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The Role of the Competitive Context in the Business Strategy ...

  1. 1. The Role of the Competitive Context in the Business Strategy Formulation Process By Donatella Depperu and Luca Gnan Working Paper N. 98/03 October 2003
  2. 2. Donatella Depperu and Luca Gnan THE ROLE OF THE COMPETITIVE CONTEXT IN THE BUSINESS STRATEGY FORMULATION PROCESS Donatella Depperu Strategic and Entrepreneurial Management Department, SDA Bocconi Via Bocconi, 8 - 20136 Milano - Italy Tel: (39) 02.5836.2704 Fax: (39) 02-5836.2519 donatella.depperu@uni-bocconi.it Luca Gnan Strategic and Entrepreneurial Management Department, SDA Bocconi Via Bocconi, 8 - 20136 Milano - Italy Tel: (39) 02.5836.2547 Fax: (39) 02-5836.2519 luca.gnan@uni-bocconi.it Abstract The characteristics of the competitive context are considered to be the factor which most strongly influences the type of strategy that a company pursues or can formulate, and the level of profitability which the company obtains by operating in the field in question. They are also considered to play a part in determining the way in which the strategy takes shape within the company. In the new competitive context which many companies are facing, the subject of strategy formulation is acquiring new importance. On the basis of these factors, an empirical research project has been conducted on a sample of 200 large and medium-sized Italian and foreign companies operating in Italy. The questions that guided the research can be summed up as follows: a) What are the characteristic features of the business strategy formulation process in large and medium- sized companies operating in Italy? b) To what extent, if any, does the external context influence the characteristics of that process? The paper analyse the strategy formulation process at business level, taking account of the competitive context and strategic decisions relating to individual Strategic Business Areas (subsequently called SBAs). In a nutshell, the aim of the research was to analyse how the companies in the sample formulate their strategies and which variables have the greatest influence on the strategy formulation procedure used. In particular, this paper analyses the environmental influences on the formulation process. JEL Classifications: L21, M10. Key words: Strategy formulation, Environment, Innovation, Consensus, Rationalisation. 1 SDA Bocconi – Research Division
  3. 3. 1. Introduction The characteristics of the competitive context are considered by some authors1 to be the factor which most strongly influences the type of strategy that a company pursues or can formulate, and the level of profitability which the company obtains by operating in the field in question2. They are also considered to play a part in determining the way in which the strategy takes shape within the company. For example, a strong bias towards planning is considered to be consistent with a stable environment in which demand is foreseeable and growing, while other methods of developing strategies are considered more suitable in dynamic contexts with highly irregular trends. If it is accepted that a company’s ability to be competitive and profitable depends not only on the type of strategy it formulates and implements, but also on the way in which the strategic process is configured, and in particular on the characteristics of the strategy formulation or definition stage (Rogers et al., 1999), the importance of the strategy development process is obvious. In the new competitive context which many companies are facing (especially because of the increasingly widespread use of information technologies and the Internet), the subject of strategy formulation is acquiring new importance. As various management models are no longer effective, some authors have begun to wonder, for example, whether the methods of defining and developing a business strategy will also require radical changes, and whether the speed characteristic of some businesses is compatible with traditional strategic processes (Eisenhardt, 2001; Stopford, 2001). Even in the case of companies that operate in less innovative contexts, questions about the efficacy of the various strategy formulation procedures and the variables which should be considered in order to design an effective system for devising the company’s strategy remain unanswered. On the basis of these factors, and indications deriving from research conducted on small companies, an empirical research project has been conducted on a sample of large and medium-sized Italian and foreign companies operating in Italy, with a view to understanding their strategy formulation procedures and especially the influence exerted on the formulation process by the characteristics of the competitive context. The questions that guided the research can be summed up as follows: What are the characteristic features of the business strategy formulation process in large and medium- sized companies operating in Italy? To what extent, if any, does the external context influence the characteristics of that process? In view of our objective, we decided to analyse the strategy formulation process at business level, taking account of the competitive context and strategic decisions relating to individual Strategic Business Areas (subsequently called SBAs). Before presenting the results of the research, we will briefly review the main literature on the subject, the reference model used in the research, and the methodology followed. 1 We refer in particular to members of the Positioning School, which includes well-known researcher M. Porter (1980). 2 Other authors recognise the role of the environment, but tend to attribute equal importance to the company’s internal and external variables. Others again consider internal resources and skills to be crucial to the development of a successful strategy, and consequently attribute a secondary role to the environment. 2 SDA Bocconi – Research Division
