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    Chapter 2

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    Steven Hillen

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    © All Rights Reserved
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    of 16
    2 Strategy | Introduction In the previous chapter, you described an organizational unit of analysis and assessed its scope and goals. The next step in our step-by-step approach is to@iSsessitiielstrategy, of th€(SigahnizatiOn aiid the ChvirOnimientin Which\itoperates. In this chapter, we focus on strategy. A GHHSBHSECSVIS a GAIGLGOREIRgeNEy for deciding the organizational design. Our focus here is on assessing your firm's strategy - ({OEHOWOEWHy the choice of a strategy is made. Chandler (1962) stated the fundamental relation in his now famous dictum, (GuetirenOlowsisttategy.” That is, given a strategy, there are some organization structures which can implement that strategy better than others.Strategy @sithigeng; structure is the means. Strategy is the operationalization of th@\fitii’s§goalsop ‘efficiency and/or effectiveness. Structure is the partition of tasks by work roles and the reportin gifelationships among |theworkiroles; or structure is the means to achieve the goals, In this chapter, we discuss which strategy should be pursued to obtain the goals decided in Chapter 1. This has to be done taking into account the environment in which the firm operates. The environment is théimatketplaceypthe regulatory and legal situation, the oppor- tunities, and other aspects of the context in which the firm operates. However, the strategy also has an effect on the environment, examined in the next chapter. For example, if you make a strategic choice to establish business in China, you have changed the environment of your organization. Thus, @@@hievifi in a business results from establishing and maintaining a fit among _ high performance three elements ¢HESHALCE MONEE, its GFGanizatlonallstractare and the(EAVIFR> (GHGAETAIWHIGRIBOperates” (Roberts, 2004, p. 12). This fit relationship is shown in the multi-contingency model presented in Chapter 1, A firm's strategy reflects management's assessment GAEHSMAFM'STSIUAHO and its choice offHOWtolpursuelEherirm(sigoals, Strategy can be described in a number of ways. For example, it can be described in terms of the five forces of the firm’s industry (Porter, 1985): existing competitors. These five forces yield three possible strategies: @Ost leader, In marketing, strategy can be described as the choice of the that is, which product the “firm should produce; what its price is; how it shoukl be promoted! andl advertised ard T We use “firm” in this chapter as a matter of convenience, but the analysis applies to any unit of analysis, be it a division, department, or team. Scanned with CamScanner 30 2 Strategy GOWANSHONLANHEstHIBUtEAIKotler, 2000). On the input side of the firm, . i including th » YPRrati, strategy is the EOiceyofyEhesirmsysupplysehain, ig the chain man, om and outsourcing, This involves the choice and management of th : (GPRD Makadok, 2001). Bharadwaj et al. (2013) introduce the concen which is an organizational strategy formulated ang “eg SPT gang STR RTTAEERSAL ARS Yor choice of a strate.” f trates your firm is always a question of what the firm should do in its situation lo © meet iy goals of efficiency and effectiveness. A simple and powerful way to describe a firm’s strategy is in terms of the fg typology (Miles and Snow, 1978): (1) reactor; (2) defender; (3) prospector; and 4). Analg without or with innovation. This ‘typology has proved to be very robust and is frequenyy used today (Hambrick, 2003; Yuan ef al., 2018). The dominant Strategic approach is reflected in such actionS{Sieapital investment) COMCERMMORGUALIY, price level company (@GRGAPEREA | reference for product innovation, preference for process ‘innovation, and corporate social responsibility (CSR). Many factors make up a firm’s strategy, but the ma important thing, ‘whether i¢@RDIOHS 1 CUREAESUatOn ang whether it (March, 1991). Exploitation includ (March, 1991), Exploitation is takin; in a more efficient or refined wi lovin ‘ploration is riginally, exploration and exploitation were developed to analyze GMAT. or siucx ae cists strategy. Strategy is the applicati and \égening-isialehangelinthe kn Fundamentally, strategy choice, knowledge ‘usage, and learning are all concerned with how the firm chooses which actions to take ‘based upon limited information. Exploration and exploitation are dimensions of strategy that can be used © form the basis for categorization of a firm’s strategy into one of four types (Hakonsson et al., 