Strategic Management – Some Important Concepts

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Some of you may have seen articles that I have posted challenging those who would degrade the role and status of the terms manager and management. In those articles and comments I said I would post further articles on strategic management. This article is the first of, hopefully, a series of articles on strategy and strategic management.

This particular article describes some general concepts, drawing on insights from General Systems Theory that may be useful in strategy formulation and strategy implementation. I am not going to produce a list of activities that you must undertake to do strategy. I am not even going to recommend a method (I hate the term methodology incorrectly applied – methodology is the study of method!). Instead, this article concentrates on underlying concepts that will be useful to anyone with responsibilities for strategy formulation and strategy implementation in a business organisational context. These concepts are applicable to both commercial and not for profit organisations.

I shall use the definition of strategy and tactics given by M P Schutzenberger and his concepts of “flexibility” and “span of foresight” and show how these can be applied in strategic management and how these can be useful in supplementing your preferred strategy method.

M P Schutzenerger (“A tentative Classification of Goal Seeking Behaviour” – Psychology Review Vol.63 1956) defines a tactic as a means of choice which proceeds according to a criterion of optimality that is applied locally, stage by stage. He defines a strategy as a means of choice which takes into account the situation as a whole. In this paper he also defines two concepts; the span of foresight and flexibility. The span of foresight is how far you can make predictions ahead of time. Flexibility is how quickly your organisation can move from one plan to another plan.

Before we look at how these concepts may assist us in strategy formulation and implementation, it is worth exploring these concepts further.

Let us look at strategy and tactics. Suppose we have perfect foresight, then strategy is relatively easy. We look ahead with our perfect foresight and determine where we want to be. We then produce a plan that will drive the organisation towards this ideal position. In such a world, the tactical plans are a ‘drill-down’ of the strategic plan and everything dovetails neatly. Strategy implementation is just ensuring the organisation conforms to the overall strategic plan. Indeed, this is the assumptions made when we do ‘corporate plans’.

In normal business corporate planning, the Board and the CFO or FD produces a set of assumptions and each subunit produces a three year forecast that is aggregated. There is a a process (either negotiation or tell) that ensures that the plans are consistent resulting in a 3 year forecast of which the next year’s forecast becomes the operational budget against which performance is measured. Note, this method assumes that we can predict with some certainty at least twelve months ahead if not three years ahead.

Suppose we cannot predict with certainty that far ahead. What can we do? How can we do strategy in these circumstances? Well it turns out we can even if we cannot predict perfectly we can still do some strategic planning. If the environment is stochastic (this is a fancy mathematical term that means there are random elements) then Schutzenberger showed in such an environment, the optimal strategy is just the simple tactic of doing one’s best in the local situation. He illustrates this with an example.

Suppose a dog is running to meet its owner in some open ground. Most dogs would follow the line of sight to its owner. If its owner is walking in a straight line at a constant speed, the optimal path is not the path the dog would take but it can be determined by simple mathematics (basically a solution of two simultaneous equations). The optimal path is a straight line that intersects. Dogs don’t do maths so adopting the simple tactic of always running to its owner will get the goal it wants. However, if the owner is pacing backwards and forwards at random, it can be shown mathematically that the dog’s tactic of always running towards its owner is the optimal strategy. The tactic becomes the strategy.

In real life, there are many instances where we can’t predict precisely how things will work out but we can see an underlying structure with a random element. Examples would include sales, patients attending casualty, help desk calls etc., in a given period. In such circumstances our corporate planning tools can be used if we adopt flexible budgeting.

Let us now get back to the two other concepts; span of foresight and flexibility. Span of foresight is basically how far you can see ahead. If we include instances of stochastic environments, as defined above, it is a measure of how well we can forecast and predict, not only in sales but all other factors that may impact on our organisation. Most strategy methods require you to analyse environmental factors such as political, technological, legislative, societal, competitive etc factors to be considered in your strategic analysis. The span of foresight is basically how far you can look ahead with any confidence.

If you are in the music business, ten years ago, your span of foresight may well be several years. Ok, you may not be able to predict exactly which artist or band might make it but you could probably guess the size of the market and probably your market share. However, if you are in this industry now with internet downloads etc, your span of foresight may well be significantly less.

Flexibility is a similar time based measure. It is how quickly you can change your strategy. Your flexibility may be dependent on the flexibility your workforce, the contracts you have with your suppliers, your infrastructure (both technical and physical), even your methods of operation.

