Systematic strategy developmentand implementation

Distance Learning Study ProgramGeneral Management

D istance LearninG PaPer

Distance Learning Study Program General Management

Distance Learning Paper

Systematic strategy develop-ment and implementation

Author: Prof. Dr. Antje-Britta Mörstedt

Published by: PFH - PRIVATE HOCHSCHULE GÖTTINGEN

Weender Landstraße 3-7

D – 37073 Göttingen

Phone: +49 551 547 00 0

1. Edition, Berlin 2012 | cover picture: © blackred – istockphoto

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TABLE OF CONTENTS

TABLE OF FIGURES ............................................................................... IV

TABLE OF ABBREVIATIONS .................................................................. VI

1  Introduction .......................................................................................... 1 

2  Strategic development and Implementation as Components of Strategic Management ........................................................................ 2 

2.1  Classification of the terms Strategy, Strategic Planning and Strategic Management ........................................................ 2 

2.2  Delineation of the components of Strategic Management .......... 5 

3  System theoretical perspective of strategic development and implementation .................................................................................... 9 

3.1  System theoretical approaches .................................................. 9 

3.1.1  General Principles ......................................................... 9 

3.1.2  Theory of Self-Organization ......................................... 13 

3.1.3  Chaos research ........................................................... 17 

3.1.3.1  Fundamentals ............................................ 17 

3.1.3.2  Essential Components of Chaos Research ................................................... 18 

3.1.4  Essential implications of the system theory approach for strategic development and implementation ............................................................ 24 

3.1.5  Implications from system theory .................................. 24 

3.1.6  Implications based on sensitivity and feedback ........... 27 

3.1.7  Dissipation as a characteristic of companies and the resulting implications on strategic management ............................................................... 29 

3.1.8  Fractals ........................................................................ 32 

3.1.9  Control of complexity ................................................... 33 

4  The Process of Strategic Development ............................................. 37 

4.1  Company and environmental analysis as a necessary requirement for the development of strategies ......................... 37 

4.2  Analysis of the internal company resources ............................. 38 

4.3  Analysis of the Company environment ..................................... 41 

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4.4  Strategic Conception ................................................................ 46 

4.4.1  SWOT-Analysis as a starting point for strategic conception ................................................................... 46 

4.4.2  Corporate strategies .................................................... 47 

4.4.3  Business division strategies ........................................ 54 

4.4.4  Functional area strategies ........................................... 57 

5  Implementation of strategies with performance measurement systems ............................................................................................. 58 

5.1  Essential factors for the successful implementation of strategies ................................................................................. 58 

5.2  Balanced Scorecard as a performance measurement system for the implementation of strategies ............................. 64 

6  Strategic Control ................................................................................ 70 

6.1  The necessity of strategic control ............................................. 70 

6.2  Conception of Strategic Control ............................................... 71 

7  Conclusion ......................................................................................... 72 

Appendix .................................................................................................. 73 

Tasks ................................................................................................. 73 

Literature ........................................................................................... 74 

TABLE OF FIGURES

Fig. 1:   Derivation of the term Strategy .................................................. 2 

Fig. 2:   Strategic action ......................................................................... 3 

Fig. 3:   Levels of Success potential ...................................................... 4 

Fig. 4:   Components of strategic management ...................................... 6 

Fig. 5:   Separation of formal and material objectives ............................ 7 

Fig. 6:   Success potential means material objectives ............................ 8 

Fig. 7:   Figure of the system concept .................................................. 11 

Fig. 8:   Sierpinski-triangle as an example of a fractal .......................... 23 

Fig. 9:   Complexity drivers ................................................................... 35 

Fig. 10:   Components of strategic analysis ........................................... 38 

Fig. 11:   Porters Value Chain ................................................................ 39 

Fig. 12:   Difference between primary and secondary activities ............. 39 

Fig. 13:   Optimized value using Porter‘s Value Chain ........................... 40 

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Fig. 14:   Examples of a Strengths-Weaknesses-Profile ........................ 41 

Fig. 15:   Companies embedded in their environment ............................ 43 

Fig. 16:   Tools of the environmental analysis ........................................ 44 

Fig. 17:   Driving forces of the branch competition according to Porter ...................................................................................... 45 

Fig. 18:   Examples of determinants of the competitive strength ............ 45 

Fig. 19:   SWOT-Matrix using the example of a European defense company .................................................................... 46 

Fig. 20:   Example of a BCG-Matrix ........................................................ 48 

Fig. 21:   Learning curve ........................................................................ 49 

Fig. 22:   Essential dynamic and static effects resulting from the learning curve .......................................................................... 49 

Fig. 23:   Phases of a classical product life cycle ................................... 50 

Fig. 24:   Graphical process of a classical product life cycle .................. 51 

Fig. 25:  Characteristics and norm strategies ........................................ 52 

Fig. 26:   Basic scheme of the market attractiveness-business-field-matrix ............................................................................... 53 

Fig. 27:   Differentiated norm strategies in the Nine-Field-Matrix ........... 54 

Fig. 28:   Porter’s competitive strategies ................................................ 55 

Fig. 29:   Essential credentials for the implementation of cost leadership and differentiation .................................................. 56 

Fig. 30:   Categories of essential tools for the implementation of strategies ................................................................................. 59 

Fig. 31:   Chances and risks of the revolutionary style ........................... 60 

Fig. 32:   Chances and risks of the evolutionary style ............................ 60 

Fig. 33:   7-S-Model ................................................................................ 62 

Fig. 34:   The process of strategy implementation .................................. 63 

Fig. 35:   Perspectives of the Balanced Scorecard ................................. 65 

Fig. 36:   Example of a cause-effect chain ............................................. 68 

Fig. 37:   Example of customer perspective ........................................... 69 

Fig. 38:   Comparison of traditional and strategic control ....................... 71 

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LIST OF ABBREVATIONS

BDS Business Division Strategy

BSC Balanced Scorecard

e. g. for example

etc. et cetera

Hrsg. Herausgeber/publisher

Jg. Jahrgang/year

Nr. Nummer/number

S. Seite/page

ZVEI Zentralverband der Elektrotechnik und Elektronikindustrie

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1 Introduction The World has changed considerably in the last 60 years in the field of technology, politics, life expectancy, and human values – more than in the previous 500 years. Companies are nowadays embedded in a dynamic and increasingly complex environment.

In the past, it was the desired wish of companies to maintain stability. To-day the opinion is that stability and flexibility should exist together. In a company, many areas require continual adaptation because of changes in the environment. This adaptation has increasingly fewer conforming char-acteristics. The companies should therefore try to actively influence the environment.

Strategic business management is responsible for this adaptation, or ra-ther mainly responsible for the active influence of the dynamic environ-ment and has therefore to be in a position to act with foresight. This is however a huge challenge which gets clearer using the perspective of chaos research – as an alternative to the systems theory. This paper will therefore examine firstly the basics of strategic management and the clas-sification of strategic development and its implementation in strategic management (Chapter 2). First of all the system theory in general as well as the chaos research as a variant will be presented (3.1). The resulting information will be presented in relation to business management in Chap-ter 3.2.

An important sub-domain of strategic business management is strategic development and implementation. There is no function more essential in the future of a company than this. The strategic process is time-consuming because strategies require time to be developed and to unfurl on the mar-ket and in particular in a company. The strategic process is difficult be-cause a number of instruments are available for use, which are difficult to distinguish between. Because of this an often tedious comparison of as-sessments and their major benefits are necessary for the strategic pro-cess: The function of communication.

The ingeniousness of the tools makes them potentially exploitable by op-portunists. To give you an idea of them during the process of strategic de-velopment (see Chapter 4), and for the implementation of strategies (see Chapter 5). One of these tools is portfolio analysis. Relevant markets can be differently defined in portfolio analysis for the development of strate-gies. It uses the interests of the individual!

The strategic control, which continually accompanies the strategic devel-opment and implementation processes, is roughly sketched in Chapter 5. The paper ends with a conclusion.

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2 Strategic development and Implementation as Compo-nents of Strategic Management

2.1 Classification of the terms Strategy, Strategic Plan-ning and Strategic Management

The term strategy originally stems from the Greek word “strategos” and means “leading an army”. It comes from the military and was first used in 1944 in economic science.1

STRATAEGEOS

Fig. 1: Derivation of the term Strategy

Today in business studies the term strategy is understood as a very gen-eral procedure for the long term success of a company.

1 John von Neumann and Oskar Morgenstern wrote about the term Strategy in their

book “Theory of Games und Economic Behavior”. They are known as the founders of the game theory. In their publication a strategy is a series of interdependent activities that are aimed at achieving a given objective.

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Fig. 2: Strategic action

In literature, there are many suggestions as to how strategies are initiated in companies. The classical understanding of a strategy is that of a ration-al plan of action, which develops from a whole row of interconnected and individually made decisions and which stand together in a hierarchical re-lationship with other components of strategic management (e.g. company philosophy or strategic targets). Strategic targets are, for example, direc-tives which substantiate the target course of a company whilst the strate-gies depict the way towards the achievement of the targets.

The School of Mintzberg particularly criticizes the assumption of rationali-ty.2 According to Mintzberg, strategies are not compelled to be the result of formal rational policy. Strategies, which are rationally planned procedures, which have to be applied, are for him just a possible type of strategy. Fur-thermore he observes the following type of strategy type from Welge and Al-Laham:3 Planned strategies which are not realized because the envi-ronmental development of the plans is completely contrary, as well as re-alized strategies which were not planned. The latter are emergent be-cause they appear rather by chance and only distinguishable ex post, when a logical pattern becomes apparent in the decision-making of the company.

In practice strategies are generally a combination of planned, rational and emergent procedures.

Strategic planning comprises information processing, where the demands of the environment are aligned with the company’s potential success, in order that the long-term success of the company is ensured through the implementation of strategies.4 The identification and development of po-tential success (factors) are hereby a paramount task of strategic plan-ning. Potentials for success are definable products (e.g. telephones), the market (e.g. the mobile market) or customer segments (e.g. business cli-ents) which offer the company the possibility of achieving its success for a certain (longer) time period.

2 Cf. Mintzberg, H., The Rise an Fall of Strategic Planning, New York, London 1994. 3 Cf. Welge, M. K., Al-Laham, A. (Management), p. 16. 4 Cf. Bea, F. X., Haas, J. (Management, p. 50.

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Characteristics Examples

• Use explains the differences in success between the company/business units

• Apply to all branches i.e. Markets• Success effect “always” applies• Abstractly defined variables

• Market position (absolute and relative market share)• Product and service quality• Customer orientation

General Success Potential

• Use explains differences in success between the company/business units

• Apply to one branch or one market• Success effect subject to certain changes during the

time period• Strongly defined variables

• Specific dimension of product quality• Density of customer network• Cost efficient manufacturing process

Market specific success potential

• Corresponds to a company’s quality of use of general or market specif ic success factors

• Refers to a company or a business area and it essentially determines this success

• Success impact influenced more or less by the behavior of the competition

• Strongly defined “posit ion” or “value” of a variable

• Achieves a quality leap with a certain company compared to competitor

• Technologically superior products compared to competitor

• Twice as many customer service branches than its strongest competitor

Success specific success potential (=effective success potential)

• Do not “explain” the company success, or company unit success as a whole but as a success which can be calculated as a result of measures

• Demand general and time-independent importance• Are mainly formulated as strong behavioral suggestions

and sometimes as “conceptions”

• Success factors with Business Process Reengineering (support from top management, intensive employee training, involvement of suppliers and customers)

• Success factors in recruiting of top management (e.g. work content, management style, extreme company image)

Success potential with regard to functional or sub functional measures

Characteristics Examples

• Use explains the differences in success between the company/business units

• Apply to all branches i.e. Markets• Success effect “always” applies• Abstractly defined variables

• Market position (absolute and relative market share)• Product and service quality• Customer orientation

General Success Potential

• Use explains differences in success between the company/business units

• Apply to one branch or one market• Success effect subject to certain changes during the

time period• Strongly defined variables

• Specific dimension of product quality• Density of customer network• Cost efficient manufacturing process

Market specific success potential

• Corresponds to a company’s quality of use of general or market specif ic success factors

• Refers to a company or a business area and it essentially determines this success

• Success impact influenced more or less by the behavior of the competition

• Strongly defined “posit ion” or “value” of a variable

• Achieves a quality leap with a certain company compared to competitor

• Technologically superior products compared to competitor

• Twice as many customer service branches than its strongest competitor

Success specific success potential (=effective success potential)

• Do not “explain” the company success, or company unit success as a whole but as a success which can be calculated as a result of measures

• Demand general and time-independent importance• Are mainly formulated as strong behavioral suggestions

and sometimes as “conceptions”

• Success factors with Business Process Reengineering (support from top management, intensive employee training, involvement of suppliers and customers)

• Success factors in recruiting of top management (e.g. work content, management style, extreme company image)

Success potential with regard to functional or sub functional measures

Fig. 3: Levels of Success potential5

One precondition for the development of the potential of success are the core capabilities of the company. These outline the possibilities that a company has in order to develop its potential of success and use them. Here one means the proficiency of innovative techniques (e. g. ceramic manufacturing) or equally the ability of a company to adapt quickly and flexibly and organizationally to environmental changes (e. g. using team structures).

Strategic planning relies on short-term planning and at certain time inter-vals (e. g. annually) it is updated and modified. Strategic planning depicts guidelines for a company’s top management. As a rule, the following com-ponents are included in this:

Setting of targets

Environment and company analysis

Strategic development and implementation6

5 Cf. Götze, U., Mikus, B. (Management), p. 24. 6 Cf. Schweitzer, M. (Planung), P 48.

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The strategic management coordinates the integration of the different company functions (e. g. operational division, business areas, or corporate levels) with regard to high-level strategies. The activities of the strategic management are distributed in the whole company, which is why they will affect different groups of people.7

The Fit Concept between company and its environment (system-environment-Fit), as well as within the sub domains of the company itself (inter-system-Fit), is at the centre of strategic management. Many con-templatable sub-systems have not only a helping function but inde-pendently fulfill functions which are not replaceable by other subsystems. With this broad integral perspective there is always the danger that over consideration can lead to an over-generalized market.8 The Fit Concept originated on the basis of the system theory which is explained as follows.

