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    Strategy Formulation Writing help

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    Strategy Formulation Writing help


    Strategy Formulation Writing help

    Abstract

    Since its emergence in the 1960’s, the field of strategic management and strategy formulation has evolved into a complex area of study, even for the most knowledgeable and experienced strategist. Strategy Safari (FT Prentice Hall, 2002), subtitled “A Guided Tour through the Wilds of Strategic Management” by Henry Mintzberg, Bruce Ahlstrand and Joseph Lampel is an overview of the full field of academic and business studies of strategy formulation, based on previous lecture series delivered by Mintzberg. In that book, the authors identified ten (10) schools of strategy formula-tion. One of which is the design school. The “design school” of strategic management, which focus-es on a non-complex model that perceives the process of strategic formation as a design process to reach a satisfactory balance between internal distinctive competence and external threat and op-portunity. Strategy formation should be a conscious, informal and controlled process of thought. While the model has limitations, four conditions may encourage an organization to use the design school model, including when relevant knowledge has been established and a situation is stable; an organization can cope with a centrally articulated strategy; and one person can handle all data connected to developing strategy. There are several criticisms of the design school of thought on its reliability and validity. The authors have counteracted with these criticisms and explained that it is based on assumptions which are misleading, as the concept propagated by design school was over simplified and restricted in application.

    Keywords: Design School, Strategy, Strategy Formulation

    Introduction

    Throughout time, a large amount of thinkers has addressed the issues related to business strategy systems from many different angles. To a large extent, the difference in perspective can be understood from a wide range of base disciplines on which the strategy arguments are based, for example economics, biology, anthropology, philosophy and politicology. Nowadays, most business enterprises are engaged in strategic planning by using new ideas, objects, practices and reaching the goals. Generally, strategy is a simple way to analyze the current situation of the organization, expected future situation, the right direction confidently and achieving the objects of the organization. Actually, it is more than that which provides the systematic way for identifying and evaluating factors external to the firm and fixing them with the organization’s abilities. In addition, strategy is a long process over long time periods with individual resources within a competitive environment to meet customer needs.

    In other words, strategy is a method or process of direction and a scope of an organization to achieve opportunities with its pattern of resources and meet the demand of markets and stakeholder expectations. A company’s strategy can decide the fate of an organization, help them to create innovative products and sustain their competitive advantage. Though there is no single universal definition of strategy, it may however be defined as “the pattern or plan that integrates an organizations major goals, policies, and action sequences into a cohesive whole.” A well formulated strategy helps to marshal and allocate an organization’s resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment, and contingent moves by intelligent opponents. Mainly Strategies are shaped and designed for the whole organization by senior mana-gers, therefore administering strategy should start from the top to bottom. Effective strategies involve discussion and communication. Strategic management focuses on integrating managerial abilities and techniques such as marketing, financial/accounting, human resource management, production management, research development to achieve organizational success [1]. Organizations should be able to sustain competitive advantage in a discrete and identifiable market. It is the way a company creates value through the configuration and coordination of its multimarket activities. When all these are carefully managed then the organization is able to achieve its competi-tive or corporate advantage. Strategy formulation is therefore the process of identifying or deciding what to do with a combination of different factors.

     2. Origins of the School

    The design school has been very influential in the development of business strategy and can be seen as the fore-runner of the positioning school. The real impetus for the design school came from the General Management group at the Harvard Business School, beginning especially with the publication of its basic textbook, Business Policy: Text and Cases [6], which first appeared in 1965. Philip Selznick’s [7] in particular, introduced the no-tion of “distinctive competence”, discussed the need to bring together the organization’s “internal state” with its “external expectations”, and argued for building “policy into the organization’s social structure”,which later came to be called “implementation”. Chandler [8], in turn, established this school’s notion of business strategy and its relationship to structure.

    The school therefore originated with the publication of Philip Selznick’s “Leadership in Administration” in 1957 and Alfred D. Chandler’s “Strategy and Structure” in 1962. Philip Selznick was the first to articulate the basic concept that undergirds this model and wrote in his book [9] that:

    “Leadership sets goals, but in doing so takes account of the conditions that have already determined what the organization can do and to the extent that it must do. In defining the mission of the organization, leaders must take into account:

    1) The internal state of the policy: the strivings, inhibitions and competences that exist within the organization, and

    2) The external expectations that determine what must be sought or achieve if the institute is to survive.

