Part A: Strategy foundations
Introduction to strategy
Key takeaways
- Strategy is the direction and scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences, with the aim of fulfilling stakeholder expectations.
- Strategy exists at three levels: corporate (which businesses to be in), business (how to compete in one market) and operational (how resources, processes and people deliver the other two).
- Section 143 of the Companies Act, 2015 requires a director to promote the success of the company for the benefit of its members as a whole, having regard to long-term consequences, employees, business relationships, community and environment, reputation, and fairness as between the directors and the members.
- Strategic decisions are non-routine, uncertain, integrative and hard to reverse, so they cannot be made by rule and are reserved to senior management and the board.
- The strategy schools contradict each other because each answered the failure of the last: Porter places advantage in industry position, the resource-based view in what the organisation owns and can do.
Strategy answers what an organisation is trying to do and how it intends to win. Governance answers who decides, on whose behalf, and who answers when it goes wrong. They are separate questions and they are taught together for a reason: a strategy nobody is accountable for is a wish, and a governance system with no strategy to govern is paperwork.
What strategy is
Strategy is the long-term direction of an organisation. The definition is deliberately short, and three words in it carry the weight. Long-term distinguishes strategy from operational decision. Direction implies a chosen path among alternatives, which means strategy is as much about what the organisation will not do. Organisation locates strategy at the level of the whole entity rather than the function.
A fuller working definition: strategy is the direction and scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences, with the aim of fulfilling stakeholder expectations. Each clause names something a strategic decision must address, and a proposal missing one of them is not a strategy.
Strategy matters because organisations that lack one still make decisions, and those decisions then accumulate in whatever direction the loudest pressure of the moment points. The alternative to a deliberate strategy is not neutrality; it is an emergent strategy that nobody chose and nobody can defend.
- It aligns effort: functions that each optimise themselves will collectively degrade the whole, which is exactly the systems failure quality professionals are trained to recognise.
- It allocates scarce resource against a criterion rather than against seniority or urgency.
- It creates a basis for saying no, which is the scarcest capability in most organisations.
- It gives the organisation a stance towards change rather than a reaction to it.
- It makes performance interpretable: a result is good or bad only relative to an intention.
- It is what the board is legally required to oversee, so it is the substance of governance.
Strategy as a subject of study
Strategy became a distinct field only in the second half of the twentieth century, and knowing its lineage explains why its tools disagree with each other. Each generation of thinking was a response to the failure of the previous one, and the tools of each survive in use.
Seven schools, and what each one contributed to the toolkit
| Period and school | Central idea | What it left behind |
|---|---|---|
| 1950s-60s, corporate planning | Strategy is long-range planning: forecast the environment, then plan against the forecast | The planning cycle, the SWOT, the corporate plan. Discredited when environments proved unforecastable, but the machinery is still in every organisation |
| 1960s-70s, design and Ansoff | Strategy is matching internal capability to external opportunity, through deliberate top-management design | The Ansoff matrix, the idea of fit, and the notion of the chief executive as chief strategist |
| 1980s, positioning and Porter | Advantage comes from industry structure and from a chosen position within it | Five forces, generic strategies, the value chain. Still the dominant vocabulary |
| 1990s, resource-based view | Advantage comes from internal resources that are valuable, rare, inimitable and organised for, not from position | VRIO, core competences, the capability agenda. The direct answer to Porter's externalism |
| 1990s, process and emergence | Strategy is not designed and then executed; it emerges from patterns of action, of which only some were intended | Mintzberg's intended, deliberate, emergent and realised strategy; logical incrementalism |
| 2000s, dynamic capabilities and blue oceans | In fast-moving environments the capability that matters is the capability to reconfigure; and advantage may lie in creating uncontested space rather than winning contested space | Dynamic capabilities, value innovation, business model thinking |
| 2010s onward, strategy as practice | Strategy is what people in organisations actually do: the workshops, the documents, the conversations | The practice turn, covered in the chapter on the practice of strategy |
The tools contradict each other because they were built to
Porter says advantage comes from the industry you are in and the position you take; the resource-based view says it comes from what you own and can do. A candidate who applies both without noticing the tension produces analysis with no conclusion. The mature answer is that both matter and that their relative weight is an empirical question, differing by industry, which is contingency theory operating at the level of strategic theory itself.