2.2 Delineation of the components of Strategic Manage-ment

As became clear in the previous explanations, strategic development, and implementation are components of strategic planning. These begin with the setting of targets. Strategic development and implementation are affili-ated via environmental and corporate analysis. Strategic planning is in turn part of strategic management.

7 Cf. Welge, K., Al-Laham, A. (Management), P13. 8 Cf. Bea, F. X., Haas, J. (Management), P16.

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Fig. 4: Components of strategic management

Every entrepreneurial activity begins with a vision. It awakens the con-science to a pipe dream of changing the environment. The vision, seen as an incentive, is the basic reason for a company and gives direction be-cause it marks out an orientation way ahead in the future. Following a template, the vision has to be implemented into the corporate philosophy as an active self-image. Whilst the vision is rather targeted towards the outside, company leadership principles are targeted towards the employ-ees. They serve as an orientation help for employees on how to behave within and outside the company and are the main precept for the realiza-tion of the vision. The entire company guidelines, which are included in a concept or which are passed on verbally, are referred to as company poli-cy.

The phrasing of company targets represents the firm establishment of a company’s vision and guidelines.

.

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Fig. 5: Separation of formal and material objectives

Performance Targets refer to the production process of a company. The manufacturing process comprises of the elementary objects of a business. Concrete performance targets are, for example, logistical or sales targets.

Financial Targets are set and controlled by the finance department of a company. Here are targets such as liquidity, investments and financial tar-gets.

Key Performance Targets express the desired economic profitability of a company. Unlike performance and financial targets, key performance tar-gets are non-tangible objects. Typical success targets are for example the annual net income, the capital profit and the added value of a company.

Success targets are also described as formal targets. Performance and financial targets represent business targets. Within these targets is the above-mentioned success potential.

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Fig. 6: Success potential means material objectives

The environmental analysis examines the prospects and risks of a com-pany as well as its attractiveness on the market. Here one can differentiate between a global and a company-specific environment. The first compris-es of components such as nature, economy, technology, or politics, whereas the second is defined by the important influencing factors of the structure of the business-relevant markets or competition.9

When the strengths and weaknesses of a business are identified and aligned with the prospects and risks, then a strategy can be developed using these as a basis, in order to achieve the set targets of the company. Strategies depict alternatives whose target incomes determine the alterna-tive. Unlike operative decisions, strategic decisions are shaped as a rule by a high measure of complexity, and are influenced especially by dynamic environmental developments and have to bear up to these re-spectively. One theory, which deals with these dynamics and complexities and their effect on the strategic management and discusses it in detail, is the system theory. This will be outlined in Chapter 3.

Functional policies are directives (guidelines) for the relevant leaders of the functional areas (e. g. marketing, R&D and production), so that they can decide on the strategies. The implementation of strategies ultimately demands an appropriate organisation in the company.

Reference points for the organisational function are for example:

Strategic business units

Employee quality

Manufacturing and sales processes

Size of business

Keeping of tradition

9 For details on environment and the boundary between system and environment, look

at chapter 3. For detailed environmental and business analysis see chapter 4.

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In literature strategic planning is extended to strategic control and the planning is completed using this. This approach shows a control concept in the sense of an underlying target. This view is not pursued in this paper. In fact, the strategic control is seen as a continual feedback process which is immanent and not just an “appendage”. The strategic control is ex-plained in Chapter 6.

Questions to reflect on and control

1) Explain strategic terminology

2) Show the differences between classical and emergent strategies.

3) Which levels of success potential do you know?

4) Differentiate between material objectives and formal objectives (targets).

3 System theoretical perspective of strategic develop-ment and implementation

3.1 System theoretical approaches

3.1.1 General Principles

The system theory is a formal science on the structure, relationship, and behaviour of popular systems. A number of approaches from different re-search areas are subsumed under these names which is why the system theory cannot be described as a consistent approach. A preliminary com-prehensive approach of system theory, which can be described as the “General principle”, was developed by Bertalanffy. It is a logical math-ematical approach, which establishes fundamental principles, which apply to different systems.

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They are in essence the following:

Finality (Systems are effective and targeted), Equifinality (the same end result can be achieved starting with different starting conditions and using different methods),

Entirety (Changes to any system elements cause changes in certain other system elements and changes to the practice of systems),

Independence (the sum of the changes of the elements, which are in-dependent of one another, corresponds to the change of the whole system).10

Whilst “classical” sciences view the major elements of their research in isolation and later, if necessary, linked together, the general principle ex-amines the interaction between the individual elements of a system, in or-der to reach a conclusive scientific understanding. Systems are no longer broken down into parts, so that later they can finish as whole, but rather it is assumed that the system is one whole, which can no longer be, attribut-ed individual parts.

The simply structured laws of “classical” science apply only to one section of some highly complex connections. The aim is not to replace the tradi-tional individual sciences but rather to give them a theoretical superstruc-ture, which on the one hand can be kept so abstract that a closed theoreti-cal object can be constructed and which, on the other hand, can be sub-stantiated so that practical recommendations of at least two individual sci-ences can be deduced.

The basis for a systemic approach is the Concept of a System. A system is a quantity of elements between which different but also reciprocal rela-tionships exist.11 In order to identify a system the individual elements and their behaviour must be as well known as the relationships existing be-tween them. The latter is difficult to determine.

10 Cf. Bertalanffy, L. von (Systemlehre), p. 545. 11 Cf. Bertalanffy, L. von (Systemlehre), p. 542.

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Fig. 7: Figure of the system concept12

What is ultimately seen as a system and what is seen as an element is dependent on which entirety is being described. This is called the system and the elements of the system are those parts that cannot or should not be further separated. The individual system elements can in turn reveal their own systems (sub-systems) and the individual system can then in turn be part of another system (super system).

The differentiation of the systems is a question which becomes problemat-ic if the contemplated entirety is not insular but demonstrates interdepend-encies within its environment. With this an important classification charac-teristic of systems is touched upon: their relationship to the environment. Isolated systems have the characteristic that they have no active or pas-sive relationships which the environment is involved in. Open systems have at least one active fundamental relationship in which the environment is involved. They have a trade-off where energy, subject matter and infor-mation are exchanged.

The closed concept of systems shows a huge defect: the system is iso-lated by its internal relations and does not take the environment of the sys-tem into account. This leads to no significant problems of the system itself in changeable surroundings. The necessity of keeping a certain internal orderliness which would keep serving the system is also neglected.

We can therefore assume an open concept of system. By accepting this openness of systems, the differentiation of systems is possible as a repeat of the difference of system and environment. The whole system becomes the environment for the systems; whereby in the end, lower probabilities

12 Cf. Vahs, D., (Organisation), p. 60.

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on the level of these sub-systems exist due to the increased filtering against an uncontrolled environment.13 And exactly due to this the realiza-tion comes that a differential system is much more than a quantity of parts and their relationship to one another. Indeed it is a certain amount of op-eratively useable system/environment differences which illustrate the whole system as a unit made up of the environment and sub-system.

Within an open system the differences of system and environment are re-peated. That means that the environment, which is only an environment in relation to the system, has no horizons. The environment can be con-ceived, on the other hand, as a system in a superior environment if a dif-ference is evident between them. Such an interlacing leads to an arbitrary increase in complexity.14 Here the above-mentioned problem regarding the drawing of boundaries is applied specifically. With objects or individuals with clear physical barriers, the organisation is simple because the draw-ing of boundaries can take place because of an organisable view, which takes into account real boundaries. Huge boundary-drawing problems oc-cur within social or ecological systems. For these a formulation of substi-tute criteria can be generally seen as a solution.

A substitute criteria for the formulation of system boundaries is the „Over-balance of the inner bond“15, from which a system of those elements are built, between which a strong tropical network of connections exists. They belong to the environment of the system. With such a system of loosely joined elements, that is to say they are elements of a superior system and they are not considered in the depiction of the system as endogenous predetermined influencing variables. The boundaries of a system are to be understood like a circle, which blocks intensive relationships from less in-tensive ones between elements. Everything outside the circle is not part of the system, but is rather the environment and at best part of a superior system.

The determining of boundaries as a result of such substitute criteria is cer-tainly restricted, otherwise a person would always be in the position to mould clear and perfectly designed systems. This fails due to the fact that there are differing judgments as to from which intensity of bonding an ele-ment becomes part of a system or environment. Ultimately, this can only be decided subjectively.

A further central object of analysis of the system theory is the question as to how a system can keep up its industrial balance – its homeostasis. With this the fact is specified that systems don’t lose their identity although they find themselves in a permanent exchange or adjustment process with their environment. Bertalanffy presented the theory after Grochla and Leh-mann, that systems keep this balance by means of processes of primary

13 Within systems, there may be a differentiation of further system-/environmental differ-

ences. The overall system is to be understood by the subsystems to be a very specif-ic "internal environment". Luhmann, N. (Systems), p. 37.

14 For details of the complexity term, chapter 2.1.3.2. 15 Compare Appelhans, H. (Corporate leadership (Unternehmensführung)), p. 101.

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and secondary regulation. If a system has the ability to react to disturb-ances which go beyond the designated range during the course of struc-tural changes, this is primary regulation. If the regulation mechanism is reduced to the rigidly determined order of elements with the help of feed-back loops within a particular range, then secondary regulation is meant.16

With respect to companies, the system theory suggests that it is possible to achieve an industrious balance in a company and maintain it. For this supervisory authorities should be established. A hierarchical structure is seen as necessary.17 Exactly this ascertaining and maintenance of certain equilibrium conditions in a company is a very important aspect from the system theory point of view.18 The industrious balance is characterized by the uniformity of the changes which means there is a continuous, steady (textual) connection between the plot and the event. And here everything that takes place is dominated by the maintenance of the company. The theory of self-organization, which will be explained in the following part, is an important variant of the system theory, but moves away from the mean-ing of the state of equilibrium.

3.1.2 Theory of Self-Organization

In the previous discussion, the leading question was how an open system can maintain its structure in a continually changing environment, that is to say, to keep an equilibrium restored during interferences. The theory of self-organization separates itself from such ideas of stability. The theory realizes that the industrious equilibrium in open systems is only kept stable for a certain time period, otherwise a „pathological homeostasis „threat-ens.19 The formation of structure, as well as its continued changes, comes more to the forefront. The theory of self-organization, which should be un-derstood as a further system theory approach, can not only be understood as a further development of the system theory20 but, as Lehman said, as a new paradigm.21

The theory of self-organization draws on the results of the system theory approach. A central object of analysis is the spontaneous development,

16 Grochla, E., Lehmann, H. (Organisation), p. 2210. 17 Beisel, R. (Synergetik), p. 20. 18 Lehmann, H. (Organisationstheorie), p. 1840. 19 Beisel, R. (Synergetik), p. 20. 20 Mußmann called the theory of self-organization as a system of second-order theory.

The systems theory of first order was for him a theory of deterministically stable states of a dynamic system. The theory of second-order system is described by him as a theory of open, stable and unstable systems. See: Mußmann, F. (Natur), p. 222. Beisel assigned the theory of self-organization to the systems theory and describes it as a modern system theory. See Beisel, R. (Synergetics), p. 20.

21 Lehmann, H. (Organisationstheorie), column 1847. A decision, whether it is here a new paradigm here or a development of the systems theory is, is unclear because it is insignificance for the progress of the work.

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further development and differentiation of regulation in systems with the characteristics openness, dynamism and complexity.22

Complexity as the ability to assume a large amount of different states within a certain time period, refers as much to the complexity of the sys-tem as to the environment. A basic assumption is that a complex gap ex-ists between the environment and the system.23 Dynamism describes the fact that systems find themselves in a permanent process of adjustment or disequilibrium.

The topic of self-organization gains significance with the intensive exami-nation of systems in science which is far from balanced. Scientists, such as the above-mentioned biologist Bertalanffy, discovered that procedures which are far from balanced are „self-organized.” Decisive for the devel-opment of the theory of self-organization is the acceptance that the for-mation of structures in the sense of the emergence of order, are far from balanced, in the same was as the previously mentioned industrious bal-ance. So-called instabilities create the condition that a far from balanced system can move from one state of organization to another. The system reacts because of the systematic self-control and internal self-monitoring. It decides for itself in what way it will react to environmental impetus and how this will be integrated into system operations. Information about its environment is system-internal constructions for the system, which means the product of its operational unity. This does not mean that the system takes away the organization of the environment, but the necessary envi-ronmental interferences will be worked on in a system-own way by means of new characteristics, i. e. those of the system.

The term “self-organization” is, in fact, meanwhile a collective term for several phenomena in modern science. In general self-organization means that changes of system components lead to modifications in the “selectivity” of system organizations and these in turn trigger changes in the spontaneous behavior of the components or at least contribute to this. Systems are described as self-organized when they are in the position to duplicate, reproduce or even repair their system structure themselves.

The theory of self-referential systems is one of the most important vari-ants of the self-organization theory. The theory examines social systems and their demarcation to the environment. According to the theory of self-referential systems, the purpose, that is the differentiation, of all the sys-tem is possible through self-reference. This was developed by Luhmann in particular with reference to social systems. He drew on the general sys-tem teachings with the above-mentioned term and defined the term of so-cial systems. With this Luhmann understood every type of social contact right up to society, this being the collectivity for all possible contacts.24

22 Paslack, R. (Urgeschichte), p. 1. 23 Ulrich, H., Probst, G. J. B. (instructions), p. 58 the concept of complexity, in detail,

chapter. 2.1.3.2. 24 Luhmann, N. (Systeme), p. 33.

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Companies are social systems because individuals and groups communi-cate with one another and each carries out its own certain task.

