ASIAN JOURNAL OF MANAGEMENT RESEARCH Online Open Access publishing platform for Management Research

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1 Online Open Access publishing platform for Management Research Copyright by the authors - Licensee IPA- Under Creative Commons license 3.0 Research Article ISSN Revisiting the strategic management process through the levels of strategy analysis The Papua New Guinea University of Technology, Department of Business Studies rdemaino@gmail.com ABSTRACT There is much debate on the conventional hierarchical arrangement of strategic management, while some authors even claim that the order is flawed. There is also no well-defined best practice model. The academic and practitioner community do not seem to agree on a particular compromise on how organizations should arrange their strategies, structures and processes, which can be accepted as best practice. While the formal strategic management process is parsimoniously accepted in five sequential steps, the strategies are analysed in three distinct levels: Corporate Level, Business Level, and Functional Level. This article aims at reviewing the concepts and link strategic management process with the three levels of analysis so as to offer a conceptual framework within which practitioners and academics can clearly cultivate the strategic link in their strategy exercises. This article should be a distinct literature contribution to the academic and practitioner community. Key words: strategic management process, corporate level strategy, business level strategy, functional level strategy, strategy analysis 1. Introduction The process of strategy formulation, implementation and evaluation is critical to any organization. According to Butler, Hung, and Orr (2011), Strategic Management is the process of thinking strategically, setting objectives for the organization, planning and implementing the necessary changes, and measuring the outcomes. While the formal strategic management process is parsimoniously accepted in five sequential steps, the strategies are analyzed in three distinct levels: Corporate Level, Business Level, and Functional Level. However, there is much debate on this hierarchical arrangement of structure and strategies, while some even claim that the order is flawed. There is also no well-defined best practice model. The academic and practitioner community do not seem to agree on a particular compromise on how organizations should arrange their strategies, structures and processes, which can be accepted as best practice. The following sections attempt to explain how organizations develop and evaluate strategies at each of the three levels (cooperate, business and functional), relative to the five steps of the strategic management process. Linking strategic management process with the levels of strategy analysis is important for strategy implementation and control in organizations. The three levels of strategy play key distinct and interrelated roles to drive organizations towards their strategic objectives. Though the contribution of corporate strategy has been strongly argued by several authors (Lockhart, 2006), practitioner and their corporate executives tell a different story (Simmons, 2009), The causal relationship between corporate strategies and corporate performance is still under investigations. Business level strategy has been linked 29

2 towards corporate core competencies and the three distinct business level strategies (Thompson, Strickland and Gamble, 2008), Functional level strategies are more associated with the firm s value creation process and the specific strategy implementation, monitoring, control and the evaluations. Defining a clear linkage and integrating the levels of strategy analysis process with the overall strategic management process is critical for organizations. This conceptual analysis aims to review the strategic link between strategic management process and the three levels of strategy analysis, and explain the conceptual framework within which strategic management process and the three levels of strategy analysis can be understood and operationalized. This article should be a distinct literature contribution to the academic and practitioner community. 2. Levels of strategy analysis 2.1 Corporate level strategy According to Butler et al. (2011), corporate level strategy refers to the selection of businesses in which a company should compete and the development and coordination of the selected businesses. Corporate strategy consists of the kind of initiatives the company uses to establish business positions in different industries, the approaches corporate executives pursue to boost the combined performance of the set of businesses the company has diversified into, and the means of capturing cross-business synergies and turning them into competitive advantages (Thompson, Strickland and Gamble, p. 38), Despite of the conceptual sense and significance that is inherent in the definitions, there exists much debate on how corporate unit and governance contribute to organizational performance. Lockhart (2006) argued that a clear causal relationship between corporate unit and subsequent organizational performance has not been established and the effort to confirm this link is fraught with difficulties. A case that sets distinct legacy was engineered by Alfred Sloan when he democratized and decentralized the General Motors (GM) bureaucracy, featuring a federal-style corporate institution based upon decentralization with coordinated control aimed at creating value for customers (Simmons, 2009), Many of the arguments regarding the strategic role of corporate unit and their significance most likely originate from the agency theory - the contention between the value creation (consumer oriented) and the wealth creation (shareholder oriented) perspectives surrounding the roles and objectives of the corporate unit. However, the corporate unit should play a catalytic role with devoted strategic commitment to meeting company and consumers needs, creating superior value to satisfy market needs. The returns of creating superior value for consumers and satisfying market needs will generate market share, competitive advantages and greater profitability, which can then expedite shareholder wealth creation. Despite of scholarly arguments against the roles and contributions of corporate unit towards organizational performance, most countries have developed regulatory framework, particularly the company Acts that legitimatize the inclusion of a board in registered companies. For instance, in New Zealand, Section 10 of the Company Act 1993 which states essential requirements of a company explicitly requires companies to have a board of directors, that is a corporate governance unit, amongst others such as a valid company name, shareholders and limited or unlimited liabilities. Moreover, the role of a corporate unit to provide sound oversight and strategic direction is seriously required in large and diversified companies with strategic business units (SBUs) competing in number of different industries. 30

