Strategic development processesduring economic and financial

crisisMartin Kunc and Rahul Bhandari

Warwick Business School, University of Warwick, Coventry, UK

Abstract

Purpose – This paper aims to explore the strategy development process followed by firms during thecurrent economic and financial crisis through the relationship between changes in performancemeasures and strategic success factors.

Design/methodology/approach – A survey to executives of global firms asking the importance ofwidely accepted performance indicators and strategic success factors has been performed obtaining 53usable surveys. Test has been performed to identify respondent bias. Empirical results from thesurvey are presented and t-tests have been performed to validate the statistical significance of thechange in importance of performance indicators and strategic success factors.

Findings – The findings suggest that firms followed a reactive strategic development process sincethey adjusted their strategic direction to the short-term problems in their performance affected by theeconomic crisis. While firms may focus their attention to similar set of performance measures duringthe crisis, their strategic behavior to face the crisis differs.

Research limitations/implications – While the sample is small (53 respondents), the authorsbelieve that the quality of the respondents, senior managers and directors with responsibility forstrategic development processes, compensates for the small number of responses.

Practical implications – Rehearsing strategies can be a powerful tool to avoid reactive strategicbehavior either anticipating environmental constraints through scenario planning or testing therobustness of strategic initiatives using diverse tools like strategic modeling.

Originality/value – The paper offers an empirical validation of strategic development processesunder uncertainty considering the linkage between changes in organizational performance,performance indicators and strategic success factors.

Keywords Economic change, Strategic management, Organizational development, World economy

Paper type Research paper

IntroductionThe economic and financial crisis is a good example of a sudden shock in theenvironment, which has affected almost all industries making organizations changetheir strategic goals as they struggle for survival (Pollard and Hotho, 2006). For manyorganizations this environment of turbulence and crisis may seem as a threat but forsome this is the time to tap into opportunities and expand. In such an environmentsome companies believe they have ample opportunities that may lead them either tosustain their competitive advantage or to gain a completely new one, for example bybuying a competitor or supplier (Wan and Yiu, 2009). In this environment other firmsseem to adopt a conventional defensive behavior by focusing on financial performance.Organizational adaptation is strongly influenced by the interpretations that topmanagement teams made of the environment (Chattopadhyay et al., 2001). There arenot clear answers to what are the right responses from organizations in thisenvironment (Gunby, 2009) nevertheless organizations have been engaged in strategic

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Management DecisionVol. 49 No. 8, 2011

pp. 1343-1353q Emerald Group Publishing Limited

0025-1747DOI 10.1108/00251741111163151

development process to respond to this external shock. The recent economic crisis, asone of the seven groups of major crisis events that organizations can face (Mitroff,2004), represents a natural experiment to analyze strategic development processesoccurred in firms when external shocks disturb strategic development normalprocesses. In this paper, we present an empirical test of the process of strategicdevelopment which occurred during the actual economic crisis.

Strategic development processes: enacting and rehearsing strategiesStrategic development processes have been conceptualized as multidimensionalintegrative frameworks in literature, for example Miller and Friesen (1977) or Baileyand Johnson (1995). Dyson et al. (2007) define strategic development process as amanagement process that informs and shapes strategic decisions on a continuous basisconforming a feedback control model. The strategic development process consists of twomain feedback processes: enacting strategy and rehearsing strategy, as Figure 1 shows.

Enacting strategy process consists of taking strategic initiatives directly toimplementation into the organization, which is “the route of hunch and hope andemergent strategy, with all its limitations” and “incremental corrective action usedreactively when unintended consequences arise corresponds to single-loop learning”(Dyson et al., 2007, p. 13). In this process, the key driver of strategic development is theprocess to set up a desired direction through strategic objectives supported byperformance measures (Dyson et al., 2007). A clearly articulated direction will guideorganizational changes towards the desired vision through unanticipated events whileperformance measurement systems control that the resulting performance is aligned

Figure 1.The strategic developmentprocess

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with the direction. While strategic direction and goals affect the choice of performancemeasures used in a company, the set of performance measures directs the attention ofthe executives, and the whole organization, to certain aspects of the businessgenerating a feedback process that sustains the strategy implementation process overtime (Kunc, 2008). Thus, enacting strategy can be interpreted as the process ofimplementing strategic initiatives and, through the feedback arising from performancemeasurement systems, making incremental reactive actions to correct the direction ofthe organization (Dyson et al., 2007).

