Advanced management and marketing

Book: Fundamentals of Strategy

Five reasons to care about strategy
1. 2. 3. 4. 5.

Management Chapter 1: Introducing strategy

Strategy is foundational and integrative Youd better assess your future employers strategy Strategy is part of almost all managers jobs And strategy can provide exciting specialist roles Finally, youll need strategy to get to the top

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

Strategic decisions are complex in nature, made in situations if uncertainty, affect operational decisions, require and integrated approach, involve considerable change. Three levels of strategy Corporate level strategy = Overall purpose and scope of the organization and how value will

be added to the different BUs of the organization. Business level strategy (SBU) = How to compete successfully in particular markets for goods and services = competitive strategy Operational strategy = How the component parts of an organization deliver effectively the strategies in terms of resources processes and people.

Corporate vs. operational strategy

Organization/wide, holistic Conceptualization of issues Creating new directions Developing new resources Ambiguous-uncertain Long term orientation

Routinised Techniques and actions Managing existing resources Operating within existing Operationally specific Day to day issues

Business level A strategic business unit is a part of an organization for which there is a distinct external market for goods or services that is different from another SBU. Vocabulary Mission = The overriding purpose of the organization in line with the values and expectations of stakeholders Be healthy and fit Vision/strategic intent = Desired future state = the aspiration Run the NY
marathon

Objective = Quantification or more precise statement of the goal Lose 5 kilos by 1st
September and run NY marathon next year

Strategic capability = Resources, activities and processes of the company. Some may provide competitive advantage Successful diet; training scheme Business model = How product, service and information flow between participating parties Join running club The 3 key elements of the strategic management model

Strategic management includes understanding the strategic position of an organization, making strategic choices for the future and managing strategy in action. Strategic position Strategic choices Strategy into action Where are we? Who do What do we want to Make it happen? Strategy we serve? Are we really become? Active in what implementation. flexible or locked-in? countries? Scope/breath of the firm. Scale, pricing, collaboration. A B AB Strategic analysis Strategy formulation Strategy implementation Is Will be Do it Is concerned with the Involve understanding Is concerned with impact on strategy of: the underlying bases for ensuring that strategies The external future strategy at both are working in practice environment (Ch. 2), an the business unit (Ch. 6) (Ch. 10) organizations strategic and corporate levels (Ch. capability (Ch. 3) and the 7 & 8) and the options for expectations and developing strategy in influence of stakeholders terms of both the (Ch. 4 & 5) directions and methods of development (Ch. 9)

Management Chapter 2: The environment external analysis

The world is a village.

Why investigating the business environment? Diversity, complexity and speed of change. Three layers of the business environment Macro What broad factors impact almost all firms? Meso What are (changes in) the competitive forces? Micro What dominates inner layer of the environment?

2 tools 3 tools 4 tools

Macro: PESTEL - Categorizes environmental influences into six main types - The focus is on future impact of environmental factors - Prioritized key drivers of change have differential impact on industries, markets and organizations - Combined effect of some of the factors likely to be me most important Political Legal Environmenta l Political
Government stability Taxation policy Foreign trade regulations Social welfare policies

Economic The organization Socio-cultural Technological Economic

Business cycles Interest rates Money supply Inflation Unemployment

Socio-cultural
Demographics Income distribution Social mobility Levels of education Lifestyle changes

Technological

New discoveries/developments Sustainability Competition law Speed of technology transfer Environmental protection laws Employment law Rates of obsolescence Energy consumption Health and safety Government R&D-spend Waste disposal Product safety and quality Focus on technological effort

Environmental

Legal

Macro: PESTEL Key drivers What are the key drivers (for change) ? The macro-environmental factors that are likely to have a high impact on the success or failure of a strategy. Macro: Scenarios Detailed and plausible views of how the business environment of an organization might develop in the future based on key drivers for change, about which there is a high level of uncertainty. Meso (industry-level): Static industry structure: Porters five forces model Competitive forces in the industry: - To determines the current attractiveness of an industry. - Affect the way individual companies compete. - Influence decisions on product/market strategy.

