this aspect of their business.

One particularly influential idea from skinner was the focused factory. He
demonstrated that it was not normally possible for a production unit to focus on
more than one style of manufacturing. Even if the same machines were used to
produce basically similar products, if those products had very different customer
demands that required a different manner of working, the factory would not be
successful. For example, trying to produce equipment for the consumer market,
where a certain error rate in production was compensated for by higher volume
sales at a lower price, was incompatible with producing 100 per cent perfect
product for the military. The most likely outcome was a compromise that satisfies no
one.

Paul Lawrence and Jay Lorsch, also from Harvard, put forth their contingency theory
of organizations. They argued that every organization is composed of multiple
paradoxes. On the one hand, each department or unit has its own objectives and
environment. It responds to those in its own way, both in terms of how it is
structured, the time horizons people assume, the formality or informality of how it
goes about its tasks and so on. All these factors contribute towards what they call
differentiation. At the same time each unit needs to work with others in pursuit of

common goals. That requires a certain amount of integration, to ensure that they
are all working with rather than against each other. In their studies of US firms in a
variety of manufacturing industries, they found that companies with a high level of
differentiation could also have a high level of integration. The reason was simple;
the greater the differentiation, the more potential for conflict between departments
and therefore the greater the need for mechanisms to help them work together.
Their work forced many managers to understand that organizations were not fixed;
that strategy and planning had to be adapted to each segment of the environment
with which they dealt.

Igor Ansoff (1918-) through his unstintingly serious, analytical and complex,
Corporate Strategy, published in 1965, had a highly significant impact on the
business world. It propelled consideration of strategy into a new dimension. It was
Ansoff who introduced the term strategic management into the business vocabulary.

Ansoffs sub-title was An Analytical Approach to Business Policy for Growth and
Expansion. The end product of strategic decisions is deceptively simple; a
combination of products and markets is selected for the firm. This combination is
arrived at by addition of new product-markets, divestment from some old ones, and
expansion of the present position, writes Ansoff. While the end product was simple,
the processes and decisions which led to the result produced a labyrinth followed
only by the most dedicated of managers. Analysis and in particular gap analysis
(the gap between where you are now and where you want to be) was the key to
unlocking strategy.

The book also brought the concept of synergy to a wide audience for the first time.
In Ansoffs original creation it was simply summed up as the 2+2=5 effect. In his
later books, Ansoff refined his definition of synergy to any effect which can produce
a combined return on the firms resources greater than the sum of its parts.

While Corporate Strategy was a notable book for its time, it produced what Ansoff
himself labeled paralysis by analysis; repeatedly making strategic plans which
remained unimplemented.

Reinforced by his conviction that strategy was a valid, if incomplete, concept, Ansoff
followed up Corporate Strategy with Strategic Management (1979) and Implanting
Strategic Management (1984). His other books include Business Strategy (1969),

Acquisition Behavior in the US Manufacturing Industry, 1948-1965 (1971), From


Strategic Planning to Strategic Management (1974), and The New Corporate
Strategy (1988).

Implanting Strategic Management, co-written with Edward McDonnell, records much


of the research conducted by Ansoff and his associates and reveals a number of
ingenious aspects of the Ansoff model. These include his approach to using
incremental implementation for managing resistance to change, product portfolio
analysis, and issue management systems.

The Problem with Strategic Planning (Analysis): The fuel for the modern growth in
interest in all things strategic has been analysis. While analysis has been the
watchword, data has been the password. Managers have assumed that anything
which could not be analyzed could not be managed. The belief in analysis is part of
a search for a logical commercial regime, a system of management which will,
under any circumstances, produce a successful result. Indeed, all the analysis in the
world can lead to decisions which are plainly wrong. IBM had all the data about its
markets, yet reached the wrong conclusions.

There are two basic problems with the reliance on analysis. First, it is all technique.
The second problem is more fundamental. Analysis produces a self-increasing loop.
The belief is that more and more analysis will bring safer and safer decisions. The
traditional view is that strategy is concerned with making predictions based on
analysis. Predictions, and the analysis which forms them, lead to security. The
bottom line is not expansion, future growth or increased profitability-it is survival.
The assumption is that growth and increased profits will naturally follow. If, by using
strategy, we can increase our chances of predicting successful methods, then our
successful methods will lead us to survival and perhaps even improvement. So,
strategy is to do with getting it right or, as the more competitive would say,
winning. Of course it is possible to win battles and lose wars and so strategy has
also grown up in the context of linking together a series of actions with some longerterm goals or aims.

This was all very well in the 1960s and for much of the 1970s. Predictions and
strategies were formed with confidence and optimism (though they were not
necessarily implemented with such sureness). Security could be found. The
business environment appeared to be reassuringly stable. Objectives could be set

and strategies developed to meet them in the knowledge that the overriding
objective would not change.

Such an approach, identifying a target and developing strategies to achieve it,


became known as Management by Objectives (MBO).

Under MBO, strategy formulation was seen as a conscious, rational process. MBO
ensured that the plan was carried out. The overall process was heavily logical and,
indeed, any other approach (such as an emotional one) was regarded as distinctly
inappropriate. The thought process was backed with hard data. There was a belief
that effective analysis produced a single, right answer; a clear plan was possible
and, once it was made explicit, would need to be followed through exactly and
precisely.

In practice, the MBO approach demanded too much data. It became overly complex
and also relied too heavily on the past to predict the future. The entire system was
ineffective at handling, encouraging, or adapting to change. MBO simplified
management to a question of reaching A from B using as direct a route as possible.
Under MBO, the ends justified the means. The managerial equivalent of highways
were developed in order to reach objectives quickly with the minimum hindrance
from outside forces.

Henry Mintzbergs book The Rise and Fall of Strategic Planning was first published in
1994. The confusion of means and ends characterizes our age, Henry Mintzberg
observes and, today, the highways are likely to be gridlocked. When the highways
are blocked managers are left to negotiate minor country roads to reach their
objectives. And then comes the final confusion: the destination is likely to have
changed during the journey. Equally, while MBO sought to narrow objectives and
ignore all other forces, success (the objective) is now less easy to identify. Todays
measurements of success can include everything from environmental performance
to meeting equal opportunities targets. Success has expanded beyond the
bottomline.

Strategic Planning to Strategic Management

Strategic Planning to Strategic Management: Strategic planning was a plausible


invention and received an enthusiastic reception from the business community. But
subsequent experience with strategic planning led to mixed results. In a minority of
firms, strategic planning restored their profitability and became an established part
of the management process. However, a substantial majority encountered a
phenomenon, which was named paralysis by analysis: strategic plans were made
but remained unimplemented, and profits/growth continued to stagnate. Claims
were increasingly made by practitioners and some academics that strategic
planning did not contribute to the profitability of firms. In the face of these claims,
Ansoff and several of his colleagues at Vanderbilt University undertook a four-year
research study to determine whether, when paralysis by analysis is overcome,
strategic planning increased profitability of firms.

