Apuntes Tema 1 - Examen Final PDF

ABOUT STRATEGIC MANAGEMENT It´s important that a firm´s strategy is aligned to the environment. Managers today face an ever-changing environment that is complex and hostile. Therefore, managers have to adopt a strategy that adapts and adjusts to a highly unstable environment. The concept of strate...

ABOUT STRATEGIC MANAGEMENT It´s important that a firm´s strategy is aligned to the environment. Managers today face an ever-changing environment that is complex and hostile. Therefore, managers have to adopt a strategy that adapts and adjusts to a highly unstable environment. The concept of strategy was developed in the 1960s, and has evolved in step with management systems and their internal and external issues. Andrews (1965): [[[[the pattern of major objectives, purposes or goals, and essential policies and plans for achieving those goals, stated in such way as to define what business the company is in or aspires to be in, and the kind of company it is or aspires to be. ]]]] Chandler (1962) Ansoff (1965) Porter (1980) [[[[*The selection of long-term goals and the choice of programmes or plans for achieving them through the suitable allocation of resources. *The actions, planes, programmes or approaches required for attaining the goals. *The way of linking a firm to its environment; the need to focus attention on achieving competitive advantage and improving firm performance; the notion of change as consubstantial with strategy, both within the environment and inside the firm itself. *A process through which a firm makes strategic decisions in order to achieve specific goals; a series of techniques for enhancing decision-making. ]]]] Ronda and Guerras (2012): the dynamics of the firm´s relation with its environment for which the necessary actions are taken to achieve its goals and/or to increase performance by means of the rational use of resources. Although the environment influences a firm by conditioning its decisions, the firm is also part of its competitor´s environment, thereby conditioning them through its own decisions → the strategy a firm chooses to compete not only seeks to respond to the environment but also aims to mold the environment in its favor. The strategy requires the presence of rivals, which are firms or agents that compete with the firm for resources, customers or for profitability and success. Therefore, the different strategic decisions share the common purpose of improving its performance (to be more competitive) *Strategy is about taking decisions and actions that feed the problem/challenge addressed, based on the environment the firm lives in. WHY DOES A FIRM SEEK TO IMPROVE ITS PERFORMANCE? The beneficiaries of a firm´s success are firstly its owners, who see an increase in the value of the investments they have made. It may also have a positive impact on all the other groups of people that have dealings with the firm → stakeholders (an individual, group or organization that´s impacted by the outcome of a project or a business venture). CONTENT OF STRATEGIC DECISIONS: - The long-term direction of a firm or organization, taking into account that the environment is changing (how applicable the strategy will be in the future). When establishing a strategy, the long term must be taken into account in order to ensure that it´s the best possible way (see the long-term consequences to assess whether the firm is in line with today´s strategy) - The generation, enhancement and exploitation of the resources and organization capabilities a firm has in order to generate rents. Set achievable expectations being aware of the resources and capabilities of the firm (what do I have and how to use it) - The definition of the scope of the firm (ámbito de la empresa)→ identifying the businesses in which the firm is going to compete (it will condition all other  activities). What kind of product is the firm selling and how scalable it can be (whenever you are setting something, who and where are you setting it for). *Agriculture industry → it doesn´t make sense to sell lemons in Australia *Tech company → it can sell services in Singapore without being physically there CHARACTERISTICS OF THE STRATEGIC DECISIONS: 1. They are adopted under conditions of high uncertainty, given the more dynamic and complex nature of the environment. The firm normally takes several assumptions/hypothesis that it will have to review once it starts operating. 2. Their nature is essentially complex (true in large, diversified corporations operating in global markets) as it is always changing (social preferences, political tensions, regulations). 3. They require the organization to adopt a holistic approach (from what the firm thinks initially to what then is later on might be completely different). The firm as a whole is the basic reference, and the generation of synergies is a key aspect. What drives the firm? o MISSION: where the firm wants to get o VISION: how the firms wants to get there o VALUES AND PRINCIPLES (a firm can´t have principles that clash with its values) 4. They impact upon the sum of the firm´s decisions at all levels. Therefore, they impact at operating levels, as they prevail over all other corporate decisions. 5. The network of outside relations the firm creates and maintains is the cornerstone for the strategy´s success (how the connections make a product or strategy better). The more the people are involved in the strategy, the more chances the firm has to be successful. 