Definition and Brief History of Strategy
Strategy is elementarily defined as a long term plan of action designed to achieve a particular goal (David, 2003). The concept, however, is not originally made for business. Rather, the business industry borrowed it from the military to help organizations in bridging the gap between policy and tactics (Nickols, 2000).
Strategy is a word adopted from the Greek word strategia, which means "generalship". It basically refers to the military act of deploying troops as well as how it affects policies (Nickols, 2000). Over the years, the concept of strategy has been exported to different industries, including business and politics. Lindell Hart (1967) provided this early definition of strategy: "the art of distributing and applying military means to fulfill the ends of policy.". A few years later, Steiner (1979) provided the following characteristics of strategy in management application: strategy is that which top management does that is of great importance to the organization; strategy refers to basic directional decisions to purposes and missions; strategy consists of the important actions necessary to realize these directions; strategy answers the question: What should the organization be doing?; and strategy answers the question: What are the ends we seek and how should we achieve them?
From then on, the concept of strategic management in business application has evolved into two mainstreams of theoretical approaches – the "content"; and "process" view of strategy (Nielsen, 2005). The first one focuses almost entirely on the internal analysis of the firm; while the second one concerned mainly with the "process" of managing change and, from an external perspective, on how companies compete (Nielsen, 2005).
Strategic Management Practices
Earlier, we have defined the term 'strategy' and found that it was adopted from the military and is a design to achieve goals. Strategic management, on the other hand, is defined as the "art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives" (David, 2003, p.5). It is the formal process, or set of processes, used to determine the strategies (actions) for the organization (Hill et al, 2004). It focuses on many areas, including the integration of: management; marketing; finance/accounting; production/operations; research and development; and computer information systems (David, 2003). Its main objective is to help the organization achieve success through the formulation of different strategies, their implementation, and evaluation (David, 2003). It is also synonymous with the term "Strategic Planning" (David, 2003).
Strategic management, even though there are several definitions provided, is still not adequately defined because of the process and concepts that involves within it. Mintzberg (1979) argued that strategic management cannot be defined by brief sentences or paragraphs, because for him, it involves "plan, ploy, pattern, position and perspective". One of the ways, however, to look at strategic management in a nutshell, is through the Strategic Management Framework Model (see figure 1) (David, 2003).
Perform internal Audit Measure and evaluate performance Implement strategies – marketing, finance, accounting, R&D, MIS issues Implement strategies – management issues Generate, evaluate and select strategies. Establish Long-Term Objectives Develop Perform external Audit
Perform internal Audit
Measure and evaluate performance
Implement strategies – marketing, finance, accounting, R&D, MIS issues
Implement strategies – management issues
Generate, evaluate and select strategies.
Establish Long-Term Objectives
Perform external Audit
Figure 1: Comprehensive Strategic-Management Model (David, 2003).
David (2003) explains that Strategic Management Model is dynamic and continuous. Furthermore, one major change in one or more of the process can affect the other processes as well. David (2003) explained that strategy formulation, implementation and evaluation should be performed on a continual basis.
The vision-mission statement of a firm is one of the factors that create its corporate image (David, 2003). This, in turn, will allow the firm to establish its long-term objectives. There are many factors that build up the image of an organization. Lantos (2001) stated that corporations should have economic and legal responsibilities to the public at large. Novak (1996) enumerated seven economic responsibilities of firms, which are to: satisfy customers with goods and services of real value; earn a fair return on the funds entrusted to the corporation by its investors; create new wealth, which can accrue to non-profit institutions which own shares of publicly-held companies and help lift the poor out of poverty as their wages rise; create new jobs; defeat envy though generating upward mobility and giving people the sense that their economic conditions can improve; promote innovation; and diversify the economic interests of citizens so as to prevent the tyranny of the majority. Legal responsibilities, on the other hand, should be to follow the law or the rules that govern firms; while ethical responsibilities involve the use of practices that are acceptable by the society and the business world (Novak, 1996).
Several studies have proven that not having a sound corporate image can be detrimental to the organization. A number of industry surveys suggest that consumers are willing to make an effort to support proactive corporate citizens. For instance, Cone and Roper's study shows that 76 percent of consumers are prepared to switch to brands or stores that seem concerned about the community (Jones, 1997). Similarly, a Walker Information national survey showed that 14 percent of US households actively seek do-gooders when making purchases, while similarly, 40 percent judge corporate citizenship as a tie-breaking activity (Business Wire, 1997). Similarly, Brown and Dacin (1997) demonstrate that negative corporate social responsibility associations can have a detrimental effect on overall product evaluation, whereas positive associations can enhance product.
External and Internal Audit
According to David (2003), the purpose of an external audit is to develop a finite list of opportunities that could benefit a firm and threats that should be avoided. This may include the evaluation of the legal, economic, political, environmental, social and technological advantages and disadvantages of the firm and doing the needed adjustments (David, 2003). On the other hand, the internal audit concerns with evaluating the internal performance of firm e.g. the performances of employees, the stability of its management system, infrastructure issues, etc (David, 2003).
