Strategic Management in Public Sector Organizations

Abstract
Public sector organizations are responsible in achieving their objectives in the most cost-effective way
possible while running their activities using the taxpayer’s money. The use of strategic management is
important in achieving objectives, but the widely-used strategic management theories are more likely
to be applied in private business instead of public sector organizations. There are different types of
public sector organizations according to the implementation of new public management (NPM) and it
affects the result of how possible it is to apply two of the strategic management theories: Porter’s
strategic positioning model and the resource-based view (RBV) strategy, in public sector organizations.

Introduction like private businesses, in which considering

Public sector, including both public
enterprises and public services such as public
goods and government provided services, are
responsible for formulating, implementing, and
evaluating strategies in the most cost-effective
way possible to provide service and programs.
Using the most suitable tools for strategic
planning is very important in achieving those
objectives. This article starts with explanations
about the context of new public managements
(NPM) which have been significant influences
and introducing new economic perspectives.
This article presents the use of two of the
strategic management theories that could be
useful in its application towards public sector
activities. The first theory is Porter’s strategic
positioning model (Porter; 1980, 1985, 1996)
which focuses on choice of strategy and
position in the market, so as to exploit market
imperfections, and the other one is the resource-
based view (RBV) of strategy (Barney 1991,
1995; Peteraf and Barney 2003) which focuses
on developing and exploiting the organization’s
resources (Hansen & Ferlie 2014). These
theories are mostly used in private business, but
there are possibilities that they could be
applicably used in public sectors as well.
performance, cost, efficiency, and how audit-
oriented. It is hoped to increase efficiency,
effectiveness, and productivity, as well as cost-
effectiveness.
There are significant differences in
between public sector organizations and private
business, especially in their core features that
would affect the application of strategic
management models. First is the degree of
administrative authority. Economic or private
organizations have the privilege of economic
freedom, meanwhile public sectors
organization can be restricted by their mandate,
which also serves as a constraint on applying
strategy in public management. Second is the
use of performance-based budget in their
budgeting. It is distinguished with focus in the
results of output and outcome. It could be the
public organizations having fixed budgets with
no relation to performance, or at the other
extreme, budgets based solely on performance
(activity-based budgets), or something in
between. The use performance-based budget
form increases the importance of strategic
management because the organizations’
survival to a larger extent depends on the
performance. The other point is the degree of

Literature Review

The new public management (NPM) is a

set of assumptions and value statements about
how public sector organizations should be
designed, organized, managed, and how, in a
quasi-business manner, they should function
(Diefenbach; 2009). In a globalized world,
public sector organizations need to adapt to a market-like competition; whether the control is
much competitive and changing business mainly political or performed via market-like
environment with a new operation and the way conditions. Market-like condition is indicated
they operate. The use of NPM is meant to make from how much competition threatens
public sector organizations become a lot more organizations’ survival.
 Based on above explanations and as
portrayed in the diagram, there are two extreme
types of public organizations. The first category
is the classical bureaus with highly restricted
tax of authority and the other is the private-like
NPM-inspired agencies with greater scope of
actions and fewer restrictions. The theoretical
argument is that overall the opportunity for
strategic management models to be applied
well when there is a greater freedom to act,
there is much performance-based budgeting,
and there are market-like conditions; meaning
that it is expected to happen when there are
strong NPM reforms.
Strategic Management Theories
1. Porter and Strategic Positioning
Porter’s work on strategic positioning
asks: how can the organization best position
itself in the industry to achieve competitive
advantage? The key idea is that the organization,
compared to competitors, constructs an
advantage from which it can make a sustained
profit. The way to achieve competitive
advantage is through a clear strategy where
only a small number of generic strategies are
viable. The low cost strategy focuses on
achieving cost advantage. The differentiation
strategy focuses on offering different products
or services that customers are willing to pay for
in return for high quality. It explores the effect
of a given strategy across the organization.
The overall goal of using a strategic
positioning approach is to gain an advantage
over competitors and to maximize profit,
meanwhile public organizations usually have
multiple stakeholders to serve within a specific
mandate and not a focus on profit for
shareholders. Strategic positioning also focuses
on the choices of customers or what markets to
serve. On the contrary, public organizations
doesn’t have that freedom of choice because of
their mandate to fulfill.
Porter’s theory can be applied in public
organizations where there are strong NPM
reforms in autonomy, market-like conditions,
and performance-based budgeting. In Indonesia,
it is not possible to use Porter strategic
management tools in government agencies and
departments such as police departments or
Ministry of Law and Human Rights where it is
not feasible to choose the market. However,
other type of public organizations such as state
owned enterprise like PT Pertamina can very
well use this strategic approach to reach their
organization objectives.
2. The RBV View of Strategy
The RBV model assumes that firms are
heterogeneous in their resources which are also
not perfectly mobile (Barney 1991). An RBV
strategy seeks to gain a competitive advantage
by implementing a value creating strategy not
simultaneously being implemented by other
competitors which can also be sustained as
competitors cannot duplicate it readily (Barney
1991). The fundamental strategy is to exploit
and develop the organization’s heterogeneous
resources to gain a sustained competitive
advantage.
RBV addresses ways to gain profit,
achieve a competitive advantage and create
strategies that cannot be imitated by others
which is not relevant in traditional public
organizations. However, RBV focuses on value
creation; how to use and develop resources to
create value. It is different from and broader
than the strategic positioning model, which
focuses on how much value the shareholder can
earn in profit. Much RBV literature focuses on
the goal of efficiency (Teece, Pisano, and
Shuen 1997), which is also relevant in
traditional public organizations where it is
important to use resources efficiently. RBV,
unlike Porter, focuses on becoming better than
competitors at implementing value creating
strategies by exploiting resources optimally.
The concept of dynamic capabilities seems to
match conditions in many current public
organizations that have to adapt to new
situations and requirements rapidly while going
through unpredictable change themselves.
RBV also requires some degree of
autonomy for public sector organizations.
Performance-based budgets may be needed as
well to support RBV to indicate success in
value creation and efficiency more clearly.
Finally, the degree of market-like conditions
needed depends on which aspects of RBV are
in focus: if the focus is on value creation and
efficiency there is not necessarily a need for the
market-like condition, but if the focus is on
competitive advantage and isolation of
resources then the market-like condition is a
fundamental prerequisite.
In Indonesia, RBV theory can be used in
the health care organizations such as BPJS or
even public hospitals in competition with
regular insurances company and private
hospitals.
Conclusions
Two of the strategic management
theories that is Porter’s strategic positioning
model and RBV can be applied in public sector
organizations under certain conditions. In
Porters’s strategic positioning model which
emphasizes in achieving competitive
advantages, it can be applied to organizations
where there are strong NPM reforms, such as in
state owned enterprises that seek profits as the
main organization objectives. RBV model is
more public organizations friendly but still
need to have a certain degree of conditions.
Overall, the conditions depend on three key
dimensions, namely the higher degree of
administrative autonomy, performance-based
budgets, and market-like conditions found in
public services organizations. It can also be said
that the organizations who run more towards
the NPM-based spectrum are more likely to be
usefully applying both strategic models.
References
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Diefenbach, Thomas. 2009. New Public
Management in Public Sector
Organizations: The Dark Sides of
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Hansen, Jesper Rosenberg, and Ferlie, Ewan.
2014. Applying Strategic Management
Theories in Public Sector Organizations:
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