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Formulating corporate objectives and strategies
78
Long Range Planning Vol. IO
August 1977
Formulatbbbbbbng Corporate Objectives and Strategies Hans G. Krijnen*
In this article Hans G. K@en sets out to illustrate part of the strategic policy-making of a firm. He uses three economic basic-aims and three groups of strategies. The basic-aims have been linked with the strategies which, in the author’s opinion, contiibute most towards the reaiisation of meaningful goals. He believes it should be possible to deduce some broad guidelines from the relationships mentioned, to be able to make a choice among a number of new product-market combinations.
When the OPEC-countries dealt the Western world a severe blow with their oil-embargo in the autumn of 1973, and industrial activities threatened to reach a lower level in consequence of this, it appeared that the management of firms seldom take into account certain, though highly improbable circumstances such as these, when determining their policy. Most managements were well-informed about a possible shortage of certain fossil fuel, but it seems that hardly anyone expected the problem might occur in the way it did and at so short notice. Another occurrence, which presented a great many firms with real problems, was the number of importation-restricting measures the Italian government took in the spring of 1974 to protect the level on their balance of payments. For Italy was a country promoting free intercourse of capital, goods and persons among E.E.C. countries, as one of the signatories of the Pact of Rome. But charity begins at home and the measures mentioned were absolutely necessary to Italy. In the meantime there are in Holland too, many firms suffering from the consequences of this action. The firms in Holland producing veal used to export +80 per cent of their production to Italy before the measures were taken, so that severe problems threatened them with respect to their survival. A third instance of a threat to a company
from an
*Hans G. Krijnen is lecturer at the Faculty of Economics of the University of Groningen in the Netherlands.
unexpected corner is the fact that since April Ist, 1971, the oil-companies mostly refused to supply petrol to a certain Dutch trading-company, as they switched, as a consequence of the oil-crisis, from a surplus to a shortage of petrol; the trading-company threatened to obtain too little petrol to supply the real need. As the continuation of the company as an independent organization incurred direct risks, the Minister of Economic Affairs intervened by taking an interim measure starting immediately This measure meant that oilcompanies refining m Holland should supply petrol at a fixed price to the trading-company. The Minister derived the authority to intervene from the act concerning economic competition. So far as these instances give rise to that action one might conclude that in the first place management would do well to attend to possible threats to the firm, and especially those threats which might have an essential influence on the viability of the firm; and secondly that the management should be imaginative in postulating where and when such threats might occur. Lastly that management ought to consider the measures to be taken to prevent those possible threats, or to be prepared to deal with them if they occur. In modern management theory such postulating has already been accepted as a part of what is nowadays called strategic planning. The aim of strategic planning is : fixing the firm’s goals; assessing and recording the weaknesses and strengths of the company; surveying the company’s position; and tracing out directives to remove the weaknesses for the coming periods with a view to making the most of its strengths. These directives form the company’s strategy. The strategy is a group of decision rules with certain characteristics which are used to chose from an infinite number of possible product-market combinations. The product-market combinations thus chosen comply with certain well-considered conditions and thus form a reasonable guarantee for the realisation of the firm’s goals which have already been set. The fixing of the goals and the choice of strategy together form the company’s strategic policy. The setting of the strategic policy can be considered as the most important task of the top-management.
Formulating Strategic policy-making was, until recently, an almost intuitive matter. However, in the past twenty years attempts have regularly been made to analyse this task of the management, and to develop a structure related to it. Firm steps in the right direction have been made. However, a large part of this matter still remains rather ill defined regarding substance and composition. In this article an attempt has been made to develop a survey of the substance of strategic policy and some fuzzy relationships between the meaningful variables are illustrated. Later on in the article the author suggests what he considers to be the most important economic basicgoals and possible strategies of the management. In that he indicates which strategies he believes will best contribute to the realization of the meaningful objectives. This relationship between basic-goals and strategies shall be further explained with the help of flowcharts. The use of these flowcharts includes the argument that there is a certain order in which certain basic-goals and related strategies should be merged. Perhaps rough rules can be derived when comparing the outcomes of the model here developed and real life; these can then be used when preparing and taking decisions in the field of the direction in which a company is to develop. Management Cycle
An organization exists to satisfy a purpose. A special type of organization is the firm. A firm tries to reach its goals by means of transformating and/or selling goods and/or services. More companies are trying to do this through a planning approach, this means that the firm tries to make its objectives explicit and tries to obtain this in a deliberate way, bearing in mind the develop ment of exogenous variables of the environment. Planning can take place on three levels.
Corporate
79
Objectives and Strategies
The basic-aims are that group of aims essential to the maintenance of the firm’s viability. In the case of viability the firm can continue to exist. So continuity is a consequence of maintenance of the firm’s viability. A firm is viable when the received compensations are greater or equal to the contributions of the participants. It holds good for companies that the financial income has to be at least higher or equal to the necessary payments to the participants. Therefore the realisation of a number of economic basic-aims is necessary. Here we start from the hypothesis that a firm pursues three economic basic-aims and moreover in a certain order. See Figure 3. The hierarchy of economic goals. Those economic goals are: * a certain return ofinvestment in short and long term: R fi
a certain degree of independence of the firm with a regard to parts of the environment: I.
b a certain degree offIexibility
of the company:
F.
