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DEVELOPING A SUSTAINABLE COMPETITIVE ADVANTAGE THROUGH
STRATEGIC POSITIONING

By R. Murray Lindsay and Linda M. Lindsay

Strategic management is the process by which senior management ensures that the
organizations strategy is carried out or that it is modified to reflect changing conditions
or knowledge. A major portion of this paper examines the critical role that accounting
plays in strategic management. Before we can begin to discuss strategic management,
it is important to have a reasonable understanding of strategy. This is because a firms
strategy is the starting point for the design of effective systems of performance
measurement and control. Moreover, the word strategy is used in many different ways,
reflecting the fact that it consists of multiple facets or dimensions. Progress on
understanding the accounting issues that follow in this paper requires that we share a
common understanding of the term and its various dimensions.

The purpose of this paper is to provide an overview of strategy, if only at an introductory
level, and the process of strategic management so as to facilitate an understanding of
the big (management) picture. More specifically, after reading and thinking about the
material in this paper, one should understand the following detailed objectives of this
paper:

1. the vocabulary used in the strategy literature in order to feel more comfortable
talking to people about strategy;
2. how choosing a strategy represents an attempt to achieve a fit between the firm and
its external or business environment;
3. a firms value proposition to its customers;
4. generic value propositions (strategies);
5. Michael Porters key principles underlying competitive strategy and how it differs
from operational excellence; and
6. the strategic management cycle and a beginning of an appreciation of the role
accounting information plays in it (strategic management accounting).

Corporate Strategy versus Business Strategy

In order for an organization to earn superior returns it must make two broad decisions
with respect to strategy. Firstly, it must choose its corporate strategy by defining the
industries and market segments it will compete in. Corporate strategy decisions deal
with such issues as diversification into unrelated businesses, vertical integration,
divestment of current businesses, and the allocation of resources across businesses.
For example, Bombardier operates in two distinct businesses: aerospace and
transportation. In addition, companies need to determine a business strategy for each
business.

Business strategy is concerned with how to compete within a specific business so as to
create value for targeted customers. For each business within its portfolio Bombardier

2
has developed a strategy that it hopes will provide it with a competitive advantage over
its competitors. In a single business company there would be no distinction between
corporate and business strategy. Figure 1 illustrates the connection between the two
types of strategy.


Accounting and control information is used for formulating and implementing both
corporate and business strategy. Accounting assists with corporate strategy by
providing information to understand the financial contribution that each business makes
to the corporation. Such financial information is required in order to know whether senior
management should divest, maintain or increase its investment in a particular business.
The material covering relevant costs, return on investment (ROI), economic value
added (EVA), value chain analysis and allocation of costs is particularly important to the
making of such decisions. It also plays a role in controlling business unit performance.
However, accounting and control information plays perhaps a bigger role in connection
with facilitating business strategy and it is this aspect that is the focus of this paper.
Unless stated otherwise, references to the term strategy in this paper refer to business
strategy.

A Basic Framework for Examining Strategy

Business strategy is concerned with the basis on which a company will compete in
order to gain a competitive advantage over competitor firms; that is, how a firm plans to
win or succeed in its chosen industry. Figure 2 outlines the four elements that underlie a
successful strategy
1
. They are:

1
Much of this discussion in this section is based upon Robert Grant, Contemporary Strategic Analysis, 3
rd

ed. (Oxford: Blackwell Publishers Ltd.), 1998, Chapters 1, 2, 3 and 5.

3

1. The organization has a clear mission and vision of what it wants to achieve. It has an
unwavering focus in aiming to achieve its explicitly stated goals.

2. The organization has a profound understanding of its competitive environment
regarding customers, suppliers, and competitor firms.

3. The organization understands its internal strengths and weaknesses through an
understanding of its resources and competencies.

4. The organization effectively implements (including modifying) its strategies through
organizational structure and control systems.

Figure 2. The Key Elements of Successful Strategy*
Successful
Strategy
Effective Implementation
(Strategic Management)
Clear mission
Exploiting
internal
strengths
Profound
understanding of
the competitive
environment
*Adapted from R. Grant, Contemporary Strategic Analysis (3
rd
ed.), Blackwell Publishers, 1998, p. 10.



Focusing upon the first three elements, strategy can be seen as serving a link between
the firm and its external environment (see Figure 3). Specifically, given the firms
aspirations, resources and competencies, on the one hand, and the business
environment in which it operates, on the other, strategy outlines the path the
organization intends to pursue in order to be successful.

4
Figure 3. Strategy as the link between the firm and its
business environment*
Strategy
Mission
Resources &
capabilities
Control systems Control systems
Competitors
Customers
Suppliers
The Firm
The Business
Environment
*adapted from R.M. Grant, Contemporary Strategic Analysis (3
rd
ed.), 1998, p.12.
Strategic Fit

The balance of this section will examine these component linkages. The last section of
the paper will then examine the fourth element.

The External Business Environment

The core of the firms business environment consists of its customers, suppliers and
competitors. In order to create a profit, organizations need to create value for their
chosen customers. Consequently, understanding what the customer values is
important. Second, organizations usually do not create the value on their own because
they require goods and services from suppliers. Thus, knowing their suppliers and
understanding their suppliers competencies is important in forming mutually beneficial
partnerships and relationships. Finally, competitor firms are also vying for a share of
customers wallets. Therefore, in selecting which group of customers to target and the
basis on which to appeal to them, companies must consider their competencies relative
to their competitors to determine whether they have a reasonably good chance of
competing successfully.

Porters five forces model provides a useful framework for examining the competitive
market dynamics in an industry
2
. According to Porters model, firms achieve
competitive advantage by recognizing industry structure, positioning themselves in
relation to that structure in the most advantageous way given their strengths, and where
possible shaping industry structure in a beneficial manner. Industry structure is
comprised of five elements: customers, suppliers, potential entrants into the market,
substitute products, and competitive rivalry (see Figure 4).


2
M. Porter, Competitive Advantage (The Free Press), 1980.

5
Figure 4. Porters Five Forces Model of Competitive
Markets*
Rivalry among
existing
competitors
Suppliers
Substitutes
Customers
Potential
Entrants
Threat of new entrants
Bargaining
power of customers
Bargaining power
of suppliers
*Source: M. Porter, Competitive Strategy (The Free Press), 1980
Threat of substitute products
or services



While the model was developed for assisting firms to identify attractive industries (i.e.
dealing with corporate strategy), it is helpful for our interest in choosing and modifying
business strategy to achieve a sustainable competitive advantage. The following
questions are of importance in this regard:

Customers
Who are our customers and why do they buy from us? What do we have to do
for them to buy more from us?
How can we differentiate the product or service to provide a unique source of
value?
Are customers being under- or over-served by competitors?
How might we appeal to different segments of the market?
Is any particular segment important to us? If so, why?
How sensitive are customers to price, quality, service, and product features?
Can we establish a brand preference with our customers?
Are we overly dependant on a small base of customers?

Suppliers
Can we use substitute inputs? Should we?
Should we backward integrate to control the source of supply?
On a total cost basis, which suppliers are low cost and which are high cost?
Would it be costly to switch from one supplier to another?
What factorson-time availability, quality, performance, price, serviceare most
important to us?

