HOW STRATEGY DEVELOPS Patterns of Strategy Development Since strategy is about the long-term direction of an organisation, it is typically thought of in terms of major decisions about the future. However, it would be a mistake to conceive of organisational strategy as necessarily developing through one-off major changes. The strategic development of organisations is better described and understood in terms of continuity. There is a tendency towards ‘momentum’ of strategy: once as organisation has adopted a particular strategy then it tends to develop from and within that strategy, rather than fundamentally changing direction. Incremental strategy development Henry Mintzberg’s historical studies of organisations over many decades showed that ‘global’ or transformational change did take place but was infrequent. More typically, organisations changed incrementally, during which times strategies formed gradually; or though piecemeal change, during which times some strategies changed and others remained constant; there were periods of continuity, in which established strategy remained unchanged; and also periods of flux, in which strategies did change but in no very clear direction. One strategic move - an acquisition, product launch, or significant investment decision perhaps - may well grow out of the existing mainstream strategy, which in itself gradually changes. Such moves may over time form an overall strategic approach of the firm, so that as time goes on each decision taken is informed by this emerging strategy and, in turn, reinforces it. Over time, this process could, of course, lead to a quite significant shift in strategy, but gradually. In many respects such gradual change makes a lot of sense, and arguably managers should seek to manage strategy so that it is achieved. No organisation could function efficiently if it were to undergo frequent major revisions of strategy; and, in any case, it is unlikely that the environment will change so rapidly that this would be necessary. Incremental change might therefore be seen as an adaptive process in a continually changing environment; indeed, this is the view held by some writers on the management of strategy and by many managers themselves. There are, however, dangers here. Environmental change may not always be gradually enough for incremental change to keep pace: if such incremental strategic change lags behind environmental change, the organisation may get out of line with its environment, and in time may need more fundamental strategic change to occur. Mintzberg’s work seems to suggest that this is so: transformational change tends to occur at times of crisis in organisations, typically when performance has declined significantly. Intended and realised strategies Conceiving of organisations’ strategies in terms of such patterns of change means it is important to be careful about just what is meant by ‘strategy’. Typically, strategy is written about as though it is developed by managers in an intended, planned fashion. Strategy is conceived of as being formulated, perhaps through some planning process, resulting in a clear expression of strategic direction, the implementation of which is also planned in terms of resource allocation, structure, and so on. The strategy then comes about, or is realised in actuality. In this way, strategy is conceived of as a deliberate, systematic process of development and implementation (route 1 in Figure 1). This is broadly the framework adopted in this book because it is a convenient way of thinking through the issues relating to strategy. However, it does not necessarily explain how strategies are actually realised. It has to be said that such evidence as exists about the effectiveness of planning systems suggests that in many organisations that have them, and which attempt to formulate strategies in such systematic ways, the intended strategies do not become realised; or only part of what is intended comes about. In effect, much of what is intended follows route 2 in Figure 1 and becomes unrealised: that is, statements of strategy which do not come about in practice. Figure 1: Strategy Development Routes Emergent, opportunistic, and imposed strategies The fact that a planned, intended strategy does not come about, does not necessarily mean that the organisation has no strategy at all. If strategy is regarded as the direction of the organisation, which develops over time, then it can also be conceived as an emergent process (route 3 in Figure 1). It should also be pointed out that, despite the existence of a stated, intended strategy which appears to have come about through a planning mechanism, strategy development may still be of an emergent nature. For example, the planning process may perform the role of monitoring the progress or efficiency of an emergent strategy. On the other hand, it may do little more than pull together the views and ‘wisdom’ of management or industry experts which have been built up over time. Indeed, it is a frequent complaint of chief executives that their planning systems seem to have degenerated into little more than rather routinised elaborations of where the organisation has come from, and the received wisdom which has been built up in it. This is, in effect, route 4 in Figure 1. It can be dangerous because the firm appears to be taking a proactive, systematic approach to strategy development, and this may mask a somewhat complacent view of the situation the organisation is in. Strategies may also come about in opportunistic ways (route 5 in Figure 1). For example, as changes occur in the environment, or new skills are recognised, these may be taken advantage of in an opportunistic manner. Indeed, a firm may be set up in the first place because an entrepreneur sees an opportunity in the market; and the likelihood is that, if the initial strategic approach of that firm is successful, that strategy will persist for some time. On the other hand, a long-established firm may enter a new market sector because of an opportunistic acquisition, for example. This is not