Jan 22, 2007

Planning fallacy


Introduction

You may have seen over enthusiastic managers fails to deliver according to their predictions and have to run around for cover at the end of the financial year.

The planning fallacy is the tendency to underestimate task-completion times. It is a consequence of the tendency to neglect distributional data and to adopt what may be termed an internal approach to prediction, in which one focuses on the constituents of the specific problem rather than on the distributional outcomes in similar cases. Let us discuss about the causes and how to overcome the same.

Cause and effect

Managers make decisions based on the delusional optimism rather than on a rational weighting of gains,losses and possibilities. They overestimate benefits and underestimate time and costs.They spin scenarios of success while overlooking the potential for mistakes and miscalculations. As a result , managers purse initiatives that are unlikely to come on budget, time frame and so fail to deliver.

Executives planning fallacy can be traced as broadly two- Personal and organizational. The planning over optimism can be because of an overenthusiastic mind, or because of organizational pressures.

Personal planning fallacy


We as a executives of modern era are highly optimistic in our approaches. We sometimes are asked to being optimistic, and getting realistic sometimes is termed as pessimism by others. Again there is a powerful tendency of the individuals to exaggerate their own talents to believe that they are above average in their own talents of personal traits and abilities.

On an average 2% admits that they are below average. Its human nature to find fault with the environment and be overoptimistic at every point , even if we have a rarest of rarest chance of winning . The Human nature of taking credit for positive outcomes and attribute negative outcomes to external factors, no matter what their true cause.Physiologists call it attribution error . Managers are not that different on attribution error . They tend to take credit for their performance on their own actions and abilities on a favorable condition like good stock market and find faults with external factors (Stock market again) when the outcome is not favorable.

a.Biased beliefs

People tend to underestimate the amount of time and resources it will take them to complete a task. The inclination to exaggerate our talents is amplifies by our tendency to misrepresent the causes of certain events. Executives takes into control favorable factors that aid them, while unfavorable factors and conditions are swept under the carpet. We also tend to exaggerate the degree of control we have over events discounting the degree of luck.Like other people business leaders routinely exaggerate their personal abilities , particularly for ambitious ,hard to measure traits like managerial skill. Their self confidence can lead to assume that they will be able to avoid to easily overcome the potential problems in the future. This misapprehension is further exaggerated again by managers tendency in taking credit for lucky breaks.


Managers see risk as a challenge to be met by the exercise of skill, and results are met by the exercise of their own sill and by the organization. Even of those mangers are true, as they are in full control of both people and events, they tend to ignore or downplay the possibilities of random and uncontrollable occurrence that impede their progress towards a goal.

Managers or organization can have limited visibility or limits or human imagination. While planning , we may not have the visibility happening at the time of project execution. The manager must not have considered all the possible sequence of events that can delay or otherwise disrupt the project. Ideally the manager has to consider all possibilities - even if micro- before having an estimation.

b. Planning mistakes

1. Competitor neglect
One of the key factors influencing the business initiatives is competitors behaviour. While making forecasts executives tend to focus on their own capabilities and plans and neglect the potential abilities and actions of rivals.

Neglecting competitors can be destructive in efforts to enter new markets. When a company identifies a new market which suited its products and capabilities it often rushes to to gain a beachhead on it, investing heavily in production capacity and marketing. They wont take into account that new companies also target the same market or some of the old sleeping players suddenly wake up and starts aggressively. Suddenly the companies reach a checkmate seeing more players attacking a limited market.

2. Anchoring
When executives and their subordinates forecasts a projects, they typically has a project plan based on market research, financial analysis and their own professional judgement. This proposal can be error prone due to overoptimism.

It is estimated that half of the start-up companies produced less than 75% of their design capacity, with another quarter producing less than 50%. Many of the plants had their performance expectations permanently lowered, and the owners never realised a return of investment.

3. Organisational pressure


Every organisation will have a limited resources to devote to new projects and competitive executives are compelled to fight for their pie. Thus the projects selected can itself be over optimistic as well as the forecast inside each project tasks.

Every organisation encourages optimism and risk. They actively discourage pessimism and is interpreted as disloyalty and laziness. The realistic executives are suppresses while the optimistic ones are rewarded thus making the organisations critical thinking ability underlined.

The optimistic biases of individuals become mutually reinforcing and unrealistic views of the future are validated by the group.

How to contain Planning fallacy
There has been different studies to show how to differentiate between fallacy and realism. We have a discussion on some of them.