With this approach Luhmann analysed the question why it was possible that people could act rationally despite the variety of possible options and that this rationality could be increased. He assumed that social systems have certain structures and developed functions that social systems have to have in order to shape and maintain themselves. Self-reference means that the systems refer to themselves during the constitution of their ele-ments and their elementary operations. In this way every act has an effect on itself. It is therefore irrelevant whether it refers to elements or opera-tions. The condition is that systems make a description of them and use it. Furthermore the balance to the environment must serve internally as an orientation and be used as a generation of information.25

A differentiation of systems is only possible through self-reference. This ultimately means nothing other than that everything is described as a sys-tem whereupon the distinction between internal and external can be used. This differentiation implies that an internal order (structure) is existent, whose expansion possibilities are restricted due to this special inner struc-ture.26 When the system recognizes the difference between system and environment, then the self-reference will characterize a system which is able to save, update and access the internal system premise and use it in any desired situation.

Further central theories of the Luhmann approach are:

As a rule two levels of consideration for systems are possible. The one level analyses the addressed question as to how a system differenti-ates between its sub systems (System differentiation), and the other level deals with the problem of system complexity, that means how a differentiation and a connectivity can occur between two elements.

A double contingence in the first place facilitates the formation of a sys-tem. It states the fact that a situation could have been otherwise possi-ble, which is why selection is necessary. This selection or determina-tion made by a system could possibly be different, which is why a con-tinual self-determination of systems is necessary, for which the above-addressed self-reference is a precondition.

How the elements stand in relation to one another and how they repro-duce is ultimately responsible for the way in which a system portrays itself. The question is expressed with the term”contact capability” and this is the central principle of connection of system and its environmen-tal elements.

Each system must choose certain elements and relations so that the structure and order can be created. This selection is a decisive condi-

25 Luhmann, N. (Systems), p. 25. 26 Luhmann, N. (Functions), p. 24.

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tion for reproduction. As soon as reduction in complexity occurs, this leads immediately back to an increase in complexity, because during the course of the reduction of complexity another selection would have been possible.

Selection and reduction of complexity occur in a social system on pur-pose. This builds the basis for selection and connected load, which is why social systems are purpose systems.27

Social systems arise therefore in direct conflict with the environment and they keep going by means of the generation and maintenance of a differ-ence in the environment. They use their boundaries to regulate the differ-ence. The environment is for them unclear and altogether not completely describable. The social system is not in a position to relate to every ele-ment with every other element every time. Only a partial acknowledge-ment of the complex environment is possible.

In addition to this, during the course of the dynamic processes of self-organization, more complex structures evolve, whose behavior can after all be predictable. With this an aspect is touched upon which is as a rule occupied by negative characteristics. The theory of self-organization as-sumes on the other hand that a situation of order in the conventional sense doesn’t evolve, but rather a special order evolves in the chaos.

This assumption is confirmed by an important variant of self-organization – chaos research. This examines systems, which feature due to a high irregularity of changes, which cause a special level or disorder in the sys-tem and the system itself. Such so-called dissipative systems28 have individual components with largely autonomous and often ambivalent be-haviour (among themselves). Seen all together they show a pattern of movement which shows an extraordinarily versatile and creative behavior which can change very quickly.

Dissipative systems are not often directed at a recognisable target and appear “disorderly.” The possibilities for direct control and guidance, as in the system theory of systems, which can achieve an industrious balance, are very restricted here. The presence of a disequilibrium in the systems highlight completely new points of view for the strategic management of a company in respect of non-linearity, the instability, and the fluctuation of processes. Chaos research assumes that disequilibrium in systems rule and that a once-found equilibrium is not permanently sustainable. Exami-

27 Sense is like a picture, when it is updated there is always a wealth of new possibili-

ties. Since people have very different horizons, they often act completely differently to the same matter. Sense in this context is the perception of otherness, and thus can provide contingency. Through this sense different connection options arise for each event. Sense is "a self-forward driving process of updating and virtualization." The dif-ferent ways in which sense works are first constituted by sense. Sense is related only to the broad sense, and it is self-referential. For details see the concept of sense by Luhmann, N. (Systems), p. 92.

28 Compare dissipative systems, chapter 2.1.3.2.

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nations and incidences from the last years point to the fact that the philos-ophy of the reasoning of equilibrium must be corrected.

3.1.3 Chaos research

3.1.3.1 Fundamentals

In today’s everyday language the term “Chaos“ refers to a complete disar-rangement. Chaos is a paraphrase for unclear and uncontrollable situa-tions, for states of things which apparently show no legality.

Chaos is not looked at more closely in science because it is assumed that an order or norm exists, which is not recognizable to the layman. Such an idea of so-called strictly mathematical laws of motion appear in Newton’s Second Law, F = m*a: where F is the net force applied, m is the mass of the body and a is the body’s acceleration. It can be deduced with the help of differential and integral calculus that if the position and acceleration of an object can be calculated at a given time, then this is forever deter-mined. Chaos research is therefore for scientific researchers a so-called high-level complexity. If formulas and laws were found here using New-ton’s theories then there would no longer be chaos. The central assump-tion of Newton’s era is that all that is in the universe is describable using the common mathematical law. If, in addition to this, the exact variables are determined in the equation, everything expected can be exactly calcu-lated because it is determined. In converse argument it is therefore possi-ble to calculate back and deterministic systems are repeatable and re-versible.

This scientific way of thinking which lasted until the beginning of the 20th century can be described as exact, mathematical, quantifiable, isolated, mechanical and materialistic. Such a way of thinking is very reductionist because everything which is not measurable or mathematically ascertain-able disappears from science. The striving for exact results is attempted by finding part solutions by dividing up problems in order to create singular linear relationships. This leads to a fragmentation into special disciplines without a consistent connection.

The extremely strict determinist way of thinking could not withstand the research of the 20th century, and was distinctly softened by chaos re-search.

Characteristically chaos exists close to order or strict rules. Chance hap-penings are different to chaos: Chaos is unplanned behaviour resulting from a purely determinist context. Rules of origin of chance happenings are not or only partly known. Therefore, chaos is often rewritten in science as determinist chaos, in order to emphasise that a complete lack of order is demonstrable because of exact rules or strict laws.

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Currently an independent and widely-accepted field of research has de-veloped which in particular analyses dynamic systems.29 This is about the development of order from disorder, that is to say, order-order-transition. Researchers working on chaos have taken leave of classical, traditionally mechanistic ideas. They are trying to overcome the paradox that chaos is determinist and can be created by fast rules without random elements. Herein lays ultimately the meaning of chaos, because next to the realisation that predictability has its boundaries it follows from chaos that many phenomena are more exactly predictable. Chaos research tries to fathom out formal structures, which lie hidden in chaos. It researches dynamic systems, which are characterized by the formation of “chaotic structures” and through “determinate chance behaviour.”30 The concise-ness of this system is that in particular small causes create large effects. The systems are at least not predictable long-term due to the complex causal relationship and appear to be random, although they are determin-istic.

Consequently in some systems where at first sight unmanageable confu-sion rules, underlying rules and structures can be discovered, which are partly quite simple. The theory of chaos does not ambulate the traditional concept whereby a simple formula always creates simple patterns and similar causes always have the same effect. This is exactly the core of the theory: two slightly differing initial positions and here it means close, can end up as completely different developments in a chaos system.

3.1.3.2 Essential Components of Chaos Research

Sensibility

Sensibility as a component of chaos research covers two variants: the ini-tial value sensibility and the parameter sensibility. Due to the fact that phenomena of small changes are described as initial value sensibility, it is expressed that systems which are clearly determined by determinist equations can go from minimally differing initial conditions to completely differing system states. The initial value sensibility is a necessary but not adequate condition for the existence of chaotic behavior. The possibility exists with this that there are systems which, despite the existence of ini-tial value sensibility, don’t tend towards chaotic behavior but rather to-wards irregular behavior.

The Parameter sensibility expresses sensibility with reference to the numerical definition of a model parameter. A chaotic non linear system abruptly changes its long-term behavior that means changes its parame-ters to defined, exactly ascertainable numerical characteristics. And so even small numerical differences can lead to completely different system behavior. Like this it is imaginable that a system first of all strives for a

29 Dynamic systems are those that can be described by their basic features such as

location, speed and their change. 30 This term should express that similar causes in chaotic systems do not have similar

effects.

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balance up to a certain parameter value, after which the calculated last time series between certain values fluctuate back and forth. After certain parameter impression the values fluctuate irregularly and regularity is no longer recognizable.

The Principle of Repetition

Generally positive and negative repetition (iteration) is distinguishable. One type of repetition strengthens, while the other restrains. A common example of negative repetition (effect-regulation) is the regulation of cen-tral heating. When the temperature of a room sinks or rises to a tempera-ture different to that on the thermostat, then the burner will be activated and will react accordingly. The burner and the thermostat are linked and interact with one another. An example of a positive repetition (strength-ening of effect) is video acoustic feedback: a video camera is set up facing a monitor. Everything in the camera’s view is passed onto the monitor. Whatever appears on the monitor’s screen is transmitted back to the screen and ever more compressed. In this case the monitor will be repro-duced by the camera onto its own screen. The monitor-in-monitor-effect arises.

On the basis of the system concept the term of repetition can be shown as follows: if two systems interchange so much that an increase (decrease) in one system can start an increase (decrease) in another system, this would be seen as a positive repetition, in the other case a negative repetition. With this a negative repetition leads to an approximation or an oscillation of a constant value. A positive repetition leads to an exponential growth or shrinkage of characteristic pattern of the systems.

Dissipative Systems with Attractors

An important working area of chaos research covers dissipative systems. Essential to the understanding of dissipative systems is the concept of en-tropy, as well as the description of states of equilibrium. Entropy clarifies the difference between the conservation and the reversibility of energy. That means none other than the entropy of a system is larger the less en-ergy it lets itself use. Entropy is a term of expression for the degree of in-sufficient use of energy. Energy can for example be conserved using a physio-chemical transformation, although its reversal is impossible. An example of this is friction, whereby movement (rubbing) transfers warmth. At the beginning of the 19th century during a train of technical inventions like the thermal engine, entropy was defined as energy which didn’t allow itself to be converted any more into mechanic work, and was described as useless and wasted energy. Entropy is therefore a yardstick for irreversi-bility.

With regard to dynamic systems entropy portrays the degree of disorder and ignorance of a system. This issue can be illustrated with an example: If a divided container has all the molecules on the left hand side at the be-ginning then the whereabouts of the individual molecules can be deter-mined by a yes-no-statement (no=right, yes=left). If the division is re-

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moved the molecules spread into the whole container and the entropy of the system increases. This means more disorder in the system and igno-rance as to the whereabouts of the individual molecules – the entropy in-creases.

Since the beginning of the last century research results have pointed out that for open systems balanced states are not common. Balanced states are regularly upset during cosmic events and are newly balanced again and again. Energy inflows cause constant physical and chemical process-es. At the moment when the level of an energy flow is on zero, the ther-modynamic balance adjusts itself. The system then, however, stops exist-ing. If it were possible in seconds to produce the thermodynamic balance of all substances in the human body- all that would remain would be the smoke, ash and steam. Only the high amount of energy continually circu-lating the body and for which it must provide a constant extraneous flow from environmental energy keeps him alive or away from fatal imbalance. Dissipate structures are therefore those that bring life.

Dissipative structures mean imbalanced structures in which irreversible phenomena have important meaning. The transition to the thermodynamic open systems, which exchange energy and substance with their surround-ings, is fulfilled with dissipative structures. Typical for this type of imbal-anced structures is their loss of energy and the existence of so-called at-tractors.

The condition for creating dissipative structures is the existence of an open non-equilibrium system, which is instable. This instability moves a fluid system into a surging one. Furthermore non linear system equations should be available. The classical thermodynamic points of view, accord-ing to the closed system, which are far from balanced, achieve stability with a minimum of entropy. On the contrary, in order to keep up stability in dissipative structures a high production of entropy is a condition. This posi-tion, in which a system creates a high amount of entropy, is seen as a type of order. It can further develop by exceeding critical values (so called bi-furcation points) 31 through external interferences or fluctuation of the sys-tem, so that qualitatively new structures arise, which cannot be deduced from the forerunner (linear).32

The state of the imbalance becomes the starting point for the creation of order. Dissipative structures make sure that a construction of new struc-tures and self-renewal of the system takes place by means of the continu-al exchange with their environment.

The state of order results from fluctuations and these, together with func-tion and structure, have an effect on the whole behavior of a system. The current state of each system considered is the result of the system’s histo-

31 Bifurcation, known as branching or forking occurs in dissipative structures where un-

predictable situations pass through to then stabilize newer higher orders. The branch point is not determinable in advance. The new system is based on this point and changes its direction of motion.

32 Mußmann, F. (Natur), p. 269.

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ry, so-to-speak. The basis for this new order is the inner dynamic, which leads to the system’s self-organization. The process of self-organization takes place away from equilibrium and is either triggered by environmental disturbances or as a result of systematic self-fluctuations.

Dissipative systems have attractors (structures of appeal). These are ge-ometric structures which portray the long-term behavior of a system in a phase.33 Or in other words: an attractor portrays an n-dimensional form with finite volume in a phase state. An attractor is therefore all that a sys-tem moves towards and to what it is attracted. Also at this point the differ-ence between chaotic and random system becomes clearer: chaotic sys-tems have attractors which fill one part of the phase space, whilst random systems fill the whole phase space, act totally randomly and don’t have an attractor. It is clear from the existence of attractors that despite the impos-sibility of predicting with chaotic systems, an “orderly system” is present. Therefore one speaks of “order to the chaos”.

Attractors can be fixed points, limited cycles or torus. These are predicta-ble in terms of their temporal behavior. In systems with chaotic solutions on the other hand, chaotic attractors exist. With a fixed point the different states of a system move towards a particular point, whilst with a limited cycle different fluctuations take place over time. A torus is a ring-shaped object along which a rung is drawn.

It depicts movements with two independent oscillations. These, also de-scribed as quasi-periodical movements, are predictable despite their com-plexity, because the tracks on which the torus begins also stay close to-gether34

A chaotic or strange attractor shows a strong sensitivity to the initial condi-tions of the system. This type of attractor has different attraction points within finite space. Its behaviour oscillates between these points; it is peri-odic and never achieves a stable balance. On the other hand it’s not com-pletely instable because the instabilities are limited by the finite space of the strange attractor. This is folded in a very complicated manner because elongations and folds are typical transformations resulting from non-linear equations of movement. With the chaotic attractor, the elongation causes increased inaccuracy during measurement of initial values, whilst the fold-ing brings together distant separation trajectories. A calculation is impos-sible.

