THE CONCEPT OF STRATEGY

AND STRATEGIC
MANAGEMENT
G. Tyge Payne, PhD

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 Strategic Management
Strategy: The unifying theme that gives coherence and
direction to the decisions of an organization
Strategic Management: Consisting of the analysis,
decisions, and actions an organization undertakes in
order to create and sustain competitive advantages.
Or, the Strategic Management Process is:
The full set of commitments, decisions, and actions
required for a firm to create value and earn above-
average returns. (Hitt, Hoskinson, & Ireland, 2004, p. 4)

Strategic Management basically seeks to answer the question:

How and why do some firms outperform others?
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 Other Definitions of Strategy
Oxford Dictionary: The art of war, especially the planning of
movements of troops and ships etc., into favorable positions; plan
of action or policy in business or politics etc.
Chester I. Barnard: Strategy is intended to focus on the
interdependence of the adversaries’ decisions and on their
expectations about each other’s behavior.
Alfred D. Chandler Jr.: The determination of the long run goals and
objectives of an enterprise, and the adoption of courses of action
and the allocation of resources necessary for carrying out these
goals.
Kenneth Andrews: Strategy is the pattern of objectives, purposes or
goals and the major policies and plans for achieving these goals,
stated in such a way as to define what business the company is in or
is to be in and the kind of company it is or is to be.
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 The Origins of Strategy
Know the other and know yourself: Triumph without peril.
Know Nature and know the Situation: Triumph completely.
- Sun Tzu (~360 B.C.)
• Business strategy is a relatively young field of study – but its
roots go back to early military strategy.
• Strategy comes from the Greek word strategos, which is
formed from stratos, meaning army, and –ag, meaning to
lead.
• Carl von Clausewitz wrote in the early 1800’s that “tactics…
[involve] the use of armed forces in the engagement, strategy
[is] the use of engagements for the objects of war.”

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 More Recent Historical
Development of Business Strategy
• Not until very large companies with the ability to influence the
competitive environment within their industries did strategic
thinking in the business world begin to be articulated.
– Alfred Sloan, CEO of GM, 1923 – 1946 - One of the first to analyze competition,
Ford, and devise a strategic plan based on its strengths and weaknesses.
– Chester Barnard, Senior Executive of New Jersey Bell, 1930s - Argued managers
should pay attention to “strategic factors” which depend on “personal or
organizational action.”
• Wartime (WWI and WWII) efforts also impacted strategic
thinking and use of formal strategic tools and concepts:
– Allocation of scarce resources
– Use of quantitative analysis in planning
– The concept of “learning curves”
– The concept of “distinctive competence” - first mentioned by Philip Selznick, a
sociologist, in a debate about whether or not to combine the military forces into a
single unit (i.e., no Army, Navy, Air Force, Marines, just the US Military).
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 More Historical Development
• It wasn’t until the 1950’s that strategy was truly introduced in business
schools as a way of analyzing the competitive environment and setting
organizational goals and objectives to fit that environment.
• These concepts serve as the foundation of strategic management study:
– Previous “Business Policy” perspectives looked at maintaining a “balance in
accord with the underlying policies of the business as a whole.” – Harvard
– Kenneth Andrews’ SWOT Analysis was developed – still in use today.
– Theodore Levitt’s “Marketing Myopia” argued that when companies fail it
typically is because firms focus on the product rather than the changing
patterns of consumer needs and tastes.
– Igor Ansoff argued, in response to Levitt, that a firm’s mission should exploit
an existing need in the market, rather than using the consumer as the common
thread in business. “In reality a given type of customer will frequently have a
range of product missions or needs.” Corporate Strategy, 1965.
– BCG developed the “experience curve” and portfolio analysis concepts.
– McKinsey & Company’s development of SBUs and the nine-block matrix.
– Mintzberg’s “Deliberate, Emergent & Realized Strategies”
– Porter’s Generic Strategies 6
 The Evolution of Strategic Management
1950s 1960s-early 70s Mid-70s-mid-80s Late 80s –1990s 2000s

DOMINANT Budgetary Corporate Positioning Competitive Strategic

THEME planning & planning advantage innovation
control

MAIN Financial Planning Selecting Focusing on Reconciling

ISSUES control growth &- sectors/markets. sources of size with
diversification Positioning for competitive flexibility &
leadership advantage agility

KEY Capital Forecasting. Industry analysis Resources & Cooperative

CONCEPTS budgeting. Corporate Segmentation capabilities. strategy.
& Financial planning. Experience curve Shareholder Complexity.
TOOLS planning Synergy Portfolio analysis value. Owning
E-commerce. standards.
— Knowledge Management—

Coordination Corporate Diversification. Restructuring. Alliances &

MANAGE-
MENT & control by planning depts. Global strategies. Reengineering. networks
IMPLIC- Budgeting created. Rise of Matrix structures Refocusing. Self -organiz
ATIONS systems corporate Outsourcing. ation
& virtual
planning organization
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Ansoff’s Product / Mission Matrix*
Present New
Product Product

Present Market Product

Mission Penetration Development

New Market
Diversification
Mission Development

*Categories define the common thread in an

organization’s business/corporate strategy.
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 BCG’s Growth-Share Matrix

High Low
Share Share

High
Growth Star
Question
Mark
?
Bark!!
Slow Cash
Dog
Growth Cow

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 Forms of Strategy
In
St t e n d Mintzberg’s
Mintzberg’sCritique
Critiqueof
ofFormal
FormalStrategic
StrategicPlanning:
Planning:
ra ed •The fallacy of prediction – the future is
•The fallacy of prediction – the future is
te g unknown
unknown
y •The
•Thefallacy
fallacyof
ofdetachment
detachment ----impossible
impossibleto to
divorce formulation from implementation
divorce formulation from implementation
•The
•Thefallacy
fallacyof
offormalization
formalization--inhibits
--inhibitsflexibility,
flexibility,
De spontaneity, intuition and learning.
lib spontaneity, intuition and learning.
era
te
S tra
t eg
y
Realized
Unrealized Strategy
Strategy

