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Establishing a strategic direction: a review

Author: Tony Proctor
Date: January-February 1997
From: Management Decision(Vol. 35, Issue 1-2)
Publisher: Emerald Group Publishing, Ltd.
Document Type: Article
Length: 7,663 words

Abstract:
A corporate strategy defines a business' objectives for a given time period and with specified plans and activities for reaching the
goals. Firms must evaluate developments in technology, inflation and the general economy, cultural trends and environmental
changes that will affect business plans. Cross impact analysis of these variables will help identify opportunities and threats to the firm
and help determine future or potential business developments. Meanwhile, gap analysis gives organizations a more accurate basis
for measuring market trends that will affect goals. Gap reduction strategies cover market penetration, market development strategy,
product development strategy and product and market diversification.

Full Text:
The corporate strategy of a business reflects its objectives and goals, usually set within a time framework, and specifies the main
policies and plans for attaining those goals. It also usually defines the nature of the organization's business which in turn influences
the kind of economic and human organization that is required. Strategy involves matching a firm's activities with its resource
capability. There is little point in trying to take advantage of some new opportunity if the resources needed are not available or cannot
be made available. A firm must develop strategies in line with its resources. Strategy also concerns the matching of a firm's activities
to the environment in which it operates. Since the environment is continually changing, strategic decisions necessarily involve coping
with change. The extent and speed of environmental change will vary and the pace at which strategy must change will vary too.

The corporate plan

The corporate plan is the plan for the company as a whole. It defines the business in which the company operates, indicates financial
objectives which have to be accomplished, specifies how revenues are to be generated through various marketing programmes and
assesses the various costs which will be incurred in achieving these objectives. The corporate plan answers the questions: Where
are we now? Where do we want to go? How do we organize resources to get there?

Specifying an appropriate definition of the nature of the firm's business is most important. For example, if Cunard had not seen its
business as being that of transportation it is less likely that would it have moved into containerization from its position as a provider of
a passenger liner service. The consequences of remaining solely in the passenger liner service would probably have meant extinction
of the firm ultimately. The goals pursued must be realistic and the first phase of corporate planning entails setting long-term goals in
terms of sales turnover, profit before tax and return on capital invested.

At the same time as setting goals to be achieved, a management audit needs to be undertaken to assess the availability of resources
to enable the set goals to be pursued effectively. All of the functional areas of management are audited: marketing, production,
finance and personnel. For example, a marketing audit amounts to an evaluation and assessment of all factors which affect the firm's
marketing performance. The factors can be internal or external to the firm. The internal audit comprises a detailed analysis by
product/service of the market share and profitability of the various lines. In addition strategies relating to marketing mix elements are
reviewed and studied together with the use made of marketing research data. At the same time, an examination is made of marketing
budgets and how they were drawn up and related to previously set agreed objectives. The external audit begins with a review of the
general economy and then makes an assessment of the prospects for the firm's markets. The external audit assesses the
appropriate action taking into account the economic and market situations. Economic, fiscal, social, business, legal and technological
developments all have a substantial impact on the business. In addition, market segments, channels, products, end uses, needs,
tastes, attitudes, stocks and profits have to be considered. Consideration also has to paid to the activities of competitors and potential
competitors.

The changing nature of the business environment

One of the strongest environmental influences on the activities of firms is technology. Rapid advancements in technology influence
not only the products and services offered by firms to customers but also the work processes employed to produce them.
Technological developments can express opportunities for those who can take advantage of them. Conversely, failure to anticipate
and respond to technological trends can be very costly. The invention of the quartz movement in Switzerland was not initially adopted
by the Swiss watch firms but was successfully adopted by manufacturers in the far east. In a one-year period following the
appearance of quartz-driven watches, Swiss manufacturers lost around 25 per cent of the market as a result of not exploiting the
technology.

Inflation and the general economic situation have a considerable impact on the fortunes of a business. It may be advantageous to
make heavy investment in a capital intensive industry coincide with a strong economy to avoid a damaging period of losses.
Economic upswings and downturns in the home market affect the demand for goods and services that can in turn result, for example,
in more or less being produced for export markets. This in turn can influence the exact specifications to which goods have to be
produced and require training to be given to workers. Many firms which operate in industries which are highly susceptible to the
economic upswings and downturns of the domestic economy spread the risk by ensuring that they have the bulk of their sales in
export markets. However, this may not be altogether a foolproof strategy since with the advent of large trading blocs in which there is
often a degree of economic interdependence, adverse economic conditions may permeate a substantial proportion of their export
markets.

