THE COPPERBELT UNIVERSITY
SCHOOL OF BUSINESS
BACHELOR DEGREES IN BUSINESS ADMINISTRATION,
MARKETING AND BANKING AND FINANCE- CBU & UNILUS
BS/BF 450/BSP 466: STRATEGIC MANAGEMENT
LECTURE NOTES
LECTURER: DR. B. MALITI
2012
Course Objectives
This course should prepare students on how to:
a) Evaluate the environment in which they are operating.
b) Prepare strategic plans.
c) Develop and analyse strategic alternatives
d) Implement the strategic plans and decisions
Course Syllabus
1. Introduction to the discipline of strategic management.
- Evolution of strategic management
- Major elements of strategic management
- Strategic leadership and decision-making.
- The characteristics of successful organisations
2. The process and practice of strategic management
- Levels of strategic management
- The strategic management process.
- Elements of the strategic management.
- Organisational planning process
3. Analysing the general environment.
- The importance of environmental influences
- An analysis of the total business environment, the nature and consequences of industrial
and the technological changes.
- The economy
- Technology
- Social factors.
- Political and legal considerations
- The effect of market and industry structure.
- The product and market life circle.
4. Developing and strategic options.
- Strategic decision making.
- Creating sustainable advantages.
2
- Evaluating the strategic situations.
- Developing and evaluating strategic alternatives
5. Developing the strategic plan
- Strategic decision support system.
- Strategic planning systems.
- Planning under risk and uncertainty
- Putting it all together
6. Strategic implementation and control
- Implementing strategic planning process
- Implementing strategic decisions
- Implementing strategic plans
- Strategy and structure relationships
- Social and political influence
- Strategic control
Course Assessment
The course grading shall have the following two components:
1. Continuous Assessment (40 %)
a. Assignments (3) – 15 %
b. Term Tests (3} - 25 %
2. Sessional Examination (60 %)
3
TABLE OF CONTENTS
PAGE
1. Introduction to the discipline of strategic management.
- Evolution of strategic management
- Major elements of strategic management
- Strategic leadership and decision-making.
- The characteristics of successful organisations
- The Case Study method
2. The process and practice of strategic management
- Levels of strategic management
- The strategic management process.
- Elements of the strategic management.
- Organisational planning process
3. Analysing the general environment.
- The importance of environmental influences
- An analysis of the total business environment, the nature and consequences of industrial
and the technological changes.
- The economy
- Technology
- Social factors.
- Political and legal considerations
- The effect of market and industry structure.
- The product and market life circle.
4. Developing and strategic options.
- Strategic decision making.
- Creating sustainable advantages.
- Evaluating the strategic situations.
- Developing and evaluating strategic alternatives
5. Developing the strategic plan
- Strategic decision support system.
- Strategic planning systems.
4
- Planning under risk and uncertainty
- Putting it all together
6. Strategic implementation and control
- Implementing strategic planning process
- Implementing strategic decisions
- Implementing strategic plans
- Strategy and structure relationships
- Social and political influence
- Strategic control
References……………………………………………………………………........
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Arthur Thompson, “ Strategic Management” , McGraw-Hill Education, 2002
Ralph D. Stacey, “Strategic Management and Organisational Dynamics: The
Challenge of Complexity”, FT Prentice Hall, 2002
Thompson, Strickland, “ Readings in Strategic Management”, McGraw-Hill
Education (ISE Editions), 2000
David Hussey, “Strategic Management: From Today to Implementation”,
Butterworth-Heinemann, 1998
Robert Burgelman, Modesto A. Maidique, “Strategic Management of Technology
and Innovation”, McGraw-Hill Education (ISE Editions), 2003
Peter L. Wright, “Strategic Management: Concepts and Cases (International
Edition)”, US Imports & PHIPEs, 2002
Pearce, “Strategic Management”, McGraw-Hill Education, 2002
Paul Finlay, “Art and Science of Strategic Management”, FT Prentice Hall, 2000
Michael A. Hitt, et al, “The Blackwell Handbook of Strategic Management
(Blackwell Handbooks in Management)”, Blackwell Publishers, 2001
Hugh Macmillan, Mahen Tampoe, “Strategic Management: Process, Content and
Implementation”, Oxford University Press, 2000
Wendy Robson, “Strategic Management and Information Systems: An Integrated
Approach”, FT Prentice Hall, 1997
Michael J. Stahl, “Cases in Strategic Management: Instructor's Manual”,
Blackwell Publishers, 1999
Jon Sutherland, Diane Canwell, “Key Concepts in Strategic Management
(Palgrave Key Concepts), Palgrave Macmillan, 2004
Colin White, “Strategic Management”, Palgrave Macmillan, 2004
5
CHAPTER 1
STRATEGIC MANAGEMENT
1
Introduction to the Discipline of Strategic Management.
1.1
Evolution of Strategic Management
Strategic management is that set of managerial decisions and actions that determines the
long-run performance of a corporation.
The study of strategic management, therefore, emphasizes the monitoring an evaluating
of external opportunities and threats in light of a corporation’s strengths and weaknesses.
Originally called business policy, strategic management incorporates such topics as longrange planning and strategy.
Business policy, in contrast, has a general management orientation and tends primarily to
look inward with its concern for properly integrating the corporation’s many functional
activities.
Strategic management, as a field of study, incorporates the integrative concerns of
business policy with a heavier environmental and strategic emphasis.
Therefore, strategic management has tended to replace business policy as the preferred
name of the field.
The Historical Context of Strategy
Until the late 19th century, organizations that were not owned by the nation state were too
small to be considered as corporations.
Small artisan factories driven by crafts may have needed strategies to survive and prosper
against competitors, but formal strategic management did not exist.
North America, Europe and Japan were more or less the only areas that had begun to
industrialise by the end of the 20th century.
Countries such as China, India, Korea, Malaysia, Singapore, Nigeria, South Africa, the
Phillipines, Saudi Arabia, Iran and Iraq were still largely without industry; they supplied
commodities and raw materials to world markets but had not yet begun to industrialize.
Strategic management, which is principally associated with increased industrialization,
was therefore more likely to develop in the industrialized countries than in other areas
around the world.
Strategic Management in the Early 20th Century
6
During the early 20th century, particularly in the USA and Europe, managers rather than
academics began to explore and define the management task.
F.W. Taylor in the USA and H. Fayol in France are examples of senior industry figures
who started to research and write on such issues. They were industrialists rather than
academics, holding senior positions in industry for some years.
Around the same time, Henry Ford began experimenting to produce goods more cheaply
and fulfill growing market demand.
In the period 1908 – 1915, he developed strategies that we still recognize today, and
included those outlined below:
Early Strategies Still Recognized Today
From the period 1908- 1915: Henry Ford
 Innovative technology
 Replacement of men by machines
 Search for new quality standards
 Constant cost-cutting through factory redesign
 Passing on the cost reductions in the form of reduced prices for the model T car
From the period 1920 – 1935: Alfred Sloan and colleagues
 Car models tailored for specific market niches
 Rapid model changes
 Structured management teams and reporting structures
 Separation of day-to-day management from the task of devising longer-term
strategy
Henry Ford did not believe in major model variations and market segmentation, unlike
his great rival from the 1920s, General Motors headed by Alfred Sloan.
Nor did Ford believe in the importance of middle and senior management. He actually
sacked many of his senior managers and ultimately left his company in real difficulties
when he died.
Hence, his rival in the 1920s and beyond, General Motors, was ultimately more
successful with other strategies that still exist today.
After the First World War came the great economic depression of the 1930s. This
brought the need for a new order in international currency and, just as importantly, the
desire for larger companies to gain economies of scale.
However, much of this was confined to North America and competitive strategy itself
was still in its infancy.
Strategic Management in the mid-20th Century
The Second World War brought its specialist demands for military equipment, coupled
with more destruction across much of Europe and Japan; North and South America went
7
largely unscathed. At this time, the Middle East and Far East still remained largely
outside the scope of industrial development.
This period was hardly the time for strategic managers to influence events. Yet strategic
game theory had its origins in developing more effective British naval tactics when
hunting for German U-boats.
The late 1940s probably witnessed the period of the greatest power of North American
industry and companies.
It was also the real beginning of strategic management development and this then
continued into the 1950s.
It was accompanied by the reconstruction of industry across Europe and the beginnings
of the Asian development period, particularly in Japan.
Economists like Penrose were beginning to explore how firms grew, and human
behaviourists like Cyert and March suggested that rational economic behaviour was an
oversimplified way of considering company development.
By the late 1950s, writers such as Ansoff were beginning to develop strategic
management concepts that would continue into the 1970s.
During the 1960s the early concepts of what would later become one of the main
approaches to strategic management – prescriptive strategic management – began to
take shape.
Ansoff argued that there were environmental factors which accelerated the development
of strategic management.
Two trends can be identified:
1. The accelerated rate of change. Strategic management provided a way of taking
advantage of new opportunities.
2. The greater spread of wealth. Strategic management needed to find ways of
identifying the opportunities provided by the spread of increasing wealth, especially
in Europe.
It was during this same period that the early research was conducted which subsequently
led to the development of the second main approach to strategic management – emergent
strategic management – although this really only came to prominence in the 1970s and
1980s.
Strategic Management into the 21st Century
The 1970s saw the major oil price rises. They came as a result of the world’s increased
need for energy and Middle Eastern success in organizing an oil price cartel.
The business environment was subject to a sudden and largely unpredicted change that
caused some strategists to reconsider the value of prediction in strategic management.
The past 20 years have witnessed further environmental developments that are identified
briefly in Table 2.1.
These trends have had the following effects on strategic management:
8

Free market competition.
This has been one element in supporting and encouraging growth in many newly
developing countries. For example, greater market competition in China and India
is considered to have led to increased wealth in those countries.

Increasing importance of Asia/Pacific markets.
Strategic management has moved out of being the preserve of North American
and European countries.
The lower labour costs and greater wealth in countries like China, Korea and
India have put pressure on Western and Japanese companies to cut costs or move
to such countries.
For example, in breakfast cereals, Cereal Partners – a joint venture between
Nestle and General Mills- has opened factories in Asia to take advantage of low
labour costs.

Global and local interests.
In addition to economic growth, the world marketplace has become more complex
in cultural and social terms.
Markets have become more international, thus making it necessary to balance
global interests and local demand variations.
For example, CP has adapted its breakfast cereal products to local tastes within its
basic worldwide branding.

Need to empower and involve employees in strategic decisions.
The higher levels of training and deeper levels of skills of employees mean that
they are no longer poorly trained and no longer have difficulty making a
contribution to strategic management, especially in some western countries.

Greater speed of technical change and rise of new forms of communication.
Technology is changing more quickly and the development of new forms of
communication, such as the internet, have revolutionized strategy.
For example, both Kellog and Cereal Partners have developed websites.

Collapse of some companies for ethical reasons.
Ethical lapses in some companies, such as Enron in the USA, have led to a
renewed emphasis on ethical issues in the development and conduct of strategic
management.
The Phases of Strategic Management
Many of the concepts and techniques dealing with strategic management have been
developed and used successfully by business corporations. Over time, business
practitioners and academic researchers have expanded and refined these concepts.
9
Initially strategic management was of most use to large corporations operating in multiple
industries.
Increasing risks of error, costly mistakes, and even economic ruin are causing today’s
professional managers in all organizations to take strategic management seriously in
order to keep their company competitive in an increasingly volatile environment.
As managers attempt to better deal with their changing world, a firm generally evolves
through the following 4 phases of strategic management:
Table 2.1: The Development of Strategic Management in the 20th Century, Showing
Important Environmental Influences
Period
1900 – 1910
1910-1930
Environment
 Colonial wars
 Global trading of commodities
World war and its legacy
1930s
Crash: trade barriers erected to
protect some countries
1940s
World war and its legacy
1950s
Sustained
economic
growth
coupled with first European trade
and political block: European
Economic Community
Continued growth until first oil
price rise late in the decade
Growth becomes more cyclical
with another oil price shock
 Far
East
and
global
developments
 Computer
data
handling
develops fast
 Beginnings of moves to
privatize
government
institutions
 Telecommunications,
global
corporations, high growth in the
Pacific Rim but currency
problems in Japan
 Late 1990s – rise of internet
trading
and
business
opportunities
 Global recession followed by
recovery
 Asian economies
1960s
1970s
1980s
1990s
2000s
10
Strategy and Management Developments
Beginnings of examination of the management task, e.g.
Fayol and Taylor
Rise of larger organizations and the consequent need for
increased management control
 Formal management control mechanisms developed, e.g.
budgeting and management accounting, particularly in the
USA.
 Early human resource experiments in USA
 Strong US industry and birth of formal strategy
 Beginnings of organizational theory
 First real strategy writings in formal series of papers
 Organizational theory is applied to managerial tasks





Strategic management techniques are researched
Separate parallel development in organizational research
Formal strategic management techniques adopted
First research writings objecting to same techniques
Major strategic emphasis on competitive aspects of formal
strategic management
 Search continues for new strategy concepts emphasizing
the human rather than the competitive aspects of the
process
 Global concepts of strategy
 Greater emphasis on the organization’s own resources
rather than competition as the basis for strategy
development
 Business opportunities from internet support new strategy
concepts of fast-moving markets, hypercompetition and
learning mechanisms
 New emphasis on innovation
 Strategists realize that low-wage economies coupled with
mature technologies in some industries, like cars, require
new strategic approaches
 Corporate social responsibility takes greater prominence in
strategy
Phase 1. Basic Functional Planning
Managers initiate serious planning when they are requested to propose next year’s
budget. Projects are proposed on the basis of very little analysis, with most
information coming from within the firm. The sales force usually provides the
small amount of environmental information.
Such simplistic operational planning only pretends to be strategic management,
yet it is quite time consuming. Normal company activities are often suspended for
weeks while managers try to cram ideas into the proposed budget.
The planning time horizon is usually 1 year.
Phase 2. Forecast-based Planning
As annual budgets become less useful at stimulating long-term planning,
managers attempt to propose 5-year plans. They now consider projects that may
take more than 1 year. In addition to internal information, managers gather any
available environmental data – usually on an ad hoc basis – and extrapolate
current trends 5 years into the future.
This phase is also time consuming, often involving a full month of managerial
activity to make sure all the proposed budgets fit together. The process gets very
political as managers compete for larger share of funds. Endless meetings take
place to evaluate proposals and justify assumptions.
The planning time horizon is usually 3 to 5 years.
Phase 3. Externally-oriented Planning (Strategic Planning)
Frustrated with highly political, yet ineffectual 5-year plans, top management
takes control of the planning process by initiating strategic planning. The
company seeks to increase its responsiveness to changing markets and
competition by thinking strategically.
Planning is taken out of the hands of lower level managers and concentrated in a
planning staff whose task is to develop strategic plans for the corporation.
Consultants often provide the sophisticated and innovative techniques that the
planning staff uses to gather information and forecast future trends.
Upper level managers meet once a year at a resort “retreat” led by key members
of the planning staff to evaluate and update the current strategic plan.
Such top-down planning emphasizes formal strategy formulation and leaves the
implementation issues to lower management levels.
Top management typically develops 5-year plans with help from consultants but
minimal input from lower levels.
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Phase 4. Strategic Management (proper)
Realizing that even the best strategic plans are worthless without the input and
commitment of lower level managers, top management forms planning groups of
managers and key employees at many levels from various departments and work
groups. They develop and integrate a series of strategic plans aimed at achieving
the company’s primary objectives. Strategic Plans now detail the implementation,
evaluation and control issues.
Rather than attempting to perfectly forecast the future, the plans emphasize
probable scenarios and contingency strategies.
The sophisticated annual 5-year strategic plan is replaced with strategic thinking
at all levels of the organization throughout the year.
Strategic information, previously available only centrally to top management, is
available via local area networks and intranets to people throughout the
organization.
Instead of a large centralized planning staff, internal and external planning
consultants are available to help guide group strategy discussions.
Although top management may still initiate the strategic planning process, the
resulting strategies may come from anywhere in the organization.
Planning is typically interactive across levels and is no longer top down. People at
all levels are now involved.
The Benefits of Strategic Management
Research has revealed that organizations that engage in strategic management generally
outperform those that do not.
The attainment of an appropriate match or “fit” between an organization’s environments and its
strategy, structure and processes has positive effects on the organization’s performance.
A survey of nearly 50 corporations in a variety of countries and industries found the 3 most
highly rated benefits of strategic management to be:



Clearer sense of strategic vision for the firm
Sharper focus on what is strategically important
Improved understanding of a rapidly changing environment
To be effective, however, strategic management need not always be a formal process.
It can begin with a few simple questions:
1. Where is the organization now? (Not where do we hope it is!)
2. If no changes are made, where will the organization be in 1 year? 2 years? 5 years?
10 years? Are the answers acceptable?
3. If the answers are not acceptable, what specific actions should management
undertake? What are the risks and benefits involved?
12
A survey by Bain & Company revealed the most popular management tools to be strategic
planning and developing mission and vision statements – essential parts of strategic
management.
Studies of the planning practices of actual organizations suggest that the real value of strategic
planning may be more in the future orientation of the planning process itself than in any written
strategic plan.
Small companies may plan informally and irregularly.
Planning the strategy of large, multidivisional corporations can become complex and time
consuming.
It often takes slightly more than a year for a large company to move from situational assessments
to a final decision agreement.
Because of the relatively large number of people affected by a strategic decision in such a firm, a
formalized, more sophisticated system is needed to ensure that strategic planning leads to
successful performance.
Otherwise, top management becomes isolated from developments in the business units, and
lower level managers lose sight of the corporate mission and objectives.
1.2
MAJOR ELEMENTS OF STRATEGIC MANAGEMENT
Strategic management includes the following elements:
 Environmental scanning (both external and internal)
 Strategy formulation (strategic or long-range planning)
 Strategy implementation
 Evaluation and control
The following figure shows how these elements interact:
Fig. 1.1: Basic Elements of the Strategic Management Process
Environmental
Scanning
Strategy
Formulation
Strategy
Implementation
Evaluation and
Control
ENVIRONMENTAL SCANNING
This is the monitoring, evaluating and disseminating of information from the external and
internal environments to key people within the corporation.
Its purpose is to identify strategic factors – those external and internal elements that will
determine the future of the corporation.
13
The simplest way to conduct environmental scanning is through SWOT analysis.
SWOT is an acronym used to describe those particular Strengths, Weaknesses, Opportunities
and Threats that are strategic factors for a specific company.
The external environment consists of variables (Opportunities and Threats) that are outside the
organization and not typically within the short-run control of top management.
These variables form the context within which the organization exists.
The key environmental variables may be:
 general forces and trends within the overall societal environment (economic,
technological, political-legal, socio-cultural forces) or
 specific factors that operate within an organization’s specific task environment – often
called its industry (shareholders, suppliers, employees/labour unions, competitors, trade
associations, communities, creditors, customers, special interest groups, governments).
The internal environment of a corporation consists of variables (Strengths and Weaknesses)
that are within the organization itself and are not usually within the short-run control of top
management.
These variables form the context in which work is done.
They include the corporation’s structure, culture and resources.
Key strengths form a set of core competencies that the corporation can use to gain competitive
advantage.
STRATEGY FORMULATION
This is the development of long-range plans for the effective management of environmental
opportunities and threats, in light of corporate strengths and weaknesses.
It includes defining the corporate mission, specifying achievable objectives, developing
strategies, and setting policy guidelines.
Mission:
An organization’s mission is the purpose or reason for the organization’s existence.
It tells what the company is providing to society, either a service or a product.
A well-conceived mission statement:
 defines the fundamental, unique purpose that sets a company apart from other firms of its
type and
 identifies the scope of the company’s operations in terms of products and services offered
and markets served.
It may also include the firm’s philosophy about how it does business and treats its employees.
It puts into words not only what the company is now, but also what it wants to become –
management’s strategic vision of the firm’s future.
Some people like to consider vision and mission as two different concepts:
 A mission statement describes what the organization is now;
 A vision statement describes what the organization would like to become in future.
14
A composite mission statement (mission plus vision) promotes a sense of shared expectations in
employees and communicates a public image to important stakeholder groups in the company’s
task environment.
It tells who we are and what we do as well as what we’d like to become.
A mission may be defined narrowly or broadly in scope.
A broadly defined mission statement keeps the company from restricting itself to one field or
product line, but it fails to clearly identify either what it makes or which product/markets it plans
to emphasize.
Example: Serve the best interests of shareowners, customers and employees.
Because this broad statement is so general, a narrow mission statement is more useful.
A narrow mission very clearly states the organization’s primary business, but it may limit the
scope of the firm’s activities in terms of product or service offered, the technology used, and the
market served.
Example: To improve the quality of home life by designing, building, marketing and servicing
the best appliances in the world (Maytag Corporation).
Objectives
These are the end results of planned activity.
They state what is to be accomplished by when and should be quantified if possible.
The achievement of corporate objectives should result in the fulfilment of a corporation’s
mission.
In effect, this is what society gives back to the corporation when the corporation does a good job
of fulfilling its mission.
Example: Increase profits 10% over last year.
Some of the areas in which a corporation might establish its goals and objectives are:
 Profitability (e.g. net profits)
 Efficiency (e.g. low costs, etc.)
 Growth (e.g. increase in total assets, sales, etc.)
 Shareholder wealth (dividends plus stock price appreciation)
 Utilization of resources ( e.g. return on investment or equity)
 Reputation (being considered a “top” firm)
 Contributions to employees (employment security, wages, diversity)
 Contributions to society (taxes paid, participation in charities, providing a needed
product or service)
 Market leadership (market share)
 Technological leadership (innovations, creativity)
 Survival (avoiding bankruptcy)
 Personal needs of top management (using the firm for personal purposes, such as
providing jobs for relatives)
15
Fig. 1.2: Strategic Management Model
Environm
ental
Scanning
External
Societal
Environ
ment:
General
forces
Task
Environ
ment:
Industr
y
analysis
Internal
Strategy Implementation
Strategy Formulation
Evaluatio
n&
Control
Mission
Reason
for
existence
Objecti
ves
What
results
to
achieve
by
when
Strategi
es
Polici
es
Plan to
achieve
mission
&
objectiv
es
Broad
guidelin
es for
decision
making
Structure:
Chain of
command
Culture:
Beliefs,
expectatio
ns, values
Resources
: Assets,
skills,
competenc
ies,
knowledge
Progra
ms
Activities
needed to
accompli
sh a plan
Budgets
Cost of
the
program
s
Procedu
res/Plan
Sequenc
e of
steps
needed
to do job
Performan
ce
Actual
results
Feedback/ Learning
Goals
In contrast to an objective, a goal is an open-ended statement of what one wants to accomplish
with no quantification of what is to be achieved and no time criteria for completion.
For example, a simple statement of “increased profitability” is thus a goal, not an objective,
because it does not state how much profit the firm wants to make the next year.
16
Strategies
A strategy of a corporation forms a comprehensive master plan stating how the corporation will
achieve its mission and objectives.
It maximizes competitive advantage and minimizes competitive disadvantage.
The typical business firm usually considers 3 types of strategy: corporate, business and
functional.
1. Corporate Strategy
This describes a company’s overall direction in terms of its general attitude toward
growth and the management of its various businesses and product lines.
Corporate strategies typically fit within the 3 main categories of stability, growth and
retrenchment.
2. Business Strategy
This usually occurs at the business unit or product level, and it emphasizes improvement
of the competitive position of a corporation’s products or services in the specific
industry or market segment served by that business unit.
Business strategies may fit within the 2 overall categories of competitive or cooperative
strategies.
Competitive strategies include differentiation, cost leadership and focus.
For example, a differentiation competitive strategy could emphasize innovative products
with creative design.
Forming alliances between firms represents a cooperative strategy.
3. Functional Strategy
This is the approach taken by a functional area to achieve corporate and business unit
objectives and strategies by maximizing resource productivity.
It is concerned with developing and nurturing a distinctive competence to provide a
company or business unit with a competitive advantage.
Examples of R&D functional strategies are
 technological followership (imitate the products of other companies) and
 technological leadership (pioneer an innovation).
Business firms use all 3 types of strategy simultaneously.
A hierarchy of strategy is the grouping of strategy types by level in the organization.
This hierarchy of strategy is a nesting of one strategy within another so that they complement
and support one another.
Functional strategies support business strategies, which in turn, support corporate strategy(ies).
Just as many firms often have no formally stated objectives, many firms have unstated,
incremental or intuitive strategies that have never been articulated or analyzed.
17
Then the only way to spot a firm’s implicit strategies is to look at what management does, not
what it says.
Implicit strategies can be derived from corporate policies, programs approved (and
disapproved), and authorized budgets.
Policies
This is a broad guideline for decision making that links the formulation of strategy with its
implementation.
Companies use policies to make sure that employees throughout the firm make decisions and
take actions that support the firm’s mission, objectives and strategies.
For example, consider the following company policies:
 Maytag Corporation: Maytag will not approve any cost reduction proposal if it reduces
product quality in any way. (This policy supports Maytag’s strategy for Maytag brands to
compete on quality rather than price).
 3M: Researchers should spend 15% of their time working on something other than their
primary project. (This supports 3M’s strong product development strategy)
 Intel: Cannibalize your product line (undercut the sales of your current products) with
better products before a competitor does it to you. (This supports Intel’s objective of
market leadership).
 General Electric: GE must be number 1 or 2 wherever it competes. (This supports GE’s
objective to be number 1 in market capitalization).
 Nordstrom: A “no questions asked” merchandise return policy, because the customer is
always right. (This supports Nordstrom’s competitive strategy of differentiation through
excellent service)
Policies like these provide clear guidance to managers throughout the organization.
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Hierarchy of Strategy (Nesting)
Corporate Strategy
Business Strategy
Functional
Strategy
STRATEGY IMPLEMENTATION
This is the process by which strategies and policies are put into action through the development
of programs, budgets and procedures.
This process might involve changes within the overall culture, structure and/or management
system of the entire organization.
Except when such drastic corporate-wide changes are needed, however, the implementation of
strategy is typically conducted by middle and lower level managers with review by top
management.
Sometimes referred to as operational planning, strategy implementation often involves day-today decisions in resource allocation.
Programs
A program is a statement of the activities or steps needed to accomplish a single-use plan.
It makes the strategy action oriented.
It may involve restructuring the organization, changing the company’s internal culture, or
beginning a new research effort.
Budgets
A budget is a statement of a firm’s programs in monetary (kwacha) terms.
Used in planning and control, a budget lists the detailed cost of each program.
Many organizations demand a certain percentage return on investment (ROI), often called a
“hurdle rate”, before management will approve a new program.
19
This ensures that the new program will significantly add to the corporation’s profit performance
and thus build shareholder value.
The budget thus not only serves as a detailed plan of the new strategy in action, but also specifies
through pro forma financial statements the expected impact on the firm’s financial future.
Procedures
Sometimes termed Standard Operating Procedures (SOPs), are a system of sequential steps or
techniques that describe in detail how a particular task or job is to be done.
They typically detail the various activities that must be carried out in order to complete the firm’s
programs.
For example, Delta Airlines used various procedures to cut costs.
EVALUATION AND CONTROL
This is the process in which corporate activities and performance results are monitored so that
actual performance can be compared with desired performance.
Managers at all levels use the resulting information to take corrective action and resolve
problems.
Although evaluation and control is the final major element of strategic management, it also can
pinpoint weaknesses in previously implemented strategic plans and thus stimulate the entire
process to begin again.
Performance
This is the end result of activities.
It includes the actual outcomes of the strategic management process.
The practice of strategic management is justified in terms of its ability to improve an
organization’s performance, typically measured in terms of profits and return on investment.
For evaluation and control to be effective, managers must obtain clear, prompt and unbiased
information from the people below them in the organization’s hierarchy.
Using this information, managers compare what is actually happening with what was originally
planned in the formulation stage.
The evaluation and control of performance completes the strategic management model.
Based on performance results, management may need to make adjustments in its strategy
formulation, in implementation, or in both.
FEEDBACK/LEARNING PROCESS
The strategic management model depicted above includes a feedback/learning process.
Arrows are drawn coming out of each part of the model and taking information to each of the
previous parts of the model.
20
As a firm or business unit develops strategies, programs, etc., it often must go back to revise or
correct decisions made earlier in the model.
For example, poor performance (as measured in evaluation and control) usually indicates that
something has gone wrong with either strategy formulation or implementation.
It could also mean that a key variable, such as a new competitor, was ignored during
environmental scanning and assessment.
1.3
STRATEGIC LEADERSHIP AND DECISION-MAKING.
STRATEGIC LEADERSHIP
Strategic leadership is the ability to shape the organization’s decisions and deliver high value
over time, not only personally but also by inspiring and managing others in the organization.
Such leadership begins with the top management team – the chief executive officer (CEO), other
leading directors and, in large companies, the leading divisional directors.
For example, it may involve a fundamental reappraisal of the company involving managers at
many levels.
This may entail taking tough decisions on:
 the product range,
 the ability of individual directors to deliver their areas of responsibility and profit, and
 the need to cut costs by reducing the number of employees at various locations around
the world.
All this may be done against the background of increasing global competition, the downturn in
the global economy, etc.
Strategic leadership is therefore a complex balancing act between a number of factors.
It involves coping with strategic pressures and changes in the environment outside the
organization.
It also entails managing the human resources inside the organization – possibly one of the most
important strategic skills.
Leadership means more than merely responding to outside events.
It includes inspiring and enthusing those inside the organization with a clear direction for the
future.
This typically involves communicating with and listening to those inside the organization with
the aim of spreading knowledge, creating and innovating new areas and solutions to problems.
Importantly, leadership also means thinking and acting to develop the future leaders of the
organization.
At its centre, strategic leadership entails developing and delivering the purpose of the
organization.
The leaders do not undertake this task by themselves, but involve others in the organization at
many levels.
21
The skill of the leaders comes in combining and managing such inputs, so that many in the
organization feel that they have made a contribution and, at the same time, are willing to follow
and work towards the strategic direction defined by the leaders.
Three factors stand out in relation to this complex task:
1. How to lead so that others will follow.
For the most part, leaders will find that managers and employees work better if decisions
are not imposed from the top.
2. How to shape the organization’s culture and style.
The atmosphere of the workplace and decision making are important in delivering results.
3. How to structure and influence decision making in the organization.
Inevitably, there will be various groups seeking power within organizations and these
need to be managed successfully.
WHAT MAKES A SUCCESSFUL LEADER?
Leadership is the art or process of influencing people so that they will strive willingly and
enthusiastically towards the achievement of the organization’s purpose.
Leadership will have a significant influence on the performance of the organization.
However, the precise relationships between the two related topics of leadership and purpose are
complex and depend on the specific circumstances.
Understanding the Influence of Leadership
Leadership is related to the purpose of the organization since there are many examples of leaders
who have guided and shaped the direction of their companies.
The essence of this aspect of leadership can be seen as the ‘influence’ – the art or process of
influencing people so that they will strive willingly and enthusiastically towards the achievement
of the group’s mission.
The organization’s purpose and strategy do not just drop out of a process of discussion, but may
be actively directed by an individual with strategic vision.
Hence it is said: Visionary leadership inspires the impossible and fiction becomes truth.
Leadership is a vital ingredient in developing the purpose and strategy of organizations.
There is substantial anecdotal evidence to support the observation that the potential that leaders
have for influencing the overall direction of the company is considerable.
Thus, in drawing up purpose and related strategy, it would be wise to consider carefully the
personality, role and power of the leading person or group in the organization.
Given the evident power that leaders may have in developing the company’s mission and
strategy, it is important to note some areas of caution based on research:
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


Leaders should to some extent reflect their followers and in some company cultures may
need to be good team players if they are to effect change. Otherwise, they will not be
followed.
Vision can be eccentric, obsessed and not always logical.
It is certainly possible to exaggerate the importance of individuals when they are leading
large and diverse groups that have strong company-political instincts.
These later features are important in the modern, complex consideration of strategic
management.
Companies such as Phillip Morris, Royal Dutch/Shell and Toyota may all be more comfortable
with a corporate leader who is inclined to be evolutionary rather than revolutionary.
Analysing Leadership Styles
In order to understand what makes a successful leader, it is useful to analyse the leadership role.
However, despite the extensive research reaching back to the 1950s, there is no general
agreement on leadership analysis.
There are three main approaches to this: the trait theories, style theories and contingency
theories.
Trait Theories: These argue that individuals with certain characteristics known as traits can be
identified who will provide leadership in virtually any situation.
According to the research that has been done, such individuals will be intelligent, self-assured,
able to see beyond the immediate issues and come from higher socio-economic groups.
In recent times, such theories have been discredited because the evidence to support them is
inconsistent and clearly incomplete in its explanation of leadership.
On this view, successful leadership would be derived largely from the leader as an individual.
Style Theories: These suggest that individuals can be identified who possess a general style of
leadership that is appropriate to the organization.
For example, two contrasting styles would be the authoritarian and the democratic: the former
imposes the leader’s will from the centre and the later allows free debate before developing a
solution.
In addition to these two styles is the laissez faire style where the leader abdicates his leadership
role.
According to the research, this has some validity, but leadership is much more complex than the
simplicities of style.
For example, it needs to take into account the varied relationships between leaders and
subordinates, the politics of decision making in the organization and the culture of the
organization.
23
Such theories have therefore been downplayed in recent years.
Successful leadership here would be defined by the leadership style.
Contingency Theories: These explore the concept that leaders should be promoted or recruited
according to the needs of the organization at a particular point in time.
The choice is contingent on the strategic issues facing the organization at that time and leaders
need to be changed as the situation itself changes.
Thus the leader needs to be seen in relation to the group whom she will lead and the nature of the
task to be undertaken.
There is some evidence to support this approach but it is still anecdotal and oversimplifies the
leadership task.
Successful leadership here would depend on the strategic context and related circumstances.
From a strategic perspective, the contingency theory approach holds the most promise for two
reasons.
First, it is the one that best captures both the leader and the relationship with others in the
organization.
Second, it also identifies clearly the importance of the strategic situation as being relevant to the
analysis of successful leadership.
Within contingency theory, there is one approach that is particularly used: the best-fit analytical
approach.
This is essentially based on the notion that leaders, subordinates and strategies must reach some
compromise if they are to be successfully carried forward.
Ultimately, the purpose of the organization and the strategies to achieve that purpose will best be
developed by some agreement between them.
This is useful in strategic management because it allows each situation to be treated differently
and it identifies three key analytical elements:
1. the chief executive officer or leader;
2. the senior/middle managers who carry out the tasks;
3. the nature of the purpose and strategies that will be undertaken.
Each of these elements is then plotted on a common scale, ranging from rigid (or heavily
structured) to relaxed (or supportive and flexible).
The best fit is then sought between three elements. (An example is shown below).
The result is inevitably vague but may prove useful in identifying the balance of style and its
influence on people, strategies and purpose.
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Successful Leadership Styles
Leadership style can vary from the shared vision approach to the dominance of individuals.
Each style will influence the way that purpose is developed and the content that results.
The Shared Vision Approach:
Senge proposed this useful perspective on the relationship between the organization and its
leadership.
It is the leaders of the organization who can show the way.
However, he argued that, in well-managed development, the whole organization is involved in
developing the purpose and strategy.
The way an organization evolves is a function of its leadership as much as its strategy.
However, the leader does not dominate and decide for the organization; rather he helps the
organization to develop a shared purpose of its future and the changes required to achieve it.
It is the leader who focuses on the underlying trends, forces for change and their impact on the
organization.
An Example of the Best-Fit Approach to Leadership Analysis
Rigid
Relaxed
Chief Executive
Officer (CEO)
Senior/middle
managers
Chosen purpose and
strategies




CEO prefers a structured style, possibly even dominant.
Senior/middle managers like to be given more personal initiative and responsibility.
Chosen strategies are tightly defined in some areas, but allow some managerial initiative.
Conclusion: In the above case, the three areas do not ‘fit’ – change and compromise are needed.
Purpose here may not be achieved with such contrasting styles and disagreements.
An age-old vision of leadership that expresses this relationship between the leader and the
organization is the following given by a Chinese philosopher Lao Tsu:
The wicked leader is he who people despise.
The good leader is he who people revere.
The great leader is he who the people say, ‘We did it ourselves’.
Thus, purpose here is developed by co-operation, discussion and broad agreement.
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The outcome may be slow, complicated and a compromise but it is likely to be well understood
by everyone and to generate strong commitment from those involved in developing it.
The Dominance Approach:
The above words of Tsu may not be appropriate in some strategic situations.
If a company is in crisis, then it may need strong and firm central leadership to enable it to
survive.
When a company is in the early stages of development, with a new vision about its future, it may
also benefit from a strong, entrepreneurial leader with a quite different style and approach to the
purpose.
In this situation, purpose is developed mainly by the choice of the leader and, possibly, the
immediate subordinates.
It will be largely imposed on others in the organization and will not engender the same degree of
commitment.
Choice of Leadership Style
Leaders and their organization will wish to consider how they should be led.
The choice of leadership style will ultimately depend on a number of factors that go beyond the
personality and personal wishes of the individual.
Some of the factors that will influence leadership style are as follows:
Factors Influencing the Leadership Style of Organizations