1. Understand the source of overoptimism and correlate with present data.
2. organisation has to bring in their own framework of estimation for an objective understanding of the forecasting process
3. Reference class forecasting -An outside view of the estimation and forecasting process. This includes an outside consultant who is experienced enough to bring an unbiased understanding of the data as well as forecast.

The strategy which is to be adopted depends on the situation itself. The organisation getting into a niche market may take the first approach, while an organised firm getting into another similar project may prefer second approach. A New company diversifying into a New and unfamiliar technology in a new terrain may go for the third approach as well.

Outside view

Making a forecast using the outside view requires planners to identify a reference class of analogous past initiatives, determine the distribution of outcomes for those initiatives. This efforts is categorised into

1. Selecting a reference class
2. Access the distribution of outcome
3. Make an intuitive prediction of your projects position in the prediction
4. Assess the reliability of your prediction
5. Correct the intuitive estimate.

There are several mathematical formulas associated with the reference class forecasting . Right now that is outside the scope of this discussion

Differentiation between Optimism and fallacy

Optimism generates much more enthusiasm to the people than does realism. It enables people to be resilient when confronting difficult situations and challenging goals.Companies has to surely promote optimism for their employees to remain motivated. The tendency towards optimism is unavoidable. The organisation has to really differentiate between risk- optimism- and fallacy. No organisation will ever want to remove the organisational pressure and thus promote pessimism.

The point but is that there must be a balance between optimism and realism- between forecast and goals. The unrealistic optimistic approach can surely trigger the team to reach new heights , but an outside realistic view will help the manager to keep the expectation right. The ideal situation is to draw an imaginary line between the planning and achievable goals.

The senior managers has to be optimistic and realistic at the same time. While pushing the team to an unrealistic goals, he has to understand that the reality through an outside reference class forecasting. More objective forecasting will help to choose the goals wisely.

Jan 15, 2007

Cabinets in an organisation


When you gets into a new organisation, in any hierarchy, You could see a cabinet or the core members of the syndicate which rules the organisation . Your survival in that organisation heavily depends on how you well u understands the syndicate. You have to quickly identify them and must make sure you wont fight them until your base on the firm is Solid .You can be a part of them or be a silent spectator. Never fight them first, Do it only after you estimate their powers. You may require greater power for yourself or have to get the blessings of a god Father who got greater power than the syndicate.

Introduction

In any organisation -organisation wide as well as team wide- there will be a crowd that decides the groups policies and action. Every action the organisation makes are in tented to satisfy the groups mission and purpose than the organisation goals and mission statements. The group make sure that the needs of the groups needs and priorities are fulfilled before the organisations needs are fulfilled.

The pillars of organisation success like amazing wealth,customer satisfaction,Return of investments to Shareholders( ROI),employee satisfaction and retention will be only satisfactorily followed if it matches with the core teams happiness and value. The core teams value thus becomes the organisation's value. It works well if the organisation goes well -with the core teams values exactly matches with the organisation goals.

If the values diverges , its the duty of the organisation to find a 'transformer' (Read New CEO,MD)who aligns the core teams values with the organisation's value. The primary goal of a 'Transformer' thus drill down to shaken the groups without breaking the heart.


Core syndicates of an organisation

There are no formal invitation to the group. They wont be there in any formal organisation chart showing the group. It comprises of a cluster of people whose perceived interests and needs are taken into account while decisions are taken .All organisation have this group, but depending on the organisation maturity and the culture -the core group defers. In small start up the cabinet consists of founders and their confidants. In larger organisations having higher verticals, there can be hundreds of interlocking cabinets in each verticals- with horizontals of divisions,department or region.

The cabinet doesn't necessarily include the bosses in each vertical. It also include people who are popular, respected by their technical,financial or problem solving abilities, success full . They must have control to the critical bottle necks and gained the attention of the higher management and major stake holder in the organisation.

Awareness about the cabinet

Any new entrant (Any level) to the organisation has to understand the cabinet and their powers. The Cabinet become invisible for the new guys and its the duty of them to identify the cabinet crowd. Any changes proposed or advocated by the new entrants which is inconsistent with the perceived attitudes and interests will be resisted upon - Even if the group members say otherwise. Understanding the heavy weights will be termed as 'Understanding the culture" of the organisation.

Executives who fail to take the core group's priorities into account risk not only their organisation performance but their own goals and in some cases, their careers.If you didn't find the the core members and their attitudes and act according to their behest - As a leader your survival change is very remote- Unless you have greater power yourself as well as backing of one or some of the power groups which hold an equal or more strength of that of the Cabinet or a subset of them.


