The Cores of Strategic Management

Katsuhiko Shimizu

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136654701
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Most strategic management textbooks seem to stem from the old belief that 'more is always better'. But in this age of data deluge, many are calling for a return to the basics. If students can master the core concepts and learn how to apply these basics, they are bound to be better equipped to approach and resolve even the most complex problems.

This book, unlike most textbooks, focuses on the core concepts of strategic management, aiming to help students understand the basic ideas of the field more clearly, rather than overloading them with new, peripherally-related information. With cases designed to help students apply their deeper understanding of the core concepts, this book will equip any student with the solid grounding in strategic management fundamentals needed to succeed in the academic and professional arena.

1

What is Strategy?

What is “strategy” or “strategic management?” There are many themes, different ideas, and even many different classes that use the term “strategy.” People tend to believe it is better and more helpful to have the term “strategy” or “strategic” attached to their ideas. This is similar to the stock price phenomena in the late 1990s when people added “.com” at the end of the company’s name and the stock price of the company jumped about 20%. However, it is probably fair to say that not many people understand the true meaning of “strategy” clearly.¹ For example, is it easy to tell how “strategic management” or “strategic information system” differs from “management” or “information system?”

There are many definitions of strategy. For example, Henry Mintzberg points out that there are ten ways to define strategy.² Nevertheless, there are some overlapping themes across all definitions. The intention of this chapter, thus, is not identifying and arguing what is the right definition of strategy. Instead, this chapter discusses what we need to understand in thinking about and developing a strategy for an organization.

To be short, strategy is about the future plan of an organization (or an individual). However, strategy is not just a plan. A plan of a family in terms of where and how to spend the next vacation is not a strategy. Similarly, thinking about how or what we will eat tomorrow or the next two weeks should not be called a strategy. However, a plan to spend next year trying to get into a prestigious MBA program or trying to get a job from a very popular investment bank can be called a strategy. What is the difference?

The word “strategy” is derived from the Greek strategos “the art of the general” in the context of war. Carl von Clausewitz and Mao Zedong are two famous people who discussed strategy. Essentially, strategy was used as a plan to win a war. By definition, winning a war is beating your competitor. To do so, you have to understand the strengths and weaknesses of your competitor as well as strengths and weaknesses of yourself.

When the concept of strategy is applied to an organization, we have to understand what war to fight and what it means to “win.” This usually means setting a clear goal for an organization. To achieve the goal, we have to develop an understanding of our customers. Winning the business war is not achieved by beating your competitors directly. Instead, business wars involve the continuous battle of attracting more customers than your competitors do. To this end, in thinking about strategy, we have to understand

• the goal of the strategy (what war are we fighting? What do we want to achieve?)
• 3Cs (customers, competitors or competition, and the company or self).

Here for the sake of discussion, I propose one definition of strategy and further discuss the goal and the 3Cs that are imperative in thinking about strategy.

Strategy

Strategy is a future plan to achieve a certain goal. Strategy consists of (1) identifying target customers, (2) providing better or less expensive services/products than competitors, and (3) utilizing the strengths (uniqueness) of the company.

Sometimes, the term strategy is interchangeably used with a business model, which can be defined as a particular system to develop products/services in a way to serve particular customer segments better than competitors.³ Because organizations are supposed to be going-concerns and thus “a war” is continuous in the business world, you have to continue to develop/refine a strategy. Thus, not only planning a unique business model, but also building and refining the business model can also be a future plan to win a war.

Goals

Goal, Vision, and Mission (and Some Others)

It is probably important to discuss how a goal is different from a vision or a mission. There are so many different definitions used in management that refer to a vision and/or a mission. According to, Jack Welch, a legendary former CEO of General Electric, a mission is about how to win in business, which sounds like strategy.⁴ To not confuse people by proposing another definition of vision and/or mission, here in this book they are treated almost the same. The only difference may be the time span they are referring to. A strategic goal typically focuses on three to five years (sometimes fewer), while a mission and vision tend to focus on longer term orientations.

