Strategic management and planning

Strategic Management and Planning* Randall E. Westgren Michael L. Cook zyxwvu zyx Modem, multidisciplinary models of strategic management are presented. Model types and the planning process used at the functional, strategic business unit, and corporate portfolio levels are contrasted. Applicability of traditional research areas in agricultural economics to strategic management and planning is high and should be exploited. A research agenda is outlined and consideration given to issues of research funding, clientele, and organization. zyxwv zyxwvutsr The development of academic inquiry into strategic management is three decades old. Leontaides' cites the 1959 Ford Foundation study by Gordon and Howell2 as the inception of business policy as a necessary part of business education. Business policy was to be the integration of the various functions (marketing, finance, etc.) to systematically deal with post-war changes in consumer and industrial markets. Long range planning became a competing term to describe this process, arising from corporate needs to provide intertemporal direction to short-term marketing tactics. Strategic became the antithesis of tactical, or shortterm, and strategicplanning was taken as the accepted term. Because the planning activity seemed to preclude measurement, feedback, and control, strategic munagement became the inclusive rubric. This preferred term was codified as recently as 2979 by Schendel and H ~ f e rbut , ~ the literature is still rife with references to generally obsolete terminology. Indeed, one 1985 text is titled Strategy, Policy, and Central Management. The consensus of the current literature is that strategic management represents the broad process of setting firm mission, goals, and objectives; controlling resources to pursue these ends; and monitoring and controlling performance relative to the objectives. The planning function becomes a subset of these activities relating to *This article was prepared for the AAEA Post-Conference Workshop on Research Issues in Agribusiness Management, Reno, Nevada, July 1986. Randall E . Westgren is Assistani Professor of Agribusiness in the Leavy School of Business and Administration at Santa Clara University, Santa Clara, Calgornia. zyxwv zyxwvut zyxwvu Michael L. Cook is President of the Rice Growers Association of CaliJornia,Sacramento, CaliJornia. Agribusiness, Vol. 2, No. 4, 477-1289 (1986) 0 1986 by John Wiley & Sons, Inc. CCC 0742-4477/86/040477-13$04..00 478 zyxw zyxw zyxwvuts WESTGREN AND COOK formulation of goals and objectives (ends), establishing strategies and tactics (ways) to achieve them, and proposing resource needs (means). This article will consider planning to occur at three levels: operational, strategic business unit, and portfolio. Operational planning considers strategy at the functional levels of the firm dealing with marketing, production, and other departments. The strategic business unit (SBU) is defined at the level of organization such as an operating division or single enterprise firm. Planning at the level of the corporation may be the combination of several SBU plans, operating in different environments and against different competitors. Express consideration of the multi-SBU firm is portfolio planning. Compounding the difficulty with nomenclature is the unsatisfactory distinction between theory and empirics in this research area. It will be a source of frustration to agribusiness scholars that theory is so inaccessible in this field. Leontiades attributes this to the “case in which theory developed to explain practice.” This issue will be dealt with at length later in this article. A final introductory issue is the applicability of strategic management and planning to the farm. Is there a dichotomy between the needs of the farm firm and other agribusiness firms? In this article a distinction will be maintained. Although strategic management and planning are equally apropos for both genres, the nature of the content and process of these functions will differ. This is in part due to scale. As organizations grow and become more complex, tasks pass from entrepreneurs with broad responsibilities to specialists. Planning is such a task. The management literature maintains separate bodies of thought on entrepreneurship and small business from the management of complex firms with compartmentalized functional responsibility. This article has three objectives. First, a discussion of the current literature and practice regarding strategic management and planning will be presented. It is designed to give scholars new to this area a brief review of a multidisciplinary research area with little adhesion to agricultural economics literature. The second objective is to relate disciplinary training in agricultural economics to the research tasks in strategic management and planning. What contributions can be made by agricultural economists prepared in theory and methods to this subject matter area? The third objective is to identify a research agenda for