Strategy Formulation in Entrepreneurial Firms

Azhdar Karami

• Publisher: Routledge
• Year: 2016
• Topic: Business
• eBook ISBN:
  9781317049326
• Subtopic: Business General
• Index: Business

This book is concerned with strategy formulation issues in the relatively neglected field of entrepreneurial firms. It raises questions, such as what is the strategic role of entrepreneurship in small businesses? How does the top management in small firms perceive the processes associated with strategy formulation? How are business strategies formulated and implemented in SMEs and importantly, are there lessons that can be learnt by large corporations from the smaller ones? Using a sample covering a wide range of entrepreneurial firms in the UK, the author addresses the lack of strategic thinking in the management of small firms and provides recommendations for effective strategic management processes.

Chapter 1

Introduction to Strategy and Entrepreneurship

Introduction

Strategic Entrepreneurship has been recognized as an important factor that contributes to a firm’s success. Despite the potential benefit of strategic entrepreneurship for sustaining entrepreneurial firms, this area has been under researched in the small and medium enterprises literature. However research into strategy formulation and implementation, particularly in small and medium-sized enterprises (SMEs), recently has become one of the main focuses of both academia and industry (Berry, 1998; Beal, 2000; Hitt, 2000; Krishnan, 2001). Perhaps this is because, the key role of SMEs is in generating employment, promoting innovation, creating competition and generating economic wealth (Smith, 1998; Bridge and Peel, 1999). Strategic management is fundamentally about setting the underpinning aims of an organization, choosing the most appropriate goals towards those aims, and fulfilling both over time (Thompson, 1996). David (1995) holds that strategic management can be defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. As this definition implies, strategic management focuses on integrating managerial abilities and techniques to achieve organizational success.

It has been discussed (Analoui and Karami, 2003) that the dominant paradigm in strategic management is a prescriptive, rational and analytic model characterized by two principle functions: strategy formulation and implementation. The major contributors to this approach are Ansoff (1965); Andrews (1986) and Porter (1979, 1980, p. 1985) from Harvard University. It has been argued that strategic management is about how the strategy is developed and implemented (Cole, 1994). Strategy formulation is how the firm chooses to define strategy and how it approaches implementation through strategic management (Collin, 1995; Bowman, 1998). The approach to strategy formulation dictates the eventual management style. The nature of the strategy formulation will therefore result in the adoption of a specific approach to strategic management. The development of a strategy can be formal or rational (Mintzberg, 1994), emergent or progressed (Whittington, 1993), under a logical incremental path. Strategic management handles how a strategy is developed and where the organization’s environment is analysed before the appropriate strategy is selected and implemented (Hambrick, 1981; Wheelen and Hunger, 1998).

Even though some have concluded that small firms do not commonly practice strategic management (Gable and Topol, 1987), there have been several studies that have found a positive relationship between strategic planning and performance in these companies. For example, Robinson (1982) found that small businesses that employed consultants to help with strategic planning performed better than firms that did not. Bracker, Keats and Pearson (1988) found that small electronics firms that engaged in sophisticated strategic planning performed better than unstructured planners. Several other studies have reported positive relationships between formal strategic planning and financial performance in small firms (Wood, Johnston and DeGenaro, 1988; Watts and Ormsby, 1990). Still others have reported positive relationships among various measures of strategy content and small firm performance (Miller and Toulouse, 1986; Bracker, Keats and Pearson, 1988). Proponents of strategic management in SMEs have suggested that the type of planning employed will be contingent upon its stage of development and that this activity will evolve and become more formal and sophisticated over the life cycle of the business (Robinson et al., 1984; Scott and Bruce, 1987). The literature suggests that as the activities and supporting functional areas of the organizations become more complex, strategic management will develop through various stages from its initial beginnings as simple financial plans and budgets, through to forecast-based planning, externally orientated planning where the managers begin to think strategically, proactively planning the firm’s future and formal strategic management techniques (Goodwin and Hodgett, 1991; Foster, 1993; Berry, 1998; Apfelthaler, 2000; Beal, 2000). It is often argued that the managers must make this necessary progression toward a strategic orientation and more sophisticated strategic management techniques as the business grows in order to ensure the future survival and long term success of the company (Hitt, 2000; Wolff, 2000).

