By: Giulio Chiesa

Thoughts on a difficult concept: thinking strategically.

Among the concepts that make up a company’s management and administration, the one that has caused more controversy in both the business and academic world is strategy. I remember that it started to infiltrate the industrial and commercial field at the end of the sixties. I came across it during a violent positioning struggle between the four giants of the American chemical sector and the pharmaceutical companies, which were the first to show a disturbing ability to take over competitors. Bruce Henderson from the Boston Consulting Group started this revolution with his “Growth-Share Matrix” and the “Experience Curve”, which shook corporations and universities to the core.

Throughout the years, several articles, books, and booklets on strategy have appeared in several languages, seeking to formulate an appropriate definition or “how” to develop a strategy. oday in 2010, after so many ups and downs in the business world, some more enlightening than others, it is clear that strategy is a decisive factor in the results obtained by any organization or institution. It has been argued that strategic thinking begins with a good business model that takes into account those necessary economic variables related to the goal.

In a competitive world, value creation is a function that company’s top management should take on with enthusiasm. In fact, it is now argued today that a company’s final goal is the creation of value. However, the presence of a competitor demands from us a better search of business alternatives, which implies distinguishing ourselves from the rest. But distinguishing in terms of what? This list of options can be very long. We will concentrate on what is “essential”: innovation (not only technological), choice of markets and clients, adoption of exemplary customer service philosophies, empowerment, and an ethical stance. Entrepreneurial history is written by those elements of distinction.

Linking Strategy to Results

In 1964, Peter Drucker wrote one of his most renowned management books, which he planned to entitle Business Strategy. His editor conducted some informal surveys because at that time the word “strategy” was inevitably tied to military situations.

Drucker cleverly realized a title’s commercial importance and agreed to change it. It became “Managing for Results”, a real poem in business literature.

Drucker cleverly realized a title’s commercial importance and agreed to change it. It became “Managing for Results”, a real poem in business literature.

Unlike war situations, where there is a winner and a loser (nowadays it might not be so) in the business world there is room for more than one winner. Wal-Mart, in the United States, is definitely a winner as well as Harvard Business School (HBS). But Target is also a winner by choosing as its core strategy to create value based on style and fashion for its customers, without exclusively focusing on the lowest price, as well as the visionary Business School of the University of Virginia that in a recent survey outranked the very liberal HBS. Those companies wanting to please everyone will lose because they are not able to compete with an edge. Success is limited by their reluctance to change; in other words, they do not want to venture into the land of strategic thinking.

Are there Rules and Referees?

There are three referees: stockholders, markets, and employees. Stockholders do not have a lot of patience. The market had some, but it is becoming more rebellious. Employees are more flag bearers than referees. There is only one rule: be aware.

• Be aware of how difficult it is to maintain differentiation and how all the changes and technological advances of the past 20 years have contributed to minimize the duration of competitive advantages, especially in very dynamic markets dedicated to research. This awareness is conducive to innovation.
• Be aware that building entry barriers by legal and ethical means, or alternatively, moving quickly to other markets, especially those where brands and patents are respected, however without excluding, with the appropriate products, those emerging markets that are already making headways.
• Being aware of how strategic planning tends to focus more on the numbers rather than guaranteeing the involvement of those assigned to the project. Such an attitude shows ignorance to the fact that execution is not a system’s job but rather a person’s job.

The Danger Lies in the Global Competitor

When these ideas are taken to a global scale, strategic thinking loses linearity, the implementation of strategies becomes more complicated, and the amount of energy required in both human and financial resources increases to incredible levels.

Luckily, someone always appears on the scene with research and publications, deserving a round of applause such well-known cases are Michael Porter and Henry Mintzberg, and more recently (1989) of Gary Hamel (consultant), and C.K. Prahalad (professor at the University of Michigan, who left us on April 10, 2010).