Emergent **Normally emergent strategy comes from

Strategy learning and dissemination within the organization.
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 Porter’s Generic Strategies
Competitive Advantage
Lower Cost Differentiation

Strategy 1 Strategy
Strategy22
Broad
Target Cost Differentiation
Differentiation
Leadership
Competitive
Scope Strategy
Strategy3A
3A Strategy
Strategy3B
3B
Narrow
Cost
CostFocus
Focus Differentiation
Differentiation
Target
Focus
Focus

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 Why is SM, as a field of study, necessary?
Why are all these theories/tools needed ?

• Provides a framework for thinking about the “business”

• Creates a fit between the organization and its external
environment.
• Provides a process of coping with change and organizational
renewal
• Fosters anticipation, innovation, and excellence
• Facilitates consistent decision-making
• Creates organizational focus
• Acts as a process of organizational leadership.
• Finally and most importantly: To help the organization to
succeed (outperform) against its competition!!
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 Strategy, Survival and Success
• The ultimate goal of the organizations is to be
successful – success is:
• Survival (long-term success)
• Achievement of Goals
• Above average returns/Profitability (probably most important,
because it determines the ability to achieve the above two)
• Strategy can help achieve success, but it doesn’t
guarantee it—certain features of strategy directly
contribute to success:
1. Goals that are simple, consistent, and long-term.
2. Profound understanding of the competitive environment.
3. Objective appraisal of resources.
4. Effective implementation.
• These observations concerning the role of strategy can be
made in relation to most human endeavors be it warfare,
chess, politics, sport or business. 13
Competition and Competitive Advantage
• Competition provides the rationale for
strategy – without competition, strategy is
of no concern.
• The essence of strategy is the
interdependence of competitors—or the
establishment of sustainable competitive
advantage over rivals.
• The study of strategy involves how we go
about identifying, establishing, and
sustaining competitive advantage.

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 Thinking Strategically:
The Three Big Strategic “Analysis” Questions

1. Where are we now? What is our situation?

2. Where do we want to go?
– Business(es) we want to be in and market
positions we want to stake out
– Buyer needs and groups we want to serve
– Outcomes we want to achieve
3. How will we get there?
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 Differing Perspectives of the Strategic
Management Process
I/O Model RBV Model
External Environment Resources

Industry Attractiveness Capability

Strategy Formulation Sustainable CA

Assets/Skills Assessment Strategy Formulation

Implementation Implementation
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 Four Assumptions of the I/O Model
1. The external environment is assumed to possess
pressures and constraints that determine the strategies
that would result in above-average returns.
2. Most firms competing within a particular industry are
assumed to control similar strategically relevant
resources and to pursue similar strategies in light of those
resources.
3. Resources used to implement strategies are highly mobile
across firms.
4. Organizational decision makers are assumed to be
rational and committed to acting in the firm’s best
interests, as shown by their profit-maximizing behaviors.

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Our Approach to Studying the Strategic
Management Process

• Both the I/O and RBV perspectives are

useful to managers and essential to
understanding the strategic management
process.
• One essentially takes an outward-in (I/O)
perspective while other takes an inward-out
(RBV) perspective.

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 Formulating
FormulatingDirections
Directions Organizational Culture
--Develop
DevelopVision/Mission
Vision/Mission(1)
(1) Stakeholder Influence
-Set
-SetObjectives
Objectives(2)
(2) Values / Ethics
(6)
Control(6)

Opportunities and Threats

StrategicControl

Strategic
StrategicAnalyses
Analyses(3)
(3) from Economic, Political,
Technological etc Sources
External Environment
Strategic

Opportunities and Threats

Competitor/Stakeholder from Competition and
Key Stakeholders

Internal Organization Organizational Culture

(5)
Implementation(5)

Stakeholder Influence
Values / Ethics
Implementation

Strategy
StrategyFormulation
Formulation(4)
(4)
-Formulate
-Formulateand
andConsider
Consider Context of Strategy
(type of organization, culture, values,
Alternatives
Alternatives life cycle competitive position)
-Make
-MakeStrategy
StrategyChoice
Choice 19
 Birnbaum’s Strategy 21 Process
Similar to
• Examine the Current Business Model Internal and
Competitive
• Go Beyond the Current Business Model Analysis
• Design a “Grand Strategy”
Similar to
• Develop a Compelling Vision Internal and
• Assure Enablers of Strategy Competitive
• Intellectual Capacity Analysis
• Processes Basic Decision
• Organizational Structures Strategic to Make Major
• Technologies Formulation and Change or Not
• Implementation
External Relationships
• Capital Resources
Related Issues to
• Set Objectives to Measure Success Monitor
• Design a Monitoring Process Implementation
Process 20
Hambrick & Fredrickson, 2001
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 The Strategy Concept
Levels of Analysis
C o rp o ra te
• Where to Compete? S tra te g y

B u s in e s s
• How to Compete? S tra te g y

• How to Contribute? F u n c tio n a l

S tra te g y

C h o ic e o f P r o d u c ts
C h o ic e o f M a r k e ts
C h o ic e o f C o m p e tito r s

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 INDUSTRY
ATTRACTIVENESS

Which CORPORATE
RATE OF PROFIT businesses STRATEGY
ABOVE THE should we be
COMPETITIVE in?
LEVEL

How do we
make
money? COMPETITIVE
ADVANTAGE

How should BUSINESS

we compete? STRATEGY

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