Strategy Paper
This is a Working Paper version of my Strategy article accepted for publication in the
Philippine Management Review 2006.
For the ABSTRACT of the Paper, please click here: Strategy Abstract
I. Introduction
Companies have long known that, to be competitive, they must develop a good strategy and then appropriately realign structure, systems, leadership behavior, human resource policies, culture, values and management processes. Strategic management is important because: (1) it results in higher organizational performance, (2) it requires that managers examine and adapt to business environment changes, (3) it coordinates diverse organizational units, helping them focus on organizational goals, (4) it is very much involved in the managerial decision-making process (Robbins and Coulter, 2005).
While there is no single, universally accepted definition for ‘strategy’, definitions are likely to converge on the following: “strategy is a plan—some sort of consciously intended course of action, a guideline (or set of guidelines) to deal with a situation” (Mintzberg et al., 2003). A company’s strategy is management’s action plan for running the business and conducting operations. The crafting of a strategy represents a managerial commitment to pursue a particular set of actions (Thompson et al., 2005).
In this study, an attempt is made to show some evidence of the first reason given above for the importance of strategic management, that is, that strategic management results in higher organizational performance.
II. Review of Literature
To deal effectively with everything that affects the growth and profitability of a firm, executives employ management processes that they feel will position it optimally in its competitive environment by maximizing the anticipation of environmental changes and of unexpected internal and competitive demands. Thus, managers employ ‘strategies’, that is to say, those large-scale, future-oriented plans for interacting with the competitive environment to achieve company objectives. A strategy is a company’s game plan. Although that plan does not precisely detail all future deployments (of people, finances, and material), it does provide a framework for managerial decisions (Pearce and Robinson, 2005).
Part of managers’ decision-making involves control and performance evaluation. For this purpose, firms use various metrics in order to assess whether they are indeed meeting goals and expectations. Firm performance is a multi-aspect phenomenon that is both difficult to measure and is influenced by several factors other than strategy. Studies have shown that organizational performance can be influenced by culture (Deal & Kennedy, 1982; Peters & Waterman, 1982), by human resource management practices (Chew and Sharma, 2005), by leadership (Jones et al., 2000), by the environment (Pearce and Robinson, 2005), by market orientation (Narver and Slater, 1990; Noble et al., 2002), and by strategy (Aragón-Sánchez and Sánchez-Marín, 2005; Andrews et al., 2006), among many other factors.
Strategic thinking, as an emerging critical characteristic of the management process, includes the competitive moves and business approaches that produce successful performance. While it is clear that strategic thinking is an important step to achieving business success, there are many varied approaches to “mapping” the strategic orientations and “thoughts” of a firm. Ozen and Ulengin (2001) build a framework for strategic thinking through a process called “Cognitive Mapping”. Their study resulted in fourteen strategic “thoughts” or elements. Interviews were conducted with three content experts in the area of strategic management, who are professors at the University of the Philippines College of Business Administration. Based on these interviews, ten out of the fourteen strategic elements studied by Ozen and Ulengin turn out to be applicable strategic orientations in the Philippine setting. These are as follows: (1) Developing core business areas through Investment, (2) Having a well-educated, dynamic, creative, proactive and constructive staff, (3) Establishing Managerial Training Systems, (4) Having a Shared Vision, (5) Having Consistent Brands and Image Strategies, (6) Investment in Employees, (7) Making TQM a Standard Group Policy, (8) Producing products that have Competitive Advantages, (9) To be more Adaptive, Flexible, and Dynamic Group, and (10) To be the Leader in Core Business Areas.
The relevance of these ten strategic elements is corroborated by literature on strategic management. For instance, a shared vision, which is the ‘strategic intent’ of the firm, provides clarity on the main intentions and aspirations of an organization. Viewed as a ‘beacon in the distance’ or an ‘animating dream’ (Hamel & Prahalad, 1990), such shared vision encapsulates the desired future state or aspiration of the organization, without which it cannot effectively compete in the marketplace. The vision statement of a wide variety of companies talks about being “the leader” or “the best” (Johnson and Scholes, 2002). The intensely competitive, rapidly changing global marketplace has refined many companies’ visions to simply be an articulation of a basic criterion or characterization of what the company must become to establish and sustain global leadership (Pearce and Robinson, 2005). Thus, having a shared vision as well as being the leader in core business areas appear to be critical strategic elements in business success. Likewise, the importance of human resource (HR) management strategies cannot be overestimated. People lie at the heart of strategy; the knowledge and experience of people can be the key factors enabling the success of strategies (Johnson and Scholes, 2002). The heightened competition in the marketplace has brought about the need to manage HR strategically so that it becomes a source of competitive advantage (Chew and Sharma, 2005). Thus, staff selection and recruitment, managerial training systems, and overall investment in employees must be critical strategic elements as well.