Behind every successfull company there is a success full cabinet

The cabinet members know the organisation goals and its history. They will have well wishers in various networks in the organisation, its counterparts, its vendors and in the industry. They represent the unique values and knowledge that distinguish their companies from the rest.They knows the business and its implications. They know how to deal with the industry -Auctions, law suits, Govt transitions and even whom to bribe from their history.

The core groups are inevitable part of the organisation and its a fact that the business wont run without them.

Bad cabinets

Direct Bad cabinet

The core members more or less objective is survival of themselves than the organisation itself. Examples like ENRON clearly shows what a direct influence of a bad cabinet. Whistle blowers are systematically kept out of the cabinet and even out of the organisation before they could blew the whistle. The bad cabinet can exploit the company for their benefits generating corruption and abuse.

Any reforms or changes proposed by anyone outside will be seriously resisted and nullified first , and later will be introduced as the cabinet members ideas. They thus make sure that the employee lack initiatives as well as send a unwritten law to others in the organisation that cabinet members are the only idea generators among the lot.

Bad Influence- Indirect

  • cabinets can influence the employees creative output:- The employees are influenced by the powerful influence at work that can skyjack the ordinary employees creativity to unspoken true interests of the cabinet member.
  • Organisation looses employees who lacks initiatives :- The ordinary employee who got an general initiatives looses them after finding that he couldn't influence the cabinet member- who didn't understood the concept at all.

  • Clones of Cabinet members are formed out of their stereotypes : Cabinet members remarks,action, body language,moral, attitudes and culture are cloned to his/her subordinates. This can include the members professionalism ( or lack of it), Efficiency (or inefficiency) and general (un)accountability.

  • Conflicts within the organisation: The cabinet or the core team invariable make a set of employees who are less power full, usually unorganised. They believes that the core group members are self centered,arbitrary and indeed harsh to criticism. Both the sides looses trust and direct communication decreases and thus emerges politics.
Getting the Bad cabinet right


When you as a organisation head finds that the cabinet is getting bigger than the shoes, has to act and cut them to shape. Invariable the bad influences on the organisation has to be taken care as well as the organisation values. If you want to move the organisation to new heights and new direction we may have to do some kind of a restructuring. It will be indeed a different challenge for you afterall
Any kind of organisational engineering conducted for the cabinet group dynamics needs a delicate touch and a deliberate design. You cannot do anything which make the entire cabinet unhappy.

The first thing you can do is to understand the situation and access and estimate the core teams capabilities and think of alternatives. You may have to think of future orientation .


It is always suicidal to think of dismantling the cabinet because the team contains the best past and the best present employees . As a business leader you can send signal to the group- Both direct, Indirect as well as intent-ed and unintended. The unconscious message is simply to not make the cabinet uncomfortable and disturbed. The slightest hesitation of the cabinet member can give a tremendous impact on his subordinates.Some senior executives try to act comfortable and happy for compensating this.

Second thing you can do is to explicitly challenge the core team , perhaps by removing some of the key members and change their portfolios or persuading them to publicly and consistently embrace the values which you advocate. It can both way send a signal to the core team as well as others that a change is inevitable. But you have to do with a specific design.

Third thing which you can do is to dilute the cabinet by introducing more members which you think can be in the group. This can be a quite challenging as the cabinet hierarchy is not charted anywhere. The cabinet members can be resistive in introducing more members as they feel they are more sound than the new members.

Fourth idea is to divide and rule. Create your own Trojans inside the cabinet.

Conclution >> LATER....


Jan 7, 2007

Strategy Theories - Advanced




This post is more technical about the strategies models and theories.We will be analysing some strategy guru's theories like Michael Porter and Kenichi Ohmae. Introduction to Michael porter we have already done in the introduction. Kenichi is called "Mr. Stratgy". Kenichi will be discussed from the Introduction. We will be discussing some of the criticisms about Porter as well.

Michael Porter: Strategic theories

A leading contributor to strategic management theory. Porter's main academic objectives focus on how a firm or a region can build a competitive advantage and develop competitive strategy. Porter's strategic system consists primarily of:

5 Force analysis

Michael Porter describes five forces affecting the profitability of companies. These are the five forces he noted:

  1. Intensity of rivalry amongst existing competitors
  2. Threat of entry by new competitors
  3. Pressure from substitute products
  4. Bargaining power of buyers (customers)
  5. Bargaining power of suppliers

These five forces, taken together, give us insight into a company's competitive position, and its profitability.

The Porter’s 5 Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you’re looking to move into.

