Learning Objectives
After this section, you should have a solid understanding of
- the concept of value-based strategy illustrated by the value stick,
- the difference between value and profit,
- main value drivers and how they can be implemented,
- the different perspectives on strategy, the related schools and their impact on strategic management;
- the phases, outcomes, challenges, and interrelations of the strategic management process;
- and the difference between strategies and tactics.
You are able to apply the knowledge gained to real-life scenarios to describe and provide explanations for strategic decisions made by firms.
Value-Based Strategy
In a Nutshell
Strategy?
A plan to create value.
This captures the core idea; the full picture is more complex.
This simple definition captures the essence of value-based strategy as proposed by Felix Oberholzer-Gee. While strategy involves many complexities, at its core it’s fundamentally about creating value for stakeholders.
Value-Based Strategy
According to the value-based strategy framework, organizations should focus on four key questions:
- To what extent do customers demonstrate a willingness to pay for the company’s offerings?
- What pricing strategy does the company employ and how does it compare to competitors?
- What are the primary costs associated with production and delivery, and how does the company manage these?
- What factors motivate suppliers or employees to work with the company?
The framework emphasizes that successful companies create value for customers, employees, and suppliers while capturing value (generating profit) from operations.
Value vs. Profit
The difference between value and profit is fundamental:
- Value refers to the total benefit created for all stakeholders (customers, employees, suppliers, shareholders)
- Profit is the portion of value that the company captures for itself
- Sustainable competitive advantage comes from creating more total value, not just capturing more for the company
- Value creation and value capturing should be balanced: companies that only focus on capturing value may harm long-term relationships
Perspectives on Strategy
5 Ps for Strategy
Mintzberg (1987) identified five definitions of strategy that each describe strategic management differently:
Strategy as Plan
Strategy sometimes refers to a plan: some sort of consciously intended course of action, or a set of guidelines to deal with a situation. By this definition, strategies have two essential characteristics:
- They are made in advance of intended actions.
- They are developed consciously and purposefully before taking action.
Example: An automobile manufacturer develops a detailed 5-year strategic plan outlining product launches, market expansion, and cost reduction targets.
Strategy as Ploy
A ploy refers to a specific maneuver or tactic employed to outwit competitors or achieve a particular objective. Strategy as ploy:
- Is a specific ‘manoeuvre’ intended to outwit an opponent or competitor
- Takes advantage of the opponent or competitor vulnerability
- May involve diversion or deception
Example: A beverage company lowers prices temporarily to gain competitive advantage during a promotion or to respond to a competitor’s move.
Strategy as a Pattern
Patterns in strategy refer to consistency and regularity of actions over time. These patterns emerge from the cumulative effect of an organization’s actions and reveal its strategy in practice:
- Strategy is consistency in behavior, whether or not intended
- Plans refer to intended strategy, patterns refer to realized strategy
- Plans and patterns can be quite independent of each other
Example: A fast-food chain consistently focuses on introducing new menu items and promotions every season, creating an anticipated pattern of innovation.
Strategy as Position
Positioning involves finding a distinctive and favorable place in the market or industry:
- Strategy seeks a match between the internal and external context
- A position can be targeted through a plan, or found through a pattern of behavior
- Position may be defined with respect to competitors, the market, or to avoid/subvert competition
Example: A luxury fashion brand positions itself as high-end and exclusive with limited distribution and premium pricing.
Strategy as Perspective
Strategy as perspective is an ingrained way of perceiving the world:
- A collective intuition about how the world works
- Can be referred to as culture or ideology
- Is shared by members of the organization
- Strategy is a concept that exists in the minds of interested parties
Example: An environmentally conscious company adopts a perspective of sustainability in all business operations.
Interrelating the Ps
Mintzberg’s five Ps framework recognizes that strategy involves dynamic interplay of different perspectives, where one P can give rise to others in various ways.
