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STRATEGIC PLAN

Strategic planning is an organization's process of defining its strategy, or direction, andmaking decisions on allocating its resources to pursue this strategy, including its capital

and people. Various business analysis techniques can be used in strategic planning,includingSWOT analysis (Strengths, Weaknesses, Opportunities, and Threats ), PESTanalysis (Political, Economic, Social, and Technological), STEER analysis (Socio-cultural, Technological, Economic, Ecological, and Regulatory factors), and EPISTEL(Environment, Political, Informatic, Social, Technological, Economic and Legal).

Strategic planning is the formal consideration of an organization's future course. Allstrategic planning deals with at least one of three key questions:

1. "What do we do?"2. "For whom do we do it?"

3. "How do we excel?"

In business strategic planning, the third question is better phrased "How can we beat oravoid competition?". (Bradford and Duncan, page 1).

In many organizations, this is viewed as a process for determining where an organizationis going over the next year or more -typically 3 to 5 years, although some extend theirvision to 20 years.

In order to determine where it is going, the organization needs to know exactly where itstands, then determine where it wants to go and how it will get there. The resulting

document is called the "strategic plan."

It is also true that strategic planning may be a tool for effectively plotting the direction ofa company; however, strategic planning itself cannot foretell exactly how the market willevolve and what issues will surface in the coming days in order to plan yourorganizational strategy. Therefore, strategic innovation and tinkering with the 'strategicplan' have to be a cornerstone strategy for an organization to survive the turbulentbusiness climate.

[edit] Vision statements, Mission statements and values

Vision: Defines the desired or intended future state of an organization or enterprise interms of its fundamental objective and/or strategic direction. Vision is a long term view,sometimes describing how the organization would like the world in which it operates tobe. For example a charity working with the poor might have a vision statement whichread "A world without poverty"

Mission: Defines the fundamental purpose of an organization or an enterprise, succinctlydescribing why it exists and what it does to achieve its Vision.

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It is sometimes used to set out a 'picture' of the organization in the future. A missionstatement provides details of what is done and answers the question: "What do we do?"For example, the charity might provide "job training for the homeless and unemployed"

Values: Beliefs that are shared among the stakeholders of an organization. Values drive

an organization's culture and priorities and provide a framework in which decisions aremade. For example, "Knowledge and skills are the keys to success" or "give a man breadand feed him for a day, but teach him to farm and feed him for life". These examplevalues may set the priorities of self sufficiency over shelter.

Strategy: Strategy narrowly defined, means "the art of the general" (from Greekstratigos). A combination of the ends (goals) for which the firm is striving and the means(policies)by which it is seeking to get there.

Organizations sometimes summarize goals and objectives into amission statement

and/or a vision statement. Others begin with a vision and mission and use them toformulate goals and objectives.

While the existence of a shared mission is extremely useful, many strategy specialistsquestion the requirement for a written mission statement. However, there are manymodels of strategic planning that start with mission statements, so it is useful to examinethem here.

AMission statementtells you the fundamental purpose of the organization. Itdefines the customer and the critical processes. It informs you of the desired levelof performance.

A Vision statementoutlines what the organization wants to be, or how it wantsthe world in which it operates to be. It concentrates on the future. It is a source ofinspiration. It provides clear decision-making criteria.

An advantage of having a statement is that it creates value for those who get exposed tothe statement, and those prospects are managers, employees and sometimes evencustomers. Statements create a sense of direction and opportunity. They both are anessential part of the strategy-making process.

Many people mistake the vision statement for the mission statement, and sometimes one

is simply used as a longer term version of the other. The Vision should describe why it isimportant to achieve the Mission. A Vision statement defines the purpose or broader goalfor being in existence or in the business and can remain the same for decades if craftedwell. A Mission statement is more specific to what the enterprise can achieve itself.Vision should describe what will be achieved in the wider sphere if the organization andothers are successful in achieving their individual missions.

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A mission statement can resemble a vision statement in a few companies, but that can bea grave mistake. It can confuse people. The mission statement can galvanize the people toachieve defined objectives, even if they are stretch objectives, provided it can beelucidated in SMART (Specific, Measurable, Achievable, Relevant and Time-bound)terms. A mission statement provides a path to realize the vision in line with its values.

These statements have a direct bearing on the bottom line and success of theorganization.

Which comes first? The mission statement or the vision statement? That depends. If youhave a new start up business, new program or plan to re engineer your current services,then the vision will guide the mission statement and the rest of the strategic plan. If youhave an established business where the mission is established, then many times, themission guides the vision statement and the rest of the strategic plan. Either way, youneed to know your fundamental purpose - the mission, your current situation in terms ofinternal resources and capabilities (strengths and/or weaknesses) and external conditions(opportunities and/or threats), and where you want to go - the vision for the future. It's

important that you keep the end or desired result in sight from the start.

[citation needed]

.

Features of an effective vision statement include:

Clarity and lack of ambiguity Vivid and clear picture Description of a bright future Memorable and engaging wording Realistic aspirations Alignment with organizational values and culture

To become really effective, an organizational vision statement must (the theory states)become assimilated into the organization's culture. Leaders have the responsibility ofcommunicating the vision regularly, creating narratives that illustrate the vision, acting asrole-models by embodying the vision, creating short-term objectives compatible with thevision, and encouraging others to craft their own personal vision compatible with theorganization's overall vision. In addition, mission statements need to be subjected to aninternal assessment and an external assessment. The internal assessment should focus onhow members inside the organization interpret their mission statement. The externalassessment which includes all of the businesses stakeholders is valuable since itoffers a different perspective. These discrepancies between these two assessments cangive insight on the organization's mission statement effectiveness.