Four forces -- bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products -- combine with other variables to influence a fifth force, the level of competition in an industry. Each of these forces has several determinants:

A graphical representation of Porters Five Forces
  • The bargaining power of customers
    • buyer concentration to firm concentration ratio
    • bargaining leverage
    • buyer volume
    • buyer switching costs relative to firm switching costs
    • buyer information availability
    • ability to backward integrate
    • availability of existing substitute products
    • buyer price sensitivity
    • price of total purchase

  • The bargaining power of suppliers
    • supplier switching costs relative to firm switching costs
    • degree of differentiation of inputs
    • presence of substitute inputs
    • supplier concentration to firm concentration ratio
    • threat of forward integration by suppliers relative to the threat of backward integration by firms
    • cost of inputs relative to selling price of the product
    • importance of volume to supplier
  • The threat of new entrants
    • the existence of barriers to entry
    • economies of product differences
    • brand equity
    • switching costs
    • capital requirements
    • access to distribution
    • absolute cost advantages
    • learning curve advantages
    • expected retaliation
    • government policies
  • The threat of substitute products
    • buyer propensity to substitute
    • relative price performance of substitutes
    • buyer switching costs
    • perceived level of product differentiation
  • The intensity of competitive rivalry
    • number of competitors
    • rate of industry growth
    • intermittent industry overcapacity
    • exit barriers
    • diversity of competitors
    • informational complexity and asymmetry
    • brand equity
    • fixed cost allocation per value added
    • level of advertising expense
Strategic Group

A strategic group is a concept used in strategic management that groups companies within an industry that have similar business models or similar combinations of strategies. For example, the fast-food industry can be portrayed as consisting of several strategic groups. The number of groups within an industry and their composition depends on what dimensions you use to define the groups. Strategists often use a two dimensional grid to display the position of each company along to the two most important dimensions.

Value Chain

The value chain categorizes the generic value-adding activities of an organization. The "primary activities" include: inbound logistics, operations (production), outbound logistics, marketing and sales, and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, R&D, and procurement. The costs and value drivers are identified for each value activity. The value chain framework quickly made its way to the forefront of management thought as a powerful analysis tool for strategic planning. Its ultimate goal is to maximize value creation while minimizing costs. The concept has been extended beyond individual organizations. It can apply to whole supply chains and distribution networks. The delivery of a mix of products and services to the end customer will mobilize different economic actors, each managing its own value chain. The industry wide synchronized interactions of those local value chains create an extended value chain, sometimes global in extent. Porter terms this larger interconnected system of value chains the "value system." A value system includes the value chains of a firm's supplier (and their suppliers all the way back), the firm itself, the firm distribution channels, the Empty vessel and the firm's buyers (and presumably extended to the buyers of their products, and so on).


Generic strategies

If the primary determinant of a firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns.

A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. The following table illustrates Porter's generic strategies:


Porter's Generic Strategies

Target Scope Advantage
Low Cost Product Uniqueness

Broad
(Industry Wide)

Cost Leadership
Strategy
Differentiation
Strategy

Narrow
(Market Segment)

Focus
Strategy

(low cost)
Focus
Strategy

(differentiation)



Cost Leadership Strategy

This generic strategy calls for being the low cost producer in an industry for a given level of quality.

Differentiation Strategy

A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition.

Focus Strategy

The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation.

A Combination of Generic Strategies

Michael Porter argued that to be successful over the long-term, a firm must select only one of these three generic strategies. Otherwise, with more than one single generic strategy the firm will be "stuck in the middle" and will not achieve a competitive advantage.

Generic Strategies and Industry Forces

These generic strategies each have attributes that can serve to defend against competitive forces. The following table compares some characteristics of the generic strategies in the context of the Porter's five forces.


Generic Strategies and Industry Forces

Industry
Force
Generic Strategies
Cost Leadership Differentiation Focus
Entry
Barriers
Ability to cut price in retaliation deters potential entrants. Customer loyalty can discourage potential entrants. Focusing develops core competencies that can act as an entry barrier.
Buyer
Power
Ability to offer lower price to powerful buyers. Large buyers have less power to negotiate because of few close alternatives. Large buyers have less power to negotiate because of few alternatives.
Supplier
Power
Better insulated from powerful suppliers. Better able to pass on supplier price increases to customers. Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases.
Threat of
Substitutes
Can use low price to defend against substitutes. Customer's become attached to differentiating attributes, reducing threat of substitutes. Specialized products & core competency protect against substitutes.
Rivalry Better able to compete on price. Brand loyalty to keep customers from rivals. Rivals cannot meet differentiation-focused customer needs.