Personality and skills of leader.
Size of company.
Degree of geographical dispersion.
Stability of organization’s environment.
Current management style of the organization’s culture.
Organization’s current profitability and its desire and need for change.
The Importance of Trust, Enthusiasm and Commitment (Bennis & Nanus)
Successful leadership will influence many parts of the organization.
Thus, if leadership is to be successful, it cannot be regarded as just a cold and abstract analytical
statement.
Therefore, the leader needs to generate trust, enthusiasm and commitment amongst key members
of the organization for the chosen purpose.
Bennis and Nanus are two US authors that researched leadership amongst US organizations in
the 1980s.
They included failure as well as success and wrote a highly successful book full of short
anecdotes and pithy conclusions on leadership and especially its people aspects.
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Their conclusions on successful leadership suggest that:
 Leaders need to generate and sustain trust in the strategy process and the general integrity
of the organization while developing its vision and mission.
 Leaders will deliver a more robust statement of purpose if they have generated and used
the intellectual capital of the many people involved in the organization.
This means that leaders have tapped the knowledge, interest and experience of those
below them in the organization.
 Successful leaders need to demonstrate a passion and determination to seek out and then
achieve the purpose that has been identified by the process.
Thus, leadership needs to demonstrate commitment, develop understanding and fire enthusiasm
for the purpose if it is to be successful.
HOW LEADERS SHAPE ORGANIZATIONS USING CULTURE AND STYLE
Leaders can shape organizations by influencing and directing the beliefs, style and value of those
inside and outside the organization.
For example, Ford Motor Company in the USA encouraged and rewarded employees and
managers who delivered results.
Equally, Ford was quite ruthless in the way that it dealt with its CEO, Jac Nasser, who failed to
deliver on high-value acquisitions and to solve substantial problems in the volume cars division.
These decisions reflect the culture and values of the company, just as much as the immediate
strategic issues that arise.
In order to shape the organization, it is essential to understand the current culture and style of an
organization and then to consider the options for a leader to change the organization.
Analysing The Current Organizational Culture
Organizational culture is the set of beliefs, values and learned ways of managing of an
organization.
This is reflected in its structures, systems and approach to the development of strategic
management.
An organization’s culture derives from its past, its present, its current people, technology and
physical resources and from the aims, objectives and values of those who work in the
organization.
For example, people in the Ford Motor Company still recalled its past battles with trade unions
which had become part of the story of Ford.
Because each organization has a different combination of the above, each will have a culture that
is unique.
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Analysis is important because culture influences every aspect of the organization and leaders
need to understand the starting point if they are to make changes.
Specifically, it is the filter and shaper through which the leaders, managers and workers develop
and implement their strategies.
For these reasons, it will be one of the factors that influences the development of strategic
management.
In spite of its importance, there is a significant problem in analysing culture.
The difficulty is the lack of agreement amongst leading writers on its nature, structure and
influence.
Hence here we explore the matter from a strategic perspective.
The main elements of organizational culture are both internal and external as given below.
Outside the organization itself, there will be a whole series of influences on the organizational
culture of the organization.
These will include the changing values of people in society and political life, the corporate
cultures of other similar companies and the employment policies of governments with which the
organization has to deal.
There may also be some international issues associated with culture, if the organization is
involved in more than one country.
Within the organization, there will also be a series of factors that will define the existing culture
of an organization.
Leaders may find it useful to analyse them under the following headings:
History and Ownership
A young company may have been founded by one individual or a small group who will continue
to influence its development for some years.
Centralised ownership will clearly concentrate power and therefore will concentrate influence
and style.
Family firms and owner-dominated firms will have clearly recognizable cultures.
Size
As firms expand, they may lose the tight ownership and control and therefore allow others to
influence their style and culture.
Even if ownership remains tight, larger companies are more difficult to control from the centre.
Technology
This will influence the culture of the company but its effects are not always predictable.
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Those technologies that require economies of scale or involve high costs and expensive
machinery usually require a formal and well-structured culture for success: examples might
include large-scale chemical production or beer brewing.
Conversely, in fast-changing technologies, such as those in telecommunications, a more flexible
culture may be required.
Leadership and Mission
Individuals and their values will reflect and change the culture of the organization over time,
especially the chief executive and immediate colleagues.
These issues are vital to the organization.
The Cultural Web
The cultural web consists of the factors that can be used to characterise some aspects of the
culture of an organization.
It is a useful method of bringing together the basic elements that are helpful in analysing the
culture of an organization.
The main elements are:
 Stories: What do people talk about in the organization? What matters in the organization?
What constitutes success or failure?
 Routines: What are the normal ways of doing things? What are the procedures (not
always written down)?
 Rituals: Beyond the normal routine, what does the organization highlight? For example,
long service? Sales achievement? Innovation? Quality standards? How does it highlight
and possibly reward such rituals?
 Symbols: What are the symbols of office? Office size? Company car size? Separate
restaurants for different levels of managers and workers? Or the absence of these? How
do employees travel: first, business or tourist class?
 Control systems: Bureaucratic? Well-documented? Oriented towards performance?
Formal or informal? Haphazard?
 Organizational structure: Who reports to whom in the organization on a formal basis
and who has an informal relationship?
 Power structures: Who makes the decisions? Who influences the decisions? How?
When?
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Analysing the Main Elements of Organizational Culture
The Environment




People
Corporate cultures
Labour policies
International issues and culture





Cultural Factors Specific to the Organization
History and Ownership
Size
Technology
Leadership and Mission
Cultural Web
Identification of the Basic Cultural Style of the Organization
 Power
 Role
 Task
 Personal
Note that different groups within the organization may have
different subcultures
Analysis of the Strategic Implications



Prescriptive or emergent
Competitive advantage
Strategic change
The Cultural web can usefully distinguish also between what is done officially in an
organization, such as press releases and post-project evaluation, and what is done
unofficially, such as grapevine stories, office parties, email messages, etc.
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The paradigm not only links the elements but may also tend to preserve them as ‘the way we
do things here’.
It summarizes the culture of the organization.
Shaping the Future Cultural Style of the Organization
Although each organization has its own unique culture, Handy suggested that there are 4 main
types within the general analysis undertaken above.
These are explained below.
Leaders can use these as a starting point in deciding how they want to shape the culture of their
organizations, especially with regard to strategic change issues.
Each of the 4 styles is linked with an ability for slow or fast strategic change – leaders will want
to reflect on this connection as they shape their organizational culture.
The power culture
The organization revolves around and is dominated by one individual or a small group.
Examples: small building companies; formerly, some newspapers with dominant proprietors.
Strategic change: fast or slow depending on the management style of the leader.
The role culture
This organization relies on committees, structures, logic and analysis.
There is a small group of senior managers who make the final decisions, but they rely on
procedures, systems and clearly defined rules of communication.
Examples: civil service, retail banks.
Strategic change: likely to be slow and methodical.
The task culture
The organization is geared to tackling identified projects or tasks.
Work is undertaken in teams that are flexible and tackle identified issues.
The teams may be multidisciplinary and adaptable to each situation.
Examples: advertising agencies, consultancies.
Strategic change: will depend on the circumstances but may be fast where this is needed.
The personal culture
The individual works and exists purely for himself.
The organization is tolerated as the way to structure and order the environment for certain useful
purposes, but the prime area of interest is the individual.
Examples: co-operatives, communes and also individual professionals like architects or
engineers working as lone people in larger organizations such as health institutions.
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Strategic change: can be instant, where the individual decides that it is in her interests to make
such a move.
In considering the 4 main types of organizational culture, there are 4 important qualifications:
1. Organizations change over time. The entrepreneur, represented by the power culture,
may mature into a larger and more traditional business.
The bureaucracy, personified by the role culture, may move towards the more flexible
structure of the task culture.
Hence, an analysis may need to be reassessed after some years.
2. Several types of culture usually exist in the same organization.
There may be small task-teams concentrating on developing new business or solving a
specific problem and, in the same organization, a more bureaucratic set-up handling
large-volume production in a more formal structure and style.
Strategic management may even need to consider whether different parts of the
organization should develop different cultures.
For example, a team culture for a radical new venture;
a personal culture for the specialist expertise required for a new computer network.
3. Different cultures may predominate, depending on the headquarters and ownership of
the company.
Research indicates that national culture will also have an influence and will interact with
the above basic type.
4. Organizational culture changes only slowly.
It is important that leaders do not expect instant shifts in basic attitudes, beliefs and ways
of acting in an organization.
For these reasons, strategic cultural change needs to be approached with caution.
Nevertheless, there are many organizations, both large and small, where the mood, style and tone
are clear enough as soon as you walk through the door.
There is one prevailing culture that permeates the way in which business is done in that
organization.
The implications for leadership follow from this.
The following are ten guidelines for analysing cultural issues within an organization.
Ten Guidelines for Analysing Organization Culture and its Strategy Implications
1. How old is the organization? Does it exist in a stable or fast-changing environment?
2. Who owns it? Shareholding structure? Small company owner-proprietor? Government
shareholding? Large public company? What are the core beliefs of the leadership?
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3. How is it organized? Central board? Divisions? Clear decision-making structure from the
top? Are structures formal or informal? Is competition encouraged between people in the
company or does the organization regard collaboration as being more important?
4. How are results judged? Sympathetically? Rigorously? What elements are monitored? Is
the emphasis on looking back to past events or forwards to future strategy?
5. How are decisions made? Individually? Collectively and by consensus? How is power
distributed throughout the organization? Who can stop change? And who can encourage
it?
6. What qualities make a good boss? And a good subordinate?
7. How are people rewarded? Remuneration? Fear? Loyalty? Satisfaction in a job well
done?
8. How are groups and individuals controlled? Personal or impersonal controls? Enthusiasm
and interest? Or abstract rules and regulations?
9. How does the organization cope with change? Easily or with difficulty?
10. Do people typically work in teams or as individuals? What does the company prefer?
Tests for strategic relevance might include:





Risk: Does the organization wish to change its level of risk?
Rewards: What reward and job satisfaction?
Change: High or low degree of change needed?
Cost reduction: Is the organization seeking major cost reductions?
Competitive advantage: Are significant new advantages likely or will they be needed?
HOW LEADERS COPE WITH POWER
As strategic change occurs, leaders of organizations will have to cope with individuals and
groups who are likely to have an active interest in the process.
There may be pressure groups, rivalries, power barons and brokers, influencers, arguments,
winners and losers.
Some disputes may be disinterested and rational and some may be governed by strongly power
is therefore concerned with the exercise of authority, leadership and management in
organizations.
Strategic change cannot be separated from such issues.
If new strategies are resisted, then leadership power needs to take a pragmatic view of what is
possible rather than what is ideal.
For example, I may be highly desirable to alter radically a company’s structure, but the cost in
terms of management time may be too high in some circumstances, even with an imposed
solution from the leadership.
An analysis of the organization’s power situation is important as strategies are developed.
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Case 12.2 on Royal Dutch Shell shows the difficulties that faced the new chairman of Royal
Dutch/ Shell in 2004 as he attempted to achieve radical change and impose his preferred
solutions on the organisation.
What are The Main Element of Power in Organisations?
As a starting point, leaders first need to recognize that it may be wishful thinking to attempt to
‘manage change’ in the sense of identifying where the organization is heading and instructing
everyone to take that route.
Leadership power may be better directed towards encouraging a positive attitude to change,
coupled with learning and persuasion.
There is nothing wrong with health competition between groups and individuals in an
organization.
It can stretch performance and help groups to become more cohesive.
It also helps to sort out the best.
The difficulty arises when it gives rise to conflict and political maneuvering.
Leaders need to recognize that there are two principal reasons for organizational conflict:
1. Differing goals and ideologies. For example, different groups or individuals within an
organization ma have different goals, make different value judgments, be given different
and conflicting objectives, etc. There may also be a lack of clarity in the goals and
objectives. it should be possible in the context of strategic change to ensure that conflict
and confusion over goals are minimized.
2. Threats to territory. For example, some groups or individuals may feel threatened by
others doing the same jobs, become jealous of other roles, be given instructions that cut
across other responsibilities, etc. It is in this area that the greatest strategic difficulty is
likely to arise. It savings are to be made or improved performance to be obtained, them it
may be necessary to accept the conflict here.
Addressing the strategic change issue, Mintzberg suggests that there are benefits from
competition in organizations.
It can be a force for achieving change.
In this sense, power is an inevitable consequence of strategic change and needs to be
accepted and channeled by the organisation’s leadership for the best results.
HOW CAN LEADERS COPE WITH POWER ISSUES?
Right at the start of any strategic change process, leaders must clarify the organization’s
objectives and the implications for individual parts of the organization.
It is true that conflict arises as a result of confusion over objectives, then it follows that these
needs to be fully explored before other matters are raised.
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In addition, five areas need to be addressed by the organization’s leadership:
1. The extent to which the organization has developed a culture of adaption or experiment.
Such an approach will help when it comes to implementing agreed strategies later.
2. The identification of major power groups or individuals whose influence and support are
essential for any major strategic change.
3. The desirability or necessity of consultation rather than confrontation, as the strategic
analytical process continues.
4. The role and traditions of leadership in the organization and the extent to which this may
enhance the success and overcome problems associated with strategic change.
5. The nature and scope of the external pressures on the organization.
These 5 areas are interconnected as a network of relationships, as follows:
The Political Network of an Organization
Leadership
The adoption of
a learningadaptive culture
Power groups:
formal and
informal
External
pressures:
competitive
and
environment
Change style:
consultation
versus
confrontation
SUCCESSFUL STRATEGIC LEADERSHIP
There are five key subject areas that leaders need to address for successful and effective
leadership.
These are shown in the following diagram:
35
The 5 Elements of Successful and Effective Strategic Leadership
Sustaining
competitive
advantage over time
Defining and
delivering to
stakeholders
Developing &
Communicating the
organization’s purpose
Managing human
resource and
organizational
decisions
Setting ethical
standards
Developing and communicating the organization’s purpose
In the first instance, strategic leader are primarily tasked with determining the organization’s
purpose and then communicating this to every part of the organization.
The content of purpose is driven by the leaders of the organization.
However, they do not normally do this alone: they will consult widely and gather contributions
from many managers in the organization.
For example, DaimlerChryster had extensive discussions both inside and outside the company
with regard to its purpose of becoming a global leader in the car market and its acquisition of the
Chryster car company to achieve this.
However there may be occasions when it is inappropriate to engage in wide consultation – for
example, during a takeover bid or company disposal when financial market rules may make such
consultation difficult.
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Managing human resource and organization decisions
In addition to defining and developing purpose, strategic leaders need to motivate and reward
managers and employees to deliver the agreed purpose.
This forms an important part of the human resource decisions of the company.
Human resources are the skills, talents and knowledge of every member of the organization.
Strategic leaders have a special responsibility to direct, develop and nurture employees in the
organization.
For many strategists, human resources are one of the key competitive advantages of companies.
This means that one of the important leadership tasks must be to find, select and keep key
employees.
For example, DaimlerChrystler has had an extensive management development programme for
many years.
It resulted in the identification of two of its recent chief executives, Jurgen Schrempp and Dieter
Zetsche.
In addition, the company also devotes substantial resources to hiring, selecting and training
employees at all levels of the organization-this is part of its on-going purpose.
While people skills are vital, leaders also need to recognize that they have an equal responsibility
to develop and maintain the culture of the organization.
We explored this issue earlier in this chapter, recognizing the crucial role of leaders in setting the
tone, atmosphere and standards that surround organizational culture.
Finally, strategic leadership will involve the reporting relationships and organizational structure
that bind people together in the company.
These issues will be explored later and remain central to the way that leaders go about their tasks
in the organization.
Setting ethical standards and defining corporate social responsibility in the organization
Although all employees have a responsibility to deliver on the ethnical and corporate social
responsibility issues in the organization, it is the leadership that sets the standards and monitors
the achievement.
As explored ealier these values will guide and direct key activities – even at quite junior levels in
the organization.
The standards therefore need to come from the top and be associated with an on-going ethical
programme, initiated by the leaders, that touches everyone in the organization.
For example, DaimlerChrysler publishes a strong ethical position on key issues to its entire
workforce and to the general public.
37
Defining and Delivering to Stakeholders
Although the organization’s leaders have extensive decision making power, they also have
outside pressures, particularly from stakeholders some of whom are inside but some of whom
have great bargaining power from outside the organization.
There is a power balance amongst the various possible stakeholders: shareholders, managers,
employees, customers, government institutions, etc.
One of the prime responsibilities of strategic leaders is to maintain good relationships with such
interested groups.
This will partly come from delivering year-end profits and dividends to shareholders in a
commercial organization and remuneration increases to employees and managers.
However, in practice, the relationship is a more subtle and complex.
For example, it is likely to involve dealing with financial institutions over raising new finance,
share dividend policy, acquisitions and forms of co-operation.
Equally, it can easily entail such issues as government negotiations on tax liabilities, government
grants and employee prospects.
One of the major issues for strategic leadership is to prioritize the various demands on time and
resource.
This requires judgement and experience coupled with the use of outside advisers – often
involving a public relations company.
Professional help in dealing with these matters has become an important part of strategic
leadership for virtually every organization – large and small.
Sustaining Competitive Advantage Over Time
There is a relationship between the value added by an organization and its competitive
advantage.
In essence, organizations that wish to increase their value added can do this by increasing their
competitive advantage.
Hence, if strategic leadership is at least partially about growing the organization’s value over
time, it is also about increasing the same organization’s competitive advantages.
It is the responsibility of the organization’s leadership to preserve and enhance the competitive
advantages of the organization.
In practice, this means activities like maintaining and improving products or service quality,
enhancing the reputation of the organization and investing in new company strategies across a
range of activities.
It may also entail acquisitions and joint ventures, but leaders need to think carefully before
moving into new areas that do not enhance competitive advantage.
38
1.4
THE CHARACTERISTICS OF SUCCESSFUL ORGANISATIONS
Key Factors For Success in an Industry
In a strategic analysis of the environment, there is an immense range of issues that can
potentially be explored, creating a problem for most organisation, which have neither the time
nor the resources to cope with such an open-ended task.
The Japanese strategist Kenichi Ohmae, the former head of the management consultants
McKinsey, in Japan, has suggested a way of tackling this matter by identifying the key factors
for success (KFS) that are likely to deliver the company’s objectives.
These can then be used to focus the analysis on particularly important industry matters.
Definition: Key factors for success in an industry are those resources , skills and attributes of the
organisation in an industry that are essential to deliver success in the market place.
Ohmae argued that, when resources of capital, labour and time are scarce, it is important that
they should be concentrated on the key activities of the business- that is, those most important to
the delivery of whatever the organisation regards as success.
This concept of key factors for success is also consistent with Porter’s view that there are factors
that determine the relative competitive positions of companies within an industry.
Moreover, the foundation of Kay’s approach is that it is important to concentrate resources on
the specific areas of the business that are most likely to prove successful.
Amit and Shoemaker call the factors ‘Strategic Industry Factors’.
All the above have said that identifying the key factors is not an easy task.
KFS are common to all the major organizations in the industry and do not differentiate one
company from another.
Such factors will vary from one industry to another.
For example, while low labour costs, a range of specialized steel products, etc. are common to
many steel companies, in the perfume and cosmetics industry the factors will include branding,
product distribution and product performance, but they are unlikely to include low labour costs.
When undertaking a strategic analysis of the environment, the identification of the KFS for an
industry may provide a useful starting point.
For example, the steel KFS item of ‘low labour costs’ would suggest an environmental analysis
of the following areas:



General wage levels in the country;
Government regulations and attitudes to worker redundancy, because high wage costs
could be reduced by sacking employees;
Trade union strength to fight labour force redundancies.
39
Identifying the Key Factors for Success in the Industry
Key factors concern not only the resources of organizations in the industry but also the
competitive environment in which organizations operate.
There are 3 principal areas that need to be analysed – Ohmae’s three Cs.
1. Customers. What do customers really want? What are the segments in the marketplace?
Can we direct our strategy towards a group? Price, service, product or service reliability,
quality, technical specifications, branding.
2. Competition. How can the organization beat or at least survive against competition?
What resources and customers does it have that make it particularly successful? How
does the organization compare on price, quality, value, etc.? Does the organization have a
stronger distributive network than its competitors? Cost comparisons, price comparisons,
quality issues, market dominance, service, distributors.
3. Corporation. What special resources does the company itself possess and how do they
compare with those of competitors? How does the company compare on costs with its
rivals? And on technologies? Skills? Organizational ability? Marketing? Low-cost
operations, economies of scale, labour costs, production output levels, quality operations,
innovative ability, labour/management relations, technologies and copyright, skills.
No single area is more important than another.
The corporate factors relate to the resource issues.
Criticism of the key factors for success has concentrated on 4 issues:
1. Identification. It is difficult to pick out the important factors.
2. Causality of relationships. Even though they have been identified, it may not be clear
how they operate or interact.
3. Dangers of generalizing. The competitive advantage of a single organization, by
definition, cannot be obtained by seeking what is commonly accepted as bringing success
to all organizations in an industry.
4. Disregard of emergent perspectives. Success may come from change in an industry,
rather than the identification of the current key factors for success.
The criticisms suggest that key factors for success should be explored with caution.
Some of the criticisms can be countered if the key factors for success are regarded as guidelines
for directing strategy development, rather than rigid rules.
They are only a starting point in strategy analysis.
40
1.5
THE CASE STUDY METHOD
HOW TO ANALYSE AND PREPARE STRATEGY CASES
The analysis and discussion of case problems has been the most popular method of
teaching strategy and policy for many years.
The case method provides the opportunity to move from a narrow, specialized view that
emphasizes functional techniques to a broader, less precise analysis of the overall
corporation.
Cases present actual business situations and enable you to examine both successful and
unsuccessful corporations.
In case analysis, you might be asked to critically analyse a situation in which a manager
had to make a decision of long-term corporate importance.
This approach gives you a feel for what it is like to be faced with making and
implementing strategic decisions in a real company situation.
In addition to the cases shown throughout this book, there are some boarder cases presented in
the following page. A case is a written description of a strategy situation. it often studies a real
organization at a point in time and describes the strategy issues that are present or that appear to
be present – meaning that the organization may not have fully understood its own strategic
situation.
The objectives of analyzing cases are:



To apply the theoretical concepts that has been covered in this text. Importantly, you
rarely need to describe in detail the theory in your case answer: you may assume that the
reader (or listener to an oral presentation) will know this.
To consider the real-life complexity of a number of factors affecting the business
problem, rather than the single subject approach that may occur when a case is explored
inside a specific chapter. Most strategy problems have several aspects that go beyond the
subject matter of one chapter.
To identify strategy issues and make recommendations.
Cases are not necessarily complete, though for most purposes you can usually work with the
material in the case. In addition, some of the data in a case may not be relevant: this mirrors real
life where managers need to select the data they use to resolve strategy issues.
Although questions are given at the ends of Cases, such questions may not reflect the true issues
underpinning the case. For example, a question might be asked about the competitive resources
and capabilities of an organization. However, you may wish to explore the competitive
environment of the organization looking at competitive resources because this may influence the
resources: for example, the competitive resource of a brand name may need to be seen in the
context of the many brands already in that market place.
41
Nevertheless, for academic work, it is vital that all the questions at the end of a case are that
cannot be earned unless these are addressed. For example, if you are asked to make
recommendations, then you must make them.
Case preparation might usefully involve the following steps:
 Read the case fairly quickly
 Read again, this time making some notes in relation to the questions or problems
 Do a SWOT analysis on an organization in the case – even if you are not asked for one
the process of doing this will help you understand the structure of the case and the data
that are available.
 Then prepare a list of major issues based, for example, on either the prescriptive or
emergent process models in this book. in practice, you may need to make a choice here
between the two processes if the market is particularly uncertain. Perhaps you can use
section 3.3 on the degree of turbulence in the market place to help you decide:
o If turbulence is high, then an emergent approach may be more appropriate;
o If turbulence is low, then a prescriptive approach may be more useful.
Importantly, even when turbulence is low, you might want to inject more innovation and
experimentation into an organization’s strategy.
In which case, you might opt for a more emergent approach – or perhaps both a prescriptive and
an emergent approach.
Here is a possible structure based on a prescriptive approach:

Environment: Work selectively through Exhibit 3.1. Only include the parts that are
really useful unless you have been instructed otherwise. What are the major background
factors influencing the organization? Who are the customers? Who are the competitors?
What is the size, share and growth of the market? And so on.

Competitive resources: Work selectively through Fig. 4.12. Only include the parts that
are really useful unless you have been instructed otherwise. What are the main tangible
and intangible resources? What are the areas of organizational capability? What about
core competencies? And so on.

Purpose: What is the purpose? If the purpose is not stated clearly, then you are entitled to
assume a purpose – but you should make this clear in your presentation or report. You
may also wish to be critical of the organization’s stated purpose – perhaps because it is
unethical or insufficiently conscious of green ‘environmental’ issues or just simply too
vague. Again, you should distinguish in your presentation between what the organization
says and what you have added.

Strategy options: You may like to demonstrate some of the other basic strategy concepts
here – for example, using cost reduction processes or Porter’s generic strategies. You
usually are awarded higher marks for the use of strategy concepts. However, the good
presentation uses such concepts with caution and indicates why they may be weak in
practice.
42

Strategy selection: Here is the place where you can use your logic and clarity to argue
your way through to some recommended strategies. Your choice of your recommended
route needs to be clear and well argued – that means a comparison with other options
with reasoning and data as to explain why you have chosen your option.

Implementation: Here is where you can perhaps set out a timetable, a discussion of the
strategic change issues, or an estimate of the main resources needed. Remember all your
recommendations have costs, including some costs that may be difficult to quantify –
associated, for example, with strategic change.
You may judge that an emergent route is more useful.




In this case, you will probably start with some of the same areas outlined above.
However, your purpose will be more experimental and make recommendations
associated with testing in the market place.
You may also have a greater range of strategic options and perhaps not select between
them but recommend experimenting with various possibilities.
The emergent route probably provides fewer opportunities for demonstrating your logical
and reasoning skills because it may not make a single recommendation.
Bear this in mind when preparing your report – for example, by indicating some areas of
logic or by also undertaking some form of prescriptive analysis to sit alongside an
emergent approach.
Some further areas of guidance:







Remember there is no formula for developing strategy.
Do not write lengthy case introductions, nor pad out your analysis with a lengthy
repetition of the material already in the case.
Be practical: remember the organization’s resources, budgets and time constraints.
State assumptions, which are acceptable as long as they are sensible.
Be specific on your recommendations.
Many universities and colleges require adequate and detailed references to the case
material in your report – check with your lecturer.
Answer the question(s) asked.
Overall, the objective of a case is to provide you with an opportunity to apply in practice
what has been learnt in theory.
Marks therefore come from the application of the theory rather than a repetition of
material in the case or a description of the theory.
The evidence in the case and the application of logic and theoretical principles to that
evidence are the foundation of a good case analysis and presentation.
43
Researching the Case
Do not restrict yourself only to the information written in the case. You should undertake outside
research into the environmental setting.
Check the decision date of each case (typically the latest date mentioned in the case) to find out
when the situation occurred and then screen the business periodicals for that time period.
Use computerized company and industry information services such as COMPUSTAT, Compact
Disclosure, and CD/International, available on CD-ROM or online at the library.
On the Internet, Hoover’s On Line Corporate Directory (www.hoovers.com) and the Security
Exchange Commission’s Edgar database (www.sec.gov) provide access to corporate annual
reports and 10-K forms.
This background will give you an appreciation for the situation as it was experienced by the
participants in the case.
A company’s annual report and 10-K form from the year of the case can be very helpful.
According to the Yankelovich Partners survey form, 8 out of 10 portfolio managers and 75% of
security analysts use annual reports when making decisions.
Financial Analysis: A Place to Begin
Once you have read a case, a good place to begin your analysis is with the financial statements.
A review of key financial ratios can help you assess the company’s overall situation and pinpoint
some problem areas.
If you are analysing a company over many years, you may want to adjust sales and net income
for inflation to arrive at “true” financial performance in constant dollars (dollars adjusted for
inflation to make them comparable over various years).
Format for Case Analysis: The Strategic Audit
There is no one best way to analyse or present a case report.
Each lecturer has personal preferences for format and approach.
Nevertheless, we suggest an approach for both written and oral reports, which provides a
systematic method for successfully attacking a case.
This approach is based on the strategic audit.
Using the Strategic Audit to Evaluate Corporate Performance
The strategic audit provides a checklist of questions, by area or issue, that enables a systematic
analysis of various corporate functions and activities to be made.
It is a type of management audit and is extremely useful as a diagnostic tool to pinpoint
corporatewide problem areas and to highlight organizational strengths and weaknesses.
 The strategic audit can help determine why a certain area is creating problems for a
corporation and help generate solutions to the problem.
44

The strategic audit is not an all-inclusive list, but it presents many of the critical questions
needed for a detailed strategic analysis of any business corporation.
Some questions or even some areas might be inappropriate for a particular company; in other
cases, the questions may be insufficient for a complete analysis.
 However, each question in a particular area of the strategic audit can be broken down into
an additional series of sub-questions.
 Develop these sub-questions when they are needed.
The strategic audit summarizes the key points in the Strategic Management Model discussed
earlier in this chapter.
The strategic audit puts into action the strategic decision-making process.
The headings in the audit are as follows:
1.
2.
3.
4.
5.
6.
7.
8.
Evaluate Current Performance Results
Review Corporate Governance
Scan and Assess the External Environment
Scan and Assess the Internal Environment
Analyze Strategic factors Using SWOT
Generate and Evaluate Strategic Alternatives
Implement Strategies
Evaluate and Control
45
INTRODUCTORY CASE STUDY: STRATEGY BASICS
NEWBURY COMICS, Inc.
Newbury Comics was founded in 1978 by Massachusetts Institute of Technology (MIT)
roommates, Mike Dreese and John Brusger. With $2000 and a comic book collection they
converted a Newbury Street studio apartment in Boston’s trendy Back Bay into the second
organized comic book shop in the area. In 1979, Newbury Comics began selling punk and new
wave music and quickly became the region’s leading specialist in alternative music. By 1982,
with a second store open in Harvard Square, the company’s revenues were being generated
mostly from cutting-edge music and rock-related merchandise.
Newbury Comics consists of 22 stores spanning the New England region and is known to
be the place to shop for everything from the best of the underground/independent scene to major
label superstars. The chain also stocks a wide variety of non-music related items such as T-shirts,
Dr. (doc) Martens shoes, posters, jewelry, cosmetics, books, magazines, and other trendy items.
The cofounders and Jan Johannet, Manager of one of the New Hampshire stores, talk
about the entrepreneurial beginning of Newbury Comics. They point out that the company wants
its customers and its employees to “have a good time” in the store. Newbury Comics hires good
people who like working in the store. The company attracts creative people because it is different
from other retailers. Mike Dreese thinks of the company as expanding out of a comic book
retailer into a lifestyle store emphasizing popular culture. He wants Newbury Comics to
dominate its product categories and to be the retailer customers seek out in order to obtain what
they want. He refers to an expression used throughout the company: “If you can’t dominate it,
don’t do it”. He wants the company to grow by looking for “incredible opportunities” (elephant
hunting). This approach seems to work at Newbury Comics. The company sustained an annual
growth rate of about 80% over the past 7 years resulting in 100% overall growth.
With some input from others at corporate headquarters, Mike Dreese develops the overall
plan for the company by looking at where he would like the company to be in 3, 5 or 10 years.
He analyzes the external environment in terms of competition, trends, and customer preferences.
John Brusger then puts Mike’s plan into action. The company identifies product growth areas by
conducting dozens of experiments each month to learn what the customer wants.
Case Review Questions
1. How is Newbury Comics an example of a learning organization?
2. What is the process of strategic management at Newbury Comics? Who is involved in
each part?
3. What do you think might be the company’s (a) current mission, (b) vision, (c) objectives,
(d) strategies, and (e) policies? Give an example of each.
4. What theory of organizational adaptation is being followed by Mike Dreeese?
5. Newbury Comics illustrates what mode of strategic decision making? Is it appropriate?
46
2
THE PROCESS AND PRACTICE OF STRATEGIC MANAGEMENT
STRATEGIC MANAGEMENT: WHAT IT IS, WHOSE RESPONSIBILITY IT IS, AND
WHY IT MATTERS




As long as companies have conducted business, some have been outstanding successes
while others have been dismal failures.
Some companies act with purpose and direction, others drift.
Some companies are adept at seizing new opportunities; others watch passively or let
them slip through the cracks.
Some companies perform well because of good internal management; others barely
survive because of inefficiency and misdirected operations.
The management practices of successful and unsuccessful enterprises have been scrutinized in an
effort to learn the really important managerial do’s and don’ts that separate the winners from the
losers.
Although what research and experience have taught us so far falls short of a genuine theory of
“how to manage“, we have nonetheless zeroed in on some notable managerial differences
between high-performing and low- performing enterprises:
1. In high-performing organizations, there is a clear sense of direction. Senior managers
have a strong vision of where the company needs to be headed and why. They are not
afraid to blaze new trails or initiate major changes in the organization’s business makeup.
By contrast, the managers of low-performing organizations are characteristically so
absorbed in the latest crisis and tending to administrative detail that they neglect the task
of thinking deeply about where the organization will be in five years if it sticks to doing
just what it is already doing. Big direction-setting decisions stay on the back burner.
They are more comfortable being late-movers instead of first-movers. Major strategic
issues are often studied but less often acted on decisively.
2. In high-performing companies, there is an abundance of skilled entrepreneurship with
unmatched knowledge about customer needs and behavior, market trends, and emerging
opportunities. Managers doggedly pursue ways to do customers. The innovative
approaches they practice is persistence search out new opportunities and move boldly to
pursue those they find most attractive.
Poorly run enterprises are neither customer driven nor opportunity-driven. Their
managers are normally less perceptive about customer needs and attitudes; their instinct
is to react to market trends rather than initiate them. They are reluctant to try out new
ideas for fear of making a mistake. Actions and decisions don’t stray far from “tried and
true” ways. Real entrepreneurial drive is missing.
47
3. In high-performing companies, managers are committed to having a first–rate strategic
action plan- one aimed at achieving superior financial performance and a strong,
defendable competitive position.
They see competitive advantage (if possible,
competitive dominance) as the key to superior profitability and long-term performance.
Weak-performing organizations are nearly always on the short end of the strategy stick.
Their managers, preoccupied with internal brushfires and paperwork deadlines, do a
comparatively poor job of maneuvering their organizations into favorable competitive
positions: they don’t develop effective ways to compete more successfully. Often they
underestimate the strength of competitors and overestimate the ability of their own
organizations to offset the competitive advantages of the market leaders.
4. High-performing organizations are strongly results-oriented and performance conscious.
Doing a good job of managing means achieving the targeted results on time. Outstanding
individual performance is valued and well rewarded.
The managers of poorly performing organizations excuse weak performance on the basis
of such uncontrollable factors as a depressed economy, slack demand, strong competitive
pressure, rising costs, and unforeseen problems. Rewards are loosely tied to standards of
superior performance. Making modest progress is rated as “doing a great job”.
5. In the best-performing companies, managers are deeply involved in implementing the
chosen strategy and making it work as planned. They understand the internal
requirements for successful strategy implementation and they insist that careful attention
be paid to the details required for first-rate execution of the chosen strategy. They engage
in “managing by wandering around,” (MBWA) staying in touch with down down-the-line
personnel, and maintaining a personal feel for how things are going. They personally
lead the process of strategy implementation and execution.
In contrast, the managers of poorly performing organizations are into the machinations
of corporate bureaucracy; the bulk of their time is taken up with studies, reports,
meetings, policymaking, memos and administrative procedure. They do not see
systematic implementations of strategic plans as their prime administrative responsibility.
They spend most of the workday in their offices, remaining largely invisible to their
organizations, using immediate subordinate as a conduit to the rest of the organization,
and keeping tight control over most decisions.
These contrasts in mindsets and approaches are striking and managerially instructive about dos
and don’ts.
48
The managers of successful organizations :
 are action oriented “strategic thinkers” who make a habit of training their eyes externally
on customer needs, new opportunities, and competitive positioning, as well as a flair for
days-to-day management and internal leadership.
 They are aware of their responsibility to shape their organization’s long-term direction,
lead the organization down clear-cut path, formulate a coherent strategic action plan that
will produce competitive advantage and long-term financial success, and orchestrate
successful implementation of the chosen strategy.
 They watch like hawks to see that their organization has a good strategy and executes it
to perfection.
 They are good strategists and entrepreneurs as well as good inside leaders.
In unsuccessful organizations:
 managers fail appreciate the importance of charting a clear organizational course and
being good entrepreneurs.
 They lack an instinct for strategic thinking and ignore the lesson implicit in the familiar
expression, if you don’t know where you are going, any road will take you there.
 Their downfall seems to be getting so wrapped up in administrative activities and solving
internal “problems” that they neglect the tasks of consciously shaping the organization’s
business makeup, directing where the business is headed, and managing the process of
getting there.
WHAT IS STRATEGIC MANAGEMENT?
The success-causing power of clear direction, good strategy, and effective implementation of
organizational action plans is now generally recognized.
Definition:
Strategic management is the process whereby managers establish an organization’s long-term
direction, set specific performance objectives, develop strategies to achieve these objectives in
the light of all the relevant internal and external circumstances, and undertake to execute the
chosen action plans.
The strategic management function is perhaps the most fundamental and most important aspect
of management and managing.
It takes superior entrepreneurship (a well-conceived strategic plan that positions the organization
in the right way at the right time) and competent strategy implementation and execution to
produce superior organization performance over the long-run.
A great strategic plan that is subsequently marred by poor execution reduces performance.
Likewise, a subpar strategic plan that is flawlessly executed seldom produces gold star results
either.
49
The optimal condition is superior entrepreneurship and strategy formation on the one hand,
combined with first-rat implementation and strategy execution on the other.
The chances are excellent that when an organization has a well-conceived, well-executed
strategy it will be a high performer- a winner.
Superior performance is the most trustworthy sign of good management.
The Essence of Strategic Management – A Prescriptive View
Definition: Strategic management can be described as the identification of the purpose of the
organization and the plans and actions to achieve that purpose.
Thus, it is possible to plan strategy in advance and then carry out that strategy over time – this is
prescriptive strategy.
Within this definition, strategic management consists of two main elements: corporate strategy
and business-level strategy.
These refer to the mapping out of the future directions that need to be adopted against the
resources possessed by the organization.
Hence, the essence of strategic management is at two levels in the organization:
At the general corporate level, it asks the following questions:




