Chapter 1 – The Strategy Process
Organisational ecosystem network of organisations, customers, suppliers, distributors,
competitors, government agencies etc involved in delivery of product/service, through cooperation
or competition.
All constituents impact each other, creating an evolving relationship where each participant needs to
be flexible and adaptable. Was initially botanical in terms of organisms that interact to survive.
James Moore identified similarities between botanics and business. These participants of an
ecosystem will span multiple industries.
Strategy course of action, including specification of resources required, to achieve a specific
objective. It is the direction and scope of an organisation over the long term, achieving advantage
through configurating its resources in a changing environment, to meet the needs of its markets and
fulfil stakeholder expectations.
Johnson, Scholes and Whittington setting future plans, but requires thorough understanding of
the organisation’s resources (like cash, assets, staff), the ecosystem it operates in (customers,
competitors, governments etc), and its stakeholders and their expectations (those who have an
interest in the business). Knowing these characteristics will help to decide on best way to achieve
sustainable competitive advantage, through formulating an appropriate strategy to best target these
key features of the business and its environment.
Their book outlines characteristics of strategic decisions they are likely to be affected by scope of
business activities, involves matching activities to its ecosystem, and must be matched to its
resource capability and capacity, strategic decisions will impact operational decisions, these
decisions will be affected by the expectations and values of those who have the power, and are apt
to long-term direction of the organisation. FORMULATING COMPETITIVE STRATEGY IS RELATING A
COMPANY TO ITS ENVIRONMENT.
A long-term planning approach can be beneficial as it forces managers to look ahead, using formal
planning methodologies to identify changes in circumstances and how to deal with them. It
improves control due to the need for identifying missions and objectives which are communicated to
management and thus improves goal congruence. Helps to identify key external and internal risks
and create contingency plans accordingly. Also encourages creativity as management will be
required to generate own ideas allowing innovation for the company as a whole.
However, it may prove difficult setting corporate objectives often due to contradictory needs of key
stakeholders (employees versus stakeholders have completely different interests and needs). Can be
short-term pressures in the way which take focus away from longer-term strategies. Hard to forecast
accurately especially in fast-moving industries (technology). Internal and external analysis is often
incomplete due to ever-changing conditions, which means that strategies developed may be
ineffective. Long-term plans may be followed too rigidly stifling innovation and initiative. The
strategic planning process can be costly and time consuming, particularly where specialists are
required. The process also requires the use of various management accounting techniques like
forecasting, modelling, cost analysis, and operational research, which may be unfamiliar to managers
and cause resistance.
Three levels of strategy corporate, business & functional.
, Corporate/strategic level – highest level within an organisation, examines strategy for entire
company, which markets it should operate within, acquisitions, disposals, diversification,
entering or exiting industries etc.
Business/management level – after selecting markets to operate within, at this level a plan
will be devised on how to be successful and compete successfully in the individual markets
that it operates within, focus on achieving advantage over competitors, meeting needs of
key customers and avoiding competitive disadvantage. Rather than the whole organisation,
business/management strategy will focus on a strategic business unit (SBU) within the
organisation which has its own external market for its products/services.
Functional/operational level – how the component parts of the organisation (it’s resources,
people, and processes) are utilised to form a strategic architecture to deliver the overall
strategic direction. Day to day management strategies of the organisation, human resource
strategy, marketing, IT, operations strategy etc. May be unique to the SBU and individually
focused, or the corporation may wish to centralise and thus synergise.
All three levels are linked, as the higher level will only succeed if it is supported by levels beneath
and vice versa. Can be typically broken down and represented as one corporate strategy at the
strategic/corporate level, then achieved by three business strategies in the business/management
level, and a choice for functional strategies in the functional/operational level.
Types of strategy
The rational model logical, step-by-step approach, analyse existing circumstances, generate
possible strategies, select best one and implement it. Likely to begin with analysis of the internal and
external environment and setting of mission and objectives. They will then help the company to
identify its current position and appraisal of the organisation, which can then be used as a
foundation for generating strategic options, evaluating them and choosing the best one,
implementing it and then consistently reviewing and controlling them.
Johnson, Scholes and Whittington – strategic analysis involves the external analysis to identify
opportunities and threats, internal environment to identify strengths and weaknesses (SWOT),
conducting stakeholder analysis to identify key objectives and assess power/interest level of these
groups, and then gap analysis to identify differences between desired and expected performance.
Strategic choice – strategies are required to close the gap, choose competitive strategy for each
business unit, identify directions for growth (which markets/products to invest in), consider whether
expansion should be achieved organically or through acquisition, mergers, joint arrangements etc.
THEN, strategic implementation – formulation of detailed plans and budgets, target setting for KPI’s,
monitoring and controlling these strategies – have these strategic plans and options been successful,
have they helped the company to achieve its objectives? If not, then a new strategy may be
required, and process would therefore be repeated.
The emergent approach (Mintzberg) includes elements of the rational model (with a formal
environmental analysis used for strategic decisions), but is not always formally planned, may evolve
in response to unexpected events, which are known as emergent strategies. Mintzberg argued that
rational model is too slow and can become outdated, an emergent approach evolves, is continuous
and incremental, rather than being logical and formal like rational.