Cultural trends can be both threats and opportunities for many firms. They are reflected in customer wants and needs in terms of a
product or service. While the demand for existing products may wane, the demand for new products will increase. There is thus a
threat to existing business but profitable new opportunities are opened up at the same time. In the UK higher disposable incomes
have been associated with a growth in the number of people wanting to take holidays abroad. This has led to a growth in travel firms,
a growth in the demand for travel books, and a growth in the demand for language courses. In contrast, the demand for holidays in
the traditional seaside UK holidays resorts has declined.

The continual adjustment to environmental change creates many new types of problems for management. These new types of
problem cannot necessarily be solved by well-established, tried and tested approaches. It is here that creative problem solving can
lend a helping hand. There are several well-known techniques which can be used to assist in the process of creative problem solving,
for example:

* brainstorming;

* morphological analysis;

* lateral thinking; and

* synectics.

Structured, analytical approaches to problem solving coupled with creative problem-solving aids can produce new insights into
difficult problems posed by rapidly changing environments.

Cross impact analysis

One of the first things one has to do in strategy formulation at any level in an establishment is to examine how the organization
relates to the environments around it. In particular one must focus on the impact that these environments can have on the
enterprise's future prosperity.

Cross impact analysis is a technique which helps in examining the impact that a mixture of external threats and opportunities can
have on the undertakings of an organization (see Table I). In implementing the technique, one has to obtain data from a range of
sources including customers, competitors, the market and the environment. The procedure involves assessing the impact that
changes or trends in these factors are likely to have on present, proposed or potential activities of the organization. Anything which
threatens the prosperity of the organization is viewed as having a negative effect on the establishment, while opportunities are
reasoned to have positive effects.

One records the various impacts on a grid and on a scale ranging from +4 to -4, where 0 specifies a lack of impact. The sum of
various extraneous threats and opportunities on each one of the identified business/organizational activities is then noted. In addition
the total scores of opportunities and threats facing each activity of the organization are recorded. All ratings are a matter of the
subjective opinions of executives.

Table I Cross impact matrix Strategic business units Existing Planned Possible Total Environment 6 12 14 32 Technology -2
3 2 3 Regulation 1 2 3 6 Economic 2 2 3 7 Cultural 2 2 3 7 Demographic 3 3 3 9 Market 6 2 -2 6 Europe 3 3 -2 4 Far East 3
-1 0 2 Competitor 2 0 -8 -6 Alpha 1 0 -4 -3 Beta 1 0 -4 -3 Customer -5 6 6 7 Wholesalers -3 3 3 3 Large retailers -2 3 3
4 Total 9 20 10 39

The technique can be employed in any type of organization. For example a moderately large health-care enterprise successfully
employed the technique in reviewing its strategic position. The main activities of the enterprise, present, proposed and potential, were
related to threats and opportunities. These came from customers (purchasing authorities), competitors local provider units, both NHS
and private), and the market and environment in which the enterprise operated. The application of cross impact analysis summarized
the activities which had an important impact on the future prosperity of the organization. It also helped to identify the key relationships
which had to be fostered and monitored. The analysis indicated that the GP beds were under threat and highlighted the importance of
the geriatric service and the surgical facility.

Gap analysis
While cross impact analysis provides a useful way of identifying and gaining a rough idea of the impact that various environmental
forces will have on the firm's strategic business units, more precise measures are required when it comes to the setting of goals.
Forecasting what is likely to happen in each business sector in the immediate and longer-term future is a key element in this process.
Moreover, the organization must make predictions which take into account factors which are external to the firm, such as market
trends, economic trends, competitive trends, sociocultural trends and technological trends.

The implications of these trends are then compared with the likely performance of the company based on internal factors such as
product strengths, material costs, technical ability, productivity prospects and financial capacity. The next step is to project earnings
from existing business over the time-scale of the forecasts and to make comparisons with the required objectives. This is referred to
as gap analysis .

For example, a manufacturer of wristwatch batteries would recognize that technology and the market demand for cells with longer life
are likely to have an impact on future product requirements - for example, kinetic watches which rely on an electronic current being
generated by movement of the arm the dynamo effect - and then stored in a capacitor. The next step would be for the firm to examine
its current position. It would see that if it carried on producing watch batteries it would start losing sales sometime in the foreseeable
future as watch producers introduce the alternative technology. It has to predict when the changes are likely to occur and what
impacts these will have on its sales and profitability. Technology and product life cycles changes are often instrumental in the process
of producing potential sales and profit gaps for firms. That is, a gap between what the firm wants to achieve in terms of sales/profit
and what it is likely to achieve on the basis of its existing portfolio of activities.

A firm has to relate the expected profit to the amount of resources employed to achieve that profit. The measure it needs to consider
is the return on investment generated by new actions it may take.

Return on investment for individual products can be linked to the overall rate of return on capital employed earned by the business.
Performance of the firm in the latter respect is reflected in the general confidence of other firms and financial institutions in dealing
with the firm in the marketplace and in the firm's ability to attract and retain shareholders' investments.