What business are we in? What business should we be in?
What are our basic directions for the future?
What is our culture and leadership style?
What is our attitude to strategic change? What should it be?
At the individual business level, it asks as follows:





How do we compete successfully? What is our sustainable competitive advantage?
How can we innovate?
Who are our customers?
Who are our competitors?
What value do we add? Where? Why? How?
These are directed towards answering the following:


What is the purpose of the organization?
What are our strategies to achieve this?
Thus, at the general corporate or headquarters level, basic decisions need to be taken over what
business the company is in or should be in. The culture and leadership of the organization are
also important at this broad general level.
50
Corporate-level strategy can also be seen in the following definition of strategic management:
Definition: Strategic management is the pattern of major objectives, purposes or goals and
essential policies or plans for achieving those goals, stated in such a way as to define what
business the company is in or is to be in and the kind of company it is or is to be.
At the business level, strategic management is concerned with competing for customers,
generating value from the resources and the underlying principle of the sustainable competitive
advantages of those resources over rival companies (competitors).
Business-level strategy can be seen in the following definition of strategic management:
Definition: The strategy of the firm is the match between its internal capabilities and its
external relationships. It describes how it responds to its suppliers, its customers, its
competitors and the social and economic environment within which it operates.
However, there is no universally agreed definition of strategy. Some strategy writers have
concentrated on corporate-level activity while most strategy writing and research has
concentrated on the business level.
This course will focus and explore both levels.
Prescriptive Approach to the three core elements
Strategic analysis
 Environment
 Resources
 Vision, Mission &
Objectives
Strategic development
 Options
 Rational selection
 Finding strategic route
forward
 Considering strategy,
structure & style
51
Strategy
implementation
The Prescriptive Strategic Process
Long-term monitoring and control
Strategic
Option 1
Analysis of
environment
Vision,
Mission &
Objectives
Strategic
Option 2
Choose
from
options
Implement
chosen
option
Analysis of
resources
Strategic
Option 3
Perhaps more options
Long-term monitoring and control
An Alternative View of Strategy – An Emergent View
Some strategists dispute the approach to strategy described above.
They emphasize the uncertainty of the future and suggest that setting out to identify a purpose
and a single strategy and then develop a complete strategic plan may be a fruitless task.
They see strategic management as being essentially entrepreneurial and dynamic, with an
element of risk.
They thus define strategic management as follows:
Definition: Strategic management can be described as finding market opportunities,
experimenting and developing competitive advantage over time.
The intended purpose of the strategy may not necessarily be realized in practice.
52
This suggests that strategy evolves as the events both inside and outside the organization change
over time – this is emergent strategy.
The Emergent Approach
Strategic development
Strategic analysis
 Environment
 Resources
 Vision, Mission
& Objectives
 Options
 Rational selection
 Finding strategic route
forward
 Considering strategy,
structure & style
Strategy
implementation
The Emergent Strategic Process
Active experimenting, learning and adjusting
Analysis of
environment
Vision, Mission &
Objective…but
not firmly fixed
Analysis of
resources
Active experimenting, learning & adjusting
53
Strategy
development and
trial of various
options
What is Strategic Management? A Modern Consensus View
In View of the above two fundamental differences of view about the nature of strategic
management, there is need for an implicit agreement on the definition of the field of strategic
management.
Consensus definition:
The field of strategic management deals with the major intended and emergent initiatives
taken by general managers on behalf of owners, involving utilization of resources, to enhance
the performance of firms in their external environments.
THE MAIN TOPICS COVERED IN STRATEGY
Examining the actions further at the business level of strategic management and focusing on this
definition, every organization has to manage its strategies in 3 main areas:
1. the organization’s internal resources
2. the external environment within which the organization operates
3. the organization’s ability to add value to what it does.
Strategic management can be seen as the linking process between the management of the
organization’s internal resources and its external relationships with its customers, suppliers,
competitors and the economic and social environment in which it exists.
The organization develops these relationships from its abilities and resources.
Hence, the organization uses its history, skills, resources, knowledge and various concepts to
explore its future actions.
Some examples of this process are shown below:
Examples of How Strategic Management Links the Organization’s Resources with its
Environment
54
Economy growing
ENVIRONMENT
Opportunity
ENVIRONMENT
threat
RESOURCES
Strategy needed to
direct activities of its
people, finance, plants,
etc.
Opportunity
Customers excited about new
Product and service
Competitors attacking
ENVIRONMENT
threat
ENVIRONMENT
Suppliers becoming
more aggressive
For some large organizations, there are additional aspects of strategy that occur at their
headquarters.
This is called the corporate level of strategic management and covers such topics as raising
finance and dealing with subsidiaries.
Resource Strategy
The resources of an organization include its human resource skills, the investment and the capital
in every part of the organization.
Organizations need to develop strategies to optimize the use of these resources..
In particular, it is essential to investigate the sustainable competitive advantage that will allow
the organization to survive and prosper against competition.
Environmental Strategy
In this context environment encompasses every aspect external to the organization itself:
not only the economic and political circumstances, which may vary widely around the world, but
also competitors, customers and suppliers, who may vary in being aggressive to a greater or
lesser degree.
Organizations therefore need to develop strategies that are best suited to their strengths and
weaknesses in relation to the environment in which they operate.
55
Adding Value
The need is to add value to the supplies brought into the organization.
To ensure its long-term survival, an organization must take the supplies it brings in, add value to
these through its operations and then deliver its output to the customer.
The purpose of strategic management is to bring about the conditions under which the
organization is able to create this vital additional value.
Strategic management must also ensure that the organization adapts to changing circumstances
so that it can continue to add value in the future.
The ways in which value can be added and enhanced are crucial to strategic management.
Strategic management is both an art and a science.
No single strategy will apply in all cases.
While most organizations would like to build on their skills, they will be influenced by their past
experiences and culture, and constrained by their background, resources and environment.
Nevertheless, strategic management is not without logic, or the application of scientific method
and the use of evidence.
At the end of the process, however, there is a place for the application of business judgement.
Key Elements of Strategic Decisions
There are 5 key elements of strategic decisions that are related primarily to the organization’s
ability to add value and compete in the marketplace:
1. Sustainable decisions that can be maintained over time. For the long-term survival of the
organization, it is important that the strategy is sustainable.
2. Develop processes to deliver the strategy. Strategy is at least partly about how to develop
organizations or allow them to evolve towards their chosen purpose.
3. Offer competitive advantage. A sustainable strategy is more likely if the strategy delivers
sustainable competitive advantages over actual or potential competitors.
Strategic management usually takes place in a competitive environment.
Even monopolistic government organizations need to compete for funds with rival
government bodies.
4. Exploit linkages between the organization and its environment – links that cannot easily
be duplicated and will contribute to superior performance.
The strategy has to exploit the many linkages that exist between the organization and its
environment: suppliers, customers, competitors and often the government itself.
Such linkages may be contractual and formal, or they may be vague and informal.
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5. Vision – the ability to move the organization forward in a significant way beyond the
current environment. This is likely to involve innovative strategies.
In the final analysis, strategic management is concerned with delivering long-term added value to
the organization.
CORE AREAS OF STRATEGIC MANAGEMENT
Definition: The three core areas of strategic management are strategic analysis, strategy
development and strategy implementation.
1. Strategic analysis. The organization, its mission and objectives have to be examined and
analysed.
Strategic management provides value for the people involved in the organization – its
stakeholders – but it is often senior managers who develop the view of the organization’s
overall objectives in the broadest possible terms.
They conduct an examination of the objectives and the organization’s relationship with
its environment.
They will also analyse the resources of the organization.
2. Strategy development.
The strategy options have to be developed and then selected.
To be successful, the strategy is likely to be built on the particular skills of the
organization and the special relationships that it has or can develop with those outside –
suppliers, customers, distributors and government.
For many organizations, this will mean developing advantages over competitors that are
sustainable over time.
There are usually many options available and one or more will have to be selected.
3. Strategy implementation.
The selected options now have to be implemented.
There may be major difficulties in terms of motivation, power relationships, government
negotiations, company acquisitions and many other matters.
A strategy that cannot be implemented is not worth the paper it is written on.
If a viable strategic management is to be developed, each of these areas should be explored
carefully.
For the purpose of clarity, it is useful to separate the strategic management process into three
sequential core areas, as we have done above.
But activities in all three areas might well be simultaneous – implementing some ideas while
analyzing and developing others.
The table below lists some of the working definitions used in the three core areas of strategic
management.
57
It highlights two important qualifications to the three core areas:
1. the influence of judgement and values;
2. the high level of speculation involved in major predictions
Definition of Terms Used in the 3 Core Areas of Strategy
Term
Definition
Mission statement Defines the business that the organization
is in against the values and expectations
of the stakeholders
Objectives
(or State more precisely what is to be
achieved and when the results are to be
goals)
accomplished. (the what)
Often quantified.
The pattern or plan that integrates an
Strategies
organization’s major goals or policies and
action sequences into a cohesive whole.
(the how).
Usually deals with the general principles
for achieving the objectives: why the
organization has chosen this particular
route.
Plans
(or The specific actions that then follow from
the strategies.
programmes)
They specify the step-by-step sequence of
actions to achieve the major objectives.
Controls
Reward
Personal Career Example
To become a leading Zambian
entrepreneur
To achieve a directorship on
the main board of a significant
Zambian company by the age
of 42.
1. Obtain an MBA from a
leading Zambian business
school (CBU)
2. To move into a leading
consultancy company
as a stepping stone to
corporate HQ.
3. To obtain a key functional
directorship by the age
of 35 in the chosen
company.
1. To obtain a degree with a
distinction this year.
2. To take the next 2 years
working in a merchant bank
for commercial experience.
3. To identify 3 top business
schools December 2 years
from now.
4. To make application to
these schools by January of
the following year
Marriage and children mean
some compromise on the first
2 years above.
Adjust plans back by 3 years.
The process of monitoring the proposed
plans as they proceed and adjusting where
necessary.
There may well be some modification of
the strategies as they proceed.
The result of the successful strategy, High salary
adding value to the organization and to satisfaction.
58
and
career
the individual.
Running
a
consultancy.
successful
The importance of judgement and values in arriving at the mission and objectives shows that
strategic management is not a precise science.
Moreover, strategic management may be highly speculative and involve major assumptions as it
attempts to predict the future of the organization.
CONTEXT, CONTENT AND PROCESS
Research has shown that in most situations strategic management is not simply a matter of
taking a strategic decision and then implementing it.
It often takes a considerable time to make the decision itself and then another delay before it
comes into effect.
There are 2 reasons for this:
First, people are involved – managers, employees, suppliers, customers for example.
Any of these people may choose to apply their own business judgement to the chosen strategy.
They may influence both the initial decision and the subsequent actions that will implement it.
Second, the environment may change radically as the strategy is being implemented.
This will invalidate the chosen strategy and mean that the process of strategy development needs
to start again.
For these reasons, an important distinction needs to be drawn in strategy development between
process, content and context.
Every strategic decision involves these 3 elements, which must be considered separately, as well
as together.
Every strategic decision involves:
1. Context – the environment within which the strategy operates and is developed.
2. Content – the main actions of the proposed strategy. The content of the IBM strategy was
the decision to launch the new PC and its subsequent performance in the marketplace.
3. Process – how the actions link together or interact with each other as the strategy unfolds
against what may be a changing environment. Process is the means by which the strategy
will be developed and achieved.
These three elements are the axes of the same three-dimensional cube of strategic management
decision making.
In most strategic management situations, the context and content are reasonably clear.
It is the way in which strategy is developed and enacted – the process – that usually causes the
most problems.
Processes need investigation and are vague and quixotic because they involve people and rapidly
changing environments.
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The difficulty is compounded by the problem that, during the implementation period, the process
can influence the initial strategic decision.
SOME PRESCRIPTIVE THEORIES OF STRATEGIC MANAGEMENT
The distinction between prescriptive and emergent strategies oversimplifies the reality of
strategy development – there are many theories.
It should be noted, however, that there is some overlap between the two areas.
In broad terms, it is useful to identify 4 main areas of prescriptive strategy theory:
1.
2.
3.
4.
Industry- and Environment-based theories of strategy;
Resource-based theories of strategy;
Game-based theories of strategy;
Co-operation- and network-based theories of strategy.
Industry and Environment-based Theories of Strategy
For some companies, profitability is the clear goal, and the content therefore addresses this
objective.
Over the long term, this is likely to override all other objectives.
Industry and environment-based theories of strategy argue that profits are delivered by selecting
the most attractive industry and then competing better than other companies in that industry.
‘Environment’ means the external factors acting on the organization: markets, competitors,
governments, etc.
These are profit-maximizing, competition-based theories and the emphasis is on the analysis of
the environment (competition), a single strategic option of profit maximization.
Such concepts derive from the assertion that organizations are rational, logical and driven by the
need for profitability
Porter’s approach relied essentially on this view.
The strategy will primarily (but not exclusively) be driven by the objective of maximizing the
organizations’s profitability in the long term by seeking and exploiting opportunities in particular
industries.
The strategy involves formal, analytical processes.
It will result in a specific set of documents that are discussed and agreed by the board of directors
(or the public sector equivalent) of an organization – a tangible strategic plan for some years
ahead.
Typically, the plan will include sections:
o predicting the general economic and political situation;
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o exploring industry characteristics including economies of scale and degree of
concentration; analyzing competitors, their strengths and weaknesses;
o identifying customer demand;
o considering the resources available to the organization; and
o recommending a set of strategies to meet these requirements.
Mintzberg and others have criticized the industry-based approach by arguing that this is simply
not the way that strategy is or should be developed in practice.
In contrast, human-resource based theories of strategy suggest that seeking to maximize
performance through a single, static strategic plan is a fallacy.
There are no clear long-term mission statements and goals, just a series of short-term horizons to
be met and then renewed.
Techniques that purport to provide long-term insights may be too simplistic.
Resource-based Theories of Strategy
Resource-based theories concentrate on the chief resources and capabilities of the organization,
especially those where the organization has a competitive advantage, as the principal source of
successful strategic management.
Essentially, competitive advantage comes from the organization’s resources rather than the
environment within which the company operates
Some of the resources must be able to provide a distinctive competitive advantage in the market
place if the company is to deliver above-average profits in that industry.
One particular aspect of resource-based strategy emphasized by US and Japanese strategists was
operations (manufacturing) strategy and the emphasis on total quality management (TQM).
Resource-based strategy development has emerged as one of the key prescriptive routes in recent
years possibly as a reaction against the strong emphasis on markets and profit maximizing of the
1980s.
Hence, researchers began to argue that the organization’s resources were far more important in
delivering competitive advantage.
It is the resources that direct and guide key strategy areas.
This perspective has now become the resource-based view of strategy development.
Essentially, although competition is explored, the emphasis in this approach is on the
organization’s own resources – its physical resources, such as plant and machinery; its people
resources, such as its leadership, knowledges and skills; and, above all, the ways that such
resources interact in organizations.
It is this combination of resources that delivers competitive advantage, because such a
combination takes years to develop and may therefore be difficult for others to copy.
One of the main criticisms of resource-based theories is that, although they are good at analyzing
competitive advantage once it has been achieved, such theories have rather less insights on the
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pathways to developing competitive advantage and to responding to a constantly changing
competitive environment.
Game-based Theories of Strategy
Game-based theories of strategy focus on an important part of the prescriptive process – the
decision making that surrounds the selection of the best strategic option.
Instead of treating this as a simple options-and-choice model, game theory attempts to explore
the interaction between an organization and others as the decision is made – the game.
The theoretical background to such an approach is based on mathematical models of options and
choice coupled with the theory of chance.
Game theory begins by recognizing that a simple choice of the ‘best’ strategy will have
implications for other companies, such as suppliers and competitors.
The consequences for others will be unknown at the time the initial choice is made by the
organization itself.
The theory then attempts to model the consequences of such a choice and thereby allow for the
choice itself to be modified as the game progresses.
Game theory will include not only competitors, but also other organizations that might be willing
to co-operate with the organization.
Such a theory considers that the options-and-choice prescriptive model oversimplifies the
options and choices available.
It will also involve negotiation with others, anticipation of competitive responses and the search
for optimal solutions.
Such a process may allow all competitors in the market place to win.
Hence, games explore resources in the context of the environment.
But it is only recently that game theory has been applied to strategy because the complex world
of strategy decisions is difficult to model adequately using the mathematical theory that lies at
the foundation of game theory.
Co-operation and Network Theories of Strategy
In co-operative strategy theory, at least two independent companies work together to achieve an
agreed objective.
In network theory, the focus rests on sharing networks of personal contacts, knowledge and
influence both inside and outside the organization.
Network theory is therefore a broader concept than co-operative theory.
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Both co-operation and network theories of strategy seek clearly defined, prescriptive strategies,
but they stress the importance of the formal and informal relationship opportunities that are also
available to organizations.
Hence, co-operation theories work mainly with the environment while network theories work
with both the environment and resources.
Such theories have arisen in recent times as a result of the realization that organizations can
deliver better value to customers and create competitive advantage over rivals by co-operating
with other companies.
Various forms of co-operation are possible.
The main underpinning principle is that such activities deliver growth by developing links that
are external to the organization.
Thus the external strategies may include strategic alliances, joint ventures and other forms of cooperation.
Such strategies are valuable for at least 3 reasons:
Because they may allow
a) companies to move into restricted markets more quickly;
b) companies to adopt new technologies earlier than their rivals by gaining the
technology from an outside company – perhaps from another country;
c) the alliance to gain and increase its market power.
Some forms of co-operation occur at the corporate headquarters level rather than at the business
level.
These might take the form of diversification away from the existing business areas or the
development of a network of alliances with its potential partners in order to spread the benefits
into a number of business relationships.
One form of co-operation that has been used increasingly around the world is the franchise
operation.
The main problems with co-operative and network strategies are that they are fragile and risk
collapse if the contractual terms have not been carefully developed or one of the partners
misrepresents the benefits that it brings to the agreement.
Also some forms of co-operation are illegal in most countries around the world, e.g. collusion.
SOME EMERGENT THEORIES OF STRATEGIC MANAGEMENT
When strategies emerge from a situation rather than being prescribed in advance, it is less likely
that they will involve a long-term strategic plan.
This does not mean that there is no planning but rather that such plans are more flexible, feeling
their way forward as issues clarify and the environment surrounding the company changes.
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Planning is short-term, more reactive to events, possibly even more entrepreneurial.
Unpredictable events may throw prescriptive plans into confusion.
Hence, some strategists argue that the whole basis of prescriptive strategy is false.
They claim that even during periods of relative certainty, organizations may be better served by
considering strategy as an emergent process.
There are 4 sets of emergent strategy theories:
1.
2.
3.
4.
Survival-based theories of strategy
Uncertainty-based theories of strategy
Human-resource based theories of strategy
Innovation and Knowledge-based theories of strategy
Survival-based Theories of Strategy
Survival-based strategies regard the survival of the fittest company in the market place as being
the prime determinant of strategic management.
The theory begins by exploring how to survive in an environment which is highly competitive,
shifting and changing.
There is little point in sophisticated prescriptive solutions: much better to dodge and weave as
the market changes, letting the strategy emerge in the process.
Hence, survival of the fittest takes place in the environment.
However, this does not mean that companies just muddle through.
The competitive jungle of the market place will ruthlessly weed out the least efficient companies;
survival-based strategies are needed in order to prosper in such circumstances.
Essentially, according to the survival-based strategists, it is the market place that matters more
than a specific strategy.
Hence, the optimal strategy for survival is to be really efficient.
Beyond this, companies can only rely on chance.
To overcome these difficulties, what most companies needed in order to survive in these highly
competitive circumstances was differentiation.
Products and services that were able to offer some aspect not easily available to competitors
would give some protection.
But since differentiation takes too long to achieve and the environment changes too quickly,
survival-based strategies should rely on running really efficient operations that can respond to
changes in the environment.
64
But survival-based strategies have been criticized for being too pessimistic; there are practical
problems in a strategy that only takes small cautious steps and keeps all options open.
Uncertainty-based Theories of Strategy
Uncertainty-based theories use mathematical probability concepts to show that strategic
management development is complex, unstable and subject to major fluctuations, thus making it
impossible to undertake any useful prediction in advance.
If prediction is impossible, then setting clear objectives for strategic management is a useless
exercise.
Strategy should be allowed to emerge and change with the fluctuations in the environment.
Due to the difficulties in predicting the future environment surrounding the organization, the
development of long-term strategic planning is regarded as having little value.
Human-resource –based Theories of Strategy
Human resource-based theories of strategy emphasize the people element in strategy
development and highlight the motivation, the politics and cultures of organizations and the
desires of individuals.
They have particularly focused on the difficulties that can arise as new strategies are introduced
and confront people with the need for change and uncertainty.
They involve people and occur wherever human resources are prominent; it is therefore difficult
to identify a precise position.
Organizations consist of individuals and groups of people, all of whom may influence or be
influenced by strategy; they may make a contribution, acquiesce or even resist the strategic
management process, but they are certainly affected by it.
Strategic logic is restricted by the processes and people already existing in the organization.
Innovation and Knowledge-based Theories of Strategy
These theories of strategy privilege the generation of new ideas and the sharing of these ideas
through knowledge as being the most important aspects of strategy development.
Innovation means the development and exploitation of any resource of the organization in a new
and radical way.
Knowledge is the collective wisdom and understanding of many people in the organization
developed over many years.
In particular, the way that the knowledge of the organization is used to generate new and radical
solutions has come to be recognized as an important contributor to strategy development.
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Innovation by its very nature moves forward the traditional thinking of the organization and
thereby delivers the possibility of new competitive advantage.
In the process of innovating, one important aspect is that of sharing knowledge and ideas.
2.5
LEVELS OF STRATEGIC MANAGEMENT
THE LEVELS OF STRATEGY
Just as there is a direction-setting logic for establishing a hierarchy of objectives that span the
enterprise from top to bottom, there is an accompanying rationale for developing a strategic
game plan at each level of management to achieve the objectives set at that level.
Thus, corporate-level objectives underlie the formation of corporate level strategy; line-ofbusiness objectives underlie the formation of line-of-business strategy (or just business
strategy); functional area objectives (in manufacturing, marketing, finance, and so on)
underlie the formation of functional area support strategy; and departmental and field unit
objectives underlie the formation of operating-level strategy.
The networkings are illustrated in Figure 2-2.
Corporate-Level Strategy.
Corporate-level strategy is senior management's game plan for directing and running the
organization as a whole; it cuts across all of an' organization's activities-its different businesses,
divisions, product lines, and technologies.
The task of developing a corporate strategy has three elements:
1. Developing plans for managing the scope and mix of the firms' various activities in order
to improve corporate performance.
Managing the business portfolio requires decisions' and actions regarding when and how the
enterprise should get into new businesses, which existing businesses the company should get
out of (and whether it should do so quickly or gradually), which opportunities of which
existing businesses to go forward with, and what corporate management itself should do to
improve the. performance of the overall corporate portfolio.
The portfolio management plan may, in addition, involve designating a common strategic
theme to be pursued by all of the company's lines of business, and it may involve selecting a
general strategic posture (aggressive expansion, maintain position, retrench and overhaul, or
fix up in preparation to sell out) for each business in the portfolio.
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Fig. 2-2: The Organizational Hierarchy of Objectives and Strategies
Level 1:
Responsibility
of corporatelevel managers
Corporate-level
strategic objectives
and performance
targets
Overall corporate
scope and strategic
mission
2-way influence
2-way influence
Corporate-level
strategy
2-way influence
Level 2:
Responsibility
of businesslevel general
managers
Business-level
strategic objectives &
performance targets
Business-level
strategic mission
2-way influence
Level 3:
Responsibility
of heads of
functional areas
within a
business unit or
division
Business-level
strategy
2-way influence
Functional area
objectives
(manufacturing,
marketing, finance, etc.)
Functional area
support strategies
(manuf., market.,
finance, etc.)
Level 4:
Responsibility of
department
heads/field unit
managers/lowerlevel managers
within a
functional area
2.
2-way influence
2-way influence
Departmental & field
unit objectives
Operating-level
strategies
Providing for coordination among different businesses in the portfolio.
Coordination of interrelated activities allows a diversified firm to .enhance the competitive
strength of its business units and makes overall corporate strategy more than just a collection
of the action plans of independent subunits.
Several issues have to be addressed:
Is there cost-reduction potential in sharing technological know-how, R&D efforts, sales
forces, distribution facilities, and so on across any business units?
Do other cross-fertilization opportunities exist?
Are the benefits worth capturing?
What coordination is needed?
Will such actions bolster the competitive positions and competitive strengths of the
67
company's various business divisions?
3.
Establishing investment priorities and allocating corporate resources across the
company's different activities.
Decisions about how much of the corporate investment budget each organizational unit will
get and actions to control the pattern of corporate resource allocation commit the firm to
pursue some opportunities aggressively and to hold back on others; in addition, these
decisions and actions serve to channel resources out of areas where earnings potentials are
lower into areas where they are higher.
The portfolio management actions of corporate officers in entering or exiting certain
businesses arid in pursuing some opportunities more boldly than others are strategically
important because they determine the organization's business positions.
Which customer needs a firm is meeting and is moving to meet, which customer groups it
serves and is moving to serve, which technologies it employs and is becoming capable of
employing, and which skills it has and is building are typically a combination of:
(1) Offensive moves to pursue selected opportunities and build new or stronger business
positions, and
(2) Defensive moves to protect existing positions against emerging threats.
Such moves strongly affect future levels of corporate performance.
The second element of corporate strategy, coordinating strategic plans across business units,
is an important corporate headquarters task because it is through coordination of the interrelated
activities of the corporation’s different business units that a corporate-level competitive
advantage can be created.
Horizontal coordination of divisional strategies enhances cross-fertilization of skills,
proprietary know-how, and technology; it pushes business units with closely related activities
to either engage in interdivisional cost-sharing or combine operations into a single unit that is
more cost-effective, and it can strengthen differentiation of the firm's products and overall
reputation.
All of these actions can add up to a bigger net competitive advantage for divisional business
units and increased corporate profitability.
The third element of corporate-level strategy- controlling the pattern of corporate resource
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allocation- is crucial because the number of "worthy projects" and "can't miss" opportunities put
forward for funding may entail capital requirements that exceed the available kwacha.
Ultimately, the pot of corporate moneys and resources limits what strategies can be supported.
With limited resources, it makes sense to:
(1) channel investment capital to support those strategic moves with the highest expected
profitability and
(2) deploy the available internal resources in close alignment with the success requirements of
each line of business the corporation is in.
In diversified firms, developing a corporate strategy is chiefly an exercise in deciding how to
build and manage the corporate portfolio of businesses.
The strategic challenge is to get sustained high performance out of a multi-industry mix of
business activities, some or many of which have nothing in common.
When single-business enterprises start to contemplate diversification, they face similar strategic
issues.
In either single business or multi business enterprises, corporate managers have to think
strategically about:
 what new businesses (if any) to enter;
 how much and what kind of diversification to pursue;
 which current activities to emphasize or downplay;
 whether to sell off or close down any existing activities;
 what strategic approach to follow in each of the company's businesses; and
 how to allocate financial capital and other organizational resources across the enterprise.
The specific strategy-related responsibilities of corporate-level managers include:
 Managing the scope and mix of businesses the corporation is in (and restructuring the
makeup of the business portfolio whenever circumstances warrant).
 Establishing corporate-level strategic objectives and financial performance targets.
 Deciding what, if any, general strategic theme or unifying concept will be used to give the
enterprise a distinctive character and/or keynote its business mission.
 Deciding what role each business unit will play in the overall corporate portfolio and
approving a general strategic direction for each line of business.
 Striving to produce a corporate-based competitive advantage through coordination of the
strategies and related activities of divisional business units.
 Maintaining a capacity to intervene should a business unit's strategic performance go awry.
69
 Reviewing and approving the major strategic recommendations/actions of subordinate
managers.
 Controlling the pattern of corporate resource allocation.
Line-of-Business Strategy
In short, business strategy, is the managerial action plan for directing and running a particular
business unit.
Business strategy deals explicitly with:
(1) How the enterprise intends to compete in that specific business;
(2) What the role or thrust of each key functional area will be in building a competitive
advantage (thereby contributing to the success of the business in the marketplace);
(3) Developing responses to changing industry and competitive conditions, and
(4) Controlling the pattern of resource allocation within the business unit.
The various business strategy elements are as follows:
 How the business is being positioned to deal with industry trends, competitive conditions,
and emerging opportunities and threats
 Actual role in the industry (leader, contender, also-ran, etc.) and efforts to change or
solidify this role.
 Attempts to appeal to particular customer groups, customer needs, and product end-uses.
 Key features of major functional area support strategies: Personnel/labor relations;
marketing, sales and distribution; R&D/technology; Manufacturing and production;
finance (including criteria for allocating resources and investment capital).
 Nature of recent actions to strengthen competitive position and improve performance.
 Breadth of product line in comparison to rival firms.
 Image and reputation (how the business is viewed by customers and by rivals).
 Competitive approaches to pricing, product differentiation, product quality, customer
service, and other important competitive variables (in comparison to approaches of rival
firms).
 Distinctive competences (if any) and other sources of competitive strength.
 Nature and source of competitive advantage (if any).
 Degree of vertical integration (full, partial, none) and other traits which define the
competitive scope within the industry.
The primary element of line-of-business strategy is always how to make the company
entrepreneurially and competitively effective in the marketplace.
Questions to consider include:
 What sort of competitive edge to strive for;
 which customer groups to go after;
 how to “position” the business in the marketplace vis-à-vis rivals;
70