3 The board which is largely a custodian of the stakeholders interests in the company is required to provide the highest level best advice in strategic ventures such as acquisitions, mergers, outsourcing, strategic alliance, vertical integration (forward or backward), horizontal integration, retrenching SBUs, and divestments. The board is also required to positively govern management behaviour so that problems such as on-the-job consumption, corporate empire building, executive jetting, and unnecessary executive extravagance are avoided. 3. Business level strategy According to Beard and Dess (1981), business level strategy is defined in terms of variation in firm characteristics relevant to its competitive success or failure within a given industry. A firm would have a separate business-level strategy for each industry in which it competed, and the relevant characteristics of the firm's business-level strategy would be measured relative to the range and norms on each characteristic in each of its industries (Beard and Dess, 1981, p.667), Hofer and Schendel (1978) succinctly state that business level strategy focuses on how to compete in a particular industry or product-market segment, thus distinctive competencies and competitive advantages are usually the most important components of strategy at this level. The key focus in business level strategy is crafting responses to changing market circumstances and initiating actions to strengthen market position, build competitive advantage, and developing strong competitive capabilities (Thompson, Strickland and Gamble, 2008), The main business level strategies are Cost Leadership Strategy, Differentiation Strategy, and Focus Strategy. Companies can pursue and consolidate their competitive position in one, two or the all three, but companies can also get stuck in the middle of the three strategic options. Depending on their core competencies and capabilities, relevant strategies can be integrated to take advantage of the company s competitive advantage. Figure 1: Core Competencies and Business-level strategy Whether the hierarchical order of business level strategy is simply for bureaucratic necessity or based on the organization s core competencies, business level strategies are crafted out based on the organization s overarching strategic vision, mission and corporate objectives, guided by its core values and guiding principles. Though the organization s founders and owners may have a specific strategic vision, enshrined at the corporate level, to achieve in the long term, their strategies to operationalizing their core competencies and cultivate programs and activities at the focused markets to generate value must be specifically established. A value chain to create value through the organization s core competencies in specific market niches must be established. Therefore, business level strategy directly relates to the corporate level strategy for implementation. An example of cost leadership strategy at the business 31

4 level of the organization, implemented through the firm s value creation process is illustrated in figure 2 below. Source: Figure 2: Cost Leadership Strategy execution through Value Creation Process 4. Functional level strategy The functional level is where the organization s value creation activities (shown in figure 2) actually take place, consistent with all the strategies and objectives simplified and cascaded from the corporate level and the business level. Functional level strategies are concerned with the actions, approaches, and practices to be employed in managing particular functions or business processes or key activities within a business (Thompson et al, 2008), Within each SBU of the company are specific operational functions such as marketing, human resource, finance, information technology, production, and others, tasked with implementing the business level strategies through each function s operational strategies that are directly aligned and strategically coherent with the business level strategies. According to Grant et al. (2011), functional level strategies focuses on the development and coordination of resources through which business level strategies can be executed effectively and efficiently. Generally, there is direct strategic linkage between the corporate level, business level, and functional level strategies, though their implementation in many organizations may lack coherence and consistency. One of the core roles of the corporate board of directors, the business level executive directors and the functional level managers is to ensure that overall processes, structures, systems, procedures, cultures, values, norms, resources, and the value creation activities are operating according to the established strategic intents aligned throughout the top-down linkage of the organization. Emergent strategies that evolve through that process are adopted to further the pursuit towards the strategic intents of the organization. Therefore, the top-down and bottom-up strategic relationship within the organization, particularly in terms of the three levels of strategy is a critical area of attention for both practitioners and scholars. As illustrated in figure 3 below, the corporate level strategy is established at the first step of the strategic management process, while the business level strategy is formulated at the 32