In the course of the article we try to show a relationship between these three economic basic-aims and a number of directions of development and growth distinguished
External and Internal Information Svstem
L
I
I +
Personal Values, Norms and Objectives of the Participants
I Expectations of the Society
I
I
t Continuous Autonomous Search Process for New Alternatives
I Values of the Firm
I
I
On the operational level plans are developed which are concerned with e.g. an efficient allocation to machines of the series of products that are to be manufactured. On an organizational level e.g. one works, according to plans, at the alteration of a functional structure in a matrix-organization. On a strategic level the management is concerned as to which economic and social basic-aims are to be pursued, and in which values. In addition to that management tries to shape the direction of development strategies which are to be used when choosing new product-market combinations.
I Decision Procedure Evaluation of New Alternatives
:
Planning :R A I
I I
The determination of the basic-aims and the choice of strategies together form the firm’s strategic policy. One considers the real choice of new product-market combinations via basic-aims and strategies as a third part of strategic planning. The relationship between the different forms of planning is shown in Figure 1. The Strategic Planning
Within the phase of strategic planning a number steps can be distinguished. See Figure 2.
R
of
= Realization Level of a Goal Variable
R,,= Aspiration Level of a Goal Variable
Figure 1.
1stop
80
Long Range Planning Vol. 10
August 1977 notice it may be possible to state with a certain degree of probability whether a firm is viable, in the Iong run this is a greater problem.
Relevant
of the Company
Environment I
I T I Choice of Strategy Concerning: 1. Product-Market Scope 2. Growth Vector t C$~~itive Advantage
Keeping to the target of the return of investment on a firm’s facilities, requires a permanent search for an optimal relationship among the means of production so used. The firm is almost always heavily involved with this because of the indivisibility of the means used, the growing specialization in the organization and the creation of new productive services as the result of technical and commercial innovations2.
5: Method of Growth 6. Balance of Portfolio
Product-Market Combinations I
1 Evaluation
Ansoff uses for this a number of characteristics that will also keep the firm. remunerative in the long-term, if pursued accordinglyl. So it is that the income is determined on the long run by the ‘external competitive position’, which is considered to be dependent on the growth and stability of e.g. the turnover, the profits, the market-share, etc. and the long term costs by ‘indicators of esciency which are related to e.g. the staff’s capability, the age of the activa etc.
9 Rejected List of Product-Market Combinations ,
I
So the drive for a larger return of investment is not dependent on a particular scale of production. The socalled optimal quantitative proportions are continually moving as a consequence of these innovations; so scale enlargement is a result hereof. What influence this may have on the market, we shall see when discussing the directions of development. The Independence-Goal
Figure 2. hereafter. First we shall look into the distinguished basic-goals. We should add the marginal note that there is a question of an imagined relationship between the variables which are indicated so that it is a question of a hypothetic model. No empiric research has been done into the accepted relationship; discovering acceptable measurable variables however is a rather complicated matter. The Return of Investment-Goal
By return of investment we understand the proportion between an income, profit and/or interest, per period and the facilities which earned this income. At short
A
Flexibility ---_____
By independence we understand the measure by which a firm prevents other organizations or persons using influence or power over the firm’s policy-making, in such a way that the firm’s viability is endangered. When the expected return of investment on short and long term may be called good, one should still strive after independence with a view to the danger mentioned here. Via the inputs and outputs of the physical transformation process the firm is related to its environment. There is interaction and so dependence: does the environment supply the desired inputs and does the environment buy the manufactured outputs? There should be consensus, regarding these points, which it relates to the environment. In that case there should be few surprises for the firm. The expectations of the participants and the environment about what the firm does, and does not or will do, are in agreement; the whole area of industrial activities, the so-called ‘domain’ has then been fixed and accepted. The degree of dependence appears in the measure of ‘domain consensus’. The so-called political system of the organization tries to maintain this ‘domain consensus’. The firm’s political system forms part of the &rm’s social system. The political system decides the system’s goals, the economic system, the allocation of the means, and the policy and procedures of control to be used for this3. Next to this, the political system looks for support for the execution of these decisions from the environment.
Formulating Price concluded from a comparative examination of the results of fXy described tests of the firm’s effectiveness that usually organizations with a higher degree of autonomy are more eff~ve than organizations with a lower degree of autonomy4. By autonomy we mean the degree of freedom a firm has to take decisions that affect the environment. Institutionalisation, the measure in which these decisions are sup orted by the environment, is sooner gained when tE ere is a higher degree of autonomy. In the latter case the organizations are better able to adjust to the environment’s demands or, if they don’t want to do so, they can try to influence the environment in such a way that the latter adjusts itself to the firm. In both cases the ‘domain consensus’ is maintained. The degree of adjusting or influencing is determined for the greater part by the measure of dependence of the firm, with respect to parts of the environment. This influence of a thiid person, the dependence, is determined by the relationship between the degree of dispersion or concentration of the required capacity of support for the own demand of inputs, and the supply of outputs on the one hand, and the offered capacity of support in the form of supply by suppliers of inputs and the demand of buyers of the firm s outputs. The degree of dispersion and concentration is decisive for the ways in which support is looked for. These ways, directions of development are in principle to be considered as directions of adjusting or influencing. For the choice of the many directions of development strategies of independence ought to be formulated.
Corporate
Objectives
and Strategies
81
the number of non-related customers, market segments, technologies and products. The firm’s degree of flexibility can be measured with the aid of the Standard Industrial Classification Code’. In which industries are activities undertaken? Stopford and Wells use the simple formula N x S > 1, where N stands for the number of two-digit industries in which the firm operates and S forms the part of the total turnover obtained by the selling of products different from the products of the industry with the biggest tumovef’. If e.g. N = 4 and S = 0,5 then N x S = 2 so that there is a case of a firm with a high degree of flexibility. The desired for degree of flexibility is decisive for the development and employment of the so-called flexibility-strategies.
Dependent A
Inflexible M 1.
-
Flexible
2.