Firms strive to maintain their existing rate of return on invested capital. In pursuit of such an objective they should only accept new
projects which promise a return on investment potential which is at least equal to the current rate of return on capital employed. Of
course, even then, as its more profitable offerings start to decline, it still may not actually maintain the existing rate of return on
invested capital.

In practice, of course, firms have to accept the best available projects. These may generate below the required rate of return with an
inevitable negative impact on medium/longer-term profitability. Next we will look at ways in which firms can try to close the "gap".

Strategies for reducing the gap

Ansoff's product/market expansion grid (see Ansoff, 1987) is a useful, though not exhaustive, framework for looking at possible
strategies to reduce the gap . All four of the strategies indicated along the two dimensions of the matrix are discussed below along
with others.

Market penetration

The aim in this case is to increase sales of existing products while at the same time trying to maintain current margins of profitability
on sales. In an expanding market this may be accomplished by outlays of promotional expenditure aimed at persuading more first-
time users to buy the product. In a saturated market, however, extra sales may only be generated as a result of increased market
share. Attempts to increase market share can put heavy pressures on marketing resources and can negatively affect short run
profitability. However, if economies of scale or the impact of the "experience curve" are felt as a result of increased supply to the
market then this may more than offset the impact on profitability of any additional marketing expenditure.

Market development strategy

The discovery and entry to new markets does not guarantee long- or short-term profitability However, economies of scale obtained in
producing for the market or in supplying the market will contribute to profitability. Nevertheless, barriers to entry to the market may
exist which mean that neither short run nor long-term contributions to overall profitability are attractive. Barriers of entry can take
many forms. They may involve overcoming distributor loyalties to existing firms operating in the market or matching higher than
industry-norm promotional expenditure which is a characteristic of the market. They could also involve developing new production
technologies or acquiring a new product technology to be able to compete effectively in the market. Indeed, the size or strength of
competition in the market may well be a barrier to entry, for it my be difficult to achieve similar profit margins or return on investment
to firms already serving the market. The latter point may often be ignored by new entrants to a market with quite devastating
consequences. Existing firms may very well manage temporarily on smaller profit margins and reduce price levels to make it
impossible for a new entrant to entrench itself in the market. Eventually, the new entrant may be forced to withdraw, not only having
suffered an actual financial loss on the venture but also having suffered a variety of opportunity costs as well.

Product development strategy

The introduction of new products can have a positive impact on sales growth. However, it has to be borne in mind that during the
initial period of time following the launch of new products, profitability may not increase since there may be substantial research,
development and launching costs associated with the ventures and these costs have to recouped within a specified period of time.
Thus while from a sales point of view and a return on investment point of view new products may seem to offer good rewards, the
specification of short-term pay-back periods will effect short-term cashflow.

Longer-term rates of return on investment which are at least equal to the current rate of return on capital employed are generally
required from new products. Unfortunately, this may not be possible and firms may have to accept the possibility or even certainty of
lower profitability, just to stay in business. Predicting demand for new products can be difficult and hence so also is the estimation of
profit potential. Product development is an attractive strategy where R&D and marketing costs are relatively low and where additional
new investment in plant and equipment is low.

Diversification

Diversification involves moving simultaneously into new products and new markets. It is a risky strategy but with careful selection of
the right kind of businesses considerable improvements in profitability can be experienced. A distinction is usually made between
diversification into related products and diversification into unrelated products. A publisher of textbooks and academic journals might
move into producing compact disks containing encyclopaedic information. This might be seen as diversifying into related products
since both products make use of the publisher's expertise in disseminating knowledge and the experience gained in the one field
might be usefully employed in the other. The same enterprise diversifying into manufacturing car components would be moving into
unrelated products. Moving into areas where a firm does not have any prior experience is highly risky and firms may prefer to move
into related markets. Moreover, there may be some synergy to be gained from moving into related markets. The synergy may be in
marketing or even in production.

Diversification into related products may be achieved through internal development but more often it is easier and advisable to do so
through a process of acquisition and merger or simply by forming a strategic alliance with another producer (see below).

The Ansoff matrix can be used diagnostically to describe the current portfolio of product market opportunities served by the firm.
Figure 2 illustrates how this is done. The size of the circles denotes the relative sales/profits of the product market and the position
relative to the axis denotes the relative newness of that product market from the firms perspective.

In addition to the four strategies identified by Ansoff there are a number of additional strategies.