Quoting the authors of “Strategic Intent” (article published in 1989 in Harvard Business Review):

…regaining competitiveness will mean rethinking many of the basic concepts of strategy. As “strategy” has blossomed, the competitiveness of Western companies has withered. This may be coincidence but we think not. We believe that the application of concepts such as “strategic fit” (between resources and opportunities) “generic strategies” (low cost vs. differentiation vs. focus) and “the strategy hierarchy” (goals, strategies and tactics) have often abetted the process of competitive decline.

These are harsh words for those who have not been able to anticipate the actions of global competitors.

Other Legacies that G.K. Prahalad Left Us.

1. 1.Companies that today are global strategic leaders began their ascent in the market with greater ambitions than their existing resources and capabilities.
2. 1.Competition analysis does not end with the tools proposed by Michael Porter. The most feared competitor is not the one whose technical, financial, and human resources are easy to analyze and understand. The real danger comes from the talented competitor that is highly “resourceful” and makes constant and dynamic use of his competitive advantages making it practically impossible or at least expensive to overcome.
3. It is a mortal sin to dilute efforts. Prahalad expresses so in a few words: “Take care of your core competencies.” It means that business is serious and not a toy in the hands of greedy executives..
4. Another lesson is the responsibilities entrusted to executives: a) in order to create value – and he adds – clients should be given the responsibility of becoming co-creators of consumer products b) to create, in a globalized world, more profitable and fairer markets by including the lower income classes in the social pyramid.

Strategy, Leadership, and Strategic Planning

Planning will never become a substitute for leadership. Strategic leadership, based on the intellectual harmonious rapport among individuals (CEO, general directors, presidents), groups ( management teams) and corporate government, goes beyond the interpersonal aspects and issues normally associated with leadership, aimed to obtain a higher level, ethically flawless performance (Finkelstein).

The leader is the first to understand the difference between strategic thinking and strategic planning. Any confusion can cause extremely unpleasant situations. The leader teaches and is encouraged to teach that the objective of planning is to create winning strategies and not to dedicate excessive resources to show their convenience. . In contrast, strategic thinking directs the company to face the markets’ competitive realities ,and to detect and exploit those constantly emerging opportunities. Once strategic thinking is allowed to roam freely in the company’s hallways, it is capable of creating a formal discipline of planning which is the best path to develop successful strategies free from internal rivalries (Mintzberg, Andrews).

Strategy is fruitful. Making a strategic plan is like bearing children. An effective plan makes improvements both in strategy as well as in performance. There is no better task for directors than to shape their strategic initiatives into the action plan. Our experience as company directors is like a self-tailored suit that shines more by adding accessories created by others. The following are some examples:

• Avoid the home-run mentality. Strategic planning is oriented to trigger gradual improvements rather than producing quick results everywhere.
• Do not acquire companies or products with the sole objective of generating accelerated growth. The intelligent strategist offers his best contributions when he insists – because he is convinced – that the ultimate corporate goal is to create new internal opportunities. By doing so, he will adequately manage group and personal motivations, empowerment, and patience.

How Top Management Participates in the Strategic Process

In a serious, unadorned, pragmatic and non-academic way, we can mention some of Top Management’s efficient steps in its participation in the strategic process.

• Developing the strategy’s formulation: what products to choose, which markets to highlight, how to neutralize the competition, how fast to grow, how to distinguish itself from the rest, etc.
• Participating in the implementation: allocating resources, setting principles, policies, and programs, and developing an organization aligned with the company’s strategy as well as goals.
• Developing a context (providing executive personnel, proposing a remuneration system in terms of qualitative and quantitative indexes, educating personnel in promoting respect, education, and style) that contributes to support the company’s sound growth and development.
• Negotiating purchases and/or sales of assets and businesses, increasing or decreasing investments in R&D, avoiding situations in response to fleeting fashion trends, and using symbols to address messages.