6
Do we have any leverage over our suppliers?

Potential Entrants
Is our marketplace attractive to potential competitors? What are the barriers to
entry in our market? How easy is it for a new competitor to enter our market?
What actions can we take to promote and extend barriers to entry?
How strong is our brand? Would our customers be loyal?
Could a potential competitor imitate our strategy and out-execute us?

Substitute Products
Do we face competition from substitute products in some or all of our markets?
From the point of view of our customers, what advantages do these substitutes
provide in terms of price, quality, and functionality?

Competitive Rivalry
What is the rate of growth in our market? Is it growing, maturing, or shrinking?
How many competitors are there in our marketplace? What are their strategies?
Are they well-financed, with deep pockets?
Is there overcapacity in the marketplace, i.e. supply greater than demand?
How important is our market in terms of the competitions financial well-being?
How loyal are our competitors customers?
What is the cost structure of our competitors?

The Internal Environment of the Organization

As shown in Figure 3, the internal environment of the organization consists of the
mission, resources, core competencies, and control systems. Control systems will be
introduced near the end of the paper.

i) Mission

At its most basic level, the mission of the company describes why the company exists.
However, a good mission statement also communicates core values held throughout
the organization; moreover, it provides both a sense of inspiration and direction for the
futurea vision of what the organization wants to become. The mission statement is
important because it communicates the fact that the business exists for reasons other
than simply maximizing profits (although making money is a necessity, it is rarely the
principal reason for the existence of a business). By communicating organizational
values, mission statements provide employees with a unique and enduring sense of
identity, purpose and unity, and, in so doing, help build employee loyalty and
commitment; they also serve to focus organizational resources in desirable areas and
constrain behaviour or activity in unwanted areas. Finally, they attempt to balance the
competing interests of key shareholders. In summary, they provide an overarching
perspective to everyones activities. Figure 5 outlines the key components of a firms
mission statement.


7

Figure 5. A firms mission statement describes its:













As an example, consider the mission statement below from Hallmark Cards:

We believe that our products and services must enrich peoples lives and enhance
their relationships; that creativity and qualityin our concepts, products and
servicesare essential to our success; that the people of Hallmark are our
companys most valuable resource; that distinguished financial performance is a
must, not as an end in itself, but as a means to accomplish our broader mission; that
our private ownership must be preserved
3
.

ii) Resources and Competencies

In the 1990s, academic strategists began to view organizations as consisting of unique
clusters of resources that give rise to specific capabilities that make possible different
strategies within a given industry
4
. This connection is shown in Figure 6.


3
Cited in C.K. Bart, Mission Possible, CA Magazine (September 1997), p. 34.
4
This is called the resource-based view of strategy.
The firms mission
provides an over-
arching perspective
to everyones
activities
Purpose: why we exist (product focus,
target customer and market, core
competency, and geographical market area)

Core values: what we believe in

Vision: what we want to be

8
Figure 6. The relationship between resources,
competencies and strategy
Resources
Organizational
Competencies
Strategy
Financial
Physical
Intellectual capital
Reputation
Tangibles Intangibles
Deployed in combination,
using organizational
processes & systems
Capabilities
Human Capital



There are two broad classifications of resources: tangible and intangible. Figure 7
provides a more detailed description of these resources.

Figure 7. A closer look at an organizations
resources
Resources
Tangibles
Financial
cash, accounts receivable
borrowing capacity
cash flow generation
Physical
location of plant & equip.
size, flexibility and
technological sophistication
of equipment
raw materials and finished
goods inventories
Intangibles
Intellectual Capital
property: patents, copyrights
information
knowledge (e.g., R&D)
Reputation
brand
relationships with employees,
customers & suppliers
Capabilities
training, expertise,
adaptability of employees
willingness, courage and
ability to try new ideas
(empowerment)
ability to share information
and knowledge among
employees
commitment, loyalty and
motivation of employees
Human Resources



9
Tangible Resources. Tangible assets fall into two types: financial and physical.
Financial assets consist of monetary assets such as cash, accounts receivable, and
bonds. They also include borrowing capacity of an organizations credit worthiness
(level of debt plays a role here) and cash flow generation. Physical resources represent
the land, buildings and machines utilized by the company, including their location, as
well as inventories in raw materials and finished goods. These are the types of things
that are typically displayed on a balance sheet as assets. However, even here a
balance sheet is incomplete in that it records values only at historical cost less any
applicable amortization or depreciation. A balance sheet does not necessarily reflect the
value that could be realized from selling them, nor their value in use (e.g. the net
present value of the cash flows they generate). For example, a piece of land purchased
on the outskirts of the city limits thirty years ago might be worth a thousand times what
was paid if the city has expanded around the property and its location is valuable to the
business (e.g. shopping mall). Thus balance sheets are, at best, only a starting point in
assessing the value of tangible assets.

Intangible Resources. In the Old Economy, dominating firms were involved with
businesses performing raw material processing and manufacturing activities (e.g. steel
making, automobile manufacturing and banking). The tangible assets of a company
comprised much of the value of an organization and traditional accounting practices
performed a reasonable job of reflecting that value. However, in the New Economy,
knowledge-based organizations accounting practices fail miserably in recording the
value of assets possessed by firms. This is because value is most often found in
intangible assets and these are largely omitted from balance sheets because their value
cannot be recorded with reasonable precision unless the company has purchased them
from an independent third party. Specifically, todays dominating firms are characterized
by the development, application and transfer of new knowledge, information, and
intellectual property as the means to gaining a sustainable competitive advantage
5
.
Utilizing innovation is often a matter of survival in many industries, and investment in
intellectual capital creates innovation. A similar story exists for brands. In 2001, Cokes
brand was valued at a staggering $69 billion dollars, representing 61% of the market
capitalization of Cokes shares
6
. Yet, generally accepted practices do not permit the
recording of ANY value for this component that provides Coca-Cola with an enduring
source of competitive advantage. A firms peopleparticularly their knowledge,
flexibility and adaptability, commitment and motivation, and innovativenessis another
source of competitive advantage. In this regard, J effrey Pfeffer describes that few
elements are as important as talented, professional, motivated people who care
7
. Yet,
here too, traditional balance sheets fail to reflect this critical source of competitive
advantage. Finally, a companys relationships with its employees, suppliers and
customers can provide a key source of advantage. For example, having the reputation

5
David Teece, California Management Review (Spring 1998), cited in Ivey Business J ournal, Mar/April
2001, p. 4.
6
See www.interbrand.com. (as at J uly 2001).
7
J . Pfeffer, The Human Equation, Harvard Business School Press, 1998, Chapter 2.

10
for being a good employer to work for can result in less turnover and lower salaries
8
. As
another example, having access to established distribution channels (e.g. wholesalers)
is a prerequisite for success in some industries.

It is useful to examine the importance the stock market places on the value of
intangibles. Table 1 portrays the ratios of firms stock market valuations to accounting
net book value for firms in a variety of industries.

