3. Strategy formation

Different views on strategy

Mintzberg's 5 P's show that strategy can be viewed in several ways: as a plan, a ploy, a pattern, a position and a perspective. The lecture also notes that a SWOT analysis (strengths, weaknesses, opportunities, threats) should be complemented by the values of shareholders and the values of managers, because these also play an important role in strategy.

History of the strategy field

Strategy formation: four activities, eight steps

Strategy formation consists of the four cognitive activities, each split into two steps:

Roles and formalisation

Who performs these activities differs per organisation. Three divisions of roles:

• Top, middle and bottom: some tasks are done by top management, others lower in the organisation (employees help with analyses and ideas, managers make the final choice).
• Line versus staff: line managers are responsible for results and can develop strategy for their product lines; staff departments (such as a strategy department) support, advise or facilitate.
• Internal versus external: strategy formation is usually done by internal managers, but external parties such as consultants can support parts of the process.

Formalisation gives structure and control, especially in large organisations with planning systems. Too many rules and reports, however, can hinder innovation, learning and entrepreneurship and demotivate people. Top management supports strategy formation through a strategic planning system (communicating the vision), monitoring, control and learning, reward systems (motivating employees) and staffing systems (making work intrinsically motivating).

Deliberate versus emergent strategy

The strategic planning perspective holds that strategy should be conscious, goal-directed and planned in advance ("think before you act"). The process is structured, stepwise, hierarchical and aimed at forecasting: analysis, developing and evaluating alternatives, choosing and elaborating a strategy, then implementation. Setting goals, dividing tasks and controlling results give direction. An advantage is that it stimulates long-term thinking; a disadvantage is that plans rest on uncertain assumptions about the future, so firms use scenario planning or regular evaluations. This perspective fits analytical thinking.

Planning works poorly for wicked problems: they are hard to define and interpret, uncertainty always remains, many sub-problems make a full plan large and failure-prone, actions and reactions constantly influence each other so the problem changes during the process, and environmental reactions are hard to predict. Staying flexible and adaptive is then wiser.

The strategic incrementalism perspective sees strategy as emerging gradually through experimenting, learning and adapting, with the future seen as uncertain and unpredictable. In practice firms must balance deliberate and emergent strategy; different units may use different approaches, which requires dynamic capabilities.

Readings

Reading 7.1 (Managing the strategy process) describes five steps: (1) setting strategic direction, distinguishing objectives (long-term intentions) from goals (concrete performance targets with deadlines), aligned through top-down and bottom-up coordination; (2) strategic programming: programmes, actions and a financial plan, with cooperation across departments to create synergy; (3) budgeting: strategic and operational budgets approved by top management; (4) monitoring, control and learning; (5) reward and staffing management: aligning rewards and key positions with the strategy.

Reading 7.2 (Logical incrementalism): strategy is not fully planned in advance but emerges through small steps, learning and adaptation, from a mix of internal decisions and external events. Formal planning overemphasises measurable figures and neglects psychological, political and behavioural factors. Managers delay decisions, test ideas or gather more information first. Step-by-step change also builds acceptance and commitment and helps handle power and differing interests. Four subsystems: the diversification system (new ideas developed gradually through experiments, prototypes and user interaction), the divestiture system (ending activities that no longer fit, usually after enough evidence, support and a good moment), the reorganisation system (structural change in small steps) and the external relations system (step-by-step responses to government and other stakeholders).

Reading 7.3 (Environmental uncertainty): the environment consists of a micro-environment (customers, competitors, suppliers) and a macro-environment (political, economic, social, technological factors). The planning school tries to predict change through analysis and forecasts; the adaptive school emphasises reacting and adapting when change happens. The visionary approach assumes firms can shape their environment through clear goals; the transformative approach stresses cooperating with other organisations to change the environment together. Foresight methods (environmental scanning, analysing key changes, scenarios, roadmaps) help, but predictions remain uncertain, so firms combine predicting, learning and adapting.

Textbook deepening: De Wit, Ch. 7 (Strategy formation)

The sections below add the theory from the textbook chapter on strategy formation to the lecture notes above.

Intended versus realized strategy; formulation versus formation

Mintzberg and Waters (1985) distinguish intended strategy (what is formulated before action: a pattern of decisions, a plan of action) from realized strategy (the strategic behaviour exhibited in practice: a pattern of actions). The two views are complementary, not contradictory.

Few strategies are purely deliberate or purely emergent; most are a mix. For managers the key issue is not formulating plans but getting the organization to realise a strategic pattern of actions: who should be involved, what activities are needed and how far strategy can be formulated in advance.

