5 Defining Strategic Management and Strategy

What Is Strategic Management?

Boiled down to its simplest, strategy is basically about making choices… For you, which career interests you, who to marry/partner, whether to have children, or car and house ownership, and even whether investing in post-secondary education is to your advantage or not.  For corporations, which product/service to sell, the right balance of labour (people) and capital (machines) to use in producing the product/service and where to physically locate among the hundreds if not thousands of strategic choices. Choices.

Studying strategic management is the combination of learning about various models which can assist us on how and why to make these strategic choices, coupled with lots of case studies on the results actual companies and people achieved – case studies.

In our first case study, issues such as those currently faced by BlackBerry and Apple are the focus of strategic management because they help answer the key question —“Why do some firms outperform other firms?” More specifically, strategic management examines how actions and events involving top executives (such as Steve Jobs), firms (Apple), and industries (the wireless market) influence a firm’s success or failure. Formal tools exist to help us better understanding these relationships.  Many of these tools will be explained and applied in this book. But formal tools are not enough; creativity is just as important to strategic management. Mastering strategy is therefore part art and part science.

This introductory chapter is intended to enable you to understand what strategic management is and why it is important. Because strategy is a complex concept, we begin by explaining five different ways to think about what strategy involves (Figure 1.1 “Defining Strategy: The Five Ps”). Next, we journey across many centuries to examine the evolution of strategy from ancient times until today. We end this chapter by presenting a conceptual model that maps out one way that executives can work toward mastering strategy. The model also provides an overall portrait of this book’s contents by organizing the remaining nine chapters into a coherent whole.

Defining Strategy: The Five Ps

Defining strategy is not simple. Strategy is a complex concept that involves many different processes and activities within an organization. To capture this complexity, Professor Henry Mintzberg of McGill University in Montreal, Canada, articulated what he labeled as “the 5 Ps of strategy.” According to Mintzberg, understanding how strategy can be viewed as a plan, as a ploy, as a position, as a pattern, and as a perspective is important. Each of these five ways of thinking about strategy is necessary for understanding what strategy is, but none of them alone is sufficient to master the concept (Mintzberg, 1987).

Understanding different ways of thinking about strategy is the first step toward mastering the art and science of strategic management. The five Ps of strategy developed from the work of Henry Mintzberg help to provide an overview of the most commonly used definitions of strategy.

Plan – a carefully crafted set of steps that a firm intends to follow in order to be successful.	Virtually every firm creates a strategic plan to guide its future. If you are reading this, you probably have a plan that requires a college degree or diploma.
Ploy – a specific move designed to outwit or trick competitors	An inquiry in Quebec discussed links between the construction industry and organized crime involving payoffs to be assured of getting profitable contracts.
Pattern – the degree of consistency in a firm’s strategic actions	Apple responds to competitive challenges by innovating. Some of these innovations are complete busts, but enough are successful that Apple’s overall performance is excellent.
Position – a firm’s place in the industry relative to its competitors	Loblaw Companies Ltd. offers Zehr’s, a higher-end grocery store, as well as No Frills, Extra Foods and SuperValu, which are positioned at different pricing levels.
Perspective – how executives interpret the landscape around them	In the mid-1990s, the Internet was mainly a communications tool. Jeff Bezos of Amazon saw it as a sales channel for selling books online.  Now Amazon.com – the business he created – is a diversified consumer products store.

Figure 1.1: Defining Strategy: The Five Ps

Strategy as a Plan

Strategic plans are the essence of strategy, according to one classic view of strategy. A strategic plan is a carefully crafted set of steps that a firm intends to follow to be successful. Virtually every organization creates a strategic plan to guide its future.

While Apple had been a very successful computer company in the early days of the micro computer, by 1996, Apple’s performance was not strong, and Gilbert F. Amelio was appointed as CEO (chief executive officer) in the hope of reversing the company’s fortunes. In a speech focused on strategy, Amelio described a plan that centered on leveraging the Internet (which at the time was in its infancy) and developing multimedia products and services. Apple’s subsequent success selling over the Internet via iTunes and with the iPad can be traced back to the plan articulated in 1996 (Markoff, 1996).

