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The Evolution of Strategic Management
Transcript of The Evolution of Strategic Management
Mary Krystine P. Olido Long-range Planning (Extrapolation) Long-range Planning was simply an extension of one year financial planning into five-year budgets and detailed operating plans. It involved little or no consideration of social or political factors, assuming that markets would be relatively stable. Gradually, it developed to encompass issues of growth and diversification. Strategic
(Externally Oriented) Planning Strategic (Externally Oriented) Planning aimed to ensure that managers engaged in debate about strategic options before the budget was drawn up.
In the mid-1900s, business managers realized that external events were playing an increasingly important role in determining corporate performance. As a result, they began to look externally for significant drivers, such as economic forces, so that they could try to plan for discontinuities. This approach continued to find favor well into the 1970s. Over the years, the practice of strategy has evolved through five phases (each phase generally involved the perceived failure of the previous phase):
1. Basic Financial Planning (Budgeting)
2. Long-range Planning (Extrapolation)
3. Strategic (Externally Oriented) Planning
4. Strategic Management
5. Complex Systems Strategy:
a. Complex Static Systems or Emergence
b. Complex Dynamic Systems or Strategic Balance Basic Financial Planning (Budgeting) The word strategy derives from the Greek for generalship, "strategia", and entered the English vocabulary in 1688 as "strategie".
According to James’ 1810 Military Dictionary, it differs from tactics, which are immediate measures in face of an enemy. Strategy concerns something “done out of sight of an enemy.” Its origins can be traced back to Sun Tzu’s The Art of War from 500 BC. James McKinsey (1889-1937), founder of the global management consultancy that bears his name, was a professor of cost accounting at the school of business at the University of Chicago. His most important publication, Budgetary Control (1922), is quoted as the start of the era of modern budgetary accounting. In the first half of the 1900s, business managers expanded the budgeting process into the future. Budgeting and strategic changes (such as entering a new market) were synthesized into the extended budgeting process, so that the budget supported the strategic objectives of the firm.
With the exception of the Great Depression, the competitive environment at this time was fairly stable and predictable. Managerial Long-Range Planning, edited by Steiner focused upon the issue of corporate long-range planning. He gathered information about how different companies were using long-range plans in order to allocate resources and to plan for growth and diversification. George Steiner (1929-present) (1963) General Electric Co. (GE) had begun to develop the concept of strategic business units (SBUs) in the 1950s. He advised splitting the functions of strategic thinking and line management. In effect, he was advising creating a line management who would carry out plans developed by a more serious staff function elsewhere. The Evolution of Strategic Management 1970s first half of 1900s 1960s Alfred Chandler (1818-2007) John W. Gardner (1912-2002) Self-renewal through careful planning Wickham Skinner - The Father of Manufacturing Technology
(1924-) Focused Factory strives for a narrower range of products, customers or processes. Strategic Management 1980s 1990s-present Complex Systems Strategy An army general wanted ten soldiers to cross a river. There was no bridge and the soldiers could not swim. The general saw a row boat in which were two children.The boat could only hold two children or one soldier at a time.
How did the soldiers cross the river in the boat? Start with 2 children crossing.
One child gets out of boat, other returns.
Child gets out, soldier crosses.
Soldier gets out, child returns.
Both children cross...etc... Before 1940s... Igor Ansoff - The Father of Modern Strategic Thinking/ The Father of Strategic Management (1918-2002) introduced the term strategic management into the business vocabulary "synergy" / 2+2=5 effect
-effect which can produce a combined return on the firm’s resources greater than the sum of its parts Strategic Planning to Strategic Management:
“paralysis by analysis”: strategic plans were made but remained unimplemented, and profits/growth continued to stagnate. Claims were increasingly made by practitioners and some academics that strategic planning did not contribute to the profitability of firms. The Concept of Strategic Management (Ansoff, 1980s)
Three Pillars of Strategic Management:
1. strategic planning
2. the capability of a firm to convert written plans into market reality
3. the skill in managing resistance to change
Complex Dynamic Systems or Strategic Balance Generally, self-confirming theories force the assumption of a linear mental model, since it is historic (including present) competencies or resources that provide the constructs for future strategy.
