1.

1 INTRODUCTION

Few if any topics in management have been given so much attention over the past 25 years as was strategy.
There is a general agreement that strategy is about the future, or rather about how our individual or
organisational goals may come true. Setting feasible, yet ambitious goals needs first an understanding of our
present situation (Where are we now?). This helps to define the desired future position (Where do we want to
be?). To make the transition between the present and the future operation, the path that takes the individual
or the organisation from where it is to where it wants to be needs to be clarified (How do we get there?).

Strategy is, in its origins, a military concept. And indeed, great military thinkers such as the
Chinese Sun Tze from the 6th century BC (!) or the Prussian Clausewitz from the early 19th
century still provide a rich pool of thought for those seeking strategic advice. The lessons of
wars waged by Alexander the Great in Persia, by Scipio against Carthage, the ancient city in
North Africa, or by Hannibal against Rome, or by the Byzantine Belisar in Africa, just to name
a few from the old times, are still worth of studying by students of today’s business strategy.
One should beware, however, of taking the military parallel too far. There are no doubt
winners and losers, plans of attack or defence in business, as well, but strategy is more than
a zero-sum game, that is, when somebody’s victory is its opponent’s defeat. Strategy is not
simply about competing for a bigger share of a finite market – it is about creating new
markets through meeting human needs in new and exciting ways.

Table 1.1 What successful organisational strategies are based on?

• A vision of the future A firm footing in reality

• Re-inventing the organisation and
its industry
• Stretching the organisation beyond
what is currently possible
• Creating a shared vision by empowering
people
• Seeing the big picture
Careful matching of organisational
strengths to market opportunities
Deploying the key strengths of
the organisation
Strong, charismatic leadership
Attention to detail

John Middleton, Bob Gorzynski, “Strategy Express”, Capstone Publishing, 2002

While each of these statements is true, it is tempting to conclude that it is impossible to follow the
recommendations on the left-hand side simultaneously with those on the right. There is a set of contradictions
here, often underlying the discourse on strategy. One had better accept that strategy itself is paradoxical.
Strategies that have ultimately proved successful often appeared contradictory or even absurd at first sight.
Conventional wisdom has often been debunked by reality. It was for instance accepted for long that there
was a trade-off between the cost and the quality of a product: you had either higher than average quality or
higher than average cost. Then first came the Japanese cars, and then the low-cost providers of various
services (airlines, hotels, etc.) who proved that this conventional wisdom may be conventional but hardly wise
or true.

Strategy is both a state of mind (challenging, questioning, innovating) and a set of tools and techniques. We
want to assist you both in learning the latter and developing the former! Unit 1 will familiarise you with the
concept of business strategy, and elaborate when you need to develop a strategy, and if you do, what sort of
strategic goals you may set for yourself. Unit 2 will focus on what tools and techniques should be used to best
analyze and understand the broad (social, regulatory and technological) and closer (industry, industry
segment) environment of the organisation. It will also consider the best ways to map the organisation’s own
internal endowments (resources, capabilities, ideas). Unit 3 will focus on the critical factors in developing and
appraising strategic options whereas Unit 4 will offer a short introduction into the critical challenges of
strategy implementation.

1.2 BUSINESS STRATEGY

Most simply, business strategy can be defined as the rules and actions used to steer a business towards making
much more money.

For a good, and enjoyable, yet less simplistic summary of strategy definitions see Fred Nickols’ article.
Major strategy revisions rarely happen once a quarter or even once a year. Strategies are drafted for a period of
three years or more, and only updated in-between. When is it inevitable that you develop a new strategy or
seriously reconsider the old one? Here are some rationales for doing so:
• Profitability is slipping, and no-one knows precisely why or how to restore it.
• Profitability is below shareholders’ required rate of return.
• While performance is acceptable, executives don’t know or disagree on which areas are the most
profitable.
• The business has such a broad portfolio of products or customers that the actual directions of business
is obscured.
• There is an air of complacency. Business is as usual, and needs to be revitalized with clear insights and
objectives.
• The business is investing in new projects outside its core business and they don’t seem to be bearing
fruit.
• Shifts are evident in the marketplace but there is no consensus on how important they are or how the
business should react to them.
• New competitors are making inroads, or new products or substitutes are coming into the market.
Source: R. Koch, P. Nieuwenhuizen, Simply Strategy, FT Prentice Hall, Great Britain, 2006,
pp.147-148.

Business strategy comes in two flavour. There is corporate strategy – plotting the direction of businesses, usually
by a corporate head office. Then there is business or business unit (often called also competitive) strategy –
crafting the strategy for individual businesses. That is what you need if you are a practical manager or an
entrepreneur.

1.2.1 Corporate Strategy

Corporations are responsible for creating value (or more simply, for making money) through their businesses, i.e.
various products / services that may be in unrelated business segments.
Corporate strategy fundamentally is concerned with the selection of businesses in which the company should
compete and with the development and coordination of that portfolio of businesses.

To be able to answer the question: What is Corporate Strategy, Really?, please read Michael E. Raynor’s
excellent article that was published with the same title in the Ivey Business Journal, in December 2007.
(http://www.iveybusinessjournal.com/article.asp?intArticle_id=722)

1.2.2 Business-unit (or Competitive) Strategy

A strategic business unit may be a division, product line, or other profit centre that can be managed and planned
independently from the other business units of the firm. Or, it can be an individual, self-contained business (the
corner shop e.g.), supplying one main market.

At the business unit level, strategic issues are less about the coordination of operating units and more about
developing and sustaining competitive advantage for the goods and services they produce.

At the business unit level, strategic success depends on in what industry your business is, and on the relative
position of your products / services within that industry.
• Industry structure – Industries can be attractive in terms of profitability and less so. Moreover, within
each industry there are always forces at work (for a detailed elaboration on Porter’s Five Forces see Unit
2) that can either improve or deteriorate the long-term average profitability of the industry.
• Relative position – Your products or services have a position within their own industry which can be
measured by (growing or shrinking) market share. Why do certain products or product groups end up
with an attractive position? Because they have attained a sustainable competitive advantage over the
others. Competitive advantage can be attained by low costs of production or by differentiation, i.e. by
providing higher than average perceived customer value. (If you want to learn more about positioning
while having fun, visit IBS Library and read “Positioning the Derriére: Toilet Nirvana” by James Brooke in
Mintzberg et. al., “Strategy Bites Back”, Prentice Hall, 2005, pp.117-119.)
• Scope – It is the array of product and buyer segments served, vertically or horizontally. Scope must be
chosen wisely (both over- and undershooting should be avoided) if the provider wants to attain
sustainable competitive advantage.