The eight strategy formation activities: extra detail

The organizational setting (many people with different experiences, interests and values) requires information exchange, decision-making procedures, communication channels, resource allocation and coordination. Additional points from the book (Figure 7.1):

• Mission setting: the mission acts as a screening mechanism that colours which issues are filtered in; it can be informally internalised in the culture rather than written down.
• Agenda setting: besides the mission, the cognitive maps of strategists, the group culture (which issues are discussable), communication and political skills and formal and informal power determine which issues get on the "organizational radar screen".
• External assessment: both the direct market environment and the broader contextual environment; the aim is to understand "what makes the system tick" (industry structure, strategies of customers, competitors, suppliers, distributors, unions, governments, financiers) and in which direction it develops.
• Internal assessment: the business system (resources and value-adding activities) and the organizational system (structure, coordination and control processes, culture), including change drivers and change inhibitors, compared with rivals.
• Option generation: from one prime candidate to multiple options; each option can range from a general outline to a full-blown plan with goals, actions, responsibilities, resources, milestones and performance measures.
• Option selection: screening on criteria such as perceived risk, anticipated benefits, capacity to execute, expected competitor reactions and follow-up possibilities; partly formal, partly judgement. Together with option generation's assessment this is called strategic decision making.
• Action taking: all hands-on "work", from setting up the business system to running the organization daily.
• Performance control: checking whether actions and results are in line with what was intended; a deviation can also be a signal to re-evaluate the solution or even the problem definition. Measures can be a few simple indicators or extensive ones such as the balanced scorecard (Kaplan and Norton).

De Wit deliberately does not call these activities "steps" or "phases": the outer arrows in Figure 7.1 show the logical clockwise sequence (like analytic reasoning), the inner arrows show jumping back and forth (like holistic reasoning).

Strategy formation roles and formalization: extra detail

Only in extreme cases is strategy formation a CEO "one-man show". Assessment and option generation often involve people lower in the hierarchy, while top management usually keeps the final selection; the recurring question is how much empowerment of middle and lower levels is beneficial. Strategy departments can range from process facilitation, to process ownership, to full responsibility for formulation. External consultants may even draw up the options. Formalization through a strategic planning system schedules steps, specifies tasks, assigns responsibilities, clarifies decision authority, allocates budgets and installs evaluation mechanisms, giving clearer accountability and more top management control. Its danger: it favours what can be neatly organised (meetings, reports, presentations, resource allocation) and can sideline insight creation, learning, innovation, political support building and entrepreneurship; planning bureaucracies can take on a life of their own and become inflexible and demotivating (Mintzberg).

The paradox of deliberateness and emergence

The future can be shaped (fascinating) but is unpredictable (frustrating). The tension is between figuring things out in advance and finding things out along the way. Deliberateness is the quality of acting intentionally: thinking before doing, making a plan (an intended course of action, usually articulated and documented, a means to an end) and then implementing it. Emergence is the process of becoming apparent: strategy shaped along the way in an iterative process of thinking and doing. Emergent strategy differs from ad hoc behaviour because a coherent pattern of action does evolve.

Each advantage has an opposite counterpart (commitment vs flexibility, direction vs opportunism, programming vs learning), and a firm cannot be fully committed to detailed long-term plans while adapting flexibly at the same time.

The strategic planning perspective in more detail

Anything that emerges unplanned is not really strategy but brilliant improvisation or luck (Andrews). Strategies are intentionally designed "as an engineer designs a bridge": long formulation (analysis, rough designs, evaluation, choice, blueprint), then construction. Key arguments: (1) planning gives direction and prevents "muddling through"; (2) it allows formalization and differentiation of strategy tasks (division of labour between formulators and implementers, specialised diagnosis, implementation and evaluation roles), with coordination through the planning system; (3) it encourages long-term thinking and commitment (Ackoff). The main difficulty is forecasting ("prediction is very difficult, especially about the future"; Makridakis: the future can only be predicted by extrapolating the past, yet it will differ from the past). Rigid long-range plans would be "Russian roulette", so planners use contingency planning based on scenarios (alternative plans in reserve) or yearly planning cycles to realign plans. This perspective shares the assumptions of the analytic reasoning perspective (Ch. 2). Example: Kooyman (Caribbean DIY retailer) plans yearly, with middle management providing the input on strengths, weaknesses and customer wishes.

The strategic incrementalism perspective in more detail

New strategies largely emerge as managers proactively piece together a viable course of action or reactively adapt. Strategy formation is messy, fragmented and piecemeal, like exploration and invention rather than design and production (Mintzberg; Quinn). Planners are accused of an obsession with rationality and control. Incrementalists accept planning for routine activities (production, finance), but not for doing new things: strategy formation is innovation, and new ideas cannot be generated on demand. Managers should behave as:

• Inventors: searching, experimenting, learning, doubting and increasing commitment as ideas prove viable, avoiding premature closure and lock-in.
• Organizational developers: new strategies are subversive; they challenge cognitive maps, culture, interests and power, which requires unlearning and incremental shaping rather than command.
• Explorers: an unknown future requires the mentality of an explorer (curious, probing, venturesome, moving step by step), not of a train conductor.