Another approach to defining Vision and Mission is to pose two questions. Firstly, "Whataspirations does the organization have for the world in which it operates and has someinfluence over?", and following on from this, "What can (and /or does) the organizationdo or contribute to fulfill those aspirations?". The succinct answer to the first questionprovides the basis of the Vision Statement. The answer to the second question determinesthe Mission Statement.

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[edit] Strategic planning outline

The preparatory phase of a business plan relies on planning. The first chapters of abusiness plan include Analysis of the Current Situation and Marketing Plan Strategy andObjectives.

Analysis of the current situation - past year

Business trends analysis Market analysis Competitive analysis Market segmentation Marketing-mix SWOT analysis Positioning - analyzing perceptions Sources of information

Marketing plan strategy & objectives - next year

Marketing strategy Desired market segmentation Desired marketing-mix TOWS-based objectives as a result of the SWOT Position & perceptual gaps Yearly sales forecast

According to Arieu, "there is strategic consistency when the actions of an organisationare consistent with the expectations of management, and these in turn are with the marketand the context" (S.K. Sharman in Human Resource Management: A Strategic Approachto Employment)

[edit] Methodologies

There are many approaches to strategic planning but typically a three-step process maybe used:

Situation - evaluate the current situation and how it came about. Target - define goals and/or objectives (sometimes called ideal state) Path - map a possible route to the goals/objectives

One alternative approach is calledDraw-See-Think

Draw - what is the ideal image or the desired end state?

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See - what is today's situation? What is the gap from ideal and why? Think- what specific actions must be taken to close the gap between today's

situation and the ideal state? Plan - what resources are required to execute the activities?

An alternative to theDraw-See-Thinkapproach is called See-Think-Draw

See - what is today's situation? Think- define goals/objectives Draw - map a route to achieving the goals/objectives

In other terms strategic planning can be as follows:

Vision - Define the vision and set a mission statement with hierarchy of goals andobjectives

SWOT - Analysis conducted according to the desired goals

Formulate - Formulate actions and processes to be taken to attain these goals Implement - Implementation of the agreed upon processes Control - Monitor and get feedback from implemented processes to fully control

the operation

[edit] Situational analysis

When developing strategies, analysis of the organization and its environment as it is atthe moment and how it may develop in the future, is important. The analysis has to beexecuted at an internal level as well as an external level to identify all opportunities andthreats of the external environment as well as the strengths and weaknesses of the

organizations.

There are several factors to assess in the external situation analysis:

1. Markets (customers),Competition,Technology,Supplier markets2. Labor markets,The economy,The regulatory environment

It is rare to find all seven of these factors having critical importance. It is also uncommonto find that the first two - markets and competition - are not of critical importance.(Bradford "External Situation - What to Consider")

Analysis of the external environment normally focuses on the customer. Managementshould be visionary in formulating customer strategy, and should do so by thinking aboutmarket environment shifts, how these could impact customer sets, and whether thosecustomer sets are the ones the company wishes to serve.

Analysis of the competitive environment is also performed, many times based on theframework suggested by Michael Porter.

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[edit] Goals, objectives and targets

Strategic planning is a very importantbusiness activity. It is also important in thepublicsectorareas such as education. It is practiced widely informally and formally. Strategicplanning and decision processes should end with objectives and a roadmap of ways to

achieve them.

One of the core goals when drafting a strategic plan is to develop it in a way that is easilytranslatable into action plans. Most strategic plans address high level initiatives and over-arching goals, but dont get articulated (translated) into day-to-day projects and tasks thatwill be required to achieve the plan. Terminology or word choice, as well as the level aplan is written, are both examples of easy ways to fail at translating your strategic plan ina way that makes sense and is executable to others. Often, plans are filled withconceptual terms which dont tie into day-to-day realities for the staff expected to carryout the plan.

The following terms have been used in strategic planning: desired end states, plans,policies, goals, objectives, strategies, tactics and actions. Definitions vary, overlap andfail to achieve clarity. The most common of these concepts are specific, time boundstatements of intended future results and general and continuing statements of intendedfuture results, which most models refer to as either goals or objectives (sometimesinterchangeably).

One model of organizing objectives uses hierarchies. The items listed above may beorganized in a hierarchy of means and ends and numbered as follows: Top RankObjective (TRO), Second Rank Objective, Third Rank Objective, etc. From any rank, theobjective in a lower rank answers to the question "How?" and the objective in a higher

rank answers to the question "Why?" The exception is the Top Rank Objective (TRO):there is no answer to the "Why?" question. That is how the TRO is defined.

People typically have several goals at the same time. "Goal congruency" refers to howwell the goals combine with each other. Does goal A appear compatible with goal B? Dothey fit together to form a unified strategy? "Goal hierarchy" consists of the nesting ofone or more goals within other goal(s).