Geometry of Chaos: Fractal geometry

The future of a chaotic system is not predictable. However, with the help of a new defining argument, some interesting and at first sight unrecognisa-ble patterns are identifiable within the chaos. Such a new defining argu-ment shows a self-similarity. This is closely linked to the term fractal. In the

33 The phase space is an important means to represent geometric behavior. It refers to

the predetermined area in the space of state variable. 34 Crutchfield, J. P., Farmer, J. D., Packard, N. H., Shaw, R. S. (Chaos), p. 84.

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past, many non-linear structures could not be described mathematically due to their irregular and ragged form. Suitable tools were not available either in differential or Euclidian geometry. The study of the validity of scale clearly emphasizes this situation: “smooth” objects get simpler on enlargement; natural objects on the other hand, always reveal new details. This is described as non-trivial validity of scale. In order to describe that type of non-linear form and structure, the chaos research used the fractal geometry developed by Mandelbrot in 1960.35

Using fractal geometry Mandelbrot wanted to express that in reality smooth shapes are more likely to be the exception and the majority of nat-ural shapes are “jagged“ or “bent“. The starting point of his thoughts is that irregular structures, whether transmission disturbances in the telegraph network, coastal devolution or mountain ranges, they repeat themselves at every scale and do not get simpler and more regular even on a small scale, but instead prove a complex system. Such objects, whether natural or artificially created, were described by Mandelbrot as fractal. They are defined as being geometrical creations which exhibit a high degree of complexity but which can be created interactively with the help of simple algorithms. Mandelbrot saw it as one of its essential properties that the majority of fractals could be created interactively. Fractal geometry de-scribes herewith the secret of the formation of complicated forms of na-ture: they emerge as a result of a few continually repetitive procedures. Fractals consist as a rule of ever-shrinking and self-similar structures.

The principle of self-similarity is seen in chaos research as a structural rule for the chaos, described above, namely that the way to chaos doesn’t happen randomly but is subject to certain rules. The emergence of self-similarity in chaos points towards principles of order within chaos. Fractals prove that in chaos, no chaos in the normal sense meaning disorder, rules, but that a certain form of order mainly exists.

35 See explanations from Mandelbrot, B. B. (Fractals), in particular page 14.

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Fig. 8: Sierpinski-triangle36 as an example of a fractal

Complexity

Because of previous statements, it may have become clear in this paper that complexity has an important meaning within the framework of chaos research, not least with reference to the statements regarding dissipative systems and their strange attractors.

The number of elements and their relations determines complexity. To this one can add complicatedness, which results from the difference of ele-ments and relations and which come under the definition complexity. Fur-thermore, variety and dynamics are components of complexity. Variety covers different possibilities of relations between elements of a system.37 The change of elements and their relations within a time span is defined as dynamics. The complexity of a system is herewith the result of the di-versity of the relations between the system elements and the environment and means that a system can adopt a huge number of possible states, so that the prediction of a system causes large difficulties. Additionally the systems are never completely describable.

If complexity in the wide sense is equated with difficulties then an “abun-dance of complexity” paraphrases difficulties, which occur due to insuffi-cient manageability of activities. Different features like possible change and relations are responsible for the insufficient manageability of activities.

36 Taken from: Thoma, B. (Chaos theory), p. 109. 37 In a system different relationships can exist between two elements. Is the number of

different elements with n, and the number of different relations between the two ele-ments designated by m, then the variety (V) is calculated according to the formula: V = m * n (n-1)/2. If you look at a system with 7 different elements, where between 2 elements only two different relationships exist, it follows from the formula a variety 2 * 7 * 6/2 = 42. Ulrich, H. (Company), P116.

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The term “gaps in complexity” describes difficulties, which occur because of inadequate compliance with demand and the potential of problem solv-ing. Barriers and cognitive or capacity-related restrictions occur as a re-sult. Problems, which develop from an abundance of complexity and gaps in complexity, increase with the change of speed of elements and their relations per unit of time.

The term complexity covers objective and subjective aspects: the object contribution to complexity is determined by the increase of irregularities in the data being processed. This means that the complexity of a system strengthens with the decreasing patterns in the size of outputs. This de-creasing clearness comes as a result of increased variety, when elements in a system are increasingly networked with one another and/or the amount of non-linear relations increases in a system. The decreasing clearness will be enforced by the addressed speed of change in the data stream. The subject contribution to complexity determines itself through the observer’s ability to recognize patterns and create schemata. The complexity of a system increases with the observer’s decreasing individual analytical ability and his limited to non-existent experience.

3.1.4 Essential implications of the system theory approach for strategic development and implementation

3.1.5 Implications from system theory

Companies are open, dynamic, complex, social, and self-referential, quot-ed, and confined systems, which should be capable of self-organization. Energy/subject matter and information flow into the company as its input. These are processed by the company (transformation) and finally given back to the environment in the form of energy/subject matter.

The employees, the management, the manufacturing and business facili-ties, and the inventories form the system in the company. Interest groups like customers or suppliers are counted in the company’s environment. There are endless interactions between the many system components, which, for example, are linked with one another through information and communications systems. Therefore, an abandonment of thought towards the cause and effect chain is reasonable. In fact, companies must see that influencing factors are joined in a circular process whereby every influenc-ing factor is related to the other. The measure of the individual interactions in a general view can change over time.

The management should not therefore see its company and environment as a type of machine, which is rather complicated, but rather with regard to its functionality something that can be explored exactly only when parts are carefully examined and built on. When a lever is lifted in one particular place, it is unpredictable what happens will happen to it in the other.

A company is confronted by many other environmental segments and re-lated systems. Because a company’s capacity and its employee’s capabili-

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ties are not sufficient to process these varieties, the company has to pro-ceed reductively, and with selective sensibility with certain systems like important and particularly relevant customers or competitors. It should de-velop and implement strategies and not consider other systems. Wrong selection is certainly possible. It can also happen that just those factors of the hidden “remaining environment” can make themselves noticeable in problematic ways. It follows that selection on the one hand generally first allows the action of companies but that this, on the other hand, induces uncertainty of the success of the company. Which uncertainties a compa-ny is confronted with are documented by different crises, like that of the mid 1970s and the early 1980s, whose end led to fundamental upheavals in companies at the beginning of the 1990s and ended with the Subprime Crisis as of 2007, the cause of massive changes in different branches. The crises made clear that they, even if not directly connected with the companies, massively influence system environments. Moreover, the cri-ses showed that prevailing methods and procedures could never be up-held over an unlimited time. Managers of companies should get away from the illusion of prognosis and the more or less unlimited controllability of their company.

A further aspect of the system theory for company control is self-organization. This describes a company’s ability to develop measures to put available resources to use and to secure the flexibility of a company according to changing terms and conditions. The ability of self-organization comprises the emergence of necessary structures and pro-cedures within a company because of the behaviour and interaction of people, without detailed instruction having been given. Once created pro-cedures and established structures are not something static, which is cre-ated from the outside, but something dynamic, which is essentially charac-terized by the members of the system.

Increasingly complex structures can develop in the course of dynamic pro-cesses, whose behaviour is unpredictable. Here an aspect is addressed which is as a rule occupied by negative characteristics. Chaos research assumes on the other hand that a conventional state of order does not develop, but rather a special order develops in the chaos. Companies and their environments are dissipative. They are characterized by a high irreg-ularity of change which brings about an extra degree of unrest in particular systems. Dissipative systems have individual components with largely au-tonomous and frequently ambivalent behaviour patterns (among them-selves). Altogether they show patterns of movement which have an ex-traordinarily complex and creative behaviour which can change very quick-ly.

Often dissipative systems are not directed at a recognizable target and seem to be “disorderly“. The possibilities of direct control, as with systems which can achieve a dynamic equilibrium, are greatly restricted. The pres-ence of imbalances in a system opens up completely new viewpoints for strategic development and implementation with regard to non-linearity, instability and the fluctuation of processes. Chaos research assumes that imbalances rule in the systems and a once-found equilibrium cannot be permanently upheld. Examinations and experience of the last years point

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to the fact that the previous philosophy on the reasoning of equilibrium should be corrected.

Just a simple creation and implementation of strategies to achieve a planned target will fail and lead to undesired results in a company, coun-ter-reaction, or lapse of attention. That means in the end that strategic management stabilizes the differential between environment and the com-pany as a system, that is to say, it represents a regulatory between inci-dental and processible complexity. The company as a system has to deal with its environment. Only then, can valuable strategies be developed and implemented.

Successful strategic development and implementations are based less on definite detailed solutions and strongly predetermined procedures than on the behaviour of those concerned in the sense of useable abilities in re-spect of dealing with problems. A successful development and implemen-tation of strategies differentiates itself from less successful implementation in that the management recognises problem-specific framework conditions develop better solutions and implement them in good time.

The strategic management must assume that creating long-term prognosis about a company’s environment and planning for it accordingly, is not possible. The company itself is equally not plan-able long-term because small causes can lead to large effects.

It follows that:

The primate of long-term planning and its rigid implementation is a possi-ble false regulatory for strategic management in a chaotic environment and can endanger the longevity of a company long-term, because it pre-vents its flexibility. For short-term planning, this is not necessarily the case because predictions are highly possible due to the existence of order with-in the chaos.

Model predictions and scenario-techniques are possible alternatives to every-day types of prognosis. Model predictions seem to be possible based on the knowledge of the self-similarity of fractals. Model behaviour corresponds on different levels of consideration. Scenario-technique seems to be suitable for strategic management, for example, in particular referring to the sensitivity to the initial value of chaotic systems in the anal-ysis phase, different scenarios are determined on the basis of different parameters and starting points. The scenario technique keeps the intellec-tual openness and the company is able to react to unpredictable disconti-nuity accordingly.

A chaotic system is very complex due to the amount of states, which it can take on with its strange attractors. This acknowledgement means for the strategic management the aspiration of increasing its own complexity, that is to say, it must be in the position to take on as many different states as possible in order to deal with the environmental complexity, which occurs through chaos.

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Based on chaos research the strategic management takes on the task within the specification of the framework rules and not the detailed rules. These framework rules should give company members a certain security and orientation in terms of their own behavioural possibilities. Trust and stability are established here. Furthermore, strategic management has to promote self-organization in the company because this is of great im-portance in a chaotic system.

3.1.6 Implications based on sensitivity and feedback

1. Sensibility

Small changes can have large effects. Systems can react very sensitively to minimal (external) disturbances. Due to this, characteristic predictions get more unsafe with an increased time horizon.

For the strategic development and implementation of a company, the initial value sensitivity means the following: wanting to up end a procedure of a company can be disadvantageous for a company because it can lead in some individual cases to pressure and no optimal solution. A reason for such failure lies in the initial value sensitivity, that means the non-attention to given conditions in a company or in other words: “the opening move is decisive.” The initial conditions therefore have a high rating for the setting of strategic measures. For strategic company rules, the thought of initial value sensitivity implies impossibility of assuming that instruments can be used in a company following an instruction book. This is for sure not a new thought; therefore it is more incredible even today those companies take on new approaches without previous reflection.

The development of constantly new approaches to solve problems must be an overriding job for the strategic management team. Only those who don’t react passively, but following the initial conditions, actively get solu-tions and practice its influence on the market conditions, will prove itself at all on the market and have real chances of growth.

With reference to the parameter sensitivity, the following is ascertained for the strategic development and implementation of a company: it is not as-sumed that once determined strategies can be followed long-term in a company or that results from their usage will be permanently known.

Furthermore, using parameter sensitivity as a basis, once successfully used instruments cannot be continually calculated with. The smallest changes can have an effect on efficiency of tools in the different corporate divisions and have a different impact on the effectiveness of previously developed targets: an effect does not merely have a cause and an action, a result. Nevertheless, a given cause or action can create many different effects, or rather results. In companies, the results of strategic measures are therefore often not ascertainable because the connections between cause and effect are as a rule only partially known and unpredictable.

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On the basis of parameter sensitivity it evolves that with the cause-effect-relationship changes cannot be ruled out over time. Completely identical starting situations can lead to different but then equally optimal results.

Altogether it can be said about sensitivity that when strategic measures are taken, those taking part should prepare for surprises. Here it means happenings which are unknown and whose cognitive appropriation takes time, which is not given. And so during the implementation of measures, which until then were optimal, difficulties suddenly occur because condi-tions (parameters) have changes minimally. That doesn’t mean that avail-able strategic measures are constantly questioned but only those which no longer stand the test.

A constitutive characteristic of a company is its high sensitivity to change, the observation of change and the impact of this within the company. A system can change its long-term conditions abruptly if certain parameter values occur. This can even be possible with the smallest numerical pecu-liarity on the parameter. The focus of the strategic action is not regularity whereby irregularity is seen as abnormal, but rather one looks for regulari-ty in the irregularity. The state of non-equilibrium along with irregularity is seen as the source of the order in which company stakeholders under-stand regularity and attribution, in the sense of example. In this way be-havioral possibilities which have one aspect of the known will be recog-nizable.

In principle, although a variety of information is given to carry out analysis and to develop corresponding strategies, the dynamic of change neverthe-less prevents a company from seeing and evaluating information because there is no longer time. Exactly because of this the aim must be to never-theless implement solutions to problems even with a lack of information and incompletely defined problems.

2. Reaction

Within the framework of strategic leadership of companies, the various influences of strong or weak relationships are to be considered. Changes in one part of a company lead to changes in many business sections and are often reciprocal. For this reason, it can only be seldom assumed that strategic measures can be selectively sustained. The principle of reaction is herewith addressed. The management can try to use this principle posi-tively for itself: negative reaction, in the sense of the use of tools and rules (effect-rules), which have been successfully used in similar situations. The company manages the necessary stability of existing and future proce-dures because uncertainties are limited. Positive reaction in the sense of a strengthening process (effect-strengthen) which leads to companies changing positively and/or being strengthened because of the involvement of scenario deliberations and feedback. With both reaction variations, the chaos research points to reaction with regard to results of possible bifurca-tions. Regarding negative reactions, it can result in an unsuccessful im-plementation of strategies because the new situation is just similar. With

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regard to the positive reaction, strengthening processes cannot develop as a company so wishes.

