Strategy in a firm is the pattern of major objectives, purposes, or goals and essential policies and plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be. Any organization needs strategy (a) when resources are finite, (b) when there is uncertainty about competitive strengths and behavior, (c) when commitment of resources is irreversible, (d) when decisions must be coordinated between far-flung places and over time, and (e) when there is uncertainty about control of the initiative. An explicit statement of strategy is the key to success in a changing business environment. Strategy provides a unified sense of direction to which all members of the organization can relate. Where there is no clear concept of strategy, decisions rest on either subjective or intuitive assessment and are made without regard to other decisions. Such decisions become increasingly unreliable as the pace of change accelerates or decelerates rapidly. Without a strategy, an organization is like a ship without a rudder going around in circles. Strategy is concerned with the deployment of potential for results and the development of a reaction capability to adapt to environmental changes. Quite naturally, we find that there are hierarchies of strategies: corporate strategy and business strategy. At the corporate level, strategy is mainly concerned with defining the set of businesses that should form the company’s overall profile. Corporate strategy seeks to unify all the business lines of a company and point them toward an overall goal. At the business level, strategy focuses on defining the manner of competition in a given industry or product/market segment.

A business strategy usually covers a plan for a single product or a group of related products. Today, most strategic action takes place at the business unit level, where sophisticated tools and techniques permit the analysis of a business; the forecasting of such variables as market growth, pricing, and the impact of government regulation; and the establishment of a plan that can sidestep threats in an erratic environment from competitors, economic cycles, and social, political, and consumer changes. Each functional area of a business (e.g., marketing) makes its own unique contribution to strategy formulation at different levels. In many firms, the marketing function represents the greatest degree of contact with the external environment, the environment least controllable by the firm. In such firms, marketing plays a pivotal role in strategy development. In its strategic role, marketing consists of establishing a match between the firm and its environment. It seeks solutions to problems of deciding (a) what business the firm is in and what kinds of business it may enter in the future and (b) how the chosen field(s) of endeavor may be successfully run in a competitive environment by pursuing product, price, promotion, and distribution perspectives to serve target markets. In the context of strategy formulation, marketing has two dimensions: present and future. The present dimension deals with the existing relationships of the firm to its environments. The future dimension encompasses intended future relationships (in the form of a set of objectives) and the action programs necessary to reach those objectives. The following example illustrates the point. McDonald’s, the hamburger chain, has among its corporate objectives the goal of increasing the productivity of its operating units. Given the high proportion of costs in fixed facilities, McDonald’s decided to increase facility utilization during off-peak hours, particularly during the morning hours.

The program developed to accomplish these goals, the Egg McMuffin, was followed by a breakfast menu consistent with the limited product line strategy of McDonald’s regular fare. In this example, the corporate goal of increased productivity led to the marketing perspective of breakfast fare (intended relationship), which was built over favorable customer attitudes toward the chain (existing relationship). Similarly, a new marketing strategy in the form of McDonald’s Chicken Fajita (intended relationship) was pursued over the company’s ability to serve food fast (existing relationship) to meet the corporate goal of growth. Generally, organizations have identifiable existing strategic perspectives; however, not many organizations have an explicit strategy for the intended future. The absence of an explicit strategy is frequently the result of a lack of top management involvement and commitment required for the development of proper perspectives of the future within the scope of current corporate activities. Marketing provides the core element for future relationships between the firm and its environment. It specifies inputs for defining objectives and helps formulate plans to achieve them.

CONCEPT OF STRATEGIC PLANNING Strategy specifies direction. Its intent is to influence the behavior of competitors and the evolution of the market to the advantage of the strategist. It seeks to change the competitive environment. Thus, a strategy statement includes a description of the new competitive equilibrium to be created, the cause-and-effect relationships that will bring it about, and the logic to support the course of action.

