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Advanced management and marketingBook: Fundamentals of Strategy

Management Chapter 1: Introducing strategyFive reasons to care about strategy

1. Strategy is foundational and integrative2. Youd better assess your future employers strategy3. Strategy is part of almost all managers jobs4. And strategy can provide exciting specialist roles5. Finally, youll need strategy to get to the top

Strategy is the direction and scope of an organization over the long term, whichachieves advantage in a changing environment, through its configuration ofresources and competences, with the aim of fulfilling stakeholder expectations.For example Yahoo: Long-term direction = Change at Yahoo requires a marathon no a sprint.Scope = spread too thinly over too many activities. Competitive advantage = Yahoo lacksadvantages over Google. Business environment = active in too many markets. Buildingresources and competences = Yahoo a brand synonymous with internet. Fulfilling values andexpectations of stakeholders = Reluctance at Yahoo to be accountable.

Strategic decisions are complex in nature, made in situations if uncertainty,affect operational decisions, require and integrated approach, involveconsiderable change.

Three levels of strategyCorporate level strategy = Overall purpose and scope of the organization and how value willbe added to the different BUs of the organization.

Business level strategy (SBU) = How to compete successfully in particular markets for goodsand services = competitive strategy

Operational strategy = How the component parts of an organization deliver effectively the strategies in terms of resources processes and people.

Corporate vs. operational strategyOrganization/wide, holistic RoutinisedConceptualization of issues Techniques and actionsCreating new directions Managing existing resourcesDeveloping new resources Operating within existingAmbiguous-uncertain Operationally specificLong term orientation Day to day issues

Business level A strategic business unit is a part of an organization for whichthere is a distinct external market for goods or services that is different fromanother SBU.

VocabularyMission = The overriding purpose of the organization in line with the values andexpectations of stakeholders Be healthy and fitVision/strategic intent = Desired future state = the aspiration Run the NYmarathon

Objective = Quantification or more precise statement of the goal Lose 5 kilos by 1st

September and run NY marathon next year

Strategic capability = Resources, activities and processes of the company.Some may provide competitive advantage Successful diet; training schemeBusiness model = How product, service and information flow betweenparticipating parties Join running club

The 3 key elements of the strategic management model

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Strategic management includes understanding the strategic position of anorganization, making strategic choices for the future and managing strategy inaction.Strategic position Strategic choices Strategy into actionWhere are we? Who dowe serve? Are we reallyflexible or locked-in?

What do we want tobecome? Active in whatcountries? Scope/breathof the firm. Scale, pricing,collaboration.

Make it happen? Strategyimplementation.

A B A BStrategic analysis Strategy formulation Strategy implementationIs Will be Do itIs concerned with theimpact on strategy of:

The externalenvironment (Ch. 2), anorganizations strategic

capability (Ch. 3) and theexpectations andinfluence of stakeholders(Ch. 4 & 5)

Involve understandingthe underlying bases forfuture strategy at boththe business unit (Ch. 6)and corporate levels (Ch.

7 & 8) and the options fordeveloping strategy interms of both thedirections and methodsof development (Ch. 9)

Is concerned withensuring that strategiesare working in practice(Ch. 10)

Management Chapter 2: The environment external analysisWhy investigating the business environment? Diversity, complexity and speed of change.

The world is a village.

Three layers of the business environment

Macro What broad factors impact almost all firms? 2 toolsMeso What are (changes in) the competitive forces? 3 toolsMicro What dominates inner layer of the environment? 4 tools

Macro:PESTEL- Categorizes environmental influences into six main types- The focus is on future impact of environmental factors- Prioritized key drivers of change have differential impact on industries,

markets and organizations- Combined effect of some of the factors likely to be me most important

Political Economic Socio-culturalGovernment stability Business cycles Demographics

Taxation policy Interest rates Income distributionForeign trade regulations Money supply Social mobilitySocial welfare policies Inflation Levels of education

Unemployment Lifestyle changes

Legal

Environmental

Technological

Socio-cultural

EconomicPolitical

Theorganization

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Technological Environmental LegalNew discoveries/developments Sustainability Competition lawSpeed of technology transfer Environmental protection laws Employment lawRates of obsolescence Energy consumption Health and safetyGovernment R&D-spend Waste disposal Product safety and qualityFocus on technological effort

Macro: PESTEL Key driversWhat are the key drivers (for change) ? The macro-environmental factors that arelikely to have a high impact on the success or failure of a strategy.