One approach recommends having short-term goals, medium-term goals, and long-termgoals. In this model, one can expect to attain short-term goals fairly easily: they stand justslightly above one's reach. At the other extreme, long-term goals appear very difficult,

almost impossible to attain. Strategic management jargon sometimes refers to "Big HairyAudacious Goals" (BHAGs) in this context. Using one goal as a stepping-stone to thenext involves goal sequencing. A person or group starts by attaining the easy short-termgoals, then steps up to the medium-term, then to the long-term goals. Goal sequencingcan create a "goal stairway". In an organizational setting, the organization may co-ordinate goals so that they do not conflict with each other. The goals of one part of theorganization should mesh compatibly with those of other parts of the organization.

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Strategic managementFrom Wikipedia, the free encyclopedia

(Redirected from Business strategy)Jump to: navigation,search

This article may need to be rewritten entirely to comply with Wikipedia's

quality standards. You can help. Thediscussion pagemay contain suggestions.(March 2009)

This article appears to contain a large number ofbuzzwords. Specific concernscan be found on the Talk page. Please improve this article if you can. (October 2010)

Strategic management is a field that deals with the major intended and emergentinitiatives taken by general managers on behalf of owners, involving utilization ofresources, to enhance the performance offirms in their external environments.[1] It entailsspecifying the organization'smission, vision and objectives, developing policies andplans, often in terms of projects and programs, which are designed to achieve theseobjectives, and then allocating resources to implement the policies and plans, projects andprograms. Abalanced scorecard is often used to evaluate the overall performance of thebusiness and its progress towards objectives. Recent studies and leading managementtheorists have advocated that strategy needs to start with stakeholders expectations anduse a modified balanced scorecard which includes all stakeholders.

Strategic management is a level of managerial activity under setting goals and overTactics. Strategic management provides overall direction to the enterprise and is closelyrelated to the field ofOrganization Studies. In the field of business administration it isuseful to talk about "strategic alignment" between the organization and its environment or"strategic consistency". According to Arieu (2007), "there is strategic consistency whenthe actions of an organization are consistent with the expectations of management, andthese in turn are with the market and the context." Strategic management includes notonly the management team but can also include the Board of Directors and otherstakeholders of the organization. It depends on the organizational structure.

Strategic management is an ongoing process that evaluates and controls the business andthe industries in which the company is involved; assesses its competitors and sets goalsand strategies to meet all existing and potential competitors; and then reassesses eachstrategy annually or quarterly [i.e. regularly] to determine how it has been implementedand whether it has succeeded or needs replacement by a new strategy to meet changedcircumstances, new technology, new competitors, a new economic environment., or anew social, financial, or political environment. (Lamb, 1984:ix)[2]

Contents

[hide]

1 Strategy formation 2 Strategy evaluation

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o 2.1 Suitability

o 2.2 Feasibility

o 2.3 Acceptability

3 General approaches 4 The strategy hierarchy

5 Historical development of strategic managemento 5.1 Birth of strategic management

o 5.2 Growth and portfolio theory

o 5.3 The marketing revolution

o 5.4 The Japanese challenge

o 5.5 Gaining competitive advantage

o 5.6 The military theorists

o 5.7 Strategic change

o 5.8 Information- and technology-driven strategy

o 5.9 Knowledge-driven strategy

o 5.10 Strategic decision making processes

6 The psychology of strategic management 7 Reasons why strategic plans fail 8 Limitations of strategic management

o 8.1 The linearity trap

9 See also 10 References

11 External links

[edit] Strategy formation

Strategic formation is a combination of three main processes which are as follows:

Performing a situation analysis, self-evaluation and competitor analysis: bothinternal and external; both micro-environmental and macro-environmental.

Concurrent with this assessment, objectives are set. These objectives should beparallel to a time-line; some are in the short-term and others on the long-term.This involves crafting vision statements (long term view of a possible future),mission statements (the role that the organization gives itself in society), overallcorporate objectives (both financial and strategic), strategic business unitobjectives (both financial and strategic), and tactical objectives.

These objectives should, in the light of the situation analysis, suggest a strategicplan. The plan provides the details of how to achieve these objectives.

[edit] Strategy evaluation

Measuring the effectiveness of the organizational strategy, it's extremelyimportant to conduct a SWOT analysis to figure out the strengths, weaknesses,opportunities and threats (both internal and external) of the entity in question.

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This may require to take certain precautionary measures or even to change theentire strategy.

In corporate strategy, Johnson, Scholes and Whittington present a model in whichstrategic options are evaluated against three key success criteria:[3]

Suitability (would it work?) Feasibility (can it be made to work?) Acceptability (will they work it?)

[edit] Suitability

Suitability deals with the overall rationale of the strategy. The key point to consider iswhether the strategy would address the key strategic issues underlined by theorganisation's strategic position.

Does it make economic sense? Would the organization obtain economies of scale,economies of scopeor

experience economy? Would it be suitable in terms of environment and capabilities?

Tools that can be used to evaluate suitability include:

Ranking strategic options Decision trees

[edit] Feasibility

Feasibility is concerned with whether the resources required to implement the strategy areavailable, can be developed or obtained. Resources include funding, people, time andinformation.

Tools that can be used to evaluate feasibility include:

cash flow analysis and forecasting break-even analysis resource deployment analysis

[edit] Acceptability

Acceptability is concerned with the expectations of the identified stakeholders (mainlyshareholders, employees and customers) with the expected performance outcomes, whichcan be return, risk and stakeholder reactions.

Return deals with the benefits expected by the stakeholders (financial and non-financial). For example, shareholders would expect the increase of their wealth,

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employees would expect improvement in their careers and customers wouldexpect better value for money.