Planning articulates the means of implementing strategy. A strategic plan specifies the sequence and the timing of steps that will alter competitive relationships. The strategy and the strategic plan are quite different things. The strategy may be brilliant in content and logic; but the sequence and timing of the plan, inadequate. The plan may be the laudable implementation of a worthless strategy. Put together, strategic planning concerns the relationship of an organization to its environment. Conceptually, the organization monitors its environment, incorporates the effects of environmental changes into corporate decision making, and formulates new strategies.

A Strategic Planning Scorecard

• Is our planning really strategic? Do we try to anticipate change or only project from the past?

• Do our plans leave room to explore strategic alternatives? Or do they confine us to conventional thinking?

• Do we have time and incentive to investigate truly important things? Or do we spend excessive planning time on trivia?

• Have we ever seriously evaluated a new approach to an old market? Or are we locked into the status quo?

• Do our plans critically document and examine strategic assumptions? Or do we not really understand the implications of the plans we review?

• Do we consistently make an attempt to examine consumer, competitor, and distributor responses to our programs? Or do we assume the changes will not affect the relationships we have seen in the past?

Companies that do well in strategic planning define their goals clearly and develop rational plans to implement them. In addition, they take the following steps to make their strategic planning effective:

• They shape the company into logical business units that can identify markets, customers, competitors, and the external threats to their business. These business units are managed semi-autonomously by executives who operate under corporate financial guidelines and with an understanding of the unit’s assigned role in the corporate plan.

• They demonstrate a willingness at the corporate level to compensate line managers on long-term achievements, not just the yearly bottom line; to fund research programs that could give the unit a long-term competitive edge; and to offer the unit the type of planning support that provides data on key issues and encourages and teaches sophisticated planning techniques.

• They develop at the corporate level the capacity to evaluate and balance competing requests from business units for corporate funds, based on the degree of risk and reward.

• They match shorter-term business unit goals to a long-term concept of the company’s evolution over the next 15 to 20 years. Exclusively the CEO’s function, effectiveness in matching business unit goals to the firm’s evolution may be tested by the board of directors.

Strategic Planning: An Example The importance of strategic planning for a company may be illustrated by the example of the Mead Corporation. The Mead Corporation is basically in the forest products business. More than 75 percent of its earnings are derived from trees, from the manufacture of pulp and paper, to the conversion of paperboard to beverage carriers, to the distribution of paper supplies to schools. Mead also has an array of businesses outside the forest products industry and is developing new technologies and businesses for its future, primarily in storing, retrieving, and reproducing data electronically. In short, Mead is a company growing in the industries in which it started as well as expanding into areas that fit the capabilities and style of its management. Although Mead was founded in 1846, it did not begin to grow rapidly until around 1955, reaching the $1 billion mark in sales in the late 1960s. Unfortunately, its competitive position did not keep pace with this expansion. In 1972 the company ranked 12th among 15 forest products companies. Clearly, if Mead was to become a leading company, its philosophy, its management style and focus, and its sense of urgency - its whole corporate culture - had to change. The vehicle for that change was the company’s strategic planning process. When top managers began to discuss ways to improve Mead, they quickly arrived at the key question: What kind of performing company should Mead be? They decided that Mead should be in the top quartile of those companies with which it was normally compared. Articulation of such a clear and simple objective provided all levels of management with a sense of direction and with a frame of reference within which to make and test their own decisions. This objective was translated into specific long-term financial goals. In 1972 a rigorous assessment of Mead’s businesses was made. The results of this assessment were not comforting - several small units were in very weak competitive positions.