Threats of new entrants (high) / barriers to entry (low) - Scale and experience - Access to supply and distribution channels - Expected retaliation - Legislation or government action - Differentiation The power of buyers/suppliers - Are buyers/suppliers concentrated? - What are the costs of switching? - Does backward/forward vertical integration exist? Degree of competitive rivalry. Competitive rivals are organizations with similar products and services aimed at the same customer group = direct competitors Intensity of rivalry depends on: - Competitor balance - Industry growth rate - High fixed costs - High fixed barriers - Low differentiation Meso: Dynamic of competition (over time) Erosion of competitive advantage - Changes in five forces - Competitors overcoming adverse forces Cycles of competitive response - When slow: long periods of established pattern of competition built imitation barriers

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

Meso (industry-level): The industry life cycle

Meso (industry-level): Comparative industry structure analysis

Micro: To differentiate competitors via strategic groups Organizations within an industry with similar strategic characteristics, following similar strategies or competing on similar bases. Micro: Uses of strategic group analysis - To understand who are the most direct competitors of an organization - To establish the different bases of competitive rivalry within and between the strategic groups - To assess if an organization could move from one group to another Changes in the macro-environment may create strategic space
o Depends on barriers to entry

Micro: To differentiate customers Market segments = a group of customers who have similar needs that are different from customer needs in other parts of the market Strategic customer = the person(s) to whom strategy is primarily addressed because they are the most influential Critical success factors (C/KSF) = those product features particularly valued by a group of customers, and where the organization must excel to outperform competition Using C/KSF: A strategy canvas. Perceived value in electrical engineering industry

Strategic gaps opportunities and threats Opportunities in business environment not being fully exploited by the competition, e.g.
In substitute industries In other strategic groups or strategic spaces In targeting buyers For complementary products and services In new market segments Markets developing over time

Chapter summary - Environmental influences layers around the organization: Macro, meso and market segments - PESTEL key drivers of change, alternative scenarios - Porter five forces 2 threats (entry, substitutes), 2 power positions (buyer, supplier) and rivalry - Also strategic groups, segments, and CSF can help to identify strategic opportunities and threats

Management Chapter 3: Strategic capability Internal analysis

Foundations: Strategic capability is the ability to perform at the level required to survive and prosper. It is underpinned by the resources and competences of the organization.

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

Strategic capabilities and competitive advantage

Tangible vs. intangible resources Physical resources Financial resources Human resources
Machines, buildings, production capacity Capital, cash, debtors/creditors, suppliers of money Number and mix of people, skills and knowledge Patents, brands, business systems, customer databases, goodwill

Intellectual capital

What are core competences? The skills and abilities by which resources are deployed effectively through an organizations activities and processes, such as to achieve competitive advantage in ways that others cannot imitate or obtain. Components of strategic capabilities

Key drivers of cost efficiency

The experience curve The competences in activities develop over time based on experience, resulting in cost efficiencies.
Growth may not be optional Unit costs should decline year on year First mover advantage, due to accumulated experience

Core competences lead to competitive advantage when they relate to an activity that underpins the value in the product features they lead to levels of performance that are significantly better than competitors they are difficult for competitors to imitate What capabilities might provide competitive advantage? VRIN V Value: Do capabilities exist that are valued by customers and provide potential competitive advantage? R Rarity: Do capabilities exist that no (or few) competitors possess? Ease of
transferability, sustainability, core rigidities

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

VRIN + dynamic capabilities Sustainable competitive advantage is achieved by: In rapidly changing environments emphasis is placed on:
Developing durable strategic capabilities that provide advantage over time Organizational capability to change, innovate, be flexible, adapt and learn = dynamic capabilities

Diagnosing strategic capability Benchmarking, value chain/network and SWOT analysis - What is a value chain? A value chain describes the categories of activities within and around an organization, which together create a product or service. - What is a value network? A value network is the set of inter-organizational links and relationships that are necessary to create a product or service. (also called supply chain) - Benchmarking Historical, industry/sector or best-in-class benchmarking - SWOT: o Summarizes analysis of:

o o

Business environment: opportunities and threats Strategic capabilities: strengths and weaknesses Uses for comparison with competitors Focuses on future choices and capability of organization to support them

The strategic analysis

Problems of SWOT analysis - Can generate long lists: need to focus on key issues - Danger of over-generalization: not a substitute for rigorous strategic analysis - Where to put what? - How to assess them? Never neutral Chapter summary - Strategic capability adequacy and suitability of resources and competences required for success - Core competences competitive advantage - Cost efficiency is vital - Dynamic capabilities are important - Methods to diagnose organizational capabilities: o Value chain and value networks o Benchmarking o SWOT analysis

Management Chapter 4: Strategic purpose

Underlying issue = whether the strategic purpose of the organization should be determined in response to a particular stakeholder or to broader stakeholder interests extreme = to society and the social good.