Macro:ScenariosDetailed and plausible views of how the business environment of an organizationmight develop in the future based on key drivers for change, about which there isa high level of uncertainty.

Meso (industry-level): Static industry structure: Porters five forces modelCompetitive forces in the industry:

- To determines the current attractiveness of an industry.

- Affect the way individual companies compete.- Influence decisions on product/market strategy.

Threats of new entrants (high) / barriers to entry (low)- Scale and experience

- Access to supply and distribution channels- Expected retaliation- Legislation or government action- Differentiation

The power of buyers/suppliers- Are buyers/suppliers concentrated?- What are the costs of switching?- Does backward/forward vertical integration exist?

Degree of competitive rivalry. Competitive rivals are organizations with similarproducts and services aimed at the same customer group = direct competitorsIntensity of rivalry depends on:

- Competitor balance- Industry growth rate- High fixed costs- High fixed barriers- Low differentiation

Meso: Dynamic of competition (over time)Erosion of competitive advantage

- Changes in five forces- Competitors overcoming adverse forces

Cycles of competitive response- When slow: long periods of established pattern of competition built

imitation barriers

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- When fast: hyper competition, constant disequilibrium and change sequence of short-lived moves

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Meso (industry-level): The industry life cycle

Meso (industry-level): Comparative industry structure analysis

Micro: To differentiate competitors via strategic groupsOrganizations within an industry with similar strategic characteristics, followingsimilar strategies or competing on similar bases.

Micro: Uses of strategic group analysis- To understand who are the most direct competitors of an organization- To establish the different bases of competitive rivalry within and between

the strategic groups- To assess if an organization could move from one group to another

o Depends on barriers to entry- Changes in the macro-environment may create strategic space

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Micro: To differentiate customersMarket segments = a group of customers who have similar needs that aredifferent from customer needs in other parts of the marketStrategic customer = the person(s) to whom strategy is primarily addressedbecause they are the most influentialCritical success factors (C/KSF) = those product features particularly valuedby a group of customers, and where the organization must excel to outperformcompetition

Using C/KSF: A strategy canvas. Perceived value in electrical engineering industry

Strategic gaps opportunities and threatsOpportunities in business environment not being fully exploited by thecompetition, e.g.

- In substitute industries- In other strategic groups or strategic spaces- In targeting buyers- For complementary products and services- In new market segments- Markets developing over time

Chapter summary- Environmental influences layers around the organization: Macro, meso

and market segments- PESTEL key drivers of change, alternative scenarios- Porter five forces 2 threats (entry, substitutes), 2 power positions (buyer,

supplier) and rivalry- Also strategic groups, segments, and CSF can help to identify strategic

opportunities and threats

Management Chapter 3: Strategic capability Internal analysisFoundations: Strategic capability

is the ability to perform at the level required to survive and prosper. It isunderpinned by the resources and competences of the organization.

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is the resources and competences of an organization needed for it to surviveand prosper.(insufficient shorthand: Resources, activities and processes of the firm. Some will be unique andprovide competitive advantage.)

Strategic capabilities and competitive advantage

Tangible vs. intangible resourcesPhysical resources

- Machines, buildings, production capacity

Financial resources- Capital, cash, debtors/creditors, suppliers of money

Human resources- Number and mix of people, skills and knowledge

Intellectual capital- Patents, brands, business systems, customer databases, goodwill

What are core competences? The skills and abilities by which resources aredeployed effectively through an organizations activities and processes, such asto achieve competitive advantage in ways that others cannot imitate or obtain.

