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Importance of Strategy in Organisational Performance

Organisational Analysis

Question: The likelihood of an organisation surviving its first five years has decreased in recent years. In this context, it has been suggested that strategy might be the Holy Grail, namely if driving companies towards strategic ambidexterity. Do you agree with this statement? Critically discuss both the role played by strategy in organisational performance, as well as the rationale, feasibility and limitations of ambidexterity.

Introduction

Strategy has traditionally been defined as “the determination of the log-run goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.” (Chandler, 1962:13). It encompasses “the pattern of objectives, purposes, or goals and the major policies and plans for achieving these 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.” (Andrews, 1971:28). The suggestion that strategy might be the key to organisational resilience directly relates to the relationship between strategy and performance. Strategic ambidexterity “is the capability that enables a firm to carry out inherently paradoxical strategies that embody and manifest two main strategic objectives” (Han and Celly, 2008:336). This essay will critically assess the role strategy has to play in organisational performance. I will consider the extent to which the role exists and if it plays this role in isolation or if it is necessary that other factors are considered in addition. It will also assess the strategic decision to pursue dual strategies as a solution for organisational performance and discuss the practicability of and impediments to such an approach.

Strategy and Performance

A review of research in the field of strategic management has shown that there are diverse ‘schools’ in the approach to strategy (Mintzberg and Lampel, 1999). Strategy has often been presented as the key solution to the lack of organisational resilience with Drucker (1994) suggesting it “is a theory about how a firm will win” (Johnson et al, 2018:4). However, having diverse conceptions of what strategy is or involves necessarily implies that these affect its resulting relationship with performance.

Mainstream ideas of strategy see it as a clear statement of what an organisation does which provides guidance and motivation for decisions and activities (Collins and Porras, 1996). The traditional approach views strategy as a plan and formal process for achieving organisational goals (Chandler, 1962). This may not necessarily be outlined from the offset but may eventually emerge from plans and policies to form a pattern (Andrews, 1971). Strategic analysis is also required to assess an organisation’s external and internal environment. By understanding both the macro-economic and industry situation as well as its key competencies and resource capabilities, an organisation can identify key success factors to achieve an ideal competitive position (Porter, 1985). Based on this analysis, an ideal strategy can be formulated, and this determines how an organisation operates. However, when related to improving performance, this approach is limited. For an organisation to perform well in an industry it must compete favourably with rivals, but this approach does not explain how these strategies are targeted at ensuring this. This does not mean the approach is inaccurate. Rather, as Mintzberg (1987:11) argued “the field of strategic management cannot afford to rely on a single definition of strategy”.

A more comprehensive understanding of strategy is that it is “the long-term direction of an organisation” (Johnson et al, 2018:4), which includes analysis, establishment of its intended strategic positioning and the tailored set of activities required to make it work (Porter, 1996). In deciding what its strategy should be, Montgomery (2008) argues that an organisation should focus on how and for whom it can make a difference. Porter (1985) has notably explored strategy from a perspective of sustainable competitive advantage focusing on deliberate choices, difference and competition. His view of strategy as possessing different dimensions provides a convincing framework for identifying strategy as the key to resilience. Five competitive forces, namely competitive rivalry, potential entrants, the threat of substitutes, and the power of clients and suppliers, have been identified as determinants of the profitability of an organisation (Porter, 1979). Strategy exists to cope with these forces to ensure returns on investments are yielded (Porter, 1985). To be effective, competitive advantages, which are how an organisation creates value for customers “both greater than the cost of supplying them and superior to that of rivals” (Johnson et al, 2018:144), must underpin competitive strategies.