  4. 4. 2. Theories relating to the strategy formulation process If the strategic process is considered in the traditional way (Ansoff, 1965), the formulation stage plays a central part because it follows the analysis and diagnosis stage (defined as “cognitive” by Ansoff) and precedes the evaluation and decision-making stage, which is followed by all the implementation activities. Figure 1 – The strategic process EVALUATION ANALYSIS FORMULATION IMPLEMENTATIO AND CHOICE AND The strategic process and the formulation stage of that process were extensively studied between the 1960s and 1980s (in particular by researchers from two schools, known as the Design School and the Planning School3). Canadian researcher Henry Mintzberg (1978, 1987, 1991; Mintzberg et al., 1998) subsequently played an important part in analysing the strategic process; he called into question a number of established theories and models (especially strategic planning as it was traditionally understood), triggering a fierce debate with Igor Ansoff (Ansoff, 1991; Mintzberg, 1991). However, as the subject can be tackled from many standpoints, numerous theories and currents in the literature converge on strategy formulation analysis, such as studies of strategy in the narrowest sense of the word, organisation studies and literature relating to strategic planning, together with psychology and literature focusing on decision making and problem solving4. If we borrow Mintzberg’s classification (1998), there are no less than 10 schools of thought5 which are referred to in studies of the strategy formation process, strategy formulation being just one stage of this process6. Some of these schools (especially the Design and Planning schools) consider that strategy formulation is a separate stage from the implementation stage, involving a high degree of rationality. According to the Planning School in particular, strategy formulation is connoted by a high degree of formalisation, which in the last analysis means that the strategy formulated is described in detailed company plans and programmes. The position advocated by Mintzberg and other researchers, who are inclined to consider strategy as the result of an incremental process, tends to reject the validity of a rational, formalised approach (or at least to deny that it is prevalent) in favour of the view that the strategies implemented by 3 Christensen and Andrews are the best-known representatives of the Design School and Ansoff of the Planning School. 4 The main reference in this respect is represented by Herbert Simon’s studies of the decision-making process (Simon, 1960, 1985, 1993). 5 The schools classified by Mintzberg are the Design, Planning, Positioning, Entrepreneurial, Cognitive, Learning, Power, Cultural, Environmental and Configuration schools. 6 In practice, the strategy formation process coincides with the strategic process, because it comprises all stages ranging from analysis and diagnosis of the current strategy to checking the new strategy devised. 3 SDA Bocconi – Research Division
  5. 5. companies are not usually planned but emergent, ie. result from the decisions taken and actions performed by the various players in the organisation day after day. If these two positions are taken to extremes and contrasted (Figure 2), it will be seen that one school of thought supports the view that strategy formulation is basically a rational, top-down process that can be strongly formalised and separated from implementation, while the other considers that strategy formulation is closely entwined with implementation, involves all levels of the organisation (and may consequently be a bottom-up process), and is characterised by a low degree of formalisation and more strongly oriented towards seizing the opportunities presented to the company. Figure 2 – Planned strategy and emergent strategy PLANNED STRATEGY EMERGENT STRATEGY • TOP-DOWN APPROACH • BOTTOM-UP APPROACH • RATIONAL • INCREMENTAL • SEPARATION BETWEEN • FORMULATION AND FORMULATION AND IMPLEMENTATION CANNOT BE IMPLEMENTATION SEPARATED • HIGH DEGREE OF FORMALISATION • NO FORMALISATION To complete the picture of theories relating to the strategic process, those which emphasise the correlations between the type of procedure according to which the strategy is formulated and the strategy problems (in the broadest sense) which the company has to tackle must also be considered. For example, Rogers et al. (1999) state that the method of formulating a strategy depends on whether the company has a defensive or innovative strategy, Pettigrew states that the process used to take strategic decisions is influenced by the type of problem to be solved, and Papadakis et al. (1998) state that the rationality of the process depends on the characteristics of the strategic decisions to be taken and the characteristics of the internal context7 rather than the specificity of the environment. The new research frontier to aim at therefore seems to be analysis of the relationship between strategy formation procedures and internal and environmental causes. 3. Reference model The theories referred to here were used as the basis for a model in which the relationship between competitive and internal environment and strategy formulation procedures is mediated by a set of variables, defined as strategic needs (Figure 3). 7 The specificity of the various strategic decisions are associated by these authors with factors such as the size of the impact that the decision may have, frequency, familiarity, uncertainty, and so on. 4 SDA Bocconi – Research Division
  6. 6. Figure 3 – Research model used • need to involve and attract resources • need for innovation in the business formula • need for rationalisation in the business formula • need for consensus EXTERNAL CONTEXT CHARACTERISTICS OF STRATEGY STRATEGIC NEEDS FORMULATION PROCESS INTERNAL CONTEXT • degree of formalisation • degree of analysis • degree of opportunism Business plan Strategic plans SWOT analysis By “external context”, we mean the competition system applicable to the Strategic Business Area in question. The internal context is represented by the structure of the company8. Strategic needs are defined as strategic problems (Pettigrew, 1990) which must be solved in order to have an effective, efficient competitive strategy to deal with changes in the external context and/or the company’s internal context. There are four types of strategic needs: - the need to involve and attract resources - the need for innovation in the business formula - the need for rationalisation of the business formula - the need for consensus. The need to involve and attract resources arises when the company needs to obtain resources it does not possess (which may be financial, technical or managerial resources) in order to attain its objectives. This need can be said to constitute a link between the changes that take place in the environment (such as needs expressed by the market or the behaviour of competitors) and the company’s ability to respond to them. One example is provided by companies subject to concentration pressures which decide to perform acquisition operations in order to withstand the competitive challenge. This growth strategy involving acquisitions may generate a significant need for funds, and therefore the need to attract resources. The need for innovation can be defined as the need to introduce significant innovations into the company’s competitive strategy in the SBA in question, by substantially modifying the business formula (Coda, 1984). 8 The structure (Airoldi et al., 1994) consists of six elements: institutional structure, economic combinations, technical structure, organisational structure, personnel organisation and assets. 5 SDA Bocconi – Research Division
