Strategic dictionary A

Ackoff, Russell L: One of the early strategy gurus, Ackoff introduced rigor into strategic planning. In his book, “A concept of corporate planning,” Ackoff mentions that there are some aspects of the future about which we can be virtually certain. Here, companies can pursue commitment planning. There are some aspects of the future about which we cannot be certain, but we can be reasonably sure of what the possibilities are. Here, contingency planning is useful. A good example is planning for a military invasion. Every possibility is identified and analyzed and a suitable action plan prepared, because time is of the essence, once a possibility has become a reality. Finally, there are some aspects of the future, which cannot be anticipated. Here, responsiveness planning can be used, i.e. building flexibility into the organization.
(See Adaptive Planning)

Activity-Based Costing: Activity Based Costing (ABC) increases the accuracy of cost information by linking overhead and other indirect costs to product or customer segments more precisely. Traditional accounting systems distribute indirect costs on the basis of direct labor hours, machine hours, or material costs. This leads to a distorted picture. Decisions about which product line to invest in and which not to invest in, become difficult. ABC undertakes detailed economic analyses of important business activities to improve strategic and operational decisions.

To build a system that will support ABC, companies should:
• Determine the key activities performed;
• Determine the cost drivers by activity;
• Determine overhead and other indirect costs by activity, using clearly identified cost drivers.

ABC can be used to:
Re-price products - Managers can analyze product profitability more accurately by combining activity-based cost data with pricing information. This can result in the re-pricing or elimination of unprofitable products. Managers can also estimate new product costs accurately.

Reduce cost - ABC identifies the components of overhead costs and other cost drivers. Managers can reduce costs by decreasing the cost of an activity or the number of activities per unit.

Influence strategic and operational planning – ABC can facilitate target costing, performance measurement for continuous improvement, and resource allocation based on projected demand and infrastructure requirements. ABC can also assist a company in identifying/evaluating new business opportunities.
(See Full Costing, Strategic Cost Management)

Adaptive Planning: This school of strategic planning, developed by Russell Ackoff, believes that the principal value of planning lies not in the plans themselves but in the process of producing them. Companies should try to put in place a system that will minimize the future need for retrospective planning, i.e. planning aimed at removing deficiencies produced by past decisions. This school classifies the future into three types: certainty, uncertainty and ignorance. When the future is reasonably certain, commitment planning can be used. When the future is uncertain but we can be reasonably sure of what the possibilities are, contingency planning can be used. Finally, there are some aspects of the future that just cannot be anticipated. The only way to deal with such uncertainties is by building responsiveness and flexibility into the organization. This is called responsiveness planning.
(See Russell Ackoff)

Adjacencies: A term coined by Chris Zook and James Allen . These are the markets close to the company’s core business. By identifying and exploiting these markets, companies can create a new growth trajectory. Adjacencies essentially imply related diversification, i.e. moving into a new area which has some resemblance to the core business and taking advantage of the existing competencies. Adjacencies represent new growth opportunities which have a strong fit with the existing business.
(See Core Competence, Diversification)

Adjusted Present Value: The Net Present Value (NPV) is a popular method of evaluating an investment decision. NPV involves estimating the cash flows expected from the project and discounting them to the present value. NPV is, however, not suitable in some more complex situations where risk is different for different cash flows. Adjusted Present value (APV) is a modified version of NPV. APV uses different discount rates for different cash flows depending on the associated risk. Higher the risk, higher the discount factor used.
(See Net Present Value)

Agency Theory: Probes the relationship between principals and agents. Principals appoint agents to get the work done. The goals of principals usually differ from those of agents. This gives rise to the agency problem.

For example, advertisers (principals) tend to emphasize sales goals and the cost-effectiveness of marketing communications, whereas advertising agencies may be more inclined to think of creative goals and attention-getting commercials. Professors of top Business Schools would like to spend most of their time doing research and consultancy. But the owners expect these professors to spend more time with students both in the classroom and outside.

Agency theory is a key concept in corporate governance. Professional managers often pursue strategies that increase their personal payoffs at the expense of shareholders. For example, they may grant themselves lavish perquisites including elegant corner offices, corporate jets, large staffs, and extravagant retirement programs.