Competitive advantage has always been an issue in the external business environment. This was clearly addressed by Michael Porter in the early nineties, which led to several moels such as the Five Forces. His theory of competitive advantage is one of a number of theories that place geographical industrialization and innovation at the centre of the process of development and competition (O'Connel, Clancy and Egeraat, 1999). In this theory, Porter mentioned four attributes namely: factor conditions; demand conditions; related and supporting industries, and; firm strategy structure and rivalry (O'Shaughnessy, 1996). Each attributes are discussed in a national context. Factor conditions basically refer to a nation's position on factors of production (i.e. skilled labor or infrastructure), which are necessary to compete in a given industry. Demand condition is the nature of national or local demand for both service and tangible products. Related and supporting industries, on the other hand, pertains to the presence or absence in the nation of supplier industries and other related industries that are internationally competitive. Finally, firm strategy, structure and rivalry determines the conditions in the nation governing how companies are created, organized and managed, as well as the nature of domestic rivalry (O'Shaughnessy, 1996). The four attributes interact with one another. Modeled as the diamond, its systemic nature is indeed variable. Several factors transform the diamond into a system. This includes domestic rivalry and geographic industry concentration. Domestic rivalry promotes upgrading of the entire national diamond; while geographic concentration transforms the diamond into a system because it elevates and magnifies the interactions within the diamond (Porter, 1990; O'Connel, Clancy and Egeraat, 1999). This systemic nature then promotes clustering, which enables both vertical and horizontal linkages between industries (Porter, 1986; O'Connel, Clancy and Egeraat, 1999).
Porter's theory provides an interesting framework on how the conditions of industries are shaped and influenced. However, many factors or competitive advantage determinants are missing in the theory. For instance, O'Shaughnessy (1996) mentioned that Porter did not give importance to the culture or politics, while O'Connel, Clancy and Egeraat (1999) criticized that Porter failed to provide a comprehensive explanation on how clusters are developed. Another missing factor is the competitive advantage of alliance or strategic alliance. Porter's theory offers an incomplete framework, but serves as a reminder that rivalry is not the only means for survival. Furthermore, it suggests that through rivalry partnerships or alliances can arise, leaving more space for competition.
Another specific example of a framework that can be used for external audit is the 4Cs developed by Ma (2004). Ma (2004) stated that the competition is now in the global scale, and hints that explaining competitive advantage in the national context may already be obsolete. To make up for the limitations of competitive advantage models of the past such as Porter's theory, Ma (2004) integrated different theories and created the 4Cs. Here, views of pro-coordinated marketing proponents such as Levitt, Ohmae and Yip are integrated with competitive advantage theory of Porter. This new 4C model features integrated attributes such as: creation and innovation; competition; cooperation; and co-option.
In the internal audit of the firm, two specific examples of concerns are the issue of culture and the management of staff, specifically how the staff can be motivated. One of the ways to assess culture is to take heed of its value dimensions. As explained by Hofstede (1980), there are four cultural value dimensions:
Ø Large versus small power distance. Large power distance is the extent to which the members of a society accept that power in institutions and organisations is distributed unequally; while small power distance is the extent to which members of a society or organization accept that power is distributed fairly (Adler, 1997).
Ø Strong versus weak uncertainty avoidance. Strong uncertainty avoidance means the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity, which leads them to support beliefs promising certainty and to maintain institutions protecting conformity; while weak uncertainty avoidance is the degree to which members tend to be relatively tolerant of uncertainty and ambiguity and require considerable autonomy and lower structure (Rodriguez, 1995).
Ø Individualism versus collectivism. Individualism is the preference for a loosely knit social framework in society; collectivism stands for a preference for a tightly knit social framework.
Ø Masculinity versus femininity. Masculinity is the preference for achievement, heroism, assertiveness and material success; while femininity refers to a preference for relationships, modesty, caring for the weak and the quality of life.
Cultural dimensions can help the firm assess the culture of their employees (Hofstede, 1980). This can help management strategies easier to implement and execute (Hofstede, 1980).
Motivation is also in an issue in the internal management of the firm. It is important because it manages and controls the turnover rate and productivity within the firm's internal environment. Greenberg and Baron define motivation as "the set of processes that arouse, direct and maintain human behavior toward attaining some goal" (Greenberg and Baron, 1997). This definition contents three key essential aspects: arousal, direction and maintaining. Arousal is to do with the drive/energy behind people's actions such as their interests to do the things or they do it just want making a good impression on others or to feel successful at what they do. Direction means the choices people make to meet the person's goal. Maintaining behavior could keep people persisting at attempting to meet their goal hence to satisfy the need that stimulated behavior in the first place (Greenberg and Baron, 1997).
Theories of motivation that organizations can use are divided into two categories: the content and process theories of motivation (Mullins, 1999). Content theories emphasize the factors that motivate individuals. Examples of content theories are Maslow's theory, Alfelder's theory, McClelland's theory, and Herzberg's theory (Mullins, 1999). On the other hand, the emphasis on process theories is on the actual process of motivation. Examples of process theories are Expectancy theories, equity theory, goal theory, and social learning theory.
David (2003) stated that there are a total of 11 types of strategies that a firm can use to gain advantage over competitors. These are: forward integration (gaining ownership or increased control over distributors or retailers); backward integration (seeking ownership or increased control of a firm's supplier); horizontal integration (seeking ownership or increased control over competitors); market penetration (seeking increased market share through greater marketing efforts); market development (introducing present product's or services in new geographic areas); product development (improving present products or services or developing new ones); concentric diversification (adding new but related products or services); horizontal diversification (adding new but related products or services for present customers); retrenchment (regrouping through cost and asset reduction to reverse declining sales and profit); divestiture (selling a division or part of the organization); and liquidation (selling all of the company's assets, in parts, for their tangible worth).
David (2003) stated that several means to achieve those strategies are through joint venture/partnership or merger/acquisition.