  7. 7. This need differs from the need to rationalise/refine the business formula, which reflects the need to introduce incremental changes designed to make the strategy increasingly effective and the company increasingly able to meet the needs of its existing customers9, and at the same time reflects the company’s need to reduce costs and rationalise its strategy in order to regain or defend its competitivity. For example, the need for innovation emerges when the needs of the company’s target customers change radically or new competitors enter the competition system, thus changing the rules of the game. As a result, significant innovations need to be introduced into the strategy used by companies to compete with their competitors. This means modifying the goods or services offered by the company on the market in question, modifying the company’s internal structure (by acquiring new resources, using different technologies or developing new skills), and possibly addressing new customer segments. The need to rationalise and refine the business formula arises when the competitive strategy needs to be improved and refined without modifying its current design. A need for rationalisation may emerge when competition becomes fierce and there is pressure on prices, when technological innovations enable competitors to become more competitive in terms of pricing, when the goods or services offered to customers need to be improved without revolutionising them, and so on. The need for consensus relates to strategic decisions which require support from those not directly involved in taking such decisions (minority shareholders, and sometimes the management or other stakeholders). Consensus is particularly crucial in order to implement innovative strategies which modify the company’s positioning in the environment, or which require strong external as well as internal support because they are liable to have a significant impact on the environment. The variable output of the model, or dependent variable, is constituted by the characteristics acquired by the strategy formulation process. Of the characteristics which can be useful to classify strategy formulation procedures at business level, we selected the following variables: • Degree of formalisation of process • Degree of analysis • Degree of opportunism. The higher the degree of formalisation, the more documents (such as plans, programmes and business plans) in which the company’s decisions are formalised are produced the more the competitive strategy is based on encounters and discussions that take place on pre-defined, organised occasions. Conversely, the degree of formalisation is low when the strategy results from decisions taken intuitively, on occasions which are not formally arranged and not subject to formalised company routine, and when it does not give rise to the production of documents in which the strategy is described and evaluated. The degree of analysis measures the intensity of the company’s proactive effort to understand and evaluate environmental trends, competitors’ behaviour and customers’ needs for the purpose of strategy formulation. The more the company uses studies, research and surveys of its competitors and customers, the greater the degree of analysis will be. Companies which make extensive use of analysis employ models, tools and 9 Refining the business formula is similar to improving the strategy for the present, as defined by Abell (1993). 6 SDA Bocconi – Research Division
  8. 8. management theories in support of their strategy formulation activities, and often have dedicated organisational units for this purpose (study office, strategic planning unit, etc.). The degree of opportunism can be evaluated with two variables (the importance of seizing opportunities/ideas which originate inside the company and the importance of seizing opportunities and adapting to the demand of the environment and the market). The readier the company is to seize unexpected opportunities, the higher the degree of opportunism will be; it is consequently considered to be a good indicator of the company’s reactivity and orientation towards implementing non-deliberate or emergent strategies. As this paper only focuses on the relationships between external context and the strategy formulation process, opportunism has only been measured in terms of “ability to seize the opportunities offered by the environment”. Depending on how these variables are combined, the strategy formulation process will acquire a typical profile, which can be represented as shown in Figure 4. In the example illustrated here, the company is characterised in the business in question by a strategy formulation process that features a low degree of formalisation, an average degree of analysis and high degree of opportunism. Figure 4 – Chart showing the characteristics of the strategy formulation process at business level formalisation A M B B B M M A analysis A opportunism In the model developed to analyse the relationships between corporate context, strategic needs and the characteristics of the strategy formulation process, account was taken of another group of variables, which can be defined as tools. These are the tools which companies use in support of their strategy formulation activities, and which in our view help to explain companies’ differing behaviours. The tools we considered were long-term strategic plans, SWOT analysis, and business plans designed to evaluate the feasibility of specific business opportunities. In this paper we have only considered the part of the model that correlates the variables of the environmental context with strategic needs, and indirectly with the characteristics of the strategy formulation process. 7 SDA Bocconi – Research Division
  9. 9. 5. Research hypotheses The research is based on two main hypotheses: Hypothesis 1: the present characteristics of the external context, and especially the environmental dynamics, give rise to strategic needs of the type described Hypothesis 2: depending on the intensity of the various types of need, the company tends to implement a specific strategy formulation process (in terms of degree of analysis, degree of formalisation and degree of opportunism). In any event we recognise that an important part in determining the characteristics of the strategy formulation process is also played by internal variables, as will be seen from the description of the model. The dynamics of the competition environment (which we analysed by reference to the three years prior to the completion of the questionnaire) are represented in this research by five variables: Competitive pressures Demand trend Changes in customers’ needs Pressure on prices Trend towards concentration. Figure 5 – Variables used to measure the pressures exerted by the environment Demand trend Competitive Pressure on pressures prices External context Changes in customers’ Trend towards needs concentration The hypotheses relating to the structure of the relationships between the environmental variables and strategic needs set out in Table 1 can be summed up as follows: As competitive pressure increases, the need for innovation and the need for rationalisation become increasingly important. When competitive pressures increase, companies must find new competition procedures (which means that a need for innovation emerges) or, while focusing on the same competitive 8 SDA Bocconi – Research Division