2012a). five without Innovation Oran 7 ia city Geri) s g 3B a Ges Exploration Figure 2.1. The strategy space Scanned with CamScanner Reactor A if your Sir i GEG TSH TST ISPS TENET) Locks an _ Intentional strategy toward innovation. It makes adjustments when forced or when — OT If your firm is @(Me/@ndem it is high on @Xploitation is innovative only in narrow, limited areas. (ESUnnOVaLOIIS) (@@iiifiea_aTa gL FOCUSED) If your firm is a prospector, t is high on exploration and Tow on exploitation; it takes an @gqreSsivelappronchTOMnnovatiOn, GVSTERateally eainaegneniormerns It experiments regularly with change. Analyzers take a mixed-mode approach to innovation. If your firm (Saal /ZEEWINONE OVA) your strategy is(SimillaRfOja(UefeneeAbut with Sre\ehiphiasisjonexploration> If your firm is an(@ialyzenwithiinnovation, your strategy is similar to a prospector, but with more emphasis(@njexploitation, Different strategies require different degrees of agility or adaptation for strategy’ changes. A reactor i@@HGEIV@RAEIG and makes changes (@HOHEISORSISERaHON|OS (@RPSHATOHIGHERPIGitation. The defender is not agile in exploration, but can make needed changes (OJexploltjchianges(forleificieneyp prospector must be agile to explor- ation of new products and services, but is not focused on exploitation per se. The analyzer has a dual focus on agility for both exploitation and exploration. Here, change (Gin AEE SEGARA URAC, as we will develop throughout the book. ‘Now, let us consider these strategic types in more detail. In Figure 2.1, begin in the lower-left comer, move to the upper left, then to the lower right and finally to the upper-right corner. This is a convenient way to compare and contrast the strategies. Although the descriptions and examples given here are provided for the firm as a whole, we emphasize that strategies can be used to describe a business unit, division, department, or team - that is, for smaller units of analysts. It also applies to private as ‘well as public organizations. In the case of smaller units, exploration and exploitation must be considered relative to other equivalent units of analysis (e.g. other depart- ‘ments ot teams, whether inside or outside the firm) that compete with your unit for success in the “marketplace.” Bl Reactor The reactor is neither of the firm’s opportunities. Gener- ally, the reactor strategy is ive in terms of achieving the “us on exploration or exploitation; instead, firm's goals, The reactor acts without a foc onc eco is toast fo heaton a Posh ate any opera ities that are now lost. Ceuisinoniveryyazile, ‘There is us 10 The executive does not systematically anticipate, plan, or project into the future. The organization does not take a deliberate position to become efficient or effective. At the other extreme, the reactor may be a dreamer that -amer is nelther efficient nor effective, Information pres som is are likel and at the same time be rather If your firm 1s a reactor, you nk gassing ue ray cng ea es it (GCRGETROWALSVOU) whether this is poor performance st hts or earnings, events such as a loss of a major customer, or Internal problems such as conflicts or inappropriate utilization of resources. Problems emerge a§{Surprisesyand Scanned with CamScanner 32 2 Strategy = are dealt with as they occur. A reactor strategy is often observed in organizatig | (G@Sinqtransition, or early start-ups in their first, entrepreneurial stages. One ae thay | a firm after a merger, where the focus is on the internal reorganization ang mae ment power struggles; the interest in both exploitation and exploration can be yt well as being agile. Another example is a newly established firm, using a trialang approach to adapt to customers’ needs, with neither high exploitation tte exploration. If the reactor strategy is followed in the(l6Agitetm, your (GRATE NGA HAE, most likely in the form of FMANCe in ty e marketplace or internal processes that cannot be managed in the available 4, ‘The firm @il\GSTOUROAERIStEHES, as it will eventually be unal capital and perhaps human resources. Thus, it is difficult to give examples of companies that can be categorized as following the reactor strate; (CEASA RAAB HFALeEV MOM MGOMOHs (Obcl, 1993). Inefficient and inetfectve government organizations and firms in the midst of bankruptcy are known fe. following reactor strategies. The one-time computer giant Digital Corporation couiy In Its later years be categorized as a reactor. It basically did not develop new technology after its famous VAX computer, and it completely missed the entrance of the PC into the market. It reacted too late with an excessively high cost structure, A teactor Is also often a start-up that has