what product/service attributes to emphasize in appealing to customers for their
patronage;
how to defend against the competitive moves of rivals;
and what actions to take in light of industry trends, societal and political changes, and
economic conditions.
Internally, business strategy must deal with how the different functional pieces of the business
(manufacturing, marketing, finance, R&D, and so on) will be aligned and made responsive to
those market factors on which the desired competitive advantage depends.
Often the internal key to good business strategy concerns the development and use of a strategysupportive distinctive competence.
The term distinctive competence refers to a skill or activity that a firm does especially well in
comparison to rival firms.
Superior capability in some competitively important aspect of creating, producing or marketing
the company's product or service can be the vehicle for establishing a competitive advantage and
then leveraging this advantage into better-than-otherwise business performance.
Selecting a business strategy that is closely matched to the firm's skills and resource base is
essential.
It is foolhardy to decide on a strategy that is not suited to what the firm is good at doing (its skills
and competences) and to what it is capable of doing with the available resources.
Unless business strategy considerations drive the pattern of internal resource allocation, there is a
strong chance that strategically important sub activities within the business will not be funded in
ways that correspond directly to what is needed in order to achieve and maintain an attractive
competitive advantage.
For a single-business enterprise, corporate strategy and business strategy become one and the
same, except when a single-business firm begins to contemplate diversification.
The distinction between corporate and business strategy is mainly relevant for firms that are
sufficiently diversified to have divisional units competing in two or more different industries.
A good example of line-of-business strategy is Kellogg's approach to the ready to-eat cereals
business:
From the beginning of the company in 1906, when Will Keith Kellogg accidentally
discovered a way to make ready-to-eat cereal, Kellogg has aimed its strategy at being
the dominant leader in the ready-to-eat cereal business. Kellogg's strategy for
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competing is based on product differentiation and market segmentation. The
company's product line features a diverse number of brands, differentiated according
to grain, shape, form, flavour colour, and taste-a something-for-everyone approach.
Competing on the basis of low price is deemphasized in favour of a differentiation
strategy keyed to extensive product variety, regular product innovation, substantial
TV advertising, periodic promotional offers and prizes, and capturing more space on
the grocery shelf than rivals. Much of Kellogg's sales efforts are targeted at the
under-25 age group (the biggest cereal eaters with an average annual consumption
of 11 pounds per capita), and 33 percent of its cereal sales are in pre-sweetened
brands promoted almost totally through TV advertising to children.
Kellogg has tried to sidestep industry maturity and product saturation with introductions of fresh, "new" types of cereals (pre-sweetened cereals in the 1940s,
"nutritional" cereals in the 1950s, "natural" and health-conscious cereals in the
1960s and early 1970s, and adult cereals in the late 1970s) and also by advertising a
variety of times and places for eating cereals other than at the morning breakfast
table. Product-line freshness is additionally enhanced by introduction of brands
which differ only slightly from existing brands (flakes versus shredded, plain versus
sugar-frosted, puffed versus cocoa flavoured), In 1979, Kellogg introduced five new
cereal brands, more than it had ever launched in a single year, as part of a steppedup and redirected effort to attract consumers in the 25-50 age group (where
consumption levels were only half those of the younger age groups). Kellogg also
introduced its cereals in four additional countries in South America and the Middle
East using campaigns that featured free samples, demonstration booths in food
stores, and heavy local advertising to promote the use of ready-to-eat cereals as a
substitute for traditional breakfast foods (corn meal and bulgur). Both of these moves
were aimed at changing the eating habits of adults who had shied away from cereals
or who had spurned breakfast altogether.
In further support of its attempt to appeal to more customer groups, Kellogg
continued to increase its research budget (already the industries most extensive) in
an effort to develop more nutritional, health-conscious cereals and breakfast foods
for the older consumer segment.
In 1979 Kellog had three strategic objectives:
(1) increasing Kellog’s 42 percent market share,
(2) increasing sales by 5 percent annually (compared to an industry growth of 2
percent), and
(3) boosting annual cereal consumption from 8.6 pounds per capita to 12 pounds by
1985.
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The strategy formulation role of the manager in charge of a business usually includes:
 Making sure that the proposed strategic plan for the business adequately supports
achievement of corporate strategic objectives and is consistent with corporate strategy
themes.
 Serving as chief strategist and leading the process of assessing the business's strategic
situation, evaluating alternative strategies, and making strategy decisions.
 Seeing that the various functional area support strategies are coordinated in ways that
promote achieving and maintaining an attractive competitive advantage.
 Controlling the pattern of resource allocation within the business in ways that support the
chosen strategy.
 Keeping higher-level management informed of market changes, deviations from plan, and
potential business strategy revisions.
Diagnosing a company's strategic posture on each spoke of the "business strategy wheel" in
Figure 2-4 usually yields a good overall picture of its business strategy.
Functional Area Support Strategy
Functional area support strategies are the action plans for managing the principal subordinate
activities within a business.
There is a functional area support strategy for each part of the business: production, marketing,
finance, human resources, R&D, and so on.
Functional area support strategies are major corollaries of line-of-business strategy.
Their role' is to flesh out the business game plan, giving it more substance, completeness, and
concrete meaning as applied to a specific part of the business.
They are important because they explicitly indicate the contribution of each major sub activity in
the business to the overall business strategy.
When all of the principal activities within a single business, particularly the activities crucial to
successful strategy execution, are integrated and exhibit a consistent fit, the whole strategy
obtains added power.
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Whereas developing line-of-business strategy is the responsibility of the general manager of the
business unit, the task of working out the details of functional area support strategy is typically
delegated by the business-level manager to the functional area heads.
And just as the business-level manager is obliged to establish a set of business-unit objectives
and a business strategy that is deemed by corporate management to contribute adequately toward
corporate-level performance objectives.
Functional area managers are typically delegated a lead role in establishing functional area
performance objectives and strategies that will help accomplish business-level objectives and
strategy.
However, just as business-level strategies and objectives are subject to the approval of the
corporate manager, functional area strategies and objectives are subject to the approval of the
business manager.
Operating-Level Strategy
Operating-level strategies refer to how departmental and supervisory-level managers intend to
carry out the fine details of functional area support strategies.
Consider the following examples of operating-level strategy:
A cosmetics firm relies on ads placed in women's magazines as an integral part of its
marketing effort to promote the attributes of its product line with women. The strategy
of the advertising director is to spend 75 percent of the advertising budget on three big
campaigns during the month prior to each of the company's three peak sales periods of
Christmas, Easter, and Mother's Day, with full-page ads placed in Cosmopolitan and
Ladies Home Journal and quarter-page ads placed in Seventeen and Family Circle.
A company with a low-price, high-volume business strategy and a need to achieve very low
manufacturing costs develops a three-pronged operating strategy aimed at boosting labour
productivity:
(1) the hiring director develops procedures that ensure careful selection and training of all
employees,
(2) the purchasing director makes unhesitating purchases of time-saving tools and equipment,
and
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(3) the employee benefits director develops a superior wage-fringe benefit package designed
to attract the best-qualified employees.
A distributor of heating and air-conditioning equipment emphasizes quick, reliable delivery of
replacement parts as the feature component of its dealer service package.
Accordingly, the inventory strategy of the warehouse manager is to maintain such an ample
supply of each part that the chance of a stock out on a given item is virtually nil. His
warehouse staffing strategy is to maintain a large enough work force to ship each order within
24 hours.
Note that in each example cited the logic of the operating-level strategy flowed directly from a
higher-order strategic requirement, and that the operating strategy was handled by the managers
in charge of carrying out the day-to-day details of specific functional activities.
Ideally, corporate strategy, business strategy, functional area support strategy, and operatinglevel strategy are developed in sufficient detail that each manager in the organization has a
confident understanding of how to manage his or her area of responsibility in accordance with
the total organization wide game plan.
This is why many layers of strategy are typically needed (especially in large, diversified organizations), with each layer being progressively narrower in focus and more explicit about the
actions to be taken and the programs to be initiated.
Table 2~1 illustrates the various levels of strategy-making responsibilities within the
organizational structure.
Coordination of the Levels of Strategy
Coordination is essential. A strategy is well formulated when its separate pieces' and layers are
consistent and interlock smoothly like a jigsaw puzzle. The power of business-level strategy is
enhanced when functional area and operating-level strategies are matched and fitted to each
other
. Ideally, corporate strategy, business strategy, functional area support strategy, and operatinglevel strategy are developed in sufficient detail that each manager in the organization has a
confident understanding of how to manage his or her area of responsibility in accordance with
the total organization wide game plan. This is why many layers of strategy are typically needed
(especially in large, diversified organizations), with each layer being progressively narrower in
focus and more explicit about the actions to be taken and the programs to be initiated. Table 2-1
illustrates the various levels of strategy-making responsibilities within the organizational structure.
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Table 2-1: The Strategy-Making Hierarchy: Who Has Primary Responsibility for What Kinds
of Strategic Actions
Strategy Level
Primary Strategy Development Strategy-Making Functions and
Responsibility
Areas of Focus
CEO and other key executives  Structuring and managing the
Corporate Strategy
(Decisions
are
typically portfolio of business units
reviewed/approved by board of (making acquisitions, initiating
directors)
divestitures,
strengthening
existing business positions).
 Coordinating
business-level
strategies; building corporatelevel competitive advantage.
 Controlling the pattern of
resource
allocation
across
business units.
General Manager/ head of  Choosing how to compete and
Line-of-Business
business unit
Strategy
what
kind
of
competitive
(Decisions
are
typically advantage to build.
reviewed/approved by senior  Developing responses to changing
corporate executive, usually CEO) industry
and
competitive
conditions.
 Coordinating the role/thrust of
functional area strategies.
 Controlling the pattern of
resource allocation within the
business unit.
Functional-area Support Functional area heads
 Fleshing out the business strategy
(Decisions
are
typically as it applies to specific functional
Strategy
reviewed/approved by business area and developing specific
unit head)
functional area action plans to
support successful execution of
business strategy.
heads/field
unit  Developing action plans to carry
Operating-level Strategy Department
heads/lower-level managers within out the day-to-day requirements
functional areas.
of functional area support
(Decisions are often made after strategies.
consultations with lateral peers in
closely related areas and are
reviewed/ approved by functional
area head).
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Coordination of the Levels of Strategy
Coordination is essential. A strategy is well formulated when its separate pieces' and layers are
consistent and interlock smoothly like a jigsaw puzzle.
The power of business-level strategy is 'enhanced when functional" area and operating-level
strategies are matched and fitted to each other manufacturing strategy, marketing strategy,
financial strategy, and so on cannot go off on independent courses.
Having all the various elements of business strategy "pulling together" neutralizes some of the
effects of organizational politics and acts to keep the sometimes myopic views and loyalties of
functional departments from blunting the priorities of what is best for the total enterprise.
Likewise, in a multi business enterprise, welding diverse business-level strategies together in
some coherent fashion increases the power of corporate strategy.
It is thus useful to view the links between the pieces and levels of strategy as (1) the conceptual
glue that binds an organization's activities together and (2) the merging force behind a wellformulated strategy!
Figure 2-5 depicts a hypothetical composite strategy and the levels of directional actions and
decisions needed to make it operationally complete.
Note the logical flow from corporate strategy to business strategy to functional support strategies
to operating-level strategies.
It should be evident from an examination of this figure that an organization's strategic plan is the
sum total of the directional actions and decisions it must make in trying to accomplish its
objectives-in effect, a collection of strategies.
These strategies form a hierarchical network encompassing the broad ranging to the very
specific, and they are linked together by analysis and soul-searching, as well as by an interactive,
iterative process of negotiation and agreement on objectives, approaches, and constraints.
2.5.1 THE STRATEGIC MANAGEMENT PROCESS.
THE PROCESS OF STRATEGIC MANAGEMENT
Because each component of strategic management entails judging whether to
continue with things as they are or to make changes, the task of managing strategy is
a dynamic process- all strategic decisions are subject to future modification.
Changes in the organization's situation and ups and downs in financial performance are
constant drivers of strategic adjustments.
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A model of the strategic management process is shown in Figure 1-1.
The first three components, in combination:
 give direction to the enterprise,
 establish the directional map for strategic action; and, in effect,
 define what we shall call an organization's strategic plan.
The fourth component is easily the most complicated and challenging one because it
involves not only deciding on but also undertaking the administrative actions needed to
convert the strategic plan into results; indeed, orchestrating the execution of strategy is
probably 5 to 10 times more rime-consuming than is formulating the strategic plan.
The fifth component, evaluating strategic performance and making corrective adjustments,
is both the end and the beginning of the strategic management cycle.
The march of external and internal events guarantees that the new opportunities, bright ideas
about strategy or its implementation do not appear according to some ordered timetable; they
have to be dealt with whenever they arise-Strategic issues soak up big chunks of management
time during some weeks and take a backs eat in other weeks.
Finally, formulating and implementing strategy must be regarded as something that is ongoing
and that evolves.
What qualifies as a surefire high-performance strategy today is sooner or later rendered stale' by
events unfolding both inside and outside the enterprise.
The task of "strategizing" can never therefore be a one-time exercise.
While the "whats" of an organization's strategic mission and long-term strategic objectives,
once established, usually present fairly stable targets to shoot for, the "hows" of strategy evolve
regularly in response to changes in an organization's internal situation and external
environment.
As a consequence, fine-tuning-type changes in strategic plans, and an occasional major change
in strategic thrust, are normal and expected (big strategy changes, however, cannot be made
often).
The need to keep strategy in tune with an organization's changing situation makes the strategic
management process dynamic and means that the prevailing strategy is rarely the result of a
single comprehensive analysis.
Strategic decisions are made over a period of time, not all at once; moreover, previous
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decisions are modified and decisions to initiate new strategic moves are forthcoming from time
to time.
Much of the time strategy evolves in a fairly orderly manner, but sometimes the strategy is
crisis-driven, forcing a number of big strategic decisions to be made rapidly.
Similarly, strategy implementation is the product of incremental improvements. internal finetuning, the pooling effect of many administrative decisions, and gradual adjustments in the
actions and behavior of both managerial subordinates and employees.
Implementation is not something that can be made to happen overnight.
The transition from the old strategy to executing the new strategy takes time; normally. the
larger the degree of strategic change, the more time it takes for the new methods of
implementation to take hold. .
WHO ARE THE STRATEGY MANAGERS?
It goes without saying that an organization's chief executive officer and chief operating officer
are strategy managers, with ultimate authority and responsibility for formulating and
implementing the strategic plans of the organization as a whole.
Most, if no all, of an organization's vice presidents have important strategy-formulating and
strategy-implementing responsibilities as well.
But managerial positions with strategic management responsibility are by no means restricted to
a few senior executives; in organizations of much size and complexity, there are strategy
managers up and down the management hierarchy.
The strategic management function directly involves all managers with line authority at the
corporate, line-of-business, functional area, and major operating department levels.
For the process of managing strategy to work very well, managers must place their imprint on
those aspects of the plan to be carried out in their area of responsibility.
As one corporate executive succinctly put it, "Those who implement the plan must make the
plan."
Corporate experiences with strategic planning over the last two decades clearly demonstrate that
strategic planning should not be a high-level staff function performed by professionals who then
hand over CEO-approved plans to others to carry out in' their respective areas of responsibility;
rather, the strategy making/strategy-executing tasks need to fall directly into the laps 'of those
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managers who run those parts of the organization where the strategic results must be achieved.
Putting responsibility and authority for strategy-making in the hands of those who ultimately
must put the strategy into place and make it work fixes accountability for strategic success or
failure directly on those who are in charge of the results producing organizational units.
As a consequence, the strategy managers in business enterprises include:
 The chief executive officer and other senior corporate-level executives who have primary
responsibility and personal authority for big strategic decisions affecting the total enterprise.
 The general managers of subsidiary line-of-business units who have profit-and loss
responsibility for the unit and consequently a leadership role in formulating and
implementing the business-level strategy of the unit.
 The functional area managers within a given business unit who have direct authority over a
major piece often business (manufacturing, marketing and sales, finance, R&D, personnel)
and therefore must support overall business strategy with strategic actions in their own areas.
 The managers of major operating departments and geographic field units who have frontline
responsibility for the details of strategic efforts in their areas and for carrying out their pieces
of the overall strategic plan.
A diversified corporation has strategy managers at all four of these levels.
A single business enterprise usually has only three levels: the corporate-level and business level
strategy managers merge into a single group with responsibility for directing the strategic efforts
of the total enterprise in that one business.
The smallest enterprises, of course, usually have only a single strategy manager (as in the case of
the owner manager of a sole proprietorship or the managing partner in a partnership-type firm)
because just one person performs the entire management function.
There are many rather than few strategy managers in not-for-profit organizations as well.
For example, a multi campus state university has four identifiable levels of strategic
management: (1) the president of the whole university system is a strategy manager with broad
direction-setting responsibility and strategic decision-making authority over all the campuses. (2)
The chancellor for each campus is a strategy manager with strategy-making/strategyimplementing authority over all academic, student, athletic, and the departmental budget, the
department's undergraduate and graduate program offerings, the faculty, and students majoring
in the department.
In federal and state government, the heads of local, district, and regional offices function as
strategy managers because they are responsible for custom-tailoring the actions of their agencies
to meet the specific needs of the geographical area their units serve and because they are in
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charge of seeing that their agency's strategic mission, programs, and services are carried out in
that area.
In municipal government, the heads of the police department, the fire department, the water and
sewer department, the parks and recreation department, the health department, and so on are
strategy managers in the sense that they are in charge of the entire operations (services and
programs offered, day-today decisions, facilities, personnel, policies and practices, budget
allocations) under their direction.
Managerial jobs with strategy-making/strategy-implementing roles are thus quite numerous and
common.
The need to understand the ins and outs of strategic management and to be skilled in strategic
thinking, strategic analysis, and methods of strategy execution is a basic aspect of managing and
is not something that only top managers need to know and to worry about.
Since the scope of a strategy manager's role in the strategy-making/strategy-implementing process plainly varies according to the manager's position in the organizational
hierarchy, "the organization" under a strategy manager's direction should henceforth be
'understood to mean whatever kind of organizational unit the strategy manager is in charge ofwhether it is an entire company or not-for-profit organization, a business unit within a diversified
company, a major geographic division, an important functional area unit within a business, or an
operating department or field unit reporting to a specific functional area head.
This will permit us to avoid using the awkward phrase "the organization or organizational
subunit" to indicate the alternative scope the strategy manager's area of responsibility and place
in the managerial hierarchy.
2.6 ELEMENTS OF THE STRATEGIC MANAGEMENT.
The Components of Strategic Management
Strategic management has five critical components:
1. Defining the organization’s business and developing a strategic mission as a basis for
establishing what the organization does and doesn’t do and where it is headed.
2. Establishing strategic objectives and performance targets.
3. Formulating a strategy to achieve the strategic objectives and targeted results.
4. Implementing and executing the chosen strategic plan
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5. Evaluating strategic performance and making corrective adjustments in strategic and/or
how it is being implemented in light of actual experience, changing conditions, and new
ideas and opportunities.
Defining the Business
A basic direction-setting question facing the senior managers of any enterprise is “what is our
business and what will it be?”
Addressing this question thoughtfully compels executives to:
 think through the scope and mix of organizational activities,
 reflect on what kind of organization they are presently trying to create,
 consider what markets they believe the organization should be in and to be specific about
which needs of which buyers to serve.
The answers that managers settle upon say a lot about the organization’s character, identity, and
direction.
Defining the business as it is now and will be later is a necessary first step in establishing as
meaningful direction and developmental path for the organization.
Management’s view of what the organization seeks to do and to become over the long-term is the
organization’s strategic mission.
It broadly charts the future course of the organization.
Since decisions about long-term direction fall squarely upon the shoulders of senior officers, the
strategic mission nearly always reflects the personal vision and thinking of top-level managers,
especially that of the chief executive officer. Some examples of corporate mission statements are
presented in Illustration Capsule 1.
Establishing strategic objectives
Specific performance targets are needed in all areas affecting the survival and success of an
enterprise, and they are needed at all levels of management, from the corporate level on down
deep into the organization’s structure.
The act of establishment formal objectives not only converts the direction, an organization is
headed into specific performance targets to be achieved but also guards against drift, aimless
activity, confusion over what to accomplish, and loss of purpose.
Both short-run objectives are needed. The strategic objectives for the organization as a whole
should at a minimum specify the following: the market position and competitive standing the
organization aims to achieve, annual profitability targets, key financial and operating results to
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be achieved through the organization’s chosen activities, and any other yardsticks by which
strategic success will be measured.
Because performance objectives are needed up and down the organization, the objective-setting
task of strategic management involves all managers; each must identify what their area’s
contribution to strategic success will be and then establish concrete, measurable performance
targets.
Standard Oil Indiana’s performance objectives are presented in Illustration Capsule 2.
Formulating Strategy
This component of strategic management brings into play the critical issue of just how the
targeted results are to be accomplished.
Objectives are the “ends” and strategy is the “means” of achieving them.
The task of formulating strategy entails taking into account all of the relevant aspects of the
organization’s internal and external situation and coming up with a detailed action plan for
achieving the targeted short-run and long-run results.
Strategy is a blueprint of all the important entrepreneurial, competitive, and functional area
actions that are to be taken in pursuing organizational objectives and positioning the organization
for sustained success.
General Electric, a pioneer of strategic management techniques, once defined strategy as “a
statement of how what resources are going to be used to take advantage of which opportunities to
minimize which threats to produce a desired result.”
This definition points toward the issues that strategy must address:
1. How to respond to changing conditions – specifically, what to do about shifting customer
needs and emerging industry trends, which new opportunities to pursue, how to defend
against competitive pressures and other externally imposed threats, and how to strengthen
the mix of the firm’s activities by doing more of some things and less of others.
2. How to allocate resources over the organization’s various business unit, divisions, and
functional departments-making decisions that steer capital investment and human
resources in behind the chosen strategic plan is always critical; some kind of strategysupportive guidelines for resource allocation have to exist.
3. How to compete in each one of the industries in which the organization participates –
decisions about how to develop customer appeal, to position the firm against rivals, to
emphasize some products and de-emphasize others, and to meet specific competitive
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threats are always integral to competitive survival and the achievement of a defendable
competitive advantage.
4. Within each lie of business of the organization, what actions and approaches to take in
each of the major functional areas and operating departments to create a unified and more
powerful strategic effect throughout the business unit. Obviously, the different functional
and operating level strategies ought to be coordinated rather than be allowed to go off on
independent courses; they need to support the creation of a sustainable competitive
advantage.
The issues of strategy thus go up and down the managerial hierarchy; strategy is not just
something that only top management wrestles with.
While there is indeed a strategy for the organization as a whole that is top management’s
responsibility, there are strategies for each line of business the organization is in; there are
strategies at the functional area level (manufacturing marketing, finance, human resources, and
so on) within each business; and there are strategies at the operating level (for each department
and field unit) to carry out the details of functional area strategy.
Optimally, the strategies at each level are formulated and implemented by those managers close
set to the scene of the action and they sufficiently coordinated to produce a unified action plan
for the whole organization.
Strategy formation is largely an exercise in entrepreneurship.
The content of a strategic action plan reflects entrepreneurial judgments about the long-term
direction of the organization, any need for major new initiatives (increased competitive
aggressiveness, a new divestiture move, divestiture f unattractive activities), and actions aimed at
keeping the organization in position to enjoy sustained success.
Specific entrepreneurial aspects of the strategy formation process include:







Searching actively for innovative ways the organist ion can improve on what it is already
doing.
Ferreting out new opportunities for the organization to pursue.
Development ways to increase the firm’s completive strength and put it in a stronger
position to cope with competitive forces.
Devising way to build and maintain a competitive advantage.
Deciding how to meet threatening external development.
Encouraging individuals throughout the organization to put forth innovative proposals
and championing those that have promise.
Directing resources away from areas of low or diminishing results toward areas of high or
increasing results.
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

Deciding when and how to diversify.
Choosing which business (or products) to abandon, which of the continuing ones to
emphasize, and which new ones to enter or add.
The critical entrepreneurial skill is making strategic choices that keep the organization in
position to enjoy sustained success.
Analysis and judgment are always factors.
The right choice and strategy for one organization need not be right for another
organization- even one in the same business.
Why?
Because situations differ from organization to organization, as well as from / time to time.
Strongly positioned firms can do things that weakly positioned ones can’t do, and weak
firms need to do things that strong ones don't.
A good strategy is one that is right for the organization, considering all of the relevant
specifics of its situation.
The entrepreneurial task of formulating strategy thus always requires heavy doses of
situational analysis and judgment, with the aim being to achieve “goodness of fit" between
strategy and all the relevant aspects of the organization’s internal situation and external
environment.
Indeed, one of the special values and contributions of managers is an ability to develop
customized solutions that fit the unique features of an organization's situation.
As an example of what strategy is and how it works, read Illustration Capsule 3 on Beatrice
Companies, Inc.
Strategy Implementation and Execution
Putting the strategy into place and getting individuals and organizational subunits to go all
out in executing their part of the strategic plan successfully is essentially an administrative task.
The managerial challenge to "make it happen" involves:
 Building an organization capable of carrying out the strategic plan.
 Developing strategy-supportive budgets and programs.
• . Instilling a strong organization wide commitment both to organizational objectives and the
chosen strategy.
 Linking the motivation and reward structure directly to achieving the targeted results. '
 Creating an organization "culture" that is in tune with strategy in every success causing
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respect.
 Installing policies and procedures that facilitate strategy implementation.
 Developing information and reporting system to track and control the progress of strategy
implementation.
 Exerting the internal leadership needed to drive implementation forward and to keep
improving how the strategy is being executed. .
Developing an action agenda for implementing and executing strategy involves managers at all
levels, from headquarters on down to each operating department, deciding on answers to the
question, "What is required for us to implement our part of the overall strategic plan and how
can we best get it done?"
Doing this task well means scrutinizing virtually every operating activity to see what actions can
be taken to improve strategy execution and to instil strategy-supportive practices and behaviour.
The administrative tasks of implementing and executing strategy involve a process of moving
incrementally and deliberately to create a variety of "fits" that bring an organization's conduct of
its internal operations into good alignment with strategy.
The value of consciously fitting the "way we do things around here" to the requirements of firstrate strategy execution is that it produces a strategy-supportive organizational culture and work
climate.
Implementation is soon defeated if the ingrained attitudes and habits of managers and
employees are hostile or at cross-purposes with the needs of strategy and if their customary ways
of doing things block strategy implementation instead of facilitating it.
A number of fits are thus needed:






Between strategy and the internal organizational structure.
Between strategy and organizational skills/technical know-how/operating capability
Between strategy and the allocation of budgets and staff size.
Between strategy and the organization's system of rewards and incentives.
Between strategy and internal policies, practices, and procedures.
Between strategy and the internal organizational atmosphere (as determined by the values and
beliefs shared by managers and employees, the philosophies and decision-making styles of
senior managers, and other factors that make up the organization's personality and culture).
The stronger these fits, the more strategy-supportive an organization's way of doing things.
Broadly viewed, the management task of strategy implementation is one of scrutinizing the
whole internal organization to diagnose what strategy-supportive approaches are needed and
what actions to take to accomplish them.
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Then the different pieces of the implementation plan need to be arranged into a pattern of
action that will produce orderly change (from the old strategy to the new strategy) rather
than creating disruption and dissatisfaction with the way things are being handled.
Both the sequence of actions and the speed of the implementation process are important
aspects of uniting the entire organization behind strategy accomplishment.
The leadership challenge is to so stimulate the enthusiasm, pride, and commitment of
managers and employees that an organization wide crusade emerges to carry out the chosen
strategy and to achieve the targeted results.
Evaluating Strategic Performance and Making Corrective Adjustments
Neither strategy formulation nor strategy implementation is a once-and-for-all-time task.
In both cases, circumstances arise which make corrective adjustments desirable.
Strategy may need to be modified because it is not working well or because changing
conditions make fine-tuning, or even major overhaul, necessary.
Even a good strategy can be improved, and it requires no great argument to see that changes
in industry and competitive conditions, the emergence of new opportunities or threats, new
executive leadership, a reordering of objectives and the like can all make a change in
strategy desirable.
Likewise, with strategy implementation there will be times when one or another aspect of
implementation 'does not go as well as planned, making adjustments necessary.
And changing internal conditions, as well as experiences with current strategy execution,
can drive different or improved implementation approaches.
Testing out new ideas and learning what works and what doesn't through trial and error is
common.
Thus, it is always incumbent upon management to monitor both how well the chosen
strategy is working and how well implementation is proceeding, making corrective
adjustments whenever better ways of doing things can be supported.
The function of strategic management is ongoing, not something to be done once and then
neglected.
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DEFINITION OF TERMS
Strategic mission consists of a long-term vision of what an organization seeks to do and
what kind of organization it intends to become. It provides an answer to the question,
"What is our business and what will it be?" It indicates what the organization does and
where it is headed.
Strategic objectives - indicate both 'the specific performance an organization seeks to
produce through its activities and the competitive position the enterprise wishes to occupy
in the markets' for its products.
Long-range' strategic objectives specify the desired performance and market position on an
ongoing basis.'
Short-range strategic objectives specify the near-term organizational targets and market
standing an organization desires to attain in progressing toward its long-range objectives.
Strategy refers to management's action plan for achieving the chosen objectives.
It specifies how the organization will be operated and run, and what entrepreneur,
competitive, and functional area approaches and actions will be taken to put the organization
into the desired position.
Strategic plan - a comprehensive statement of an organization's strategic mission,
objectives, and strategy; a detailed road map of the direction and course the organization
presently intends to follow in conducting its activities.
Strategy formulation- the process whereby management develops an organization's
strategic mission, derives specific strategic objectives, and chooses a strategy;
it includes all the direction-setting components of managing the total organization.
Strategy implementation - embraces the full range of managerial activities associated with
putting the chosen strategy into place, supervising its pursuit, and achieving the targeted
results.
Two things lie at the root of what separates the best-managed organizations from the rest:
1. Superior entrepreneurship (a well-conceived strategic plan that positions the organization
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in the right way at the right time).
2. Competent implementation and execution of the chosen strategy. Good management
really means good strategic management.
A well-formulated, well executed strategy is the most sure-fire route to achieving an
attractive competitive advantage and enhanced organizational performance over the long
term.
While it is easy to understand that a strategic plan is a directional map for where an organization is headed and how it intends to achieve its objectives, it is much harder to understand
what goes into a strategic plan and how the strategy-making task is performed.
This chapter explores each direction-setting step: defining the business, establishing strategic
objectives, and formulating a comprehensive strategy.
It also explores the hierarchica11evels of strategy within an organization, the kinds of factors
that shape strategy, and how managers approach the task of developing strategic plans.
THE THREE ENTREPRENEURIAL COMPONENTS OF DIRECTION-SETTING
The entrepreneurial responsibilities of a manager entail putting one's imprint on all the
direction-setting decisions for his or her areas of authority.
Three elements comprise the entrepreneurial task:
1. Defining the organization's business and strategic mission.
2. Establishing strategic objectives and performance targets.
3.Formulating a strategy to achieve targeted objectives.
The work product of these three elements is a strategic plan (see Figure 2-1).
Normally, how an organization answers "Who are we and where are we headed?" is a function
of past experiences, the specifics of its present situation, the outlook if it continues to do just
what it is doing now, opportunities and threats on the horizon, and what senior managers'
conclude about the organization's best long-term course.
The question, "What is our business and what will it be?" can be answered in at least eight
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different ways:
1.
In terms of the products or services being provided. Thus, a pecan grower may define
its business simply as one of producing pecans; a microwave manufacturer may see
itself as being in the convenience cooking business; and a local fire department may
view its business as the fire-fighting and fire-prevention business.
2.
In terms of the principal ingredient in a line of products. Paper companies, for
example, can use the same machines to turn out a variety of paper products-newsprint,
stationery, notebook paper, and slick printing papers; yet they see themselves as being
in the paper business rather than in the newsprint business or the stationery business
or the notebook paper business because they can vary production and sales mixes
across end-use segments as market conditions warrant.
3.
In terms of the technology that spawns the product. General Electric's thousands of
products have sprung from the technology of electricity, and 3M's line up of some
50,000 products has emerged from the company's distinctive expertise in finding new
applications for chemical coating and bonding technology.
4.
In terms of the customer groups being served. General Motors has long seen itself as
being a full-line car manufacturer, with models to fit every purse and lifestyle.
Personal computers sold to corporations and business professionals define a business/
market segment that is quite distinct from home computers sold to individuals through
mass-merchandise retail chain stores. Likewise, the business of a neighbourhood
convenience food store entails a narrower product line for a narrower customer group
than does the business of a large supermarket.
5.
In terms of the customer needs and wants being met. The business of small appliance
manufacturers hinges on offering a variety of effort-saving and time-saving which:
lease drilling sites, drill their own wells, pump crude oil out of the wells, transport
their own crude oil in their own ships and through their own pipelines to their own
refineries, and sell gasoline and other refined products at wholesale and retail
through their own networks of branded distributors and service station outlets. In
between these two extremes of industry scope, firms can stake out partially
integrated positions, participating only in selected stages of the industry.
7.
In terms of creating a diversified enterprise that engages in a group of related
businesses. The "related" aspect can be based on a core skill, a core technology,
complementary relationships among products, common channels of distribution,
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common customer groups, or overlapping customer functions and applications.
Procter & Gamble's (P & G) lineup of products, for instance, includes Jif peanut
butter, Duncan Hines cake mixes, Folger's coffee, Tide laundry detergent, Crest
toothpaste, Read and Shoulders shampoo, Crisco vegetable oil and shortening,
Charmin toilet tissue, and Ivory soap--all different businesses with different
competitors, different manufacturing techniques, and so on. But what ties them
together into a package of related diversification is that they are all marketed through
a common distribution system to be sold in retail food outlets to customers
everywhere. Similar consumer marketing and merchandising skills are used for all of
P & G's products.
8.
In terms of creating a multi-industry portfolio of unrelated businesses. Here the answer
to "What is our business?" can be based on any of several considerations:
opportunism, a preference for not putting all of the firm's eggs in one basket,
attempts to stabilize earnings over the cycle of economic ups and downs, the fun of
making a profit by shifting and shuffling the assets of several companies, a belief in
growth via diversification, or even "getting into any business where we can make
good money." In companies built around unrelated diversifications, there is a
conceptual theme that links different businesses in terms of customer needs,
customer groups, and technology. 1
Management's concept of what the organization seeks to do and the customer groups
and a customer need it intends to serve defines the business and establishes the
organization's strategic mission.
The mission statement specifies what activities the organization as a whole intends to
pursue now and in the future; ~ says something about what kind of organization it is
now and is to become and, by omission, what it is not to do and not to become."
It depicts an organization's character, identity, and scope of activities.
"What /s Our Business?"
Peter Drucker, a widely respected authority on managing, asserts that management
failure to examine the question, "What is our business?" in a timely, probing fashion is
the most important single cause of organization frustration and subpar performance.
He argues that when the concept of an organization's business is not thought through and
spelled out clearly, the enterprise lacks a solid foundation for establishing realistic
objectives, strategies, plans, and work assignments."
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Drucker maintains that any business definition needs to be grounded in how the
enterprise intends to "create a: customer"; he states:
A business is not defined by the company's name, statutes, or articles of incorporation.
It is defined by the want the customer satisfies when he buys a product or a service. To
satisfy the customer is the mission and purpose of every business. The question "What is
our business?" can, therefore, be answered only by looking at the business from the
outside, from the point of view of customer and market. What the customer sees, thinks,
believes, and wants, at any given time, must be accepted by management as an objective
fact to the customer, no product or service, and certainly no company, is of much
importance .... The customer only wants to know what the product or service will do for
him tomorrow. All he is interested in are his own values, his own wants, his own reality.
For this reason alone, any serious attempt to state "what our business is" must start with
the customer, his realities, his situation, his behaviour, his expectations, and his values.'
The Three Dimensions of Defining "What /s Our Business?"
Derek Abell has expanded on the importance of a customer-focused concept and suggests
defining a business in terms of three dimensions:
(1) customer groups, or who is being satisfied;
(2) customer needs, or what is being satisfied; and
(3) technologies, or how customer needs are satisfied.
Abell points out that a product, in effect, is a physical manifestation of the application of a
particular technology to the satisfaction of a particular function or need for a particular customer
group.
The decision of what business to be in, therefore, is necessarily a joint choice of technologies,
needs satisfied/values received, and customers to serve; the choice is not simply which products
to offer or which industries to be in.
The products offered and the markets served are results of choices about whom to satisfy, what
to satisfy, and how to produce the satisfaction; the specific combination of these three choices
really comprises the answer to "What is our business?"
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"What Will Our Business Be?"
Sooner or later, today's answer to "What is our business?" becomes obsolete.
Therefore, managers need to keep looking beyond the present definition of the business, always
probing for answers to the additional question, "and what will it be?"
This latter part of the question forces managers to think ahead and act to position the firm in
response to the impact of change.
The future is always uncertain (sometimes it is totally unpredictable), and keeping a watchful eye
out for the time to institute conscious redirection of the organization reduces the chances of
complacency and unpleasant surprises.
Good entrepreneurship always requires attention to such questions as:
 What customer wants and needs are presently going unsatisfied?
 How will the requirements of present customers change?
 What new end-use applications are likely to emerge?
 What new technologies will be used to meet which needs of which customer groups?
 What will competitors do and what differences will this make?
 Which new product ideas and new technological potentials can be converted into new
businesses?
 What customer needs and customer groups should the organization be getting in position
to serve?
 Should diversification be pursued and, if so, what kind and how much diversification
makes sense?
 What business should the organization continue in and what should it plan to abandon?
 What new business positions need to be taken now that can yield big payoffs down the
road?
In the best-run organizations, the senior management task of consciously taking actions to shape
the organization's future seems to be grounded firmly in thinking deeply about where the
organization is now and where it needs to be headed, what it should and should not be doing and
for whom, and when it is time to shift to a new direction and to redefine the business.
The Importance of a Clear Mission and Future Direction
In practice, many statements of "who we are, what we do, and where we are headed" have both
broad and narrow connotations (see, for example, the business definitions for the companies in
Illustration Capsule 2).
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They can be broad in the sense of embracing several distinct types of products, industries,
customer groups, technologies, and needs to be served, yet narrow in the sense of limiting the
scope of the organization's activities to an understandable, meaningful arena. Consider the
following definitions of scope:
Distinctions between broad and narrow are relative.
Home entertainment is probably too broad a definition for a firm that makes only stereo
equipment, but it is quite equipment, radios, and VCRs.
What is important about the broad or narrow definition is that it should be functionally useful:
Overly narrow business definitions carry the risk that management's peripheral vision will be
unduly restricted and important strategic threats or opportunities in nearby markets may be
overlooked.
On the other hand, broadly defining an organization's strategic mission in language with high
"fog intensity" can obscure the essential character and present or future operating scope of the
enterprise.
An umbrella like definition that "Our business is to serve the food needs of the nation" offers no
sense of direction or organizational identity; it can mean the organization's business is anything
from growing wheat or operating a vegetable cannery to 'running a supermarket chain,
manufacturing farm machinery, or running a Kentucky Fried Chicken franchise.
Both the U.S. Postal Service and Federal Express are in the "mail business," but this definition
hides their very different business concepts and target clientele.
The broader the language used to define the organization's business, the less focus it directs to
specific customer groups, customer needs, technologies, and types of products.
The managerial value of a clear mission statement is in crystallizing the firm's long-term
direction and in steering entrepreneurial decisions into a coherent pattern.
An unambiguous answer to "What is our business and what will it be?" can help managers avoid
the trap of trying to march in too many directions at once, and its counterpart, the trap of being
unclear about when or where to march at all.
When managers don't have a clear vision of what the organization is trying to do and to become,
their decisions and actions are as likely to blockade the path ahead as to clear it.
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Establishing Strategic Objectives: The Second Element in Setting Direction
Strategic objectives set forth the competitive market position that an enterprise seeks to have and
the specific performance targets that management seeks to achieve in pursuing the strategic
mission.
Some strategic objectives relate externally to the attractiveness and mix of industries the firm is
in, the competitive position it aspires to in each industry, the reputation it wants to have with
customers and the public, the standing it wants in the financial investment community, and its
capabilities vis-a-vis competitors.
Other strategic objectives relate internally to the desired organizational performance and
financial results.
The most common strategic objectives concern market share, growth in revenues and earnings,
return on investment, competitive strength, technological capability, recognition as an industry
leader, reputation with customers, overall size and degree of diversification, earnings stability
over the cycle of ups and downs in the economy, financial strength, being well represented in
industries with attractive prospects, and the like.
Strategic objectives are needed in all areas on which the survival and success of the organization
depend, and they are needed at all levels of management from the corporate level on down deep
into the organization structure.
Moreover, it is normally desirable to develop both long-range and short-range objectives.
Long-range objectives keep management alert to what has to be done now to attain the desired
results later.
Short-range objectives indicate the speed and momentum which management seeks to maintain;
they call the attention of managers and organizational subunits to the level of performance
expected in the near term.
Why Have Strategic Objectives?
This second direction-setting element is a big one.
Unless and until the direction an organization is headed is converted into specific performance
targets, into achieving a specific market standing and competitive position, and into specific
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commitments to action, there is great risk that the strategic mission will remain a statement of
good intentions and unrealized achievement.
Setting strategic objectives reduces this risk.
The hard knocks of experience tell a powerful story about the use of objectives: Managements
that establish objectives for themselves and for their organizations are more likely to achieve
them than managements that operate without performance targets.
Spelling out the targeted strategic position and results in concrete, measurable terms helps
prevent organization drift, establishes organizational priorities, and provides benchmarks for
judging how well the organization is doing.
What Performance Targets Are Realistic?
Strategic objectives and performance targets cannot be set on the basis of whatever management
decides would be "nice."
If objectives are to be something other than "pie-in-the-sky .wishful thinking," and if, at the same
time, they are to serve as a tool for stretching the enterprise to achieve its full potential, then they
must meet the criterion of being challenging but achievable.
Satisfying this criterion means setting objectives in the light of several important "insideoutside" considerations:
 What performance levels will economic, industry, and competitive conditions realistically
allow?
 What financial performance does the organization need to achieve (from an income statement
and balance sheet perspective) in order to (1) "look good" to investors and the financial
community and (2) have the financial resources requisite for executing the chosen strategic
plan?
 What market share and competitive standing can the enterprise realistically aspire to?
 What performance is the organization capable of when pushed?
Good objectives are given the acronym “SMART”:
S = Specific
M = Measurable
A= Achievable
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R = Realistic
T = Time-framed
Therefore, setting challenging but achievable objectives requires managers to judge what
performance is possible in light of external conditions as opposed to what performance the
internal. organization is really capable of achieving.
In addition, there can be two-way direction-setting interaction between objectives and
strategy: whereas strategy is the means for accomplishing strategic objectives, the choice of
a strategy implies that the organization's financial performance objectives will be set high
enough to fund successful strategy execution.
Direction-Setting and the Hierarchy of Strategic Objectives
For direction-setting to penetrate either deeply or meaningfully into the organizational
hierarchy, strategic objectives must be established not only at the corporate level for the
organization as a whole but also for each of the specific lines of business and products in
which the organization has an interest and, further, for each functional area and department
within the organization structure.
When every involved manager, from the chief executive officer on down to the first-line
supervisor, formulates objectives at his or her level of job responsibility and is rewarded on
the basis of whether the agreed-upon objectives are achieved. then chances are that all
managers will know precisely what they need to accomplish; they will also have a clear
understanding of their unit's expected contribution to overall organizational performance.
An example will clarify how strategic objectives at one level drive the objectives and
strategic plans of the next level in the organizational hierarchy.
Suppose the senior executives of a diversified corporation establish a corporate profit
objective of $5 million for next year. Suppose further that, after discussion between
corporate management and the general managers of the firm's five different businesses,
each business is given the challenging but achievable profit objective of $1 million (the
plan being that if the five business divisions can contribute $1 million each in profit, the
corporation as a whole can reach its $5 million profit objective). Observe so far, with
respect to profit only, that corporate executives have set a priority of $5 million in total
profit for the year, and that the general managers of each business division have been
assigned responsibility for $1 million in profit by year-end. A concrete result has thus been
agreed upon and translated into measurable action commitments to achieve something at
two levels in the managerial hierarchy. Next, the general manager of business unit X
may, after some analytical calculations and discussion with functional area subordinates,
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conclude that reaching the $1 million profit objective will require selling 100,000 units at
an average price of $50 and producing them at an average cost of $40 (the $10 profit
margin multiplied by 100,000 units yields a $1 million profit). Consequently, the general
manager and the manufacturing manager may settle upon manufacturing objectives of
producing 100,000 units at a unit cost of $40; and the general manager and the
marketing manager may agree upon a sales objective of 100,000 units and an average
target selling price of $50. In turn, the marketing manager may break the sales objective
of 100,000 units down into unit sales targets for each salesperson, sales territory,
customer type, and/ or item in the product line.
In similar fashion, objectives can be agreed upon for every other strategically relevant area
of concern and priority.
The key idea in this example is that the process of establishing objectives for each manager and
organizational subunit leads to a clearer definition of what results are expected and who is
responsible for achieving them.
If done right, setting objectives energizes the organization, heads it down the chosen path at a
measurable pace, and creates a results-oriented organizational climate.
At the same time, a hierarchy of strategic objectives that transcends and links organizational
levels brings the answer to "Where we now and where are we headed?" home to every manager
and organizational unit.
The effect is to add both concreteness and standards for performance to the statement of strategic
mission and business definition.
By specifying in measurable terms what contribution and results are expected from each
manager and unit within the organization, everyone in the managerial hierarchy comes to understand the direction of the total enterprise and their role in it-a major leap forward in getting the
whole organization moving along the chosen course.
In summary, managing with clearly defined strategic objectives in mind is likely to produce
better organizational performance than managing without objectives.
Illustration Capsule 5 explains some of the finer points in stating objectives clearly and precisely
enough to make them managerially useful.
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Formulating Strategy: The Third Element in Setting Direction
In almost every instance, managers have choices about which path to take in achieving strategic
objectives.
As the old adage goes, "There's more than one way to skin a cat."
An organization's strategy thus represents the pattern of choices management has made among
the alternative means.
Strategy is the trajectory or flight path toward the bull's-eye (the target objectives) and is made
up of the entrepreneurial, competitive, and functional area approaches management intends to
employ in positioning the enterprise and in managing its overall portfolio of activities.
Because each organization's situation is unique, strategy tends to be custom tailored by
management to fit all of the relevant internal and external circumstances that make up its
situation.
And because an organization's circumstances change, its strategy is always evolving as managers
either fine-tune or overhaul the ways they try to achieve strategic objectives.
2.7 ORGANISATIONAL PLANNING PROCESS
1.2
STRATEGY PLANNING
The strategic planning process is composed of the four planning stages, namely, scanning the
environment, strategy formulation, strategy implementation and strategy evaluation and control.
i) Environmental Scanning of the external environment (to ascertain opportunities and threats
outside the organization not usually within short term control of top management) and the
internal environment (to ascertain strengths and weaknesses within the organization not usually
within the short term control of top management).
The two major components in environmental analysis are environmental monitoring and
determination of strategic impacts.
Environmental monitoring involves three stages:
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
Searching the environment for signals that may portend significant changes like monetary
trends, inflation, strikes, shortages, technological breakthroughs and industry
overcapacity.

