The question “What is strategy?” has stimulated lots of debates, countless articles, and serious disagreement among management thinkers. Perhaps this is why many executives also struggle with it. However, they deserve a pragmatic reply. Understanding how a strategy is crafted is important, because there is a proven link between a company’s strategic choices and its long-term performance. Successful companies typically have a better grasp of customers’ wants and needs, their competitors’ strengths and weaknesses, and how they can create value for all stakeholders. Successful strategies reflect a company’s clear strategic intent and a deep understanding of its core competencies and assets—generic strategies rarely propel a company to a leadership position.
Numerous attempts have been made at providing a simple, descriptive definition of strategy but its inherent complexity and subtlety preclude a one-sentence description. There is a substantial agreement about its principal dimensions, however. Strategy is about positioning an organization for competitive advantage. It involves making choices about which markets to participate in, what products and services to offer, and how to allocate corporate resources. And its primary goal is to create long-term value for shareholders and other stakeholders by providing customer value. Strategy therefore is different from vision, mission, goals, priorities, and plans. It is the result of choices executives make, about what to offer, where to play and how to win, to maximize long-term value.
What to offer refers to a company’s value proposition and comprises the core of its business model; it includes everything it offers its customers in a specific market or segment. This comprises not only the company’s bundles of products and services but also how it differentiates itself from its competitors. A value proposition therefore consists of the full range of tangible and intangible benefits a company provides to its customers and other stakeholders.
Where to play specifies the target markets in terms of the customers and the needs to be served. The best way to define a target market is highly situational. It can be defined in any number of ways, such as by where the target customers are (for example, in certain parts of the world or in particular parts of town), how they buy (perhaps through specific channels), who they are (their particular demographics and other innate characteristics), when they buy (for example, on particular occasions), what they buy (for instance, are they price buyers or do they place more value on service?), and for whom they buy (themselves, friends, family, their company, or their customers?).
How to win spells out the capabilities and policies that will give a company an essential advantage over key competitors in delivering the value proposition. As such, it has two dimensions. The first is the value chain infrastructure dimension. It deals with questions such as: What key internal resources and capabilities has the company created to support the chosen value proposition and target markets? What partner network has it assembled to support the business model? and How are these activities organized into an overall, coherent value creation and delivery model? The second is the management dimension. It summarizes a company’s choices about its organizational structure, financial structure, and management policies. Organization and management style are closely linked. In companies that are organized primarily around product divisions management is often highly centralized. In contrast, companies operating with a more geographic organizational structure usually are managed on a more decentralized basis.
Choices must be made because there is usually more than one way to win in every market, but not everyone can win in any given market. With good choices, a business gains the right to win in its target markets. The target market, value proposition, capabilities and management regime must hang together in a coherent way.
Most companies face innumerable options for what value proposition to choose, where to play and how to win. As well, they have to sort out seemingly conflicting objectives such as the need for both long-term growth and short-term profitability. To “maximize long-term value” means—when there are mutually exclusive options—to select options that will give the greatest sustained increase to the company’s economic value. It is worth emphasizing that “maximizing long-term value” is not the same thing as “maximizing share price” or “maximizing shareholder value.” Those objectives typically represent the more short-term demands of current shareholders or their advisers, and they do not always align with what is best for all stakeholders, On the other hand, “maximizing long-term value” does not mean forgetting about the short term. Economic value takes into account growth and profitability, the short term and long term, and risk as well as reward.
Strategic thinking has evolved substantially in the past 25 years. We have learned much about how to analyze the competitive environment, define a sustainable position, develop competitive and corporate advantages, and how to sustain advantage in the face of competitive challenges and threats. Different approaches—including industrial organization theory, the resource-based view, dynamic capabilities and game theory—have helped academicians and practitioners understand the dynamics of competition and develop recommendations about how firms should define their competitive and corporate strategies. But drivers such as globalization and technological change continue to profoundly change the competitive game. The fastest growing firms in this new environment appear to be those that have taken advantage of these structural changes to innovate in their business models so they can compete differently.
