Key concepts

In this section of the website, you will find in-depth definitions and explanations of the most important concepts and terms used within the text. More concise definitions can be found in the Glossary, as well as on the Flashcards.

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Acquisition is where strategies are developed by taking over ownership of another organisation. There are many different motives for developing through acquisition or merger:

  • The speed with which it allows the company to enter new product or market areas.
  • The competitive situation may influence a company to prefer acquisition. In markets that are static and where market shares of companies are reasonably steady, it can be a difficult proposition for a new company to enter the market, since its presence may create excess capacity. If, however, the new company enters by acquisition, the risk of competitive reaction is reduced.
  • Deregulation was a major driving force behind merger and acquisition activities where regulation had created a level of fragmentation that was regarded as sub-optimal.
  • There may be financial motives for acquisitions. If the share value or price/earnings (P/E) ratio of a company is high, the motive may be to spot and acquire a firm with a low share value or P/E ratio.
  • An acquisition may provide the opportunity to exploit an organisation's core competences in a new arena.
  • Cost efficiency is a commonly stated a reason for acquisitions (by cutting out duplication or by gaining scale advantages).
  • Learning can be an important motive.
  • Institutional shareholders may expect to see continuing growth and acquisitions may be a quick way to deliver this growth.
  • Growth through acquisitions can also be very attractive to ambitious senior managers as it speeds the growth of the company.
  • There are some stakeholders whose motives are speculative rather than strategic. They favour acquisitions that might bring a short-term boost to share value.

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Barriers to entry are factors that need to be overcome by new entrants if they are to compete successfully. Typical barriers are:

  • Economies of scale.
  • The capital requirement of entry.
  • Access to supply or distribution channels.
  • Customer or supplier loyalty.
  • Experience.
  • Expected retaliation.
  • Legislation or government action.
  • Differentiation.

Benchmarking is concerned with assessing an organisation's strategic capability in relative terms – i.e. its ability to meet and beat the performance of competitors. There are different ways in which relative capability might be understood.

  • Historical benchmarking: It is common for organisations to consider their performance in relation to previous years in order to identify any significant changes. The danger with historical comparison alone, however, is that it can lead to complacency since it is the rate of improvement compared with that of competitors that is important.
  • Industry/sector benchmarking: Insights about performance standards can be gleaned by looking at the comparative performance of other organisations in the same industry sector or between similar public service providers. These industry norms compare the performance of organisations in the same industry or sector against a set of performance indicators. Whilst it may make sense to compare like with like, an over-riding danger of industry norm comparisons (whether in the private or public sector) is that the whole industry may be performing badly and losing out competitively to other industries that can satisfy customers' needs in different ways. So a benchmarking regime needs to look wider than a particular industry or sector, as discussed below.
  • Best-in-class benchmarking: The shortcomings of industry norm comparisons have encouraged organisations to seek comparisons more widely through the search for best practice wherever it may be found. Best-in-class benchmarking compares an organisation's performance against ‘best in class' performance – wherever that is found. The real power of this approach is not just ‘beyond industry/sector' comparisons. It is concerned with shaking managers out of the mindset that improvements in performance will be gradual as a result of incremental changes in resources or competences, which is not the reality that many organisations face in the twenty-first century.

Business ethics exists at three levels:

  • At the macro level, there are issues about the role of businesses and other organisations in the national and international organisation of society. Expectations range from laissez-faire free enterprise at one extreme to organisations as shapers of society at the other. There are also important issues of international relationships and the role of business on an international scale. This is the first issue – the broad ethical stance of an organisation, which is concerned with the extent to which an organisation will exceed its minimum obligations to stakeholders and society at large. Managers need to understand the factors that influence these societal expectations of organisations – particularly in relation to how inclusive or exclusive they are expected to be to the interests of the various stakeholders discussed in the previous section.
  • Within this macro framework, corporate social responsibility is concerned with the specific ways in which an organisation will move beyond the minimum obligations provided through regulation and corporate governance, and how the conflicting demands of different stakeholders will be reconciled.
  • At the individual level, it concerns the behaviour and actions of individuals within organisations. This is clearly an important issue for the management of organisations, but it is discussed here only in so far as it affects strategy, and in particular the role of managers in the strategic management process.

A business model describes the structure of product, service and information flows and the roles of the participating parties. This includes potential benefits and sources of revenue to each of the parties. The value chain framework can be used to identify many traditional business models. For example, the linear supply chain from component manufacturers, to finished product assemblers, primary distributors, retailers and finally the consumer. Even in this case – where the product ‘flows' in a linear fashion through the chain – information and other services may exist in branches of the chain. For example, market research and after-sales service may be undertaken by other parties from outside this linear chain. E-commerce models are emerging out of traditional business models based on the degree of innovation from traditional approaches and the complexity (mainly the level of integration of activities).

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There are a number of different change styles:

  • Education and communication involve the explanation of the reasons for and means of strategic change.
  • Collaboration or participation in the change process is the involvement of those who will be affected by strategic change in the change agenda
  • Intervention is the co-ordination of and authority over processes of change by a change agent who delegates elements of the change process.
  • Direction involves the use of personal managerial authority to establish a clear future strategy and how change will occur. It is essentially top-down management of strategic change.
  • In its most extreme form, a directive style becomes coercion, involving the imposition of change or the issuing of edicts about change. This is the explicit use of power and may be necessary if the organisation is facing a crisis, for example.

Competitive rivals are organisations with similar products and services aimed at the same customer group. There are a number of factors that affect the degree of competitive rivalry in an industry or sector:

  • The extent to which competitors are in balance.
  • Industry growth rates may affect rivalry.
  • High fixed costs in an industry, perhaps through capital intensity, may result in price wars and low-margins if industry capacity exceeds demand as capacity-fill becomes a prerogative.
  • Where there are high exit barriers to an industry, there is again likely to be the persistence of excess capacity and, consequently, increased competition.
  • Differentiation can be important. In a commodity market, where products or services are undifferentiated, there is little to stop customers switching between competitors increasing rivalry.

An organisation's configuration consists of the structures, processes and relationships through which the organisation operates. Configuring the organisation so that all these elements fit both together and with key strategic challenges is crucial to organisational success:

  • The structural design (describing roles, responsibilities and lines of reporting) in organisations. Structural design can deeply influence the sources of an organisation's advantage, particularly with regard to knowledge management; failure to adjust structures appropriately can fatally undermine strategy implementation. But good structure alone is not enough for success.
  • The processes that drive and support people within and around an organisation. These processes too can have a major influence on success or failure, defining how strategies are made and controlled and the ways that managers and other employees interact and implement strategy in action.
  • The relationships that connecting people both within and outside the organisation, in particular:
    • relationships between organisational units and the centre
    • relationships outside the firm, including issues such as outsourcing and strategic alliances.

Consolidation is where organisations protect and strengthen their position in their current markets with current products. Since the market situation is likely to be changing (e.g. through improved performance of competitors or new entrants) consolidation does not mean standing still. Indeed, it may require considerable reshaping and innovation to improve the value of an organisation's products or services. In turn, this will require attention to how an organisation's resources and competences should be adapted and developed to maintain the competitive position of the organisation.

Convergence is where previously separate industries begin to overlap in terms of activities, technologies, products and customers. There are two sets of ‘forces' that might drive convergence. First, convergence might be supply-led – where organisations start to behave as though there are linkages between the separate industries or sectors. This type of convergence may be driven by external factors in the business environment. For example, governments can help or hinder convergence through regulation or de-regulation. Secondly, convergence may also occur through demand-side (market) forces - where consumers start to behave as though industries have converged. For example, they start to substitute one product with another or they start to see links between complementary products that they want to have ‘bundled'.

The concept of core competences was developed in the 1990s, most notably by Gary Hamel and CK Prahalad. Whilst there are various definitions, in this book core competences are taken to mean the activities and processes through which resources are deployed in such a way as to achieve competitive advantage in ways that others cannot imitate or obtain. For example a supplier that achieves competitive advantage in a retail market might have done so on the basis of an unique resource such as a powerful brand, or by finding ways of providing service or building relationships with that retailer in ways that its competitors find difficult to imitate, a core competence.

In order to achieve this advantage, core competences therefore need to fulfil the following criteria:

  • They must relate to an activity or process that underpins the value in the product or service features – as seen through the eyes of the customer (or other powerful stakeholder). This is the value criterion discussed earlier.
  • The competences must lead to levels of performance that are significantly better than competitors (or similar organisations in the public sector).
  • The competence must be robust - i.e. difficult for competitors to imitate.

Critical success factors (CSFs) are those product features that are particularly valued by a group of customers and, therefore, where the organisation must excel to outperform competition. CSFs will differ from one market segment to another since different customer groups value different product features. Therefore organisations will need to compete on different bases and through different resources and competences. In some industries these resources and competences may be relatively easy to imitate by competitors in the medium-term. Consequently, competitive advantage needs to be secured by continually shifting the ground of competition. So a core competence could be the processes of innovation – which requires the knowledge to link together many separate areas of knowledge. In the public services the concept of critical success factors is also valid except that it may relate to a stakeholder other than the customer, for example, the providers of funding. Sometimes the requirements of both customers and funders matter but they may value different things and these may be difficult pressures to reconcile.

Corporate social responsibility is concerned with the ways in which an organisation exceeds the minimum obligations to stakeholders specified through regulation and corporate governance. This includes considerations as to how the conflicting demands of different stakeholders can be reconciled. Since the legal and regulatory frameworks pay uneven attention to the rights of different stakeholders it is useful to distinguish between contractual stakeholders – such as customers, suppliers or employees – who have a legal relationship with an organisation and community stakeholders – such as local communities, consumers (in general) and pressure groups who do not have the protection of the law to the same extent as the first group. Therefore the corporate social responsibility policies of companies will be particularly important to these community stakeholders.

Cultural processes are concerned with organisational culture and the standardisation of norms. Control is indirect, internalised as employees become part of the culture. Control is exerted on the input of employees, as the culture defines norms of appropriate effort and initiative. Cultural processes are particularly important in organisations facing complex and dynamic environments. The fostering of innovation is crucial to survival and success in these circumstances – but not in bureaucratised ways. Collaborative cultures can foster ‘communities of practice', in which expert practitioners inside or even outside the organisation share their knowledge to generate innovative solutions to problems on their own initiative. Cultural processes can also be important between organisations in their approach to competition and collaboration.

The cultural web is a representation of the taken-for-granted assumptions, or paradigm, of an organisation and the physical manifestations of organisational culture. The elements of the cultural web are:

  • The routine ways that members of the organisation behave towards each other, and towards those outside the organisation, make up ‘the way we do things around here'.
  • The rituals of organisational life are the special events through which the organisation emphasises what is particularly important and reinforces ‘the way we do things around here'.
  • The stories told by members of the organisation to each other, to outsiders, to new recruits and so on, embed the present in its organisational history and also flag up important events and personalities.
  • Symbols such as logos, offices, cars and titles, or the type of language and terminology commonly used, become a short-hand representation of the nature of the organisation.
  • Power structures - the most powerful groupings within the organisation are likely to be closely associated with this set of core assumptions and beliefs.
  • The control systems, measurements and reward systems emphasise what it is important to monitor in the organisation, and to focus attention and activity upon.
  • Organisational structure is likely to reflect power structures and, again, delineate important relationships and emphasise what is important in the organisation.
  • The paradigm of the organisation encapsulates and reinforces the behaviours observed in the other elements of the cultural web.

