ARENA Mapping: An Effective Strategy Focusing Tool
by
Alex Coman
May 26, 2008

Email: Alex@mta.ac.il
Abstract
ARENA is a graphical tool designed to map the business environment. Like other
managerial tools such as the Gant chart and the Pareto diagram, the ARENA provides
a concise single picture of the external actors influencing the organization’s value that
can be used for decision making.
The paper presents the ARENA model and demonstrates its applications. Cases are
described and the ARENA is compared to existing models.
Key words: Corporate Strategy, Focusing, Scenario Analysis, Theory of Constraints,
ARENA
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Introduction
This paper presents the ARENA model, a graphical depiction of the firm’s business
environment designed to assist managers in their strategic and tactical decision
making, with the objective of improving the firm’s value. The tool addresses several
needs of senior managers in the organization:
1. The global view: Some of the graphical focusing tools that are applied in the
operational area can help executives gain the global view that they need to function
effectively and make better use of their limited time and resources:

Pareto analysis has established the rule that 20% of the variables account for
80% of the outcome, enabling people to focus in conditions of independent
events. Pareto charts are common analytical tools (Ronen and Pass, 2007).

The critical-path method (CPM) and the critical chain (CC) (Goldratt, 1997)
enable managers to focus on a small number of elements. The CPM and CC
visual representations are very useful in providing a global view of the whole
project.