agribusiness strategic management. The attempted agenda is sensitive to issues of appropriate clientele, research organization, funding, and interaction with management scholars outside colleges of agriculture. FUNCTIONS, APPROACHES, MEASUREMENT Two topics from the vast literature in strategic management and planning will be emphasized: models of strategic management and the planning process. Other areas of inquiry will be mentioned as tangents to these topics. QtrateejcManagement Modele Several traditional approaches to strategic management have led to a common representation of the components of the strategic management process. Figure 1 is taken from Pearce and Robinson’ (p. 61). They argue that at the level of detail zyx zyxwv STRATEGIC MANAGEMENT AND PLANNING Company nisaion Company rc 1 Profile 479 4 zyxwvuts zy zy External Environment - remote Interactive Opportunity Analyaia and Strategic Choice I I I Long Tern Objective8 Grand Strategy 1 I Annual Objectivea I I 1 I Operational Strategies I I I I 1 Inplementation I --I major impact minor inpact --j 1. Traditional Strategic Management Model (Pearce and Robinson). in the figure, most models of strategic management are similar, including those designed for small Strategic choice is determined by the confluence of company mission, company profile, and the external environment. Company mission is vaguely the subset of possible philosophies, goals, and objectives chosen by the top echelon of the firm. The company profile is the human resources, capital assets, market presence, technology, corporate structure, and other strengths and weaknesses of the firm. The external environment consists of general social, political, and environmental conditions (the remote environment) and specific competitive and economic factors in relevant markets (the task environment). These three sets of constraints determine a set of endogenous strategy choices from which the “best” is chosen. To the extent that this choice is dependent upon anticipated choices by rivals, this is a game theoretic problem. Enumerated strategy options by rivals 480 zyxwvut zyxw z zyxw WESTGREN AND COOK will be a major portion of the task environment. To the extent that rivals are not individually known, strategy may be formulated against the market as a whole. The chosen strategy is formulated at several operational levels. The least spedific is the grand strategy. The grand strategy is one of a small set of generic strategies. Each author maintains a slightly different relevant set, but they overlap greatly. Table I shows the grand strategy sets compiled by Pierce and Robinson and Thompson and Strickland.’ Most of the grand strategy options are dominated by marketing considerations, reflecting the predilection of scholars during the 1960s and 1970s. Alternative models discussed below consider manufacturing, finance, and other functional areas more prominently. Operational strategies are delineated over the planning horizon to achieve longterm objectives of the grand strategy. The trajectory of the plan is specified by intermediate targets: the annual objectives. The process to this point can be defined as planning. Review and evaluation, or the control function, feed back to the ongoing process of strategy choice. Two related competing views of strategic management were developed in the late 1960s. The Boston Consulting Group, led by its founder, Bruce Henderson, developed a simple matrix to characterize the value of strategic business units within a multiunit firm. Driven by the experience ~ u r v e , businesses ~”~ fall in one of four quadrants of the growth-share matrix (Figure 2). High growth-high market share business units generate and use large amounts of cash and are labeled STARS. They are the object of corporate acquisition as they have large impact on the performance of the firm portfolio. High market share-low growth firms, CASH COWS, generate cash to be used in the development of other business units (incipient stars). Low growth-low market share firms are DOGS, deserving only divesture. The fourth quadrant, QUESTION MARKS, are of dubious value despite high growth, as they will not dominate market share. These businesses are treated as good income generating businesses through sale to other firms. The second model of strategic management of this ilk is the McKinsey and Company industry attractiveness-business strength matrix. ‘I This nine quadrant model is shown in Figure 3. The industry attractiveness axis is based on a weighted subjective assessment of market size and growth rate, rivalry, barriers to entry, regulation, and other environmental factors similar to the list used in the Pearce Table I. Grand Strategy Sets. Pearce and Robinson Thompson and Strickland Concentration Vertical Integration Horizontal Integration Market Development Product Development Innovation Joint Venture Concentric Diversification Conglomerate Diversification Retrenchment/Tumaround Divesture Liquidation Concentration Vertical Integration Related Diversification Unrelated Diversification