Vertical integration

Vertical integration involves the firm taking over functions either behind or in front of its own position in the production chain. Forward
integration occurs when a producer takes over a distributor whereas backward integration occurs when a manufacturer takes over a
supplier. Integrative strategies enable firms to gain greater control over the chain of production and distribution. This can be important
where, for example, a manufacturer may have difficulty in gaining vital components from a supplier. It may be because the supplier is
also selling the same component to other firms and cannot produce enough to satisfy everyone. Under such circumstances the
manufacturer may be tempted to try to buy out the supplier (i.e. become the owner of the supplier's business) to ensure that it can
always have supplies of the key component. The same kind of principle may apply in the case of a producer trying to gain distribution
for its products. The existence of tied outlets or franchises may make it difficult for the producer to gain the level of distribution it
aspires to. Under such circumstances forward integration may provide a means of circumventing the problem. As in the case of
diversification, the appropriate vehicle for achieving vertical integration may be through merger, acquisition or strategic alliance.

Reducing costs

Reduction in the costs of running the organization is another way of reducing the profit gap. It involves either the better use of
materials or labour; the reduction of distribution or management costs; or the reduction of other overheads. There is often scope for
this kind of cost saving in most organizations.

Value engineering is an extremely useful tool which can enable enormous cost savings to be achieved. It is not only applicable to
manufactured products but also applicable to services as well. Value analysis is an important aspect of product management which is
concerned with finding the most economical and cost-effective method of producing a product or service. In effect, the specifications
of a product or service are considered in minute detail and management looks for more cost-effective ways of performing the same
function. For example, a piece of equipment may be made up of all metal parts which are relatively expensive to produce.
Substitution of parts made from other materials may lower the cost of producing the equipment but without impairing performance,
including its reliability. When properly carried out, value engineering should prevent over- or under-engineering from occurring.

Not only do products have to be designed so that they help to maximize a firm's long-term profitability, but they have to be designed
so that they can be used with safety. Marketing products which are unsafe can have disastrous consequences for a firm. In the next
section we will look at problems which can arise from marketing unsafe products and what steps can be taken to avoid such
problems in the first place.

Adjusting prices

The adjustment of prices and discounts to propel the firm to new, higher gross profits without losing sales revenue can enable a firm
to close an identified profit gap. Such a strategy could imply repositioning the products or services, or even modifying them in one
way or another. Another strategy is increasing prices without increasing prices. Organizations can often disguise price rises,
permanent or temporary, by making it appear that no price rise is in fact occurring. This can be achieved in any one of the following
ways:

* The discount structure can be altered so that the total profit to the company is increased but the list price to customers remains the
same.
* The minimum order size is increased so that small orders are eliminated and overall costs thereby reduced.

* Delivery and special services are charged for.

* Invoices are raised for repairs on purchased equipment.

* Charge for engineering, installation and supervision.

* Customers are made to pay for any overtime required in order to get out rush orders.

* Interest is collected on overdue accounts.

* Lower margin models in the product line are eliminated and more profitable ones sold in their place.

* Escalator clauses are built into bids for contracts.

* The physical characteristics of the product are changed - e.g. it is made smaller.

Joint venture/strategic alliance

While many of the above approaches can be implemented by a firm without outside assistance, most of them can be assisted by
cooperation with other organizations. This may take the form of acquisition of firms operating in markets to which entry is desired or
the acquisition of firms at different stages in the production and marketing chain for the purpose of assuring vertical integration.
However, there is now a trend towards forming joint ventures and strategic alliances between two or more firms.

Joint ventures involve inter-organizational pooling of strengths for the effective delivery of product market strategies. Franchise
arrangements such as those used by Coca-Cola and McDonald's, are examples of one type of joint venture. There are many reasons
for joint ventures but they revolve around a beneficial exchange of resource strengths the franchiser provides the systems, products,
marketing material and image, for example, and the franchisee provides local knowledge and expertise, human resource inputs and
cash.

There are various kinds of strategic alliances. Some are new ventures formed between sellers and customers to ensure a smooth
flow of raw materials, components, or services into the customers' manufacturing operations. Other alliances may be found between
potential competitors in order to cooperate in the development of related or convergent technologies, or in the development of a new
product or close products, or in the development of a new market.

Theory of core competence

The notion of core competences, particularly technological competences has long been part of strategic thinking. As long ago as
1957 Selznick used the term distinctive competence to denote what a particular business was uniquely good at by comparison with
its close competitors (Selznick, 1957). Selznick suggested how distinctive competence and what he called "organizational character"
what we would now call culture - could be combined to fulfil an organization's basic mission - at least analogous to strategic intent.
Selznick's idea of distinctive competence pinpointed the competitive element which differentiates one business from another. Such
differentiation is no longer enough because the current speed of technological development means that competitive advantage based
on a singular competence is unlikely to be sustainable for long.

Prahalad and Hamel (1990) argued that core competences are the bases on which to build strategies. Their argument resulted from
studies examining the way in which successful firms, mainly Japanese, appeared systematically to acquire, develop and exploit
combinations of fundamental technologies in order to develop generic or core products with which to dominate global markets.
Multiple core competences can thus give a business a sustainable competitive advantage.

