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Strategic Drift

Identify four organisations that, in your view, are in the different phases of strategic drift (see Exhibit 5. 2). Justify your selection.

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Strategic drift, as defined by Gerry Johnson in Exploring Corporate Strategy, is the tendency to develop strategies incrementally on the basis of historical and cultural influences, while failing to keep pace with a changing environment. In such circumstances the strategy of the organization gradually drifts away from the realities of its environment and towards an internally determined view of the world of management.

Strategic drift occurs when a company, especially one that has enjoyed considerable success, responds far too slowly to changes in the external environment and continues with the strategy that once served it very well. There are four phases in strategic drift; incremental change (phase 1), strategic drift (phase 2), flux (phase 3) and transformational change or death (phase 4). Phase 1 is characterized by relatively long periods during which strategies are either unchanged or change incrementally.

This change is generally in keeping with the environment or may have slight variations around a successful theme as the company avoids drifting too far from some past successes. In phase 2 the environment grows at a faster rate than the firm’s strategies. This may occur for several reasons, that is ; while one may be aware that changes are happening, the extent may not be so easily appreciated except in hindsight or as reflected through the financials; it could also be that while the changes are observed they are interpreted in terms of the familiar thus resulting in the wrong conclusion being drawn.

There is also the situation where although the firm may see the environmental drift, it refuses to align as it binds itself to the successful strategies of the past. These strategies become the company’s core around which it revolves and has its competitive advantage. Another contributory factor can also be unwillingness of the firm to alter the current relationships with suppliers, customer base or the internal skills to align with the market. Phase 3 may be a period of flux as management pressured to alter the firm’s strategies in response to downturn in profit does so but not in any clear direction.

Internal rivalry may be high as solutions are sought to determine which strategy to follow. There may also be loss of confidence in the company resulting in lowering share prices. As the situation worsens there are three options in phase 4. The firm can die, be taken over by another organization or simply go through a period of transformational change. Motorola found itself in phase 4 of the strategic drift in the late 90’s as in response to depressed profits it was forced to conduct a series of layoffs, restructures and restrategising before transforming.

According to Sydney Finkelstein article on “Why smart executives fail”, Motorola which was founded in 1928 has had a long tradition of technological innovations. It solidified its reputation as a world leader in this area through innovation with the television, pager, microprocessor, analogue phone among other things. Motorola’s first cellular system began commercial operation in 1983 with them becoming the world top cellular phone supplier shortly thereafter. They claimed 60 per cent of the US mobile market, revenues growing at an average of 27 percent to $27 billion in 1994, while net income surged 58 per cent a year to $1. billion. During this period, although digital mobile technology was introduced, it was not embraced by Motorola even after receiving several signals from the market. The market signals included – direct prodding by their customers requesting that they provide the new technology especially based on the benefits offered; increase in royalty income from digital patent it licensed to Nokia and Erikson and finally the falling market shares and profit. Motorola’s shares dip to 34 percent in the early 1998’s, while Nokia’s share went from 11 per cent to 34 per cent during the same time period.

That same year Motorola laid off 20,000 employees. Motorola was fully poised with the potential to maintaining their position as market leader using digital technology however they chose to rely on internal forecasting models that predicted carriers would be better off with analogue phones rather than digital. Sony whose mission statement was ‘a clever company that would make new high technology products in ingenious ways’ aggressively marketed its hardware entering the big league when it formed a joint venture with CBS Records in 1975 with the launch of the new technology – the Betamax home videocassette recorder.

Within two years a new videocassette recorder (VCR) made by it arch-rival Matsushita using the VHS standard became the product of choice for consumers. This happened as Sony was too busy defending the hardware than marketing and creating customers. Matsushita, on the other hand, aggressively aligned electronics firms to their brand so that when motion picture studios began to release a larger number of their library titles VHS was the format of choice. ‘We didn’t put enough effort into making a family. The other side, coming later, made a family’, founder Akio Morita later stated.

Sony also concluded that the compelling reason for the purchase of hardware is software. Resulting from lessons learnt from competition with arch rival Matsushita, Sony adjusted their strategy. Consequently, convinced that its record library had helped guarantee the success of the Compact Disc, Sony looked to CBS Records to provide the software necessary to ensure the success of its new Digital Audio Tape. In the years that followed Sony acquired expensive movie studios to showcase their impressive arsenal of hardware.

As much attention was not paid to the American management team and the lavish spending spree on renovation production, management, and television ballooned. Overheads increased by 50 per cent to $300 million by 1991, some $60 million greater than other major studios, and its $700 million production budget were nearly twice that of its competitors. The average Sony motion picture cost $40 million versus the industry average of $28 million. In November 1994 Sony announced a $3. 2 billion write-off related to Columbia Pictures which wiped out nearly 25 per cent of Sony’s shareholders’ equity.

It was not until Sony found itself here in phase 3 of the strategic, drift having major decline in shareholder values, that it restructured its management team and strategies. Wang Labs based on strategies created in an attempt to avoid the mistakes of the past found itself in phase 4 of the strategic drift as it filed for bankruptcy in 1992. An Wang, an inventor and innovator, sold several of his creations to companies who used them to make products for commercial uses. Resulting from one such deal with IBM in 1956, Wang’s feeling of being cheated by the computer giant biased his future decisions towards them.