Epilogue

The analysis of management concepts and its complex topics, such as the concept of strategy, must not end with the lightness of proverbs or with definite or unchangeable conclusions. Therefore, our conclusions aim to only highlight some issues not included in the previous pages and those that I think should be kept in mind:

• Not all the companies appear on the market with the arrogance of Google or i-Phone. Most have to learn to walk before they can run. There are more Davids than Goliaths, but, at the end, Goliath wins more victories..
• Benchmarking is as old as Methuselah. All Roman statues are copies of Greek models. Copying in an intelligent way does not imply a lack of intelligence.
• Innovation is a state of mind of the Boss. If he does not believe in innovation, the desert of conformism will prevail in his company.

Strategically speaking, innovating is eliminating old ways of thinking (organizational pyramids), old ways of acting (working solo), taking away what is useless (wordiness, circumlocution, demagogy), matching content and form (presentations, assemblies), and developing one’s own style (tidiness, kindness, awareness).

A company’s life (actually, life in general) is a trade-off that is the strategic equivalent of a fork in a road. Whether ascending, descending, or walking there are always many forks. If the “world is flat”, an insidious idea, , we should expect to find fewer detours on such plains. However, this is not the case. Even on the plains we can make the wrong turn in the absence of a compass (our strategy). That would be a shame, right?

Bibliography

Prahalad, C.K., y Gary Hamel, (1994). “Competing for the future”, HBS Press.

Prahalad, C.K. (2004). “The Future of Competition”, HBS Press.

Prahalad, C.K. (2004). The Fortune at the Bottom of the Pyramid, Wharton Publishing.

“La inclusión como estrategia central” (junio-julio 2010), Gestión, pp. 116-120.

Finkelstein, Hambrick, Cannella. (2009). “Strategic Leadership”, Oxford University Press.

Mintzberg, H. (1994). The Rise and Fall of Strategic Planning, The Free Press.

Hamermesh, R. G. (2001). “Making Planning Strategic”, Harvard Business Review 1991.

By: Veneta Andonova y Mauricio Losada

Although it is no longer new the follow-up of multinational companies in emerging countries, its study is relatively a new interest in literature that specializes in international businesses. This interest is due to a certain fact that is that up until a few years ago, the purchase of companies abroad was almost the exclusive power of developed countries multinational companies, but currently many firms of emerging economies have consolidated as multinational leaders in their sectors, buying companies in highly competitive markets. Some of those cases are: Cemex, the Mexican cement producing company that today is the second cement company in the world, Companhia Vale do Rio Doce (CVRD), the Brazilian mining company and Embraer, the Brazilian manufacturer of aircraft. These multinational companies of a Latin American source are examples of the Multilatinas.

How do Multilatinas emerge?

In an attempt to explain the growing expansion of multinational companies from emerging markets, some of the proposals related to the traditional internationalization theories have lost their relevance. Santiso (2008; p.12) states that now it is not enough to think that access to cheap labor, the control of natural resources or managerial/technical skills acquired during periods of state protection, are sufficient arguments to explain this trend. Their ideas stem from these approaches by stating for example that innovation is a distinctive feature of the main emerging countries including Latin-American multinationals.

Another explanation to the phenomenon of the multilatinas is provided by Cuervo-Cazurra (2008; p.148). This author states that the changes in the institutional environment forced companies to face new scenarios, in which the skill to innovate and grow was crucial to stay current in the markets. The liberalization of the economies that took place at the end of the eighties in most of the Latin-American countries allows the entrance of world renowned foreign companies to respond with improvements in their efficiencies and innovation.

By tradition, the studies on Latin-American or multilatinas multinational focus above all in Mexican and Brazilian companies that sometimes include Argentinean or Chilean companies, and leave aside the rest in the “others” categories. However, it seems that this approximation to the study of multilatinas companies will have to change at least for the Colombian companies. In the most recent study of these organizations made by the America Economía magazine, a notorious growth in sales of the Colombian Multilatinas happened between December 2008 and December 2009; high above the data of Mexican and Brazilian enterprises. This new dynamism amongst Multilatinas that also coincides with a global crisis presents interesting questions on the strategy of Colombian multinationals and the threat this could represent for the Mexican and Brazilian consolidated enterprises.

