Organizational strategy is the process of determining a company’s long-term direction and making decisions on allocating resources to pursue this direction. It is a fundamental aspect of running a business and plays a critical role in determining a company’s success. Several theories of organizational strategy have been developed and applied in industries. These theories provide a roadmap for companies to navigate the complex and ever-changing business environment.
In this article, we will discuss the top theories of organizational strategy and their applications in modern businesses. These theories have been proven effective in helping businesses understand their internal and external environments, identify areas of strength and weakness, and develop effective strategies to achieve their goals. By understanding and applying these theories, businesses can make better strategic decisions and ultimately achieve greater success.
What is organizational strategy?
Organizational theory studies the design, structure, and behavior of organizations and their management. It is an interdisciplinary field that draws on concepts and insights from sociology, psychology, economics, and management. Organizational theory is concerned with understanding how organizations function and how they can be structured and managed to achieve their goals. In particular, organizational theory is a useful field of academic study that can be applied to business practices to improve results and increase profits.
The origins of organizational theory can be traced to the late 19th century and the work of Henri Fayol, considered the father of modern management. Fayol developed the concept of management functions, which include planning, organizing, commanding, coordinating, and controlling. These functions are still widely used in modern organizations today. In the early 20th century, Mary Parker Follett and Chester Barnard contributed to the development of organizational theory by introducing the concepts of power and authority in organizations.
In the 1960s and 1970s, organizational theory continued to evolve with the emergence of the systems perspective, which emphasized the interdependence of the organization’s parts and the importance of understanding the organization as a whole. The systems perspective was later complemented by the contingency perspective, which emphasized the importance of understanding the external environment and the need for organizations to adapt to changing circumstances.
Today, organizational theory continues to evolve and is a rich and diverse field. It is commonly taught in business schools to complement other topics such as marketing and finance. In fact, there are many online degrees, like a uk online mba at Aston University, that prepare students to enter the business world with a strong knowledge of organizational strategy. Keep reading to learn about the top organizational strategies employed by businesses today.
The resource-based view (RBV)
The RBV theory posits that a company’s resources and capabilities are the primary determinants of its competitiveness and success. According to this theory, a company’s resources and capabilities, such as its brand, patents, and distribution networks, can provide a sustainable competitive advantage. Applying the RBV theory in business, companies focus on identifying and developing unique resources and capabilities that are valuable, rare, inimitable, and non-substitutable. This enables the company to create a barrier to entry for competitors and maintain a competitive advantage in the market.
One of the key advantages of the RBV theory is that it allows companies to focus on their internal resources and capabilities rather than external factors, such as the industry structure and economic conditions. By focusing on their unique resources and capabilities, companies can create a sustainable competitive advantage and achieve long-term success.
Another advantage of the RBV theory is that it provides a framework for identifying and developing new resources and capabilities that give companies a competitive edge. This helps companies adapt to changing market conditions and stay ahead of their competitors. The RBV theory also helps companies avoid the trap of over-investing in resources and capabilities that are not valuable, rare, inimitable, and non-substitutable. This helps companies avoid wasting resources and improve their overall efficiency.
Porter’s Five Forces theory
Porter’s Five Forces theory is a framework for industry analysis and business strategy development. It identifies five forces that determine the competitive intensity and, therefore, the attractiveness of a market. These five forces are the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitute products or services, and the intensity of competitive rivalry. By analyzing these forces, companies gain a better understanding of their industry and how to compete effectively within it.
The threat of new entrants is the potential for new competitors to enter the market. The higher the threat of new entrants, the less attractive the market is for existing companies. This is because new entrants can decrease prices, increase innovation, and take a market share from existing companies. The bargaining power of suppliers is the ability of suppliers to raise prices or reduce the quality of their products and services. If suppliers have increased bargaining power, companies will have to pay more for their inputs and may have less control over their quality.
The bargaining power of buyers is the ability of buyers to negotiate lower prices or better terms from companies. If buyers have high bargaining power, companies will have to lower their prices and may have less control over the terms of the sale. The threat of substitute products or services is the potential for customers to switch to alternative products or services. The more substitutes available, the less attractive the market is for existing companies.
Finally, the intensity of competitive rivalry is the level of competition within the market. The higher the intensity of competitive rivalry, the less attractive the market is for existing companies. By analyzing these forces, companies can develop strategies to mitigate or leverage them to gain a competitive advantage.