Table 1
Ratio of Market Value to Book Value for Selected Companies


Share Price
as of
Aug. 6, 2001
Total Equity
(in thousands of $)
Shares
Outstanding
Ratio of
Market
Value to
Book Value
Dofasco (steel) $26.33 $1,852,500 74,920,000 1.1
Canadian Tire $37.85 $1,459,439 78,552,699 2.0
PCS (potash) $95.19 $2,012,100 51,840,572 2.5
Air Canada $7.06 $316,000 120,160,319 2.7
Molson $50.90 $795,400 59,766,779 3.8
Loblaws $53.60 $3,124,000 276,245,314 4.7
Intel $30.28 $37,322,000 6,721,000,000 5.5
WestJ et $23.80 $181,092 44,998,583 5.9
Bombardier $21.73 $3,812,400 1,366,051,000 7.8
Dell $27.84 $15,622,000 2,601,000,000 12.9
Pfizer (pharmaceutical) $40.34 $16,076,000 6,210,000,000 15.6


We see the highest ratios exist for New Economy companies which compete on the
basis of intellectual capital (Pfizer), firms that possess very strong brands and/or
execute their novel strategy flawlessly (Dell). On the other hand, Old Economy
companies like Dofasco (steel), PCS (potash) and Canadian tire have much lower
valuations. But note, the issue is not simply New Economy versus Old. Intel has a
higher ratio (relative to, say, Canadian Tire) in part due to the information systems they
have developed and installed (see below). The moral of the story is that balance sheets
using generally accepted accounting principles (GAAP) do not reflect a very valuable
and significant portion of some companies assets. This is because GAAP forces
companies to expense investments on R&D, people, and brand promotiondespite the
fact that these intangible assets are critical to the firms long run competitiveness. To
focus on an extreme case, the traditional balance sheet only captures 6.4 percent
(1/15.6) of the value of the pharmaceutical company Pfizer. It thus behooves
management to understand and manage those sources of their competitive advantage

8
J . Pfeffer, The Six Dangerous Myths about Pay, Harvard Business School, May-J une 1998, pp. 108-
119.

11
that go unrecorded
9
what Itami called invisible assets
10
.

One might ask oneself, Why cant financial statements be modified to measure the
value of intangible assets? While one never knows what innovations might be
forthcoming in measurement, and many people are giving this issue serious thought, it
is doubtful that following such a road will bear much fruit. This is because the value of
intangibles assets typically does not attach separately to the asset
11
. Instead, value is
contextual: it relates to the specific organization, its strategy, the entire collection of
assets possessed by the company, and the organizational processes that transform this
collection of assets into a tangible product and/or service that is valued by customers
12
.

Organizational Capabilities/Competencies. Resources are important because they
place a constraint on the types of activities that can be performed and the standard that
can be attained. However, creating a competitive advantage is not simply a matter of
assembling resources. In the long run, competitive advantage depends upon how these
resources are deployed, usually in combination, using organizational processes and
systems, to produce unique capabilities relative to other firms
13
. Grant provides an
excellent explanation of the relationship among resources, capabilities, and strategy
depicted in Figure 6 which gives rise to competitive advantage.

There is a key distinction between resources and capabilities. Resources are inputs
into the production processthey are the basic units of analysis. But, on their
own, few resources are productive. Productive activity requires the co-operation and
co-ordination of teams of resources. A capability is the capacity for a team of
resources to perform some task or activity. While resources are the source of a
firms capabilities, capabilities are the main source of its competitive advantage
14
.

For example, while no one would deny that the skill of the driver in a Formula One car
race is critical to winning a race, equally crucial is the pit crew preparing the car and fine
tuning it for race day conditions, undertaking research to develop ever faster cars, and
possessing considerable financial backing to make these other resources available.
Moreover, all of these resources have to work together to optimize performance. The
fastest race car in the world wont win a race if the tires are wrong, or the cockpit is too
small for the driver, or the pit crew forgets to put gas in the car. It is only when the team
has a shared understanding of each others needs that success becomes possible.

9
See D. Robertson and C. Lanfranconi, Financial Reporting: Communicating Intellectual Property, Ivey
Business Journal (March/April 2001), pp.8-11. See also J . J ames, Insuring the Brand, Ivey Business
Journal (March/April 2001), pp.12-15. The interbrand website (www.interbrand.com) provides a useful
discussion on the strategic value of brands.
10
H. Itami, Mobilizing Invisible Assets Harvard Business School Press, 1987.
11
Brands and patents are two notable exceptions.
12
R. Kaplan and D. Norton, The Strategy-Focused Organization, Harvard Business School Press, 2001,
pp.66-67.
13
R. Amit and P. Schoemaker, Strategic Assets and Organizational Rent, Strategic Management
Journal 1993, pp.33-46.
14
R. Grant, The Resource-based Theory of Competitive Advantage: Implications for Strategy
Formulation, California Management Review, 1991, pp.114-135.

12

Organizational capabilities, or what Prahalad and Hamel call core competencies
15
,
may be defined as a set of differentiated skills, complementary assets and
organizational routines which together allow a firm to coordinate a particular set of
activities in a way that provides the basis for competitive advantage in a particular
market or set of markets
16
. For example, a core competency of McDonalds is the
ability to create consistency of products, service, cleanliness, and family atmosphere in
thousands of restaurants located around the world. For Wal-Mart, it is its inventory
management system that gathers data and transmits it from point-of-sale scanners to
monitor inventory levels, plan deliveries, and place orders with suppliers to replenish
distribution warehouses. More generally, firms may build capabilities in providing high
levels of service, process or product innovations, manufacturing flexibility, short product
development cycles, responsiveness to market trends, or a functional capability like
brand management
17
. Most capabilities represent intangible assets and therefore do
not appear on a firms balance sheet.

For the purposes of the study of accounting and control systems, there are three
management challenges associated with the notion of core competencies that we will
emphasize. First, core competencies reflect the ability to co-ordinate diverse skills and
technologies. Often, this integration will require the ability to communicate and work
across functional boundaries in order for people to have a shared understanding of
customer needs and technological possibilities. Prahalad and Hamel provide the
following example:

The theoretical knowledge to put a radio on a chip does not in itself assure a
company the skill to produce a miniature radio no bigger than a business card. To
bring off this feat, Casio must harmonize know-how in miniaturization,
microprocessor design, materials science and ultra thin casingthe same skills it
applies in its miniature car calculators, pocket TVs, and digital watches
18
.

Second, while in the short run a companys success stems from the price/performance
attributes of its current products/services, success in the long run stems from managing
ones core competencies. Core competencies are what underlie tomorrows products
and access to new markets or distribution channels. Returning to the example above
involving Casio, if they only saw themselves in terms of making miniaturized radios,
they would never be in the business of selling organizers, watches, or calculators. It is a
companys ability to conceive of itself in terms of its competenciesrather than its

15
C.K. Prahalad and G. Hamel, The Core Competence of the Corporation, Harvard Business Review
(May/J une 1990), pp.79-91.
16
D. Teece, G. Pisano, and A. Shuen, Dynamic Capabilities and Strategic Management, unpublished
paper, University of Berkeley, as cited in P. Keen, The Process Edge, Harvard Business School Press,
1997, pp.11-12.
17
R. Amit and P. Schoemaker, Strategic Assets and Organizational Rent, Strategic Management
Journal 1993, pp.35.
18
C.K. Prahalad and G. Hamel, The Core Competence of the Corporation, Harvard Business Review
(May/J une 1990), p. 81.


13
productsthat permits companies to pursue what at first glance are unrelated markets;
it also prevents companies from making the mistake of outsourcing their competitive
advantage or failing to leverage off of it. Hamel provides the two following examples
when companies fail to define themselves by their competencies.

