Strategic management

Why organisations exist

The management of business strategy is not the same to all people and one obvious key influence on this is the nature of the organisation. Traditionally, most organisations could simply have being placed in one of these categories:

• not-for-profit
• commercial
• governmental

However, as the business environment became more complex, we now find some governmental organisations with revenue targets, commercial organisations setting up welfare foundations and not-for-profit organisations operating with slick commercial operations.

The reasons a commercial organisation might have a not-for-profit foundation as part of its corporate structure are explored in the members' section. In general however, we can differentiate the three as follows:

The approaches and methodologies discussed in this article were conceived for the private sector but aspects can be adjusted if desired to suit the variations in the other two sectors. Commercial organisations invariably start out with one or two individuals, perhaps college friends, work colleagues or family members, getting together. In the UK, family-run businesses comprise over 75% of all businesses and employ in excess of 50% of the UK workforce. However, less that 25% survive to the second generation and less than 15% to the third.

What causes this decline?

Succession planning is one of the key success factors of a family-owned business, and one that is often hoped for by the founder but not the descendants. By the third generation, many companies have either folded or been taken over. This is most commonly seen when a skilled trade is involved such as pottery, jewellery making or farming. The problem here is loss of (or lack of) shared values.

Values

Values are principles or standards that are considered worthwhile or desirable. Values can be seen as what we think, and when applied, the way we behave. In an organisation, the values often drive the mission (and therefore – almost everything else), so it is important the management team have shared, or common values.

One category of organisation where the original values were propagated down the generations is Quaker companies. These were founded on Quaker principles and had strong moral ethics both towards customers and employees, unique in the 18th century when workhouses were the norm.

All of the following organisations were founded on Quaker principles: Cadbury's, Rowntree Mackintosh, JS Fry and Sons, Terry's, Barclay's, Friends Provident, Clarks, Amnesty International, Bryant and May, Huntley and Palmers, LloydsTSB, Oxfam.

Interestingly, the Quaker Oats Company (now a division of Pepsico) is not a Quaker company. It never had a connection with the Quakers, but simply chose its name because Quakers have a reputation for honesty.

Survival is not compulsory

There is no law to say organisations, governments or even nations must continue indefinitely. The heading of this paragraph, a quotation from Henry Ford, is a simple reminder that it takes real effort to ensure business continuity. So what makes an organisation want to survive into the future? The answer is something akin to the animal survival instinct. And it is the owners, directors or senior management of a company that need this trait.

Some basic definitions

A lot of valuable management time is wasted arguing the difference between vision, mission, targets, plans or objectives, and different organisations use different words to describe the same thing. Rather than list several different definitions of each, here is one simple list that can be built upon and adapted by the reader:

Values

The way the organisation behaves, either derived from the founder or agreed collectively by top management.

Vision

An organisation's vision is the concept of a new and desirable future reality based on its values – what it wants to become known for or become.

Mission

Put simply, the mission is the purpose for which the organisation exists.

Strategy

This is the roadmap of the journey detailing how the organisation will achieve the above. Several strategies might co-exist; for example, in the home market there might be one to maximise returns and maintain income whilst in a newly opened market there might be one to work up to a top three position by sales within five years.

Objectives

These are quantifiable milestones to aim for, enabling outputs and progress to be measured. They are often grouped into short, medium and long-term periods such as 1, 3 and 5 years.

What is strategic management?

It is to do with making decisions about the future direction of the organisation and then putting them into action. There are two main aspects:

Strategic planning

This is absolutely vital, whether we are considering a sole trader or a multinational company. A simple way of looking at it in the planning stage is by asking three basic questions:

• where are we now?
• where are we going
• how are we going to get there?

Strategic implementation

This involves developing the appropriate organisational structure and processes that can realise the strategy, and then monitoring the progress and effectiveness of the action plans.

Where are we now?

Often called situation appraisal, it is a snap-shot of the organisation from two aspects:

External

This comprises an appraisal of the environment that the organisation is either operating within at present or in the future (care must be taken not to mix these up). There are several models and tools that can be employed such as force-field analysis, PEST analysis or competitive benchmarking etc (see the members section for more details of these). As well as the general environment, it is useful to perform competitor analysis, possibly for each and every key competitor. Although covering broadly similar issues such as values, objectives and strategies, this must also include assumptions made and predictions – bearing in mind it is a perception of another organisation and the data probably will be incomplete, inaccurate and possibly erroneous.

Stakeholder analysis

A well-known and useful tool is stakeholder analysis which serves to identify and prioritise who might have an interest in the organisation, what that interest might be, and how much influence they can exert (see Stakeholders).

