Strategy as a Concept and Its Importance in Overall Organisational Development - Literature review Example

Business Information and Analysis Executive Summary The paper focuses on strategy as a concept and its importance in overall organisational development. Different schools of strategic management have defined strategy from separate perspectives and the agreement and disagreement found in this regard have been also discussed in the paper. The impact of external and internal environments on strategy development and formulation has been further explained in following sections. Value innovation is an emerging concept, but has a paramount impact on strategy formulation. In this respect, the role of Blue Ocean and Red Ocean approaches towards strategy has been explained, along with the associated methods of constructing strategies. In order to gain a holistic understanding of strategy and factors affecting the same, the rational and irrational approaches to strategy have been critically analysed. Table of Contents Introduction 4 Section A 4 Define Strategy: Evolution 4 Mintzberg’s Five Ps of Strategy 5 School of Strategic Thinking 6 Critical analysis 6 Section B 7 Importance of strategy 7 Rational/planned approach 7 Irrational/dynamic approach 7 Emergent and Rational versus Scenario Planning 8 Value Innovation (Blue Ocean Strategies) versus Red Ocean 8 Critical analysis 9 Section C 10 Crafting strategy from a planned/rational approach 10 Crafting strategy from an emergent/umbrella approach 11 Irrationality in crafting strategy 12 Impact of value innovation on strategic planning 13 Conclusion 14 Introduction Following the vision and mission statement, the most important step in conducting and continuing business in an organization is development of ‘strategy’. Though the concept is ubiquitous in nature, yet there exists considerable ambiguity related to its definition, formation and importance (Andrews, et al., 2009). The aim of this paper is to elaborately define the concept of ‘strategy’, its importance and construction of strategy. Section A Define Strategy: Evolution In true business sense, strategy can be defined using various dimensions. A strategy is developed to determine the directions of overall activities of an organization. Strategy is generally long-term in nature. However, an enterprise can develop short-term strategies as well. In order to have a better understanding of the construct, it is important to study its evolution and developments made (Andrews, et al., 2009). Since its evolution, the definition of strategy has been a semantic issue to a great extent. Various authors have tried so far to examine historical evolution of the concept of strategy, but have been unsuccessful. The paper aims at developing a definition from commonalities of the earlier explanations. The term ‘strategy’ was developed from a Greek term ‘strategos’, which means “planning destruction of enemies by effective utilization of resources” (Bracker, 1980). The concept is largely used in military and political contexts and has been a subject of discussion for historical authors and individuals such as, Shakespeare, Kant, Mill, Tolstoy, Yamamoto, Hitler and Napoleon. Implementation of ‘strategy’ in the business world had become prominent post World War II as the era observed progressive changes in terms of development of a competitive environment in the stable business sectors. Ansoff had ascribed these changes to certain factors such as, accelerated changes within organization and increased involvement of science and technology in management process. Modern authors such as, Von Neumann and Morgenstern, had initially linked ‘strategy’ with their theory related to games. Since then, several other authors have contributed towards development of the concept. Authors such as, Hofer and Schendel, observed that there are three areas where most researchers had disagreed. These areas are wideness of the concept, relevant components and inclusiveness of the strategy construction process. From the various definitions proposed by the authors, certain common characteristics of strategy were developed, which are situational analysis to determine a firm’s position in its respective industry and efficient resource allocation to achieve organisational goals (Bracker, 1980). Mintzberg’s Five Ps of Strategy According to Henry Mintzberg (1987), a single definition of strategy does not suffice for explaining various dimensions of strategic management. Consequently, he proposed five terminologies in order to explain the structure of strategy, namely plan, ploy, pattern, position and perspective as well as the interrelationship between these terminologies. Plan: Mintzberg had explained that any strategy is an action plan devised to serve a certain purpose. Hence, it can be suggested that strategies are to be prepared prior to any activity and caution should be taken while developing the strategy. Ploy: The author proposed that strategy as a ploy is necessary to develop so as to have advantage over the competitors. Strategy is required to influence and discourage the competitors. In this context, the author considered the game theory as an appropriate tool for developing competitive strategy as a ploy. Pattern: Mintzberg added that strategy as a plan and ploy is inadequate to explain its broad scope. A strategy can be developed from consistent behaviour observed within an organization and its interaction with the external business environment. So, the third definition explains strategy as a pattern based on consistent behaviour or past experience. Position: The rationale behind defining strategy in terms of position