The Development of Strategy in Small and Medium Organizations

Strategy formation may be one of the most important aspects of managing a company. Without a proper strategy the ship bounces around the sea in hopes of finding fruitful land. How that strategy is formed is often a difficult question to answer. Research by Pop and Borza, (2013) helps to determine how strategy works within small and medium organizations (SME). This helps further solidify the concept that strategy is based   upon the environment and resources available that help to make companies more competitive.

In developing strategic decisions it is important for managers to interpret the signals coming from the internal and external environment appropriately. Doing so creates an opportunity to formulate strategies not only for their daily operations but also for long term corporate interests. It is this strategy that will act as a guide to regeneration and renewal that leads to corporate achievement. 

Successful strategies are developed, implemented and then re-evaluated. Companies that are static and unable to change are the ones that will eventually suffer economic decline.  Renewing products, procedures, marketing campaigns, distribution methods, financial resources, and human capital components are just some of the overall process that should be revisited and improved on a continual basis. 

To help determine how strategy is evaluated, formulated and implemented at Romanian SMEs the researchers conducted a number of case studies. They utilized five companies and formulated their approaches into concepts such as the definition of strategy, implementation, development, references, evaluation, and information in the strategic process.  The study helps highlight the process of strategic development as well as the thought processes that are applied. 

Understanding the environment and moving through a systematic evaluation of strengths and weaknesses was beneficial. The process of environmental and competitive understanding was seen as “keeping an eye on the market”. The decision makers used exact data to make their strategies but maintained a level of flexibility to mitigate risk. They adjusted their strategy when the market called for it. 

When companies were developing the mission and the management team’s personal values were extremely important in developing appropriate statements and policies. Missions and processes have changed overtime making strategy a fluid endeavor. There wasn’t a specific point at which the companies made changes but they did so based upon their understanding of their environment. 

When change was needed it was typically the manager or the executive that made the decision. They focused on changing processes in order to adjust the internal workings of the organization to the newly adopted strategies. At times these changes created a positive or negative chain reaction throughout an organization. When these changes were dysfunctional they changed the strategy or processes again. 

Since many new companies within their market went bankrupt the managers tried to maintain an entrepreneurial stance and use strategy to ensure they are meeting their longer term objectives. This included trying new products and services when they create an opportunity. Yet despite their interest, the new opportunities needed to fit within their strategic needs to be considered relevant. 

Each company used their own specific approaches to formulating a strategy. The report doesn’t go into these concepts in depth but it is possible to see some trends that include 1.) understanding environmental needs, 2.) understanding internal resources, 3.) developing the strategy, 4.) changing processes to match the strategy, 5.) being open to new opportunities within the strategy and, 6.) changing the strategy when the market changes.  As such, strategy is a constant fluid evaluation of one’s internal and environmental factors. It is a process of seeing the trends and meeting those trends in ways that maximize financial growth and organizational sustainability. 

Pop, Z. & Borza, A. (2013). Summarizing the crucial steps of the strategic management process through the eyes of Romanian managers of SMES. Review of Economic Studies & Research Virgil Madgearu, 6 (1).

Managing the Complex Web of Global Subsidiaries

Global firms often work with a number or partners in order to move their products into multiple markets. Global firms use subsidiaries to help them promote and distribute their products. Research by Homburg, et. al. (2012) seeks to categorize the varying types of firms available on the market to help multinational organizations do a better job at managing across countries, cultures, and markets.  Their research finds five different types of firms that have their own benefits and detractors.

Global firms attempt to maintain competitiveness by using subsidiaries to create effective international reach. These firms are more aligned with regional and local differences in market characteristics. Problems result when global marketing loses a level of efficiency and effectiveness in the development of methods of managing these multiple distribution fingers. 

Drawing from configuration theory of organizations it is possible to use subsidiary archetypes to understand the varying nature of firms.  The majority of marketing researchers have advocated for additional customization but this can create difficulties in global management and in turn impact sales.  Global marketing requires a different way of viewing subsidiary management. 

It is possible that moving beyond subsidiary characteristics to find value-added functions helps to create efficient archetypes. These archetypes enhance the effectiveness of decision-makers to make strategic considerations due to their ability to conceptualize complex information. Knowing how each type of firm can help in the branding and distribution of products is helpful in developing efficiencies.

The research used three steps to categorize firms:

-Conceptual Domains: Value-added scope, influence, and competence are common.

