Strategic Management: Does it matter?
by Stathis Gould

Strategy tools can be invaluable or useless, it depends how you use them.

The basics of strategy analysis include looking at an industry - and the competition and strategic resources within it - using models such as PEST (political, economic, sociological, technological), industry life-cycle analysis and Porter's five forces. This then feeds into the framing and prioritising of issues and the pursuit of agreed strategic options that drive resource allocation. This is the basis of good strategy formulation - or so the classical view leads us to think.

Michael Mankins, of Marakon, an international management consultancy, believes that the model most companies use for strategic planning does not reflect the way executives make decisions. Theoretical strategic planning, in his view, is a batch process (i.e. a decision is made, then there is a gap, then another decision is made). Market and competitor information is analysed, threats and opportunities are considered, then the multi-year plan is defined. But in real life, strategic decision-making is often driven by an immediate need for action and has no beginning and end.

This batch model approach has two shortcomings. The first is time - the complexity of difficult decisions means that they are made outside the planning cycle. An example of this is Gap, the US retailer, which needs to rethink its target customers, merchandise strategy, pricing, real estate portfolio and supply chain - all fundamental issues that will take years to sort out.

Second, there is a problem of timing. New threats and opportunities turn up continually and cannot be predicted in the traditional strategic planning process. Take, for example, the airline industry which had to react to the 11 September disaster. All airlines had to make urgent management decisions in order to survive. Another example is the mergers and acquisition opportunities that often appear spontaneously.

Eminent strategic theorists such as Henry Mintzberg have argued that the linear approach to strategic planning that Mankins refers to is costly and time consuming. Their view is that formalised processes cannot produce strategies effectively and it is not realistic to think that we can predict market positions in the future. If structured and managed properly, organisations can learn and adapt to changes in the market. Strategies are therefore determined in an unstructured and informal way. It is what employees do on a daily basis that forms strategic choices.

Does this mean that we should minimise our time thinking about and formulating strategy or even ditch the strategic plan? Based on my experience in developing strategy, it seems to me that organisational learning and strategic planning are not mutually exclusive. The approach to strategy will mostly depend on the organisational context, particularly its history, culture and size.

Common to all situations is that there must be a degree of top-down strategy management and a degree of bottom-up empowerment and participation. We also need to keep in mind that strategic theories complement each other. So Porter's five forces framework and value chain analysis is not being superseded by the resource-based view of the firm. Organisational learning is also reinforced by techniques such as scenario planning and this can give organisations greater flexibility.

In extremely competitive environments, it is unlikely for an organisation to have a documented planned strategy, let alone a written strategic plan. Many companies in high-tech industries, for example, do not have strategies that spell out market positions and core competencies but instead have broad rules that can govern real-time activity, such as decisions around acquisitions and alliances.

For multinational companies, there is often a structured strategic planning process under an executive director, which includes the performance plan for the upcoming year, and in turn incorporates the operational budget, and a medium- and long-term outlook. A communication process and system of regular monitoring of targets and forecasts follow the preparation of the plan and operational budget. The difficulty is often not around formulating strategy but executing it and aligning the actions and behaviour of front-line employees to where the board wants the company to go.

In these organisations, there should not be a dilemma about how to think about strategy and implementation. There is no need to choose between structured strategic planning and learning through autonomous actions at the front-line. A dedicated team with a formal planning approach to strategy can deploy the analytical tools to help identify key issues and opportunities and final strategic choices to support the CEO and board. Strategy is about making choices - and both formal and informal processes will help those decisions.

In a value-based management approach to decision making, along the lines of that used by Lloyds TSB under Sir Brian Pitman, structured decision making can be vital to generating superior returns to shareholders over the long term. Typically, a strategy and planning team will lead a process of determining which product and customer markets to serve and how to compete in each market. A formal assessment of position in terms of market and competition and economic profitability per segment starts the strategy development process. Lloyds TSB had a particularly structured strategic and planning process starting with a strategy review, then strategy formulation leading to annual planning and finally monitoring. Annual planning was focused solely on strategy implementation of strategic choices.

Any kind of formal planning process or consideration of the future can add value when it develops strategic thinking. According to McKinsey, international strategy consultants, the process can add value if it increases the innovative nature of a company's strategies by ensuring that employees challenge assumptions and are open to new thinking.

General Electric was a pioneer in the development of formalised approaches to corporate strategy and control but it has also been a prime mover in the dismantling of these formal controls in favour of a more flexible, informal and dynamic approach to corporate strategy. The changes that Jack Welch, former CEO of GE, made included de-layering to make management more responsive and making strategic planning more personal through conversations in small meetings around key strategic issues and actions. Many organisations are involved in globally competitive and complex markets and more flexible and rationalised structures with loosely defined job descriptions can help them be more responsive to changing conditions.

However, no matter how far one believes that the market makes the important choices, there needs to be a context for management action. For this reason, most organisations find it useful to look forward at the evolution of markets and select appropriate strategies and objectives. This process, at the very least, gives employees a meaningful context in which to work. In ensuring your organisation can adapt to change it is necessary to avoid a planning process and organisational structure that inhibits change. Given the many different views of strategy, business strategists and policy-makers alike should be sensitive to the kinds of strategy that are desirable and feasible in particular times and particular places. There is much to be learned from the process involved and research has shown that planning can bring benefits of control, public relations and group therapy.

Stathis Gould is the Technical Specialist in the Technical Department, CIMA UK. This article is contributed by CIMA (The Chartered Institute of Management Accountants) and it first appeared in Insight, CIMA's on-line newsletter for accountants in business. Insight is accessible at www.cimaglobal.com/insight.