6. They tend to require changes in organizations that are not always easy to manage due to the baggage of resources and culture a firm generates and the ramifications changes may have for the interests of the various stakeholders involved. It´s important to be trained to work with something that is dynamic and is not going to be the same always. If a firm becomes too rigid, at some point the environment might break its strategy. GOOD STRATEGIES: - Fit with the context and are internally consistent - Are different from the competitor´s strategy - Are sustainable over time, thereby ensuring the firm´s long-term survival REASONS THAT MAY CONDEMN FIRMS TO STRATEGIC FAILURE: Sometimes firm fail and are forced to change their strategy, or go into liquidation.  Poor analysis or diagnosis of the problem: due to the complexity and uncertainty associated with strategic decisions, the limited rationality of the people making the decisions may lead to a wrong diagnosis or to the failure to identify or properly evaluate the different possible options. Mistake objective for strategy: defining a strategic objective without specifying how it is to be achieved doesn´t automatically lead to success, however challenging or motivating it might be. Poor definition of strategic objectives: either by establishing overly obvious objectives that lead nowhere or by defining such a sweeping array of objectives to please different stakeholders that it becomes impossible to set a clear and specific heading for focusing the organization´s efforts. Organizational inertia: this stops the firm from adapting to the necessary changes. o The traditional way of doing things may block the consideration of strategic options other than those that have been in place in the past. o The fear of losing power among influential groups, such as top management, may put a hold on the necessary solutions. The Icarus paradox or “dying from success”: highly successful firms that have reached a dominant position in their industry are sometimes reluctant to change their strategy because they might lose that status, and they are unable to stop other firms doing so successfully, and ousting them from the market. Identifying the strategic process with a formal process of simply doing the paperwork, yet without any real strategic thought process for identifying challenges, ways of resolving them and specific actions for overcoming them. OTHER MAJOR CONCEPTS: - Opportunities: those factors that favor the firm´s operations, and therefore its success. - Threats: those factors that obstruct the road to success. Both of them are beyond the firm´s short-term control, as they cannot be directly modified through its own decisions (challenges posed by the firm´s environment). The firm must adapt or indirectly influence their evolution over the medium or long term. - Resources and capabilities: principal assets a firm has for pursuing its business (in order to respond to the environment) - Strengths: activities the firm carries out especially well, normally informed by the availability of valuable or strategic resources and capabilities. They constitute the main tools for achieving success. - Weaknesses: activities that are important for success, but in which the firm is not in the best position to record an excellent performance. For a firm to build a successful strategy, it needs to rely on its strengths and corrects its weaknesses. In the medium term, it´s important to reinforce the strengths and remove or overcome the weaknesses to face the environment´s challenges.  - Competitive advantage: characteristic that favorably distinguishes the firm from its competitors, and which these cannot obtain or imitate, at least in the short term. - Profits, profitability and/or value creation: how more worth a firm is on the market (the way to measure its performance or success) The improvement in the firm´s performance benefits the various stakeholders it deals with: ➔ Shareholders see how the value of their investments and the return on it improve. ➔ Business success benefit employees through higher wages or job security ➔ Suppliers benefit from a larger order portfolio ➔ Customers enjoy the firm´s products or services. ➔ Society at large also benefits from a firm´s success, as it generates wealth, job, taxes… LEVELS OF STRATEGY: STRATEGY HIERARCHY, whose responsibility befalls different people within the organization. The various levels don´t pose different issues for the firm that can be separated for their analysis and resolution, but rather different aspects of the same strategic problem → close interaction between the various levels if the corporate strategy is to be successful. That means that there´s a need for information sharing and communication between those responsible at each level for coordinating the different strategies, and thereby ensuring their coherence and consistency with the mission and strategic goals. A) CORPORATE STRATEGY: typically focused on long-term objectives but may influence near term activities. Purpose: identify the activities or businesses the firm seeks to pursue (establish a firm´s general guidance). It involves a comprehensive understanding of the firm:  o Its future orientation → definition of the vision, missions, strategic goals and values o The search for opportunities for value creation o The manner in which the company intends to grow or develop in the future o The search for synergies → the creation of value for the integration, complementarity and interrelationships of the sundry activities in the business portfolio beyond each business´s individual results. There are synergies when the whole is greater than the sum of its part. It refers to the decisions for gaining a foothold in different industries and to the actions used for channeling its diversified businesses. B) COMPETITIVE