Strategy must be based on a deep understanding of the firms external environment and an honest assessment of its organisation-wide capabilities
In a world characterised by demanding organisational stakeholders, a volatile environment and global competition, the primary responsibility of top managers is the formulation of strategies that lead to gaining and sustaining competitive advantage. Organisational survival and the welfare of stakeholders depend on it.
Strategy, in a business sense, was first coined by Alfred Chandler in his 1962 book, Strategy and Structure: Chapters in the History of the Industrial Enterprise. Since then, strategy has sought to relieve a basic tension in business: competitive success is transient. That is, todays competitive success is neither given nor guaranteed. Environmental changes have the capacity to undermine a firms success overnight. Whether a leader in the production of semiconductors, a commercial bank or a long-haul commercial airline, even the most formidable competitive position can be undermined by environmental changes, ranging from shifts in consumer preferences and technological innovation to the arrival of unforeseen competition.
It is also true that organisations fail not only because environmental changes disrupt the competitive order, but also because those responsible for formulating strategy fail to recognise opportunities and threats as they emerge.
With these challenges in mind, the primary objective of strategy is to create the conditions for sustainable competitive advantage by bringing organisations in line with the demands of the environments in which they operate. This is an ongoing process that requires a rational approach to understanding both the markets competitive conditions and the capabilities of the firm.
Environmental changes have the capacity to undermine a firms success overnight
Strategy formulation is an integrative, organisation-wide process that crosses multiple levels of the organisational hierarchy. Among the top management team (the CEO, chief operating officer and chief financial officer), corporate strategy is about setting the direction of the firm and making decisions about which markets to enter and exit. For the diversified firm, this level of strategy is also about configuring the organisation to maximise its collective opportunities while minimising its collective costs. For instance, a diversified technology firm that operates in distinct markets (such as smart phones and tablet PCs) may have no need to cultivate distinct technology development functions for each business. Instead, chief strategists may decide that the company is better served to combine these activities so as to facilitate joint development opportunities and the sharing of technologies across the firm, thereby resulting in a whole that is greater than the sum of its parts: synergy.
In the context of competing within specific markets, competitive strategy (often formulated within an organisations divisions) is focused on the specifics of a given market. At this level, decisions are made about which markets to serve and how to satisfy the needs of a specific set of customers. Generally, this question results in decisions about whether the firm should offer relatively undifferentiated products or services (think petrol and steel rods) at relatively low prices (relative to competitor offerings) or products or services that are considered to be unique (think Bentley, Emirates airline, or Manolo Blahnik shoes), for which consumers might be willing to pay a premium.
Irrespective of the strategic choice made, strategy must both recognise and be based on a deep understanding of the conditions in the firms external environment and an honest assessment of its organisation-wide capabilities. For example, the 2004 documentary Super Size Me offered a scathing critique of the fast-food industry and its propensity for selling high-calorie, processed food that, it was claimed, led to a host of negative health consequences. Awareness of this problem resulted in a shift in consumer preferences and demand.
If you were the chief strategist of an organic food grocery chain at the time, this shift in your external environment might have been the harbinger of an enormous opportunity. However, if you were the chief strategist of a fast-food company whose business model was based on selling high-calorie food in large quantities, this shift in your external environment would have been seen as a major long-term threat to a profitable business model.
The astute strategist would have staked a claim in this evolving landscape through a strategic reformulation of the competitive strategy. Others might have dismissed emerging trends while continuing to push exclusively high-calorie food, to their eventual dismay. As a result of such decisions, todays competitive landscape rewards those companies that modified their offerings to include healthy menu options, while those that failed to recognise the relevance of emerging trends have since suffered the competitive consequences.
It is noteworthy that while strategy formulation is an inherently conceptual process, no strategy is effective unless its implementation brings the strategy to life. Beyond strategy formulation, managers are required to ensure that the organisation is appropriately designed, that an organisational culture is developed to suit the needs of the strategy, that people are incentivised to act in the best interests of the firms strategic objectives, and that the strategy remains relevant.
Patrick McClelland is director of the MBA programme and assistant professor of management at the School of Business Administration, American University of Sharjah