By identifying its distinctive competences and relating them to its core products a firm can be specific with its plans to develop those
capabilities and acquire new ones where necessary and so maximize the utility of its limited resources to achieve the greatest
sustainable advantage. An inability of a firm to identify core competences correctly will result in the firm overlooking attractive
opportunities and pursuing poor ones.

Core competences are the basis for producing a competitive advantage. The achievement of a transformational strategic intent will
almost inevitably demand competences which may at first appear far beyond the capacity of the relevant firm. Competences have
therefore to be leveraged up as far as possible. The acquisition and nurturing of competences which are not core is wasteful of
resources and effort and only serves to dissipate concentration on the core. It is therefore preferable to buy in non-core competences
(Quinn et al., 1990) and focus all internal efforts on the acquisition and development of core competences. Core competences which
are lacking can be developed internally through focused investment in R&D or acquired externally through various forms of
collaborative arrangements. It should be noted, however, that internal development is increasingly expensive and beyond the means
of all but the largest organizations. Moreover, in an era when the diffusion of technology is rapid, the resultant competitive advantage
may be short-lived.

Prahalad and Hamel (1990) provide several such examples of the use of core competences. The success of NEC for example,
systematically exploited the convergence of core competences in computing and communications. A committee oversaw the
development of these core competences and resulting core products. This was supported by other coordination groups and teams
which cut across the traditional organization structure and ensured that each member of the organization knew and understood the
strategic intent. They developed competences internally and also through over 100 purposive collaborations and alliances with other
organizations. Between 1980 and 1988 sales grew from $3.8 billion to $21.9 billion and the company became the world number one
in semiconductors and a leading player in telecommunications and computers (Prahalad and Hamel, 1990, pp. 79-91). The
organizational implications of this approach to strategy formation in the face of rapidly developing technology are clearly recognized
in the growing literature on the deconstruction of organizational monoliths to forms based around more or less loosely coupled teams
and alliances.

Strategic intent

Strategic intent states succinctly the direction in which a business is headed in the long term. It can have a profound effect on the
firm's stakeholders, both internal and external, if it is expressed in clear and simple terms. Employees know what they are trying to
achieve and therefore how they should make their greatest efforts; customers know what the firm's products and services embody;
suppliers understand what the key elements are when dealing with the firm.

Hamel and Prahalad (1989) showed how strategic intent generated a tension by raising competitive challenges which identified a
competence gap which it was necessary to close if the strategic intent was to be achieved. Przybylowicz and Faulkner (1993) also
suggested that to be effective strategic intent must create a sense of urgency, be competitor focused, search for weaknesses in
competitors' positions which can provide competitive advantage if properly addressed, and must remain stable over time while being
flexible as to the means used to achieve the intended goals. Some of these essential characteristics of effective strategic intent are
purely analytical, but the distinctive feature is their transformational impact. For example, compare Canon's stated strategic intent of
"beat Xerox", with the perhaps more traditional corporate objectives of "15 per cent return on capita] employed" and "10 per cent per
annum asset growth". Canon's is directional, memorable and engaging. The financial objectives are as transformational as last year's
Christmas pudding.

Herein lies a great strength of the approach and also a great danger. On the face of it "beat Xerox" appears entirely aimed at the
motivation of the organization's employees, i.e. a psychological statement. Undoubtedly it contains these characteristics. If that was
all, then it would greatly increase the probability of being entrapped in a strategic window. On the face of it the possibility of a camera
manufacturer beating Xerox appears extremely slight - certainly not an apparently open strategic window. The espousal of such an
intent, motivational though it might be in its directional focus and apparent simplicity, would therefore seem likely to ensnare and
entrap. Moreover since the achievement of such an intent would be a very long-term process, it would be a correspondingly long-term
project to recognize that entrapment had occurred and that the strategic window was firmly closed.

However, strategic intent is not simply a psychologically transformational statement, it is also analytical. By this is meant that it is
analytically sound. "Beat Xerox" was not just a rallying call, but the result of some detailed analysis of the competitive position,
including an analysis of Xerox's own attitude and likely actions to the approaching expiry of its patents. The analysis also involved the
development, and detailed discussion throughout the organization, of a painstaking detailed action programme of competitive
challenges, first, to identify and close the competence gap (through a carefully planned programme of licensing and investment in
internal R&D), and, second, to compete and beat their target competitor. Clearly each of these stages in the process resulted from a
very clear understanding of what they were trying to achieve and much detailed analysis of technologies, markets and competitors
(not simply Xerox itself). The approach is both effectively transformational and analytically sound. This is what rescues it from the
shortcomings of previous approaches which were either one or the other, but rarely both. And this is what makes it an effective
escape from entrapment in strategic windows.

