Table of Contents
2.The development of strategy approaches
3.What makes a strategy successful
4. The practical strategy advisor perspective
4.1 BCG / Adaptive strategy
4.2.1 "The Coherance Premium"
4.2.2 "The Capabilities Premium"
5.Tesla as an example for strategic decision making
Decision making is a fundamental skill for any successful executive. But decisions at strategic level are hard to make. They require large amounts of resources and commitments which may be irreversible. They involve long-term consequences that are hard to predict. And, they require considering multiple, often conflicting, strategic objectives which are difficult to balance, particularly in the presence of risk and uncertainty. Research and thinking about modern business strategy emerged as a field of study and practice in the 1960s. Prior to that time, the words "strategy" and "competition" rarely appeared in the most prominent management literature.1 When influential academics in the USA started to think fundamentally about strategic decision making in the 1980s and '90s, they made the assumption that everything works in a competitive working, free market and developed thereof generic strategy tools, that are supposed to work everywhere.2 However, Elmes (the guest speaker) argues that they are not well founded, since strategies need to be developed in the respective context of an industry or market. This position will be explained in more detail during this essay. Especially the determinant of market efficiency, meaning how competitive a market is, strongly influences the development of strategic decisions. There are many industries where government involvement or asymmetric competition need to be considered to make strategic decisions, whereby generic strategy tools tend to be ineffective. Therefore, the key questions for this essay will be firstly what are the traditional concepts of strategy and how have they involved, secondly what actually makes a strategy successful and lastly how does it apply in practice.
2.The development of strategy approaches
Traditionally strategy was defined as the "...broad formula for how a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals" and the "...combination of the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there.".3 The development of the business strategy practice started as mentioned before in the 1960s when the first sort of comments were made which argued, that strategy is about a plan. A classic example is Chandler who said a strategy is "...the determination of the basic long term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals...".4 Later the thinking started to shape towards an understanding of strategy not just as a plan but rather as how to get the plan and consequently as a process. Accordingly, Whittington stated that "the practice perspective on strategy focuses on strategists and strategizing and not organisations and strategies".5 In his paper he describes why there is a need for a rethink the ideas of strategy. At first, he criticizes the idea of traditional thinking to just maximize profits, because nowadays there are many more goals for a company as social ambitions and especially for non-profit organizations this goal is not applicable. The more, Whittington criticizes the previously mentioned assumption of competitive markets by giving his own research in India as an example for an uncompetitive market. Consequently, the thinking moved on to the perspective of strategy in terms of an organization's capability. Heracleous described this in 1998 as following: "The purpose of strategic thinking is to discover novel, imaginative strategies which can re-write the rules of the competitive game; and to envision potential futures significantly different from the present".6 This means that organisations need to have the right group of people constantly thinking about strategic issues to be ready to act when the opportunity comes along. Elmes refers to this by giving an example from his professional career, when consulted fossil energy companies, where the board executives used to have a point in the agenda during meetings about every possible scenario such as climate change and possible strategies for that occurrence years before the topic publicly occurred in the common media. Lastly, the thinking shifted to the most recent perspective which focuses on the context that surrounds each strategy and the respective adjustments necessary for each context. Accordingly from this perspective there are no universal tools. Hence, in 2010 Grant outlined strategy as "...a practice-driven subject with general propositions that are highly contingent on particular circumstances"7
3. What makes a strategy successful
Generally, there are many determinants that influence how successful a strategy will be. Besides the two basic conceptions as the context of a strategy and the process of strategy making, there are the two core concepts of the position based view and the resource based view, which are very useful and relevant, according to Elmes. (See Exhibit 1)
Firstly, there is the position based view addressing the position of a company in a market and its competitors, which can be interpreted as a focus on external determinants. The fundamental assumption is that there are two generic strategies either to compete on costs of the products or to compete on differentiation. Therefore, if a firm wants to achieve a competitive advantage it is needed either to produce cheaper or to deliver superior value and differentiation compared to its competitors, whereby consumers are willing to purchase at a higher price.
The most famous advocate of this concept is Michael Porter who is known for his Five Forces analysis and his "Generic Strategies". His arguments include the approach to base a strategy on competitive analysis and appropriate value creation.8
Secondly, there is the resource based view, which argues that a firm can reach a competitive advantage by using their resources and capabilities to achieve a sustainable competitive advantage, which can be interpreted as a focus on internal determinants. According to this view, it is crucial to make the right combination of resources to create competence and therefore succeed in a competence driven competition. As an example for a firm with distinct capabilities Elmes mentioned Apple having the ability to create very user centred designs which eventually creates a competitive advantage. So which resources and capabilities give a firm such a core competence? According to Jay Barney, crucial are the ones that add value, are rare, can't be copied and can't be substituted.9 Especially the oil and gas industry provides a good examples of companies with different distinctive capabilities. For instance, Shell is good in adapting to local circumstances and having the right strategy in the respective country, whereas BP has competence in finding big oil fields.
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Under the assumption of quickly moving markets in modern business, the concept of dynamic capabilities becomes more relevant. They determine an organisation's ability to change and to adjust quickly as well as describe the combination of resources and capabilities that characterize distinguishing characteristics of the organization. A competitive advantage increases when the internal and external factors are combined so that the core competence underpins the chosen market positioning. Therefore, a dynamic fit between resources, capabilities and market positioning enables a sustainable competitive advantage. (See Exhibit 2)
Eisenhardt and Martin defined dynamic capabilities as "...the firm's processes that use resources - specifically the processes to integrate, reconfigure, gain and release resources - to match and even create market change. Dynamic capabilities thus are organisational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die.10 ״
As an example for a company with outstanding dynamic capabilities Elmes mentions Cemex, which is a Mexican cement making company that acquired many medium sized companies around the world and transformed this acquisitions into success stories trough their excellent dynamic capabilities. The difficulty consists of matching the changes inside a company and outside the company as the industry structure or the nature of competition. This stands in special contradiction to the position based view, where a company plans to react on the market a move from point A to point B, whereas in the dynamic capabilities concept a company needs to adapt and find a dynamic fit between resources, capabilities and market positioning to achieve a competitive advantage.
1 Ghemawat, p. (2002). Competition and Business strategy in Historical Perspective.
2 Hart, s. L. (1992). An Integrative Framework for Strategy-Making Processes.
Danny Miller, P. H. (1983). strategy-making and environment.
3 Porter, M. E. (1980). Competitive strategy. Free Press.
4 Chandler, A. (1962). strategy and structure: Chapters in the history of industrial enterprise. New York.
5 Whittington, R. (1996). Strategy-as-Practice: Taking Social Practices Seriously
6 Heracleous, L. (1998). strategic thinking or strategic planning
7 Grant, R. M. (2010). Contemporary strategy Analysis.
8 Porter, M. E. (1980). Competitive strategy
9 Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management
10 Kathleen M. Eisenhardt, J. A. (2000). Dynamic capabilities: what are they?