Deciding between these three dimensions is what makes strategy at the business unit level. To put it simply, a
good position in an attractive industry within an optimal scope provides sustainable competitive advantage. A
good position can be attained through low cost or differentiation, sometimes through both. But more often than
not, there is trade-off at the heart of any strategy. A good position through cost leadership or differentiation will
defend your company against the adverse affects of the Five Forces of your industry.
A well-drafted two-page summary of the above concepts you’ll find at
http://www.quickmba.com/strategy/competitive-advantage/. It is a must!

1.3. STRATEGIC GOALS

Many authors argue that strategic goal setting must rely on a vision which leads the management to articulating
the organisation’s mission which defines the boundaries of organisational activity within the framework of the
overall vision. The mission, in turn, may be the bottom line for formulating strategic goals and objectives.

This may or may not be so. Visions can sometimes be motivating. Just like the one that is attributed to Arnold
Schwarzenegger who was elected Governor of the State of California in 2003:
I will come to America, which is the country for me. Once there, I will become the
greatest bodybuilder in history.......... I will go into movies as an actor, producer and
eventually director. By the time I am 30 I will have starred in first movie and I will be
a millionaire...... I will collect houses, art and automobiles. I will marry a glamorous
and intelligent wife. By 32, I will have been invited to the White House.

Personal visions are forceful driving forces. Business leaders may also have personal visions which they more
often than not project onto the organisation they head. If employees come to share that vision, it helps to create
commitment and loyalty. Behind several successful businesses there is a strong personality with a far-fetched
vision: think of Sam Walton (Wal-Mart), Ingvar Kamprad (IKEA) or Andrew Grove (Intel).

Mission or Purpose is a precise description of what an organization does. It should describe the business the
organization is in. It is a definition of “why” the organization exists currently. If a mission statement is good, then it
provides an orientation for strategists, that is, it keeps future scenarios and action plans in line.
Intel's original plan, written on the back of a menu, is an excellent example of a good mission statement:
The company will engage in research, development, and manufacture and sales of
integrated electronic structures to fulfil the needs of electronic systems
manufacturers. This will include thin films, thick films, semiconductor devices,
and ......... A variety of processes will be established, both at a laboratory and
production level ...... as well as the development and manufacture of special
processing and test equipment required to carry out these processes. Products may
include dioded transistors ....... Principal customers for these products are expected
to be the manufacturers of advanced electronic systems ..... It is anticipated that
many of these customers will be located outside California.
Source: http://www.planware.org/strategicplan.htm#2.

Today’s corporate world, however, is abounding in meaningless mission statements that are articulated and
announced only because managements believe that a serious company cannot do without it. If you'd prefer a
statement of this kind, use the Dilbert Mission Statement Generator. It is fun!

With or without visions and articulated missions, strategic goals need to be set right. The overall goal of all
business strategies is superior and sustainable financial performance, i.e. higher profits than earned by the
average players in the industry in which the business is active. Higher than average profits can only be earned
and sustained (continued to be earned) if the organisation has competitive advantage over its rivals.
Nevertheless, to say that “we want to have superior financial performance” or that “we want to have competitive
advantage” is not a strategic goal. It should be more specific – if you have a liking for acronyms, set your strategic
goals and objectives SMART:

Specific - the objective should state exactly what is to be achieved.

Measurable - an objective should be capable of measurement – so that it is possible to determine whether (or
how far) it has been achieved.
Achievable - the objective should be realistic given the circumstances in which it is set and the resources
available to the business.
Relevant - objectives should be relevant to the people responsible for achieving them.
Time Bound - objectives should be set with a time-frame in mind. These deadlines also need to be realistic.

Source: http://www.tutor2u.net/business.

Aside from presumably indicating a necessity to achieve regular profits (expressed as return on shareholders'
funds), objectives should relate to the expectations and requirements of all the major stakeholders, including
employees, and should reflect the underlying reasons for running the business. These objectives could cover
growth, profitability, technology, offerings and markets. They can cover the business as a whole including such
matters as diversification, organic growth, or acquisition plans, or they can relate to primary matters in key
functional areas.
Figure 1.1 – Example: Strategic Objectives

Source: http://www.csuchico.edu/mgmt/strategy/module2/sld033.htm

Read carefully Steven Flinn’s article that elaborates in an attractively concise manner how the way you look upon
the external and internal circumstances of your organisation will effect your approach to setting your strategic
goals. This article, and the strategy development frameworks it highlights leads us straight to the depths of
strategic management.

1.4. STRATEGIC MANAGEMENT

Strategic management, in its broadest sense, is about taking decisions based on long-term objectives, the deep
understanding of the competitive environment and the appraisal of own resources and capabilities. In practice,
strategic management has the components shown in the figure below:

Figure 1.2 – The Strategic Management Process

Strategic Analysis is about analyzing the strengths (and weaknesses) of a business position and understanding
the important external and internal factors that may influence that position, to the worse or the better. The process
of Strategic Analysis can be assisted by a number of tools which will be dealt with in Unit 2
Strategy Formulation involves identifying, evaluating and selecting strategic options based on the strategic
analyses as well as on the understanding of what the customer wants and what the stakeholders expect (the
„ground rules”). (Unit 3).

Strategy Implementation is to translate the analyzed and selected strategy into organisational action, often the
hardest part. This e-material deals with implementation in brief in Unit 4. Further knowledge on strategy
implementation can be gained in the subsequent seminar sessions.

In the strategic management process first corporate strategies must be developed, followed crafting competitive
strategies for the business units. Competitive strategies must then be translated to functional areas such as
product development, production, sales & marketing, HR and the rest (functional and operational strategies) by
adding detail and defining the ways of implementation. If you have a single-business company, you can start
immediately with developing your competitive strategy.