Riskdeals with the probability and consequences of failure of a strategy(financial and non-financial).

Stakeholder reactions deals with anticipating the likely reaction of stakeholders.

Shareholders could oppose the issuing of new shares, employees and unions couldoppose outsourcing for fear of losing their jobs, customers could have concernsover a merger with regards to quality and support.

Tools that can be used to evaluate acceptability include:

what-if analysis stakeholdermapping

[edit] General approaches

In general terms, there are two main approaches, which are opposite but complementeach other in some ways, to strategic management:

The Industrial Organizational Approacho based on economic theory deals with issues like competitive rivalry,

resource allocation, economies of scaleo assumptions rationality, self discipline behaviour, profit maximization

The Sociological Approacho deals primarily with human interactions

o assumptions bounded rationality, satisfying behaviour, profit sub-

optimality. An example of a company that currently operates this way is

Google. The stakeholder focused approach is an example of this modernapproach to strategy.

Strategic management techniques can be viewed as bottom-up, top-down, orcollaborative processes. In the bottom-up approach, employees submit proposals to theirmanagers who, in turn, funnel the best ideas further up the organization. This is oftenaccomplished by a capital budgeting process. Proposals are assessed using financialcriteria such as return on investmentorcost-benefit analysis.Cost underestimation andbenefit overestimation are major sources of error. The proposals that are approved formthe substance of a new strategy, all of which is done without a grand strategic design or astrategic architect. The top-down approach is the most common by far. In it, the CEO,

possibly with the assistance of a strategic planning team, decides on the overall directionthe company should take. Some organizations are starting to experiment withcollaborative strategic planning techniques that recognize the emergent nature of strategicdecisions.

Strategic decisions should focus on Outcome, Time remaining, and currentValue/priority. The outcome comprises both the desired ending goal and the plandesigned to reach that goal. Managing strategically requires paying attention to the time

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remaining to reach a particular level or goal and adjusting the pace and optionsaccordingly. Value/priority relates to the shifting, relative concept of value-add. Strategicdecisions should be based on the understanding that the value-add of whatever you aremanaging is a constantly changing reference point. An objective that begins with a highlevel of value-add may change due to influence of internal and external factors. Strategic

management by definition, is managing with a heads-up approach to outcome, time andrelative value, and actively making course corrections as needed.

[edit] The strategy hierarchy

In most (large) corporations there are several levels of management. Strategicmanagement is the highest of these levels in the sense that it is the broadest - applying toall parts of the firm - while also incorporating the longest time horizon. It gives directionto corporate values, corporate culture, corporate goals, and corporate missions. Under thisbroad corporate strategy there are typically business-level competitive strategies andfunctional unit strategies.

Corporate strategy refers to the overarching strategy of the diversified firm. Such acorporate strategy answers the questions of "which businesses should we be in?" and"how does being in these businesses create synergy and/or add to the competitiveadvantage of the corporation as a whole?" Business strategy refers to the aggregatedstrategies of single business firm or a strategic business unit (SBU) in a diversifiedcorporation. According to Michael Porter, a firm must formulate a business strategy thatincorporates eithercost leadership,differentiation orfocus in order to achieve asustainable competitive advantage and long-term success in its chosen areas or industries.Alternatively, according to W. Chan Kim and Rene Mauborgne, an organization canachieve high growth and profits by creating aBlue Ocean Strategy that breaks the

previous value-cost trade off by simultaneously pursuing both differentiation and lowcost.

Functional strategies include marketing strategies, new product development strategies,human resource strategies, financial strategies, legal strategies, supply-chain strategies,and information technology management strategies. The emphasis is on short andmedium term plans and is limited to the domain of each departments functionalresponsibility. Each functional department attempts to do its part in meeting overallcorporate objectives, and hence to some extent their strategies are derived from broadercorporate strategies.

Many companies feel that a functional organizational structure is not an efficient way toorganize activities so they havereengineered according to processes or SBUs. Astrategic business unit is a semi-autonomous unit that is usually responsible for its ownbudgeting, new product decisions, hiring decisions, and price setting. An SBU is treatedas an internal profit centre by corporate headquarters. A technology strategy, forexample, although it is focused on technology as a means of achieving an organization'soverall objective(s), may include dimensions that are beyond the scope of a singlebusiness unit, engineering organization or IT department.

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An additional level of strategy called operational strategy was encouraged byPeterDruckerin his theory ofmanagement by objectives(MBO). It is very narrow in focus anddeals with day-to-day operational activities such as scheduling criteria. It must operatewithin a budget but is not at liberty to adjust or create that budget. Operational levelstrategies are informed by business level strategies which, in turn, are informed by

corporate level strategies.

Since the turn of the millennium, some firms have reverted to a simpler strategic structuredriven by advances in information technology. It is felt that knowledge managementsystems should be used to share information and create common goals. Strategicdivisions are thought to hamper this process. This notion of strategy has been capturedunder the rubric ofdynamic strategy, popularized by Carpenter and Sanders's textbook[1]. This work builds on that of Brown and Eisenhart as well as Christensen and portraysfirm strategy, both business and corporate, as necessarily embracing ongoing strategicchange, and the seamless integration of strategy formulation and implementation. Suchchange and implementation are usually built into the strategy through the staging and

pacing facets.