The current-reality tree techniques (Ronen and Pass, 2007) and root-cause
analysis in particular enable managers to focus on fundamental problems. The
graphical representation showing the organization’s problems on a single slide
facilitates managerial decision making and delegation of authority.
However, a shortage of comprehensive focusing tools at the strategic level is one of
the reasons that the operational improvements provided by these tools are not
translated into strategic advantage often enough. The BCG (Boston Consulting Group)
provides a methodology for classifying strategy but no translation into action items.
The same applies to the GE-McKinsey model. Porter’s (1985) models list potential
threats and provide stakeholder analysis, Mintzberg (1988) discusses generic
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strategies, while Hamel and Prahalad (1994) discuss modern strategic directions. In
short, one can not see the strategic forest for the trees. While each of these approaches
addresses one or another facet of the strategic whole, the ARENA model enables the
creation of a simple and clear strategic picture that can be translated into tactical
changes in the organization.
2. A common interdisciplinary language: There is a distinct need for a common
interdisciplinary language to connect managerial disciplines. Operations should be
linked to marketing and logistics, finance should connect to marketing, and strategy
should consider all of the firm’s strengths and weaknesses. Each discipline has its own
distinct language, which does not make for effective communication and means that
local improvements do not always translate into a global contribution to the firm’s
value. The ARENA model provides a common language and a way out of the Tower
of Babel.
3. Knowledge management: Today’s managers have ample strategic and operational
information, which they can manage for the firm’s benefit by focusing on the
appropriate domains and avoiding the danger of drowning in the mass of available
data. ARENA’s function is to link the various information sources into a collaboration
that will improve the firm’s value.
In sum, the ARENA solution generates a simple graphical representation providing: 1.
a global view, 2. a common interdisciplinary language 3. a tool focusing on relevant
knowledge for decision making.
A particularly notable example of an industry where ARENA could be usefully
applied is that of today’s flourishing venture companies, which examine 10 to 12
potential ventures for each investment made. How can a manager understand the value
of a potential startup in less than an hour? ARENA enables a faster grasp of a
venture’s real potential and problems, making it possible to evaluate additional
ventures and select the better few.
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Section 2 of this paper presents and demonstrates the ARENA model. Section 3
illustrates its use by Nokia in the cellular telephony ARENA. Section 4 demonstrates
its application for decision making. Section 5 concludes the article.
Section 2: The ARENA model
We present the ARENA model in three stages:
A. Vocabulary – defining the
“words”: “nouns” and “verbs” of the ARENA notation; B. Syntax – rules for linking
“words”; and C. Semantics – guidelines for the effective modeling of a given business
problem into an ARENA.
A. Vocabulary. The ARENA vocabulary consists of three entity types (nouns) and
four relation types (verbs).
The three ARENA entity types are:
1. Firms, represented by solid rectangles, each denoting the firm’s name,
e.g.,
IBM
. A firm is typically associated with its competitors, supply
chain, leading customers, major suppliers, substitutes, complementors, business
partners, merger-and-acquisition (M&A) targets, etc.
2. Businesses and Markets, represented by dotted rectangles denoting the area of
activity, e.g.,
Personal computers
. They describe the firm’s business,
substitutes, market segments, technologies, geographical regions, etc.
3. Monopolies and Regulatory Agencies are represented by thick solid
Microsoft
rectangles denoting the name, e.g.,
. Monopolies are major players
such as Microsoft (and may accord only loosely to the legal or economic
definition). Regulatory agencies and standards institutions define standards
(ASA, ISO, GMP), authorize the marketing of drugs (FDA), regulate financial
markets (the Federal Reserve), manage telecommunications resources (FCC),
etc.
The four ARENA relation types are:
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1. Business relations, represented by a solid arrow. The arrow points in the
direction of the product or service flow – from the supplier to the customer.
The product or service’s name is indicated on or near the arrow. When several
products or services are provided they are indicated separately. The following
example indicates that IBM sells both computers and consulting services to its
customers:
IBM
Hardware Consulting
Customers
.
2. Information flow relations, represented by a dotted arrow. The arrow points
in the direction of the information flow – from the source to its destination.
The medium used to communicate and the message transmitted are indicated
on or near the arrow. Information flows relate in particular to marketing,
advertising, promotion, etc. The following example indicates that IBM
advertises itself via commercials on television as well as through internet sites:
IBM
Television:
Internet:
Image Technical Data
Customers
3. Control, represented by a thick arrow. The arrow points from the entity that
controls to the entity that is controlled. The controlled domain is indicated on
or near the arrow. Control emanates typically from regulatory agencies, experts
and consultants involved in decision making. Examples include physicians
prescribing medication to patients, consultants selecting options:
FCC
Transmission
Frequencies
IBM
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4. Integration, represented by an arrowless line. Horizontal integration or
diversification is indicated by a horizontal line like the one linking Disney film
studios with Disney’s amusement park businesses.
Disney
Disney Warner
Amusement Parks
Studios
Films
ABC CBS
Networks
.
Vertical integration is indicated by a vertical line like the one linking Disney’s
film studio businesses with ABC – a Disney-owned network. When integration is
partial as a result of M&As, takeovers, spin-offs or joint ventures, ownership
percentages are indicated near the owned entity:
Microsoft
NBC
50%
50%
MSNBC
.
B. Syntax. ARENA’s syntax defines rules for the linkage of pertinent entities. The
syntax consists of the following three elements.
1. Hierarchy. ARENA uses a Venn diagrammatic syntax, specializing Harel’s
(1988) notation to hierarchically map business domains, segments within these
domains and salient firms within these segments. The hierarchical notation
conveys commonalities between technologies, businesses and markets, and
provides the reader with a selective view.
Citibank
Commercial
Merrill Lynch
Charles Schwab
Investment
Banks
AIG
Visa
Insurance
Companies
Credit/debit
Cards
Financial Services
In the above example, the Financial Services industry is broken down for
demonstration purposes into three businesses: banking, insurance and
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credit/debit cards. The banking business is further broken down into
commercial and investment banks. Citibank is an instance of a commercial
bank; Merrill Lynch and Charles Schwab are instances of investment banks;
AIG is an insurance company and Visa is in the credit card business.
2. Parsimony. Concise mapping of the business ARENA is recommended as it
facilitates analysis and communication of ideas. Parsimony is achieved by
linking, wherever possible, the highest levels of abstraction. In the following
example, linking individual firms involves a “spaghetti” of nine arrows, which
requires significant cognitive effort to decipher.
Nestlé
Tropicana
Vons’
Sloan’s
Hershey’s
Zabar’s
The same information can be communicated by a single arrow by aggregating
Nestlé, Tropicana and Hershey’s into the “Suppliers” business class and Vons,
Sloan’s and Zabar’s into the “Retailers” business class.
Nestlé
Vons’
Tropicana Hershey’s
Suppliers
Sloan’s
Zabar’s
Retailers
Exclusive relationships between firms are still depicted, highlighting the
exceptions to the rule.
Another means of achieving representational economy is to ignore information
flows when they are an integral part of the business relationship. In the above
example, the addition of information flows of suppliers promoting new
products and deals and retailers entering orders or providing feedback is
implied by the business relationship and is therefore superfluous. Only nonredundant information flows should be included such as advertising, web sites,
product specialists, etc.