an idea, but does not seem to be able to execute It. Libratone seems to be trapped in their focus on setting sound free. They have not been exploiting their options to create scale or to work with Apple and leverage the potential here. The price of a Libratone speaker is not low despite the fat that they are now owned by a Hong Kong-based consortium and the hardware is made in China; they do not seem to be very efficient. Rather, they have a focus on streaming sound in a market where the competition is becoming fierce, and they seem to have missed the smart home development where Google and Amazon are driving the market, followed by competitors like Harman Kardon and Sonos. Thus, they are nt very effective and do not explore these opportunities. Their strategy seems to be consistent with their goal that we discussed in Chapter 1. ee Defender Now move to the upper-left comer of Figure 2.1. If your firm has a get me "exploitation than on exploration, then your strategy is a defender. The 4: high on exploiting its resources and situation, but low on exploring thd, being innovative outsid@lits marrow Clrent|Scope. The executives inside firm are focused on, Ther on maintaining a @OmpEGEVE POSH which may be measured in te15 OT . share or profitability. Sales forecasting, as an extrapolation of the past, #5 re tool used to support the defender strategy; that the puts proce lo i (GET RGAMPT WAGE BT, and fend off competitors, or at ea" calf from encroaching into the well-defined territory of the defender. The aeons gine? ie niche for which it works hard to Scanned with CamScanner Defender = (GRORUPEREHALITE. To remain competitive, a CERES ARENA Mires Metae aA (GGeiseAyinformation}toyenable|continWOUS|FeHineMent (rather than innovation) of current products and production methods. The defender maintains its position by being @MCeHtinlRneNUEIZAHOHpof (GBS. This strategy keeps the defender invulnerable to less efficient competitors. The defender can make changes in existing processes for existing products and services, but the goal is (JbElefficientland maintainlits|positionigrhus, the defender firm focuses off[prOcessi Innovation) and fas efficienicylas the primiarylgOal, as dis- cussed in Chapter 1. On the other hand, effectiveness is low (relatively speaking) in a defender firm. If your firm is a defender, you will find that yod/@annOllehangelmiueijor “change qucky. Your agit Is limited an focused on defending your postion. Thus, there is a steady strategy of repeatedly doing the same thing efficiently. A high capital requirement ‘The emphasis on(@QUAlIGaMiaWBEIRIGHIASAIMIEARS to prevent new entrants from coming into the market or to prevent existing competitors from taking over the firm's market share. The defender can do well for a long time. Its(¥ulnerability comes When its products) (GRBERMERS Ure ONoniger|aesireain|eHelimatKet. Another threat is if new technology "reduces high capital requirements, thus allowing competition from new entrants. Similar threats may come from#{fieWiregulation|or/deregulation, as we have scen in industries such as transportation and telecommunications. A defender is: When buyers stop purchasing its products, the defender is new markets. Slowness to change or limited agility, combined with a high focus on efficiency, makes the defender vulnerable in the long run. — ‘A good example of a defender is LEGO, the Danish plastic brick children’s toy company. It has kept its focus on toy bricks for decades. Prior to 2000, LEGO was making a handsome profit and was a growth company for many years. It protected its position with aggressive marketing, defending patents, copyrights, and trademarks, and with an ongoing process of automating the production as much as possible, (A@efeHdlerls0 uses all Megaljmecastires}tojpmaintainjitsycoms> (G@RBBVEEAR® LEGO has consistently been very focused on this and, in November 2018, the LEGO Group won a major intellectual property lawsuit against LEPIN in China? ‘As discussed in Chapter 1, during the period 2000 to 2004, LEGO struggled to make changes to meet new demands for more electronically based toys; it was not well situated to move from adopting a defender strategy to a more innovative strategy. LEGO had gone for a number of years with an inconsistent and continu- ously shifting strategic focus, with consequent severe financial losses. To survive, the company needed to halt a sales decline, reduce debt, and focus on cash flow. It was a Classic turnaround, and it required tight fiscal control and top-down management. LEGO was again very successful; in 2014, it recorded its highest profit ever, and in ? See www.lego.

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