STRATEGY: defined at the segment, and emphasizes products or services and attaining competitive advantage. Purpose: how to compete more effectively in each one of the activities or businesses in which the firm operates. *Important to create and sustain a competitive advantage, and the creation, improvement and exploitation of valuable resources and capabilities. A diversified corporation needs to define specific units of analysis other than those for the firm as a whole and for the traditional functional subsystems → strategic business units (SBUs). It´s a homogeneous set of activities from a strategic perspective for which a common competitive strategy can be formulated, which is in turn different to the appropriate strategy for other activities and/or strategic units. This is because the firm doesn´t have an overall competitive positioning, but a market share for each business that is pursued within a specific competitive environment, with different competitors, depending on specific success factors and requiring different competencies → it requires then a different competitive strategy. C) FUNCTIONAL STRATEGY: designs the approach for functions or departments (how marketing, supply chain, engineering should run their departments). Purpose: how to use and apply resources and capabilities within each operational area in each business unit, with a view to maximizing the productivity of those resources. This is the level at which resources and capabilities are generated and developed in order to achieve the goals defined in the previous level. Functional strategies, coordinated and mutually supporting each other, need to play their part in the achievement of the firm´s goals, and are essential to ensure higher-level strategies have the utmost impact. THE PROCESS OF STRATEGIC MANAGEMENT AND ITS PHASES OF THE STRATEGIC MANAGEMENT PROCESS 1. STRATEGIC ANALYSIS: process of conducting research on a company and its operating environment to formulate a strategy. - Identifying and evaluating data relevant to the company´s strategy - Defining the internal and external environments to be analyzed - Using several analytic methods (Porter´s five forces analysis, SWOT analysis and value chain analysis) a) Defining the firm´s future orientation – vision, mission, strategic goals and values – seeks to lend consistency to business operations as a whole and to the process of strategic management. b) External analysis: aims to identify the threats and opportunities prevailing in the environment in which the firm is embedded. c) Internal analysis: used to perform a diagnosis of the firm, identifying the most significant internal variables and evaluating them to decide which ones are strengths and which ones are weaknesses. 2. STRATEGIC FORMULATION: process where organizations define clear objectives and develop a blueprint to achieve them. It necessitates the integration of insights from various functional areas (marketing, finance) and operations to craft strategies aligned with the organization´s mission and vision. The ultimate goal is establishing a competitive advantage (cost leadership and product differentiation) and fostering sustainable growth, ensuring the organization´s long-term viability and success. In strategy formulation, organizations meticulously analyze their internal and external environments, define clear mission and vision statements, set achievable goals and develop robust strategies. This process, grounded in comprehensive research and analysis. Once you understand the context, you know the rules, the market and the consequences you are going to play with (how the strategy will be relevant in that specific context). It´s also important to know the market segment in which the company operates. Corporate strategies are used to define a firm´s future directions of development (expansion, diversification), the types or methods of development (mergers, acquisitions and alliances) or the most appropriate level of internationalization and the suitable channels to be used accordingly. Business Unit: an organizational subsystem that has its own market, a set of competitors and a mission distinct from those of the other subsystems in the organization.  3. STRATEGIC IMPLEMENTATION: the act of executing a plan to reach the desired goal or set of goals (putting those strategies or plans into actions). It involves the assessment of strategies through the application of different criteria in order to identify the one that, at least a priori, appears to be the best possible alternative. It depends heavily on feedback and status reports to ensure the strategy is working and to rework any areas that may need improvement (establish measures to see if the strategy is successful). Strategy implementation is important because it involves taking action instead of simply brainstorming ideas. It helps show the team that the strategies discussed are viable. It´s also a great tool for team development because everyone can participate. It depends on thorough communication and the right tools to facilitate the strategy. - Definition of the organizational support – organizational structure, leadership, human resources and organizational culture - Definition of the administrative support systems – definition of the strategic plan and control systems RESPONSIBILITY FOR STRATEGIC DECISIONS: TOP MANAGEMENT: The main responsibility for the process befalls a firm´s top management, as strategic decisions impact upon the firm as a whole or upon a significant part of it, and have major long-term implications. This is because strategic decisions are made within an uncertain and complex context with possible