Self-confirming theories of strategy require the strategist to assume that what the firm has done in the past will be done in the future. In effect, executives “confirm” that past strategy has been appropriate by adopting it repeatedly over time.
Self-confirming Theories: Equilibrium-based strategic model involves a succession of steps that are designed to keep the firm focused upon its historic competencies. Out of that concept ideas such as SWOT analysis (strengths, weaknesses, opportunities, and threats) and “five forces” analysis were developed. Michael Porter of Harvard Business School is perhaps the best known of all the strategy theorists. Theorists Porters model of competitive forces assumes that there are five competitive forces that identifies the competitive power in a business situation. These five competitive forces identified by the Michael Porter are:
Threat of substitute products
Threat of new entrants
Intense rivalry among existing players
Bargaining power of suppliers
Bargaining power of Buyers From analysis of a number of companies, he developed “generic strategies”: Porter contends that there are three ways by which companies can gain competitive advantage:
•By becoming the lowest cost producer in a given market•By being a differentiated producer (offering something extra or special to charge a premium price)•Or by being a focused producer (achieving dominance in a niche market) This has led to the myth of “sustainable competitive advantage”. In reality, any competitive advantage is short-lived. If a company raises its quality standards and increases profits as a result, its competitors will follow.
Businesses are quick to copy, mimic, pretend and, even, steal. The logical and distressing conclusion is that an organization has to be continuously developing new forms of competitive advantage. It must move on all the time. If it stands still, competitive advantage will evaporate before its very eyes and competitors will pass. The Reality of Competitive Environments
The new competitive world has moved from a linear (or highly predictable, somewhat simple) state to a non-linear (or highly uncertain, complex) state. That does not mean that nothing will continue to be predictable. It means that in the future historic relationships will most likely not be the same as they were in the past
Put simply, complex environmental systems (the competitive environment) require complex mental models of strategy if the firm is to succeed. The use of linear mental models in environments of varying complexity and rate of change is a prescription for failure. Henry Mintzberg has famously coined the term “crafting strategy,” whereby strategy is created as deliberately, delicately, and dangerously as a potter making a pot.
To Mintzberg strategy is more likely to “emerge,” through a kind of organizational osmosis, than be produced by a group of strategists sitting round a table believeing they can predict the future. Complex Static Systems or Emergence Chaos and Complexity
Chaos theory had dealt with the unpredictable processes that were observable in science. Those who moved on to complexity theory added an interesting twist to the basic idea of complexity. Complex systems thinking has to do with the fact that the global system or environment is made up of a limitless number of other systems. Theorists hypothesize that complex systems may behave in much the same way as the molecules in a glass of water, which interact randomly.
Another approach for dealing with complex environments is called systems thinking. Proponents of systems thinking believe that it is possible to consider complex issues and to make “reasonable inferences” about the outcomes of such complex systems.
Charles Darwin’s concept focused upon two ideas: first, the idea of natural selection, or the survival of the fittest; second, the idea of evolution. His concept of evolution was based upon the hypothesis that matter was constantly in a state of moving from a lower level of complexity to a higher level of complexity.
The application of a Darwinian-based theory of complexity has resulted in an alternative to the equilibrium theory of economics – “complex adaptive systems” – which again, proposes that the economic system is characterized by progressive upward evolution.
The positive aspect of the theory is that it turns managers toward thinking about complex systems. There is no doubt that linear thinking (equilibrium-based management theory) can damage a company, but the absence of scientific support for “adaptive systems” (in either nature or in business) may also be problematic when trying to build corporate strategy.
A number of people are now using the idea of complex dynamic systems as a way to think about the competitive environment. Moving from the Darwinian presupposition of evolution to a recognition of the complex nature of the environment may present a better opportunity for the corporate strategist.