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3. Value System. A major goal of the ARENA is to provide a multidisciplinary
platform for discussion and analysis. By positioning businesses along the value
system, we achieve cognitive anchoring enabling professional experts to focus
on their respective areas of competence. Businesses and markets are positioned
so that suppliers are at the top of the ARENA; manufacturers are positioned
below, followed by distributors and retailers. Final users are positioned at the
bottom of the ARENA. Regulatory agencies and standards institutions are
positioned above the markets they control.
Ministry of
Agriculture
`
Hygiene
Regulation
Farmers
Milk
Dairies
Cheese
Restaurants
Service
4.
Consumers
Cheese
Retailers
Products
Consumers
Thus, by scanning the ARENA from top (raw materials) to bottom (final users)
one learns how value is added when products and services are refined in their
flow down the value system.
The value system syntax enables marketing and sales experts to focus on their
areas of expertise, which are depicted in the ARENA from the firm down and
relate
to
competitors,
distribution
systems,
customer
segmentation,
advertising, business intelligence, etc. This so-called “downstream” region is
consistently located in the lower part of the ARENA. Logistics and
procurement experts focus on supply-chain management (SCM), which is
located “upstream” in the upper part of the ARENA. R&D experts typically
focus on technology suppliers and on emerging substitutes that are positioned
near and above the firm.
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Finally, a major goal of the ARENA is to bridge disciplinary chasms. By
arranging the value system from top to bottom we assure that vertical
integration will be depicted vertically, and horizontal integration –
horizontally, which is not the case with many current models.
C. Semantics: ARENA’s semantics provide guidelines for the effective modeling of
a given business problem into a single picture. The process should start with a
well-defined decision problem such as the selection of manufacturing partners,
distribution channels, new technologies, potential buyers for the firm, etc. Next,
we draw the firm, its major competitors, substitutes and complementors, and
develop the ARENA in the desired direction by adding key suppliers, distribution
channels, potential coalitions, regulators, standards institutions, market segments,
advertising channels, key decision makers, etc.
The ARENA’s decision-making process is further developed in the following
section.
Section 3: Nokia’s ARENA analysis
The following discussion of Nokia’s business strategy derives from its investor
relations presentations, according to which its current ARENA recognizes two
customer segments: individuals and enterprises. Nokia’s analysis of its gross margins
reveals that while those from plain mobile phones reach around 35%, those from
multimedia average 40% and those from enterprise solutions exceed 45%. Presently, it
reaches its end users through two channel types: (1) mobile operators – or Businessto-Business, and (2) distributors, value-added-resellers, and system integrators. Nokia
is unhappy with this situation. It considers its reach today to be “niche market” and
wants to upgrade to “mass market”.
Nokia starts by drawing its ARENA, which it perceives to include the following:
1. Networking providers such as Cisco
2. Voice applications from companies such as Nortel
3. Data applications from companies such as SAP
4. Security application providers such as CheckPoint
5. Mobileware manufacturers such as RIM
6. Data devices – PCs and personal-data-assistants (PDAs)
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7. Desk phones
8. Mobile operators such as Vodafone
9. Distributors, value-added-resellers, and system integrators
10. End users: individuals and enterprises.
Next, Nokia focuses on areas of the ARENA in which it does not aim to do business.
It starts by eliminating competition in networking, voice applications, data
applications, mobile operators, data devices and desk phones. It then determines to
create an “independent software revenue stream” out of its currently insignificant one.
Its initiative to create “Nokia services” starts by offering security services, and then
analyzing the use of “internet services on Nokia devices”. It starts by focusing on
maps, identifying six distinct applications for them: in car navigation, routing,
pedestrian guidance, searching maps for content, user generated content collection and
management, sharing and publishing of map content and gathering – getting together.
Deploying each of these strategic decisions into action requires Nokia to individually
develop the relevant capabilities, or to acquire or partner with players in the ARENA.
Map management for example could be achieved by partnering with current players in
the ARENA, namely Google-Maps or Microsoft-Virtual-Earth. An alternative
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scenario would consist of acquiring players in the ARENA and developing a new core
competence for Nokia. The number of make, partner or buy scenarios is huge and is
resolved by mapping attractive players in the ARENA.
It should be noted that while Nokia explicitly decided not to compete with the mobile
operators, its service offerings compete with some of those currently offered by
mobile operators and could therefore result in channel conflicts.
Section 4: Decision making and the ARENA model
A three-stage methodology was developed for decision making:
1. Define the business ARENA
2. Focus on key areas within the ARENA
3. Action – act to improve your ARENA position.
We illustrate the process by considering Vocaltec, a pioneer in the Voice-over-IP
ARENA. Vocaltec’s strategy, which focused on providing end users with software to
help them bypass their telephone service providers, was to enable customers to dial a
local number to their internet service providers (ISPs) and use this connection for
long-distance telephone calls. This strategy, which called for the development of an
end-user solution to be mass marketed in the consumer market, proved ineffective.
The company suffered losses and two years later turned to providing Voice-over-IP
solutions for PTTs, incumbent local exchange companies (ILECs) and competitive
local exchange companies (CLECs). The new strategy enabled Vocaltec to reduce its
costs, improve the utilization of its infrastructure investments and deploy advanced
services over existing wires. This strategic shift required fundamental changes in
Vocaltec’s products, R&D, marketing and service operations. While successful, it was
two years before the strategic change occurred, by which time bigger and stronger
competitors were sharing Vocaltec’s technology. Using the ARENA methodology
Vocaltec could have reached its decision at an earlier stage, by the following scenario:
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1. ARENA: Vocaltec first builds its ARENA by charting the telecommunications
market. At the top it maps equipment manufacturers. These are broken down
into telephony switching equipment, data switching equipment, modems and
other telephony equipment for end users. Underneath it develops the value
system by introducing pertinent communications service providers: PTTs,
ILECs, ISPs, cable, cellular, etc. These are linked to their target markets:
business and residential.
Nortel
Cisco
Siemens
Equipment and Technology
Vocaltec
Distributors
British
Telecom
NT
T
PTTs
Deutche
Telecom
Business
ISPs
Dealers
Analogue VoIP
Residential
Vocaltec is depicted as a de-facto monopoly in the VoIP market since it had
Users
about 80% of the emerging market in that area in 1995. In order to achieve its
goal Vocaltec has to develop a network of distributors and dealers to support
its products.
2. : Focus: An analysis shows that as a small startup Vocaltec does not have the
resources required to reach a mass market of end users, providing the software
free of charge. The solution can only be marketed to technologically savvy
internet users who know how to install the product. Of this limited population
only those willing to significantly sacrifice quality of service in return for
bypassing the PTT’s tolls are potential customers. Financially, the company
lacks the capital required to establish international distribution channels,
advertising and service. On the other hand the service provider market is
characterized by significantly larger deals, requiring fewer marketing
resources. However, it requires higher quality standards. Hence, the
operational implications.
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3. Action: Once the strategic goal has been redefined as providing VoIP
solutions to PTTs, the ARENA is redrawn:
Nortel
Cisco
Siemens
Equipment and Technology
British
Telecom
Business
NT
T
PTTs
Vocaltec
Deutche
Telecom
Analogue VoIP
Residential
Vocaltec now charts a list of action items:

