CIMA knowledge fast forward is a knowledge sharing initiative which strives to improve the conceptual clarity of the business community with regard to a core management/financial accounting or business related knowledge area, describing the concept, and explaining how it applies in practice. Strategy in practice Contributor: Dharshan Cooray (ACMA, CGMA) Several theories can be applied [...]

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CIMA knowledge fast forward is a knowledge sharing initiative which strives to improve the conceptual clarity of the business community with regard to a core management/financial accounting or business related knowledge area, describing the concept, and explaining how it applies in practice.

Strategy in practice

Contributor: Dharshan Cooray (ACMA, CGMA)
Several theories can be applied to the strategic management of an organisation, with varying degrees of success across industries and cultures. Each has unique advantages that can be leveraged depending on the resources of the organisation and the culture in which it operates.

Defining strategic management

‘Strategic management can be defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organisation to achieve its objectives’ (David, 2006). One key facet of this definition is that it recognises strategic management as both an ‘art’ and a ‘science’, while focusing on achieving strategic objectives of the firm.

Shaping your destiny

The essence of strategic intent theory stems from the core idea that Western companies match market-based objectives to internal resources, searching for sustainable advantages over rivals while Japanese companies leverage resources by accelerating the pace of learning, being more externally focused, aiming for seemingly impossible goals (Hamel and Prahalad, 1989).
This theory focuses on the growth and market dominance of primarily Japanese electronic and automobile companies such as Honda, Canon and Komatsu. It is necessary, however, to note that direct comparison between companies across nationalities and industries may not be entirely possible due to key differences such as culture, competitive state and market behaviour related to an industry.

In terms of culture, for example, Japanese companies operate within the context of ‘Wa’, stressing group harmony and social cohesion (David, 2006). This contributes to the development of superior ‘factor conditions’ such as an efficient workforce and better information flow, focusing on learning from western rivals in order to out-do them in the long run. In addition, the presence of co-operative, nationalistic suppliers targeting industry growth and knowledge sharing results in superior ‘related and supporting industries’. These factors mean that Japanese suppliers enhance ‘locational competitive advantage’ as a nation, consistent with the ‘Diamond theory’ by Porter (1980).

Strategic intent applied

The strategic intent theory presents the view that organisations should not be restricted by internal resources and plans or market space limitations, but should pursue ambitious strategic initiatives, focused on outward, futuristic factors. Canon inventing a disposable cartridge and Honda getting into the market of 50cc bikes are examples of such innovative strategies (Hamel and Prahalad, 1989). These strategies can be categorised as ‘inventive strategies’ which create new competitive space (David, 2006).

It can be argued that companies need to ‘invent’ and then ‘renovate’ their strategies by considering internal capability and capacity, consistent with the ‘design school’ of strategy formulation, prescribing identification of opportunities existing in an organisation’s external environment which can be better exploited by them than rivals i.e. Amazon which started as an online book store, renovated its strategy by including CDs, videos, children’s toys etc. (David, 2006).

From an overall perspective, this theory focuses on the importance of adopting a longer term, market based and innovative approach to strategic management, where a view parallel to the entrepreneurial school of strategy formulation, identifying the leaders’ ‘vision’ which will search for new opportunities in the market, as a common source of motivation and direction for all members of an enterprise is prescribed. Building knowledge and skill based competencies whilst constantly creating new market space, using creativity and inventive ability is prescribed when operating with strategic intent (Hamel and Prahalad, 1989).

It is important to recognize the additional costs, resource personal and business processes required to fulfill such goals, which need to be generated, and assess whether such resources could be allocated by the company in concern, and whether the benefit will outweigh costs incurred (Dilworth, 1983).

The fundamental message originating from this theory is that every company does have the opportunity to ‘shape its own destiny’. In this context, the authors prioritise enhancing strategic scope over concentrating on incremental advantages, and focus on revolutionising an organisation’s market space when crafting strategy (Hamel and Prahalad 1994).