Strategic/organizational purposes is expressed by values, mission, vision or objectives. Why is the company alive? Whats important in this company? Mission = the overriding purpose of the organization in line with the values or expectations of stakeholders. Vision/strategic intent = desired future state = what the organization aspires to be. Influences on strategic purpose - Governance structure - Social responsibility and ethics - Stakeholder expectations Governance structure Two generic governance models: shareholder vs. stakeholder model Shareholders are those that have a legitimate claim to the assets/profits of the firm. The organization is a tradable stream of future cash (financial). Advantages:
High rate of return Encouragement of economy Strategic decisions more objective due separation of ownership and management Managers could be sacrificing shareholder value to pursue their own agendas Risk of short termism Decisions to benefit own career due lack of management Corporate reputation and top management greed give themselves bonuses.

Disadvantages:

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

High risk decisions and investments due employee influence Investors greater access to information and monitoring management Long-term horizons no pressure for short-term results Slowing down decision process Long-term investments with no good market expectations Limited growth of economy

Disadvantages:

Corporate governance The structures and systems of control by which managers are held accountable to legitimate stakeholder. Important because of 3 reasons: 1. The separation of ownership and management control 2. Corporate scandals 3. Increased accountability to wider stakeholder interests Issues highlighted by the governance chain. Governance chains reveal the links between ultimate beneficiaries and management. - To whom are executives responsible? Family company a lot of interaction
between owner/manager, other companies just a few interactions a year

Who are the shareholders (owners)? What is the role of institutional investors? Pension fund What means of scrutiny and control exist? Replace board, change strategy and
even sell company without approval of the board. Controlling activities of agent.

Governing bodies

2 tier board (often in Europe)

o o
o

Supervisory board vs. executive (decision-making) board Appointments and remuneration of top management. Who is responsible for who? not about the decision Strategic management delegated to top management. (Non-executives (no day to day responsibilities) in) the board engages with management on in- and external reporting, top-level appointments, remuneration and strategic management. Anglosaksisch

1 tier board

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

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

Different levels of access to information. Manager and people have not the same
interest.

Principal-agent problem - Self-interest among agents, e.g. bonuses - Misalignment of measures and targets, incentives and control Benefits and disadvantages of the governance models
o Reflect agent self-interests rather than those of end beneficiaries

Three types of stakeholders: - Economic suppliers/competitors and shareholders - Socio/political policymakers, regulators and government agencies. Public sector - Technological key adapters. standard agencies new product introduction Social responsibility and ethics Corporate social responsibility is concerned with the ways in which an organization exceeds its minimum obligations to stakeholders specified through regulation. Stances on social responsibility

Laissez-faire = Not thinking about own or social interest. Short-term interests of shareholders are to make a profit, pay taxes and provide jobs minimum obligations
o o o Legal compliance Defensive Unilateral

Forum for stakeholder interaction = Idealistic. Incorporates multiple stakeholder interests and expectations rather than just shareholders and influences on organizational purposes and strategies.
o o o o Sustainability Board-level Proactive Partnership

Enlightened self-interest = You have to take care of a problem because its in your own interest. Communication with stakeholder groups and shareholders. Long-term
o o o Business sense (e.g. GMP) Reactive Interactive

Shaper of society = Not many companies do this, but they say they do.
o o o Social and business change All responsible Defining N-alliances. Likely partnering. Charity do social things but need money to get attention

Stakeholder expectations How? By means of stakeholder mapping. Two issues: - Interested each stakeholder group is in impressing its expectations on the organizations purposes and choice of strategies. - Whether stakeholders have the power to do so. Stakeholder mapping identifies stakeholder expectations and power, and helps in understanding political priorities. Stakeholder analysis reveals the influence of different stakeholders. Stakeholder mapping: the power/interest matrix

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

Power = the ability of individuals or groups to persuade, induce or coerce others into following certain courses of action. Level of interest = how likely does the stakeholder show an interest to support or oppose strategy. Questions with stakeholder mapping
In determining purpose and strategy, which stakeholder expectations need to be considered? How do the actual levels of interest and power reflect corporate governance framework? Who are the key blockers and the facilitators of strategy? Can levels of interest or power of key stakeholders be maintained?