  10. 10. advantages as in the past, withstand competition from competitors that cut their prices. To achieve this aim they need to rationalise their business formula, regaining efficiency wherever possible. As demand grows, the need to attract resources increases (because growth involves an increase in the need for funding and requires an injection of new managerial and executive energy), as does the need for innovation (because the company must respond to the needs of new customers in new ways); however, the need to rationalise the business formula decreases (as long as demand is growing, the company can afford some inefficiencies in order to meet customers’ demand), as does the need for consensus (because even those who do not directly participate in the decision-making process are reassured by growth). Pressure on prices is positively correlated with the need for rationalisation (ie. recovery of efficiency, the benefits of which can be reflected in sale prices) When growing needs are expressed by customers, the need for innovation increases (because innovation is the response that enables the company to meet customers’ new and more sophisticated needs) A trend towards concentration increases the need to attract resources in order to implement an internal growth strategy (by increasing size) or an external growth strategy (through acquisitions, mergers and agreements). Table 1 - Hypotheses regarding the relationships between environmental variables and strategic needs Need to attract Need for Need for Need for resources innovation rationalisation consensus Competitive pressures + + Growth of demand + + - - Pressure on prices + Rate of change of customers’ needs + Concentration trend + Expectations relating to the relationships between strategic needs and the characteristics of the strategy formulation process are shown in Table 2. The hypotheses formulated in this respect are as follows: The more resources need to be attracted, the more useful it is to formalise the formulation process, giving rise to the production (inter alia) of written documents which can be used to explain the strategy to third parties who will be asked to provide the necessary resources. The more resources need to be attracted, the more analyses need to be conducted. Analysis produces information that can be used to communicate better with external contacts (which may be banks, potential suppliers of capital, or public agencies). The higher the degree of opportunism, the greater the need to attract resources: to be ready to exploit opportunities, it is necessary to possess financial, managerial and entrepreneurial resources. The greater the need for innovation, the greater the tendency towards opportunism, because the company must be able to take advantage of internal and external opportunities. 9 SDA Bocconi – Research Division
  11. 11. The greater the need for innovation, the more necessary it is for the formulation process to feature a high degree of analysis, because analysis should help to understand the customer’s needs and define the direction that innovation will take. The greater the need for rationalisation, the higher the degree of analysis must be in order to identify the areas in which efficiency can be regained and the necessary degree of formalisation. The identification of ways to rationalise the business formula is unlikely to represent an emergent process, as it is typically on the agenda of meetings of the top management. The greater the need to obtain consensus from those who do not take part in the company’s decisions, the greater the degree of formalisation must be, because the process and its output must both be effectively illustrated in order to obtain the approval and support sought. Table 2: Hypotheses regarding the relationships between strategic needs and the characteristics of the strategy formulation process Degree of Degree of Degree of formalisation opportunism analysis Need to attract resources + + + Need for innovation + + Need for rationalisation + + Need for consensus + A number of hypotheses have been formulated about the role of the tools used to support the business strategy formulation process, as shown in Table 3. Very briefly, there is expected to be: a positive relationship between the use of the business plan and the degree of formalisation and analysis a positive correlation between the use of the strategic plan and the degree of formalisation and analysis, and a negative correlation with the degree of opportunism (the more opportunities are seized, the less strategic plans are developed) a positive relationship between the use of SWOT analysis and the degree of analysis; a positive relationship between the use of SWOT analysis and the degree of opportunism (those familiar with SWOT analysis are ready to seize opportunities). 10 SDA Bocconi – Research Division
  12. 12. Table 3: Hypotheses regarding the relationships between the tools used and the characteristics of the strategy formulation process Degree of Degree of Degree of formalisation opportunism analysis Business Plan of SBA + + Strategic Plan of SBA + - + SWOT analysis + + 6. Research methodology On the basis of the theories summed up above, an empirical research project was conducted on a sample of 200 large and medium-sized Italian companies. The minimum size threshold was set at a turnover of 300 billion lire, regardless of the industry in which the company operated. In a nutshell, the aim of the research was to analyse how the companies in the sample formulate their strategies and which variables have the greatest influence on the strategy formulation procedure used. In particular, this article analyses the environmental influences on the formulation process. In order to establish a clearer and more significant relationship between strategy formulation procedures and the reference environment, it was decided to conduct the survey at the level of individual businesses. Each company was consequently asked to fill in one research questionnaire for each of their businesses or Strategic Business Areas. We were thus able to formulate hypotheses about the possible relationships between the competitive environment and strategy formulation. The questionnaires were sent by post and, where possible, by e-mail. The questions related to the last 3 years’ business; as the research was conducted in 2000, they consequently covered the 1997-2000 period. The questionnaire was divided into 2 parts. - The first part related to the company as a whole; in addition to collecting identifying data and information it was designed to explore the company’s institutional set-up and to understand its portfolio strategy over the previous 3 years. - The second part concentrated on strategy formulation at SBA level; it included questions designed to measure competitive pressures, the significance of the various strategic needs, the characteristics of the SBA strategy formulation process, and the trends of this latter variable. The sample comprised a total of 29 large companies operating in 54 SBAs. The various strategy formulation procedures at business or SBA level were correlated with a model consisting of three variables (see Table 4): - Degree of formalisation (DF) - Degree of analysis (DA) - Degree of opportunism (DO). 11 SDA Bocconi – Research Division