An emergent strategy will be tried and tested, adapted and tweaked if fails, more short-term than
traditional. If using for the long-term, then need a culture of innovation where ideas are
,continuously being proposed. Analysis, choice and implementation becomes more triangular rather
than a straight line. This approach still applies logical and formal methodologies, but is flexible and
adaptable to unexpected events.
Logical Incrementalism (Lindblom) usually a small-scale expansion of past policies, rather than a
large, radical change. Lindblom believes rational isn’t sensible, as strategy is not decided by
autonomous planning teams that have the time designated to considering all info and options before
deciding on the strategy, but instead just managers do this themselves and will likely mean they only
choose one strategy from few options, tending to be based on their past experiences of what they
know works well – hence, small-scale expansions of past policies.
Consultation, compromise and accommodation are built into the strategy decision process and is
therefore more acceptable to stakeholders, it also requires less of a culture shift to suit as only
incremental changes are made.
However, may result in no longer-term plan, and potentially suffering from strategic-drift, and
maybe not achieving the objectives set out, not satisfying customers. Also, may mean that major
changes are not made and avoided even where they may be needed.
Freewheeling opportunism organisations should avoid formal planning and just take advantage
of opportunities as they arise. Formal planning takes too long and is too constraining, especially for
organisations in fast-paced industries/markets. May be suitable to those managers who dislike
formal planning.
Issues with this is the failure to identify risks due to a lack of planning, not forced to look ahead and
therefore won’t have contingency plans in place. Can cause strategic drift if no plan to follow. Harder
to raise finance without a formal plan in place, as lenders/shareholders often use this as a basis as to
whether the company is a worthwhile investment. Also, managers need to be highly skilled at
understanding and reacting to the changing market where a freewheeling opportunistic approach is
used, less experienced managers may struggle to keep up.
Formal planning approaches like the rational model and partially the emergent model will suit
companies in stable industries, with sufficient time to plan and undertake detailed analyses, and
inexperienced managers who can use the formal plan as a guideline to develop the right strategy.
Whereas informal approaches like freewheeling opportunism and partially incrementalism are
suitable to companies in dynamic, fast-changing industries with little time to plan, experienced
managers who can innovate and quickly react to change, and no need to raise external finance.
Incrementalism isn’t suitable for new organisations as they have no past policies in place to base
future strategies on.
Strategic Planning for NFP’s charities, councils, schools, hospitals – likely to have multiple
objectives unlike profit seeking companies which are mainly profit focused. Stakeholders may have
conflicting demands, also like profitable companies. Difficult to measure NFP objectives, as they tend
to be qualitative in nature and not as easy to quantify. More equal power between stakeholders.
Service receivers may not have paid for the service, so may be pressures from other angles.
NFP’s still need strategies, often between 1 to five years ahead as a government requirement. Public
sector needs to achieve certain KPI’s, used for measuring competitiveness in a profitable company,
but more as a governmental control over activities for the NFP to ensure funds are used
appropriately.
3 E’s (audit commission) for public sector organisations when setting objectives:
, 1. Economy level of inputs
2. Efficiency link between outputs and inputs, the internal processes approach. Doing the
right things.
3. Effectiveness looks at outputs (the goal approach), the ultimate objectives. Doing things
right.
Should apply all three approaches, by considering financial and non-financial factors.
Perspectives to strategic planning
A traditional approach (Stakeholders) looking at stakeholders and their objectives, and
formulating plans to achieve those objectives. Can be a flawed approach using objectives in isolation
as market considerations may be ignored, but may be more useful for NFP’s where mission and
objectives are the main focus.
Market-led/positioning approach an analysis of markets and competitor actions before
developing strategies and objectives. Firm needs to have a good fit with its environment, as the firm
needs to be able to change if markets change. Aim is to predict change far enough in advance rather
than always reacting to it, which can be difficult to do with volatile markets.
Resource-based/competence-led approach those who found anticipating the environment too
difficult may turn to focus on it’s using its core competencies instead. These need to correlate to the
areas that the firm is good at to succeed. Can be difficult for a firm to copy.
Management accountant’s role in developing strategy
Normally involves providing info to aid strategic planning and decision making. Strategic
management accounting (SMA) is a form of management accounting that focuses on info
surrounding external factors, as well as non-financial info and internally generated info.
External focus – traditional MA’s focus on internal issues, as their role is to aid creation of
operational strategies, safeguard and ensure efficient use of assets and resources, measure and
report financial/non-financial performance. Whereas SMA’s provide info to make key strategic
decisions, which has a stronger external focus, on behaviours of competitors, customers, suppliers.
Need to consider entire ecosystem, and activities of business partners, to understand market for
effective strategic planning.
Forward looking – traditional MA’s role is measuring historic performance, but SMA’s needs to be
more forward looking, to analyse strategies employed in the future, rather than considering past
performance.
SMA’s will provide competitor analysis, customer profitability, pricing decisions (based on customer
and competitor behaviour), portfolio analysis (key products and each strategies), corporate decision
support (new proposals), customer profitability analysis, evaluation of brand value (brand name
valuations for acquisitions/disposals of BU’s), strategic info for acquisitions, disposals and mergers,
and investments in strategic management systems (cloud computing, new accounting softwares etc).
VS TMA’s – provide things like cost structure, product costs, market share, profitability, price
margins etc.
Info provided by SMA’s can ensure more effective strategic planning, increase awareness of business
and its environment, increase control over business performance, and lead to better decision
making.