A business model should be a central element of a firm’s strategic plan. Simply stated, a business model describes the process through which a firm hopes to earn profits. It probably won’t surprise you to learn that developing a viable business model requires that a firm sell goods or services for more than it costs the firm to create and distribute those goods. A more subtle but equally important aspect of a business model is providing customers with a good or service more cheaply than they can create it themselves.

Consider, for example, large chains of pizza restaurants such as Boston Pizza and Domino’s.

Because these firms buy their ingredients in massive quantities, they pay far less for these items than any family could (an advantage called economies of scale^[1]). Meanwhile, Boston Pizza and Domino’s have developed specialized kitchen equipment that allows them to produce better-tasting pizza than can be created using the basic ovens that most families rely on for cooking. Pizza restaurants thus can make better-tasting pizzas for far less cost than a family can make itself. This business model provides healthy margins and has enabled Boston Pizza and Domino’s to become massive firms.

Strategic plans are important to individuals too. Indeed, a well-known proverb states that “he who fails to plan, plans to fail.” In other words, being successful requires a person to lay out a path for the future and then follow that path. If you are reading this, earning a college degree is probably a key step in your strategic plan for your career. Don’t be concerned if your plan is not fully developed, however. Life is full of unexpected twists and turns, so maintaining flexibility is wise for individuals planning their career strategies as well as for firms.

For firms, these unexpected twists and turns place limits on the value of strategic planning. Former heavyweight boxing champion Mike Tyson captured the limitations of strategic plans when he noted, “Everyone has a plan until I punch them in the face.” From that point forward, strategy is less about a plan and more about adjusting to a shifting situation. For firms, changes in the behavior of competitors, customers, suppliers, regulators, and other external groups can all be sources of a metaphorical punch in the face. As events unfold around a firm, its strategic plan may reflect a competitive reality that no longer exists. Because the landscape of business changes rapidly, other ways of thinking about strategy are needed.

Strategy as a Ploy

A second way to view strategy is in terms of ploys. A strategic ploy^[2] is a specific move designed to outwit or trick competitors. Ploys often involve using creativity to enhance success.

Think of Mark Twain’s Tom Sawyer, where main character Tom is stuck whitewashing a fence instead of playing or going to the swimming hole. His one attempt at bribery didn’t work. He managed to  convince his friends that he enjoyed painting:  “Like it? Well, I don’t see why I oughtn’t to like it. Does a boy get a chance to whitewash a fence every day?” He maneuvered his friends into gladly paying him for a chance to whitewash Aunt Polly’s fence  (Twain, 1876).

Ploys can be especially beneficial in the face of much stronger opponents. Military history offers quite a few illustrative examples. Before the American Revolution, land battles were usually fought by two opposing armies, each of which wore brightly colored clothing, marching toward each other across open fields. George Washington and his officers knew that the United States could not possibly defeat better-trained and better-equipped British forces in a traditional battle. To overcome its weaknesses, the American military relied on ambushes, hit-and-run attacks, and other guerilla moves. It even broke an unwritten rule of war by targeting British officers during skirmishes. This was an effort to reduce the opponent’s effectiveness by removing its leadership.

Centuries earlier, the Carthaginian general Hannibal concocted perhaps the most famous ploy ever. Carthage was at war with Rome, a scary circumstance for most Carthaginians given their far weaker fighting force. The Alps had never been crossed by an army. In fact, the Alps were considered such a treacherous mountain range that the Romans did not bother monitoring the part of their territory that bordered the Alps. No horse was up to the challenge, but Hannibal cleverly put his soldiers on elephants, and his army was able to make the mountain crossing. The Romans were caught completely unprepared and most of them were frightened by the sight of charging elephants. By using the element of surprise, Hannibal was able to lead his army to victory over a much more powerful enemy.

Ploys continue to be important today. In 2011, a pizzeria owner in Pennsylvania was accused of making a rather unique attempt to outmaneuver two rival pizza shops. According to police, the man tried to sabotage his competitors by placing mice in their pizzerias. If the ploy had not been discovered, the two shops could have suffered bad publicity or even been shut down by authorities because of health concerns. Although most strategic ploys are legal, this one was not, and the perpetrator was arrested (Reuters, 2011).