Components of strategic capabilities

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Key drivers ofcost efficiency

The experience curveThe competences in activities develop over time based on experience, resultingin cost efficiencies.

- Growth may not be optional- Unit costs should decline year on year- First mover advantage, due to accumulated experience

Core competences lead to competitive advantage when they relate to an activity that underpins the value in the product features they lead to levels of performance that are significantly better thancompetitors they are difficult for competitors to imitate

What capabilities might provide competitive advantage?VRIN

V Value: Do capabilities exist that are valued by customers and providepotential competitive advantage?R Rarity: Do capabilities exist that no (or few) competitors possess? Ease oftransferability, sustainability, core rigidities

I Inimitability: Are capabilities difficult for competitors to imitate?N Non-substitutability: Is the risk of capability substitution low? At product/servicelevel by other products or services. At competence level by a different approach

VRIN + dynamic capabilitiesSustainable competitive advantage is achieved by:

- Developing durable strategic capabilities that provide advantage over time

In rapidly changing environments emphasis is placed on:

- Organizational capability to change, innovate, be flexible, adapt and learn = dynamiccapabilities

Diagnosing strategic capability Benchmarking, value chain/networkandSWOT analysis

- What is a value chain? A value chain describes the categories of activitieswithin and around an organization, which together create a product orservice.

- What is a value network? A value network is the set of inter-organizationallinks and relationships that are necessary to create a product or service.(also called supply chain)

- Benchmarking Historical, industry/sector or best-in-class benchmarking

- SWOT:o Summarizes analysis of:

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Business environment: opportunities and threats Strategic capabilities: strengths and weaknesses

o Uses for comparison with competitorso Focuses on future choices and capability of organization to support

them

The strategic analysis

Problems of SWOT analysis- Can generate long lists: need to focus on key issues- Danger of over-generalization: not a substitute for rigorous strategic

analysis- Where to put what?- How to assess them? Never neutral

Chapter summary- Strategic capability adequacy and suitability of resources and

competences required for success- Core competences competitive advantage- Cost efficiency is vital- Dynamic capabilities are important- Methods to diagnose organizational capabilities:

o Value chain and value networkso Benchmarkingo SWOT analysis

Management Chapter 4: Strategic purposeUnderlying issue = whether the strategic purpose of the organization should be

determined in response to a particular stakeholder or to broader stakeholderinterests extreme = to society and the social good.

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Strategic/organizational purposes is expressed by values, mission, vision orobjectives. Why is the company alive? Whats important in this company?Mission = the overriding purpose of the organization in line with the values orexpectations of stakeholders.Vision/strategic intent = desired future state = what the organization aspires tobe.

Influences on strategic purpose- Governance structure- Social responsibility and ethics- Stakeholder expectations

Governance structureTwo generic governance models: shareholder vs. stakeholder modelShareholders are those that have a legitimate claim to the assets/profits of thefirm.The organization is a tradable stream of future cash (financial).

Advantages:- High rate of return- Encouragement of economy- Strategic decisions more objective due separation of ownership and management

Disadvantages:- Managers could be sacrificing shareholder value to pursue their own agendas

- Risk of short termism Decisions to benefit own career due lack of management- Corporate reputation and top management greed give themselves bonuses.

Stakeholders are those individuals or groups who depend on an organization tofulfill their own goals and on whom, in turn, the organization depends.Advantages:

- High risk decisions and investments due employee influence

- Investors greater access to information and monitoring management- Long-term horizons no pressure for short-term resultsDisadvantages:

- Slowing down decision process- Long-term investments with no good market expectations- Limited growth of economy

Corporate governanceThe structures and systems of control by which managers are held accountableto legitimate stakeholder.Important because of 3 reasons:

1. The separation of ownership and management control

2. Corporate scandals3. Increased accountability to wider stakeholder interests

Issues highlighted by the governance chain.Governance chains reveal the links between ultimate beneficiaries andmanagement.