Identification of commodities/materials which may be threatened or benefit from
environmental changes.

Evaluation of the possible consequences to the organization of changes in supply
conditions arising from such environmental changes and the probability of such changes
occurring.
Determination of the strategic impact of a given supply item on profit and supply risk.
The profit impact of a given supply item can be defined in terms of volume purchased,
percentage of total purchase cost and impact on product quality or business growth.
Supply risk is assessed in terms of availability, number of suppliers, competitive demand, make
or buy opportunities, storage risks and substitution opportunities.
On the basis of the above profit and supply risk criteria all purchase items can be assigned to one
of the following four categories: Strategic items ( high profit impact, high supply risk);
Bottleneck items ( low profit impact, high supply risk); Leverage items
( high profit impact, low supply risk); and, Non-critical items ( low profit impact, low supply
risk).
An evaluation of such impacts can enable managers at the appropriate level to prioritise what
materials and allied supply considerations require immediate attention.
Other approaches to environmental scanning are:

PEST (political, economic, social and technology) analysis also includes legal, ecological
and demographic classifications.
PEST factors input into SWOT analysis.

SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis assesses internal
strengths and weaknesses in relation to the external opportunities and threats in the
organization’s environment.
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SWOT analysis is the essential preliminary to the formulation of strategies at corporate,
business and functional levels.

Life Cycle analysis based upon the product life cycle.

Scenario Planning consists of developing a conceptual forecast of the future based on
given assumptions.

System Modelling in which computer-based models are developed to simulate key
aspects of a function using “what if?’ situations.

Strategic Issue Management (SIM) involves the identification of one or a few key issues
that are perceived as crucial and evaluating their impact and potential consequences.

Delphi Method is a subjective approach to forecasting based on a systematic approach to
reaching agreement among a group of researchers.
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THE MAIN COMPONENTS OF THE STRATEGIC PLANNING PROCESS
MISSION AND GOALS
EXTERNAL ANALYSIS
Opportunities & Threats
SWOT
Strategic Choice
INTERNAL ANALYSIS
Strengths & Weaknesses
Functional – Level
Strategy
Business – Level
Strategy
Global Strategy
Corporate – Level
Strategy
Strategy Implementation
Designing
Organizational Structure
Matching Strategy,
Structure & Controls
Managing Strategic
Change
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Designing Control
Systems
Porter’s Five Forces Model.
Porter’s concept of value chain analysis focuses on the position of an SBU within the industry to
which it belongs.
Porter identifies five competitive forces that determine the intensity of competition in an industry
and the total value of profits or value generated in that particular industry.
These forces are industry competitors, new entrants, suppliers, buyers and substitutes.
The Porter’s Five Forces Model of Competition
FIRMS IN OTHER INDUSTRIES
WHOSE PRODUCTS CAN
SERVE AS SUBSTITUTES
Competitive forces arising from the availability of
good substitutes which are competitively priced
SUPPLIERS
Competitive forces arising
from suppliers exercise of
bargaining power &
economic leverage
COPMETITIVE FORCES
CREATED BY THE
STRATEGIC MOVES AND
COUNTERMOVES OF
RIVAL FIRMS – INDUSTRY
COMPETITORS
The “ Centre Ring” of
competition
CUSTOMERS
Competitive forces arising
from customers exercise of
bargaining power &
economic leverage
Competitive forces & constraining
pressures arising from threat of entry
POTENTIAL NEW
ENTRANTS
An industry analysis usually begins with a general examination of the forces influencing the
organization.
The objective of such a study is to use this to develop the competitive advantage of the
organization to enable it to defeat its rival companies.
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Michael Porter’s contribution to our understanding of the competitive environment of the firm
has wide implications for many organizations in both the private and public sectors.
This type of analysis is often undertaken using the Porter’s Five Forces Model because it
identifies 5 basic forces that can act on the organization:
1. The Bargaining Power of Suppliers
2. The Bargaining Power of Buyers
3. The Threat of Potential New Entrants
4. The Threat of Substitutes
5. The Extent of Competitive Rivalry
The objective of such an analysis is to investigate how the organization needs to form its strategy
in order to develop opportunities in its environment and protect itself against competition and
other threats.
The Bargaining Power of Suppliers
Virtually every organization has suppliers of raw materials or services which are used to produce
the final goods or services.
Porter suggested that suppliers are more powerful under the following conditions:
 If there are only a few suppliers. This means that it is difficult to change from one to
another if a supplier starts to exert its power.
 If there are no substitutes for the supplies they offer. This is especially the case if the
supplies are important for technical reasons – perhaps they form a crucial ingredient in a
production process or the service they offer is vital to smooth production.
 If suppliers’ prices form a large part of the total costs of the organization. Any increase
in price would hit value added unless the organization was able to raise its own prices in
compensation.
 If a supplier can potentially undertake the value-added process of the organization.
Occasionally a supplier will have power if it is able to integrate forward and undertake
the value-addition process done by the organization; this could pose a real threat to the
survival of the organization.
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The Bargaining Power of Buyers
The term buyers is used to describe what might also be called the customers of the organization.
Buyers have more bargaining power under the following conditions:

If buyers are concentrated and there are few of them. When an organization has no
option but to negotiate with a buyer because there are few alternative buyers around, the
organization is clearly in a weak position: national government contracts in defence,
health and education, etc. where the government can drive a hard bargain with
organizations.

If the product from the organization is undifferentiated. If an organization’s product is
much the same as that from other organizations, the buyer can easily change from one to
another without problems. The buyer is even more likely to make such a shift if the
quality of the buyer’s product is unaffected by such a change.

If backward integration is possible. As with suppliers above, the buyer’s bargaining
power is increased if the buyer is able to backward-integrate and take over the role of the
organization.

If the selling price from the organization is unimportant to the total costs of the buyer.
The Threat of Potential New Entrants
New entrants (firms) come into the marketplace when the profit margins are attractive and the
barriers to entry are low.
The attraction of high profitability is clear and so the major strategic issue is that of barriers to
entry into a market.
Porter argued that there were 7 major sources of barriers to entry:
1. Economies of Scale. Unit costs of production may be reduced as the absolute volume per
period is increased. Such cost reductions occur in many industries and present barriers
because they mean that any new entrant has to come in on a large scale in order to
achieve the low cost levels of those already present: such a scale is risky.
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2. Product Differentiation. Branding, customer knowledge, special levels of service and
many other aspects may create barriers by forcing new entrants to spend extra funds or
simply take longer to become established in the market. Real barriers to entry can be
created in strategic terms by long-established companies with such strengths in a market.
3. Capital Requirements. Entry into some markets may involve major investment in
technology, plant, distribution, service outlets and other eras. The ability to raise such
finance and the risks associated with such outlays of capital will deter some companies.
4. Switching (changing) Costs. When a buyer is satisfied with the existing product or
service, it is naturally difficult to switch that buyer to a new entrant. The cost of making
the switch would naturally fall to the new entrant and will represent a barrier to entry. In
addition to the costs of persuading customers to switch, organizations should expect that
existing companies will retaliate with further actions designed to drive out new entrants.
5. Access to Distribution Channels. It is not enough to produce a quality product; it must be
distributed to the customer through channels that may be controlled by companies already
in the market.
6. Cost Disadvantages Independent of Scale. Where an established company knows the
market well, has the confidence of major buyers, has invested heavily in infrastructure to
service the market and has specialist expertise, it becomes a daunting task for new
entrants to gain a foothold in the market.
7. Government Policy. For many years, governments have enacted legislation to protect
companies and industries: monopolies in telecommunications, health authorities, utilities
such as gas and electricity, are some examples where entry has been difficult if not
impossible.
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The Threat of Substitutes
Occasionally, substitutes render a product in an industry redundant.
For example, SmithKline Beecham lost sales from its product Tagamet for the treatment of
ulcers, due to the introduction of more effective products – Zantac from Glaxo and Losec from
Astra.
More often, substitutes do not entirely replace existing products but introduce new technology or
reduce the costs of producing the same product.
Effectively, substitutes may limit the profits in an industry by keeping prices down.
From a strategy viewpoint, the key issues to be analyzed are:
 the possible threat of obsolescence;
 the ability of customers to switch to the substitute;
 the costs of providing some extra aspect of the service that will prevent switching;
 the likely reduction in profit margin if prices come down or are held.
The Extent of Competitive Rivalry
Some markets are more competitive than others.
Higher competitive rivalry may occur in the following circumstances:

When competitors are roughly of equal size and one competitor decides to gain share
over the others, then rivalry increases significantly and profits fall. In a market with a
dominant company, there may be less rivalry because the larger company is often able to
stop quickly any move by its smaller competitors.

If a market is growing slowly and a company wishes to gain dominance, then by
definition it must take its sales from its competitors – increasing rivalry.

Where fixed costs or the costs of storing finished products in an industry are high, then
companies may attempt to gain market share in order to achieve break-even or higher
levels of profitability. Paper making, steel manufacture and car production are examples
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of industries where there is a real case for cutting prices to achieve basic sales volumes –
thus increasing rivalry.

If extra production capacity in an industry comes in large increments, then companies
may be tempted to fill that capacity by reducing prices, at least temporarily.

If it is difficult to differentiate products or services, then competition is essentially pricebased and it is difficult to ensure customer loyalty.

When it is difficult or expensive to exit from an industry (perhaps due to legislation on
redundancy costs or the cost of closing dirty plant), there is likely to be excess capacity in
the industry and increased rivalry.

If entrants have expressed a determination to achieve a strategic stake in that market,
the costs of such an entry would be relatively unimportant when related to the total costs
of the company concerned and the long-term advantages of a presence in the market.
Strategy Implications from the General Industry and Competitive Analysis
In strategic management, it is not enough just to produce an analysis; it is important to consider
the implications for the organization’s future strategy.
Some issues that might arise from the above include:
o Is there a case for changing the strategic relationships with suppliers? Could more be
gained by moving into close partnership with selected suppliers rather than regarding
them as rivals?
o Is there a case for forming a new relationship with large buyers? Manufacture of ownlabel products for large customers in retail industry may be undertaken at lower margins
than branded business but has proved a highly successful strategy for some leading
European companies.
o What are the key factors for success that drive an industry and influence its strategic
development? What are the lessons for the future that need to be built into the
organization’s strategic management?
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o Are there any major technical developments that rivals are working on that could
fundamentally alter the nature of the environment? What is the time span and level of
investment for such activity? What action should we take, if any?
ii) Strategy Formulation at corporate, business and functional levels relates to the preparation
of a mission statement, deriving of objectives and determination of strategic decisions.
The preparation of a mission statement: At all levels, a good mission statement helps in strategy
formulation by providing a sense of purpose that maintains the focus of strategic plans.
Deriving objectives: Corporate and business objectives are strategic, long term, and general
while functional objectives are tactical, short term and specific.
Determination of strategic decisions: Functional decisions are derived from corporate strategical
decisions.
iii) Strategy Implementation: This relates to organizational structures, resource allocation,
policies and procedures.
Organization structure provides the manager and staff of a function with information regarding
their place in the organization, their upwards, downward and lateral relationships, and tasks and
responsibilities.
Resource allocation. In most organizations the financial, physical, human and technological
resources allocated to a function will be reduced to quantitative terms and expressed in budgets
or financial statements.
Policies are instruments for strategy implementation as they provide guidelines, authority, a basis
for management control, promote management by exception by providing guidelines for routine
action and they lead to uniformity and consistency.
Procedures are the formal arrangements through which policies are implemented.
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iv) Strategy Evaluation and Control: Strategy evaluation is undertaken at the formulation and
post implementation stages.
At the formulation stage the aim is to evaluate which of several possible strategic options is
likely to provide the greatest competitive advantage.
Some of the methods by which the suitability of a particular strategy can be evaluated are return
analysis, profitability analysis, risk analysis and resource deployment analysis.
At the post-implementation stage evaluation is concerned with whether the chosen strategy has
been successful and what changes are required to most contemporary opportunities and threats.
Four principles that can be applied to strategic evaluation at both stages are consistency,
consonance (adaptive response), advantage and feasibility.
Evaluation criteria for the second stage are internal consistency, environmental fit, resource fit
and communication and implementation.
Evaluation differs from control and the control process involves four stages: establish
performance standards, measure performance, compare actual to planned performance standards,
take appropriate corrective action.
THE PRIMARY DETERMINANTS OF STRATEGY
Many, many factors have to be considered in formulating strategy.
In general, the goal is to achieve a good match between the organization's internal skills,
capabilities, and resources on the one hand and all of the relevant external considerations on the
other hand.
Six broad categories of considerations usually dominate the design of strategy:
1.
2.
3.
4.
5.
Market opportunity, industry attractiveness, and competitive forces.
What a company's skills, capabilities, and resources allow it to do best.
Emerging threats to the company's well-being and performance.
The personal values, aspirations, and vision of managers, especially those of the most
senior executive.
Social, political, regulatory, ethical, and economic aspects of the external environment
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6.
in which the enterprise operates.
The organization's culture, core beliefs, and business philosophy.
Figure 2-6 is a simple model illustrating how these factors come into play.
Market Opportunity and Industry Attractiveness
Market opportunity, the attractiveness of the industry environment, and competitive forces
are always factors in formulating strategic plans.
Most of the time they are key strategy-shaping considerations, for unless an enterprise
believes it is positioned to pursue an attractive opportunity there is usually the option of
choosing some other strategic course.
But once an interesting opportunity is spotted, the choice of strategy depends on industry
and competitive conditions.
The strategy-shaping issues are:
o how to capture the opportunity,
o what kind of competitive strategy to use, and
o how to position the enterprise in light of industry conditions, competition, the
strategies of rivals, and the enterprise's own situation.
This assessment of the industry and competitive environment entails many facets:
analyzing it; predicting it; attempting to change it; deciding how best to adapt to it;
and/or electing to get into or get out of some parts of it (in terms of specific customer
groups, customer needs, technologies, and products).
The choice of strategy is shaped by all relevant industry aspects: key market trends,
R&D and technology considerations, the economics of the industry, competitive forces,
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competitors' strategies, government policies and regulations, buyer demographics and
profiles, competition from substitute products, general economic trends and conditions,
the factors that govern competitive success-essentially anything and everything that
really bears on how to get into a strong competitive position.
Industry versus Company Opportunities
In viewing the role of opportunity in the strategy formation process, it is important to
distinguish between industry opportunities and company opportunities.
It is fair to say that there are always attractive industries opportunities in an economy and
new ones emerge as wants, needs, technologies, market demographics, and competitive
factors change.
But whether these create opportunities for a specific company is another matter.
New forms of health care delivery are probably not a relevant opportunity for Exxon, nor is
the growing popularity of videocassette recorders a likely opportunity for McDonald's.
The prevailing and emerging industry opportunities that are likely to be most relevant to a
particular company are those where the company in question will be able to enjoy some kind of
competitive advantage.
Opportunity, Timing, and First-Mover Advantages
When to pursue an opportunity can affect strategy almost as much as what opportunity to
pursue.
The timing of strategic moves is especially important when first-mover advantages or disadvantages exist.
Being the first competitor to initiate a fresh strategy can have a high payoff when:
(1) pioneering adds greatly to a firm's image and reputation with buyers;
(2) early commitments to supplies of raw materials, new technologies, distribution channels,
and so on can produce ad absolute cost advantage over rivals;
(3) customer loyalty is high, so that long-term benefits accrue to the firm that first convinces
the customer to use its product; and
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(4) moving first can be a pre-emptive strike, making imitation extremely difficult or
unlikely. The stronger any first-mover advantages are, the greater the danger of being late.
However, being late or following a "wait and see" approach is wise if first-mover
disadvantages exist.
Pioneering is risky when:
(1) the costs of opening up a new market are great but customer loyalty is weak,
(2) technological change is so rapid that early investments can be rendered obsolete (thus
allowing following firms to have the advantage of the newest products and processes), and
(3) the industry is developing so rapidly that skills and know-how built up during the early
competitive phase are easily bypassed and overcome by late movers.
Good timing, therefore, is an important ingredient in good business strategy formulation.
Organizational Skills, Competences, and Resources
No matter how appealing or abundant an enterprise's opportunities may be, a strategist is
forced to validate each opportunity by inquiring into whether the organization has the
means to capitalize on it, given the opposing forces of competition and organizational
circumstances.
Opportunity without the organizational resources and competence to capture it is an
illusion.
An organization's strengths (demonstrated and potential) may make it particularly suited to
seize some opportunities; likewise, its weaknesses may make the pursuit of other
opportunities excessively risky or disqualify it entirely.
A good strategy must be doable as well as tuned to attractive opportunity; hence objective
appraisal of what a firm can do and what it shouldn't try to do always needs to guide the
choice of strategy.
Experience shows that in seeking an attractive match between a firm's opportunities and its
capabilities a firm should try to build on what it does well and should avoid strategies
whose key requirements involve what it does poorly, what it has never done at all, and
what goes heavily against the ingrained corporate culture.
If managers will have to turn an organization upside down and inside out to make a
particular strategy doable, then that strategy should usually be ruled out.
Moreover, because of the strategic importance of organizational strengths, weaknesses, and
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resource capabilities, it makes sense to consider whether the organization has or can build a
distinctive competence to help capture the target opportunity.
Distinctive competences can take several forms:
 excelling in the manufacture of a quality product;
 offering customer’s superior service after the sale;
 finding innovative ways to achieve low-cost production efficiency, and then offering
customers the attractiveness of a lower price;
 excelling at developing innovative products that buyers consider a step ahead of
rivals' products;
 designing more clever advertising and sales promotion techniques;
 having the best technological expertise;
 being better at working with customer new applications and uses of the product;
having the best network of dealers and distributors; and so on.
The importance of distinctive competence to strategy formation rests with (1) the unique
capability it gives an organization in capitalizing on a particular opportunity, (2) the competitive
edge it may give a firm in the marketplace, and (3) the potential for using a distinctive
competence as the cornerstone of strategy.
It is always easier to develop competitive advantage in a market when a firm has a
distinctive competence in one of the key requirements for market success, where rival
organizations do not have offsetting competences, and where rivals are not able to attain a
similar competence except at high cost and/or over an extended period of time.
Thomas Peters, co-author of In Search of Excellence, observes:
“Above all, the top performers-school, hospital, sports team, business-are a package of
distinctive skills.
In most cases, one particularly distinctive strength-innovation at 3M, J & J, or
Hewlett-Packard; service at IBM, McDonald's, Frito-Lay, or Disney; quality at Perdue
Farms, Procter & Gamble, Mars, or May tag-and the distinctive skill-which in all cases
is a product of some variation of "50 million moments of truth a year"-are a virtual
unassailable barrier to competitor entry or serious encroachment....”
Jan Carlzon of SAS puts it this way, "We do not wish to do one thing 1000 percent
better, we wish to do 1000 things 1 percent better."
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Frank G. (Buck) Rodgers, IBM's corporate marketing vice president, made a parallel
remark; "Above all we want a reputation for doing the little things well." And a longterm observer of Procter & Gamble noted, "They are so thorough, it's boring."
Experiences such as these teach that attending to the development of a useful distinctive
competence is one of the "trade secrets" of first-rate strategic management.
Even if an organization has no distinctive competence (and many do not), it is still incumbent
upon a firm to shape its strategy to suit its particular skills and available resources.
It never makes sense to develop a strategic plan that cannot be executed with the skills and
resources a firm is able to muster.
Emerging Threats to the Company's Well-Being and Performance
Very often, certain factors in a company's external environment pose threats to its long-term
well-being.
These externally imposed threats may stem from:
 the emergence of cheaper technologies,
 the advent of new substitute products,
 adverse economic trends,
 restrictive government action,
 changing consumer values and lifestyles,
 projections of natural resource depletion,
 unfavourable demographic shifts,
 new sources of strong competition, and the like.
Such threats can be a major factor in shaping organizational strategy, and a wise strategist is as
much alert to the threats of environmental change as to the opportunities that it may present.
Several examples of strategy-related environmental threats are cited below:
 The potential of nationalization and government takeover threatens the investment strategy of
transnational corporations whenever they locate facilities in countries having a record of
political instability.
 The business of many American manufacturers has been severely threatened by cheaper
foreign imports of comparable or better quality.
 The health and nutrition concerns of consumers have produced sharp declines in the use of
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foods with high contents of salt, sugar, fat, additives, and preservatives; the long-term sales
threats have forced food manufacturers to revolutionize food processing techniques.
 Growing popularity of satellite dishes, cable TV, and videocassette recorders poses a major
new competitive threat to NBC, CBS, and ABC.
The sizes of the audiences watching programmes on the three major networks shows signs of
reducing as more and more households tune in to the cable channels and use VCRs to watch
movies.
Major advertisers, observing the networks’ declining share of home viewers, have shifted some
of their advertising budgets to cable TV, thus cutting into the bread-and-butter ad revenues of the
major networks.

Increased costs of regulatory compliance and public concerns about the safety of nucleargenerated electric power have threatened both the business of manufacturing nuclear
generating equipment and the financial ability of power companies to install and operate
nuclear powered plants.
Indeed, during the 1978-1986 periods, no new nuclear facilities were ordered and over 50
previously contracted-for units were cancelled.
A market once thought to be promising dried up quickly.
Most organizations react to environmental threats rather than predicting them.
Actually, this is not a strong criticism of managers; many strategically important
environmental changes are not readily predicted.
Some occur without warning and with few, if any, advance clues; others are "bound to
happen" but the uncertainty is when.
And still others are simply unknowable.
Even when threatening signals are detected early, it is not always easy to assess the extent of
their strategic significance.
Trying to forecast the strategic significance of future events is scarcely an exact science.
Nonetheless, managers have to stay alert to threatening developments and try to develop a
strategy that is effective even with adverse environmental change.
The Personal Values, Aspirations, and Vision of Managers
Strategy formulation is rarely so dominated by objective analysis of prevailing circumstances
that the subjective imprint of managers is purged.
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Managers do not dispassionately assess what strategic course to steer.
Their decisions are often influenced by:
 their own vision of how to compete and to position the enterprise and
 what image and standing they want the company to have.
Both casual observation and formal studies indicate that the ambitions, values, business
philosophies, attitudes toward risk, and personal vision of managers usually have important
influences on strategy.
Sometimes the influence of the manager's personal values and experiences is conscious and
deliberate; at other times it may be unconscious.
As Professor Andrews has noted in explaining the relevance of personal factors to strategy,
"Somebody has to have his heart in it”.
Attitudes towards risk also have a big influence on strategy.
Risk averters are inclined towards “safe” strategies where external threats appear minimal,
profits are adequate but not spectacular, and in-house resources are ample to satisfy
anticipated needs.
Quite often, risk-averse managers insist on following a financial approach that emphasizes
internal financing rather than debt-financing; likewise they may opt to defer major financial
commitments as long as possible or until the effects of uncertainty are deemed minimal.
They may view pioneering-type innovations as “too chancy” compared to proven, wellestablished techniques, or they may simply prefer to be followers rather than leaders.
In general, the risk-averter places a high premium on “conservative” strategies which
minimize the downside risk.
On the other hand eager risk-takers lean more toward opportunistic strategies where the
payoffs are greater, the challenges are more demanding, and the glamour is more appealing,
despite the chance of failure.
For the risk-taker, innovation is preferred to imitation, and launching a strategy offensive rank
ahead of defensive conservatism.
A confident optimism about market prospects overrules pessimism, and attempts to improve
the firm’s market position are more attractive than maintaining the status quo.
Social, Political, Regulatory, Ethical, and Economic Considerations
Social, political, regulatory, ethical and economic factors can obviously impinge upon the
choice of strategy.
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Although the integration between strategy and such factors is a two-way street, here we wish
to focus on how the need for overall societal approval of a firm’s behaviour, together with a
firm’s perceived social and ethical obligations, constrain strategy formation.
That consumerism, truth-in-packaging, equal opportunity employment, occupational health
and safety, open housing, product safety, concern for environmental protection, nutritional
issues, beliefs about ethics and morals, and other similar societal-based factors have an impact
on organisation strategies requires no discussion.
Adapting strategy to accommodate these factors is common place.
o Toys have been redesigned to improve safety features.
o The manufacturers of home heating equipment have introduced new energy-saving
models in response to consumer concern about high energy costs.
o Cigarette manufacturer have dramatically reduced the tar and nicotine content of
cigarette and are aggressively marketing new low-tar, and nicotine content.
o Growers of exportable agricultural products and manufactures of military weapons
have adjusted production and sales approaches in international markets to conform to
emerging U.S foreign policy and to the unfolding of international “crises”.
o The efforts of Mothers Against Drunk Driving and other such groups have not gone
unnoticed by the makers of alcoholic beverages.
Managerial alertness to the implications of societal forces and political economic concern is
now an essential part of the strategy formulation process.
The desirability (if not the imperative) of relating an organisation to the needs and
expectations of strategy society is not really a controversial issue today.
Making sure that an organization’s strategy is responsive to societal concerns means:
(1) keeping organisational activities in tune with what is generally perceived as in the public
interest;
(2) responding positively to emerging society priorities and expectations
(3) demonstrating a willingness to take needed action ahead of regulatory confrontation;
(4) balancing stockholder interests against the larger interest of society as a whole; (5) being a
“good citizen” in the community and
(6) making the corporation’s social and ethical obligations an explicit and high-priority
consideration in the way the enterprise conducts its affairs.
Keeping an organisation’s strategy socially responsive has both “carrot” and ”stick” aspects.
 There is the positive appeal for an organisation to pursue a strategy that will improve
its public image and at the same time enhance performance opportunities (and these
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are always inexorably tied to the general health and well-being of society).
 And then there is the negative burden of a tarnished reputation and potentially onerous
regulation if a firm ignores the changing priorities and expectations of society.
ENVIRONMENTAL FACTORS
Industries are not self-contained entities but are embedded in a wider macro-environment – the
broader economic, technological, demographic and political environment.
Changes in the macro-environment can have a direct impact on any one of the five forces in
Porter’s model, thereby altering the relative strength of these forces and, with it, the
attractiveness of the industry.
Each aspect of these macro-environmental forces can have an impact on an industry’s
competitive structure.
a) Political
Political and legal factors have a major effect on the level of opportunities and threats in the
environment.
One of the most significant trends in recent years has been the move toward deregulation.
By eliminating many legal restrictions, deregulation has lowered barriers to entry and led to
intense competition in a number of industries.
At the same time, the increased intensity of competition created many threats.
For the future, fears about the destruction of the ozone layer, acid rain, and global warming
may be near the top of the political agenda.
Given these concerns, governments seem increasingly likely to enact tough environmental
regulations to limit air pollution.
Rather than resist this trend, companies should try to take advantage of it by anticipating
regulations and undertaking appropriate action.
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b) Economic
The state of the macroeconomic environment determines the general health and well-being of the
economy.
This in turn affects a company’s ability to earn an adequate rate of return.
The four most important factors in the macroeconomy are the growth rate of the economy,
interest rates, currency exchange rates, and inflation rates.
Because it leads to an expansion in expenditures by consumers, economic growth tends to
produce a general easing of competitive pressures within an industry.
This gives companies the opportunity to expand their operations and earn higher profits.
Because economic decline leads to a reduction in expenditures by consumers, it increases
competitive pressures.
Economic decline frequently causes price wars in mature industries.
The level of interest rates can determine the level of demand for a company’s products.
Interest rates are important whenever consumers routinely borrow money to finance their
purchase of these products.
For companies in industries where interest rates directly affect demand, rising interest rates are a
threat and falling rates an opportunity.
Currency exchange rates define the value of different national currencies against each other.
Movement in currency exchange rates has a direct impact on the competitiveness of a company’s
products in the global marketplace.
A low or declining local currency reduces the threat from foreign competitors while it creates
opportunities for increased sales overseas.
Inflation can destabilize the economy, producing slower economic growth, higher interest rates,
and volatile currency movements.
If inflation keeps increasing, investment planning becomes hazardous.
The key characteristic of inflation is that it makes the future less predictable.
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In an inflationary environment, it may be impossible to predict with accuracy the real value of
returns that can be earned from a project five years hence.
Such uncertainty makes companies less willing to invest.
Their holding back in turn depresses economic activity and ultimately pushes the economy into a
slump. Thus, high inflation is a threat to companies.
c) Social
As with technological change, social change creates opportunities and threats.
One of the major social movements of the 1970s and 1980s was the trend toward greater health
consciousness.
Its impact has been immense, and companies that recognized the opportunities early have often
reaped significant gains.
At the same time the health trend has created a threat for many industries.
The tobacco industry, for example, is now in decline as a direct result of greater consumer
awareness of the health implications of smoking.
Similarly, the sugar industry has seen sales decrease as consumers have decided to switch to
artificial sweeteners.
d) Technological
Since World War II, the pace of technological change has accelerated.
This has unleashed a process that has been called a “perennial gale of creative destruction”.
Technological change can make established products obsolete overnight, and at the same time it
can create a host of new product possibilities.
Thus, technological change is both creative and destructive, both an opportunity and a threat.
One of the most important impacts of technological change is that it can affect the height of
barriers to entry and, as a result, radically reshape the structure of an industry.
This can significantly lower costs and result in many new firms entering the industry.
The overall result can be the unleashing of powerful competitive dynamics.
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e) “Green” Issues
According to the Environmental Protection Act 1990, ‘the environment consists of all or any of
the following media namely, the air, water and land; and the medium of air includes the air
within buildings and the air within the natural or man made structures above or below the
ground’.
Responsibility to the environment is one aspect of the social responsibility of business and
should be a consideration when devising strategies.
Important areas of environmental concern include:
(i) More efficient use of raw materials in manufacturing operations especially timber and
minerals.
Consumer concern about rainforests has had a direct impact on the demand for tropical
hardwoods which has affected timber producers, wholesalers and users.
(ii) Pollution and Waste. Pollution is also defined by the Act as pollution of the environment due
to the release (into an environmental medium) from any process of substances which are capable
of causing harm to man or any other living organism supported by the environment.
(iii) Waste Disposal and Recycling. Waste is defined as:

Any substance which constitutes a scrap material or an effluent or other unwanted surplus
substance arising from the application of any process.

Any substance or article which requires to be disposed of as being broken, worn out,
contaminated or otherwise spoiled.
Anything which is discarded or otherwise dealt with as if it were waste shall be presumed
to be waste unless the contrary is proved.
Strategy and Organisation Culture
Every organisation has policies, values, traditions, behaviours, and ways of doing things
which become so ingrained that the organisation takes on a distinctive culture.
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Some companies are noted for being pioneers and exhibiting innovative leadership; others are
cautious and conservative, often quite content to assume a follow-the-leader role.
Still others are dominated by such traits as a long-standing dedication to superior
craftsmanship, a proclivity for financial wheeling and dealing, a desire to grow rapidly by
acquiring other companies, a strong social consciousness, or unusual emphasis on customer
service and total customer satisfaction.
A couple of examples illustrate the strong link between strategy and culture.
 IBM’s founder, Thomas Watson, once stated, “We must be prepared to change all the
things we are in order to remain competitive in the environment, but we must never
change our three basic beliefs: (1) respect for the dignity of the individual, (2) offering
the best customer service in the world, and (3) excellence.”
IBM’s staunch commitment to these values underlies the company’s big competitive edge
over rivals in software availability (thus giving IBM users more computing productivity for
their money) and customer services, and perhaps it explains why IBM is (at least arguably) the
best-managed company in the world.

