Strategy in Action:; The Execution, Politics, and Payoff of Business Planning

Book by Boris Yavitz William H Newman

Chapter 1

The Realm of Strategy

The word strategy means many things to different people -- ranging from on-side kicks for football fans, to naval blockades for military commanders, to any alternative for operations researchers, to recognition of China for heads of state. Thus in this opening chapter we need to identify the distinctive role of business strategy in the management of a company.

Turning the concept of strategy into an effective managerial tool requires considerable skill -- as we shall show in later chapters. But before embarking on the main message of the book, we want a common understanding of what the shouting is all about.

PLACE OF STRATEGY IN SHAPING AND GUIDING A COMPANY

What Strategy Is Not

Discussions about strategy with many executives have revealed several sources of confusion. If we immediately set these aside, the nature of strategy becomes clearer.

1. Strategy is not a response to short-term fluctuations in operations or the environment, nor is it the response to the frequent short-term reports on, for example, sales, labor turnover, weekly output, or competitors' prices that every manager receives. Instead, strategy deals with the predetermined direction toward which these quick responses are pointed. It is concerned with the longer-term course that the ship is steering, not with the waves.

2. Strategy is not a set of numbers merely projected out three to five years; it is not an extrapolation exercise based on this year's balance sheet and profit-and-loss statement. Rather, the emphasis in strategy is on the quality and texture of the business. New services, the focus of research, market position, foreign sources of materials, government sharing of high risks -- these are the kinds of issues that are molded into a verbal statement of where and how the company hopes to move. General Electric and several other companies, for instance, insist that the qualitative strategic plan be a separate document from the subsequently prepared financial projections.

3. Strategy is not a rationalization of what we did last year or of what appears in next year's budget. With a bit of imagination and artful wording, a statement that looks like a strategy can be written around almost any set of activities of a going concern. An actual strategy, in contrast, is a longer-term plan that sets the direction and tone of the shorter-range plans. Unless the strategy provides underlying guidance, its preparation is mere window dressing.

4. Strategy is not a functional plan, not even a long-run one -- such as a five-year marketing plan or a seven-year production plan. Rather, strategy involves the integration of all these functional plans into a balanced overall scheme. In some circumstances one function may drive the others -- product development, say, may determine marketing efforts or vice versa. Nevertheless, it is company strategy that sets the priorities and weighs or minimizes the risks. An overall viewpoint is essential.

5. Strategy is not a statement of pious intentions or optimistic wishes. Merely envisioning a future world and selecting an attractive position in that world is not a strategic plan. Instead, a strategy must be feasible in terms of resources that will be mobilized, and it must identify ways by which at least some form of superiority over competitors is to be achieved.

6. Strategy is not a cluster of ideas in the minds of a few select leaders of the company -- ideas labeled strategy if and when they are voiced because they come from key individuals. Rather, the concepts are disseminated and understood by all managers to at least the middle levels of the organization and perhaps below. Unless there is such widespread understanding, coupled with acceptance and preferably commitment, not much progress toward strategic goals will occur.

This list of "is not's' sets some helpful boundaries on the meaning of company strategy. By weeding out what may mistakenly be called strategy, we can focus on the potential power of the main concept. Of course, the converse of the "is not's' generates a set of positive characteristics -- namely, that strategy focuses on basic longer-term direction, is primarily qualitative, provides guidance for preparation of short-term plans, integrates functional plans into an overall scheme for the company, is realistic and action oriented, and is understood throughout the top and middle levels of the organization.

Realistic Mission Anchored to Action Programs

The nature of company strategy can also be suggested by sketching in broad strokes the analytical process by which a particular strategy is formulated. Methods and problems in designing a strategy are explored in Chapter 6; here we are making a quick pass to show the qualities of the end product.

An essential feature of all strategic planning is a forecast of the world ahead -- or, at best, a forecast of those parts of the environment that will have significant impact on the company's successes and failures. Of course, there will be a variety of uncertainties, and our strategic planning will have to deal with them. Nevertheless, forecast we must if we are to grasp full advantage of the changes that lie ahead.

This scenario of the future should cover social, political, and technological changes as well as economic shifts (see Figure 1-1). Ideally, we would like to spot each change that will create significant opportunities or threats to our industry and then relate that external change back to the particular parts of our operations that will be affected. Analysis of these anticipated developments should enable us to decide what strengths or capabilities, such as access to low-cost materials or strong market position, will be crucial for future success. Conversely, the forecasts should warn us of weaknesses that would spell disaster.

A second kind of forecast and analysis focuses on our company's strengths and weaknesses relative to present and anticipated competition. Future actions by these competitors sharply impacts on the strategy that makes most sense for us.

Then, we need to be creative and skillful in identifying future opportunities where our relative strengths give us a comparative advantage. On the down side, we try to spot declining or unprofitable segments that require a fresh approach or withdrawal.

From such a set of forecasts and analyses -- which, in fact, are much more complex, as will be seen in later chapters -- a picture emerges of where and what we would like our company to be in that future world. What are the particular products or services we believe we can provide to what markets in a distinctive manner with the resources we can mobilize? This becomes our strategic mission. As events unfold we may adjust the target, but at any point in time the strategy tells us the best direction to move.

A desired position in a predicted future world -- that is, a company "mission" -- can be treated as the bulls-eye or target of the strategy. But the main role of strategy is to evolve a trajectory or flight path toward that bulls-eye. Typically, a company must initiate at appropriate times a whole series of programs or action plans if it is to attain its desired domain. As Figure 1-1 suggests, to move from our present position to the desired position may require launching new products, building a reservoir of technically trained people, negotiating a merger, or perhaps liquidating part of our present operations. When and how to move aggressively on these programs is an important aspect of the strategy. The tie to current activities comes largely, though not entirely, through these thrusts.