    But the real impetus for the design school came from the General Management group at the Harvard Business School, beginning especially with the publication of its basic textbook, Business Policy: Text and Cases, which first appeared in 1965.

    3. The Design School Model

    Henry Mintzberg taught that “strategy formulation is judgmental designing, intuitive visioning, and emergent learning; it is about transformation as well as perpetuation; it has to include analyzing before and programming after as well as negotiating during.” In 1998, Mintzberg outlined activities, aligned with figure below, that need to be carried out by upper management:

    1) Conducting an internal appraisal to understand the organization’s competencies, strengths, and weakness;

    2) Conducting an external appraisal of the environment to determine threats and opportunities. At its simplest, the design school proposes a model of strategy making that seeks to attain a match, or fit, be-tween internal capabilities and external possibilities. The model places primary emphasis on the appraisals of the external and internal situations, the former uncovering threats and opportunities in the environment, the latter revealing strengths and weaknesses of the organizations (aka SWOT analysis). The model places primary emphasis on the appraisals of the external and internal situations, the former unco-vering threats and opportunities in the environment, the latter revealing strengths and weaknesses of the organi-zation (Figure 1).

     

    Figure 1. The basic design school model.

    The design school endorses a prescriptive view of strategy formulation, being potentially more concerned with how strategy should be formulated rather than how it actually is. This school therefore seeks to find a match or fit for internal capabilities and external possibilities. It says to think before you leap. It lays a lot of importance in the analysis of external and internal situations. The “design” school is responsible for the devel-opment of the Strength, Weaknesses Opportunities Threats (SWOT) model. In this model, the strengths and weaknesses of a company are mapped, together with the opportunities and threats in the marketplace.

    Richard Rumelt [12] suggests that the strategy must be evaluated once it has been selected from multiple op-tions. This evaluation should be based upon following tests which are considered to be the best evaluation framework:

     Consistency: The strategy must not present mutually inconsistent goals and policies.

     Consonance: The strategy must represent an adaptive response to the external environment and to the criti-cal changes occurring within it.

     Advantage: The strategy must provide for the creation and/or maintenance of a competitive advantage in the selected area of activity.

     Feasibility: The strategy must neither overtax available resources, nor create unsolvable sub problems. Once the best possible strategy has been selected, implementation follows.

    3.1. Premises of the Design School

    Running through most of the literature that was identified with this school are a number of fundamental premis-es about the process of strategy formulation. A number of basic premises underlie the design school, some fully evident, others only implicitly recognized. These premises include external environmental variables and factors of strength and weaknesses as their variables. These premises are as follows:

    1) Strategy formation should be a deliberate process of conscious thought. Action must flow from reason: ef-fective strategies derive from a tightly controlled process of human thinking. Strategy making in this sense is an acquired, not a natural, skill or an intuitive one—it must be learned formally.

    2) Responsibility for that control and consciousness must rest with the chief executive officer: that person is the strategist, the manager who sits at the apex of the organizational pyramid. It might be noted that this premise not only relegates other members of the organization to subordinate roles in strategy formation, but also pre-cludes external actors from the process altogether (except for members of the board of directors, who An-drews believed must review strategy).

    3) The model of strategy formation must be kept simple and informal. Fundamental to this view is the belief that elaboration and formalization will sap the model of its essence. This premise, in fact, goes with the last: one way to ensure that strategy is controlled in one mind is to keep the process simple. This distinguishes the design school from the entrepreneurial school on one side and the planning and especially positioning schools on the other. 235 A. Sarbah, D. Otu-Nyarko

    4) Strategies should be one of a kind: the best ones result from a process of individualized design. As suggested above, it is the specific situation that matters, not any system of general variables. It follows therefore, that strategies have to be tailored to the individual case. And that process above all should be a “creative act”, to build on distinctive competence.

    5) The design process is complete when strategies appear fully formulated as perspective. This school offers little room for instrumentalist views or emergent strategies, which allow “formulation” to continue during and after “implementation”. The big picture must appear—the grand strategy, an overall concept of the business.

    6) These strategies should be explicit, so they have to be kept simple. Andrews, in common with virtually all the writers of this school, believed that strategies should be explicit for those who make them, and, if at all possible, articulated so that others in the organization. “Simplicity is the essence of good art”.

    7) Finally, only after these unique, full-blown, explicit, and simple strategies are fully formulated can they then be implemented. Central to this distinction is the associated premise that structure must follow strategy. It appears to be assumed that each time a new strategy is formulated, the state of structure and everything else in the organization must be considered a new.