They were substantial users of cash that was needed elsewhere in businesses where Mead had opportunities for significant growth. Mead’s board decided that by 1977 the company should get out of certain businesses, even though some of those high cash users were profitable. Setting goals and assessing Mead’s mix of businesses were only the first steps. Strategic planning had to become a way of life if the corporate culture was going to be changed. Five major changes were instituted. First, the corporate goals were articulated throughout the company - over and over and over again. Second, the management system was restructured. This restructuring was much easier said than done. In Mead’s pulp and paper businesses, the culture expected top management to be heavily involved in the day-to-day operation of major facilities and intimately involved in major construction projects, a style that had served the company well when it was simply a producer of paper. By the early 1970s, however, Mead was simply too large and too diverse for such a hands-on approach. The nonpulp and paper businesses, which were managed with a variety of styles, needed to be integrated into a more balanced management system. Therefore, it was essential for top management to stay out of day-to-day operations. This decision allowed division managers to become stronger and to develop a greater sense of personal responsibility for their operations. By staying away from major construction projects, top managers allowed on-site managers to complete under budget and ahead of schedule the largest and most complex programs in the company’s history. Third, simultaneously with the restructuring of its management system, seminars were used to teach strategic planning concepts and techniques. These seminars, sometimes week-long sessions, were held off the premises with groups of 5 to 20 people at a time. Eventually, the top managers in the company became graduates of Mead’s approach to strategic planning. Fourth, specific and distinctly different goals were developed and agreed upon for each of Mead’s two dozen or so business units. Whereas the earlier Mead culture had charged each operation to grow in any way it could, each business unit now had to achieve a leadership position in its markets or, if a leadership position was not practical, to generate cash. Finally, the board began to fund agreed-upon strategies instead of approving capital projects piecemeal or yielding to emotional pleas from favorite managers. The first phase of change was the easiest to accomplish. Between 1973 and 1976, Mead disposed of 11 units that offered neither growth nor significant cash flow.

Over $100 million was obtained from these divestitures, and that money was promptly reinvested in Mead’s stronger businesses. As a result, Mead’s mix of businesses showed substantial improvement by 1977. In fact, Mead achieved its portfolio goals one year ahead of schedule. For the remaining businesses, developing better strategies and obtaining better operating performance were much harder to achieve. After all, on a relative basis, the company was performing well. With the exception of 1975, 1984, 1989, and 1994, the years from 1973 to 1997 set all-time records for performance. The evolution of Mead’s strategic planning system and the role it played in helping the good businesses of the company improve their relative performance are public knowledge. The financial results speak for themselves. In spite of the divestitures of businesses with sales of over $500 million, Mead’s sales grew at a compound rate of 9 percent from 1973 to reach $5.1 billion in 1997. In addition, by the end of 1993, Mead’s return on total capital (ROTC) reached 11.2 percent. More important, among 15 forest products companies with which Mead is normally compared, it had moved from twelfth place in 1972 to second place in 1983, a position it continued to maintain in 1994. These were the results of using a strategic planning system as the vehicle for improving financial performance. During the period from 1988 to 1993, Mead took additional measures to increase its focus in two areas: (a) its coated paper and board business and (b) its value-added, less capital-intensive businesses (the distribution and conversion of paper and related supplies and electronic publishing). Today Mead is a well-managed, highly focused, aggressive company. It is well positioned to be exceptionally successful in the rest of 1990s, and beyond.

Strategic Planning: Emerging Perspectives Many forces affected the way strategic planning developed in the 1970s and early 1980s. These forces included slower growth worldwide, intense global competition, burgeoning automation, obsolescence due to technological change, deregulation, an explosion in information availability, more rapid shifts in raw material prices, chaotic money markets, and major changes in macroeconomic and sociopolitical systems. As a result, destabilization and fluidity have become the norm in world business. Today there are many, many strategic alternatives for all types of industries. Firms are constantly coming up with new ways of making products and getting them to market. Comfortable positions in industry after industry (e.g., in banking, telecommunications, airlines, automobiles) are disappearing, and barriers to entry are much more difficult to maintain. Markets are open, and new competitors are coming from unexpected directions. To steadily prosper in such an environment, companies need new strategic planning perspectives. First, top management must assume a more explicit role in strategic planning, dedicating a large amount of time to deciding how things ought to be instead of listening to analyses of how they are. Second, strategic planning must become an exercise in creativity instead of an exercise in forecasting. Third, strategic planning processes and tools that assume that the future will be similar to the past must be replaced by a mindset obsessed with being first to recognize change and turn it into competitive advantage. Fourth, the role of the planner must change from being a purveyor of incrementalism to that of a crusader for action. Finally, strategic planning must be restored to the core of line management responsibilities. These perspectives can be described along six action-oriented dimensions: managing a business for competitive advantage, viewing change as an opportunity, managing through people, shaping the strategically managed organization, managing for focus and flexibility, and managing fit across all functions. Considering these dimensions can make strategic planning more relevant and effective.