You will have more details to come in the following Units. Yet, there is one final warning here. You can and should
learn about strategic management. But you cannot learn it. It is like cooking. You must learn the basics of how to
get around in the kitchen but that will not make you beat Jamie Oliver. After all,

creating strategy is judgemental designing, intuitive visioning, and emergent

learning; it requires personal thinking and social interacting, cooperative as well as
conflictive; it can include analyzing before and programming after as well as
imagining during.

Providing any answer short of this would be doing you a disservice because when it
comes to strategy there are no easy answer. Except, of course, to make sure you
understand deeply what you are strategizing about, that you act engagingly,
responsively, and responsibly, and that you have the courage to see with your own
eyes, think with your own brain, and act with your own heart.

Henry Mintzberg, Bruce Ahlstrand and Joseph Lampel, “Strategy Bites Back”, Prentice
Hall, 2005, p. 276.

Again, it is like cooking…

A recipe is not meant to be followed exactly – it is a canvas on which you can embroider.
Add a zest to this, a drop or two of that, a tiny pinch of the other. Let yourself be led by
your palate and your tongue, your eyes and your heart. In other words, be guided by your
love of food, and then you will be able to cook.

Chef Roger Vergé, in: Henry Mintzberg, Bruce Ahlstrand and Joseph Lampel, “Strategy Bites
Back”, Prentice Hall, 2005

2.1 INTRODUCTION

Whether personal life or business, it is imperative to know where you are going to, i.e. where you want to see
yourself in 5, 10 or 25 years. This is what in the strategic vocabulary is called vision, goals and objectives.
However, it is equally important to be aware of where you are at present, relative to your vision, goals and
objectives, in terms of your own strengths and weaknesses and in terms of the environment in which you need to
reach your goals. Achievements both depend on yourself and your respective environment, narrow and broad. In
the strategic vocabulary, getting to know yourself and your environment figures as strategic analysis.

In business, strategic analysis, as a part of the strategic management triangle (see Figure 1.2 in Unit 1), includes
the external or environmental analysis of the economic system, the competition, opportunities and threats in the
environment; and the internal or corporate appraisal of the resource-base, the capabilities and the strengths and
weaknesses of the organization.

2.2 ANALYTICAL TOOLS & CONSIDERATIONS SUPPORTING COMPETITIVE STRATEGIES

The profound understanding of the competitive environment is as critical ingredient of a successful strategy as is
the appraisal of the internal strengths and weaknesses of the company. Business strategy is essentially a quest
for profit. But you will be able to earn an above average return for your company and stakeholders only if you are
able to deliver superior value to your customers. In other words, you will make good money only if you have a
competitive advantage. The sources of sustainable competitive advantage must be identified both within your
company and its external environment.
2.2.1 ENVIRONMENTAL AUDIT

One can identify various overlapping levels of the external environment. The macro environment comprises the
country and its economic system where the company operates. When analysing the macro environment, one
should look at issues like the political system or the economic health of the given country, the technological and
legal background, socio-cultural factors, or environmental issues. Read this short summary
(http://www.netmba.com/strategy/pest/) on the so-called PEST analysis that provides an easy framework to
remember the factors to be analyzed.

Since the world is uncertain, and it is difficult, or rather impossible to forecast what is going to happen exactly in
your macro-environment, gain some insight into scenario making techniques at
http://www.netmba.com/strategy/scenario/.

If you find the issue of predicting uncertain futures challenging, you may enjoy reading the following excellent
article: Strategy for uncertainty.

2.2.2 INDUSTRY ANALYSIS AND COMPETITIVE STRATEGY

Now you have a clearer picture of the country/region, where you operate or where you want to invest. Therefore
you can make a decision whether to choose country A over country B, market X over market Y. But analysing the
macro environment in itself is not enough. You also need to understand the industry where you are going to
compete.

Industries differ widely in growth trends, economic distinctiveness, the intensity of competition, technology and
you name it. But in the end, average industry-level profitability is something that can be compared across the
range of industries. In terms of average profitability, there are “good” industries and less attractive ones. Some
industries (such as tobacco, pharmaceuticals, and medical equipment) consistently earn high rates of profit;
others (such as iron and steel, nonferrous metals, airlines, and basic building materials) can hardly earn their cost
of capital. In terms of return on equity, the difference between the top earning industries and the rearguard can be
5-fold.

There are many factors that determine in which category an industry falls in terms of its profit potential. A helpful
framework for classifying and analysing these factors is the one developed by Michael Porter of Harvard Business
School.

Porter’s Five Forces model views the average profitability of an industry as determined by five sources of
competitive pressure. And evidently, the more competitive pressure in an industry, the less profit it will earn. The
five forces that drive as Porter suggests competition are:
1. Rivalry among existing firms
2. Threat of new market entrants
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Threat of substitute products (including technology change)

Familiarize yourself with the model at http://www.12manage.com/methods_porter_five_forces.html.

Please note (repeatedly) that the weaker the Five Forces, the greater an industry’s profits. Your competitive
environment can be deemed ideal when:
• rivalry is only moderate,
• entry barriers are relatively high,
• there are no good substitutes, and
• suppliers and customers are in a weak bargaining position.

For good illustrations of changing industry dynamics in IT, airlines and energy, read the enclosed article from
page 12 through page 20: Industry evolution.

From a strategic viewpoint, your objective must be to craft a strategy that will
• insulate your company from competitive forces,
• influence the industry’s competitive rules in your company’s favour,
• provide a strong position from which “to play the game” of competition,
• help to create sustainable competitive advantage.

If you want to see how a good, one-page executive summary of a Five Forces analysis looks like, visit IBS’
Library and see “Prospects for the US Casino Industry” in R.M. Grant, Contemporary Strategy Analysis, Fifth
Edition, Blackwell, London, 2005, p. 86.
2.2.3 COMPETITIVE STRATEGY ANALYSIS

How should you position your firm (your products) within the industry (within their relevant business segments) so
as to build and sustain, even against adverse Five Forces, competitive advantage? The answer to this question is
the foundation and cornerstone of all strategy.

Without competitive advantage, firms are doomed to the “strategic hell” of perfect competition in which profits are
elusive, products are commodities and firms are creatures of their environment. With competitive advantage, we
can have strategic choice and exercise discretion. Competitive strategies can be deployed in different strategic
clothes: these clothes we call generic strategies.