Retrenchment/ Repositioning Abandonment/Divesture/Liquidate Combination of above STRATEGIC MANAGEMENT AND PLANNING Bigh STARS zyx 481 QUESTIOU MARKS zyxwvutsr Market Grouth Rate CASE Lou DOGS COW8 Medium Eigh LOW Eigh Business Strengths llediui LOW invest/grow m selective I Figore 3. McKinsey Model for Business Portfolio. divest zyx I 482 zyxwvutsr zyxw zyx WESTGREN AND COOK and Robinson external environment analysis. The business strength axis is a subjective assessment of firm characteristics such as market share, resources, management capability, and other elements of the firm profile discussed above. The significant difference between this vision of corporate strategic management and the traditional model is the output. The traditional model generates an operational strategy from the interaction of environment and company profile. Performance goals are set at the various operational levels of the firm across several measurement criteria. The McKinsey model generates a list of business units deserving of high resource allocation or divesture. Performance is measured in the aggregate and primarily on financial criteria. These two portfolio models of strategic management have generated a wide following. Haspeslagh” found that 45% of the Fortune 500 companies and 36% of Fortune lo00 companies use business portfolio analysis, with annually increasing numbers. Among the industries with prevalent use are food manufacturing and farm equipment. A research hypothesis worth testing is that use of these models has culminated in the recent spate of “megamergers” in the food industries. To many, relegating strategic management to the role of portfolio management is unsatisfactory. Even to practitioners, the cavalier recommendations that arise from these simple models are subject to question. Why not feed the dogs and breed the cows? Are there some active management choices that can make the existing portfolio of assets attractive in the long run? Planning at the SBU level has merit as an alternative. The most influential new writing in this area is by Porter. His first book, Competitive Strutegy,I3 is widely cited for bridging the literatures of industrial organization and strategic management. His model of industry competition (Figure 4) leads to a determination of industry attractiveness. It thus has the elements of the models discussed above, but is unique in deriving strategic inferences from structural variables. For example, interfirm rivalry increases with numerous and balanced competitors, high fixed costs, high exit barriers, and low differentiation among products. Rivalry may take the form of, but is not limited to, price competition. Determinants of buyer and seller power include many structural variables such as relative concentration between industries, product substitutes, switching costs among rival firms, unequal access to market information, and threat of forward/backward integration. Potential new entrants and product substitutes also promote unstable industry performance. Entry and exit barriers also drive strategy choices in mature and declining industries. l4 The relatively mature agribusiness industries should be excellent test cases for this approach, particularly given increased competition from foreign zyxw zy fiInlS. Porter’s second book, CompetitiveAdvantage,” develops a framework for building one of three grand strategies for the firm: cost advantage, differentiation, and focus. This list is abbreviated relative to the strategies in Table 1. Porter uses the “value chain” as the instrument to determine strategy (Figure 5). The value chain for the firm consists of all primary and secondary functions that provide value to buyers. Firms pursue a cost advantage strategy by measuring costs and fixed assets associated with all the functions, identifying cost drivers, and configuring the value chain for a broad, sustainable cost differential vis B vis competitors. Differentiation is attained by configuring the value chain perceived by the buyer in a manner that will support a sustainable advantage that cannot be eroded by zyx z STRATEGIC MANAGEMENT AND PLANNING zyx 483 zyxwv F entry threat POTBWTIAL EWTRAWTS BOYERS IWDOSTRY COMPETITORS zy I bargaining pou.= bargaining pov= rivalry T Ezl SUBSTITUTES threat of aubatitution Fipm 4. Porter's Model of the Forces Driving Industry Competition. -" - a P P o r t a c t i v i : a IWBWWD LOCISTICS FIRM IWFRASTRUC+URE 1 'I I I BUMAU I I I I I 1 I TBCBIIOLOGY DEVELOPMEIT 1 ROCURMBWT OPERATIOIS I I RESOURCE MAYAGEMEW? OOTBODWD LOGISTICS I I I I I zyxw MARKET1WG L SALES Pri ry activitiee Figure 5. The Value Chain Model. SERVICE WESTGREN AND COOK zyxw zyx price differentials. A focus strategy can be based on cost or differentiation, executed in a particular market segment. The value chain model initially appears to be little more than the firm profile component of a traditional strategic management model. Aside from the sophistication of the presentation, there are important differences. First, the value chain model specifically addresses forward