Three generic strategies have been recognised as approaches for potential success (Porter, 1980). Cost-leadership is where an organisation focuses on operating at the lowest cost and involves the “aggressive construction of efficient-scale facilities, tight-cost and overhead control… and cost-minimization in areas like R&D, advertising, service…” (Porter, 2004:35). Operating at a low-cost position provides a defence against competition from rivals because lower cost means an organisation can earn good returns which is an indicator of good performance. However, it requires constant reinvestment in modern equipment and product quality must be equal or similar to that of competitors. It is also efficient only where the firm is the cost leader, not one of several which would mean competition among them (Porter, 1985). The constant focus on cost minimisation also creates the risk of neglecting product or marketing changes. Differentiation strategy involves differentiating a product in a manner which distinguishes it as unique in way that is valued by customers to allow for higher prices (Porter, 2004). This will typically depend on the industry and can be done along diverse dimensions such as customer service, technology, complements and others. This strategy ensures that the likelihood of substitution and price sensitivity is lower. However, there are risks including changes in buyer’s needs, imitation from competitors which diminishes the differentiation and in certain industries price differentials may become too large to hold brand loyalty. A focus strategy is where products are tailored to the needs of a narrow fragment or domain of activity, either focusing on price or differentiation. However, this strategy will only be effective if the target group has distinctive needs which cannot be more effectively or efficiently served by those competing more broadly (Porter, 2004). Also, implicitly there will be a limit to the achievable overall market share, as there is a “trade-off between profitability and sales volume”, which may be incompatible with the pursuit of growth (Porter, 2004:40). Additionally, a risk exists that competitors may find submarkets within the focus group and “outfocus focusers” or there could be convergence of the needs of the target and broader markets with singular products meeting both needs (Ibid).

The effectiveness of strategies requires an organisation’s activities to ‘fit’ and reinforce each other, resulting in operational effectiveness and hence better performance. It also ensures sustainability as it is difficult to match the interlocked activities necessary and coupled with the high cost of shifting strategic positions, deters ‘straddlers and repositioners’ (Porter, 1996). Differences in implementation, given these factors, explain variances in performance of companies despite similar strategies.

Therefore, the pursuit of these strategies is not without risks. There is the risk that an organisation fails to attain or sustain the strategy leaving them ‘stuck in the middle’, and unless the industry supports such a position performance will not improve (Porter, 2004). Also, the evolution of industries including changes in technology or customer needs could erode the advantage provided by a strategy. It has also been found that environment moderates the relationship between strategy and performance and is “critical because it establishes the context in which to evaluate the importance of various relationships between strategy and performance” (Prescott, 1986). For instance, researchers found that the “level of differentiation needed was a function of the external environment facing the firm” (Markides and Charitou, 2004:26). Also of importance is structure, which influences and is influenced by strategy. It has been stated that “a poor organisation structure makes good performance impossible” (Drucker, 1993:4) hence it is imperative to ensure a compatible structure as without it the effectiveness of strategy will be limited.

The generic strategies framework has also been criticised by researchers who contend that it is inaccurate to choose between low-cost leadership and differentiation as effective strategies as customers see quality and price rather than cost when making purchase decisions (Bowman and Faulkner, 1992). They suggest that sustainable competitive advantage is best achieved by offering products which are either better and cheaper, better regardless of price or equal but cheaper when compared to competitors (Bowman and Faulkner, 1997). Academic research has also shown that other factors affect performance because strategy is not the only source of competitive advantage. For instance, culture has been viewed as source of competitive advantage (Willmott, 1993). From this perspective good performance is as a result of getting the culture right.

Strategic Ambidexterity

Although it has been suggested by academics that dual strategies can be successfully pursued, it is clear from research that many companies experience different fates despite competing with the same dual strategies (Markides and Charitou, 2004). This necessitates further scrutiny of the methods used by the respective organisations to explain this disparity. There is disagreement between advocates of strategic ambidexterity regarding what the most appropriate approach to pursuing dual strategies is, specifically between separation and integration strategies (Ibid). Supporters of the separation approach believe that the key solution is to distinguish the business models as physically different organisations clearly distinct from each other (Gilbert and Bower, 2002). Porter (1996), who views the cost of ‘straddling’ (simultaneously retaining an existing business model while seeking to establish the new successful position) as practically insurmountable, acquiesces only in this narrow circumstance where the activities are kept wholly separate that dual strategies can be successfully pursued within an organisation. The rationale of this approach is that conflicts that arise between the existing organisation and the new model which could stifle the success of the latter will be avoided. By maintaining separate “culture, processes, and strategy without interference from the parent company”, and allowing the new business model to run under separate management, it should thrive as it is not stifled by the other business model which may perceive a threat, creating incentive to stop its development (Markides and Charitou, 2004). However, one substantial limitation of this approach is that the business models will be unable to exploit potential synergies from each other which could ultimately be beneficial as it restricts the new venture from accessing indispensable resources from the parent company (Day et al, 2001). Additionally, spinoffs may have difficulty achieving true staying power in the market (Iansiti et al, 2003). In contrast integration advocates the incorporation of the new venture into the existing business model. The rationale is that crucial synergies can be exploited if the goal of essentially creating an ‘ambidextrous organisation’ is achieved (Tushman and O’Reilly, 1996). However, this approach does not indicate how the problem of conflict between dual strategies can be resolved.