Despite the fact that Xerox has long described itself as a document company it
missed the opportunity for printers. Today, if you want another copy you send it to
the printer, you dont walk down to the copying room. Its more or less the same
technology sold to more or less the same customers. How does that happen?
Because a company, even though it might talk about itself in broad terms, really is
devoted to single business model [strategy], in this case, copiers.

I saw the same thing at Coca-Cola, which has been late to most of the new
beverage trends over the last 10 years. It was late to these fruit-flavoured teasthat
was Snapple, and it was late to the sports drinksthat was Gatorade. You can
say, But how could this be? After all, this is the greatest beverage company in the
world. I got the hint when I was talking to Roberto Goizuetta, the former chairman,
shortly before he died. I asked him what his dream was for Coca-Cola. He said: My
dream is that anywhere in the world, if somebody turns on a tap, out comes Coca-
Cola. And I thought to myself, That guy has imprisoned all the talent, the passion,
the imagination, the competencies, the infrastructure of this company in a definition
that comes down to brown fuzzy liquid
19
.

Finally, developing and enhancing competencies requires investment. It requires
investment in specialized information, education and training, physical assets, and
systems for coordination and integration, and incentives
20
. As previously stated, the
current practice of expensing such expenditures inhibits the required investment. The
challenge for management is to determine the capabilities they wish to develop as part
of the strategic planning process and to integrate such plans in operational business
planning (resource allocation) processes.

This concludes our broad overview of business strategy. The key point in strategy
selection is the notion of attaining a strategic fit. Specifically, a good strategy is built
upon a consistency or harmony between a firms mission and its resources and
capabilities, on the one hand, and its external business environment, on the other, as
depicted in Figure 3. We now turn to a more in-depth look at the foundations of strategy.


19
S. Bernhut, Leading the Revolution: Gary Hamel, Ivey Business Journal (J uly-August 2001), p.41.
20
D. Teece, G. Pisano, and A. Shuen, Dynamic Capabilities and Strategic Management, unpublished
paper, University of Berkeley, as cited in P. Keen, The Process Edge, Harvard Business School Press,
1997, p.12.

14
Foundations of Strategy

Strategy as a Value Proposition

In their book, The Discipline of Market Leaders, Treacy and Wiersema argue that no
company can succeed by trying to be all things to all people. Instead, a company must
find its unique customer value proposition that it alone can deliver to its selected market
segment
21
. A companys strategic position is then defined in terms of the value
proposition selected. The concept of strategy is therefore intimately connected to
possessing a good understanding of customers and the potential dimensions underlying
their purchase decision. The purpose of this section is to flesh these points out in a
more concrete way.

A key point is that customers buy on the basis of perceived value performance for the
dollar. Achieving competitive advantage therefore requires that a company deliver
more value to its customers than the competition. This can occur in two possible ways:

1. providing more performance for a given purchase price; and
2. providing a given level of performance at a lower price.

Figure 8 demonstrates the notion of performance by illustrating the customer value
model.

21
M. Treacy and F. Wiersema, The Discipline of Market Leaders, Addison-Wesley Publishing Company,
1995.

15


This model outlines the various elements or attributes that underlie customer
perceptions of value. These elements can be described as follows:

Price (Cost). What the customer pays for the product, including pre-purchase costs
(e.g. time to research the best product), the actual selling cost of the product, the cost
of using the product, the costs of repairing and servicing the product, and the cost of
disposing the product at the end of its useful life. Notice that this conception of cost is
based on a life cycle consideration of costs (from cradle to grave).

Product/service attributes. These attributes can be broken down into two key
categories: functionality and quality. Functionality refers to the specifications of the
product in terms of a number of dimensions. The dimensions underlying functionality
are
22
:

1. Performance: A products primary operating or performance characteristics.
Using a car as an example, this would include such things as braking,
acceleration, handling, comfort and quietness.

2. Features: Essentially the bells and whistles of a product. A car might have
power seats, seating for six people, and a CD player.

3. Durability: The amount of use one gets before the product physically
deteriorates and repairs become necessary or until replacement becomes

22
This discussion on functionality is based on J . Evans and W. Lindsay, The Management and Control of
Quality, 3rd ed. (Minneapolis: West Publishing Company), 1996, p.13.

16
preferable. For a car this might include such things as the number of miles the
engine will last or the length of time before the seats will need to be re-
upholstered.

4. Aesthetics: how a product looks, feels, and sounds. With respect to a car, the
feel a person experiences when using controls, the placement of controls, and
the color of the car are all related to aesthetics.

Quality is narrowly defined in this paper as meaning conformance to specifications.
Specifications represent ideal values for the various dimensions underlying functionality
as determined by the designers of the product or service. Usually, tolerances around
the ideal value are specified because it is impossible to consistently meet ideal targets
because of the presence of variation. Thus a part dimension might be specified at 0.543
.02 cm. Given this definition, a $15,000 Ford Focus can be every much a quality
vehicle as an $80,000 Lexus; that is, they both can conform to specifications. However,
the Lexus offers much more in terms of functionality (at a price of course).

This distinction between functionality and quality is very important. Briefly, conformance
to specifications provides a means of measuring quality (Did we achieve the operating
specifications we established for this product or service?). This is called quality of
conformance. However, conformance to specifications is meaningless if we are not
providing what the customer wants in terms of the various elements underlying
functionality. Consequently, it is also necessary to measure how well our
products/services meet the needs of our targeted groups of customers. This is called
quality of design. The differences between these two types of quality are illustrated in
Figure 9.



17

This distinction is stressed because quality is often taken to mean both conformance to
specifications and design quality (functionality) in common parlance. A narrower
definition is adopted in this paper because of the importance in separating the two
dimensions for measurement and control purposes. In this paper if the term quality is
used alone, it should always be interpreted as meaning quality of conformance.

Customer service. This dimension consists of four potential elements: convenience (e.g.
locations, hours of operation), selection (varieties offered), assistance, and time.
Assistance consists of the help provided in the buying phase along with post acquisition
service. It also includes the ease with which the customer can deal with the company,
the knowledge and courtesy of its people, and their interest in the welfare of their
customers. Customer service is an important element in terms of why firms choose
suppliers on a basis other than price. Time reflects such things as the responsiveness
or flexibility to customer requests (e.g. meeting customer delivery dates) and the speed
of after sales service.

Image and Reputation. This dimension represents those intangible elements that attract
customers to purchase a companys products well beyond the tangible aspects of the
product. It might be a reflection of the products status (e.g. Rolex watch, Mercedes
automobiles) or what use or possession of the product conveys (e.g. Nike Air J ordan
athletic shoes). It also includes the reputation of the firm that allows it to distinguish itself
from its competitors. For example, the larger accounting firms (e.g. Deloitte & Touche)
have always attempted to establish a reputation for their expertise, professionalism and
integrity as a way of distinguishing themselves from smaller, regional firms. Image is
closely related to the brand that gets established through advertising, whereas
reputation is established by word of mouth and the past actions of the company.

The competition. A customers perception of the value provided by a specific supplier
firm will always be affected by what the competition offers.

