Strategic Planning Theories Essay Example

Strategic Planning Theories Paper DBA 822 Seminars in Strategy and International Business Strategic Planning Theories A Literature Review By; Benjamin J. Shuford III 8/24/10 Introduction: Strategic planning is a broad concept that has been introduced into the main stream practices of today’s corporations. Strategic planning can be defined as an organization’s process of defining goals, direction, and decision making processes that effect the allocation of resources that include capital and people. The term â€Å"strategy† is derived from the Greek word of â€Å"strategos,† which means literally, â€Å"general of the army. (Hart, 1965). The Greek tribes of ancient civilizations would elect a strategos to head their regiments during battles. These political rulers would follow the strategic advice from the council members about managing troops to win battles. From its early military roots on winning battles to becoming a pattern of purposes and policies that define a company and its busines s, strategic planning has become the primary focus of today’s diverse organizations. There are many theories that are used to describe how organizations view the strategic planning process. These processes are framed as models that are consistently being revised to fit the needs of an organization. This literature review will focus on some of these models and the theorists who developed them. This literature review will review theories from Igor Ansoff, Henry Mintzberg, Michael Porter, and Kenichi Ohmae. The purpose will be to gain a better understanding of how these theories shape organizational performance. An analysis will be conducted to evaluate the practice of and the future direction of these theories. The choice to review these four theorists over all of the others is because of their legacy and robust contributions to the field of strategic management. Ansoff was one of the earliest writers on strategy as a management discipline, and laid strong foundations for several later writers to build upon, including Michael Porter, Gary Hamel and C K Prahalad. He invented the modern approach to strategy and his work pulled together various ideas and disparate strands of thought, giving a new coherence and discipline to the concept he described as strategic planning. We will write a custom essay sample on Strategic Planning Theories specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Strategic Planning Theories specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Strategic Planning Theories specifically for you FOR ONLY $16.38 $13.9/page Hire Writer A debate between Ansoff and Henry Mintzberg over their differing views of strategy was reflected in print over many years, particularly in the Harvard Business Review. Ansoff has often been criticized by Mintzberg, who disliked the idea of strategy being built from planning which is supported by analytical techniques. This criticism was based on the belief that Ansoffs reliance on planning suffered from three fallacies: that events can be predicted, that strategic thinking can be separated from operational management, and that hard data, analysis and techniques can produce novel strategies. The strategic planning/management theories of Porter and Ohmae were derived from both Ansoff and Mentzberg. Ansoff was the originator of the strategic management concept, and was responsible for establishing strategic planning as a management activity. The Strategic Planning Process: Because of high competitive business environments, organizations must engage in strategic planning processes that clearly define and state the objectives of the organization. They must assess both external and internal factors to develop and implement a strategy to stay competitive. They need to evaluate the process and make needed adjustments to stay on track. In their search for sources of sustainable competitive advantage, researchers have come to realize that business performance depends not only on the formulation and successful implementation of a given strategy but also on the process by which competitive positions are created or maintained. Mintzberg was one of the first to point out that the realized strategy of an organization can strongly differ from the intended strategy and that the extent to which an intended strategy can be realized is closely related to the strategic process that exist within the organization (Mintzberg, 1987). In his early work, he identified three main types of strategy processes: planning, entrepreneurial and learning-by-experience. He described planning as a philosophical approach when he classifies strategic business thinking in ten schools of thought, which he describes in their historical and ideological context. Early theorist, such as Igor Ansoff, focused on the analytical aspects of strategy formation. The first three schools in Mintzberg’s taxonomy are therefore prescriptive and focus on how strategy ought to be formulated. One of the major premises of the prescriptive schools if the performance claim, which states that the more an organization engages in systematic strategic planning, the more likely it will result in above average returns. The prescriptive schools have been influential in the discourse of strategy formulation, but have failed to explain the process of strategy execution (Mintzberg, 1990). Mintzbergs