A choice of a certain strategy in business - Essay Example

?  Management strategy “The essence of strategy formulation is coping with competition. Competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry.” M E Porter 'How Competitive Forces Shape Strategy', Harvard Business Review, March/April, 1979. Management strategy Abstract A choice of a certain strategy in business is the determinant factor of a future success. Under conditions of turbulent environment there is a need for businesses to react properly to various changes in the global context of the world. On the example of case-studies of different companies and the challenges they face with, this paper underlines the necessity to develop a more flexible and multi-sided strategic decision making. The main concepts for further research were borrowed from theoretical developments of Mintzberg (1998), Johnson et al (2008), Child (2005) and others. The specific question of the research study is : “….. adopting a simple profit-maximising perspective ..... can have positive impacts for a firm .....”. This claim is considered in terms of emergent and prescriptive approaches. Such companies, as Microsoft, Nokia and PowerCo emergent approaches are correlated with strategic decisions to increase their profits. The strategic developments within the modern companies are dynamic and flexible. This trend can be explained by the necessity for the companies to be more responsive in the global business world. Further on, we should underline the importance of financial and organizational issues of every firm and the company for a proper development of their future management strategies. Introduction Under conditions of the modern globalization there are evident trends of convergence and unification. Strategic decision making should be based on mutual understanding between the managers and employees and all parties involved should be ready to react to the immediate changes in the world. Current ‘management techniques’ are challenging and they should be considered in detail by the managers and the employees within every company and a firm with respect to the specific features of the inner structures of their organizations. The strategic management is a helpful tool for “choosing the right place for defining a unique position, making clear trade-offs, a tighter fit; it involves a comprehensive approach to managing all important aspects of the company's internal environment and it therefore significantly differs from other management techniques” (Child, 2005). Business planning and development strategies if developed under conditions of a dynamic environment should be focused on management strategies, which are responsive for structural, processing, systematic and cultural environmental changes. This discipline implies activities planning which are relevant to the orientation and functioning of the corporation. Profit-maximization perspective in the emergent approach of strategic management is a crucial technique for the modern managers and it should be noted that the contrasting strategy is the perfect example of discussion about profit-maximization policies. The field of contrasting strategy is a perfect field for focusing on owner-managed firms and professionally managed firms in their relation to profit maximizing perspective. The objects and behaviors of different firms may differ, but at the same time it is necessary to mention that profit maximization is “an oversimplified models of competitive interaction” (Volberda and Elfring, 2001). There is a close relationship between economics and strategy. In accordance with Mintzber (1992) “as never before, [strategic management] academics have adopted the language and logic of economics.” In the context of neoclassical economics a profit is the maximizing entity, which enables inputs transformation into outputs. Still, there are many opponents of profit-maximization perspective, because the modern companies are more concentrated on gaining money hand over fist and very often neglect social or organizational issues. Strategic management: main concepts In accordance with Mintzberg (1998) strategic management is divided into ten models or 'schools'. The company begins developing its strategy when it wants to satisfy the needs of their customers better than their rivals. Strategic management led to positive outcomes more than 90% of the companies (Volberda and Elfring, 2001). There are numerous factors, which should be taken into account by the companies, such as setting of future directions; analysis of the external environment; considerations about human resource management; easy-going communication within the company. Therefore, Mintzberg claims that to deal with the environmental changes is one of the most crucial concerns for the companies. With this respect, a simple profit-maximizing strategy of the company is not the best choice for a potential success. It is essential to analyze potential strategic decisions for the company on the basis of a ‘top-down’ strategic model proposed by Mintzberg. The following steps are the most important ones: mission-objectives-situation analysis-application-control (Mintzberg, 1998). Strategic planning is a complex approach and numerous factors should be taken into account in order to reach maximum benefits. Therefore, the profit-maximizing perspective is not enough to cover all aspects of strategic management. Firstly, profit maximization is aimed only at for-profit sector. To maximize profit means to maximize shareholder’s value. It is the opinion of the one school. Thus, a consulting firm is established as a corporation with the sale of company stock only to the employees with the