to suggest that such opportunistic developments are always wise, but they do occur, and can lead to changes in the realised strategy of an organisation. Finally strategy may be imposed (route 6 in Figure 1). A strategy of retrenchment, with divestments and the cutting of costs, may be forced by recession or a threatened take-over. Developments of new products may be forced by the obsolescence of existing products. Government action may have a direct impact on organisational strategy; for example, in the public sector; or by privatisation of public utilities or state-owned enterprises, as has happened most dramatically in recent years in eastern Europe. Again such pressure may be dealt with through planning mechanisms within the organisation; or it may be handled through some other mechanism, such as individual decision making by senior executives. In any event, such imposed strategy development can result in significant long-term changes for an organisation. Explaining Strategy Development The 'natural selection' view The planning view The logical-incrementalist view The cultural view The political view The visionary view Elements of Strategic Decision-making Process There are four stages which can be discerned in decision processes. These are represented in Figure 2.
Figure 2: Phases of strategic decision making The awareness of a strategic issue typically occurs at an individual or small group level. This is not likely to be an analytical process; rather people get a ‘gut feeling’ based on their previous experience. These people may not be managers - they are likely to be those in most direct contact with whatever stimulates awareness, perhaps sales staff dealing with customers. This awareness will develop through a period of ‘incubation’ in which various stimuli build up a picture of the extent to which an organisation’s circumstances deviate from what is normally to be expected. These stimuli are likely to be related to internal performance measures such as turnover or profit performance; customer reaction to the quality and price of service or products; and changes in the environment, in terms of competitive action, technological change, and economic conditions. The importance of the individual’s role in problem recognition needs to be emphasised. There is evidence to suggest that successful business performance is associated with management’s capability in sensing its environment. This does not necessarily mean that the company has complex or sophisticated means of achieving this, but rather that people in the organisation - not only managers - respond to or take into account a wide range of influences. This accumulation of stimuli eventually reaches a point where the presence of a problem cannot be ignored and requires an orgnaisational response. Typically, this triggering point is reached when the formal information systems of the organisation begin to highlight the problem; perhaps a variance against budget becomes undeniable or a number of sales areas consistently report dropping sales. At this stage, however, issues may still be ill defined. Issue formulation involves a number of processes. Information gathering is likely to take place, but not necessarily in a highly structured, objective manner. Information is sought and gathered on a verbal and informal basis, particularly among more senior management. This may, of course, be supplemented through more formal analysis. However, the rationalisation of information so as to clarify the situation is a process which draws heavily on existing managerial experience. Indeed, the role of information generated from more formalised environmental analysis in this process is often to post-rationalise or legitimise managers’ emerging views of the situation. The resolution (or definition) of what constitutes the nature of the issue may prove difficult. Overall, formal analysis appears to play much less of a role than is suggested in some management texts. Through debate and discussion, there will probably be an attempt to reach an organisational view or consensus on the problem to be tackled. The emerging view will therefore take shape in terms of both individual and collective experience, and different views will be resolved through social and political processes. It may also be that these processes of issue formulation could trigger a different problem, so the process tends to be interactive. In developing solutions, managers search for ready-made solutions through memory search, in which the manager seeks for known, existing, or tried solutions; or passive search, which means waiting for possible solutions to be thrown up. It is likely that there will be a number of these searches in which managers draw on what they have experienced and tried in the past before there is an attempt to design a solution; that is, to custom-build a strategy to handle the problem at hand. In either search or design the process of choice tends to be iterative. Managers begin with a rather vague idea of a possible solution and gradually refine it by recycling it through selection routines back into problem identification or through further search routines. The process is developmental, based on debate and discussion within the organsiation and, again, on the collective management wisdom and experience in the organisation. Indeed, the logical incrementalist view of strategy development suggests that successful managers actively use bargaining processes in order to challenge prevailing strategic inclinations and generate information from other parts of the organisation to help in making decisions. As has been seen, the process of developing solutions may overlap with the processes of selecting solutions. They are somewhat arbitrary categorisations for the purpose of description and might be regarded as part of the same process, in which a limited number of potential solutions gradually get reduced until one or more emerges. This may occur through ‘screening’, in which managers eliminate that which they consider not to be feasible. However, the pre-dominant