Ansoff looked again at his entire theory. His logic was impressively simple either
strategic planning was a bad idea, or it was part of a broader concept which was not
fully developed and needed to be enhanced in order to make strategic planning
effective. An early fundamental answer perceived by Ansoff was that strategic
planning is an incomplete instrument for managing change, not unlike an
automobile with an engine but no steering wheel to convert the engines energy
into movement.

Characteristically, he sought the answer in extensive research. He examined


acquisitions by American companies between 1948 and 1968 and concluded that
acquisitions which were based upon an articulated strategy fared considerably
better than those which were opportunistic decisions. The result of the research was
a book titled Acquisition Behavior of US Manufacturing Firms, 1945-1963.

In 1972 Ansoff published the concept under the name of Strategic Management
through a pioneering paper titled The Concept of Strategic Management, which was
ultimately to earn him the title of the father of strategic management. The paper
asserted the importance of strategic planning as a major pillar of strategic
management but added a second pillar the capability of a firm to convert written
plans into market reality. The third pillar- the skill in managing resistance to change
was to be added in the 1980s.

Ansoff obtained sponsorship from IBM and General Electric for the first International
Conference on Strategic Management, which was held in Vanderbilt in 1973 and
resulted in his third book, From Strategic Planning to Strategic Management.

The complete concept of strategic management embraces a combination of


strategic planning, planning of organizational capability and effective management
of resistance to change, typically caused by strategic planning. Ansoff says that
strategic management is a comprehensive procedure which starts with strategic
diagnosis and guides a firm through a series of additional steps which culminate in
new products, markets, and technologies, as well as new capabilities. Strategic
Management aimed to give people at all levels the tools and support they needed to
manage strategic change. Its focus was no longer primarily external, but equally
internal how can the organization seize and maintain strategic advantage by using
the combined efforts of the people that work in it?

Between 1974 and 1979 Ansoff developed a theory which embraces not only
business firms but other environment-serving organizations. The resulting book
titled Strategic Management, was published in 1979.

Self-confirming Theories: In the 1980s, there was a renewed interest in discovering


ways of dealing with an increasingly complex and changing environment. It was
during this time that the practice of strategy began to move toward a metaphorical
application of an old idea. For many years, management theorists had borrowed the
ideas of an economic theory commonly referred to as equilibrium theory, or
equilibrium systems theory, as a basis for developing management theory.
Basically, the concept was developed around the idea of linearity (and, to some
extent, simplicity). Self-confirming theories of strategy require the strategist to
assume that what the firm has done in the past will be done in the future. In effect,
executives confirm that past strategy has been appropriate by adopting it
repeatedly over time.

Self-confirming theories may be recognized by their historic-simple frame and


mental models. Such theories use terms such as mission, core competencies,
competitive advantage, and sustainable competitive advantage. They are
founded in the theory of comparative advantage developed by economists David
Ricardo and Adam Smith. The theory of comparative advantage, which suggests
that some countries have unique assets, has become the basis for contemporary
strategy. Strategists modified the idea and called it competitive advantage. If it
chooses to use that approach, a firm needs to identify its core competencies,
competitive advantage, and then convert that identification to a mission. In
principle, the purpose of the mission statement is to keep the firm focused upon its
unique area of competitive advantage. Further, the mission is supposed to set

boundaries and to keep it in the box. Generally, self-confirming theories force the
assumption of a linear mental model, since it is historic (including present)
competencies or resources that provide the constructs for future strategy.

Thousands of articles and books have been written on the development of


equilibrium-based strategy. The equilibrium-based strategic model involves a
succession of steps that are designed to keep the firm focused upon its historic
competencies. Out of that concept ideas such as SWOT analysis (strengths,
weaknesses, opportunities, and threats) and five forces analysis were developed.
The latter is dealt with in Michael Porters 1985 book Competitive Strategy. In most
cases, the difference between one key thinker and another is minor at best, but

Michael Porter of Harvard Business School is perhaps the best known of all the
strategy theorists. He has generally been more prolific than the rest. Porter has
been responsible for the writing of numerous books and articles that have been
widely accepted in the field. He has been especially involved in the creation or
popularization of a number of tools that have been widely used in the discipline.

Porters first book for practicing managers, Competitive Strategy: Techniques for
Analyzing Industries and Competitors, was first published in 1980. Drawing heavily
on industrial economics (a field of study that tries to explain industrial performance
through economics), he was trying to take these basic notions and create a much
richer, more complex theory, much closer to the reality of competition. The book
defines five competitive forces that determine industry profitability potential
entrants, buyers (customers), suppliers, substitutes, and competitors within the
industry. Each of these can exert power to drive margins down. The attractiveness
of an industry depends on how strong each of these influences is. Competitive
Strategy brought together in a rational and readily understandable manner both
existing and new concepts to form a coherent framework for analyzing the
competitive environment.

The realization that he had not been focusing on choice of competitive positioning,
this work led Porter in turn to his interests in the concept of competitive advantage,
the theme of his next major book, Competitive Advantage: Creating and Sustaining
Superior Performance (1985). He sought a middle ground between the two polarized
approaches then accepted-on the one hand, that competitive advantage was
achieved by organizations adapting to their particular circumstances; and, on the
other, that competitive advantage was based on the simple principle that the more

in-tune and aware of a market a company is, the more competitive it can be
(through lower prices and increased market share). From analysis of a number of
companies, he developed generic strategies: Porter contends that there are three
ways by which companies can gain competitive advantage:

By becoming the lowest cost producer in a given market


By being a differentiated producer (offering something extra or special to charge a
premium price)
Or by being a focused producer (achieving dominance in a niche market)
Porter insisted that though the generic strategies existed, it was up to each
organization to carefully select which were most appropriate to them and at which
particular time. The generic strategies are backed by five competitive forces
which are then applied to five different kinds of industries (fragmented, emerging,
mature, declining, and global.

To examine an organizations internal competitive ness, Porter advocates the use of


a value chain analysis of a companys internal processes and the interactions
between different elements of the organization to determine how and where value
is added. A systematic way of examining all the activities a firm performs and how
they interact is essential for analyzing the sources of competitive advantage. The
value chain disaggregates a firm into its strategically relevant activities in order to
understand the behavior of costs and the existing and potential sources of
differentiation. A firm gains competitive advantage by performing these
strategically important activities more cheaply or better than its competitors. Each
of these activities can be used to gain competitive advantage on its own or together
with other strategically important activities. Here, the concept of linkages
(relationships between the way one value activity is performed and the cost or
performance of another) becomes relevant. These linkages need not be internal
they can equally well be with suppliers and customers. Viewing every thing a
company does in terms of its overall competitiveness, argues Porter, is a crucial
step to becoming more competitive.

This has led to the myth of sustainable competitive advantage. In reality, any
competitive advantage is short-lived. If a company raises its quality standards and
increases profits as a result, its competitors will follow. If a company says that it is
reengineering, its competitors will claim to be reengineering more successfully.
Businesses are quick to copy, mimic, pretend and, even, steal. The logical and
distressing conclusion is that an organization has to be continuously developing new

forms of competitive advantage. It must move on all the time. If it stands still,
competitive advantage will evaporate before its very eyes and competitors will
pass.

