Chapter 8 Strategy Formation — Strategy Formulation and Implementation PDF

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BME002 Strategic Management in Tourism and Hospitality with TQM

Chapter 8: Strategy Formation — Strategy Formulation and Implementation Learning Objectives After reading this chapter, you should be able to: ✓ Define strategy formation: strategy formulation and implementation. ✓ Discuss the evaluation of different approaches to strategy formation. ✓ Evaluate assumptions of different schools of thought about strategy formation. ✓ Comment on strategy formation in the international context.

INTRODUCTION The evolution of strategic management has been influenced by many disciplines, such as biology, history, physics, mathematics, psychology, anthropology, economics, urban planning, political science, and military history (Mintzberg, Ahlstrand, and Lampel, 1998). As the strategic management field has evolved, different views on strategic management have emerged on its nature and characteristics. Since the 1980s, scholars have reviewed strategic management literature and recognized groups of authors who share similar views about strategy and strategic management and how strategic decisions should be formulated and implemented. A number of terms have been used for each trend or development, such as pattern, method, view, approach, or schools of thought.

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BME002 Strategic Management in Tourism and Hospitality with TQM

This chapter discusses how strategy formulation and implementation (called strategy formation hereafter) is viewed by different schools of thought or approaches in the strategic management field. We will critically evaluate each view and offer suggestions for developing and implementing strategies.

STRATEGY FORMATION—STRATEGY FORMULATION AND IMPLEMENTATION Strategy formulation involves understanding the underlying bases that guide future strategy, generating strategic options for evaluation and selecting the best options among them (Johnson, Scholes, and Whittington, 2008). Strategy implementation addresses the issue of how to put a formulated strategy into action or practice with limited time and resources (Alexander, 1991). Although strategy formulation and implementation are defined separately and perceived as separate areas, in recent years, strategy formulation and implementation have now been seen as a whole process rather than separate activities. Therefore, it is recommended that they should not be defined alone or separated from each other (Mintzberg, 1994; Mintzberg et al., 1998; Okumus, 2003). In other words, the four main elements of strategic management—strategy analysis, strategy formulation, strategy implementation, and strategy control—are not mutually exclusive; in fact, they are interdependent and dynamic. Therefore, the term strategy formation is used here to refer to both strategy formulation and implementation as a single unit (Mintzberg et al., 1998). The next section will look at the different schools of thought of strategy formation. Kindly check the video about strategy formulation and implementation.

VIDEO GUIDE: Please check the video guide below of: Strategy Formulation https://www.youtube.com/watch?v=3Qf9ggcYs78 Implementing Strategy https://www.youtube.com/watch?v=dyX8hgdmpLw Schools of Thought in the Strategic Management Field In the early days, the main emphasis was on the importance of planning, and the terminology used for this approach was the planning school. From the mid-1970s, the importance of learning has been recognized, and this approach has been called the learning, incremental, or emergent approach. After observing the limitations of previous approaches, it was decided that there was really no “one best way” to develop and implement strategies. It was decided that the most appropriate way to develop and implement strategies would depend on the situation. This approach has been called the contingency school. Scholars such as Mintzberg and colleagues (1998) and Richardson (1994) combined these three schools of thought under one single dimension called the configurational, or comprehensive, school of thought. However, Mintzberg and Quinn (1996) and Stacey (1996) claimed that even this view has limitations, and they

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BME002 Strategic Management in Tourism and Hospitality with TQM

proposed that one should look beyond configurations and evaluate the complexities and dynamics of the strategy process. These authors called this final approach the complexity view (Stacey, 1996). The implications of each school on the process of strategy formation are reviewed and evaluated in the following sections. The Planning Approach The planning approach is the oldest and most influential approach in the strategic management field (Whittington, 2001). Its development goes back to the late 1960s, beginning with the writings of Ansoff (1965), Andrews (1971), Chandler (1962), and Sloan (1963). This approach views strategy formation as the outcome of sequential, planned, and deliberate procedures. According to this view, strategic planning consists of four separate elements: analysis, strategy formulation, strategy implementation, and control/monitoring. This approach gives more emphasis to the formal analysis of the issues in both the external and internal environments. It is assumed that with precise calculations, techniques, and analysis, planning can make the external environment more predictable so companies can develop and implement successful strategies to respond to changes in the external environment. Developing strategies or strategic decisions by following strategic planning principles and utilizing PESTE analysis, Porter’s Industry Structure Analysis, and SWOT analysis are considered the primary responsibilities of corporate offices, senior executives, or specialised departments such as the strategic planning department or the corporate strategic planning office. Because they are considered to be experts in this area, they can see the whole picture and are better able to analyses the situation than those at lower levels. The issue of implementation is seen as purely tactical, and it is an activity that is carried out by middle and lower management levels (Okumus and Roper, 1999). In other words, strategies or strategic decisions are developed by senior executives, and apart from minor modifications, these executives should not deal with the implementation part. The role of middle managers and supervisors is to implement the developed strategies. This approach further advocates well-specified plans with clear objectives, timetables, budgets and resource allocations, clear lines of responsibility, limited participation in strategy development, and minimum discretion for all levels of implementers. Finally, profit maximization, cost cutting, high market share, and other tangible outcomes are the ultimate aims of the strategy formation process. The Learning or Emergent Approach The learning approach does not see strategy formation as a neat, sequential, and rational process. This school of thought suggests that strategies often emerge from the pragmatic processes of trial and error and that they are often developed and executed in an incremental, trial-and-error way, mainly by middle managers, and that the strategy formulation and implementation stages often overlap (Johnson, 1987; Mintzberg, 1994; Pettigrew and Whipp, 1991; Quinn, 1980). For example, Mintzberg and colleagues (1998) describe it as “crafting” or “emergent” strategy and state that successful companies, as in the case of Honda (Pascale, 1984), achieved their position without going through the process of analysis, formulation, and implementation for which the planning approach implies. When we analyze how Southwest Airlines has started and become one of the most successful airlines in the United States, it is evident that the company did not achieve this success through strategic planning but instead by responding to emerging issues in an incremental way and learning from their experiences.