level of "principal." When the year ends, sales return at rate 40%. Some bonuses are returned to principals and other money is invested into other firm’s assets. Thus, sales return is only 10%. Taxes are paid only on 10%. In the result shareholder value does not increase. In case the company aims at long-term survival, then we should consider profit as cost of doing business, as Peter Drucker puts it.Therefore, it is better to look for long-term decision making in order to balance the needs of stakeholders. The company does not operate for profits maximization only. It is a wrong goal. Profits are required for covering potential risks of economic activities of the company. The relation between maximizing profits is measured by marginal cost that equals to marginal revenue. Optimization is the required transformation in the name of profit maximization within the company. Under conditions of the standard economic theory, individuals or production may consume the resources in the firms. Consumption leads to profit maximization. In accordance with theoretical developments by Pettigrew and Fenton (2000) the “entire process is concerned with utility maximization, but some activities, identified as production (for use by others), deliver utility indirectly to factor owners through the easing of their household budget constraints” (Pettigrew and Fenton 2000, p. 34). Thus, a key assumption underlying our typical view of firms as profit maximizing entities is that utility maximization targeted by owners is the best goal for enrichment of the company. Moreover, profit maximization goal is designated by the specific nature of the firm, where “the relative amounts of ownership claims held by insiders (management) and outsiders (investors with no direct role in the management of the firm” (Ibid.). Within the companies of dispersed ownership and the companies concentrated inside ownership there are different strategic goals. Very often the companies are focused on economic attractiveness of the firm in the international market. Managers are often focused on potential profitability of the firm. With respect to owner-managers are, they are influenced by idiosyncratic non-monetary goals and are more concerned about market attractiveness. Owner managers are able to combine the firm’s production and consumption together with nonfinancial goals. Utility maximization may not be always consistent with profit maximizing behavior on behalf of the firm. In comparing these two types of companies, it is possible to illustrate the way profit maximization perspective can be both positive and negative for the company. On the basis of empirical data on the owner-managed companies and the strategies on their entry, exit, and pricing, these firms were responsive to economic changes in the market. On the one hand, there are different resources available for owner-managed and professionally managed firms. It is more expensive to enter economically attractive market and financial resources are more available for professionally managed firms. On the other hand, resources play different role for enter and exit of the firms from the markets. In accordance with the modern researches and studies in this field, the family firms for theoretical profit-maximizing may avoid agency problems. There are numerous factors influencing inconsistent policies of profit-maximization goals: “One factor that is largely credited with sustaining firms is the profit motive. Profits are a vital ingredient in capitalism which energizes investors and entrepreneurs to take risk and seek new opportunities. Indeed, profit for firms is just like the soul to a living creature. Without profits, firms in a free market economy would find it impossible to be a generator of economic value” (Johnson, Scholes, Whittington, 2008). This is a strong point concerning advantage of profit-maximization perspective. Therefore, with respect to individual concerns of the firms and companies it is possible to develop this perspective. Nevertheless, the profit-maximization strategy should be considered as a sound strategic approach. Family-managed firms use their resources both for production and consumption. Moreover, owner-managed companies are weaker competitors interested in their enrichment and they are lacking of resources available for professionally-managed firms (Cesnovar, 2006). It should be also mentioned that many firms are in the searching for “profit maximization” policy. They require too much energy and potential in order to pursue their goals. Sometimes this policy is positioned as an intimidating factor for the society and organizations. The majority of the modern companies are looking forward increase of their profits in spite of potential corporate scandals, violation of corporate responsibility and reliability etc. The modern firms are more often the economic actors. Their moral and social norms play a crucial role in the modern business world (Johnson, Scholes, Whittington, 2008). The representatives of capitalism theory underline that corporation may succeed from profit-maximization policy in case they take into account not only potential benefits gained, but also human dignity. Practical implementation of strategic model of profit maximization Under conditions of the modern turbulent business world, there is a need to differ between prescriptive or emergent strategic approach. Profit maximization strategy is consistent with long-term planning and prescriptive approach is more relevant to the firms, who are focused on this approach. In terms of consequential and deterministic process of company’s internal and external environment analysis, it is possible to create a long-term