Kenichi Ohmae strategy model


Kenichi Ohmae (born February 21, 1943) is one of the world's leading business and corporate strategists. He is known as 'Mr strategy' and has developed the 3C's model.[ Kenichi formulated the 3C's model (three C's framework) . He stresses that a strategist should focus on three key factors for success. "In the construction of any business strategy, three main players must be taken into account:
  • the corporation itself,

  • the customer, and

  • the competition".

Only by integrating the three C's (Customer, Competitor, and Company) in a strategic triangle, sustained competitive advantage can exist. He refers to these key factors as the three C's or the strategic triangle.

3C's model: Customer-based strategies are the basis of all strategy. ..."There is no doubt that a corporation's foremost concern ought to be the interest of its customers rather than that of its stockholders and other parties. In the long run, the corporation that is genuinely interested in its customers is the one that will be interesting to investors".

Segmenting by objectives:
Here, the differentiation is done in terms of the different ways different customers use the product. Take coffee, for example. Some people drink it to wakeup or keep alert, while others view coffee as a way to relax or socialize (coffee breaks).

Segmenting by customer coverage:
This type of strategic segmentation normally emerges from a trade-off study of marketing costs versus market coverage. There appears always to be a point of diminishing returns in the cost-versus-coverage relationship. The corporation's task, therefore, is to optimize its range of market coverage, be it geographical or channel, so that its cost of marketing will be advantageous relative to the competition.

Resegmenting the market:
In a fiercely competitive market, the corporation and its head-on competitors are likely to be dissecting the market in similar ways. Over an extended period of time, therefore the effectiveness of a given initial strategic segmentation will tend to decline. In such a situation it often pays to pick a small group of key customers and reexamine what it is that they are really looking for.

Changes in customer mix:
Such a market segment change occurs where the forces at work are altering the distribution of the user-mix over time by influencing demography, distribution channels, customer size, etc. This kind of change calls for shifting the allocation of corporate resources and/or changing the absolute level of resources committed in the business, failing which severe losses in the market share can occur.

3C's framework: Corporate-based strategies. They aim to maximize the corporation's strengths relative to the competition in the functional areas that are critical to success in the industry.


Selectivity and sequencing:
In order to win the corporation does not need to have a clear lead in every function from sourcing to functioning. If it can gain a decisive edge in one key function, it will eventually be able to pull ahead of the competition in other functions that may now be no better than mediocre.


A case of make or buy:
In case of rapidly rising wage costs, it becomes a critical decision for a company to subcontract a major share of its assembly operations. Its competitors may not be able to shift production so rapidly to subcontractors and vendors, and the resulting difference in cost structure and/or in the company's ability to cope with demand fluctuations could have have significant strategic implications.

Improving cost-effectiveness:


This can be done in three basic methods. The first is by reducing basic costs much more effectively than the competition. The second method is simply to exercise greater selectivity in terms of orders accepted, product offered, or functions to be performed which means cherry-picking the high-impact operations so that as others are eliminated, functional costs will drop faster than sales revenues. The third method is to share a certain key function among the corporation's other businesses or even with other companies. Experience indicates that there are many situations in which sharing resources in one or more basic sub-functions of marketing can be advantageous.


3 C's model: Competitor-based strategies


according to Kenichi Ohmae can be constructed by looking at possible sources of differentiation in functions ranging from purchasing, design, and engineering to sales and servicing.


The power of an image:
Both Sony and Honda outsell their competitors as they invested more heavily in public relations and promotion and managed these functions more carefully than did their competitors. When product performance and mode of distribution are very difficult to differentiate, image may be the only source of positive differentiation. But as the case of the Swiss watch industry reminds us, a strategy built on image can be risky and must be monitored constantly.


Capitalizing on profit- and cost-structure differences:
Firstly, the difference in source of profit might be exploited, for e.g. profit from new product sales, profit from services etc. Secondly, a difference in the ratio of fixed cost to variable cost might also be exploited strategically for e.g. a company with a lower fixed cost ratio can lower prices in a sluggish market and win market share. This hurts the company with a higher fixed cost ratio as the market price is too low to justify its high-fixed-cost-low-volume operation.


Tactics for flyweights:
If such a company chooses to compete in mass-media advertising or massive R&D efforts, the additional fixed costs will absorb such a large portion of its revenue that its giant competitors will inevitably win. It could though calculate its incentives on a graduated percentage basis rather than on absolute volume, thus making the incentives variable by guaranteeing the dealer a larger percentage of each extra unit sold. The Big Three, of course, cannot afford to offer such high percentages across the board to their respective franchised stores; their profitability would soon be eroded if they did.