Shareholder value is determined by the strategic cash-generating capability of the organization which, in turn, is determined by the ways in which a wide number of factors are managed. A common business-level strategy selected by many companies in order to properly manage such multiplicity of factors is the investment strategy, which sets the amount and type of resources—human, functional, and financial— that must be invested to gain a competitive advantage (Johnson and Scholes, 2002; Hill and Jones, 1998). Thus, it is reasonable to include the development of core business areas through investment as a strategic element. Also, market orientation is at the heart of modern marketing management and strategy; it is the business culture that most effectively and efficiently creates superior value for customers (Narver and Slater, 1990). Thus, a strong and consistent brand image and reputation is a valuable competitive asset in most businesses (Thompson et al., 2005).
Hypercompetitive industry environments have changed strategic decision making to a large extent. As a result of the intense competition in these industries, some product life cycles have decreased from a period of one to two years to a period of six to nine months, leaving less time for a company’s products to generate revenue. Speed and flexibility have become key sources of competitive advantage for companies competing in these industries (Hitt et al., 2003). Vast changes in the internal and external environments mean that strategies must be flexible. Changes in strategy are inevitable, and incorporating an attitude of adaptiveness and flexibility into strategy design helps forestall difficulties later in its implementation. (Higgins and Vincze, 1993). A system whereby to ensure firms’ success and even survival in this rapidly-changing industrial landscape is Total Quality Management (TQM), which focuses on encouraging a continuous flow of incremental improvements from the bottom of the organization’s hierarchy (Miller, 1998). Emphasizing on customer definitions of quality instead of those derived by the firm, TQM systems have been used in firms across multiple nations and economic regions to increase their competitiveness. Accepted widely as a viable means of improving the firm’s competitiveness, TQM systems have been incorporated in many firms’ strategic planning since the early 1980s (Hitt et al., 2003).
As regards the relationship between organizational performance and strategic orientation, studies have shown that there is a positive and meaningful relation between entrepreneurial and technological orientation and financial performance (Kaya and Seyrek, 2005); that companies adhering to the combined strategy of cost and differentiation outperformed those following pure differentiation or pure cost strategies (Yeung et al., 2006); that market orientation has a substantial positive effect on profitability (Narver & Slater, 1990); that firms possessing higher levels of competitor orientation, national brand focus, and selling orientation exhibit superior performance (Noble et al., 2002); and that organizations which continuously search for new market opportunities through processes of innovation and development in products outperform those which do not (Aragón-Sánchez and Sánchez-Marín, 2005).
III. Theoretical Framework
Competitiveness, in the long run, derives from an ability to build, at lower cost and more speedily than competitors, the core competencies that spawn unanticipated products. The real sources of advantage are to be found in management’s ability to consolidate corporate-wide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities (Hamel & Prahalad, 1990).
These core competencies, around which strategies are designed, typically occur at any of three (3) levels: Corporate, Business unit, and Functional. Strategic decisions at the corporate level tend to be more value oriented, more conceptual, and less concrete than decisions at the business or functional level (Pearce and Robinson, 2005). As such, it is important that management adopt an appropriate “strategic architecture”, and then communicate its intent to the whole organization and the outside world. Otherwise, lack of clarity of strategic intent and strategic architecture would appear to have an adverse impact on financial performance (Hamel & Prahalad, 1990). Indeed, there appears to be some evidence that strategy —especially that which is characteristic of organizations that are innovative, pioneers, and proactive— is an influential determinant of organizational performance (Andrews et al., 2006). This is the theoretical framework followed in this study.
* Taken from Pearce & de Kluver, "Strategy: View from the Top", Chapter 2
(this is NOT the theoretical framework that appears on the final article)
(For the full article, proceed to:
The Library, College of Business Administration, U.P. Diliman, Q.C.)