criterion for assessing feasibility is not formal analysis but managerial judgement followed by political bargaining. Formal analysis is the least observed of these three approaches, and needs again to be seen in the context of social and political processes. It should also be remembered that the process might well be taking place below the most senior levels of management, so it may be necessary to refer possible solutions to some higher level, and seeking this authorisation is another way of selecting between possibilities. Typically, though not always, authorisation is sought for a completed solution after screening has taken place. Thus raises the question of whether it is sensible to view this referral as a sort of checking of an incrementally generated strategic solution against some overall strategy. Paradigm and the risk of strategic drift The conservative influence of the paradigm (i.e., the frame of reference managers have built up over time consisting of their beliefs and assumptions about the nature of their business) and ‘the way we do things around here’ are likely to have important implications for the development of strategy in organisations. Faced with pressures for change, managers will be likely to deal with the situation in ways which protect the paradigm from challenge. This raises difficulties when managing strategic change, for it may be that the action required is outside the scope of the paradigm, and that members of the organisation would therefore be required to change substantially their core beliefs or routines. Desirable as this may be, the evidence is that it does not occur easily. Managers are much more likely to attempt to deal with the situation by searching for what they can understand and cope with in terms of the existing paradigm, and this seems to be especially so in organisations in which there is a particularly high degree of homogeneity in the beliefs and assumptions which comprise it. Managers will, then, typically attempt to minimise the extent to which they are faced with ambiguity and uncertainty by looking for that which is familiar. Figure 3 illustrates how this might occur. Faced with a stimulus for action, in this case declining performance, managers first seek for means of improving the implementation of existing strategy: this could be through the tightening of controls. In effect, they will tighten up their accepted way of operating. It this is not effective, a change of strategy may occur, but still a change which is in line with the existing paradigm. For example, managers may seek to extend the market for their business, but may assume that it will be similar to their existing market, and therefore set about managing the new venture in much the same way as they have been used to. There has been no change to the paradigm and there is not likely to be until this attempt to reconstruct strategy in the image of the existing paradigm also fails. What is occurring is the predominant application of the familiar and the attempt to avoid or reduce uncertainty or ambiguity. Figure - 3 : The dynamics of paradigm change [Adapted from P. Grinyer and J. C. Spender (1979). Turnaround: Managerial recipes for strategic success, Associated Business Press. p. 203.] This is, of course, an alternative explanation of incremental or adaptive strategy development. Indeed, it may be that changing the strategy within the paradigm makes sense: after all, it does encapsulate the experience of those in the organisation, and permits change to take place within what is familiar and understood. However, the outcome of processes of decision making of this kind may not be the adaptive strategy making, which keeps in line with environmental change. Rather it may be an adaptation in line with the experience enshrined in the paradigm. Nonetheless the forces in the environment will have an effect on performance. Over time this may well give rise to the sort of strategic drift, in which the organisation’s strategy gradually, even if imperceptibly, moves away from the forces at work in its environment. This pattern of drift is made more difficult to detect and reverse because although changes are being made in strategy - albeit within the parameters of the paradigm - such changes are the application of the familiar and may achieve some short-term improvement in performance, thus tending to legitimise the action taken. However, in time either the drift becomes apparent or environmental change increases, and performance is affected. Strategy development is, then, likely to go into a state of flux, with no clear direction, further damaging performance. Eventually more transformational change is required, if the demise of the organisation is to be avoided. The paradigm is, then, an inevitable feature of organisational life which can be thought of either as encapsulating the distinctive competences of the organisation or, more dangerously, as a conservative influence likely to prevent change and result in a momentum of strategy which can lead to strategic drift. Summary and Implications for the Study of Strategy This chapter has dealt with the processes of strategic management as they are to be found in organisations: it is therefore descriptive not prescriptive. There is no suggestion here that, because such processes exist, this is how strategy should be managed. However, it is important to understand the reality of strategy making in organisations not least because those who seek to influence the strategy of organisations must do so within that reality. There is little point in formulating strategies which may be analytically elegant without having an understanding of the processes which are actually at work. Moreover, it is this book’s intention that the subject should be approached in such a way that it builds upon this understanding of reality and, wherever possible, relates an essentially analytical approach to the real world of managers. In this concluding section, some of the lessons of this chapter are summarised and related to what follows in the rest of the book. |