How Ps lead to others
- A perspective may give rise to a plan
- A pattern may emerge and give rise to a formal plan
- Patterns may give rise to perspectives
Examples of interplay
- Netflix: Behavioral patterns of data-driven decisions led to a data-driven perspective that now guides all strategic planning
- Kodak: Immutable perspective about film photography prevented changes to plans and positions, despite technological shifts
- Toyota: Recognizing patterns of inefficiency led to the Toyota Production System plan, which transformed manufacturing perspective industry-wide
Each perspective focuses attention on important aspects of the organization and its strategy. Together, they enhance our ability to understand and manage the processes by which strategies form.
Perspectives gives rise to plans, plans are realized thorugh an integrated set of patterns
- Perspective: Ryanair’s underlying perspective is to provide low-cost, reliable air travel with a focus on customer service. This perspective shapes all their strategic decisions and organizational culture.
- Plan: Based on this perspective, Ryanair developed a plan to operate as a low-cost carrier. This included strategies like using a single type of aircraft (Boeing 737) to reduce maintenance costs, offering no-frills service, and focusing on point-to-point routes instead of the traditional hub-and-spoke model.
- Position: Ryanair positioned itself in the market as a low-cost alternative to traditional airlines. This clear positioning helped them attract price-sensitive customers and differentiate themselves from competitors.
- Pattern: Over time, the consistent execution of their low-cost strategy led to emergent patterns of behavior. For example, their employees became known for their friendly and efficient service, and the airline developed a reputation for punctuality and reliability.
- Ploy: Occasionally, Ryanair used tactical ploys to outmaneuver competitors, such as entering new markets with aggressive pricing to quickly gain market share.
This example illustrates how a strong perspective can lead to a clear plan and position on how to create value, which then results in consistent patterns of behavior that reinforce Ryanair’s strategic goals.
Recognizing and addressing patterns led to a strategic plan that reshapes perspectives on value creation
- Patterns: In the mid-20th century, Toyota recognized the importance of behavioral patterns to reduce inefficiencies and waste in their production processes.
- Plan: Toyota developed the Toyota Production System (TPS), which focused on eliminating waste (muda), improving quality, and increasing efficiency. This plan introduced concepts like Just-In-Time (JIT) production and Jidoka (automation with a human touch).
- Perspective: Over time, the successful implementation of TPS transformed Toyota’s perspective on manufacturing. They began to see continuous improvement (Kaizen) and respect for people as core principles of their business philosophy. This perspective not only shaped their internal culture but also influenced the broader manufacturing industry.
This example illustrates how recognizing and addressing patterns of inefficiency led to a strategic plan that ultimately reshaped Toyota’s (and even the industry’s) entire approach to create value.
Behavioral patterns give rise to a perspective (i.e., a perpsective is consolidated around what worked)
- Patterns: Netflix has consistently based its decisions and services on data (e.g. by identifying binge-worthy series and making personalised recommendations), and has found that this leads to higher user satisfaction and retention.
- Perspective: These patterns led Netflix to adopt a data-driven perspective. They began to see data analytics as crucial for understanding and predicting customer behavior. This perspective emphasized the importance of leveraging big data to make informed decisions about content creation, acquisition, and recommendation algorithms.
This shift to a data-driven perspective has been instrumental in Netflix’s success, allowing them to consistently deliver content that resonates with their audience and maintain a competitive edge in the streaming industry.
Immutable perspectives impeding changes to plans and positions
- Perspective: Kodak had a long-standing perspective that film photography was their core business. This perspective was deeply ingrained in their corporate culture and strategic thinking.
- Plan: Based on this perspective, Kodak continued to invest heavily in film technology and production, even as digital photography began to emerge. Their strategic plans focused on improving film quality and expanding film-based services.
- Position: Kodak maintained its market position as a leader in film photography, largely ignoring the growing digital market. They believed that digital photography would not significantly impact their core business.
Despite having developed one of the first digital cameras in the 1970s, Kodak’s commitment to their traditional perspective prevented them from fully embracing digital technology. This resistance to change ultimately led to a decline in their market share and financial troubles as digital photography became the industry standard.
Schools of Strategy
Overview
Strategy literature has been characterized by ten major schools since its inception in the 1960s: three prescriptive and seven descriptive (Mintzberg, 2014). These perspectives represent different processes of strategy development and implementation.
