Management Benchmark Study-Book Summary Chapter 03-Literature, Summaries of Benchmarking

Download Management Benchmark Study-Book Summary Chapter 03-Literature and more Summaries Benchmarking in PDF only on Docsity! Ch 3 Strategy 06.08.02 version 2.doc 06.08.02 Chapter 3. Strategy1 By Marylynn Placet and Kristi M. Branch The word “strategy” has been in use since Sun Tzu wrote the Art of War in the fourth century B.C. (Sun Tzu 1971). Sun Tzu wrote, of course, about military strategy. The literature on corporate strategy, which emerged in the 1950s and 1960s (Chandler 1962; Ansoff 1965; Learned et al. 1965) is vast and continues to grow at an astonishing rate. Strategic management – the way in which a firm identifies its strategic direction and aligns its operational processes to its strategy – has become an academic discipline in its own right, like marketing and finance (Mintzberg et al. 1998:18; Rumelt et al. 1994:15). In essence, strategy has to do with understanding where an organization will go in the future and how it will get there. Most academicians and corporate managers believe strategy affects the overall welfare of the corporation, and strategy making is an important activity, though a few believe firms are better off without a strategy (see Inkpen and Choudhury 1995). Many who believe strategy is important, however, find fault with the ability of formalized strategic planning processes to deal adequately with the pace of change facing organizations in today’s environment. The disruptive changes created by revolutionary technologies (including communication and information processing technologies), globalization, and new business methods can turn an organization’s current advantages into barriers for future success and have led to new thinking about the focus and goal of strategy (Christensen and Overdorf 2000; Miller and Morris 1999; D’Aveni 1994; Brown and Eisenhardt 1998; Tushman and Anderson 1997). D’Aveni (1994) and Dudik (2000) argue that under the dynamic conditions affecting many organizations today, which D’Aveni calls hypercompetition, strategy that seeks to sustain organizational advantage needs to be replaced with strategy that seeks to establish flexibility and the ability to disrupt the advantages of competitors. This perspective places an emphasis on competition and the ability of the organization to change the rules of the game or the game it chooses to play. Consequently, the pace of change has placed greater emphasis on developing strategies that can successfully take advantage of changing situations rather than on designing a single strategy for success. Public science organizations find themselves in a challenging position. On the one hand, they are participating at the cutting edge of knowledge, where the goal is to achieve transforming breakthroughs in theory, materials, processes, and/or tools and to utilize breakthroughs achieved by other research organizations. They must be able to be agile in determining managing their current scientific direction and future science strategies. On the other hand, they tend to be embedded in large-scale institutions that are permeated by cumbersome, slow, and change- resistant procedures and political processes. This review addresses definitions of strategy, approaches to strategy development, tools typically used in strategy development, problems with strategic planning, and the role of strategic planning in government. It concludes by discussing the implications of this literature for managing publicly funded science programs and science organizations. 1 Related chapters include: Science Policy; Change Management, Competencies; Organizational Culture; Leadership; Organizational Communication; Innovation. Ch 3 Strategy 06.08.02 version 2.doc 2 06.08.02 Definitions of Strategy Many strategic management textbooks exist, each with its own definition of strategy. For instance, Mintzberg and Quinn (1996:3) define a strategy as the pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole. A well-formulated strategy helps to marshal and allocate an organization’s resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment and contingent moves by intelligent opponents (emphasis included in the original). Thompson and Strickland (1993:6) define strategy as “the pattern of organizational moves and managerial approaches used to achieve organizational objectives and to pursue the organization’s mission.” Michael Porter (1996) states: “The essence of strategy is choosing to perform activities differently than rivals do.” D’Aveni (1994) takes the view that strategy is not only the creation of advantage but “also the creative destruction of the opponent’s advantage.” Brown and Eisenhardt (1998:4) define strategy as “the creation of a relentless flow of competitive advantages that, taken together form a semi-coherent strategic direction.” In their recent book, Mintzberg et al. (1998:9) contend, “[S]trategy is one of those words that we inevitably define in one way yet often also use in another.” Most people think of strategy as a plan – a direction, a guide, or course of action into the future. But when asked to describe a strategy actually pursued, people tend to describe a pattern or a set of behaviors over time, e.g., a company that perpetually markets the most expensive products is said to pursue a “high-end strategy.” So strategy can be