plan for the firm. Hendry and Pettigrew (1992) claim: the firms gain profits from a systematic strategy planning. In terms of prescriptive approach the companies are focused on long-term planning and they are more ready and open for external changes. Still, the modern turbulent world it is necessary for the companies to develop dynamic strategies in order to cope with a current situation in the market. Creative potential of employees and managers is on halt in terms of prescriptive approach. An emergent approach is discusses by Mintzberg and his ideas about the necessity to adapt to the changing market environment: “strategies can be unplanned, developing incrementally over time as businesses actions adapt to a changing reality” (Mintzberg, 1998, p. 76). The perfect example of the emergent strategy is the Microsoft Company. It has never limited its strategies and policies by mission or goals statements. This company was more focused on ‘diversification or restructuring’ than on profit maximization. Another example of emergent approach is the case study of the company PowerCo. This company operates internationally and there is a need for the constant changes, strategic development and employees’ training. They enabled employees to develop their professional skills and working experiences. Thus, it was easier for the managers of the company to develop their strategy with respect to the main claims by Pettigrew et al. (2000) 1) strategic managers of PowerCo are focused environmental changes. 2) PowerCo develops employees’ abilities which are unavailable for the rival companies. 3) Philosophy development by PowerCo. 4) Employees participation in Government Grants (Cesnovar, 2006). We can correlate strategies implemented by PowerCo as their intention to maximize profits by means of their employees’ knowledge development. A well-known case study of Nokia Company is a good example of effective implementation of emergent approach. The great challenge experienced by the company in 70s resulted in the company’s implementation of a ‘growth vision’. The company was focused on internationalization, development of high-tech products share and competitiveness of the businesses maintenance (Johnson, 2008). Therefore, profit maximization was also targeted by the company, but it was necessary for the development of the internal and external power of the company. Therefore, in the modern business world the issue about innovative developments in strategic management is high on the agenda. It should be noted that strategic management should be considered as a wide-scope phenomenon, which covers such issues as profits gaining and the company’s development at all levels (Hendry, Pettigrew, 1992). It should be noted that under conditions of profit-maximization perspective there are no well-developed methodological and theoretical bases in this field. There are many advantages of traditional implementation of strategic management, but it is required to make it more specific to every company and firm. The issue of individuality and uniqueness in the modern business context is very important. Any strategy can be beneficial for the company it is only should be noted that the flexible nature of different strategies should be correlated with the specific nature of strategic management practices. Conclusion Consequently, strategic planning and profit-maximizing perspective is a perfect way for any company to develop their potential and become more competitive internationally. Strategic management implies the presence of diversity issues. Emergent approach is more compatible with profit maximization of the company than long-term planning. It is possible to see on the example of the abovementioned firms and companies that profit maximization is financial resources spent on company development and goods production. There is a strong correlation between the fixed costs and the variable costs. In order to well-balance this ratio, it should be noted that spent expenses are considered to be constant and the firms should be ready for potential financial expenditures. Variable expenses are dynamic and may be changed in a certain period of time. To gain the maximum amount of profit means to manage fixed costs in the name of the best potential benefit or advantage. There is a need to evaluate whether variable costs are necessary or not. Different operations of the firms or the companies depend on the choice of the appropriate strategy and avoid negative impact exerted on the produced goods. Profit maximization very often extends the limits of the production process. There is a need, for example, to make investments into wise advertising campaign designated especially for the company. References 1. Cesnovar, T., 2006. The Impact of Strategic Management on Business Outcomes - Empirical Research. Journal for East European Management Studies 11(3): 227+. 2. Child, J., 2005. Organisation: Contemporary Principles and Practice. Blackwell Publishing. 3. Hendry, C., Pettigrew, A., 1992. Patterns of strategic change. Development of Human Resource Management 3 (3):137+. 4. Johnson, G., Scholes, K., Whittington, R., 2008. Exploring Corporate Strategy, Text and Cases. 8th edition. Hemel Hempstead, Prentice Hall. 5. Lynch, R., 2006. Corporate Strategy. 4th edition. Harlow, FT, Prentice Hall. 6. Mintzberg, H. et al, 1998. Strategic Safari. Hemel Hempstead, Prentice Hall. 7. Pettigrew, A., Fenton. E., 2000. Business & Economics. 8. Rodrigues, S. & Child, J., 2008. Corporate Co-evolution. Blackwell 9. Volberda, H. & Elfring., eds, 2001.Rethinking Strategy. Sage, London. 10. Whittington, R., 2002. 2nd Edition. What is Strategy and does it matter? UK, Routledge. Read More