conflicts of interest among the various groups involved. Top management ranges from the firm´s top executives (CEO → directly responsible for corporate strategy) through to functional managers (commercial or operations managers → define and align functional strategies). *In diversified corporations it´s important the role played by the supervisors of each business unit, especially with regard to the formulation of the competitive strategy. Top managers are in charge of adopting the decisions designed to formulate and implement the strategy for the achievement of the overall goals, which include the following duties: - Align the strategy management process by defining the mission, vision and strategic goals, and overseeing the different phases involved - Obtain, develop and mobilise the firm´s resources and capabilities (tangible, intangible, financial and human), which require their coordination to ensure they´re available in the right amount, moment and place - Seek corporate returns → create value for the capital invested in the firm - Handle conflicts of interest between the firm´s direct or indirect stakeholders - Liaise between the firm and the main agents in the environment in order to exploit the opportunities it provides and void the threats it poses BOARD OF DIRECTORS: It´s responsible for the overall supervision of the process and the evaluation and control of top managers in its strategic tasks to enhance its quality and defend shareholder´s interest in terms of value creation. This is done through Strategy Committees set up accordingly or through the Board as a whole. STRATEGY AND CORPORATE DEVELOPMENT STAFF: Group of specialists in charge of gathering information and then processing and analyzing it, with the drafting recommendations on major strategic decisions. In many cases, firms resort to the independent advice provided by strategy consultancy firms operating in the market. *In large firms, there´s a specific body responsible for advising top management and the Board of Directors. *Large corporations → Chief Strategy Officer → duties of internal consultancy, linked to the provision of advice when formulating strategies. It might also involve responsibilities of executive nature associated with the implementation of strategy in general, or with the orientation and execution of especially important strategies, as in the case of a merger or acquisition. The distribution of responsibilities responds more closely to the structure of a large corporation. In the case of small and medium, the tasks associated with the process of strategic management are assigned to barely a handful of people or solely to the business owner or chief executive. Whereas the responsibility for the phases of strategic analysis and formulation is highly concentrated in the bodies described. Responsibility for the implementation is much more widespread throughout the organization, also affecting line managers on all levels and the firm´s workforce as a whole.  They all have a significant part to play in the success of the implementation and in the success of the strategy itself. FIT AND CHANGE IN THE STRATEGIC MANAGEMENT PROCESS: There has to be a suitable fit between the different elements comprising the strategy to ensure its success → strategic and organizational. STRATEGIC FIT: Necessary match between the context in which the strategy is to be developed and the chosen strategy itself. The context is defined by the environment, a firm´s specific characteristics in terms of resource and capabilities, and the strategic goals defined by management. There´s strategic fit when the chosen strategy leads us closer to our goals: - Exploiting opportunities in the environment and avoiding its threats - Drawing upon the firm´s strengths and eluding or mitigating its possible weaknesses In the absence of any of the above aspects → strategy suffers and the risk of failure increases: Unsuitable strategy: a firm that fails to adapt to the environment Unfeasible strategy: a firm chooses a strategy for which it doesn´t have the necessary resources ORGANISATIONAL FIT: Match between the chosen strategy and the organizational characteristics of the firm in which that strategy is to be implemented. You have to get people passionate about your mission and vision. When a firm´s strategic goals, the environment or the allocation of resources and capabilities change, the existing fit will be broken and results will worsen. Unless this mismatch is corrected, it will lead to a downturn in the firm´s results. STRATEGIC CHANGE: A more or less radical or a more or less incremental modification of the strategy. When strategic change is undertaken successfully, the necessary fit between context and strategy is restored. ORGANISATIONAL CHANGE: The necessary modification of one or more of the organization´s characteristics. When the strategy is modified to adapt to the new context, the previous organizational fit is likely to be impaired (the characteristics of the organization in which the former strategy prevailed may not be the right ones for the success of the new strategy) → changes of the organization´s characteristics to render it compatible with the new strategy. Strategy is not set in stone, so the requirements of an ever-changing context force managers to permanently assess the strategic fit and modify current strategy. Strategic change normally leads on to organizational change. STRATEGIC MANAGEMENT AS A FIELD OF STUDY: Strategic management, as an academic discipline, first appeared in 1960s. Chandler (1962): its work is considered to be the first academic research conducted on business strategy by seeking to