Managers also often tend to pursue growth at the cost of profitability. Shareholders generally want to maximize earnings, as it results in stock appreciation. Since managers are typically compensated more for sales than earnings growth, they tend to be enthusiastic about strategies like mergers and acquisitions even when this enthusiasm is not really justified. Managers may also pursue diversification opportunities that are not necessarily in line with the company’s best interests.

In other cases, managers may become complacent and allow things to drift. They may avoid risk since they feel they are more likely to be fired for failure, than for mediocre performance. Executives may be far less entrepreneurial than they should be. They may not make the bold moves that the situation demands.

One way to tackle the agency problem is to align the interests of managers with those of owners by using appropriate incentives such as stock option and executive bonus plans. But ironically enough, these schemes may also tempt managers to act against the best interests of the firm. For example, they may manipulate the financial statements to increase earnings artificially.
(See Corporate Governance)

Alignment: A key factor in effective implementation of strategy. Most large organizations are divided into business units which are out of synch and work at cross purposes. The challenge is to coordinate the activities of these units and leverage their skills for the benefit of the organization as a whole. Kaplan & Norton call this alignment.

By aligning the activities of its various business and support units, an organization can create additional sources of value in various ways. Financial synergies can be generated through centralized resource allocation and financial management. Value can also be created if corporate headquarters can operate internal capital markets better than external market mechanisms and share knowledge across business units, in a manner that would be difficult if the different units were independent entities.

Customer synergy means enhancing customer relationships by offering a range of complementary products and services from different business units. Corporations can leverage their multiple products and services to create unique integrated solutions, resulting in customer satisfaction and loyalty that less diversified and more focused organizations cannot match. Companies can also generate value by delivering a value proposition consistently throughout their decentralized units. Cross selling to specific customers can also generate value.

Internal process synergies can be created by generating economies of scale in activities such as procurement, logistics, information technology and infrastructure. Sharing processes across units generates economies of scale in such activities and helps cut costs. Centralized resources having specialized expertise and knowledge in how to operate a key process or service can be leveraged. The sharing of common philosophies, programs and competencies across business units can also generate significant benefits. Expertise sharing can reduce the time to respond to customer needs and make the company better equipped to exploit the emerging opportunities in the business environment.

Learning and growth synergies can be generated by developing and sharing critical intangible assets including people, technology, culture and leadership. Corporate Headquarters can put in place effective processes for developing intangible assets and promote the sharing of knowledge and best practices throughout all its business and support units. New ideas can rapidly spread across the enterprise and be assimilated by the business units in a manner that would be difficult, were they independent entities. Growing leaders faster than competition can generate competitive advantage.

There are different ways of achieving alignment. One way is to start at the top and then cascade down. Another way is to start in the middle, at the business unit level, before building a corporate scorecard and map. Some companies launch an enterprise wide initiative right at the start. Others conduct a pilot test at one or two business units before extending the scope to other enterprise units.

Alignment has four components: strategic fit, organization alignment, human capital alignment and alignment of planning and control systems. Strategic fit exists when the internal performance drivers are consistent and aligned with the desired customer and financial outcomes. Organization alignment explores how the various parts of an organization synchronize their activities to generate synergy. Human capital alignment is achieved when employees’ goals, training and incentives become aligned with business strategy. Planning and control systems alignment exists when management systems for planning, operations and control are linked to strategy.

As Kaplan and Norton put it, “Strategy execution is not a matter of luck. It is the result of conscious attention, combining both leadership and management processes to describe and measure the strategy, to align internal and external organizational units with the strategy, to align employees with the strategy through intrinsic and extrinsic motivation and targeted competency development programs and finally, to align existing management processes, reports and review meetings, with the execution, monitoring and adapting of the strategy.”
(See Balanced Scorecard)

Ansoff, Igor H: A famous strategy guru, Igor Ansoff developed the notion of corporate strategic planning. He argued that any business needs to look at its resources, and align them with the business environment. Ansoff's analytical tools such as competence grids, flow matrices, charts and diagrams are popular in contemporary management literature. He used the term competitive advantage years before Michael Porter.

