Strategic Management Institute - Influencing the Future
Strategy Survey: Much of the content of the program discussed above is based on the results of our research into the practice of strategic management. When Emily Ross wrote a summary in Business Review Weekly (BRW) she likened the results to a "Strategy Free Zone". Much needs to be done - hence the birth of the SMI. A more detailed report can be obtained from HCP. Please email us for a copy hcandp@hcandp.com
Survey: the practice of strategic management; formulation, implementation and effectiveness
Overview
In the mid 1990’s renowned business strategists Hamel and Prahalad (1994) and Porter (1996) lamented the demise of meaningful strategic management practices in major corporations. These writers (and many others) sought to influence the practice and management of strategy, suggesting practitioners apply new approaches to both the content and context of strategy formulation. Similarly, Kaplan and Norton (1992) expressed a strong concern about the lack of effectiveness of strategy implementation. HCP's Strategic Management Institute and RMIT University sought to identify current strategic management practices in Australian organisations. The research arose from our concern that contemporary approaches to strategy remain at a conceptual level only, whilst managers continue to rely on less dynamic methods and exercise an over reliance on cost reduction, as a primary means to compete.
A number of interesting observations were made from the survey, amongst them, was the observation that 73% of respondees agreed that they could implement strategy more effectively.
The survey was solely concerned with Australian industrial organisations and addressed the question:
“What are the strategic management practices that are conducted by senior managers in Australian organisations and how effective are they?
The following PDF file provides a summary of our findings. (Download a copy Here). A more comprehensive and detailed report is available upon request. We invite you to contact us at hcandp@hcandp.com. We will be delighted to send you a copy.
A description of the purpose and rationale of the study follows:
1.0 Introduction
In the mid 1990’s renowned business strategists Hamel and Prahalad (1994) and Porter (1996) lamented the demise of meaningful strategic management practices, both as a means to compete and as a means of creating New Wealth in business organisations. These writers (and many others) sought to influence the practice and management of strategy, suggesting practitioners apply new approaches to both the content and context of strategy formulation.
Proposing an alternative content of strategy for example, Hamel and Prahalad (1994) observed that chief executives were
‘spending less than 3% of their time building a corporate vision for the future’
1.1 A Different View of the Content of Strategy Formulation
Addressing the need for better content of strategy specifically, Hamel and Prahalad (1994) considered that too many executives continuously play ‘catch up’, focusing on short term and inward looking processes of cost reduction, down sizing, outsourcing and restructuring. Porter (1996) was emphatic; he suggested that the activities of cost reduction and down sizing are primarily concerned with operational effectiveness (OE), but not strategy. Both Hamel and Prahalad (1994) and Porter (1996) recognised the importance of OE, but suggest that such activities are a highly ineffective means of delivering a sustainable competitive advantage.
Where OE is effective, is in the delivery of a comparative advantage over competitors, but rarely a competitive advantage. A comparative advantage usually delivers more of a short term competitive solution and is primarily applicable to existing rather than future markets. Regrettably, where superior OE performance does result in a business’s ability to outperform rivals, the long term effect can actually result in a reduction in value, rather than an increase. A reduction in value occurs as continual cost reduction is followed by reductions in price and by definition, profitability. Price reductions occur as businesses seek to maintain market share by offering a comparative price advantage over competitors, justified on the basis of their new and lower cost base.
As a result of the over emphasis on OE, products also tend to become far more ‘commoditised’, again making differentiation and wealth creation difficult to realise. As the automotive industry pursues its never ending quest to reduce costs for example, parts are being shared across a range of new cars with the result that differentiation is continually diluted between models. Similarly, Motorola and then Ericsson, each lost considerable market share in the mobile phone business, as it became increasingly difficult for each to distinguish the difference between competitive products and the value they each could deliver to their customers.
Differentiation is obtained by providing customers with a product and service offering that is based on a different and/or unique set of activities to competitors. If an organisation is also capable of providing a different suite of design features and benefits (e.g. Apple Computer) in its products, it is also likely to benefit significantly in the market place. Differentiation in capabilities is also mandatory and requires an organisation to develop a unique and unbeatable set of ‘core competences’ (hence capabilities). New core competences can be built or acquired whilst existing competences can be leveraged.
Successful differentiation through capabilities can result in rivals finding it very difficult to compete, particularly in the marketplace of the future. A survey conducted by Dr Paul Hunter (a founder of the Strategic Management Institute and Director of HCP) in 1999 confirmed this view.
Results of his survey conducted into business strategy in Australia showed that participating organisations that conducted a restructuring exercise with the purpose of building and leveraging competences, emerged in a position that allowed them to create new and competitive positions in the market. Those businesses that sought to arbitrarily reduce costs, typically emerged only with a lower cost base and an imperative conduct ongoing rounds of cost cutting, as competitors continually matched their savings targets, dollar for dollar.
An example of the way in which OE can deliver a competitive advantage over a comparative advantage is the application of a ‘quick response’ delivery service to customers. Such a program has the capacity to either deliver a unique business model to customers, or simply a means to reduce costs. McDonalds Restaurants for instance, built a highly effective delivery model for fast food, but competitors soon flooded the market with similar offerings. The end result was the placement of enormous pressure on price and a continuous battle to retain market share. In contrast, Virgin Blue Airlines continues to build a significant market share as it seeks to continually reduce cost, but at the same time, maintain profitability and create new wealth.