Underlying the customer value model shown in Figure 8 is the fact that customers (or
segments of the market) are different. While some customers buy solely on the basis of
price, other customers value products and services that offer distinct features more
appropriate to their needs. A value proposition describes the unique mix of price,
product, service, and image that a company will offer its customers. It determines the
market segment in which the company will compete and how a company will
differentiate itself from the competition. Ultimately, it defines a firms strategic position
for achieving a sustainable competitive advantage.

In conclusion, selecting a value proposition answers the question: How will we compete
for and satisfy our targeted group of customers? The value proposition is a key
concept in this paper because it impacts directly on the performance measurement
system in terms of what to measure.


18
Generic Value Propositions and the Success Factors that Underlie Them

A firm can obtain a competitive advantage over its rivals by offering a distinctive value
proposition in one of two basic ways: it can provide an identical product/service at a
lower cost (cost leadership) or it can provide a differentiated product/service such that
the customer is willing to pay a higher price. By combining these two types of strategic
position with the firms choice of scopebroad market or a narrow focused segment
Michael Porter has identified generic strategies: cost leadership, differentiation, and
focus (see Figure 10)
23
.
Figure 10. Generic Strategies
Source of Competitive Advantage
Scope
Broad
Target
Narrow
Focus
Differentiation
(Air Canada)
Differentiation
Focus
(Harry Rosen,
GAP)
Cost
Focus
(WestJ et)
Cost
Leadership
(Wal-Mart)
Low Cost Differentiation

Cost Leadership

Under a cost leadership strategy the goal is to have the lowest costs in the industry. In
order to do so, a firm must sell a standard, no frills product and exploit all sources of
cost advantage by understanding its cost drivers. Cost drivers are those factors that
determine a firms unit costs. Examples of firms pursuing a low cost strategy are Wal-
Mart, WestJ et, and Costco.

There are two types of cost drivers: structural and executional. Structural cost drivers
derive from a companys choices about its underlying structure and location
24
. The
structural sources of low cost advantage are economies through experience and scale,
superior process technology, cheaper input costs (materials and/or labour), and offering
a narrow line of products and services (see Figure 11).

23
M. Porter, Competitive Strategy, The Free Press, 1985.
24
J ohn Shank and Vijay Govindarajan, Strategic Cost Management and the Value Chain, Journal of
Cost Management (Winter 1992), p.193.

19




On the other hand, executional cost drivers stem from the ability of a company to
execute operations successfully. They include such factors as: work force involvement,
capacity utilization, plant layout efficiency, superior product design, effective linkage
with suppliers and customers, and a commitment to quality of conformance (see Figure
12)
25
.


25
Ibid.

20


While both sets of cost drivers are important, the study of executional cost drivers is
currently being emphasized. Recent management developments such as total quality
management (TQM), just-in-time (J IT), employee empowerment, re-engineering, activity
based management (ABM), and design for manufacturability are all attempts to make
operations more effective and efficient. Moreover, contemporary management thinking
actually challenges some of the conventional wisdom with respect to structural cost
drivers. For example, the need to be flexible to accommodate customer preferences is
antagonistic to the emphasis on economies of scale.

Differentiation

A differentiation strategy is based on providing something unique that is valued by
customers so as to be able to charge a premium price and/or command a higher sales
volume. This differentiation can take many forms by focusing on various combinations
of the attributes listed in Figure 8. This differentiation can be real in the sense that the
product has superior performance or quality, or it can be intangible, in the sense that the
product or service carries a better image, fashion or brand recognition, or the buying
experience is superior. Examples of companies pursuing a differentiated strategy are
Intel, Tommy Hilfiger, BMW, Rolex, Maytag, Home Depot and Starbucks.

There are two keys to pursuing a differentiated strategy. The first is that customers must
value the uniqueness provided and be willing to pay for it, i.e. the value to the customer
of the uniqueness must be perceived to be greater than the associated cost. This issue
reflects the importance of understanding the customer. The second is that the sellers
costs of providing the uniqueness must be less than the price premium commanded.
This is why attention to costs is still important even for those companies pursuing a
differentiated strategy.

21
Focus

A focus strategy is based on targeting a narrow niche segment in the industry. Segment
possibilities arise from product or service specifications, buyer characteristics, and even
geography. A firm can pursue a differentiated focus by targeting a segment in the
market with different needs that is being ignored. Harry Rosen, an up-market mens
clothier, is an example. It provides outstanding service and highly fashionable clothes to
its customersfor a price. Alternatively, a cost focus can be pursued. Relative to Air
Canada, WestJ et Airlines pursues such a strategy. It is seeking the segment of the
traveling public who is cost conscious and willing to forego some services in order to
have low prices. They see their primary competition as the bus or car.

Treacy and Wiersemas research of market leaders ties nicely into this discussion of
generic strategies and puts some concreteness into the various perspectives. Their
research suggests that successful companies choose one of three different kinds of
customer value propositions on which to organize their activities.

Cost Leadership through Operational Excellence: These companies deliver a
combination of quality, price, convenience, and basic service that results in a best total
cost proposition for customers. They are not product or service innovators, nor do they
cultivate one-to-one relationships with their customers. However, they execute
extraordinarily well in providing standardized no frills products, and their proposition to
customers is guaranteed low price and/or hassle-free service
26
. Costco, Dell and
WestJ et Airlines are examples.

Product Leadership: Their proposition is to offer products that push performance
boundaries. Competition is not about price; it is about offering the best product.
Moreover, product leadership companies dont build their propositions with just one
innovation; they continue to innovate year after year, product cycle after product cycle
27
.
Intel, Nike and Sony are examples.

Customer Intimacy: These companies focus on delivering not what the market wants
but what specific customers want. Customer-intimate companies do not pursue one-
time transactions; they cultivate relationships. They specialize in satisfying unique
needs, which often only they, by virtue of their close relationship withand intimate
knowledge ofthe customer recognize. Their proposition to the customer: We have the
best total solution for youand we provide all the support you need to achieve optimum
results and/or value from whatever products you buy
28
. Home Depot and Harry Rosen
are examples.


26
M. Treacy and F. Wiersema, The Discipline of Market Leaders (Addison-Wesley Publishing Company),
1995, p. 31.
27
M. Treacy and F. Wiersema, The Discipline of Market Leaders (Addison-Wesley Publishing Company),
1995, p. xv.
28
M. Treacy and F. Wiersema, The Discipline of Market Leaders (Addison-Wesley Publishing Company),
1995, p. xv.

22
Treacy and Wiersemas research indicates that successful companies excel at providing
one of these dimensions of value while maintaining a threshold of performance on the
other dimensions. Their research also indicates customers can distinguish among the
various kinds of value and recognize that it is unreasonable to demand superior
offerings on every dimension from a single supplier. For example, no one goes to Wal-
Mart expecting the same personalized service that one might expect to receive at Harry
Rosens. However, they do expect low prices.