Many happenings and processes in companies and their environment are to be so understood that they are all part of a complex reactionary system. Selective interventions can spread netlike in their effectiveness on the whole company and its environment and lead to unpredictable conse-quences. Also with the hitherto successful cause-effect models, the dan-ger exists that they no longer have the desired effect. Technical possibili-ties, which can join company areas together so that effects do not remain locally limited, strengthen the netlike spread. On the other hand, every change from just one company element causes all the other elements to change at the same moment; at least they are not the same for the changed element.

Reactions always cause a counter-reaction. The company can completely change due to the principle of reaction. It does not change back simply to a certain state or path, but develops further. This development contains not only a choice of behavioural possibilities from an existing behavioural repertoire, but also a knowing or unknowing expansion of its behavioural repertoire and a restructuring. Development is closely linked to reflection, restructure, questioning, or simply learning, and means to create new po-tential, to adapt and to change. This is the result and phenomena of the company itself.

Knowing that everything is interactive in some form, interdependence in and around a company are available and increasing, business is getting altogether more complex and dynamic, then it is a consequence that the management has to make sure that an awareness of employees for net-working is being developed, for collaboration as a part of the system “company” where each company part influences the other and vice versa and where the whole thing is bigger than the sum of his part. Man and his behaviour pattern cannot be regarded in isolation and predicted, but he is in a bond with other system components of the company. He can only be rated with other components. Accordingly, the behaviour of involved par-ties of the company does not happen because of the addition of behav-ioural patterns of each individual. The latter described as the “superposi-tion principle” has reduced validity.

3.1.7 Dissipation as a characteristic of companies and the result-ing implications on strategic management

It is typical that dissipative structures exchange energy and subject matter and show energy loss. Furthermore dissipative systems provide for the construction of new structures and system renewal through to the constant exchange with its environment. The term energy is described as a sys-tem’s inherent ability to create external impact. If one describes the inter-dependence of a company and its environment as cycles, which for exam-ple exchange money or flow of goods and if one assumes that the move-ment of circulation is subject to friction processes which lead to an energy withdrawal, then this is a company with a dissipative system. The energy

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term here extends to include the abilities to designate the skills of financial resources, employees or information to perform work.

A further point connected to this, which speaks for dissipative systems, is that the highest amount of economic processes belongs to irreversible processes and those that over time become irreversible. From a physical point of view, they do not underlie the principle of energy conservation of classical mechanical systems. Information flows for example underlie dis-sipation when their ability to carry out work is reduced. This is the case with information pathology or over-aged information. Their dissipation is bigger the more complex and dynamic the environment of a system is. The increase of entropy is, using this example, an indication of the expira-tion of available information. At any starting time, information can indeed be given about a system like a company and it is roughly within a restrict-ed area of determinability. In time, however, trajectors can develop from those points, which were compatible with the initial conditions, which dis-tance themselves further from the initial area. Therefore only the original information remains useful which has stayed invariant in relation to the dynamic development.

For a company it is essential to be constructed dissipative because then it has the possibility of further development through the continuous ex-change with the environment. The preconditions for this are the following: the company can be seen as an open system and its system components are strongly linked by an internal interaction. This link has to be so strong that a self-organisation arises. The processes between the company com-ponents are permanently active so that the company finds itself in disequi-librium.

Due to the openness of a company, it is possible for it to take on an input of larger complexity than its output shows and with this to get continuously new energy, like repairing damages and deficiencies of the company. Companies experience negative entropy with this (“negentropy”), they can create order and complexity. If the energy flow from the outside exceeds the inner dissipation of the company, or the dissipation of the company with its environment, then the company can grow or use the energy for adaptation measures on changed environmental conditions. In this case more energy is available than is necessary for matter preservation.

This order cannot be compared to equilibrium however: it is existential for a company that it finds itself in disequilibrium with its environment because companies in equilibrium are threatened with insolvency because their inner complexity, for example, with cost structures or work processes, is unnecessarily higher than in the company environment and competitive-ness suffers. Additionally companies that are without unbalanced phases get into a super order and the over balance of order is responsible for the instability of the system. That means none other than that the company slides into insolvency.

Companies in disequilibrium are in continuous exchange with their envi-ronment and their structures are in a continual adjustment process, which is why their organisation changes periodically and irreversibly. Through

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the continuous exchange of structures, i.e. the employees among them-selves, the organisation develops in the company self-referentially. The basis of this process is the assumptions that a group of workers take as a basis for their organisational measures. Later decisions will be taken to some extent based on earlier decisions. In turn, these decisions will be built on the effects, which have occurred from the interaction of system components, although these effects were not consciously planned by any-one. They occur sometimes seemingly naturally and traceably, sometimes surprisingly. Assumptions about applicable strategies can therefore ap-pear completely correct but can develop in time and in combination with other structural characteristics.

In the light of dissipative structures, the following picture develops for stra-tegic development and implementation: companies are open systems, which must compose, of dissipative structures in order to secure their ex-istence. A situation of equilibrium is not to be aspired to because that means the standing still of a company. Today such a state of affairs leads to a lack of success. Dissipative structures, by means of continuous ex-change and feedback processes with their own components and with the environment, provide for the construction of new order models and for a self-renewal of the company. A condition for this is that the strategic pro-cess allows it.

Dissipative structures can feature chaotic attractors. With attractors like fix points, limited cycles or tori, occurring disturbances are “forgotten” be-cause linear processes are working with them. They are characterized by the fact that reproduction is guaranteed because similar circumstances activate similar processes. With chaotic attractors, this is not the case. With these the non-linear processes play a role, by which just small changes can have disproportionate consequences. This is because their inner complexity is so big that even the most exact analysis can lead to no prognosis on the system behaviour. Likewise, chosen variables do not aid the explanation of a process like with process simplification.

The task of strategic management is to find out about the process of at-tractors in the phase space, where a local calculation is not possible, and only global contemplation. They must then decide how much they are tempted to intervene and regulate the situation. This is not allowed to hap-pen where rigid processes are given, but they are to be arranged so that they adjust dynamically, i.e. are viable. Often the mistake is made in com-panies that in complex turbulent situations difficulties, which appear, are handled using regulations, which are too rigid.

Striving for a perfect solution is not adequate in the sense of chaotic re-search, because next to a fixed-point attractor, a limit cycle or torus, there can always be a strange attractor. This means that if a system at first moves on along a particular course it can go off onto a completely different course because of tiny changes. These fluctuations can happen very quickly. Therefore, it is very important for strategic processes that concen-tration remains on the essential and a second best solution is quickly found rather than carrying out tedious analysis. The danger then is that

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quite different aspects occur again through changes in the smallest condi-tions. This means a continuous pursuit of simple processes.

In a further connection, the insight into strange attractors is interpretable with people, because if this is transmitted to perceive people it means none other than people’s complex circumstances are perceived according to their starting conditions. Already small differences in experience, opin-ion, or education could lead to this. In companies where many different people work together, they build their own realities and adopt a different position, which is why endless arguments and misunderstandings can happen. The principle boundaries of observation must be clear to the re-spective stakeholders and they must recognise that as observers, they are part of the company that they observe, and that the observation first cre-ates the observed phenomenon. It follows that company members, with their own realms of observation, have differing judgements for strategic measures.

The high complexity of the human nervous system very probably creates chaotic behaviour. Here there is also potential for the emergence of a strange attractor. Previous approaches in business studies assume ra-tional working members. The chaotic behaviour of people which was noted during the chaos research, related to a company and its employees, means that these connections have to be taken into account and that it recognises and accredits its employees for their creativity, their unpredict-ability, and their complex connections.

At this point, the aspect of complexity relating to people should be ad-dressed again. In 1961, Hayek was already of the opinion that it would overextend people’s potential to understand complex connections in detail and to give a comprehensive explanation. Recognition and prediction of patterns is merely possible. The latter is confirmed by chaos research be-cause even in chaotic systems below the level, patterns of behaviour can be made out and certain development paths (attractors) influence the sys-tem more than others do. These attractors do not allow precise prediction of systems behaviour however, a differentiation between more or less probable states and the denomination of bandwidth or passages of possi-ble behaviour are possible.

3.1.8 Fractals

Fractal geometry is the examination of non-linear forms – fractals – that predominate in nature with folds and spikes, which cannot be calculated using every-day mathematics. This order, the self-similarity, is seen as the possibility of organising complex and dynamic company environments and to successfully manage complexities in a company.

Companies are subject to a market economy whose aim is to satisfy needs, which is a naturally hard selection process. This has to stay like this if the market economy is to fulfil its aged own aim and not become strained by other targets in which, for example, necessary adaptations to structure will be prevented. The market economy functions according to

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the principle of fractals: self-organisation and self-optimisation in small fast control circuits. Each generates a use for the other and receives an equiv-alent. Companies function like the market economy – these are fractals too – which quickly adapt to a dynamic environment if high learning effects in the company made possible and implemented.

Malik in 1984 and Bleicher in 1991 concluded that complexity in compa-nies could be dealt with using the Recursion principle. This is the principle of self-similarity in convoluted systems.38

Precisely because fractals can newly form or dissolve during cell division and fusion, it seems that changing demands of the company become nec-essary and so self-optimisation and dynamic become possible. Employees record the latter as a fractal, that fast changes within an environment are not seen as a problem but as a chance of competition. The self-similarity spoken about allows for deviations because even fractal geometry teaches similar but never identical structures. Companies’ development potential is justified by the existing tension between the degree of self-similarity and the system-oriented differentiation between members of a system.

The aims of the individual fractals are also self-similar. This self-similarity is achieved by means of a cooperative target finding process, which in-cludes all concerned parties, the character of a closed loop, keeping all relevant parameters comprised (market requirements, personal values etc.) and leaving the fractal enough space so that it can continue to devel-op independently. Quality, the sparing use of resources, reliability, speed and an adherence to delivery dates are aspects which play a prominent role in the fractal company.

3.1.9 Control of complexity

Since the beginning of the 1990s, complexity of management problems has increased enormously due to different changes in companies. Global influences are in particular responsible for similar complex processes aris-ing. The increase of complexity is substantiated theoretically by chaos re-search. The relevance of complexity is strongly emphasized by chaos re-search because it shows how quickly a system can change from calcula-ble to incalculable behaviour, and how numerous the states of system can be, which it can take on in a particular time period, not least when one considers the strange attractors. In this connection, it is shown that there are cases where the law of strong causality does not apply, which leads to a strong increase in complexity. The demonstrated non-linearity of dissipa-tive systems, the demonstrated regeneration behaviour, the irreversibility of systems, prove that behaviour additionally sharpens up the complexity problem. Even in very simple shapes – like fractals- complexity can occur. Phenomena of complexity as interface densities, uncertainty, transparen-cy, variety of richness, are present in every-day business. Overlapping with typical economic problems like cost, for example, additional problems

38 Malik, F. F. (Strategy), p. 98, Bleicher, K. (Management), P 31.

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in the form of overheads additionally increase complexity. Complex tasks, which a company has to solve, will be more demanding and more difficult to comprehend. Future development is no longer clearly predictable, future environmental and entrepreneurial situations are no longer transparent. Additionally complexity of product program and markets increase continu-ally.

Communication possibilities become improved by an increased application of information and communications technology and quick and wide infor-mation on interdependency between economics, politics, technique, ecol-ogy, and publicity is reached. However, the decision-makers in companies get into increasing difficulties making adequate decisions because a much bigger amount of information has to be processed. The reason for the emergence of this type of phenomena of complexity in companies is com-plexity drivers. These can be differentiated into exogenous and endoge-nous complexity drivers. If market demands and competition terms induce complexity in a company then these are described as exogenous com-plexity drivers.

Examples of this are the increasing globalization and deregulation of mar-kets or the change of seller’s market into buyer’s market. Endogenous complexity drivers portray factors for the increase of complexity within a company. Here one can name the separation of tasks, responsibility and competence, the superfluous product-related variety and the length of the decision-making process.

The following table gives an overview of endogenous and exogenous complexity drivers. Regarding endogenous one again makes the differen-tiation between those whose development correlate directly and those that are independent.

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9Pr of. Dr. Antje-Bri tta Mör stedt

Komplextitätstreiber

exogen endogen

Nachfragekomplexi tätAutonome Individualisierung auf den Märkten führt die Unternehmen zueiner verstärkten Fragmentierung der Märkte mit kleiner werdendenZielgruppen, deren Bedürfnisse sich dynamisch ändern.

Wettberwerbskomplexi tätZunehmende Ausweitung derWettbewerbsintensität und -dynamikwegen Globalisierung und Deregulierung der Märkte sowieWandlung der Verkäufer- zu engen Käuf ermärkten

Neue Technologien, verkürzte Produktlebenszyklen, Zusammen-wachsen bisher getrennter Technologien bewirken ein Ansteigen der technologischen Komplexität

Technologische Komplexität

Direkt durch exogene Kompexitätstreiberinduziert

Nicht direkt durch exogene Kompexititätstreiber induziert , sondern aus dem Unternehmen selbst heraus entstanden.

KundenstrukturkomplexitätVielzahl anheterogenen Kunden mit zum Teil geringen Abnahmemengen.

ProgrammkomplexitätBreites und tiefes Produktprogramm mit hohemDiversifikationsgrad und zahlreichen Produktvarianten.

Produktkomplexität

Produkte, die sich aus einer hohen Anzahl an eingesetzten Rohm aterialien, Teilen oder Baugruppen zusammensetzen, die gegebenenfalls noch sehr verschieden sind.

ProduktionsprogrammkomplexitätVariantenreiche Teile, Baugruppen für ein Produkt werden selbst hergestelltund deren auftrags- und kundenbezogene Individualisierung erfolgt auf einer sehr niedrigenWertschöpfungsstuf e.