defined as a pattern of behavior. Mintzberg et al. include several other ways of defining strategy: Strategy is “position” – selling particular products in particular markets. Strategy is “perspective” – an organization’s fundamental way of doing things, e.g., the “McDonald’s way.” Strategy is “ploy” – a specific maneuver intended to outwit a competitor. The five P’s (plan, pattern, position, perspective, and ploy) serve as a key aspect of Mintzberg et al.’s framework for analyzing different schools of thought about strategy. Strategy and Organizational Design The concepts of organizational design and the resource theory of the firm have greatly influenced recent discussions of strategy. It is generally recognized that a good fit between strategy, organizational design, and external opportunity creates a competitive advantage for an organization (Galbraith et al. 1993; Galbraith 1994; Tushman et al. 1997:583).2 An appropriate organizational design is generally viewed as enabling “an organization to execute better, learn faster, and change more easily” (Mohrman et al. 1995:7). An organization’s design comprises multiple, interrelated elements, frequently categorized as structure, people, processes, rewards, and tasks or work systems that together can create unique organizational capabilities that provide competitive advantage (Quinn et al. 1997; Galbraith 1994, 1995). Although the classic bureaucratic form may be the form of choice in a stable environment with low complexity, research has shown that rapid change and increased complexity require greater lateral mechanisms and a more organic form (Galbraith 1973, 1994; Burns and Stalker 1961; Hall 1962). 2 D’Aveni (1994:31) disputes this on the grounds that it implies permanence. He says that organizations need to prepare for hypercompetition in an entirely different way, focusing on creating disruption, seizing the initiative, and creating a series of temporary advantages. Ch 3 Strategy 06.08.02 version 2.doc 5 06.08.02 approach to strategy development was used extensively in the 1970s, until its usefulness came into question. A balanced view, representing both the merits and limitation of such formalized processes, is provided by Hax and Majluf (1996). Figure 2. Strategic Planning Process at General Electric Corporation (from Mintzberg et al. 1998: 55) Somewhat later, Michael Porter (also from the Harvard School) focused more systematically on external forces and the changing nature of competition within the industry to which the firm belongs. His model, commonly called the “Five Forces,” belongs to the “positioning school.” As shown in Figure 3, it consists of: (1) the internal rivalry among existing players in the industry, (2) the threat of new entrants (firms) to the industry; (3) the bargaining power of suppliers, (4) the bargaining power of buyers (customers), and (5) the threat of substitute products (Porter 1980, 1991). To deal with these forces, firms must make a choice among possible “generic” strategies such as becoming the low-cost provider, differentiating the product (making it unique), developing a high degree of customer loyalty, or focusing on narrow market segments. Firms should avoid the strategy of “being all things to all people.” Porter’s model of competitive analysis became the dominant strategy approach (Mintzberg et al. 1998:82) and continues to be a strong force in business education today. Ch 3 Strategy 06.08.02 version 2.doc 6 06.08.02 Figure 3. The Five Forces Shaping Strategy (Montgomery and Porter 1991:12) Hamel and Prahalad (1993, 1994) complement Porter’s focus on external, industry analysis as the key to strategy with an emphasis on a dynamic capabilities approach to strategy development, in which the roots of competitive advantage are found in the core competencies of the firm. Strategy is the ability to stretch and leverage those competencies (see Chapter 7: Competencies). According to Hamel and Prahalad, strategic management is a collective learning process aimed at developing and exploiting distinctive competences that are difficult to imitate. This view is reinforced by D’Aveni (1994), Brown and Eisenhardt (1998) and Galbraith and Lawler (1998), who also emphasize the need to develop an organizational design that enables the flexible development and recombination of these capabilities. Hamel and Prahalad (1989) further offer the concept of strategic intent, in which the organization envisions its desired leadership position and uses that vision to set direction, define emerging market opportunities, serve as the rallying cry for employees, and establish the criteria the organization will use to chart its progress. Kay’s (1995:6) study of organizational success presents a similar framework: successful strategies are based on recognizing the organization’s distinctive capabilities, identifying a market in which these capabilities provide a competitive advantage, and focusing its business on maximizing the value of that competitive advantage. Ch 3 Strategy 06.08.02 version 2.doc 7 06.08.02 Combining ideas from both Porter (with the industry analysis or external focus) and Hamel and Prahalad (with the capabilities and learning focus), Collis and Montgomery (1999) developed a resource-based view of the firm, which saw “capabilities and resources as the heart of a company’s competitive position,” subject to the interplay