[edit] Historical development of strategic management

[edit] Birth of strategic management

Strategic management as a discipline originated in the 1950s and 60s. Although therewere numerous early contributors to the literature, the most influential pioneers wereAlfred D. Chandler, Philip Selznick, Igor Ansoff, and Peter Drucker.

Alfred Chandlerrecognized the importance of coordinating the various aspects of

management under one all-encompassing strategy. Prior to this time the various functionsof management were separate with little overall coordination or strategy. Interactionsbetween functions or between departments were typically handled by a boundaryposition, that is, there were one or two managers that relayed information back and forthbetween two departments. Chandler also stressed the importance of taking a long termperspective when looking to the future. In his 1962 groundbreaking workStrategy andStructure, Chandler showed that a long-term coordinated strategy was necessary to give acompany structure, direction, and focus. He says it concisely, structure followsstrategy.[4]

In 1957, Philip Selznickintroduced the idea of matching the organization's internal

factors with external environmental circumstances.[5] This core idea was developed intowhat we now call SWOT analysis by Learned, Andrews, and others at the HarvardBusiness School General Management Group. Strengths and weaknesses of the firm areassessed in light of the opportunities and threats from the business environment.

Igor Ansoffbuilt on Chandler's work by adding a range of strategic concepts andinventing a whole new vocabulary. He developed a strategy grid that compared marketpenetration strategies, product development strategies, market development strategies and

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horizontal and vertical integration and diversification strategies. He felt that managementcould use these strategies to systematically prepare for future opportunities andchallenges. In his 1965 classic Corporate Strategy, he developed the gap analysis stillused today in which we must understand the gap between where we are currently andwhere we would like to be, then develop what he called gap reducing actions.[6]

Peter Druckerwas a prolific strategy theorist, author of dozens of management books,with a career spanning five decades. His contributions to strategic management weremany but two are most important. Firstly, he stressed the importance of objectives. Anorganization without clear objectives is like a ship without a rudder. As early as 1954 hewas developing a theory of management based on objectives.[7]This evolved into histheory ofmanagement by objectives (MBO). According to Drucker, the procedure ofsetting objectives and monitoring your progress towards them should permeate the entireorganization, top to bottom. His other seminal contribution was in predicting theimportance of what today we would call intellectual capital. He predicted the rise of whathe called the knowledge worker and explained the consequences of this for

management. He said that knowledge work is non-hierarchical. Work would be carriedout in teams with the person most knowledgeable in the task at hand being the temporaryleader.

In 1985, Ellen-Earle Chaffee summarized what she thought were the main elements ofstrategic management theory by the 1970s:[8]

Strategic management involves adapting the organization to its businessenvironment.

Strategic management is fluid and complex. Change creates novel combinationsof circumstances requiring unstructured non-repetitive responses.

Strategic management affects the entire organization by providing direction. Strategic management involves both strategy formation (she called it content) and

also strategy implementation (she called it process). Strategic management is partially planned and partially unplanned. Strategic management is done at several levels: overall corporate strategy, and

individual business strategies. Strategic management involves both conceptual and analytical thought processes.

[edit] Growth and portfolio theory

In the 1970s much of strategic management dealt with size, growth, and portfolio theory.

The PIMS study was a long term study, started in the 1960s and lasted for 19 years, thatattempted to understand the Profit Impact of Marketing Strategies (PIMS), particularlythe effect of market share. Started at General Electric, moved to Harvard in the early1970s, and then moved to the Strategic Planning Institute in the late 1970s, it nowcontains decades of information on the relationship between profitability and strategy.Their initial conclusion was unambiguous: The greater a company's market share, thegreater will be their rate of profit. The high market share provides volume and economiesof scale. It also provides experience and learning curveadvantages. The combined effect

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is increased profits.[9] The studies conclusions continue to be drawn on by academics andcompanies today: "PIMS provides compelling quantitative evidence as to which businessstrategies work and don't work" - Tom Peters.

The benefits of high market share naturally lead to an interest in growth strategies. The

relative advantages ofhorizontal integration, vertical integration, diversification,franchises, mergers and acquisitions, joint ventures, and organic growth were discussed.The most appropriate market dominance strategies were assessed given the competitiveand regulatory environment.

There was also research that indicated that a low market share strategy could also be veryprofitable. Schumacher (1973),[10] Woo and Cooper (1982),[11]Levenson (1984),[12] andlater Traverso (2002)[13] showed how smaller niche players obtained very high returns.

By the early 1980s the paradoxical conclusion was that high market share and low marketshare companies were often very profitable but most of the companies in between were

not. This was sometimes called the hole in the middle problem. This anomaly would beexplained by Michael Porter in the 1980s.

The management of diversified organizations required new techniques and new ways ofthinking. The first CEO to address the problem of a multi-divisional company wasAlfredSloan at General Motors. GM was decentralized into semi-autonomous strategicbusiness units (SBU's), but with centralized support functions.