School of Strategic Thought (Mintzberg and Lampel, 1990). | | | | | | | | School| Category| Foundation| | | | Design| Prescriptive| Engineering| | | | Planning| Prescriptive| Systems Theory| | | | Positioning| Prescriptive| Economics| | | | Entrepreneurial| Descriptive| Economics| | | | Cognitive| Descriptive| Psychology| | | | Learning| Descriptive| Psychology| | | | Power| Descriptive| Political Science| | | | Cultural| Descriptive| Anthropology| | | | Environmental| Descriptive| Biology| | | | Configuration| Both| History| | | | | | | | | | The Design school defines strategy formation as a process of conception. It began during the late 1950s and mid-1960s. This school puts emphasis on an appraisal of external environment and the internal situation using the classic SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats). Also shaping strategy formulation are the values of the organization’s management and an assessment of the organization’s social responsibilities (Selznick, 1957). The Planning school identified strategy formation as a formal process. It emerged in the mid 1960. It has resulted in a plethora of strategic planning models. The underlying foundation of all of these models is straightforward: divide the SWOT model into neatly delineated steps. Step1 – Set objectives – Establish and qualify goals or objective of the organization. Step 2- External Audits – Assess the external environment, using the SWOT analysis, and create a set of forecasts about the future. Step 3 – Internal audits – Typically this process is assisted by checklists and tables of topic to consider. Step 4 – Strategy evaluation – Organizations can use a variety of techniques ranging from return on nvestment (ROI), to risk analysis, to calculating shareholder value. Step 5 – Strategy implementation – This step creates a very detailed and formalized action plan. Objectives, strategies, budgets, and programs are all brought together into a master plan. The Positioning School defines strategy formation as an analytical process. This school began in the 1980s and was popular due to the notion of competitive strategy frameworks that were identified as five forces on an organization’s environment by Michael Porter. The significance of this school is that it emphasized the importance of strategies to any given industry. The Entrepreneurial school looks at strategy formation as a visionary process. This school of thought developed in the 1990s and using vision as a central starting point. Vision establishes the broad sense of direction while preserving flexibility to adapt to changing conditions. One of the advocates of the entrepreneurial school is Peter Drucker, who identifies entrepreneurship with management itself: â€Å"Central to business enterprise is†¦ the entrepreneurial act, an act of economic risk taking. And business enterprise is an entrepreneurial institution† (Drucker, 1970). The Cognitive school defined strategy formation as a mental process and started in the early 1990s. This school focuses on the mind of the strategist, drawing from the field of cognitive psychology. There is a large body of research that suggests that individuals encounter a variety of problems in making decisions that influence many situations in the management process because they are difficult to change and form once implemented. Individuals who practice this school find that they each have different cognitive styles that can distort decision making processes. The Learning school defines strategy formation as an emergent process. It started in the mid 1990s and follows the perspective that people within an organization learn how to use the organization’s abilities to change and adapt in a positive manner in order to respond to a changing environment (Quinn, 1980). This school is less concerned with the actual strategy that was formulated than with what it took to get a strategy implemented. The Power school, which began in the late 1980s, defines strategy formation as a process of negotiation and is based on the notion that the influence of power from the external environment will affect any organization, and in many cases politics will infuse an organization. This school views strategy as a political process that focuses on alliance building, empire building, budgeting, expertise, insurgency, counterinsurgency, lording, rival camps, whistle-blowing, and line versus staff. The importance of this school is that it has identified the political process as a reality that must be acknowledged and managed but that is not the sole means for making strategies within an organization. The Cultural school defines strategy formation as a collective process. The cultural school began in the early 1990s and can be thought of as a system of shared values, beliefs, and meanings held by staff members that distinguish the organization from other organizations. The dimensions making up this school include teamwork, honesty, control, decision making processes, rewards, and conflict. The Environmental school started in the mid-1990s and defines strategy formation as a reactive process. It views the forces operating outside the organization as active, while the organization itself merely reacts to these outside forces. The primary contribution of this school is that it attempts to bring the overall view of strategy formation into balance. This