To arrive at the current external strategic position, the following 5-step sequence can be conducted:

• assess environmental natures
• identify key environmental forces
• assess environmental influences
• identify competitive position
• define key opportunities and threats (OT)

Internal

This is a health-check of the current/expected capabilities of the organisation, whether using a well-established reference tool such as the EFQM excellence model (see Excellence models and awards), or a more informal approach. The aim is to identify what the organisation does well or not, what resources and competencies are available, how well the processes are working and if internal targets are being achieved. Only when the organisation has profound knowledge of its current abilities, will it be able to gauge what it might be capable of in the future.

Some ISO9001:2000 certificated organisations use their internal audit resource for this critical step, as opposed to simply getting their internal auditors to perform low-level repetitive tick-box audits. Topics that are reviewed include: objectives, strategy, leadership, structure, systems, financials, processes, resources, capabilities, culture and constraints. The output of this is a perception of strengths and weaknesses (SW). Put together with the opportunities and threats (OT) from the external assessment, we get the well-known SWOT model.

Note: When conducting a SWOT analysis, many organisations jump straight to filling in a four-box template. As can be seen from above, this is actually the last step.

Where are we going?

There are no rules here. Organisations in a competitive environment should be continually striving to differentiate themselves from the competition; either on price, service, response or some other success factor. An interesting approach is to analyse where the organisation would be if nothing changes, and also where it needs to be. Of course the larger the gap the larger the need for change.

Irrespective of the strategic options open to the organisation there are three fundamental steps:

Option generation

This involves proposing various routes either at strategic or product level including:

• continue as-is
• acquire a competitor
• open up regional offices
• develop new products for current markets
• develop new markets for current products
• penetrate more into existing markets
• reposition the product in terms of price or value
• abandon certain, products/services, markets, approaches etc

Option evaluation

This is an impartial stress-test review of each option, weighing up the risks versus rewards. The objective is to propose one or two options that are feasible, sustainable, implementable and in-line with the values, and are within the capabilities of the organisation.

Strategy selection

The organisation does not operate in a vacuum. It is a dynamic playing-field and allowances must be made for reaction from the competition. So if a new product is launched, expect the opposition to possibly follow suite (patent issues aside, of course). Likewise, if prices drop, expect the same. The strategy is not cast in stone and might need refining in the early days of roll-out in light of these foreseeable reactions and also unforeseen changes (such as a new competitor or technological or legislation changes).

How are we going to get there?

This involves defining the route-map (including allowances for events as mentioned above) and is often best run as a project. Considerations might include:

• Changes to organisational structure including roles and responsibilities
• Infrastructure changes opening/closing/redevelopment of facilities, plant, buildings and locations
• Non-human resource planning such as investment in equipment and new technology
• Development of new processes or redesign/realignment of existing ones
• Contingency plans
• Funding requirements
• Key milestones and associated objectives defined to measure progress towards the goal
• Motivation methods to overcome the fatigue factor associated with potential continual change

Often the above is captured in a concise document such as a strategic or business plan so interested parties can critically review both the options presented and the route selected.

Often the objectives (being the cascaded 'output' of this part of the strategic planning process) are ill-conceived. Thus when they cannot be met, frustration sets in. A common cause of this unfortunate situation is unbalanced goals – too much emphasis on one target at the expense of others. For example, pressure on short-term profit targets and ignoring longer-term investment or total focus on financial targets and ignoring non-financial ones. Getting the balance is an art in itself.

'Businesses must be run at a profit, else it will die. But when anyone tries to run a business solely for profit… then also the business must die, for it no longer has a reason for existence.' Henry Ford

Is a strategy really necessary?

Many organisations do indeed do very well without grand strategic plans. They seem to prosper by being in the right place at the right time and appear to get more than their fair share of luck. Indeed, there is a school of though that says strategic plans only serve to constrict the free development of an organisation and actually hold it back. The argument is that when things are going well, grand plans are unnecessary, and it is only when things are not going well that plans are needed. Whilst this might be true for a small number of organisations, the risk of getting it wrong is so great that a more conservative approach might be prudent for the majority. Short-term success without grand plans is common in all walks of life; the trick is to sustain it over the medium to long term.

Are targets needed at all?

Some might argue against the need for business objectives/targets along the following lines:

• They can make the organisation narrow-minded
• It becomes easier for competitors to understand the organisation and where it is going
• Flexibility and responsiveness can become limited
• Some say objectives are only needed in times of survival or change

On balance, most people are actually more comfortable with targets and performance measures than without – even in our private lives. We compare our available bank balance to our monthly spend, we compare our actual speed with that indicated on the roadside (especially near speed cameras), and we live our daily lives by referring to the time. It is not the presence of a target that makes people uncomfortable, but is often an issue when the target appears unrealistic, misaligned with personal aims or has not been well communicated.

'Men never plan to be failures; they simply fail to plan to be successful.'

William A. Ward (1921)

A healthy company?

