Models as Tools in Developing Strategic Fit - Essay Example

Models as Tools in Developing Strategic Fit Introduction Strategy is defined as “the direction and scope of an organization over the long term: which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations.” (Johnson and Scholes, 2005, p. 9). In one glance, the concept of fit is conveyed, in the matching of direction and scope, changing environment, resource and competences, and stakeholder expectations. Strategic fit is defined as the harmonizing of organizational resources and capabilities with the challenges posed by the environment. Michael Porter emphasizes “fit” as the tailoring of the firm’s functional strategies to support its corporate and competitive strategies. On the other hand, the concept is viewed by Gary Hamel and C. K. Prahalad more as a “stretch”, that is, supplementing internal resources and capabilities and doing more with what the firm has rather than just “fitting” the strategic plan to these resources. (Dessler, 2005, p. 34) The very concept of strategy had been adopted from its military application, that is, strategy is the bridge that spans the gap between means and ends. (Nickols, 2006, p. 1) The many factors that influence the environment pose various challenges to the organization. The assessment of these challenges by management should lead them to devise the appropriate goals and objectives to guide organizational activities. This is the process of strategic planning, and to provide a systematic framework in the assessment of environmental conditions and the conceptualization of appropriate strategic goals and tactics, management may draw upon a wealth of theoretical models which have been developed by strategic management theorists in the academe. There are some models that have become the popular choice of practitioners because of their power, simplicity and ease of application. Some models address the task of external strategic analysis. The Five Forces model of Porter resolves the industrial environment into five aspects: the power of buyers, suppliers, new entrants, substitutes, and competitive rivals. (Grundy, 2006, p. 213). Another model, the PESTLE model, was the culmination of succeeding independent efforts exerted by different authors (Aguilar, Brown, Fahey and others). It classifies factors influencing the macro-environment subject to analysis, namely, the Political, Economic, Social, Technical, Legal, and Ecological. (Morrison, 2008) On the other hand, the internal strategic analysis forms the basis of other analytical models. The Core Competence model of Hamel and Prahalad conceptualizes strategic planning from the point of view of the core strengths of the organization as the driver of competitiveness. (Dessler, 2005, p. 34). Another internal model is the Ashridge Mission Model, which is comprised of four elements: purpose, strategy, values, and policies and behavioural standards. The latter seeks to determine the company’s culture, its beliefs and moral principles, and to formulate from this an appropriate mission statement to relate the organization to its environment. (Campbell & Nash, 2009) Finally, there are Porter’s Value Chain and the theory of Competitive Advantage, that also stress on the internal strengths and value-enhancing qualities of the organization, and their importance in determining its goals and strategic objectives. Mission, vision and values There has been much debate about the actual usefulness of strategic planning. Noel (1989) notes that strategy may not even be within the prerogative of the CEO or management, because organizational inertia or politics may by themselves compel the actions that organizations take, raising the debate between formulation and implementation of strategies as earlier propounded by Steiner and Miner (1977). Others who take the organismic view even propose that organizations undergo a natural selection process whereby the fittest survive; it is the environment that determines the selection process, not management, and thus the adoption of a strategic plan has minimal impact on the firm’s development. (Hannan and Freeman, 1977). Juxtaposed to these opinions are research findings that the strategic cores enacted by CEOs are crucial determinants of firms’ survival (Noel, 1989). The mission defines the direction the company is to take and the issues to concentrate on. (Noel, 1989) It is difficult to describe how a mission and vision may be arrived at. They may originate externally or internally, or maybe even from intuition (Johnson & Scholes, 1997, p. 63). Suffice it to say that it is the vision that conveys the goal, and the mission articulates the manner by which this goal is to be achieved. Campbell’s Ashridge Mission Model is useful for evaluating a company’s mission. This model integrates two traditional schools of thought: the Strategic School, which sees mission as a definition of the business’s commercial purpose and target market; and the Cultural/ Philosophy/Ethics School, which views mission as a statement or expression that ought to ensure good cooperation between employees. While the Ashridge model provides a strong cornerstone for strategic planning, it also has limitations, more common of which is a possible mismatch between stated values and behaviour with that of employees’ actual values and behaviour. Also, it is likely that a mission, after the time, effort, and cost involved in formulating it, would remain a “paper tiger” because of failure to actualize the stated objectives and policies. (Campbell, 1992) External Analysis Strategizing requires a thorough understanding of conditions that affect the organization, both from within and without. As examples of models that address the analysis of the external environment, Porter’s 5-forces and the PESTLE models will be described here. Porter’s 5-forces model is typically used to create a detailed picture of an industry, by defining the industry participants and stakeholders and their relative bargaining power over the firm. This becomes helpful