RSS Feed for the unit Strategic view of performance

Introduction

In this session we take a closer look at what is meant by strategy. The classical approach to strategic management treats strategic planning and control as purely the province of senior managers. More recent approaches accept that middle-level managers may have an important role to play, not only in implementing strategy but also in the emergence and formulation of strategic direction. We will look at three broad approaches to understanding strategy. First, we examine the idea of strategy as a formal, top-down process of analysis and planning based on a considered response to the environment in which the organisation operates, and its core mission. Second, we consider strategy as the identification and development of core capabilities and networks of relationships, as a source of competitive advantage. Third, we turn to one important aspect of strategy: understanding and managing the creation of value, within and between organisations. Finally, we consider the ways in which strategic direction can emerge over time as the accumulation of smaller tactical decisions, as opposed to a formal, top-down process of analysis and planning.

Learning Outcomes

After studying this unit, you should be able to:

explain the difference between a ‘markets approach’ and a ‘resource-based approach’ to strategy, and how they complement each other;
explain what is meant by ‘the value chain’, and how it applies to your organisation;
explain what is meant by ‘emergent strategy’ and why intended and actual strategy may differ;
contribute more effectively to developing and implementing strategy in your organisation.

Activity 1

1 What do we mean by strategy?

Activity 1

Take a couple of minutes to think about what you understand by the word ‘strategy’.

Now read the discussion

Commentary

The first context in which many of us will have come across the word ‘strategy’ is military. In military parlance, strategy describes the broad set of principles and objectives determining the conduct of a war. Strategy is contrasted with the day-to-day ‘tactical’ decisions taken in the field as events unfold. Similarly, we often talk about strategy in the context of games. A football team may develop a strategy for a match based on an understanding of the strengths and weaknesses of the other side, the nature and condition of the pitch, and their own strengths and weaknesses. The team's tactics in response to the unfolding events of the match will be guided by that strategy. The idea of strategy has also come to be adopted in the world of business and, to some extent, in not-for-profit organisations.

As we mentioned in the introduction, it is possible to understand strategy from a number of different perspectives. Each of the different perspectives implies a different understanding of what we mean by strategy. For the purposes of this course we will adopt the following broad definition of strategy:

Strategy is the pattern of activities followed by an organisation in pursuit of its long-term purposes.

First, strategy is concerned with the broad pattern of an organisation's activities, not the day-to-day detail. Second, strategy is concerned with the long term. Finally, strategy is concerned with organisational purposes: these may have a commercial focus, such as market penetration, profitability and growth; or, for some organisations, they may concern political or social goals.

1.1 Organisational purposes

1 What do we mean by strategy?

1.1 Organisational purposes

The starting point for any strategy is the purposes of an organisation. Being clear about organisational purposes is not a trivial exercise. The very phrase ‘organisational purposes’ is potentially misleading, suggesting as it does some clear and agreed set of goals. In practice, the purposes of an organisation are often unclear and often contested. Different groups both inside and outside the organisation may have competing views (with varying degrees of influence) of what those purposes should be. Further, organisational purposes are often tacit rather than clearly articulated.

Common purposes include:

Profitability – This is the dominant performance measure for commercial western organisations. It is measured either in terms of absolute profits or as a ratio, such as return on capital or earnings per share. But this should not be assumed to be the dominant objective of all organisations, for the following reasons:
• Public-sector service organisations have no profit objectives. They are likely to use service measures of output and to relate these to their cost base – an approach that may have been forced upon them by governments’ emphasis on cash-limited budgets.
• Voluntary-sector organisations may measure success in terms of levels of funding obtained and levels of service provision.
Commercial organisations outside the UK and the USA often give less emphasis to profitability as the dominant measure than their Anglo-American counterparts.
Small organisations – or at least those that survive – will give equal weighting to cash flow as to profitability
Growth – This is an important objective for many organisations. Indeed, for some organisations (for example organisations entering new markets) it is the overriding objective.
Shareholder value – As shareholders are the owners of commercial organisations, it is logical that one objective should be to maximise the value of their holdings. What is surprising is the limited extent to which this objective features in many strategic management processes, although some organisations do tie their strategy to an explicit analysis of shareholder value. This is due in part to the impracticability of shareholder value as a basis for many management decisions, and in part to the limited control that shareholders are, in practice, able to exert over the managers of their assets.
Customer satisfaction – The three previous objectives ignore the interests of customers, without which neither commercial nor non-commercial organisations can long survive. The massive increase in competition in many commercial markets, the erosion of monopolies and the shift towards increased consumer power are obliging commercial organisations to give greater weight to customer interests.
Some organisations pursue other objectives, including ones relating to operations, innovation and employee satisfaction. Increasingly, albeit often reluctantly, organisations in all sectors are recognising that performance objectives need to take account of a wider range of stakeholders, and that the needs of these stakeholders should be balanced against each other.