At AT&T, the value system for nearly a century has emphasized (1) universal service,
(2) fairness in handling personnel matters, (3) a belief that work should be held in
balance with commitments to one’s family and community, and (4) relationships (from
one part of the organisation to another).
These values have been viewed by AT & T’s management to be essential in getting things
done in a technologically dynamic, highly structured company.
At both IBM and AT & T, the value system is deeply ingrained and widely shared by
managers and employees, to such an extent that a definite corporate culture has emerged- the
shared values are not empty slogans they are a way of life within the company.
In companies with strong corporate culture, the cultural or personality traits are typically
reflected in strategy; in some cases these traits even dominate the choice of strategy.
This is because culture-related values and policies become imbedded in the thoughts and
actions of executives, in the way the enterprise shapes its responses to external events, and in
the skills and expertise it builds into the company structure, thereby creating a culture-driven
bias about what strategy to select and also, shaping what strategy a firm may be most capable
of executing with some proficiency.
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MANAGING THE STRATEGY FORMATION PROCESS
Companies and managers go about the strategy-making task differently.
In small, owner-managed companies strategic plans tend to be developed informally; the plan
itself is not likely to be written but instead may exist mainly in the entrepreneur’s own mind
and in oral agreements with key subordinates.
The largest firms, however, develop their plans via an annual strategic planning cycle
(complete with prescribed procedures, forms, and timetables) that includes broad management
participation, numerous studies, and multiple meetings to probe and question.
The larger and more diverse the enterprise, the more that managers feel it is better to have a
structured process that is done annually, involves written plans, and requires management
scrutiny and official approval at each level.
Along with variations in the organisational process of formulating strategy come variations in
the way the manager, as chief entrepreneur and organisational leader, personally participates
in the actual work of strategic analysis and strategic choice.
Most managers use one of four approaches to strategy-making:
 The master strategic approach.
Here the manager personally functions as chief strategist, and chief entrepreneur,
exercising strong influence over the kinds and amount of analysis conducted, over the
strategy alternatives to be explored, and over details of strategy.
This does not mean that the manager personally does all of the work but that the manager
is the chief architect of strategy and wields a proactive hand in shaping some or all of the
major pieces of strategy.
The manager acts as strategy commander, with a big ownership stake in the chosen
strategy.
 The delegate-to-others approach.
Here manager in charge delegates virtually all of the strategic planning to others, perhaps a
planning staff or a task force.
The manager does little more than suggest minor changes and place a stamp of approval
on the plan that emerges, ending up with little personal stake in the formal strategy
statement.
The great hazard facing the planners and the company whose chief executive turns too
much of the strategy formulation task over to others is that the resulting plan will gather
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dust on the shelf rather than become a blueprint for action.
When the ownership of the proposed strategy rests with those who wrote the plan instead
of those who must responsibility for carrying out the recommended strategy, the stage is
set for the plan to be largely ignored as nothing more than a ceremonial exercise.
 The collaborative approach.
This is a middle approach whereby the manager enlists the help of key subordinates in
hammering out a consensus strategy which all “the key players” will support and do their
best to implement successfully.
The greatest strength of this style of managing the formulation process is that those who
are charged with strategy formulation are also those who are charged with implementing
the chosen strategy.
Giving subordinate managers a clear-cut ownership stake in the strategy they subsequently
must implement not only enhances commitment to successful execution but also when
subordinates have had a hand in proposing their part of the overall strategy they can be
held accountable for making it work-the “I told you it was a bad idea” alibi won’t work.
 The champion approach.
In this style of presiding over strategy formulating, the manager is interested neither in a
big personal stake in the details of strategy nor in the time-consuming tedium of leading
others through participative brainstorming or a collaborative “group wisdom” exercise.
Rather, the idea is to encourage subordinate managers to develop, champion, and
implement sound strategies.
Here strategy moves upward from the “doers” and the fast-trackers”.
The executive serves as a judge, evaluating the strategy proposals that reach his desk.
This approach is especially well suited for large diversified corporations where it is
impossible for the CEO to be on top of all the strategic and operating problems facing
each of many business divisions.
Therefore, if the CEO is to exploit the fact that there are many people in the enterprise
who can see strategic opportunities that he cannot, then he must give up some control over
strategic opportunities order to foster strategic opportunities and new strategic initiatives.
The CEO may well articulate general strategic themes as organisation wide guidelines for
strategic thinking, but the real skill is stimulating and rewarding new strategy proposals
put forth by a champion who believes in a opportunity and badly wants the latitude to go
after it.
With this approach, the total “strategy” is strongly influenced by the sum of the
championed initiatives that get approved.
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GOOD ENTERPRENEURSHIP EQUALS GOOD STRATEGIC PLANNING
How well managers have performed the entrepreneurial task of direction-setting and strategy
development can be appraised from two angles.
1. One is from the perspective of whether the chosen strategic plan is right for the organisation
given its particular situation.
Does it offer a potentially effective match with the organisation’s internal and external
environments?
Does it allow the enterprise to exploit attractive opportunities and/or to escape the impact of
externally imposed threats?
All things considered, is there “goodness of fit” between the chosen strategy and the relevant
external/internal considerations?
2. The second angle involves whether the strategy has been fleshed out in enough detail to
constitute an action plan for the whole organisation.
A complete strategy is always a combination of many distinct actions and decisions, rather
than a single point of attack.
Thus the strategic plan must affect every manager, beginning at the level.
However, there are often different degrees to which those inside and outside the top
management ranks know all the strategy details and plans.
Ultimately, of course, the test of good entrepreneurship is whether the chosen strategy
produces the desired level of performance and culminates in the achievement of the target
objectives.
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The Entrepreneurial Components of a Strategic Plan
DEFINING THE
ORGANIZATION’S
BUSINESS &
STRATEGIC
MISSION
Developing a
Clear Concept and
Vision of “who we
are and where are
we headed”.
Providing
Answers to the
Questions “what
customer groups
and customer
needs will we
serve?” and “what
is our business and
what will it be?”
+
ESTABLISHING
STRATEGIC
OBJECTIVES
+
Translating the
Chosen Strategic
Mission into specific
measurable
Performance Targets
and Results:
Agreeing on what is
to be accomplished
through the
organization’s
activities.
FORMULATING
A STRATEGY
Selecting an
Action-oriented
Game Plan that
indicates how
Chosen Objectives
will be pursued
and what
Entrepreneurial,
Competitive, and
Functional area
approaches
management will
adopt to get the
organization in the
Position it wants
to be.
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=
AN
ORGANIZATION’S
STRATEGIC PLAN
A detailed Blueprint
indicating the
Direction and
Strategy that the
organization
presently intends to
follow in conducting
its activities.
3 ANALYSING THE GENERAL ENVIRONMENT.
THE IMPORTANCE OF ENVIRONMENTAL INFLUENCES
In strategy, the environment means everything and everyone outside the organization:
competitors, customers, suppliers plus other influential institutions such as local and national
governments.
Strategists are agreed that an understanding of the competitive environment is an essential
element of the development of strategic management.
It is important to study the environment surrounding the organization for 3 main reasons.
First, most organizations compete against others. Hence a study of the environment will provide
information on the nature of competition as a step to developing sustainable competitive
advantage.
Sustainable competitive advantage is an advantage over competitors that cannot easily be
imitated.
Second, most organizations will perceive opportunities that might be explored and threats that
need to be contained.
Such opportunities and threats may come not just from competitors but also from government
decisions, changes in technology and social developments, and many other factors.
Third, there are opportunities for networks and other linkages, which lead to sustainable cooperation.
Such linkages with others may strengthen an organization in its environment by providing
mutual support.
Competitive Situation Analysis
Industry analysis sets the stage for digging deeply into the industry’s competitive process - the
sources of competitive pressures, how strong those pressures are, what competitors are doing,
and what future competitive conditions will be like.
Here four areas of inquiry are paramount:
1. What competitive forces exist and how strong are they?
2. What are the relative cost positions of rival firms in the industry?
3. What are the competitive positions and relative strengths of key rival doing better than
others, and who has what kind of competitive edge?
4. What moves can key rivals be expected to make next?
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This phase of business strategy analysis is important because competitive forces shape strategy
and because the strategies of rival firms shape competitive forces.
A company in a very attractive industry may fail to earn attractive profits if, beleaguered by
competitive pressure, it gets maneuvered into a weak competitive position and has little defense
from the attacks of aggressive rivals.
Some firms are more profitable than others, regardless of the average profitability of the
industry.
Thus, a company, in seeking a strategy that will put (or keep) it in an attractive market position,
needs took broadly at the whole competitive environment.
A leader will seek to build defenses against competition, and a distressed firm may elect to
retreat to market riches where competition is comparatively weak.
AN ANALYSIS OF THE TOTAL BUSINESS ENVIRONMENT, THE NATURE AND
CONSEQUENCES OF INDUSTRIAL AND TECHNOLOGICAL CHANGES
TECHNIQUES OF INDUSTRY AND COMPETITIVE ANALYSIS
The bread-and-butter tasks of strategy analysis are performed at the business-unit level.
And while many factors always enter into diagnosing what sort of strategy makes the most
sense for a particular business, two things emerge time and again as dominant analytic
considerations.
(1) The first concerns how attractive an industry is in terms of its prospects for long-term
profitability and what factors make the industry more or less attractive.
There are big differences in the relative attractiveness of industries; some industries are full of
opportunity and growth potential while others are stagnant or in decline.
Some industries are intensely competitive, with no prospect for winning a meaningful
competitive edge; other industries, though quite competitive, still have strategic windows that
offer interesting competitive advantage possibilities.
Industries differ so much in their attractiveness that even an industry leader may be unable to
earn respectable profits when the industry’s prospects are grim.
(2) The second big analytical consideration concerns the determinants of relative competitive
position within an industry.
Competition is a game with winners and losers.
It inevitably leads to differences in competitive position and competitive advantage among
industry participants.
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These differences are so important that, even in industries with wide open opportunities, firms
will fail if they lack competitive advantage or if they are unable to get out of poor competitive
market positions.
Disparities in competitive strength and the uneven distribution of competitive advantage
explain why some firms are more profitable than others and why all industries have leaders
and laggards.
However, the particulars of how the game of competition is played are not the same from
industry to industry.
Every industry has its own competitive “rules” and its own weighted ranking of what factors
count most/ least in determining competitive position and competitive advantage.
Identifying all these factors thus becomes fundamental.
This chapter examines the techniques for conducting a full-scale industry and competitive
analysis.
The results of such an analysis pave the way for deciding what business strategy to pursue.
THE ELEMENTS OF INDUSTRY AND COMPETITIVE ANALYSIS
The entrepreneurial task of assessing whether and how a company’s present line-of business
strategy can be improved consists of a three-pronged diagnosis:
1. Industry situation analysis- an examination of industry structure, direction, economics
and long-term attractiveness.
2. Competitive situation analysis – an analysis of competitive forces and key competitors.
3. Company situation analysis-an assessment of the company’s own present business
situation and competitive position.
To analyse an organization’s environment, certain basic analytical procedures can be
undertaken, as given in the Table below.
Table: 9 Basic Stages in Environmental Analysis
Stage
1 Environment basics –
an opening evaluation to
define and explore basic
characteristics
of
the
Techniques
Estimates of some basic
factors surrounding the
environment:
 Market definition & size
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Outcome of Stage
Basic strategic analysis:
 Scope
the
strategic
opportunity
 Establish future growth
environment.
 Market growth
 Market share
2 Consideration of the
degree of turbulence in
the environment
General considerations:
 Change: fast or slow?
 Repetitive or surprising
future?
 Forecastable
or
unpredictable?
 Complex
or
simple
influences
on
the
organization?
PESTEL
(political,
economic,
social,
technological,
environmental, legal )
3
Background factors
that
influence
the
competitive environment
4 Analysis of stages of
market growth
Industry life cycle
5 Factors specific to the
industry: what delivers
success?
Key factors for success
analysis
6 Factors specific to the
competitive balance of
power in the industry
7 Factors specific to cooperation in the industry
Five Forces analysis
8
Factors specific to
immediate competitors
Competitor analysis and
product portfolio analysis
Four Links analysis
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prospects
 Begin to structure market
competition
Guidance
on
initial
questions:
 Is the environment too
turbulent to undertake
useful predictions?
 What
are
the
opportunities and threats
for the organization?
 Identify key influences
 Predict, if possible
 Understand
interconnections between
events
 Identify growth stage
 Consider implications for
strategy
 Identify
maturity,
overproduction
and
cyclicality issues
 Identify factors relevant
to strategy
 Focus strategic analysis
and development
 Static and descriptive
analysis of competitive
forces
 Analysis of current and
future organizations with
whom co-operation is
possible
 Network analysis
 Competitor profile
 Analysis of relative
market strengths
9 Customer analysis
Market and segmentation
studies
 Strategy targeted
at
existing and potential
customers.
STRATEGIC ENVIRONMENT – THE BASICS
In order to begin the environmental analysis, it is useful to start with some basic factors that
are sometimes forgotten in the academic concepts but contribute to the strategic analysis of the
environment.
We can divide the basics into 3 areas:
1. Market definition and size
2. Market growth
3. Market share
Market Definition and Size
In analyzing the strategic environment, most organizations will want an answer to the basic
question – ‘What is the size of the market?’
This is important because it will assist in defining the strategic task.
Markets are usually described in terms of annual sales.
From a strategy perspective, a large market may be more attractive than a small market.
Measuring market size raises a related problem – how to define the ‘market’.
The answer will depend on the customers and the extent to which other products are a real
substitute.
Market Growth
In establishing the size of the market, it is also common practice to estimate how much the
market has grown over the previous period – usually the previous year.
From a strategy perspective, the importance of growth relates to the organization’s objectives.
An organization wishing to grow rapidly might be more attracted to a market growing rapidly.
Clearly any such estimate also needs to take into account the argument about market definition
made above.
Market Share
A large share of a market is usually regarded as being strategically beneficial.
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A large share may make it possible to influence prices and may also reduce costs through
scope for economies, thereby increasing profitability.
In practice, it may be difficult to establish a precise market share.
There may be other strategic circumstances where a dominant share may be identified – e.g.
the market share held by companies supplying domestic water to households – without
necessarily being able to measure the precise share.
DEGREE OF TURBULENCE IN THE ENVIRONMENT
At the general level of environmental analysis, it is important to consider the basic conditions
surrounding the organization.
Special attention needs to be directed to the nature and strength of the forces driving strategic
change – the dynamics of the environment.
This is because if the forces are exceptionally turbulent, they make it difficult to use some of
the analytical techniques – like Porter’s Five Forces.
Also because the nature of the environment may influence the way that the organization is
structured to cope with such changes.
The environmental forces surrounding the organization can be assessed according to 2 main
measures:
1. Changeability – the degree to which the environment is likely to change.
2. Predictability – the degree to with which such changes can be predicted.
These measures can each be subdivided further.
Changeability comprises:
 Complexity – the degree to which the organization’s environment is affected by factors
such as internationalization and technological, social and political complications.
 Novelty – the degree to which the environment presents the organizations with new
situations.
Predictability comprises:
 Rate of change of the environment ( from slow to fast).
 Visibility of the future in terms of the availability and usefulness of the information
used to predict the future.
Using these factors as a basis, it is then possible to build a spectrum that categorizes the
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environment and provides a rating for its degree of turbulence.
When turbulence is low, it may be possible to predict the future with confidence.
When turbulence is higher, such predictions may have little meaning.
The changeability elements influencing the organization may contain many and complex items
and the novelty being introduced into the market place may be high.
If the level of turbulence is high – hypercompetition – and as a result the environment is
difficult to study, the analysis may need to be treated with some caution.
ANALYSING THE GENERAL ENVIRONMENT
In any consideration of the factors surrounding the organization, 2 techniques can be used to
explore the general environment.
These are the PESTEL checklist and Scenarios.
PESTEL CHECKLIST
Since there are no simple rules governing an analysis of the organization, each analysis needs
to be guided by what is relevant for that particular organization.
However, it may be useful to begin the process with the PESTEL checklist.
PESTEL consists of the Political, Economic, Socio-cultural, Technological, Environment and
Legal aspects of the environment.
Checklist for a PESTEL Analysis
Political future




Political parties and alignments at local, national and regional trading-block level.
Legislation, e.g. on taxation and employment law.
Relations between government and the organization (possibly influencing the
preceding items in a major way and forming a part of future strategic management).
Government ownership of industry and attitude to monopolies and competition.
Socio-cultural future





Shifts in values and culture
Change in lifestyle
Attitudes to work and leisure
‘Green’ environmental issues
Education and health
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

Demographic changes
Distribution of income
Economic future









Total GDP and GDP per head
Inflation
Consumer expenditure and disposable income
Interest rates
Currency fluctuations and exchange rates
Investment – by the state, private enterprise and foreign companies
Cyclicality
Unemployment
Energy costs, transport costs, communications costs, raw materials costs
Technological future






Government and COMESA investment policy
Identified new research initiatives
New patents and products
Speed of change and adoption of new technology
Level of expenditure on R&D by organization’s rivals
Developments in nominally unrelated industries that might be applicable
Environmental future



‘Green’ issues that affect the environment
Level and type of energy consumed – renewable energy?
Rubbish, waste and its disposal
Legal future



Competition law and government policy
Employment and safety law
Product safety issues
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INDUSTRY SITUATION ANALYSIS AND INDUSTRY ATTRACTIVENESS
The overriding purpose of “industry situation analysis” is not to just “learn all one can” about
the industry but rather is to probe the industry’s long-term profit potential and discover the
factors that make the industry more or less attractive.
Industry analysis needs to be focused on four questions:
1. How is the industry structured?
2. What driving forces are causing the industry to change and how important will these
changes be?
3. What economic factors and business characteristics have the most influence on the
requirements for competitive success in the industry; or, to put it another way, what do
firms in this industry have to do well to make money and to succeed?
4. What strategic issues and problems face the industry?
Good, solid answers to those questions enable a strategist to:
 understand what factors are causing changes in an industry,
 make predictions about where the industry is headed and why,
 judge what the industry’s future structure will be like, and
 conclude whether the industry’s attractiveness and profit prospects are bright or dim
and why.
Strategic Group Mapping and Industry Structure
The first step in industry analysis is to examine industry structure.
As a working definition, we will use the word industry to mean a group of firms, whose
products are so similar that they are drawn into close competition, serving the same needs of
the same types of buyers.
The raw data for profiling industry structure are fairly standard: the number of sellers and their
relative sizes, identification of the market leaders, the structure of the buying side of the
market, the channels of distribution from manufacturer to final user, the prevalence of
backward and forward integration within the industry, the ease of entry and exit, the size of the
industry and its geographical boundaries (local, regional, national, or global), and any other
basic characteristics peculiar to the industry in question that shape the industry arena in which
firms compete.
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It is important to understand the generic environment of the industry, that is, whether the
industry can be broadly characterized as:
fragmented (many relatively small competitors), mature, emerging, declining, characterized
by global competition, dominated by rapid technological change, or whatever.
Some specific industry structure factors to be alert for include the following:
 group of competitors, each group occupying an identifiable position in the overall
market and having an identifiable appeal to buyers.
 A strategic group consists of those rival firms with competitively similar market
approaches.
Companies in the same strategic group can resemble one another in any of several
ways:
offering comparable product line breath; utilizing distribution channels; being
vertically integrated to much the same degree; offering buyers similar services and
technical assistance; appealing to similar customer groups; appealing to buyer needs
with the same product features; making extensive use of mass media advertising;
depending on identical technological approaches; and/ or selling in the same
price/quality range.
 An industry contains only one strategic group when all sellers approach the market
with essentially identical strategies.
 At the other extreme, there are as many strategic groups as there are competitors when
each rival pursues a distinctively different market approach.
The major home appliance industry, for example, contains three identifiable strategic
groups.
One cluster (composed of such firms as GE, Frigidaire, and whirl pool) produces a full
line of home appliances (refrigerators, freezers, clothes washers and dryers,
dishwashers, stoves, cooking tops, ovens, garbage disposals and microwave ovens).
Employs heavy national advertising, is vertically integrated and has established a
national network of distributors and dealers.
Another cluster consists of premium quality, specialist firms (like Amana in
refrigerators and freezers, Maytag in washers and dryers, Kitchen Aid in dishwashers,
Jenn-Air in cooking tops) that focus on high-price market segments and have selective
distribution.
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A third cluster, consisting of firms like Roper, Design and Manufacturing ,and
Hardwick, concentrates on supplying private label retailers and budget-priced, models
for the low end of the market.
A strategic group map is constructed by plotting the market positions of the industry’s
strategic groups on a two-dimensional map using two strategic variables as axes (see the retail
jewellery industry example in Illustration Capsule 9).
The map serves as a convenient bridge between looking at the industry as a whole and
considering the standing of each firm separately.
The method for constructing a strategic group map and deciding which firms belong in which
strategic group can be summarized as follows:



Identify the broad characteristic that differentiates firms in the industry from one
another.
Plot the firms on a two-variable map using pairs of these differentiating characteristics.
Assign firms that fall in about the same strategy space to the same strategic group.
Draw circles around each strategic group, making the circles proportional to the size of
the group’s respective share of total industry sales revenues.
There are five important guidelines to observe in trying to map the relative competitive
positions of firms in the industry’s overall “strategy space”.
First, the two variables selected as axes for the map should not be highly correlated; if they
are, the circles on the map will fall along a diagonal, rendering one of the variables useless.
For example, if companies with broad product lines use multiple distribution channels while
companies with narrow lines use a single distribution channel, then a map based on the
number of distribution channels and product line breadth will fail to identify anything more
about the relative competitive positioning of rivals than would just one of the variables by
itself.
Second, the best strategic variables to choose as axes for the map are those which expose big
differences in how rivals have positioned themselves to compete against one another in the
marketplace.
This of course requires identifying the characteristics that differentiate rivals items from one
another and then using these differences (a) as variables for the axes on the map and (b) as the
basis for deciding which firm belongs in which strategic group.
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Third, the variables used as axes need not be either quantitative or continuous; rather, they can
be discrete variables or defined in terms of distinct classes and combinations (as turned out to
be the case in Illustration Capsule 9).
Fourth, drawing the sizes of the circles on the map proportional to the combined sales of the
firms in each strategic group allows the map to reflect the relative sizes of each strategic
group.
Fifth, if there are more than two good strategic variables that can be used as axes for the map,
then several maps can be drawn to give difference exposures to the competitive positioning
relationships present in the industry structure.
Because there need not be one best map for portraying industry structure and strategic
positioning, it is advisable to experiment with different pairs of strategic variables.
Strategic group analysis adds to the picture of “what life is like” in the industry:
1. Industry trends often have different implications for different strategic groups.
It is worth studying each industry trend to explore (a) whether the trend is closing off
the viability of one or more strategic groups and, if so, where competitors in the
affected groups may try to shift: (b) whether the trend will raise or lower the entry
barriers into a group and the degree to which competitive pressures in the group will be
increased or decreased: and (c) how the companies in each group will otherwise be
affected by the trend and their probable response to it.
2. The profit potential of firms in different strategic groups often varies because of
strengths and weaknesses in each group’s market position. strategic group maps helps
pinpoint those firms whose position is tenuous or marginal; firms in marginal groups
are candidates for exit or for launching attempts to move into another strategic group.
3. Entry barriers vary according to the particular strategic group that an entrant seeks to
join (some strategic groups are easier to enter than others).
4. Firms in different strategic groups often enjoy differing degrees of bargaining leverage
with suppliers and/or with customers, and they may also face differing degrees of
exposure to competition from substitute products outside the industry.
5. Greater numbers of strategic groups generally increase competitive rivalry in an
industry because of the possibility for both intergroup and intragroup competition.
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If there are strong indications that certain strategic groups (or specific firms) are trying to
change their positions in the strategy space on the map, then attaching arrows to the circles
showing the targeted direction enhances the picture of industry structure.
The Concept of Driving Forces
While mapping an industry’s structure has analytical benefit, any such picture tells only part of
the story about industry conditions.
Except in the rarest of cases, every industry is in a state of constant flux- forces of change are
constantly at work and new ones are usually gathering steam.
One popular hypothesis about how industries change is that they often go through observable
evolutionary phases or life-cycle stages.
The sequence of stages is usually; early development, rapid growth and takeoff, competitive
shake-out and consolidation, early maturity, saturation, and decline and decay.
Whether industries will actually evolve in orderly sequence according to the life cycle
hypothesis is debatable.” many do, but some do not.
There are cases where industries have skipped maturity, passing from rapid growth to decline
very quickly.
Sometimes growth reoccurs after a period of decay (this occurred in the radio broadcasting,
bicycle, and motorcycle industries).
Sometimes the paths of different industries collide, causing them to reform and merge as one
industry (this is now occurring among banks savings and loan associations, and brokerage
firms, which were in distinctly separate industries but are now reforming into a single financial
services industry).
And sometimes the growth phase of the cycle can be lengthened by product innovation.
Because of these facets, it is difficult to predict when the “usual” cycle pattern will hold, when
it will not, and how long the phases will last.
Hence, while it is worthwhile to diagnose where an industry is in the life cycle, it is equally
fruitful to identify what forces are at work causing important changes in the industry
landscape.
Industries evolve because forces are in motion that creates incentives or pressures for change.
The most dominant of these forces are called driving forces because they have the strongest
influence on what kind of changes will take place in the industry’s structure and environment.
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The Kinds of Driving Forces and How They Work
There are numerous types of driving forces with power to produce strategically relevant
changes in an industry:
Changes in the long-term industry growth rate.
Increases or decreases in industry growth are powerful variables in the investment decisions of
existing firms to expand capacity.
A strong upsurge in growth frequently attracts new firms to enter the market, and a shrinking
market often causes some firms to exit the industry.
Upward or downward shifts in industry growth are a force for industry change because they
affect the balance between industry supply and buyer demand and the intensity of competition.
Changes in who buys the product and how they use it.
Increases or decreases in the kinds of customers who purchase the product have potential for:
o changing customer service requirements (credit, technical services, maintenance, and
repair);
o creating a need to alter distribution channels; and
o precipitating broader/ narrower product lines, increased/decreased capital
requirements, and different marketing practices.
The hand held calculator industry became a different market requiring different strategies
when students and households began to use them as well as engineers and scientists.
The computer industry was transformed by the surge of buyers for personal and home
computers.
Consumer interest in cordless telephones and mobile telephones for use in car and trucks
created a major new buyer segment for telephone for use in the cars and trucks created a major
new buyer segment for telephone equipment manufacturers.
Predictions of industry change should, therefore, include an assessment of potential new buyer
segments and their characteristics.
Product innovation.
Product innovation can:
o broaden demand,
o promote entry into the industry,
141
o enhance product differentiation among rival sellers, and
o impact manufacturing methods, economies of scale, marketing costs and practices, and
distribution.
Industries in which product innovation has been a key driving force include copying
equipment, cameras and photographic equipment, computers, electronic videogames, toys
prescription drugs, soft drinks (sugar-free and caffeine-free), beer (low-calorie) and
cigarettes (low-nicotine).
Process innovation
Frequent and important technological advances in manufacturing methods can dramatically
alter unit costs, capital requirements, minimum efficient plant sizes, the desirability of vertical
integration, and learning curve effects process innovation can alter the relative cost positions
of rival firms and change the number of firms of cost-efficient size the market can support.
Marketing innovation.
From time to time firms opt to market their products in new ways that spark a burst of buyer
interest, widen demand, increase product differentiation, and /or lower unit costs, thus setting
in motion new forces which alter the industry and the competitive positions of participant
firms.
Entry or exit of major firms.
When an established firm from another industry enters a new market, it usually brings with it
new ideas and perceptions about how its skills and resources can be innovatively applied; the
outcome can be a “new ball game” with new rules for competing and new key players.
Similarly, the exit of a major firm changes industry structure by reducing the number of
market leaders (perhaps increasing the dominance of the leaders who remain) and causing a
rush to capture the former customers of the exiting firm.
Diffusion of proprietary knowledge.
As a technology becomes more established and knowledge about it spreads through the
conduits of rival firms, suppliers, distributors, and customers, the advantage held by firms with
proprietary technology erodes.
This makes it easier for new competitors to spring up and, also, for suppliers or customers to
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integrate vertically into the industry.
Except where strong patent protection effectively blockades the diffusion of an important
technology, it is likely that rapid diffusion of proprietary knowledge will be an important
driver of industry change.
Changes in cost and efficiency
In industries where new economies of scale are emerging or where strong learning curve
effects cause unit costs to decline, large firm size and production experience become distinct
advantages, causing all firms to adopt volume-building strategies a “race for growth” emerges
as the driving force.
Likewise, sharply rising costs for a key ingredient input (either raw materials or necessary
labour skills) can cause a scramble to either (a) line up reliable supplies of the input at
affordable prices or else (b) search out lower-cost substitutes.
Moving from a differentiated to a commodity product emphasis (or Vice Versa).
Sometimes growing numbers of buyers decide that a standard “one-size fits-all” product with a
bargain price meets their requirements just as effectively as do premium priced brands offering
a broad choice of styles and options.
Such a swing in buyer demand can be a driver of industry change, shifting patronage away
from sellers of more expensive, differentiated products to sellers of cheaper commodity
products and creating a strongly price-oriented market focus- a feature and literally can
dominated the industry landscape and limit the strategic freedom of industry participants.
On the other hand, a shift away from standardized products occurs when sellers are able to win
a bigger and more loyal buyer following by bringing out new performance features, making
style changes
3.5 The importance of environmental influences
3.6 An analysis of the total business environment, the nature and consequences of industrial
and the technological changes.
3.7 The economy
3.8 Technology
3.9 Social factors.
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3.10
3.11
3.12
4
Political and legal considerations
The effect of market and industry structure.
The product and market life circle.
DEVELOPING AND EVALUATING STRATEGIC OPTIONS
4.5 STRATEGIC DECISION MAKING.
The distinguishing characteristic of strategic management is its emphasis on strategic
decision making.
As organizations grow larger and more complex with more uncertain environments,
decisions become increasingly complicated and difficult to make.
We propose a strategic decision-making framework that can help people make these
decisions regardless of their level and function in the corporation.
WHAT MAKES A DECISION STRATEGIC
Unlike many other decisions, strategic decisions deal with the long-run future of the entire
organization and have 3 characteristics:
1. Rare: Strategic decisions are unusual and typically have no precedent to follow.
2. Consequential: Strategic decisions commit substantial resources and demand a great deal
of commitment from people at all levels.
3. Directive: Strategic decisions set precedents for lesser decisions and future actions
throughout the organization.
MINTZBERG’S MODES OF STRATEGIC DECISION MAKING
Some strategic decisions are made in a flash by one person (often an entrepreneur or a
powerful chief executive officer) who has a brilliant insight and is quickly able to convince
others to adopt her idea.
Other strategic decisions seem to develop out of a series of small incremental choices that
over time push the organization more in one direction than another.
Mintzberg states that the 3 most typical approaches or modes of strategic decision making are
entrepreneurial, adaptive, and planning.
A fourth mode, logical incrementalism, was added later by Quinn.
The Entrepreneurial Decision-making Mode
Strategy is made by one powerful individual.
The focus is on opportunities; problems are secondary.
Strategy is guided by the founder’s own vision of direction and is exemplified by large, bold
decisions.
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The dominant goal is growth of the corporation.
The Adaptive Decision-making Mode
Sometimes referred to as “muddling through”, this mode is characterized by reactive
solutions to existing problems, rather than a proactive search for new opportunities.
Much bargaining goes on concerning priorities of objectives.
Strategy is fragmented and is developed to move the corporation forward incrementally.
This mode is typical of most universities, many large hospitals, a large number of
governmental agencies, and a surprising number of large corporations.
The Planning Decision-making Mode
This mode involves the systematic gathering of appropriate information for situation
analysis, the generation of feasible alternative strategies, and the rational selection of the
most appropriate strategy.
It includes both the proactive search for new opportunities and the reactive solution of
existing problems.
Logical Incrementalism
This mode can be viewed as a synthesis of the planning, adaptive and, to a lesser extent, the
entrepreneurial modes.
In this mode, top management has a reasonably clear idea of the corporation’s mission and
objectives, but, in its development of strategies, it chooses to use “an interactive process in
which the organization probes the future, experiments and learns from a series of partial
(incremental) commitments rather than through global formulations of total strategies.
Thus, although the mission and objectives are set, the strategy is allowed to emerge out of
debate, discussion, and experimentation.
This approach appears to be useful when:
 the environment is changing rapidly and
 when it is important to build consensus and develop needed resources before
committing the entire corporation to a specific strategy.
STRATEGIC DECISION-MAKING PROCESS: AID TO BETTER DECISIONS
It is proposed that in most situations the planning mode, which includes the basic elements of
the strategic management process, is a more rational and thus better way of making strategic
decisions.
Research indicates that the planning mode is not only more analytical and less political than
are the other modes, but it is also more appropriate for dealing with complex, changing
environments.
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Thus, the following 8-step strategic decision-making process is proposed to improve the
making of strategic decisions:
 Evaluate current performance results in terms of
(a) return on investment (ROI), profitability, etc. and
(b) the current mission, objectives, strategies and policies.
 Review corporate governance, i.e. the performance of the firm’s board of directors
and top management.
 Scan and assess the external environment to determine the strategic factors that pose
Opportunities and Threats.
 Scan and assess the internal corporate environment to determine the strategic
factors that are Strengths (especially core competencies) and Weaknesses.
 Analyze strategic (SWOT) factors to
(a) pinpoint problem areas, and
(b) review and revise the corporate mission and objectives as necessary.
 Generate, evaluate and select the best alternative strategy in light of the analysis
conducted in step 5.
 Implement selected strategies via programmes, budgets and procedures.
 Evaluate implemented strategies via feedback systems and the control of activities to
ensure their minimum deviation from plans.
This rational approach to strategic decision making has been used successfully by many
reputable corporations all over the world.
It is also the basis for the Strategic Audit.
4.5.1 CREATING SUSTAINABLE ADVANTAGES.
We say that a company has a competitive advantage when its profit rate is higher than the
average for its industry.
And a company has a sustained competitive advantage when it is able to maintain this high
profit rate over a number of years.
Profit rate is normally defined as some ratio, such as return on capital employed (ROCE).
The profit rates of a number of companies are shown relative to the mean ROCE earned by
all companies active in the industry.
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Two basic conditions determine a company’s profit rate and hence whether it has a
competitive advantage:
 First, the amount of value customers place on the company’s goods or services.
 Second, the company’s costs of production.
In general, the more value customers place on a company’s products, the higher the price the
company charges for those products.
Note, however, that the price a company charges for a good or service is typically less than
the value placed on that good or service by the customer.
This is so because the customer captures some of that value in the form of what economists
call a consumer surplus.
The customer is able to do this because the company is competing with other companies for
the customer’s business, so the company must charge a lower price than it could were it a
monopoly supplier.
Moreover, it is normally impossible to segment the market to such a degree that the company
can charge each customer a price that reflects that individual’s assessment of the value of a
product, which economists refer to as a customer’s reservation price.
For these reasons, the price that gets charged tends to be less than the value placed on the
product by many customers.
This suggests that a company has high profits, and thus a competitive advantage, when it
creates more value for its customers than do rivals.
Thus, the concept of value creation lies at the heart of competitive advantage.
We can depict this scenario diagrammatically as follows:
Value Creation
V – P = Consumer surplus
P – C = Profit margin
V
P
C
C
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V = Value to consumer
P = Price
C = Costs of production
V – P = Consumer Surplus
P – C = Profit Margin
V – C = Value created
The company makes a profit so long as P > C, and its profit rate will be greater the lower
C is relative to P.
The difference between V and P is in part determined by the intensity of competitive
pressures in the marketplace.
The lower the intensity of competitive pressure, the higher the price that can be charged
relative to V.
The value created by a company is measured by the difference between V and C, i.e.
V – C.
A company creates value by converting inputs that cost C into a product on which
consumers place a value of V.
A company can create more value for its customers either by:
o Lowering C or
o Making the product more attractive through superior design, functionality,
quality, etc. so that consumers place a greater value on it (V increases) and,
consequently, are willing to pay a high price (P increases).
The above figure shows how a company’s profit rate is jointly determined by the price it
can charge for its products and by its cost structure.
Superior value creation does not necessarily require a company to have the lowest cost
structure in an industry or to create the most valuable product in the eyes of consumers.
But it does require that the gap between perceived value (V) and costs of production (C)
be greater than the gap attained by competitors.
Porter has argued that low cost and differentiation are two basic strategies for creating
value and attaining a competitive advantage in an industry.
According to Porter, competitive advantage (and higher profits) goes to those companies
that can create superior value.
And the way to create superior value is to:
o drive down the cost structure of the business and/or
o differentiate the product in some way so that consumers value it more and are
prepared to pay a premium price.
Thus, Competitive Advantage = Value Creation + Low Cost + Differentiation
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The Strategic Decision-Making Process
Scan & Assess
External
Environment:
 Societal
 Task
Evaluate
Current
Performance
Results
Examine and
Evaluate the
Current:




Mission
Objectives
Strategies
Policies
Review
Corporate
Governance:
 Board of
Directors
 Top
Management
Scan &
Assess
Internal
Environment:
 Structure
 Culture
 Resources
Analyze
External
Factors:
 Opport
unities
 Threats
Externa
l
Factors:
Select
Strategic
Factors
(SWOT) in
Light of
Current
Situation