In the first place, it is possible to analyze the multinationalization movement of several Colombian companies to better understand their positioning in international markets due to the recent Cuervo-Cazurra (2008) hypothesis, that states that multilatina companies (Colombian, Mexican or Brazilian) have some advantages when they decide to embark on even less developed institutional environments (Africa, for example).

The importance of the institutional environment for the companies lies in that it is a given scenario, the managers develop the necessary skills to manage the institutional world contingencies that surround them, they generate assumptions and attitudes that influence the way firms establish relationships with their environment (Cuervo-Cazurra & Genc, 2008; p. 961). In a multinationalization process, the comparison between the local institutional environment and the institutional environment of the country where it takes its investments, may give the firm “signals” of the degree of easiness / difficulty it will face during the process and in the subsequent development of its entrepreneurial activities in the host country.

In accordance with this statement, one can expect that when foreign investments are made, a firm tries to enter those countries where institutional conditions are similar or lower than those they usually face in their country of origin. This would allow companies to benefit from the experience in managing difficult institutional conducts and would positively impact their competitive advantage abroad. Below we shall assess this hypothesis to see if it reflects the behavior of Colombian companies and if it explains the spectacular growth in sales of Colombian multilatinas which is way higher than the figures reported by Mexican and Brazilian companies. In addition, we shall present some proposals on the internationalization strategy of multilatinas in general.

The Empirical Study

One of the difficulties in studying a new phenomenon is the lack of data on the object of interest. This work is no exception, and therefore the first step in the research was the construction of a data base of companies that made direct foreign investments (DFI) from Colombia in any place in the world. Information was searched in the specialized press on Colombian companies that had made direct investments abroad in the period 2000-2008.

Information was gathered on the year of operation, the sector and the country to which the investment was destined. In addition, it was investigated if a company belonged to a national entrepreneurial group and if it had any experience in international markets (exports, acquisitions, affiliates, etc.). Twenty six companies were identified and 15 beneficiary countries of DFI from Colombia. In the data base of the Superintendencia de Sociedades de Colombia (Colombia’s Superintendence of Corporations) data of current assets and current liabilities was collected and the current ratio of the companies identified was calculated.

Simultaneously, information was collected on the institutional differences between Colombia and the DFI countries of destiny. Databases of the Heritage Foundation were studied to determine the Economic Freedom Ratio (ILE, as per initials in Spanish) of Colombia and the country of destiny in the year in which the investment was made. The same procedure was followed with the World Wide Governance Indicators (WWGI) data of the World Bank, from which he Rule of Law (ROL) indicators were taken.

The table herein below summarizes the relationships found in the variables studied and the decision to make DFI by the Colombian companies between 2000 and 2008 using a logistic regression.

Belonging to an entrepreneurial group, in the international experience of the current ratio are variables that in accordance with the data, do not significantly impact the probability that the Colombian firms included in the study decide to go with DFI to a specific country. Physical distance does have a significant effect on the decision to do DFI and this result supports the approaches of the incremental multinationalization model companies us, for example when making investments in nearby countries benefitting from the knowledge they have or acquiring additional knowledge with more ease, due to the fact that the exchange of information becomes more fluid in view of the existence of common elements such as language or the history of countries; these issues facilitate the mobility of the various key elements to be successful in the multinationalization process, such as factors associated to capital, management technologies and capacities of the human resources in general.