school emphasizes that the outside environment, the leadership, and the organization itself are actually responsible for strategy making. The Configuration school defines strategy formation as a process of transformation. This school began in the mid-1990s and attempts to integrate strategy by showing how different dimensions of an organization band together under particular conditions to define states, models, or ideas types. The premise of this school is that periods of stability and transformation can best be understood as life cycles of an organization. The key to strategic management is to recognize the need for transformation and manage the process of change without having a negative impact on the organization. Later developments in strategic management literature moved away from the prescriptive approach modeled on quantitative exact sciences and their inherent presumptions of a controlled world. The descriptive schools of thought are inspired on the qualitative social and cultural sciences and study what businesses actually did to be successful for other organizations to learn from their approaches. The descriptive schools move from a focus on a-priori strategic planning to a-posteriori dynamic strategy formulation and execution. For practitioners, the prescriptive schools of thought are very attractive. However, the descriptive schools are somewhat problematic to practitioners of strategic management because they do not provide straightforward recipes for success. The question raised by Mintzberg’s taxonomy of strategic thought and other similar taxonomies is how average practitioners can determine what strategy they should employ (Sokol, 1992). Fuller (1996) suggests that traditional strategic planning is under fire. Strategic planning in the classical model was developed in an era when the external environment was relatively simple, stable, and predictable, and when the behavior of a firm was viewed as being cybernetic. Strategic plans were primarily used as a control mechanism to reduce uncertainty and risk and to allocate power. They were internally focused because many of the company’s transactions were internal. As a result of slow or negligible environmental change, managers were able to consider their strategic options once a year through a process that is detached from the ordinary workings of the company. Consequently, the plans that are produced are used in litigation between a corporation and its business units, or among business units, for control of the decision-making processes. Hamel and Prahalad (1995) ask why it is that in so many companies strategic planning departments are being disbanded or dramatically downsized. This change in emphasis was driven by thinkers such as Hammer and Champy (1993) with their concept â€Å"business process re-engineering†. Hamel and Prahalad (1995) continue to make the claim that the problem is not with strategy but with the particular notion of strategy that predominates in most companies. What is being rejected is not strategy itself, but strategy setting as a pedantic planning ritual on one hand or as a speculative and open-ended investment commitment on the other. The academic scholars of the Planning School had determined a formal process for strategic planning and, in 1985; a study by Ginter (1985) was undertaken in the UK to determine whether this academic model had practical applicability. The 4,000 members of the Planning Executive Institute were asked a range of questions to provide a forum for assessing the perceptions of planning and strategic managers in practice. In excess of 1,000 members responded, and the researchers concluded that the model was a good framework for the way strategic planning takes place in the corporate environment. The Ginter (1985) paper described the strategic process as containing eight elements: (1) Vision and mission; (2) Objective setting; (3) External environmental scanning; (4) Internal environmental scanning; (5) Strategic alternatives (crafting strategy); (6) Strategy selection; (7) Implementation; and (8) Control. These elements are found consistently in the literature and taught in university business schools and undergraduate programs Thompson and Strickland (1998), Hill and Jones (1998), Stahl and Grigsby (1992). Viljoen (1994), and Hubbard (1996), all propound similar models in their educational texts. The central message of the Planning School is â€Å"formal procedure, formal training, formal analysis, lots of numbers† (Mintzberg, 1998). Many corporations adopted formal strategic planning as the fundamental driving concept for their business. Differentiation strategy When using a differentiation strategy, a company focuses effort on providing a unique Product or service, setting their offerings apart from competitors. Product differentiation fulfills a customer need and involves uniquely tailoring the product or service to the customer. This strategy allows organizations to charge a premium price to capture market share. The differentiation strategy is effectively implemented when the business provides unique or superior value to the customer through product quality, features, or after-sale support and service. Firms following a differentiation strategy can charge a higher price for their products based on the product characteristics, the delivery system, the quality of service, or the distribution channels. The quality may be real or perceived, based on fashion, brand name, or image. The differentiation strategy appeals to a sophisticated or knowledgeable consumer interested in a unique quality product or service and willing to pay a higher price for these non-standardized products. Customers value the differentiated products more than they value low costs. Our research identified three tactics which were significantly related to organizational performance in the companies we surveyed following the differentiation strategy. These critical practices included: 1. Innovation in marketing technology and methods. 