Users
Size: supplying large PTTs implies that Vocaltec can remain a small hightech company providing cutting edge technologies to old-economy
customers.

Quality: Carrier grade quality levels require products with no single point
of failure. This is a hurdle to be tackled.

Product: the product has to be redefined and its characteristics changed.
While a consumer product must be foolproof and extremely friendly, the
new product definition means that it is operated by professional PTT staff.
Friendliness loses importance, while configurability and manageability
gain importance.

Research and Development: While the previous solution handled relatively
small amounts of traffic, the new strategy calls for handling major
bandwidths. This calls for new competencies to handle the new
bottlenecks.

Production: The old strategy called for an ultimate volume of thousands of
shipments per week. The new strategy implies a small number of
sophisticated software and hardware solutions to be produced.
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
Support: The old strategy called for a multilingual support center capable
of handling thousands of naïve questions. The new strategy caters to a
smaller volume, English-speaking professional audience.

Marketing and sales were the constraint of the old strategy. The focus was
on the development of distribution networks. The new strategy calls for
massive presence at professional shows where a couple of large deals per
year supply major growth.

The human resources profile of the company changes: fewer employees,
more
technology
professionals,
less
marketing.
More
business
development is aimed at identifying potential corporate buyers (Deutche
Telecom ultimately bought a stake in Vocaltec) and there is less support.
Vocaltec focuses on the recruitment of professionals with a strong carrier
grade background (with PTT and telecom equipment manufacturers) to
complement its computer strength with telephony know-how.

The financing burden is eliminated. The original strategy called for vast
investments in the creation of distribution networks, the mass production
of product packages and the feeding of these products into the distribution
network. The new strategy with equipment manufacturers and PTTs as the
main market places a significantly lower burden on finances. There is no
need for deep pockets to establish an international presence.
Section 5: Conclusion
The ARENA model provides a visual notation for strategic analysis. Its methodology
calls for the creation of a picture of the major pertinent players, focusing on key
businesses and market segments, and translating the strategy into a set of action items.
By updating the ARENA periodically or whenever major changes occur, we obtain a
closed-loop instrument with a built-in feedback mechanism.
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References
Goldratt, E.M. (1997), Critical Chain (Croton on Hudson, NY: North River Press).
Hamel, G. and C.K. Prahalad (1994), Competing for the Future (Harvard Business
School Press).
Harel, D. (1988), On Visual Formalisms, Communications of the ACM 31(5), May,
514-530.
Mintzberg, H. (1988), Generic Strategies, Advances in Strategic Management 5, 1-67.
Porter, M.E. (1985), Competitive Advantage (New York: The Free Press).
Ronen, B. and S. Pass (2007), Focused Operations Management: Achieving More
with Existing Resources (Hoboken, NJ: John Wiley and Sons).
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