Drucker on strategy

Drucker on strategy



Drucker on strategy

Definition of Strategy

1.1       Drucker on strategy

1.1.1    Drucker defined strategy as “a pattern of activities that seek to achieve the objectives of the organization and adapt its scope, resources and operations to environmental changes in the long term.”
1.1.2    It contains several elements:
(a)        A strategy consists of organized activities.
(b)        The purpose of these activities (the strategy) is to achieve an objective.
(c)        Strategy is long-term. Formal strategic planning by large companies, for example, might cover five years or ten years into the future, and for some companies even longer.
(d)        The strategic choices that an enterprise makes are strongly influenced by the environment in which the enterprise exists.
(e)        The environment is continually changing, which means that strategies cannot be rigid and unchanging.
(f)        Strategies involve an enterprise in doing different things with different resources over time, as it is forced to adapt to changes in its environment.
1.1.3    A strategic five-year plan for a company will therefore consider questions such as:
(a)        Where are we now?
(b)        Where do we want to be in five years’ time?
(c)        How do we get from where we are now to where we want to be?
(d)        How large will the company be?
(e)        What will it be doing?
(f)        Where will it be operating?
(g)        How many employees will it need and what skills will they need?
(h)        What technology should be used?

1.2       Johnson, Scholes and Whittington on strategy

1.2.1    They have defined strategy as “the direction and scope of an organization over the long term, which achieves advantage in a changing environment through its configuration of resources and competencies with the aim of fulfilling stakeholder expectations.”
1.2.2    This definition has some similarities to the definition by Drucker, but it contains two other aspects of strategic management:
(a)        An enterprise should use its resources and its skills and abilities to achieve a competitive advantage in its business activities. Competitive advantage is achieved by doing something better and more successfully than any competitors can do.
(b)        It is often assumed that the main objective of a company should be to maximize the wealth of its shareholders. Johnson, Scholes and Whittington state that the objective of an entity should be to fulfill stakeholder expectations.
1.2.3    Johnson, Scholes and Whittington identified the range or scope of strategic decisions as follows;
(a)        Deciding the scope of the entity’s activities. What businesses should we be in?
(b)        Relating the activities of the entity to the environment in which it operates.
(c)        Ensuring that the entity has the resource capacity to operate in its selected areas of activity. This means making sure that the entity has enough employees with the right skills, access to sufficient raw materials and other supplies, enough equipment, suitable IT systems, and so on.
(d)        Allocating resources to the different business activities.
(e)        Providing a high-level (strategic) framework for more detailed decision-making at an operational level.
(f)        Reflecting the values and expectations of the individuals in positions of power within the entity.
(g)        Deciding the long-term direction that the entity should take.
(h)        In many cases, implementing change within the entity so that it adapts successfully to its changing environment.


Example 1


A company that extracts and supplies oil and natural gas is considering its future business direction over the next 10 years. It is aware that these resources are in limited supply, and that there is growing public and political concern about the environment.

The company’s board of directors might agree on the following broad strategy.

  • The company will continue to extract oil and natural gas, but it will also invest heavily in production of energy from renewable energy sources, such as wind and sea.
  • The move into energy from renewable sources recognises the probability that public and political pressure will grow for restrictions on the use of nonrenewable energy sources and for protection of the global environment.
  • Change is therefore essential for long-term survival.
  • The strategic plan should also provide for the resources required to achieve the company’s goals. Important resources for the chosen plan will include exploration rights, access to pipelines and other methods of transporting energy to users, and expertise in wind and wave power technology.
  • A decision must be made about how many resources (including money) should be invested in each business activity.
  • This will depend partly on the strategic vision of the board of directors, and the direction they think the company should be taking. What proportion if its total energy sources in ten years time will come from wind and wave power, and to what extent will the company still be relying on oil and natural gas?
  • The strategic plan also reflects the values of the board of directors. In this example, the company has not included nuclear power in its strategic plan.

1.2.5    If you look at this definition of alongside:

2.      Levels of Strategy

2.1       Introduction

2.1.1    It is usual to analyse strategy into a hierarchy of different levels. Johnson, Scholes and Whittington identify three levels of strategy:
(a)        corporate strategy,
(b)        business strategy, and
(c)        functional strategy.

2.2       Corporate strategy

2.2.1    Corporate strategy is concerned with deciding which business or businesses an entity should be in, and setting targets for the achievement of the entity’s overall objectives.