The cultural web is, then, a useful concept for understanding the underlying assumptions, linked to political, symbolic and structural aspects, of an organisation.

Organisational culture is the ‘basic assumptions and beliefs that are shared by members of an organisation, that operate unconsciously and define in a basic taken-for-granted fashion an organisation's view of itself and its environment'. So expectations and strategy are rooted in ‘collective experience' (group and organisational) and become reflected in organisational routines that accumulated over time. In other words culture is about the collective behviours in an organisation and strategies can be seen as the outcome of the collective taken-for-granted assumptions, behaviours and routines of organisations. This taken-for-grantedness is likely to be handed down over time within a group and so oorganisations can be ‘captured' by their culture. The assumptions and behaviours of individuals within organisations are also influenced by assumptions and behaviours in the parts of the business environment with which those individuals and the organisation as a whole ‘impinge'. These are called cultural frames of reference. Also there are normally sub-cultures in parts of an organisations – which have different assumptions, behaviours and expectations. This may be the differences between business functions, geographical locations or even different informal groups (perhaps by age or length of service).

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Development directions for an organisation are the possible ways in which strategies could change in relation to market coverage, products, capability and expectations about the organisation's strategies. These range from strategies concerned with protecting and building an organisation's position with its existing products and capabilities through to diversification requiring changes of products, capabilities and entering or creating new market opportunities which take the organisation into arenas in which it is currently not a credible player. In practice any of these separate directions is likely to require some degrees of change in other directions too. For example, market development may not be possible without some changes in product or service features.

Development methods. The strategy development method is concerned with how a strategy will be pursued. Whatever the broad strategy and development direction, there will be different methods by which a strategy could be pursued. For example, an organisation may be pursuing a broad strategy of growth, through positioning itself as the cheapest provider of ‘regular' quality products. The development direction within this generic approach could be one of gaining market share (market penetration) through continued reduction of costs (to remain the lowest cost producer) passed on to customers in lower prices. However, there are still issues as to the method by which this might be achieved. The cost improvements may be achieved internally by increasing the efficiency of current operations or through strategic alliances – perhaps to share distribution outlets with another (non-competing) company; or it may be achieved by acquisition of a competitor to gain market share and to benefit from the associated economies of scale.

Devolution concerns the extent to which the centre of an organisation delegates decision making to units and managers lower down in the hierarchy. Devolution is particularly effective where important knowledge is dispersed throughout the organisation and where responsiveness to the changing needs of different customer segments is important. In these conditions, top managers can be too remote from the ‘sharp-end' to really understand the organisation's resources and opportunities. In fast-moving markets, it is often better to place decision-making authority close to the action rather than force decisions up through slow and remote hierarchies.

A differentiation strategy seeks to provide products or services that offer benefits different from those of competitors and that are widely valued by buyers. The aim is to achieve competitive advantage by offering better products or services at the same price or enhancing margins by pricing slightly higher. In public services, the equivalent is the achievement of a ‘centre of excellence' status, which could attract higher funding from government (for example, universities try to show that they are better at research or teaching than other universities).

The extent to which a differentiation approaches will be successful is likely to be dependent on a number of factors:

  • Has the organisation clearly identified who the strategic customer is? The extent to which the organisation understands what is valued by the strategic customer can be dangerously taken for granted by managers. This is a reminder of the importance of identifying critical success.
  • It is important to be clear who are the competitors. For example, is the business competing with a wide competitor base or with a much narrower base, perhaps within a particular market segment?

Diffusion of innovations is the pace at which a market is likely to adopt new products – or the improved performance of existing products. Diffusion is influenced by a number of factors to do with two main issues: the nature of the innovation and the processes of bringing the innovation to market.

  • Supply-side issues concerned with product features such as:
    • Degree of improvement in performance above current products (from a customer's perspective) – to provide sufficient incentive to change.
    • Compatibility with other factors.
    • Complexity can discourage uptake.
    • Experimentation – the ability to test products before commitment to a final decision – either directly or through the availability of information about the experience of other customers.
    • Relationship management - how easy it is to get information, place orders and receive support.
  • Demand-side issues –processes that exist in markets that drive adoption of new products or new product features:
    • Market awareness is the basic requirement.
    • Observability (to potential adopters) of the benefits of the product or service in use.
    • Customers are different from each other and range from innovators (the first to adopt) through to laggards (the last to adopt). Also, the likelihood and extent of adoption by the slower groups is influenced by the response of the faster groups.

Direct supervision is the direct control of strategic decisions by one or a few individuals, typically focused on the effort put into the business by employees. It is a dominant process in small organisations. It can also exist in larger organisations where little change is occurring and if the complexity of the business is not too great for a small number of managers to control the strategy in detail from the centre. Direct supervision requires that the controllers thoroughly understand what is entailed by the jobs they supervise. They must be able to correct errors, but not cramp innovative experiments. Direct supervision is easiest on a single site, although long-distance monitoring is now possible through electronic means. Direct supervision can also be effective during a crisis, when autocratic control through direct supervision may be necessary to achieve quick results.

Diversification is defined as a strategy which takes the organisation into new markets and products or services and therefore increases the diversity that a corporate parent must oversee. Three potentially value-creating reasons for diversification are as follows:

  • There are efficiency gains from applying the organisation's existing resources or capabilities to new markets and products or services. These are often described as economies of scope, by contrast to economies of scale. If an organisation has underutilised resources or capabilities that it cannot effectively close or dispose of to other potential users, it can make sense to use these resources or capabilities by diversification into a new activity. Sometimes these scope benefits are referred to as the benefits of synergy, by which is meant the benefits that might be gained where activities or processes complement each other such that their combined effect is greater than the sum of the parts.
  • There may also be gains from applying the organisation's corporate managerial capabilities to new markets and products and services. In a sense, this extends the point above, but highlights skills that can easily be neglected. At the corporate parent level, managers may develop a capability to manage a range of different products and services which, although they do not share resources at the operational unit level, do draw on similar kinds of overall corporate managerial skills.
  • Having a diverse range of products or services can increase market power. With a diverse range of products or services, an organisation can afford to cross-subsidise one product from the surpluses earned by another, in a way that competitors may not be able to.

Dynamic capabilities are taken to mean an organisation's ability to develop and change competences to meet the needs of rapidly changing environments. These capabilities may be relatively formal, such as the organisational systems for new product development or standardised procedures for agreement for capital expenditure. They may also take the form of major strategic moves, such as acquisitions or alliances by which new skills are learned by the organisation. Or they may be more informal such the way in which decisions get taken or, perhaps, how, decisions can get taken faster than usual when fast response is needed. They could also take the form of embedded “organisational knowledge about how to deal with particular circumstances the organisation faces, or how to innovate. Indeed, it is likely that dynamic capabilities will have both formal and informal, visible and invisible, characteristics associated with them. For example, Kathy Eisenhardt has shown that successful acquisition processes that bring in new knowledge to the organisation depend on high quality pre and post acquisition analysis of how the acquisition can be integrated into the new organisation so as to capture synergies and bases of learning from that acquisition. However, hand-in-hand with these formal procedures will be more informal ways of doing things in the acquisition process built on informal personal relationships and the exchange of knowledge in more informal ways.

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Emergent strategy comes about through more everyday routines, activities and processes in organizations that, on the face of it, may not be directly to do with development of strategy but nonetheless can play an important role. Such processes include:

  • logical incrementalism
  • resource allocation routines
  • cultural processes
  • organisational politics

Enabling success is concerned with the two-way relationship between overall business strategies and strategies in separate resource areas such as people, information, finance and technology. For example, many organisations are concerned with how information processing capability might be ‘grafted' into their business to improve the competitiveness of current strategies. But to understand properly this relationship between information and business strategy it is also important to ask how the whole business process might be transformed by IT. The danger of asking only the first question is that strategy moves forward as a set of adjustments to an old business idea – to perform things a little better, a little cheaper and a little faster. It does not ask the radical question as to changing the business idea to capitalise on the new capabilities that IT offers. These same two-way considerations apply to the other resource areas too.

The ethical stance is the extent to which an organisation will exceed its minimum obligations to stakeholders and society at large. Different organisations take very different stances:

  • Type 1 represents one extreme stance where organisations take the view that the only responsibility of business is the short-term interests of shareholders.
  • The second type of ethical stance is similar to that of the previous group, but it is tempered with recognition of the long-term financial benefit to the shareholder of well-managed relationships with other stakeholders. This has been called a stance of enlightened self-interest.
  • The third ethical stance is that stakeholder interests and expectations (wider than just shareholders) should be more explicitly incorporated in the organisation's purposes and strategies beyond the minimum obligations of regulation and corporate governance.
  • The final group represents the ideological end of the spectrum. They have purposes that are concerned with shaping society, and the financial considerations are regarded as of secondary importance or a constraint.

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A failure strategy is one which does not provide perceived value-for-money in terms of product features, price or both. For example, the strategies suggested by routes 6, 7 and 8 on the strategy clock are probably destined for failure. Route 6 suggests increasing price without increasing product/service benefits to the customer. This is, of course, the very strategy that monopoly organisations are accused of following. However, unless the organisation is protected by legislation, or high economic barriers to entry, competitors are likely to erode market share. Route 7 is an even more disastrous extension of route 6, involving the reduction in product/service benefits whilst increasing relative price. Route 8, reduction in benefits whilst maintaining price, is also dangerous, though firms have tried to follow it. There is a high risk that competitors will increase their share substantially. Although the logic of routes 6, 7 and 8 might suggest withdrawal from the market many public service providers stumble on because there is no market mechanism to punish poor value-for-money and/or there is a lack of political will to close down the services. Arguably there is another basis of failure, which is for a business to be unclear as to its fundamental generic strategy such that it ends up being ‘stuck in the middle' – a recipe for failure.

Financial control is the most extreme form of devolution, dissolving the organisation into highly autonomous business units. The relationship between the centre and the business units is as a parent who is a shareholder or banker for those units. As the name suggests, the relationship is financial and there is little concern for the detailed product/market strategy of business units – even to the extent that they can compete openly with each other provided they deliver the financial results. They might even have authority to raise funds from outside the company.

Financial Management. Finance and the way that it is managed can be a key determinant of strategic success. From a shareholder's point of view, what matters is the cash-generating capability of the business since this determines the ability to pay dividends in the short term and to reinvest for the future (which, in turn, should enable a future flow of dividend payments). The public sector equivalent is the need to deliver best value within financial limits. However, as highlighted in previous sections in this chapter, strategic success – in this case enabled through good financial management – cannot be achieved through a set of ‘rules' and priorities which apply in equal measure to all organisations and at all times. The relationship between finance and strategic success is dependent on context. Nonetheless, there are three broad issues that organisations of all types face:

  • Managing for value, whether this is concerned with creating value for shareholders or ensuring the best use of public money, is an important consideration for, and responsibility of, managers.
  • Funding strategic developments is clearly important too: in particular, that the nature of the funding is appropriate for the type of strategy – and vice versa. This is concerned with balancing business and financial risks.
  • The financial expectations of stakeholders will vary – both between different stakeholders and in relation to different strategies. This should influence managers in both strategy development and implementation.