  13. 13. The three strategy formulation procedures were all measured on a six-point Likert scale (ranging from 0=nil to 5=high). The greater the company’s tendency to produce plans, programmes and business plans that formalise its decisions, the higher the degree of formalisation (DF). The more the company uses studies, research and surveys of competitors, customers and its own resources, the higher the degree of analysis (DA). Finally, the readier the company is to seize unexpected opportunities, the higher the degree of opportunism (DO), namely the level of importance of seizing opportunities and adapting to the demands of the environment and the market. The degree of opportunism is consequently considered to be a good indicator of the company’s reactivity and orientation towards implementing non-deliberate or emergent strategies. Table 4: The various strategy formulation procedures used by the sample Degree of Value Formalisation Analysis Opportunism Nil 0.0% 7.5% 0.0% Slight 11.3% 9.4% 3.7% Low 11.3% 13.2% 7.4% Average 30.2% 20.8% 24.1% Fairly high 37.7% 28.3% 24.1% High 9.4% 20.8% 40.7% Total 100.0% 100.0% 100.0% The strategy formulation procedures were postulated to be responses to the emergence of: A) Some strategic needs : - the need for the company to involve and attract internal and external resources (F1) - the need for innovation in the business formula (F2); - the need to rationalise/refine the business formula in order to regain efficiency (F3) - the need for consensus on the part of the minority shareholders, the management and other company stakeholders (F4). All four requirements were measured on a 5-point Likert scale (1=much lower, 2=lower, 3=unchanged, 4=higher, 5=much higher). B) Some strategy formulation tools: • A long-term strategic plan is drawn up (A1) • A SWOT analysis is conducted (A2) • Business plans are drawn up to evaluate specific business opportunities (A3). All three activities were evaluated in terms of disagreement (value 0) or agreement (value 1) with the statement. The presumed relationships between the three strategy formulation variables and (i) the four needs and (ii) the three strategy formulation tools were postulated to be influenced to some extent by the degree of 12 SDA Bocconi – Research Division
  14. 14. freedom of strategy formulation possessed by each SBA (P1), measured on a six-point Likert scale (ranging from 0=nil to 5=high). The four needs described above (the need for innovation in the business formula, the need to rationalise/refine the business formula in order to regain efficiency, the need for the company to involve and attract internal and external resources and the need for consensus on the part of minority shareholders, the management and other company stakeholders) were correlated with five changes in the environment which had taken place in the preceding three years: 1) Level of competitive pressure (COMP) 2) Level of demand (DEMAND) 3) Level of customers’ needs (CUSTOMERS) 4) Pressure on prices (PRICES) 5) Trend towards concentration (CONC). The five environmental changes were measured on an 11-point Likert scale ranging from –5=phenomenon declining to +5=phenomenon strongly increasing. The four relationships between needs and environmental changes were postulated to be influenced by the degree of freedom possessed by each SBA in strategy formulation (P1). 4. Results of the research Testing of the two main hypotheses led to the development of two methodological steps, which can be summed up as follows: 1) identification of the weighting variables of the relationships so as to take account of the various degrees of freedom possessed by each SBA in strategy formulation 2) testing of the hypotheses by determining which relationships are actually active in the system of all possible determinants of the strategy formulation procedures, illustrated below:  Needfor companyto involveand attractinternaland externalresources     Needfor innovationin businessformula  Degreeof formalisat  ion  Needfor rationalisation/refi nementof businessformulato regainefficiency     Degreeof analysis = f  Needfor consensuson thepart of minorityshareholde management other companystakeholde  rs, and rs   A long - termstrategicplan is drawnup  Degreeof opportunis m     A strengths/weaknessesand opportunities/risksanalysisis conducted     Businessplansare drawnup to evaluatespeciticbusinessopportunit ies   Competitiv pressure e  Need for companyto involveand attractint ernal and externalresources      Levelof demand  Need for innovation bu sin ess formula in     = g Customers' needs  Need for rationalis ation/ refinementof bu sin ess formulato regainefficiency   Pressureon prices  Need for consensuson the part of min ority shareholde , management othercompanystakeholde  rs and rs  Trendtowardsconcentrat   ion 13 SDA Bocconi – Research Division
  15. 15. To identify the seven relationships we employed linear weighted regression models with the use of stepwise methods to select the determinants of the strategy formulation procedures (see methodological appendix). Figure 5 shows the complete system of relationships identified. The continuous line in that figure represents a positive cause-effect relationship, and the dotted line a negative cause-effect relationship. Figure 5 – Complete system of relationships Need for involvement and attraction Development of demand Need for Degree of rationalisation and refinement formalisation Need for Customers’ needs consensus Need for innovation Degree of analysis Business Plan of SBA Strategic plan of SBA ’ Degree of opportunism Analysis of strengths and weaknesses The results of the research therefore confirmed some, though not all of the hypotheses formulated. The results are summarised in Tables 5, 6 and 7: the first compares the hypotheses and evidence regarding the relationships between environmental variables and strategic needs, the second compares the hypotheses and empirical evidence regarding the relationships between strategic needs and the characteristics of the strategy formulation process, and the third associates strategy formulation tools with the characteristics of the strategy formulation process. The postulated relationships are shown in brackets. 14 SDA Bocconi – Research Division