One of the most valuable concepts in the strategic management of multi-divisionalcompanies was portfolio theory. In the previous decade Harry Markowitz and otherfinancial theorists developed the theory ofportfolio analysis. It was concluded that a

broad portfolio of financial assets could reduce specific risk. In the 1970s marketersextended the theory to product portfolio decisions and managerial strategists extended itto operating division portfolios. Each of a companys operating divisions were seen as anelement in the corporate portfolio. Each operating division (also called strategic businessunits) was treated as a semi-independent profit center with its own revenues, costs,objectives, and strategies. Several techniques were developed to analyze the relationshipsbetween elements in a portfolio. B.C.G. Analysis, for example, was developed by theBoston Consulting Group in the early 1970s. This was the theory that gave us thewonderful image of a CEO sitting on a stool milking a cash cow. Shortly after that theG.E. multi factoral model was developed by General Electric. Companies continued todiversify until the 1980s when it was realized that in many cases a portfolio of operatingdivisions was worth more as separate completely independent companies.

[edit] The marketing revolution

The 1970s also saw the rise of the marketing oriented firm. From the beginnings ofcapitalism it was assumed that the key requirement of business success was aproduct ofhigh technical quality. If you produced a product that worked well and was durable, itwas assumed you would have no difficulty selling them at a profit. This was called the

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production orientation and it was generally true that good products could be sold withouteffort, encapsulated in the saying "Build a better mousetrap and the world will beat a pathto your door". This was largely due to the growing numbers of affluent and middle classpeople that capitalism had created. But after the untapped demand caused by the secondworld war was saturated in the 1950s it became obvious that products were not selling as

easily as they had been. The answer was to concentrate onselling. The 1950s and 1960sis known as the sales era and the guidingphilosophy of business of the time is todaycalled the sales orientation. In the early 1970s Theodore Levitt and others at Harvardargued that the sales orientation had things backward. They claimed that instead ofproducing products then trying to sell them to the customer, businesses should start withthe customer, find out what they wanted, and then produce it for them. The customerbecame the driving force behind all strategic business decisions. Thismarketingorientation, in the decades since its introduction, has been reformulated and repackagedunder numerous names including customer orientation, marketing philosophy,customerintimacy, customer focus, customer driven, and market focused.

[edit] The Japanese challenge

By the late 70s, Americans had started to notice how successful Japanese industry hadbecome. In industry after industry, including steel, watches, ship building, cameras,autos, and electronics, the Japanese were surpassing American and European companies.Westerners wanted to know why. Numerous theories purported to explain the Japanesesuccess including:

Higher employee morale, dedication, and loyalty; Lower cost structure, including wages; Effective government industrial policy;

Modernization after WWII leading to high capital intensity and productivity; Economies of scale associated with increased exporting; Relatively low value of the Yen leading to low interest rates and capital costs, low

dividend expectations, and inexpensive exports; Superior quality control techniques such as Total Quality Management and other

systems introduced by W. Edwards Demingin the 1950s and 60s.[14]

Although there was some truth to all these potential explanations, there was clearlysomething missing. In fact by 1980 the Japanese cost structure was higher than theAmerican. And post WWII reconstruction was nearly 40 years in the past. The firstmanagement theorist to suggest an explanation was Richard Pascale.

In 1981, Richard Pascale and Anthony Athos in The Art of Japanese Managementclaimed that the main reason for Japanese success was their superior managementtechniques.[15] They divided management into 7 aspects (which are also known asMcKinsey 7S Framework): Strategy, Structure, Systems, Skills, Staff, Style, andSupraordinate goals (which we would now call shared values). The first three of the 7 S'swere called hard factors and this is where American companies excelled. The remainingfour factors (skills, staff, style, and shared values) were called soft factors and were not

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well understood by American businesses of the time (for details on the role of soft andhard factors see Wickens P.D. 1995.) Americans did not yet place great value oncorporate culture, shared values and beliefs, and social cohesion in the workplace. InJapan the task of management was seen as managing the whole complex of human needs,economic, social, psychological, and spiritual. In America work was seen as something

that was separate from the rest of one's life. It was quite common for Americans toexhibit a very different personality at work compared to the rest of their lives. Pascalealso highlighted the difference between decision making styles; hierarchical in America,and consensus in Japan. He also claimed that American business lacked long term vision,preferring instead to apply management fads and theories in a piecemeal fashion.

One year later, The Mind of the Strategistwas released in America by Kenichi Ohmae,the head ofMcKinsey & Co.'s Tokyo office.[16] (It was originally published in Japan in1975.) He claimed that strategy in America was too analytical. Strategy should be acreative art: It is a frame of mind that requires intuition and intellectual flexibility. Heclaimed that Americans constrained their strategic options by thinking in terms of

analytical techniques, rote formula, and step-by-step processes. He compared the cultureof Japan in which vagueness, ambiguity, and tentative decisions were acceptable, toAmerican culture that valued fast decisions.

Also in 1982, Tom Peters and Robert Waterman released a study that would respond tothe Japanese challenge head on.[17] Peters and Waterman, who had several years earliercollaborated with Pascale and Athos at McKinsey & Co. asked What makes an excellentcompany?. They looked at 62 companies that they thought were fairly successful. Eachwas subject to six performance criteria. To be classified as an excellent company, it hadto be above the 50th percentile in 4 of the 6 performance metrics for 20 consecutiveyears. Forty-three companies passed the test. They then studied these successful

companies and interviewed key executives. They concluded inIn Search of Excellencethat there were 8 keys to excellence that were shared by all 43 firms. They are:

A bias for action Do it. Try it. Dont waste time studying it with multiplereports and committees.