The dangers of developing continuously are that it generates, and relies on, a
climate of uncertainty. The company also runs the risk of fighting on too many
fronts. This is often manifested in a huge number of improvement programs in
various parts of the organization which give the impression of moving forward, but
are often simply cosmetic.

Constantly evolving and developing strategy is labeled strategic innovation. The


mistake is to assume that strategic innovation calls for radical and continual major
surgery on all corporate arteries. Continuous small changes across an organization
make a difference. We did not seek to be 100 percent better at anything. We seek
to be one percent better at 100 things, says SASs Jan Carlzon.

Porter would suggest that his five forces model and SWOT allow for nonlinear
analysis, but most would agree that the overlaying of a linear mental model (selfconfirming theory) on top of any nonlinear analysis would render any such
argument questionable.

Jay Barney is often credited with popularizing an adaptation of the equilibriumbased model, called the resource view of the firm. This particular view that a
firms resources must also be analyzed and understood in developing corporate
strategy might simply be viewed as an addition to the traditional self-confirming
theories.

The equilibrium-based strategic model involves a succession of steps that are


designed to keep the firm in the box or focused upon its historic competencies.
Some might argue that the use of SWOT analysis avoids this problem, since it
analyzes the firms strengths and weaknesses. That generally does not hold true,
however, because the assumption that the firms current/historic strengths will
serve the company well in the future tends to override any attempts to engage in
discontinuous change.

From the early 1980s to the mid-1900s, approaches based on the equilibrium theory
repeatedly failed, and the level of dissatisfaction with this particular approach grew.
The new global competitive environment that emerged in the late 1980s demanded
a solution. TQM gained a great deal of popularity through the early 1990s, but it
soon fell far short of being a holistic solution. The generally accepted failure rate for
TQM initiatives during this period was over 80%. Failure to understand the critical
role that quality plays in corporate success can be disastrous, but TQM cannot
replace strategy, and it is wrong to believe that quality is all a company needs to be
competitive. Quality is simply the price of admission to play the game. Once in the
game, it is strategy that must drive organizational activities.

In the early 1990s, major consulting firms were overwhelmed with clients who
wanted to use process re-engineering as a solution for everything from sagging
profits to product development cycles. Like TQM, process re-engineering failed to
deliver, with a failure rate of around 70%. As a result of these failures, many people
began to suggest that the real issue was change and the usual preponderance of
books soon hit the market. However, once again, the general view was that the
majority of change initiatives added little value to the bottom line.

Discussions with a number of senior executives reveal that most people have given
up on the traditional strategic approach, which is based on mission statements and
core competencies. Interestingly, though, most of their companies still use that
traditional approach. It is important to understand that self-confirming theories of
strategy remain the most frequently used at this time, with well over 90% of all
companies making use of the approach, or of some hybrid that is based upon it.
Why do people continue to use the approach if they no longer trust it? There are a
number of answers to that question.

First, most undergraduate and graduate schools still teach that approach, almost
exclusively. Second, the approach is easy to learn and understand. Third, it is
comforting, because it focuses upon what some have called self-confirming theory
it confirms that what we have done in the past is good, since we are going to
continue to do in the future what we have done in the past (i.e. our future strategy
will be based upon our historic competencies).

As early as 1989, Rosabeth Moss Kanter was pointing out, in When Giants Learn to
Dance, the problems with another historic-linear approach, which she refers to as
excellence. People tend to love the idea of excellence. It makes for a great book

title, whether it involves searching for excellence or building something to last.


Alongside these books were the 7 things that companies do titles, which again
focused upon excellence in practice.

Benchmarking is a variant of the excellence practice. The underlying mental


model suggests that something someone did somewhere at some point in time will
work for your firm where it is today (and tomorrow). The reality is that it might work
but it might not. Therein lies the problem with linear (simple) historic mental
models.

Almost without exception, the companies featured in the excellence books


encountered problems within a few years of the books publication. This is true even
for James C. Collins and Jerry I Porras Built To Last.

As a result of the apparent failure of the self-confirming theories, strategy


theorists have searched for alternatives.

The Reality of Competitive Environments:The new competitive world has moved


from a linear (or highly predictable, somewhat simple) state to a non-linear (or
highly uncertain, complex) state. That does not mean that nothing will continue to
be predictable. It means that in the future historic relationships will most likely not
be the same as they were in the past.

In 1980, Ansoff published a paper which represented another step in the


development of practical strategic management which concerned the development
of practical tools for managing adaptation of firms to turbulent environments. The
paper, called Strategic Issue Management, presented a way of adapting a firm to
the environment, when environmental change develops so fast that strategic
planning becomes too slow to produce timely responses to surprising threats and
opportunities.

From 1991 to 2001, rapid change and high levels of complexity have characterized
the global competitive environment. As the rate of environmental change
accelerates, and the level of complexity rises, the rules of the game change. Such
changes mean that the firm must change in harmony with the environment. If it
does not, ultimately the environment will eliminate it. For the company that does

not change in harmony with the environment, the result is deterioration and,
perhaps, demise.

Companies are complex systems operating within complex dynamic systems. In


every case, the complexity as well as the rate of system change will be different at
different points of time. There are a number of implications for this reality.

Simple-historic or simple-linear strategy is insufficient to prepare a firm for


environments that involve varying levels of complexity and rates of change.

As a complex system, every aspect off the firm (not just its strategies) must be
balanced with the future environment if the firm is to maximize performance.

Imbalances between the firm and the environment result in diminished


performance, or in some cases, the demise of the firm.

Put simply, complex environmental systems (the competitive environment) require


complex mental models of strategy if the firm is to succeed. The use of linear
mental models in environments of varying complexity and rate of change is a
prescription for failure.

Henry Mintzberg has famously coined the term crafting strategy, whereby
strategy is created as deliberately, delicately, and dangerously as a potter making a
pot. To Mintzberg strategy is more likely to emerge, through a kind of
organizational osmosis, than be produced by a group of strategists sitting round a
table believeing they can predict the future.

Mintzberg argues that intuition is the soft underbelly of management and that
strategy has set out to provide uniformity and formality when none can be created.

Another fatal flaw in the conventional view of strategy is that it tended to separate
the skills required to develop the strategy in the first place (analytical) from those
needed to achieve its objectives in reality (practical).

Mintzberg argues the case for what he labels strategic programming. His view is
that strategy has for too long been housed in ivory towers built from corporate data
and analysis. It has become distant from reality, when to have any viable
commercial life strategy needs to become completely immersed in reality.

In an era of constant and unpredictable change, the practical usefulness of strategy


is increasingly questioned. The skeptics argue that it is all well and good to come up
with a brilliantly formulated strategy, but quite another to implement it. By the time
implementation begins, the business environment is liable to have changed and be
in the process of changing even further.