Porters Key Principles Underlying Strategic Positioning
29


The essence of strategy is to develop a sustainable competitive advantage by being
different from your competitors, i.e. adopting a different set of rules. Michael Porter, of
the Harvard Business School and a leading scholar on strategy, stresses this point. He
writes a company can outperform rivals only if it can establish a difference that it can
preserve
30
. Companies that fail to do this end up following one of two paths, with both
having dire consequences. The first path is where a firm attempts to play by the same
set of rules as the market leader. This leads to a race that no one can win except the
customer (who is the recipient of more features and less cost brought about by the
heightened competition). Inevitably, industry profitability is destroyed. Copying the
leader will rarely result in permanent gains in market share; instead, it leads, at best, to
jockeying back and forth by one or two points of market share. At worst, and the more
likely scenario, it leads to failure for the imitator because of the leaders superior
resources (who can withstand losses for a longer period of time) and the fact that the
structure, systems and processes are designed to support the leaders chosen strategy
better than the imitators who is unable to replicate the leaders strategy. Higher costs
and lower effectiveness can be the only outcome, resulting in a drastic loss in
competitive advantage.

The second path is to attempt to be all things to all people, perhaps out of the common
desire to grow revenues. When firms attempt to appeal to more customers by offering
increased product varieties and services (i.e. a full product line), they fail to be world
class at anything. A few examples of how increased variety leads to higher costs are:
more inventory to accompany the larger product offerings, higher purchasing costs to
deal with additional suppliers, and more expensive machines to produce the added
variety. Faced with these added costs, it becomes more difficult to compete with the
focused (low cost) competitor who makes only a subset of what their competitor does
and has dedicated people and equipment for the task. In addition, as product offerings
increase and the customer base expands, the firm loses touch with what their
customers value and there is confusion concerning what is truly important. Thus
tensions develop that are irreconcilable. For example, is the name of the game low cost
or is it about designing products with the latest technology. Unable to do both, a
competitor that focuses on only one of the two will be the winner. Porter makes this
point very well in what he calls being stuck in the middle. Basically, he states that a

29
Much of this section is based on the article by Michael Porter: What is Strategy?, Harvard Business
Review (November-December 1996).
30
Ibid, p. 62.

23
firm stuck in the middle is almost guaranteed low profitability as it either loses the high
volume customers who demand low prices or must lose profits to get this business
away from the low-cost firms. Yet it also loses high margin businessthe creamto the
firms who are focused on high-margin targets or have achieved differentiation overall.
The firm that is stuck in the middle also probably suffers from a blurred corporate culture
and a conflicting set of organizational arrangements and motivation system
31
.

In short, strategy is about positioning the company to be competitive by selecting the
unique or distinctive value proposition the firm will provide and, in so doing, the targeted
group of customers and product varieties to offer. This choice reflects consideration of
both the firms internal and external environments, as discussed previously.

At a more fundamental level of analysis, however, competitive advantage stems from
the activities a company chooses to perform and how efficiently they are performed. As
Porter states:

Ultimately, all differences between companies in cost or price derive from the
hundreds of activities required to create, produce, sell, and deliver their products or
services, such as calling on customers, assembling final products, and training
employees. Cost is generated by performing activities, and cost advantage arises
from performing particular activities more efficiently than competitors. Similarly,
differentiation arises from both the choice of activities and how they are performed.
Activities, then, are the basic units of competitive advantage
32
.

In Porters view, strategy is about being different. It means performing different activities
than your rivals or performing similar activities in different ways to deliver a unique mix
of value. This is a significant observation and underscores the importance this paper
places on utilizing an activity platform for the control and management of
organizations. The remainder of this section will examine four key points that build upon
this basic observation.

i) Strategy rests on performing unique activities

Since customers are not always the same (their needs, wallet sizes, and ways to
access them may be different), many companies can be successful within a specific
industry provided they offer a different value proposition than their competition that
follows from choosing activities that are different from the competitions. For example,
Air Canada is pursuing a different strategy than WestJ et Airlines. Air Canada is a full
service, higher priced airline that flies passengers from points in Canada to almost any
place in the world. In appealing to customers who require more comfort, particularly
business travelers, Air Canada offers business class service along with the use of
private lounges in airports. Additionally, since some customers might be traveling on
long flights, the airline offers meals. It also transfers baggage from one airplane to
another on connecting flights for the convenience of passengers. Finally, to increase
loyalty, it offers frequent flier points.

31
Michael Porter, Competitive Strategy, New York: The Free Press,1980, p.42.
32
Michael Porter, What is Strategy?, Harvard Business Review (November-December 1996), p.62.

24
WestJ et Airlines, on the other hand, identifies its competition with non-airline travel
alternatives (e.g. the bus, car, train). Accordingly, its prices are slashed to the bone and
are frequently about half of what Air Canada charges. What makes low-priced flights
possible is the strategy of slashing maintenance and training costs by adopting only one
kind of aircraft (the fuel efficient and very popular Boeing 737), sticking to fairly short
routes and limited destinations, adopting a policy of slow and steady growth, and cutting
out frills like meals, business class seating, inter-line baggage transfers, movies and
frequent flier points. These are the different set of activities that are uniquely tailored to
WestJ ets low cost strategic position.

This comparison produces two observations. One is that each position cannot be
achieved by performing the same set of activities. For example, providing meals on
WestJ et flights would increase expenses which is not consistent with its low-cost
strategy. The other is that both strategies can be successful. WestJ et has gone from
having 3 planes serving 5 Western cities to 63 planes serving 35 destinations across
Canada, the United States and the Caribbean. On October 26, 2006, WestJ et
announced that it had its best quarterly profit ever reaching C$52.8 million. Moreover,
this occurred during a time that saw the Canadian market as being too small to sustain
two national airlines (Canadian and Air Canada) as well as the terrorist attack of
September 11, 2001.

ii) Strategy requires making trade-offs

Strategy requires deliberately making trade-offs in competing: doing one thing well by
choosing not to do other things. WestJ ets activities are all consistent with its objective
of being a cost leader that allows it to offer cheap fares (see Figure 13 outlining an
activity map reflecting WestJ et Airlines strategic position).



25
Figure 13. WestJet Airlines Activity System*
Short haul, jet service
to big and smaller
sized centers Frequent, reliable
departures
Highly
productive,
friendly and helpful
staff
Rock bottomticket
prices
No frills
service
Standardized
planes - Boeing
737
Employee
stock
ownership
Slow and
steady
growth
High
aircraft
utilization
No seat
assignments
Flexiblework
relationship
- no union
Profit
sharing
Canadas
low-fare,
short haul
carrier
*This activity map, based on Porter (1996), shows how West Jet Airlines strategic position is reflected by a set of activities. The
blue ovals support higher order strategic themes which essentially outline the companys value proposition to customers. The
light yellow circles reflect clusters of tightly linked activities designed to implement the strategic theme.
No meals
No travel
agents, ticketless
ticketing
No baggage
transfers
No
connections
with other
flights
Aggressively
hedging fuel

However, WestJ et has attained this consistency by making explicit trade-offs by
deciding not to offer long haul flights and high levels of service. Such trade-offs arise
when activities are inconsistent in that doing more of one necessitates doing less of
another. For example, offering long haul flights would mean that it would have to buy
larger planes, thereby forgoing the significant cost benefits of utilizing a standard plane.
Offering meals not only adds direct costs, it also leads to longer turnaround times at the
gate, resulting in a lower plane utilization as well as lower customer satisfaction. This is
why companies that try to straddle various strategic positions are inevitably
unsuccessful: the focused competitor will provide the customer with more value, either
through having lower costs, higher functionality, or higher service levels
33
. As Porter
states, different strategies require different product configurations, equipment, employee
behaviour, skills and different management systems
34
. Moreover, by following a
consistent strategy, employees know what is important and customers know what to
expect. In conclusion, it is the need to make trade-offs that makes choosing a strategy
necessary.

iii) Strategy involves creating fit among an organizations activities

An enduring competitive advantage is not the result of doing one specific activity well;
instead, it stems from the entire system of activities performed. The role of strategy is to
create a strategic fit among the activities performed. Returning to Figure 13, notice

33
In the first quarter of 2000, WestJ et had a profit of 2.2 per seat mile while Air Canada lost 0.1 (Peter
Fitzpatrick, WestJ et Avoids Industry Turbulence, National Post, May 12, 2000.
34
Michael Porter, What is Strategy?, Harvard Business Review (November-December 1996), p.69.

