The rational approach to strategy

Mrs. Carla Serfontein CA(SA) Lecturer in Financial Management and CIMA: Project and Relationship Management Centre for Accounting University of the Free State

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“If you do not know where you are going, any road will get you there.” Lewis Carol

 In the last few months my reading of academic literature has increased greatly and I realised that the new “buzz” word in business is strategy. This got me thinking and I came to the conclusion that strategy is not only the starting point for a business model or the key to a successful business, but also the starting point for personal growth, success and career advancement. This realisation meant that strategy filled my mind and triggered a desire to research how to prepare a successful strategy.

During this period of research I noticed that an effective strategy model is not that clear cut. The Economist stated that “Nobody really knows what strategy is” while Louis Pasteur said that “Chance favours only the prepared mind”.

The above two statements in short states that although having a plan (strategy) is of utmost importance, what a strategy entails and how to prepare it is not as simple as what people in general expect.

According to the Chartered Institute of Management Accountants’ (CIMA) 2015 study text for Project and Relationship Management, there is a formal, structured approach to the formulation of a strategy called “The Rational Approach”. The following diagram demonstrates this rational approach to strategy formulation as per the Kaplan online university website:

strategy

The rational approach demonstrates that the actual preparation of a strategy is as a result of a clear direction that the entity wants to take as well as various forms of appraisals.

In order for us to understand what objectives entail, the following definitions of Mission, Vision and Objectives as per Principles of Management, v. 1.0 by Mason Carpenter, Talya Bauer, and Berrin Erdogan, must be understood:

strategy2

 

As per these definitions it is clear that a mission statement gives the overall purpose of the organisation and that the vision statement describes a picture of the preferred future. The vision and mission must set the tone and direction of a strategy and the goals and objectives of an entity should lead to the completion of a strategy.

Michael Porter, founder of the modern strategy field and one of the world’s most influential thinkers on management and competitiveness as per the Harvard Business School website http://www.isc.hbs.edu/about-michael-porter/Pages/default.aspx, commented that a strategy must answer the following questions: “How are we going to be unique? How are we going to gain a competitive advantage? How are we going to maintain this advantage over time?” at the 2008 Leaders in London Summit. Accordingly, the goals and objectives of an entity should also lead to answers to these questions and the strategy should answer the “how” not necessarily the detailed steps.

Porter thus suggests that strategy is focused on the competitive advantage of an entity. To know what your organisation’s competitive advantage is, an effective form of appraisal is a SWOT analysis. A SWOT analysis is effective since it not only looks at the strengths and weaknesses of the entity which is internally linked to the entity, but also at the opportunities and threats that the organisation may encounter as a result of the external environment or industry that the entity operates in. The following diagram is a template that can be used to prepare a SWOT analysis of an entity that was obtained from www.business-docs.co.uk:

strategy3

The Rational Approach to strategy shows that the SWOT analysis is a very helpful tool in determining what your competitive advantage is or what must be done to gain a competitive advantage.

The downfall to a SWOT analysis is that even though it looks simple enough, an entity usually makes use of experts to perform it. This is also why the Rational Approach is not always appropriate for a Small or Medium Enterprise (SME). However, if your entity decides not to follow the Rational Approach to strategy, a SWOT analysis is helpful even when setting a less rigid strategy.

If your entity decides to perform an internal SWOT analysis, it is very important that you analyse the environment that the entity operates in since this has a direct impact on the direction the entity chooses to move in as well as how competitively they can engage in the industry.

Porter suggested that the competitive environment is influenced by five forces:

  • Rivalry amongst competitors
  • Threat of substitutes
  • Power of buyers
  • Power of suppliers
  • Threat of new entrants

Depending on how strong a threat or the power of an external party over your entity is, you will have to make provision in your strategy to obtain or maintain a competitive advantage.

Porter’s five forces effectively analyses the competitive environment. An entity however not only operates on a competitive level but also a macro environmental level that will have an effect on the SWOT analysis and eventually their strategy. Refer to the following diagram from www.marcuspowe.com:

strategy4

The industry part is covered by Porter’s five forces but to determine the impact of the external environment on your organization you have to do a PEST(EL) analysis:

  • Political influences and events
  • Economic influences
  • Social influences
  • Technological influences
  • Ecological/environmental influences
  • Legal influences

These influences must also be taken into account in your SWOT analysis. The organisation’s strategy must then address the weaknesses and threats identified in the SWOT analysis in order to mitigate risks and increase their competitive advantage. The strategy must also provide how they are going to apply their strengths and use the identified opportunities to increase their competitive advantage.

There is a Greek proverb that states: “Whom the Gods wish to destroy – they send 30 years of success.” A proper strategy might just keep you from destruction and maintaining your success in the good times or just give you the wings to fly in the bad times.