1.2 Stakeholders

1 What do we mean by strategy?

1.2 Stakeholders

The balanced scorecard framework (Kaplan and Norton, 1998) is one approach to taking account of stakeholder interests. It is based on the principle that organisations need to serve the interests of multiple stakeholder groups simultaneously. Failure to serve the needs of one is likely to prevent them from effectively serving the needs of the others. For example, failure to serve the needs of customers will damage a firm's ability to serve the financial needs of shareholders.

Kaplan and Norton explicitly recognise three stakeholder groups in their work on the balanced scorecard: employees, customers and shareholders. However, for most organisations a much wider range of stakeholders potentially needs consideration. Figure 1 shows a typical set of stakeholders. While failure to serve the needs of one set of stakeholders is likely to cause problems in serving the needs of others, there may also be conflicts between their interests. Organisations often have to make trade-offs between conflicting objectives: for example, short-term return on shareholders’ funds versus job security versus environmental concerns.

Figure 1: An organisation's stakeholders

The ‘near environment’

2 Market-based approach to strategy

The ‘near environment’

All organisations operate in a near or micro-environment, with which they frequently interact. These organisations will include customers, suppliers and competitors. Examples of the impact of the near environment on an organisation include:

competition for customers
competition for (or collaboration with) suppliers
competition for resources
competition (or collaboration) to influence external factors.

A market-based approach to strategy starts by analysing the near environment and the organisation's resources, and seeks through a process of further analysis and planning to fit the organisation to its environment.

The near environment is usually contrasted to the far environment (the macro influences on the organisation such as general economic and political trends).

2.1 Porter's five forces framework

2 Market-based approach to strategy

2.1 Porter's five forces framework

Much strategy (particularly in the private sector) is concerned with establishing and maintaining competitive advantage. One of the tools available to assist managers in analysing the near environment for this purpose is Porter's ‘five forces of competition’ (Porter, 1980). This model is widely used as a means of understanding the structure of an industry or sector, and as a framework within which to identify possible structural changes.

The model identifies five types of competitive pressure within a sector: established competitors, new entrants to the market, substitute products, and the bargaining power of suppliers and of customers. These are summarised in Figure 2.

Suppliers are important because their relative power can determine what proportion of the price of the final product they capture. In the automotive component business, for example, many makers of components vie with each other to supply a small number of car manufacturers, allowing the car manufacturers to put pressure on suppliers’ margins. In contrast, a large number of computer manufacturers are supplied by a small number of makers of computer chips for central processors. Customers may vary similarly in their relative power.

Figure 2: The five forces of competition (Source: Porter, 1980)

Organisations need to consider not only the behaviour of current competitors, but also the potential for other organisations to enter the market. The important issue here is assessing the level of barriers to entry. For example, in sectors where brand recognition is important, new entrants need to spend heavily to build a brand. In other sectors, the minimum economic scale of operations may be high, thereby requiring heavy capital investment by new entrants.

An organisation needs to consider not only those competitors offering similar products or services, but also those offering products or services that may act as substitutes. For example, cheaper restaurants now suffer considerable competition from supermarkets selling high-quality, easily prepared ‘ready meals’ to eat at home as a substitute for dining out.

Porter argues that the degree of competitiveness or rivalry within an industry depends on the availability of substitutes, the strength of suppliers and buyers (customers), and the threat of new entrants (which in turn depends on the ease of entry). Thus pharmaceutical research, with its high entry costs, sophisticated technology and patent protection, has low levels of rivalry and high margins and profitability. Only the growing power of customers (health services) threatens this profitability. In the restaurant business, in contrast, the entry barriers and start-up costs are low, customers have a wide choice and therefore considerable bargaining power, and there is a range of substitutes. The restaurant trade is highly competitive and margins and profitability are generally low.

2.2 Applying the five forces model

2 Market-based approach to strategy

2.2 Applying the five forces model

A five forces analysis allows an organisation to consider the relative attractiveness of different industry sectors when making strategic choices about exiting or entering particular sectors and markets. Close analysis of these forces can allow an organisation to find a position in the sector where it can best defend itself against them or, most effectively, influence them.

Understanding Forces of Competition In Private Sector organisations.