Weaknesses of planning when confronted with wicked problems:

1. Problems cannot simply be recognised and analysed, they can be interpreted in many ways: "the definition of a wicked problem is the problem" (Rittel and Webber).
2. A full analysis is impossible and leads to paralysis by analysis; managers must act and think at the same time.
3. A comprehensive plan for many subproblems is like keeping ten plates twirling; once one falls, the rest crash. Knagg's law: the more complex a plan, the larger the chance of failure. Better to tackle subproblems individually.
4. Formulation and implementation cannot be separated because wicked problems are interactive: actions trigger counteractions by customers, competitors, suppliers, regulators, unions and employees, so plans are outdated as soon as implementation starts. An iterative process of action, reaction, reconsideration leads to an emergent pattern.
5. The future is inherently unknown, so commitments should be postponed as long as possible.

To incrementalists, "strategic planning" is a contradiction in terms. Example: Pixar ("going from suck to non-suck"): films start from rough ideas, incubation teams and tens of thousands of storyboards, constant feedback; "we don't actually finish our films, we release them".

Managing the paradox of deliberateness and emergence

There is no consensus; the right mix depends on context (a hypercompetitive environment differs from a stable one), personal and cultural differences.

• Balancing: the balance differs per department (production is more planning-oriented, product development more incremental, R&D a bit of both), per business unit (stable industries favour deliberateness, hypercompetitive industries emergence) and per corporate model (portfolio organizations show more variety than integrated organizations). Balancing can be institutionalised in a scenario process (popularised by Royal Dutch Shell), which is formal but leaves room for intuitive and entrepreneurial input. Example: TomTom uses templates and formal plans for business and product units (operational), while the management board decides corporate strategy incrementally.
• Juxtaposing: corporate level managers take part in many different formation processes at once (corporate, divisions, business units, company-wide initiatives, international activities, ad hoc projects) and must manage different blends simultaneously, which requires dynamic capabilities. In professional firms, venture capitalists are "bifurcated strategists" (King): planning for their portfolio companies, emergent strategies for themselves.

Strategy formation in international perspective

• National level: formal planning was found most common and formalised in the US and other English-speaking countries (Steiner and Schollhammer). Ohmae: "most large US corporations are run like the Soviet economy". Explanation: a strong division of labour with a distinct managerial class that formulates while the workforce implements; planning is mostly short-term (short-term oriented cultures, Hofstede). Italy and Japan showed little formal planning; Japanese firms are "less planned, less rigid, but more vision- and mission-driven" and prioritised strategic intent over planning (Canon, Honda, Komatsu).
• Uncertainty avoidance and control: societies with a strong desire for order and structure use planning (or tradition, paternalism) to reduce uncertainty; more tolerant societies plan less. Societies that want to dominate their environment (Western countries: "plan or be planned for", Ackoff) favour deliberate strategy; fatalistic cultures muddle through reactively (disjointed action, not emergent strategy); in between (South-East Asia) people accept unpredictability but proactively pave their own way with receptivity and adaptability, favouring incrementalism.
• Industry level: strategy in small firms and SMEs is mainly emergent, especially for product and market decisions; in large firms strategy is more planned at the top, with middle managers facilitating emergent strategies (Wooldridge and Floyd).
• To the strategist: strategy formation is the interplay between an unstable environment and an organizational operating system seeking stability, with leadership mediating (Mintzberg); the strategist's own disposition matters.

Readings in the book's framing

Reading 7.1 (Chakravarthy and Lorange) represents the planning pole: they do not defend but assume the value of formal planning and link the strategic planning system to the monitoring, control and learning system, the incentives system and the staffing system. Their long-term financial plan often covers five years and must show that approved programmes can be funded internally or externally. The strategic budget covers new product-market initiatives; the operating budget sustains existing momentum. Reading 7.2 (Quinn) represents incrementalism; Quinn distinguishes logical incrementalism (proactive: managers intentionally let unintended strategies emerge) from muddling through (reactive, ad hoc improvisation). "Logical" means reasonable and well-considered, not formal logic, which is why De Wit uses the term strategic incrementalism. Reading 7.3 (Vecchiato) is the bridging reading: strategic foresight as a "planned learning process about the future" that copes with the two characteristics of environmental uncertainty, complexity and dynamism; it helps strategists not to know opportunities and threats in advance, but to detect them earlier and react more effectively.