“The past is history and strategic management is concerned with future action, but the best evidence about the future may derive from what happened in the past.” Lynch (2009:83)
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Starting with a brief overview of the field it needs to be pointed out that strategic planning as a part of strategic management field5 originated in 1950s and gained importance in the business world 1960s and 1970s. In the 1980s, as a consequence of economic shocks and the rate of change, various planning models and methods were cast aside by many practitioners as not fit for the market reality (Lassarre op. cit.).
Dynamic changes taking place on the markets in past decades forced adjustments in the approach towards planning, decision-making and business operations among companies from practically all economic sectors, like banking, investment, logistics, and real estate. Planning became a more complex task with the expansion of companies into new markets and the race for competitive advantage in the 1970s and 1980s (Porter 1985, 1998, 2005; Lassare 2007; Henry 2008). Since then it became an import tool to identify and explain opportunities, minimise effects of adverse conditions and changes and encourage forward thinking and favourable attitude towards change (Greenley 1986).
Although the field is not a novelty there are numerous pitfalls, which are repeated by companies including non-systematic analysis leading to accumulation of vast quantities of data and information without proper analysis and understanding and implementation of too formal planning style, which does not allow creativity and flexibility. The response to these issues could be the Futures approach, which is the subject of this thesis.
5 Frequently the term strategic planning is used synonymously with the term strategic management in the business and academic world (David 2001). Contrary, for Thompson and Martin (2005), and Lassare (2007) strategic management is a broader field than long-range planning alone, and is divided into three areas: strategy formulation, implementation and evaluation. For the purpose of this doctoral dissertation distinction and separation of strategic planning from the strategic management is important to emphasize.
The author of this study follows views of Thompson and Martin (2005) and Lassarre (2007).
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The strategic management process requires development of a set of decisions, commitments and actions needed by an organisation to succeed on the market (Chambers and Taylor 1999; Pearce and Robinson 2005); it is performed by practically all business enterprises in a structured or less formal form (Hitt, Freeman, Harrison 2005; Hitt, Ireland, Hoskisson 2007; Morden 2007). The concept of strategic management process has four major components, which are related and inter-dependent (Rowe, Mason and Dickel 1994; Sadler 1998). These are:
1. Strategic analysis and planning – focused on internal capabilities and external environment of the company. Its aim is to identify internal strengths and weaknesses, together with external opportunities and threats facing the organisation. This includes political, social and environmental factors crucial for operating and growth of specific enterprise. The analysis contains possible source of value addition and competitive advantage, as well as limitations and constraints threatening the achievement of aims and objectives (Henry 2008). Planning6 is the attempt to anticipate the future factors and environment changes, which can directly or indirectly influence the enterprise and its operations (Pettigrew and Whipp 1991).
2. Strategy formulation and strategic decision-making - in this phase of the strategic management process company’s mission, vision, objectives and strategy are developed. Using the results of the strategic analysis and planning phase decision-makers chose how to formulate plans and strategies, define alternative strategies and crisis management procedures, decide how to allocate company’s resources, and set controlling mechanisms (Lassarre 2007).
6 This doctoral research is focused on strategic analysis and the planning phase of the strategic management process in the context of commercial real estate companies’ practice.
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3. Strategic choice - it is applied to identify the alternatives available and to the company (Morden 2007). It includes decisions about: expansion into new markets, change of suppliers and growth of market share, launch of new products and services or closing of the production line, mergers, acquisitions and new investments. The aim of this phase is to choose the most appropriate strategies from available alternatives identified in the previous stage of the process, which will fit the objectives.
4. Strategy implementation - in essence it is putting the chosen strategies and plans into practice. It is a key element of the strategic management process and is highly dependent upon managers’ skills and knowledge, resources availability and financial standing of the company (Ward and Peppard 2002; Mordern 2007). Figure 2.6 below presents components of the strategic management process.
Figure 2.6 Components of strategic management process Source: Based on Morden (2007:17)
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For number of reasons strategic planning could be important for companies from the commercial property field. This could be market cyclicality, a high unit price of properties, as well as information asymmetry. As signalled in the introductory chapter, certain catalytic events force enterprises to engage in planning. Hewlett and Kaufmann (2008) describe six types of events that are catalysts for real estate companies to engage in strategic planning (see Figure 2.7).
Figure 2.7 Reasons for strategic planning among real estate companies Source: Based on Hewlett and Kauffman (2008)
Changing economic and real estate environments are frequent phenomenon usually occurring with shifts in the business cycle. Changes in ownership or leadership in a real estate company can increase the need to review the strategy or adjust it to new circumstances. Mergers and acquisitions can be another reason for a change in strategies of companies involved in the process. Merging companies often search for synergy and common objectives. In case of acquisition the buyer usually imposes its strategy to the purchased company (Addo 2000). Tremendous growth can be a positive signal and stimulus to the successful company to review its strategy and plan according to new objectives. Challenges to growth and legacy in any real estate company are likely to occur at each stage of the economic cycle. Their source can lay, for instance, in loss of financial liquidity, adverse marketing and a decrease in sales, image or reputation
Changing economic and real estate
environments
Changes is ownership or
leadership
Mergers and acquisitions
Tremendous growth Challenges to growth Legacy vision
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problems. These challenges are likely to cause rationalisation of expenditures, reduction of employment level, services and products offered. Responding to market changes often requires difficult and courageous decisions concerning inter alia operational structure, finances, and marketing (Leinberger 1993; Bennis and Naus 1997). Prevailing methods and often managers’ mind-sets are focused on short-term decision-making and positioning the business in the existing competitive space instead of developing of long-term strategy (Ratcliffe 2006).
Numerous authors point out that strategy can be divided into Henry (2008), Johnson, Scholes and Whittington (2008), Wittmann and Reuter (2008):
1. Corporate strategy, concerning the broader issues of industries, in which the organisation wants to compete and it deals principally with mergers and acquisitions.
2. Business strategy, or competitive strategy describing how a company is planning to compete within a particular industry or market sector and how it will achieve a competitive advantage.
3. Functional strategy (Operational), it deals with functional issues and decisions about research and development (R&D), marketing, and finance.
McMahan (2006) emphasizes that the commercial real estate industry is often considered as the one having difficulties in adopting management concepts and tools already successfully used in other industries; reasons for this can be found in the lack of organisational leadership, high levels of financial leverage, and functional organisation of real estate enterprises (Muhlebach and Alexander 1997; Geltner et al. 2006).
However, these objections can be addressed to most of industries or companies (Ohmae 1982). Historically, real estate companies had a local focus, and in most cases, small
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and medium companies still do (Das and Pani 2005). McMahan (Ibid.) also points out that the primary focus of real estate companies is on the product rather than the customer. This approach did not foster long-term relationships with clients and did not require long-term planning. Also, strategic planning was not adapted by commercial real estate companies as fast as by other industries, for instance, the automotive or technological industries (Hewlett and Kaufmann 2008).
2.6.2 Quantitative versus qualitative approach towards market analysis and