The nature of the five forces within an organisation's environment changes over time. For example, a large part of the food retail sector used to be characterised by relatively large and powerful distributors serving numerous small and weak retailers. Over time the balance of power has shifted in many countries as food retailing has become concentrated in a few supermarket chains with massive purchasing power. A different type of change is illustrated by the market for telephone services. In the early days of mobile telephony, mobile telephones were a complement to, rather than a substitute for, telephone services based on landlines. As price structures have changed in the industry, mobile telephony has increasingly become a direct substitute for landline-based telephony. The five forces analysis provides a framework for analysing changes such as these. Changes in the level and kind of competition affect the structure of the industry, and the structure of the industry affects the nature of competition.

Understanding Forces of Competition Outside Private Sector organisations.

Porter's five forces framework is clearly most applicable to private-sector organisations operating in free markets. However, elements of the model apply to all organisations; and the notion of strategy, as starting from an analysis of the near environment, is important in all sectors. For some organisations, an extension of the model may be useful. For example, in analysing the competitive environment faced by many organisations, it is important to understand the role played by government regulation. David McKevitt (2000) has suggested a model for analysing the environment of what he calls street-level public organisations (that is, public-sector organisations that interact directly with the public). This model is summarised in Figure 3.

Figure 3: Environment of public-sector organisations (Source: based on McKevitt, 2000)

Professional associations are important since they set standards and may provide career structures for the professionals involved in service delivery (for example nurses, doctors or social workers).

Related street-level organisations may be important either as substitutes (e.g. Citizens Advice Bureau in relation to social services organisations as sources of advice) or collaborators (for example community health organisations and hospitals).

Suppliers are important in the same way as in the private sector (although we should note that some suppliers will also be related street-level organisations).

The relationship with the client-citizen, however, is not the same as with buyers in the Porter model. Often the client is not paying for services and is a consumer rather than customer. However, in many cases there is some element of choice and their patronage is important to the organisation in securing resources.

In most cases, government is the funder (although the funding relationship can be at arm's length or close).

McKevitt points out that it is important to understand not only these separate aspects of the near environment, but also the tensions and relationships between them: for example, the frequent gaps between professional bodies’ view of appropriate standards and public opinion, or the relationship between government views and the media impact of client groups.

2.3 Strategy as fit between organisation and environment

2 Market-based approach to strategy

2.3 Strategy as fit between organisation and environment

The market perspective on strategy suggests that a major focus of strategic decision-making is how best to ensure an effective fit between an organisation and its environment. However, that fit is not static. The challenge is constantly to monitor and forecast changes in the business environment and to adapt the organisation and its strategy accordingly.

Box 1 Managing strategic fit at the US Nature Conservancy

The US Nature Conservancy had a clear mission: to preserve plants and animals and special habitats that represent the diversity of life. Traditionally they had sought to achieve this mission through the purchase and management of critical habitats for endangered species. They measured their success by the land area they owned and protected and in terms of their membership figures.

However, during the 1990s they began to realise that this strategy was no longer adequate to achieve their mission. Increasing development pressures meant that often the threats to wildlife habitats were coming from outside those areas. For example intensive farming on the outskirts of protected areas was causing damage. They needed a new strategy to meet the new threats.

They shifted their efforts from the purchase and protection of land parcels to a strategy of influencing land use in much wider areas. They hoped to ensure that economic and recreational activities going on outside critical habitats don't undermine the ecological balance within them.

To support this new strategy they needed to develop new capabilities. They had always relied on a strong base of scientific expertise and skills in land acquisition and management. These continued to be important, but they also needed to develop two further capabilities. First, they needed skills in community development to build and develop support for conservation in local communities around critical habitats. Second, they needed business development and marketing skills. An important strand of the strategy was to promote the growth of businesses with low environmental impact in environmentally sensitive areas to reduce tension between conservation and local economic health and employment prospects.

(Source: Howard and Magretta, 1995)

Activity 2

In relation to a product or service offered by your organisation, make some notes on the nature of its near environment, using either Porter's or McKevitt's models (or a sensible adaptation).
What are the most important external forces faced by your organisation, that need to be taken account of in formulating strategy for this product or service?

Now read the discussion

Commentary

One of the first things that may have struck you is that, in order to answer these questions in other than a very superficial way, you require a great deal of information. The activity may have left you with more questions than answers about your organisation's near environment. Often the information that we have – about competitors (current and potential), customers, suppliers and potential substitutes for our products or services – is heavily anecdotal. Although many organisations invest significant resources in scanning their environment and understanding the competitive forces they face, the information they gain is often partial and quickly outdated.

Gathering information is of course only the start. How is that information analysed and used? Is the organisation involved in double-loop learning, questioning its basic assumptions about its activities (like the US Nature Conservancy in the example above), or is information discounted if it does not fit basic assumptions?