is to highlight on the position of an organization in its respective industry or marketplace. An organization needs to develop a strategy for establishing its position in the market, to consumers and in the industry for gaining sustainable competitive advantage. Perspective: Organisational culture and behaviour have a profound impact on strategic decisions of a firm. Consequently, strategy can be developed from cultural and behavioural perspectives. Mintzberg, keeping in view these reasons, defined strategy as perspective (Mintzberg, 1987). School of Strategic Thinking Under the purview of strategic management, two models are applied for designing strategy for a firm, namely industrial organization (I/O) model and resource based model. These models analyse the external and internal environments of an organisation respectively in order to develop a strategy for earning superior profit. The I/O model helps an organisation to utilise its knowledge and skills to devise strategy that will identify and exploit existing opportunities in a high-potential industry. An organisation, under this model, need to evaluate components of the external environment (macro indicators of economy, competitors, technologies and other factors) using the PESTLE tool so as to recognise and capitalise on underlying opportunities while eliminating the threats. In context of SWOT analysis, the I/O model focuses mainly on the external factors for developing on strategies. The I/O model enables an organisation to recognise the potential sectors within an industry for extracting competitive benefits (Pepall, Richards and Norman, 2005). The resource-based model recognises critical resources from the internal environment of an organisation, which can contribute towards achieving competitive advantage. The resources comprise manpower, technologies, expertise and knowledge in the shape of strength and weaknesses of the organisation. According to the model, the strategy to superior returns should be such that it incorporates necessary resources, develop capabilities and align them for the purpose of capitalising on the existing opportunities. The model suggests that an appropriate strategy for earning better profit is to utilise internal resources so as to develop standardized as well as differentiated products as per market demand (Barney and Clark, 2007). Critical analysis In this section, the evolution and definition has been elucidated elaborately. The studies show that the concept of strategy is quite old and had originated from Greece. Post World War II, the concept started gaining attention and eventually was implemented by various organisations to develop their competitive positioning. The five Ps of Mintzberg (1987) related to strategy explains broadness of the concept. The theory suggests that narrowing down the concept may result in distortion of dimensions and aspects associated. These five Ps provide a comprehensive structure to the concept of strategy. Alongside, it was also observed that the strategic competitiveness models such as, industrial organisation model and resource based model, play an important role in determining strategy of a firm for earning above average returns. In addition, it was also noticed that the I/O model and resource based model collectively form a complete model as the former is based on components of the external environment, while the latter is based on that of the internal environment. Section B Importance of strategy Strategy is considered as the most important intangible asset of an organisation. According to various authors there are two major approaches that need to be considered while determining the importance of strategy. The first approach is planned or rational approach, while the other one is known as dynamic or irrational approach (Acur and Englyst, 2006). Rational/planned approach According to the rational approach, strategy is the primary responsibility of the top management. The upper-level management frames the strategies and delegate them to the operational level. A strategy is an integral part of organisational culture and tradition, which is developed in a structured and sequential manner as a part of planned approach. The rational approach can be better understood through the theory of rational choice. The theory explains that an appropriate strategy development require unambiguous flow of knowledge and impact of various alternatives. In addition, the rational approach follows a systematic procedure for evaluation of strategies (Heuser, 2010; Hill and Jones, 2007). Irrational/dynamic approach The dynamic or irrational approach depends on the environmental components of an organisation or considers these factors while determining organisational strategy. The dynamic approach explains that the environmental components are generally volatile, complex and highly uncertain. Consequently, the strategies must be dynamic in nature. The dynamic approach increases flexibility level of a strategy. One of the examples of dynamic approach to strategic management is emergent strategy. Emergent strategy can be stated as one that is developed during contingency using available resources and within a limited time frame (Andersen, 2004). Emergent and Rational versus Scenario Planning The emergent strategies can be explained as a set of actions that are generally devoid of long-term planning and are devised at contingent situations. These strategies are highly flexible in nature and are developed using limited resources. Emergent strategies are framed when unexpected opportunities or threats surface and limited time period is available to take any action. However, emergent