Strategic intent needs to be defined with precision and it also needs to be supported by indications of how fast the firm proposes to
travel and how far. The milestones along the route need to be spelled out and progress at each stage monitored and the people
involved rewarded according to progress.

"Become the leading world producer of photocopiers" is a statement of strategic direction which could be a powerful organizing and
motivating concept. The strategic intent of "beat Xerox" is still more powerful, focusing as it does on the major competitor and thus
identifying standards to be beaten, or mechanisms to be avoided, right across every aspect of the business. The way Canon
achieved their strategic intent in essence involved spelling out the strategic intent in terms of a competitive challenge, identifying the
existing and required competences and then setting about acquiring those competences which need to be added in order to achieve
the challenge set.

Strategic intent has to be expressed in simple, unambiguous terms. These are statements of mission or long-term objectives capable
of initiating and galvanizing action and being converted into competitive challenges which are staging posts along the way. The
expression of strategic intent in terms of a competitive challenge identifies a gap between the actual competences possessed and
those required in order to achieve the strategic intent. The process involved is relatively straightforward:

1 Identify the competitive challenge and state the strategic intent.

2 List core competences in terms of:

* managerial skills;

* technological competences which are required to attain the strategic intent.

3 List core competences in terms of:

* managerial skills;
* technological competences which are currently possessed.

4 Identify the nature of the gap between actual competences and those required to achieve the strategic intent.

5 Determine the best way to improve managerial skills and technological competences by:

* internal development;

* external acquisition.

The core competences and strategic intent conceptual approach to strategy formation and planning is explicitly concerned with the
technology of the business, the organizational structure of the business (organized as cross-cutting strands of competence rather
than product-based business units), the actual and potential core products of the business (which may or may not be conceivable)
and the strategic intent of the business.

Strategic intents can take many forms, related to the achievement of specific challenging goals - "put a man on the moon by the end
of the decade", "encircle Caterpillar" etc. The end result of a successful intent is, however, likely to be the achievement of a
leadership position in either the served market or some radically new, previously undreamed of market. Following the path of
strategic intent is not without dangers. Hamel and Prahalad (1989) argue that market share leadership typically yields shareholder
wealth and nearly all companies pursue market share. However, few achieve exemplary performance for their shareholders.
Moreover, Kontes and Mankins (1992) suggest that one of the weaknesses of the strategic intent proposition is the absence of an
economic framework for making investment decisions. In following a strategy of global market leadership it is assumed that
competitors will not respond in ways that drive investment returns to or below the cost of capital. However, this does in fact often
happen when all players try to lead all markets. Thus although the results of a successfully pursued strategic intent may be market
leadership, that is not in itself an adequate strategic intent, lacking in both the analytical and transformational requirements

Strategy formulation itself requires a more detailed approach in which specific attention is given to the strengths and weaknesses of
enterprises and the opportunities and threats which exist in the marketplace, in the next section we look at ways of doing this.

SWOT and the TOWS matrix

SWOT analysis is a technique specifically designed to help with the identification of suitable business strategies for an organization to
follow. It involves specifying and relating together organizational strengths and weaknesses and environmental opportunities and
threats. The TOWS matrix presents a mechanism for facilitating this linkage and a framework for identifying and formulating
strategies. Implementing the TOWS matrix requires that the following steps are followed:

* Pinpoint and assess the impact of environmental factors: economic, political, demographic, products and technology, market and
competition on the organization.

* Make a prognosis about the future.

* Undertake an assessment of "strengths and weaknesses" in terms of management and organization, operations, finance and
marketing.

* Develop strategy options.

Working through this process enables internal and external factors to be entered on a grid and different combinations to be studied.
For example, the entry to one cell of the grid could involve maximizing opportunities and maximizing strengths. This would amount to
putting together at least one strength and one opportunity to produce a strategy that capitalizes on this combination.

The TOWS matrix in practice

As with cross impact analysis there is no limitation as to the type of organizational unit that can benefit from this type of analysis.
Moreover, any situation that involves strategic decision making can benefit from this approach. Weihrich (1982) discusses a
conceptual application of the TOWS matrix to the strategic dilemma facing Volkswagen in the USA during the 1970s. The discourse
illustrates the usefulness of the TOWS matrix as a structuring device for strategic problems. This raises the interesting question of
whether the use of the TOWS matrix can lead to the identification of appropriate strategies for an organization.

In pursuit of this question the writer has examined several instances in which the TOWS matrix has been employed, three of which
are discussed below.

A small division of a large British manufacturing company was experiencing a problem of what to do with an unwanted effluent which
was created as a result of a chemical treatment process. The firm had tried a variety of ways of disposing of the unwanted liquids but
none was satisfactory. The problem was raised at a seminar at Keele University during which the TOWS matrix was being explored in
some depth.