to the analyst because instead of merely describing the varied interests that permeate and circumscribe the firm, it also describes how strong its relative influence upon the actions and decisions of the firm. It ascribes each influence to a concrete group of persons or an interest to which the manager can relate when formulating his plans. Porter’s model has become one of the more popular models in use by practitioners because it addresses the relationships internal to the industry, so that the influences exerted on the firm are described with greater detail. To a certain extent, however, other environmental influences such as aspects of the politico-legal framework or the greater macro-economy are ignored by this model. The PESTLE Model on the other hand does not identify interests, but situations in the macro-environment. It focuses on developments that influence the organization, and classifies them according to nature, whether such is political, economic, social, technical, legal or ecological. The model is useful in that it provides a framework aimed at thoroughness. In classifying these influences, there is little chance that any important aspect will be inadvertently omitted. Furthermore, the model is quite easy to use in that it is sufficiently general as to accommodate most environments. It lacks, however, in detail, ignoring, for example, the competitive rivalry among firms within the industry which Porter’s model succinctly addresses. Internal Analysis Among the models that focus on the analysis of internal factors, the more often-used models are the Core Competence model of Hamel and Pralahad, and Porter’s Value Chain. These theories posit that a firm’s success depend as much on internal forces as it does external pressures, sometimes even moreso. That is because organizations reflect the attitudes of the people who run them, and “these attitudes are a function of the personal objectives of managers together with the myriad of pressures which arise from the product, labour and capital markets in which they operate and the constraints provided by shareholders and other stakeholders.” (Doyle & Hooley, 1991, p. 59) These so determine the firm’s orientation, to the point that though they be situated in the same milieu, firms pursue increasingly different objectives and styles due to differences in their internal factors (Gould and Campbell, 1988, as cited in Doyle & Hooley, 1991, p. 59) This is also the viewpoint espoused by the Core Competency model of Hamel and Pralahad. By “core competencies” is taken to mean “collective learning, especially regarding how to co-ordinate many different kinds of skills and how to integrate many different technologies.” (Sotarauta, 2009) Core competencies should, among other things, be difficult to imitate or reproduce. Thus, the source of strength of a company begins with its core competencies, such that new products and markets can be created out of these competencies. Understandably, not a few have taken issue with this revolutionary theory by Hamel and Pralahad. Mizrach (1997) scored the theory’s authors’ seeming trivialization of the conventional market tests and product surveys in favour of “new edge” and “visionary” ventures that anticipate consumers’ needs before they exist and create new products for still non-existent demand. “The public does not know what is possible, but we do,” Hamel and Pralahad wrote in their book Competing for the Future, a statement Mizrach critiques as “doing a disservice to CEOs by minimizing the role of governments, universities, nonprofit organizations, advocacy groups, and non-Western perspectives.” The theory is criticized as entirely “business-centric” as it refuses to acknowledge contributions by the aforementioned institutions and sectors. Another assertion of this theory that pundits found faulty is that “competing” for the future is the nature of business and that it precludes “cooperating” or “collaborating” for the future. In response to the perceived shortcomings of the Hamel-Pralahad theory of core competence that is the basis of “Strategic Architecture” (that is, a firm’s architecture is key to business success), Slywotzky (1996, as cited in Burns, 2002) proposed a complementary model which he called “Strategic Anticipation” which relied on Business Designs (customer selection, market positioning and business processes) and Value Migration (customer loyalty switching). In fine, it relied on external focus as basis for anticipatory market action, rather than internal focus, and offered a diametrically alternative view to that of Hamel-Pralahad. On the other hand, the Value Chain model developed by Porter had been more openly received. The term ‘value chain’ refers to the sequence of activities within and around the organization that are involved in creating the utility (value) in the product or service. Value chain analysis relates these activities to the competitive strength of the firm. The theory rests upon the premise that an organization is more than a random compilation of resources (machinery, manpower and money), and by arranging these elements into a system and systematic activities, it will produce something of value for which people will pay a price. Porter argues that the ability to manage the linkages between activities is a source of competitive advantage. (Recklies, 2001) The concept of the value chain has proven useful not only in understanding internal strengths but in conceptualizing systems in general, such that it has been applied to whole supply chains and distribution networks. The synchronization of local value chains creates an extended, conceivably even global, value chain into one integral “value system”. This theory has spun off from an internal analytical tool to one that does not distinguish borders between firms. Combined internal and external analyses While the earlier models were either outward or inward looking processes, there are models that viewed the external and internal factors simultaneously; there are the Competitive Advantage, the