Making the most of your resources

The resource based view (RBV) of competitive advantage argues that internal resources are more important than external resources in achieving and sustaining competitive advantage (Barney, 1991). This view is contradictory to the views of Hamel and Prahalad and advises a more rational, realistic perspective, with an organisation understanding its internal capabilities and subsequently capitalising on suitable external opportunities (David, 2006). The RBV focuses more on identifying internal resources which are rare, hard to imitate and not substitutable when formulating and implementing competitive strategy, which in the authors opinion will be a more manageable (in terms of control), structured and sustainable approach to strategic management, as it involves managing variables within the control of an organisation.

Competitive advantage applied

Johnson et al (2008) identify creating a customer value proposition (CVP) as an important element of a successful business model. Ratan Tata of the Tata group envisioning a cost effective vehicle for families to travel, where he was ascertaining how he could effectively fulfil a need of a particular customer segment is an example of creating a CVP. The article on competing for the future does not focus on fulfilment of new or existing customer requirements although it focuses on building market space and core competencies. This is a key area which strategy formulation for the future should incorporate.

This theory captures key disciplines which need to be developed in strategic management such as collective staff engagement in strategy formulation, where innovative ideas and experience at all levels, across functions are captured to generate strategic options. However, competence building involves capitalising on market opportunities external to the entity, such as new technology and demographic changes, which are not focused on by this theory (www. Harvard Managementor.com).

The development of new competencies and products is given high priority as it would lead to sustainable growth. This objective can be achieved through research and development for new product development, market penetration and market development. The importance of this aspect of the business is identified as ‘organisational learning and growth’ which is a part of the balanced scorecard, which will be evaluated as a performance matrix for individuals and SBU’s (www.balancedscorecard.org).

Collaborate with your competitors and win

This theory focuses on how to maximise mutual benefits from a joint venture, as opposed to one party being weakened and the other strengthened through obtaining product, market and competence based knowledge (Hamel and Prahalad, 1989).

Joint ventures in practice

An essential element when entering a joint venture (JV) is to focus on the objective of the partnership and evaluate whether the synergies generated with the JV partner and arrangement is the most suitable to achieve such an objective. This was the main reason why the joint venture between Apple and IBM with the objective of creating a new, object-oriented operating system, failed as the synergy and opportunities that were relevant weren’t considered, and both parties had legal issues relating to products that were not disclosed. (www.forbes.com)

The level of knowledge transfer and the agreement on the outcome of the partnership will be based on the objective of the alliance between two organisations. I.e. forward integration could target increasing distributor or retailer network to enhance market exposure in a growing industry or to reduce costs incurred with existing retailers (David, 1985).

JV theory captures many diverse interests of parties entering into a strategic alliance, where the authors highlight the importance of identifying such ambitions and taking precautionary measures throughout the partnership, in order to avoid one party being weakened by another. Hutheesing (2001) highlights that 30% of all JV’s and partnerships are outright failures, while another 17% dissipate after initial success due to problems and disagreements between JV partners, which shows the need for detailed evaluation of the ambitions of the alliance partner, when forming an alliance to avoid failure.

However, this theory by Hamel and Prahalad would be of more value to businesses if situations when firms should collaborate were evaluated in depth, i.e. a few small players in an industry collaborating to compete with a larger competitor or when distinct competencies of firms complement each other (Rattner, 1999).

Strategic theory in practice

These theories, when applied appropriately contribute to the advancement of strategic management in terms of futuristic, outward looking approaches to strategy formulation as well as integration of such intent with the workforce within the company making them more innovative, core competence based organisations who could create and expand market demand consistently. However, it should be taken into consideration that they may not be as successful in certain industries as well as across nations and diverse industries.
In addition, while most organisations have well-defined procedures for developing strategic plans, which generally result in reliable strategies designed to promote progress and maximise returns, there is often a major disconnect between its formulation and execution. The ability to cascade an organisation’s vision, mission and core strategies into actionable behaviours that achieve critical objectives continues to be a challenge for most organisations. To this end, the CGMA strategy mapping tool can be a valuable resource in developing a framework that allows organisations to describe and communicate their strategies concisely and succinctly and close the gap between formulation and successful implementation of strategy. More information can be found at www.cgma.org/resources.




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