The Remunerative Firm
The Powerless, Flexible Firm
R
The Fixed, Independent Firm
In&p&dent
3.
The Viable Firm
4.
Figure 4. The Flexibility Goal By flexibility we understand the degree in which the firm is able to remain economically viable after an unexpected and unforeseen unfavourable event has taken place e.g. strikes, a new epoch-making product by a competitor, nationalization, the falling-off of a market as a consequence of intervention by the government, economic recessions etc. This aim ought to be pursued as soon as the return of investment goal and the independence goal will be realised in the future in a sufficient or optimal degree. The afore-mentioned occurrences may be disastrous for the firm. One way to avoid them is to spread the firm’s activities. In this way less risk is incurred. Riskspreading means the combination of projects in which the uncertainties partly or wholly compensate each otheP. This degree of compensation is dependent on the measure in which the results vary in the same or opposite direction with a change in the data constellation. For this Ansoff again developed a number of He speaks of external and internal flexindicator?. ibility. The latter is determined by the measure of keeping flexible the available resources. The former, from an offensive viewpoint is obtained by enlarging the number of fertile technologies and the strength of research and development. Defensively, the external flexibility is given concrete meaning by
Four Kinds of Remunerative Firms Dependent on the degree in which the three distinguished economic basic goals have been realised, organisations may be divided into four kinds. We now start from the principle that the request of being sufficiently profitable is complied with. These groups are : Remunerative Firms; these are to a high degree dependent upon other organizations and moreover have little flexibility. This is the so-called captive ‘organizations which are captives organizations; of a particular populationye.
(1)The
Fixed, Independent Firms; these are not flexible but they are, to a high degree, independent of other organizations. The firm has given concrete fomr
(2)The
New
Present
Market Penetration
Product Development
New
Market Development
Diversification
Figure 5.
82
Long Range Planning Voi. 10
August 1977
to power e.g. in the form of a particular position of monopoly.
(3)The polwerless,flexiblefimts;
these are to a high degree dependent on third persons or institutions but flexible; e.g. a firm operating in many unrelated areas but with few and very large suppliers of the necessary raw materials.
(4) The
viable jirms;
these are to a high degree flexible
and independent e.g. a firm which non-related activities in a number autonomous divisions, operating do not influence one another. This called an optimal and free firm.
has classed many of more or less in markets that is what might be
Within this article we do not connections between the three certainly present, but discussion necessary for the progress of the
go into the possible basic-goals. They are on that topic is not argument.
If the firm is only profitable three lines of conduct arc to be distinguished: (a) the normal line of conduct: this one leads from class 1 via class 2 to class 4: line A. (b) the exceptional line of conduct: class 3 to class 4: line B.
from class 1 via
(c) the optimal line of conduct: from class 1 directly to class e.g. by means of fusion: line C.
Is Competition Is Market Remunerative
Market
Is New Product Remunerative?
Lower Relative Remunerative Optimum ?
Figure 6.
Formulating See Figure 4: four hinds of remunerative
firms.
In Figure 4 we illustrate the possible lines of conduct by means of arrows. The firm may also be affected actions, negatively, e.g. by means of competitive actions of customers and suppliers etc.: line R. With which strategks may the fourth position be obtained? By strategy we mean a rough decision rule which is used when choosing specific product-market combinations which contribute in the highest degree to the firms economic basic-goals. These decision rules
Corporate
Objectives and Strategies
may relate to six aspects: the whole area of industrial activities, the direction of growth, the competitive advantages, the synergy, the method of growth and the balance of portfolio. These strategies are formed after the fixing of a gap between the desired and expected values of the basic-goals, the analysis of the firm and the analysis of the relevant environment. The strategies mentioned hereafter are all related to the firm’s directions of growth. See Figure 2. The Return of Investment Strategies
These strategies contribute
in the highest degree to the
x Start
Try to Acquire Prestige
!
No
Yes
Cartels
I Maintain Al!ernatives
.
I
Co-operation e.g. Joint Venture +
Yes
I Yes
4
Review I,
Figure 7.
83
9.1
54
Long Range Planning Vol. 10
August 1977
realisation of the return of investment. These strategies are designated in respect of market-penetration, product-development and market-development. See Figure 5. Market penetration forms the most natural development of present-day activities; the turnover increases, the average costs decrease in most cases and the market share increases. A correct marketing mix may turn this into reality. When, however, the market-demand does not increase any more, or even decreases, or when the competition is too strong, or a too large market share is obtained 610 longer any effective competition), or when the optimal quantitative proportions under which products have been manufactured are obtained, then product development is to be considered. For this a research-apparatus is necessary: a risky business. For market development we again need marketresearch. If those directions of growth don’t show any results, the fimr is usually forced to specialise or differentiate. If those directions of growth show results it still needs to be decided whether the firm buys or starts developing (the method of growth). When the firm, however, is still not profitable, then termination or saie of the concern to another firm is the only possible solution. Note Figure 6. The strategies of return of investment. The Strategies of Independence The firm may approach the reduction in the degree of dependence on the environment to reasonable proportions in two ways. In the first place it can try, when support is present, to undo the influence by untying the production-process as much as possible from the environment by cutting off the core technologies (as Thompson terms them) ; this cutting off takes e.g. place via buffering, smoothing, special charges, anticipation, via foretelling of exogenous variables and rationing during scarcity. A firm is never wholly self-sufficient; this dependence on the environment however threatens the so-called
technical rationality. Therefore a domain consensus is a necessity. The dependence may now be fenced in in a second way, namely by making it obvious to the environment that their interests run parallel. In the case of a prestigious image, obtained via good quality products, a good social policy, a good financial policy etc., this may be obtained. There also is a situation of independence when altematives are possible e.g. suppliers from the home-country and abroad. Certainly when the supply is dispersed. If there is a concentration of supply, one should fix up long-range contracts. A more extreme form of cooperation e.g. in a joint venture, or forming of cartels, or co-optation of the task environment, are ways to include the environment’s influence in the firm’s policy
I
New Products
Products -
Firm its Own Customer
Similar Type Concentric Diversification
(Related Marketing)
I
i
I
Conglomerate Diversification
New Type
.