Rehearsing strategy comprises testing methods, such as strategic modeling,balanced scorecard and robustness tests, to validate strategies before implementing(O’Brien and Dyson, 2007). This second process is originated with the premise that aneffective strategic development process has to be proactive and includes mechanismsto look ahead by anticipating possible futures and developing strategic options (Dysonet al., 2007). Rehearsing strategy comprises the creation and use of models for guidingstrategic discussions where managers test and evaluate their strategic options beforeimplementing strategic initiatives. The lessons obtained from virtual performance areemployed to change or improve the strategic initiatives (Dyson et al., 2007). Within thisprocess, firms should identify external uncontrollable events and through exploringinternal and external environments capture this uncertainty using tools like scenarioplanning (Schoemaker, 1993a) or simulation (Kunc and Morecroft, 2007). The rehearsalprocess provides with fast “virtual feedback” about unexpected events and the likelyconsequences to the organization. In this way, the process prepares managers to facedifficult situations without falling into reactive behavior, which may hinder theachievement of the firm’s strategic goals.

Although the strategic development process are firmly based on existing tools (seeAppendix), the feedback process “enacting strategy” has not been identifiedempirically, only partial tests have been performed such as in Dyson (2004), Dysonand Foster (1982) and O’Brien (2004)). As it can be observed in Figure 1, the effect of theenvironment as a moderator on organizational performance (Schoemaker, 1993b; Baumand Wally, 2003) is included in the strategic development process through the variable“uncontrolled inputs”. Therefore, environment shocks like the economic and financialcrisis in 2008 are natural experiments to observe the process of strategic developmentin organizations. Our paper contributes to the strategic development process literatureshowing the path between the effect of uncontrolled events affecting the performanceof firms, their effects in the importance of performance measures, and theirconsequences on strategic direction and goals.

The 2008 global economic and financial crisis: an opportunity to observestrategic development processes over timeVaaler and McNamara (2004) define crisis as a short period of unexpected and notablyunfavorable shift in the external environment that organizations face. Pearson andClair (1998) define crisis as a high impact event that affects organizations’ viability andimplies the need to make decisions quickly. The actual economic and financial crisishas conditioned the environment from 2008 to present. The main characteristics of thecurrent economic and financial crisis are: reduction in credit available, reduction andprice conscious consumer spending, increase in unemployment, significant movetowards establishing cost efficiencies within the corporations, reduction in shareholder

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value and lower return on investments (Stiglitz, 2009). We can conclude that events likethe 2008 global economic and financial crisis strongly affected firm performance as anuncontrolled input.

The responsiveness of the organizations during the crisis can be explained bycomparing the importance attributed to different performance measures before andduring the crisis, which indicates the learning processes from current performancemeasures. Performance measurement systems (PMS) have been the cornerstone ofstrategy implementation and strategic feedback processes (Tapinos and Dyson, 2007;Kaplan and Norton, 2007). PMS play a key role in developing and achieving firm’sstrategy, evaluating the achievement of organizational objectives and compensatingmanagers (Ittner and Larcker, 2000) since companies are focusing on non-financialaspects such as long-term loyalty, customer satisfaction, innovation rate, deliveryeffectiveness, etc. in order to implement their strategies (Kaplan and Norton, 2007).Along with the focus on non-financial performance aspects of the business, firms havealso started to focus on long-term rather than short-term success related to theirstrategy. Thus, the strategic behavior can be understood by analyzing the performancemeasures the firm is implementing at any point of time (Dyson et al., 2007). Duringeconomic and financial crisis, organizations performance is highly uncertain so theyperceive such environment threatening (Wan and Yiu, 2009). Perceptions of threats canintensify management concern about efficiency leading to cost-cutting activities.Therefore, non-financial measures leading to growth may be abandoned duringuncertain times since these measures may become less important when the survival ofthe firm may be compromised. Consequently,

H1. Firms learned from current performance that financial measures andnon-financial measures related to achieving financial sustainability becamemore important during economic and financial crisis.

