Nature of Strategy:
A logical place to start the discussion of information gathering and interpretation is strategy, because
the demands of strategic planning and management drive much of what FP&A does. Strategy describes
how an organization positions itself relative to its competition, deploys its resources and directs its
activities to create and sustain its competitive advantage. This definition of strategy may sound as if it
is oriented only toward for-profit organization, but all organizations, including not-for-profits, must
compete in some sense. Non-profit educational institutions must compete for students, faculty and
funding. Health organizations compete for funding but also compete against solutions for dealing with a problem.
For example, maintaining the status quo or doing nothing at all. Since the last quarter of the 20th
century, the role of strategy and the nature of competitive advantage have been intensely discussed, and
there are many theories and models. Some models emphasize the role of planning, while others say that
planning is pointless in today’s dynamic environment and may even deter an organization from
responding quickly to changes. Some models focus inward, on defining core competencies and
resources and fitting them to market opportunities such as unmet needs or underserved geographic or
demographic markets. Some models urge organizations to focus outward and evolve the organization
toward external opportunities. Consequently, this chapter must be a high- level view of this complex
terrain. Its goal is to help FP&A understand the approach to strategy that organizations, especially its own, adopt.
FP&A’s Role The role of FP&A in strategic planning will vary. In some organizations FP&A may drive
the entire strategic planning process, calling on the valuable information the function has gathered and
insight it has created about the organization, its industry and competitors, and the economy. If the
organization has professional strategic planners, FP&A may support the strategic planning process by
using the organization’s historical performance data to increase the accuracy of planners’ expectations,
projecting financial results of proposed strategies to help assure that the strategies are indeed leading
toward the intended goals. Since competitors’ strategies are treated as proprietary information, analysts
will have to use their understanding of strategy, the competitor’s history and the industry to make
reasonable assumptions about future competitive actions. Analysts must also be thoroughly familiar
with the hierarchy of financial and operational performance metrics that senior management has
chosen and the way in which various decisions will affect those metrics. It may be the responsibility of
FP&A to point out, in the course of its usual analytic tasks, when planning conflicts with strategic
commitments
for example, when an expenditure that may look like a good opportunity is actually spending resources
to expand capabilities outside the strategy’s focus or beyond a desired financial leverage “Whatever
FP&A’s role is, analysts must understand what drives the development of the organization’s strategy
and also the strategies of the organization’s competitors.”
What is Strategy?
“Strategy” is often used
interchangeably with “strategic planning,” but strategy is different and more complex than “planning.”
Strategy is a pattern of coordinated actions. It has a formal component management-endorsed
strategies, high-level budgets and approved business unit plans and an informal, spontaneous
component an aptitude for spotting opportunities and challenges as they emerge and quickly initiating a coordinated organizational response.
Strategy is about numbers, about what performance factors must be changed and by how much to
achieve a desired value. They increase in specificity as they are pushed down through the organization.
A strategy must be converted into operating plans for each of the organization’s major value segments,
which will depend on how the organization has structured itself. Each operating plan requires the
creation of functional plans. Each layer of planning adds specificity to the basic question of what
performance is required for the organization to achieve its strategic goals. However, strategy is also
about culture. Strategy must yoke the organization’s identity and capacities to its actions i.e., it must
achieve a “strategic fit” between the chosen plan and what the organization wants to be and what it
excels in. It must orient the organization in relation to its customers and stakeholders and to its
competition. It must bridge the distance between the upper layers of management that are creating the
corporate strategy, the division and business unit heads who must align their strategies with the
corporate strategy, and the front-line managers who must implement functional strategies that will
enable the function to play its proper role in this endeavor. Strategies are about commitment to a plan,
but they are also dynamic. An effective strategy focuses the organization on certain goals but allows
the organization enough latitude to adjust the “how” of the strategy to local conditions, changes and
emerging risks and opportunities. Henry Mintzberg, a scholar in the discipline of strategy, proposed
that a strategy actually exists in three forms:
Three Forms of Strategy
● Intended, what strategic planners design at the highest level
● Realized, what is actually implemented (Mintzberg estimated that only 10 percent to 30 percent of intended strategies are implemented as designed.
