E3: Strategic Management

Chapter 1: The Strategy Process

Definition of Strategy

Strategy (Johnsons)

 The unique direction and scope of an organisation

 Over the long-term
 To achieve sustainable competitive advantage
 Through the configuration of resources
 Within a changing environment
 To meet the specific/different needs of markets

Strategy (Michael Porter)

 The unique way in which the company, its products, services or strategic business units serves
the specific needs of its customers;
 It is the “thing” which differentiates the company from its competitors;
 It is the source of long-term sustainable competitive advantage

Competitive Advantage

 Is about how the business makes its market offering and seeks to outperform its rivals
Competitive advantage generates the earnings needed for a financial strategy, i.e. generate
shareholder value, ensures sustainable environment and provides benefits to the communities
in which it operates (stakeholders)
  Economic profit/Super-normal profits arise when market power (competitive advantage)
belongs to a firm rather than its competitors, resulting in that firm achieving discounted
earnings above the opportunity cost of capital it employs

 Over the short-term companies may experience superior profit until competitive entry erodes
profits by increasing buyer choice and pushing price down.

 Over the long-term super-normal profits belong to those that have erected powerful barriers to
entry/sustainable competitive advantage

The Organizational Ecosystem

 It is fundamental to know what will work for a particular organization by understanding the
ecosystem it exists in
 An organization’s ecosystem is made up of a network of organizations involved in the delivery of
a product or service
 Network of organizations includes:
i. Customer
ii. Suppliers
iii. Distributors
iv. Competitors
v. Government Agencies
 This can be via:
i. Cooperation or;
ii. Competition
 The idea is that the components of the ecosystem are constantly evolving to make each
organization flexible and adaptable to survive
 The concept of a business ecosystem is to help organizations consider how to succeed in an
environment which is changing constantly and at great speed
The Purpose of Strategy

 Strategy is what makes you unique and gives you competitive advantage
 Strategy is the direction and scope of an organisation over the long term: which achieves
advantage for the organisation through its configuration of resources within a changing
environment, to meet the needs of markets and to fulfil stakeholder expectations.’
 Strategic Action: A course of action including the specification of resources required to achieve a
specific objective
 Strategy requires an understanding of;
i. Resources (cash, assets etc.)
ii. Ecosystem i.e. environmental factors
iii. Stakeholders (anyone with interest in the business)
 These will help the organization decide how to achieve competitive advantage

Characteristics of Strategic Decision

i. Long-term implications
ii. Involves uncertainty
iii. Impacts the future direction of the company
 iv. Impacts the whole organisation including the operational decisions
v. Impacts various stakeholders
vi. Requires the assessment and allocation of resources
vii. Requires matching strengths and weaknesses and activities with the opportunities and threats
posed by the ecosystem

Advantages and Disadvantages of deliberate long-term planning (rational model)

Advantages

i. Forces Managers to look ahead

ii. Improved Control
iii. Identifies key risks
iv. Encourages creativity
v. Enforces consistency on all levels
vi. Clarifies aims and objectives
vii. Forces decisions

Disadvantages of deliberate long-term planning (rational model)

i. Conflicting objectives of stakeholders

ii. Balancing long term planning with short term pressures
iii. Difficulties in forecasting accurately
iv. Bounded rationality; incomplete information
v. Too rigid
vi. Costly
vii. Management of distrust

Criticisms of a formal planning approach

i. Practical failure
ii. Routine and Regular
iii. Reduces initiative
iv. Internal politics
v. Exaggerates power