Members of the seminar, all of whom except the seminar leader were middle managers of the same company, made use of the
TOWS matrix along with conventional brainstorming to generate insights into how the problem might be resolved. Among the
favourably reviewed suggestions was the idea that the company might profitably convert the effluent into a by-product which could be
sold on the open market. The need for brainstorming became apparent when it was realized that the TOWS matrix provided a useful
structuring mechanism for the problem that did not automatically lead to the creation of new insights.

The health-service enterprise, mentioned above, applied the TOWS matrix extensively in its analysis of the corporate strategy it might
follow. Internal strengths of the enterprise included spare surgical capacity, a good stock of buildings built in the 1970s and 1980s, a
strong management team, good hotel services (including laundry and catering) and an active Leagues of Friends of the hospitals.
Internal weaknesses included problems of recruiting and retaining staff, a lack of resident junior medical staff, the poor state of some
of the buildings, industrial relations problems, and the continuing under-utilization of some surgical facilities. The enterprise identified
growth in the size of the ageing local population as an opportunity and also the fact that there was a lack of provision to meet certain
needs in the district. These included the need for a rehabilitation unit for the younger physically disabled and a wide range of
psychiatric facilities to replace those provided in unsatisfactory conditions. There was also the opportunity to utilize government
provided "waiting list initiative moneys" to reduce the very long waiting lists which existed in the district. The threats facing the unit
included competition for patients arising from other provider units (both public and private), competition for staff from other local
employers (who could afford to pay higher salaries and wages), and, an unknown factor, the power of the fundholders. Another
important threat was related to problems associated with mental handicap services. This took the form of resistance to change
among the relatives of the client group, and the continuing downward pressure on funding for community services.

The TOWS matrix proved useful in structuring the strategic choice situation for the organization but unfortunately no new ideas or
insights arose as a direct result from using this structuring mechanism. Indeed, the organization simply reported that the strategies
evolved as a result of using the TOWS mechanism merely confirmed what it already knew. Nevertheless, executives considered it a
useful structuring mechanism and that it was worth retaining for future use.

In yet another instance, a metal extrusion company serving aerospace, defence, nuclear, forging and stockist markets, developed a
TOWS matrix. It identified three opportunities:

1 growing general engineering market - O1;

2 more specialization and target end users - O2;

3 sub-contract assemblies - O3.

Threats comprised:

* declining defence and aerospace market - T1;

* strong competition emerging from Europe in 1992 - T2;

* unstable economy because of interest rates - T3;

* lack of investment - T4.

Internal strengths were:

* knowledge of specialist alloys - S1;

* knowledge of process capabilities - S2;

* monopoly in terms of high-strength extrusion capability - S3.

Weaknesses were:

* reliability of plant - W1;

* lack of process control and IT - W2;

* lack of technical knowledge in the sales-force - W3;

* costs - W4.

Among the strategies which emerged were:

* developing markets - building on O1, O2, S1 and S2;

* developing maintenance programmes - building on O1 and W1;

* diversifying into other markets - building on T1, T2, S1, S2 and S3;

* developing joint ventures in Europe - building on T2, T3, W2 and W4.

Again, while feeling that such a structuring mechanism was useful, the company reported that its usefulness was somewhat limited.
The technique was able to provide a good structure for the problem but did not really provide any really new insights into it.
Brainstorming

Osborn (1957) is often credited with being the inventor of brainstorming. Brainstorming helps to overcome the restrictive nature of
evaluation which takes place in most business meetings. Osborn believed that social pressures inhibited individuals from stating their
ideas. He set about trying to remedy this situation through the medium of structured meetings at which ideas were to be freely
expressed before evaluation. Osborn considered that the approach was one which anyone could apply whenever he or she is
searching for ideas. He extolled the virtue of "deferment of judgement" as an aid to creativity. Later work at Buffalo by Parnes (1963)
supported Osborn's claims that through the deferment of judgement principle more and more good ideas could be produced in unit
time.

One of the most popular forms of brainstorming takes the form of a group activity. A warm-up session is advocated in the case where
participants have not had previous experience of the technique. There is a group leader who records all the ideas generated during
the session on a flip-chart. The group members are invited to call out ideas relating to the problem as they occur. The aim is to
generate as many ideas as possible - the wilder the ideas the better. One does not evaluate ideas during the generation process. By
being able to see other people's ideas recorded, other individuals are able to find new combinations or "hitchhike or freewheel" on
those ideas to produce insights.