Figure 8.
Industry Column I
Raw Materials Horizontal Diyersification
Speciatisation Differentiation
I I ,Phases of
Vertical Integration
Production
m
I m
I
I
I
I
I m Consumers
Figure 9.
I m
I
Formulating
Corporate
Objectives
and Strategies
85
tages of vertical integration. The problem of dcpendence is moved to another phase in the industry column. Note Figure 9. The diversificational directions of growth. The specialization is discontinued which may influence quality in an unfavourable way; the difference in quantitative proportions under which products are manufactured may force the firm to supply to a competitor in a next phase, and lastly fast technological changes may supply substitutes. Next to this there are a number of side-issues which are carefully mentioned by the government; the discontinuation of supplies to a competitor, the increase of prices of products supplied to the competitor, the exclusion from the market of rivals by taking the market over completely (‘pre-empting’)‘*. Make or BUY
Vertical integrationis a form of reduction of dependence that ought to be approached very carefully. It can be very disadvantageous to try to obtain vertical integration simply out of motives of profit or power. In principle, vertical integration can only be recommended in two cases: namely when the organization feels itself to be too dependent on the environment, and when a supplied raw-material or basic-material does not meet the requirements of quality. When the organization, after development and application of strategies related to these forms of uncertainty reduction, still finds insufficient independence, sale to another organization is to be considered.
The Strategies
( Figure
stop
J
10.
making. In the case of co-optation the buyer or supplier is made a participant of the firm to enlarge institutionalization. Price concluded that firms with cooptation are usually more effective than other firms. However, co-optation does reduce the consensus inside the organization. Note diagram 7. The strategies of independence. These aforementioned ways of diminution of the degree of dependence can be considered as transitional forms of vertical integration. Vertical integration may be considered as the most extreme form of reduction of the firm’s dependence with a view to the environment. Vertical integration covers the complete absorption in the firm’s program of activities of preceding or following production phases : integration backwards and forwards: Note Figure 8. Specification within diversification. Against the advantages of complete independence via certainty of supply and sale and the possibility of a lower price which may influence the return of investment in a favourable way are the following disadvan-
of
Flexibility
In the case of an independent firm, everything is staked on one decision. That is very risky indeed. Though the firm is independent it is at the same time inflexible; if an unexpected event occurs e.g. the falling off of the market or the appearance on the market of a new product by a competitor, then there is a large chance that the firm’s viability is threatened. Also when one is hardly able to realize the return of investment-goal and the independence-goal in a sufficient way, the firm ought to strive after the flexibility-goal, as far as possible: in the long run this may enlarge the return of investment and independence. Moreover the firm should develop strategies of flexibility when it is paying very well and if higher optima are possible: right then the firm has sufficient means available to develop The firm should give up risk-spreading activities. trying to reach a higher optimum. Risk-spreading is achieved by exploitation of hardly related, or nonrelated product-market combinations. In that case it is possible to choose from three growth-directions, namely parallelization (also called horizontal diversification), concentric and conglomerate diversification. Note Figure 8. The choice also depends on the value one attaches to the or technological svnergy, which may marketingexist in the forementioned directions of growth. The striving after flexibility is a dangerous matter in itself as one invests in product market combinations that do
86
Long Range Planning Vol. 10
t
August 1977
1
1
Constraints
I-
-
Norms and Results of Other People
‘I
-
-
l-act rs WhrcT 8 ause utonomous +I hanges of Aspiration I eve1 .I 1
Combination of P‘A 1 I,F
Available Sources and Capabilities: Knowledge of Environment and the Organisation I
-
---~,,, Figure6.
Determine I : Expected Degreeof * Independencei I
I
1 1 Determine
F:
1 Diversificationi
A =Aspirated
,- Concentnc , and , Conglomerare’ , Dwersification!
Value
1
Figure 11. not have a great deal in common with the product market combinations already used. Note Figure 10. Strategies of flexibility.
a research programme. So far we can only speak of a conception. It is our view that every organization operating more or less independently and considered to do so, should take this conception as a starting-point when formulating strategic policy. See Figure 11.
Conclusion In this
article we tried to relate a number of economic basic-goals and a number of groups of strategies to reach these goals. This relationship has not been examined empirically. The argument has been built up round hypotheses, which it is intended to test through
References (1)
H. I. Ansoff, Corporate Strategy, Harmondsworth
(2)
E. T. Penrose, The Theory of the Growth of the Firm. Oxford (1972).
(1968).
Formulating (3)
I. L. Price, Organizational Effectiveness, Homewood
(4)
1. L. Price, ibid.
(5)
J. L. Bouma, Leerboek (1971).
(6)
H. I. Ansoff, ibid.
Der Bedrijsekonomie,
(1968).
Corporate
Objectives and Strategies
(7)
Standard (1972).