Finally, it is important to recognize that in studying strategic management practice in small and medium-sized firms, the role of the entrepreneur is critical (McGrath and MacMillan, 2000; Meyer and Heppard, 2000). In business, preparation comes through strategic planning (Analoui and Karami, 1993). Many owners and managers of small businesses routinely plan their day-to-day operations, but do not believe that strategic planning applies to them. However, it has been discussed that, no business is too small to require a sound strategy, and few strategies are so simple that they need not be developed into a strategic plan (Robinson and Pearce, 2001). The entrepreneur’s personal goals, characteristics and strategic awareness will all significantly impact on the development of the business (Daft, Sormunen and Parks, 1988; McKenna, 1996). Previous studies have already shown that whether or not an effective strategy development process is implemented will be heavily influenced by the firm’s owner manager and that the ability to comprehend and make appropriate use of sophisticated strategic management practice is a function of the entrepreneur’s previous experience (McKenna, 1996; Berry, 1998; Chan and Foster, 2001).

Origin of Strategy

Before reviewing the core research background related to strategic management in entrepreneurial small and medium sized enterprises, it is necessary to clarify the term because of the troublesome intellectual terrain that strategy in management occupies. Let us first be clear as to what strategy is. What is the origin of strategy? Where does the word strategy come from? In the case of the origin of strategy, Luttwak (1987) has contended that as in the case of many scientific terms, the word “strategy” (French strategie; Italian strategia) is derived indirectly from the Greek strategos (general), which does not carry the connotation of the modern word. The Greek equivalent for our “strategy” would have been strategike episteme (general’s knowledge) or strategon sophia (generals’ wisdom). On the other hand strategemata (strategematon is the Greek title of the Latin work by Frontinus) describes a compilation of strategema, precisely “stratagems” or tricks of war (ruses de guerre). Characteristically, a modern American definition of official military origin is much more inclusive: ‘The art and science of developing and using political, economic, psychological and military forces as necessary during peace and war, to afford the maximum support to policies, in order to increase the probabilities and favourable consequences of victory and to lessen the chances of defeat’ (Luttwak, 1987, pp. 239–240).

Definition of Strategy in Management

The word strategy has long been used implicitly in different ways (Bowman and Kakabadse, 1997; Mintzberg and Quinn, 1998). The term strategy has been conceptualized in diverse forms according to the parent social science discipline of numerous authors (Mintzberg, 1994; Marsh, 1999). The concept of strategy in business and management is analogous to that in war. Strategy as an area of management that is concerned with the general direction and long-term policy of the business as distinct from short-term tactics and day to day operations. Hence, the strategy of business may be defined as it’s long-term objectives and the general means by which it intends to achieve them (Segal-Horn, 1998). Explicit recognition of multiple definitions can help us to manoeuvre through this field. Accordingly, some definitions of strategy in management are presented here and their relevant interrelationships are then considered. One early definition of strategy was provided by the American business historian, Chandler (1962), who suggested:

strategy is the determination of the basic long term goals and objectives of an enterprise, and the adaption of courses of action and the allocation of resources for carrying out those goals (1962, p. 13).

He subscribes to the widely-held view that strategy is as much about planning and defining goals and objectives as it is about providing the means for achieving them. A more continuous and interactive definition of strategy, has been offered by Hofer and Schendel (1978):

strategy is a fundamental pattern of present and planned resource deployments and environmental interactions that, indicates how the organization will achieve its objectives (1978, p. 25).

Another commentator Andrews (1986) defines strategy as:

…a pattern of decisions… (which represent)… the unity, coherence and internal consistency of a company’s strategic decisions that position a company in its environment and give the firm its identity, its power to mobilise its strengths, and its likelihood of success in the marketplace (Andrews, 1986, p. 112).

Mintzberg and Quinn (1998) identified interrelated definitions of strategy. Strategy as a plan: by this definition, strategies have two essential characteristics. They are made in advance of the actions to which they are applied and they are developed consciously and purposefully. A strategy is the means used to achieve the objectives of the organization. A strategy is not just a plan, it ties together all the parts of the organization. Strategy covers all major aspects of the firm and through strategy all parts of the firm are compatible with each other and fit together well. As a plan strategies may be general or they can be specific. ‘A strategy is the pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole. A well-formulated strategy helps to marshal and allocate an organization’s resources into a unique and viable posture based on it’s relative internal competencies and shortcomings, anticipated changes in the environment, and contingent moves by intelligent opponents’ (Mintzberg and Quinn, 1998, p. 3).