The five forces framework helps identify the sources of competition in an industry or sector. The five forces are:

  • The Threat of Entry which depends on the extent to which there are barriers to entry. These are factors that need to be overcome by new entrants if they are to compete successfully. Typical barriers are: Economies of scale, capital requirements, access to distribution channels, experience, expected retaliation, legislation or government action, and differentiation.
  • The Threat of Substitutes which reduces demand for a particular ‘class' of products as customers switch to the alternatives. Substitution can be of three types: product-for-product substitution, substitution of need and generic substitution.
  • The Power of Buyers and Suppliers. These two forces are linked. The relationship with buyers and sellers can have similar effects in constraining the strategic freedom of an organisation and in influencing the margins of that organisation.
  • Competitive Rivalry is direct competition between organisations with similar products and services aimed at the same customer group.

A focused differentiation strategy seeks to provide high perceived product/service benefits justifying a substantial price premium, usually to a selected market segment (niche). In many markets these are described as premium products and are usually heavily branded. For example, in the alcoholic drinks market premium beers, single malt whiskeys, wines from particular chateaux, all compete to convince customers that their product is sufficiently differentiated from their competitors' to ‘justify' significantly higher prices. In the public services national or international centres of excellence (such as a specialist museum) achieve unit levels of funding significantly higher than the more generalist providers. However, focused differentiation raises some important issues:

  • A choice may have to be made between a focus strategy (position 5) and broad differentiation (position 4) if sales are to grow.
  • Pursuing a focus strategy may be difficult when it is only part of an organisation's overall strategy – a very common situation.
  • Focus strategies may conflict with stakeholder expectations.
  • New ventures often start in very focused ways – for example, new ‘leading-edge' medical services in hospitals. It may, however, be difficult to find ways to grow such new ventures. Moving from route 5 to route 4 will mean a lowering of price and therefore cost, whilst maintaining differentiation features.
  • The market situation may change such that differences between segments may be eroded, leaving the organisation open to much wider competition. Customers may become unwilling to pay a price premium as the features of the ‘regular' offerings improve. Or the market may be further segmented by even more differentiated offerings from competitors.

A forcefield analysis provides an initial view of change problems that need to be tackled, by identifying forces for and against change. It allows some key questions to be asked:

  • What aspects of the current situation might aid change in the desired direction, and how might these be reinforced?
  • What aspects of the current situation would block such change, and how can these be overcome?
  • What needs to be introduced or developed to aid change?

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Game theory is concerned with the inter-relationships between the competitive moves of a set of competitors. The central idea is that the strategist has to anticipate the reaction of competitors. There are three core assumptions in this. First, that a competitor will behave rationally and always try to win to their own benefit. Second, that the competitor is in an interdependent relationship with other competitors. So all competitors are affected by what other competitors do; one competitor's move will galvanise response from another competitor, and the outcome of choices made by one competitor is dependent on the choices made by another. Third that to a greater or lesser extent competitors are aware of the interdependencies that exist and of the sorts of move that competitors could take. Arguably, this is especially so within strategic groups where competitors are following similar strategies or have similar characteristics or where competitors are targeting the same market segments.

There are two key principles to guide the development of successful strategies of competition that flow from these assumptions:

  • Strategists, as game theorists, need to put themselves in the position of the competitor or competitors. They can then take an informed, rational, view about what that competitor is likely to do and choose their best course of action in this light.
  • To do this it is important to identify if there is any strategy that could be followed by a competitor that would lead to the strategist's own organisation being dominated in the market. If there is then the priority is to take the necessary steps to eliminate that strategy.

These principles seem simple enough, but the study of game theory based on them has become very complex and elaborate.

The governance framework describes whom the organisation is there to serve and how the purposes and priorities of the organisation should be decided. This concerns how an organisation should function and the distribution of power among different stakeholders. This section will discuss a number of issues relating to corporate governance and the implications to strategic management. It will be seen that there are different traditions and frameworks in different countries. Corporate governance has become an increasingly important issue for organisations for two main reasons. First, the need to separate ownership and management control of organisations, (which is now the norm except with very small businesses), means that most organisations operate within a hierarchy, or chain, of governance. This chain represents all those groups that have influence an organisation's purposes through their direct involvement in either ownership or management of an organisation. Second, there has been an increasing tendency to make organisations more visibly accountable and/or responsive, not only to those ‘owners' and ‘managers' in the governance chain but to a wider range of stakeholders – including the community at large.

The Boston Consulting Group (BCG) Growth/Share matrix is one of the most common and long-standing ways of conceiving of the balance of a portfolio of businesses is in terms of the relationship between market share and market growth. It classifies business units into four types:

  • A star is a business unit which has a high market share in a growing market. The business unit may be spending heavily to gain that share, but experience curve benefits should mean that costs are reducing over time and, it is to be hoped, at a rate faster than that of competitors.
  • A question mark (or problem child) is a business unit in a growing market, but without a high market share. It may be necessary to spend heavily to increase market share, but if so, it is unlikely that the business unit is achieving sufficient cost reduction benefits to offset such investments.
  • A cash cow is a business unit with a high market share in a mature market. Because growth is low and market conditions are more stable, the need for heavy marketing investment is less. But high relative market share means that the business unit should be able to maintain unit cost levels below those of competitors. The cash cow should then be a cash provider (e.g. to finance question marks).
  • Dogs are business units with a low share in static or declining markets and are thus the worst of all combinations. They may be a cash drain and use up a disproportionate amount of company time and resources.

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Human resources approaches. Human resource management is about both ‘hard' and ‘soft' approaches. Hard approaches are about people as a resource and how systems and procedures can be used to acquire, utilise, develop, and retain people to the strategic advantage of the organisation. The needs of the organisation are dominant. Soft approaches are concerned with people's behaviour, both individually and collectively i.e. culture, how these help or hinder strategies and how they can be changed. It is also about a commitment to meeting the needs of individuals as well as the organisation. In the modern economy the need for organisations to create and share knowledge is crucial to success and can be strongly influenced by how trust is built and sustained within organisations – what has been called ‘fair process'. HR in organisations often underplays the soft side and concentrates on hard systems and structures. Since the soft side is about changing behaviours if it is neglected strategic development and change will be hindered.

A hybrid strategy seeks simultaneously to achieve differentiation and a price lower than that of competitors. Here the success of the strategy depends on the ability to deliver enhanced benefits to customer together with low prices whilst achieving sufficient margins for reinvestment to maintain and develop the bases of differentiation. It might be argued that, if differentiation can be achieved, there should be no need to have a lower price, since it should be possible to obtain prices at least equal to competition, if not higher. However, the hybrid strategy could be advantageous in the following circumstances:

  • If much greater volumes can be achieved than competitors then margins may still be better because of a low cost base.
  • If an organisation is clear about the activities on which differentiation can be built (i.e. potential core competences) it may then be able to reduce costs on other activities.
  • As an entry strategy in a market with established competitors. This is often used when developing a global strategy. Organisations search for the ‘loose brick' in a competitor's portfolio of businesses – perhaps a poorly run operation in a geographical area of the world – then enter that market with a superior product and, if necessary, a lower price. The aim is to take market share, divert the attention of the competitor, and establish a foothold from which they could move further.

Hypercompetition occurs where the frequency, boldness and aggressiveness of dynamic movements by competitors accelerate to create a condition of constant disequilibrium and change. The implications of how competition is understood and how organisations might respond are extremely important. Whereas competition in slower-moving environments is primarily concerned with building and sustaining competitive advantages that are difficult to imitate, hypercompetitive environments require organisations to acknowledge that advantages will be temporary. Competition may also be about disrupting the status quo so that no one is able to sustain long-term advantage on any given basis. So longer-term competitive advantage is gained through a sequence of short-lived moves.

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Managers might face an imposed strategy by powerful external stakeholders. For example, government may dictate a particular strategic course or direction as in the public sector, or where it exercises extensive regulation over an industry; or it may choose to deregulate or privatise a sector or organisation currently in the public sector. Businesses in the private sector may also be subject to such imposed strategic direction, or significant constraints on their choices. A multinational corporation seeking to develop businesses in some parts of the world may be subject to governmental requirements to do this in certain ways, perhaps through joint ventures or local alliances. An operating business within a multidivisional organisation may regard the overall corporate strategic direction of its parent as akin to imposed strategy.

An industry is ‘a group of firms producing the same principal product' (1) or, more broadly, ‘a group of firms producing products that are close substitutes for each other'. This concept of an industry can be extended into the public services through the idea of a sector. Social services, health care or education also have many producers of the same kinds of services. From a strategic management perspective it is useful for managers in any organisation to understand the competitive forces acting on and between organisations in the same industry or sector since this will determine the attractiveness of that industry and the way in which individual organisations might choose to compete. It may inform important decisions about product/market strategy and whether to leave or enter industries or sectors.

(1) D. Rutherford, Routledge Dictionary of Economics, 2nd edition, Routledge, 1995.

From a strategic point of view information management is about how information ‘processing' capability can improve the competitive position of an organisation through the ways in which knowledge is created and shared both within and around an organisation. It is essential to understand that this is not just about IT driven systems and procedures – although they may be crucially important to competitiveness. The important point is that not all of an organisation's knowledge can be captured in systems. Indeed the tacit knowledge embedded in organisations is difficult to capture yet is usually the basis on which competitive advantage is built. There is an obvious danger that IT and information systems start to take on a purpose of their own – disconnected from the organisation's strategies.

Intended strategy is an expression of desired strategic direction deliberately formulated or planned by managers. The implication is that that the implementation of this intended strategy is also planned in terms of resource allocation, control systems, organisational structure and so on. However, in many organisations that attempt to formulate detailed intended is unrealised; it does not come about in practice, or only partially so. There may be all sorts of reasons for this. The plans are unworkable, the environment changes after the plan has been drawn up and managers decide that the strategy, as planned, should not be put into effect, or people in the organisation or influential stakeholders do not go along with the plan.

Internal development is where strategies are developed by building on and developing an organisation's own capabilities. For many organisations, internal development (sometimes known as ‘organic development') has been the primary method of strategy development for several reasons:

  • For products that are highly technical in design or method of manufacture, businesses may choose to develop new products themselves, since the process of development is seen as the best way of acquiring the necessary capabilities to compete successfully in the marketplace.
  • A similar argument may apply to the development of new markets by direct involvement. Market knowledge may be a core competence creating competitive advantage over other organisations that are more distant from their customers.
  • Although the final cost of developing new activities internally may be greater than that of acquiring other companies, the spread of cost over time may be more favourable and realistic. Also the slower rate of change which internal development brings may also minimise the disruption to other activities.
  • An organisation may have no choice about how new ventures are developed. In many instances those breaking new ground may not be in a position to develop by acquisition or joint development, since they are the only ones in the field.
  • Internal development also may avoid the often traumatic political and cultural problems arising from post-acquisition integration and coping with the different traditions and incompatible expectations of two organisations.