Before telling you more about the strategic clothes you may choose to wear, you ‘d better take some further
analytical steps.

(i) What business are you in?

This seems to be a silly question to which you could answer: why? I am in the publishing business. But if you
give it some thought, you will come to realize what a difference there is in publishing business school
textbooks versus publishing books by Dan Brown. They are different products, and therefore different
business segments.

Different segments can arise also if some buyers require the basic version of your product whereas others
want it to be adapted to their own special requirements. The differences in the same product may simply lie in
home delivery, or extra after-sale service needs, etc. The customer will pay for your extras, but they will also
cost you more – you are due to have a different business segment because of different profitability.

Or think of a butcher who supplies both large supermarkets and small family shops. The former are difficult
buyers (especially when it comes to payment) whereas the other make hardly any trouble. You have
customers with different buying criteria in spite of getting the same or similar products.

You also may sell your product to different regions, at home or abroad. You may face a high-growth market in
one and a mature, low-growth one in another. In the latter, you are due to face fierce competition, lower
prices, and even losses while happily cashing in on the former.

In different segments there are different competitive forces at work, and therefore your strategic responses
also need to be different. It is for this reason that a proper answer to the question under subtitle (i) is
imperative.

In order to avoid that you get lost in segmenting your business by coming up with an unmanageable list of
parameters, we suggest that you use, at least for a start, the quick-and-dirty test proposed by Richard Koch
and Peter Nieuwenhuizen.

Toolbox 2.1 Business segmentation – quick and dirty

(i) Where do you make your money?

Now that you have defined your business segments, the most important thing to know is which of these
segments generates most of your money, both in terms of revenues and profits. Knowing your segment
profitability will help you to apply an order of importance when strategizing.

Toolbox 2.2 Arriving at P&L for a business segment

Note: Allocating S&D (sales and distribution), R&D (research and development) and G&A
(general and administration) costs to business segments might not be as straightforward as
it seems. If you want to learn more about a useful cost allocation method, click on
http://www.pitt.edu/~roztocki/abc/abctutor/sld001.htm.
 (i) How good are your competitive positions?

A simple and yet telling marker of your competitive position is relative market share. This is the best proxy for
competitive advantage you can have. RMS is the market share or sales of your company in a given segment
divided by the market share or sales of your largest competitor in the same segment. If your sales in the
segment total €800,000 per year, and those of your largest competitor amount to 1,100,000 then your relative
market share equals 0,73.

Figure 2.1 The rule of thumb for relative market share (RMS)

RMS Position Explanation

4.0 or greater Dominance Extremely strong position
1.5 to 3.9 Clear leadership Very strong position
1.0 to 1.49 Narrow leadership Strong position
0.7 to 0.99 Strong follower Fairly strong position
0.3 to 0.69 Follower Moderate position
Less than 0.3 Marginal player Weak position
Source: Koch, Nieuwenhuizen (2006), p. 47.

If you then plot your RMSs against your best estimate of future market growth, you will arrive at the famous
BCG-matrix developed by Bruce Henderson, the founder of Boston Consulting Group.

Figure 2.2 – The growth/share matrix by BCG

In the BCG matrix, market growth rate serves as a proxy for industry attractiveness, that is, an ideal
constellation of the Five Forces. Being a Star means having a strong competitive advantage in an attractive
industry – the dream of all businesses. You are strongly advised to learn more about the contents and
implications of the BCG matrix at http://www.netmba.com/strategy/matrix/bcg/.

Now you are fairly well equipped analytically to start with the hard part – strategizing about the future
positions of your businesses, that is, developing competitive strategies. These will be dealt with in Unit 3. But
before doing so, you still need to have a look at the inside of your company: what is in-house that can support
your competitive strategy?

2.2.4 LINKING CORE COMPETENCIES TO COMPETITIVE STRATEGY

If you find that you are more profitable than your competitors, why is this? Or, if you are gaining market share,
there must be a reason. This reason often lies in the special skills and competences your firm or business unit
possesses relative to competitors.

Figure 2.3 Core competences and competitive advantage

 Source: John McGee, Howard Thomas, David Wilson, Strategy: Analysis and Practice, McGraw-Hill,
London, 2005, p.254.

Core competencies are those capabilities that are critical to a business achieving competitive advantage. The
starting point for analysing core competencies is recognising that competition between businesses is as much a
race for competence mastery as it is for market position and market power.

While resources are the assets owned by the firm, capabilities are what the firm can do by deploying its
resources. Individual resources do not lead to competitive advantage on their own; they must work together to
create organizational capability.

It is often the case that two companies have very similar resources but one is more competitive than the other.
The reason for this lies in how smartly can one company deploy its resources, create linkages and therefore
create competences. Strategic capability of a company includes its resources and competences. This means that
similar companies may have differing strategic capability, depending on how well they can create competences
from their resources. Please note that core competence = strategic asset = distinctive capability.

3M Corporation has expanded from sandpaper, into adhesive tapes, audio- and
videotapes, road signs, medical products, and floppy disks. Its product list comprises
over 30,000 separate products. Is it an unstructured conglomerate? Certainly not,
claims 3M. Its vast product range rests on a foundation of key technologies relating
to adhesives and thin-film coatings, and its ability to manage the development and
marketing of new products.

Reversely, serious problems may arise when a company faced with the obsolescence
of its leading product focuses its strategy on continuing to serve the respective
customer needs rather than deploying its proven resources and capabilities in other
markets. When Olivetti, the Italian typewriter manufacturer saw the displacement of
typewriters by PCs during the late 1980s, it sought to serve the word processing
needs of its customers by expanding into microcomputers. The venture was a costly
failure. By contrast, Remington, another leading typewriter manufacturer moved into
products that required similar resources, technological skills and competences:
electric shavers and other personal care appliances.

All organizations have a variety of capabilities without which they could not stay afloat. However, not all of them
possess or are aware of one or more core capabilities or competences which in fact are the crux of superior
performance and the basis for future strategies.

Read carefully the attached article on core competences, with particular regard to why and when a competence or
a capability can be regarded core or distinctive: http://www.quickmba.com/strategy/core-competencies/.