- To whom are executives responsible? Family company a lot of interactionbetween owner/manager, other companies just a few interactions a year

- Who are the shareholders (owners)?- What is the role of institutional investors? Pension fund- What means of scrutiny and control exist? Replace board, change strategy and

even sell company without approval of the board. Controlling activities of agent.

Governing bodies

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- 2 tier board (often in Europe)o Supervisory board vs. executive (decision-making) board

o Appointments and remuneration of top management. Who is responsible for who?

not about the decisiono Strategic management delegated to top management.

- 1 tier boardo (Non-executives (no day to day responsibilities) in) the board engages with

management on in- and external reporting, top-level appointments, remuneration

and strategic management. Anglosaksisch

Imperfect operation of the governance chain- Lack of clarity on end beneficiaries. People dont know what pension funds are

doing with their money.

- Unequal division of power. Not owning biggest % of the shares, but have 50% shareor more of the decision-making power executive.

- Different levels of access to information. Manager and people have not the sameinterest.

Principal-agent problem- Self-interest among agents, e.g. bonuses- Misalignment of measures and targets, incentives and control

o Reflect agent self-interests rather than those of end beneficiaries

Benefits and disadvantages of the governance models

Three types of stakeholders:- Economic suppliers/competitors and shareholders- Socio/political policymakers, regulators and government agencies.

Public sector- Technological key adapters. standard agencies new product

introduction

Social responsibility and ethicsCorporate social responsibility is concerned with the ways in which anorganization exceeds its minimum obligations to stakeholders specified throughregulation.

Stances on social responsibility

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- Laissez-faire = Not thinking about own or social interest. Short-terminterests of shareholders are to make a profit, pay taxes and provide

jobs minimum obligationso Legal complianceo Defensiveo Unilateral

- Forum for stakeholder interaction = Idealistic. Incorporates multiplestakeholder interests and expectations rather than just shareholders andinfluences on organizational purposes and strategies.

o Sustainabilityo Board-levelo Proactiveo Partnership

- Enlightened self-interest = You have to take care of a problem because itsin your own interest. Communication with stakeholder groups andshareholders. Long-term

o Business sense (e.g. GMP)o Reactive

o Interactive- Shaper of society = Not many companies do this, but they say they do.

o Social and business changeo All responsibleo Defining

o N-alliances. Likely partnering. Charity do social things but need money to get

attention

Stakeholder expectationsHow? By means of stakeholder mapping.

Two issues:- Interested each stakeholder group is in impressing its expectations on the

organizations purposes and choice of strategies.- Whether stakeholders have the power to do so.-

Stakeholder mapping identifies stakeholder expectations and power, and helps inunderstanding political priorities.Stakeholder analysis reveals the influence of different stakeholders.

Stakeholder mapping: the power/interest matrix

(Institutional shareholders = pension funds show little interest unless shareprices start to dip, they then demand to be heard by management)

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Power = the ability of individuals or groups to persuade, induce or coerce othersinto following certain courses of action.Level of interest = how likely does the stakeholder show an interest to support oroppose strategy.Questions with stakeholder mapping

- In determining purpose and strategy, which stakeholder expectations need to be

considered?- How do the actual levels of interest and power reflect corporate governance framework?- Who are the key blockers and the facilitators of strategy?- Can levels of interest or power of key stakeholders be maintained?

Chapter summary- Shareholders` expectations influence on organizations purpose- Governance chains links between ultimate beneficiaries and

management- Shareholder vs. stakeholder model- Ethical dimensions corporate social responsibility- Stakeholders influence on purpose and strategy

- Values, vision, mission and objectives

Management Chapter 5: CultureIs history a blessing or a burden?