The SWOT analysis
SWOT analysis is a strategic planning tool that helps businesses identify their strengths, weaknesses, opportunities, and threats. It is a simple but powerful framework that can be used to evaluate a company’s internal and external environment. The analysis is usually presented in a matrix format, with strengths and weaknesses being internal factors and opportunities and threats being external factors.
When applying the SWOT analysis, companies begin by identifying their strengths, which are the unique attributes or capabilities that give them an advantage over their competitors. This includes having a strong brand, a loyal customer base, and proprietary technology. Next, they would identify their weaknesses, which are the areas where they are vulnerable or where they lack the resources or capabilities to compete effectively. This could include a lack of diversification, a weak financial position, or a lack of skilled employees.
Once the internal factors have been identified, the company would then turn its attention to the external environment and identify opportunities and threats. Opportunities are external factors that the company can take advantage of to improve its performance, such as a new market or a change in consumer behavior. Threats, on the other hand, are external factors that have the potential to harm the company, such as increased competition or a new regulation.
By identifying these opportunities and threats, companies can develop strategies to capitalize on opportunities and mitigate threats. It is important to note that SWOT analysis is not a one-time exercise; it should be regularly reviewed and updated to ensure that the company stays aligned with its strategy and goals as the business environment is constantly changing.
The balanced scorecard theory
The balanced scorecard (BSC) theory was developed by Robert Kaplan and David Norton in the early 1990s as a performance management tool. It is a framework that helps organizations measure their performance in four areas: financial, customer, internal process, and learning and growth. By measuring performance in these four areas, the BSC provides a comprehensive view of a company’s performance and helps identify areas where improvements are needed.
The BSC is a powerful tool that can be used to align an organization’s strategy with its goals and objectives. By linking performance measures to specific goals and objectives, the BSC helps to ensure that everyone in the organization is working toward the same targets.
Additionally, the BSC provides a means of communication between different levels of management, enabling everyone in the organization to have a better understanding of the company’s overall performance and strategy. The BSC also allows managers to track performance over time and make necessary adjustments to their strategy. By regularly monitoring performance, managers can identify areas where their strategy is not working and make adjustments to improve results.
The McKinsey 7S Framework
The McKinsey 7S Framework is a management model that describes how seven elements of an organization are interdependent and need to be aligned for successful strategy implementation. The seven elements are strategy, structure, systems, shared values, style, staff, and skills.
The first element, strategy, refers to the long-term direction and plan of the organization. The second element, structure, refers to the organization’s design, such as its hierarchy and reporting lines. The third element, systems, refers to the processes and procedures that the organization uses to accomplish its goals. The fourth element, shared values, refers to the beliefs and culture that shape the organization’s behavior. Style refers to the leadership approach of the organization. Staff refers to the people who work for the organization, including their skills and capabilities. The seventh element, skills, refers to the specialized capabilities and expertise of the organization.
By applying the McKinsey 7S Framework in business, companies ensure that all seven elements are aligned and working together to achieve the company’s goals. This involves assessing each element and determining if it aligns with the company’s strategy and goals. If there is a misalignment, the company makes changes to align the elements to create a cohesive and effective organizational strategy that is more likely to be successful. It is important to note that the 7S framework is not a one-time exercise and should be regularly reviewed and updated to ensure that the company stays aligned with its strategy and goals.
In conclusion, a variety of theories of organizational strategy have been developed and applied in businesses. The resource-based view (RBV), Porter’s Five Forces, SWOT analysis, the balanced scorecard, and the McKinsey 7S Framework are some of the most widely used and effective theories. Each theory provides a unique perspective on how a company can determine its long-term direction and allocate resources to achieve success.
By applying these theories, businesses can gain a better understanding of their internal and external environments, identify areas of strength and weakness, and develop effective strategies to achieve their goals. Understanding and applying these theories helps companies make better strategic decisions and ultimately achieve greater success.
It is worth noting that no single theory can provide all the answers for an organization, and it is important to combine and adapt different theories to suit the specific needs of the company. Additionally, as the world is constantly changing, new organizational theories are emerging to address the challenges that organizations face. For example, with the rise of digitalization and automation, theories such as digital strategy and platform strategy are becoming increasingly relevant.
Moreover, new organizational strategies have begun to emerge in the post-COVID world ass a result of the dramatic changes to the workplace caused by the pandemic. With fewer people coming to the office and more people working remotely, organizational theories will have to change. In fact, companies will have to dramatically alter how they manage offices if remote work becomes a permanent fixture of the business world. Therefore, organizations need to stay informed and adapt to these changes to stay competitive.