  16. 16. Table 5: Hypotheses and results regarding the relationships between environmental variables and company needs Need to attract Need for Need for Need for resources innovation rationalisation consensus Competitive pressures (+) (+) Growth of demand (+) + (+) + (-) - (-) - Pressure on prices (+) Rate of change of customers’ needs (+) + Trend towards concentration (+) Table 6: Hypotheses and results regarding the relationships between company needs and the characteristics of the business strategy formulation process Degree of Degree of Degree of formalisation opportunism analysis Need to attract resources (+) (+) + (+) Need for innovation (+) (+) + Need for rationalisation (+) + (-) - (+) + Need for consensus (+) Table 7: Hypotheses and results regarding the relationships between the tools used and the characteristics of the business strategy formulation process Degree of Degree of Degree of formalisation opportunism analysis Business Plan of SBA (+) (+) - Strategic Plan of SBA (+)+ (-) - (+) Analysis of strengths and weaknesses (+) - (+) The three strategy formulation procedures are explained by the three needs identified and the tools considered. In particular, the following findings emerge: • Expanding demand influences all the needs indicated above, though in different ways: there is a positive correlation with the needs for involvement/attraction and innovation, and a negative correlation with the needs for rationalisation and consensus. This confirms our hypotheses, because in the presence of growing demand it is necessary to attract resources and also innovate, whereas no need to rationalise or to obtain a consensus regarding the decisions taken emerges in such a favourable situation. 15 SDA Bocconi – Research Division
  17. 17. • The development of customers’ needs is positively correlated with the need for innovation. Our interpretation is that the more demand grows, the more innovation is required to meet the needs of new customer segments and to provide a wide range of solutions to meet the needs of existing customers. However, the hypothesis that competitive pressures are positively associated with the need for innovation and the need for rationalisation was disproved, as was the hypothesis that a growing trend towards concentration corresponds to an increasing need for resources, and that pressure on prices is positively correlated with the need for rationalisation. The findings regarding the relationships between strategic needs and the characteristics of the competitive strategy formulation process indicate that: • the need to attract resources is positively associated only with the degree of opportunism; our interpretation is that in order to be ready to seize opportunities, a company needs resources • the need for innovation influences the degree of analysis (hypothesis confirmed), but is not correlated with the degree of opportunism; this suggests that analysis is mainly considered important by companies which are aware that they need to innovate, and consequently wish to obtain a thorough understanding of the competition scenario and customers’ needs • the need for rationalisation, as was to be expected, is positively correlated with the degree of analysis and negatively correlated with the degree of opportunism; a positive correlation with the degree of formalisation also emerges • the need for consensus does not seem to be associated with any of the postulated strategy formulation procedures, whereas we had expected to find a positive relationship with the degree of formalisation. Finally, if we consider the part which may be played by the tools used to support strategy formulation, the empirical research indicates that: • The hypotheses regarding the positive relationship between the development of the strategic plan and the degree of formalisation, and the negative relationship between the use of the plan and the degree of opportunism, were confirmed. However, contrary to expectations, no relationship with the degree of analysis emerged. • No relationship between the use of the business plan and the degree of formalisation or degree of opportunism emerged. However, a negative correlation with the degree of analysis emerged, whereas a positive correlation had been expected. Our interpretation of this result is that there is a kind of replacement effect between analysis and development of business plans, as if companies did not have enough energy to implement both. This result is particularly interesting in view of the fact that analysis should form the basis for development of the business plan, because it supplies the data and hypotheses on which the business plan will be developed in order to evaluate the feasibility of a project. • SWOT analysis is not correlated with the degree of analysis, and above all is negatively correlated with the degree of opportunism, whereas a positive correlation had been expected. Our interpretation of this result is that organisational units in which the strategy formulation process involves a significant tendency to take advantage of the opportunities offered by the environment are mainly inspired by the hunches and experience of their executives. 16 SDA Bocconi – Research Division
  18. 18. 5. Conclusions At the end of this first research project, which will be followed by a number of detailed studies and extensions, we feel it useful to make some comments about three subjects: - the part played by the external context in the competitive strategy formulation process - the complexity of analysing the strategy formulation process - companies’ behaviour patterns. As regards the first aspect, which forms the subject of the present study, our research demonstrates that only two of the variables selected are context variables which, in the view of the researchers, can explain strategic needs and the differences in terms of strategy formulation procedures: the demand trend and customers’ needs. This confirms that the competitive environment plays an important part, although it seems to depend directly not so much on the demand trend as on the behaviour of competitors. The most interesting finding is that this correlation emerged both for companies operating on a B2B basis and for those which directly address end users. Of the two variables, the demand trend is the one with the greatest impact, because it is correlated with all the types of strategic need identified and, through them, with strategy formulation procedures. The conclusion that can be drawn in this respect is that the demand trend is so important because it affects the various needs not only directly but also indirectly, thus influencing competitors’ behaviour and the rules of the competition game. However (and this is the second factor which should be borne in mind), analysis of the procedures used by companies to formulate their business strategies is