3.1 Understanding organisational capabilities

3 Resource-based approach to strategy

3.1 Understanding organisational capabilities

Corporate success … is not the realisation of visions, aspirations, and missions – the product of wish-driven strategy. It is the result of a careful appreciation of the strengths of the firm and the economic environment it faces. But nor is success often the realisation of a carefully orchestrated corporate plan. The strategy of successful firms is adaptive and opportunistic. Yet in the hands of a successful company an adaptive and opportunistic strategy is also rational, analytic, and calculated. Adaptiveness does not mean waiting for something to turn up. Opportunism is only productive for a firm which knows which opportunities to seize and which to reject…

Corporate success derives from a competitive advantage which is based on distinct capabilities, which is most often derived from the unique character of a firm's relationships with its suppliers, customers, or employees, and which is precisely identified and applied to relevant markets.

(Kay, 1993, p. 4)

In the previous section, we discussed how organisations fit into their competitive environment. In this section, we shift the emphasis from the external to the internal context of strategy: the resources that an organisation possesses, or needs to possess, as the basis for a robust strategy. We shift from the sector to the organisation, by looking at:

what are the organisation's capabilities, and its important networks of relationships
how relevant they are to the objectives of the organisation
what new capabilities and relationships may be needed over time
how these should be built or acquired.

Organisational capabilities are also often referred to as organisational competences, although strictly a capability refers to the potential and competence suggests an applied and well-practised capability.

By capabilities we mean an organisation's capacity to engage in a range of productive activities. All organisations possess unique bundles of resources, and it is how these resources are used that determines differences in performance between organisations. Resources are not productive in themselves – they need to be converted into capabilities by being managed and co-ordinated.

It is these resultant capabilities that, if hard to imitate, are the main source of competitive advantage. Strategy, from the resource perspective, is therefore about choosing among and committing to long-term paths of capability development. Figure 4 summarises the relationship between resources, capabilities and competitive advantage.

Figure 4: The relationship between resources, capabilities and competitive advantage (Source: Grant, 1998)

To confer competitive advantage on an organisation, capabilities need to have a number of properties:

Inimitability – They should be difficult for other organisations to imitate or acquire. For example, if key capabilities rest on the competence of particular individuals, other organisations may tempt them away with a better offer. By contrast the capability to generate effective learning within the organisation may be rather harder to copy or buy.
Durability – They should be durable. For example, many technological innovations are quickly superseded by new developments. An individual technological innovation may be too short-lived to confer real advantage. However, the capability to generate technological innovations may confer a more lasting advantage.
Relevance – They should be relevant. For example, in the banking sector, the size of the branch network used to be a key source of strategic advantage. Those banks that were able to deliver services geographically close to the customer were more likely to secure their business. As telephone and Internet banking become more prevalent, branch networks become less strategically relevant.
Appropriability – Not all profits generated by a resource flow to the owner of that resource. The division of the value generated is subject to negotiation between the organisation, its employees, customers, suppliers, distributors and partners. For example, a farming business that develops a capability to produce more cheaply may reap some benefits in increased profitability but, faced with powerful retail chains as its customers, it may come under pressure to pass on much of the cost savings to them. This will result partly in increased profits for the retail chains and partly in reduced prices for the consumer. Similarly, capabilities that rest on the skills of individual employees may result in the organisation having to pay a large proportion of the value generated to those employees in order to keep them from taking jobs elsewhere.

John Kay (an influential economist and writer on business strategy) identifies three main classes of organisational capability that meet the above criteria: innovation, architecture and reputation.

Innovation is an obvious source of distinctive capability, but it is much less often a sustainable or appropriable source because successful innovation quickly attracts imitation. Maintaining an advantage is most easily possible for those few innovations for which patent protection is effective. There are others where process secrecy or other characteristics make it difficult for other firms to follow. More often, turning an innovation into a competitive advantage requires the development of a whole range of supporting strategies.

What appears to be competitive advantage derived from innovation is frequently the return to a system of organisation capable of producing a series of innovations. This is an example of a second distinctive capability which I call architecture. Architecture is a system of relationships within the firm, or between the firm and its suppliers or customers, or both. Generally the system is a complex one and the content of the relationships implicit rather than explicit. The structure relies on continued mutual commitment to monitor and enforce its terms. A firm with distinctive architecture gains strength from the ability to transfer information which is specific to the firm, product or market within the organisation and to its customers and suppliers. It can also respond quickly and flexibly to changing circumstances. It has often been through their greater ability to develop such architecture that Japanese firms have established competitive advantage over their American rivals.

A third distinctive capability is reputation. Reputation is, in a sense, a type of architecture but it is so widespread, and so important, that it is best to treat it as a distinct source of competitive advantage. Easier to maintain than create, reputation meets the essential conditions for sustainability. Indeed an important element of the strategy of many successful firms has been the transformation of an initial distinctive capability based on innovation or architecture to a more enduring one derived from reputation.