and backward linkages among value chain components of suppliers and buyers. Outbound-inbound logistics linkages and procurement-marketing linkages are obvious connections in market channels. Perhaps the most important opportunities for sustainable competitive advantages come from technology linkages. Will MIS compatibility among vertically related firms lead to more efficient or effective production in each firm? In the medical field, linked computer inventory/order systems between hospitals and suppliers have established competitive advantages for both types of firms in their respective industries. The second difference is the broad scope of activities considered for differentiation and cost advantage. Differentiation was traditionally a product of the marketing function, supported by advertising expenditures. Porter expands differentiable functions to the production areas of logistics, operations, procurement, and technology development. Quality control, flexible manufacturing systems, computer-aided design, and efficient delivery can provide different bundles of valuable characteristics to customers. Buyers can perceive the benefits of such differentiation if the marketing process is transparent to them and will pay for it. Cost advantage can be achieved more broadly than by producing at minimal production costs. Cost advantage may be driven by savings in borrowing costs, inventory and distribution management, firm infrastructure, etc. The combination of Porter's market environment and firm profile models should provide a strong framework for applied research into agribusiness strategic management. His exposition is accessible and broadly supported by case studies. Unfortunately, his models do not complete the cycle of implementation, evaluation, and control. These areas are often cited as the source of failure for formal strategic management and planning systems in practice. l6 The links between the upper management echelon's vision of strategy and the operational levels where implementation is to occur are often weak or in conflict. This is a major message The among recent "pop" management books such as In Search of E~cellence,'~ M-Form Society,18 and Vanguard Management. l9 zyxw The Planning Process Analytically developed strategic direction is a powerful management tool. It encourages integrated and concentrated effort on a clear mission. Strategic management literature, however, suggests that a wide gap exists between analytically developed strategy and strategy implementation. Many planning scholars now suggest that the planning process is as important as the plan. Many observers agree with Husseymwho states that planning stands or falls on the twin pillars of the analytical and the behavioral. There is an increasing body of literature that empirically supports this hypothesis that a balance between the analytical and the behavioral must be present in constructive planning efforts. Wernham2' found that implementation in successful planning firms was an interactive rather than rational/sequential process. Brown," in a stimulating article, goes so far as to STRATEGIC MANAGEMENT AND PLANNING 485 suggest that planners should now leave the field of rational decision making to computers and should themselves concentrate on the nonrational judgmental aspects of human activity. The current wave of planning literature takes both of these topics one step further by encouraging the phenomenon of “strategic thinking.” Even though ag economists have little training in the areas of “the planning process” they have considerable comparative advantage in the development and understanding of strategic thinking-the process of continual evaluation of strategic position and alternatives. One interesting and iconoclastic view of planning is by Hayes.= He argues that the traditional paradigm of setting strategic goals (ends), choosing long- and short-term strategies (ways) to achieve them, and assembling resources (means) may be inappropriate in a turbulent environment. Obtaining slack resources and operating in a flexible planning system will allow a modem firm to adjust its future path more easily given a changing competitive environment. His means-waysends paradigm requires a relatively costly firm structure, most likely antithetical to cost advantage strategy, with less discipline from the environment. Babb and Lang4 consider the issue of organizational slack and its incompatibility with neoclassical firm theory. If Hayes is correct, organizational slack should not be misidentified as the pejorative X-inefficiency of Leibenstein (see Marion and MuelleP Parker and ConnoP) in industry studies. The implications of slack and inefficiency diverge. zyxwv zyxwv ROLE OF AGRICULTURAL ECONOMISTS There are many topics within the planning area that will benefit from the training and skills of agricultural economists. Above all, the rigor of thought demanded by the parent discipline of economics is needed in planning. Planning is fundamentally a resource allocation task-the core of microeconomics. In