2. Fostering innovation and creativity. 3. Focus on building high market share. Cost leadership strategy Porter’s generic strategy of cost leadership focuses on gaining competitive advantage by having the lowest costs and cost structure in the industry. In order to achieve a low-cost advantage, an organization must have a low-cost leadership mindset, low-cost manufacturing with rapid distribution and replenishment, and a workforce committed to the low-cost strategy. The organization must be willing to discontinue any activities in which they do not have a cost advantage and may outsource activities to other organizations that have a cost advantage. There are many ways to achieve cost leadership such as mass production, mass distribution, economies of scale, technology, product design, input cost, capacity utilization of resources, and access to raw materials. Cost leaders work to have the lowest product or service unit costs and can withstand competition with their lower cost structure. Cost leaders may take a number of cost saving actions, including building efficient scale facilities, tightly controlling overhead and production costs, and monitoring costs to build their relatively standardized products that offer features acceptable to many customers at the lowest competitive price. But the tactic that proved to be most critical to this strategy is the minimization of distribution costs. Focus strategy In a focus generic strategy, a firm targets a specific, often narrow, segment of the market. The firm can choose to concentrate on a select customer group (youths or senior citizens, for example), product range, segment of a market (professional craft persons versus do-it-yourselfers), geographical areas (East coast versus West coast), or service line. For example, many European firms focus solely on the European market. Focus also is based on adopting a narrow competitive scope within an industry that large firms may have overlooked. The focus strategy aims at growing market share through operating in a narrow market or niche segment more effectively than larger competitors. A successful focus strategy depends upon an industry segment large enough to have good growth potential but small enough not to be important to other major competitors. Focusing allows the firm to direct its resources to certain value chain activities to build its advantage. An organization may also choose a combination strategy by mixing one of the generic strategies of low-cost or differentiation with the focus strategy. For example, a firm may choose to have a focus differentiation strategy or a focus/cost leadership strategy. Based on our research, four tactics appear to be critical for organizations attempting a focus/low cost strategy: 1. Providing outstanding customer service. 2. Improving operational efficiency. 3. Controlling the quality of products or services. 4. Extensive training of front-line personnel. Focus/differentiation Another combination focus strategy is a focus/differentiation strategy where the organization has a unique quality product offered to a targeted market segment or niche. The significantly important tactics include: * Producing specialty products and services. * Producing products or services for high price market segments. In addition to generic strategies, Porter (1985) developed several other modular concepts. The five forces model is shown in Figure 2. Porter (1980) suggested that the task facing managers is to analyze competitive forces in an industry’s environment. He claimed that only five forces needed consideration. Porter (1980) argued that the stronger the manifestation of each of the forces, the more limited the ability of established companies to raise prices and to earn greater profits. This is pure Modernist, Neo-economic thinking. The simplifying and â€Å"blinding† role of externalities in economics, blinds Porter (1980) who is unable to postulate the role of government, or de-regulation, in his five factor, positioning model at the very time he was proselytizing the case of the US Airline industry under severe conditions of Reaganite, ideological deregulation of that industry (Kouzmin, 2007). Porter (1997) preaches that many of these intangible forces are measurable and that, in addition, there is a â€Å"chain of causality that runs from competitive environment to position to activities to employee skills and organization†. This causal argument is further pursued with Porter’s (1985) concepts of the value chain (see Figure 3). The value chain analysis is based on the simple linear idea that every activity performed in an organization will add some value to the final products or services produced. The final product is simply the aggregate of values contributed. The 