Mintzbergs most recent work is probably his most controversial. Strategy is not
the consequence of planning but the opposite: its starting point, he says
countering the carefully wrought arguments of strategists, from Igor Ansoff in the
1960s to the Boston Consulting Group in the 1970s and Michael Porter in the 1980s.
The Rise and Fall of Strategic Planning is a Masterly and painstaking deconstruction
of central pillars of management theory.

The divide between analysis and practice is patently artificial. Strategy does not
stop and start, it is a continuous process of redefinition and implementation. In his
book, The Mind of the Strategist, the Japanese strategic thinker Kenichi Ohmae
says: In strategic thinking, one first seeks a clear understanding of the particular
character of each element of a situation and then makes the fullest possible use of
human brain power to restructure the elements in the most advantageous way.
Phenomena and events in the real world do not always fit a linear model. Hence the
most reliable means of dissecting a situation into its constituent parts and
reassembling them in the desired pattern is not a step-by-step methodology such as
systems analysis. Rather, it is that ultimate nonlinear thinking tool, the human
brain. True strategic thinking thus contrasts sharply with the conventional
mechanical systems approach based on linear thinking. But it also contrasts with
the approach that stakes everything on intuition, reaching conclusions without any
real breakdown or analysis.

When future could be expected to follow neat linear patterns, strategy had a clear
place in the order of things. Organizations are increasingly aware that, as they move
forward, they are not going to do so in a straight unswerving line. The important
ability now is to be able to hold on to a general direction rather than to slavishly

follow a predetermined path. Now, the neatness is being upset, new perspectives
are necessary. The new emphasis is on the process of strategy as well as the output.
Such flexibility demands a broader perspective of the organizations activities and
direction. This requires a stronger awareness of the links between strategy, change,
team-working, and learning. Strategy is as essential today as it ever was. But,
equally, understanding its full richness and complexity remains a formidable task.

Kenichi Ohmae argues that an effective strategic plan takes account of three main
players the company, the customer, and the competition each exerting their own
influence. The strategy that ignores competitive reaction is flawed; so is the
strategy that does not take into account sufficiently how the customer will react;
and so, of course, is the strategic plan that does not explore fully the organizations
capacity to implement it.

Kenichi Ohmae says that a good business strategy is one, by which a company can
gain significant ground on its competitors at an acceptable cost to itself. He
believes there are four principal ways of doing this:

Focus on the key factors for success (KFSs). Ohmae argues that certain functional or
operating areas within every business are more critical for success in that particular
business environment than others. If you concentrate effort into these areas and
your competitors do not, this is a source of competitive advantage. The problem, of
course, is identifying what these key factors for success are.
Build on relative superiority. When all competitors are seeking to compete on the
KFSs, a company can exploit any differences in competitive conditions. For example,
it can make use of technology or sales networks not in direct competition with its
rivals.
Pursue aggressive initiatives. Frequently, the only way to win against a much larger,
entrenched competitor is to upset the competitive environment, by undermining the
value of its KFSs changing the rules of the game by introducing new KFSs.
Utilizing strategic degrees of freedom. By this tautological phrase, Ohmae means
that the company can focus on innovation in areas which are untouched by
competitors.
In each of these four methods, the principal concern is to avoid doing the same
thing, on the same battle-ground, as the competition, Ohmae explains.

Kathryn Rudie Harrigans first book, Strategies for Declining Businesses focused on
declining businesses. Harrigan believes there is a life-cycle for businesses and they
need to revitalize themselves constantly to prevent decline. From declining
businesses, Harrigan moved on to the subject of vertical integration and the
development of strategies to deal with it. A central premise of the framework she
developed was that, as firms strived to increase their control over supply and
distribution activities, they also increased their ultimate strategic inflexibility (by
increasing their exit barriers). In search of more flexible approaches she carried out
lengthy research into joint ventures. Despite their boom, Harrigans research
showed that between 1924 and 1985 the average success rate for joint ventures
was only 46 per cent and the average life span a meager three and a half years. In
her two books on joint ventures, Harrison argued they will become a key element in
competitive strategy. The reasons she gave for this were: economic deregulation,
technological change, increasing capital requirements in connection with
development of new products, increasing globalization of markets.

She predicted:

One-on-one competition will be replaced by competition among constellations of


firms that routinely venture together.
Teams of co-operating firms seeking each other out like favorite dancing partners
will soon replace many current industry structures where firms stand alone.
To cope with these changes, managers must learn how to co-operate, as well as
compete, effectively.
Harrigans later work focused on mature businesses. Managing Maturing Businesses
(1988) examined the second half of a businesss life or, as it is more dramatically
put, the endgame. She has coined the phrase The last iceman always makes
money, which she explains as The last surviving player makes money serving the
last bit of demand, when the competitors drop away. The importance of her work in
this area was given credence by the fact that over two-thirds of the industries within
mature economies were experiencing slow growth or negative growth in demand for
their products.

Ameliorating the pain and avoiding premature death have been the motivating
factors of Harrigans work. Harrigans argument is that endgame can be highly
profitable if companies adopt a coherent strategy sufficiently early. The strategic
options are:

Divest now the first company out usually gets the highest price; later leavers may
not get anything.
Last iceman focusing on customer niches which will continue long-term and will be
prepared to pay a premium.
Selective shrinking taking the profitable high ground and leaving the less
profitable low ground to the competitors.
Milking the business the last option, but none the less a practical alternative in
many situations.
Complex Systems Strategy

Complexity-based approaches or complex adaptive systems, were developed in


response to the apparent failure of equilibrium-based approaches. Complexitybased thinkers will fall into a number of different camps. The majority believe that
the environment must be understood in terms of its complexity, chaos, and
ecological constructs. This group subscribes to the Darwinian hypotheses (upward
evolution of a system) as a metaphor for the business environment. This kind of
thinking has resulted in the idea of self-organizing companies.

The complexity group falls into two categories. One might be called a pure
complexity-based group, the other a hybrid. In the case of the former, theorists
generally apply the concept of emergence to every situation. According to this
group predictive modeling is rendered useless by the chaotic nature of the
environment. They would suggest that any attempt to plan for the future is
pointless.

The hybrid group also assumes that the Darwinian hypotheses may be used as a
metaphor for business systems. This particular group of thought is based upon the
idea that the firm may compete on the edge of chaos, that is in a state in which the
system is complex adaptive, but at the same time with a minimal level of
predictability in the system (Brown and Eisenhardts Competing on the Edge). This
group of thinkers have combined the emergent (complex-historic) approach with the
extrapolation (simple-future)approach.

Emergence

The emergence camp is divided into at least two or three distinctive groups.
Emergence-based theorists begin with the idea of complex systems and chaos
theory. Some suggest that the ability to deal with complexity on a futuristic basis is
impossible. Others suggest that it is possible to understand some aspects of
futuristic systems. A third group imposes naturalistic ecological presuppositions in
its theory.

Ralph Stacey and Henry Mintzberg tend to hold to the view that it is simply not
possible to consider future complex environments. As a result they suggest that the
strategist must wait for events to occur, or emerge, then develop strategy. This
approach of incrementalism involves the after the fact development of strategy
for discontinuous events. Mintzberg suggests that, as discontinuous events occur,
the firm should dynamically craft strategy.Stacey generally agrees with Mintzberg,
but in his book Managing The Unknowable, he additionally suggests that it is
possible to create organizations that are designed to deal with ambiguity and
complexity.