Strategy as pattern: defining strategy as a plan is not sufficient; we also need a definition that encompasses the resulting behaviour. Thus, strategy is proposed as a pattern, ‘specifically a pattern in a stream of actions’ (Mintzberg and Quinn, 1998, p. 11). The definition of strategy whether as plan or pattern can be quite independent of each other: plans may go unrealized, while patterns may appear without preconception. Mintzberg, Quinn and Ghoshal (1995) argued that, ‘if we label the first definition intended strategy and the second realized strategy, then we can distinguish deliberate strategies, where intentions that existed previously were realized, from emergent strategies, where patterns developed in the absence of intentions, or despite them which went unrealized’ (1995, p. 15).

Strategy as position: the third definition is that strategy is a position-specific, a means of locating an organization in what organization theorists like to call an ‘environment’ (Mintzberg and Quinn, 1998, p. 13). By this definition, strategy becomes the mediating force or match between organization and environment, that is between the internal and the external context. Strategy as a position looks outside the organization, seeking to locate the organization in the external environment and place it in a concrete position.

Strategy as perspective: a fourth definition of strategy looks inside of the organization. Strategy in this respect is to the organization what personality is to the individual (Mintzberg, Quinn and Ghoshal, 1995). The definition of strategy as a perspective, suggests that strategy is a concept. In this case strategy is a perspective shared by the members of an organization through their intentions and/or by they actions (Mintzberg and Quinn, 1998). Strategy as both position and perspective can be compatible with strategy as plan and/or pattern. But in fact, the relationship between these different definitions can be more involved than that.

Johnson and Scholes (1993) describe strategy as being concerned with:

• the full scope of an organization’s activity,

• the process of matching the organization’s activities to its environment,

• the process of matching the organization’s activities to its resource capabilities,

• having major resource implications and,

• being affected by the values and beliefs of those who have power in an organization.

Johnson and Scholes (1993) in their empirically-grounded text on exploring corporate strategy, categorize a number of different approaches to strategy as follow:

• A ‘natural selection’ view, that is where organizations are under great environmental pressure and have constantly to adapt to changes in their environment.

• A ‘planning’ view, that is where strategy comes about through highly systematized forms of planning; this is the rational approach to strategy.

• A ‘logical incremental view’, that is an evolutionary step-by-step approach to strategy; it is an adaptive approach but one which is more controlled by them than the natural selection example mentioned above.

• A ‘cultural view’, that is an approach to strategy based on the experiences, assumptions and beliefs of management over time and which may eventually permeate the whole organization.

• A ‘political view’, that is where strategy emerges after a variety of internal battles, in which managers, individuals and groups bargain and trade their interests and information.

• A ‘visionary view’, that is where the strategy is dominated by one individual, or sometimes a small group, who have a particular vision of where the organization can and should be; this is a particularly intuitive approach.

Chaffee (1985), whose tripartite classification of strategy is presented in Table 1.1, attention should be thus focused more on means, with goals seen as an alignment of the organization and its environment. Lower level changes in style, marketing of quality, are seen as strategically important. Although top managers are still seen as responsible for guiding strategy, other managers are clearly involved in the process (Chaffee, 1985).

Of the associated terms that are regarded as important variables by Chaffee, strategic management appears in each of his three classifications of strategy. When strategy is linear, strategic management takes the form of long range planning; when strategy is adaptive, strategic management balances strategic fit to company predisposition. Finally, when strategy is interpretive, strategic management can be regarded as a vital capability for the continuous improvement of quality performance.

Evolution of Strategy Theory

Over the last 30 years there have been many developments in the field of strategic management. Many of the concepts that form the current approaches were developed over the recent decades. Among the main concepts developed during the 1960s and 1970s were the product life cycle, the experiences curve, the strategic business unit (SBU), and the growth share (portfolio) matrix. The Boston Consulting Group was the dominant influence (Leavy, 1996) in forming the above views. In the 1960s and 1970s the emphasis was primarily on strategies for growth, diversification and vertical integration. The 1980s were dominated by the contribution of Michael Porter in the field of strategic management...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• Preface
• Acknowledgments
• 1 Introduction to Strategy and Entrepreneurship
• 2 Strategy Formulation in Small and Medium-Sized Enterprises
• 3 Researching Strategy
• 4 Data Analysis and Major Findings
• 5 Strategic Entrepreneurship
• 6 Crafting Strategy and Environmental Context
• 7 Final Lessons and Conclusion
• Index