3Cs model of Kenichi Ohmae Ohmae (1982) has much to discuss about competitive position, particularly the competitive positioning of successful Japanese companies. It is his view that the theories abounding in economic and economic policy circles concerning the importance of position have not been the drivers of Japanese success. He believes that strategy is not about beating the competition but about satisfying customer needs. Still further, Deming (1986) expounds a fundamental concept when exhorting his audience to consider the concept of competition. It is his argument that people must learn to cooperate with others and to compete with themselves. In the context of strategy, the ideas of Ohmae and Deming, regarding the importance of customers is most important. Concepts of competition and market share are of little use to the business principal and as a consequence there is very little that the philosophies of the Positioning School can add to their strategy knowledge base. As with Ohmae’s Japanese corporations, competitive advantage is driven by the ability to serve the needs of customers better. The 3Cs Model is a strategic look at the factors needed for success. The 3C’s model points out that a strategist should focus on three key factors for success. In the construction of a business strategy, three main players must be taken into account: 1. The Corporation 2. The Customer 3. The Competitors Only by integrating these three C’s (Corporation, Customer, Competitors) in a strategic triangle, a sustained competitive advantage can exist. Ohmae refers to these key factors as the three C’s or strategic triangle. Hito-Kane-Mono A favorite phrase of Japanese business planners is hito-kane-mono, standing for people, money and things. They believe that streamlined corporate management is achieved when these three critical resources are in balance without surplus or waste. For example: Cash over and beyond what competent people can intelligently expend is wasted. Of the three critical resources, funds should be allocated last. The corporation should firstly allocate management talent, based on the available mono (things): plant, machinery, technology, process know-how and functional strength. Once these hito (people) have developed creative and imaginative ideas to capture the business’s upward potential, the kane (money) should be given to the specific ideas and programs generated by the individual managers. The Ansoff Growth Matrix Strategy Tool Igor Ansoff (1965) was the originator of the strategic management concept, and was responsible for establishing strategic planning as a management activity in its own right. His landmark book, Corporate Strategy (1965), was the first text to concentrate entirely on strategy, and although the ideas outlined are complex, it remains one of the classics of management literature. Ansoff was one of the earliest writers on strategy as a management discipline, and laid strong foundations for several later writers to build upon, including Michael Porter, Gary Hamel and C K Prahalad. He invented the modern approach to strategy and his work pulled together various ideas and disparate strands of thought, giving a new coherence and discipline to the concept he described as strategic planning. During the 1970s and 1980s, this concept shaped more ideas about management as other writers took up Ansoffs ideas, such as core competence or sticking to the knitting. A debate between Ansoff and Henry Mintzberg over their differing views of strategy was reflected in print over many years, particularly in the Harvard Business Review. Ansoff has often been criticized by Mintzberg, who disliked the idea of strategy being built from planning which is supported by analytical techniques. This criticism was based on the belief that Ansoffs reliance on planning suffered from three fallacies: that events can be predicted, that strategic thinking can be separated from operational management, and that hard data, analysis and techniques can produce novel strategies. Ansoff argued that within a companys activities there should be an element of core capability, an idea later adopted and expanded by Hamel and Prahalad. To establish a link between past and future corporate activities (the first time such an approach was undertaken) The Ansoff Growth matrix is a tool that helps businesses decide their product and market growth strategy. This Ansoff Matrix considers the existing and new markets as well as the existing and new products and services as a potential for business growth and development. Ansoff identified four key strategy components that interact with each other causing various effects on both new and existing products and markets. Figure four below is followed with a brief description of each component of the matrix. The Ansoff Growth Matrix Grid Source: (Proctor, 1997, p. 146). Market penetration Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing markets. Market penetration seeks to achieve four main objectives: †¢ Maintain or increase the market share of current products – this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to personal selling †¢ Secure dominance of growth markets Restructure a mature market by driving out competitors; this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for competitors †¢ Increase usage by existing customers – for example by