An alternative approach that has been put forward is a contingency-based approach (Lawrence and Lorsch, 1967). There is a spectrum of possible approaches that can be employed, and this is dependent on firstly how serious the conflicts between strategies are and the extent to which the models are considered ‘strategically similar’ (Markides and Charitou, 2004). An organisation can ideally opt for a separation strategy where there are significant conflicts and less likelihood of synergies that could be shared among them. However, the key to success is not to leave the new venture isolated but to also ensure that mechanisms are put in place to allow the potential for exploiting synergies, irrespective of the likelihood of said synergies (Ibid). An integration approach is appropriate where the new strategy presents little conflict with the existing model and they serve strategically similar businesses, with more synergies to gain from (Ibid). However, it was found that simply integrating the business model was not a formula for guaranteed success. Rather care must also be taken to avoid suffocating the new model with existing policies, and the new model should be viewed as an opportunity as opposed to a threat and embraced in a creative way (Ibid). Organisations can also decide to take either a phased integration or separation approach. The former would be appropriate where to avoid initial conflicts, separation is preferable for a short period and gradually merge (Markides and Charitou, 2004). The challenge is preparing for this integration as it has been found that it can be difficult to create conditions that facilitate integration of ‘spin-offs’ (Iansiti et al, 2003). The latter option is used to “leverage the firm’s existing assets and experience” as there is limited conflict but achieve eventual separation as the markets the models serve are “fundamentally different”; the challenge is the ability to coexist with something that will eventually be separated and keeping certain processes sufficiently distinct. (Markides and Charitou, 2004:31). The feasibility of achieving dual strategies appears to be contingent on thinking, not about whether separation is best or not, but about what activities should be kept separate and what should be kept integrated (Gulati and Garino, 2000).

Still opposing academics take the view that it is dangerous to pursue more than one strategy as an organisation risks not doing any strategy well (Porter, 1996). Given the fact that “a strategic position is not sustainable unless there are trade-offs with other positions” it is expected that eventually inconsistencies in requirements such as equipment, employee behaviour, skills and management systems will lead to a ‘stuck in the middle’ scenario, resulting in reduced competitive advantage and consequently performance (Ibid). Indeed, research has found that commitment to a generic strategy results in higher performance than if a firm becomes stuck in the middle (Dess and Davis). Additionally, despite the approaches outlined above, research has found that most attempts fail with only outliers such as Singapore Airlines successfully competing with dual strategies (Markides and Charitou, 2004). This is evidence that it is usually very difficult to achieve. Furthermore, in practice it is not always necessary to pursue dual strategies, nor is the demarcation between them as strict as theorised. Organisations cannot pursue low costs in isolation with no consideration for the quality and value it is providing, neither can they focus on innovation without monitoring their costs as in most industries there is a limit to what customers will be willing to pay irrespective of product uniqueness (Kumar, 2006).

Conclusion

An assessment of the literature on strategy indicates that strategy is influential in regard to performance as it guides the decisions and actions of an organisation. However, Porter’s work in particular shows how strategy can be used to achieve organisational resilience. It advocates exploitation of competitive advantage and leads to alignment of all activities, making success sustainable. But as has also been discussed, it does not operate in isolation and is affected by the environment. Furthermore, for a strategy to be successful it has been briefly outlined that structure and culture cannot be overlooked as research has found they play significant roles in influencing performance. Hence, although strategy can be influential in improving performance, the extent to which it can be regarded as the ‘Holy Grail’ is debatable.

The assessment of strategic ambidexterity shows that it is possible to pursue dual strategies, albeit in limited circumstances. However, organisations seeking to implement this method must not overlook the trend that shows the research is more indicative of a higher likelihood of failure than success.

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