addition, Leontief s laudatory comments about ag economists skills with data are equally valid in the context of planning. Planning is not simply the application of twoperson game theory with price as the endogenous variable. Vast quantities of primary and secondary data for industry structure, behavior, and performance variables across multiple competitors are necessary for informed planning. Specific roles for agricultural economists in planning can be catalogued by level of strategy (operational, SBU, corporate portfolio) and by contributions to the process of strategic thinking. Ag economists have much to contribute to planning at the operational level. Traditional research areas are directly applicable to planning for operational strategies: consumption theory, risk management, supply and demand fundamentals, production efficiency and cost analysis, and forecasting methods. Authors contributing to this workshop have reviewed the literatures in these areas as they relate to the functional areas of agribusiness management. But aside from direct applications to firm level problems, these research areas often support industry models with value in strategic and tactical planning. Information from these research areas on consumer behavior, cost structures, etc. can be used in production, marketing, and financial planning for operations. Research on planning at the strategic business unit level will draw heavily from industrial organization, macro models of industries and sectors, and spatial 486 zyxwvuts zyxwv zyxw WESTGREN AND COOK models of commodity markets. These research areas are among the core of environmental analysis for business units. Each of Porter’s five structural variablesrivalry, substitutability, potential entry, and buyer and seller interaction-have been addressed in great depth by ag economics research. While some nontraditional research interpretations may be necessary, traditional theories and methods will serve SBU planning models well. Corporate portfolio models of planning can also draw directly from traditions in ag economics research. Portfolios of business units are treated no differently from portfolios of financial assets and farm enterprises. Risk-return tradeoffs are paramount in all portfolios. In the corporate portfolio there may be license for expanding the definition of expected returns to include other measures of performance than ROI, but the concepts are clear. If portfolio models of crop mix could be adapted from financial theory, agribusiness enterprise portfolios could also. Therefore, although the basis for strategic management may be founded in behavioral models different from rational economic behavior, ag economists have ample opportunity to contribute directly to this broad research area. Students of agricultural and applied economics may be better trained for the rigor of strategic management and for honing its theories than students of business management with broad, but shallow disciplinary training. zyxwvu RESEARCH AGENDA FOR STRATEGIC MANAGEMENT AND PLANNING Setting an exhaustive agenda for future research on this topic is beyond the limits of this article. Evidence of the burgeoning literature in strategic management includes three journals, The Journal of Business Strategy, Long Range Planning, and Strategic Management Journal, dedicated to the subject in recent years and large page allocations in traditional publications such as the Academy of Management Journal. Given the paucity of past research on the agribusiness sector, research needs are as broad as the general literature. An abbreviated agenda is presented. 1. Audit of Agribusiness Strategic Management Assess the current use of formal and informal strategic management in firms and industries in the agribusiness sector. A newly formed regional research committee, NEC-65, has chosen this research area as one objective in their project “Private Strategies, Public Policies, and Food System Performance.” Successful investigation into this topic will require work with organizational behavior scholars, as the efficacy of planning is a function of organization structure, coalition formation, and reward systems. 2. Strategic Groups Identify strategic groups within the food and agriculture industries. Research reviewed by McGee and Thomas2’indicates that intraindustry groups with common strategic variables are better than SIC industries for establishing structure-performance causation. Brewing and supermarkets are the only agribusiness industry STRATEGIC MANAGEMENT AND PLANNING 487 zy strategic groups investigated in previous work. Our understanding of strategic rivalry and market performance can be sharpened by this avenue of inquiry. 