Others involve themselves in apparently self-defeating arguments. In The Fifth


Discipline, Peter Senge advances the idea of systems thinking and suggests that it
is possible to observe complex systems and make reliable inferences about such
systems. On the other hand, in the multi-author work The Dance of Change, he
tends to take a purely Darwinian emergence view.

The emergent or complex-historic group of strategists is by far the fastest-growing


group in the field. As those who see the failure of self-confirming theories seek
alternatives, the focus on complexity by the emergent group seems to make a lot of
sense.

Chaos and Complexity:Around the mid-1950s, there had been a certain amount of
investigation into the idea of cybernetics, or the study of processes. That led some
people to think about the competitive environment in a very different way. Chaos
and complexity theory were introduced. By the early 1990s, complexity theory had
taken on a life of its own. At about the same time, the idea of systems thinking was
popularized, particularly, in Peter Senges 1990 book The Fifth Discipline.

The period was characterized by a blending of disciplines, including natural science,


social sciences, and business. A number of business theorists moved on from the
metaphor of chaos theory in business to complexity theory. Chaos theory had dealt
with the unpredictable processes that were observable in science. Those who
moved on to complexity theory added an interesting twist to the basic idea of
complexity. Complex systems thinking has to do with the fact that the global system
or environment is made up of a limitless number of other systems. Theorists
hypothesize that complex systems may behave in much the same way as the
molecules in a glass of water, which interact randomly.

Systems Thinking:Another approach for dealing with complex environments is called


systems thinking. Proponents of systems thinking believe that it is possible to
consider complex issues and to make reasonable inferences about the outcomes
of such complex systems. Systems thinking has been widely discussed in corporate
circles, but few companies actually utilize the approach, especially at the senior
executive level where it could be most beneficial. Those few leaders who have the
intuitive ability to think in terms of complex systems, are and will continue to be,
highly successful.

Darwinian Theory:Alongside this hypothesis relating to complex systems, the idea of


using Darwins theory of evolution as a metaphor for complexity was developed.
Charles Darwins concept focused upon two ideas: first, the idea of natural
selection, or the survival of the fittest; second, the idea of evolution. His concept of
evolution was based upon the hypothesis that matter was constantly in a state of
moving from a lower level of complexity to a higher level of complexity. In his view,
this accounted for the similarities between monkeys, apes, and the different races
of humans.

Scientific evidence generally refutes these particular views (along with others held
by Darwin), but Darwins hypothesis has none the less been adapted metaphorically
to complexity theory as it is applied in business. Those who subscribe to the theory
say that the evolution (from lower complexity to higher complexity) that occurs
naturally in nature must apply equally to businesses. Complexity management
theorists go on to suggest that one of the goals of every manager should be to allow
the business to emulate nature by self-organizing.

This theme is clearly revealed in Peter Senges 1999 book The Dance of Change. In
one article in the book, entitled The leadership of profound change-toward an
ecology of leadership, Senge suggests that leaders need to understand more about
nature and to manage with that in mind. The CEO, according to Senge, is not the
solution to driving meaningful change in the organization.

In most cases, the complexity-based theorists assume the Darwinian hypotheses


(upward mutation or evolution of complex natural systems) as a metaphor for
management and strategy theory. This idea is developed in what is called selforganization. It is also an integral part of the complexity theorists response to the
linear economic model referred to as equilibrium theory, which is called complex
adaptive systems theory.

The evidence clearly invalidates the Darwinian hypotheses. Complex dynamic


systems as an idea is finding support not only as a way of describing the natural
environment, but also as a reasonable metaphor for developing management and
strategy theory. This approach deals with complex systems without the
prepositional fallacies related to complex adaptive systems theory.

Shona L. Brown and Kathleen M. EisenhardtBrown and Eisenhardts book Competing


on the Edge (1998) displays their work as somewhat of a hybrid of the complex
adaptive systems approach (including the Darwinian hypotheses) and the selfconfirming schools of thought. In essence, Brown and Eisenhardt suggest that the
firm is competing in complex environments, and thus must deal with high levels of
uncertainty. Their view is that the firm is constantly in a process of changing its
competencies. There is some dissonance between their adoption of competencies
and their prescriptions for dynamic corporate strategy.

Henry Mintzberg The work of Canadian, Henry Mintzberg counters much of the
detailed rationalism of other major thinkers. He falls in the complex-historic
(emergence) category of strategists, although, unlike most in that camp, he does
not appear to have adopted the Darwinian metaphor. Mintzberg believes in
incremental responses to changes as they emerge in the environment. It is clear
that he holds to the idea of a complex environment, yet he also seems to believe
that it is not possible to anticipate or prepare proactively for discontinuous events.
His views are the antitheses of Ansoffs.

Ralph Stacey His book Managing the Unknowable (1992) was really ahead of the
curve among the work of the proponents of complex adaptive systems. Staceys
work differs from that of many of the others in that particular school, since he
suggests that companies need to prepare proactively for complexity.

Complex Dynamic Systems

The application of a Darwinian-based theory of complexity has resulted in an


alternative to the equilibrium theory of economics complex adaptive systems
which again, proposes that the economic system is characterized by progressive
upward evolution.

The positive aspect of the theory is that it turns managers toward thinking about
complex systems. There is no doubt that linear thinking (equilibrium-based
management theory) can damage a company, but the absence of scientific support
for adaptive systems (in either nature or in business) may also be problematic
when trying to build corporate strategy.

A number of people are now using the idea of complex dynamic systems as a way
to think about the competitive environment. Moving from the Darwinian
presupposition of evolution to a recognition of the complex nature of the
environment may present a better opportunity for the corporate strategist.

There is currently a clear trend toward complexity-based corporate strategy.


Emerging research supports the fact that moving from a linear to a non-linear
complex mental model of the environment will help managers to lead a more
profitable organization.

C. K. Prahalad and Gary Hamel Their book Competing for the Future was first
published in 1994. Their work has gone through a number of cycles, or changes.
Early on, it seemed to focus on self-confirming theories. However, they were quick
to comprehend the apparent failure of that model, and began to move more toward
a complexity-based model. In their later works they have focused on anticipating
the complex nature of the future environment. At the same time they are not

proponents of strategy based on complex adaptive systems (the Darwinian


hypotheses). A very positive aspect of their work is their emphasis on proactive
strategies for dealing with future uncertainty.

The phrase core competencies has now entered the language of management. In
laymans terms, core competencies are what a company excels at. Gary Hamel and
C K Prahalad define core competencies as the skills that enable a firm to develop a
fundamental customer benefit. They argue that strategic planning is neither radical
enough nor sufficiently long-term in perspective. Instead its aim remains
incremental improvement. In contrast, they advocate crafting strategic architecture.
The phraseology is unwieldy, but means basically that organizations should
concentrate on rewriting the rules of their industry and creating a new competitive
industry.