Hito-Kane-Mono


A favorite phrase of Japanese business planners is hito-kane-mono, or people, money, and things (fixed assets). They believe that streamlined corporate management is achieved when these three critical resources are in balance without any superfluity or waste. For example cash over and beyond what competent people can intelligently expend is wasted. Again too many managers without enough money will exhaust their energies and involve their colleagues in time-wasting paper warfare over the allocation of the limited funds. Of the three critical resources, funds should be allocated last. Based on the available mono-plant, machinery, technology, process know-how, functional strengths and so on-the corporation should first allocate management talent. Once these hito have developed creative, imaginative ideas to capture the business's upward potential, the kane, or money, should be allocated to the specific ideas and programs generated by individual managers.

Criticism

Michael Porter

Porter's framework has repeatedly been challenged by other academics and strategists. Kevin P. Coyne and Somu Subramaniam have stated that three dubious assumptions underlie the five forces:

  • That buyers, competitors, and suppliers are unrelated and do not interact and collude
  • That the source of value is structural advantage (creating barriers to entry)
  • That uncertainty is low, allowing participants in a market to plan for and respond to competitive behavior.

Jan 1, 2007

Business Strategy- Introduction


Strategic management is that set of managerial decisions and actions that determines the long-run performance of a corporation. It includes environmental scanning, strategy formulation, strategy implementation and evaluation and control.

Overview

An organization’s strategy must be appropriate for its resources, environmental circumstances, and core objectives. The process involves matching the company's internal resources (eg IT) and capabilities (eg quality management)] to the external business environment the organization faces.

Strategy formulation involves:

Doing a situation analysis: both internal and external; both micro-environmental and macro-environmental.
Concurrent with this assessment, objectives are set. This involves
  • Crafting vision statements (long term view of a possible future)
  • Mission statements (the role that the organization gives itself in society)
  • Overall corporate objectives (both financial and strategic)
  • Strategic business unit objectives (both financial and strategic)
Tactical objectives.

These objectives should, in the light of the situation analysis, suggest a strategic plan. The plan provides the details of how to achieve these objectives.
This three-step strategy formulation process is sometimes referred to as determining where you are now, determining where you want to go, and then determining how to get there. These three questions are the essence of strategic planning. SWOT Analysis: I/O Economics for the external factors and RBV for the internal factors.

What Is Strategy?

Strategy is all these-it is perspective, position, plan, and pattern. Strategy is the bridge between policy or high-order goals on the one hand and tactics or concrete actions on the other. Strategy and tactics together straddle the gap between ends and means.

strategy is a term that refers to a complex web of thoughts, ideas, insights, experiences, goals, expertise, memories, perceptions, and expectations that provides general guidance for specific actions in pursuit of particular ends. Strategy is at once the course we chart, the journey we imagine and, at the same time, it is the course we steer, the trip we actually make. Even when we are embarking on a voyage of discovery, with no particular destination in mind, the voyage has a purpose, an outcome, an end to be kept in view.

Strategy, then, has no existence apart from the ends sought. It is a general framework that provides guidance for actions to be taken and, at the same time, is shaped by the actions taken. This means that the necessary precondition for formulating strategy is a clear and widespread understanding of the ends to be obtained. Without these ends in view, action is purely tactical and can quickly degenerate into nothing more than a flailing about.
When there are no "ends in view" for the organization writ large, strategies still exist and they are still operational, even highly effective, but for an individual or unit, not for the organization as a whole. The risks of not having a set of company-wide ends clearly in view include missed opportunities, fragmented and wasted effort, working at cross purposes, and internecine warfare. A comment from Lionel Urwick's classic Harvard Business Review article regarding the span of control is applicable here :
"There is nothing which rots morale more quickly and more completely than . . . the feeling that those in authority do not know their own minds."
For the leadership of an organization to remain unclear or to vacillate regarding ends, strategy, tactics and means is to not know their own minds. The accompanying loss of morale is enormous.