Customer focus Get close to the customer.Know your customer. Entrepreneurship Even big companies act and think small by giving people the

authority to take initiatives. Productivity through people Treat your people with respect and they will

reward you with productivity. Value-oriented CEOs The CEO should actively propagate corporate values

throughout the organization. Stick to the knitting Do what you know well. Keep things simple and lean Complexity encourages waste and confusion. Simultaneously centralized and decentralized Have tight centralized control

while also allowing maximum individual autonomy.

The basic blueprint on how to compete against the Japanese had been drawn. But as J.E.Rehfeld (1994) explains it is not a straight forward task due to differences in culture. [18] A

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certain type of alchemy was required to transform knowledge from various cultures into amanagement style that allows a specific company to compete in a globally diverse world.He says, for example, that Japanese stylekaizen (continuous improvement) techniques,although suitable for people socialized in Japanese culture, have not been successfulwhen implemented in the U.S. unless they are modified significantly.

In 2009, industry consultants Mark Blaxill and Ralph Eckardt suggested that much of theJapanese business dominance that began in the mid 1970s was the direct result ofcompetition enforcement efforts by the Federal Trade Commission (FTC) and U.S.Department of Justice(DOJ). In 1975 the FTC reached a settlement with XeroxCorporation in its anti-trust lawsuit. (At the time, the FTC was under the direction ofFrederic M. Scherer). The 1975 Xerox consent decree forced the licensing of thecompanys entirepatentportfolio, mainly to Japanese competitors. (See "compulsorylicense".) This action marked the start of an activist approach to managing competitionby the FTC and DOJ, which resulted in the compulsory licensing of tens of thousands ofpatent from some of America's leading companies, including IBM, AT&T,DuPont,

Bausch & Lomb, and Eastman Kodak.

[original research?]

Within four years of the consent decree, Xerox's share of the U.S.copiermarket droppedfrom nearly 100% to less than 14%. Between 1950 and 1980 Japanese companiesconsummated more than 35,000 foreign licensing agreements, mostly with U.S.companies, for free or low-cost licenses made possible by the FTC and DOJ. The post-1975 era of anti-trust initiatives by Washington D.C. economists at the FTC correspondeddirectly with the rapid, unprecedented rise in Japanese competitiveness and asimultaneous stalling of the U.S. manufacturing economy.[19]

[edit] Gaining competitive advantage

The Japanese challenge shook the confidence of the western business elite, but detailedcomparisons of the two management styles and examinations of successful businessesconvinced westerners that they could overcome the challenge. The 1980s and early 1990ssaw a plethora of theories explaining exactly how this could be done. They cannot all bedetailed here, but some of the more important strategic advances of the decade areexplained below.

Gary Hamel andC. K. Prahalad declared that strategy needs to be more active andinteractive; less arm-chair planning was needed. They introduced terms like strategicintent and strategic architecture.[20][21]Their most well known advance was the idea of

core competency. They showed how important it was to know the one or two key thingsthat your company does better than the competition. [22]

Active strategic management required active information gathering and active problemsolving. In the early days of Hewlett-Packard (HP), Dave Packard and Bill Hewlettdevised an active management style that they called management by walking around(MBWA). Senior HP managers were seldom at their desks. They spent most of their daysvisiting employees, customers, and suppliers. This direct contact with key people

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provided them with a solid grounding from which viable strategies could be crafted. TheMBWA concept was popularized in 1985 by a book by Tom Peters andNancy Austin.[23]

Japanese managers employ a similar system, which originated at Honda, and issometimes called the 3 G's (Genba, Genbutsu, and Genjitsu, which translate into actualplace, actual thing, and actual situation).

Probably the most influential strategist of the decade wasMichael Porter. He introducedmany new concepts including; 5 forces analysis, generic strategies, the value chain,strategic groups, and clusters. In 5 forces analysishe identifies the forces that shape afirm's strategic environment. It is like aSWOT analysis with structure and purpose. Itshows how a firm can use these forces to obtain a sustainable competitive advantage.Porter modifies Chandler's dictum about structure following strategy by introducing asecond level of structure: Organizational structure follows strategy, which in turn followsindustry structure. Porter'sgeneric strategies detail the interaction between costminimization strategies, product differentiation strategies, and market focusstrategies. Although he did not introduce these terms, he showed the importance of

choosing one of them rather than trying to position your company between them. He alsochallenged managers to see their industry in terms of a value chain. A firm will besuccessful only to the extent that it contributes to the industry's value chain. This forcedmanagement to look at its operations from the customer's point of view. Every operationshould be examined in terms of what value it adds in the eyes of the final customer.

In 1993, John Kay took the idea of the value chain to a financial level claiming Addingvalue is the central purpose of business activity, where adding value is defined as thedifference between the market value of outputs and the cost of inputs including capital,all divided by the firm's net output. Borrowing from Gary Hamel and Michael Porter,Kay claims that the role of strategic management is to identify your core competencies,

and then assemble a collection of assets that will increase value added and provide acompetitive advantage. He claims that there are 3 types of capabilities that can do this;innovation, reputation, and organizational structure.