3. Simulation Games of Strategy Use market simulations in experiments to determine strategic decision-making behavior among agribusiness managers. Simulation games offer the opportunity for repeated controlled experiments using a wide range of strategic choice variables, entry and exit barriers, tumultuous remote environments, and reward mechanisms. Building from existing models, a wide range of industries can be simulated with the intent of producing generalizable results that will contribute to general management literature, as well as in agribusiness management. zyxw 4. Strategies for Cooperatives Exploit new models of strategic management in applied research on sustainable strategies for agricultural cooperatives. Drawing broadly from the value chain model, strategic group rivalry, and organizational behavior may augment cooperative theory research in establishing the roles for coops within agribusiness industries. 5. Strategic Databases Establish useful public domain management information of the external environment for agribusiness firms. Possible inclusions are scenario analyses based on political as well as economic variables. 6. Industry Analyses Continue the tradition of in-depth industry and subsector analyses typified by output from NC-117 and NC-144). These studies can be exploited by industry clientele as well as other researchers in linking remote and task environments in strategic management. 7. Risk in strategic Management Expand the definition of risk to make it meaningful in planning decisions. Draw from psychology and organizational behavior literatures implications for the management of long-run business risk that may not be specifically tied to usual notions of price and technical risk. On an operational level, risk management in procurement strategies should be an important topic. zyxw zyxwv 8. Strategic Thinking What pedagogical techniques can be developed for teaching strategic thinking to agribusiness students? What are the characteristics of effective strategic thinking and how can they be articulated? Among the problems with a strategic management research agenda for agribusiness is the issue of appropriate clientele. The tradition in this research area 488 zyxwvut zyxw zy WESTGREN AND COOK among management scholars has been to pursue jointly research, consulting, and executive development by completing case studies of strategic management. Ag economists have lived under stricter rules for partitioning research, extension, and consulting. This is particularly troublesome when the clientele is large agribusinesses, not farm firms. Experiment station funds are not going to be readily available for support of public corporations, although they may be provided for work specifically with agricultural cooperatives, a traditional client. If trade association and market development groups continue to increase their research funds, this will be a source of “arm’s length” funds. While member firms may indirectly benefit, research cannot be co-opted directly by an individual firm. Private research funding, not clearly dichotomous with consulting payments, will probably support this research area. This will raise many of the same issues of proprietary data and publication rights as the biological scientists at Land Grant universities face in joint projects on biotechnology. Clearly prescribed rules must be developed to maintain the viability of the research area and avoid its co-option as consulting. Business schools have successfully dealt with these issues. The pattern of strategic management research involves direct consulting and secondary data gathering, with research results disseminated through executive development courses, resident instruction, and popular and scientific publication. The “purity” of the distinctions among public service, research, consulting, and continuing education revered by schools of agriculture is foresaken. “Good science” can include anecdotal case studies, theory, and statistical testing of hypotheses. Of necessity is the goodwill of client firms. Publication outletb are ample for this research area. While this literature suffers from a lack of mathematical elegance, and hence bears little resemblance to agricultural economics literature, it can rely on sophisticated behavioral models from psychology and sociology. This increases the risk of acceptance as “good science” (King and Sonka=) by peers, as it diverges from disciplinary research. Disciplinary research progress is certainly important to the profession. But if inroads are to be made in agribusiness management research, cross-disciplinary efforts are necessary. Strategic management research is an important, timely field of endeavor. The current stress on firms in all subsectors of agribusiness is evidence of the need for meaningful, applicable research in this area. REFERENCES zyxwv zyxw zyx 1. M. Leontaides, “The Confusing Words of Business Policy,” Acad. Mgt. Reu., 1981. 2. R.A. Gorden and J.E. Howell, Higher Educationfor Business, Columbia University Press, New York, 1959. 3. D.E. Schendel and C.W. Hofer, Eds., Strategic Managemeni, Little, Brown, Boston, MA, 1979. 4. W.H. Newman, J.P. Logan, and W.H. Hegarty, Strategy, Polky, and Central Managemem, Southwestern, Cincinnati, OH, 1985. 5. J.A. Pearce I1 and R.B. Robinson, Strategic Manugement, Richard D. Irwin, Homewood, IL, 1982. 6. F. 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