The reservation of strategic decisions to the board is not organisational convention; it is a legal allocation, and the case law that produced it is still the law applied by Kenyan courts. The Companies Act, 2015 codifies the general duties of directors at sections 142 to 147, and section 143 is the one that connects directly to strategy. It requires a director to act in the way the director considers, in good faith, would promote the success of the company for the benefit of its members as a whole, and in doing so to have regard to six matters:
- the long-term consequences of any decision of the directors;
- the interests of the employees of the company;
- the need to foster the company's business relationships with suppliers, customers and others;
- the impact of the operations of the company on the community and the environment;
- the desirability of the company maintaining a reputation for high standards of business conduct; and
- the need to act fairly as between the directors and the members of the company.
That list is a statutory description of strategic thinking. It requires a long-term horizon, it names stakeholders beyond the shareholder, and it makes reputation a matter the board must weigh. A director who approves a strategy without having considered those six things has not merely governed badly; they have failed to discharge a statutory duty.
Salomon v A Salomon and Co Ltd [1897] AC 22
Established that a company is a legal person separate from its members, so its property, debts and acts are its own. This is the foundation on which the whole of governance rests: because the company is distinct from those who own it and from those who run it, the question of on whose behalf managers act arises at all, and every governance mechanism is a response to it.
Percival v Wright [1902] 2 Ch 421
Directors owe their duties to the company, not to individual shareholders. This is why a strategy is judged against the interests of the company as a whole rather than against the preference of whichever shareholder is loudest, and it is codified in Kenya by section 143 of the Companies Act, 2015, which directs the board to the benefit of the members as a whole.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Directors must exercise their powers for the purpose for which those powers were conferred. Issuing shares to dilute a shareholder and defeat a takeover was an improper purpose even though the directors honestly believed it served the company. The proper-purpose doctrine, now section 142 of the Companies Act, 2015, means a strategic action can be unlawful because of the reason behind it, not because of its effect.
Re City Equitable Fire Insurance Co Ltd [1925] Ch 407
Set the historical standard of care for directors, which was subjective and undemanding. Kenya has deliberately replaced it: section 145 of the Companies Act, 2015 imposes the care, skill and diligence of a reasonably diligent person with both the general knowledge and experience reasonably expected of someone in that role, and the actual knowledge and experience the particular director has. The standard therefore rises for a director who is a qualified professional, which is directly relevant to a quality professional serving on a board.
Levels and vocabulary of strategy
Strategy exists at three levels, and confusing them is the commonest error in an examination answer. A question about corporate-level strategy is asking which businesses to be in; a question about business-level strategy is asking how to compete in one of them.
Three levels of strategy
| Level | The question it answers | Kenyan illustration |
|---|---|---|
| Corporate level | What businesses should we be in, and how does the centre add value to them? | Whether Centum should hold both a beverage business and real estate; whether a bank should own an insurance subsidiary |
| Business level | How do we compete successfully in this particular market? | Whether a supermarket chain competes on price, on convenience of location, or on range and service |
| Operational level | How do the parts of the organisation deliver the business and corporate strategies in terms of resources, processes and people? | How a factory schedules production, how a bank staffs its branches, how a quality function allocates its audit programme |
Operational is not a synonym for unimportant
The operational level is where strategy either happens or does not, and it is where a quality professional spends their career. A brilliant differentiation strategy defeated by a process that cannot hold tolerance has failed at the operational level, and the failure is strategic.
Strategic decisions
- They concern the long-term direction of the organisation, so their consequences outlast the people who made them.
- They concern the scope of the organisation's activities: what it does and does not do.
- They seek advantage over competitors, or in the public sector, superior value delivery against a mandate.
- They address changes in the business environment rather than assuming stability.
- They build on, or stretch, the organisation's resources and competences.
- They carry major resource implications, often irreversible ones.
- They affect operating decisions throughout the organisation, cascading downward.
- They are influenced by the values and expectations of those with power in and around the organisation.
- They are complex in nature, involving high uncertainty and non-routine judgement.
- They are integrative, requiring managers to cross functional and operational boundaries.
- They frequently require substantial organisational change, which is why so many fail in implementation rather than in conception.
Two consequences follow:
- Strategic decisions cannot be made by rule, because the situations are non-routine by definition; they require judgement, which is why they are reserved to senior management and the board.
- They are hard to reverse, which is the argument for the governance apparatus that surrounds them.