Prescriptive Schools
Design school: Strategy as a process of conception. Views strategy as achieving fit between internal capabilities and external possibilities through formal analysis.
Planning school: Strategy as a formal process. Emphasizes systematic planning with detailed steps, checklists, and techniques.
Positioning school: Strategy as an analytical process. Focuses on selecting optimal positions in marketplace through formal analysis of industry situations.
Descriptive Schools
Entrepreneurial school: Strategy as a visionary process. Emphasizes role of leadership vision and entrepreneurial insight.
Cognitive school: Strategy as a mental process. Focuses on how strategists think and process information.
Learning school: Strategy as an emergent process. Views strategy as emerging through organizational learning and adaptation.
Power school: Strategy as a process of negotiation. Emphasizes role of power, politics, and negotiation in strategy formation.
Cultural school: Strategy as a social process. Focuses on collective culture and shared beliefs in strategy formation.
Environmental school: Strategy as a reactive process. Views strategy as response to environmental forces.
Configuration school: Strategy as a process of transformation. Integrates other schools and focuses on organizational configurations and transformation.
Comparison of Schools
Each school offers a unique perspective on strategy formation, with specific strengths and potential limitations when taken to extremes.
| School | Illogical extreme | Intended message | Realized message |
|---|---|---|---|
| Design | Fixation | Fit | Think (strategy making as case study) |
| Planning | Ritual | Formalize | Program (rather than formulate) |
| Positioning | Fortification | Analyze | Calculate (rather than create or commit) |
| Entrepreneurial | Idolatry | Envision | Centralize (then hope) |
| Cognitive | Fantasy | Cope or create | Worry (being unable to cope in either case) |
| Learning | Drift | Learn | Play (rather than pursue) |
| Power | Intrique | Promote | Hoard (rather than share) |
| Cultural | Essentricitiy | Coalesce | Perpetuate (rather than change) |
| Environmental | Conformity | React | Capitulate (rather than confront) |
| Configurational | Degeneration | Integrate, transform | Lump (rather than split, adapt) |
Each school has value, but problems arise when any single school dominates thinking or is taken to its logical extreme.
Strategic Management
Definition
Strategic management is a process that encompasses the formulation, implementation, and adaptation of cross-functional decisions to achieve organizational objectives (Mintzberg, 2014).
Strategic management characteristics:
- Process-oriented: Ongoing, continuous process rather than one-time event
- Deliberate and emergent: Combines planned intentions with adaptive responses
- Influenced by multiple factors: Not solely rational but affected by cognitive limitations, political dynamics, and cultural factors
- Cross-functional: Involves decisions spanning multiple organizational functions
- Proactive orientation: Allows organizations to be more proactive than reactive in shaping their future
Some authors use strategic management synonymously with strategic planning, though strategic management typically refers to the broader process including formulation, implementation, and evaluation.
Phases of Strategic Management
Strategic management involves three interconnected phases: formulation, implementation, and evaluation, with feedback loops connecting all phases.
Formulation of Strategy
Involves developing and conceptualizing a company’s strategy:
- Strategic planning, setting objectives
- Making strategic choices about direction and resource allocation
- Focuses on the “what” and “why” of strategy
- Primarily involves top management and leaders
Implementation of Strategy
Transforms formulated strategies into operational activities:
- Allocating resources, setting up systems and processes
- Ensuring day-to-day activities align with chosen strategy
- Focuses on the “how” of strategy
- Involves middle and lower-level management and employees throughout organization
- Often presents challenges related to coordination, communication, and culture
Evaluation of Strategy
Systematic assessment of strategy performance:
- Monitoring key performance indicators and measuring progress
- Conducting regular reviews and assessing environmental changes
- Making adjustments based on evaluation findings
- Involves all levels of management in collaborative effort
The phases are interconnected with feedback loops, as evaluation findings influence both future formulation and current implementation.
Strategies vs. Tactics
Strategy is the pattern or plan that integrates an organisation’s major goals1, policies2 and programs3 into a cohesive whole (Mintzberg, 2014).