OrganisationskomplexitätStarke Fragmentierung von Prozessen, Entscheidungskom petenz und Gesamtverantwortung sowie Schnittstellendichte.

Zielkomplexi tätKoordinations- und Abwicklungssystem e, welche eine Vielzahl parallel im Unternehmen verfolgter,operativer Ziele anstreben.

Fertigungssystemkomplexität

Zentrale, deterministische Steuerung von Fertigungssystemen über einen hochintegrierten Maschinenpark. Die Fertigungssysteme weisen einen horizontal und vertikal undifferenzierten Wertschöpfungsfluss auf.

Fig. 9: Complexity drivers39

Many business units should rise to the challenge of complexity. The com-plexity drivers mentioned are examples of an increasing number of com-plexity drivers, which influence corporate matters and which contribute to induced increasing complexity internally or externally in the company. When the first publications on system theory appeared, their research within business studies gained importance and the economic discipline emphasized the accomplishment of complexity based on the company’s internal and external conditions as a central problem at the forefront of its consideration.

Reducing complexity in a company should not be the aim however –especially where unnecessary complexity emerge. Strategic manage-ment should not just be able to reduce complexity but also – planned or unplanned – increase it. Therefore it is necessary to view complexity sim-ultaneously as a problem in the form of unnecessary complexity (over complexity) and as a solution in the sense of an increase in complexity – at the existence of under-complexity.

Over-complexity means that the business processes are negatively influ-ence by the scale of complexity because too many varied relations exist, which can hardly be systematically planned and managed. There is a too high a number of uncontrollable behavioural possibilities. Over-complexity can lead to an unpredicted and incompetent behaviour and therefore high costs and processing time, as well as a lacking adherence to delivery

39 Adam, D., Johannwille, U. (Complexity), p. 5 and Bliss, C. (Management), p. 6.

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dates. If, on the other hand, a company’s elements are not adequately linked together and they cannot connect then under-complexity exists and the constant production of desired results is endangered.

In order to adequately face the problem of over and under complexity aris-ing, the phenomenon complexity has to be accepted. Furthermore, a rea-sonable handling of complexity has to be created, which creates possibili-ties, which increase or reduce the complexities in parallel. Therefore, the acceptance, as well as the management of complexity should be ex-plicitly followed in companies. The management of complexity comprises, as well as the allowance for interdependencies during the tasks, not only complexity reduction but also complexity increase. This however makes dealings with complexity even more complex.

Complexity always means double contingency. That means there is no optimal strategy for a company. Everything is always possible. Selection is just selection and not the whole issue. If decisions are made, there will usually be other possibilities. There is a contingency; the company has choices and must decide.

A company with a lot of complexity to work with can only face this with an equally high amount of complexity. Or as the lawmaker Ashby said: only variety can absorb variety.40 For companies this means that not all princi-pally possible states should be accepted. Companies have targets and are embedded in further systems, which have relationships or connections to other systems. A company must make sure that some of the possible states do not occur because they could be, for example, contrary to legal or corporate conditions.

The total variety must be reduced to a certain amount of feasible and justi-fiable states. The company needs specific management tools for this (va-riety). If the available variety in the company is not sufficient then the com-pany will not be successful. This means when a company has to work with a high amount of environmental complexity then a high amount of compa-ny complexity must be set against it. Many management tools have to be examined in this connection for their complexity management effect. A company cannot simply increase its complexity. According to Luhmann there is a particular point in companies at which each increase in complex-ity overstrains the ability of a company to manage its own complexity, be-cause it can neither generalize its environmental relations nor does it have enough time because every change of state would demand an overall change.41

It becomes clear from this that a company has to determine the complexity grade for itself, so that the environmental complexity can just work suc-cessfully without being overstretched internally. Each company has an optimal grade of complexity, which can neither be reached with a pure re-duction of complexity nor through increased complexity. Both measures

40 Ashby, W. R. (Introduction), p. 207. 41 Luhmann, N. (Complexity), column 1068.

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should be used. It tends to be that large companies generally use com-plexity-reducing measures and middle-sized companies generally use complexity-increasing measures, in order to find their optimal grade of complexity.

Questions to reflect on and control

1) What are the general principles that lead to fundamentally different systems?

2) Explain the term complexity.

3) What do you understand by chaos research?

4) Explain the possible complexity drivers for companies.

4 The Process of Strategic Development

4.1 Company and environmental analysis as a neces-sary requirement for the development of strategies

In the sense of system theory, companies are open socio-technological systems; in which exchange processes with the environment are essential. The development of strategies only happens if these are accompanied by a strategic analysis in the form of an environmental and company analysis. The environment has to be examined for chances and risks for the com-pany and its strengths and weaknesses. It is irrelevant here whether strat-egies are developed as rationally planned measures or as an emergent procedure. There are continuous feedback processes in the analysis which need watching, which means the strategic development process does not follow a hierarchy but is subjected to continuous feedback loops. A task of the strategic analysis is to reduce risks from the environment and weaknesses from the own company as well as using chances from the environment with strengths of the company. The aim of strategic develop-ment is to establish success potential, which is a prerequisite for the com-pany’s existence on the market.

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Fig. 10: Components of strategic analysis

The environmental and company analysis are summarized in the so-called SWOT-Analysis. This will be explained later in this chapter.

4.2 Analysis of the internal company resources

The company analysis has the aim of identifying the strengths and weak-ness of a company as objectively as possible by comparing the strategic success potential with a competitive analysis. A possibility is offered by Porter’s value chain.42 According to Porter, every company is a collection of activities from which a product is designed, manufactured, sold and de-livered. These activities can be illustrated using a value chain. A value chain portrays a roughly structured picture of a company in which the im-portant tasks are shown according to an actual continuous flow principle, which a product goes through during its creation and sales process. Each value chain is a system of upstream and downstream value chains em-bedded by suppliers and consumers.

42 The following remarks are closely aligned to Porter, M. E. (Competitive advantages,

p. 65).

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Fig. 11: Porters Value Chain

Porter differentiates between primary and secondary (supportive) activi-ties.

Primary activities are just linked to the manufacturing and sales of prod-ucts. If it is aiming for a competitive advance the company has to carry out the activities more cost-effectively and /or profitably than the competitor.

Fig. 12: Difference between primary and secondary activities

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Fig. 13: Optimized value using Porter‘s Value Chain

The idea of including the performance process in strategic deliberations and considering the processes of the value chain as a source of cost and differential advantages compared to the competitor is new to Porter’s val-ue chain.

The viewpoint of classical business functions and the categorising of the company’s infrastructure is critical here as a secondary function. To visual-ise the strengths and weaknesses of the available resources of the com-pany a strengths-weaknesses-profile can be created based on Porter’s value chain. Strategic success factors will be shown as success relevant strengths and weaknesses. Strength exists in a company if it can prove its lead compared to its competitors, and can consistently orientate itself to its customer’s wishes. If a company shows weaknesses then the necessary resources and competences are missing. These weaknesses should be dealt with using relevant strategies. An example of a strengths-weaknesses-profile is portrayed in the following chart.

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Fig. 14: Examples of a Strengths-Weaknesses-Profile

If a company sees itself as better than its competitor does then five poten-tial points are given. If the company is obviously worse, then 1 point is giv-en. In the best situation, the company gets 500 points. In the above exam-ple, the company got 280 points and received an average result in com-parison to its competitor.

4.3 Analysis of the Company environment

During the environment analysis chances and risks should be found which will be considered during the development of strategies. The consideration can happen for one through an adaptation of the company to its environ-ment or otherwise through an influence of the environment. The difficulty here is that there are discontinued environmental developments. These express themselves for example in the

increased speed of environmental change,

the growing intensity of environmental connections, and

the complexity of the environment.

The company has to process a large amount and variety of information. Therefore, it makes sense to determine and differentiate the influencing factors on the environment on the achievement of objectives of the com-

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pany. The environment can be differentiated with regard to company-specific environment, on the one hand, and a global environment of the company on the other hand.

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Unternehmens-führung

Produktion

Absatz

Beschaff ung

F & E

Absatz - markt

weitere Beschaffungsmärkte

Arbeit smarkt

Kapita lm

arkt

Untern eh mensspezifische U mwelt

Ö konomie Gesellschaft

Globale Umwelt

Technologie

S taat

Ökologie

Fig. 15: Companies embedded in their environment43

The company specific environment portrays the competitive environment of a company. The company appears in different interactions with this en-vironmental area, in particular with customers, suppliers and competitors, in order to successfully achieve its targets. The global environment covers all general factors which are not relevant for the own company or the branch but are furthermore relevant for a larger number of companies.

By comparison to company specific environment, the global environment cannot be, or only slightly be, controlled and influenced by the said com-pany. Therefore the company must examine changes in the relevant envi-ronmental segments and show and discuss the consequences. A subdivi-sion of the global environment has widely asserted itself in the following segments:44

Legal Environmental factors: For example, the law of the federal gov-ernment and the state, as well as subordinated regulations, administrative instructions and international law. Additional to this there is communal law and municipal administration.

43 Source: Götze, U., Mikus, B. (Management), p. 29. 44 Welge, M. K., Al-Laham, A. (Management), p. 185 or similar Baum, H.-G., Coenen-

berg, A. G., Günther, T. (Controlling), p. 56.

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Economic Environmental Factors: For example the macro economical developments, such as the development of the gross domestic product, unemployment rate, or the income development of the own country and the country of sales.

Socio-environmental Factors: These cover the social and cultural norms and values, like politics (democracy v dictatorship), religion (Christianity v Islam) or the education system (highly or weakly developed).

Technological Environmental Factors: Examples are here the further development potential of relevant technologies (trendsetter, basis, and key technology) or the application parameters of relevant technologies.

The segments of a systematic and regular analysis should be carried out subsequent to the sub-division of the global environment. The tools shown in the next chart are available.

Environmental scanning:

• Segments of the global environment are systematically scanned for trends, changes and weak signals

• Scanning can be carried out unplanned, periodically and continually.

Environmental monitoring:

• Is based on the scanning phase

• Follows and interprets company developments through continual documentation – data collection is focused and systematic.

Environmental forecasting:

• Contains the prognosis of company development (direction, dimension, speed of change).

Environmental assessment:

• Conclusive process of assessment of outcome of environmental development on the company.

Fig. 16: Tools of the environmental analysis

The company-specific environment can be examined using Porter’s branch instrument model. He sees five competitive strengths which influ-ence the intensity of competition in a branch.

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Fig. 17: Driving forces of the branch competition according to Porter45

Fig. 18: Examples of determinants of the competitive strength46

The main problem when creating an environmental analysis is collecting the necessary information. The evaluation of the environmental analysis is

45 Porter, M. E. (Competitive strategy), p. 34. 46 Porter, M. E. (Competitive strategy), p. 37.

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put together with the company analysis and both of these are compiled into the SWOT-Analysis so that base strategies can be designed.

4.4 Strategic Conception

4.4.1 SWOT-Analysis as a starting point for strategic conception

Abilities, which differentiate a company from its competitor, are the basis for the creation of worthy strategies. In a SWOT-analysis, the strengths and weaknesses are compared with the opportunities and threats of a company. A comparison of the internal factors with external conditions conduce the strategic development. After the end of an analysis suitable strategic alternatives are designed. The next step is to choose alternatives which appear most suitable for achieving the aims of the company and achieving a successful position in the field.

Environmental factors

Company factors

Opportunities

1. New defense markets in Europe

2. Access to civilian markets (dual use products)

3. Increased pan-European projects (e.g. Eurofighter)

Threats

1. Reduction of military budget

2. New competitors from European countries

3. Concentration tendencies in the branch

Strengths

1. Technological leadership

2. Good contact to military authorities

3. Strong cash position

SO-strategies

1. Development of new products (satellite navigation) and services (airport lighting)

2. Expansion in eastern European markets

ST-strategies

1. Cooperation or acquisitions in Europe

2. Intensification of marketing activities

Weaknesses

1. High production costs

2. Inflexible production and process structures

3. National sales presence

4. Partially missing critical mass

WO-strategies

1. Creating sales units abroad

2. Creating new ventures in sections

3. Creating joint ventures

WT-strategies

1. Closure or outsourcing inefficient areas

2. Increasing efficiency (BPR-projects)

Fig. 19: SWOT-Matrix using the example of a European defense company47

When opportunities and strengths meet then the company has a possibility of a positive development, a meeting of weaknesses and dangers present a danger for the future development of a company.

47 Müller-Stewens, G., Lechner, C. (Initiatives), p. 225.

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The SWOT-matrix results in necessary discussion processes for the fur-ther development. It cannot eliminate general planning uncertainties but points out strategic knowledge gaps and helps to show a company’s de-velopment possibilities. Strategies can be designed for different levels of a company:

Corporate strategies

Business division strategies

Functional area strategies.

4.4.2 Corporate strategies

Strategies on a corporate level give general directions of impact for the company. Opportunities and risks of the environment are tailored to the strength and weaknesses of the company, consisting of several strategic business units. The development can be adjusted for the product and ser-vice areas to the growth, stabilising, or negative investment. Furthermore, the dominant question is on which market the products and services should be offered. Both these questions are closely linked so that product-market-strategies are in focus on a corporate level. A central tool for the development of these strategies is the portfolio analysis. In order to use this, the strategic business division must be defined and separated.

Essential characteristics of strategic business units

The SBD covers individual or several related business units for which an independent plan can be created

Each SBD has its own circle of competitors who they can match or outdo

The SBD is led by a manager who is responsible for the strategic plan-ning and the results and who mainly manages the success-related fac-tors.

Each SBD should add its own independent input to the increase of profit and should therefore also strive for independent targets

Diversity and connectivity as a basis for establishing strategic busi-ness units

The creation of SBDs allows for a fine division of the company and a de-tailed planning but at the same time complexities can arise between the different SGEs, which lead to independent decisions being impossible to make

The specific amount of SBDs to be created should orientate towards the differences of environmental conditions (diversity) as well as the number and intensity of relationships between the company units (connectivity).