5 second and third step of the strategic management process after completing the environmental analysis. The analysis of the macro environment using the PEST tool and the micro (industry) environment using Michael Porter s five forces model, gives clear direction on how different SBUs of the company in each industry can compete. Functional level strategy is formulated and implemented at the third and fourth step of the strategic management process, after business level strategies are clearly specified. The feedback loop of the strategic management process captures all three levels of strategy. The functional level operations and the SBUs have their Key Result Areas (KRAs) and their respective Key Performance Indicators (KPIs), Strategy evaluation is a critical bottom-up performance based feedback process that holds functional level responsible to achieve business level strategy, and business level strategy achieving corporate level strategy, and scrutinise the whole organisation s operations. Figure 3: Conceptual framework linking Strategic Management Process and three Levels of Strategy The implementation of the levels of strategy analysis and strategic management process discussed in the preceding sections can vary from organization to organization for different industries. For instance, many small and medium sized enterprises (SMEs) have a smaller corporate level focus and fewer business level concentrations, while huge multinational corporations (MNCs) have a larger corporate body and multiple business level concentrations. Despite the size and type of organizations, business and industry type, the conceptual framework presented in figure 3 offers an overarching logic of how organizations can define and operationalize their strategies. 5. Conclusion Corporate level strategies are established at the first step of strategic management process, while business level strategies are formulated at the second and third step of the strategic management process after a thorough environmental analysis process using tools such as PESTEL and the Porter s five forces model. Functional level strategies are developed and implemented through the key value creation functions to achieve the business level strategies, 33

6 which lead to achieving the corporate vision. Strategy formulation and implementation has an inherent top-down linkage while the strategy control and evaluation has a bottom-up linkage. This relationship is systematically inherent and fosters effective and efficient strategic coordination throughout the organization. Though the relationship between corporate level strategies and organizational performance have been widely criticised, many corporate organizations have shown cases of how corporate executives have driven corporate success with distinct corporate leadership, corporate decision making and corporate level strategies. Business level strategies of differentiation, cost leadership and focus strategies have been linked to corporate core competencies, which lead to building corporate competitive advantages. The success of corporate level strategies and the business level strategies are underpinned by the effective development and implementation of functional level strategies through the value chain. Based on this review, it is strongly recommended that strategic management process must be defined with the three level of strategy analysis. The academic and practitioner community can accept the fact that the levels of strategy and strategic management process cannot be viewed independently. It increases the effectiveness of strategy formulation and implementation when the levels of strategy are specifically linked with the overall strategic management process. The organizational structure and control systems must be aligned with the strategy framework to ensure the top-down and bottom-up linkage is alive and well and effective. 6. Reference 1. Beard, D., and Dess, G. (1981), Corporate level strategy, business level strategy, and firm performance. Academy of Management Journal, 24 (4), pp Companies Act, 1993 (2013, October), [online], New Zealand Legislation, 3. Grant, R., Butler, B., Hung, H.,and Orr, S. (2011), Contemporary Strategic Management: An Australasian Perspective. Queensland, Australia: John Wiley and Sons Ltd 4. Hofer, C, and Schendel, D. (1978), Strategy formulation: Analytical concepts. St. Paul. 5. Minn.: USA, West Publishing Co. 6. Lockhart, J. (2006), What really happens inside the board room and how it may shed light on corporate success and failure. Journal of General Management, 31 (4), Simmons, C. (2009), The Sloan legacy. Business Strategy Review, 20 (4), pp Thompson, A., Strickland, A., and Gamble, J. (2008), Crafting and executing strategy; the quest for competitive advantage. New York, USA: McGraw-Hill/Irwin Inc. 34