Firms have different behaviors when they face environmental hardship. For example,some firms adopt aggressive pricing strategies to increase market share because theyhave enough financial resources while other firms become defensive and react moreslowly to the shocks as executives respond with risk-averse behavior (Moses, 1992).Crisis engenders threats and opportunities depending on the interpretation of themanagers (Starbuck et al., 1978). Some scholars suggest that cost-leadership strategycan be suitable for hostile environments as firms try to lower the costs (Miller, 1991;Hambrick, 1983). Therefore,

H2. Firms changed the importance of strategic success factors to be aligned withthe lessons learned from performance measures.

MethodologyData collectionWe employed an internet-based survey (Gunby, 2009) sent to more than 700 executivesin either “Fortune 500” or “FTSE 100” companies belonging to an alumni network of awell-known UK business school. After the initial designing and revision of the surveyquestionnaire, online web-based survey was selected as a medium. Crawford et al.(2001) state that there is a strong correlation between lower response rates inweb-based surveys and the design of the survey regarding the ease in filling in thequestionnaire and maintaining the interest of the responder. Therefore it was decided

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to conduct the survey online using a professional paid survey hosting website. Tapinos(2005), Bachmann et al. (1996) and Weible and Wallace (1998) state that online surveysreduce the response times, the costs of study and allow the use of larger samples. ButHair et al. (2007) state that the biggest disadvantage in this type of survey is lowresponse rate. Repeated contacts/reminders can potentially improve the response rates(Tapinos, 2005) but this was not performed in our case as the questionnaire wasmanaged primarily by the Alumni office. The response rate of 6 percent, which is quitebelow the ideal response rate of 10-15 percent (McDouglas et al., 1994), is above thestudy performed by Gunby (2009) with a 4 percent response rate in similar topic. Therelatively low response rate can also be attributed to summer holidays, work pressurearising from current financial crisis period and small response collection timescale.

The survey contained widely known performance measures (see Table I for thesources of the measures) and strategic success factors (see Table II for the sources ofthe factors) that were evaluated in their level of importance using a seven-point scale(note: the survey can be obtained from the authors). The data reported was collectedfrom 53 executives. We have performed tests to identify respondent bias and we didnot detect any bias. This method is not as rich in data as case study methods, whichhave been mainly employed in empirical tests of strategic development processes (seeO’Brien and Dyson (2007) for examples) but a survey provides the opportunity to askmultiple respondents from diverse organizations simultaneously by giving anoverview of general organizational behavior.

We believe that the sample is well representative of the process of strategicdevelopment in firms for a number of reasons. First, 68 percent of the sample had a

Performance measure

Averagebeforecrisisa

Averageduringcrisisb

Meandifference

Source of the performancemeasure

Operating profit 4.85 5.08 20.23 * Merchant (2007)

Return on investment 3.96 4.45 20.49 *Kennerley and Neely (2002);Merchant (2007)

Sales growth 4.49 4.47 0.02 Hoque (2004)Dividend yield 2.90 2.92 0.02 Merchant (2007)Costs reduction 3.66 4.7 21.04 * Merchant (2007)Material and labour efficiency 3.32 3.9 20.58 * Hoque (2004)Process improvements andreengineering 2.94 3.56 20.62 * Hoque (2004)New product introduction 3.64 3.51 0.13 Hoque (2004)Employee development and traininghours 2.81 2.64 0.17 * Hoque (2004)Customer satisfaction 4.28 4.43 20.15 Hoque (2004)On time delivery 3.58 3.58 0.00 Hoque (2004)Relation with suppliers 2.81 3.02 20.21 * * Hoque (2004)Employee health and safety 3.31 3.48 20.17 Hoque (2004)Market share 4.02 4.11 20.09 Hoque (2004)Customer response time 3.26 3.43 20.17 * * Hoque (2004)Employee satisfaction 3.30 3.36 20.06 Hoque (2004)

Notes: Importance measured using a scale from 1 to 7; *significant change at 5 percent; * *significantchange at 10 percent; aCronbach’s alpha is 0.97; bCronbach’s alpha is 0.96