It does not take a rocket scientist to see that your flexibility should be shorter than your span of foresight yet how often have organisations failed to recognise this.

The British motor industry in 1950s and 1960s is a classic case. Production facilities had been consistently starved of investment and little investment was put into creating a flexible workforce. In those days where new models took years to create and product-lifecycles were relatively long, inflexibility was not recognised as a strategic issue. In contrast the Japanese motor industry invested significantly in flexible production (Kan-ban, QC, JIT etc) plus faster new product development resulting in their dominance in this sector.

Some organisations are running similar risks today. I have always asserted that management has some similarity to the fashion business. A new fad comes along. People adopt it regardless whether it is relevant to their organisation or not. In many instances, the new fad or fashions yield short-term financial benefits at the risk of compromising the organisations’ future flexibility. Yet rarely is this recognised.

In the 1980s, the deregulation in Financial Services allowed many insurance companies to innovate with new products. In many instances, the speed of innovation necessitated the introduction of packaged solutions that did not run on the organisations own IT infrastructure and created islands of independent IT outside the control of its in-house departments. This was fine while organisations wanted to view the world through a product perspective but in the last decade, organisations were moving towards a customer centric perspective and found great difficulty in implementing solutions because of the need to iron out inconsistent views of a single customer. In many instances, this lead to implementing ‘clunky’ data warehouse software just to get a unified view on what each customer bought off the organisation. Basically implementing product-based solution decreased the organisations flexibility when it came to implementing customer-wealth management.

Another area that could lead to compromising flexibility is that of outsourcing. Don’t get me wrong, I am a fan of outsourcing when it is the sensible thing to do as part of a coherent strategy. However, it can be a source of organisational inflexibility often obscured by the cost reduction business case. Outsource providers need a period of operation with some guarantee of obtaining a return on their investment. Hence they would tend to negotiate contracts that ‘locks-in’ an organisation for a certain period. Also, to make a return, they need to define clearly what service, what volumes and what service levels they have committed. Now, the tighter the contractual terms you negotiate with your outsource provider, the greater the potential inflexibility and the greater potential for higher costs to you as your supplier plays “the change control game” with you and your procurement department.

It is not only outsourcing that increases inflexibility. There would appear to be a heuristic relationship between the complexity of a situation and its impact on your flexibility. Using external resources through contract may save you effort in controlling the work but you take on added complexity in that you have externalised control and have to take on contract risks.

You may even believe that you have negotiated a great contract with your supplier where you have passed all risks to them at a favourable price. Two examples will illustrate what appear to be great deals when negotiated, but may not be so good in operation. The first is the construction project for The new Wembley Stadium undertaken by the English Football Association. It is now years late and even when it is delivered, there will be years of court cases with the contractor.

The second example of an external contract is the administration of the Congestion Charge in London. The Mayor’s office did a great job in negotiating a contract with Capita for the provision of the administration and technology to support the Congestion Charge in London. This contract pushed most of the risks to the supplier. After one year of operation, the traffic in the designated the area was significantly reduced, well below the assumptions made by Capita. Since they were paid on a percentage of the revenue collected, Capita was not making the expected returns. The Mayor’s Office had to make an ex-gratia payment of about £30M to its supplier to keep the contract going.

So when you are doing strategic thinking, try and be clear how far you can actually see ahead with any accuracy. This will be a good clue to your ‘span of foresight’. Also, look critically at your organisation and try and assess its flexibility. Basically, ask yourself how quickly you can execute a major change in strategy. This is an indication of your ‘flexibility’. Make sure your flexibility is less than your span of foresight.

To sum up, this article is revisiting the fundamentals of strategy formulation and implementation. It looks at business strategy from a General Systems perspective and has highlighted the difference between strategy and tactics. It has also highlighted the importance of two strategic concepts; an organisation’s “span of foresight” and an organisation’s “flexibility”. We have also seen how the normal business planning tools such as corporate planning is dependent on a ‘predictable’ type of environment.

Whether you are a leader or even a manager with strategy responsibilities, I would recommend using these concepts in your work. This should be used alongside your preferred strategy methods. I shall be publishing further articles on environment classifications following the work of Emery and Trist and propose way of looking at an organisations’ strategic stance base on some ideas of mine.

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