    3.2. Critique of the Design School

    The writings of the design school can be critiqued on a number of levels. In perhaps the most general sense, the school has denied itself the chance to adapt. Research results that have put parts of it under suspicion were not considered; indeed, there was no reason to, if the model could not be elaborated upon.

    A strategy that locates an organization in a niche can narrow its own perspective. This seems to have hap-pened to the design school itself (not to mention all the other schools) with regard to strategy formation. The premises of the model deny certain important aspects of strategy formation, including incremental development and emergent strategy, the influence of existing structures on strategy, and the full participation of actors other than the chief executive.

    The important criticism is about:

     How does an organization know its strengths and weaknesses? On this, the design school has been quite clear—by consideration, assessment, judgment supported by analysis; in other words, by conscious thought expressed verbally and on paper. One gets the image of executives sitting around a table, discussing the strengths, weaknesses, and distinctive competencies of an organization, much as do students in a case study class. Having decided what these are, they are then ready to design strategies.

     But are competences distinct even to an organization? Might they not also be distinct to context, to time, even with the application? In other words, can any organization really be sure of its strengths before it tests them?

    3.3. Strengths and Weaknesses

    The centerpiece in the Strategic Toolkit is the SWOT. This remains popular in textbooks and amongst consul-tants in spite of new strategic techniques. The SWOT with the design school model is a convenient tool allowing a consultant drop into an organization, do a SWOT analysis, compile a strategy and move on. But:

     Listing strengths on paper is prone to bias and over-confidence and is very different from testing the organi-zation and experiencing the strengths at work. Research and popular press alike show that listed strengths are of uncertain value.

     Experience shows that strengths are narrower than expected and weaknesses broader.

     The business we are in cannot be discovered in a paper exercise but requires testing and experience.

     SWOT information is usually not used in strategy formulation.

     Business literature is full of references to events where assumed strengths either did not materialize or where they did but turned out to be hindrances.

    4. Application of Design School of Thought

    The design school model would seem to apply best at the junction of a major shift for an organization, coming out of a period of changing circumstances and into one of stability. Of course, a clever new management might also wish to impose a better strategy for an organization whose circumstances have not changed. There is another context where the design school model might apply, and that is the new organization, since it must have a clear sense of direction in order to compete with its more established rivals (or else position itself in a niche free of their direct influence). This period of the initial conception of strategy is, of course, often the consequence of an entrepreneur with a vision, the person who created the organization in the first place. The de-sign school’s major contribution is that it has developed an important vocabulary by which to discuss grand strategy and has provided the central notion that strategy represents a fundamental fit between external opportu-nity and internal capability; an “informing idea”.

    5. A Look at the Operations of Amazon.com

    Amazon.com was one of the first major companies to sell goods over the Internet and has become a worldwide established name. Amazon.com is an American e-commerce company that is based in Washington. It was founded by Jeff Bezos in 1994 and began as an online bookstore, but due to its success, Amazon has diversified into other product lines and services such as groceries, electronics and Merchant Progra. Amazon is the 5th most admired company in the world. Amazon has embraced what known as a “design school model” of strategy de-velopment. Amazon.com’s stock price has fluctuated in over the years from $105 in 1999 to $5 in 2001 [13]. Ama-zon.com has developed separate websites for Canada, UK, Germany, France, China and Japan. Amazon.com vi-sion is to become: “Earth’s biggest selection and to be Earth’s most customer centric company.” [14] Amazon is one company that has adopted and implemented or made use of the design school approach to strategy formulation. It conducted an internal appraisal of itself, and an external appraisal of threats and oppor-tunities.

    5.1. Amazon.com’s Internal Appraisal Approach

    The design school model calls for both external and internal appraisals. An external appraisal helps an organiza-tion to understand threats and opportunities that are out there in the market. The internal assessment helps the organization to understand its strengths and weaknesses. The “Strengths, Weaknesses, Opportunities and Threats” (SWOT) tool is one that most familiar analysis tool and stems from the design school model.