(Kay, 1993, p. 14)

3.2 Building capabilities and relationships

3 Resource-based approach to strategy

3.2 Building capabilities and relationships

So, from the resource-based perspective, an important area of strategic choice concerns how to recognise and build relevant, inimitable, durable, and appropriable capabilities.

First, it is important that the building of capabilities does not occur in a vacuum. The resource-based view accepts the importance of understanding the near environment. For example, Collis and Montgomery (1995) describe how Masco Corporation invested heavily in building a strong capability in metalworking, as a basis for diversification into closely related industries. However, buyers were highly price-sensitive, suppliers were powerful and entry barriers were low in these industries. Consequently, Masco made low returns on their investment in building capability.

Second, capabilities that confer genuine competitive advantage often take a long time to build. They require organisations to show persistent intent over an extended period. Many organisations find it hard to take a sufficiently long-term view to build such capabilities.

Box 2 Marks and Spencer's capabilities in a changing environment

Marks and Spencer (a UK retail chain) has been a highly profitable organisation. Its profitability has been founded on a unique set of resources and capabilities that together have given it significant competitive advantage.

A base of properties in prime retail locations which help M&S achieve occupancy costs well below sector averages.
A brand reputation with a wide base of customers which has not required reinforcement or building through advertising or promotions.
Employee loyalty leading to lower than average turnover and retention of employee skills.
Close and effective management of supply chains leading to lower costs and higher quality.
Flat management structure combined with effective management systems.

(Source: Collis and Montgomery, 1995)

Despite these strengths, Marks and Spencer's performance declined at the end of the 1990s. It became increasingly apparent that these capabilities were no longer sufficient to maintain competitive advantage. In particular the reliance on own-brand goods, and on a brand reputation unsupported by advertising, were creating difficulties. Consumer tastes had changed, and the target market was placing increased value on named clothing brands. At the same time competitors were increasingly sourcing goods overseas while M&S had relied on a high proportion of UK suppliers, so driving up its relative cost base. It became clear it would have to develop new capabilities if it were to survive and prosper.

Activity 3

Consider the Marks and Spencer example just given. Categorise M&S's resources and capabilities in terms of John Kay's categories, leading to competitive advantage and later to their down turn.You can use Table 1 to help you think about these issues.

Contribution of organisational capabilities to competitive advantage

Organisational capabilities	Leading to competitive advantage	Contributing to down turn	Information not available
Innovation
Architecture: Relationships within firm
Architecture: Relationships between firm and suppliers
Architecture: Relationships between firm and customers/ buyers
Reputation

Now read the discussion

Commentary

A base of properties in prime retail locations which help M&S achieve occupancy costs well below sector averages.

This property base can be seen as a resource that translates into a particular capability (the ability to present goods to the customer in a wide range of locations they want to shop, consistently and at low cost). In itself this does not translate into a competitive advantage – other retailers can purchase prime locations. However, over time the persistent effect of this widespread network of retail locations has been to help build reputation.

A brand reputation with a wide base of customers which has not required reinforcement or building through advertising or promotions.

Again, this is about reputation – although, as Kay points out, this reputation is at heart about the long-term relationships Marks and Spencer has built up with its customers (who are also an important referral market).

Employee loyalty leading to lower than average turnover and retention of employee skills.

This concerns the relationships M&S has built up over time with its employees. We might call this the human resource architecture.

Close and effective management of supply chains leading to lower costs and higher quality.

Again this concerns architecture: this time, the network of relationships with suppliers.

Flat management structure combined with effective management systems.

This final point again concerns architecture: the routines and systems for managing internal relationships.

The downturn in the fortunes of M&S rests on two main problems with the relevance of its traditional capabilities to a changing environment. First, it suffered a decay in reputation as M&S lost track of what was required to maintain its customer and reference market architecture. Second, the relevance of its supply chain architecture was lost in the face of competitive cost pressures.

3.3 Understanding the value chain

3 Resource-based approach to strategy

3.3 Understanding the value chain

The value of any end product or service is built up in stages. These stages may all take place in the same organisation or across a series of organisations. By analysing the value chain, an organisation can gain a better understanding of the key capabilities involved in creating the products or services it is involved with. Essentially, the value chain can be regarded as a complete transformation model overlaid by the necessary support functions. Figure 5 shows a simplified model of the value chain involved in producing Open University educational services.

Figure 5: An OU value chain

At its simplest, a value chain is an activity path through an organisation. It tells you what the organisation does and the order in which it does it. It should also tell you something about how it does it. A value chain can be a very helpful tool for understanding the difference between two organisations that appear to be functioning in similar ways in the same sector. This is because organisations can construct their value chains in very different ways. A different design of the value chain, by which we mean a different activity path through the organisation, might simply indicate a different way of doing things, or it might generate notable competitive advantage.

