STRATEGY



Strategy—the firm's choice concerning how to deploy its resources—has content and timing. The strategy of each business unit defines which are its preferred customers to serve and which product/technological parameters are most appropriate for satisfying this demand (content). Judgments about its competitive environment suggest whether a business unit's early implementation of actions will be more advantageous than letting competitors take pioneering risks—whether a first-mover advantage exists for the firm that preempts another's product introductions, for example (timing).

Formulation of the multibusiness firm's corporate strategy assigns a mission to each of its business units that is consistent with the organization's goals; each business unit's mission defines the timing of cash flows to be generated (or a responsibility to support other business units that, in tum, generate cash). Because corporate-level strategy integrates the activities of its mix of businesses, its totality defines the firm's "personality" and risk-taking attitudes in its quest to create value for its stakeholders. Although corporate strategy has previously been focused on the timing of cash flows generated by astute investment in short-term projects, concems about competitiveness and the challenges of managing people-based sources of competitive advantage have forced managers to participate in longer-term projects, as well. Where business units once developed individual distinctive competences appropriate to the unique opportunities and threats they faced, corporate managers now nurture the development and sharing of core competencies across organizational boundaries to cope with converging industry boundaries and to leverage the benefits of resource expenditures across several marketplaces.

Strategy (from strategos, the art of the general) has its roots in traditional military tactics and logistics such as those described in Sun Tzu's Art of War. Modem business practices have appropriated some of the tenents of the ancient military codes and applied them to business transactions in order to acquire a great market share, to improve efficiency, and to increase profit margins. Access to the vast computational power of mainframe computers in the late 1960s linked corporate strategy formulation issues inextricably with those of financial analyses, especially in matters of diversification where covariance terms were calculated to assess risk preferences. Promulgation of the 1970s strategic planning practices of General Electric Company popularized the use of strategic business units (SBUs), which assign "bottom line responsibility" to the use of resources within organizational units smaller than divisions (or with customer/technological responsibilities that transcend divisional boundaries). General Electric was also an early user of objective criteria, such as the growth/share matrix, to direct strategic investments. (Demand growth rates and relative market shares were typical criteria in such frameworks; low market-share businesses facing slow demand growth—dogs—were candidates for divestiture.) Troubled lines of business are candidates for turnarounds to improve liquidity; firms in turnarounds cut back in markets where they are overextended (retrenchment) and reduce noncontributing activities to improve their cash flows.

Strategy implementation issues have become inextricably linked with the design of effective management information systems and empowerment of organizational resources, particularly where corporate level managers seek to manage relationships among their firm's ongoing mix of business units effectively (operating synergies) as well as pick the best businesses to invest in (financial synergies). As strategic planning processes have sought to elicit support from personnel who must implement the firm's strategy, the power of strategic planners who once generated armchair analyses—complete with alternative scenarios that anticipated every contingency—has migrated to the "troops in the trenches" who must make the plan succeed. Line personnel in all aspects of operations have initiated suggestions for reengineering the process by which firms create value for their customers. Ongoing managers have voluntarily downsized their organizations to create value for shareholders, lest the managers be replaced by outsiders with the same mandate of value creation (the "market for corporate control").

Each business-level strategy matches firm's discretionary investments to existing (and future) market conditions in light of competitors' strategies for serving chosen customers in anticipation of creating value for investors (competitive strategy). Some industries have greater profitability potential than others at a particular time in a particular country. The five-forces model—which considers whether an industry's structural traits support high profitability margins—suggests which lines of business to enter (or exit). Using the tools of microeconomic analysis, the model indicates that the most profitable industries will sustain high entry barriers, low supplier and customer bargaining power, no perfect substitute products, and little price competition. Forecasts of future industry conditions are critical to justify new (or continued) funding of business units when using the five-forces model because competition is dynamic. Business unit managers must devise entry strategies appropriate to overcome the entry barriers in operation when their firm's products are introduced, and must remain evervigilant to overcome the response of competitors' innovations.

While corporate-level managers are charged with finding the best uses for resources, managers responsible for each business unit are charged with sustaining a basis for competitive advantage in serving the most attractive customers as their markets evolve. Although cost-based strengths are fundamental to becoming a preferred vendor, the evolving requirements of sophisticated customers mean that competitive advantage is a constantly moving target and effective managers must anticipate how industry success requirements will change and make expenditures to preempt competitors from improving their relative positions vis-à-vis key customers. When industries seem attractive, cash is often reinvested to maximize market share (economies of scale). Implicit in such reinvestment policies is the expectation that postponed profits can be harvested later by surrendering market share. Because the "first to exit" liquidates more of its investment than firms that procrastinate, however, business unit managers must also assess the changing costs of overcoming exit barriers when competitive conditions sour and declining demand no longer justifies continuing investment. In volatile markets, dominant market share is no longer a virtue. Strategic flexibility is more-highly valued as environments devolve to hypercompetition.