Strategy According to Michael Porter

Michael E. Porter is the Bishop William Lawrence University Professor, based at Harvard Business School. A University professorship is the highest professional recognition that can be awarded to a Harvard faculty member. In 2001, Harvard Business School and Harvard University jointly created the Institute for Strategy and Competitiveness, dedicated to furthering Professor Porter’s work.
http://dor.hbs.edu/fi_redirect.jhtml?facInfo=bio&facEmId=mporter&loc=extn

In a 1996 Harvard Business Review article [5] and in an earlier book [6], Porter argues that competitive strategy is "about being different." He adds, "It means deliberately choosing a different set of activities to deliver a unique mix of value." In short, Porter argues that strategy is about competitive position, about differentiating yourself in the eyes of the customer, about adding value through a mix of activities different from those used by competitors. In his earlier book, Porter defines competitive strategy as "a combination of the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there." Thus, Porter seems to embrace strategy as both plan and position. (It should be noted that Porter writes about competitive strategy, not about strategy in general.)

Strategy of Porter- How?

How does one determine, articulate and communicate company-wide ends? How does one ensure understanding and obtain commitment to these ends? The quick answers are as follows:

The ends to be obtained are determined through discussions and debates regarding the company's future in light of its current situation. Even a SWOT analysis (an assessment of Strengths, Weaknesses, Opportunities and Threats) is conducted based on current perceptions.

The ends settled on are articulated in plain language, free from flowery words and political "spin." The risk of misdirection is too great to tolerate unfettered wordsmithing. Moreover, the ends are communicated regularly, repeatedly, through a variety of channels and avenues. There is no end to their communication.
Understanding is ensured via discussion, dialog and even debate, in a word, through conversations. These conversations are liberally sprinkled with examples, for instances, and what ifs. Initially, the CEO bears the burden of these conversations with staff. As more people come to understand and commit to the ends being sought, this communications burden can be shared with others. However, the CEO can never completely relinquish it. The CEO is the keeper of the vision and, periodically, must be seen reaffirming it.
Ultimately, the ends sought can be expressed via a scorecard or some other device for measuring and publicly reporting on company performance. Individual effort can then be assessed in light of these same ends. Suppose, for instance, that a company has these ends in mind: improved customer service and satisfaction, reduced costs, increased productivity, and increasing revenues from new products and services. It is a simple and undeniably relevant matter for managers to periodically ask the following questions of the employees reporting to them:
  • What have you done to improve customer service?
  • What have you done to improve customer satisfaction?
  • What have you done to reduce costs?
  • What have you done to increase productivity?
  • What have you done to increase revenues from new products and services?
The Decisions Are the Same
No matter which definition of strategy one uses, the decisions called for are the same. These decisions pertain to choices between and among products and services, customers and markets, distribution channels, technologies, pricing, and geographic operations, to name a few. What is required is a structured, disciplined, systematic way of making these decisions. Using the "driving forces" approach is one option. Choosing on the basis of "value disciplines" is another. Committing on the basis of "value-chain analysis" is yet a third. Using all three as a system of cross-checks is also a possibility.

Strategy diagram- Mindmap



Strategy implementation involves:

Allocation of sufficient resources (financial, personnel, time, technology support)
Establishing a chain of command or some alternative structure (such as cross functional teams)
Assigning responsibility of specific tasks or processes to specific individuals or groups
It also involves managing the process. This includes monitoring results, comparing to benchmarks and best practices, evaluating the efficacy and efficiency of the process, controlling for variances, and making adjustments to the process as necessary.
When implementing specific programs, this involves acquiring the requisite resources, developing the process, training, process testing, documentation, and integration with (and/or conversion from) legacy processes.

Strategy formulation and implementation is an on-going, never-ending, integrated process requiring continuous reassessment and reformation. Strategic management is dynamic; see Strategy dynamics. It involves a complex pattern of actions and reactions. It is partially planned and partially unplanned. Strategy is both planned and emergent, dynamic, and interactive. Some people (such as Andy Grove at Intel) feel that there are critical points at which a strategy must take a new direction in order to be in step with a changing business environment. These critical points of change are called strategic inflection points.

Time scales

Strategic management operates on several time scales. Short term strategies involve planning and managing for the present. Long term strategies involve preparing for and preempting the future. Marketing strategist Derek Abell (1993), has suggested that understanding this dual nature of strategic management is the least understood part of the process. He claims that balancing the temporal aspects of strategic planning requires the use of dual strategies simultaneously.
Strategic Management is actually a solid foundation or a framework within which all the functionning managerial operations are bundled together. This is the highest level corporate activity that sets the terms and goals for a company that it should follow for prosperity.
General approaches
In general terms, there are two main approaches to strategic management which are opposite but complement each other in some ways:
'The Industrial Organization Approach'

o based on economic theory - deals with issues like competitive rivalry, resource allocation, economies of scale
o assumptions - rationality, self discipline behaviour, profit maximization