At the same time, we see that the institutional difference between Colombia and the countries of destiny negatively affect the decision of Colombian companies to make DFI. That is, the companies try to establish operations in countries that are not only physically and culturally close, but also institutionally, to benefit from the knowledge on the management of its operations in institutional environments with a similar degree of development. Also, we found that the firms do not take into consideration if the institutional environment in the country of destiny is stronger or weaker than the Colombian, only if there is or not a difference with the institutional environment of Colombia. For the Colombian multilatinas, this result only partially supports the recent idea of Cuervo-Cazurra et al. (2008; p.975) on the potential of multilatina companies in institutionally less developed environments and it has major strategic implications for the internationalization policy of these companies. We find that in general, Colombian companies continue to follow a strategy of multinationalization influenced by the similarity of conditions and the sudden increase in the sales volume of these companies cannot be explained by the hypothesis of search of institutional differences. In summary, it seems that the increase in presence of the Colombian multilatinas is due to their capacity to benefit from factors of similarity and closeness and not so much by the more risky strategies presented by Cuervo-Cazurra et al. (2008). This result is of interest to the Mexican and Brazilian multilatinas that traditionally excelled in the studies of multilatinas in part due to the fact that their internationalization strategies have been different.

Final Thoughts

The partial support to the ideas recently presented based on which the competitive advantage of the multilatinas could be built regarding the capacity to manage an underdeveloped institutional environment deserves a final thought. The first multilatinas, like the Mexicans or Brazilians built success when they conquered markets in institutional environments more competitive developed than theirs. This internationalization strategy was and is difficult to follow by Latin companies that more recently opted for internationalization specially in sectors with little innovation and technological development. In general these companies are from Latin countries that opted for commercial liberalization later and their companies are less experienced in competing with the leading multinational companies in their sectors. What the Colombian case reveals is that the companies that are facing such a situation almost always try to expand not so much in the markets of developed countries that have well organized institutional environments; they rather try to establish operations in the neighboring countries whose development level is similar. Given that several of these “new” multilatinas point to strategies which target market is “the base of the pyramid” or the massive Latin clients, its entrance in other Latin markets has the potential of destabilizing the competitive advantage of local competitors. Consequently, one has to be attentive to a new wave of multilatinas that do not opt to invest in the wealthy countries nor do they want to operate in less developed countries, such as the Africans for example, where it has been argued that there is a true opportunity for multilatinas. The “new” multilatinas look for clients in other Latin countries with similar development. Undoubtedly, companies in the traditional birth countries of multilatinas such as México and Brazil should take note.?

References:

America Economía, (2010) http://rankings.americaeconomia.com/2010/multilatinas/ (página consultada el 10 de julio de 2010)

Santiso, J. (2008). “La emergencia de las multilatinas”. Revista de la CEPAL, 95: 7-30.

Cuervo-Cazurra, A. y Genc, M. (2008). “Transforming disadvantages into advantages: Developing-country MNEs in the least developed countries”. Journal of International Business Studies, 98: 957-959.

By: Antonio Lloret

For companies to maintain a level of competitiveness that allows them to subsist, sustainability must be an integral part of their business strategy. These two aspects -competitiveness and sustainability- are key to success, hence the importance of using natural, economic and social resources efficiently and being able to adapt to consumer demands for sustainable goods and services. But instead of viewing these as limitations, companies should see these as strategic opportunities to create value.

Competitiveness, understood as the efficient allocation of resources (capital, work, technology) and the proper use of natural and social capital, is a prerequisite to the implementation of sustainable actions that enable a company to generate internal and external economic value, while the term “sustainability” presupposes rational use of natural, social and economic resources by companies. Thus, sustainability is about meeting the needs of the present generation without sacrificing the capacity of future generations to meet theirs.

In a strictly corporate sense, sustainability means the company incorporates environmental and social considerations into its commercial operations, strategic planning and frequent interactions with agents of interest. Sustainable practices, however, are the approaches, technologies and strategies the company implements to ensure resources are put to more efficient use, reduce waste and control environmental risks. Such practices can also include the design and manufacture of ecological products, reducing the environmental impact of the supply chain and working with the local community to minimize the environmental consequences of the company’s operations – all while creating economic value.