Strategy as a Pattern

Strategy as pattern^[3] is a third way to view strategy. This view focuses on the extent to which a firm’s actions over time are consistent. A lack of a strategic pattern helps explain why distillery giant Seagram’s deteriorated into massive losses and became the target of a takeover. The company was started in the mid-1850s as a distiller in Montreal. After Prohibition in the United States ended in 1933 (which itself was a boom for Seagram’s through sales to bootleggers), Seagram Co. Ltd. was ready for the pent-up demand for alcohol from U.S. consumers. At the firm’s peak in the mid-1950s, one out of every three distilled-alcohol drinks consumed by Americans was made by Seagram (Slater, 2013).

Cash-rich, the company began to diversify, first buying other beverage companies — wine, champagne, cognac, and even orange juice with the purchase of Tropicana Products. One of Seagram’s most profitable investments was a large minority share in chemical giant DuPont. However, in 1994, Edgar Bronfman Jr. took over at Seagram’s, and continued a diversification strategy, pushing into the entertainment business, an area that Seagrams did not know much about.  Things went so poorly, in 2000, Seagram sold their profitable DuPont holdings to France’s Vivendi SA, a European telecommunications giant.  The deal ended up destroying much of the Bronfman family fortune (Slater, 2013).

In contrast, Apple has very consistent in its strategic pattern: it always responds to competitive challenges by innovating. Some of these innovations are complete busts. Perhaps the best known was the Newton, a tablet-like device that may have been ahead of its time. Another was the Pippin, a video game system introduced in 1996 to near-universal derision. Apple TV, a 2007 offering intended to link televisions with the Internet, also was slow to attract customers. However, in 2014, the $99 box is selling pretty well: Tim Cook (Apple CEO) just told shareholders that the company generated more than $1 billion in Apple TV sales in 2013 — which implies sales of more than 10 million units. There are risks to following a pattern too closely. A consistent pattern can make a company predictable, a possibility that Apple must guard against in the years ahead (Kafta, 2014).

Strategy as a Position

Viewing strategy as a plan, a ploy, and a pattern involve only the actions of a single firm. In contrast, the next P—strategy as position^[4]—considers a firm and its competitors. Specifically, strategy as position refers to a firm’s place in the industry relative to its competitors. McDonald’s, for example, has long been and remains the clear leader among fast-food chains. This position offers both good and bad aspects for McDonald’s. One advantage of leading an industry is that many customers are familiar with and loyal to leaders. Being the market leader, however, also makes McDonald’s a target for rivals such as Burger King and Wendy’s. These firms create their strategies with McDonald’s as a primary concern. Old Navy offers another example of strategy as position. Old Navy has been positioned to sell fashionable clothes at competitive prices.

Old Navy is owned by the same corporation (Gap Inc.) as the midlevel brand the Gap and upscale brand Banana Republic. Each of these three brands is positioned at a different pricing level. The firm hopes that as Old Navy’s customers grow older and more affluent, they will shop at the Gap and then eventually at Banana Republic. A similar positioning of different brands is pursued by General Motors through its Chevrolet (entry level), Buick (midlevel), and Cadillac (upscale) divisions.

Firms can carve out a position by performing certain activities in a different manner than their rivals. WestJet Airlines Ltd., based in Calgary, Alberta, is able to position itself as a price leader. WestJet offers the lowest price and lowest cost structure, has an excellent service, and delivers a superior experience. WestJet pioneered paper-free ticketing, consumer phone bookings, and the snack and bag lunch. They use Boeing 737 airplanes exclusively, stocking parts and training staff based on one model of plane. WestJet uses an A to B model rather than a web and spokes model, which is common with airlines such as Air Canada. Air Canada accumulates people in hub cities to get them to the spokes, which are smaller centers. There is a higher cost structure to support the 1-2 hours between flights for the hub and spokes model. It should be noted that Air Canada – designated as Canada’s national airline – is legislated to provide services to hubs and spokes. WestJet can “cherry-pick,” flying only the most profitable routes, which is an obvious major advantage not available to Air Canada (Business in Vancouver, 2003).