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This approach values the significance of power distribution, politics, and organizational culture in the strategy formation process. Having rational, mainly financial, objectives may not always be practical, as companies often need to consider intangible aspects of the process such as internal politics and culture (Whittington, 2001). This is because organizations are often political entities, comprised of shifting coalitions and powerful internal and external interest groups who may have conflicting demands and objectives (Mintzberg et al., 1998). Therefore, it is not always straightforward to develop and implement strategies without considering internal politics and power structures (Pettigrew and Whipp, 1991). In addition, the strategies should be appropriate to the company’s values, traditions, and past experiences, as the culture of an organization (Johnson, 1987) or defensive routines (Argyris, 1989) can be slow or can stop the strategy formation process. Previous research studies (De Geus, 1988; Johnson, 1987) support the appropriateness of the ‘learning’ school where the strategy formation processes are found to be interactive and incremental rather than rational and top-down. The Contingency Approach The contingency school of thought suggests that successful strategies are not developed and implemented by a simple or single set of factors. Instead, their successes depend on many factors in the internal and external environments of the company. This approach was developed as a reaction to the idea of “one best way management.” According to Child (1984), the contingency view relates to the design of an effective organization that must cope with the contingencies of certain factors, such as environment, technology, resources, people, and other elements in a situation in which the firm operates. In other words, the effectiveness of the strategy formation process depends on how multiple factors interact in a situation, and there may be different ways to approach the same issue, depending on the situation. Berman (1980) suggests that strategies can be carried out more effectively if they are chosen to match the situation, especially the extent of agreement about the strategy, the degree of capacity and coordination of the strategy formation process, and the stability/complexity of the environment and the organization. Put another way, the process of strategy formation cannot be uniform for all situations, invariable over time, and homogeneous across organizational levels, and therefore executives and managers should find suitable ways and switch them when necessary to deploy their strategies successfully. The Configurational Approach Attempts were made to combine all of the previous strategic management schools of thought into one single perspective, which is called the configurational view (Johnson et al., 2008; Mintzberg et al., 1998; Okumus and Roper, 1999; Richardson, 1994). It was intended to eliminate the disadvantages of the previous approaches and offer a holistic view. The main difference between the contingency approach and the configurational approach is that the contingency view suggests “it all depends on the situation in the strategy formation,” whereas the configurational view is concerned with “combining all previous approaches together.” Mintzberg and colleagues (1998) stated the following: The process of strategy making can be one of conceptual designing or formal planning, systematic analysing or leadership visioning, cooperative learning or competitive politicking, focusing on individual cognition, collective socialisation, or simple response to the forces of the environment; but each must be found at its own time and in its own context. In other words, the schools of thought on strategy formation themselves represent particular configurations.

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BME002 Strategic Management in Tourism and Hospitality with TQM

