Historian and intellectual thinker Robert Aron said “Strategic thought draws its inspiration each century, or rather at each moment of history, from the problems which events themselves pose.”
Each age has its own strategy. The military and political strategies of the past were the products of their times, just as business strategy is of the present.
Throughout history, the nature and purpose of strategy has not changed. From Alexander the Great to Henry Ford to Bill Gates, strategists have responded to the economic, social, and technological conditions of their day. What has changed is the conscious effort to analyze, create, and apply strategy.
In the late 1950s and early 1960s, business strategy emerged as a new field with distinct intellectual properties. A small number of creative strategic thinkers took a new look at business – a world that was focused on the practical and the present. The bodies of thought they created were unlike any that had come before. Their ideas would prove enormously influential, and strategic thought would become the new way of conceiving, assessing, and implementing a path to the future.
The main schools of thought that form the basis of modern strategy development evolved through five main phases:
- strategic planning
- competitive advantage
- strategy processes
- dynamic strategy
Strategic planning is an organizational activity that creates plans of action for achieving goals, and communicates those plans in a coordinated manner. Strategic planning assesses the organization’s position in relation to its environment, relating internal strengths and weaknesses to external opportunities and threats.
As early as the 1920s, the Harvard Business School developed strategic planning methodologies for business. These early strategies focused on implementing organizational policies that led to improved economic performance. In the 1950s, the focus of strategic planning shifted away from organizational policy, and toward the management of growth, risk, and market share. By the 1960s, strategic planning was a recognized discipline that embraced the “design school,” which held that strategy was a method to find a match between an organization’s capabilities and opportunities within the competitive environment.
An environmental analysis method was developed for assessing a company’s situation. It was called a SWOT analysis after the internal strengths and weaknesses, and external opportunities and threats that it assessed. These characteristics were used as the criteria to make choices about the overall strategy for the organization.
The next evolutionary stage was the period of generalization – the search for universal rules and concepts that govern the development of business strategy. Generalization deals with the idea that generic strategic frameworks can be defined that fit all organizations in all circumstances. The strategies make use of tools, such as benchmarking, to compare performance. Benchmarking is the practice of examining the best practices in an industry and using that knowledge as the basis for an improvement in all aspects of operations.
During the 1970s, strategic thinkers focused on generic strategies to help improve the competitive position of an organization. One of the most influential was Michael Porter. Porter argued that organizations have to make a choice between three basic generic strategies, each requiring a different set of skills and resources. The three strategies are:
- cost leadership – In a cost leadership strategy, an organization concentrates on lowering its production costs to below that of its competitors. Competitive advantage is gained either from higher profits or by gaining market share through lower prices.
- differentiation – In a differentiation strategy, an organization seeks to be unique in a way that is valued by customers. Competitive advantage comes from adding value to products and services through the addition of unique features or benefits that generate a higher price and a better profit margin.
- focus – In a focus strategy, an organization targets a market segment or demographic group and tailors its strategy to serve that group to the exclusion of others. Although differentiation and cost leadership may be used, the main focus is on fulfilling the needs of the target niche. Competitive advantage comes from dominating the targeted market segment.
Competitive advantage is the specific characteristics and factors that differentiate an organization and make it more successful than its competitors. Competitive advantage grows out of creating value – the perceived worth of a product, service, or process relative to its cost to produce. During the 1980s, the focus shifted to strategies involving competitive advantage. Strategists realized that superior performance could not reliably be achieved by identifying characteristics, as in strategic planning, or by applying generic frameworks, as in generalization.
There are two basic types of competitive advantage:
- Resource-based strategies take advantage of the resources and capabilities available to the organization, determining what would best be exploited to obtain competitive advantage.
- Activities-based strategies create value by effectively coordinating internal activities and resources by improving the quality and speed of processes.
Strategy processes are the cognitive and behavioral routines that organizations use to generate and adapt strategies, and to develop the capabilities to manage those strategies. In essence, strategy processes concern the impact of an activity on its own outcome. They encompass actions that are intended to result in anticipated outcomes, and actions that emerge as a result of responding to change.
The 1980s and 1990s brought a growing interest in how strategies are formulated and implemented within organizations, and how the process of strategic change occurs and develops over time. Strategists realized that business performance was influenced by the processes by which strategies were implemented, and how those processes affected the outcome.
Professor Henry Mintzberg was one of the first strategists to note that there was often a difference between an organization’s intended strategy and its realized strategy. Put simply, an intended strategy is what is planned to happen, and a realized strategy is what actually does happen. The difference between what is planned and the results can be explained by how the strategy is implemented – strategy processes.
An important part of the phase of strategy processes was the concept of the application of knowledge. Knowledge strategy designs an organization’s future based on using knowledge effectively. Intellectual resources and capabilities are treated as assets. Knowledge strategy involves the identification of intellectual gaps and surpluses, which are then managed to enhance organizational performance. That process of discovery through evaluation, and application of knowledge to improve future performance is known as “lessons learned.”
