Topic 2. The Four Key Attributes of Strategic Management - 15.09

Topic 2.
The Four Key Attributes of Strategic Management
The Four Key Attributes of Strategic Management are:

• Directs the organization toward overall goals and objectives.
• Includes multiple stakeholders in decision making.
• Needs to incorporate short-term and long-term perspectives.
• Recognizes trade-offs between efficiency and effectiveness.
First, strategic management is directed toward overall organizational goals
and objectives.
That is, effort must be directed at what is best for the total organization, not
just a single functional area. Some authors have referred to this perspective as
“organizational versus individual rationality.” That is, what might look “rational”
or ideal for one functional area, such as operations, may not be in the best interest
of the overall firm. For example, operations may decide to schedule long
production runs of similar products to lower unit costs. However, the standardized
output may be counter to what the marketing department needs to appeal to a
demanding target market. Similarly, research and development may
“overengineer” the product to develop a far superior offering, but the design may
make the product so expensive that market demand is minimal.
As noted by David Novak, former CEO of Yum Brands:
«I tell people that once you get a job you should act like you run the place.
Not in terms of ego, but in terms of how you think about the business. Don’t just
think about your piece of the business. Think about your piece of the business and
the total business. This way, you’ll always have a broader perspective».
Second, strategic management includes multiple stakeholders in decision
making. Stakeholders are those individuals, groups, and organizations that have a
“stake” in the success of the organization, including owners (shareholders in a
publicly held corporation), employees, customers, suppliers, the community at
large, and so on. Managers will not be successful if they focus on a single
stakeholder. For example, if the overwhelming emphasis is on generating profits
for the owners, employees may become alienated, customer service may suffer,
and the suppliers may resent demands for pricing concessions.
Third, strategic management requires incorporating both short-term and long-
term perspectives. Peter Senge, a leading strategic management author, has
referred to this need as a “creative tension.” That is, managers must maintain both
a vision for the future of the organization and a focus on its present operating
needs. However, financial markets can exert significant pressures on executives to
meet short-term performance targets. Studies have shown that corporate leaders
often take a short-term approach to the detriment of creating long-term shareholder
value.
Andrew Winston addresses this issue in his recent book, The Big Pivot:
«Consider the following scenario: You are close to the end of the quarter and
you are faced with a project that you are certain will make money. That is, it has a
guaranteed positive net present value (NPV). But it will reduce your earnings for
this quarter. Do you invest?». A research study posed this question to 400 CFOs
and a majority said they would not do it. Further, 80 percent of the executives
would decrease R&D spending, advertising, and general maintenance. So, what
occurs when you cut back on these investments to prop up short-term earnings
every quarter? Logically, you don’t invest in projects with favorable paybacks and
you underspend on initiatives that build longer-term value. Thus, your earnings
targets in the future quarters actually get more difficult to hit.
Fourth, strategic management involves the recognition of trade-offs between
effectiveness and efficiency. Some authors have referred to this as the difference
between “doing the right thing” (effectiveness) and “doing things right”
(efficiency). While managers must allocate and use resources wisely, they must
still direct their efforts toward the attainment of overall organizational objectives.
As noted by Meg Whitman, Hewlett-Packard’s former CEO, “Less than perfect
strategy execution against the right strategy will probably work. A 100 percent
execution against the wrong strategy won’t.”
Successful managers must make many trade-offs. It is central to the practice
of strategic management. At times, managers must focus on the short term and
efficiency; at other times, the emphasis is on the long term and expanding a firm’s
product-market scope in order to anticipate opportunities in the competitive
environment.
To summarize, leaders typically face many difficult and challenging
decisions:
• Do we manage for today or for tomorrow? A firm’s long-term survival
requires taking risks and learning from failure in the pursuit of new products and
services. However, companies also need consistency in their products and services.
This depicts the tension between existing products and new ones, stability and
change. This is the innovation paradox. For example, in the late 1990s, IBM’s
senior leaders saw the Internet wave and felt the need to harness the new
technology. However, the firm also needed to sustain its traditional strength in
client-server markets. Each strategy required different structures, cultures, rewards,
and metrics—which could not easily be executed in tandem.
• Do we stick to boundaries or cross them? Global supply chains can be very
effective, but they may also lack flexibility. New ideas can emerge from
innovation activities that are dispersed throughout the world. However, not having
all the talent and brains in one location can be costly. This is the tension between
global connectedness and local needs, the globalization paradox. In 2009, NASA’s
director of human health and performance started an initiative geared toward
generating new knowledge through collaborative cross-firm and cross-disciplinary
work. Not too surprisingly, he faced strong pushback from scientists interested in
protecting their turf and their identities as independent experts. Although both
collaboration and independent work were required to generate new innovations,
they posed organizational and cultural challenges.
• Whom do we focus on, shareholders or stakeholders? Clearly, companies
exist to create value. But managers are often faced with the choice between
maximizing shareholder gains while trying to create benefits for a wide range of
stakeholders – employees, customers, society, etc. However, being socially
responsible may bring down a firm’s share price, and prioritizing employees may
conflict with short-term shareholders’ or customers’ needs. This is the obligation
paradox. Paul Polman, Unilever’s CEO, launched the Unilever Sustainable Living
Plan in 2010. The goal was to double the size of the business over 10 years,
improve the health and well-being of more than a billion people, and cut the firm’s
environmental impact in half. He argued that such investments would lead to
greater profits over the long term; whereas a singular focus on short-term profits
would have adverse effects on society and the environment. His arguments were
persuasive to many; however, there have been many challenges in implementing
the plan. Not surprisingly, it has caused uncertainty among senior executives that
has led to anxiety and fights over resource allocation.
VOCABULARY
Stakeholders – individuals, groups, and organizations that have a stake in the
success of the organization. These include owners (shareholders in a publicly held
corporation), employees, customers, suppliers, and the community at large.
Effectiveness – tailoring actions to the needs of an organization rather than
wasting effort, or “doing the right thing.”
Efficiency – performing actions at a low cost relative to a benchmark, or
“doing things right.”

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The Four Key Attributes of Strategic Management

The Four Key Attributes of Strategic Management are:

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