highly complex because those procedures are also affected by the internal context. Companies of different sizes, institutional set-ups and nationalities can be expected to devise their strategies in different ways because their structures, operating systems, values and cultures are different. Hence the complexity of the strategic process (even if the formulation stage alone is considered) and the difficulty of identifying which variables should be considered and how they should be measured for the purpose of an empirical evaluation of this subject. The third factor relates to companies’ behaviour. Two extreme behaviour patterns seem to emerge from the research presented here: - On the one hand, the behaviour of companies which formulate their strategy in a structured, formalised way. These are mainly companies which need to take up the challenge of rationalising their business formula in a difficult context, characterised by falling demand. The output of this process is constituted by strategic plans, which are likely to be complex. - On the other hand, the behaviour of companies which are strongly oriented towards exploiting opportunities. These companies do not draw up strategic plans but use SWOT analysis, and are characterised by a limited need for rationalisation. As there is no correlation with the need for innovation, it can be assumed that these companies are well positioned in their competitive environment, and rely mainly on entrepreneurial hunches and experience when choosing the type of strategy to be implemented. The two behaviour patterns, which recall Mintzberg’s concepts of deliberate strategy and emergent strategy, will be better understood if it is borne in mind that the degree of analysis is positively correlated with the degree of formalisation. This may be explained by the fact that companies which have a formulation process with a high degree of formalisation have a greater need for rationalisation, and conduct a great deal of analysis to meet this need. Conversely, those oriented towards taking advantage of opportunities seem to 17 SDA Bocconi – Research Division
  19. 19. rely on hunches, and the analyses they conduct are based on SWOT analysis. Moreover, the degree of analysis is negatively correlated with the development of the business plan; analyses only seem to be conducted for use in the traditional planning process, not to devise business plans too, as ought to be the case. This suggests that the strategic management of large companies is far more similar to that of small and medium-sized companies than might have been expected. 18 SDA Bocconi – Research Division
  20. 20. Bibliography Abell Derek F., Managing with Dual Strategies. Mastering The Present. Preempting The Future, The Free Press, New York, 1993; Airoldi G. – Brunetti G. – Coda V., Economia Aziendale, Il Mulino, Bologna, 1994; Andrews Kenneth R., The Concept of Corporate Strategy, Irwin, Homewood (Illinois), 1980; Ansoff H. Igor, Corporate Strategy, McGraw-Hill, New York, 1965 (Italian translation: Strategia aziendale, Etaslibri, Milan, 1968); Ansoff H. Igor, Critique of Henry Mintzberg’ ‘The Design School: reconsidering the basic premises of strategic management’; Strategic Management Journal, 1991; Coda Vittorio, “La valutazione della formula imprenditoriale”, in Sviluppo & Organizzazione, 1984; Eisenhardt Kathleen M., “Strategy as Strategic Decision Making”, in Cusumano M.A. – Markides C.C. (ed), Strategic Thinking for the Next Economy, Jossey-Bass, Cambridge, MA, 2001; Hax Arnoldo C. – Majluf Nicolas S., The Strategy Concept And Process, Prentice Hall, Upper Saddle River, 1991 and 1996 (2nd edition); Mintzberg Henry, Patterns in strategy formation; Management Science, 1978. Mintzberg Henry, Crafting Strategy; Harvard Business Review, 1987. Mintzberg Henry, Learning 1, planning 0 reply to Igor Ansoff; Strategic Management Journal, 1991. Mintzberg Henry – Ahlstrand Bruce – Lample Joseph, Strategy Safari, The Free Press, New York, 1998; Papadakis V.M. – Lioukas S. – Chambers D., “Strategic Decision-making Processes: The Role of Management and Context”, in Strategic Management Journal, vol.19, 1998; Pettigrew A.M. “Longitudinal Field Research on Change: Theory And Practice”, in Organization Science, 1990; Pettigrew A.M., “The Character and Significance of Strategy Process Research”, in Strategic Management Journal, vol.13, 1992; Pettigrew A.M. – Whipp R., “Managing the Twin Processes of Competition and Change. The Role of Intangible Assets”, in Lorange et al. (ed), Implementing Strategic Processes. Change, Learning and Co- operation, Basil Blackwell, Oxford, 1993; Pettigrew A.M., “Linking Change Processes to Outcomes”, in Beer Michael – Nohria Nitin, Breaking the Code of Change, Harvard Business School Press, Boston, 2000; Porter M., Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press, New York, 1980; Rogers Patrick R. – Miller Alex – Judge William Q, “Using Information-Processing Theory to Understand Planning/Performance Relationships in the Context of Strategy”, in Strategic Management Journal, 1999; Simon H.A., The New Science of Management Decision, Harper & Row, New York, 1960; Simon H.A., “Strategy and Organizational Evolution”, in Strategic Management Journal, 1993; Stopford J., “Should Strategy Makers Become Dream Weavers?”, in Harvard Business Review, January 2001. 19 SDA Bocconi – Research Division
  21. 21. Methodological appendix 1) Identification of the weighting variables of the relationships For the purpose of weighting the various strategy formulation procedures, we identified the degree of involution of variable P1 (degree of strategic independence of the SBA) which enabled the function10 of maximum probability of the following saturated models (ie. with all independent variables) to be minimised: Strategy formulation procedure = a0 + a1* need for innovation in the business formula (F1) + a2* need for rationalisation/refinement of the business formula (F2) + a3* need for the company to involve and attract internal and external resources (F3) + a4* need for consensus (F4) + a5* a long-term strategic plan is drawn up (A1) + a6* a SWOT analysis is conducted (A2) + a7* business plans are drawn up to evaluate specific business opportunities (A3) The values obtained were as follows: Relationship DF: Log function of maxver = -62.973 Value of power = -1.000 Relationship DA: Log function of maxver = -75.432 Value of power = -0.500 Relationship DO: Log function of maxver = -64.024 Value of power = 1.500 For the four strategic needs, we proceeded in a similar way in relation to the following saturated models: Strategic need = a0 + a1* Level of competitive pressure (COMP) a2* Level of demand (DEMAND) a3* Level of customers’ needs (CUSTOMERS) a4* Pressure on prices (PRICES) a5* Trend towards concentration (CONC) The values obtained are: Relationship F1: Log function of maxver = -50964 Value of power = -1.500 Relationship F2: Log function of maxver = -53.598 Value of power = -2.500 Relationship F3: Log function of maxver = -68.123 Value of power = 1.000 Relationship F4: Log function of maxver = -67.713 Value of power = 0.000 10 ie. the logarithm function 20 SDA Bocconi – Research Division