In addition, Westjet has equipped many of their airport gates with two airplane bridges (a second one connects to the door at the rear of the plane), enabling them to off-load and re-load passengers twice as fast as Air Canada. This quicker turn-around time directly supports higher profits – an airplane on the tarmac is simply a cost item! The only time airplanes generate income is while they are flying.

When firms position themselves through unique goods and services that customers value, business often thrives. But when firms try to please everyone, they often find themselves without the competitive positioning needed for long-term success. Thus deciding what a firm is not going to do is just as important to strategy as deciding what it is going to do (Porter, 1996). To gain competitive advantage and greater success, firms sometimes change positions. But this can be a risky move.  Zellers became a successful department store by targeting moderate-income customers. When the firm abandoned this established position to compete for wealthier customers and higher margins, the results were disastrous. The firm was forced into bankruptcy and closed many stores. Zellers eventually sold many of its locations to Target, a new entrant to the Canadian marketplace. In contrast to firms such as Zellers that changed positions, Apple has long maintained a position as a leading innovator in various industries. This positioning has served Apple well.

Strategy as a Perspective

The fifth and final P shifts the focus to inside the minds of the executives running a firm. Strategy as perspective^[5] refers to how executives interpret the competitive landscape around them. Because each person is unique, two different executives could look at the same event—such as a new competitor emerging—and attach different meanings to it. One might just see a new threat to his or her firm’s sales; the other might view the newcomer as a potential ally.

An old cliché urges listeners to “make lemons into lemonade.”

A good example of applying this idea through strategy as perspective is provided by Newfoundland and Labrador Tourism.  Ads played up the charming and old-fashioned place names such as Tickle Cove and Cupids, along with spectacular photography to create a perception of a charming, quiet, and exotic destination – compared to Disneyland. These strategists were willing to take a possibly negative situation and see the potential upside.

Video 1.1 Newfoundland and Labrador Tourism.

http://youtu.be/8Gtrn8nLMn8

Executives who adopt unique and positive perspectives can lead firms to find and exploit opportunities that others simply miss. In the mid-1990s, the Internet was mainly a communication tool for academics and government agencies. Jeff Bezos looked beyond these functions and viewed the Internet as a potential sales channel. After examining a number of different markets that he might enter using the Internet, Bezos saw strong profit potential in the bookselling business, and he began selling books online. Today, the company he created—Amazon—has expanded far beyond its original focus on books to become a dominant retailer in countless different markets. The late Steve Jobs at Apple appeared to take a similar perspective; he saw opportunities where others could not, and his firm has reaped significant benefits as a result.

References

Business in Vancouver. (Sept. 23-29, 2003) Issue 726. “WestJet soars on its price-leading strategy”.

Kafta, P. (2014). Apples TV Hobby is Now a Billion Dollar Business Web. Recode. Retrieved from http://recode.net/2014/02/28/apples-tv-hobby-is-now-a-billion-dollar-business/

Markoff, J. (1996, May 14). Apple unveils strategic plan of small steps. New York Times. Retrieved from http://www.nytimes.com/1996/05/14/business/apple-unveils-strategic -plan-of-small-steps.html

Mintzberg, H. (1987). The strategy concept I: Five Ps for strategy. California Management Review, 30(1), 11–24.

Porter, M. E. (1996, November–December). What is strategy? Harvard Business Review, 61–79.

Slater, J. (2013, April 5). Charles Bronfman opens up about Seagram’s demise: ‘It is a disaster’. The Globe and Mail. Retrieved from http://www.theglobeandmail.com/report-on-business/seagrams-bronfman-had-thirst-for-justice/article16086892/#dashboard/follows/

Twain, M. (1876). Tom Sawyer Whitewashing the Fence. In Tom Sawyer (Chapter 2). Retrieved from http://www.pbs.org/marktwain/learnmore/writings_tom.html

Reuters.  (2011, March 2).  Pizza Maker Charged with Using Mice Against Competition.  Retrieved from:  http://www.reuters.com/article/2011/03/02/us-crime-pizza-idUSTRE7213UL20110302