In addition to the business model innovation drivers noted above, much recent interest has come from three other environmental shifts. Advances in information technology have been a major force behind the recent interest in business model innovation. Many e-businesses are based on new business models. New strategies for the ‘bottom of the pyramid’ in emerging markets have also steered researchers and practitioners toward the systematic study of business approaches. Third, the quest for sustainability and commitment to corporate social responsibility in all aspects of a business have become an imperative: A company that creates profit for its shareholders while protecting the environment and improving the lives of those with whom it interacts is likely to enjoy a significant competitive advantage over its rivals. These companies operate in such a way that their business interests and the interests of the environment and society intersect.
The evolution of strategic thinking reflects these changes and is characterized by a gradual shift in focus from an industrial economics to a resource-based perspective to a human and intellectual capital perspective. It is important to understand the reasons underlying this evolution, because they reflect a changing view of what strategy is and how it is crafted.
The early industrial economics perspective held that environmental influences—particularly those that shape industry structure—were the primary determinants of a company’s success. The competitive environment was thought to impose pressures and constraints, which made certain strategies more attractive than others. Carefully choosing where to compete—selecting the most attractive industries or industry segments—and control strategically important resources, such as financial capital, became the dominant themes of strategy development at both the business unit and corporate levels. The focus, therefore, was on capturing economic value through adept positioning. Thus, industry analysis, competitor analysis, segmentation, positioning, and strategic planning became the most important tools for analyzing strategic opportunity.1
As globalization, the technology revolution, and other major environmental forces picked up speed and radically changed the competitive landscape, key assumptions underlying the industrial economics model came under scrutiny. Should the competitive environment be treated as a constraint on strategy formulation, or was strategy really about shaping competitive conditions? Was the assumption that businesses should control most of the relevant strategic resources needed to compete still applicable? Were strategic resources really as mobile as the traditional model assumed, and was the advantage associated with owning particular resources and competencies therefore necessarily short lived?
In response to these questions, a resource-based perspective of strategy development emerged. Rather than focusing on positioning a company within environment-dictated constraints, this new school of thought defined strategic thinking in terms of building core capabilities that transcend the boundaries of traditional business units. It focused on creating corporate portfolios around core businesses and on adopting goals and processes aimed at enhancing core competencies.2 This new paradigm reflected a shift in emphasis from capturing economic value to creating value through the development and nurturing of key resources and capabilities.
The current focus on knowledge and human and intellectual capital as a company’s key strategic resource is a natural extension of the resource-based view of strategy and fits with the transition of global commerce to a knowledge-based economy. For a majority of companies, access to physical or financial resources no longer is an impediment to growth or opportunity; not having the right people or knowledge has become the limiting factor. Microsoft, Google, and Yahoo scan the entire pool of U.S. computer science graduates every year to identify and attract the few they want to attract. Today it is recognized that competency-based strategies are dependent on people, that scarce knowledge and expertise drive product development, and that personal relationships with clients are critical to market responsiveness.3
Strategy Formulation: Concepts and Dimensions
Strategy, Business Models, and Tactics
Every company has a business model—a blueprint of how it does business—defined by its core strategy although it may not always be explicitly articulated. This model most likely evolved over time as the company rose to prominence in its primary markets and reflects key choices about what value it provides to whom, how, and at what price and cost. As shown in Figure 1.1, it describes who its customers are, how it reaches them and relates to them (market participation); what a company offers its customers (the value proposition); with what resources, activities, and partners it creates its offerings (value chain infrastructure); and finally, how it organizes, finances, and manages its operations (management model ).
A company’s value proposition comprises the core of its business model; it includes everything it offers to its customers in a specific market or segment. This comprises not only the company’s bundles of products and services, but also how it differentiates itself from its competitors. A value proposition therefore consists of the full range of tangible and intangible benefits a company provides to its customers and other stakeholders.
Figure 1.1 Four components of a business model
The market participation dimension of a business model has three components. It describes what specific markets or segments a company chooses to serve, domestically or abroad; what methods of distribution it uses to reach its customers; and how it promotes and advertises its value proposition to its target customers.
The value chain infrastructure dimension of the business model deals with such questions as: What key internal resources and capabilities has the company created to support the chosen value proposition and target markets? What partner network has it assembled to support the business model? and How are these activities organized into an overall, coherent value creation and delivery model?