(8)
J. M. Stopford and L. T. Wells, Managing the Multinational Enterprise, N.Y. (1972).
(9)
J. D. Thompson, Organisations in Action, N.Y. (1967).
Wassenaar
(10)
Industrial
Classification
Manual,
87
Washington
J. M. Blair, Economic Concentration, N.Y. (1972).
Long Range Planning Vol. IO
August 1977
Formulatbbbbbbng Corporate Objectives and Strategies Hans G. Krijnen*
In this article Hans G. K@en sets out to illustrate part of the strategic policy-making of a firm. He uses three economic basic-aims and three groups of strategies. The basic-aims have been linked with the strategies which, in the author’s opinion, contiibute most towards the reaiisation of meaningful goals. He believes it should be possible to deduce some broad guidelines from the relationships mentioned, to be able to make a choice among a number of new product-market combinations.
When the OPEC-countries dealt the Western world a severe blow with their oil-embargo in the autumn of 1973, and industrial activities threatened to reach a lower level in consequence of this, it appeared that the management of firms seldom take into account certain, though highly improbable circumstances such as these, when determining their policy. Most managements were well-informed about a possible shortage of certain fossil fuel, but it seems that hardly anyone expected the problem might occur in the way it did and at so short notice. Another occurrence, which presented a great many firms with real problems, was the number of importation-restricting measures the Italian government took in the spring of 1974 to protect the level on their balance of payments. For Italy was a country promoting free intercourse of capital, goods and persons among E.E.C. countries, as one of the signatories of the Pact of Rome. But charity begins at home and the measures mentioned were absolutely necessary to Italy. In the meantime there are in Holland too, many firms suffering from the consequences of this action. The firms in Holland producing veal used to export +80 per cent of their production to Italy before the measures were taken, so that severe problems threatened them with respect to their survival. A third instance of a threat to a company
from an
*Hans G. Krijnen is lecturer at the Faculty of Economics of the University of Groningen in the Netherlands.
unexpected corner is the fact that since April Ist, 1971, the oil-companies mostly refused to supply petrol to a certain Dutch trading-company, as they switched, as a consequence of the oil-crisis, from a surplus to a shortage of petrol; the trading-company threatened to obtain too little petrol to supply the real need. As the continuation of the company as an independent organization incurred direct risks, the Minister of Economic Affairs intervened by taking an interim measure starting immediately This measure meant that oilcompanies refining m Holland should supply petrol at a fixed price to the trading-company. The Minister derived the authority to intervene from the act concerning economic competition. So far as these instances give rise to that action one might conclude that in the first place management would do well to attend to possible threats to the firm, and especially those threats which might have an essential influence on the viability of the firm; and secondly that the management should be imaginative in postulating where and when such threats might occur. Lastly that management ought to consider the measures to be taken to prevent those possible threats, or to be prepared to deal with them if they occur. In modern management theory such postulating has already been accepted as a part of what is nowadays called strategic planning. The aim of strategic planning is : fixing the firm’s goals; assessing and recording the weaknesses and strengths of the company; surveying the company’s position; and tracing out directives to remove the weaknesses for the coming periods with a view to making the most of its strengths. These directives form the company’s strategy. The strategy is a group of decision rules with certain characteristics which are used to chose from an infinite number of possible product-market combinations. The product-market combinations thus chosen comply with certain well-considered conditions and thus form a reasonable guarantee for the realisation of the firm’s goals which have already been set. The fixing of the goals and the choice of strategy together form the company’s strategic policy. The setting of the strategic policy can be considered as the most important task of the top-management.
Formulating Strategic policy-making was, until recently, an almost intuitive matter. However, in the past twenty years attempts have regularly been made to analyse this task of the management, and to develop a structure related to it. Firm steps in the right direction have been made. However, a large part of this matter still remains rather ill defined regarding substance and composition. In this article an attempt has been made to develop a survey of the substance of strategic policy and some fuzzy relationships between the meaningful variables are illustrated. Later on in the article the author suggests what he considers to be the most important economic basicgoals and possible strategies of the management. In that he indicates which strategies he believes will best contribute to the realization of the meaningful objectives. This relationship between basic-goals and strategies shall be further explained with the help of flowcharts. The use of these flowcharts includes the argument that there is a certain order in which certain basic-goals and related strategies should be merged. Perhaps rough rules can be derived when comparing the outcomes of the model here developed and real life; these can then be used when preparing and taking decisions in the field of the direction in which a company is to develop. Management Cycle
An organization exists to satisfy a purpose. A special type of organization is the firm. A firm tries to reach its goals by means of transformating and/or selling goods and/or services. More companies are trying to do this through a planning approach, this means that the firm tries to make its objectives explicit and tries to obtain this in a deliberate way, bearing in mind the develop ment of exogenous variables of the environment. Planning can take place on three levels.
Corporate
79
Objectives and Strategies
The basic-aims are that group of aims essential to the maintenance of the firm’s viability. In the case of viability the firm can continue to exist. So continuity is a consequence of maintenance of the firm’s viability. A firm is viable when the received compensations are greater or equal to the contributions of the participants. It holds good for companies that the financial income has to be at least higher or equal to the necessary payments to the participants. Therefore the realisation of a number of economic basic-aims is necessary. Here we start from the hypothesis that a firm pursues three economic basic-aims and moreover in a certain order. See Figure 3. The hierarchy of economic goals. Those economic goals are: * a certain return ofinvestment in short and long term: R fi
a certain degree of independence of the firm with a regard to parts of the environment: I.
b a certain degree offIexibility
of the company:
F.
In the course of the article we try to show a relationship between these three economic basic-aims and a number of directions of development and growth distinguished
External and Internal Information Svstem
L
I
I +
Personal Values, Norms and Objectives of the Participants
I Expectations of the Society
I
I
t Continuous Autonomous Search Process for New Alternatives
I Values of the Firm
I
I
On the operational level plans are developed which are concerned with e.g. an efficient allocation to machines of the series of products that are to be manufactured. On an organizational level e.g. one works, according to plans, at the alteration of a functional structure in a matrix-organization. On a strategic level the management is concerned as to which economic and social basic-aims are to be pursued, and in which values. In addition to that management tries to shape the direction of development strategies which are to be used when choosing new product-market combinations.