A strategy of internationalisation might be pursued for a number of reasons. First, there may be market based reasons:

  • The globalisation of markets and competition can be seen as both cause and consequence of the internationalisation of individual organisations. There is evidence of homogenisation in some markets. Globalisation thereby relates not only to contextual factors such world - wide homogenisation of consumer demand but also to the adoption of global strategies in which activities are tightly integrated and coordinated on a cross national basis and the whole world is seen as a potential area of operation.
  • Firms acting as suppliers to industrial companies may follow their customers when these internationalise their operations.
  • By expanding its markets internationally a firm can bypass limitations in its home market. Often it is those organisations with small home markets which lead internationalisation.
  • There may also be opportunities to exploit differences between countries and geographical regions. For example:
    • The exploitation of differences in culture.
    • Administrative differences allow firms to take advantage, for example, of tax differentials.
    • It is not always the case that global reach makes sense. Exploiting geographically specific differences can help at times.
    • The exploitation of specific economic factors. This could include, for example, labour or the costs of capital.

Strategies of internationalisation may also be pursued to build on and take advantage of strategic capabilities:

  • By internationalising companies are able to broaden the size of the market so as to exploit strategic capabilities.
  • The internationalisation of value adding activities allows an organisation to access and develop resources and capabilities in ways not possible in its ‘home' country thereby enhancing its competitive advantage and competitive position.
  • Companies may also seek to enhance their knowledge base by entering markets which are strategically important as a source of industry innovation.
  • There may also be economic benefits in strategies of internationalisation:
    • International diversification allows firms to reap economies of scale by expanding the size of the market they serve.
    • Stabilisation of earnings across markets.

Business units may play different roles in an international portfolio:

  • Strategic leaders' are business units that not only hold valuable resources and capabilities but are also located in countries that are crucial for competitive success because of, for example, the size of the local market or the accessibility of key technologies.
  • Contributors', business units with valuable internal resources but located in countries of lesser strategic significance, can nevertheless play key roles in a multinational organisations' competitive success.
  • Though not contributing substantially to the enhancement of a firm's competitive advantage ‘implementers' are important in the sense that they help generate vital financial resources.
  • The existence of ‘black holes' is highly problematic. Possibilities for overcoming this unattractive position include the development of alliances and the selective and targeted development of key resources and capabilities.

There are two generic international strategies:

  • In a multi-domestic strategy most, if not all, value adding activities are located in individual national markets served by the organisation and products and/or services are adapted to the unique local requirements.
  • In a global strategy standardised products are developed and produced in centralised locations. With a greater emphasis on exploiting economies of scale, value adding activities are typically concentrated in a more limited set of locations than for multi-domestic strategies.

In practice, organisations rarely, if ever, fall neatly into the basic categories of pure global or multi-domestic strategies. Instead they seek to develop their own specific ways of balancing on the one hand the tension between standardisation and adaptation of products and/of services and, on the other hand, exploiting the opportunities provided by unique locational characteristics and economies of scale.

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Organisational knowledge is the collective and shared experience accumulated through systems, routines and activities of sharing across the organisation. There are various reasons organisational knowledge has been highlighted as important. First, as organisations become more complex and larger the need to share and pool what people know becomes more of a challenge. Second, because information systems have started to provide more sophisticated ways of doing this. And third, because there is an increasing realisation that many of the lessons discussed already in this chapter are true. It is less likely that organisations will achieve competitive advantage through their physical resources and more likely that they will achieve advantage through the way they do things and the experience that they have accumulated. Therefore knowledge about how to do things which draws on that experience becomes crucially important.

The concept of organisational knowledge therefore closely relates to some of the ideas discussed in chapter 3. There are resources that underpin knowledge. For example, acquiring or developing adequate hardware and software for information systems infrastructure is a threshold capability for most organisations in the twenty-first century. Some knowledge will be a rare resource – for example, the knowledge of a particularly talented individual, such as a research scientist, or the intellectual property of an organisation (e.g. its patents). Knowledge is captured by formal organisational systems, processes (such as market research or procurement processes), and day-to-day activities which draw on people's experience. So it is likely to be a complex and causally ambiguous strategic capability made up of linked competences. It is also concerned with the capacity of an organisation to learn and is therefore central to the dynamic capability of an organisation to adapt to changing conditions.

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Leadership is the process of influencing an organisation (or group within an organisation) in its efforts towards achieving an aim or goal. Within this definition, a leader is not necessarily someone at the top of an organisation, but rather someone who is in a position to have influence. They are often categorised in two ways:

  • Charismatic leaders, who are mainly concerned with building a vision for the organisation and energising people to achieve it, and are therefore usually associated with managing change. The evidence suggests that these leaders have particularly beneficial impact on performance when the people who work for them see the organisation facing uncertainty.
  • Instrumental or transactional leaders, who focus more on designing systems and controlling the organisation's activities, and are more likely to be associated with improving the current situation.

A learning organisation is one capable of continual regeneration from the variety of knowledge, experience and skills of individuals within a culture which encourages mutual questioning and challenge around a shared purpose or vision. It emphasises the potential capacity and capability of organisations to regenerate themselves from within: and in this way for strategies to emerge from within. There is also an acknowledgement of the need for the organisation to be pluralistic, in which different, even conflicting ideas and views are welcomed, surfaced and become the basis of debate. Experimentation is the norm, so ideas are tried out in action and in turn become part of the learning process.

Lock-in is where an organisation achieves a proprietary position in its industry; it becomes an industry standard. Lock-in means that other businesses have to conform to or relate to that standard in order to prosper. The ‘architecture' of the industry is built around this dominant player. In the public sector in the UK, reference is made to the ‘gold standard', by which is meant an exemplar organisation – setting the ‘business model' for the sector against which the activities and performance of others are judged. If other organisations choose to provide services significantly differently they run the risk of a loss of credibility.

The achievement of lock-in is likely to be dependent on a number of factors:

  • Size or market dominance. It is unlikely that other organisations seek to conform to such standards unless they perceive the organisation that promotes it to be dominant in its market.
  • It is likely that such standards will be set early in life cycles of markets. In the volatility of growth markets it is more likely that the single-minded pursuit of lock-in by the first movers will be successful than when the market is mature.
  • Once this position is achieved, it may be self-reinforcing and escalating. When one or more firms support the standard, then more come on board. Then others are obliged to and so on.
  • There is likely to be rigorous insistence on the preservation of that lock-in position. Rivals will be seen off fiercely; insistence on conformity to the standard will be strict.

Logical incrementalism is the development of strategy by experimentation and learning from partial commitments rather than though global formulations of total strategies. For example:

  • Managers have a generalised rather than specific view of where they want the organisation to be in the future and try to move towards this position incrementally.
  • Managers try to be sensitive to environmental signals through constant scanning and by testing changes in strategy in small-scale steps.
  • They do this by attempting to ensure the success and development of a strong, secure, but flexible core business, building on the experience gained in that business to inform decisions about its development and experimenting with ‘side bet' ventures. Commitment to strategic options may therefore be tentative in the early stages of strategy development.
  • Such experiments cannot be expected to be the sole responsibility of top management. They emerge from the ‘subsystems', in the organisation. For example, the groups of people involved in, for example, product development, product positioning, diversification, external relations, and so on.

A low price strategy seeks to achieve a lower price than competitors whilst trying to maintain similar perceived product or service benefits to those offered by competitors. If a business unit aims to achieve competitive advantage through a low price strategy it has two basic choices. The first is to try to identify and focus on a market segment that is unattractive to competitors and in this way avoid competitive pressures to erode price. A more challenging situation is where there is competition on the basis of price. This is a common occurrence in the public sector and for commodity-like markets.

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Managing for value is concerned with maximising the long-term cash-generating capability of an organisation. Value creation is determined by three main issues:

  • Funds from operations. In the long term, this concerns the extent to which the organisation is operating profitably. This is determined by:
    • Sales revenue – made up of sales volume and the prices that the organisation is able to maintain in its markets.
    • ‘Production' and selling costs – both made up of fixed and variable elements.
    • Overhead or indirect costs.
  • Investment in assets – the extent to which assets and working capital are being stretched is also a key consideration. This will affect value creation as follows:
    • The costs of capital investment or, in some cases, the disposal of redundant assets.
    • The management of the elements of working capital such as stock, debtors and creditors will increase or decrease shareholder value as indicated.
  • Financing costs – the mix of capital in the business – between debt (requiring interest payments) and equity will determine the cost of capital (and also the financial risk).

Market development is a development direction where existing products are offered in new markets and has three main types:

  • Current products are exploited in other market segments, where similar critical success factors exist.
  • Development of new uses for existing products.
  • Geographical spread, either nationally or internationally, into new markets.

The process of market entry requires an organisation to select attractive and profitable national markets and to identify the appropriate entry mode. Some factors that require particular attention in comparing the attractiveness of national markets are these:

  • Macro-economic conditions reflected in indicators such as the GDP and levels of disposable income which help in the estimation of the potential size of the market. Companies must also be aware of the stability of a countries currency which may affect its income stream.
  • The political environment may create significant opportunities for organisations. It is common for regional development agencies in many counties to provide investment incentives to foreign investors.
  • The infrastructure of national markets will also be an important factor in assessing the attractiveness for national markets for entry, in particular:
    • Existing transport and communication infrastructure;
    • Availability of necessary local resources such as appropriately skilled labour.
    • Tariff and non-tariff barriers to trade, a key factor in deciding between exporting and local production. The higher these barriers are, the more attractive local production will be.
  • The similarity of cultural norms and social structures with the organisation's home country can provide an indicator of any changes to established products, processes and procedures which may be required.
  • The extent of political and legal risks which an organisation might face when doing business in the country. In broad terms political risk relates to the effect that political and social events or conditions may have on the profitability of a firm's activities and the security of its investments.

Market penetration is a development direction where an organisation gains market share. The ease with which an organisation can pursue a strategy of market penetration may be dependent on:

  • Market growth rate. When the overall market is growing, or can be induced to grow, it is easier for organisations with a small market share, or even new entrants, to gain share.
  • There may be resource issues driving or preventing market penetration. Building market share can be a costly process for weakly positioned businesses. Short-term profits are likely to be sacrificed, particularly when trying to build share from a low base.
  • Sometimes the complacency of market leaders can allow lower share competitors to catch up because they are not regarded as serious competitors (i.e. they are not like the current competitors).

Market processes are the dominant way in which organisations relate to their external suppliers, distributors and competitors in capitalist economies. It is not surprising that managers (and even politicians) have attempted to use internal markets to control their own organisations. Market processes involve some formalised system of ‘contracting' for resources or inputs from other parts of an organisation and for supplying outputs to other parts of an organisation. Control focuses on outputs, for example revenues earned in successful competition for contracts. The control is indirect: rather than accepting detailed performance targets determined externally, units have simply to earn their keep in competitive markets.

A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market. Customer needs may vary for a whole variety of reasons. In practical terms it is important to consider which bases of segmentation are most important in any particular market. For example, in industrial markets, segmentation is often thought of in terms of industrial classification of buyers – e.g. ‘we sell to the domestic appliance industry'. However, it may be that this is not the most relevant basis of segmentation when thinking about the future. Segmentation by buyer behaviour (for example, direct buying versus those users who buy through third parties such as contractors) or purchase value (for example, high-value bulk purchasers versus frequent low-value purchasers) might be more appropriate in some markets. Indeed, it is often useful to consider different bases of segmentation in the same market to help understand the dynamics of that market and how these are changing.