2.3       Business strategy

2.3.1    Business strategy, also called competitive strategy, is concerned with how each business activity within the entity contributes towards the achievement of the corporate strategy.
2.3.2    A large group of companies might consist of many subsidiary companies. Subsidiaries might be organized into strategic business units (SBUs) or operational divisions.
2.3.3    A SBU may be defined as “a division within a large organization that has a significant degree of autonomy, typically being responsible for developing and marketing its own products and services.” Each SBU is a different business, and should have its own business strategy.
2.3.4    In a commercial entity, business strategy focuses on markets and is concerned with how to compete successfully in the chosen markets with the chosen products.

2.4       Functional strategy

2.4.1    Functional strategy is also called operational strategy. These decisions include product pricing, investment in plant, personnel policy, and so on. It is important that these strategies link to the strategic business unit strategies and through those strategies, in turn, to the corporate strategy, as the successful implementation of these is necessary for the fulfillment of both corporate and business objectives.
2.4.2    Functional strategies are the detailed strategies of departments such as finance, sales, IT marketing, production and human resources management. Functional strategies must support the overall corporate strategy and business strategies of an organization. For example,
(a)        IT should support a marketing strategy that leads to a financial advantage for the firm.
(b)        Human resources need to ensure that new production staff recruited have the right skills.
2.4.3    In the development of functional strategies the communication process is both top down and bottom up. This ensures that people at all levels are aware of the plan and have a stake in implementing it.
2.4.4    Much operational strategy is created by individual business functions and delivered by them.

Functional areas



Devising products and services, pricing, promoting and distributing them, in order to satisfy customer needs at a profit. Marketing and corporate strategies are interrelated.


Factory location, manufacturing techniques, outsourcing and so on.


Ensuring that the firm has enough financial resources to fund its other strategies by identifying sources of finance and using them effectively.

Human resources

Secure personnel of the right skills in the right quantity at the right time, and to ensure that they have the right skills and values to promote the firm's overall goals.

Information systems

A firm's information systems are becoming increasingly important, as an item of expenditure, as administrative support and as a tool for competitive strength. Not all information technology applications are strategic, and the strategic value of IT will vary from case to case.


New products and techniques.


Example 2


Boruc Ltd is a company selling widgets. The finance director says: 'We plan to issue more shares to raise money for new plant capacity – we don't want loan finance – which will enable us to compete better in the vital and growing widget markets of Latin America. After we've promised the shareholders 5% profit growth this year, and trading is tough.'

What are the corporate, business and functional strategies in the above statement?

  • The corporate objective is profit growth.
  • The corporate strategy is the decision that entering new markets, rather than producing new products will achieve this.
  • The business strategy suggests that those markets include Latin America.
  • The operational or functional strategy involves the decision to invest in new plant (the production function), which is to be financed by shares rather than loans (the finance function).


Example 3


Manufacturing strategy is a functional strategy for a manufacturing company.

The objectives of manufacturing strategy are stated in terms of:

  • Cost,
  • Quality,
  • Delivery (speed or reliability of delivery), and
  • Flexibility (the ability to switch between different products or production methods).

There is some trade-off between these objectives. For example, the cost objective might be to minimize costs, but this objective might be affected by a requirement to provide products of a minimum quality. The trade-off between cost and quality should be recognized in the objectives for manufacturing strategy.

To formulate a manufacturing strategy, decisions have to be taken for five aspects of manufacturing operations:

  • Decisions about plant and equipment
  • Production planning and control
  • Labour and staffing
  • Production design and engineering
  • The organization and management of the manufacturing function

Manufacturing strategy may therefore be defined as the set of decisions that determine the capability of the manufacturing system and specify how the system will operate to meet a set of manufacturing objectives that are consistent with the overall business objectives.

3.       Elements of Strategic Management

3.1       Defining elements of strategic management

3.1.1    Strategic management is a board-ranging subject. To study strategic management, it is useful to have a logical structure or model as a basis for analysis. Johnson, Scholes and Whittington state that strategic management consists of three elements:
(a)        Strategic position
(b)        Strategic choices
(c)        Strategic into action