Importance of a Clear Goal

If asked about the goal of a company, responses such as, “maximizing shareholders’ value,” “increase sales,” or even “satisfying customers” are often given. It is difficult to deny such goals, which also means such goals can apply to any company. However, under such a general goal, organizational members have little idea about what war they are in or what they want to achieve. There are three problems when organizational goals are too general or broad:

1. Unclear feedback. It is difficult to know whether a goal is actually achieved when the goal is broad. What does “maximize” shareholders’ value mean? Moreover, to the extent that a goal is vague and broad, there are too many ways (or excuses) to say “we made it.” Unless we identify a specific and concrete goal, it is difficult to obtain clear feedback to strive for achieving the goal.
2. Lack of stimulus. When a goal is broad, it reduces the motivational influence to drive organizational members to accomplish it. In addition to employees being confused about knowing what exactly they are supposed to do, a broad and vague goal also lacks the power to stimulate individuals’ imagination. For example, how does maximizing shareholders’ value (whatever it means) influence the everyday lives of employees? If a goal is imaginable in terms of “I want to be a part of a successful team,” passionate employees work hard to achieve the goal.
3. Vague standard for modification. Strategy is a plan for the future. This also means that a strategy may need to be modified in correspondence with changes in external business environments including competitors’ actions. If a goal is clear and concrete, it is less difficult to modify the strategy. When a destination is clearly shared, all employees have to do is find an alternative route to reach the destination. However, when the goal is very vague or broad, the goal cannot be a standard on which the strategy is modified.

In sum, a goal should be concrete and measurable so that it can easily be understood, it is clear if it is achieved or not, and it can be used as a standard to modify the strategy in accordance with changes in the environment. Moreover, the goal should be conceivable, yet also challenging enough to stimulate organizational members. One useful acronym in setting a goal is SMART: Specific, Measurable, Assignable, Realistic, and Time-related.⁵

From this perspective, a good example of a widely used effective goal is “to be number one in this market.” It is concrete and measurable. Because you can actually see your competitors and their employees, you can conceive what you should do or what needs to be done relatively easily. Moreover, being number one sounds good and it stimulates a sense of pride. In the same token, “being a public company,” is another concrete, measurable goal that is both financially and emotionally motivating.

Interestingly, once a clear and concrete goal such as being number one or being a public company is achieved, many companies have a hard time trying to identify the next goal. It is partly because the previous goal was very powerful and partly because too much energy was dedicated to achieve the goal and very limited energy was spent on thinking about the next steps. It is great to be accepted by a prestigious college, or becoming a publicly traded company but then what?

Growth

From time to time, a manager will say, “Quality is more important than quantity,” “we want to be the best company, not necessarily the largest company.” It is true that too much focus on growth sometimes makes a company “greedy” and lose touch with customers. But, it is also true that such statements are often made after a company failed in diversification or lost its number-one position in the industry to a foreign competitor.

Similar to “being number one,” growth can provide a number of important and positive influences for an organization. It can be argued that most managers want to grow their company one way or another. Below, three major reasons are discussed.

First, if your company is public, growth is what shareholders expect.

Stock price = today’s profit (Earning per Share, EPR) × future growth potential (Price Earnings Ratio, PER)

If a manager cannot meet the growth expected by the stock market, the stock price goes down, often quite drastically. Even if a company grows by 15% per year, the same thing can happen if shareholders expected it to grow by 20%.

Second, size resulting from growth is one of the most powerful competitive advantages. Wal-Mart is a good example of how size leads to competitive advantage. Proliferation of brand is another positive effect of getting larger. Of course, larger organizations are less likely to go bankrupt than smaller ones (although it does not mean that large organizations cannot go bankrupt, as is the case with General Motors).

Finally, growth accompanies opportunities: more and bigger business opportunities. This aspect is particularly significant in the case of start-up companies. In a small company, the harder one works, the more the company grows. Employees work hard because it is intrinsically fun and rewarding. That is why many employees in small start-up companies work like crazy in a very untypical work setting such as their garage or dorm room.

At some point, growing companies hit a wall. It may be because of the maturity of the market, strategic mishaps, or the company becomes too big to grow. In many cases, employees lose passion and motivation, because they do not see direct feedback from the market. As a result, they turn their focus inside. Rather than seeing customers and competitors to identify opportunities, they peer inside the company to find problems. This is when energetic entrepreneurial companies become bureaucratic political organizations. Not making mistakes is regarded as having higher importance than taking risks and pursuing challenges. Once vivid and passionate organizational cultures are often replaced with rigid rules and cost-saving policies.