establish an empirical link between firm´s growth strategies and the organizational structures they adopted. Andrews (1965): provided a definition of strategy that is applied today, and laid the foundations for internal and external strategic analysis. Ansoff (1965): tweaked the definition of strategy and identified the basic strategies of corporate growth and development. Strategic Management has emerged and been compiled over time based on the confluence of 3 different sources: academia, business practices and consultancies specializing in strategy → ABC Model (Academic, Business, Consultants) ADVANTAGES: - Greater wealth of knowledge - Certain equilibrium between theoretical and practical considerations → between the knowledge generated through scholarly research and that stemming from the practical solutions devised by firms or the consultancies advising them. PROBLEM: it´s not always easy to - Organize and systematically arrange the knowledge generated - Transfer know-how between the various players in the discipline´s history ACADEMIC CONTRIBUTIONS TO STRATEGIC MANAGEMENT: ➔ Economics: Agency Theory and Transaction Cost Theory ➔ Industrial Organization ➔ Organization Theory ➔ Psychology: individual behavior of managers Since its beginnings, strategic management has evolved considerably, becoming an increasingly more mature and consolidated discipline within the field of management. This journey toward maturity has been accompanied by an increase in the array of topics analyzed and in the methodologies used in their research. Today, Strategic Management is a consolidated discipline within the field of education and research. This is confirmed by the activity of conferences and publications promoted by academic societies: (The international academic community has been steadily growing in the number of researches and in the instances of cooperation among them) - Strategic Management Society - Strategic Management Division (Academy of Management) - Strategy Section (ACEDE Spanish Academy of Management) APPROACHES TO STRATEGIC MANAGEMENT: A key issue for strategic management involves the reasons for firm´s success or failure within a context of global competition. This implies identifying the factors of success. While scholars all share this goal, the way of actually achieving it is not quite so clear. Theories and approaches to provide a coherent explanation for business success: THE RATIONAL APPROACH: Based on economic logic, it´s of an eminently prescriptive nature concerned about how strategies should be formulated. Inspired by the rational decision model propounded by economic theory, it assumes that managers have considerable discretional leeway, and they are analytical, rational and can play comprehensively. The aim is to instruct senior managers on how to properly formulate the strategy that will maximize firm performance, based on a study of the environment´s possibilities and the firm´s capabilities. THE ORGANISATIONAL APPROACH: Centered on strategic processes, it analyses how strategic decisions are made within organizations. It´s of an eminently descriptive nature → it sets out to show how and why strategies are rolled out and developed in firms (how strategies are actually formulated in practice). This approach furthers certain proposals of a regulatory nature on how to develop the strategic decision-making process. THE HOLISTIC APPROACH: The aim is to merge economic and organizational considerations (formulation and implementation), selecting the most interesting contributions from the 2 previous approaches. In a process of this nature, it´s assumed that a far-reaching search for data has been made, a reasonable number of alternatives have been considered, and these alternatives have been assessed according to objective criteria. The rational or synoptic process for selecting and implementing a strategy has been championed as an “ideal process” that benefits the firm. In a process of this nature, it´s assumed that a far-reaching search for data has been made, a reasonable number of alternatives have been considered, and these alternatives have been assessed according to objective criteria. Nevertheless, one needs to ponder the part played by rationality in the adoption of strategic decisions and what decides whether the process actually followed is more or less rational. The adoption of a rational strategic decision-making process has certain major advantages for senior management and for the success of the chosen strategy: It caters a more systematic, logical and rational analysis of the decision to be adopted It enables the firm to be more proactive than reactive when outlining its own future It provides all the organization´s members with an understanding of what the firm expects to achieve It helps to evaluate the less strategic decisions made by lower-level managers It facilitates the assessment and control of the strategy´s progress in the future  It paves the way for the involvement of more people in the strategic management process Those firms pursuing a rational process will be expected to record better results. However, reality shows that this process doesn´t always unfold in this manner, and its monitoring doesn´t guarantee the strategy´s success. This is because the rational process takes place under conditions of uncertainty, complexity and conflict. ✓ Objectives are often unclear and change over time ✓ People frequently look for information and alternatives in a disorderly and opportunistic manner ✓ The analysis of the alternatives may be incomplete ✓ Decisions are often more a reflection of the use of standard operating procedures than a systematic and