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Summary of the book Foundations of Strategy for the course Strategy and management at UU.
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Foundations of strategyChapter 1
The concept of strategy
The role of strategy in success
Strategy is not a detailed plan of instructions. It is a unifying theme that gives coherence and
direction to the actions and decisions of an individual or organization.
Successful strategy consist of:
1. Goals that are simple, consistent and long term.
2. Profound understanding of the competitive environment.
3. Objective appraisal of resources.
4. Effective implementation.
Strategy today
Enterprises need business strategies for much the same reasons that armies need military strategies:
to give direction and purpose, to deploy resources in the most effective manner and to coordinate
the decisions made by different individuals.
Distinction between Corporate Strategy and Business Strategy:
- Corporate strategy: defines the scope of the firm in terms of the industries and markets in
which it competes. Corporate strategy decisions include investment in diversification,
vertical integration, acquisitions and new ventures; the allocation of resources between the
different businesses of the firm; and divestments. Poses question: where to compete?
- Business strategy: is concerned with how the firm competes within a particular industry or
market. If the firm is to prosper within an industry, it must establish a competitive advantage
over its rivals. Hence, this area of strategy is also referred to as Competitive Strategy.
Poses question: How to compete?
Hierarchy of strategy statements put out by management”
, 1. Mission statement: ‘Why we exist’
2. Statements of principals and values: ‘What we believe and how we behave’
3. Vision statement: ‘What we want to be’
4. Strategy statement: What the competitive game plan will be.
Mintzberg: Intended, Realized and Emergent strategy:
- Intended: Strategy as conceived by the top management.
- Realized: Actual strategy implemented.
- Emergent: Decisions that emerge because of the external environment.
In practice, strategy making almost always involves a combination of centrally driven rational design
and decentralized adaptation. In all the companies we are familiar with, strategic planning combines
design and emergence – a process that Grant refers to as planned emergence. The balance between
the two depends greatly upon the stability and predictability of a company’s business environment.
Strategy improves decision making in several ways:
1. Strategy simplifies decision making by constraining the range of decision alternatives
considered and by acting as a heuristic (a rule of thumb) that reduces the search required to
find an acceptable solution to a decision problem.
2. A strategy‐making process permits the knowledge of different individuals to be pooled and
integrated.
3. A strategy‐making process facilitates the use of analytic tools.
Stakeholder approach:
The firm is distributed between different stakeholders (such as: employees, lenders, landlords,
governments and owners). The management needs to balance these, often conflicting, interests.
Stakeholder Analysis is a tool for understanding and prioritizing the needs of stakeholders. Key steps
in stakeholder analysis:
- Identifying potential stakeholders.
- Ranking stakeholders on importance.
- Identify criteria where each stakeholder would judge the firm on.
- Deciding how well the firm is doing from each stakeholders perspective.
- Identify what can be done to satisfy each stakeholder.
- Identify long term issues with stakeholders.
, Stakeholder interest refers to a particular stakeholder’s political interest in an organization or issue
rather than merely their degree of inquisitiveness. Stakeholder power refers to the stakeholder’s
ability to affect the organization’s or the issue’s future.
Shareholder approach:
Most English‐speaking countries have endorsed shareholder capitalism, where companies’
overriding duty is to produce profits for owners. During the 21st century, shareholder value
maximization has come to be associated with short‐termism, financial manipulation, excessive CEO
compensation and the failures of risk management that precipitated the 2008/9 financial crisis. The
responsibilities of business to employees, customers, society and the natural environment are
central ethical and social issues. The world’s most consistently successful companies in terms of
profits and shareholder value tend to be those that are motivated by factors other than profit. Why
does the pursuit of profit so often fail to realize its goal?
1. Profit will only be an effective guide to management action if managers know what
determines profit. Obsession with profitability can blinker managers’ perception of the real
drivers of superior performance.
2. Motivation: Success is the result of coordinated effort. The goal of maximizing the return to
stockholders is unlikely to inspire employees and other company stakeholders and it’s
unlikely to be especially effective in inducing cooperation and unity between them.
CSR = Corporate Social Responsibility.
Milton Friedman declared CSR to be both unethical and undesirable. Unethical because it involved
management spending owners’ money on projects that owners had not approved of and
undesirable because it involved corporate executives determining the interests of society. Main
arguments for prioritizing shareholder interests and seeking to maximize profits rather than returns
to other stakeholders are:
- Competition: erodes profitability. As competition increases, the interests of different
stakeholders converge around the goal of survival. Survival requires that, over the long term,
the firm earn a rate of profit that covers its cost of capital; otherwise, it will not be able to
replace its assets.
- The market for corporate control: Management teams that fail to maximize the profits of
their companies will be replaced by teams that do.
- Convergence of stakeholder interests: Even beyond a common interest in the survival of the
firm, there is likely to be more community of interests than conflict of interests among
different stakeholders.
- Simplicity: A key problem of the stakeholder approach is that considering multiple goals and
specifying trade‐offs between them vastly increase the complexity of decision making.
Strategic management of not‐for‐profit organizations
Strategy is as important in not‐for‐profit organizations as it is in business firms. The benefits we have
attributed to strategic management in terms of improved decision making, achieving coordination
and setting performance targets may be even more important in the non‐profit sector. Moreover,
many of the same concepts and tools of strategic analysis are readily applicable to not‐for‐profits,
, albeit with some adaptation.
For businesses, profit is always a key goal since it ensures survival and fuels development. But for
not‐ for‐profits, goals are typically complex.
In many markets (theatres, sports clubs, vocational training) for‐profits and not‐for‐profits may be in
competition with one another. Indeed, for these types of not‐for‐profit organizations, the pressing
need to break even in order to survive may mean that their strategies do not differ significantly from
those of for‐profit firms. In the case of not‐for‐profits that do not charge users for the services they
offer (mostly charities), competition does not really exist at the final market level. However, these
organizations compete for funding: raising donations from individuals, winning grants from
foundations or obtaining contracts from funding agencies.
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