Strategy characteristics:
- Broad, high-level plans that guide organization’s overall direction and viability
- Long-term in nature
- Abstract and conceptual
- Define continuing basis for ordering adaptations towards broadly conceived purposes
Tactics characteristics:
- Specific, focused actions to address immediate challenges or opportunities
- Short-term in nature
- Concrete and specific
- Short duration, adaptive action-interaction realignments used to accomplish limited goals
Strategy is the pattern or plan that integrates an organisation’s major goals, policies and programs into a cohesive whole (Mintzberg, 2014):
- Goals state what is to be achieved, and by when
- Policies are rules or guidelines that express limits within which action should occur
- Programs specify step-by-step sequence of actions necessary to achieve major objectives
Competitive Advantage
Competitive advantage refers to factors that set a company apart from rivals and allow it to:
- Gain stronger market position
- Achieve higher profitability
- Sustain long-term success
- Provide superior value to customers or stakeholders
Competitive advantage can arise from:
- Internally developed core competencies or distinctive capabilities (Prahalad & Hamel, 2009)
- Configuration and coordination of the organization’s value chain (M. E. Porter, 1986)
- Various forms of unique attributes, but common goal is providing superior value compared to competitors
Operational Efficiency
Operational efficiency (OE) means executing similar day-to-day activities better than rivals, while strategic positioning means performing different activities from rivals, or performing similar activities in different ways (M. Porter, 1996).
Why OE cannot replace strategy:
- Competitors can often replicate operational improvements relatively quickly
- When OE is the basis of competition, it results in absolute improvements for all players, but relative advantage for no one
- Unless competitors collude, it leads to competitive convergence that can be destructive for the industry
- OE is essentially a backward-looking exercise: optimizing something already in place
- True strategic thinking involves creating new value and possibilities for top-line growth
Both OE and strategy are essential to superior performance, but OE alone cannot provide sustainable competitive advantage.
Key Takeaways
- Value-based strategy provides a simple yet comprehensive framework for understanding strategy as value creation and capture
- Multiple perspectives on strategy (5 Ps) each provide a distinct, complementary way to understand strategic management
- Different schools of strategy provide rich variety of approaches to strategy formation, each with unique insights and limitations
- Strategic management is a comprehensive process involving formulation, implementation, and evaluation with feedback loops
- Strategy vs. tactics distinction helps clarify different levels of organizational decision-making
Review and Consolidation
The following questions are designed to review and consolidate what you have learned and are a good starting point for preparing for the exam.
Value-Based Strategy
Read Felix Oberholzer-Gee’s article about eliminating strategic overload to enhance your understanding of his strategy concept and work on the following questions.
- What is a value-based strategy?
- According to Oberholzer-Gee, what are the key components of a value-based strategy?
- How does creating value for customers, employees, and suppliers contribute to a company’s long-term success?
- What is the difference between value and profit?
- Describe the main ways a company can create value under a value-based strategy. Through what can these be implemented?
- Provide an example of a company that has successfully implemented a value-based strategy. What specific actions did they take?
- What advises does Obehrolzer-Gee give with regard to the selection and implementation of strategic initiatives?
- What is the difference between value creation and value capturing (e.g., with regards to focus, process, and outcome)?
- What are the potential challenges and limitations of implementing a value-based strategy in an organization?
- Compare the value-based strategy approach with another strategic management theory you have studied / you will study. What are the key similarities and differences?
General Questions
- Discuss relationships among strategy as a pattern, plan, and perspective. What do these perspectives imply for strategic management? Give examples.
- Edward Deming, a famous businessman, once said, “In God we trust. All others bring data.” What did Deming mean in terms of formulating a strategy? To which school does that attitude belong?
- Why are objectives are essential for organizational success?
- What role do policies play in the strategic management process? Give examples.
- Why is strategy implementation often considered the most difficult stage in the strategic-management process?
- Give an example of a recent political development that changed the overall strategy of an organization.
Literature
Footnotes
Goals (or objectives) state what is to be achieved, and by when.↩︎
Policies are rules or guidelines that express the limits within which action should occur.↩︎
Programs specify the step-by-step sequence of actions necessary to achieve major objectives, i.e. how objectives will be achieved within the limits set by policy.↩︎