I Decision Procedure Evaluation of New Alternatives
:
Planning :R A I
I I
The determination of the basic-aims and the choice of strategies together form the firm’s strategic policy. One considers the real choice of new product-market combinations via basic-aims and strategies as a third part of strategic planning. The relationship between the different forms of planning is shown in Figure 1. The Strategic Planning
Within the phase of strategic planning a number steps can be distinguished. See Figure 2.
R
of
= Realization Level of a Goal Variable
R,,= Aspiration Level of a Goal Variable
Figure 1.
1stop
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Long Range Planning Vol. 10
August 1977 notice it may be possible to state with a certain degree of probability whether a firm is viable, in the Iong run this is a greater problem.
Relevant
of the Company
Environment I
I T I Choice of Strategy Concerning: 1. Product-Market Scope 2. Growth Vector t C$~~itive Advantage
Keeping to the target of the return of investment on a firm’s facilities, requires a permanent search for an optimal relationship among the means of production so used. The firm is almost always heavily involved with this because of the indivisibility of the means used, the growing specialization in the organization and the creation of new productive services as the result of technical and commercial innovations2.
5: Method of Growth 6. Balance of Portfolio
Product-Market Combinations I
1 Evaluation
Ansoff uses for this a number of characteristics that will also keep the firm. remunerative in the long-term, if pursued accordinglyl. So it is that the income is determined on the long run by the ‘external competitive position’, which is considered to be dependent on the growth and stability of e.g. the turnover, the profits, the market-share, etc. and the long term costs by ‘indicators of esciency which are related to e.g. the staff’s capability, the age of the activa etc.
9 Rejected List of Product-Market Combinations ,
I
So the drive for a larger return of investment is not dependent on a particular scale of production. The socalled optimal quantitative proportions are continually moving as a consequence of these innovations; so scale enlargement is a result hereof. What influence this may have on the market, we shall see when discussing the directions of development. The Independence-Goal
Figure 2. hereafter. First we shall look into the distinguished basic-goals. We should add the marginal note that there is a question of an imagined relationship between the variables which are indicated so that it is a question of a hypothetic model. No empiric research has been done into the accepted relationship; discovering acceptable measurable variables however is a rather complicated matter. The Return of Investment-Goal
By return of investment we understand the proportion between an income, profit and/or interest, per period and the facilities which earned this income. At short
A
Flexibility ---_____
By independence we understand the measure by which a firm prevents other organizations or persons using influence or power over the firm’s policy-making, in such a way that the firm’s viability is endangered. When the expected return of investment on short and long term may be called good, one should still strive after independence with a view to the danger mentioned here. Via the inputs and outputs of the physical transformation process the firm is related to its environment. There is interaction and so dependence: does the environment supply the desired inputs and does the environment buy the manufactured outputs? There should be consensus, regarding these points, which it relates to the environment. In that case there should be few surprises for the firm. The expectations of the participants and the environment about what the firm does, and does not or will do, are in agreement; the whole area of industrial activities, the so-called ‘domain’ has then been fixed and accepted. The degree of dependence appears in the measure of ‘domain consensus’. The so-called political system of the organization tries to maintain this ‘domain consensus’. The firm’s political system forms part of the &rm’s social system. The political system decides the system’s goals, the economic system, the allocation of the means, and the policy and procedures of control to be used for this3. Next to this, the political system looks for support for the execution of these decisions from the environment.
Formulating Price concluded from a comparative examination of the results of fXy described tests of the firm’s effectiveness that usually organizations with a higher degree of autonomy are more eff~ve than organizations with a lower degree of autonomy4. By autonomy we mean the degree of freedom a firm has to take decisions that affect the environment. Institutionalisation, the measure in which these decisions are sup orted by the environment, is sooner gained when tE ere is a higher degree of autonomy. In the latter case the organizations are better able to adjust to the environment’s demands or, if they don’t want to do so, they can try to influence the environment in such a way that the latter adjusts itself to the firm. In both cases the ‘domain consensus’ is maintained. The degree of adjusting or influencing is determined for the greater part by the measure of dependence of the firm, with respect to parts of the environment. This influence of a thiid person, the dependence, is determined by the relationship between the degree of dispersion or concentration of the required capacity of support for the own demand of inputs, and the supply of outputs on the one hand, and the offered capacity of support in the form of supply by suppliers of inputs and the demand of buyers of the firm s outputs. The degree of dispersion and concentration is decisive for the ways in which support is looked for. These ways, directions of development are in principle to be considered as directions of adjusting or influencing. For the choice of the many directions of development strategies of independence ought to be formulated.
Corporate
Objectives
and Strategies
81
the number of non-related customers, market segments, technologies and products. The firm’s degree of flexibility can be measured with the aid of the Standard Industrial Classification Code’. In which industries are activities undertaken? Stopford and Wells use the simple formula N x S > 1, where N stands for the number of two-digit industries in which the firm operates and S forms the part of the total turnover obtained by the selling of products different from the products of the industry with the biggest tumovef’. If e.g. N = 4 and S = 0,5 then N x S = 2 so that there is a case of a firm with a high degree of flexibility. The desired for degree of flexibility is decisive for the development and employment of the so-called flexibility-strategies.
Dependent A
Inflexible M 1.
-
Flexible
2.