of three fundamental market forces: (1) demand (does it meet customers’ needs and is it competitively superior?), (2) scarcity (is it imitable or substitutable, and is it durable?), and (3) appropriability (who owns the profits?). This approach provides guidance on how to identify and assess the resources of the organization and their ability to enable the organization to compete successfully. James Brian Quinn (1980) discusses logical incrementalism, which describes the phenomenon of developing a consistent pattern among decisions made in the series of “subsystems” present in an organization, e.g., the subsystems for diversification, external relations, and human resources. The top executive or top executive team is the architect of the strategy or vision (which develops over time), and this vision is implemented politically through building credibility, broadening support, systematic waiting, and managing coalitions. Noda and Bower (1996) describe research, primarily by Burgelman (1996), that investigates how strategic initiatives “emerge” from managerial activities of front-line and middle managers (or from virtually anywhere people have the capacity to learn and the resources to support that capacity). Top managers merely exercise critical influences by setting up structural context (organizational and administrative mechanisms, such as measurement systems, reward systems, organizational structure) to reflect corporate objectives, thereby manipulating the way decisions and actions of lower-level staff members are made. This is sometimes called a “grassroots model” of strategy formation and is part of the “learning school” approach to strategy (Mintzberg et al. 1998:196). The literature also discusses strategy formation as a process of negotiation, focusing on the role of power relations in strategy development. Mintzberg et al. (1998:236) assert: “Introduce any form of ambiguity – environmental uncertainty, competing goals, varied perceptions, scarcity of resources – and politics arises.” Along these lines, Bolman and Deal (1997:163) claim that: “Goals and decisions emerge from bargaining, negotiation, and jockeying for position among different stakeholders.” Regarding strategic maneuvering, Porter (1980:91) contends: “Many moves that would significantly improve a firm’s position do threaten competitors…. Thus a key to success … is predicting and influencing retaliation.” Cooperation is also a potential offshoot of power relations. Astley and Fombrun (1983) coined the term collective strategy to describe the joint nature of strategy formation among interdependent companies or networks (e.g., efforts within the banking industry to develop ATMs). In a recent book, Markides (2000) stresses that the process of developing superior strategies is part planning and part trial and error. He argues that a company must develop its strategy by asking “Who should we target as customers, what should we offer them, and how should we go about it?” They should “…raise these questions, identify possible answers, evaluate the answers, and make a choice. The objective should be to come up with ideas that differentiate the firm from its competitors. Therefore, the more creative the ideas, the better.” He asks, “Do creative new strategies emerge from planning, or is something else involved?” He concludes, “Analysis and planning will not produce a full-fledged strategy ready for implementation, but they will help narrow the options. Experimentation should then follow on that limited set of options, out of which the final strategy will emerge” (Markides 2000:147-149). Hamel (1996, 2000) contends that radical strategy innovation has now become paramount. He claims that the current environment is hostile to industry incumbents and hospitable to industry Ch 3 Strategy 06.08.02 version 2.doc 10 06.08.02 ♦ Decision science and decision analysis was developed as a recognized field of study in the 1960s and 1970s at Harvard, Stanford, MIT, Chicago, Michigan, and other major universities. It is generally considered a branch of the engineering discipline of Operations Research, but also has links to economics, mathematics, and psychology. The theoretical foundations of decision analysis are a set of axioms that imply that the desirability of alternative courses of action depends on the likelihood of possible outcomes and the preferences for those outcomes. Likelihood is estimated using probability distributions and desirability is measured using utility functions. Probabilities and utilities are used to calculate the expected utility of each alternative. Alternatives with higher expected utilities should be preferred. Subjective judgments by subject area experts are often used to determine probabilities and utilities and an effort is made to deal explicitly with uncertainty (Morgan and Henrion 1990). Clemen (1995), Hammond et al. (1999), and House and Shull (1988) provide clear descriptions of the various tools used in decision analysis. Problems with Strategic Planning While most authors agree that a well-formulated strategy provides direction, helps focus efforts, and provides consistency to employees, and hence gives the organization advantages, another school of thought contends that a deliberate absence of strategy may promote creativity and flexibility in an organization (see for example, Inkpen and Choudhury 