On the more practical side, when doing strategic analysis with a view to identifying the core competences of your
company or business unit, you should seek answers to questions as follows:
• What is your business particularly good at doing? What is it that the customers really value?
• How rare are these competences in your industry?
• How easily can your competitors imitate them? How can you prevent them from doing so?
• How can you deepen and reinforce these competences throughout your company or business unit?
• Are the competences different across the different business segments?
• If you wanted to expand into adjacent segment, where would the competences be most valuable to
customers and least subject to imitation by competitors?
Source: Koch, Nieuwenhuizen (2006), p. 75.

2.3 ANALYTICAL TOOLS & CONSIDERATIONS SUPPORTING CORPORATE STRATEGIES

Certainly, most of the analytical tools you got to know above, can and should be used also in corporate strategy
making. Corporations also need a proper understanding of their macro-environment (Chapter 2.1.1), or that of the
competitive forces in their industry (2.1.2), or a mapping of their portfolio of businesses (2.1.3 iii.)

There are three main insights that are fundamental to corporate strategy makers:
1 Portfolio management – the businesses that should make up the portfolio.
2 Relatedness – the way in which the synergies between businesses are to be managed and exploited.
3 Growth potentials – the ways in which profitable growth is to be achieved through internal investment
and/or external acquisition, alliance.
To put it more simply, the corporate strategy of a diversified company concerns three different questions: what
businesses the corporation should be in; how the corporate headquarter should manage the array of business
units and what are the critical resources that should be acquired externally through M&As and strategic alliances?

The issue of portfolio management, or rather, the required analysis prior to portfolio management has already
been touched upon in Chapter 2.13. If portfolio management is of special interest to you, you may greatly benefit
from going through the attached self-study module: http://www.csuchico.edu/mgmt/strategy/module8/.

How corporate headquarters, and their corporate strategies may add or subtract value is often called the
parenting advantage. Corporate offices may, in principle, choose from three main role models. They can behave
as (i) restructurers, or as (ii) synergy managers, or as (iii) parental developers.

(i) Restructurers

Corporate parents as restructurers need to be adept at identifying restructuring opportunities in businesses

and have the skills to intervene to transform performance in those businesses. They may well hold a diverse
range of businesses within their portfolio. They do have a limited role at business unit level, which is to
identify ways in which businesses can be turned round or fitness improved and to manage the re-structuring
period. They will acquire another corporation and sell off businesses which do not have restructuring or
improvement opportunities but they will also move specialist managers from the centre into the businesses
they keep to set them on a profitable course. They will then leave the businesses alone. So the emphasis is
on autonomous business units with a small corporate centre, but, with specialist turnaround skills of
corporate staff.

(ii) Synergy managers

Synergy can occur in situations where two or more activities or processes complement each other, to the
extent that their combined effect is greater than the sum of the parts. In terms of corporate strategy synergy
is often seen as the raison d’être of the corporate centre. The logic is that value can be enhanced across
business units in a number of ways: activities might be shared; common brand names may provide value to
different products within different businesses; there may exist common skills or competences across
businesses.

However there are problems in achieving such synergies: the skills or competences on which synergy is
supposed to be based may not really exist or, if they do, may not add value. There also needs to be a benefit
in such sharing or transferring of skills which outweigh the costs involved in doing so. In terms of practical
realities managers in the businesses have to be prepared to cooperate in such transfers and sharing. There
also needs to be compatibility between the systems and culture of the business units that are to do the
sharing. Finally the corporate centre needs to be determined to achieve such synergies. The need here, at a
minimum, is for central staff to act as integrators, and therefore to understand the businesses well enough to
do so. The centre may also need to be prepared to intervene at the business level in terms of strategic
direction and control to ensure such potential synergies bear fruit.

(i) Parental developer

The corporate centre as a parental developer seeks to employ its own competences to add value to its
businesses. Parental developers have to be clear about the relevant resources or capabilities they have to
enhance the potential of business units, for example, experience in globalising domestically based
businesses; or a valuable brand that may enhance the performance of image of a business; or perhaps
specialist skills in financial management, brand marketing or research and development. If such parenting
competences exist, corporate managers then need to identify a "parenting opportunity": a business or
businesses which are not fulfilling their potential but where improvement could be made by the application of
the competences of the parent.

This is the main difference between the synergy manager and the parental developer: while the synergy
manager concentrates on helping create or develop benefits across business units or transfer capabilities
across business units, parental developers have to be clear about the relevant resources and capabilities
they themselves have as parents to enhance the potential of the business units.

The corporate parent may also realise that there are some business units within its portfolio where it can add
little value. This may help identify businesses that should not be part of the corporate portfolio. More
uncomfortably, however, such business units could be high performing businesses, successful in their own
right and not requiring the competences of the parent. The logic of the parental development approach is that
since the centre cannot add value, it is a cost and is therefore destroying value; that the parent should
therefore consider divesting such a business, realising a premium for it and reinvesting it in businesses
where it can add value. Logical as this may seem it is unlikely to find favour, not least because the executives
at the centre might be indicted by their own shareholders for selling the "crown jewels”.
The third big question of corporate strategy is whether the resources and capabilities for a growth strategy are
available or can be developed in-house or must be acquired from the market and what are the costs of either
approach. In order to avoid overwhelming you, here we are going to point only to some of the external expansion
possibilities that figure high on the analytical agenda of all corporate strategy makers.

Figure 2.4 – Corporate expansion options

Source: McGee, Thomas, Wilson (2005), p.394

Use the suggested, attractively short articles to familiarize yourself with the concepts of horizontal
(http://www.quickmba.com/strategy/horizontal-integration/) and vertical integration
(http://www.quickmba.com/strategy/vertical-integration/) and diversification.

Please note, as each article emphasizes, that each corporate expansion options needs a careful analysis of all
pros and cons. Also note, without going no into the details, that whether integration or diversification can be
achieved through competitive and co-operative means. Competitive implementation implies takeovers,
acquisitions and mergers whereas co-operative methods include joint ventures, various partnerships and
alliances.

2.4 WHAT DO THE STAKEHOLDERS SAY? – ANOTHER IMPORTANT ISSUES FOR STRATEGIC ANALYSIS

Whether you are up to competitive or corporate strategy development, you need to pay special attention to how
the stakeholders of your business may relate to your strategic plans and directions.