plans are not any kind of accidental plan; every organisation needs to prepare for exigencies while developing its corporate strategy. Emergent plans act as back-up in an event of failure of primary plans. It often enables an organisation to have competitive advantage by recognising unexpected opportunities. Scenario planning is an important aspect of strategic management, which surfaces when tradition forecasting fails to predict a particular situation. The present business environment is highly dynamic in nature and equally turbulent. In such a situation, although business opportunities are increasing, the threats are heightening at a rapid rate as well. Scenario planning does not predict the future, but provides logical reasons pertaining to actions required to be taken in a particular situation. Scenario planning ensures the survival of an organisation even with limited resources. It has been observed that several aspects of scenario planning align with that of system thinking approach. A rational planning structure follows the planned approach to strategic management. It mainly takes in consideration the organisational behaviour and culture. The planning process is a lengthy one and slower than that of emergent and scenario planning. Organisations following such approach are highly structured in nature with little scope of flexibility. The rational planning model is most suited in a stable business environment with smooth flow of data and information (Hill and Jones, 2007). Value Innovation (Blue Ocean Strategies) versus Red Ocean Innovation that lacks value is generally technology driven and more directed towards pioneering the market place. Value innovation, as the name suggest, place higher emphasis on involvement of value in innovative activities undertaken by a company. It primarily focuses on value creation at a progressive rate along with gaining market share owing to innovation. Value innovation is considered as the cornerstone of the Blue Ocean strategy. The Red Ocean companies follow a conventional approach in their activities and are driven by high level of competition. Through increased competitiveness, they have a tendency of building defensive position in the industry. In the Red Ocean enterprises, boundaries of the operations are defined and rules of competition are clearly explained. On the contrary, the Blue Ocean organisations are driven by value innovation as opposed to competitiveness. These organisations seek untapped opportunities and market sectors, create demand and generate profit. Value innovation helps in framing a strategy that helps to create a holistic organisation with interlinked activities. The Blue Ocean companies regard competition as an irrelevant factor in their developmental process, while the Red Ocean companies aim at gaining greater market share by outperforming their rival companies (Kim and Mauborgne, 1997; 2005). The assumptions of Red Ocean strategy include pre-existing structural conditions of any industry wherein firms must compete to survive; this approach is frequently termed as Reconstructionist approach. These firms generally have limited strategic choices such as, differentiation or low cost, while the Blue Ocean organisations combine or recombine available resources in an innovative manner for securing competitive advantage at the least cost (Hsiao, 2005). Critical analysis Every planning requires a unique strategy, which is developed based on either planned approach or dynamic approach. Both these approaches have their respective merits. The rational approach ensures that strategy making process follows the top-down approach, where decisions are mainly taken at top level and delegated to the lower levels. However, dynamic approach is highly unconventional and flexible in nature and is useful in case of emergent planning situation. The above section has further discussed and contrasted various strategy-based planning methods such as, rational, emergent and scenario planning. It was observed that in the present day contingent environment, emergent and scenario planning strategies are more appropriate. The building blocks of Red Ocean and Blue Ocean organisations and their differences have been highlighted in this section. Red Ocean organisations were found to be highly structural in nature and driven by competition, while the Blue Ocean organisations rely on technological possibilities and improvise upon resources for acquiring innovative output. The Blue Ocean organisations can be considered more sustainable due to high degree of flexibility in their business approach and value innovation. In this context, it was also understood that the importance of value innovation is increasing at a rapid rate and organisations are expected to shift their strategy from Red Ocean to Blue Ocean. After critically analysing the various aspects of strategy and its implication on business environment, it can be suggested that strategy does play an important role in organisation. In other words, it answers the question that has been asked in the given section. Moreover, the rigidness of red ocean approach makes it a less environment friendly strategic approach; on the contrary, keeping in view the growing instability in the business environment, it is important for organisation to undertake value innovation for competitive advantage. Thus, the blue ocean approach can be considered as the most recommended strategy for organisations. Section C Crafting strategy from a planned/rational approach The strategy formulation process under the rational approach can be classified under three segments: Strategic analysis Strategic choice Strategic implementation