Strategic Management Dynamics

Warren’s approach from a methodological point of view

─ positioning it against “conventional” strategy and system dynamics

Andreas Größler

Radboud University Nijmegen, the Netherlands

What is strategy?

According to Warren (2010, 1):

An organization‘s strategy is how it tries to achieve its objectives.

• works also for not-for-profit organizations

• choosing objectives first

• positioning the organization in relation to other organizations and the

environment

• managing the organization’s path over time (dynamic decision making)

• Rumelt (2011, 241): “A new strategy is [...] a hypothesis and its

implementation is an experiment.”

“Methods” for strategic analysis you might know

• Porter’s five forces

• Porter’s value chain

• BCG portfolio

• McKinsey portfolio

• Experience curve

• SWOT analysis

• PEST/SEPTE/PESTEL analysis

• Scenario analysis

• Value curves

• VRIO analysis

Rumelt (2011, 36): “Bad strategy is long on goals and short on policy or

action.”

Motivation: why yet another strategic analysis method?

Many strategy approaches

• do not appropriately consider dynamics

• talk in very abstract terms

• fall short on the implementation aspect

• look at nearly meaningless performance indicators

• are based on doubtful empirical investigations

• focus on uni-directional and direct causalities

• put emphasis on positioning instead of permanent adjustment

• are either theory-without-relevance or actionism-without-theory

Strategy dynamics wants to make things better

Strategy dynamics offers an alternative by

• providing a clear framework for strategic analysis

• concentrating on tangible and directly related intangible assets

• emphasising performance over time, not in the short-run

• looking at absolute performance measures

• taking dynamics into account

• offering computer support

• acknowledging a feedback relation between organisation and environment

Why Strategy needs Dynamics …

Established strategy frameworks:

“Where to compete” ... given the market

opportunity + industry conditions

“How to compete” ... what to offer,

what value proposition

Sources of advantage …

resources, capabilities, business model

“Positioning”

Why Strategy needs Dynamics …

Established strategy frameworks:

“Where to compete” ... given the market

opportunity + industry conditions

“How to compete” ... what to offer,

what value proposition

Sources of advantage …

resources, capabilities, business model

“Positioning”

+ how to manage over time

… continually ... as the market, competition and

the business all change

… holistically across all functions and

decisions

… quantitatively … what to do, when,

how much, delivering what results

Implementation + performance

The case of a highly strategic issue: personnel planning at

an air traffic control organisation

“Manpower Planning (MP) is necessary to meet the strategic objective:

‘the provision of the right number of staff, with the right qualification, at the right

time and in the right place to meet business requirements’” (Eurocontrol).

© spiegel-online.de

The answers management wants …

Where?

time

Profit * now

Why?

How?

* strictly, free cash flow External events and poor decisions lead to a bad future

Managing external events + better decisions, over time lead to a better future

Historic events and decisions explain today, and much of the future

… or other aims, both in business and non-

commercial cases

… for a whole organisation, or a part,

or a function

Rumelt (2011, 55): “Unless leadership offers a theory of why things haven’t worked in the

past [...] it is hard to generate good strategy.”

Starbucks’ profit history and alternative futures

Starbucks—Hypothetical profit history and alternative

futures

The estimated number of deaths and serious injuries from

civil conflict in Sierra Leone

Revenue growth aims in a new market for an

IT/communications firm

Profit growth opportunity for the East European credit

card business of a major bank

Warren’s theses about strategy:

• Changing a strategic position is a very rare event.

• Most of management’s strategy work consists of delivering the strategy,

also known as implementation or execution.

• Action, choices, and decisions by an organization, and changes in external

conditions are “strategic” if they significantly affect medium- to long-term

performance.

• In most cases, management has considerable scope to drive strong

performance.

• Superior ROIC is not a good indicator of competitive advantage or strong

strategic management.

• Strategic management is about building and sustaining performance into

the future.

• History matters—a lot!

Strategy and theory are related concepts

• Barney&Hesterly (2006, 5): “...a firm’s strategy is defined as its theory

about how to gain competitive advantage.”

• Revenue = sales volume * price per unit (i)

• Revenue = market size * market share (ii)

• Both, (i) and (ii) are mathematically correct but only (i) provides a causal

explanation

• Furthermore, management can directly influence price and indirectly sales

volume (e.g. by price, advertising)

• Industry forces and competitors’ actions determine the scope of

management’s influence

Causal Structure of Ryanair Profits for Year Ended March 2009

Explanation of Ryanair Profits, 2005–2009, and plausible

future to 2014

How customers drive sales for Ryanair

An illustrative “lookup chart” for travel frequency versus

price

How resources drive Ryanair’s costs, e.g., routes

How changing rates of customer losses affect customer

numbers and sales

Causal relationships and resource stock accumulation

For three factors linked by a causal relationship we can state:

If we know the value of A and B at any time, then we can calculate or

estimate the value of C at any time.

For resource stocks, however, this is different:

The quantity of a resource X today is the total amount of X that has ever

been added up to this time minus the amount that has ever been lost.

Growth in Ryanair’s customer base, aircraft fleet, and route

network

Graphical summary of resource-based approach to

understanding performance

Extreme claims of the resource-based view of strategy and

reality

According to standard strategy literature (Peteraf, 1993; Mahoney and

Pandian, 1992; Barney, 1991; Wernerfelt, 1984), resources are

1. durable: has a long-lasting positive effect on the strategic position of a

firm;

2. non-tradable: not possible for competitors to easily buy it;

3. non-replicable: not possible for competitors to easily duplicate or copy it;

and

4. non-substitutable: not possible for competitors to easily find a substitute

for it.

However, resource characteristics occur along a continuum rather than being

absolute. In other words, “very few resources are totally durable, absolutely

non-tradable, or totally impossible to copy or substitute” (Warren, 2002, 18).

Summary: Resources in strategy dynamics

• Resources accumulate and deplete (fill and drain) over time.

• It is important to know, separately, the inflow and outflow rates for a

resource.

• Management steers strategy and performance by influencing resource flow

rates.

• Resources are quantities of items or materials driving demand and capacity

– hence income and cost – that are owned or reliably available to the

organization and are built over time.

• It is not possible to explain performance without information on the

quantities of the tangible resources that drive it.

Three factors drive flows of resource stocks:

1. Management decisions

2. External factors, in particular competitors’ behaviour

3. Existing levels of resource stocks

• Potential resources can have an effect

• Resource stocks might also influence their own flows

Ryanair’s choice of price levels drives its customer win

rate

Competitors’ price levels also influence Ryanair’s

customer win rate

How routes drive customer growth for Ryanair

How shortages of staff or aircraft drive Ryanair’s customer

loss rate

How Ryanair’s customer win rate is increased by word of

mouth

Building the strategic architecture: rules and steps

• Performance over time depends on resource levels, management

decisions, and external factors

• Resources are won and lost (accumulated and depleted) over time

• Resource win and loss rates also depend on existing resource levels,

management decisions, and external factors

1. Sketch how performance of concern is changing over time for the period of

interest

2. Lay out how this performance depends on (tangible) resources

3. Specify how resources depend, over time, on their flows rates

4. Identify how each flow rate over time depend on existing resources levels

(including the resource itself and potential resource levels), management

decisions, and external factors