  22. 22. 2) Identification of system of recursive causal relationships 2.1) Degree of formalisation The model relating to the degree of formalisation is as follows: Degree of formalisation (DF) = b0 + b1* Drafting of a long-term strategic plan in the SBA + b2* Rationalisation/refinement of competitive strategy which presents a corrected R-squared of 0.237 and a standard error of estimate of 1.78. The values of b0, b1 and b2 are set out in Table 8 below: Table 8: Coefficients of the “Degree of Formalisation” model Coefficientsa,b Model: 2 Standardi zed Unstandardized Coefficien Coefficients ts Collinearity Statistics B Std. Error Beta t Sig. Tolerance VIF (Constant) 1,038 ,619 1,677 ,101 Drafting of a long-term strategic plan in the SBA ,955 ,332 ,367 2,877 ,006 ,998 1,002 Rationalisation/refinement of competitive strategy ,392 ,142 ,353 2,766 ,008 ,998 1,002 a. Dependent Variable: Degree of formalisation in defining the SBA strategy b. Weighted Least Squares Regression - Weighted by Weight for X63 from WLS, MOD_86 PESO** 1,000 2.2) Degree of analysis The model for analysis of the environment and formulation needs and tools is as follows: Degree of analysis (DA) = b0 + b1* Rationalisation/refinement of competitive strategy + b2* Consensus on strategic decisions + b3* Innovation of competitive strategy employed which presents a corrected R-squared of 0.238 and a standard error of estimate of 1.72. The values of b0, b1, b2 and b3 are set out in Table 9 below: Table 9: Coefficients of the Degree of Analysis model 2.3) Degree of opportunism The model relating to the degree of opportunism (namely the ability to seize opportunities and adapt to the demand of the environment and the market) proved to be as follows: Degree of opportunism (DO) = b0 + b1* Analysis of strengths and weaknesses in the SBA + b2* Drafting of long-term strategic plan in the SBA + b3* Evolution of need to involve/attract resources + b4* Rationalisation/refinement of competitive strategy 21 SDA Bocconi – Research Division
  23. 23. which presents a corrected R-squared of 0.617 and a standard error of estimate of 0.42. The values of b0, b1, b2, b3 and b4 are set out in Table 10 below: Table 10: Coefficients of the “Degree of Opportunism” model Coefficientsa,b Model: 4 Standardi zed Unstandardized Coefficien Coefficients ts Collinearity Statistics B Std. Error Beta t Sig. Tolerance VIF (Constant) 2,826 ,594 4,758 ,000 Analysis of strengths/weaknesses in the SBA ,975 ,307 ,310 3,175 ,003 ,856 1,168 Drafting of a long-term strategic plan in the -1,399 ,282 -,494 -4,959 ,000 ,821 1,219 SBA Development of need to involve/attract in the ,660 ,134 ,482 4,938 ,000 ,855 1,169 past three years Rationalisation/refinement of competitive -,295 ,138 -,204 -2,139 ,038 ,898 1,113 strategy a. Dependent Variable: Importance of seizing opportunities and adapting to the demand of the market and the environment b. Weighted Least Squares Regression - Weighted by Weight for X67 from WLS, MOD_88 PESO** -1,500 2.4) Need for the company to involve and attract internal and external resources The model relating to the need for the company to involve and attract internal and external resources is as follows: Need for the company to involve and attract internal and external resources (F1) = b0 + b1* Development of demand which presents a corrected R-squared of 0.202 and a standard error of estimate of 1.69. The values of b0 and b1 are set out in Table 11 below: Table 11: Coefficients of the model relating to the need for the company to involve and attract internal and external resources Coefficientsa,b Standardi zed Unstandardized Coefficien Coefficients ts Collinearity Statistics Model B Std. Error Beta t Sig. Tolerance VIF 1 (Constant) 3,583 ,124 28,963 ,000 Demand ,137 ,038 ,467 3,625 ,001 1,000 1,000 a. Dependent Variable: Evolution of need to involve/attract in the past three years b. Weighted Least Squares Regression - Weighted by Weight for X59 from WLS, MOD_89 PESO2** 1,500 2.5) Need for innovation in the business formula The model relating to the need for innovation in the business formula proved to be as follows: Need for innovation in the business formula (F2) = b0 + b1* Development of demand + b2*Level of customers’ needs which presents a corrected R-squared of 0.263 and a standard error of estimate of 3.08. 22 SDA Bocconi – Research Division
  24. 24. The values of b0, b1 and b2 are set out in table 12 below: Table 12: Coefficients of the model relating to the need for innovation in the business formula Coefficientsa,b Model: 2 Standardi zed Unstandardized Coefficien Coefficients ts Collinearity Statistics B Std. Error Beta t Sig. Tolerance VIF (Constant) 3,185 ,296 10,767 ,000 Demand ,108 ,034 ,398 3,172 ,003 ,936 1,069 Customers ,171 ,077 ,279 2,222 ,031 ,936 1,069 a. Dependent Variable: b. Weighted Least Squares Regression - Weighted by Weight for X60 from WLS, MOD_90 PESO2** 2,500 2.6) Need for rationalisation/refinement of the business formula The model relating to the need for rationalisation/refinement of the business formula is as follows: Need for rationalisation/refinement of the business formula (F3) = b0 + b1* Development of demand + which presents a corrected R-squared of 0.184 and a standard error of estimate of 0.54. The values of b0 and b1 are set out in Table 13 below: Table 13: Coefficients of the model relating to the need for rationalisation/refinement of the business formula Coefficientsa,b Standardi zed Unstandardized Coefficien Coefficients ts Collinearity Statistics Model B Std. Error Beta t Sig. Tolerance VIF 1 (Constant) 4,159 ,176 23,588 ,000 Demand -,176 ,050 -,447 -3,500 ,001 1,000 1,000 a. Dependent Variable: Rationalisation/refinement of competitive strategy b. Weighted Least Squares Regression - Weighted by Weight for X61 from WLS, MOD_91 PESO2** -1,000 2.7) Need for consensus The model relating to the need for consensus is as follows: Need for consensus (F4) = b0 + b1* Development of demand + which presents a corrected R-squared of 0.134 and a standard error of estimate of 0.103. The values of a0 and a1 are set out in Table 14 below: Table 14: Coefficients of the model relating to the need for consensus 23 SDA Bocconi – Research Division
  25. 25. Coefficientsa,b Standardi zed Unstandardized Coefficien Coefficients ts Collinearity Statistics Model B Std. Error Beta t Sig. Tolerance VIF 1 (Constant) 3,611 ,194 18,599 ,000 Demand -,169 ,058 -,390 -2,901 ,006 1,000 1,000 a. Dependent Variable: Consensus relating to strategic decisions b. Weighted Least Squares Regression - Weighted by Weight for X62 from WLS, MOD_92 PESO2** ,000 24 SDA Bocconi – Research Division

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