More than 15 years ago, McKinsey, another world famous consulting firm, emphasized the importance of growth in its company brochure. Simply put, it said, growth solves most organizational problems. Although this statement is possible, it was probably a little bit extreme and can be misleading. This is probably why such a statement is no longer visible. Yet, the importance of growth for an organization is unquestionable. While it is true that quantity may not substitute quality, the importance of growth and its positive effects on employees should not be underestimated in thinking about strategic goals.

3Cs (Customers, Competitors or Competition, and the Company or Self)

Customers

The importance of customers and their needs is obvious. Managers and business journals are often consumed with “customer satisfaction.”

One very important aspect of strategy is not understanding the importance of customers, but understanding the importance of identifying target customers (or customer segments). Why is it important to identify target customers? If you say, “it is because every customer (segment) has different needs,” you are not wrong, but not quite right either.

Although customer satisfaction is almost a mantra in the business world, satisfying customers is actually not very difficult. If, for example, Dell, in competing with Apple, starts selling an iPod-like gadget with high quality software for, say, $25, what would customers feel? I am sure that customers would feel very satisfied. What is wrong? Dell is likely to lose money, a lot of it!

Put it another way, running a business inevitably involves satisfying customers and making money simultaneously. If you try to satisfy any and every customer, it becomes difficult to make money. Thus, a company needs to find customers who are satisfied with what the company can provide and are willing to pay for it. More specifically, a company has to identify customers (customer segments) who appreciate its uniqueness and will pay for it. It is impossible to satisfy all customers above and beyond all competitors, and still make money.

The key premise of this discussion is the limitation of resources. No matter how large a company is resources are limited. If a company spends the resources to meet the needs of all types of customers, resources will be spread too thin. If a competitor focuses on a particular customer segment and uses all its resources to satisfy the particular customer segment, it will likely gain customers. This is what happened to department stores in comparison to specialty stores. In this way, trade-off or deciding what is done as well as what is not done, is a critical concept in thinking about strategy. Although it is great to capture all the customers, this will never happen. To the extent a company needs to compete with many rivals, some of which have more resources, identifying a certain customer segment and investing resources heavily on that segment is the only way for a company to differentiate itself and survive in the long run. Trade-off leads to focus, which is the source of differentiation from competitors.

Competition

As pointed out already, strategy is a plan for winning a war, thus competition should be at the heart of strategy. Interestingly, competition is the most neglected C among 3Cs in the classroom. It is probably because people tend to focus on improving services/products over previous versions of the same product, as opposed to improving over competitors’ products. People often feel satisfied if they are better than they were before. Unfortunately, customers do not care how much improvement was made over past products or services. What customers care for is better service/products or less expensive service/products than competitors. Put yourself in the shoes of a gas station owner. You work extremely hard to slash costs and pass the cost savings to customers, say five cents per gallon. However, if your price is a few cents more expensive than that of the rival across the street, customers will fill up across the street at the rival’s station. A company must always see itself as customers see it. What companies need to strive for is providing better/less expensive services/products than competitors, not better or less expensive products than itself at a previous point in time.

In relation, the standard to evaluate “better” should also be based on the perspective of customers. Technological excellence or objective functions may not always be important. It is well known that technologically superior beta was defeated by the VHS. A simple vinyl bag (from my perspective) made by Louis Vuitton is a few hundred dollars more expensive than rivals and still very popular.

It is important to note that better/less expensive services/products are an important part of strategy, but not strategy itself. A strategy is not better or less expensive services or products per se, but a business model that makes it possible to provide or manufacture a better product or the same quality product at lower costs is a strategy. Think about Dell. Although Dell gave up its number one position in PC sales to HP recently...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Dedication
• Contents
• 1. What is Strategy?
• 2. External Environment Analysis
• 3. Internal Environment Analysis
• 4. Business Level Strategy
• 5. Corporate Level Strategy
• 6. M&As, Alliance, and International Strategy
• 7. Leadership and Decision Making
• 8. Strategy Implementation
• Epilogue: From Strategy to Strategic Thinking
• Notes
• Index