The Remunerative Firm
The Powerless, Flexible Firm
R
The Fixed, Independent Firm
In&p&dent
3.
The Viable Firm
4.
Figure 4. The Flexibility Goal By flexibility we understand the degree in which the firm is able to remain economically viable after an unexpected and unforeseen unfavourable event has taken place e.g. strikes, a new epoch-making product by a competitor, nationalization, the falling-off of a market as a consequence of intervention by the government, economic recessions etc. This aim ought to be pursued as soon as the return of investment goal and the independence goal will be realised in the future in a sufficient or optimal degree. The afore-mentioned occurrences may be disastrous for the firm. One way to avoid them is to spread the firm’s activities. In this way less risk is incurred. Riskspreading means the combination of projects in which the uncertainties partly or wholly compensate each otheP. This degree of compensation is dependent on the measure in which the results vary in the same or opposite direction with a change in the data constellation. For this Ansoff again developed a number of He speaks of external and internal flexindicator?. ibility. The latter is determined by the measure of keeping flexible the available resources. The former, from an offensive viewpoint is obtained by enlarging the number of fertile technologies and the strength of research and development. Defensively, the external flexibility is given concrete meaning by
Four Kinds of Remunerative Firms Dependent on the degree in which the three distinguished economic basic goals have been realised, organisations may be divided into four kinds. We now start from the principle that the request of being sufficiently profitable is complied with. These groups are : Remunerative Firms; these are to a high degree dependent upon other organizations and moreover have little flexibility. This is the so-called captive ‘organizations which are captives organizations; of a particular populationye.
(1)The
Fixed, Independent Firms; these are not flexible but they are, to a high degree, independent of other organizations. The firm has given concrete fomr
(2)The
New
Present
Market Penetration
Product Development
New
Market Development
Diversification
Figure 5.
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Long Range Planning Voi. 10
August 1977
to power e.g. in the form of a particular position of monopoly.
(3)The polwerless,flexiblefimts;
these are to a high degree dependent on third persons or institutions but flexible; e.g. a firm operating in many unrelated areas but with few and very large suppliers of the necessary raw materials.
(4) The
viable jirms;
these are to a high degree flexible
and independent e.g. a firm which non-related activities in a number autonomous divisions, operating do not influence one another. This called an optimal and free firm.
has classed many of more or less in markets that is what might be
Within this article we do not connections between the three certainly present, but discussion necessary for the progress of the
go into the possible basic-goals. They are on that topic is not argument.
If the firm is only profitable three lines of conduct arc to be distinguished: (a) the normal line of conduct: this one leads from class 1 via class 2 to class 4: line A. (b) the exceptional line of conduct: class 3 to class 4: line B.
from class 1 via
(c) the optimal line of conduct: from class 1 directly to class e.g. by means of fusion: line C.
Is Competition Is Market Remunerative
Market
Is New Product Remunerative?
Lower Relative Remunerative Optimum ?
Figure 6.
Formulating See Figure 4: four hinds of remunerative
firms.
In Figure 4 we illustrate the possible lines of conduct by means of arrows. The firm may also be affected actions, negatively, e.g. by means of competitive actions of customers and suppliers etc.: line R. With which strategks may the fourth position be obtained? By strategy we mean a rough decision rule which is used when choosing specific product-market combinations which contribute in the highest degree to the firms economic basic-goals. These decision rules
Corporate
Objectives and Strategies
may relate to six aspects: the whole area of industrial activities, the direction of growth, the competitive advantages, the synergy, the method of growth and the balance of portfolio. These strategies are formed after the fixing of a gap between the desired and expected values of the basic-goals, the analysis of the firm and the analysis of the relevant environment. The strategies mentioned hereafter are all related to the firm’s directions of growth. See Figure 2. The Return of Investment Strategies
These strategies contribute
in the highest degree to the
x Start
Try to Acquire Prestige
!
No
Yes
Cartels
I Maintain Al!ernatives
.
I
Co-operation e.g. Joint Venture +
Yes
I Yes
4
Review I,
Figure 7.
83
9.1
54
Long Range Planning Vol. 10
August 1977
realisation of the return of investment. These strategies are designated in respect of market-penetration, product-development and market-development. See Figure 5. Market penetration forms the most natural development of present-day activities; the turnover increases, the average costs decrease in most cases and the market share increases. A correct marketing mix may turn this into reality. When, however, the market-demand does not increase any more, or even decreases, or when the competition is too strong, or a too large market share is obtained 610 longer any effective competition), or when the optimal quantitative proportions under which products have been manufactured are obtained, then product development is to be considered. For this a research-apparatus is necessary: a risky business. For market development we again need marketresearch. If those directions of growth don’t show any results, the fimr is usually forced to specialise or differentiate. If those directions of growth show results it still needs to be decided whether the firm buys or starts developing (the method of growth). When the firm, however, is still not profitable, then termination or saie of the concern to another firm is the only possible solution. Note Figure 6. The strategies of return of investment. The Strategies of Independence The firm may approach the reduction in the degree of dependence on the environment to reasonable proportions in two ways. In the first place it can try, when support is present, to undo the influence by untying the production-process as much as possible from the environment by cutting off the core technologies (as Thompson terms them) ; this cutting off takes e.g. place via buffering, smoothing, special charges, anticipation, via foretelling of exogenous variables and rationing during scarcity. A firm is never wholly self-sufficient; this dependence on the environment however threatens the so-called
technical rationality. Therefore a domain consensus is a necessity. The dependence may now be fenced in in a second way, namely by making it obvious to the environment that their interests run parallel. In the case of a prestigious image, obtained via good quality products, a good social policy, a good financial policy etc., this may be obtained. There also is a situation of independence when altematives are possible e.g. suppliers from the home-country and abroad. Certainly when the supply is dispersed. If there is a concentration of supply, one should fix up long-range contracts. A more extreme form of cooperation e.g. in a joint venture, or forming of cartels, or co-optation of the task environment, are ways to include the environment’s influence in the firm’s policy
I
New Products
Products -
Firm its Own Customer
Similar Type Concentric Diversification
(Related Marketing)
I
i
I
Conglomerate Diversification
New Type
.