Stakeholders are individuals or organisations that have an interest in, or some kind of stake in, the firm’s ongoing
and future activities. Primary stakeholders of all businesses are owners, customers and employees, secondary
stakeholders of varied importance are financial intermediaries, suppliers, local communities, government
agencies, activist (e.g. environmental) groups, unions and the like.

Stakeholder analysis is the process of identifying, understanding and prioritizing the needs of key stakeholders so
that the question of which stakeholders deserve management attention in the process of strategy development is
addressed. A fair summary on stakeholder analysis you will find at
http://www.12manage.com/methods_stakeholder_analysis.html. When going through this concise summary, do
not forget to click on stakeholder mapping in the text as it will teach you some simple and useful analytical tools.

2.5 SWOT ANALYSIS – AN USEFUL INTEGRATIVE TOOL IN STRATEGIC ANALYSIS

SWOT analysis is a popular tool in management and strategy formulation. It can help to identify the Strengths,
Weaknesses, Opportunities and Threats of a particular business or company.

Strengths and weaknesses are internal factors that create value or destroy value. They can include resources,
skills or competences that a company has at its disposal, compared to its competitors. They can come from your
internal assessments.

Opportunities and threats are external factors that create value or destroy value. A company cannot control them.
But they emerge from either the competitive dynamics of the industry/market (Five Forces) or from demographic,
economic, political, technical, social, legal or cultural factors (PEST).

Confronting your SWOT factors not only can help you to summarise the major findings of your strategic analysis
but it also can assist you in arriving at new strategic insights. Please, read carefully this one-page summary at
HTTP://WWW.QUICKMBA.COM/STRATEGY/SWOT/. If you want more details, study the following presentation:
http://www.tutor2u.net/business/presentations/strategy/swotanalysis/default.html.

For fun, make your personal SWOT analysis using free spreadsheets offered by
http://www.mindtools.com/pages/article/newTMC_05_1.htm.

3.1 INTRODUCTION

In Unit 1 and Unit 2 we have learned what strategy is, why companies have strategies and what is meant by
strategic management. Once we know our general strategic goals, we carry out numerous analyses to see where
we are at present. We must be aware of our position relative to our competitors, as well as within the economic
system, the industry, the markets and the business segments where we compete. We can only build on those
resources and competences that we possess. Alternatively we must acquire them if they are critical in achieving
our strategic goals.

Please note that suitable, realistic strategic choices (action plans) must always rely on the results of the analyses
you had performed.

We have also learned that within the overall quest for value and profit, corporate strategy, i.e. the overall strategy
for diversified firms is concerned with deciding which industries, which markets the firm should be engaged in with
what products and services. Business or competitive strategy is concerned with establishing competitive
advantage within selected industries/markets, based on consumer needs and preferences. (Lots of interesting
examples on assessing and understanding consumer needs you can find at http://www.va-
interactive.com/inbusiness/leadership_art.html.)

3.2 COMPETITIVE STRATEGY OPTIONS

Competitive strategy refers to how a company competes in a particular business (business or market segment).
Competitive strategy is concerned with how a company can gain a competitive advantage in a distinct market
through a distinctive way of competing.

Competitive advantage grows out of value a firm is able to create for its buyers that
exceeds the firm's cost of creating it. Value is what buyers are willing to pay, and
superior value stems from offering lower prices than competitors for equivalent
benefits or providing unique benefits that more than offset a higher price. There are
two basic types of competitive advantage: cost leadership and differentiation.

Source: Michael E. Porter, Competitive Advantage, New York, Free

Press, 1985, p.3

Figure 3.1 defines the choices of "generic strategy" a business can follow. Porter’s generic strategies are the
widely accepted pool for any business to pursue to achieve competitive advantage. Businesses may be
successful choosing and implementing any of these strategic options as long as they stick closely to the chosen
option and do not move toward being “stuck in the middle” by trying to be all things (i.e. offering quality specialty
products at low costs) to all customers.

Figure 3.1 Porter’s generic strategies

First, you should read a short summary on the basics of generic strategy options at
http://www.quickmba.com/strategy/generic.shtml. Pay particular attention to the figure in the summary that
describes how the competitive structure of an industry (the Five Forces) effects the applicability of generic
options.

Subsequently, read an article published in the prestigious Journal of Business Strategy (Danny Miller: The
Generic Strategy Trap) that will deepen your understanding of generic strategies through a set of real-life
examples.

3.3 STRATEGIC OPTIONS AT THE COMPANY LEVEL

Strategic options at the corporate level can be numerous including expanding along the value chain; growing new
products and services; using new distribution channels; entering new geographies; addressing new customer
segments; and moving into the white space with a new business based on a strong capability. No matter which
approach is taken by successful strategists, they share two characteristics: they were tremendously disciplined,
applying rigorous analysis before opting for a new strategic direction, and in almost all cases, they developed their
repeatable formulas by carefully studying their customers.

For the sake of simplicity, the good old Ansoff-matrix compresses the wide range of strategies open for a
company in a 2x2 matrix.

Figure 3.2 The Ansoff growth matrix

Depending on whether the company chooses to focus on new or its existing markets, and whether it sticks to its
old product range or develops new ones, it can aim at:

• Market penetration – i.e., selling its existing products in known, existing markets in a defensive manner
(defending market share) or in an aggressive one (driving out competitors).

Defending market share may prompt the company to:

• increase advertising spending,
• provide higher levels of customer service,
• introduce more brands to match product attributes of rivals’ brands,
• broaden product line to close off vacant niches,
• keep prices reasonable & quality attractive,
• build new capacity ahead of market demand,
• invest enough to remain cost competitive,
• patent feasible alternative technologies,
• sign exclusive contracts with best suppliers & distributors.
Offensive strategies require you to
• remember that the best defense is a good offense,
• be a first-mover,
• relentlessly pursue continuous improvement & innovation,
• force rivals to scramble to keep up,
• launch initiatives that keep rivals off balance,
• try to grow FASTER than industry & to wrest market share from rivals.