Strategic analysis is the process of investigating the present strategic position of the organisation. The foremost step in this regard is classification of high potential business sectors in relevant and irrelevant segments with respect to a firm’s activities. In order to understand the strategic position of the organisation it is necessary to analyse various environmental constrains existing within the internal and external environment of the organisation. The environment analysis is conducted using tools such as, PESTLE and SWOT analysis, for determining comprehensive attractiveness of the market. PESTLE (Political, Economic, Socio-cultural, Technological, Legal and Environmental) aspects of the organisation, when analysed, helps in understanding the prevailing scenario in the industry and market based on which the organisation can frame the strategies. SWOT (Strength, weakness, Opportunities and threats) analysis is undertaken to develop organisational capabilities and functional competencies that can be aligned with framed strategies. SWOT analysis also helps the organisation in neutralising internal weaknesses. The rational approach thrust upon consideration of prevailing assumptions, culture and beliefs within the organisation along with expectations and power of various stakeholders of the organisation (Hill and Jones, 2007). According to the strategic choice theory, the primary strategic options that an organisation has are growth, acquisition, diversification and standardisation. These strategic choices are evaluated by the higher management and all relevant decisions are taken by senior level management employees from various departments. The pertaining decisions of the senior management team are evaluated on the basis of relative merits of each choice and its feasibility. In addition, the cost benefit analysis is also conducted so as to understand cost incurred and benefits gained by the company. According to Pearce and Robinson (2000), feasibility tests generally include pilot testing, net present value and return analysis. After evaluation every aspects and weighing cost and benefits of each strategic choice, the organisation selects the most appropriate alternative (s). According to Michael Porter, the competitive strategies can be cost leadership, differentiation and focus based. Implementation of strategy is the most complicated step in the strategy formulation process. The success of implementation process is highly dependent on the organisational structure and its existing culture. The structure is determined by the operations and functionality of the organisation. The structure in this context can be either mechanistic or organic in nature. In this step, the organisation needs to focus on aligning its resources according to the needs of the strategy. Most strategies and their implementation involve certain changes in the organisation, change management in this situation is very important to manage resistance and anxiety among employees (Pearce and Robinson, 2000; Acur and Englyst, 2006). Crafting strategy from an emergent/umbrella approach The advantage of rational approach is that the complexities lying within an organisation are effectively minimised by way of framing a strict structure of functionality. However, Mintzberg (1987) suggested in his research that only a limited number of strategies based on rational approach are implemented in the real world. On the contrary, the emergent approach appears to be more realistic, dynamic and flexible in nature. Under the purview of the umbrella approach, the strategies are developed as a result of changing market scenario and business environment. As a result, the strategies are comparatively fluid in nature. Strategic innovation is one of the major considerations while formulating an emergent strategy as it results in growth strategies, innovative products, technological development and creation of new business models. The emergent strategies are based on quick decision making abilities of the managers as well as employees and are influenced by culture and power structure of an organisation. The emergent approach views strategy formulation as a creative task. According to the approach, in practical situations, the managers are provided with limited timeframe and resources in order to manage an emergent situation. In such circumstances, the decisions are taken based on past experiences and knowledge sharing. Studies suggest that emergent strategies result from behavioural patterns where one thought leads to another, till a new pattern or strategy is developed. This process was defined as Incrementalism by Lindblom (Andrews, et al., 2009). This approach does not have any specific structure and every employee has a right to participate in the decision making process. The tall hierarchies are diminished in this approach. Emergent strategies are crafted by involving value innovation, sustainable differentiation and integrated decision making in the process. The decisions are evaluated keeping in view past, present and future requirements. This is followed by allocation of the resources and implementation of the most suitable alternative (Pearce and Robinson, 2000). Irrationality in crafting strategy In strategic decision making, the role of irrationality is gaining importance from marketers and academic researchers. A number of authors have suggested that irrationality, when combined with rationalistic view of a business, can result in creation of competitive advantage. The irrationality approach takes in consideration emotions and perception of individuals regarding business creation and development (Mohiuddin