Table I.Changes in importance of

performance measures

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turnover of more than £1billion whereas 83 percent of the sample had a turnover ofmore than £100 million. This clearly shows that the participating companies are highperforming companies, which have strategic development mechanisms in place tomanage their performance through crisis. Second, 50 percent of the sample consists ofmanufacturing organizations (e.g. pharmaceuticals, IT manufacturing, chemical andautomotive) and the other half comprises service organizations (e.g. Telecom, retail, ITservices, insurance and banking) which covers the typical firms in the economy. Third,respondents’ company headquarters are located mainly in Europe (64 percent) andUSA (28 percent) providing a good coverage of the countries mostly affected by thecrisis. Fourth, the respondents participating in the survey were individuals at veryhigh positions in their respective companies (67 percent were managers and seniormanagers and 28 percent were directors) with thorough knowledge of their companies’strategic development processes reducing the risk of personal opinion without directknowledge about the process. Apart from the job title classification it was also foundthat the specific job titles of the participating respondents were very close to variousaspects of strategic development processes, for example, director of the area of strategyand planning, and 78 percent of the respondents were involved at either corporate ordepartmental level with performance measurement processes such as designing orupdating performance measures.

ResultsDirection of change in performance measuresWe performed t-test analyses to identify whether changes in performance measures’importance across organizations are statistically significant. The results show thatmeasures related to financial performance had increased significantly in theirimportance and applicability within respondents’ organizations (see Table I)confirming H1. Organizations become more financially focused during the actualglobal economic and financial crisis since financial measures become more importantespecially when survival of the firm is under threat. An additional important finding isthat not only financial measures increase their importance but also non-financialmeasures related to process efficiency like cost reduction, material and labor efficiency,process improvement and reengineering. Financial measures such as return oninvestments and operating profits became important as the actual economic crisisaffects working capital. Other financial measures like cost reduction, as well asnon-financial measures like material and labor efficiency, productivity and process

Strategy success factor

Averagebeforecrisisa

Averageduringcrisisb

Meandifference Source

Sustaining leadership/competitive position 5.21 5.30 20.09 Boddy (2007)Sustained cost reduction 3.94 5.34 21.40 * Boddy (2007)Customer satisfaction 5.39 5.66 20.27 Boddy (2007)Increasing market share 4.90 4.81 0.09 Boddy (2007)Innovation (R&D and new product development) 5.36 5.36 0.00 Boddy (2007)

Notes: Importance measured using a scale from 1 to 7; *significant change at 5 percent; * *significantchange at 10 percent; aCronbach’s alpha is 0.78; bCronbach’s alpha is 0.58

Table II.Changes in strategysuccess factors

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improvements, also seem to be more attuned to offer better value to price-sensitivecustomers. Interestingly, organizations also focus their attention on externalstakeholders during crisis as measures like relation with suppliers and customerresponse time became more relevant within respondents’ organizations.

To summarize, our study shows that PMS reflects the strategic responsiveness ofthe organizations during situation of crisis.

Direction of change in strategic directionWe performed t-tests analyses to identify whether organizations’ respondents changedtheir strategic success factors to reflect the changes in PMS (see Table II). The changesin strategic success factors (SSF) towards financial factors confirm the alignmentbetween performance measures and strategic direction and goals as implied in thestrategic development framework (Dyson et al., 2007) confirming H2. Increasedimportance for sustained cost reduction SSF is due to the effect of financial andeconomic crisis affecting financial performance and it is clearly supported by adecrease in the significance of increasing market share success factor. Other changes,which are not statistically significant, like increased importance of customersatisfaction success factor in this climate seems to be based on organizations’ needs tomanage competition and maintain actual customers, which is in line with the change incustomer response time measure. An interesting finding is the lack of change in theimportance of the innovation strategy success factor. This meant that innovationcontinues to be equally important towards long term strategies of the respondents’organizations even though employee development and training hours measure, whichis a driver for innovation in balanced scorecards (Kaplan and Norton, 2007), decreases.Increasing market share success factor also decreases in line with the correspondingdecrease in importance in the related measure. It is also interesting to note that theCronbach’s alpha decreases for measurement of strategic success factor after the crisisindicating less reliable scales. However, this result may also indicate disagreementbetween firms on the direction of strategic change, a sign of potential heterogeneousperformance and different behaviors when they face environmental hardship(Starbuck et al., 1978), since similar set of questions before crisis has a higherCronbach’s alpha. This result implies the need of more exploration in terms ofalignment between performance measures and strategic behavior.