Figure 8.
Industry Column I
Raw Materials Horizontal Diyersification
Speciatisation Differentiation
I I ,Phases of
Vertical Integration
Production
m
I m
I
I
I
I
I m Consumers
Figure 9.
I m
I
Formulating
Corporate
Objectives
and Strategies
85
tages of vertical integration. The problem of dcpendence is moved to another phase in the industry column. Note Figure 9. The diversificational directions of growth. The specialization is discontinued which may influence quality in an unfavourable way; the difference in quantitative proportions under which products are manufactured may force the firm to supply to a competitor in a next phase, and lastly fast technological changes may supply substitutes. Next to this there are a number of side-issues which are carefully mentioned by the government; the discontinuation of supplies to a competitor, the increase of prices of products supplied to the competitor, the exclusion from the market of rivals by taking the market over completely (‘pre-empting’)‘*. Make or BUY
Vertical integrationis a form of reduction of dependence that ought to be approached very carefully. It can be very disadvantageous to try to obtain vertical integration simply out of motives of profit or power. In principle, vertical integration can only be recommended in two cases: namely when the organization feels itself to be too dependent on the environment, and when a supplied raw-material or basic-material does not meet the requirements of quality. When the organization, after development and application of strategies related to these forms of uncertainty reduction, still finds insufficient independence, sale to another organization is to be considered.
The Strategies
( Figure
stop
J
10.
making. In the case of co-optation the buyer or supplier is made a participant of the firm to enlarge institutionalization. Price concluded that firms with cooptation are usually more effective than other firms. However, co-optation does reduce the consensus inside the organization. Note diagram 7. The strategies of independence. These aforementioned ways of diminution of the degree of dependence can be considered as transitional forms of vertical integration. Vertical integration may be considered as the most extreme form of reduction of the firm’s dependence with a view to the environment. Vertical integration covers the complete absorption in the firm’s program of activities of preceding or following production phases : integration backwards and forwards: Note Figure 8. Specification within diversification. Against the advantages of complete independence via certainty of supply and sale and the possibility of a lower price which may influence the return of investment in a favourable way are the following disadvan-
of
Flexibility
In the case of an independent firm, everything is staked on one decision. That is very risky indeed. Though the firm is independent it is at the same time inflexible; if an unexpected event occurs e.g. the falling off of the market or the appearance on the market of a new product by a competitor, then there is a large chance that the firm’s viability is threatened. Also when one is hardly able to realize the return of investment-goal and the independence-goal in a sufficient way, the firm ought to strive after the flexibility-goal, as far as possible: in the long run this may enlarge the return of investment and independence. Moreover the firm should develop strategies of flexibility when it is paying very well and if higher optima are possible: right then the firm has sufficient means available to develop The firm should give up risk-spreading activities. trying to reach a higher optimum. Risk-spreading is achieved by exploitation of hardly related, or nonrelated product-market combinations. In that case it is possible to choose from three growth-directions, namely parallelization (also called horizontal diversification), concentric and conglomerate diversification. Note Figure 8. The choice also depends on the value one attaches to the or technological svnergy, which may marketingexist in the forementioned directions of growth. The striving after flexibility is a dangerous matter in itself as one invests in product market combinations that do
86
Long Range Planning Vol. 10
t
August 1977
1
1
Constraints
I-
-
Norms and Results of Other People
‘I
-
-
l-act rs WhrcT 8 ause utonomous +I hanges of Aspiration I eve1 .I 1
Combination of P‘A 1 I,F
Available Sources and Capabilities: Knowledge of Environment and the Organisation I
-
---~,,, Figure6.
Determine I : Expected Degreeof * Independencei I
I
1 1 Determine
F:
1 Diversificationi
A =Aspirated
,- Concentnc , and , Conglomerare’ , Dwersification!
Value
1
Figure 11. not have a great deal in common with the product market combinations already used. Note Figure 10. Strategies of flexibility.
a research programme. So far we can only speak of a conception. It is our view that every organization operating more or less independently and considered to do so, should take this conception as a starting-point when formulating strategic policy. See Figure 11.
Conclusion In this
article we tried to relate a number of economic basic-goals and a number of groups of strategies to reach these goals. This relationship has not been examined empirically. The argument has been built up round hypotheses, which it is intended to test through
References (1)
H. I. Ansoff, Corporate Strategy, Harmondsworth
(2)
E. T. Penrose, The Theory of the Growth of the Firm. Oxford (1972).
(1968).
Formulating (3)
I. L. Price, Organizational Effectiveness, Homewood
(4)
1. L. Price, ibid.
(5)
J. L. Bouma, Leerboek (1971).
(6)
H. I. Ansoff, ibid.
Der Bedrijsekonomie,
(1968).
Corporate
Objectives and Strategies
(7)
Standard (1972).
(8)
J. M. Stopford and L. T. Wells, Managing the Multinational Enterprise, N.Y. (1972).
(9)
J. D. Thompson, Organisations in Action, N.Y. (1967).
Wassenaar
(10)
Industrial
Classification
Manual,
87
Washington
J. M. Blair, Economic Concentration, N.Y. (1972).