7.1 Strategy: Definition and purpose
You have probably heard the expression that a particular person is an 'armchair strategist'. The inference is that the person referred to has no practical experience of war, politics or football, but nevertheless is an expert in strategy. Most of us exhibit this behaviour in some form: we know how a war or a sporting contest should be conducted to ensure a win. However, if we honestly examine our knowledge bank, most of us would have to concede that we know very little about strategy.
Perhaps you are acquainted with strategy from your earlier studies in management or marketing, but if that is not so you will find that your textbook will not add much to your knowledge. The text by Hill (2005) assumes that you understand what strategy is. If you already know about strategy, what follows is a refresher course; if you are uncertain what strategy is about, what follows should help fill in the gaps in your knowledge. This discussion will suffice for the time being and be a useful precursor to the Introduction to Strategic Management unit you will undertake later in your studies.
Strategy may be defined as the pattern or plan that integrates an organisation's major goals, policies, and action sequences into a cohesive whole . A global strategy, then, is a unified plan which ties all parts of a MNE together so that it can achieve its objectives, subject to environmental constraints and its own resource capabilities.
The management of strategy is a process - the strategic management process - in which the major elements are:
- diagnosis of the organisation's internal and external environments, also known as a SWOT ( S trengths, W eaknesses, O pportunities, T hreats) analysis, which is explained further in a reading
- strategy formulation
- strategy implementation; and
- evaluation and control, which incorporates a feedback loop
The terminology and sequence used in Figure 7.1 below vary a little from this, but if you follow the diagram's flow from left to right you should be able to imagine the activities of the managers in an Australian MNE about to embark on an overseas expansion program.
Figure 7.1 Global strategic management process model
Source: Ashegian and Ebrahimi 1990, pp. 398-399.
The strategic planning process which underpins the strategic management process is illustrated in Figure 7.2. You are not expected to remember the detail in Figure 7.2, but it is important to understand the essence of what it tells you and the types of issues involved in planning for international business. You will also see in the top right-hand corner the term 'strategic intent'. This is analogous to the term 'mission', although in a course devoted wholly to strategic management we might differentiate between the two terms. They are almost, but not exactly, the same thing.
The dual purpose of any firm is to survive and to make a profit. The firm makes a profit by giving consumers goods or services which they value. The firm therefore is involved in some process of value creation. This process may be considered as a value chain in which each link adds value to the primary material. For example, imagine the activities in a bakery making meat pies:
- The pastry maker adds value to the raw ingredients (for example flour, salt, and sugar).
- The pie filler adds value by inserting the meat (or fruit) mince.
- The baker adds value by cooking the pie.
- The counter attendant adds value by assisting the customer to purchase the pie.
- primary activities : essentially production and marketing such as those illustrated in the pie-making example above
- secondary activities : essentially those activities which provide support facilities to the production and marketing people
In the bakery example, secondary activities would be the buying of the basic ingredients and the organisation structure which would include the owner of the bakery, the chief baker, the accountant, the sales staff and so on.
The concept of the value chain comes from Michael Porter, one of the best known management writers of the 1980s. Figure 7.3 below is from Porter's 1985 book, Competitive advantage. You will be asked to study this diagram in detail as part of Activity 7.1 shortly.
Pause now to read what Hill (2005) says about strategy and the value chain. Included here is the article explaining the important nature of a SWOT analysis and two related articles examining Porter's more recent views on strategy including an application of his views to Australia .
In your text
Hill 2005, Chapter 12, pp. 409-415.
Reading 7.1
Robertson, J. 2003, 'Sending in the SWOT team', Management Today , June, p. 36.
Reading 7.2
Wilmot, B. 2002, 'Getting clustered', Management Today , June, pp. 14-18.
Reading 7.3
James, D. 2002, 'How to kick global goals', Business Review Weekly , 28 March-3 April, pp. 49-55.
The concept of the value chain has important implications for international businesses choosing the right strategy to reduce costs of creating value or adding to their products. Let's see if you understand this by doing the following activity.
Activity 7.1
Compare Porter's value chain diagram (Figure 7.3) with Hill's (2005, p. 413) diagram and answer the following questions.
- What are inbound logistics and outbound logistics in the Porter diagram?
- Do inbound and/or outbound logistics apply to manufacturing and/or marketing in Hill's (2005) diagram?
- What is 'margin' in Porter's diagram?
Q uestion 3 may be a tough one, so here's the answer : margin is the difference between total value and the collective cost of performing the value activities. - Does margin sound similar to profit?
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