• product development – i.e., innovating new products for existing markets (see a good article by de Bono
and Heller on product development options at http://www.thinkingmanagers.com/management/product-
development.php.; examples from the household cleaning market, you can find at
http://www.tutor2u.net/business/marketing/casestudy_%20products_household_cleaning.asp.

• market development – i.e., entering geographically new markets (on entering international markets,
read http://www.tutor2u.net/business/presentations/strategy/global/default.html), or testing new
distribution channels often under new brand names, or targeting new customer segments;
 • diversification – i.e., taking the risk of entering new markets with new products through upward o
downward integration or diversification as explained in Chapter 2.2 (see for lots of illustration and ideas
http://www.thinkingmanagers.com/management/diversification.php.)

3.4 EVALUATING YOUR CHOSEN STRATEGIC OPTIONS

Once you have decided on the major strategic directions of your business, you are a big step forward but not
necessarily destined for success. Several things can go wrong: you may have based your strategy formulation on
deficient or untrue analysis of the market or the business itself; you may have set too ambitious or too modest
goals; you may have invented something that cannot be implemented; and the like. Read a recent interview with
Michael Porter who answers: Why Do Good Managers Set Bad Strategies?
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1594#

Important questions must be answered before you set to implement your competitive or corporate strategies:

 Does the strategy look attractive in terms of financial returns and the timescale required for delivery?

 What are the risks involved in following the strategy and how significant are they?

 Are the assumptions made about the strategy reasonable and justifiable given the context?

 What is the likelihood of success for the strategy given conditions within the external environment?

All these questions can be combined under the three broad criteria of suitability, acceptability and feasibility, but
to find answers to the questions involved in assessing and selecting particular options requires the application of
relevant tools, models and frameworks. Below is a revised list of the questions implied by each of the broad sets
of criteria are linked to some possibly relevant tools.

Toolbox 3.1 Strategy evaluation signposts and tools

Criteria & Questions Tools, Models & Techniques

Suitability
Does the strategy
address the external
environment?
Is the strategy viable
and achievable given
conditions within the
environment?
Does the strategy
build upon or exploit the
strategic capabilities of the
organisation?
Does the strategy
create/exploit synergy
across the organisation?
Does the strategy fit
with the current corporate
culture of the organisation?
Does the strategy
create/maintain competitive
advantage?
SWOT analysis (Ch. 2.4)
PEST analysis (Ch. 2.2.1)
Five forces framework (Ch. 2.2.2)
Strategic group analysis (http://www.csuchico.edu/mgmt/strategy/module3/ Slides
41-45)
Market segmentation analysis (Ch. 2.1.3 (i))
Resource analysis (http://www.tutor2u.net/business/strategy/resources.htm)
Value chain analysis
(http://www.tutor2u.net/business/strategy/value_chain_analysis.htm
Core competences analysis (Ch. 2.1.4)
Activity mapping
(http://www.valuebasedmanagement.net/methods_value_stream_mapping.html)
Cultural web mapping
(http://www.12manage.com/methods_lewin_force_field_analysis.html)
Generic strategy identification (Ch. 3.2)
Synergy analysis – portfolio; linkages; core competences; management styles

Acceptability
What are the
expected outcomes of the
strategy and are they
consistent with stakeholder
expectations?
Does the strategy look
attractive in terms of
Stakeholder mapping (Ch. 2.3)
Profitability analyses – return on capital employed; payback period & net present
value of discounted cash flows
Risk analyses – financial ratio projections; sensitivity analysis & simulations
(http://www.12manage.com/methods_slywotzky_strategic_risk_management.html)
financial returns and the
timescale required for
delivery?
What are the risks
involved in following the
strategy and how significant
are they?

Feasibility
Has the organisation
got the resources and
capabilities to deliver the
strategy?
What gaps in
resources and capabilities
need addressing in order to
ensure success?
Resource analysis
Value chain analysis
Core competences analysis
Activity mapping
Resource and capability gap identification
Cultural web re-mapping
Stakeholder re-mapping

4.1 INTRODUCTION

An integral part of the strategic management process is strategy implementation. Once the position of the
organisation is assessed, the strategic route is set and all possible choices evaluated, it is time to turn strategy
into action.

Quite often this turns out to be the trickiest part of strategic management as it requires total commitment from
every layer of the organisation. Besides, strategy implementation almost always requires changes in the
organisation. Even if change is well managed, there will always be some resistant towards it, be it reorganisation
or simply introducing a new technology or a new IT system.

Implementing strategy is organisation specific and situation dependent. It is not possible to collect all the good
advice how to go about it. Therefore, this course is structured so that in your next semester you will read and
discuss a number of case studies in order to get an insight – how (mis)manage strategy and most importantly,
how to be successful in turning strategy into action.

In this last unit we will not come forward with much theory. This is more of a collection of some articles and cases
that can help you understand the cornerstones of strategy implementation. And your next semester will give you a
perfect opportunity to use all the knowledge you gained from going through this e-learning material.

“- How do you make God laugh?

- Tell him your plans.”

An old joke, but one that can raise a wry smile with many managers who have tried to formulate and implement
strategies within organisations. Whatever the plan, however well it has been thought out, life seems to have a way
of throwing a monkey wrench into the works.

4.2 DELIBERATE OR EMERGENT STRATEGY?

In their work on the nature of the strategy process, Mintzberg and Waters (Mintzberg, H., Waters, J.A. (1985), "Of
strategies, deliberate and emergent’", Strategic Management Journal, Vol. 6 pp.257-72.) make a distinction
between intended and realised strategies, which provides a key insight into the strategy process.

Figure 4.1 Deliberate vs. emergent strategy

Where a strategy is realised as intended, this can be seen as the outcome of a deliberate process. However,
many intended strategies are not realised in practice, these are unrealised strategies.

In many cases, a successfully realised strategy is not the outcome of original intentions. Sometimes events
intervene or the strategy changes during the process, perhaps as early results become apparent. This can be
best described as an emergent strategy.

Deliberate and emergent strategies form the polar extremes of a continuum, with a range of types in between
depending on the extent and how they meet the “perfect conditions” at either end.

4.3 STRATEGY AS PLAN OR PATTERN?

The distinction between deliberate and emergent strategies underpins the debate about strategy process
paradigms – how organisations should go about the process of developing strategy.