- Blessing: history matterso Effective (standardized) routines

o Experience in decision making, so it can simplify decision-making because you have

routines.o Exploit earlier investments and successo Longer-term orientationo Incremental change suits continuous improvement

- Burden: path dependency lock in

o Misattribution of success. When something goes good manager made thesuccess, but outsiders say it was luck. So different view of success.

o Inertia How to learn elephants dance? (multinationals). Gm vs. Japan Compete

on car business (change company fundamentally is really difficult)o Progressive failure to address strategic issues

Strategic drif t

Strategic drift is the tendency for strategies to develop incrementally on the basisof historical and cultural influences, but fail to keep pace wit a changing(business, EW) environment. (outside in approach)When the organizations strategy gradually moves away from relevance tot the

forces in the wider environment. D. Miller (1992)

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The issue: How to break out of a (downward) reinforcing cycle? If profits go downyoure not able to reinvest, so how to catch up with the competitor.

Organizational cultureCultural frames of reference

Organizational culture is the basic assumptions and beliefs that are shared by

members of an organization, that operate unconsciously and define in a basictaken-for-granted fashion an organizations view of itself and its environment.

Culture in four layers (from outside in)Values values concern the collectiveBeliefs beliefs concern the collectiveBeliefs routines, organizational structure, control, symbolic behaviorParadigm (or taken-for-granted assumptions) set of assumptions heldrelatively in common

Cultures influence on strategy development

Analyzing cultureFind the manifestations of a paradigm

- Rituals, e.g. company after-work party- Stories, embed present in company history, e.g. heroes, successes, disasters, mavericks

- Symbols, e.g. office layout (you can see who is higher in hierarchy), titles, lease cars- Control systems, e.g. reporting and reward

The cultural web of an organization

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Assessing control systems- What is most closely monitored?- Is emphasis on reward or punishment?- Are controls related to history or current strategies?- Are there many/few controls?

Chapter summary- The culture of an organization may contribute to its strategic capabilities

but may also give rise to strategic drift.- Cultural influences inform and constrain the strategic development of an

organization.- The cultural web can be used to understand an organizations culture and

its relationship to organizational strategy.

Management Chapter 6: Business-level strategyStrategy development process

Business-level strategies (strategic clock)

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Business-level strategy stands below corporate-level strategy and above

operational strategy.

A strategic business unit is a part of an organization for which there is a distinctexternal market for goods or services that is different from another SBU.Opposing pitfalls in identifying SBUs:

- Too many different products/markets means lack of focus- Too few means not reflecting diversity of products/markets

Bases of competitive advantage- Competitive strategy

o The bases for achieving competitive advantageo The bases for providing best value

- Porters customer-market orientationo Generic strategies

- Faulkner & Bowman and DAvenis market strategieso Provide customer needs better or more effectively than competitorso The strategy clock

No frills strategy (Lidl) = Low price combined with low perceived product

benefits focusing on price-sensitive market segments.- Commodity markets- Price-sensitive customers- High power, low switching costs among buyers- Opportunity to avoid major competitors

Low price strategy (Asda, Morrisons) = Lower price than competitors, maintainsimilar product/service benefits, year on year efficiency gains. (for example, buyone get one free)

- Need a low cost baseo Low cost itself not a basis for sustainable advantageo Low cost achieved in ways that competitors cannot match to give sustainable

advantage

- Pitfalls of low price strategy

o Margin pressured (competitor reaction)o Inability to re-invest, leading over time to loss of perceived benefit of product

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Hybrid strategy (Tesco) = Simultaneously achieving differentiation and a pricelower than prime competitors.

- Need clarity about activities on which differentiation can be built (core competences)o Reduce costs of other activities

- Entry strategy in market with established competitors

Differentiation strategy (Waitrose, Sainsbury) = Offering widely valued benefits

different from competitors, better products/services at same or higher price,centres of excellence.Success depends on:

- Identification of strategic customers and knowing what they value- Knowing the competitors

o Narrow competitor base focused differentiationo Wide competitor base address bases of differentiation valued by customers

Focused differentiation (Harrods) = High perceived product/service benefits toselected market segment (niche), premium products, heavily branded.