Value chains can be used to identify sources of increased efficiency and also to facilitate ‘benchmarking’ of how competitors create value and how their activities compare with yours. Value chain analysis has four underlying elements:

identifying the cost of each activity
understanding what factors are driving the costs behind each activity
monitoring the processes of competitor organisations in relation to each activity (‘benchmarking’)
understanding the linkages in the chain and horizontal strategy opportunities.

You may find that even a very simple overview of an organisation's value chain gives a great deal of insight into its relative strengths and weaknesses. It is also the case that imaginative approaches to reconstructing (‘reconfiguring’) the value chain can release new ways of clustering resources and therefore new types of capability within organisations.

Analysis of the value chain enables us to identify where an organisation's distinctive capabilities are based. They may arise from clear advantages in particular functions (e.g. R& D, manufacture), or from the integration of individual functional capabilities. These distinctive capabilities give rise to core competencies, which are what make the organisation what it is. They are the key to the continued success of the institution, and effective strategies need to recognise and build on them.

Value chain analysis, together with an understanding of an organisation's key capabilities, can provide a basis for decisions about whether to integrate all stages of the value chain within the same organisation or to enter into partnerships with other organisations better equipped to deliver some of those stages. Equally, value chain analysis may allow an organisation to make decisions about whether to extend its activities up or down the value chain. Certain activities on any value chain might add a high proportion of financial value to the finished product or service: these are known as high value-added activities.

Box 3 Managing the value chain at Li & Fung

Li & Fung is Hong Kong's largest export trading company. The company has moved from acting as a middleman between retailers and manufacturers to playing a much more extensive role in the management of the whole value chain. They work closely with their customers in the design and specification of products. Li and Fung have a close involvement in the high value-added front-end and back-end activities in the value chain. They are closely involved with design, engineering and product planning at the front end. At the back end, they carry out quality control, testing and handle logistics. They manage the lower value-added middle stages through a large network of (7,500) suppliers across the region. Li & Fung's CEO, Victor Fung, explains:

Say we get an order from a European retailer to produce 10,000 garments. It's not a simple matter of our Korean office sourcing Korean products or our Indonesian office sourcing Indonesian products. For this customer we might decide to buy yarn from a Korean producer but have it woven and dyed in Taiwan. So we pick the yarn and ship it to Taiwan. The Japanese have the best zippers and buttons, but they manufacture them mostly in China. OK, so we go to YKK, a big Japanese manufacturer and we order the right zippers from their Chinese plants. Then we determine that, because of quotas and labour conditions, the best place to make the garments is Thailand. So we ship everything there. And because the customer needs quick delivery we may divide the order across five factories in Thailand. Effectively we are customising the value chain to best meet the customer's needs.

In a sense, we are a smokeless factory. We do design. We buy and inspect the raw materials. We have factory managers, people who set up and plan production and balance the lines. We inspect production. But we don't manage the workers, and we don't own the factories.

Think about the scope of what we do. We work with about 7,500 suppliers in more than 26 countries. If the average factory has 200 workers – that's probably a low estimate -then in effect there are more than a million workers engaged on behalf of our customers. That's why our policy is not to own any portion of the value chain that deals with running factories. Managing a million workers would be a colossal undertaking. We'd lose all flexibility; we'd lose our ability to fine-tune and co-ordinate. So we deliberately leave that management challenge to the individual entrepreneurs we contract with.

Our target in working with factories is to take anywhere from 30% to 70% of their production. We want to be important to them, and at 30% we're most likely their largest customer. On the other hand, we need flexibility – so we don't want the responsibility of having them completely dependent on us. And we also benefit from their exposure to their other customers.

If we don't own factories, can we say we are in manufacturing? Absolutely, because, of the 15 steps in the manufacturing value chain, we probably do 10.

(Magretta, 1998, pp. 105–6)

Such close attention to the value chain enables Li & Fung both to drive down costs and to reduce the time from order to delivery, buying their customers (retail chains) vital time in which to track customer tastes and deliver products that correspond to quickly shifting fashions.

Activity 4

Consider the description of Li & Fung above. What would you say are the distinctive capabilities of this organisation? You can use Table 2 to help you to analyse their capabilities and consider what may lead to future problems.