The Sociological Approach

o deals primarily with human interactions
o assumptions - bounded rationality, satisficing behaviour, profit sub-optimality. An example of a company that currently operates this way is Google

Strategic management techniques can be viewed as bottom-up, top-down, or collaborative processes. In the bottom-up approach, employees submit proposals to their managers who, in turn, funnel the best ideas further up the organization. This is often accomplished by a capital budgeting process. Proposals are assessed using financial criteria such as return on investment or cost-benefit analysis. The proposals that are approved form the substance of a new strategy, all of which is done without a grand strategic design or a strategic architect. The top-down approach is the most common by far. In it, the CEO, possibly with the assistance of a strategic planning team, decides on the overall direction the company should take. Some organizations are starting to experiment with collaborative strategic planning techniques that recognize the emergent nature of strategic decisions.

The strategy hierarchy

In most (large) corporations there are several levels of strategy. Strategic management is the highest in the sense that it is the broadest, applying to all parts of the firm. It gives direction to corporate values, corporate culture, corporate goals, and corporate missions. Under this broad corporate strategy there are often functional or business unit strategies.

Functional strategies include marketing strategies, new product development strategies, human resource strategies, financial strategies, legal strategies, and information technology management strategies. The emphasis is on short and medium term plans and is limited to the domain of each department's functional responsibility. Each functional department attempts to do its part in meeting overall corporate objectives, and hence to some extent their strategies are derived from broader corporate strategies.

Many companies feel that a functional organizational structure is not an efficient way to organize activities so they have reengineered according to processes or strategic business units (called SBUs). A strategic business unit is a semi-autonomous unit within an organization. It is usually responsible for its own budgeting, new product decisions, hiring decisions, and price setting. An SBU is treated as an internal profit centre by corporate headquarters. Each SBU is responsible for developing its business strategies, strategies that must be in tune with broader corporate strategies.

The "lowest" level of strategy is operational strategy. It is very narrow in focus and deals with day-to-day operational activities such as scheduling criteria. It must operate within a budget but is not at liberty to adjust or create that budget. Operational level strategy was encouraged by Peter Drucker in his theory of management by objectives (MBO). Operational level strategies are informed by business level strategies which, in turn, are informed by corporate level strategies.

Business strategy, which refers to the aggregated operational strategies of single business firm or that of an SBU in a diversified corporation refers to the way in which a firm competes in its chosen arenas.


Corporate strategy, then, refers to the overarching strategy of the diversified firm. Such corporate strategy answers the questions of "in which businesses should we compete?" and "how does being in one business add to the competitive advantage of another portfolio firm, as well as the competitive advantage of the corporation as a whole?"

Dynamic Statergy Since the turn of the millennium, there has been a tendency in some firms to revert to a simpler strategic structure. This is being driven by information technology. It is felt that knowledge management systems should be used to share information and create common goals. Strategic divisions are thought to hamper this process. Most recently, this notion of strategy has been captured under the rubric of dynamic strategy, popularized by the strategic management textbook authored by Carpenter and Sanders.This work builds on that of Brown and Eisenhart as well as Christensen and portrays firm strategy, both business and corporate, as necessarily embracing ongoing strategic change, and the seamless integration of strategy formulation and implementation. Such change and implementation are usually built into the strategy through the staging and pacing facets.

Reasons why strategic plans fail

There are many reasons why strategic plans fail, especially:
Failure to understand the customer
o Why do they buy
o Is there a real need for the product
o inadequate or incorrect marketing research
Inability to predict environmental reaction

o What will competitors do
 Fighting brands
 Price wars

o Will government intervene
Over-estimation of resource competence
o Can the staff, equipment, and processes handle the new strategy
o Failure to develop new employee and management skills

Failure to coordinate
o Reporting and control relationships not adequate
o Organizational structure not flexible enough

Failure to obtain senior management commitment
o Failure to get management involved right from the start
o Failure to obtain sufficient company resources to accomplish task

Failure to obtain employee commitment
o New strategy not well explained to employees
o No incentives given to workers to embrace the new strategy

Under-estimation of time requirements
o No critical path analysis done

Failure to follow the plan
o No follow through after initial planning
o No tracking of progress against plan
o No consequences for above

Failure to manage change
o Inadequate understanding of the internal resistance to change
o Lack of vision on the relationships between processes, technology and organization

Poor communications
o Insufficient information sharing among stakeholders
o Exclusion of stakeholders and delegates

Failure to focus
o Inability or unwillingness to make choices which are true to the strategic mission (i.e. to do fewer things, better), leads to mediocrity, inability to compete