In law, a company is a non-living entity. However, a modern, yet unusual management view is to perceive the organisation as a living organism. Organisations are not immune to human-like tendencies such as sickness and growing old or infirm. Solid performance now or in the past is not guaranteed into the future. Values grow stale, people get jaded with the same old message, customers fancy a change of supplier, employees leave or retire. What worked once may not be appropriate in a few years.

This point was well illustrated soon after Tom Peter's book In Search of Excellence: 60% of the 43 organisations commended in the book for best-practice were in financial difficulties 10 year later.

Planning or wishful thinking?

Everyone, it seems, wants to grow their business by 150%, be number one in their market or the UK's leading provider of X. Clearly in a limited marketplace it usually isn't possible. What constraint can be applied to stop wild imagination taking over from reality?

One possible approach for consideration is the resource-based strategy (Grant, 1991). This involves defining the organisation in terms of what it is able to do more than what it wants to do. The approach argues that organisations are more successful when they concentrate on their capabilities and internal resources and not when they are led by ad hoc market opportunities. However, it is not the resource as such, it's the distinct competence that it confers on the organisation. So whether the resource is financial, physical, human, technological or reputational - it is how it is applied that matters.

The customer is king

This common business cliché is a pertinent aspect of what is known as a customer-focused strategy. This involves putting the customer at the heart-and-soul of the operation and subsequently designing the processes around the needs and expectations of the customer. Of all stakeholders, the customer is the only one that brings in revenue, therefore it is imperative that customer needs are met in a manner that will satisfy the needs of the other stakeholders. With the stakeholder analysis already conducted, it is interesting to see to what degree the various stakeholders are aligned. If alignment is high, the chances of success will be significantly greater than if they are at odds (see Stakeholders).

One difficulty some businesses face is the problem of understanding the implied needs of the customer as well as the stated ones. With no systematic approach, known or visible needs are easily captured but leave the more intangible unknown ones un-acted upon. With this as a prime source of subsequent customer complaints, the smart organisation needs to devote some time to thinking about this issue. One useful tool that can be employed is quality-function deployment (QFD) which is a technique to identify and capture customer requirements and convert them into internal specifications.

Competitive advantage

Traditionally, organisations strove to develop competitive advantage with aspects such as:

• size
• scale
• experience
• power

These aspects are all insular – it is the organisation itself that benefits directly and not the customer. Historically, some organisations grew so big that, whether they reached monopoly-status or not, they began to stagnate and eventually decline.

Modern competitive advantage is more customer-centric. Size alone does not ensure continued survival, and organisations now often position themselves to compete on aspects such as:

• innovation
• quality
• flexibility
• service
• speed

Growth nowadays can therefore be measured in other ways, such as growth in pervasiveness or influence. And with ever-growing awareness of resource sustainability, it is becoming clear that bigger is not always better.

Critical success factors (CSFs)

Sometimes organisations make the error of trying to be 'all things to all men' and get pulled in too many directions. Critical success factors are vital for a strategy to succeed and need to be clear to all involved. Porter argued that the two main CSFs are price and differentiation and an organisation should focus on one or the other. However, he went on to point out that many get muddled and end up 'stuck-in-the-middle'. Others feel that a basket of several might be more realistic and representative.

Stakeholder concerns

People rarely are comfortable with change and stakeholders are no exception. Strategic plans invariably cause upset to one or more of the stakeholder groups and managing this conflict is important. For example if an organisation wants to close down a loss-making plant, this will benefit the shareholders but employees are upset due to the loss of work. Conversely, an environmental pressure group might oppose the opening of a new plant whereas the local community would welcome the job opportunities. There are several approaches an organisation might take in dealing with pressure groups:

• ignore – hope the media will lose interest
• fight – mount a legal defence
• accommodate - compromise
• comply – give in to demands
• get out – exit the arena totally

See Stakeholders for more detail on managing stakeholder relationships and conflicts.

Business plans

A business plan crystallises all of the above strategic thinking into a stand-alone document. Such plans are either for internal use – as a reference aid for management, or for external use - to secure funding or to attract a business partner. As such the format varies with the purpose, but there are several important points when developing them:

• Talk is cheap, doing is harder
• Those that prepare the plan often don't have to implement it
• Take off the rose-tinted spectacles when preparing the plan – be brutal
• Sales and revenue forecasts are often wildly optimistic
• Knowing the critical numbers is essential – break-even point, return-on-capital, market size etc
• One prepared, the plan is immediately out-of-date – periodic updating is essential
• Assume competitor reaction will be hostile at best
• It is the planning process with its associated studies, discussions, reflections and decisions that is important. The plan is just the output. It is not cast in stone – things change, so should the plan

As an illustration, a business plan for the development and launch of a new product is discussed further in the members section.