But how can a company achieve these goals? At what point can we say a company is sustainable and competitive at the same time? What specific actions can it take? A good starting point is to understand how a company creates value and what the benefits of sustainable actions are. According to the competitive advantage model (Porter, 1985), a company that proactively seeks to improve its industry position can create a competitive advantage by employing a differentiation, focus or low-cost strategy.

A differentiation strategy is one where the company seeks to offer a unique product for which the consumer is willing to pay a premium or one where the consumer obtains an added benefit, not necessarily monetary, that makes him or her prefer that company’s products.

A low-cost approach employs aggressive price strategies designed to shore up profits by selling at average industry prices or below the industry average to gain market share.

Finally, a company that opts for a focus strategy concentrates on a narrow market segment and will use either a cost leadership strategy or a differentiation strategy or a combination of both to get ahead in its focus market.

These competitive advantage strategies can be linked to the three pillars of sustainability – economic, environmental and social-, which, rather than being mutually exclusive, are complementary. Figure 1 is commonly used to illustrate the concept of sustainability and its components. At point “S”, where these three pillars intersect, it is possible to speak of sustainability. In the case of companies, this means their strategies are aligned with all three components to a degree that allows them to honor their social and environmental commitments, while still creating economic value.

 Figure 1. Sustainability Diagram. Source: Adams (2006).

From a sustainability perspective, the strategic actions a company can take to differentiate itself are mainly associated with its reputation and brands; its capacity to innovate and adapt to the changing preferences of today’s consumer to produce sustainable product designs that have a lower environmental impact; and willingness on the part of consumers to pay more for goods with sustainable attributes. On the cost strategy side we find more efficient production processes, greater employee productivity, a reduction in the cost of capital as a consequence of fewer run-ins with environmental regulators and innovation that puts cleaner, more efficient technology at the company’s disposal.

Table 1 lists some sustainable actions liked to the aforementioned generic strategies and their implications.

Table 1: Sustainable Actions Adapted to Generic Competitive Advantage Strategies. Adaptation of the Blackburn Model (2007).

Clearly some of these value-adding actions, such as maintaining a good reputation and reducing risks and contingencies, are actions the company would carry out anyway during the course of its daily operations and cannot necessarily be attributed to sustainable actions.

We could argue that if the company has already taken actions such as these, its sustainability or competitiveness is not up for debate and as such, it should have no difficulty communicating the sustainable actions it takes internally and externally, in light of dynamic market conditions, current regulations, the demands of agents of interest and increasing consumer preference for sustainable goods and services.

To understand how a company’s actions can be linked to sustainability with a view to maintaining competitiveness, we took it upon ourselves to compile a list of the best business practices implemented by some of the world’s leading companies, broken down by sector and categorized according to the economic, environmental and social components of sustainability. In Mexico, these include companies like Nissan de México, Bimbo, FEMSA, Grupo Modelo, Cemex, Casas Geo, Met-Mex Peñoles and Petróleos Mexicanos, all of which take specific sustainable actions.

Conclusions

The proper alignment of a company’s strategy with the components of sustainability stems from a vision in which it is possible to link competitiveness with sustainability. In fact, strictly speaking, we shouldn’t see one as separate from the other, since a company’s survival depends largely on long-term sustainable actions that take into account economic, environmental and social factors. ?

References

Adams, W.M. (2006), “The Future of Sustainability: Re-thinking Environment and Development in the Twenty-First Century,” Report of the IUCN Renowned Thinkers Meeting, 29-31 January, 2006.

Blackburn, W. R. (2007), The Sustainability Handbook. London: Earthscan.

Lloret, A. (2009) Competitividad y Sustentabilidad: Las dos caras de una moneda que genera valor. Mexico: Dirección Estratégica, August 2009.

Porter, M. E. (1985), Competitive Advantage, New York, The Free Press, pp. 11-15.