The most recent phase in strategic development is dynamic strategy. This involves the continuous monitoring and upgrading of strategic plans. It places importance on a partnership between planning and innovation. A dynamic strategy responds to changing conditions. The concept grew out from the rapid change of today’s business world. Strategists came to realize that in modern business, strategy works as an ongoing process, not a rigid plan of attack. Dynamic strategy recognizes that there are times that either opportunity or threat dictates that strategy must be reassessed. These critical points of change are called strategic inflection points.
One of the cornerstones of dynamic strategy is how effectively knowledge is managed and distributed within the organization. In dynamic environments, underlying conditions often change before a strategy can be fully implemented. Strategy formulation and implementation is regarded as a constant learning process and the quality of strategy directly depends on the quality of the organization’s learning systems.
Modern business strategy has made significant strides since its beginnings in the early twentieth century. Each new phase of development has brought forth new concepts and contributed to the understanding of how business strategy can be used to create and sustain a dynamic competitive organization.
Schools of strategic thought
In the late 1990s, Dr. Henry Mintzberg, along with colleagues Drs. Bruce Ahlstrand and Joseph Lampel, published a landmark work on business strategy. In it, they identified ten key schools of thought, which were grouped into one of three coherent categories of strategy formulation. Each school of strategic thought falls into one of three groupings: the prescriptive schools, the descriptive schools, and the configuration school.
The Prescriptive schools
There are three prescriptive schools. These schools are concerned with how strategies should be formed.
- The design school approach takes a conceptual view. Its view is that the fit between an organization and its environment is the most important factor in strategy. The design school model places primary emphasis on SWOT (strengths, weaknesses, opportunities, threats) analysis. The key players are members of senior management who formulate clear and simple strategies and communicate them to staff.
- The planning school perspective takes a constructive view. It builds on the design school but is more formal in application. Strategy is delineated into distinct steps, measurable by tools such as checklists. The key players are strategic planners, who specialize in the creation of formal process maps with specific steps that lead to the realization of strategies.
- The positioning school perspective takes an analytical view. The aim of positioning strategy is to create a strong defendable position against the competition by creating a sustainable strategic advantage. The key players are analysts, who monitor and steer an organization toward a favorable market position by using tools such as benchmarking.
The Descriptive schools
There are six descriptive schools. These schools are concerned with what happens during the creation of strategy.
The entrepreneurial school takes a visionary view. It focuses on strategy formulation by embracing the views of a visionary. This is most often a charismatic business leader with the vision of creating a unique market position using the company’s resources. The key player is the company leader.
The cognitive school involves understanding strategic vision and how strategy unfolds and develops. Strategic models and psychological analysis are tools used in the understanding of strategy as a cognitive process. Key players are strategic thinkers who conceptualize and translate how vision and inspiration actually work.
- The learning school involves using strategy as an educational tool. It takes the premise that the future is unpredictable and concentrates practical application of strategy in the present. Lessons learned from experiences are quickly applied throughout the organization. In this school, strategies emerge in small steps, with options for change intact, as an organization learns and reassesses at each step. Key players are in all levels of management.
- The power school sees strategy as an exercise in power where “battles” are fought by managers over resources, markets, and profit. Strategy formulation is a process that takes advantage of politics, bargaining, and confrontation to better the position of the organization. Key players are the power brokers within an organization.
- The cultural school takes a collective and cooperative approach to strategy. It is the opposite of the power school. Strategies are devised by collective thought and contribution to the strategy process. The cultural school creates loyalty by fostering ownership by creating a shared vision. Social interaction is a key tool and everyone in the organization is a key player in this school.
- The environmental school suggests that the goal of strategy is to survive the shifts and changes in the business environment. It focuses on agility and contingency planning and preparedness. Tools involve agile production and risk management. Key players are in management.
The final grouping, the configuration school, focuses on the strategy of transformation. In essence, it is strategy to manage strategy. It involves the use and combination of elements of both the prescriptive and descriptive schools.
The Configuration school
The configuration school views strategies as resources. These resources fulfill their purpose and remain relatively stable for periods of time. But periodically, an organization will go through a transformative period. This type of dramatic change often happens in response to times of crisis or of great opportunity. When this happens, strategic resources have to be reconfigured.
It is natural and inevitable that all organizations go through change. The key to strategic management is to maintain stability and adaptability during that change. The configuration school deals with planning what the new strategic approach will be, as well as what strategic approach to take in managing the transformation without catastrophic disruption.
Each school of strategic thought has its own place in a particular environment, in a set period of time, and under certain conditions. All organizations are unique, and each one will seek the type of strategic approach to achieve the best performance in its own competitive environment. The variation of approaches in the schools of strategic thought can be perplexing. However, the prescriptive, descriptive, and configuration schools have a common objective – to find a pattern that separates success from failure.