26
how the various strategic themes reinforce one another. For example, it would be much
more difficult to have no frills service if the flights were long. Moreover, achieving a
strategic fit can lead to second order benefits when the activities are reinforcing or
complementary, whereby using one activity makes it more attractive to use the other
35
.
The fewer activities performed resulting from the no frills service theme allows for more
frequent and reliable departures as well as higher aircraft utilization. This in turn makes
it possible to lower ticket prices which is critical for the customer they are appealing to:
the person who would otherwise travel by land or not make the trip at all.

Positions built on systems of activities are much more sustainable than those built on
individual activities. This is because it is easy for a competitor to copy one of your
activities. However, mimicking a whole series of activities, along with effectively
executing them, is much more difficult. This entails a major transformation, often cutting
across functional boundaries. Specifically, it might require changes in work processes,
organizational structure, information and reward systems, and even human resource
policies. Even with such changes it might not be possible to mimic a competitors
strategy. For example, Air Canada possesses several different types of aircraft. It could
never hope to have service costs as low as WestJ ets. Moreover, to offer frills on some
flights but not on others would confuse the public and even its own staff. Finally, Air
Canadas size and tradition of labour problems will likely never allow it to have the
flexible, motivated employees that underlie WestJ ets success
36
. This point also serves
to remind us that strategies cannot be fundamentally altered every year. According to
Porter, a strategy is a major commitment that needs to be in place for a considerable
period of time in order to become fully implemented and properly executed; it does not
just exist for a single planning cycle
37
.

iv) The connection with core competencies

We have stated that strategy is about creating fit among a companys activities. Such
systems of activities, along with the organizational structure, systems, and processes
used to integrate decision making across organizational units, leads to an organization
developing unique capabilities or competencies. However, according to Porter, such
competencies do not arise from the performance of a single activity, but rather stem
from the performance of many reinforcing and complementary activities
38
. As Porter
would say, What is WestJ ets core competence? It is not usually one particular activity
(which would make it difficult to enjoy an enduring advantage given competitors can
more easily imitate it); instead, it is the entire system of activities that result in low costs.
Thus it is more accurate to think of competencies in terms of themes that pervade a
group of tightly linked activities, e.g. low cost, friendly service, brand promotion.


35
Paul Milgrom and J ohn Roberts, Complementarities and fit: Strategy, structure and organizational
change in manufacturing, Journal of Accounting & Economics (March - May 1995), pp.179-208
36
J ay Bryan, WestJ et puts friendly back in the skies, National Post, September 6, 1999; Margaret
J etelina, J etsetter, CGA Magazine (May), 2000.
37
Michael Porter, What is Strategy?, Harvard Business Review (November-December 1996), p.74.
38
Michael Porter, What is Strategy?, Harvard Business Review (November-December 1996), p.73.

27
We wish to stress that it is helpful to think in terms of capabilities or competencies,
currently possessed or to be acquired, as underlyingat least in parta firms
competitive advantage rather than defining strategy in terms of which customers are
we going to serve and what are their needs (which become secondary strategic
considerations)
39
. This conceptualization leads to a more stable basis for a firm to
define its identity in a world characterized by rapidly changing technologies and volatile
customer preferences and needs. Otherwise there is a danger that management will
attempt to grow the company by such means as acquiring companies, extending
product lines, adding new features, and imitating the services of the competition, all of
which serves to blur the companys distinctive position by reducing focus and fit among
activities, as well as creating compromises
40
. As well, it leads management to think in
terms of product rather than competence management, resulting in missed
opportunities within the companys area of competency (recall the Xerox example
earlier in printers) and a failure to nourish and grow their competencies
41
.

Contrasting Strategy with Operational Effectiveness

While strategy and operational effectiveness are both important for achieving superior
performance, they are different from one another and must be considered separately.
However, too often, Porter argues, firms attempt to compete on the basis of operational
excellence as their strategy and this is a recipe for disaster
42
. Peter Drucker echoes
Porters concern:

Not in a very long timenot, perhaps, since the late 1940s or early 1950shave there
been as many new major management techniques as there are today: downsizing,
outsourcing, total quality management, economic value analysis, benchmarking, re-
engineering. Each is a powerful tool. But, with the exceptions of outsourcing and re-
engineering, these tools are designed primarily to do differently what is already
being done. They are how to do tools. Yet what to do is increasingly becoming
the challenge facing managements, especially those of big companies that have
enjoyed long term success. The story is a familiar one: a company that was a
superstar only yesterday finds itself stagnating and frustrated, in trouble and, often,
in a seemingly unmanageable crisis. This phenomenon is by no means confined to
the United States. It has become common in J apan and Germany, the Netherlands,
and France, Italy, and Sweden
43
.

Operational effectiveness (or best practice) is based on performing the same or similar
activity better than your rivals through continuous improvement on the dimensions of an
activitys cost, quality and time. While better performers will achieve a cost advantage
over weaker performers, such an advantage may only be temporary as the methods for

39
R. Grant, Contemporary Strategy Analysis, 3
rd
ed. (Oxford: Blackwell Publishers Ltd.), 1998, Chapter 5.
40
Michael Porter, What is Strategy?, Harvard Business Review (November-December 1996), p. 77.
41
C.K. Prahalad and G. Hamel, The Core Competences of the Corporation, Harvard Business Review
(May-J une 1990), pp.79-91.
42
Michael Porter, What is Strategy?, Harvard Business Review (November-December 1996).
43
Peter Drucker, The Theory of Business, Harvard Business Review (September - October 1994), p. 94.


28
achieving operational effectiveness in single activities are well documented and can be
copied, as evidenced by the hordes of consultants who are busy installing yet the latest
tool underlying competitive advantage. The result is that companies become more
and more homogeneous and less distinctive strategically, which, as explained above, is
the worst form of strategy. When everyone plays the game by the same rules no one
wins!
44
This is why Porter says that although operational effectiveness is necessary in
todays hyper competitive worldeveryone is doing itit is insufficient for achieving a
sustainable competitive advantage. This requires performing different activities than
your competitors. In this connection, the analogy by Treacy and Wiersema is particularly
insightful. Operational effectiveness is about how to run the race
45
. Strategy concerns
itself with which race to run. Figure 14 outlines the basic differences between
operational effectiveness and strategy.