Middle manager roles in strategy are of five types:

  • The first is the systematic role of implementation and control: this does reflect the idea of top-down change in which they are monitors of that change.
  • The second is as “translators” of strategy when it is established by more senior management. If misinterpretation of the intended strategy is to be avoided, it is therefore vital that middle managers understand and feel an ownership of it.
  • Similarly, middle managers are likely to be involved in the reinterpretation and adjustment of strategic responses as events unfold– a vital role they are uniquely qualified for because they are in day-to-day contact with such aspects of the organisation and its environment.
  • They are therefore a crucial relevance bridge between top management and members of the organisation at lower levels.
  • They are also in a position to be advisors to more senior management on what are likely to be the organisational blockages and requirements for change.

A mission statement is a statement of the overriding direction and purpose of an organisation. It can be thought of as an expression of its raison d'être. Some organisations use the term vision statement – some even have both vision and mission statements. If there is substantial disagreement within the organisation or with stakeholders as to its mission (or vision), it may well give rise to real problems in resolving the strategic direction of the organisation. Although mission statements had become much more widely adopted by the early 2000s, many critics regard them as bland and wide-ranging. However, this may be necessary given the political nature of strategic management, since it is essential at that level to have statements to which most, if not all, stakeholders can subscribe. They need to emphasise the common ground amongst stakeholders and not the differences.

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A ‘no frills' strategy combines a low price, low perceived product/service benefits and a focus on a price-sensitive market segment. These segments might exist for a number of reasons:

  • The products or services are commodity-like.
  • There may be price-sensitive customers, who cannot afford, or choose not, to buy better-quality goods.
  • The buyers have high power and/or low switching costs – so building customer loyalty is difficult – for example with petrol retailing.
  • Where there are a small number of providers with similar market shares.
  • Where the major providers are competing on a non-price basis the low price segment may be an opportunity for smaller players to avoid the major competitors.

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Organisational culture is the ‘basic assumptions and beliefs that are shared by members of an organisation, that operate unconsciously and define in a basic taken-for-granted fashion an organisation's view of itself and its environment'. So expectations and strategy are rooted in ‘collective experience' (group and organisational) and become reflected in organisational routines that accumulated over time. In other words culture is about the collective behviours in an organisation and strategies can be seen as the outcome of the collective taken-for-granted assumptions, behaviours and routines of organisations. This taken-for-grantedness is likely to be handed down over time within a group and so oorganisations can be ‘captured' by their culture. The assumptions and behaviours of individuals within organisations are also influenced by assumptions and behaviours in the parts of the business environment with which those individuals and the organisation as a whole ‘impinge'. These are called cultural frames of reference. Also there are normally sub-cultures in parts of an organisations – which have different assumptions, behaviours and expectations. This may be the differences between business functions, geographical locations or even different informal groups (perhaps by age or length of service).

An organisational field is a community of organisations with a common ‘meaning system' and whose participants interact more frequently with one another than with those outside the field. Organisations within a field tend to share a common business environment such as a dominant technology, regulation or education and training. In turn this can mean that they tend to cohere around common norms and values. For example, there are many organisations in the organisational field of ‘justice' (such as lawyers, police, courts, prisons and probation services). Although, as specialists, their roles are different and their detailed prescriptions as to how justice should be achieved differ, they are all tied together into the same ‘politico-economic system'. They are all committed to the principle that justice is a good thing which is worth striving for and they interact frequently on this issue. An organisational field, therefore, is both the organisations comprising it and the assumptions they adhere to. This shared set of assumptions is referred to in this book as the recipe.

Organisational knowledge is the collective and shared experience accumulated through systems, routines and activities of sharing across the organisation. There are various reasons organisational knowledge has been highlighted as important. First, as organisations become more complex and larger the need to share and pool what people know becomes more of a challenge. Second, because information systems have started to provide more sophisticated ways of doing this. And third, because there is an increasing realisation that many of the lessons discussed already in this chapter are true. It is less likely that organisations will achieve competitive advantage through their physical resources and more likely that they will achieve advantage through the way they do things and the experience that they have accumulated. Therefore knowledge about how to do things which draws on that experience becomes crucially important.

The concept of organisational knowledge therefore closely relates to some of the ideas discussed in chapter 3. There are resources that underpin knowledge. For example, acquiring or developing adequate hardware and software for information systems infrastructure is a threshold capability for most organisations in the twenty-first century. Some knowledge will be a rare resource – for example, the knowledge of a particularly talented individual, such as a research scientist, or the intellectual property of an organisation (e.g. its patents). Knowledge is captured by formal organisational systems, processes (such as market research or procurement processes), and day-to-day activities which draw on people's experience. So it is likely to be a complex and causally ambiguous strategic capability made up of linked competences. It is also concerned with the capacity of an organisation to learn and is therefore central to the dynamic capability of an organisation to adapt to changing conditions.

Organisational processes can be thought of as controls on the organisation's operations and can therefore help or hinder the translation of strategy into action. Control processes can be sub-divided in two ways. First, they tend to emphasise either control over inputs or control over outputs. Input control processes concern themselves with the resources consumed in the strategy, especially financial resources and human commitment. Output control processes focus on ensuring satisfactory results, for example the meeting of targets or achieving market competitiveness. The second sub-division is between direct and indirect controls. Direct controls involve close supervision or monitoring. Indirect controls are more hands-off, setting up the conditions whereby desired behaviours are achieved semi-automatically. Organisations normally use a blend of these control processes, but some will dominate over others according to the strategic challenges.

Organisational routines may be the source of emergent strategies. All organisations have within them systems and routines for undertaking the operations of the business. These might include day-to-day decision making processes about resource allocation across businesses. For example, it could be that a manager within an organisation wishes to pursue a project and puts forward a proposal to do so. This may take the form of an argued case supported by a set of financial projections and measurements. In so doing that manager will be competing with other proposals for the resources available. The procedures for deciding between competing proposals will include financial yardsticks and benchmarks, the argued case by the competing managers and the extent to which those making the decision see it as fitting within an existing strategy and meeting the needs, in turn, of their own financial objectives and targets. The point is that, whilst the context for decisions may be established at the top much of the resolution of what proposals go forward and what do not is happening at a much lower level than what would be conventionally thought of “strategic”. It is much more day-to-day or month-to-month set of activities. However the cumulative effects of such decisions will guide the strategy of an organisation.

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The paradigm is the set of assumptions held in common and taken for granted in an organisation. For an organisation to operate effectively there has to be such a generally accepted set of assumptions. These assumptions represent collective experience without which people would have to ‘reinvent their world' for different circumstances that they face. The paradigm both informs and drives strategy. It can both underpin successful strategies and constrain the development of new strategies.

The parental developer seeks to employ its own competences as a parent to add value to its businesses. Here, then, the issue is not so much about how it can help create or develop benefits across business units or transfer capabilities between business units, as in the case of managing synergy. Rather parental developers have to be clear about the relevant resources or capabilities they themselves have as parents to enhance the potential of business units. If such parenting competences exist, corporate managers then need to identify a ‘parenting opportunity': a business or businesses which are not fulfilling their potential but where improvement could be made by the application of the competences of the parent.

The parenting matrix classifies business units in terms of the fit between the corporate parent and the business unit:

  • Heartland business units are ones to which the parent can add value without danger of doing harm. They should be at the core of future strategy.
  • Ballast business units are ones the parent understands well but can do little for. They would probably be just as successful as independent companies. If they are part of a future corporate strategy, they need to be managed with a light touch and bear as little cost of the corporate bureaucracy as possible.
  • Value trap business units are dangerous. They appear attractive because there are opportunities for the parent to add value. But they are deceptively attractive, because there is a high danger that the parent's attentions will result in more harm than good. Value trap businesses should only be included in the future strategy if they can be moved into the heartland. Moreover, some adjustments to the skills, resources or characteristics of the parent will probably be necessary.
  • Alien business units are clear misfits. They offer little opportunity to add value and they rub awkwardly with the normal behaviour of the parent. Exit is the best strategy.

Performance targets focus on the outputs of an organisation (or part of an organisation), such as product quality, revenues or profits. These targets are often known as Key Performance Indicators (KPIs). The performance of an organisation is judged, either internally or externally, on its ability to meet these targets. However, within specified boundaries, the organisation remains free on how targets should be achieved. Many managers find it difficult to develop a useful set of targets. One reason for this is that any particular set of indicators is liable to give only a partial view of the overall picture. Also, some important indicators (such as customer satisfaction) tend to get neglected because hard to measure, leaving the focus on easily available data such as financial ratios.

The PESTEL framework categorises environmental influences into six main types: political, economic, social, technological, environmental and legal. These factors are not independent of each other many are linked. For example, technology developments change the way that people work, their living standards and their life styles. Changes in any of these factors affect the competitive environment in which organisations operate. So understanding how PESTEL factors might impact on and drive change in general is only really a starting point. Managers need to understand the key drivers of change and also the differential impact of these external influences and drivers on particular industries, markets and individual organisations. The influences and drivers also vary from nation to nation (and from region to region within countries). It is particularly important that PESTEL is used to look at the future impact of environmental factors, which may be different from their past impact.

Planning processes are the archetypal administrative control, where the successful implementation of strategies is achieved through processes that plan and control the allocation of resources and monitor their utilisation. The focus is on controlling the organisation's inputs, particularly financial. A plan would cover all parts of the organisation and show clearly, in financial terms, the level of resources allocated to each area (whether that be functions, divisions or business units). It would also show the detailed ways in which this resource was to be used. This would usually take the form of a budget. These cost items would then be monitored regularly to measure actual spend against plan.

Porter's Diamond suggests that there are inherent reasons why some nations are more competitive than others, and why some industries within nations are more competitive than others. It suggests that the national home base of an organisation plays an important role in creating advantage on a global scale. This home base provides factors which organisations are able to build on and extend to provide such advantage:

  • There may be specific factor conditions that help explain the basis of advantage on a national level. These provide initial advantages that are subsequently built upon to yield more advanced factors of competition. For example, in countries such as Switzerland and Japan, in which either legislation or custom means that it is difficult to lay off labour, there has been a greater impetus towards automation of industries. Also the linguistic ability of the Swiss has provided a significant advantage to its banking industry.
  • Home demand conditions provide the basis upon which the characteristics of the advantage of an organisation are shaped. For example, Japanese customers' high expectations of electrical and electronic equipment have provided an impetus for those industries in Japan leading to global dominance of those sectors.
  • One successful industry may lead to advantage in related and supporting industries. In Italy, for example, the leather footwear industry, the leather working machinery industry and the design services, which underpin them, benefit from one another. In Singapore, port services and ship repair industries are mutually advantageous.
  • The characteristics of firm strategy, industry structure and rivalry in different countries also help explain bases of advantage. In Germany the propensity for systematic, often hierarchical, processes of management has been particularly successful in providing reliability and technical excellence in engineering industries. Domestic rivalry and the search for competitive advantages within a nation can help provide organisations with bases for achieving such advantage on a more global scale. Examples are brewing industries of The Netherlands and Denmark and the pharmaceuticals industry in Switzerland.