Review &
Revise as
Necessary:
 Mission
Objectives
Generate
&
Evaluate
Strategic
Alternatives
Select &
Recomme
nd Best
Alternative
Implement
Strategies:
 Programs
 Budgets
 Procedures
Evaluate
and
Control
Analyze
Internal
Factors:
 Strengths
 Weaknesses
Strategy Formulation: Steps 1-6
Strategy
Implement
ation:
Step 7
Evaluation
& Control:
Step 8
The Generic Building Blocks of
Competitive Advantage
Superior Quality
Superior
Efficiency
COMPETITIVE
ADVANTAGE
 Low cost
 Differentiation
Superior
Innovation
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Superior Customer
Responsiveness
THE GENERIC BUILDING BLOCKS OF COMPETITIVE ADVANTAGE
Four factors build competitive advantage: efficiency, quality, innovation and customer
responsiveness.
They are the generic building blocks of competitive advantage that any company can
adopt, regardless of its industry or the products or services it produces.
All these blocks are highly interrelated: superior quality can lead to superior efficiency,
while innovation can enhance efficiency, quality and customer responsiveness.
Efficiency
A company is a device for transforming inputs into outputs.
Inputs are basic factors of production such as labor, land, capital, management, and
technological know-how.
Outputs are the goods and services that a company produces.
The simplest measure of efficiency is the quantity of inputs that it takes to produce a
given output:
Efficiency = Outputs / Inputs
The more efficient a company, the fewer the inputs required to produce a given output.
Thus, efficiency helps a company attain a low-cost competitive advantage.
The most important component of efficiency for many companies is employee (labour)
productivity, which is usually measured by output per employee.
Labour productivity = Output / Number of employees
Holding all else constant, the company with the highest employee productivity in an
industry will typically have the lowest costs of production.
In other words, that company will have a cost-based competitive advantage.
To achieve high productivity, a company must adopt the appropriate strategy, structure
and control systems.
Quality
Quality products are goods and services that are reliable in the sense that they do the job
they were designed for and do it well.
The impact of high product quality on competitive advantage is twofold.
First, providing high-quality products increases the value of those products in the eyes of
consumers.
In turn, this enhanced perception of value allows the company to charge a higher price for
its products.
Second, high quality brings about greater efficiency and lower unit costs.
Less employee time is wasted making defective products or providing sub-standard
services, and less time has to be spent fixing mistakes, which translates into higher
employee productivity and lower unit costs.
Thus, high product quality lets a company not only charge higher prices for its product
but also lower its costs.
The importance of quality in building competitive advantage has increased dramatically
in recent years that it has now become an imperative for survival.
The Impact of Quality on Profits
Increased
reliability
Higher prices
Increased
quality
Higher
profits
Increased
productivity
Lower
costs
Innovation
Innovation can be defined as anything new or novel about the way a company operates or the
products it produces.
Innovation includes advances in the kinds of products, production processes, management
systems, organizational structures, and strategies developed by a company.
Innovation is perhaps the single most important building block of competitive advantage.
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In the long run, competition can be viewed as a process driven by innovation.
Although not all innovations succeed, those that do can be a major source of competitive
advantage because, by definition, they give a company something unique, something its
competitors lack (until they imitate the innovation).
Uniqueness can allow a company either to differentiate itself from its rivals and charge a
premium price for its product or to reduce its unit costs far below those of competitors.
By the time competitors succeed in imitating the innovator, the innovating company had built up
such strong brand loyalty that its position proves difficult for imitators to attack.
Customer Responsiveness
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4.6 Evaluating the strategic situations.
4.7 Developing and evaluating strategic alternatives
DEVELOPING BUSINESS-LEVEL STRATEGY OPTIONS
In many prescriptive approaches to strategy development, it is usual to define the
purpose of the organization and then develop a range of strategy options that might
achieve that purpose.
After developing the options, a selection is made between them.
This section is concerned with the options development part of this sequence at the
level of individual businesses and markets.
The following section then considers options at the corporate level of those companies
that are involved in a number of diverse markets.
Then we analyze the organization’s environments and its resources.
Before embarking on an exploration of the strategic options that emerge from this study,
it is useful to summarize the situation.
One approach is to produce an analysis of the organization’s strengths and weaknesses
and explore the opportunities and threats that connect it with the environment – this is
often called a SWOT analysis.
In addition, such analysis might be supported by a consideration of such issues as
vision, innovation and technology.
In addition to these considerations, most organizations would also draw up summary of
the main elements of the organization’s purpose as starting point for options
development.
To develop the strategic options, both rational and more imaginative processes can be
used.
Inevitably because of the difficulty of modeling imagination, strategic research papers
and books tend to concentrate on the more rational aspects, which are easier to outline,
structure and study.
Although we concentrate on the more rational approaches, we acknowledge the
importance of the creative process in options generation.
We begin the options development process by exploring the competitive environment
through three rational strategic routes: generic strategies, market options and expansion
methods.
We then turn to the organization’s own resources and explore another three rational
areas: the value chain, the resource-based view and cost cutting options.
Importantly, there are considerable cross-linkages between the competitive
environment and resource-bases routes: the market environment considers the
resources of competitors and the company’s own resources need to be considered in
the context of its competitors.
In theory, there are a very large number of options available to any organization,
probably more than it can cope with.
Developing Business Strategy Options
155
Coupled with a
more ideas-based
approach that is
difficult to model
SWOT Analysis
Key Elements of
Organization’s Purpose
Environmentbased Options:
Resourcebased Options:
 Generic Strategies
 Market Options
 Expansion Methods
 Value Chain
 Resourcebased view
 Cost reduction
Identify Major Options
Choose between
options:
Prescriptive
Perhaps keep
options open:
Emergent
PURPOSE AND THE SWOT ANALYSIS – CONTRIBUTION OF KENNETH
ANDREWS
As a starting point for the development of strategic options, Andrews first identified the
importance of connecting the organisation’s purpose – its mission and objectives – with
its strategic options and subsequent activities.
The interdependence of purposes, policies, and organized action is crucial to the
particularity of an individual strategy and its opportunity to identify competitive
advantage.
156
Andrews went on to argue persuasively that the rational analysis of the possibilities
open to organization was an essential part of strategy development.
As a starting point in developing options, it is useful to summarize the current position
using a SWOT analysis of the organization.
SWOT is an analysis of the strengths and weakness present internally in the
organization, coupled with the opportunities and threats that the organization
faces externally.
This approach follows from the distinction drawn by Andrews between two aspects of
the organization:
 Strengths and weaknesses – resource-based analysis
 Opportunities and threats – environment-based analysis
Each analysis will be unique to the organization for which it is being devised, but some
general pointers and issues can be drawn up.
These are indicated in the table below, which provides a checklist of some possible
factors.
In devising a SWOT analysis, there are several factors that will enhance the quality of
the material:
o Keep it brief – pages of analysis are not usually required.
o Relate strengths and weaknesses, wherever possible, to industry key factors for
success.
o Strengths and weaknesses should also be stated in competitive terms, if
possible. It is reassuring to be ‘good’ at something, but it is more relevant to be
‘better than the competition’.
o Statements should be specific and avoid blandness – there is little point in stating
ideas that everyone believes in.
o Analysis should distinguish between where the company wishes to be and
where it is now. The gap should be realistic.
o It is important to be realistic about the strengths and weaknesses of one’s own
and competitive organizations.
SOME POSSIBLE FACTORS IN A SWOT ANALYSIS
INTERNAL
Strengths
Weaknesses
 Market dominance
 Share weakness
 Core strengths
 Few core strengths and low on key skills
 Economies of scale
 Old plant with higher costs than competition
 Low-cost position
 Weak finances & poor cash flow
 Leadership and management skills
 Management skills & leadership lacking
 Financial and cash resource
 Poor record on innovation and new ideas
157
 Manufacturing ability & age of equipment  Weak organization with poor architecture
 Innovation processes & results
 Low quality and reputation
 Architecture network
 Products not differentiated and dependent
on few products
 Differentiated products
 Product or service quality
EXTERNAL
Opportunities
Threats
 New markets & segments
 New market entrants
 New products
 Increased competition
 Diversification opportunities
 Increased pressure from customers &
suppliers
 Market growth

Substitutes
 Competitor weakness
 Low market growth
 Strategic space
 Economic cycle downturn
 Demographic & social change
 Change in political or economic  Technological threat
environment
 Change in political or economic environment
 New
takeover
or
partnership  Demographic change
opportunities
 New international barriers to trade
 Economic upturn
 International growth
Environment- Based Options: Generic Strategies- The Contribution of Porter
Generic strategies are the three basic strategies of cost leadership, differentiation and
focus (sometimes called niche) open to any business.
Porter’s contribution was based on earlier work in industrial economics, exploring how
firms compete.
Porter made the bold claim that there were only three fundamental strategies that any
business could undertake-that is why he called them generic.
158
During the 1980s, they were regarded as being at the fore front of strategic thinking.
Arguably, they still have a contribution to make in the new century in the development of
strategic options.
However, strategists concentrating on the resource-based view now regard generic
strategies as being largely historic.
The Three Generic Competitive Strategies: The Three Options
Porter argued that there were three basic, i.e. generic, strategies open to any business:
1. Cost leadership
2. Differentiation
3. Focus
According to the theory, every business needs to choose one of these in order to
compete in the market place and gain sustainable competitive advantage.
Each of these three strategic options represents an area that every business and many
not-for-profit organizations can usefully explore.
The three options can be explained by considering two aspects of the competitive
environment.
1. The source of competitive advantage. There are fundamentally only two sources
of competitive advantage.
These are differentiation of products from competitors and low costs.
2. The competitive scope of the target customers. It is possible to target the
organization’s products as a broad target covering most of the market place or to
pick a narrow target and focus on a niche within the market.
Porter then brought these two elements together in the famous diagram below.
Generic Strategic Options
Competitive Advantage
Lower Cost
Cost leadership
Competitive Scope
Broad Target
159
Differentiation
Differentiation
Focus
Narrow Target
Porter later modified the concept to split the niche sector into:


Niche differentiation.
Niche low-cost leadership.
The figure above is sometimes shown in this modified form.
Low-cost leadership
The low-cost leader in an industry has built and maintains plant, equipment,
labour costs and working practices that deliver the lowest costs in that industry.
The essential point is that the firm with the lowest costs has a clear and possibly
sustainable competitive advantage.
However, in order to cut costs, a low-cost producer must fine and exploit all the sources
of cost advantage.
Low-cost producers typically sell a standard, or no-frills, product and place considerable
strategic emphasis on reaping scale or absolute cost advantages from all sources.
In practice, low-cost leaders achieve their position by shaving costs off every element of
the value chain – the strategy comes from attention to detail.
McDonald’s Restaurants achieves its low costs through standardized products,
centralized buying of supplies for a whole country and so on.
The profit advantage gained from low-cost leadership derives from the assertion that
low-cost leaders should be able to sell their products in the market place at around the
average price of the market.
If such products are not perceived as comparable or their performance is not acceptable
to buyer, accost leader will be forced to discount prices below completion in order to
gain sales.
Compared with the low-cost leader, competitors will have higher costs.
After successful completion of this strategy option, the costs of the lowest-cost producer
will be lower by definition than those of other competitors.
This will deliver above average profits to the low-cost leader.
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To follow this strategy option, an organization will place the emphasis on cost
reduction at every point in its processes.
Cost leadership does not necessarily imply a low price: the company could charge an
average price and reinvest the extra profits generated.
Differentiation
Differentiation occurs when the products of an organization meet the needs of some
customers in the market place better than others.
When the organization is able to differentiate its products, it is able to charge a price
that is higher than the average price in the market place.
Underlying differentiation is the concept of market segmentation, which is explored later.
Market segmentation is the identification of specific groups who respond
differently from other groups to competitive strategies.
Essentially, some customers will pay more for a differentiated product that is targeted
towards them.
Examples of differentiation include better levels of service, more luxurious materials and
better performance.
McDonald’s is differentiated by its brand name and its ‘Big Mac’ and ‘Ronald McDonald’
products and imagery.
Another example can be taken from the European ice cream industry.
The Mars Ice Cream range is clearly differentiated by its branding and its consequent
ability to charge a premium price.
In order to differentiate a product, Porter argued that is necessary for the producer to
incur extra costs, for example, to advertise a brand and thus differentiate it.
The differentiated product costs will therefore be higher than those of competitors.
The producer of the differentiated product then derives an advantage from its pricing:
with its uniquely differentiated product it is able to charge a premium price, i.e. one that
is higher than its competitors.
There are two problems associated with differentiation strategies:
1. it is difficult to estimate whether the extra costs incurred in differentiation can be
recovered from the customer by charging a higher price.
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2. The successful differentiation may attract competitors to copy the differentiated
product and enter the market segment.
There are often costs associated with being first into a market, so there may be
additional cost advantages from moving in second – for example, other
companies have followed McDonald’s and Mars Ice Cream.
Neither of the above problems is insurmountable but they do weaken the attractiveness
of this option.
Focus strategy (sometimes called niche strategy)
Sometimes, according to Porter, neither a low-cost leadership strategy nor a
differentiation strategy is possible for an organization across the broad range of the
market.
For example, the costs of achieving low-cost leadership may require substantial funds
which are not available.
Equally, the costs of differentiation, while serving the mass market of customers, may
be too high: if the differentiation involves quality, it may not be credible to offer high
quality and cheap products under the same brand name, so a new brand name has to
be developed and supported.
For these and related reasons, it may be better to adopt a focus strategy.
A focus strategy occurs when the organization focuses on a specific niche in the
market place and develops its competitive advantage by offering products
especially developed for that niche.
Hence the focused strategy selects a segment or group of segments in the industry and
tailors its strategy to serve them to the exclusion of others.
By optimizing its strategy for the targets, the focuser seeks to achieve a competitive
advantage in its target segments, even though it does not possess a competitive
advantage overall.
Porter has later on argued that the company may undertake this process either by using
a cost leadership approach or by differentiation:

In a cost focus approach a firm seeks a cost advantage in its target segment
only.
162

In a differentiation focus approach a firm seeks differentiation in its target
segment only.
The essence of focus is the exploitation of a narrow target’s differences from the
balance of the industry.
By targeting a small, specialized group of buyers it should be possible to earn higher
than average profits, either by charging a premium price for exceptional quality or by a
cheap and cheerful low-price product.
For the European ice cream market, examples would be:


differentiation focus – super premium ice cream segment;
Cost focus – economy ice cream segment.
In the global car market, Rolls-Royce and Ferrari are clearly niche players – they have
only a minute percentage of the market worldwide.
Their niche is premium product and premium price.
There are some problems with the focus strategy, as follows:



By definition, the niche is small and may not be large enough to justify attention.
Cost focus may be difficult if economies of scale are important in an industry
such as the car industry.
The niche is clearly specialist in nature and may disappear over time.
None of these problems is insurmountable. Many small and medium-sized companies
have found that this is the most useful strategic area to explore.
The danger of being stuck in the middle
Porter concluded his analysis of what he termed the main generic strategies by
suggesting that there are real dangers for the firm that engages in each generic strategy
but fails to achieve any of them – it is stuck in the middle.
A firm in this position
will compete at a disadvantage because the cost leader, differentiators, or
focuser will be better positioned to compete in any segment…. such a firm will be
much less profitable than rivals achieving one of the generic strategies.
Comment on Porter’s generic strategies
163
Hendry and other have set out the problems of the logic and the empirical evidence
associated with generic strategies that limit its absolute value.
We summarize them follows:
Low-cost leadership





If the option is to seek low-cost leadership, then how can more than one
company be the low-cost leader? It may be a contradiction in terms to have an
option of low-cost leadership.
Competitors also have the option to reduce their costs in the long term, so how
can one company hope to maintain its competitive advantage without risk?
Low-cost leadership should be associated with cutting costs per unit of
production. However, there are limitations to the usefulness of this concept.
They will also apply here.
Low-cost leadership assumes that technology is relatively predictable, if
changing. Radical change can so alter the cost positions of actual and potential
competitors that the concept may have only limited relevance in fast-changing,
high-technology markets.
Cost reductions only lead to competitive advantage when customers are able to
make comparisons.
This means that the low-cost leader must also lead price reductions or
competitors will be able to catch up, even if this takes some years and is at lower
profit margins.
But permanent price reduction by the cost leader may have a damaging impact
on the market positioning of product or service that will limit its usefulness.
Differentiation



Differentiated products are assumed to be higher priced. This is probably too
simplistic. The form of differentiation may not lend itself to higher prices.
The company may have the objective of increasing its market share, in which
case it may use differentiation for this purpose and match the lower prices of
competitors.
Porter discusses differentiation as if the form this will take in any market will be
immediately obvious.
The real problem for strategy options is not to identify the need for differentiation
but to work out what form this should take that will be attractive to the customer.
Generic strategy options throw no light on this issue whatsoever.
164
They simply make the dubious assumption that once differentiation has been
decided on it is obvious how the product should be differentiated.
Competitive scope



The distinction between broad and narrow targets is sometimes unclear. Are
they distinguished by size of market? If the distinction between them is unclear
then what benefit is served by the distinction?
For many companies, it is certainly useful to recognize that it would be more
productive to pursue a niche strategy, away from the broad market of the market
leaders. That is the easy part of the logic.
The difficult part is to identify which niche is likely to prove worthwhile. Generic
strategies provide no useful guidance on this at all.
As markets fragment and product life cycles become shorter, the concept of
broad targets may become increasingly redundant.
Stuck in the middle
As was pointed out above, there is now useful empirical evidence that some companies
do pursue differentiation and low-cost strategies at the same time.
They use their low costs to provide greater differentiation and then reinvest the profits to
lower their costs even further companies such as Benetton (Italy), (Japan) and BMW
(Germany) have been cited as examples.
Resource-based view
We earlier explored the arguments supporting this view of strategic analysis.
They also apply to strategy options and suggest that options based on the uniqueness
of the company rather than the characteristic of the industry are likely to prove more
useful in developing competitive strategy.
But the resource-based view does undermine much of Porter’s approach.
Fast-moving markets
In dynamic markets such as those driven by new internet technology, the application of
generic strategies wills almost certainly Miss Major new market opportunities. They
cannot be identified by the generic strategies approach.
Conclusions
165
Given these criticisms, it might be concluded that the concept of generic strategies has
no merit.
However, as long as it is treated only as part of a broader analysis, it can be a useful
tool for generating basic options in strategic analysis.
It forces exploration of two important aspects of strategic management: the role of cost
reduction and the use of differentiated products in relation to customers and
competitors.
But it is only a starting point in the development of such options.
When the market is growing fast, it may provide no useful routes at all.
More generally, the whole approach takes a highly prescriptive view of strategic action.
Environment-based strategic options: The Market options Matrix
The market options matrix identifies the product and market options available to the
organization, including the possibility of withdrawal and movement into unrelated
markets.
The distinction is drawn between markets, which are defined as customers, and
products, which are defined as the items sold to customer.
Thus, for example, one customer could buy several different products, depending on
need.
The market options matrix examiners the options available to the organization from a
broader strategic perspective than the simple market/product matrix (called in some
texts as the Ansoff matrix).
Thus the market options matrix not only considers the possibility of launching new
products and moving into new markets, but explores the possibility of withdrawing from
market and moving into unrelated markets.
Nevertheless, the format is based on product/market options.
The foundation in ‘product/market options’ suggests that such options are primarily at
the business level of the organization.
In practice, some options may need to be considered at the corporate level in an impact
on other areas of the business and also make it more difficult for the group in total to
employ core competencies, block competitive moves, etc. such decisions will need to
be decided on a case by case basis.
Each of the strategic options is now considered in turn.
Withdrawal
166
It may seem perverse to begin the consideration of market options with the possible
strategy of withdrawing from them.
But strategy must always consider the unpredictable if it is to develop competitive
advantage.
There are number of circumstances where this option may have merit, for example.

Product life cycle in decline phase with little possibility of retrenchment. In the
context of global TV, the time will come in the next 20 years (or sooner) when
digital TV channels will take over from analogue broadcasts and all the old
products will simply be scrapped.

Overextension of product range which can only be resolved by withdrawing some
products.
In television, some of the many channels now being offered may have such small
audiences that they do not justify even the minimal expense of keeping them
operating.

Holding company sales of subsidiaries.
Such companies often see their subsidiary companies, perhaps in diverse
industries, as being little more than assets to be bought and sold from the market
for reasons associated with finance, ability to link with other stations, change of
corporate objectives, etc.

Raise funds for investment elsewhere.
Organizations may be able to sell the asset they are planning to withdraw from
the market.
Even without a sale, the working capital and management time devoted to the
asset might be redeployed to other more productive uses.
Government owned companies faced with restrictions on outside funds might
regard withdrawal and sale as a useful strategy here.
Demerger
In a sense, this is a form of withdrawal from the market, but it has a rather specialist
meaning with some attractive implications.
For some companies whose shares are openly traded on the stock exchange, the value
of the underlying assets may be rather larger that the value implied by the share price.
167
For example, the UK-based chemical company ICI was split into two companies in 1993
by issuing two sets of shares to its existing shareholders.
The shares of the two companies were then separately traded on the London Stock
Exchange at a greater value than when they had been combined.
The reason was that part of the company’s product range was in basic and specialist
chemicals.
A separate part was in agro chemicals, the latter being highly attractive to stockholders.
ICI was demerged, with the first part keeping the name ICI and the second part taking
the name company Hoechst – have followed a similar strategy.
This strategy has been used increasingly to realize the underlying asset values in
publicly quoted companies.
It also has the benefit that companies with totally unrelated market activities allow each
part to focus on its own activities without competing for scarce resources.
It has the disadvantage that it may destroy the benefits of size, cross-trading and
uniqueness of a large company.
Privatization
In many countries around the world, there has been a trend to privatize governmentowned companies – that is, to sell the company’s shares into private ownership.
This has become a major option for some institutions.
For example, many national telecommunications companies have now been privatized,
except in the USA, where they have always been in the private sector.
The results in terms of management style, public accountability, and ownership and
strategy changes have been substantial.
The changes in the product range, levels of service and public perceptions have also
been significant.
Market penetration in the existing market
Without moving outside the organization’s current range of products or services, it may
be possible to attract customers from directly competing products by penetrating the
market.
Market penetration strategy should begin with existing customers.
A direct attack on competing customers invites retaliation that can nullify the initial gains
and erode the company’s profit margins.
168
Retaining an existing customer is usually cheaper, especially in consumer goods
markets.
Car companies such as Toyota and BMW make great efforts to retain customers when
the change cars.
If a direct attack is to be mounted on a competitor in order to penetrate the market, it is
likely to be more effective if a combination of activities is mounted – for example, an
improvement in product quality and levels of service along with promotional activity.
Clearly, this is likely to be more expensive in the short term but should have benefits in
the long run in terms of increased market share.
News Corporation satellite operations regularly combine new TV channels with
advertising and special deals on decoders as part of its strategy to penetrate the
market.
Market penetration may be easier if the market is growing.
The reason is that existing customer loyalties may be less secure and new customers
entering the market may still be searching for the most acceptable product.
The most attractive strategy in these circumstances will vary with the company’s market
share position:

Existing companies with low relative market share in a growing market have little
to lose from aggressively attacking the market or a segment of it.
For example, the smaller burger king (Grand Metropolitan, UK) has attacked
McDonald’s hard over the last few years with some success.

Existing companies with a high relative market share in a growing market have
potentially an attractive position which might be lost.
Predatory price cutting is a strategy something employed to keep out the smaller
new entrants.
It will work well and move the company down the experience curve, as long as it has
the production capacity.
This strategy has been employed by Intel to launch new-generation computer chips
and hold off the smaller new entrants such as Cyrix and AMD (all US companies).
169
Market development using existing products
For this strategic route, the organization moves beyond its immediate customer focus
into attracting new customers for its existing product range.
It may seek new segments of the market, new geographical areas or new uses for its
products or services that will bring in new customers.
Expansion to bring totally new customers to the company for its existing products could
easily involve some slight repackaging and then promotion to a new market segment.
It will often involve selling the same product in new international markets – there are
many examples of such a strategy throughout this book.
Using core competencies and a little ingenuity, it may be possible to find new uses for
existing products.
For example, the pharmaceutical company Glaxo (UK) has sought to develop the
markets for its anti-ulcer drug Zantac as markets have matured in Western Europe and
North America.
Thus it has marketed the product to an increasing range of countries and it has also
developed a lower-strength version to be sold without prescription as a stomach remedy
in place of antacid remedies.
Product development for the existing market
We refer here to significant new product developments, not a minor variation on an
existing product.
There are a number of reasons that might justify such a strategy:





to utilize excess production capacity;
to counter competitive entry;
to exploit new technology;
to maintain the company’s stance as a product innovator;
to protect overall market share.
Understanding the reason is key to selecting the route that product development will
then follow.
170
Probably the area with the most potential is that associated with innovation: it may
represent a threat to an existing product line or an opportunity to take market share from
competition.
Sometimes product development strategies do not always fall neatly into an existing
market.
They often move the company into markets and towards customers that are not
currently being served.
This is part of the natural growth of many organizations.
Diversification: Related Markets
When an organization diversifies, it moves out of its current products and markets into
new areas.
Clearly, this will involve a step into the unknown and will carry a higher degree of
business risk.
However, the organization may minimize this risk if it moves into related markets.
(Related here means a market that has some existing connection with its existing value
chain).
It is usual to distinguish three types of relationship based on the value chain.
1. Forward integration. A manufacturer becomes involved in the activities of the
organization’s output such as distribution, transport, logistics – for example, the
purchase of glass distributors by Europe’s two leading glass manufacturers, St
Gobain (France) and Pikington (UK).
2. Backward integration. The organization extends its activities to those of its
inputs such as its suppliers of law materials, plant and machinery – for example,
purchase by the oil company EIf (France ) of oil drilling interests in the North Sea.
3. Horizontal integration. The organization moves into area immediately related
to its existing activities because either they complementary – for example, the
acquisition by BMW (Germany) of the UK car company Rover in 1994.
News Corporation has engaged in forward integration by purchasing cable and satellite
channels to deliver TV programmes directly to customers.
It has integrated backgrounds into film production companies.
It has undertaken horizontal integration by extending the range of its activities from
newspapers to books, TV and electronic media.
Synergy is the main reason given for such activities.
171
It means essentially that the whole is worth more than the sum of the parts; the value to
be generated from owning and controlling more of the value chain is greater because
the various elements support each other.
This concept is relatively easy to understand but rather more difficult to analyze
precisely.
This means that it is difficult to assess its specific contribution to strategic management.
It is related to the concept of linkages in the value chain and is probably best assessed
using these concepts.
Diversification: Unrelated Markets
When an organization moves into unrelated markets, it runs the risk of operating in
areas where its detailed knowledge of the key factors for success is limited.
Essentially, it acts as if it were a holding company.
Some companies have operated such a strategy with success, probably the best known
being Hanson plc (UK, but with strong interests in the USA) and General Electric (USA).
The logic of such an expansion is unlikely to be market-related, by definition, since the
target market has no connection with the organization’s current areas of interest.
There are two reasons why the strategy may have some merit:
1. There could be other connections in finance with the existing business that could
justify such expansion.
2. There may be no connection but the diversification could still be operated
successfully if the holding company managed such a venture using tight but clear
financial controls.
Clearly, such strategies are directly related to the discussion on strategic parenting.
However, it should be pointed out that unrelated diversification is not popular at present:
it flies against the evidence and logic of the resource-based view.
Comment
The Market Options matrix is a useful way of structuring the options available.
However, it does not in itself provide many useful indicators of which option to choose in
what circumstances.
Thus its value lies in structuring the problem rather than solving it.
The main strategic insights come from the possibilities that it raises to challenge current
thinking by opening up the debate.
172
Such routes may involve the expenditure of some funds on new product development
research, advertising and related matters.
Hence, the options are more likely to be favoured by those organizations with significant
financial resources.
Many of the options are more by those organizations with significant financial resources.
Many of the options are more likely to be considered by profitable companies, rather
than those attempting to recover from substantial losses.
However, by disposing of some assets, market-based options may actually raise funds
and provide greater freedom of action for those remaining in the organization.
Typically, these might include the sale of parts of companies.
The market options matrix may be more appropriate in the commercial, non-government
owned sector because state companies are usually set up to fill a specific role with little
room for development beyond this definition.
Environment-Based Strategic Options: The Expansion Method Matrix
Definition The expansion method matrix explores in a structured way the methods
by which the market opportunities associated with strategy options might be achieved.
By examining the organisation’s internal and external expansion opportunities and its
geographical spread of activity, it is possible to structure the various methods that are
available.
For example, launching a new product could be done using an existing company or an
acquisition, merger or joint venture with another firm.
Acquisitions
Probably the most important reason for this method of market expansion is that
associated with the particular assets of the company: brands, market share, core
competencies and special technologies may all represent reasons for purchase.
Acquisitions may also be made for competitive reasons.
In a static market, it may be expensive and slow to enter by building from the beginning.
For example, in the slow-growing coffee market, Philip Morris/Kraft General Foods has
made a series of company purchases to add to its Maxwell House brand: Cafe Hag and
Jacobs Coffee.
173
In fast-growing markets, acquisitions may be the means to acquire presence more
rapidly.
For example, the purchase of the Biogen Company by Roche (Switzerland) moved the
Swiss company at a stroke from its traditional drugs market into the totally new area of
biomedical sciences.
Mergers
Mergers are similar to acquisitions in the sense of two companies combining.
However, mergers usually arise because neither company has the scale to acquire the
other on its own.
This has the potential benefit of being more friendly but requires special handling if the
benefits are to be realised.
In other respects, it is similar to an acquisition in terms of the main strategic issues.
Joint ventures and Alliances
A joint venture is the formation of a company whose shares are owned jointly by two
parent companies.
It usually shares some of the assets and skills of both parents.
Cereal Partners Inc. is a 50/50 joint venture between Nestle and General Mills (USA)
whose purpose is to attack Kellogg's breakfast cereals around the world except in North
America.
An alliance is some form of weaker contractual agreement or even minority
shareholding between two parent companies.
It usually falls short of the formation of a separate subsidiary.
Several of the European telecommunications companies have built alliances as the
basis for international expansion.
Franchise
A franchise is a form of licensing agreement in which the contractor provides the
licensee with a pre-formed package of activity.
It may include a brand name, technical service expertise and some advertising
assistance.
Payment is usually a percentage of turnover.
McDonald's Restaurants are among the best-known franchises.
174
International options
In spite of the publicity on some occasions across Europe, acquisitions are relatively
infrequent outside the UK and North America.
They are also used sparingly in many countries of South-East Asia and in Japan.
There are two main reasons: shares are more openly traded in Anglo-Saxon countries
than in parts of Europe and Asia, where bank and government holdings are more
important; and there is a stronger tradition in some countries of interlocking
shareholdings that makes outright acquisition difficult, if not impossible.
Beyond this basic issue, the greater degree of global trading has made options that
might have applied in a few Western countries now available around the world.
There are two that have some importance for overseas operations:
1
Turnkey. A contractor who has total responsibility for building and possibly
commissioning large-scale plant.
Payment can take many forms.
2
Licensing. Technology or other assets are provided under licence from the home
country.
Payment is usually by royalty or some other percentage of turnover arrangement.
More generally, overseas expansion for many companies may take the form of the following
sequence:





Exporting as a possible first expansion step.
An overseas office may then be set up to provide a permanent presence.
Overseas manufacture can take place, but this dearly increases the risk and exposure
to international risks such as currency.
Multinational operations may be set up to provide major international activity.
Global operations may be introduced. The distinction from multinational operations lies
in the degree of international commitment and, importantly, in the ability to source production and raw materials from the most favourable location anywhere in the world.
There are various risks and opportunities associated with all the above operations.
Probably the most important of these is currency variation - that is, the difficulty of trading in
currencies that are volatile and may cause significant and unexpected losses.
Comment
175
The expansion method matrix suffers from the same disadvantage as the previous matrix Let it
is useful at structuring the options but offers only limited guidance on choosing between them.
Finally, there is further coverage of the main expansion methods in the next chapter on
strategic management options; the reason is that in practice many of such options are
driven from the centre of large companies rather than at the individual business level.
RESOURCE-BASED STRATEGIC OPTIONS: THE VALUE CHAIN
The development of strategy options based on resource considerations is reasonably
well established.
Market is only growing slowly or because the organisation itself has very limited re For
example, public sector organisations with limitations placed on their resources
government may find that resource-based options provide more scope than
environment opportunities.
Identifying sources of value added: upstream and downstream
Value can be added early in the value chain, i.e. upstream, and later in the value
downstream.
Examining where and how value can be added by the resources of the isation will
generate strategic options.

Upstream activities are those that add value early in the value chain. Such activities
include procurement of raw materials and the production processes. To add v
it is useful to buy in bulk and make few changes to the production process, thing
costs low and throughput constant. This is assisted if the organisation pr
standardised items. Upstream value is added by low-cost efficient production
and process innovations, such as those described in Chapter 7. Value is also a
efficient purchase of raw materials and other forms of procurement.

Downstream activities are those that add value later in the value chain. These may
rely on differentiated products for which higher prices can be charged. Such.
Variations may mean stopping the production line and making changes, which extra
costs. The resources may also involve elements of advertising or specialised to
promote the differentiated items. Downstream value is also added by reseal
development, patenting, advertising and market positioning.
The value chain can itself be associated with upstream and downstream activities
Figure 8.1l.
176
Many organisations are, of course, involved in adding value both upstream and
stream. For example, News Corporation would clearly have resources in the do", part
because its magazines and books are targeted at specific groups of customers.
It would also use largely undifferentiated newspaper and printing inks to produce
products, which would be located upstream.
Finding resource-based options: architecture, reputation and innovation
Essentially the resource-based view argues that organisations need some form of
distinctiveness over competitors. In seeking out options, one method would be to test
our resources against the criteria of architecture, reputation and innovation." This would
focus the process in terms of both current resources and those needed for the future.
For example using these three concepts, we can specify the ways in which News
Corporation has beer. developing in this area:
The network of relationships and contracts both within and around the organisation: the
architecture. News Corporation has built a range of companies that are all focused in
the areas of news, sport and entertainment. They make the company quite distinctive
from Disney or Time Warner. This is clearly an asset that the company has developed.
he favourable impression that News Corporation has generated with its customer
reputation. Again, News Corporation has developed a clear image in this area, based
on newspapers in particular. Its aggressive, open and iconoclastic style has set it apart
from its rivals. This is clearly an asset of the organisation.
The organisation's capacity to develop new products or services: innovation. Several
examples of the innovative ability of News Corporation are recorded in Case 8.4. This
may we cover core competencies as well as resource assets at the company.
Finding resource-based options - core competencies
Core competencies are defined as a group of skills and technologies that enable an
organisation to provide a particular benefit to customers." We explored them in Chapter
6 ~ can use them again here to guide the development of strategy options. Options that
Strategic options based on the resource-based view
Beyond the two areas outlined above, there are no detailed structures to conduct such
an examination because every organisation is different. It will be necessary to survey
each of the functional areas of the organisation for their resources. The aim of such an
exercise is to explore those areas for their contribution to value added and competitive
advantage.
The checklist presented in Exhibit 8.3 has been prepared to assist the search for key
resource options. However, such a list is not without its strategic dangers - readers are
177
referred to the comments on SWOT analysis at the beginning of the chapter for a
discussion. Moreover, a mechanistic combination of resources would miss the important
issue that unique resources may derive from the tacit knowledge of the organisation.
Such knowledge is unlikely to be discovered by a checklist
DEVELOPING BUSINESS-LEVEL STRATEGY OPTIONS
some markets, it is quite possible that low-wage-settlement countries such as Thailand,
Malaysia and the Philippines will provide real competition. This will mean that companies are unable to survive in Western countries unless they can cut costs drastically.
Cost reduction strategy options therefore need to be considered. The main routes to
cost reduction are:

Designing in cost reduction. In some industries, large cost reductions come not
from activity in the production plant, but before the product ever reaches the factory. By
carefully designing the product - for instance, so that it has fewer parts or is simpler to
manufacture - real reductions in costs can be achieved.

Supplier relationships. If a supplier is willing and able to maintain quality and
reduce costs, then the organisation will achieve a cost reduction.

Economies of scale and scope. For a large plant, unit costs may fall as the size
of the plant increases. It may also be possible for different products to share some
functional costs.

The experience curve. As a company becomes more experienced at production,
it may be able to reduce its costs.