Richard DAveni The best-known work of Richard DAveni of Dartmouth College is


Hypercompetition (1994), in which he overtly takes on the traditional self-confirming
strategic approaches. Based upon his observations of the real world, the book
concludes that the world is no longer linear, and does not reward those who use
linear approaches to create corporate strategy. In its place, he suggests, the planner
needs to consider a new approach. In assessing the new corporate world, he makes
a number of insightful observations in Hypercompetition:

Firms must destroy their competitive advantage to gain advantage..

Entry barriers work only if others respect them.

A logical approach is to be unpredictable and irrational.

Traditional long-term planning does not prepare for the short term.

Attacking competitors weaknesses can be a mistake. Traditional approaches


such as SWOT analysis may not work in a hypercompetitive environment.

Companies have to compete to win, but competing makes winning more


difficult.
DAveni builds the case for a complex environment and the need to change the
organization continually in response to the environment, then proposes an answer
to his argument about the need for a dynamic theory: the 7-S approach.

Superior stakeholder satisfaction.

Strategic soothsaying.

Positioning for speed.

Shifting the rules of the game.


Signaling strategic intent.

Simultaneous and sequential strategic thrusts

At the heart DAvenis ideas is his conclusion that companies need to be focused
upon disrupting the market. He suggests that there are three critical factors that
enable a firm to deliver sustainable disruption in the market:

A vision for disruption.


Capabilities for disruption (the organization).
Product/market tactics used to deliver disruptions.
There are a number of similarities between the work of Ansoff and that of DAveni.
Both suggest that the environment involves some level of complexity and rate of
change. Both propose a contingency theory approach that is, the organization
must be designed to respond to the present and future environment. Both believe
that the environment of the 1990s began a new period of highly turbulent,
unpredictable, changing environments.

Hybrid Systems:One of the more questionable adaptations of the various theories


comes from those who attempt to combine complex adaptive systems and
equilibrium-based theory. These theorists suggest that strategists should apply
complex adaptive systems approaches to their strategy, while at the same time
developing historic (or even new) competencies. Clearly there are problems with
this combination.

Observing the global environment, and accepting the fact that there are two
environmental issues that strategists must address complexity and rate of change
it is clear that an organization must be continually changing in nonlinear terms
both in speed and in complexity. Rosabeth Moss Kanters useful idea of
contingency theory (presented in When Giants Learn to Dance) rightly suggests
that the organization must be able to respond contingently to future changes in the

environment. Her approach is similar to W. R. Ashbys requisite variety theorem


explained in his Introduction to Cybernetics.

The modified Ansoff Model is also a hybrid. On one hand, a complex dynamic
systems approach is taken. On the other, an emergence approach is viewed as part
of the firms ability to respond to discontinuous events. Then, the firm is assessed
using a complex model to determine its ability aggressively to create the future
strategy the firm needs and the responsiveness capabilities of the firm to address
discontinuous events as they emerge.

Rosabeth Moss Kanter Also from Harvard Business School, the fact that Kanter
rejects the self-confirming approach to the development of strategy in favor of
contingency design is an important underpinning of her work. She believes that the
strategist must begin with an understanding of the future environment, then
contingently design the firm around that understanding. In her book When Giants
Learn to Dance (1990), she offers seven ideas that describe managers who will be
successful in the new corporate environment:

They operate without the power of the might of the hierarchy behind them
(leadership vs. positional power).
They can compete (internally) without undercutting competition).
They must have the highest ethical standards.
They possess humility.
They must have a process focus.
They must be multifaceted and ambidextrous (work across business units/flexible).
They must be willing to tie their rewards to their own performance.
Evan Dudik Strategic Renaissance (2000) by Evan Dudik takes a complex systems
approach to strategy by suggesting that the planner must understand the level of
uncertainty of the future environment (very similar to Ansoffs turbulence) and, at
the same time, that the firm must create a complex adaptive system (the firm itself)
if it is to deal with that uncertainty. It is clearly an excellent application of
contingency theory. Dudiks book covers all of the positives related to developing
complex mental models and is excellent in presenting contingency approaches to
the development of corporate strategy.

Predictive Modeling:Predictive modeling involves a complex mental model and a


futuristic (as opposed to historic) strategic frame. Since complex-futuristic
approaches involve complexity, there are a number of types of those approaches,
including some hybrids. Even though some of the approaches are especially
concerned with complexity, some tend to be less holistic or whole-system than
others.

AIS: The first approach might be called artificial intelligence simulation or AIS,
which involves the creation of a computer-based model in which key variables can
be manipulated. The researcher might identify 10 independent variables that
appear to drive certain outcomes (dependent variables). In some cases it is possible
to base the behaviors of the variables on statistically based relationships. That adds
power to the model. Regardless, the AIS process allows the researcher to
manipulate variables in order to develop some level of predictive confidence in the
future. In some ways, AIS can be similar to war gaming.

Scenarios and war gaming can be quite helpful in complex environments.

Scenarios: The concept of scenario planning was pioneered by oil giant Shell.
Creating one single strategic plan to be followed with military precision simply didnt
work in practice. As circumstances changed, the strategic plan also needed
changing and executives were either constantly going back to the drawing board or
trying to push through a plan that was no longer appropriate. The longer the
planning horizon, the worse the problem became. Shells answer was to make not
one but a number of sets of assumptions about the future environment. At its
simplest, these would be optimistic, pessimistic, and straightline. Any one of these
scenarios could happen, but managers now drew up plans that followed the most
likely series of events, while building in frequent evaluation points where one of the
alternative scenarios could take over. In effect, what they were doing was thinking
through the implications of necessary deviations of a plan sufficiently far ahead to
be able to implement them at minimum cost and effort.

Scenarios are classified as complex-future models (predictive modeling) and they


have been successfully used for the development of strategy for complex
environments for a number of years. Scenarios involve the analysis of future driving
forces in an environment and the consideration of a range of possible outcomes..
Scenarios tend to focus on a very narrow area of the future, but ideally will attempt

to account for driving forces, or independent variables that could have an impact
upon the area being studied. Scenarios have two purposes: first, a multiple scenario
(i.e. three or four possible scenarios about a specific issue) can provide a complex
systems overview of an issue; second, they can be extremely helpful in driving
organizational learning.

A number of comments have been made regarding driving organizational learning


and managing resistance to change. It is important to remember that dissonant
data (information that indicates that the future environment will shift, and that the
rules of the game will change) is more often rejected by senior managers than
accepted. Managing such resistance (which can be measured using the modified
Ansoff model) is quite important from a profit standpoint.

One of the keys to anticipating future turbulence environments is to ensure that the
firm has the level of adaptiveness required for the level of future turbulence. In
turbulence levels above 3.0, there is a growing expectation of discontinuous or
surprise events. As the turbulence level rises, the ability of the firm to reactively
transform is clearly a profit issue. The higher the level of environmental speed and
complexity, the higher the negative profit impact if the organization has low levels
of adaptive capabilities. As research by Dawn Kelly and Terry Amburgey reveals,
internal resistance to change slows the organizational response to discontinuous
events.