    5.1.1. Value Chain

    Amazon developed a value chain of itself to its internal environment so that it can operationally best add value and maintain a competitive advantage. They used the value chain model from Michael Porter’s book, “Competi-tive Advantage: Creating and Sustaining Superior Performance.” The value chain analysis undertaken examines the operational effectiveness of activities that enable Amazon.com to perform better than its competitors; i.e. the distinctive value chain activities that are difficult to imitate. Using the framework proposed by Amit and Zott [16], this analysis focuses on “value creation” and “transaction cost economies”; where Amazon.com configures its value chain activities to create unique value for customers, reduce its costs of carrying out these activities and reduce the cost of its customers’ transactions. The figure below indicates examples of how Amazon.com has created value and reduced costs in its value chain activities. Amazon developed a value chain of itself so internally it can operationally best add value and maintain a competitive advantage. They used the value chain model from Michael Porter’s book, “Competitive Advantage: Creating and Sustaining Superior Performance.” [17] This is shown in Figure 2.

     

    Figure 2. Amazon.com value chain.

    5.1.2. Resource Based View

    The resource based view of a firm suggests that the sustainable competitive advantage and superior performance of an organization are determined by its distinct capabilities, i.e. resources and competences [18]. The resource based view helps an organization to determine where to invest in critical resources to have a competitive advan-tage. The more valuable and rare the right resources are in the right places, the more likely the firm may have a long-term advantage over its competition. Therefore, in order for Amazon.com to develop, implement and sustain effective strategies, the capabilities of the organization need to be exploited [19]. The resource based view, therefore helps an organization to deter-mine where to invest in critical resources to have a competitive advantage. The more valuable and rare the right resources are in the right places, the more likely the firm may have a long-term advantage over its competition. Amazon.com’s resources and competencies have been highlighted in Figure 3.

    5.1.3. Financial Analysis

    Amazon reviews at the macro-level:

     

    Figure 3. Resource based view. Source: Authors construct.

     Revenue to cost of sales overtime;

     Revenue and retained profits;

     Gearing, debt and capital structure.

    Amazon’s investments are paying off. Their net sales continue to grow, their cost of goods decreases as a % of sales and their net income continues to increase. And, they continue to invest in initiatives that provide them a longer-term competitive advantage. The graph above, Figure 4 shows that net sales have been increasing year on year since 2002. In 2007, we can see that the gap between net sales and cost of sales was the biggest it had ever been. This indicates that op-erations and the costs of generating revenue have been managed efficiently. However, despite the year on year increase in sales revenue, the net income (Figure 5) trend shows that since 2004, reported profit (net income) decreased. Possible reasons for this trend are discussed below.

    5.1.4. 2004-2006, Drop in Net Income Analyzed

    During the 2005-2006 period, the company’s decision to increase investment in technology and marketing with an extra $662 million as well as increasing the marketing budget by an extra $65 million would have contributed to the extended down turn of profits. Table 1 shows a net profit margin decreasing from 8.5% in 2004 to a very low 1.4% within the space of 2 years. Such was the case until 2007 when the upward trend emerged once again; an indication that some form of recovery is on the horizon.

    Importance: Amazon.com deemed investment into these two areas as critical in their bid to stay ahead of competitors. Payment of dividends to shareholders suffered as a result (0.46 cents per share in 2006 compared to 0.81 cents per share in 2005). Amazon.com will therefore need to consider such requirements and its implication on reported profit when orchestrating their desired strategic plan.

    5.1.5. Gearing, Debt and Capital Structure

    The gearing ratio below, Figure 6, (debt/equity) shows the proportion of debt or long term borrowing to capital employed. In 2005, 82% of the company’s finance was obtained through borrowing. Amazon reduced this to 68% in 2006. Such factors will need to be considered when considering other strategic options. Gearing leads to in-

     

    Figure 4. Revenue to cost of sales. Source: Amazon.com.

     

    Figure 5. Revenue and retained profit reviewed. Source: Amazon.com.

    Table 1. 1998-2007 performance analyzed in % terms.

     

    Figure 6. Gearing trend debt/equity. Source: Amazon.com.

    terest payments, decreasing the reported profit levels. Amazon reduced their interest cost by $14 million in 2006 as a result of the change in capital structure. Such progress has continued into 2007, with the company holding it the lowest amount of debt since 1998. Importance: New projects need to be financed and therefore the need to borrow external and the implications of doing so should be considered by Amazon.com. Nonetheless, Table 1 shows that interest cover has been in-creasing year on year. This ratio measures the ability to meet interest payments. Therefore, the 2007 figure of 8.5 suggests that Amazon.com can meet their interest payments eight and a half times over, a favorable ratio which will stand them in good stead if future strategies require the attainment of extra finance from debt provid-ers.

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