Capacity utilisation. Where plant has a high fixed cost, there may be cost
reductions to be obtained by running production as close to capacity as possible.
Designing in cost reduction
In some cases, up to 70 per cent of the cost of manufacturing a product is determined at
the design stage - that is, before the product ever reaches the factory." The reason is
that it is at the design stage that major savings can be made on components, plant and
procedures. It is more difficult to make them once products have reached the factory
floor because of the inflexibility of installed machinery and the high cost of changing
over time.
In addition, efficiency in the design procedures themselves has become an important
element in the process. It can take years to design some products, with all the
consequent costs involved. If time can be saved, this reduces the cost of the process.
For example, Renault Cars (France) announced a new design and development facility
in 1995 costing US$1.22 billion." The aim was to reduce design time from 58 months to
38 months for a new car launch in the year 2000. The facility's current cost per car was
between US$l billion and US$5 billion, depending on the model: this would be reduced
by US$200 million per model simply by producing each design more quickly.
178
Supplier relationships
Both in manufacturing and service industries, one of the ways of reducing costs is by
negotiating cost reductions with suppliers to the organisation. This can be undertaken in
one of two ways."
1 Closer relationships with suppliers. As used by Toyota, this will involve sharing
technical and development information in order to lower the cost of the finished product.
It implies closer co-operation over many years, often with a small number of key
suppliers. Inevitably, some of the value added is passed from the manufacturer to the
supplier. However, it can help to drive down costs overall and raise quality.
More distant relationships with suppliers. This will involve aggressive negotiating to
obtain the lowest possible price for an agreed specification. For example, Saab Cars (partowned by General Motors) actually telephoned its suppliers of car mirrors twice a day for two
weeks requesting lower quotes before deciding." In this case, supplier relationships are at
arm's length and obtain the lowest prices.
There is some recent evidence that the first of the two options above is becoming the
preferred strategy.
higher volume production allows unit costs to be reduced. When it is possible to perform
an operation more efficiently or differently at large volumes, then the increased
efficiency may result in lower costs. Economies of scale can lead to lower costs - for
example, in major petrochemical plants and in pulp and paper production.
Economies of scale need to be distinguished from capacity utilisation of plant. In the
latter case, costs fall as the plant reaches capacity but would not fall any further if an
even larger plant were to be built. With economies of scale, the larger plant would lead
to a further cost reduction. Savings that occur when Definition. Economies of scope
are the extra cost savings that are available as a result of separate products sharing
some facilities. An example might be those products that share the same retail outlets
and can be delivered by the same transport. Economies of scale are also available in
areas outside production. They may occur in areas such as:


Research and development. On some occasions, only a large-scale operation
can justify special services or items of testing equipment.
Marketing. Really large companies are able to aggregate separate advertising
budgets into one massive fund and negotiate extra media discounts that are
simply not available to smaller companies.
scale are the extra cost Distribution. Loads can be grouped and selected to
maximise the use of carrying capacity on transport vehicles travelling between
fixed destinations.
In the analysis of resources, economies of scale are a relevant area for analysis.
It is important to make an assessment for at least one leading competitor if
possible. Factors to search for will include not only size of plant, but also age and
179
efficiency of equipment. Although writers such as Porter" are clear about the
basic benefits of economies of scale and scope, real doubts have been
expressed about the true reductions in costs to be derived from them - see for
example, Kay.38 The doubts centre on the argument that larger plant will have
lower costs. When Henry Ford built his massive new Baton Rouge car plant in
the 1930s, he was driven by this view. In practice, he encountered a number of
problems." They included:

machine-related issues - the increased complexity and inflexibility of very large
plant;
scale and scope
Definition.. Economies of human-related issues - the increasingly depersonalised and
mechanistic nature of work in such plant, which made it less attractive or interesting for
workers to perform to their best ability.
Although there were other management problems associated with the relative failure of
this plant, some of the major reasons lay in the above areas. In the 1990s, large-scale
steel plant was held up as providing lower costs, but new technologies have now
allowed much smaller-scale operations to make the same profits.
The competitive advantage of large plant is lost if the market breaks into segments that
are better served by higher-cost plants that produce variations on the basic item which
more directly meet customers' needs. Car markets and consumer electronics markets
are examples where, respectively, four-wheel-drive vehicles and specialist hi-fi systems
are not the cheapest in terms of production but meet real customer demand.
THE STRATEGY
Economies of
The conclusion has to be that economies of scale have their place but are only part of a
broader drive for competitive advantage.
Using the experience curve effect
Definition. The experience curve is the relationship between the unit costs of a product
and the total units ever produced of that product, plotted in graphical form, with the units
being cumulative from the first day of production.
PART 3 • DEVELOPING
In the 1960s, a large number of unrelated industries were surveyed in terms of their
costs and the cumulative production ever achieved: it is important to understand that
this is cumulative production ever achieved, not just the production in one year. It was
shown that an empirical relationship could be drawn between a cost reduction and
180
cumulative output. Moreover, this relationship appeared to hold over a number of
industries, from insurance to steel production. It appeared to show dramatic reductions
in costs: typically, costs fall by 15 per cent every time overall output doubles. It is shown
in Figure 8.12. The relationship was explained by suggesting that, in addition to
economies of scale, there were other cost savings to be gained - for example through:



technical progress;
greater learning about the processes;
greater skills from having undertaken the process over time.
The cost experience concept can be seen at both the company level and the
industry level.


At the company level, the market leader will, by definition, have produced
cumulatively more product than any other company. The leader should have the
lowest costs and other companies should be at a disadvantage.
At the industry level, costs should fall as the industry overall produces more.
Every company should benefit from knowledge that is circulated within its
industries.
When comparisons are drawn across different and unrelated industries, the similarities
in the cost-curve relationship are remarkable for industries as far apart as aircraft
manufacture and chicken broiler production. But there are few, if any, broad lessons for
strategic management. As Kay points out." the only similarity between aircraft and
chickens is that they both have wings. There may be an apparent relationship in that the
cost-curves look similar, but the causes are entirely different. Hence, the strategy
implications are entirely different. Aircraft production is essentially global - see Case
14.3. Chicken production relies largely on national markets and requires somewhat less
sophisticated technology and totally different forms of investment from aircraft
manufacture and assembly. It is essential to consider the concept of experience curves
within an industry only.
Even within an industry, there are ways of overcoming experience curve effects, the
most obvious being by new technology. Another way would be to entice an employee of
a more experienced company to join the organisation. As Abernathy and Wayne" point
out, there are real limits to the benefits of the experience curve:
PART 3 • DEVELOPING THE STRATEGY



Market demand in market segments for a special product change or varia - easily
be met: to achieve scale, production flexibility may have to be sacrifice;
Technical innovation can overtake learning in a more fundamental way: a ne"
may radically alter the cost profile of an existing operation.
Demand needs to double for every significant proportionate cost reduction. where growth is still present but slowing down, this is only possible if an everket
181
share is obtained. As market share becomes larger, this becomes progress;
difficult and expensive to achieve. In a static market where a company already cent market share, this becomes logically impossible.
Within a defined market, the experience curve may suggest a significant reduction, but it
is not always a key source of cost advantage.
Capacity utilisation
Definition ~ Capacity utilisation is the level of plant in operation at any time, usually
express; cent age of total production capacity of that plant. In the global iron and steel
inc.; cussed in Chapter 3, we saw an example of the cost benefits to be gained by full - of plant capacity. But we also saw how companies cut their prices as they scramc their
plant, thus reducing their profit margins. High-capacity utilisation is useful on
competitors allowing such activity to take place, which may weaken its effect.
8.7.6 Structured process to achieve cost reduction options
We explored the basic issue of cost reduction above. However, Ohmae has suze model
which structures this process in a logical and cross-functional way. It des examined for
its implications in this area, and is shown in Figure 8.13. Overall, does not pretend to be
comprehensive but rather to show the options that are possible; logical flow and the
interconnections between the various elements. For exam Corporation over the last five
years has emphasised the need to cut costs in order -competitive. It has introduced
various programmes to achieve this.
PART 3 • DEVELOPING THE STRATEGY
1
2
3
Employ outside advisers such as consultants. This can be expensive but is proc
appropriate where particular specialist skills are needed. Outside resources are -temporarily.
Concentrate resources on particular tasks that are more likely to yield added
value and C(JI:" tive advantage. The problem here is that other areas of the
organisation are ine : neglected. Correct choice of the selected area is therefore
vital. For these reas resources are often concentrated on a segment or niche of
the market that is like, bring long-term benefit. The limited resources are focused.
Offer superior service. This can be an area where smaller companies can win
against 1 competitors. By being unencumbered by the slow decision making of
large comp smaller organisations can react faster and more flexibly to customers.
This may _ justify slightly higher prices than the larger competitors. Resource
strategies here involve extra training and possibly even the hiring of extra service
staff in some
8.8.2 Resources in not-for-profit organisations
182
These vary from the small charitable organisation to large government-funded instituti
They need to be considered separately.
Charitable organisations
. These have two unique areas of resource:
1 Beliefs. These drive the organisation forward in terms of the charitable purpose. means that everyone is likely to be highly motivated. It is a real resource in terms
of work that people are prepared to undertake on occasions.
2 Voluntary workers. These people can put exceptional effort into the enterprise
and take major tasks. However, because of the voluntary nature, such a resource
needs handled with care. People can become demotivated. Some need to be
given a gres, degree of freedom than would be appropriate in a commercial
organisation.
Government-funded institutions
These often have highly professional resources but may be strongly bureaucratic. The
ture of such organisations needs to be taken into account in devising resource opti
Resources may be large and unwieldy and slow to respond to outside events.
SUMMARY


In the prescriptive strategy process, the development of strategic options is an
important part of the strategic process. Essentially, it explores the issue of what
options are available to the organisation to meet its defined purpose. Although
rational techniques are usually employed to develop the options, there is a need
in practice to consider generating creative options from many sources. This
chapter has concentrated on the more rational techniques because they are
more suited to analysis and development.
There are two main routes to options development: market-based and resourcebased approaches. These correspond to the analytical structure of the earlier
part of the text. Within the market-based approach, there are three main routes:
183
generic strategies, market options and expansion methods. Each of these can
usefully be considered in turn.

According to Porter, there are only three fundamental strategic options available
to any organisation - he called them generic strategies. The three options are:
1. cost leadership, which aims to place the organisation amongst the lowest-cost
producers in the market;
2
differentiations, which is aimed at developing and targeting a product that is
different in some significant way from its competitors in the market place;
3 focus, which involves targeting a small segment of the market. It may operate by
using a low-cost focus or differentiated focus approach.
According to the theory, it is important to select between the options and not to be
'stuck in the middle'. Some influential strategists have produced evidence that has
cast doubt on this point. There have been numerous criticisms of the approach
based on logic and empirical evidence of actual industry practice. Undoubtedly,
these comments have validity, but generic strategies may represent a useful starting
point in developing strategy options.
 By examining the market place and the products available, it is possible to
structure options that may be possible for organisations to adopt: the overall
structure is called the market options matrix. The matrix represents a method of
generating options but provides
DEVELOPING THE STRATEGY
No guidance on choosing between them. The main strategic in sights come from the
sibilities that it raises to challenge the current thinking by opening up the debate.

The expansion method matrix explores in a structured way the methods by which
options might be achieved. By examining the organisation's internal and external
sion opportunities and its geographical spread of activity, it is possible to
structure various methods that are available.

In addition to the market-based options, there is a range of options based 0
resources of the organisation. There are three main approaches to the
development of options: the value chain, the resource-based view and cost
reduction. Each of approaches may be useful in options development.
184
1 Value can be added early in the value chain, upstream, or later in the value
chain, stream. Upstream activities add value by processing raw materials into
standardised products. Downstream strategies concentrate on differentiated
products, targeted to specific market segments.
2 The resource-based view argues that each organisation is unique in terms of its
re sour this means that there can be no formula that will identify the strategic
options. How the criteria developed by Kay - architecture, reputation and
innovation - may pr some guidance. In addition, Hamel and Prahalad's core
competencies may also pr some strategic options. A hierarchy of competencies
may be developed to identify develop new competencies in the organisation.
3 Cost reduction options also deserve to be explored. Opportunities exist in many
Organisations to reduce the costs incurred by the resources of the organisation.
There are main opportunity areas for cost reduction: designing in cost reductions,
supplier relationships, economies of scale and scope, the experience curve and
capacity 'utilisati
Some specific types of organisation need special consideration in the development
options:
1
Small businesses are unlikely to contain the range of resources of larger enterp
However, this problem can be overcome by employing outside advisers and
concencing resources. More flexible service may provide a real competitive
advantage.
2
Charitable organisations benefit from exceptional resources: the beliefs that drive
the ety and the use of voluntary workers. However, they may need to give such
people freedom to keep them motivated.
4 Government institutions have highly professional resources but may be
bureaucratic their approach. Resources may be unwieldy and slow to respond to
events.
CORPORATE-LEVEL STRATEGY: THE BENEFITS AND COSTS OF DIVERSIFYING
Corporate level strategy is important because multi-business corporations are major
contributors to all the economies of the leading nations of the world. In the USA and
Western Europe, such corporations account for around 60 per cent of industrial output.
Even in the developing countries, I groups' are becoming widespread as the means of
generating output.' Such businesses may be multinational in their scope in the sense
185
that they have significant operations outside their home countries: this certainly applies
to both GE and Siemens in Case 9.1. But the important point here is that such
companies are usually also multiproduct companies with a diversified portfolio of
business interests. Hence, whether in one main country or in many, the largest
contributors to economic growth are the multi business corporations, all of whom will
need a corporate-level strategy.
In a multi-product companies, each of the subsidiaries will have a large or a limited trading connection with another part of the group. For example at GE, the consumer finance
division will have only limited connections with the media division because these
divisions have few common customers and resources. By contrast at GE, the consumer
and industrial division may have some common interest with the energy division
because they both have common industrial customers.
In multi-product companies, each subsidiary will have its own resources, its own
markets and therefore its own business strategy: for example, the resources in the
media division at GE include the NBC Television studios; the resources at the GE
consumer finance division include the network contacts with banks and other financial
institutions. Above these subsidiaries, the enterprise will have a corporate headquarters,
where corporate-level strategy options are generated.' For example, the headquarters of
GE is located in Bridgewater, Connecticut, USA, from where it directs worldwide
operations. The corporate activity of such a headquarters will include:





the selection of businesses to be part of the group;
the management and leadership of each
business within the group;
the selection, incentivisation and motivation of senior managers in each
business;
the resources to be allocated by the centre to individual businesses.
Corporate strategy options are concerned with the maximisation of value added and the
additional competitive advantage contributed by the central headquarters of the group of
companies. Importantly, the corporate headquarters must add value to the group if it is
to justify its existence.
The benefits of corporate-level strategy diversification
By definition, multi-business companies are those trading in more than one market,
each with its relatively autonomous and discrete operating companies: such operations
are diversified. Opinions on the benefits of diversification have changed quite markedly
over the past 30 years. It used to be said that being involved in a series of unrelated
industries meant that the risks of overall failure were lower because the upswing in one
market - such as healthcare at GE - would counterbalance any downswing in another
186
market - such as transportation in the same company.' In addition, it was also argued
that basic technological linkages between some diversified companies meant that they
could provide mutual technical support: see the 3M Case in Chapter 8 for an example of
this approach. At one stage in the 1960s and 70s, there were corporations with
hundreds of semi-independent subsidiaries." As we will see later in this section, this
scatter-gun approach changed later in the century in Western countries. However, even
today, there are many companies - including South Korean firms like Samsung and
Indian firms like Tata - that still have a broad range of different semi-independent
businesses.
In recent years, the benefits of a corporate strategy have come from the suggestion that
the competitive recourses and strong market position of one division example, it might
be possible to transfer the competitive advantages of one part of the business to
another. One obvious example Virgin Group - see Case 2.4 - where the strong Virgin
brand has been used to support different businesses from cosmetics to airlines.
Corporate strategy benefits can also occur through sharing resources and activities a
range of related businesses within a corporate group. For example, the US consumer
products group Procter and Gamble (P&G) is market leader in both paper towels and in
P babies' nappies (diapers). Both of these products are manufactured from paper that
produced in a P&G joint factory to gain economies of scale and jointly reduce their
costs. In addition, the marketing and sale of both product groups will be conducted
through the same distribution outlets: this means that each business can employ some
of the transport companies and sales networks to gain further cost reductions.
Essentially, separate companies are able to gain the economies of scope that arise
from a P&G corporate strategy.
In addition, there are benefits from corporate strategy associated with economies.
Financial economies are cost savings arise from two sources:
1
Because of the greater size that arises from the combination of all its
subsidiaries, the corporate headquarters may obtain funds at a lower cost of
capital than might be available to an individual subsidiary of the corporation.
2
Because of its position at the centre of the organisation, the corporate
headquarters be in a better position to allocate funds between the competing
individual business thereby make more efficient use of limited financial
resources.
It is the role of the group headquarters to find and then manage the financial and capital
resources of the firm." For example, GE's size and special contacts through its banking
operations - see Case 9.1 - give the GE headquarters access to funds at very low of
interest. This is a real competitive advantage for that group. In addition, the co
headquarters of GE is very active in examining each of its major businesses and all
funds to those that appear to have the best growth prospects.
187
It is also argued that it is beneficial for a group of companies to have a range of ledge,
technical skills and technologies around which to learn and build the corn resources."
For example at GE, each of the divisions is engaged in research and development in its
own areas. But there is also a group headquarters view on research and knowledge
focuses on three areas that are relevant to a number of divisions: environmental issues,
nanotechnology and security safety matters. Such knowledge development is across
the GE group.
In the diversified group, the corporate strategy should earn above-average profits result
of the special contribution of the group's headquarters over and above the tribution of
the individual companies. This means that the diversified firms that up the corporate
group are worth more as part of that group than they would be ~ individually. For
example at GE, the theory suggests that the commercial finance di
is worth more because it is located in the same group as the divisions making turbines
and broadcasting NBC national television programmes across the USA. Some find it
difficult to understand what conceivable benefit could possibly be gained by combining
such diversified elements. But according to corporate strategy theory, benefit possible for example, as we have seen at GE, the corporate headquarters is able to vide access
to cheaper finance and lower capital costs than would be available to individual
companies such as GE's subsidiaries in commercial finance, steam turbines and
television stations.
More generally, the possible benefits of such a central headquarters in a diversified ccan be classified into three main areas: internal, external and financial. These are
marised in Exhibit 9.1.
1
2
3
the size and cost of the headquarters staff;
the complexity and management of the diversified firm;
the lack of a competitive resource-based focus.
The size and cost of headquarters staff
The most obvious disadvantage of operating a diversified firm is the need to employ a
porate headquarters. There have been few formal surveys regarding size but one su
found that there was a 'wide variation in the absolute size of corporate headquarters' .IS
Th., study of 536 corporations found that the numbers of staff in headquarters varied
from
for a company in Chile to 17,100 for a company in Germany. Typically, headquarters s might include general management, legal, financial, reporting and control, and taxation.
The complexity and management of the diversified firm
188
As mentioned earlier, there was a strong belief in diversification in the 1960s in order to
red the risks of being exposed to one business. However during the 1980s, corporations
be to realise that such diversification carried costs associated with the internal
management the diversification strategy. Some of the large corporations were broken
up into their cor; stituent parts, at least in part because they became too complex to
manage." In additi some divisions were worth more as individual businesses than as
part of a corporation - perhzr because the share price of the group was dragged down
by a poorly performing divisi while, in the same group, there were highly profitable
divisions that could be sold individua..:
Complexity can also lead to increased costs across the corporation. Some of these
easily measured such as the bureaucracy associated with reporting periodically to F
However, other costs are less easily measured but equally important: for example, the
nee to gain economies of scope requires a degree of sharing amongst managers that
may no easily achieved; equally, the unequal distribution of resources by the HQ to
subsidiaries lead to conflict if the managers of subsidiaries believe that they are not
being treated fail
The lack of a competitive resource-based focus
During the 1990s, the resource-based view (RBV) of the firm - see Chapter 4 - be
increasingly prominent in strategy development. From a corporate perspective, such
approach suggested that the heavily diversified firm is lacking in competitive focus therefore has few competitive advantages. 18 From this viewpoint, it would be better to
bre up the corporation. On a more positive note, RBV theory also suggests the areas
into a firm might wish to diversify based on its existing strengths.
To summarise the costs and the benefits, we can recall the work of Alfred Chanc on the
centre of the corporation." He argued that the headquarters of multidivisi firms were
primarily engaged in two activities: 'entrepreneurial' to create value for the poration and
'administrative' to prevent losses and ensure efficient resource usaze diversification is to
be justified, then the costs associated with these two areas must be than the benefits of
operating a diversified group.
CORPORATE STRATEGY AND THE ROLE OF THE CENTRE - THE PRINCIPLE OF
PARENTING
Within corporate strategy, it is important that the headquarters itself considers and its
role and relationships with its subsidiaries: for obvious reasons, this is called p some
texts.
The corporate headquarters' role might include the following possible areas:


corporate functions and services such as international treasury management anc
human resource management;
corporate development initiatives, such as centralised R&D and new acquisitions
189



additional finance for growth or problem areas, on the principle of the product s:
outlined in the next section of this chapter;
development of formal linkages between businesses such as the transfer of techn
core competencies between subsidiaries;
detailed comments on and evaluation of the strategies developed by the su;
companies.
For example at News Corporation, the company's leading shareholder and Rupert
Murdoch - is involved in all the leading strategic decisions about subsidence his position
at the group headquarters - see Case 8.4. Beyond this and as an exam: the film library
of the News Corporation subsidiary Twentieth Century Fox is a
its other subsidiaries, including its TV stations in both the USA and the UK. This
operates even though they are operating totally independent schedules and are co
independent companies. In addition, the News Corporation centre is the major p funds
for the main growth areas such as its new internet and media ventures - Wall Street
Journal, etc. - and the new, exclusive sports channels and contracts - Fox
Clearly, such parenting resources are formidable if carefully developed. Ea -- will have
its own combination of resources, depending on its mix of businesses relevant strategic
issues. However, corporate headquarters have a cost. The purpose parenting is to add
value to the subsidiaries that are served, otherwise the parental cost cannot be
justified." Subsidiaries need to perform better with the parent than they would
independently.
Corporate headquarters characteristics
For the full benefits of corporate strategy, it is not enough for the headquarters to
provide a few add-on services. It means developing the core skills of the parent itself;
these are called the corporate or parenting characteristics of the headquarters."
The parent needs three attributes:
1 an understanding of or familiarity with the key factors for success relevant for all of the
diverse industries in which each of its subsidiaries is engaged;
2 an ability to contribute something extra beyond the subsidiaries that it manages these might be from any of the areas identified earlier (e.g. R&D, finance);
3 following from the above two points, an ability to define its HQ role accordingly.
Essentially, if the diversified group is highly related, then HQ has a strong strategy
linking role; if the group is highly diversified, then HQ has a role closer to a banker who
leaves the strategy to the subsidiaries, raises the finance for the group and assesses
the performance of subsidiaries. The next section explains this is in more depth.
Determinants of the size and role of corporate headquarters
There are three principal determinants of the size and role of corporate headquarters in
multi-product corporations’
190
1 The overall size of the group: because larger companies have scale economies
in information processing, the largest corporate groups do not necessarily have
the largest numbers of people in headquarters.
2 The governance system of the group: the shareholding structure will influence
the activities of the HQ and the geographical location of the HQ may also be
important. If there are few shareholders, then there will be no need for an
extensive staff to deal with this. If the group is government owned, then the
evidence suggests that the HQ tends to be larger. Some countries such as Japan
also seem to have larger headquarters than others.
3 The corporate strategy of the group: this is the most important determinant of the
size and role of the HQ. If the group has related diversification - for example,
Unilever in Case 9.3 - then the headquarters typically discusses and actively
influences the strategies of the subsidiaries. The HQ numbers to undertake this
task are high. By contrast, if the group consists of a series of unrelated
companies - such has GE in Case 9.1, then the HQ typically acts more as a
banker and does not engage in detailed strategy discussions. Such activity
requires fewer numbers at HQ and its role is more limited.
To summarise, there is no simple formula to determine the size and role of the
corporate headquarters. Senior directors need to consider precisely what contribution
the headquarters makes to the group as a whole. This will then lead to proposals with
regard to policy, staff numbers and reporting relationships with the subsidiaries. 'The
end result should be a headquarters that delivers on the added-value components of
the chosen corporate strategy, but which may well bear little resemblance to other
superficially similar companies that follow similar strategies.
What are the main activities undertaken by the corporate headquarters?
To explore and define parenting further, we can identify the main tasks typically undertaken by a corporate headquarters. They fall into five areas and are shown in Figure
9.3. Some of these areas have already been explored in Chapter 6 earlier, so are not
pursued further here.
The five main areas of corporate headquarters activity are:
1
Ethics and corporate social responsibility issues: explored in Chapter 6.
2
Stakeholder management and communication, including shareholders: explored
in Che; 3 Control and guidance of subsidiaries: the degree of control will depend
191
on the diversification. If a group is highly diversified, then the control will be
largely financial and profit oriented. If the diversification is closely related, then it
is highly likely the headquarters will engage in discussion with subsidiaries on
topics such as customers and competitive advantage. Both Nokia and Unilever
have closely subsidiaries with strong engagement from the centre, as illustrated
in Cases 9.2
3
Remuneration incentives and people evaluation: for many multi-product groups
and corporations, including GE in Case 9.1, this is a vital role of the
headquarters. Each company have its own approach but any company that
values its employees will regard this.. key topic - certainly true of all the four main
companies in this chapter. This explored in Chapters 12 and 16.
4
Legal and treasury: all companies have legal requirements with regard to tax
and company reporting that must be co-ordinated from the centre. In addition,
many companies will have a treasury function at HQ: the role here is to manage
the cash across the group and to raise new funds for the group, as required.
There is an important strategic ancial element involved here but it is beyond the
scope of this book.
Corporate strategy: decisions about the company’s diversified portfolio of
products
There are good strategic reasons for this: to be reliant on one product or customer
clearly carries immense risks if, for any reason, that product or service should fail or the
customer should go elsewhere.
Decisions on strategy usually involve a range of products in a range of markets – often
referred to as ‘balancing the product portfolio. However, readers will immediately
recognise that this view about diversifying the product portfolio runs totally counter to
the resource based view of strategy development. this was explored in Chapter 4 and
is currently on of the more highly regarded theories of strategy development. Readers
will also know that there are various conflicting views on strategy development: one of
the themes of this book. For the purposes of this chapter, we will accept the premise of
diversification and explore the concept of balancing the product portfolio.
When an organisation has a number of products in its portfolio, it is quite likely that they
will be in different stages of market development: some will be relatively new and some
much order. For example at Nokia in case 9.2, there will be some mobiles that have
been around for some years based on simple and well-proven technology. At the same
time, there will be others based on the latest 3G technology that will have much greater
growth potential but be at an early stage of market development.
Many organisations will not wish to risk having all their products in the same markets
and at the same stages of development: they will follow a strategy of diversification. It is
192
useful to have some products with limited growth but producing profits steadily, as well
as having others that have real potential but may still be in the early stages of their
growth. Indeed, the products that are earning steadily may be used to fund the
development of those that will provide the growth and profits in the future.
According to this argument, the key strategy is to produce a balanced portfolio of
products - some low-risk but dull growth, some higher-risk with future potential and
rewards. The results can be measured in both profit and cash terms. (Cash is used as a
measure here because, both in theory and in practice, it is possible for a company to be
trading profitably and yet go bankrupt. This is because the company is earning
insufficient cash as the profits are being reinvested in growth in the business. It is
important to understand this distinction.) The key strategic issue for corporate
headquarters is how to arrive at this balance based upon the twin needs for new growth
while maintaining current stability: the starting point is product portfolio analysis.
Portfolio analysis was originally suggested by the Boston Consulting Group (BCG) in
the 1970s and, as a result, one version of the approach is known as the BCG portfolio
matrix.
Definition: The portfolio matrix analyses the range of products possessed by an
organisation (its portfolio) against two criteria: relative market share and market
growth. It is sometimes called the growth-share matrix and was subject to a number
of criticisms that are important to understand. Other versions of portfolio matrices were
later developed to overcome weaknesses in the BCG approach - for example, the
directional policy matrix explained in Section 9.4.3. Portfolio analysis is one method of
arriving at the best balance of products within a multi-product company.
The BCG growth-share matrix
This matrix is one means of analysing the balance of an organisation's product portfolio,
the purpose being to produce the best balance of growth versus stable products within a
diversified company. According to this matrix, two basic factors define a product's
strategic stance in the market place:
1
2
relative market share - for each product, the ratio of the share of the
organisation's product divided by the share of the market leaders"
market growth rape - for each product, the market growth rate of the product
category.
Relative market share is important because, in the competitive battle of the market
place, it is advantageous to have a larger share than rivals: this gives room for
manoeuvre, the scale to undertake investment and the ability to command distribution.
Some researchers, such as Buzzell and Gale,28 claim to have found empirical evidence
to support these statements. For example, in a survey of major companies, the two
researchers found that businesses with over SO per cent share of their markets enjoy
rates of return three times greater than businesses with small market shares. There are
other empirical studies that also support this broad conclusion." However, ]acobsen and
193
Aaker'" have questioned this relationship. They point out that such a close correlation
will also derive from other differences in businesses. High market share companies do
not just differ on market share but on other dimensions as well: for example, they may
have better management and may have more luck. However, Aaker himself in a more
recent work" has conceded that portfolios do have their uses, along with their
limitations.
Market growth rate is important because markets that are growing rapidly offer more
opportunities for sales than lower growth markets. Rapid growth is less likely to involve
stealing share from competition and more likely to come from new buyers entering the
market. This gives many new opportunities for the right product. There are also '-however - perhaps the chief being that growing markets are often not as profitable with
low growth. Investment is usually needed to promote the rapid growth and ~ be funded
out of profits.
Relative market share and market growth rate are combined in the growth-share as
shown in Figure 9.6. It should be noted that the term 'matrix' is misleading. T_ the
diagram does not have four distinct boxes, but rather four areas which merge another.
The four areas are given distinctive names to signify their strategic signiE
Definition: Stars. The upper-left quadrant contains the stars: products with high
relative shares operating in high-growth markets. The growth rate will mean that they
heavy investment and will therefore be cash users. However, because they have market
shares, it is assumed that they will have economies of scale and be able to large
amounts of cash. Overall, it is therefore asserted that they will be cash neu assumption
not necessarily supported in practice and not yet fully tested.
Definition: Cash cows/The lower-left quadrant shows the cash cows: product areas
that hz relative market shares but exist in low-growth markets. The business is mature
assumed that lower levels of investment will be required. On this basis, it is - likely that
they will be able to generate both cash and profits. Such profits could transfer to support
the stars. However, there is a real strategic danger here ~ cows become undersupported and begin to lose their market share."
Definition: Problem children. The upper-right quadrant contains the problem children:
prod low relative market shares in high-growth markets. Such products have not yet ~
dominant positions in rapidly growing markets or, possibly, their market share become
less dominant as competition has become more aggressive. The marker means that it is
likely that considerable investment will still be required and their market share will mean
that such products will have difficulty generating substantial Hence, on this basis; these
products are likely to be cash users.
Definition: Dogs. The lower-right quadrant contains the dogs: products that have low
relative market shares in low-growth businesses. It is assumed that the products will
need low investment but that they are unlikely to be major profit earners. Hence, these
two should balance each other and they should be cash neutral overall. In practice, they
194
actually absorb cash because of the investment required to hold their position. There
are often regarded as unattractive for the long term and recommended for disposal.
Overall, the general strategy is to take cash from the cash cows to fund stars and invest
in future new products that do not yet even appear on the matrix. Cash may also be
invested selectively in some problem children to turn them into stars, with the others
being milked or even sold to provide funds for elsewhere. Typically in many
organisations, the dogs form the largest category and often represent the most difficult
strategic decisions. Should they be sold? Could they be repositioned in a smaller
market category that would allow them to dominate that category? Are they really cash
neutral or possibly absorbing cash? If they are cash-absorbers, what strategies might
be adopted?
Clearly the strategic questions raised by the approach have a useful function in the analysis and development of strategy. In Chapter 10, we will examine these further in the
context of strategic choice. Some care needs to be taken in calculating the positions of
products on the matrix and Chapter 10 has a worked example to show how it can be
done.
Difficulties with the BCG growth-share matrix
There are a number of problems associated with the matrix. The most obvious difficulty
is that strategy is defined purely in terms of two simple factors and other issues are
ignored. Further problems include:



The definition of market growth. What is high market growth and what is low?
Conventionally, this is often set above or below S per cent per annum, but there
are no rules.
The definition of the market. It is not always clear how the market should be
defined. It is always possible to make a product dominate a market by defining
the market narrowly enough. For example, do we consider the entire European
steel market, where Usinor would have a small share, or do we take the French
segment only, when the Usinor share would be much higher? This could radically
alter the conclusions.
The definition of relative market share. What constitutes a high relative share and
a low share? Conventionally, the ratio is set at 1.S (the market share of the
organisation's product divided by the market share of market leader's product)
but why should this be so?

Hence, although the BCG matrix has the merit of simplicity, it has some significant
weaknesses. As a result, other product portfolio approaches have been developed.
Other product portfolio approaches - the directional policy matrix
195
In order to overcome the obvious limitations of the BCG matrix, other product portfolio
approaches have been developed. Essentially, rather than relying on the simplistic (but
easily measurable) axes of market growth and market share, the further developments
used rather more comprehensive measures of strategic success. Three examples will
suffice:
1
In the case of the matrix developed by the well-known management consultants
McKinsey, the two matrix axes were market attractiveness and business
competitive strength."
In the case of strategy planners at the major oil company Royal Dutch/Shell, the
matrix axes were called industry attractiveness and business competitive
position:" Shell called its matrix development the directional policy matrix (DPM).
Another very similar matrix was developed around the same time by the large US
con-glomerate General Electric, and is called the strategic business-planning
grid.
2
3
Most of these matrices have much in common, so our exploration is confined to the
DPM. Taking the example of the DPM matrix, the axes for this approach are:
 Industry attractiveness. In addition to market growth, this axis includes market
size, industry profitability, amount of competition, market concentration,
seasonality, cycles of demand, industry profitability. Each of these factors is rated
and then combined into a numerical index. The industry attractiveness of each
part of a multi-product business can be conveniently classified into high, medium
or low.

Business competitive position. In addition to market share, this axis includes the
(T?~-' relative price competitiveness, its reputation, quality, geographic strengths,
cw;tt::::~::::::: market knowledge. Again, the factors are rated and classified into
an index strong, average or weak.
The complete matrix can then be plotted: see Figure 9.7. It will be evident that, organisation has a strong competitive position in an attractive industry, it should invest
further For example, and Unilever has continued to invest worldwide in ice cream, with
acquisitions in the USA, China and Brazil in recent years. Conversely, where a
company has a weak competitive position in an industry with low attractiveness, it
should strongly consider divesting itself of such a product area. For example, Unilever
divested its s:
Chemicals Division in 1997, where it was relatively weak compared with other
companies and the market was subject to periodic downturns in profitability.
Other positions in such matrices suggest other solutions. For example, a strong
competitive position in an industry with low attractiveness might imply a strategy of cash
generation, since there would be little point in investing further in such an unattractive'
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but there would be important cash to be generated from such a strong competitive
In Unilever's case, such a product group might be its oils and fats business, where
strong share in many countries, but the market prospects are not as attractive as in
consumer toiletries business.
All this may seem clear and highly valuable in strategy development. The first s:-:
comes in developing the two axes: for example, exactly how do you develop an in
represents market growth, market size, industry profitability and so on? It can be d
it is time-consuming and, partly at least, dependent on judgement. This means ~ open
to management politics, influence and negotiation rather than the simple ~ process of
the BCG matrix. Beyond this, there are other problems associated with all product
portfolio matrices which are discussed in the next section.
Difficulties with all forms of product portfolio matrices
In spite of their advantages, all such matrices present a number of analytical problems:
 Dubious recommendations. Can we really afford to eliminate dogs when they ma;
common factory overheads with others? Are we in danger of under investing in
\G cash cows and diverting the funds into inherently weak problem children?
Similar questions can be asked about the DPM.
5
Developing the Strategic Plan
5.5 Strategic decision support system.
5.6 Strategic planning systems.
5.7 Planning under risk and uncertainty
5.8 Putting it all together
6
Strategic Implementation and Control
6.5 Implementing strategic planning process
Strategy Implementation
Strategy implementation is the sum total of the activities and choices required for the
execution of a strategic plan.
It is the process by which strategies and policies are put into action through the
development of programmes, budgets, and procedures.
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Although implementation is usually considered after strategy has been formulated,
implementation is a key part of strategic management.
Strategy formulation and strategy implementation should thus be considered as two sides
of the same coin.
Poor implementation has been blamed for a number of strategic failures.
For example, studies show that half of all acquisitions fail to achieve what was expected
of them, and 1 out of 4 international ventures do not succeed.
To begin the implementation process, strategy makers must consider these questions:



Who are the people who will carry out the strategic plan?
What must be done to align the company’s operations in the new intended
direction?
How is everyone going to work together to do what is needed?
These questions and similar ones should have been addressed initially when the pros and
cons of strategic alternatives were analyzed.
They must also be addressed again before appropriate implementation plans can be made.
Unless top management can answer these basic questions satisfactorily, even the best
planned strategy is unlikely to provide the desired outcome.
A survey of 93 Fortune 500 U.S. firms revealed that over half of the corporations
experienced the following 10 problems when they attempted to implement a strategic
change.
These problems are listed in order of frequency.
1. Implementation took more time than originally planned.
2. Unanticipated major problems arose.
3. Activities were ineffectively coordinated.
4. Competing activities and crises took attention away from implementation.
5. The involved employees had insufficient capabilities to perform their jobs.
6. Lower-level employees were inadequately trained.
7. Uncontrollable external environmental factors created problems.
8. Departmental managers provided inadequate leadership and direction.
9. Key implementation tasks and activities were poorly defined.
10. The information system inadequately monitored activities.
Who Implements Strategy?
6.6 Implementing strategic decisions
6.7 Implementing strategic plans
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6.8 Strategy and structure relationships
6.9 Social and political influence
6.10 Strategic control
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