Starting from the late 80’s Wang Labs lost out when the world shifted from using word processors to PC, however they were blinded by their love for the word processors and made major losses as IBM took the PC to the market. Wang could have raise capital by issuing shares however because he felt that he had given up too much of the company in a similar past transaction he refused and instead opted to seek loans According to Paul Golding, prior to 1999 the Jamaican telecommunications sector was dominated by Cable and Wireless Jamaica (C&WJ), which changed its name in 2008 to LIME (Landline Internet Mobile, Entertainment).

In 1988 the company was granted five exclusive licenses each for 25 years, which would be valid until 2013, with options for extensions for a further 25 years. The licenses made C&WJ the sole provider of the island’s domestic and international telephone service and guaranteed an after-tax rate of return of 17. 5% – 20%. C&WJ was quite comfortable with the strategies they employed especially as they were a monopoly in these early years. This resulted in the organization being stuck in phase 1 as they became complacent, relying on the same old strategies as technology boomed globally.

They were “out of touch” with customer demand and the untapped potential of the market. Liberalization of the telecommunications market commenced with the granting of two new carrier licenses for the provision of domestic mobile voice, data, and information services. In April 2001 Digicel launched its mobile telecommunication company in Jamaica. Rates rose from 4 per cent in 2001 (Digicel’s launch year) to close to 100 per cent today – making it one of the most highly penetrated countries in the world and driving a grassroots level ICT development across Jamaica. Of the less than 2. million local population, Digicel Jamaica has 2 million customers, representing a 75% market share. Additionally, scores of small entrepreneurs owe their successes to a reliance on their Digicel phones, especially in areas where there were no previous mobile signals by the competition. On October 27th, Digicel announced its intention to move its Jamaica and Group offices to a brand new facility on the waterfront in downtown Kingston, demonstrating its commitment to spearhead the rejuvenation of this area of the capital city of the first country in which Digicel launched back in 2001.

In April 2001, when Digicel launched its GSM mobile service in Jamaica, the company anticipated reaching the 100,000 customer plateau by the end of its first year in operation. Instead, it hit the 100,000 mark a mere 100 days after launch. Never before in the country’s history of mobile telecommunications had such tremendous growth been seen in a network, as Digicel broke record after record on its way to surpassing its major competitor as the mobile provider with the largest customer base in the island. It took LIME, its major competitor approximately 10 years to reach the 400,000 customer mark.

In comparison, it took Digicel about 13 months to reach the same figure. Digicel’s customer base in 2010 was over 2. 1 million customers in a population of 2. 8 million. Digicel raised the bar where an acceptable level of network coverage was concerned. Jamaicans living in rural parishes finally had a genuine option for mobile communications. With an island-wide network of over 1,000 cellular towers spread across all 14 parishes, Digicel firmly established itself as the mobile provider with the premier network coverage across the country.

Digicel currently appears to be in Phase 2 of the strategic drift as its strategy of providing islandwide service has materialised and it continues to be poised towards supplying any further required hardware. However there is growing concern that Digicel needs to review its customer service as well as its rates. If you really want to understand a company, you need to understand its history and culture. In analyzing an organization one of the most common flaws is to disregard the past in trying to make sense of the present.

Culture is also a major component of history, as is highlighted with Motorola that is known as an engineering-driven company. It is likened in its mindset to an ‘internal think-tank’, focused on the market while customers are secondary. Digicel is also similar in this regards as its main focus appears to be on the hardware and to a lesser extent the customer. Motorola’s had an insular culture where its workforce had a ‘fortress mentality, cut off from reality, in-bred, with tremendous self-confidence, and a lack of concern with the outside world’.

One former CEO stated, ‘every time we stumble significantly it is because we have been so successful in one generation of the technology that we don’t focus on replacing ourselves with the next technology quick enough’ People make sense of new issues in the context of past issues; they are likely to address a problem in much the same way as they dealt with a previous similar one. Moreover, they are likely to search for evidence that supports those inclinations.

So some data will be seen as more important than other data, and some may not be taken on board at all. The important points are: * The interpretation of events and issues in terms of prior experience is inevitable. The idea that managers approach strategic problems and issues entirely dispassionately and objectively is unrealistic. * Such interpretation and bias arise from experience of the past, not least with regard to what is seen to have worked or given rise to problems. So the future is likely to be made sense of in terms of the past.

As with individuals, so also with groups – managers do not operate purely as individuals; they work and interact with others, and at the collective level, too, there are reasons to expect experience to count. This is reflected in the taken-for-granted assumptions and ingrained organizational routines that are collectively referred to as ‘organizational culture’. Such taken-for-granted assumptions and routines can be especially important as an influence on the development of organizational strategy.

For a group or organization to operate effectively, there has to be a generally accepted set of assumptions which in effect, represents the collective experience without which people would have to ‘reinvent their world’ for different circumstances. As with individual experience, this shared understanding allows the collective experience gathered over years to be brought to bear to make sense of a given situation, to inform a likely course of action, and to gauge the likelihood of the latter’s success. Such collective thinking typically stretches even beyond the organization.

Managers may assume that they can manage the environment, but the evidence is that the environment largely determines managerial action. If managers sensitize themselves to the influence of the history of their organisation they stand a better chance of better appreciating their current strategy and may be able to detect and avoid strategic drift. Managers would more likely to be able to question the extent to which the strategy they are seeking to develop is usefully informed by that history as distinct from being driven or captured by it.