The management submodel summarizes a company’s choices about a suitable organizational structure, financial structure, and management policies. Typically, organization and management are closely linked. In companies that are organized primarily around product divisions management is often highly centralized. In contrast, companies operating with a more geographic organizational structure usually are managed on a more decentralized basis.
Business models can take many forms. The well-known “razor–razor blade model” involves pricing razors inexpensively, but aggressively marking-up the consumables (razor blades). Jet engines for commercial aircraft are priced the same way—manufacturers know that engines are long lived, and maintenance and parts are where Rolls Royce, General Electric (GE), Pratt & Whitney and others make their money. In the sports apparel business, sponsorship is a key component of today’s business models. Nike, Adidas, Reebok, and others sponsor football and soccer clubs and teams, providing kit and sponsorship dollars as well as royalty streams from the sale of replica products.
In industries characterized by a single dominant business model competitive advantage is won mainly through better execution, more efficient processes, lean organizations, and product innovation. Increasingly, however, industries feature multiple- and co-existing business models. In this environment, competitive advantage is achieved by creating focused and innovative business models. Consider the airline, music, telecom or banking industries. In each one there are different business models competing against each other. For example, in the airline industry there are the traditional flag carriers, the low-cost airlines, the business class only airlines, and the fractional private jet ownership companies. Each business model embodies a different approach to achieving a competitive advantage.
Describing a company’s strategy in terms of its business model allows explicit consideration of the logic or architecture of each component and its relationship to others as a set of designed choices that can be changed. Thus, thinking holistically about every component of the business model—and systematically challenging orthodoxies within these components—significantly extends the scope for innovation and improves the chances of building a sustainable competitive advantage.
The term “strategy”, however, has a broader meaning. It extends beyond the design of business models—and redesigning them as competitive positions change—for long-term economic value: Strategy formulation embodies a “contingency” notion—a good strategy anticipates a wide range of changes in the competitive environment and contains provisions to deal effectively with those changes. A business model therefore is more generic than a specific business strategy. Coupling strategic analysis with business model evaluation is necessary in order to protect whatever competitive advantage results from the design and implementation of new business models. Selecting a business strategy is a more granular exercise than designing a business model. Linking competitive strategy analysis to business model design requires segmenting the market, creating a value proposition for each segment, setting up the apparatus to deliver that value, and then figuring out how to prevent the business model/strategy from being undermined through imitation by competitors or disintermediation by customers.4
We also need to distinguish between the terms “strategy” and “tactics”. New business concepts, technologies, and ideas are born every day. The Internet, innovation, outsourcing, offshoring, total quality, flexibility, and speed, for example, all have come to be recognized as essential to a company’s competitive strength and agility. But although enhancing operational effectiveness is crucial in today’s cut throat competitive environment, it is no substitute for sound strategic thinking. There is a difference between strategy and tactics—the application of operational tools and managerial philosophies focused on operational effectiveness. Both are essential to competitiveness. But whereas tactics are aimed at doing things better than competitors, strategy focuses on doing things differently. Understanding this distinction is critical, as recent history has shown. Companies that embraced the Internet as “the strategic answer” to their business rather than just another, if important, new tool were in for a rude awakening. By focusing too much on e-business options at the expense of broader strategic concerns, many found themselves chasing customers indiscriminately, trading quality and service for price, and, with it, losing their competitive advantage and profitability.5
Good Strategy Takes a Long-term Perspective and Forces Trade-offs
Strategic thinking, instead, focuses on the longer term and on taking different approaches to deliver customer value; on choosing different sets of activities that cannot easily be imitated, thereby providing a basis for an enduring competitive advantage. Amazon is a good example.
Today, Amazon offers 230 million items for sale in America—some 30 times the number sold by Wal-Mart, the world’s biggest retailer, which has its own fast-growing online business. Its total 2013 revenues were $74.5 billion, but when one takes into account the merchandise that other companies sell through its “marketplace” service the sales volume is nearly double that. Though by far the biggest online retailer in America, Amazon is still growing faster than the 17 percent pace of e-commerce as a whole. It is the top online seller in Europe and Japan, too, and has designs on China’s vast market. Last year Amazon was the world’s ninth-biggest retailer ranked by sales; by 2018 it may well be in the top two.