The configurational approach views the strategy formation process as an episodic process. In other words, it suggests that all of the preceding approaches may be combined and used together, although sometimes one approach may be more appropriate for a certain period of time and another may become more important at another time (Mintzberg et al., 1998). Unlike the previous approaches, this view advocates that in a company, managers at every level of management (top, middle, and lower) should participate and cooperate in both formulating and implementing strategies. Considering key factors in the strategy formation process, such as strategy, structure, leadership, culture, resources, communication, and other variables, as a whole is the key to developing and implementing successful strategies and achieving desired objectives. Key factors make sense in terms of the whole, so there is no use getting just one or two elements right. Because they are all interdependent, they must all fit together and be consistent with one another. Success can only be achieved through appropriate patterns of action, positions, and performances, which should all fit together and support one another (Mintzberg et al., 1998). Therefore, in order to develop and implement strategies, a number of certain factors should fit together and a comprehensive strategy formulation and implementation framework is needed to analyze and evaluate the fit and interactions among the key factors. To sum up, the central idea of the configurational approach is that focusing on only one or two factors is not enough, and therefore a holistic view should be taken into consideration when understanding and evaluating strategy formation in tourism and hospitality organizations. The Complexity Approach This view suggest that organizations are adaptive systems that take the form of nonlinear negative and positive feedback loops that connect the individuals, groups, functions, and processes in an organization to one another, and connect an organization to other systems in the environment (Levy, 1994; Stacey, 1996; Theys, 1998). Due to these nonlinear feedback loops, any small change or development, both within and outside the organization, can have significant and unexpected implications for the firm; this is often entitled the “butterfly effect” (Stacey, 1995). In terms of strategy formation, this means that managers need to identify and evaluate the emerging patterns continuously within and outside the company and then develop and implement strategies rapidly. In addition, they also need to consider the implications of the strategy formation process, not just for a specific part of the company but also for other functional areas and on customers, competitors, and all other stakeholders (Glass, 1996; Stacey, 1996). This view suggests that successful companies operate in a state of nonequilibrium or “bounded instability,” that challenges the status quo continuously and tries to change the external and internal environments (Stacey, 1996). It is perhaps not a good idea for companies to aim to achieve and maintain a “fit” between their external environment and their internal resources, since things are always changing and evolving. Stacey (1995) further suggests that companies should attempt to develop diverse cultures, informal working groups, and networks and allow for the emergence of internal conflicts among departments and groups. These should help challenge and change existing formal and mental models, modes of thinking, and structures and subsequently allow the complexities and dynamics of the strategy formation process to be better understood. Eventually, this will allow, and perhaps force, the company to invent and create new ways of developing and implementing strategies. It is also suggested that there might be some regularities and order in chaos, and therefore managers should look for emerging patterns in chaos and complexities (Stacey, 1996; Theys, 1998).

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BME002 Strategic Management in Tourism and Hospitality with TQM

Contrary to the previous approaches, this view does not recommend having definite aims and objectives for the long-term future. Instead, it is suggested that managers need to understand, evaluate, and interpret the complexities and dynamics of the situation as an ongoing process and respond to emerging patterns rapidly if they are to be successful. This may require continuous modification of a company’s vision, goals, objectives, structure, and culture to incorporate new and relevant values and norms (Glass, 1996; Stacey, 1996). STRATEGY FORMATION IN THE INTERNATIONAL CONTEXT The strategic management literature does not clearly explain how far strategy formation differs in international firms than strategy formation does in domestic firms. Some authors do not view the strategy development and implementation process in an international context any differently from that in general strategic management. For example, Lynch (1997) argues that “international aspects of strategy implementation follow the same principles but are complicated by culture, geographical diversity, and other factors”. In return, several scholars use the strategic management literature, particularly the planning school, when discussing strategy formation in an international context (Deresky, 1997; Fatehi, 1996; Hodgetts and Luthans, 1997; Mead, 1998). These authors identify two main dimensions of international strategy: the diversity and size of the company. Although both of these can be important in terms of strategy development and implementation, international management scholars give more emphasis to the diversity of the company. This is because they refer to and emphasise diverse cultures and locations in managing international firms. However, they fail to evaluate and clearly illustrate how these diverse cultures and locations influence the strategy development and implementation processes in international firms. In other words, the strategy formation in international companies is viewed very similarly to the domestic strategy development and implementation process. According to Fatehi (1996), there are no fundamental differences between domestic and international strategy implementation processes: Irrespective of the nature of the operation, the strategic management process remains basically the same, for the domestic enterprise and MNC. Just because the firm expands abroad it does not mean that there will be a different strategy formulation and implementation process. Several authors have further discussed strategy formation in international firms and proposed various approaches to developing and implementing strategies in an international context. (i.e., Brooke, 1996; Chakravarthy and Perlmutter, 1985). The main groupings of these approaches and their propositions are explained in Table 8.2. When we compare and contrast the schools of thought in strategic management with the approaches to strategic planning in the international context, it is apparent that there are important areas of commonality between the approaches in both fields. This is not surprising, as the review of Chakravarthy and Perlmutter’s (1985) pioneering study indicates that the four approaches were initially adapted to international or multinational firms from Chakravarthy and Lorange’s (1984) conceptual study in the strategic management field. Many international management scholars, such as Deresky (1997), Fatehi (1996), Herbert (1999), Hodgetts and Luthans (1997), and Mead (1998), use the strategic management literature in their studies when they explain and discuss issues related to international firms. This is seen as normal by Bartlett and Ghoshal (1991), since these authors argue that concepts and frameworks are often borrowed from the strategic management field and applied into the international management field. In short, scholars in the international management field have applied the concepts of strategy development and implementation from the strategic management field, and therefore four out of the five approaches found in this field also appear in the international management field. There are not many studies that specifically

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