Contribution of organisational capabilities to competitive advantage

Organisational capabilities	Leading to competitive advantage	Potential weakness	Information not available
Innovation
Architecture: Relationships within firm
Architecture: Relationships with firms in value chain, manufacturers and suppliers
Architecture: Relationships with firms in value chain, customers/ buyers
Reputation

Now read the discussion

Commentary

It seems likely that Li & Fung see themselves as having good skills in the areas of design, product planning, engineering, quality control and logistics. They also have an important capability in their supply chain architecture: their network of relationships with suppliers over a large and diverse geographical region. However, all of these are, at least in some degree, common and imitable. Underlying the importance of these factors is the capability they have developed to bring them together by managing large and complex value chains.

4.1 Emergent strategy

4 Strategy as rational planning

4.1 Emergent strategy

In many organisations, strategic choices are made through a strategic planning process. A typical strategic planning process that draws on both markets and resource-based perspectives is sketched out in Figure 6.

Figure 6: A strategic planning process

This strategic planning process may be the preserve of a top team or a specialist strategic planning department. In smaller organisations the whole process may go on in the mind of one individual. In some organisations managers throughout the organisation will be involved in the strategic planning cycle.

While not denying that formal analysis and planning has a role, some writers on strategy have emphasised another view of strategy processes.

A number of writers on strategy (most notably Henry Mintzberg) have argued that the strategy process is often less ordered and planned than assumed above (Mintzberg, 1994). Mintzberg argued that strategy often emerges as a cumulative pattern of actions that is only retrospectively rationalised and organised as a plan. Especially where organisations face a turbulent, fast-changing environment, they may need to respond to events and information more quickly than a formal strategic planning cycle allows.

Burgelman (1994) carried out an in-depth case study of Intel's withdrawal from the memory chip (DRAM) market. His findings emphasised that this became a strategic plan only in retrospect. The decision to withdraw came about as an aggregation of many smaller decisions by managers as they moved resources away from this product group in response to market conditions. Burgelman emphasised the role of middle managers in making these decisions:

While Intel is widely regarded as one of the most innovative and adroitly managed high-technology firms, the DRAM exit story suggests that even extraordinarily capable and technically sophisticated top managers, such as Gordon Moore and Andy Grove, do not always have the foresight of the mythical Olympian CEO making strategy. Rational justification, emotional attachment, and bounded rationality, mixed with valid concerns about protecting a core technology of the firm, made it very difficult for Intel's top management to exit from DRAMs. At the same time, actions by some middle-level managers responding to external and internal selection pressures had already begun to dissolve the strategic context of DRAMs and undermine the reality of Intel, the memory company. Incremental shifts in the allocation of scarce manufacturing resources from DRAMs to microprocessors and technological trade-offs favouring microprocessors over DRAMs happened before the official corporate strategy was restated. The study of strategic business exit thus confirms that strategic actions often diverge from statements of strategy, that resource allocation and official strategy are not necessarily tightly linked, and that strategic actions of complex firms involve multiple levels of management simultaneously.

(Burgelman, 1994, pp. 48–9)

An important point here is that emergent strategy should not be equated with lack of management. It may reflect organisational systems and routines that enable the organisation to respond quickly and flexibly to threats and opportunities. Planned and emergent strategy may also co-exist, as illustrated in Figure 7. Emergent strategy and intended strategy both affect the organisational resource allocation process. The pattern of actions that emerges is the actual strategy of the organisation.

Figure 7: Processes of strategy formulation and implementation (Source: based on Christensen and Dann, 1999)

Role of middle managers in the emergence of strategy

As we noted above in our discussion of Intel, middle managers may play a significant role in the emergence of organisational strategy, since they often have a similarly significant role in resource allocation. You may like to consider how a middle manager could shape organisational strategy using the following checklist of functions by Floyd and Wooldridge:

Upward

Synthesising information:

Gather information on the feasibility of new programmes
Communicate the activities of competitors, suppliers, etc.
Assess changes in the external environment

Championing:

Justify and define new programmes
Evaluate the merits of new proposals
Search for new opportunities
Propose programmes or projects to higher-level managers

Downward

Facilitating adaptability:

Relax regulations to get new projects started
‘Buy time’ for experimental programmes
Locate and provide resources for trial projects
Provide a safe haven for experimental programmes
Encourage informal discussion and information sharing

Implementing deliberate strategy:

Monitor activities to support top management objectives
Translate goals into action plans
Translate goals into individual objectives
Sell top management initiatives to subordinates

(Floyd and Wooldridge, 1997, p. 467)

5 Summary

Our first learning outcome for this session was that you should be able to explain the difference between a ‘markets approach’ and a ‘resource-based approach’ to strategy, and how they complement each other . We first looked at how analysis of the near environment forms a basis for planning a strategy to achieve an organisation’s purposes. As part of this, we discussed Porter’s five forces framework for competitive analysis, and how it may need to be adapted for some organisations and sectors. Activity 2 asked you to think about the near environment faced by your own organisation. We then turned to the resource-based view of strategy, and considered how analysis and development of an organisation’s resources and capabilities form another basis for strategic planning.We looked at four prerequisites for the capability to deliver competitive advantage: inimitability, durability, relevance, and appropriability. We discussed three main categories of capability: innovation, architecture and reputation. Activity 3 asked you to apply these ideas to the example of Marks and Spencer. Activity 4 asked you to analyse the distinctive capabilities of Li & Fung.