On top of its online-retail success, Amazon has produced two other transformative businesses. The Kindle e-reader pioneered the shift from paper books to electronic ones, creating a market that now accounts for more than a 10th of spending on books in America and which Amazon dominates. Less visible but just as transformative is Amazon’s invention in 2006 of cloud-computing as a pay-as-you-go service, now a $9 billion market. That venture, called Amazon Web Services (AWS), has slashed the technology costs of starting an enterprise or running an existing one.
And Amazon enjoys an advantage most competitors envy: Remarkably patient shareholders. The company made a net profit of just $274 million last year, a minuscule amount in relation to its revenues and its $154 billion value on the stock exchange; its shares are valued at more than 500 times last year’s earnings, 34 times the multiple for Wal-Mart. Ités core retail business is thought to do little better than break-even; most of its profits come from the independent vendors who sell through Amazon’s marketplace.
Such long-termism takes investment. In its early days Amazon avoided direct competition with retailers because its lack of stores made it “capital-light”. Today its empire of warehouses and data centers has changed that. Now its pitch to merchants and technologists is that it will build physical assets so that they do not have to. By doing so, it keeps its competitors close and makes them depend on Amazon for key parts of their business models.6
ING DIRECT (the trading name of ING Bank [Australia] Limited) is the world’s leading direct savings bank and provides another example of a company with a potentially (industry-) transformative strategy that forces competitors to reexamine their entire business model. ING Direct operates a branchless direct bank with operations in Australia, Austria (branded ING-DiBa), Canada, France, Germany (branded ING-DiBa), Italy, Spain, the United Kingdom, and the United States. It offers services over the Internet and by phone, ATM, or mail and focuses on simple, high-interest savings accounts. Customers do business exclusively online, over the phone, or by mail. The bank’s value proposition is simple and direct—great rates, 24 x 7 convenience, and superior customer service. In the United States alone, ING DIRECT has already attracted more than two million customers.
Whereas operational effectiveness tools can improve competitiveness, they do not by themselves force companies to choose between entirely different, internally consistent sets of activities. Other banks could copy ING DIRECT and other competitors by also offering banking services directly to end users, but they would have to dismantle their traditional distribution structures—branch offices primarily—to reap the benefits ING realizes from its strategy. Thus, choosing a unique competitive positioning—the essence of strategy—forces trade-offs in terms of what to do and, equally important, what not to do and creates barriers to imitation.
Value Erodes Over Time
Good strategy formulation focuses on creating value—for customers, shareholders, partners, suppliers, employees, and the community—by satisfying the needs and wants of the market place better than anyone else. If a company can deliver value to its customers better than its rivals can over a sustained period of time, that company likely has a superior strategy. This is not a simple task. Customers’ wants, needs, and preferences change, often rapidly, as they become more knowledgeable about a product or service, as new competitors enter the market, and as new entrants redefine what value means. As a result, what is valuable today might not be valuable tomorrow. The moral of this logic is simple but powerful: The value of a particular product or service offering, unless constantly maintained, nourished, and improved, erodes with time.
Consider the U.S. market for coffee. Thirty years ago, coffee was more or less a commodity. Traditional coffee shops and “office” coffee defined consumer behavior, and Nescafé, Folgers, and Hills Brothers accounted for approximately 90 percent of the retail market. Then Starbucks came along. The company redefined “drinking a cup of coffee” into a new value proposition consisting of three elements: (1) “great” coffee—Starbuck’s relentless search for the highest quality coffee in the world was the cornerstone of a differentiated market positioning; (2) a unique physical environment—Starbucks created a “second” living room for customers to enjoy their coffee, relax, and meet people; and (3) a new service philosophy—“baristas” were expected to be experts in coffee and provide a high level of customized service. The new value proposition took off and redefined the competitive playing field for traditional coffeemakers and grocery stores, chains such as Dunkin’ Donuts and McDonald’s and many others. To this day, major companies such as General Foods and Procter & Gamble are having trouble launching a major counteroffensive for marketing gourmet coffee through traditional (grocery) channels, a clear indication of how radically customer perceptions of value about coffee have changed.