- Difficult when the focus strategy is only part of an organizations overall strategy

Pitfalls:- Possible conflict with stakeholder expectations- New ventures start off focused, but need to grow- Market situation may change, reducing differences between segments

Failure strategies (Super de Boer/Laurus) = Provides insufficient perceived value-for-money in terms of product features, price or both.

- Increased price without similarly increasing product/service benefit- Reduced benefits for customer, whilst maintaining price

Comparison of typologies

Sustaining competitive advantage

Achieving low prices- Operate with lower margins- Develop a unique cost structure- Create efficiency in organizational capabilities- Focus on market segments with low expectations

Dangers of low price strategies- Competitors might follow suit- Customers associate low price with low benefits

- Cost reductions may result in inability to pursue differentiation strategy

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Competition and collaboration- Collaborate to achieve advantage or avoid competition- Organizations may compete in some markets and collaborate in others- Collaborate when the transaction costs (with collaboration) are lower than

when operating alone- Collaboration can help to build switching costs- Collaboration can vary between potential competitors or between buyers

and sellers

Chapter summaryBusiness level strategy

- Competing better/providing best value- Strategye development for each SBU

Competitive strategies- No frills, low price, differentiation, hybrid, focused differentiation

Sustainable competitive advantage requires:- Linked competences, difficult to imitate

- Ability to achieve lock-in as industry standardCollaboration strategies may offer alternatives to or complement competitiveadvantages.

Management Chapter 7: Corporate-level strategyStrategic directions and corporate strategy

Strategic (development) directions are the strategic options available to anorganization, in terms of products and market coverage, taking into account thestrategic capability of the organization and the expectations of stakeholders.

Strategic directions (Ansoff matrix)

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Market penetration refers to a strategy by which an organization increases shareof its existing markets with its existing product range.Constraints: - Retaliation from competitors

- Legal constraints

Consolidation refers to a strategy by which an organization focuses defensivelyon their current markets with current products.Forms: - Defending market share

- Downsizing or divestment

Product development refers to a strategy by which an organization deliversmodified or new products to existing marketsRisks: - Overstretch? You may need new capabilities

- Project management risk

Diversification refers to a strategy by which an organization pursues newproduct offerings and new markets.Related: - Within the current capabilities or value network of the organizationUnrelated: - Beyond the current capabilities or value network of the organization

Reasons for diversification:

1. Efficiency gains2. Stretching corporate managerial capabilities3. Increasing market power4. Responding to market decline5. Spreading risk6. Expectations of powerful stakeholders

Related diversification:

Diversification problemsRelated: - Underestimating the required new capabilities

- Overestimating possible synergies

- Costly and requires time- Difficulties for SBUs to share resources/adapt policies

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Unrelated: - Generally unfavorable, because: No economics of scope and higher cost ofheadquarters

- Can succeed in some cases, because: when exploiting dominant logic and incountries with underdeveloped markets

Degree of diversity performance

Value creation and corporate parentValue-adding activities of corporate parents

- Envisioning- Coaching and facilitating- Providing central services and resources- Intervening

Three corporate parenting roles

Value destroying corporate parents- Bureaucracy adds cost and hinders responsiveness increases complexity- Buffers away from reality/obscures performance financial safety net- Too diverse lack of clarity on overall vision- Managerial ambition empire building (hubris)

Corporate portfolio managementPortfolio balance (BCG-matrix)

- Markets- Organizations needs

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Attractiveness of BUs (GE-McKinsey matrix)- Profitability- Growth rates

Portfolio fit- Synergies between business units- Synergies with corporate parent

Market growth/share (or BCG) matrix

Directional policy (GE-McKinsey) matrix Guidelines based on

directional policy matrixChapter summary- Corporate strategy

o Decisions on product an international scopeo How to add value to business units

- Product diversityo Related/unrelated diversification

- Parenting roleso Portfolio manager, synergy manager, parental developer

- Portfolio modelso BCG-matrix, directional policy matrix, parenting matrix