Sustainability, and the SWOT models. Competitive advantage seeks to strengthen the business’s long-term competitive position in the marketplace through the choice of either of cost leadership, differentiation, or focus (market niche) strategies. The SWOT model juxtaposes the external factors (threats and opportunities) with the internal factors (strengths and weaknesses). Finally, the sustainability model emphasizes the need for the firm to employ ecology-friendly production methods in response to the call for environmental sustainability. Al these models combine internal and external factors in framing a suitable strategy for the firm. Implementation The implementation phase actualizes the use of these models so that a suitable strategic fit may be arrived at for the company. Examples abound: 1. Starbucks entered a market dominated by firms that sold coffee in a bottle. The product was seen as generic, hardly differentiated, and with low profit margins. Starbucks took a different approach by making coffee into an “emotional experience”, injecting status, ambience, and wireless accessibility into the experience of specialty coffee, such that customers are willing to pay higher prices. This may be viewed as an application of the core competencies or the value chain approach, since the specialty coffee experience is the result of specialized core knowledge and a chain of activities that add value to what, in the simplest terms, is a cup of coffee. These internal strengths are matched or fitted with the urban lifestyle of the “young upcoming professionals” who rush off with their coffee in the morning, meet to talk with clients and colleagues throughout the working day, and converge to relate with their peer groups in the evening. Starbucks provided the very setting and service that is a perfect fit for these needs. (http://www.starbucks.com/) 2. Nike, the multinational company that manufactures and markets sports footwear and apparel, has built a successful brand equity with its trademark “swoosh”. The company’s success is also anchored on a strategic fit between its capabilities and the demands of the market. Internally, the company has recruited into its managerial ranks competitive athletes who have an excellent appreciation of the sports culture. It has thus developed a strength in understanding the qualities athletes desire in their footwear and apparel. Externally, the company has sponsored the brightest stars in the various sports events so that the “swoosh” is clearly visible in international sports coverages for golf, tennis, and other such tournaments. Nike understood the culture of people’s iconic regard for sports stars, and takes advantage of this by sponsoring the likes of Tiger Woods, Maria Sharapova, Lebron James, and so forth. (http://www.nike.com/) 3. In response to the threat of its leaking underground storage tanks in sixty-six of its manufacturing sites worldwide, causing health problems among the residents, Xerox undertook a Design for Environment (DFE) which, however, encountered resistance among the employees. The changes involved drastic adoption of environmental standards and waste-free initiatives in product design and manufacturing, and establishment of an Asset Recycle Management (ARM) group responsible for DFE initiatives worldwide. There were thus conflicts between the “hard issues” of more efficient production methods and energy utilization, with the “soft issues” of company culture and accustomed employee behaviour. The company was aware that mandating changes through impersonal rules and regulations does not address the cultural aspect and therefore is a cause for the failure of the change initiative. Xerox thus employed Education, Demonstration, Involvement, Outside Support, and “Piggy-Backing” (incorporating environmental issues as a component in the quality program) and thereby overcame the resistance to change. (Frazier, 1994) 4. McDonald’s has mastered the scientific standardization of products and processes that has set the trend for fastfoods. This competitive advantage squarely fits its customers’ need for fast, hot, filling food at reasonable cost, and of consistently reliable quality that is the same the world over. (http://www.mcdonalds.com/usa/eat.html) Unfortunately, there is a trade-off between the attainment of “hard” targets including profit margins, operations efficiency and product quality, and the “soft” issue of employee welfare. McDonald’s has been strongly criticized for its disregard for labour laws, absence of employee prerogatives, “robotic” procedures and low pay. McDonald’s has put up the defense of “recruited acquiescence” in explaining what might appear to be exploitation of the marginalized sectors of the labour force. In any case, there is no resistance from among the employees themselves; most of them are students, housewives and immigrants who view this as a temporary job. (Gonos, 2002) Conclusion All businesses, small and large, make use of strategy in employing their resources to suit market needs. Organizational strategy as a formal exercise, however, has pronounced benefits for large corporations. Substantial resources, thousands of employees, and a vast environment make it difficult to devise a “fit” if the procedure is not systematically undertaken. The above models make it possible to “break down” the elements and conceptualize an appropriate match between resources and environment. Large corporations thus need to systematically address strategic planning change management. The discussion highlights accordance between “internal” and “external” analysis. Both types of analyses are important if the company wishes to avail of the full advantage of strategic planning. The idea of “strategic fit” is to match internal and external considerations, in the most advantageous manner possible. Competitive advantage, value chains and core competencies create the firm’s unique ability to meet the peculiar set of outside conditions at any one point in time. 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