The Starbucks example illustrates the principle of “value migration” and its consequences for creating competitive advantage. At any given point in time a company competes with a particular mix of resources. Some of the company’s assets and capabilities are better than those of its rivals; others are inferior; the superior assets and capabilities are the source of positional advantages. Whatever competitive advantage the firm possesses, it must expect that ongoing change in the strategic environment and competitive moves by rival firms continuously work to erode it. Competitive strategy thus has a dual purpose: (1) slowing down the erosion process by protecting current sources of advantage against the actions of competitors and (2) investing in new capabilities that form the basis for the next position of competitive advantage. The creation and maintenance of advantage is therefore a continuous process.
Strategy Is About Creating Options
At the time a strategy is crafted some outcomes are more predictable than others. When Motorola invests in a new technology, for example, it might know that this technology holds promise in several markets. Its precise returns in different applications, however, might not be known with any degree of certainty until much later.7 Therefore, strategy formulation is about crafting a long-term vision for an organization while maintaining a degree of flexibility about how to get there and creating a portfolio of options for adapting to change. Strategy formulation therefore includes considering a host of environmental and organizational contingencies. This implies learning is an essential component of the process. As soon as a company begins to implement a chosen direction, it starts to learn—about how well attuned the chosen direction is to the competitive environment, how rivals are likely to respond, and how well prepared the organization is to carry out its competitive intentions.
Strategy: An Ecosystem Perspective
In today’s increasingly interconnected world, a single company focus often is not strategically viable. Most companies rely heavily on networks of partners, suppliers, and customers to achieve market success and sustain performance. These networks function like a biological ecosystem, in which companies succeed and fail as a collective whole.
Business ecosystems have become a widespread phenomenon within industries such as banking, biotechnology, insurance, and software. As with biological systems, the boundaries of a business ecosystem are fluid and sometimes difficult to define. Business ecosystems cross entire industries and can encompass the full range of organizations that influence the value of a product or service.
Technology increasingly is the connective tissue that lets the ecosystem function, grow, and develop in widely diverse ways. Corporations planning to craft an effective ecosystem strategy must have a technical infrastructure in place that allows them to share information and encourage collaboration, as well as integrate systems within the ecosystem. Wal-Mart’s success as the world’s largest retailer, for example, is based, in part, on information technology decisions that are closely tied to its understanding of the ecosystem on which it depends. Wal-Mart maintains a vast supply-chain ecosystem that stretches from manufacturer to consumer. This centralized supply chain brings efficiencies to Wal-Mart and also creates value for its suppliers, both large and small, by providing a massive new channel for them to reach consumers worldwide.
An ecosystem-based strategy perspective makes clear the importance of interdependency in today’s business environment. Stand-alone strategies often no longer suffice, because a company’s performance is increasingly dependent on its ability to influence assets outside its direct control.
Strategy is concerned with analyzing and making decisions about numerous activities ranging from acquiring and allocating resources to building capabilities to shaping corporate culture to installing appropriate support systems. All these decisions are aimed at aligning an organization’s resources and capabilities with the goals of a chosen strategic direction. Strategic alignment can be directed at closing strategic capability gaps or at maintaining strategic focus.
Strategic capability gaps are substantive disparities in competences, skills, and resources between what customers demand or are likely to demand in the future and what the organization currently can deliver. This strategic alignment dimension, therefore, focuses on closing the gap between what it takes to succeed in the marketplace and what the company currently can do. Examples of activities in this category are developing better technologies, creating faster delivery mechanisms, adopting a stronger branding, and building a stronger distribution network.
A second dimension of alignment is concerned with maintaining strategic focus. Strategy formulation and implementation are human activities and thus are subject to error, obstruction, or even abuse. Therefore, to successfully execute a chosen strategy an organization must find ways to ensure that what is said—by groups and individuals at all levels of the organization—is in fact done. Making sure strategic objectives are effectively communicated, allocating the necessary resources, and creating proper incentives for effective alignment are examples of activities in this category.