Managing for Competitive Advantage. Organizations in a market economy are concerned with delivering a service or product in the most profitable way. The key to profitability is to achieve a sustainable competitive advantage based on superior performance relative to the competition. Superior performance requires doing three things better than the competition. First, the firm must clearly designate the product/market, based on marketplace realities and a true understanding of its strengths and weaknesses. Second, it must design a winning business system or structure that enables the company to outperform competitors in producing and delivering the product or service. Third, management must do a better job of managing the overall business system, by managing not only relationships within the corporation but also critical external relationships with suppliers, customers, and competitors. In turn, the notion of white-space opportunities is proving especially compelling for highly decentralized companies such as Hewlett-Packard Co. HP Chairman Lewis E. Platt now believes his most important role in strategy formulation is to build bridges among the company’s various operations. “I don’t create business strategies,” argues Platt. “My role is to encourage discussion of the white spaces, the overlap and gap among business strategies, the important areas that are not addressed by the strategies of individual HP businesses.” As an example, Hewlett-Packard Co. brings its customers and suppliers together with the general managers of its many business units in strategy sessions aimed at creating new market opportunities. In each case, HP defines a “business ecosystem,” the framework for its managers to explore and analyze. In an ecosystem, companies sometimes compete and often cooperate to come up with innovations, create new products, and serve customers.

Most of the business managers are so busy minding their current businesses that is is hard to step out and see threats or opportunities. But by looking at the entire ecosystem, it provides a broad perspective to them. It gets people out of their boxes. A session on the ecosystem for the automotive industry saw HP assembling managers from divisions that make service-bay diagnostic systems for Ford Motor Co., workstations in auto manufacturing plants, and electronic components for cars. The company also invited customers and suppliers. What could all these divisions do together to create new value for the industry? “Many of the opportunities came right out of the mouth of customers.” Possibilities included creating “smart” highway systems or building integrated systems that would collect service problems and immediately feed them back to Detroit. It changes the vision of the business future and managers start thinking about how they can get increased value from all the pieces of the company. By inviting such a broad range of people to the strategy table, HP gained viewpoints that would normally not be heard. Yet those opinions are critical to creating future products and markets.

Viewing Change as an Opportunity. A new culture should be created within the organization such that managers look to change as an opportunity and adapt their business system to continuously emerging conditions. In other words, change should not be viewed as a problem but as a source of opportunity, providing the potential for creativity and innovation.

Managing through People. Management’s first task is to create a vision of the organization that includes (a) where the organization should be going, again based on a clear examination of the company’s strengths and weaknesses; (b) what markets it should compete in; (c) how it will compete; and (d) major action programs required. The next task is to convert vision to reality - to develop the capabilities of the organization, to expedite change and remove obstacles, and to shape the environment. Central to both the establishment and execution of a corporate vision is the effective recruitment, development, and deployment of human resources. “In the end, management is measured by the skill and sensitivity with which it manages and develops people, for it is only through the quality of their people that organizations can change effectively.’’13 Electronic Data Systems Corp., which manages large-scale data centers, has opened its strategic-planning process to a broad range of players. In 1992, EDS launched a major strategy initiative that involved 2,500 of its 55,000 employees. The company picked a core group of 150 staffers from around the world for the yearlong assignment. The group ranged from a 26-year-old systems engineer who had been with EDS for two years to a sixty-something corporate vice-president with a quarter of a century of EDS experience. The staffers identified potential “discontinuities” that could threaten or pose opportunities for EDS. They isolated the company’s core competencies - what it does best and how that differentiates it from the competition. And they crafted a “strategic intent” - a point of view about its future. As has been said, “We discovered that in order for us to make information technology valuable to people, we had to be able to go into a company and offer consulting to provide more complete solutions, and we couldn’t do that without building a business strategy.”13 So EDS began to create a management- consulting practice, acquiring A.T. Kearney Inc. for $600 million. Similar approaches have been used by a wide range of companies, including Marriott Hotels and Helene Curtis Industries.