Figure 14. Distinguishing Strategy from Operational
Effectiveness
Strategy
offering a unique customer
value proposition by
performing different activities
than your rivals or performing
similar activities in different
ways
making trade-offs in
competing: doing one thing
well by not doing other
activities that are
incompatible
creating complementarities
and fit across activities
In a nutshell: which race
should we run
Operational Effectiveness
the goal is to perform the same or
similar activity better than your
rivals
involves continuous improvement
in an activitys cost, quality, and
time
concerned with how best to
execute the chosen strategy (how
to run the race)

Emerging Strategy
46


Thus far strategy has largely been represented as analytical in nature, whereby senior
management attempts to choose a deliberate strategic position based on a rational
assessment of their internal and external environments. Once chosen, the task is then

44
Michel Robert, Strategy Pure and Simple II: How Winning Companies Dominate Their Competitors
(McGraw-Hill), Revised Edition, 1998.
45
M. Treacy and F. Wiersema, The Discipline of Market Leaders (Addison-Wesley Publishing Company),
1995.
46
This section draws on the ideas of Robert Simons contained in the two following sources: Levers of
Control (Harvard Business School Press) 1995, pp.20-21; Performance Measurement and Control
Systems (Prentice Hall), 2000, pp.33-36.

29
to implement their intended strategy through the construction of a strategic plan which,
among other things, communicates the strategy, sets goals, and coordinates internal
resources to facilitate the achievement of the strategy. While this description is accurate
in some cases, it is misleading in others. In some situations, intended strategies are
replaced by emerging strategies based on receiving feedback on areas of success or
failure or the results of experiments attempting to try new ways based on unsatisfactory
initial attempts. Alternatively, employees close to the customer might make some
discoveries based on discussions with the customer or in seeing how customers
reacted to an unplanned occurrence. Thus, through the process of learning,
organizations sometimes modify their strategies. In reality, as Mintzberg observes, both
models of strategy operate concurrently in organizations:

there is no such thing as a purely deliberate strategy or a purely emergent one.
No one organizationnot even the ones commanded by those ancient Greek
generalsknows enough to work everything out in advance, to ignore learning en
route. And no onenot even a solitary pottercan be flexible enough to leave
everything to happenstance, to give up all control
47
.

An important point is that organizations must find a way to balance both control
(implement their intended strategy) and innovation (emerging strategy); that is, to
achieve both.

The Connection Between Strategy and Management Accounting

We hope this brief examination has convinced the reader of the importance of strategy.
We also hope that enough has been written about the topic so that one has an intuitive
understanding for what strategy means, the notion of achieving a strategic fit among a
firms internal and external environments, and the need to offer a unique value
proposition to customers based on choosing a different set of activities to perform than
your rivals. At this point, lets review what strategy has to do with management
accounting:

First, accounting can inform the process of strategy formulation (including emerging
strategy). This can occur in many ways, such as determining which:

customer segments, product or service varieties, distribution channels, or sales
territories are most profitable;
customer segments are most satisfied;
activities the firm should perform based on their profitability and the resources and
competencies possessed by the organization (value chain analysis); and
activities performed by the company are valued by the customer and what is the cost
of providing them. Such a comparison provides the basis for knowing which activities
to perform and emphasize (leverage) and which ones to possibly abandon (the
methodology underlying the customer value creation model will show us how to do
this).

47
H. Mintzberg, Crafting Strategy, Harvard Business Review (1987): p.69.

30

Second, the focus on strategy might give the impression that all that matters to being
successful is choosing the right strategy; however, this is far from the case. It is
increasingly being recognized that success comes from being able to effectively
implement and manage strategy rather than merely having a good one
48
. This point is
reflected in the coloured box in Figure 15.

Figure 15. The Key Elements of Successful
Strategy*
Successful
Strategy
Effective Implementation
(Strategic Management)
Clear mission
Exploiting
internal
strengths
Profound
understanding of
the competitive
environment
*Adapted from R. Grant, Contemporary Strategic Analysis (3
rd
ed.), Blackwell Publishers, 1998, p. 10.


Effective implementation of strategy consists of the following four processes:

operationalizing the strategy in concrete (actionable) terms;
communicating the strategy and linking it to everyones work;
setting strategic objectives, developing tactical plans to attain objectives, and
allocating resources in support of such plans (strategic business planning); and
obtaining feedback on the success of actions taken to achieve strategic goals and
learning from the experience (feedback and learning)
49
.

Through its involvement in performance measurement, operational budgeting, target
setting, and its link to reward systems, accounting has the opportunity to play a critical
role in fostering all of these processes.


48
J . Pfeffer, The Human Equation, Harvard Business School Press, 1998, Chapter 1. R. Kaplan and D.
Norton, The Strategy Focused Organization, Harvard Business School Press, 2001, p.1.
49
Adapted from R.S. Kaplan and D.P. Norton, Using the Balanced Scorecard as a Strategic
Management System, Harvard Business Review (J anuary-February 1996), pp.75-85 and J .K. Shank,
"Strategic Cost Management: New Wine, Or J ust New Bottles," Journal of Management Accounting
Research (Fall 1989): 50.

31
Taken together, the formulation of strategies, along with their implementation, is called
strategic management. More formally, strategic management is the process by which
management ensures that the organizations strategy is carried out or that it is modified
to reflect changing conditions and feedback. Strategic management is an ongoing
process that revolves around a cycle. The strategic management cycle is shown in
Figure 16.

Figure 16. The Strategic Management Cycle
formulating strategy
operationalizing the strategy in concrete (actionable)
terms
communicating the strategy and linking it to
everyones work
setting strategic objectives, developing tactical plans to
attain objectives, and allocating resources in support of
such plans (periodic strategic business planning); and
obtaining feedback on the success of actions taken to
achieve strategic goals and learning from it (feedback
and learning)
I
M
P
L
E
M
E
N
T
I
N
G
The term strategic management accounting is used to describe the managerial use of
accounting information (broadly interpreted) in the formulation and implementation of
strategy or, in other words, to facilitate the process of strategic management. This is an
emerging and exciting area within the discipline of management
50
. Figure 17 provides
an overview of strategic management accounting.

50
The conventional term is strategic cost management based on the seminal work of Shank and
Govindarajan (see J . Shank and V. Govindarajan, Strategic Cost Management, New York: The Free
Press, 1993). We have utilized a broader term to incorporate the important role that performance
measurement plays in the strategic management process, particularly in the implementation of strategy.

32
Figure 17. Strategic Management Accounting: the role of
accounting in strategic management
Strategy
Formulating &
renewing
- customer value
creation model
- value chain analysis
- ABC: profitability
analysis of products,
customers, channels
- customer
satisfaction
Business
planning
Communicating
& linking
Operationalizing
Feedback &
learning
- budgeting
(aligning resources)
-target setting
- accountability
-setting goals
- performance
measurement &
appraisal
- linking rewards to
performance
measurement
- establishing
performance
measures
- strategy mapping
-performance
measurement
- assessment of
cause and effect
relationships
underlying
strategy maps
Strategic Management
Copyright R Murray Lindsay, Feb. 2007


The purpose of this illustration is to provide a comprehensive overview to see where the
various topics fit in facilitating the process of strategic management. Do not be
dismayed if the details seem fuzzy at this stage. As the various topics are discussed,
come back to this figure in order to keep the big picture in mind and see the connection
between the provision of management accounting information and the serving of some
management purpose.

Finally, performance measurement and control systems can be used to encourage
employees to innovate, to share information about changes taking place in their
environment, and provide data or benchmarks that can assist in understanding the
competitive environment and the changes taking place within it.













August 13, 2008