Is All Strategy Planned?
Even the best-laid plans do not always result in the intended outcomes. Between the time a strategy is crafted—that is, when intended outcomes are specified—and the time it is implemented, a host of things can change. For example, a competitor might introduce a new product or new regulations might have been passed. Thus, the realized strategy can be somewhat different from the intended strategy.8
Strategy formulation occurs at the corporate, business unit, and functional levels. In a multibusiness, diversified corporation, corporate strategy is concerned with what kinds of businesses a firm should compete in and how the overall portfolio of businesses should be managed. In a single-product or single-service business or in a division of a multibusiness corporation, business unit strategy is concerned with deciding what product or service to offer, how to manufacture or create it, and how to take it to the marketplace. Functional strategies typically involve a more limited domain, such as marketing, human resources, or technology. All three are parts of strategic management—the totality of managerial processes used to guide the long-term future of an organization.
The Role of Stakeholders
Most companies rely, to a great extent, on a network of external stakeholders—suppliers, partners, and even competitors—in creating value for customers. The motivation of internal stakeholders—directors, top executives, middle managers, and employees—also is critical to success. A misstep in managing suppliers, a major error in employee relations, or a lack of communication with principal shareholders can set back a company’s progress by years. The importance of different stakeholders to a company’s competitive position depends on the stake they have in the organization and the kind of influence they can exert. Stakeholders can have an ownership stake (shareholders and directors, among others), an economic stake (creditors, employees, customers, and suppliers), or a social stake (regulatory agencies, charities, the local community, and activist groups).9 Some have formal power, others economic or political power. Formal power is usually associated with legal obligations or rights; economic power is derived from an ability to withhold products, services, or capital; and political power is rooted in an ability to persuade other stakeholders to influence the behavior of an organization.
Vision and Mission
A vision statement represents senior management’s long-range goals for the organization—a description of what competitive position it wants to attain over a given period of time and what core competencies it must acquire to get there. As such, it summarizes a company’s broad strategic focus for the future. A mission statement documents the purpose for an organization’s existence. Mission statements often contain a code of corporate conduct to guide management in implementing the mission.
In crafting a vision statement, two important lessons are worth heeding. First, most successful companies focus on relatively few activities and do them extremely well. Domino’s is successful precisely because it sticks to pizza; H&R Block because it concentrates on tax preparation; and Microsoft because it focuses on software. This suggests that effective strategy development is as much about deciding what not to do as it is about choosing what activities to focus on.
The second lesson is that most successful companies achieved their leadership position by adopting a vision far greater than their resource base and competencies would allow. To become the market leader, a focus on the drivers of competition is not enough; a vision that paints “a new future” is required. With such a mindset, gaps between capabilities and goals become challenges rather than constraints, and the goal of winning can sustain a sense of urgency over a long period of time.10 Consider Amazon’s vision statement: “Our vision is to be the earth’s most consumer centric company; to build a place where people can come to find and discover anything they might want to buy online”.
A vision statement should provide both strategic guidance and motivational focus. A good vision “is clear, but not so constraining that it inhibits initiative, meets the legitimate interests and values of all stakeholders, and is feasible; that is, it can be implemented.”11
Increasingly, companies are adopting formal statements of corporate values, the core of a mission statement, and senior executives now routinely identify ethical behavior, honesty, integrity, and social concerns as top issues on their companies’ agendas. Whole Foods Market is an example of a company with a well-defined mission statement. It lists eight core values that guide all of its strategic thinking:
• Selling the highest quality natural and organic products available.
• Satisfying, delighting, and nourishing our customers.
• Supporting Team Member happiness and excellence.
• Creating wealth through profits and growth.
• Serving and supporting our local and global communities.
• Practicing and advancing our environmental stewardship.
• Creating ongoing win–win partnerships with our suppliers.
• Promoting the health of our stakeholders through healthy eating education.