Shaping the Strategically Managed Organization. Management should work toward developing an innovative, self-renewing organization that the future will demand. Organizational change depends on such factors as structure, strategy, systems, style, skills, staff, and shared values. Organizations that take an externally focused, forward-looking approach to the design of these factors have a much better chance of self-renewal than those whose perspective is predominantly internal and historical.

Managing for Focus and Flexibility. Today, strategic planning should be viewed differently than it was viewed in the past. A five-year plan, updated annually, should be replaced by an ongoing concern for the direction the organization is taking. Many scholars describe an ongoing concern for the direction of the firm, that is, concern with what a company must do to become smart, targeted, and nimble enough to prosper in an era of constant change, as strategic thinking. The key words in this pursuit are focus and flexibility. Focus means figuring out and building on what the company does best. It involves identifying the evolving needs of customers, then developing the key skills - often called the core competencies - making sure that everyone in the company understands them. Flexibility means sketching rough scenarios of the future (i.e., bands of possibilities) and being ready to pounce on opportunities as they arise. The point may be illustrated with reference to Sears. From 1985 to 1994, about $163 billion of stock market value was created in the retail industry. Some 25 companies were responsible for creating 85% of that wealth, and many of them did it with “business designs” that featured stores outside shopping malls, with low prices, quality merchandise, and broad selection. While Wal-Mart Stores Inc. generated $42 billion and Home Depot Inc. added $20 billion in value, Sears’s retail operations captured less that $1 billion in that 10-year period. How did it happen? Like so many American business icons, Sears lost sight of its customers. They did not know whom they wanted to serve. That was a huge hole in the company’s strategy. They were also not clear on what basis they thought they could win against the competition. A major strategy overhaul led to the disposal of nonretail assets and a renewed focus on Sears’s core business.

The company renovated dowdy stores, upgraded women’s apparel, and launched a new ad campaign to engineer a major turnaround at the department-store giant. One of the things that got the company in trouble was its lack of focus on the customer. Extensive customer research discovered high levels of brand loyalty to Sears’s hardware lines. The research also suggested that by segmenting the do-it-yourself market and focusing on home projects with a low degree of complexity, say, papering a bathroom or installing a dimmer switch, Sears could avoid a major competitive collision with Home Depot and other home-improvement giants. Customers, the Sears research showed, desired convenience more than breadth of category in such hardware stores. After successfully testing the concept of hardware outlets, the company is now making a billion-dollar capital bet that Sears can gain growth in this new market. It hopes to have 1,000 freestanding, 20,000-square-foot hardware stores built in five years, with 200 of them running by 1998, at a cost of $1.25 million per outlet.

Managing Fit Across All Functions. Different functions or activities must reinforce each other for a successful strategy. A productive sales force, for example, confers a greater advantage when the company’s product embodies premium technology and its marketing approach emphasizes customer assistance and support. A production line with high levels of model variety is more valuable when combined with an inventory and order-processing system that minimizes the need for stocking finished goods, a sales process equipped to explain and encourage customization, and an advertising theme that stresses the benefits of product variations that meet a customer’s special needs. Such complementaries are pervasive in strategy.