● Emergent, the way front-line managers adapt the intended strategy to changing environmental and competitive conditions and opportunities
As the formal strategy is implemented over time, it will be refined. Mintzberg sees strategy as a
learning experience, an evolutionary process of constant tests and adaptations. (Mintzberg in fact
would hold that very young organizations probably
should wait to develop a strategy that it takes some time competing in the market to understand the
organization and its environment to propose a strategy.
Organizational Considerations
● The organization’s capabilities and culture. A sustainable strategy aligns not only with an
organization’s capabilities and resources but also with its structure, vision and culture. Some strategies
may require significant change in reporting relationships or how people work together from
competitive to collaborative relationships. Structure and culture can be very difficult to change, and
even when change is possible, it may take longer than a conventional strategy cycle lasts. Managers
have to consider whether the organization can implement the level of change the strategy necessitates.
Some competitive strategies may cast the organization as an imitator rather than an innovator it will
create value by imitating directions, technology or processes pioneered by a competitor. How will
managers and employees accept this new vision and identity?
● Industry forces. An understanding of industry can ensure that the strategy takes into account unique
characteristics such as industrial cycles, the economic attributes of the industry, and competitive forces
that affect the plausibility of competitive strategies.
● External or macroenvironment. The macroenvironment will also pose both opportunities and
constraints on competitive strategies. For example, signs of economic recovery may signal increases in
revenue to support strategic initiatives, but they may also signal increased competition in certain types
of industries. Increased regulations surrounding climate change may mean increased costs that limit
earnings but could also support directing the organization’s attention to new products.
Functions of Strategy
Strategy serves multiple functions:
● It clarifies decision making.
A clear strategy reduces the time required to make a business decision because it limits the number of
possible choices. Because of its clearly stated objectives, options can be objectively analyzed in terms
of their effects on, for example, market share, or earnings before interest and taxes, or cash flows.
● It makes governance clearer. Governance is a framework of rules and practices by which an
organization’s board ensures accountability, fairness and transparency in the organization’s relationship
with all of its stakeholders. Decision makers must be able to provide a good reason for taking an action
counter to the corporate strategy.
● It can increase coordination and cohesion if the planning process was inclusive and if the strategy is
effectively communicated throughout the organization.
● It can force the organization to stretch, to make better use of its strengths, including creativity.
Missions and Values The Heart and Soul of Strategy Typically, strategy includes a vision of what the
organization would like to look like in the future, a mission and a set of distinct values. Mission is
defined by Mintzberg as “an organization’s basic function in society, in terms of the products and
services it produces for its customers.” Values are important beliefs or ideals shared by the members of
an organization. Consider the following example
Case Study A company operates a chain of physical fitness centers. In its communications to
stakeholders, it has identified itself as one of the top three companies of this type in its market. It talks
about the company’s commitment to improving its clients’ fitness, overall health and sense of well-
being by combining the latest in fitness technology; traditional and nontraditional philosophies of
health, nutrition and exercise; and certified trainers. Its stated mission is to create value for its
shareholders comparable to or above that of its peers, to provide ethical wages and benefits for its employees
and to improve the fitness, health and psychological well-being of its clients. The company points to
certain guiding values:
● Openness. This includes transparency in communication and decision making as well as openness to
nontraditional philosophies.
● Health. Management defines health in a holistic way, focusing on body, mind and spirit.
● Commitment to the well-being of its employees. Aware of problems in this area in competitors, the
company commits to providing benefits, scheduling employee tasks in a way that will not damage their
health, and supporting continual learning opportunities and certification. What the company does not
say is notable as well. The company could have said that it believed in building physical strength and
flexibility to support athletes’ competitive goals, but it did not. It could have said that its strategy was
to make fitness available to a larger number of clients, but it did not. Missions and values of this sort
would take the company in a direction that managers, for now, choose not to pursue.
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