The portfolio manager is, in effect, a corporate parent acting as an agent on behalf of financial markets and shareholders with a view to enhancing the value attained from the various businesses in a more efficient or effective way than financial markets could. Their role is to identify and acquire under-valued assets or businesses and improve them. They might do this, for example, by acquiring another corporation, divesting low-performing businesses within it and encouraging the improved performance of those with potential. Such corporations may not be much concerned about the relatedness of the business units in their portfolio and may only play limited roles within those business units. Portfolio managers seek to keep the cost of the centre low, for example by having a small corporate staff with few central services, leaving the business units alone so that their chief executives have a high degree of autonomy, but setting clear financial targets for those chief executives with very high rewards if they achieve them and the expectation of low rewards, or loss of position, if they do not. Such corporate parents could, of course, manage quite a large number of such businesses because they are not directly intervening in the product/market strategies of those businesses. Rather they are setting financial targets, making central evaluations about the well-being and future prospects of such businesses and investing or divesting accordingly.

Power is the ability of individuals or groups to persuade, induce or coerce others into following certain courses of action. This is the mechanism by which one set of expectations will dominate strategic development or seek compromise with others.

There are various sources of power for both internal and external stakeholders in influencing a particular strategy. For example, position in the hierarchy, personal qualities, control of resources, knowledge and skills, control of the environment and direct involvement in implementation of strategy. It should be remembered that the distribution of power will vary in relation to the particular strategy under consideration. Also the relative importance of these sources will vary over time. Indeed major changes in the business environment – such as de-regulation or the advent of cheap and powerful IT- can drastically shift the power balance between organisations and their stakeholders.

Since there are a variety of different sources of power, it is often useful to look for indicators of power, which are the visible signs that stakeholders have been able to exploit one or more of the sources of power. There are four useful indicators of power: The status of the individual or group (such as job grade or reputation); the claim on resources (such as budget size); representation in powerful positions and symbols of power (such as office size or use of titles and names). No single indicator is likely fully to uncover the structure of power within a company. However, by looking at all four indicators, it may be possible to understand which people or groups appear to have power by a number of these measures.

Price-based strategies seek to gain competitive advantage through prices that are more attractive to customers than competitors. There are two broad approaches. First is the no frills strategy (route 1 on the strategy clock) which combines a low price, low perceived added value and a focus on a price-sensitive market segment. It can be viable because there may well exist a segment of the market which, while recognising that the quality of the product or service might be low, cannot or chooses not to afford to buy better-quality goods.

Second is the low price strategy (Route 2 on the strategy clock) which seeks to achieve a lower price than competitors whilst trying to maintain similar value of product or service. If a business unit aims to achieve competitive advantage through a low price strategy it has two basic choices in trying to achieve sustainability. The first is to try and identify and focus on a market segment which is unattractive to competitors; and in this way avoid competitive pressures to erode price below levels which would achieve acceptable returns. A more challenging situation is where there is competition on the basis of price. Here tactical advantage may be gained by reducing price; but it is likely to be followed by competitors with the danger of a slide into margin reduction across an industry as a whole, and an inability to reinvest to develop the product or service for the long term. Clearly a low price strategy cannot be pursued without a low cost base. However low cost in itself is not a basis for advantage if competitors can also achieve the same low costs. The need is for a low cost base which competitors cannot match.

The principal-agent model can be useful in explaining how each of the relationships in the corporate governance chain operates. In the simplest chain, (for example in a small family business) the board are the direct ‘agent' for the shareholders (the ‘principal'). There may be a small number of family shareholders some of whom will be elected as board members and also run the company day-to-day. Non-executive shareholders (the beneficiaries) directly scrutinise the performance of the board in providing them with financial returns. In larger organisations the situation is more complicated as there is a need to employ professional managers to run the organisation without being either shareholders or board members. So there are extra links in the chain since these managers are ‘agents' for the board (the ‘principal').

In larger publicly quoted companies the chain will also have additional links on the shareholder side since there are now thousands of individual shareholders. But most of these beneficiaries will not have invested directly in companies. Most will hold financial investments – particularly in pension funds that are investing in a whole range of companies. These funds are controlled by trustees and the day-to-day investment activity is undertaken by investment managers. Indeed the final beneficiaries may not even know in which companies they have a financial stake and have little power to influence the companies' boards directly. So the board are the agents for investment managers who in turn are agents for trustees and eventually the ultimate beneficiaries. Interestingly the beneficiaries of companies' performance are employees of firms whose pensions are dependent on a competitive and successful private sector in the economy. So the governance chain is, in theory, a circle – starting and finishing with many millions of individual employees and their dependents.

Product development is a development direction where organisations deliver modified or new products to existing markets. At a minimum, product development may be needed to survive but may also represent a considerable opportunity. Sometimes this may be achieved with existing capabilities. However, product development may require the development of new capabilities. Despite the attractiveness of product development, it may not always be in line with expectations and may raise uncomfortable dilemmas for organisations. For example, powerful stakeholders may oppose product development.

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Reinforcing cycles are created by the dynamic interaction between the various factors of environment, configuration and elements of strategy. Reinforcing cycles tend to preserve the status quo. For example, the ‘machine bureaucracy' is a configuration often adopted in stable environmental conditions and can help create a position of cost leadership. This can underpin a positioning of ‘low price' (or cost efficiency in the public services), requiring standardised work processes which, in turn, are well supported by a defender culture. This culture seeks out stable parts of the environment and the whole cycle is self-perpetuating.

An organisation's resources can be considered under the following four broad categories:

  • Physical resources – such as the number of machines, buildings or the production capacity of the organisation. The nature of these resources, such as the age, condition, capacity and location of each resource will determine the usefulness of such resources.
  • Financial resources – such as capital, cash, debtors and creditors, and suppliers of money (shareholders, bankers, etc.).
  • Human resources – including the number and mix (e.g. demographic profile) of people in an organisation. The intangible resource of their skills and knowledge is also likely to be important. This applies both to employees and other people in an organisation's networks. In knowledge-based economies people do genuinely become ‘the most valuable asset'.
  • Intellectual capital is an important aspect of the intangible resources of an organisation. This includes patents, brands, business systems and customer databases. There should be no doubt that these intangible resources have a value, since when businesses are sold part of the value is ‘goodwill'. In a knowledge-based economy intellectual capital is likely to be a major asset of many organisations.

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A strategic business unit is a part of an organisation for which there is a distinct external market for goods or services that is different from another SBU. The identification of an organisation's strategic business units is essential to the development of business-level strategies since these will vary from one SBU to another. There are two opposing pitfalls that need to be avoided:

  • If each product and each geographical branch (and so on) is considered to be an independent SBU such immense variety of competitive strategies for a single organisation would create a lack of focus and inefficiency. This would make the development of corporate-level strategy almost impossible.
  • On the other hand, the concept of the SBU is important in properly reflecting the diversity of products and markets that actually exist.

There are two broad criteria which can help in avoiding these two pitfalls and, therefore in identifying SBUs that are useful when developing business-level strategies.

  • External criteria for identifying SBUs are about the nature of the market place for different parts of the organisation. Two parts of an organisation should only be regarded as the same SBU if they are targeting the same customer types, through the same sorts of channels and facing similar competitors.
  • Internal criteria for identifying SBUs are about the nature of an organisation's strategic capability – its resources and competences. Two parts of an organisation should only be regarded as the same SBU if they have similar products/services built on similar technologies and sharing a similar set of resources and competences. This usually means that the cost structure of the ‘units' will be similar.

Scenarios are detailed and plausible views of how the business environment of an organisation might develop in the future based on groupings of key environmental influences and drivers of change about which there is a high level of uncertainty. For example, in the energy industries, given lead times and costs of exploration, there is a need for views of the business environment of 20 years or even more. Whilst a whole host of environmental issues are of relevance a number of these, such as raw material availability, transmission and storage technologies and subsequent prices and demand, are of crucial importance. Obviously, it is not possible to forecast precisely such factors over a 20-year + time horizon, but it can be valuable to have different views of possible futures. In other industries the level of uncertainty is very high even for much shorter time horizons and scenario planning may be valuable too. Scenario planning does not attempt to predict the unpredictable and, therefore, considers multiple, equally plausible, futures. These scenarios are not just based on a hunch; they are logically consistent but different from each other.

Sharing and debating these scenarios improves organisational learning by making managers more perceptive about the forces in the business environment and what is really important. Managers should also evaluate and develop strategies (or contingency plans) for each scenario. They should also monitor the environment to see how it is actually unfolding and adjust strategies and plans accordingly.

Processes of self-control achieve the integration of knowledge and co-ordination of activities by the direct interaction of individuals without supervision. The contribution of managers to this process is to ensure that individuals have the channels to interact (perhaps by improving the IT and communications infrastructure), and that the social processes which this interaction creates are properly regulated to avoid rigidities. So managers are concerned with shaping the context in which others are working – particularly to ensure that knowledge creation and integration is working. If individuals are to have a greater say in how they perform their work and achieve the organisation's goals, they need to be properly supported in the way in which resources are made available to them.

Stakeholder mapping identifies stakeholder expectations and power and helps in understanding political priorities. It underlines the importance of two issues:

  • How interested each stakeholder group is to impress its expectations on the organisation's purposes and choice of specific strategies.
  • Whether stakeholders have the power to do so.

Stakeholders are those individuals or groups who depend on an organisation to fulfil their own goals and on whom, in turn, the organisation depends. Important external stakeholders would usually include financial institutions, customers, suppliers, shareholders and unions. Inside an organisation few individuals have sufficient power to determine unilaterally the strategy of the organisation. Influence is likely to occur only because individuals share expectations with others by being a part of a stakeholder group, which may be departments, geographical locations or different levels in the hierarchy. Individuals may belong to more than one stakeholder group and stakeholder groups will ‘line up' differently depending on the issue or strategy in hand.

A strategic alliance is where two or more organisations share resources and activities to pursue a strategy. This kind of joint development of new strategies has become increasingly popular. This is because organisations cannot always cope with increasingly complex environments (such as globalisation) from internal resources and competences alone. They may see the need to obtain materials, skills, innovation, finance or access to markets, and recognise that these may be as readily available through co-operation as through ownership. Alliances vary considerably in their complexity, from simple two-partner alliances co-producing a product to one with multiple partners providing complex products and solutions.

There are four types of strategic change:

  • Adaptation is change which can be accommodated within the current paradigm and occur incrementally. It is the most common form of change in organisations.
  • Reconstruction is the type of change which may be rapid and could involve a good deal of upheaval in an organisation, but which does not fundamentally change the paradigm. It could be a turnaround situation where there is need for major structural changes or a major cost-cutting programme to deal with a decline in financial performance or difficult or changing market conditions.
  • Evolution is a change in strategy which requires paradigm change, but over time. This has given rise to the idea of the learning organisation.
  • Revolution is change which requires rapid and major strategic and paradigm change. This could be in circumstances where the strategy has been so bounded by the existing paradigm and established ways of doing things in the organisation, that, even when environmental or competitive pressures might require fundamental change, the organization has failed to respond.

Strategic choices involve understanding the underlying bases for future strategy at both the business unit and corporate levels and the options for developing strategy in terms of both the directions in which strategy might move and the methods of development. These issues are covered in Part III of this book:

  • There are strategic choices in terms of how the organisation seeks to compete at the business level. This requires an identification of bases of competitive advantage arising from an understanding of both markets and customers and the strategic capability of the organisation.
  • At the highest level in an organisation there are issues of corporate-level strategy, which are concerned with the scope of an organisation's strategies. This includes decisions about the portfolio of products and/or businesses and the spread of markets. So for many organisations international strategies are a key part of corporate-level strategy. Corporate-level strategy is also concerned with the relationship between the separate parts of the business and how the corporate ‘parent' adds value to these various parts.
  • Strategic choices also exist in terms of development directions (such as product or market development) and development methods (such as internal, alliances or acquisitions).