1995:313-323). Tightly controlled organizations with high reliance on formalized procedures and a passion for consistency may lose the ability to innovate and may hence become less successful. One example of the deliberate absence of strategy is the company Nucor, which has no written strategic plan, no written objectives, and no mission statement. Their absence is symbolic of the non- bureaucratic, flexible, learning organization Nacor has worked hard to become. So, at one end of the spectrum, some people believe strategy itself is deleterious to an organization’s success. But focusing on strategy does not necessarily have to prevent creativity and flexibility. Hamel (2000) claims that developing an innovative strategic competency is the critical factor for ensuring future organizational success. Although criticism has been directed at almost all theories or models of strategy development, most criticism has focused on the formalized, strategic planning processes that Mintzberg et al. classify as the “planning school” approach. These criticisms can be summarized as follows (derived from Mintzberg et al. 1998:65-77; and Mintzberg 1994): ♦ Products of planning often aren’t used. For example, a 1997 survey of 50 companies found that over 20 had developed a SWOT analysis, yet “no one subsequently used the outputs within the later stages of the strategy process” (Hill and Westbrook 1997:46), prompting the researchers to write an article entitled, “SWOT Analysis: It’s Time for a Product Recall.” ♦ Planning processes can dominate the staff. Methodologies can become very elaborate and time consuming, with too much emphasis on analysis and too little on true strategic insights. ♦ The implementers are often excluded from the process. New organizations are sometimes created just to conduct the planning, often cutting executives out of the strategy development process. ♦ Planning processes often fail to develop true strategic choices. Planners sometimes adopt the first strategy that meets certain basic conditions in an acceptable manner. They Ch 3 Strategy 06.08.02 version 2.doc 11 06.08.02 make no real effort to search for or analyze an array of strategy alternatives before making a decision. ♦ Forecasts are invariably wrong. Strategic planning requires stability during, and predictability following, strategy making. However, disruptions and discontinuities are a fact of life. Planning cannot do much other than extrapolate the present trends and hope for the best. ♦ “Hard” data used in strategic planning lack the richness needed to make strategic decisions. The strategic planning “system” is supposed to be detached and objective and relies on detailed “facts” about the organization and its context. But hard information is often limited in scope and fails to encompass important non-economic and non- quantitative factors. It can be too aggregated for effective use, often arrives too late to be of use, and is sometimes unreliable and subject to biases. ♦ Innovation cannot be institutionalized. Strategic planning is not always viewed as an aid to strategic thinking or strategy making (as perhaps it should be), but as a replacement for intuition and creative thinking. The thinking of genius entrepreneurs is hard to replicate in a formalized, institutionalized process. Strategy making is “a complex process involving the most sophisticated, subtle, and at times subconscious of human cognitive and social processes” (Mintzberg et al. 1998:73). ♦ Strategic planning is not strategy making. Mintzberg et al. (1998:77) contend, “Planning, rather than providing new strategies, could not proceed without their prior existence. Strategic planning has been misnamed. It should have been called strategic programming.” Despite the pitfalls and constraints of detailed and routinized strategic planning, most academicians, industry analysts, and corporate executives believe that organizational strategy is important. The thing to keep in mind is that strategy cannot be reduced to strategic planning processes, especially at the upper levels of the organization. Strategic planning is better used to ensure strategic alignment and coordination across levels and groups, than to develop innovative strategy directions. Strategic Planning in Government Agencies Profitability and shareholder value are the drivers behind private sector planning exercises. Firms ask, “How can we capture more market share? What new markets should we go after? What innovative products should we be developing?” Government agencies, unlike private sector firms, sometimes struggle with defining and measuring “the bottom line.” Rather than achieving the goal of profitability, government agencies must ask: “How should we be better serve the American public? How do we measure success?” The answers aren’t always simple, and that makes strategy development more elusive. Even a focus on “customers” may not be particularly helpful to government agencies, since the members of the public served by federal organizations are to some extent a captive group (i.e., the services they receive are not available anywhere else) and they are not making simple buy-no buy decisions. About the time GE and other organizations were beginning to implement detailed, data-intensive strategic planning processes, the US Department of Defense, under the leadership of Robert McNamara (during the Kennedy