Because corporate-level (headquarters or corporate staff) managerial activities are justified by making particular combinations of business units more valuable than if each line of business were a separate company held in a financial portfolio, corporate strategy is centrally concerned with the nature of relationships between business units. Resource allocation among a multitude of business units is also a central concern of corporate level strategy; corporate managers often proactively intervene in business level decisions by deciding in which lines of business the firm should (1) enter; (2) exit; (3) expand (or shrink) by funding the capacity of a business unit's geographic plants; (4) encourage coordination among a business unit's geographic plants (or encourage autonomy among them instead); and/or (5) encourage coordination among the resources and facilities of related (but separate) business units more overtly than if decisions to share expenses, transfer knowledge, participate in each other's value-creation chains, or other relationships were left to chance. (In a "bottom-up" strategic planning process, these same decisions might surface when corporate-level managers arbitrate between competing uses of resources when resources are rationed.) Corporate strategy accounts for the differences between the two types of strategic planning processes (top-down versus bottom-up) with regard to which business unit initiates the need for headquarters to make trade-offs among competing uses of capital. Although business-unit managers typically compete across the firm for capital allocations, processes for enhancing the firm's core competencies increasingly make human resource allocations across business units a strategic concern that is coordinated by headquarters, as well.

Core competencies arising from an organization's accumulated technical knowledge and management systems can be shared more easily when its corporate strategy encourages intrafirm interactions (economies of scope) than when each business unit throughout a firm's international system of operations goes its own way (laissez-faire). While business unit managers often champion shorter-term interests that favor the market segments they have chosen to serve, product attributes they believe will best serve their customers, and technological postures that will develop competencies that best suit their respective lines of business, corporate level managers champion "bigpicture," corporate-wide interests and legitimize internal schemes of cross-subsidization by providing budgetary relief for activities that could enhance the longer-term priorities of the firm through the funding of (1) "corporate development" divisions, (2) strategic alliances that expose the firm to desired competencies without requiring equity ownership (virtual firm arrangements), or (3) other forms of corporate venturing, including internal alliances.

Although business-unit managers are concerned with optimizing their internal value-creating chains of relationships (by forging effective competitive strategies), corporate-level managers are responsible for arranging (and monitoring) the best system of valuecreating relationships among sister business units, as well as with outsiders—which may include international suppliers (and distributors), locally competent suppliers (and distributors) within each site of international operations, competitors, local governments that build and support local infrastructures, and customers, among others. Doing so requires firms to maintain strategic flexibility since strategy implementation may involve cross-licensing (or other forms of information exchange), joint ventures (or other forms of equity participation), or direct investments through acquisition.

Within flexible organizations, corporate-level strategy initiates and audits competitive advantages based on organizational attributes. In particular, effective vertical strategies require a continuous process of redesigning task responsibilities (in collaboration with suppliers and customers) to create more value-added opportunities internally while continually weeding-out activities (and customers) that do not fit the firm's choice regarding what businesses it wants to be in (vertical integration), hence what competencies it wants to develop to sustain its competitive advantage. Vertical relationships can be secured through contractual ties, strategic alliances, or equity ownership, depending upon the competitive environments where transactions must occur. Disinvestment (or the severing of vendor-customer relationships) must occur when necessary, even where both business units are owned by the same corporate parents. Thus corporate-level oversight is mandatory—especially where sister business units are linked in such buyer-supplier relationships—to avoid perverting the firm's strategic vision.

Strategic flexibility requires organizations to gain new capabilities—through acquisition or internal development, depending upon the timing requirements of effective implementation—before competitors reach similar conclusions. Strategic flexibility may require firms to relocate stages of their value chain where national cost advantages in factors of production are short-lived. Where easy international flows of information make competitive imitation inevitable and timing advantages based on proprietary information are increasingly short-lived, flexible organizations need a corporate strategy that moves them from less-competitive businesses to those where opportunities to prosper are greater and success requirements are more compatible with the strengths they have developed internally.

[ Kathryn Rudie Harrigan ]

FURTHER READING:

Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press, 1980.



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