Levels of Strategy

i. Corporate Level
 Highest level of strategy within the organization
 Examines strategy for the organization as a whole
 Focuses on which businesses and markets the organization should operate in
  Corporate strategy is concerned with:
i. Acquisitions, disposals and diversification
ii. Entering new industries
iii. Leaving existing industries

ii. Business/Management Level

 Business strategy looks at how the organization can compete successfully in the chosen
market
 Business strategy is concerned with:
i. Achieving competitive advantage
ii. Meet needs of key customers
iii. Avoid competitive disadvantage
 Business strategy focuses on strategic business units (SBUs)
 An SBU is a unit within an organization for which there is an external market for
products distinct from other units

iii. Functional/Operational Level

 This level is concerned with how the component parts of the organization (in terms of
resources, people and processes)
 Pulled together to form a strategic architecture which will effectively deliver the overall
strategic direction
 It looks at the day-to-day management strategies of the organization
 Concerned with
i. Human resource strategy
ii. Marketing strategy
iii. Information systems and technology strategy
iv. Operations strategy
 Strategies could be unique to the SBU and benefit from being individually focused or the
corporate unit may seek to centralize them and so benefit from society
All three levels are linked. Corporate level will only succeed if it is supported by operational level
Types of Strategy

i. The Rational Model

 Logical, step-by-step approach
 Requires the organization to analyze its existing circumstances and generate possible
strategies and selecting and implementing the best one
 See the table in your pocket file and memorize that

Three main stages of the rational model:

ii. The Emergent Approach: Mintzberg
 Strategies are not always formally planned
 Generally made from the bottom up
 Strategies may evolve in response to unexpected events that impact on the organization
 An emergent approach is evolving, continuous and incremental.
 Takes longer than a planned strategy due to the evolution involved
 More short term than the traditional approach. To rely on emergent strategies longer it
requires a culture of innovation
 However, this does not mean that the organization does not have a formal plan for the
future but to be successful they need to amend this strategy for unexpected events.

iii. Crafting Strategies

 This strategy combines deliberate strategic planning techniques (rational model) with
emergent strategies
 How to craft strategy
i. Manage stability
ii. Detect discontinuity
iii. Reconcile change and continuity
iv. Know the business
v. Manage emerging patterns
iv. Logical Incrementalism/Adaptive Strategy
 This approach suggests that strategy tends to be a small-scale extension of past policy
rather than radical change
 In order words, managers try to make small changes to what they know has worked well
in the past rather than one off changes
 Developing business through a small series of steps
 Adaptive mode of strategy making
 Incrementalism may have no overall long-term plan causing it to suffer from strategic
drift which leads to an inability to meet customer needs
  Criticism: Does not work where radical change is necessary i.e. may lead to strategic
drift
 Unsuitable for new organizations because they lack past strategies to base their future
policies on

v. Freewheeling Opportunism
 Suggests that organizations should avoid formal planning
 Simply takes advantage of opportunities as they arise
 Caters especially for fast changing industries e.g. pharmaceuticals and technology
development
 May also suit any experienced manager who happens to dislike planning
 Advantages
i. Good opportunities are not lost
ii. Adapt to change more quickly
iii. Might encourage flexible creative attitude

 Disadvantages
i. No coordinating framework
ii. Emphasizes the profit motive
iii. The firm ends up only reacting

Problems with lack of formal planning

i. Failure to identify risks

Business does not look ahead and this means it may fail to identify key risks, meaning it will not
have contingency plans to deal with the risks should they arise

ii. Strategic drifts

Organization has no overall future plans meaning it’ll be difficult for them to compete
effectively.

iii. Difficulty in raising finance

Investors like to know what plans the organization has for the future. If the company does not
have a formal plan, it’ll be difficult to convince SHs and banks to invest.

iv. Management skill

Freewheeling opportunists require managers that are highly skilled at understanding and
reacting to changing markets. And less experienced managers will find this difficult.
Adopting an approach to strategy

More formal planning approaches (Rational model and to a degree emergent model) suit organizations
that:

i. Exist in a relatively stable industry

ii. Have relatively inexperienced managers and formal planning will help with organizing
guidelines to help develop a strategy

