In the 1950s, when the response to environmental discontinuities became important, the concept of strategy entered into the business vocabulary. In the early days, the meaning of strategy was not clear. The dictionaries did not help, since following military usage they still defined strategy as ‘the science and the art of deploying forces for battle.’
At first, many managers and some academics questioned the usefulness of the new concept. Having witnessed half a century of miraculous performance by American industry without the benefit of strategy, they asked why it had suddenly become necessary, and what it could do for the firm. This chapter is based on Ansoff’s early writings in which he addressed these pertinent questions.
Concept of Strategy
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Yardsticks by which the present and future performance of the firm is measured. The quality of these yardsticks is usually called objectives and the desired quantity called goals.
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Rules for developing the firm’s relationship with its external environment: What products-technology the firm will develop, where and to whom the products are to be sold, how will the firm gain advantage over competitors. This set of rules is called the product-market or business strategy .
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Rules for establishing the internal relations and processes within the organization; this is frequently called the organizational concept .
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The rules by which the firm conducts its day-to-day business called operating policies .
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The process of strategy formulation results in no immediate action. Rather it sets the general directions in which the firm’s position will grow and develop.
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Therefore, strategy must next be used to generate strategic projects through a search process . The role of strategy in search is first to focus on areas defined by the strategy, and second, to filter out and uncover possibilities that are consistent/inconsistent with the strategy.
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Thus, strategy becomes unnecessary whenever the historical dynamics of an organization will take it where it wants to go. This to say, when the search process is already focused on the preferred areas.
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At the time of strategy formulation, it is not possible to enumerate all the project possibilities that will be uncovered. Therefore, strategy formulation must be based on highly aggregated, incomplete, and uncertain information about the various classes of alternatives.
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When search uncovers specific alternatives, the more precise, less aggregated information that becomes available may cast doubts on the wisdom of the original strategy choice. Thus, successful use of strategy requires strategic feedback .
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Since both strategy and objectives are used to filter projects, they appear similar. Yet they are distinct. Objectives are a set of higher-level decision rules and represent the ends that the firm is seeking to attain, while the strategy is the means to these ends. A strategy that is valid only under one set of objectives may lose its validity when the objectives of the organization are changed.
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Strategy and objectives are interchangeable; both at different points in time and at different levels of organization. Thus, some attributes of performance (such as market share) can be an objective of the firm at one time and its strategy at another. Further, as objectives and strategy are elaborated throughout an organization, a typical hierarchical relationship results: elements of strategy at a higher managerial level become objectives at a lower one.
Thus, strategy is an elusive and a somewhat abstract concept. Its formulation typically produces no immediate productive action in the firm. Above all, it is an expensive process both in terms of money and managerial time and effort.
Strategy and Performance
Since management is a pragmatic results-oriented activity, the question needs to be asked whether an abstract concept, such as strategy, can usefully contribute to the firm’s performance.
In the business firm, concern with explicit formulation of strategy still exists. However, history of business abounds with clear examples of deliberate and successful use of strategy. Two well-known examples of strategic success include DuPont’s deliberate and successful move from explosives into chemicals in the 1920s and Henry Ford’s concentration on the Model T for the emerging mass market, although Ford’s strategy of vertical integration was a failure. More recently, Larry Page and Sergey Brin’s farsighted yet simple design for a web search was the basis for Google. In another instance of success, Apple’s Steve Wozniak and Steve Jobs developed the first ‘personal computer’ to a market that did not know that it needed it. Apple just became the first US company with a $1 Trillion-dollar market cap.
A trained business observer can discern a unique strategy in a majority of successful firms. However, while discernible in most cases, strategies are frequently not made explicit. They are either a private concept shared only by the key management, or a diffuse, generally understood but seldom verbalized sense of common purpose throughout the firm.
It has been argued by some managers, and with good reason, that this is a desirable state of affairs: Because it represents a unique competitive advantage of the firm, strategy should not be made explicit and must be kept private. However, since the 1960s, American business literature has increasingly reflected an opposing view in favor of a carefully and explicitly formulated strategy. This view favors not only making strategy a matter of concern to many managers throughout the firm, but also to many of the relevant ‘workers,’ particularly in marketing and R&D, since they are not only making important contributions to strategy formulation but are also the principal agents of its implementation.
If the value of a concept is to be measured by its contribution to success, one would have to admit that both of the above views are correct: Many firms have succeeded and are succeeding without the benefit of an explicitly enunciated strategy, while a growing number have benefited from a deliberate strategy formulation.
An explanation can be sought through resolution of another apparent paradox: Strategy is a system concept that gives coherence and direction to growth of a complex organization. How is it possible then for a large and complex organization, such as a business firm, to attain coordination and coherence without making strategy explicit?
