First of a seven-part series of articles excerpted from the book Voyage to Excellence – Strategic Management in the 21st Century by Mohd Faiz Abdullah
Strategy may be defined as the long-term direction and scope of business of an organisation or company that enables it to attain a desired state via the employment of resources and harnessing of competences with a plan of implementation designed to fulfil stakeholders’ expectations.
That is a mouthful usually given by writers of strategic management textbooks but like it or not is considered a holistic definition. Some authors, like Harvard strategy guru Michael Porter, insist on adding the term “gaining competitive advantage” as the predominant aim of strategy but I would beg to differ in view of the different approaches to the concept of strategic management itself. For example, Blue Ocean Strategy plays down competitive advantage in as much as its main strategic rationale is not about beating the competition but on creating new opportunities and new markets in uncontested waters. Others like the older Six Sigma focus not so much on competition than on total quality enhancement as being key to strategic management.
Nevertheless, whether it is competitive advantage or creating new markets, strategy entails an action plan that managers devise and implement in order to achieve the organization’s goals. To differentiate it from any ordinary plan, strategy is long term. It also warrants the strategic use of resources which, as we know, are limited. That means, strategy entails decision-making in the context of multiple choices. As every choice made has an opportunity cost, making that choice itself is a major exercise in strategy.
Finally, the basic idea of attaining a desired state in the future must be in sync with the overall need to fulfil stakeholders’ expectations. Some may say this is a tall order because the term “stakeholders” is just too amorphous to enable strategic decision-making with finality. Who are they? Shareholders are stakeholders but expectations of controlling as compared to minority shareholders may not be the same. Employees, customers, suppliers and sometimes even members of the public can be stakeholders. In attempting to please all, we may end up pleasing none!
The reality is that decisions cannot be taken in isolation or in a vacuum. As we learn from Newton’s Third Law, for every action, there is an equal and opposite reaction. True, strategy is not exactly physical science and the reaction may not be equal and opposite but because decisions taken will elicit the likely or actual behaviour of others, strategy cannot disregard these stakeholder components. The role of strategy here is to find the golden mean in fulfilling their expectations. We will take this up when we consider the areas of ethical management, corporate social responsibility and corporate governance.
Strategy according to Michael Porter
Porter’s approach towards defining strategy proceeds first on the basis of what it is not rather than what it is. The fundamental question about strategy is not about being the best but being unique. The worst strategy or “the fatal error” is to compete with rivals on the same dimensions because trying to be the best in the industry will lead to zero-sum competition.
According to Porter, strategy is not about goals and aspirations but rather how to position the company to achieve them. Strategy is not about taking any specific action whether at present or in the future. For example, the oft-repeated phrase “our strategy is to globalise/expand/grow our business” is mere aspiration but not strategy. That is just an expression of the intended course of action to internationalise or expand the market or operations. The logical conclusion from this, therefore, is that strategy is not mission or vision.
Porter goes as far as saying that “competition based on operational effectiveness alone is mutually destructive, leading to wars of attrition that can be arrested by only limiting competition.” Companies competing solely on operational effectiveness are facing diminishing returns, even declining prices, and pressures on costs that compromise their ability to invest for the long term.
Strategy is the position that a firm seeks to occupy in the market place in order to attain success in its goals. Strategy spells out the unique strengths that the firm has and why it would be able to win. It is concrete, specific and is about the choice or choices to be made to deliver unique value. This is called devising a unique value proposition. To Porter, a value proposition answers three key questions: what customers, what needs are we trying to meet and at what price.
Strategy warrants having a different value chain that must be aligned with the value proposition. Strategy also means having a trade-off. A strategy that tries to please everyone is no strategy at all – you cannot make everyone happy. The mantra about pleasing everyone is not only irrelevant but may be disastrous. There must also be fit or what is now commonly referred to as strategic fit which is the linking of all the activities in the value chain.
For example, the way design is done will affect production and the way production is done affects logistics and so on. That is why good strategies are almost impossible to imitate because you cannot take just one part but the whole. Strategy also requires continuity. In a fast-changing world, there is also the misconception that companies need to change all the time. According to Porter, that is only true in terms of operational effectiveness. Change is true in that sense but not change in strategies. Flip flopping in value proposition will get you nowhere. You cannot be low-cost one day and differentiation the next. People will get confused and your suppliers would not know how to respond.
Strategy is performing activities different from those of rivals or performing similar activities in different ways. A company can outperform rivals only if it can establish a difference it can preserve. It must deliver greater value to customers or create comparable value at a lower cost. Being different means “deliberately choosing a different set of activities to deliver a unique mix of value.” Strategy is, therefore, the creation of a unique and valuable position, involving a different set of activities.
NEXT: DEBUNKING PORTER and the holy grail of Competitive Advantage
Professor Dr Mohd Faiz Abdullah is the Dean of Selangor Business School. His fifth book, entitled Islamic State: Between the Idea and the Reality is set for publication in early 2019.