War gaming: War gaming is a good way of preparing for complex futures. War
gaming is somewhat similar to using scenarios. There are a number of ways of
doing it, but it generally involves the gathering of competitor information prior to
beginning the exercise. The information might cover the predisposition or probable
behavior of different competitors. Some might use a five forces analysis and a
SWOT analysis (of each competitor). A modified Ansoff strategic profile of each
competitor can be a most valuable tool.

War gaming involves the organization dividing its managers into teams, which take
on the role of competitors. The competitors simulate a battle. The game is played in
terms of successive strategies created by each team. The exercise facilitator
creates ways for the competitors to play out their strategy, based upon the research
about the competitor that they were given. In some cases, the senior executives of
the client firm will take on the role of strategists for their own firm, while their
management team will play the roles of their competitors. This can be an extremely

revealing exercise, especially when the third or fourth passes or battles are
completed.

In many ways the value of war gaming, as with scenarios, is that of organizational
learning. War gaming can help internal managers to change their mental models of
the competitive environment as well as their perceptions of competitors most
probable behaviors. One word of caution: there is nothing more boring than a poorly
conceived war game, and the services of external facilitators are recommended;
make sure that the facilitators selected are at the cutting edge in their field. Those
that revert to simple (non complexity-based) approaches, such as SWOT alone,
should be avoided.

Significance of study
Any person, corporation, or nation should know who or where they are, where they
want to be, and how to get there.[2] The strategic-planning process utilizes
analytical models that provide a realistic picture of the individual, corporation, or
nation at its consciously incompetent level, creating the necessary motivation for
the development of a strategic plan.[3] The process requires five distinct steps
outlined below and the selected strategy must be sufficiently robust to enable the
firm to perform activities differently from its rivals or to perform similar activities in
a more efficient manner.[4]

A good strategic plan includes metrics that translate the vision and mission into
specific end points.[5] This is critical because strategic planning is ultimately about
resource allocation and would not be relevant if resources were unlimited. This
article aims to explain how finance, financial goals, and financial performance can
play a more integral role in the strategic planning and decision-making process,
particularly in the implementation and monitoring stage.

The Strategic-Planning and Decision-Making Process

1. Vision Statement

The creation of a broad statement about the companys values, purpose, and future
direction is the first step in the strategic-planning process.[6] The vision statement
must express the companys core ideologieswhat it stands for and why it exists
and its vision for the future, that is, what it aspires to be, achieve, or create.[7]

2. Mission Statement

An effective mission statement conveys eight key components about the firm:
target customers and markets; main products and services; geographic domain;
core technologies; commitment to survival, growth, and profitability; philosophy;
self-concept; and desired public image.[8] The finance component is represented by
the companys commitment to survival, growth, and profitability.[9] The companys

long-term financial goals represent its commitment to a strategy that is innovative,


updated, unique, value-driven, and superior to those of competitors.[10]

3. Analysis

This third step is an analysis of the firms business trends, external opportunities,
internal resources, and core competencies. For external analysis, firms often utilize
Porters five forces model of industry competition,[11] which identifies the
companys level of rivalry with existing competitors, the threat of substitute
products, the potential for new entrants, the bargaining power of suppliers, and the
bargaining power of customers.[12]

For internal analysis, companies can apply the industry evolution model, which
identifies takeoff (technology, product quality, and product performance features),
rapid growth (driving costs down and pursuing product innovation), early maturity
and slowing growth (cost reduction, value services, and aggressive tactics to
maintain or gain market share), market saturation (elimination of marginal products
and continuous improvement of value-chain activities), and stagnation or decline
(redirection to fastest-growing market segments and efforts to be a low-cost
industry leader).[13]

Another method, value-chain analysis clarifies a firms value-creation process based


on its primary and secondary activities.[14] This becomes a more insightful
analytical tool when used in conjunction with activity-based costing and
benchmarking tools that help the firm determine its major costs, resource strengths,
and competencies, as well as identify areas where productivity can be improved and
where re-engineering may produce a greater economic impact.[15]

SWOT (strengths, weaknesses, opportunities, and threats) is a classic model of


internal and external analysis providing management information to set priorities
and fully utilize the firms competencies and capabilities to exploit external
opportunities,[16] determine the critical weaknesses that need to be corrected, and
counter existing threats.[17]

4. Strategy Formulation

To formulate a long-term strategy, Porters generic strategies model [18] is useful as


it helps the firm aim for one of the following competitive advantages: a) low-cost
leadership (product is a commodity, buyers are price-sensitive, and there are few
opportunities for differentiation); b) differentiation (buyers needs and preferences
are diverse and there are opportunities for product differentiation); c) best-cost
provider (buyers expect superior value at a lower price); d) focused low-cost
(market niches with specific tastes and needs); or e) focused differentiation (market
niches with unique preferences and needs).[19]

5. Strategy Implementation and Management

In the last ten years, the balanced scorecard (BSC)[20] has become one of the most
effective management instruments for implementing and monitoring strategy
execution as it helps to align strategy with expected performance and it stresses
the importance of establishing financial goals for employees, functional areas, and
business units. The BSC ensures that the strategy is translated into objectives,
operational actions, and financial goals and focuses on four key dimensions:
financial factors, employee learning and growth, customer satisfaction, and internal
business processes.[21]

The Role of Finance

Financial metrics have long been the standard for assessing a firms performance.
The BSC supports the role of finance in establishing and monitoring specific and
measurable financial strategic goals on a coordinated, integrated basis, thus
enabling the firm to operate efficiently and effectively. Financial goals and metrics
are established based on benchmarking the best-in-industry and include:

1. Free Cash Flow

This is a measure of the firms financial soundness and shows how efficiently its
financial resources are being utilized to generate additional cash for future
investments.[22] It represents the net cash available after deducting the
investments and working capital increases from the firms operating cash flow.

Companies should utilize this metric when they anticipate substantial capital
expenditures in the near future or follow-through for implemented projects.

2. Economic Value-Added

This is the bottom-line contribution on a risk-adjusted basis and helps management


to make effective, timely decisions to expand businesses that increase the firms
economic value and to implement corrective actions in those that are destroying its
value.[23] It is determined by deducting the operating capital cost from the net
income. Companies set economic value-added goals to effectively assess their
businesses value contributions and improve the resource allocation process.

3. Asset Management

This calls for the efficient management of current assets (cash, receivables,
inventory) and current liabilities (payables, accruals) turnovers and the enhanced
management of its working capital and cash conversion cycle. Companies must
utilize this practice when their operating performance falls behind industry
benchmarks or benchmarked companies.

4. Financing Decisions and Capital Structure

Here, financing is limited to the optimal capital structure (debt ratio or leverage),
which is the level that minimizes the firms cost of capital. This optimal capital
structure determines the firms reserve borrowing capacity (short- and long-term)
and the risk of potential financial distress.[24] Companies establish this structure
when their cost of capital rises above that of direct competitors and there is a lack
of new investments.