Strategic control lies between the two extremes of strategic planning and financial control and is the style most organisations operate. The relationship between the centre and the business units is one of a parent who behaves as a strategic shaper, influencing the behaviour in business units and forming the context within which managers are operating. Because it allows discretion lower down, it is more suitable where the centre has little knowledge about business unit operations and business unit strategies are unlikely to make major impacts on the corporation as a whole.

The strategic customer is the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased. Unless you are clear on who is the strategic customer you end up analysing and targeting the wrong people because in many markets the strategic customer acts as a ‘gatekeeper' to the end user. So there has to be an understanding of what is valued by that strategic customer as a starting point for strategy. This does not mean that the requirements of the other customers are unimportant – they have to be met. But the requirements of the strategic customer are of paramount importance. For example, for many consumer goods the retail outlet is the strategic customer as they way they display, promote and support products in store are hugely influential on the final consumer preferences. But internet shopping may change this pattern putting the final consumer back as the strategic customer. There are many instances where the strategic customer does not use the product themselves. Purchasing of gifts is an obvious example. Also within organisations managers are buying plant, equipment, software on behalf of those who use them in organisations – they are the strategic customer – but not the user. In the public sector the strategic customer is very often the ‘body' who controls the funds or authorises use rather than the user of the service. So family doctors are the strategic customers of pharmaceutical companies and so on.

Many organisations go through long periods of relative continuity during which established strategy remains largely unchanged or changes incrementally. This can go on for considerable periods of time in some organisations. But these processes tend to create strategic drift – where strategies progressively fail to address the strategic position of the organisation and performance deteriorates. This is typically followed by a period of flux in which strategies change but in no very clear direction. There may then be transformational change, in which there is a fundamental change in strategic direction, though this is infrequent.

A strategic gap is an opportunity in the competitive environment that is not being fully exploited by competitors. These are of several types: By using some of the frameworks described in this chapter, managers can begin to identify opportunities to gain competitive advantage in this way:

  • Opportunities in substitute industries
  • Opportunities in other strategic groups or strategic spaces
  • Opportunities in the chain of buyers
  • Opportunities for complementary products and services
  • Opportunities in new market segments
  • Opportunities over time

Strategic groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases. These characteristics are different from those in other strategic groups in the same industry or sector. For example, in grocery retailing, supermarkets, convenience stores and corner shops are three of the strategic groups. There may be many different characteristics that distinguish between strategic groups but these can be grouped into two major categories First, the scope of an organisation's activities (such as product range, geographical coverage and range of distribution channels used). Second, the resource commitment (such as brands, marketing spend and extent of vertical integration). Which of these characteristics are especially relevant in terms of a given industry needs to be understood in terms of the history and development of that industry and the forces at work in the environment.

Strategic planning systems may take the form of systematised, step by step, chronological procedures involving different parts of the organisation. For example, in a large organisation the following steps might occur:

  • The cycle's starting point is usually a set of guidelines or assumptions about the external environment and also the overall priorities, guidelines and expectations from the set by the corporate centre.
  • This is followed by strategic plans drawn up by the various businesses or divisions. So strategic plans came up from the businesses to the corporate centre the executives of which discuss those plans with the businesses usually in face-to-face meetings. On the basis of these discussions the businesses revise their plans for further discussion.
  • The corporate plan results from the aggregation of the business plans and that co-ordination may be undertaken by a corporate planning department that, in effect, has a coordination role. The corporate board then has to approve the corporate plan.
  • A number if key financial and strategic targets are then likely to be extracted to provide a basis for performance monitoring of businesses and key strategic priorities on the basis of the plan.

In the strategic planning style the corporate centre is the master planner prescribing detailed roles for departments and business units, whose role is confined to the operational delivery of the plan. The centre orchestrates, co-ordinates and controls all of business unit activities through the extensive use of the formal planning and control systems. The centre also directly manages the infrastructure and provides many corporate services. This is the classic bureaucracy familiar to many managers in large public sector organisations.

The strategic position is concerned with identifying the impact on strategy of the external environment, an organisation's strategic capability (resources and competences) and the expectations and influence of stakeholders. The sorts of questions this raises are central to future strategies and these issues are covered in Part II of this book:

  • The environment. The organisation exists in the context of a complex political, economic, social, technological, environmental and legal world. This environment changes and is more complex for some organisations than for others. How this affects the organisation could include an understanding of historical and environmental effects, as well as expected or potential changes in environmental variables. Many of those variables will give rise to opportunities and others will exert threats on the organisation – or both.
  • The strategic capability of the organisation – made up of resources and competences One way of thinking about the strategic capability of an organisation is to consider its strengths and weaknesses (for example, where it is at a competitive advantage or disadvantage). The aim is to form a view of the internal influences – and constraints – on strategic choices for the future. It is usually a combination of resources and high levels of competence in particular activities (in this book referred to as core competences) that provide advantages which competitors find difficult to imitate.
  • There are important expectations that influence an organisation's purposes. The issue of corporate governance is important. Here the question is: who should the organisation primarily serve and how should managers be held responsible for this? But the expectations of a variety of different stakeholders also affect purposes. Which stakeholder views prevail will depend on which group has the greatest power, and understanding this can be of great importance. Cultural influences from within the organisation and from the world around it also influence the strategy an organisation follows, not least because the environmental and resource influences on the organisation are likely to be interpreted in terms of the assumptions inherent in that culture. All of this raises ethical issues about what managers and organisations do and why.

Strategy is the direction and scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources with the aim of fulfilling stakeholder expectations. There are a number of consequences of these characteristics. Strategic decisions are likely to be complex in nature; may also have to be made in situations of uncertainty; they are likely to demand an integrated approach to managing the organisation; they may also require relationships and networks outside the organisation; they will very often involve change in organisations - which may prove difficult because of the heritage of resources and because of culture.

Assuming that there are a number of providers customers will choose which offering to accept on their perception of value-for-money. This consists of the combination of price and customer perceived product/service benefits of each offering – shown graphically as the strategy clock. Since the positions on the ‘strategy clock' represent different positions in the market where customers (or potential customers) have different ‘requirements' in terms of value-for-money they also represent a set of generic strategies for achieving competitive advantage. Since these strategies are ‘market-facing' it is important to understand the critical success factors for each position on the clock. The consideration of each of these strategies will also acknowledge the importance of an organisation's costs – particularly relative to competitors.

There are three ways of looking at strategy development - referred to in this book as the strategy lenses:

  • Strategy as design: the view that strategy development can be a logical process in which the forces and constraints on the organisation are weighed carefully through analytic and evaluative techniques to establish clear strategic direction. This creates conditions in which carefully planned implementation of strategy should occur. This is perhaps the most commonly held view about how strategy is developed and what managing strategy is about. It is usually associated with the notion that it is top management's responsibility to do all this and that therefore they should lead the development of strategy in organisations.
  • Strategy as experience: here the view is that future strategies of organisations are based on the adaptation of past strategies influenced by the experience of managers and others in the organisation. This is strongly driven by the taken-for-granted assumptions and ways of doing things embedded in the culture of organisations. In so far as different views and expectations exist, they will be resolved not just through rational analytic processes, but also through processes of bargaining and negotiation. Here, then, the view is that there is a tendency for the strategy of the organisation to build on and be a continuation of what has gone before.
  • Strategy as ideas: neither of the above lenses is especially helpful in explaining innovation. So how do new ideas come about? This lens emphasises the importance ofvariety and diversity in and around organisations, which can potentially generate genuinely new ideas. Here strategy is seen not so much as planned from the top but as emergent from within and around the organisation as people cope with an uncertain and changing environment in their day-to-day activities. Top managers are the creators of the context and conditions in which this can happen and need to be able to recognise patterns in the emergence of such ideas that form the future strategy of their organisations. New ideas will emerge, but they are likely to have to battle for survival against the forces for conformity to past strategies (as the experience lens explains). Drawing on evolutionary and complexity theories, the ideas lens provides insights into how innovation might take place.

Strategy workshops usually take the form of intensive working sessions of a few days, perhaps away from the office, by groups of executives addressing the strategy of the organisation. They may employ analytic tools and techniques, as well as drawing on participants' experience, to develop strategic recommendations to the senior executives. A strategy workshop may be for the top management team of the organisation itself – perhaps the board of directors. It could be for a different level of management, perhaps the heads of departments or functions in an organisation. Or, again, it may consist of different levels of management and staff across the organisation. Indeed organisations may set up project teams to tackle particular issues with the specific intent of involving groups of managers or staff with familiarity of those issues. The aim is, therefore, to devolve responsibility whilst also accessing expertise.

Translating strategy into action is concerned with ensuring that strategies are working in practice. These issues are covered in Part IV of this book and includes:

  • Structuring an organisation to support successful performance. This includes organisational structures, processes and relationships (and the interaction between these elements).
  • Enabling success through the way in which the separate resource areas (people, information, finance and technology) of an organisation support strategies. The reverse is also important to success namely, the extent to which new strategies are built on the particular resource and competence strengths of an organisation.
  • Managing strategy very often involves change- this will include the need to understand how the context of an organisation should influence the approach to change; the different types of roles for people in managing change. It also looks at the styles that can be adopted for managing change and the levers by which change can be effected.

Structural types define the ‘levels' and roles in an organisation. They are important to managers not just because they describe who is responsible for what. Formal structures matter in at least two more ways. First, structural reporting lines shape patterns of communication and knowledge exchange: people tend not to talk much to people much higher or lower in the heirarchy, or in different parts of the organisation. Second, the kinds of structural positions at the top suggest the kinds of skills required to move up the organisation: a structure with functional specialists such as marketing or production at the top indicates the importance to success of specialised functional disciplines rather than general business experience. In short, formal structures can reveal a great deal about the role of knowledge and skills in an organisation.

There are seven basic structural types: functional, multidivisional, holding, matrix, transnational, team and project. Broadly, the first three of these tend to emphasise one structural dimension over another, for instance functional specialisms or business units. The four that follow tend to mix structural dimensions more evenly, for instance trying to give product and geographical units equal weight. However, none of these structures is a universal solution to the challenges of organising. Rather, the right structure depends on the particular kinds of challenges each organisation faces.

Substitution reduces demand for a particular ‘class' of products as customers switch to the alternatives – even to the extent that this class of products or services becomes obsolete. This depends on whether a substitute provides a higher perceived benefit or value. Substitution may take different forms:

  • There could be product-for-product substitution.
  • There may be substitution of need by a new product or service, rendering an existing product or service redundant.
  • Generic substitution occurs where products or services compete for disposable income. So some industries suffer because consumers decide to ‘do without' and spend their money elsewhere. In the public sector different services (education, health, defence etc.) compete for a share of public spending.

Success criteria are used to judge the likely success or failure of a strategic option. There are three main success criteria:

  • Suitability is concerned with whether a strategy addresses the circumstances in which an organisation is operating – the strategic position as discussed in Part II of this book.
  • Acceptability is concerned with the expected performance outcomes (such as the return or risk) of a strategy and the extent to which these would be in line with the expectations of stakeholders.
  • Feasibility is concerned with whether a strategy could be made to work in practice. Assessing the feasibility of a strategy requires an emphasis on more detailed practicalities of strategic capability.