DiscussionHaving the capability to deal with low probability but high impact events effectively isvery important for firm survival (Yu et al., 2008). Cost-leadership and differentiationstrategies are effective in environments with high level of dynamism to improve afirm’s performance in comparison to its competitors (Nandakumar et al., 2010). Ourresults show that a cost-leadership strategy is more favorable by managers to survivein highly uncertain environments partially abandoning differentiation strategies butthere is also evidence of heterogeneous responses. However, if the firm focuses toomuch on short-term financial objectives, it will affect employees’ recognition oflong-term goals of the firm. Thus, PMS should reflect not only short-term crisissituations but also balance the response with objectives addressing the long-termaspects of the firm such as strategy and vision.

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Managers in difficult environments change their attention towards financial-relatedmeasures, both financial- and non-financial, to manage their working capital affectingtheir strategy success factors. Managers mixed short term reactions with long termstrategy by incorporating changes to performance measures to address short termissues raised by the 2008 global economic and financial crisis. While firms have toaddress uncontrolled events, they also need look for long term solutions affecting theirlong-term strategy success factors no matter which situation they are in. Otherwise,firms will follow hunch and hope and the strategic direction will be mainly emergingrather than deliberate (Dyson et al., 2007).

Managers should look for congruency between the changes in importance ofstrategy success factors affected by unique situations, the creation of strategicinitiatives, their implementation and applicability of new performance measures. Thisis the realm of strategy rehearsal feedback loop within the strategic developmentprocess framework, as shown in Figure 1. Companies with a strong financial position,or well prepared for the challenge by using scenario planning (O’Brien, 2004), may notneed to force themselves to move their attention towards financial measures and cancontinue to focus on non-financial measures which will lead them to emerge with asuperior position with respect to other players. Firms that follow a proactivepreparation for relevant contingencies can obtain significant advantages (Pollard andHotho, 2006). Consequently, environmental events can be an important source to futurepoor performance if managerial attention moves away from long-term designedstrategies to emergent uncontrolled strategies.

ConclusionsHaving the organizational capabilities to deal with the crisis effectively is key forsurvival but it is not enough. Some of the consequences of the crisis are higher costs(borrowing costs go up), reduced revenues (low prices and reduced consumer spending)and low prospects of innovation (reduction in R&D) (Yu et al., 2008). In such a situationfirms may reformulate their strategic objectives to address existing circumstancesdistancing themselves from the strategic direction to achieve their vision and erodingtheir competitive advantage. Burgess et al. (2007) mention an example of a company,which addressed the current economic and financial crisis by increasing the importanceof financial performance measures, thereby resulting in deterioration of performance innon-financial performance areas. This eventually led to competitors overtaking thecompany. Companies that focus too much on short-term based financial objectives maylead their employees forgetting the long term strategic direction of the company (Burgesset al., 2007). Understanding the consequences of short-term changes in PMS oncompanies’ long-term strategic situation is still an area not thoroughly explored.

However, we believe that new strategic direction and goals and their correspondingstrategic initiatives should be rehearsed to ensure that the strategic initiatives willcontribute positively to the sustainability of the firm. Therefore, strategic developmentprocesses (O’Brien and Dyson, 2007), as an organizational capability, can only beeffective if enacting strategy feedback loop is supported by the rehearsing strategyfeedback loop in any circumstance, especially during economic and financial crisis.

LimitationsOur paper contributes to untangling how uncertainty influences strategy developmentand the process by which managers respond in formulating strategy (Parnell et al.,

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2000). However, the paper is not without limitations. One of the main limitations of thisstudy is the problem of single respondents but top-level respondents’ information canbe considered to be accurate (Nandakumar et al., 2010). An additional limitation is thesurveys were conducted via a web-based portal and it may have skewed the sampletoward managers with higher technical skills including formal education in specificstrategic management theory and manifest operationally in a better planning anddecision making skill set (Gunby, 2009).

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Appendix

Corresponding authorMartin Kunc can be contacted at: Martin.Kunc@wbs.ac.uk

Settingdirection

Creatinginitiatives

Assessingideas

Learning (evaluationand choice)

Visioning U U

Stakeholder analysis U U

Drama theory U U

Problem structuring methods U U U

Resource-based view U

SWOT analysis U

Five forces U

Product portfolio matrices U

System dynamics U U

Agent-based models U U

Scenario planning U U

Decision/risk analysis U

Balanced scorecard U U U

Financial measures U

Robustness analysis U U

Real options U U

Source: O’Brien and Dyson (2007)

Table AI.Frameworks and

methods employed in thestrategic development

process

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