Our second learning outcome was that you should be able to explain what is meant by ‘the value chain’, and how it applies to your organisation. We looked at how a careful analysis of the value chain could reveal opportunities for performance improvement both within the organisation and by managing the value chain outside the organisation. We looked at Li & Fung as an example of effective management across a value chain involving multiple organisations

Our third learning outcome was that you should be able to explain what is meant by ‘emergent strategy’ and why intended and actual strategy may differ . We first looked at a formal rational process of strategic planning, and then observed that unexpected crises and opportunities and quickly changing environments may produce a significant gap between intended and realised strategy. Consequently the quality of an organisation’s strategy is as much determined by its systems and routines for responding to crises and opportunities as it is by the quality of its formal strategic planning process.

Our final learning outcome was that you should be equipped to contribute more effectively to developing and implementing strategy in your organisation. We noted that strategy is increasingly seen as not only the province of a top team, but involving a wide range of managers throughout the organisation. The Floyd and Wooldridge framework will help you to look at your role in developing and implementing strategy. This session should leave you better prepared to play that role.

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References

Burgelman, R. A. (1994) ‘Fading memories – a process theory of strategic business exit’, Administrative Science Quarterly, Vol. 39, No. 1, pp. 24–56.

Christensen, C. C. and Dann, J. B. (1999) ‘The processes of strategy definition and implementation’, Harvard Business School Teaching Note 9–399–179, Rev. November 1, 1999.

Collis, D. J. and Montgomery, C. A. (1995) ‘Competing on Resources: Strategy in the 1990s’, Harvard Business Review, July-August. Reprint No. 95403.

Floyd, S. W. and Wooldridge, B. (1997) ‘Middle management's strategic influence and organizational performance’, Journal of Management Studies, Vol. 34, No. 3, pp. 465–85.

Grant, R. M. (1998) Contemporary Strategy Analysis (third edn), Oxford, Blackwell.

Howard, A. and Magretta, J. (1995) ‘Surviving success: an interview with Nature Conservancy's John Sawhill’, Harvard Business Review, September-October.

Kaplan, R. S. and Norton, D. P. (1998) ‘The balanced scorecard: measures that drive performance’ in Harvard Business Review on Measuring Corporate Performance. Boston, MA; Harvard Business School Press. Originally published inHarvard Business Review, January-February 1992. Reprint 92105.

Kay, J. (1993) Foundations of Corporate Success, Oxford, Oxford University Press.

Magretta, J. (1998) ‘Fast, global, and entrepreneurial: supply chain management Hong Kong style – An interview with Victor Fung’, Harvard Business Review, September-October.

McKevitt, D. (2000) ‘Strategy implementation in public sector organisations’ in Flood, P., Dromgoole, T, Caroll, S. J. and Gorman, L. (eds) Managing Strategy Implementation, Oxford, Blackwell.

Mintzberg, H. (1994) ‘The rise and fall of strategic planning’, Harvard Business Review, January-February.

Porter, M. E. (1980) Competitive Strategy: Techniques for Analysing Industries and Competitors, New York, Free Press.

Acknowledgements

The content acknowledged below is Proprietary (see terms and conditions) and is used under licence.

Grateful acknowledgement is made to the following sources for permission to reproduce material in this session:

Figure 2: From ‘How competitive forces shape strategy’, by E. Porter, Vol. 57, No. 2 1979.

Figure 3: Figure 3 (B700_3_003i.jpg) based on McKevitt, D., ‘Strategy implementation in public sector organisations’ in Flood, P., Dromgoole, T., Caroll, S.J. and Gorman, L., (eds) “Managing Strategy Implementation”, Blackwell Publishers Ltd, 2000;

Figure 4: Grant, R.M., “Contemporary Strategy Analysis”, (3rd edition), Blackwell publishers Ltd, 1998;

Figure 5: Grant, R. M. (1998) Contemporary Strategy Analysis (3rd edition), Blackwell Publishers Ltd;

Figure 8: From ‘The processes of strategy definition and implementation’, by C. C. Christensen and J. B. Dann

Every effort has been made to trace all copyright owners, but if any have been inadvertently overlooked, the publishers will be pleased to make the necessary arrangements at the first opportunity.

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