Brainstorming and the TOWS matrix

The success in finding new insights into the first of the three instances recorded above suggested that the combination of a TOWS
matrix and a brainstorming session could well be beneficial. The health enterprise case was taken as a topic for further exploration. A
brainstorming session was held at Keele University to provide a platform for generating new strategies for the identified components
of the TOWS matrix as reported by the NHS enterprise. The brainstorming group comprised students following a creativity course
(MBA level) at Keele University. A short session generated the following list of ideas. In each case a cell of the TOWS matrix was
filled with ideas based on corresponding identified opportunities/threats, opportunities/weaknesses, etc.

Opportunities and threats:

* Making use of spare capacity to meet the needs of a growing population.

* Making use of strong professional people.

* Subcontract hospital management strengths to other hospitals with weaker management.

* Trying to organize spare surgical capacity to meet waiting list needs.

* Eliminating competitors by take-overs.

* Building heliport for disaster contingency.

* Optimizing usage of surgical capacity by selling to overseas clients

Opportunities and weaknesses:

* Building a rehabilitation centre for young, physically handicapped (residential).

* Increasing levels of pay to staff to compete effectively.

* Provide a cafeteria for staff as a fringe benefit.

* Introducing a training scheme for support staff to increase job prospects (rotation).

* Developing different management system by asking disgruntled staff who have plenty of ideas.

Threats and strengths:

* Training foreign doctors for shortages.

* Developing a teaching hospital in spare room.

* Creating backup facilities for GPs in spare buildings.

* Developing a mental handicap training centre for changing perspectives.

* Advertising and PR to community to aid funding.

Threats and weaknesses:

* Veterinary development for R&D.

Many ideas shown above represented new perspectives on the situation which the enterprise had not previously considered. The
question of whether or not any of the new ideas would be implemented is a different matter since the decision-making process is itself
complex. The illustration simply shows that structuring devices such as the TOWS matrix simply enable us to ensure that we have a
reasonable base from which to examine problems or situations. To gain new insights one can obtain benefit from using a simple
creative problem-solving aid such as brainstorming.

There is no limitation as to the type of organizational unit which can benefit from this type of analysis. Moreover, any situation which
involves strategic decision making can benefit from this approach. Weihrich (1982) discusses a conceptual application of the TOWS
matrix to the strategic dilemma facing Volkswagen in the USA during the 1970s. The discourse illustrates the usefulness of the
TOWS matrix as a structuring device for strategic problems. Experience also shows that the use of the TOWS matrix can lead to the
identification of appropriate strategies for an organization.

References and further reading

Allaire, P.A. (1992), "Quality and beyond", Journal for Quality and Participation, Vol. 15 No. 2, March, pp. 6-8.

Ansoff, H.I. (1987), Corporate Strategy, Penguin Books, Harmondsworth (revised ed.).

Bower, J.L. and Hout, M. (1988), "Fast cycle capability for competitive power", Harvard Business Review, November-December, pp.
110-8.

Hamel G. and Prahalad, C.K. (1989), "Strategic intent", Harvard Business Review, May-June.

Kontes, P.W. and Mankins, M.C. (1992), "Is global market leadership worth it?", Across the Board, Vol. 29 No. 10, October, pp. 13-5.

Osborn, A. (1957), Applied Imagination, Scribner, New York, NY.

Parnes, S.J. (1963), "The deferment of judgement principle: a clarification of the literature", Psychological Reports, Vol. 12, pp 521-2.

Prahalad, C.K. and Hamel, G. (1990), "The core competence of the corporation", Harvard Business Review, May-June.

Przybylowicz, E.R and Faulkner, T.W. (1993), "Kodak applies strategic intent to the management of technology", Research-
Technology Management, Vol. 36 No. 1, January/February, pp. 31-8.

Quinn, J.B., Doorley, T.L. and Paquette, PC. (1990), "Beyond products: services-based strategy", Harvard Business Review, March-
April, pp. 5868.

Selznick, P. (1957), Leadership and Administration, Harper & Row, New York, NY.

Weihrich, H. (1982), "The TOWS matrix: tool for situational analysis", Long Range Planning, Vol. 15 No. 2, pp. 54-66.

Application questions

1 What is your organization's strategic intent?

2 The author has reviewed techniques and discussed the development of strategic thought. Does business strategy have a
conceptual underpinning, or is it more of a series of fashionable postures?

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Please note: Illustration(s) are not available due to copyright restrictions.

Copyright: COPYRIGHT 1997 Emerald Group Publishing, Ltd.

http://www.emeraldinsight.com/
Source Citation (MLA 9th Edition)
Proctor, Tony. "Establishing a strategic direction: a review." Management Decision, vol. 35, no. 1-2, Jan.-Feb. 1997, pp. 143+. Gale
Academic OneFile, link.gale.com/apps/doc/A19694582/AONE?u=esc&sid=bookmark-AONE&xid=8ae9ae64. Accessed 25 May
2022.
Gale Document Number: GALE|A19694582