3.2       Strategic position

3.2.1    Strategic position means making an analysis or assessment of the strategic position of the entity. The senior management of a company, for example, needs to understand the position of the company in its markets:
(a)        in what ways does the company perform better than its competitors?
(b)        in what ways are competitors more successful?
In other words, how do rival companies compare with each other in terms of competitive advantage?
3.2.2    Management also need to understand the factors in the business environment that affect their company, and how the company will be affected by changes that are likely to happen in the environment in the future. For example:
(a)        Could the company be affected by changes in technology, or changes in the state of the economy, or new laws?
(b)        Will there be changes in what customers want to buy, because of changes in society or life styles? If so, how might this affect what the company produces and sells?
3.2.3    Management have to make a decision about what their company should be doing, and what the company is trying to achieve. Objectives need to be realistic, so management need to understand where the company stands now in its markets, and where it should be trying to get to a few years in the future.
3.2.4    All these factors must be considered in the analysis of strategic position. Johnson, Scholes and Whittington suggest that there are three aspects to strategic position:
(a)        Environment – an analysis of the business environment involves an analysis of the threats and opportunities that seem to exist, and an assessment of their significance.
(b)        Strategic capability of the entity – the management of an entity should also make an assessment of the strategic capability of the entity. This means reaching an understanding of what the entity is capable of achieving. An assessment of strategic capability involves an analysis of the strengths and weaknesses of the entity.
(c)        Expectations and purposes – an analysis of strategic position also requires management to make decisions about the purpose of the entity and what it is trying to achieve.

3.3       Strategic choice

3.3.1    Strategic choice follows strategic analysis and is based upon the following three elements.
(a)        Generation of strategic options, e.g. growth, acquisition, diversification or concentration.
(b)        Evaluation of the options to assess their relative merits and feasibility.
(c)        Selection of the strategy or option that the organization will pursue.
3.3.2    Strategic choices need to be made of every level, though obviously choices made at any particular level can influence choices at other levels.
(a)        Corporate level – Decisions have to be made about what the entity should be doing. For companies, this means making decisions about which products or services it should be selling, and what markets it should be selling them in.
(b)        Business level – For companies, a major strategic choice is between a strategy of cost leadership and a strategy of differentiation.
(c)        Operational level – For example, whether an organization should outsource components or make them itself.

3.4       Strategy into action/implementation

3.4.1    These means implementing the chosen strategies. There are three aspects to strategy implementation:
(a)        Organising – An organization structure must be established that will help the entity to implement its strategies effectively in order to achieve its strategic targets. Organising means putting into place a management structure and delegating authority. Individuals should be made responsible and accountable for different aspects of the chosen strategies. Decision-making processes must be established.

For example, should the organization be split into European, US and Asian divisions? How autonomous should divisions be?
(b)        Enabling – It means enabling the entity to achieve success through the effective use of its resources.

For example, appropriate human resources and fixed assets need to be acquired.
(c)        Managing change – Most strategic planning and implementation will involve change, so managing change, in particular employees’ fears and resistance, is crucial.


Example 4


A full-price airline is considering setting up a no-frills, low-fare subsidiary. The strategic planning process would include the following elements.

Strategic position – competitor action, oil price forecasts, passenger volume forecasts, availability of cheap landing rights, public concern for environmental damage, effect on the main brand.

Strategic choices – which routes to launch? Set up a service from scratch or buy an existing cheap airline? Which planes to use, what on-board services to offer?

Strategic implementation – how autonomous should the new airline be? How to recruit and train staff? Implementation of the internet booking system. Acquisition of aircraft. Obtaining landing slots.

4.       A Rational Model

4.1.1    The ‘rational planning model’ is a strategic planning framework that:
(a)        sees the purpose of strategy as the achievement of clearly-established objectives
(b)        considers strategic planning to be a formal process, led by senior management
(c)        sees strategic planning as a multi-layered process, with corporate strategy, business strategy and functional strategies.
4.1.2    The rational planning model consists of several elements, and the planning process goes through each of these elements in the following sequence.







Vision and Mission


Vision represents the overall aspiration for the future.
Mission is concerned with the overriding purpose and core values of a company based on the values and expectations of its stakeholders.





The entity should also have clear objectives, such as the examination of shareholder wealth. Within the planning processes, targets can be established for the achievement of objectives within the planning period.



Environmental analysis


There are opportunities and threats within the business environment of the entity. These must be identified, and suitable strategic responses should be developed to deal with anticipated change and also unexpected change.



Position audit


The planning process should include an assessment of the resources, systems, management, procedures and organisation of the entity. Strengths and weaknesses should be identified. Strategies should seek to make full use of any strengths within the entity and to reduce or remove significant weaknesses.



Corporate appraisal


The mission statement and objectives of the entity, together with the results from the environmental analysis and position audit, should lead on to a formal appraisal of strategy and what the entity might be capable of achieving.



Strategic choice


Different strategic alternatives should be identified and evaluated, and preferred strategies should be selected that will enable the entity to achieve its stated objectives.



Strategic implementation


The selected strategies should then be implemented.



Strategic control


The implementation of strategies should be monitored. Changes and adjustments should be made where these become necessary.
This rational planning process is repeated at regular intervals (typically annually).


Summary of Strategic Management

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Drucker on strategy


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