More informal planning approaches (Freewheeling and to a certain degree incrementalism) suit
organizations that:

i. Are in dynamic and fast changing industries

ii. Have more experienced and innovative manages that are able to react quickly to changes
iii. Does not need to raise significant external finance

Real world balances are between:

i. Rational Approach
ii. Emergent strategies

Strategic Planning for not-for-profit organizations (OTQ’s)

i. Economy: Looks solely at the level of inputs; Did we spend more?

ii. Efficiency: Looks at the link between outputs and inputs; How well did we use our input?
iii. Effectiveness: Looks at the outputs; How well did we deliver on our objectives?
Perspectives to Strategic Planning

i. A traditional approach
 Looking at shareholders and their objectives
 The emphasis is on formulating plans to achieve these objectives
 Objectives are important but this approach is flawed because objectives are set in
isolation of from market considerations
ii. Market led or Positioning approach
 This approach starts with an analysis of markets and competitors’ actions before setting
and developing objectives
 This ensures that the firm fits in with its environment
 The idea is to be able to predict changes way in advance to control change rather than
reacting to change
 Main problem with this approach lies in predicting the future.
 External focus; Outside in approach
 Super normal profits come from:
i. High market shares relative to rivals
ii. Different product
iii. Low Cost
 iii. Resource based or Competence led approach
 Firms that find predicting the future and anticipating the environment difficult have
switched to a competency/resource-based approach.
 The emphasis in this approach is to look at what the firm is good at i.e. its core
competences
 Starts from considering the strengths and weaknesses then using core competences as a
basis for competitive advantage
 These core competences are difficult for competitors to copy

Strategic Lenses (Johnsons)

 Strategy as design (Rational model)

 Strategy as experience (Incrementalism)
 Strategy as variety (Emergent view)
 Strategy as discourse (Strategy is used as a political tool to exhort power)

Strategic Lenses (Mckinsey)

 Financial: What is required to create value for a business?

 Market: Is the company operating in markets that will deliver growth over time?
 Competitive advantage: What advantage does the company have in terms of capabilities;
products relative to competitors?
 Operating model: Can the organisation deliver value through capabilities and talent?

Strategic Management Accounting

 A form of management accounting where emphasis is placed on information which relates to

factors outside the entity as well as non-financial and internally generated information
 Nature of the Strategic Management Accounting *Be able to design an accounting system.
i. What do you think?
 Financial and Non-financial
 External orientation (Competitors
 Future orientation (Forecasts, Risk)
 Goal congruence
ii. Most strategic decisions are unique, so information needed is likely to be ad hoc and
specially tailored.
 Exam implication of this?
iii. Characteristics
 Relevant,
 Accurate
 Cost-effective
 Efficient
 Timely
To achieve this they work as part of a multi-skilled team to:

i. Formulate policy and setting corporate objectives

ii. Formulate strategic plans derived from these objectives
iii. Formulate shorter terms plans
iv. Acquisition and use of finance
v. Derive performance measures of financial and non-financial nature
vi. Improvement of business systems and process through risk management and internal audit
review
vii. Monitor outcomes against plans and other benchmarks and responsiveness of action for
improvement
viii. Design of systems, recording of events and transactions and management of information
systems
ix. Generation, communication and interpretation of financial and non-financial information
x. Provision of specific information for decision making

 Decision making is becoming a source of competitive advantage and value creation

 In this process the management accountant is responsible for the identification, generation,
presentation and interpretation of information relevant to:

i. Financial analysis (current position)

ii. Financial planning (goals and objectives)

iii. Financial control

 Examples of strategic management accounting

i. Competitor analysis, including benchmarking
ii. Financial effect of competitor response
iii. Product profitability
iv. Customer profitability
v. Pricing decisions
vi. Product market decisions
vii. Capacity expansion
viii. Brand values
ix. Shareholder wealth
x. Cash-flow
xi. Enter or leave a business area
xii. Introducing new technology
 Key Differences between Strategic and Traditional Management Accountants