and Qin, 2013). Irrationality is important for positioning and targeting consumers so as to understand emotions and expectations of the consumers. Lack of irrationality or high degree of logical decisions has often resulted in business failure for several organisations such as, Coca Cola. Whereas, brands such as, Harley-Davidson, have been very successful by way of ensuring that strategies are developed through irrational approach (Andersen, 2004). Fournier (1998) explained that it is the human aspects of a brand that secure consumer loyalty; hence, relevant strategies must be crafted based on dimensions of irrational approaches. Coping with global competition and unstable business environment has further compelled organisations to undertake irrational approaches in their strategic decision making so that sustainability can be practiced in the operations. Irrationality ensures effective decision-making even with limited resources as it utilises the intrapreneurial skills of every organisational member. Moreover, the irrational approach enables the management to constantly observe and monitor the internal and external environment for changes, risks and threats in order to be neutralised at the right time. Irrationality is gradually gaining recognition in strategy formulation because hierarchical approach to strategy planning is neither cost efficient nor resource and time efficient (Fournier, 1998). Impact of value innovation on strategic planning Kim and Mauborgne (1997) had proposed in their paper that value innovation is a strategic choice for organisations seeking incremental growth in their respective industries. Innovation is important for every organisation, but value innovation is a more holistic approach as it differs from conventional strategies on five aspects. These aspects have been discussed as follows: Industry Assumptions: Under the rational approach, organisations assume that structure of the industry is permanent in nature and they must compete within the framework to earn superior position. However, value innovation, firstly, considers the industrial structure as flexible and mouldable and secondly, views intra-industrial competition as an irrelevant factor for growth. So, under value innovation, strategies are crafted in such a manner that organisations strive to improve overall performance progressively, irrespective of the competitors’ activities. Strategic Focus: Competition being no benchmark for the Blue Ocean companies (value innovators), these organisations are more focused on developing strategies that will enable them to exploit critical resources in a sustainable manner and limit wastage (Aiman-Smith, et al., 2005). Consumers: Unlike conventional planned approach, value innovators concentrate upon serving value in exchange of payment to consumers in form of products. The value innovators consider consumer perception and their requirements while designing the products. It targets mass consumers by recognising commonalities in the consumer demand. Asset and Capabilities: Value innovation ensures that strategies are framed in such a manner that an organisation is able to fully utilise its capabilities and resources, as opposed to leveraging them to acquire new assets. Value innovation induces optimum allocation and utilisation of resources and reduction of wastage. Product and Service Offerings: Value innovation blurs organisational boundaries while formulating strategies related to products and service offerings. The focus of value innovation is on creating and serving commodities that is beyond traditional offering of the industry and meeting consumers’ satisfaction level (Kim and Mauborgne, 1997; 2005). Conclusion In the paper, the evolution of strategy was studied. It was observed that strategy was initially implemented in military activities, however, with time important of strategy increased in business sectors. According to Mintzberg (1987), Strategy is a plan that can be long or short term and permanent or flexible in nature depending upon an organisation’s requirement that is devised to serve organisational goals of achieving growth and earning profit. He further explained strategy through the ‘Five Ps of Strategy’. Due to the broadness of the concept, it is often quite complicated to determine the importance of strategy. It was eventually observed in the paper that strategy development is one of the important organisational decisions, which provide direction to the mission and vision of an enterprise. The paper has highlighted various kinds of strategies, namely, emergent, rational and scenario planning that organisations formulate in order to achieve the desired goals. The strategies are primarily developed based on two major approaches, namely rational and irrational. On the basis of the implemented strategy, organisations are further classified into Blue Ocean and Red Ocean organisations. The blue ocean organisations exhibit prioritisation of value innovation in their operations while red ocean organisations are mainly driven by intra-industry competition. After gaining insight about these kinds of organisations, it was possible to develop a clear understanding of role and importance of strategy. In the third section, the paper focussed on the various strategic approaches for the purpose of crafting or constructing strategy in an organisation. For formulating strategy in an organisation, it is important to analyse the internal and external environment, understand the environmental factors that affect organisational structure, determine the appropriate strategic framework and implement it. 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