Ansoff's “Corporate Strategy: An analytical approach to business policy for growth and expansion” (1987), mentions three classes of decisions: (a) strategic (the selection of the product/market mix); (b) administrative (structure), and (c) operating (process). According to Ansoff, strategy should focus on three fundamental issues:
• Definition of the firm’s core objectives
• Whether the firm should diversify and, if so, into what areas
• How the business should exploit and develop its new or existing market
The closer a business stays to its existing products and markets, the lower the risk. Introducing new products into diversified markets carries the highest risk. Hence, the recommendation to stick to the knitting. Ansoff showed this in a matrix form, with four possible strategies, depending on the situation faced.


Old Products

New Products

Old Markets

Market Penetration
Product development

New Markets

Market Development
Diversification

• Market penetration means increasing market share by encouraging current customers to buy more, attracting customers of competitors or convincing non-users to use the product.

• Market development implies launching the current product in a new market by expanding distribution channels, selling in new locations or identifying the potential users.

• Product development involves launching a new product in the current market by developing new features, improving quality levels, etc.

• Diversification means moving beyond the current business. Concentric (related) diversification involves developing new products for the same segment. Conglomerate (unrelated) diversification involves developing new products for new markets.

Ansoff is also famous for:
• establishing corporate planning as a formal management process.
• popularizing SWOT analysis
• developing the idea of environmental scanning.
• repositioning ‘strategic planning’ as part of a continuing process rather than a once-a-year (or less frequent) planning process.
• Articulating the various advantages and disadvantages of deliberate strategy versus emergent strategy.
• ‘Gap’ analysis – which looks at the gap between our aspirations and the likely outcome of current strategies.

Ansoff’s seminal book ‘Corporate Planning’ has emphasized the need to break down the strategy process into various steps:
• external analysis – understanding market opportunities and threats
• internal analysis – understanding strengths and weaknesses.
• choice (and our alternatives).
• implementation.
(See Strategic Options, SWOT Analysis)

Anti Takeover Strategy: A takeover means change of ownership and usually change of management. The current management can resist the takeover bid in various ways:
• The Golden Parachute is a provision in a CEO's contract to ensure that he will get a large bonus in cash or stock if the company is acquired.
• The supermajority is a defense that requires an overwhelming majority of shareholders to approve of any acquisition. This makes a takeover much more unlikely.
• A staggered board of directors prolongs the takeover process by preventing the entire board from being replaced at the same time. The terms are staggered so that some members are elected say every two years, while others are elected every four years. The acquirer may not want to wait four years for completely reconstituting the board.
• Dual-class stock allows company owners to hold on to voting stock, while the company issues stock with little or no voting rights to the public. That way the new investors cannot take control of the company.
• A poison pill refers to anything the target company does to make itself less valuable or less desirable as an acquisition after the raid has begun. For example, high-level managers and other employees may threaten to leave the company if it is acquired. A specific asset of a company like the R&D center or a particular division may be sold off to another company, or spun off into a separate corporation. A flip-in provision may allow current shareholders to buy more stocks at a steep discount in the event of a takeover attempt. The flow of additional cheap shares into the total pool of shares dilutes their value and voting power. A more drastic poison pill involves deliberately taking on large amounts of debt.
Argyris, Chris: A social psychologist by training, Chris Argyris has done pioneering work on how individuals respond to changing organizational situations and the impediments to organizational learning. Argyris has done extensive research on learning in teams and drawn attention to the problems created by defensive behavior. The cleverer the team is, the more difficult it becomes to maintain openness to learning, and to avoid becoming defensive. Argyris describes the process involved here as ‘double-loop learning’. While ‘single-loop learning’ involves doing existing things better, ‘double-loop’ learning entails doing existing things in new ways or inventing new things. Effectively, double-loop learning involves reframing problems and stepping outside existing mind-sets. Argyris’ language is sometimes hard to understand. So he is often perceived as an esoteric rather than a popular guru. But his ideas and thoughts are profound and continue to guide the functioning of today’s organizations.
(See Organizational Learning)