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With the creation of SBDs a company is in the position to break down the global aims of the company into the individual units and assign them the resources for their developed targets.

When strategic business units (SBU) are defined, it should be considered that this is a dynamic process with changed environmental conditions, e. g. changes in customer structure, which requires a new definition. If this is not achieved a company can get into huge difficulties on the market.

The defined strategic business units can now be evaluated within the Bos-ton-Consulting-Group (BCG-matrix). This is the most well known portfolio matrix, which was developed in the 1960s by the Boston Consulting Group. Key factors here are the environmental dimension, market growth and the corporate dimension of relative market shares. The market growth is determined by the turnover or sales volume and the relative market share through the relationship of the own market share to the strongest competitor. The size of the circles in the following chart visualizes the meaning of the strategic business unit (measured on turnover or profit contribution).

Fig. 20: Example of a BCG-Matrix

The meaning of the relative market share explains itself with the learning curve concept, which is briefly shown in the following chart.

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Fig. 21: Learning curve

Fig. 22: Essential dynamic and static effects resulting from the learning curve

The learning curve and its possible effects explain the relevance of the relative market share as a strategic success factor. The meaning of mar-ket growth is made clear in the life cycle model shown in the following chart.

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Phase

Criteria Introduction Growth Maturity

Saturation/ decline

Growth rate Undeter-mined

High Low Zero/ negative

Market potential

Unclear Clear Clear Known

Number of competitors

Small Achieves the highest amount

Consolida-tion, mar-ginal sellers drop out

Further decline

Allocation of market share

Not assessable

Concentra-tion

Concentra-tion

Concentra-tion

Customer loyalty

Low Higher Lessening Higher

Stability of market share

Low Higher High High

Access possibilities

Good (because no strong competitor yet)

Still good especially when growth is high

Low Mainly uninteresting

Role of technology

Growing role of technology

High influence

Focus moves from product to manufac-turing process

Technology is known, widespread and stagnated

Fig. 23: Phases of a classical product life cycle48

48 Weber, J., Schäffer, U. (Controlling), p. 386.

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Fig. 24: Graphical process of a classical product life cycle

The phases of a classic product life cycle show a strong sequence. After the introductory phase the growth, maturity, saturation and degeneration phases follow. Each phase shows different quantitative and qualitative dimensions. Different corporate strategies can be derived from the BCG-matrix:

New products are usually in the introductory or growth phase and are characterized by a low relative market share on the one hand, and by a high market growth rate on the other. Due to the high growth rate of the market, growth strategies for market share increase are recommended in order to establish a potential decreasing trend in cost at the same time. If considerable further investments are necessary in this case then this decision is often difficult because new products are character-ized by a negative cash flow.

Star-Products are those, which achieve a leading market position dur-ing the growth phase. The relative market share is kept. A develop-ment of the capacities occur at least according to the market growth, which is why one speaks here of growth rate strategies. The necessary investments are responsible for the revenues, these as a rule corre-spond to expenditure, and the cash flow is balanced. The star product is able to finance its own growth.

Cash-Cows are characterized by having a high market share during a low market growth rate. They are in the saturation phase of their lifecy-cle. A stable competition and a high relative market share lead to fa-vorable cost positions and an increased profit margin. Because the

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market growth stagnates capital investments are no longer necessary. Replacement investments and rationalization investments preserve the market share.

Problematic products promise no market growth and have a relatively weak market position. They are in the maturity, saturation or degenera-tion phase. Cash flows are negative or at best balanced. Disinvestment strategies are imminent.

I Question marks

Characteristics:

SBDs in the introductory or early growth phase with high capital de-mands

(Cash flow negative (accounts receiv-able +, accounts payable - ---> cash flow -)

Norm strategy:

Either clearly increase market share if the offensive strategy is promising compared to competitors or sink if the sales (disinvestment) if market situa-tion is unpromising

II Stars

Characteristics:

In the growth phase the capital de-mand is generated as a result of their strong market position

Cash flow roughly balanced (accounts receivable ++, accounts payable - - ---> cash flow 0)

Norm strategy:

Keep market share and build slightly on it (growth strategy)

IV Dogs

Characteristics:

SBDs with low market growth (e. g. late maturity phase, degenera-tion phase) and relatively weak mar-ket position

Cash flow negative to balanced (accounts receivable +, accounts payable - ---> cash flow 0)

Norm strategy:

Strongly sink the market share, sell (disinvestment strategy)

III Cash Cows

Characteristics:

SBDs in the late growth and maturity phase with a high market position

Cash flow clearly positive (accounts receivable +++, accounts payable - ---> cash flow ++)

(Paymaster of the company)

Norm strategy:

Keep market share or lower slightly (profit strategy)

Fig. 25: Characteristics and norm strategies

A further example of a portfolio-matrix is shown in the McKinsey & Co. ap-proach:

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Fig. 26: Basic scheme of the market attractiveness-business-field-matrix

Description of the fields of the market attractiveness-business-field-matrix

Fields 6, 8, 9 = freezing of funds zone, investment and growth strategy (with large in-vestments amongst others for capital widening, intensive market adaptation, etc.), the cash flow is often negative short-term. A positive cash flow is expected medium and long-term.

Fields 1, 2, 4 = funds release zone. Absorption or disinvestment strategy, because the future outlook of the SBDs is rather bad. Striving for short or medium-term profit maximi-zation. Cash flow is often still positive. If this is not the case, the SBDs role should be considered.

Fields 3, 5, 7 = selective area. No clear statements about SBDs possible.

A number of strategic factors determine the success of a strategy. The environmental dimension “market attractiveness” is illustrated for example by dimensions such as size of market, market risk, competition or pur-chase frequency, whilst the corporate dimension “strength of business segment”, is determined, amongst other things, through the dimensions of relative market share, product quality or sales advantage.

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Fig. 27: Differentiated norm strategies in the Nine-Field-Matrix

4.4.3 Business division strategies

BDS define the basic behavior to be used in the individual product-market-areas. According to Porter, the strategies on this level are mainly competi-tion strategies. The BDS will create an advantageous position with the competition. Porter differentiates between three types of strategy which achieve these aims:

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Fig. 28: Porter’s competitive strategies49

During the course of a strategic development for cost leadership, a cost analysis should first be made in order to determine the behaviour of costs and to analyse the cost drivers. Companies, which want to implement these strategies, are striving for an optimized cost structure with as low as possible unit costs. A relatively large market share is a prerequisite be-cause a scaled cost digression will occur. This is termed as a scale effect (economies of scale). The unit cost sinks for example due to a rational course of activities, an under proportional increase in overheads during increased quantity of output. The danger of this strategy is the high inter-est of cost optimization. For example, it can lead to a lack of flexibility and willingness to adapt to changes in the market. In particular, technological improvements can make cost optimization obsolete so that competitive advantage only occurs periodically.

The strategic direction of product differentiation or a service can be put down to the following points:

Product characteristics, guarantee or service features, design, etc., stand out qualitatively from the competition

Achieving a psychological position in the total market (brand image) which leads to the consumer preferring it to the competitors.

At the centre of this strategy is not the optimization of costs but the per-formance characteristics. These purposely and exclusively developed characteristics are not connected to a high market share as a rule, be-

49 Closely aligned to Porter, M. E. (Competitive advantages), p. 38.

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cause a high amount of customers do not want or are not willing to pay a correspondingly higher price. The differentiation strategy is therefore not aimed at all customers of a branch.

Conditions for the implementation of strategies of

cost leadership differentiation

In marketing

High market share, strong growth

A quantity based distribution sys-tem

Aggressive price policy (low price strategy) and wide spread advertis-ing

In production

Large standardization and product standardization

High grade of atomization

Large capacity utilization and productivity

In research & development

Development tailored towards product and production (application orientated)

In management

Efficient cost control system in manufacturing and administration

In marketing

Good product design and long tra-ditions

Extremely positive quality image to the public

Effective customer service and an exclusive distribution system

Target group oriented advertising, high price

In production

Highest product quality, high tech-nological position

Standardization and normalization only when necessary differentiation is guaranteed

In research & development

Intensive groundwork research

In management

Efficient, externally oriented infor-mation systems

Fig. 29: Essential credentials for the implementation of cost leadership and differentiation

The niche formation is aimed at a particular segment. The company is fo-cused on a particular customer need in a relatively wealthy market seg-ment. The differentiation happens due to a very exact customer need, which the company fulfils better in comparison to the competition. The niche strategy can be implemented as a focused cost leadership strategy or as a focused differential strategy.

The dynamically complex environment with its constantly changing com-petition leads to existing competitive advantages becoming necessary components in the daily business. Because of this a company shouldn’t continually stick to one strategy but should see that a change between the shown patterns of action is possible, if necessary. The success of a com-

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pany crucially depends on whether a company can successfully manage and influence interactions with the environment. Companies should there-fore be in a position to change their costs and quality positions. If a com-pany want to react successfully on a market it must not just offer high quality or low costs but both, because dynamic competition causes the company’s product range to adapt itself and so price or quality alone can-not achieve competitive advantage over the competition. The change seen as a combination of differential and cost leadership strategies is called an outpacing strategy. With this strategy, a company can change in time be-tween the two strategy alternatives depending on the market conditions, in order to achieve a sustainable lead over its competitor.

4.4.4 Functional area strategies

Whilst business division strategies can strive for the right direction with competitive advantages, functional area strategies form the basic measures and aims of the functional area (e.g. production, marketing, per-sonnel). The functional strategies are derived from the previous strategies (corporate and business division strategies). During this phase, the opera-tive management is required to plan and conceive all measures, which are necessary according to their functionality for the implementation of corpo-rate and business division strategies

With the formulation of functional strategies, the process of strategy formu-lation is hierarchical down to the lowest level. Here is so-to-speak the cross over between strategic conception and with this the choice of a suit-able strategy as well as the strategic implementation. As a rule, the curve stretches from marketing/sales plan to the production and procurement through to personnel and financial planning.

Marketing-/Sales planning

As a rule, this comprises the detailed planning of sales figures, the sales channels, the concrete development of products and services, the for-mation of price and conditions as well as marketing measures like adver-tising.

Production and procurement planning

Here production quantities, production technology, the number, and choice of suppliers, as well as basic questions such as in-house or external man-ufacturing, are clarified.

Personnel planning

The personnel planning comprise the choice of employees and their de-velopment right up to the determination of their salaries and wages.

Financial planning

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Here the profit and loss account and the continuous liquidity planning play a major role. Investment planning, with its financing, is also of importance.

Questions to reflect on and control

1) Which components comprise the strategic analysis?

2) Differentiate between valuable and non-valuable activities

3) Which environmental factors do you know of?

4) What are the essential characteristics of strategic business units?

5 Implementation of strategies with performance meas-urement systems

5.1 Essential factors for the successful implementation of strategies

Within the framework of strategic implementation, one has to firstly per-form the specification of the strategy and the associated following proce-dures and then an acceptance of the strategy has to be achieved in the business units concerned. These two tasks are also considered as practi-cal implementation or behavioural implementation.

A realisation of the business and, above all, functioning unit strategies, is the object of practical implementation. It comes about during the tactical planning of measures, scheduling and budget planning. There will be a link here between strategic and operative planning. A practical strategy implementation additionally demands an alignment of not immediate but nevertheless relevant success factors. If, for example, the strategy is pur-sued to sell its own products using other previously unused sales channels like the internet for example, then the success factors of personnel and technology facilities are to be adjusted so that a Fit occurs.

It is the job of the behavioural-oriented enforcement to remedy any possi-ble resistance and to create acceptance for the strategies, which are to be implemented. This is especially the case with the business units when be-haviour, thought structures and attitudes to values are established, which can lead to the changes of the strategies being rejected or it lacking the ability to implement. Then the behaviour-oriented implementation gains importance. The following factors must be considered for this strategic im-plementation:

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Mediation of the strategy (information of the concerned employees on reasons, contents and aims, as well as consequences of the strate-gies),

Education and introductory training for the employees concerned, in order to get the right strategically-related qualifications,

Creating consensus (conflict resolution during the implementation).

An overview of essential tools for the strategy implementation to create acceptance of strategies is shown in the following chart:

Fig. 30: Categories of essential tools for the implementation of strategies50

During the implementation the grade of influence of the concerned can be differentiated between the partisan and bomb throwing strategies. With the partisan strategy a cooperative approach takes place bottom-up, whilst during the bomb-throwing strategy a direct approach takes place as a rule, top-down. If a company decides on a bomb-throwing strategy then the time it takes to implement is short. This type can however be linked to enormous acceptance problems. These shouldn’t be the case with parti-san strategies which are more grass root.

After the period of implementation a difference can be made between a revolutionary or evolutionary approach. Whilst the revolutionary approach strives for a radically planned change within a short time, the evolutionary approach is characterized by a development made in small steps using experience.

50 Grimmeisen, M. (Implementation controlling), p 17.

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Fig. 31: Chances and risks of the revolutionary style

Fig. 32: Chances and risks of the evolutionary style

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Another model used for strategic implementation is the 7-S-Model from McKinsey. The model considers seven factors, which describe the corpo-rate content. Three hard factors (strategy, structure and systems) portray the success which differentiates one company from another. They are guidelines for decisions. The soft factors (style, skills, staff and shared values) portray the internal management concept and support the success concept.

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Fig. 33: 7-S-Model

Strategy describes the aims of a company. Safeguarding a company’s success is a priority. Additional measures are described with which the company aims can be achieved.

Structure refers to organisational structures. Organisational tools like co-ordination, division of labour, configuration, and delegation and their con-nection are addressed.

Systems are the primary and secondary systems of the company.

Leadership style includes standards which a company works by, and sets priorities with, on how to treat its employees.

Staffs are the people who work in the company. Their demographic and educational characteristics are demonstrated.

Skills (competences) are company abilities which exist regardless of the individual person. BMW’s main skill (competence) is in car manufacturing.

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Shared Values are the livelihood of the company and include the expecta-tions and core beliefs of the employees in their company. They combine the hard and the soft factors.

The model is a culturally stressed one in which the upper management develops the strategy and tries to achieve its implementation by designing and fixing a certain corporate culture.