-Core Domain Constructions: Structure, subsidiary size, value-added scope, strategy, strategic influence, strategic competence, strategic importance, etc…

-Cluster Descriptive Variables: Performance, environment, communication, coordination, etc…

In this study they used surveys and random samples of multinational companies across various service sectors. They were able to categorize a variety of different market clusters to help define each type of company. Knowing cluster characteristics should encourage managers to think more strategically about which types of firms they are using and why they are using them for global and regional marketing. They are as follows:

Saturated Administrators:  These are the larger firms that have done well in the beginning of the globalization process. They are moderately effective but maintain name brand and strong purchasing power. They have difficulty effectively making their way into local markets and are relied on by a majority of companies seeking a global presence. 

Universal Champs: These are high performing firms that focus on certain industries in which they can maximize profits. They are seen as effective and seem to do well with high value added products/services.  Due to the nature of the customers they seek wealthier nations where the economic system is stable and maintain purchasing power. 

Important Dependents:  They are strategically important but small. They exist in a number of Asian countries and are relatively passive but have high value-added services. They provide local access to markets other firms may have a hard time reaching. 

Promising Aspirants:  These are small firms that are self-sufficient and work out of an entrepreneurial approach. They are beneficial in terms of their ability to work in fast growing markets that require cognitive flexibility. They offer generally low value-added services but work well in risky markets.

Flexible Implementers:  Small and young clusters. Very few value added activities with low influence and low competence. They move products and services along to local markets with high standardization.

Homburg, C., et.al. (2012) Ensuring international competitiveness: a configurative approach to foreign marketing subsidiaries. Journal of the Academy of Marketing Science, 40 (2).

The Strategy of Level-K Decisions-Outside Bounded Rationality

Art Dr. Murad Abel

Reviewing a number of game theory results the authors Crawford, Costa-Gomes, and Iriberri (2013) discuss why people often deviate systematically from equilibrium in game theory. By understanding why some choices appear irrational (level-k) it is possible to better determine under what circumstances such behavior is prevalent. Their paper reviews and analyzes a large swath of game theory results to make some conclusions. 

Strategic thinking is a natural part of everyone’s life and influences everything from school choice to business decisions. In game theory each person seeks to maximize their payoffs based upon predicting the choices of others by assuming the rationality of the other players. This is called bounded rationality as all players work under the same assumptions. 

There is also something called level-k responses. It is an assumption that all players actions will improve in an attempt to take the dominant stance that eventually leads to equilibrium. A level-k response would indicate that a person is making decisions outside of shared understandings of “rational” choice. This indicates the person’s cognitive model and assumptions of the game may be different than other players. 

Because there is a lack of information when a game starts, some players recognize this ambiguity and avoid dominant positions that often fit within the equilibrium model. Each person responds to the game with a personality type that impacts the types of decisions they make. It is their personal beliefs that help them develop a strategy for dealing with the components of a game and choosing certain patterns. 

Equilibrium is seen as rationality with a common belief among players. The more evidence a person obtains from the game the more accurate and rational their decisions. Players often make larger and wilder maneuvers in the beginning of a game and then move to define choices toward the later part of the game as they begin to understand the rules. 

Using a concept called level-k models it is possible to see how certain behaviors move away from equilibrium choices and under what circumstances such behavior can be expected. Many poor decisions may be made from a lack of time, information, or cognitive deficiencies.  Yet it is possible to find that level-k decision-making may have some advantages in resolving games and conflict. 

In a level–k decision it is believed that the player is making decisions regardless of the other players within the game. Level-1 players have higher cognitive hierarchies than Level-0 players and believe others are playing at a lower level. So and so forth up the chain of complexity. Higher level thinkers (i.e. L3 players) may come to the conclusion that the game takes into account many different levels of strategic thinkers and their actions are based upon the aspects of their complex environment.

Expanding on the concepts within the paper it is important to make a distinction between irrational behavior and perceived irrational behavior. In small games with clearly defined rules the rational choices are obvious. In larger games without restrictions, what is seen by one as irrational choice may yet be the most rational choice. These choices may depend on objective, environmental testing behavior, countering limited thinking of other players, or even drawing in the behavior of other players. 

Strategic thinking is important as organizations seek to move from local to global marketplaces where the environment has many more options and choices. The perception of rationality is based upon the abilities of those who are doing the judging and their ability to understand the environment or the behavior.  As cognitive complexity rises so does the ability of individuals to make choices where the strategic purpose of the decisions are not immediately apparent to lower level thinkers. This could be an advantage in and of itself.

Crawford, V., et. al. (2013) Structural models of nonequilibrium strategic thinking: theory, evidence and applications. Journal of Economic Literature, 51 (1).