SWOT analysis summarises the key issues from the business environment and the strategic capability of an organisation that are most likely to impact on strategy development. This can also be useful as a basis against which to judge future courses of action. The aim is to identify the extent to which the current strengths and weaknesses are relevant to, and capable of, dealing with the changes taking place in the business environment. It can also be used to assess whether there are opportunities to exploit further the unique resources or core competences of the organisation. Overall a SWOT analysis should help focus discussion on future choices and the extent to which an organisation is capable of supporting these strategies.

Synergy is often seen as the raison d'être of the corporate parent. In terms of corporate parenting, the logic is that value can be enhanced across business units in two main ways:

  • Resources or activities might be shared: for example, common distribution systems might be used for different businesses; overseas offices may be shared by smaller business units acting in different geographical areas; common brand names may provide value to different products within different businesses.
  • There may exist common skills or competences across businesses. If this is so, then the skills and competences learned in one business may be shared by another, thus improving performance. Or there may exist expertise built up, for example, in marketing or research, which is transferable to other businesses within a portfolio less capable in such ways, again enhancing their performance.

However, there are problems in achieving such synergistic benefits:

  • Excessive costs: the benefits in such sharing or transference of skills need to outweigh the costs of undertaking such integration
  • Overcoming self interest: managers in the business units have to be prepared to co-operate in such transference and sharing.
  • The illusion of synergy. It is not unusual for managers to claim, either at the business level or the corporate level, that particular competences exist, are important and are useful to share, when they are little more than the inherited myths in the business, or are not really valued by customers.
  • Compatibility between business unit systems and culture: a business may have been acquired with the logic of gaining synergistically from an existing business in a firm's portfolio, only to find that the two businesses are quite different in cultural terms such that sharing between the two is problematic.
  • Variations in local conditions: particularly between different countries.
  • Determination: the corporate parent needs to be determined to achieve such synergies. The need here, at a minimum, is for central staff to act as integrators, and therefore to understand the businesses well enough to do so. The parent may also need to be prepared to intervene at the business level in terms of strategic direction and control to ensure that such potential synergies bear fruit.

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A technological path identifies the major factors that are influencing technological developments. There are four main types:

  • Supplier-dominated developments – where the strategic issue for the producer is rapid learning on how new technologies might transform business processes in ‘their' part of the value network.
  • Scale-intensive developments –where advantage is gained from economies of scale and learning results from that scale. Here the strategic challenge is to ensure that incremental learning does occur and best practice is diffused through the organisation.
  • Information-intensive developments –where the exploitation of IT is the central strategic issue.
  • Science-based developments – where he strategic challenges are to monitor academic research, develop products and acquire the resources to achieve commercial-scale production. An associated task is the assessment and management of risk.

Technology management is concerned with the relationship between technology, innovation and strategic success. The key strategic issue is innovation and technology should be seen as a means of underpinning innovation in organisations. But it is easy for organisations to get distracted by technology development itself without asking how the technology will assist in the creation and sharing of knowledge in an organisation. Crucial is the question as to how the process will provide competitive advantage. The technology itself may be easy to acquire by competitors so is not necessarily a source of advantage. The exploitation of that technology is where advantage may be created.

The link between business strategy and technology is likely to be dependent on context. So factors such as company size, industry sector and product type will shape the relationship. However, the following issues are usually important to understand and manage: how technology changes the competitive situation; how technology can underpin strategic capability and how to organise technology to achieve competitive advantage.

A tipping point is where demand for a product or service suddenly takes off or declines– sometimes dramatically. This phenomenon is also observed in public health in the progress of an epidemic. It is equally relevant to decline as well as growth – which is of interest to many public sector organisations – for example, reductions in crime. It appears that it is the combination of three factors that accelerates adoption at a tipping point: the influence of a few important people (e.g. high profile early adopters); a memorable message (usually about benefits) and small changes in context (usually the business environment).

The TOWS matrix is used to generate strategic options by building directly on the information about the strategic position that is summarised in a SWOT analysis. In this sense the TOWS matrix not only helps generate strategic options it also addresses their suitability. Each box of the TOWS matrix is used to identify options that address a different combination of the internal factors (strengths and weaknesses) and the external factors (opportunities and threats). For example, the top left-hand box should list options that use the strengths of the organisation to take advantage of opportunities in the business environment. In contrast the bottom right-hand box should list options that minimise weaknesses and also avoid threats.

A turnaround strategy requires an emphasis is on speed of change and rapid cost reduction and/or revenue generation. Some of the main elements of turnaround strategies are:

  • Crisis stabilisation. The aim here is to regain control over the deteriorating position. There is likely to be a short-term focus on cost reduction and/or revenue increase.
  • Management Changes. Changes in management are usually required, especially at the top level. This usually includes the introduction of a new chairman or chief executive, as well as changes in the board, especially in marketing, sales and finance.
  • Gaining stakeholder support. It is likely that, as decline has occurred, there has been less and less good quality of information to key stakeholders. In a turnaround situation it is vital that key stakeholders, perhaps the bank or key shareholder groups, as well as employees are kept clearly informed of the situation as it is and improvements as they are being made.
  • Clarifying the target market(s). Central to any turnaround success is ensuring clarity on the target market or market segments most likely to generate cash and grow profits and focusing revenue generating activities on those key market segments.
  • Re-focusing. Clarifying the target market is also likely to provide the opportunity to discontinue products and services that are either not targeted on those markets, eating up management time for little return or not making sufficient financial contribution.
  • Financial restructuring. The financial structure of the organisation may need to be changed. This typically involves changing the existing capital structure, raising additional finance or renegotiating agreements with creditors, especially banks.
  • Prioritisation of critical improvement areas. All of this requires the ability of management to prioritise those things that give quick and significant improvements.

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Value adding activities of corporate parents can be of various types:

Envisioning the overall role and expectations of the organisation, sometimes called strategic intent. This is important for three main reasons.

  • Focus: Because in the absence of such clarity it is likely that the corporate parent will undertake activities and bear costs that have nothing to do with adding value to the business units, and are therefore just costs which diminish value.
  • Clarity to external stakeholders: Because corporate managers need to make clear to stakeholders what the corporation as a whole is about.
  • Clarity to business units: Internally, if business unit managers are not be able to make sense of what their corporate parent is there for, they inevitably feel as though the corporate centre is either little more than a cost burden, or that corporate executives lack clarity of direction.

A second role is that of intervening within business units to improve performance or developing business unit strategy; for example:

  • By regularly monitoring the performance of business units and their senior executives against the standards they have been set;
  • By taking action to improve business unit level performance, for example, by replacing managers, selling off businesses or ensuring turnaround of poorly performing divisions or businesses.
  • Actively seeking to challenge and develop the strategic ambitions of the business unit.
  • Coaching and training of people and managers in business units.
  • Helping develop the strategic capabilities of business units.
  • Achieving synergies across business units and encouraging collaboration and co-ordinating across business units which could result in products or services which a single unit could not deliver.

Third, the corporate parent may be able to offer central services and resources to help business units such as:

  • Investment, particularly during the early days of new ventures.
  • Scale advantages from resource sharing, particularly in the use of infrastructure, support services and other overhead items.
  • Transferable managerial capabilities that can be used across business units.
  • The corporate parent may also have expertise of its own that can be helpful to business units; for example:
    • Providing expertise and services not available within smaller units.
    • Knowledge creation and sharing processes that might help foster innovation and learning.
    • Leverage for example in access to markets or in purchasing, by combining the purchasing power of the business units.
    • Skills in brokering external linkages or collaborations and accessing external networks.

The value chain describes the activities within and around an organisation which together create a product or service. It is the cost of these value activities and the value that they deliver that determines whether or not best value products or services are developed. The concept was used and developed by Michael Porter in relation to competitive strategy. Primary activities are directly concerned with the creation or delivery of a product or service and can be grouped into five main areas:

  • Inbound logistics are the activities concerned with receiving, storing and distributing the inputs to the product or service. They include materials handling, stock control, transport, etc.
  • Operations transform these various inputs into the final product or service: machining, packaging, assembly, testing, etc.
  • Outbound logistics collect, store and distribute the product to customers. For tangible products this would be warehousing, materials handling, transport, etc. In the case of services, they may be more concerned with arrangements for bringing customers to the service if it is a fixed location (e.g. sports events).
  • Marketing and sales provide the means whereby consumers/users are made aware of the product or service and are able to purchase it. This would include sales administration, advertising, selling and so on. In public services, communication networks which help users access a particular service are often important.
  • Service includes all those activities which enhance or maintain the value of a product or service, such as installation, repair, training and spares.

Each of these groups of primary activities is linked to support activities that help to improve the effectiveness or efficiency of primary activities. They can be divided into four areas:

  • Procurement. This refers to the processes for acquiring the various resource inputs to the primary activities. As such, it occurs in many parts of the organisation.
  • Technology development. All value activities have a ‘technology', even if it is just know-how. The key technologies may be concerned directly with the product (e.g. R&D, product design) or with processes (e.g. process development) or with a particular resource (e.g. raw materials improvements). This area is fundamental to the innovative capacity of the organisation.
  • Human resource management. This is a particularly important area which transcends all primary activities. It is concerned with those activities involved in recruiting, managing, training, developing and rewarding people within the organisation.
  • Infrastructure. The systems of planning, finance, quality control, information management, etc. mportant to an organisation's performance in its primary activities. Infrastructure also consists of the structures and routines of the organisation which are part of its culture (see chapter 4 section…).

Unintentionally corporate parents may undertake value destroying activities:

  • Corporate parents can add cost with bureaucratic mechanisms and hierarchies that delay decisions, create a ‘bureaucratic fog' and hinder market responsiveness.
  • Corporate parents buffer the executives in businesses from the realities of financial markets by providing a financial ‘safety net' that mean that executives are not truly answerable for the performance of their businesses.
  • Far from having a clear overall vision of what is trying to be achieved, the diversity and size of some corporations make it very difficult to see what they are about.
  • Corporate hierarchies provide a focus for managerial ambition. Managers aspire to be at the top of the corporate ladder, rather than performing the value creation role of the business-unit level. The corporate centre is rather more seen as a vehicle for empire building in which executives seek to grow the number of businesses and the size of the corporation for motives of personal ambition.

The value network is the set of inter-organisational links and relationships that are necessary to create a product or service. In most industries it is rare for a single organisation to undertake in-house all of the value activities from the product design through to the delivery of the final product or service to the final consumer. There is usually specialisation of role and any one organisation is part of the wider value network. It is this process of specialisation within the value network on a set of linked activities that can underpin excellence in creating best-value products. So an organisation needs to be clear about what activities it ought to undertake itself and which it should not and, perhaps, outsource. However, since much of the cost and value creation will occur in the supply and distribution chains, managers need to understand this whole process and how they can manage these linkages and relationships to improve customer value. It is not sufficient to look at the organisation's internal position alone. For example, the quality of a consumer durable product (say a cooker or a television) when it reaches the final purchaser is not only influenced by the linked set of activities which are undertaken within the manufacturing company itself. It is also determined by the quality of components from suppliers and the performance of the distributors. It is therefore critical that organisations understand the bases of their strategic capabilities in relation to the wider value network.

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