With the 7-S model, a Fit is emphasized within the hard and soft factors, as well as between the two factors, so that a strategy can be successfully implemented.

Fig. 34: The process of strategy implementation

This picture shows an example for the implementation of strategies. In the planning phase of the strategic implementation, the strategy has to be checked for quality characteristics like transparency, operability, or con-sistency, in order to immediately avoid possible acceptance problems from measures implementing the strategy. Also part of this phase is the analy-sis of what is affected by the implementation and how big the organiza-tional need is for the relevant success factors. At the end of the day, the aims of the implementation have to be formulated.

In the realization phase, communication measures, like the arrangement of strategies and trainings, are first carried out. In the subsequent imple-mentation phase the implementation of the strategy in which the project teams are built, the defined strategy element and measures for adaptation of the success factors are developed and short-term activities are imple-mented. The deployment phase forms the completion of the actual realiza-tion of the strategy. The results, which the strategic implementation has achieved, are shown in the control phase. Here a comparison is made be-tween the targets set and the targets achieved (implemented).

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5.2 Balanced Scorecard as a performance measurement system for the implementation of strategies

By performance, measurement the development of key performance indi-cators of different dimensions is understood (e. g. costs, time, quality, in-novative capability, customer satisfaction). These lead to an effectivity as-sessment (“doing the right things”) and efficiency assessment (“doing the things right”) of the performance and performance potential of different objects in a company, so- called performance levels (e. g. organizational units of different size, employees, system processes). In performance measurement the meaning of frequently non-financial pre-tax values should be emphasized (costs, i. e. key performance indicators), which means those which will have an impact on the future (financial) perfor-mance. The performance transparency aspired to by its definition and connection to financial and non-financial indicators should contribute to performance improvement on all performance levels of a company, by means of effective planning and management processes. Additionally, a performance measurement should encourage performance level-related and –comprehensive communications processes and an increased em-ployee motivation, as well as generating additional learning effects.

One of the most important tools of a performance measurement system is the Balanced Scorecard. It breaks down the barely understandable strate-gies into precise quantities and measurable targets.

In 1990, in cooperation with 12 firms, Kaplan and Norton developed the basic scorecard. It is based on the inadequacies of traditionally and purely corporate, financially geared operating figures. It is a balanced implemen-tation-orientated tax projection, which aligns both internal and external business perspectives. It usually consists of four perspectives, which are each characterized by respective operating figures.51

51 Cf. Kaplan, R. S., Norton, D. P. (Balanced Scorecard), p. 7.

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Fig. 35: Perspectives of the Balanced Scorecard52

The Balanced Scorecard aspires to the following balanced operating fig-ures:

External and internal operating figures;

Financial and non-financial operating figures;

Advanced and subsequent operating figures;

Short-term and long-term operating figures.

Based on strategic consideration a good Balanced Scorecard, that means operative figures and operative figure specifications, as well as measure which are fixed to the basic scorecard, give the strategic direction, or ra-ther they help guarantee the implementation of strategic guidelines in the application area. In this way, the Balanced Scorecard enables not only an integration of strategic aims in the operational activities but also activates an integrative effect on the working relationship of the managers.

For the establishment of a Balanced Scorecard, there is important prepar-atory work to be done. Not only visions, performance level targets and strategies for the possible application areas have to be clarified, but also the closely related conceivability regarding the processes and organisa-

52 Kerth, K., Asum, H. (Strategic tools), p. 260.

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tional orientation, as well as customer expectations or as the suggestions for supplier connections.

The four angles usually make up the most important areas of the company although the angles can be remodelled depending on the branch and con-nection; or rather, they can be added to with more angles.

The financial aspect is firstly about the important fiscal control lever for the company. Many perspectives lead to the financial perspective, because here the individual successes of the particular perspectives influence the financial figures. Examples of targets are increase of profitability, increase of shareholder value, turnover, sinking of costs.

With the particular strategic business areas, the fiscal targeting aims at the position of the particular strategic business areas in its lifecycle. A busi-ness area in the growth phase has other benchmarks to one in the maturi-ty phase.

In the growth phase, the business fields seldom achieve payment surplus-es. High development costs and initial investments must firstly be amortisized. A conceivable target here could be the percentage increase of the resulting growth rate, or of the growth in turnover.

In the maturity phase, the interest payment on the capital invested plays a big role. As a rule, this phase is about expanding capital and the develop-ment of the competitive position. Market shares must be held or expand-ed. The majority of business units will set their target to one with as high a return as possible.

The degeneration phase is no longer about investments and the expan-sion of market share but more about the “fruits” to be harvested from the first phases. The strategic objective here is therefore the maximisation of the return flow from the sales process.

When competition pressure increases the concentration on the market becomes especially important. The customer is the central figure.

First of all the potential customers must be identified, their wishes and needs found, and the internal innovation and then the production process has to be aligned accordingly. The main aim from the customer perspec-tive is therefore to create values for clearly defined customer target groups through which the company can remain competitive and achieve its long-term financial goal. Examples of these are increased customer loyalty, in-creased customer satisfaction and an improved reputation.

These aims can only be reached if the internal organisation supports it. Necessary improvements of internal processes should be carried out or new business processes should be detected. A complete picture of the value chain is necessary to indentify processes, which position the com-pany well. The processes are recognised when Porter’s value chain is ex-amined within a typical process (innovation process, operational process and customer service process) and which contribute to the achievement of

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the financial and customer targets and therefore to the implementation of the strategy.

The innovation process recognises and describes current and future cus-tomer wishes and needs and develops their solutions. The job of the busi-ness process is to carry out the current business in an optimal way. Cus-tomer service offers service, which connects to the actual product pur-chase and provides the customer with an additional benefit. Examples of targets are increased product quality, increase motivation, minimized de-livery time.

Within the learning and development perspective, the learning and grow-ing of the company should be encouraged. The aim is to stick to the or-ganisational framework so that the targets of the other three perspectives can be achieved. The infrastructure should be built on. Here are three rel-evant factors for this:

Employee potential;

Potential resulting from information systems;

Motivation.

The recognition and support of employee potential has gained meaning over the years. The requirements for responsible, thoughtful employees have increased and the meaning understood. The dependency of innova-tion capability and the process of optimisation using employee expertise are seen as crucial success factors.

Employee training ensures the best possible customer support. Further-more cost saving can be implemented by means of abolishing and modify-ing inefficient work processes. The company can further develop itself by recognising, supporting, and using the potential of its employees. It leans through its employees.

A further important potential to be recognized and used is that of infor-mation systems. Here the internal information flow is meant. Training and motivating employees is not sufficient, they must have access to all infor-mation needed for their jobs.

The third category of the learning and development perspective is targeted at employee motivation. The knowledge is base on the fact that the productivity of the employee is highly dependent on the grade of motiva-tion. Reward systems, promotion chances and targeting as tools for target motivated measures are used in this connection. It is important for a com-pany to support its employees’ own initiative in order to make use of their potential, particularly with respect to innovation targets.

Companies will always align their total target to that of the fiscal target. Because of this the basic scorecard was designed, so that targets of the other perspectives are aligned with those of the fiscal targets. This way the fiscal target has a double role: on the one hand it defines the financial

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achievement and on the other hand, it allocates the other perspectives their respective ultimate targets.

If the perspectives’ targets are set then a linkage is required. Then it will be decided which target is dependent on which. Each one must be linked to a chain which is linked at the end to the targets of the financial perspec-tive.

Fig. 36: Example of a cause-effect chain53

In the next step, the chosen targets are transcribed into precise key per-formance indicators. These serve to measure and implement the strategic target. For each target, there are figures to be calculated. Subsequently the figures have to be given, for example the increase in sales of 20 % or the sinking of costs by 10 %. The contribution to strategic implementation is so defined.

53 Closely aligned to Kerth, K., Asum, H. (Strategic tools), p. 265.

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Aim Key performance indicator

Measures Measurement method

Improvement of customer satis-faction

Sinking of the rate of complaints to less than 1 %

Introduction of quality tests by the processor after each work-ing process

Number of com-plaints with re-gard to the total amount of deliv-ered products

Expand market share

For Sales: in-crease of new customers by 200 % within 2 years

Each day at least 40 % interested parties (= poten-tial new custom-ers) will be visited

The basis is the number of inter-ested visits with reference to the total customer visits (including old customers)

Expand market share

Increase share of turnover of “old customers” ten-fold within three years

Intensive product advertising via emails and mail-ings directed at existing custom-ers

All orders are counted for which no new customer base was created

Achieve 50 % level of aware-ness with cus-tomers and po-tential customers

The reputation of the company should be im-proved in expert groups through target-orientated in house exhibi-tions

In house exhibi-tions to which regional and trade press are invited

Determine num-ber of companies taking part

Fig. 37: Example of customer perspective

The setting of measures and the responsible person complete the process of introducing a Balanced Scorecard, as well as the transfer of sub-goals onto individual people through corresponding target agreements. The achievement of goals is checked annually so that the success of the strat-egy implemented becomes measurable.

Even though the basic score card portrays a very complex tool, which needs a long time to set up, by using it the strategy becomes tangible for all concerned. Moreover, it ensures a transparency in the company and also for external stake holder groups like the supervisory board. They look at many success relevant company factors and not simply at the financial results.

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Questions to reflect on and control

1) What is understood by issue and behavioural implementation of strategies?

6 Strategic Control

6.1 The necessity of strategic control

The strategic development and implementation is selective because only sections are chosen from the many relevant aspects and taken as a basis. The market share-market growth portfolio chooses only the relevant mar-ket share and the relative market growth as a headline indicator represent-ing many. Additionally a general recommendation for the formulation of norm strategies takes place. So, for example, when Poor-dog-products are identified a disinvestment strategy is recommended. A tool is necessary which always gives feedback and questions whether the decisions taken were useful and should stay in use. This task is carried out by strategic control. It must be able to compensate the selective process to that effect, whether the decisions taken make sense. Here the strategic development and implementation must accompany strategic control.

Strategic control is therefore a systematic process, which runs parallel to strategic development and implementation. It examines the implementa-tion and correctness of the strategic planning through the negotiation of variations between planned and comparative sizes. The following chart clarifies the conceptual formulation of strategic control compared with tra-ditional control.

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Size comparison Traditional control Strategic control

Control content Pure target performance comparison in the form of a target control com-plements an analysis of the causes for deviation

Target, assumption and progress of plan controls and strategic enlighten-ment

Control size As a rule monetary sizes Monetary (quantitative) and qualitative sizes

Control orientation Company internal tar-geted punctual fixed controls

Internally as well as ex-ternally targeted total controls on success fac-tors of the company (all round inspection)

Control time period Once only after the re-sults

Continuous, parallel to strategic development and implementation

Fig. 38: Comparison of traditional and strategic control54

6.2 Conception of Strategic Control

The control of strategic development and implementation can be seen as a control of assumptions because during the development and implemen-tation of strategies explicit and implicit assumptions are made. Are these assumptions valid or have they changed so that strategies need adjust-ment? Implicit assumptions additionally hide a considerable danger be-cause they have more or less unknowingly found themselves introduced to strategic developments. Here permanent environment and corporate con-trol in connection with early strategic planning, discontinuity and structure breaks must be demonstrated. Therefore, within the framework of an in-ternal feasibility control an examination of implementation feasibility is re-quired. Can strategies be implemented at all in the company? Is the com-pany in a position to achieve identified competitive advantages as well and from these can it generate staggered success and liquidity, or wealth and financial power? Here the focus of the strategic control lies in changes in the underlying real, financial, and human capital.

With the external feasibility control (from a market oriented point of view), the changes in the company environment are considered, which compli-cate the implementation of product-market-strategies. In particular it must be made sure that risks are avoided and chances are taken seriously. The observation of products currently on the market and the continuous collec-tion of information for developing products should accompany this

54 Baum, H.-G., Coenenberg, A. G., Günther, T. (Controlling), p. 320.

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Furthermore, it should be regularly checked whether the set targets were at all realistic or whether improvements must be made and strategies aligned. Moreover, the process of strategic development and implementa-tion should be checked. That means is the success potential still there or has it changed and are profits under expectation?

The examination of whether the process of strategic development and im-plementation has run itself efficiently and effectively also belongs to that of strategic control. Implemented strategies should be continually checked for their grade of implementation. This summarizes whether predeter-mined measures were also implemented (content control) and to what ex-tent the implementation has already succeeded (realization control).

Questions to reflect on and control:

1) Separate strategic and traditional control

7 Conclusion

You have learned on the basis of chaos research that the processes of strategic management are not particularly simply, but actually the opposite is the case. Complexity and networking of the system in which a company find itself, demand alignment and circumstances and situations that are not always continually understood and because of their complexity will never be understood. The majority of factors which are important in the decision making cannot really be predicted. This long distance paper should have nevertheless sketched the process of strategic development and implementation using chosen tools and demonstrates strategic con-trol.

The following books are suitable for further reading into this subject mat-ter:

Welge, M. K., Al-Laham, A. (Management). This is a thorough and under-standable book on stategic managment, which offers a solid theoretical basis with a practical orientation.

Bea, F. X., Haas, J. (Management). A handy reference book which gives a quick and good view of strategic management.

For a further look at system theory from an economical point of view:

Malik, E. (Strategie) (10th edition)

A very interesting book which offers much food for t thought.

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Appendix

Tasks

1) Which two dominating understandings of the term strategy do you know? Explain the differences between the two.

2) What happens during a opportunities/risks analysis? When does one speak of opportunities and when does one speak of risks (dangers)?

3) Explain the BCG-Matrix and the principle trading alternatives men-tioned.

4) Show the strengths and weaknesses of the BCG-Matrix.

5) What is a dissipative system?

6) Explain the essentials of chaos research.

7) Explain the components of strategic management.

8) Name the essential implications of system theory on strategic devel-opment and implementation.

9) What do you understand by double contingency?

10) Discuss Porter’s value chain.

11) What are the driving forces of competition according to Porter?

12) Explain the four perspectives of the Balanced Scorecard.

13) Why can the Balanced Scorecard be used as an instrument for im-plementation of strategies?

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