The answer is to be found in the nature of the firm’s growth. If a firm is operating in growing markets, if the characteristics of demand change slowly, if the technology of products and processes is stable , if all these conditions exist, strategy needs to change slowly and incrementally. Coherence of behavior and organizational coordination are attained through informal organizational learning and adaption. New managers and workers are typically given long indoctrination periods into the nature of the business; their careers are shaped by gradual progression through the firm. In the process they acquire an experiential, almost intuitive, awareness of the firm’s strategic guidelines. When environment, technology, or competitors change in an orderly manner, these managers are able to adapt their responses incrementally, using their accumulated knowledge and experience. A manger in R&D can be expected to act coherently with managers in marketing and production. The result is reasonably coherent organizational growth. The strategy remains stable and implicit.
It can be questioned whether such loosely coordinated behavior produces the best possible growth, but it works demonstrably. The first half of the twentieth century was a period of relatively stability with continued growth, and the absence of concern with strategy is not surprising. However, the second half of the century, particularly the 90s and on, is a new ‘ball game.’ In many cases, the historical organizational dynamics arc a path to stagnation and/or decline . Therefore, strategy has emerged as a tool for reorienting the organizational thrust . Given this fact, several questions need to be asked concerning the utility of having a strategy.
The first is whether a systematic, explicit strategy is a viable concept. Some writers (significantly observers not of the firm but of decision processes in the government) have argued that organizational complexity ; uncertainties of information and limited human cognition make it impossible to approach strategy formulation in a systematic manner. Their argument is that strategy formulation must of necessity, proceed in the adaptive, unsystematic, informal way observed in most organizations. The answer to this contention is that the proof of the pudding is in the eating. Numerous business firms, which in recent years formulated and announced their strategies, have laid this argument to rest.
Given that systematic strategy formulation is feasible, the second question to ask is whether it produces improvement in organizational performance if used as an alternative to adaptive growth. Several pieces of evidence support this statement.
One of these comes from an extensive study of American mergers and acquisitions. Among other significant results, we found that deliberate and systematic preplanning of acquisition strategy produces significantly better financial performance than an unplanned, opportunistic, adaptive approach. These results are valid under stringent tests of their statistic validity (Ansoff et al. 1970-B). A summary of these findings will be discussed in Part III. Since these earlier studies, a number of subsequent research studies confirmed our findings, namely that explicit strategy formulation can improve performance.
When to Formulate Strategy
The third question we need to ask is when does recourse to an explicit strategy become essential. One condition is when rapid and discontinuous changes occur in the environment of the firm. This may be caused by saturation of traditional markets, technological discoveries inside or outside the firm, and/or a sudden influx of new competitors.
Under these conditions, established organizational traditions and experiences no longer suffice for coping with the new opportunities and new threats. Without the benefit of a unifying strategy, the chances are high that different parts of the organization will develop different, contradictory and ineffective responses.
Marketing will continue struggling to revive historical demand; production will make investments in automation of obsolete production lines, while R&D develops new products based on an obsolete technology. Conflicts will result, and reorientation of the firm will be prolonged, turbulent, and inefficient. In some cases, the reorientation may come too late to guarantee survival.
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How to choose the right directions for further growth from among many and imperfectly perceived alternatives.
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How to harness the energies of a large number of people in the new chosen direction.
Answers to these questions are the essence of strategy formulation and implementation. At this point, strategy becomes an essential and badly needed managerial tool.
Such conditions were the cause of interest in explicit strategy formulation in the USA during the mid-1950s when pent-up wartime demand began to reach saturation; and again, during 1990s when technology began to make obsolete some industries and to proliferate new ones; and when restructuring of international markets presented both new threats and new opportunities to business firms.
An explicit new strategy also becomes necessary when the objectives of an organization change drastically as a result of new demands imposed on the organization by society. This is precisely what is happening today in many nonbusiness purposive organizations: the church, the government, and universities.
Difficulties Encountered in Implanting Strategy Formulation
One major source of difficulty comes from the fact that in most organizations the pre-strategy decision-making processes are heavily political in nature. Strategy introduces elements of rationality that are disruptive to the historical culture of the firm and threatening to the political processes . A natural organizational reaction is to fight against the disruption of the historical culture and power structure, rather than confront the challenges posed by the environment. It is less visible, but nevertheless present and strong, during introduction of strategic planning into the business firm.
A no less important difficulty is that introduction of strategic planning triggers conflicts between previous profit-making activities and the new innovative activities. Organizations typically do not have the capability, the capacity or the motivational systems to think and act strategically.
Finally, organizations generally lack information about themselves and their environment that is need for managerial talents capable of formulating and implementing strategy. 1
Summary
Strategy is a potentially very powerful tool for coping with the conditions of change that surround the firm today; but it is complex, costly to introduce, and costly to use. Nevertheless, there is evidence that it more than pays for itself.
Strategy is a tool that offers significant helps for coping with turbulence confronted by business firms, loss of relevance by universities, breakdown in law enforcement, breakdown in health service system, urban congestion. Therefore, it merits serious attention as a managerial tool, not only for the firm but also for a broad spectrum of social organizations.
Exercises
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Some senior managers have argued that even if made explicit and written down, strategy should be kept private to the very top managers of the firm in order to prevent competition from finding out about it. What are the merits and faults of this argument?
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Other senior managers have argued that by focusing search, strategy restricts the entrepreneurial freedom to respond to whatever attractive opportunities may come along. What are the merits and faults of this argument?