A broad distinction can be drawn between two competing approaches that form the limits of a continuum:

• The planning approach – which is based the deliberate strategy view, seeing strategy as a process of
formulating and successfully implementing plans; and

• The incrementalist approach – which is based on a view of strategy as pattern emerging from a stream
of organisational activities and decisions.

The planning approach sees strategy formulated then implemented in a series of steps, involving rational
analysis and evaluation of options, explicit communication of a course of action, followed by implementation
through detailed functional plans and budgets. Whilst there may be iteration and feedback between the
stages, the overall logic remains clear (see for details:
http://www.bain.com/management_tools/tools_planning.asp?groupCode=2).
The Planning Approach

• Strategies are the outcome of rational, sequential, planned and methodical procedures

• Definite and precise strategic objectives are set

• The organisation and environment are analysed

• Potential strategic options are generated and the optimum solution chosen

• Defined procedures for implementation and the achievement of the strategic objectives are developed

• The strategy is made explicit in the form of detailed plans

The incremental approach sees strategy as a pattern emerging from the activities and decisions of the
organisation. The future is difficult to predict and organisations are difficult to control rationally. Rather than
commit to a single plan and to past experience, the organisation needs to maintain flexibility and adapt to the
changing environment. For several good examples and advice, read
http://www.thinkingmanagers.com/management/future-strategies.php.

This is not a haphazard approach that ignores analysis or planning, rather it sees the strategy evolving from a
process of continual formulation, implementation, testing and adapting, with the distinction between the
stages often blurred.

The Incremental Approach

• Evolutionary but purposeful strategy development

• Strategy is developed as issues arise

• Strategy is continually adjusted to match changes in the operating environment

• Early commitment to a strategy is tentative and subject to review

• Strategic options are continually assessed for fit

• Successful options gain additional resources

• Strategic options are developed from existing strategies by experimentation and through gradual
implementation.

The extent to which the strategy process is, and should be, planned or incremental is a matter of debate. It
could also be argued that different approaches suit different contexts – for example, the planned approach
might be most applicable in a turnaround situation, whilst the incremental approach is best suited to changing
situations with high levels of uncertainty.
4.4 SUCCESSFUL IMPLEMENTATION IS NO ACCIDENT

Too often, managers ask the question of "how to implement" far too late. They start thinking about
implementation only after they've developed their strategies. That's a mistake. They should take
implementation steps both before and during strategy development as well.

Michael K. Allio, a long-time strategy consultant contends that “implementation lies at the core of strategy and
deserves as much attention as the formulation of strategy”. Read carefully his practice-driven implementation
guide (A Short, Practical Guide to Implementing Strategy)

A peculiar concept, called corporate culture plays a critical role in implementing strategy. Your company culture is
simply what your company is in terms of traditions, shared beliefs, feel-good or feel-bad combinations. As
Graham Yemm, another strategy consultant suggests “where your culture does not fit with strategy
implementation…people are in conflict. Should they be loyal to…company traditions and resist actions…
promoting better strategy execution? Or should they support strategy by engaging in behaviours that run counter
to the culture?”. His advice is worth reading in ‘Does Your Culture Support or Sabotage Your Strategy?’.

4.5 SCORECARDS: TRANSLATING STRATEGY INTO CONTROLLED ACTION

Scorecards, also called strategy, performance or balanced scorecards, are now ubiquitous. Scorecards are a
primary means of translating strategy into action. They define, through measurement, the intent and purpose of
strategic objectives and provide clarity to managers, staff and external observers on the meaning of performance
for an organization.

For decades, companies focused solely on financial numbers to keep score. This worked fine in stable
environments when "making the numbers" simply meant doing a little better this year than last year. Those days
are gone and, as Robert Kaplan and Thomas Johnson argued in their history of management accounting. Their
book, Relevance Lost suggested that performance reporting designed for external financial disclosure and
constrained by local accounting standards is wholly inadequate to the task of modern business management.
Written at the end of the 1980s, Relevance Lost marked the beginning of an urgent search for better
measurement approaches that has been underway ever since. Ultimately, this search led to the balanced
scorecard (BSC), created by Kaplan and David Norton.

The term balanced comes from the fact that the scorecard strives to measure performance in both financial and
non-financial terms - using the four perspectives of financial, customer, internal process and enablers of
organizational learning and growth (see Figure 4.2). These four perspectives are often misunderstood to imply
that results for different stakeholders are all equally important. This is not the case. As Kaplan and Norton explain
in each of their books, the source of these different categories of measures is the business strategy, which
clarifies how an organization intends to create sustainable profits and growth.

Figure 4.2: The elements of a balanced scorecard for an airline company

The learning perspective includes employee training and corporate cultural attitudes related to both individual and
corporate self-improvement. In a knowledge-worker organization, people, the only repository of knowledge are
the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge
workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training
funds where they can help the most. In any case, learning and growth constitute the essential foundation for
success of any knowledge-worker organization.

The business process perspective refers to internal business processes. Metrics based on this perspective allow
the managers to know how well their business is running, and whether its products and services conform to
customer requirements (the mission). These metrics have to be carefully designed by those who know these
processes most intimately; with our unique missions these are not something that can be developed by outside
consultants.

In addition to the strategic management process, two kinds of business processes may be identified: a) mission-
oriented processes, and b) support processes. Mission-oriented processes are the special goals of companies
and businesses, and many unique problems are encountered in these processes. The support processes are
more repetitive in nature, and hence easier to measure and benchmark using generic metrics.

Recent management philosophy has shown an increasing realization of the importance of customer focus and
customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will
eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading
indicator of future decline, even though the current financial picture may look good.

In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds
of processes for which we are providing a product or service to those customer groups.
The BSC methodology does not disregard the traditional need for financial data. Timely and accurate funding data
will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than
enough handling and processing of financial data. With the implementation of a corporate database, it is hoped
that more of the processing can be centralized and automated. But the point is that the current emphasis on
financials leads to the "unbalanced" situation with regard to other perspectives.

Useful, practical suggestions as for measures and targets within the realm of the four perspectives (learning,
internal, customer and financial) you can find at http://www.tutor2u.net/business/strategy/balanced-scorecard-
perspectives.html.