years) embraced a system called Planning-Programming- Budgeting System (PPBS), which later infiltrated the entire US Federal government as well as State and foreign governments and, to some extent, industry (e.g., Air Canada used it). The intent Ch 3 Strategy 06.08.02 version 2.doc 12 06.08.02 was to base planning on “outputs” rather than “inputs,” and to focus on missions or strategic thrusts (e.g., civil defense, or retaliation forces) rather than on internal functional or structural divisions such as the Army, Navy, or Air Force. The process included (1) formulating objectives, (2) relating program outputs (favorable impacts) to the objectives, (3) relating outputs to program inputs in dollar terms, (4) aggregating outputs into total benefits over the entire lifetime of the program, (5) similarly aggregating inputs into total costs, (6) establishing benefit- cost ratios, and (7) comparing benefit-cost ratios of existing and proposed programs in order to choose among them. The process was “supposed to generate strategic thinking as well as enable strategic planning to be tied to capital and operational budgeting” (Mintzberg 1994:117). It was used during the Vietnam War era in attempt to make strategic decisions, but by 1974, Aaron Wildavsky (author of the acclaimed book, The Politics of the Budgetary Process 1974:205) wrote, “PPBS has failed everywhere and at all times.” More recently, Bryson et al. (1986:73) found at least five different models of strategic planning applied in government settings, with the Harvard SWOT Model and the Stakeholder Model the most commonly used approaches to strategic planning in the public sector (also see Bryson and Roering 1987, 1988.) Similar to its use in the private sector, the Harvard SWOT Model helps government planners assess organizational strengths and weaknesses, identify opportunities and threats, and attempt to co-align the organization with its environment. Nutt and Backoff (1992) also discuss this approach and encourage organizations to build on strengths, overcome weaknesses, exploit opportunities, and block threats. Stakeholder approaches (e.g., see Freeman 1984; and Mason and Mitroff 1981) focus on identifying individuals and organizations with an interest (or “stake”) in the agency. A stakeholder focus for organizational strategic planning activities aims to maximize stakeholder support for, or minimize their opposition to, agency initiatives. An even more recent national survey examining the experience of State agencies with strategic planning (Berry and Wechsler 1995) found that a majority of State agencies use some type of strategic planning or analysis to set program and policy direction and to respond to budgetary pressures (among other reasons), but did not collect information about the types of strategy approaches used. By partnering with leading edge private sector companies, the Federal Benchmarking Consortium (1997)4 investigated how best practices in customer-driven strategic planning could be applied in the Federal government. They found that the Government Performance and Results Act of 1993 drives many of the planning activities, requiring federal agencies to develop strategic plans for how they will deliver high quality products and services to the American people (see Chapter 6, “Performance Assessment”). They also found that the “best-in-class” organizations use “aggressive and varied ways to locate and listen to the ‘Voice of the Customer,’” ranging from simple (such as point-of-service response cards) to sophisticated (e.g., technologist advisory panels) methods. These approaches help organizations improve products and services for current customers, as well as to identify and develop new customers. 4 Note that James Cavanagh and Dolores Livingston of the US Department of Energy were the benchmarking study team leaders, and that the team members included managers from the Defense Mapping Agency, Internal Revenue Service, Department of Veterans Affairs, National Highway Traffic Safety Administration, Coast Guard, Department of Justice, General Services Administration, Bureau of Engraving and Printing, Social Security Administration, Department of Education, Patent and Trademark Office, Department of Transportation, Department of the Treasury, Department of the Navy, and National Aeronautics and Space Administration. Benchmark study partners included: Ameritech, American Society for Quality Control, BancOne, Chevron, City of Phoenix, City of Sunnyvale, Commonwealth of Virginia, Corning, Dupont, Florida Power and Light, GTE, Intel, Johnson and Johnson, Motorola, Southern California Gas, Wisconsin Electric Power, and Xerox. Ch 3 Strategy 06.08.02 version 2.doc 15 06.08.02 Bryson, John, and William D. Roering. 1988. Initiation of Strategic Planning by Governments. Public Administration Review 48:995-1004. Bryson, John, and William D. Roering. 1987. Applying Private-Sector Strategic Planning in the Public Sector. Journal of the American Planning Association 53:9-22. Burgelman, R.A. 1996. A Process Model of Strategic Business Exit: Implications for an Evolutionary Perspective on Strategy. Strategic Management Journal 17:193-214. Burns, Tom, and G..M. Stalker. 1961. The Management of Innovation. London: Tavistock Publications. Camerer, Colin F. 1994. Does Strategy Research Need Game Theory? 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