Strategic Management and Business Performance

Hill et al. (2004, 5) define strategy regarding its function as: "an action a company takes to attain superior performance". Functional definitions are, however, not suitable to assess the Performance Claim. When a strategy is defined as the action(s) taken to improve performance, the claim that strategy enhances performance becomes a tautology (Actions taken to attain superior performance, on average, have a positive impact on company performance). A different kind of definition is required to assess the Performance Claim.

Mintzberg (1979, 11) argued that strategic planning is a multifaceted phenomenon which is impossible to define in a short essential definition. He rejects any interpretation of strategy that restricts it to explicit, a priori guidelines and expands restrictive definitions by including evolved, a posteriori, consistencies in decisional behaviour as a strategy. Mintzberg advocates a phenomenological approach and defines strategy as a "plan, ploy, pattern, position and perspective" (Mintzberg 1987).

The multifaceted approach of Mintzberg is more suitable to assess the Performance Claim because it explains what strategic management is or can be, not what it is intended to do. Strategic planning is the formal process, or set of processes used to determine the strategies (actions) of the organisation (Hill et al. 2004, 5). Not all strategy is, however, derived from a formalised process. Hill et al. (2004, 23) distinguish, following Mintzberg, between intended strategy and emergent strategy. In intended strategy—the formal strategic planning process—strategic choices are based on rigorous analysis of external and internal factors.

Emergent strategies, on the other hand, originate from organisational grassroots. Emergent strategies are not developed but evolve in an organisation through actions that the organisation takes in reaction to internal and external circumstances (Hill et al. 2004, 20). The discourse around the Performance Claim focuses on the impact on the performance of strategic planning as a formalised process. In this essay, the Performance Claim will be evaluated from both perspectives.

Company performance is traditionally related to increasing shareholder value. Performance can, however, also be measured regarding reduction of environmental footprint, improved occupational health and safety performance, increased customer satisfaction and so on. All research referred to in this essay uses the restricted interpretation of company performance, e.g. financial performance.

A key term in the Performance Claim is that company performance is on average positively affected by formal strategic planning. The research referred to in this essay (Miller & Cardinal 1994, Rogers et al. 1999) investigated whether a positive correlation between the amount of strategic planning and company performance exists; the more formal strategic planning, the better a company will perform.

Several researchers emphasise the importance of emergent strategy formulation and downplay the role of formal strategic planning. They argue that luck plays a critical role in whether an organisation is successful or not (Mintzberg 1979, Hart 1992, Hamel 1996).

Strategy formation is, according to Mintzberg, the interplay between the formal, intended strategies and informal, emergent strategies, mediated by leadership (Mintzberg 1979, 72). He emphasises that strategy is not a fixed plan, nor does it change systematically at prearranged times at the will of management (Mintzberg 1979, 84). Mintzberg emphasises the unpredictability of the external environment. An organisation can find itself in a stable environment for long periods of time, without the need to change its strategy. Sometimes the environment can, however, become so turbulent that even the best planning techniques are useless because of the high level of unpredictability (Mintzberg 1979, 75). This seems to contradict the finding of Rogers et al. (1999) that stronger planning-profitability correlations emerge when firms face turbulent environments. Companies that perform well in a chaotic environment acknowledge that circumstances are in eternal flux. Both Rogers and Mintzberg are correct, the world is unpredictable, but proper strategic planning includes provisions for this uncertainty, such as scenario planning (Hill et al. 2004, 23).

Hamel (1996) argues that strategic planning as it is practised in business management is not strategic at all. He claims that strategy development tends to be a reductionist process, based on simple rules and heuristics, working from the present to the future, rather than the other way around. The strategic planning process is mostly extrapolative, and it is assumed that the future will resemble the past, an assumption that David Hume has shown to be irrational more than 250 years ago (Prevos 2005). Hamel emphasises the creative aspect of strategic management and points out that it is not a rote process that can be instrumentalised in neat systems, but a quest that must be a subversive revolution to improve company performance (Hamel 1996, 71).

Hill et al. (2004, 130) argue that, although luck may be a reason for an organisation's success in particular cases, it is an unconvincing explanation for the persistent success of a company. They find it "difficult to imagine how sustained excellence … could result from anything other than a conscious effort" (Hill et al. 2004, 130). There are, however, many examples of how luck has positively influenced the future of organisations dramatically, and vice versa how unpredictable external circumstances have negatively influenced an organisation's fortune.

Empirical research shows a positive correlation between the extent of formal strategic planning and company performance (Miller & Cardinal 1994, Rogers et al. 1999). This research does, however, not prove a causal link between strategic planning and company performance. From an evolutionary perspective, only those companies that maintain a positive performance will survive. The research did not include an analysis of failed companies and their strategic planning. Furthermore, the research focusses on realised strategies. Mintzberg argues in this context that achieved strategy is always a combination of intended and emergent strategies (Mintzberg 1979, Mintzberg 1987). Following Mintzberg's typology of strategy formulation, the positive correlation between strategic planning and performance is not only based on formal, intended, strategy. Emergent strategy, and thus serendipity, luck and informal strategy formulation, play an essential role in achieving positive performance. This concept also explains the seeming contradiction between Rogers and Mintzberg regarding the influence of turbulence. Hill et al. (2004, 21) recognise the mutual importance of intended and emergent strategy and stress that management needs to understand the process of emergence and intervene when appropriate. Even though these strategies evolve without going through the formal process, management needs to evaluate these and select those that align with the vision set for the organisation.

Hart (1992) summarises the discourse between proponents of strict formal planning and those that stress the limits of this approach. He refers to formal planning as the rational model for strategy formulation. The rational model advocates to consider all available alternatives, identify and evaluate all of the consequences of each option and then select the preferred alternative. Researchers challenging this approach argue that organisations can achieve only limited rationality because of individual cognitive limits, heuristics and biases in human judgement.

Hart proposes an integrated approach to strategy formulation. Hart argues that prior literature on the subject has focused on a particular theme and has failed to capture the full range of the phenomenon of strategic planning.

An integrated approach to strategic management is required to get the full benefits. Strategic planning will not automatically positively influence performance once put into place; it requires constant "tinkering and kludging" to deal with continually changing circumstances.

Research into strategy formulation has resulted in a plethora of strategic management theories. The fundamental differences between individual approaches and the fact that they come and go in quick succession support the claim that there is no firm scientific basis for theories of management (Miller & Vaughan 2001, 5).

Strategic management theory is an eclectic field with contributions from military history, engineering, industrial economics, organisational sociology, behavioural, cognitive and social psychology, anthropology and political science (Foster & Browne 1996, 21). Strategic management is thus more aligned with social sciences than the exact sciences and as such needs a methodology to suit the unpredictability of human behaviour, rather than a rational model, feigning predictability.

Management deals with human beings and their social interaction and both the external and internal environment are in a constant state of flux. A strategy will only improve performance if its formulation takes the fundamental unpredictability of the world into account. Strategy cannot be formulated through rational systems that model the real world. Formulating strategy is a continuously developing narrative between the organisation and the external environment.