This essential tie between mission and thrusts can be compared to the realities of a chess game. A series of smart moves without some broader strategy will not finally win the game against a capable competitor, and a grand design without a series of moves to achieve it remains but a twinkle in the loser's eye.

The Use of Strategy

Crown Cork & Seal Company presents a classic case illustrating the process just described. When J. F. Connelly became president, the company was on the verge of bankruptcy, with only a small part of its product line -- bottle caps and related closures -- earning a modest profit. The outlook for its major business, tin cans, was dismal. The product was mature, with total demand growing slowly; glass, paper, and plastics were making inroads in this market and threatening to make even more; competitors had excess capacity, and price competition was severe. But there were a few brighter spots in the total picture, and Connelly decided to concentrate on one of these. Cans that could hold contents under pressure were more difficult to make and consequently were not subject to cutthroat competition. Moreover, the growth prospects for these were better than average, with aerosols and beer the major users. As for beer containers, Connelly predicted that metal cans would take market share from glass bottles. Thus serving this special niche became Crown Cork's target.

Several major programs were necessary to develop a comparative advantage in the niche. All thought of a full line was abandoned, and the regular can business was liquidated (this provided some capital to pacify the bankers). On the other hand, Connelly tooled-up to give excellent service to his selected customers; this involved locating plants close to customers, installing some new equipment, and organizing very fast response to customer needs. Also, overhead was trimmed far below the industry average.

The results at Crown Cork have been dramatic. Volume did grow much faster than the total can industry -- not only in beer but later in soft drinks as well. Crown Cork's service has enabled the company to obtain an increasing share of this volume. Meanwhile, the low overhead gives the company the best profit margin in the industry. Granted, this market concentration and low overhead has made the company somewhat vulnerable. But for over two decades in the company's major line of business there has been a clear, realistic mission anchored in action programs.

For a recent example of well-conceived strategic action, Citibank's decision to serve worldwide corporations as a special group of clients is impressive. For years Citibank has had a network of branches in foreign countries. Traditionally, each country had a strong manager who ran the local operations with a high degree of decentralization. But several environmental changes have raised questions about the amount of local autonomy that is desirable. Multinational corporations have grown rapidly and account for an increasing share of world trade. In addition, modern communication devices have made rapid, frequent contact with all cities of the world commonplace. These developments, in turn, have led multinational corporations to centralized management of cash balances, foreign exchange transactions, funds transfer, short-term borrowing, and the like. Citibank predicts that the multinationals will seek increasing efficiencies through coordination of their fiscal operations.

These developments create an opportunity for banks that can provide integrated services worldwide tailored to the specific needs of individual multinational corporations. And Citibank, with its well-developed branch network, has a comparative strength. Seizing the opportunity, Citibank decided to serve this niche with distinction.

But picking the mission is not enough. Citibank has to assure that its widespread facilities do, in fact, serve the coordinated needs of each major customer. For this purpose Citibank created a new World Corporation Group charged with relationships with about 450 multinational clients. Work with these clients was transferred from the foreign branches (and the New York international division), and a single officer was placed in charge of serving each client. However, to avoid costly duplication, the global account officers -- like account executives in an advertising agency -- call on the local branches to perform any work that is needed.

A delicate matrix form of organization has emerged. There are continuing problems of the allocation of scarce resources -- notably, money for loans in developing countries. Nevertheless, the strategy is clear. The initiative for planning and control of services to these clients is centralized. This means some interference with service to local overseas clients, but Citibank believes that in its relative position the gains from improved service to multinational corporations will outweigh losses on the local front.

In this segment of its operations, then, Citibank has identified a mission and established programs (primarily organization and personnel in this instance) necessary to pursue that mission. To date the results have been good. Like any strategy, however, the wisdom of continuing that direction depends on the accuracy and monitoring of the forecasts -- or premises -- about future environmental conditions.

Rising Need for Strategic Direction

The concept of company strategy has been set forth in the preceding pages -- first by noting what strategy is not, next by briefly sketching the strategy formulation process, and then by giving two quick examples. The need for this kind of strategic management is increasing. Managing a company, always a challenging task, is becoming more difficult, and careful strategic analysis is vital to cut through the maze. Among the forces that are making strategy crucial are these:

1. Managers are being confronted by a wider range of external pressures that must be taken into account in their major decisions. These pressures to which management is now expected to be responsive include environmental protection, employment opportunities for minorities and all sorts of disadvantaged, shielding the consumer, and conforming to increasing government regulations.

2. Shorter payout periods are necessary for most investments. The more frequent shifts in technology, consumer preferences, resource availability, foreign exchange rates, and so forth trim the time available to recoup investments. Consequently, better forecasting and faster responses to external changes have to be built into the planning process.

3. Improved communications aid competitors, suppliers, customers, and ourselves alike. Jet travel, photo-phones, television via satellite, electronic computers, worldwide news services all increase the range of factors to be considered and the speed of responses to events everywhere. And they add to the information explosion. One result is that strategic shifts must be more discerning and more frequent.

4. Growing intensity of competition quickly removes any slack in the system. World trade means competition from anywhere; advancing technology encourages cross-industry competition. Consequently, strategic planning must consider who our future competitors will be, not only who is here today.

5. Larger enterprises require more levels of management and usually embrace more diverse kinds of businesses. This size itself leads to antitrust complications, potential synergies, hedging risks, more formal internal systems, and less first-hand experience in the industries managed. And strategy should incorporate these factors.

6. Changing values of members of the organization complicate strategy formulation. Attitudes toward leisure, self-fulfillment, mobility, insecurity (future shock), ethical behavior, "participation," and loyalty to one's employer affect the alternative strategies proposed and the commitment...