rational analysis This model of the rational process of strategic management tends to be criticized for: - The decision-maker´s bounded rationality doesn´t always involve the alternative that maximizes the results, but instead the one that simply satisfies the achievement of the goals proposed - The learning throughout the decision-making process - The political aspects of the process, and the role that luck, chance or the intuition of a brilliant idea may play in the choice of strategic options and their success or failure Generally speaking, the strategic decision-making processes are never wholly rational or totally political, but instead they are better understood in terms of the complementarity between rational and less rational aspects. The model in each organization will depend on: o Top management´s characteristics o The nature of the actual strategic decision to be adopted o The organization´s context → the characteristics of the environment and of the firm FACTORS THAT FAVOR OR COMPROMISE THE RATIONAL NATURE OF THE STRATEGIC DECISION-MAKING PROCESS: ▪ The presence or not of a credible competitive threat ▪ The importance of the decision to be adopted ▪ The existence or otherwise of independent control mechanisms ▪ The existence or not of conflicting goals among stakeholders ▪ The degree of uncertainty surrounding the strategic decision-making process ▪ The size of the organization TOWARDS A HOLISTIC VIEW OF STRATEGIC MANAGEMENT: A holistic view of strategic management seeks to merge the rational and organizational approaches according to the key notion that both are valid insofar as they stem from the same reality. Focusing all one´s attention on one of them and ignoring the other may lead to a significant loss of information and capacity for analysis that may compromise the strategy´s success and the firm´s competitiveness and profitability. In order to develop a holistic view: ➔ The distinction and complementarity between strategies that are deliberate or intentional and emergent ones ➔ The consideration of the more organizational and less economic-rational aspects The model described (el de phases for strategic management processes) is a deliberate strategy. Emergent strategies: those that originate within the very heart of a firm, with no deliberate plan and informed by experience, from trying out a number of strategic actions, seeking to respond to an immediate problem or through serendipity → they respond to the notion of converting into strategy something that works, without it necessarily having been planned. The emergent model focuses on non-deliberate aspects (on the strategic decision- making process itself) and on the problems an organization has to face when rolling out or implementing the strategy when the human resources involved in the process have different and sometimes conflicting goals. Both types of strategies are present in a firm → strategy is the outcome of an intentional or rational process (deliberate) and of the result of the appearance of the responses a firm makes to the problems it faces (emergent). It´s important to integrate the 2 main pillars of strategy formulation (deliberate and emergent) to understand strategic management, in its twin facets of formulation and implementation. A deliberate strategy is better when the cost of the venture´s failure is very high (decisions involving diversification, vertical integration, internationalization) The emergent approach is more appropriate for the slow and gradual creation of valuable capabilities that provide the firm with a long-term competitive advantage In order to complete the holistic approach, it´s important to stress the necessary complementarity between the more economic-rational aspects of the strategic management process and those in which the organizational approach carries more weight → strike a suitable balance between them to guarantee the strategy´s success. *Organizational problems take on special significance in the definition of a firm´s mission and goals. The existence of different stakeholders generates a situation of potential conflict in objectives that needs to be resolved → analysis of a firm´s governance, social responsibility or business ethics. At the strategy formulation phase → relational strategies: involve seeking privileged relationships with sundry agents in the environment over and above the normal relations established within a market context → protect the firm from its competition by looking for “safe zones” that remove part of the uncertainty from the environment. Regarding the evaluation and selection of strategies → analyze the consequences they may have for the different stakeholder groups related to the firm, the possibility of conflict and the need to handle it properly. The implementation phase signals the appearance of key organizational problems for the strategies´ success: ➔ The design of the organizational structure ➔ Organizational change ➔ The leadership role ➔ Human resources policy ➔ The role of organizational culture The importance that organizational aspects have in the strategy´s success has been growing in recent years as more attention has been paid to individual factors and the relationships between individuals (more attention is being paid to cognitive and emotional aspects, and to the social relationship among the people that make up the organization). These aspects have a bearing on how decisions are made within the firm, and therefore on the type of strategies chosen and, indirectly, on their outcomes. This is relevant when analyzing the role played by top management or the strategy leader in the strategies chosen and their success.