introducing loyalty schemes a market penetration marketing strategy is very much about â€Å"business as usual†. The business is focusing on markets and produc ts it knows well. It is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research. Market development Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets. There are many possible ways of approaching this strategy, including: †¢ New geographical markets; for example exporting the product to a new country †¢ New product dimensions or packaging: for example †¢ New distribution channels †¢ Different pricing policies to attract different customers or create new market segments Product development Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets. Diversification Diversification is the name given to the growth strategy where a business markets new products in new markets. This is an inherently more risk strategy because the business is moving into markets in which it has little or no experience. For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks. Future Direction of Strategic Planning Strategic planning has come a long since its humble earlier works that were defined in the early 1960s. Many of these earlier concepts are still valid today or are reflected in the basic assumptions being used by leaders in our ever diverse organizations. Today, the goal of the organization is to achieve a competitive advantage by positioning itself in such a way that it has the ability to succeed all competition by enhancing performance. Competitive advantage is a concept that business organizations will continue to strive for. Michael Porter has been credited with introducing the five forces concept into business strategies. His theory has served as a back board for IO Theory (industrial Organization) theory. The traditional Bain/Mason paradigm of industrial organization offered strategic management a systematic model for assessing competition within an industry and was never really inducted into business policy by top decision makers. Many economists today have learned that introducing business policies into strategic planning and managing the economic impact of this union offers a positive influence on how organizations match up against each other on a microeconomic scale (Porter, 1981). From an IO economic perspective, mobility barriers or market positions are critical sources of competitive advantages that lead to superior performance. Organizational economics is more concerned with devising appropriate governance mechanisms or contracts to help reduce transaction or agency costs. The RBV (Resource Based View) of the firm has refocused the field of strategic management on all internal characteristics and views firms these characteristics as the source of competitive advantage. These characteristics have been identified as operational efficiencies, mergers, acquisitions, level of diversification, types of diversification, organizational structures, team management style, human resources management, and the manipulation of the political and social influences intruding upon the market that impacts organizations (Teece, 1982). The resource based view of the firm will be continue to be of significant importance to any organization because it provides leaders with specific tools needed to sustain a competitive position in a market place by providing management needed insights into examining the resource attributes and the their relationships towards other related variables in the market place as a means to gain the edge in the dynamic market (Barney, 2001). Conclusion Strategic planning has developed into a vital practice that must be approached with careful consideration to allow for through investigation into how an organization is structured. From both an internal and external perspective, managers need to recognize the need to evaluate value, mission, core competencies, history, and past, current, and future situations in order to gain and sustain competitive advantage in a market place. The need to identify strengths, weaknesses, opportunities, and threats, has been addressed as a main basic goal that must be used by leaders to empower the organization. Various models and theorists have been identified and explained as a means to gain a better understanding on how to define strategic planning. Since the 1960s, there have been many different points of view concerning the strategic planning concept. Various schools of thought have been developed by infamous theorists who have engraved a foot print into the development of modern corporate practices. Many of these concepts have paved the way for common approaches utilized by corporations as building blocks for surviving in such dynamic and competitive environments. Many of the strategies that are in use today are variations from the past and will continue to be adopted and manipulated to fit the needs of leaders seeking to find solutions to new and emerging issues that are relevant and applicable to the real business needs of organizations. Leaders today will need to continue finding new ways to plan for the future and adjust to the pace of environmental change with confidence, knowledge, skill, and ability. References Ansoff, H. I. (1965). An Analytic Approach to Business Policy for Growth and Expansion. McGraw-Hill, New York, NY. Barney, J. B. 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