5. Profitability Ratios

This is a measure of the operational efficiency of a firm. Profitability ratios also


indicate inefficient areas that require corrective actions by management; they

measure profit relationships with sales, total assets, and net worth. Companies must
set profitability ratio goals when they need to operate more effectively and pursue
improvements in their value-chain activities.

6. Growth Indices

Growth indices evaluate sales and market share growth and determine the
acceptable trade-off of growth with respect to reductions in cash flows, profit
margins, and returns on investment. Growth usually drains cash and reserve
borrowing funds, and sometimes, aggressive asset management is required to
ensure sufficient cash and limited borrowing.[25] Companies must set growth index
goals when growth rates have lagged behind the industry norms or when they have
high operating leverage.

7. Risk Assessment and Management

A firm must address its key uncertainties by identifying, measuring, and controlling
its existing risks in corporate governance and regulatory compliance, the likelihood
of their occurrence, and their economic impact. Then, a process must be
implemented to mitigate the causes and effects of those risks.[26] Companies must
make these assessments when they anticipate greater uncertainty in their business
or when there is a need to enhance their risk culture.

8. Tax Optimization

Many functional areas and business units need to manage the level of tax liability
undertaken in conducting business and to understand that mitigating risk also
reduces expected taxes.[27] Moreover, new initiatives, acquisitions, and product
development projects must be weighed against their tax implications and net aftertax contribution to the firms value. In general, performance must, whenever
possible, be measured on an after-tax basis. Global companies must adopt this
measure when operating in different tax environments, where they are able to take
advantage of inconsistencies in tax regulations.

Conclusion

The introduction of the balanced scorecard emphasized financial performance as


one of the key indicators of a firms success and helped to link strategic goals to
performance and provide timely, useful information to facilitate strategic and
operational control decisions. This has led to the role of finance in the strategic
planning process becoming more relevant than ever.

Empirical studies have shown that a vast majority of corporate strategies fail during
execution. The above financial metrics help firms implement and monitor their
strategies with specific, industry-related, and measurable financial goals,
strengthening the organizations capabilities with hard-to-imitate and nonsubstitutable competencies. They create sustainable competitive advantages that
maximize a firms value, the main objective of all stakeholders.

[1] M.E. Porter, What is Strategy? Harvard Business Review, 74, no. 6 (1996).
[purchase required]

[2] D. Abell, Defining the Business: The Starting Point of Strategic Planning, (New
Jersey: Prentice-Hall, 1980).

[3] J.S. Bruner, The Process of Education: A Landmark in Education Theory,


(hyperlink no longer accessible). (Boston: Harvard University Press, 1977).

[4] J.A. Pearce and R.B. Robinson, Formulation, Implementation, and Control of
Competitive Strategy, (New York: Irwin McGraw-Hill, 2000).

[5] C.S. Clark and S.E. Krentz, Avoiding the Pitfalls of Strategic Planning,
Healthcare Financial Management, 60, no. 11 (2004): 6368.

[6] T. Jick and M. Peiperl, Managing Change: Cases and Concepts, (New York:
Irwin/McGraw-Hill, 2003).

[7] J.C. Collins and J.I. Porras, Building Your Companys Vision, Harvard Business
Review, 74, no. 5 (1996). [purchase required]

[8] Pearce and Robinson.

[9] J.A. Pearce and F. David, Corporate Mission Statement: The Bottom Line, The
Academy of Management Executive, 1, no. 2 (1987): 109116. [purchase required]

[10] R.K. Johnson, Strategy, Success, a Dynamic Economy, and the 21st Century
Manager, The Business Review, 5, no. 2 (2006).

[11] M.E. Porter, How Competitive Forces Shape Strategy, Harvard Business
Review, 57, no. 2 (1979).

[12] Ibid.

[13] A.A. Thompson, A.J. Strickland, and J.E. Gamble, Crafting and Executing
Strategy, (New York: McGraw-Hill/Irwin, 2009).

[14] Pearce and Robinson.

[15] Thompson, Strickland, and Gamble.

[16] B. Jovanovic and G.M. MacDonald, The Life Cycle of a Competitive Industry,
The Journal of Political Economy, 102, no. 2 (1994: 322347).

[17] C.A. Lai and J.C. Rivera, Jr., Using a Strategic Planning Tool as a Framework for
Case Analysis, Journal of College Science Teaching, 36, no. 2 (2006): 2631.

[18] M.E. Porter, Competitive Advantage: Techniques for Analyzing Industries and
Competitors, (New York: The Free Press, 1980).

[19] Thompson, Strickland, and Gamble.

[20] R.S. Kaplan and D.P. Norton, Using the Balanced Scorecard as a Strategic
Management System, (hyperlink no longer accessible). Harvard Business Review,
74, no. 1 (1996).

[21] Ibid.

[22] Peter Grant, How Financial Targets Determine Your Strategy, Global Finance,
11, no. 3 (1997): 3034

[23] Ibid.

[24] Sidney L. Barton and Paul J. Gordon, Corporate Strategy: Useful Perspective for
the Study of Capital Structure? The Academy of Management Review, 12, no. 1
(1987): 6775.

[25] B.T. Gale and B. Branch, Cash Flow Analysis: More Important Than Ever,
Harvard Business Review, JulyAugust (1981).

[26] H.D. Pforsich, B.K.P. Kramer, and G.R. Just, Establishing an Effective Internal
Audit Department, Strategic Finance, 87, no. 10 (2006): 2229.

[27] Q. Lawrence, Hedging in Perspective, Corporate Finance, 115, no. 36 (1994).

747
About the Author(s)

Pedro M. Kono, DBA, is a professor of finance at Graziadio School of Business and


Management at Pepperdine University and Fox School of Business at Temple
University. He is also the president of Key Financing Solutions, a company engaged
in structuring vendor programs and international financing. Dr. Kono worked for
many years for Citigroup in the U.S., U.K., Japan, and Brazil, and gained significant
international and diversified management experience at commercial banking,
leasing, and finance companies. He obtained his doctoral degree from Wayne
Huizenga School of Business and Entrepreneurship at Nova Southeastern University
and has conducted research in the fields of corporate finance, specifically in the
investment area, and corporate strategy. He is currently researching the market
efficiency hypothesis and the performance of Exchange-Traded Funds (ETFs) in the
U.S., Japan, and Brazil.

Barry Barnes, PhD, is the Chair of Leadership at Nova Southeastern University in


Fort Lauderdale, Florida, where he teaches graduate-level courses in leadership,
strategic decision making, and organizational behavior. In 2009, he received an
Outstanding Research Award at the Global Conference on Business and Finance; he
received a Best Paper Award at the International Global Academy of Business, and
he was selected as Faculty Member of the Year in 2000. Dr. Barnes has published in
the International Journal of Organizational Analysis, The International Journal of
Business Research, Review of Business Research, the Journal of Applied
Management and Entrepreneurship, and other journals. His recent research and
writing focus on the relationship between leadership, organizational change, and
strategy, as well as the innovative and improvisational business practices of the
legendary rock band the Grateful Dead.