Virgin Blue can also be used as an example to demonstrate how wealth creation can be obtained through the delivery of strategies based on differentiation and the delivery of greater value, combined with the practice of OE, but not OE on its own.
1.2 A Different View of the Context of Strategy Formulation
The foregoing criticisms also allude to the recognition of the need for a different approach to managing the context of strategic management. Whilst many of the common practices of strategy formulation were born in an era of static change, today’s business environment is fast moving and dynamic. Traditional methods of strategy formulation (Chandler, 1962, Andrews, 1971) rely on situational analysis, developed either from reviews of existing market positions (primarily market share) or environmental analysis (Strengths, Weaknesses, Threats and Opportunities (SWOT)). Such methods are far less relevant in a business world characterised by uncertainty, rapid advances in technology and continual change.
Developed and enhanced through an ongoing program of ‘strategising’ (the conduct of continual ‘strategic conversations’) a dynamic approach to strategy must consider both external market positioning and the core competences that the organisation must leverage, build or acquire if it is to maintain a sustainable competitive advantage. Strategy must also differentiate between competitiveness in the markets of today and the markets of the future. It is now far less likely that a strategic ‘plan’ depicting a single view of a certain future, will be appropriate. Such a plan, (usually compiled over a two day ‘talk fest’) formalised in an 'annual report', is rarely sufficient to satisfy the needs of a business that seeks an aggressive approach to the creation of new wealth on an ongoing basis.
Strategic renewal flourishes in an environment of organisational learning and knowledge management and a culture that promotes Creativity, Innovation and ongoing Organisational Transformation and Renewal. It is informed through formal Business Intelligence programs and motivated through strong Leadership. Resulting ideas can be wasted however, unless the organisation recognises, encourages and rewards the practice of organisation wide Entrepreneurship.
2.0 A Different View of Strategy Implementation
Whilst Hamel and Prahalad (1994) and Porter (1996) were concerned with the effectiveness of strategy formulation in the management press, Kaplan and Norton expressed similar (1992) concern about the effectiveness of strategy implementation. The authors also sought to emphasise wealth creation through growth, as opposed to the more ‘process centric’ exercise of cost reduction. The secret weapon in their armoury was to ensure that OE objectives were fully aligned with the strategic objectives of the business. Their 'modus operandi' was to develop a performance measurement, management and reporting system that commenced with the strategic goals and objectives of the organisation, rather than the cost reduction desires that tend to be a more isolated and a less strategic in nature.
The methodology used by Kaplan and Norton (1992) is now well known as the Balanced Score Card (BSC). Again as we approach the end of 2004, we can observe numerous organisations that are still contemplating its introduction, even though success stories from its application abound.
3.0 The Research Program
The issue at the heart of the proposed research is that many of the advanced approaches to strategy remain at a conceptual level only, with managers continuing to rely on cost reduction as a primary means to compete. They also appear to be heavily reliant upon traditional methods of strategic planning as a method of developing new strategies. Minimal attempt appears to be made to effectively measure and monitor strategy implementation. This view is also supported by research conducted by Dr Paul Hunter in 1999. Here, his research showed that few managers could be considered to be practicing any advanced form of strategic management, although they were observed to practice OE and traditional approaches to strategy.
The 2003/4 survey was concerned solely with Australian industrial organisations and addressed the question:
“What are the strategic management practices that are conducted by senior managers in Australian organisations and how effective are they?"
To answer the question, a survey was mailed to a selection of Chief Executive Officers responsible for the performance of Australian businesses. The main purpose of the research was to gain an insight into the practice (approach to formulation and implementation) and effectiveness of strategic management that is conducted within a broad range of organisations with operations in Australia,
4.0 Rationale for program
Evidence of under performance in Australian corporations is far too common, as witnessed by the unfortunate performances of OneTel, Pacific Dunlop, Pasminco, HIH Insurance and Ansett. Few exhibit sufficient strength and growth to suggest that senior managers are practicing effective methods of strategic management. In contrast, continual announcements of downsizing, restructuring and reengineering abound. As suggested above, such exercises are undertaken primarily to reduce operating costs, a practice that is subject to the law of diminishing returns and therefore a, limited means of creating new wealth. The identification of the strategic management practices that will contribute to the creation of new wealth is the primary purpose of the proposed research.
We appreciated the contribution from those who participated in the survey and look forward to developing the ‘next steps’ in our effort to raise the awareness of the need to apply more relevant approaches to strategic management in Australia.
BIBLIOGRAPHY
Andrews, K.R., 1971, The Concept of Corporate Strategy, Irwin, , Homewood, Ill.
Chandler, A., 1962, Strategy and Structure: Chapters in the History of the Industrial Enterprise., MIT Press, Cambridge, MA
Hamel, G and Prahalad, C (1994) Competing For The Future, Harvard Business School Press, Boston, Massachusetts.
Kaplan, R., Norton, D. “The Balanced Score Card – Measures That Drive Performance”, Harvard Business Review, January – February, 1992.
Mintzberg, H., “Crafting Strategy” , Harvard Business Review, July – August, (1987), 65 – 75
Porter, M. (1996) “What is Strategy?”, Harvard Business Review, November-December, pp 61-78.