The 1980s also saw the widespread acceptance ofpositioning theory. Although the theoryoriginated with Jack Trout in 1969, it didnt gain wide acceptance until Al Ries and JackTrout wrote their classic book Positioning: The Battle For Your Mind (1979). Thebasic premise is that a strategy should not be judged by internal company factors but bythe way customers see it relative to the competition. Crafting and implementing a strategyinvolves creating a position in the mind of the collective consumer. Several techniqueswere applied to positioning theory, some newly invented but most borrowed from otherdisciplines. Perceptual mapping for example, creates visual displays of the relationshipsbetween positions. Multidimensional scaling,discriminant analysis,factor analysis, andconjoint analysis are mathematical techniques used to determine the most relevantcharacteristics (called dimensions or factors) upon which positions should be based.Preference regression can be used to determine vectors of ideal positions andclusteranalysis can identify clusters of positions.

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Others felt that internal company resources were the key. In 1992, Jay Barney, forexample, saw strategy as assembling the optimum mix of resources, including human,technology, and suppliers, and then configure them in unique and sustainable ways.[24]

Michael Hammerand James Champy felt that these resources needed to be restructured.[25]

This process, that they labeled reengineering, involved organizing a firm's assetsaround whole processes rather than tasks. In this way a team of people saw a projectthrough, from inception to completion. This avoided functional silos where isolateddepartments seldom talked to each other. It also eliminated waste due to functionaloverlap and interdepartmental communications.

In 1989 Richard Lesterand the researchers at the MIT Industrial Performance Centeridentified seven best practices and concluded that firms must accelerate the shift awayfrom the mass production of low cost standardized products. The seven areas of bestpractice were:[26]

Simultaneous continuous improvement in cost, quality, service, and productinnovation Breaking down organizational barriers between departments Eliminating layers of management creating flatter organizational hierarchies. Closer relationships with customers and suppliers Intelligent use of new technology Global focus Improving human resource skills

The search for best practices is also calledbenchmarking.[27]This involves determiningwhere you need to improve, finding an organization that is exceptional in this area, then

studying the company and applying its best practices in your firm.

A large group of theorists felt the area where western business was most lacking wasproduct quality. People like W. Edwards Deming,[28]Joseph M. Juran,[29]A. Kearney,[30]

Philip Crosby,[31] and Armand Feignbaum[32] suggested quality improvement techniqueslike total quality management (TQM),continuous improvement(kaizen),leanmanufacturing, Six Sigma, and return on quality (ROQ).

An equally large group of theorists felt that poor customer service was the problem.People like James Heskett (1988),[33]Earl Sasser (1995), William Davidow,[34] LenSchlesinger,[35] A. Paraurgman (1988), Len Berry,[36] Jane Kingman-Brundage,[37]

Christopher Hart, and Christopher Lovelock (1994), gave us fishbone diagramming,service charting, Total Customer Service (TCS), the service profit chain, service gapsanalysis, the service encounter, strategic service vision, service mapping, and serviceteams. Their underlying assumption was that there is no better source of competitiveadvantage than a continuous stream of delighted customers.

Process management uses some of the techniques from product quality management andsome of the techniques from customer service management. It looks at an activity as a

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sequential process. The objective is to find inefficiencies and make the process moreeffective. Although the procedures have a long history, dating back to Taylorism, thescope of their applicability has been greatly widened, leaving no aspect of the firm freefrom potential process improvements. Because of the broad applicability of processmanagement techniques, they can be used as a basis for competitive advantage.

Some realized that businesses were spending much more on acquiring new customersthan on retaining current ones. Carl Sewell,[38]Frederick F. Reichheld,[39] C. Gronroos,[40]

and Earl Sasser[41] showed us how a competitive advantage could be found in ensuringthat customers returned again and again. This has come to be known as the loyalty effectafter Reicheld's book of the same name in which he broadens the concept to includeemployee loyalty, supplier loyalty, distributor loyalty, and shareholder loyalty. They alsodeveloped techniques for estimating the lifetime value of a loyal customer, calledcustomer lifetime value(CLV). A significant movement started that attempted to recastselling and marketing techniques into a long term endeavor that created a sustainedrelationship with customers (called relationship selling, relationship marketing, and

customer relationship management). Customer relationship management (CRM) software(and its many variants) became an integral tool that sustained this trend.

James Gilmore and Joseph Pine found competitive advantage in mass customization.[42]

Flexible manufacturing techniques allowed businesses to individualize products for eachcustomer without losing economies of scale. This effectively turned the product into aservice. They also realized that if a service is mass customized by creating aperformance for each individual client, that service would be transformed into anexperience. Their book, The Experience Economy,[43] along with the work ofBerndSchmitt convinced many to see service provision as a form of theatre. This school ofthought is sometimes referred to as customer experience management (CEM).

Like Peters and Waterman a decade earlier, James Collins and Jerry Porras spent yearsconducting empirical research on what makes great companies. Six years of researchuncovered a key underlying principle behind the 19 successful companies that theystudied: They all encourage and preserve a core ideology that nurtures the company.Even though strategy and tactics change daily, the companies, nevertheless, were able tomaintain a core set of values. These core values encourage employees to build anorganization that lasts. InBuilt To Last(1994) they claim that short term profit goals, costcutting, and restructuring will not stimulate dedicated employees to build a greatcompany that will endure.[44] In 2000 Collins coined the term built to flip to describethe prevailing business attitudes in Silicon Valley. It describes a business culture wheretechnological change inhibits a long term focus. He also popularized the concept of theBHAG (Big Hairy Audacious Goal).

Arie de Geus(1997) undertook a similar study and obtained similar results. He identifiedfour key traits of companies that had prospered for 50 years or more. They are:

Sensitivity to the business environment the ability to learn and adjust

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