Strategic Intent and Stretch
A statement of strategic intent is both an executive summary of the strategic goals a company has adopted and a motivational message. Properly articulated, a statement of strategic intent does more than paint a vision for the future; it signals the desire to win and recognizes that successful strategies are built as much around what can be as around what is. It focuses the organization on key competitive targets and provides goals about which competencies to develop, what kinds of resources to harness, and what segments to concentrate on. Instead of worrying about the degree of fit between current resources and opportunities, it shifts the focus to how to close the capability gap. Current resources and capabilities become starting points for strategy development, not constraints on strategy formulation or its implementation.12
A related idea is the concept of stretch. Stretch reflects the recognition that successful strategies are built as much around what can be as around what is. Ultimately, every company must create a fit between its resources and its opportunities. The question is over what time frame? Too short a time frame encourages a focus on fit rather than stretch, on resource allocation rather than on getting more value from existing resources. The use of too long a time horizon, however, creates an unacceptable degree of uncertainty and threatens to turn stretch objectives into unrealistic goals.
The Strategy Formulation Process
Steps
The process of crafting a strategy can be organized around three key questions: Where are we now? Where do we go? How do we get there? Each question defines a part of the process and suggests different types of analyses and evaluations. It also shows that the components of a strategic analysis overlap, and that feedback loops are an integral part of the process.
1. The Where are we now? part of the process is concerned with assessing the current state of the business or the company as a whole. It begins with revisiting such fundamental issues as what the organization’s mission is, what management’s long-term vision for the company is, and who its principal stakeholders are. Other key components include a detailed evaluation of the company’s current performance; of pertinent trends in the broader sociopolitical, economic, legal, and technological environment in which the company operates; of opportunities and threats in the industry environment; and of internal strengths and weaknesses.
2. The Where do we go? questions are designed to generate and explore strategic alternatives based on the answers obtained to the first question. At the business unit level, for example, are optional decisions, such as whether to concentrate on growth in a few market segments or adopt a wider market focus, go it alone or partner with another company, or focus on value-added or low-cost solutions for customers. At the corporate level, this part of the process is focused on shaping the portfolio of businesses the company participates in and on making adjustments in parenting philosophies and processes. At both levels, the output is a statement of strategic intent, which identifies the guiding business concept or driving force that will propel the company forward.
3. The How do we get there? component of the process is focused on how to achieve the desired objectives. One of the most important issues addressed at this stage is how to bridge the capability gap that separates current organizational skills and capabilities from those that are needed to achieve the stated strategic intent. It deals with the “strategic alignment” of core competences with emerging market needs and with identifying key success factors associated with successfully implementing the chosen strategy. The end product is a detailed set of initiatives for implementing the chosen strategy and exercising strategic discipline and control.
A strategy review can be triggered by a host of factors—new leadership, disappointing performance, changes in ownership, and the emergence of new competitors or technologies—or be part of a scheduled, typically annual, review process.
Most companies employ some form of strategic planning. The impetus for imposing structure to the process comes from two main pressures: (1) the need to cope with an increasingly complex range of issues—economic, political, social, and legal on a global scale—and (2) the increasing speed with which the competitive environment is changing. A formal system ensures that the required amount of time and resources are allocated to the process, that priorities are set, that activities are integrated and coordinated, and that the right feedback is obtained.
This planning process is usually organized in terms of a planning cycle. This cycle often begins with a review at the corporate level of the overall competitive environment and of the corporate guidelines to the various divisions and businesses. Next, divisions and business units are asked to update their long-term strategies and indicate how these strategies fit with the company’s major priorities and goals. Third, divisional and business unit plans are reviewed, evaluated, adjusted, coordinated, and integrated in meetings between corporate and divisional/business unit managers. Finally, detailed operating plans are developed at the divisional/business unit level, and final approvals are obtained from corporate headquarters.
A formal strategic planning system or planning cycle, by definition, attempts to structure strategy development and implementation as a primarily linear, sequential process. Environmental and competitive changes do not respect a calendar-driven process, however. When a significant new competitive opportunity or challenge emerges, a company cannot afford to wait to respond. This does not mean that formal processes should be abandoned altogether. Rather, it underscores that even though strategy is about crafting a long-term vision for an organization, it should maintain a degree of flexibility about how to get there and preserve options for adapting to change.