Chapter summary - Shareholders` expectations influence on organizations purpose - Governance chains links between ultimate beneficiaries and management - Shareholder vs. stakeholder model - Ethical dimensions corporate social responsibility - Stakeholders influence on purpose and strategy - Values, vision, mission and objectives

Management Chapter 5: Culture

Is history a blessing or a burden? - Blessing: history matters
o Effective (standardized) routines Experience in decision making, so it can simplify decision-making because you have routines. Exploit earlier investments and success Longer-term orientation Incremental change suits continuous improvement Misattribution of success. When something goes good manager made the success, but outsiders say it was luck. So different view of success. Inertia How to learn elephants dance? (multinationals). Gm vs. Japan Compete on car business (change company fundamentally is really difficult) Progressive failure to address strategic issues

o
o o o

Burden: path dependency lock in

o o
o

Strategic drift

Strategic drift is the tendency for strategies to develop incrementally on the basis of historical and cultural influences, but fail to keep pace wit a changing (business, EW) environment. (outside in approach) When the organizations strategy gradually moves away from relevance tot the forces in the wider environment. D. Miller (1992)

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

Organizational culture Cultural frames of reference

Organizational culture is the basic assumptions and beliefs that are shared by members of an organization, that operate unconsciously and define in a basic taken-for-granted fashion an organizations view of itself and its environment. Culture in four layers (from outside in) Values values concern the collective Beliefs beliefs concern the collective Beliefs routines, organizational structure, control, symbolic behavior Paradigm (or taken-for-granted assumptions) set of assumptions held relatively in common Cultures influence on strategy development

Analyzing culture Find the manifestations of a paradigm

-

Rituals, e.g. company after-work party Stories, embed present in company history, e.g. heroes, successes, disasters, mavericks Symbols, e.g. office layout (you can see who is higher in hierarchy), titles, lease cars Control systems, e.g. reporting and reward

The cultural web of an organization

Assessing control systems

-

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

Chapter summary - The culture of an organization may contribute to its strategic capabilities but may also give rise to strategic drift. - Cultural influences inform and constrain the strategic development of an organization. - The cultural web can be used to understand an organizations culture and its relationship to organizational strategy.

Management Chapter 6: Business-level strategy

Strategy development process

Business-level strategies (strategic clock)

Business-level strategy stands below corporate-level strategy and above operational strategy. A strategic business unit is a part of an organization for which there is a distinct external market for goods or services that is different from another SBU. Opposing pitfalls in identifying SBUs:
Too many different products/markets means lack of focus Too few means not reflecting diversity of products/markets

Bases of competitive advantage - Competitive strategy o The bases for achieving competitive advantage o The bases for providing best value - Porters customer-market orientation o Generic strategies Faulkner & Bowman and DAvenis market strategies o Provide customer needs better or more effectively than competitors o The strategy clock

No frills strategy (Lidl) = Low price combined with low perceived product benefits focusing on price-sensitive market segments.
Commodity markets Price-sensitive customers High power, low switching costs among buyers Opportunity to avoid major competitors

Low price strategy (Asda, Morrisons) = Lower price than competitors, maintain similar product/service benefits, year on year efficiency gains. (for example, buy one get one free) - Need a low cost base
o o Low cost itself not a basis for sustainable advantage Low cost achieved in ways that competitors cannot match to give sustainable advantage Margin pressured (competitor reaction) Inability to re-invest, leading over time to loss of perceived benefit of product

Pitfalls of low price strategy

o o

Hybrid strategy (Tesco) = Simultaneously achieving differentiation and a price lower than prime competitors.
Need clarity about activities on which differentiation can be built (core competences) o Reduce costs of other activities Entry strategy in market with established competitors

Differentiation strategy (Waitrose, Sainsbury) = Offering widely valued benefits different from competitors, better products/services at same or higher price, centres of excellence. Success depends on: - Identification of strategic customers and knowing what they value - Knowing the competitors Focused differentiation (Harrods) = High perceived product/service benefits to selected market segment (niche), premium products, heavily branded. Pitfalls:
Difficult when the focus strategy is only part of an organizations overall strategy Possible conflict with stakeholder expectations New ventures start off focused, but need to grow Market situation may change, reducing differences between segments o o Narrow competitor base focused differentiation Wide competitor base address bases of differentiation valued by customers

Failure strategies (Super de Boer/Laurus) = Provides insufficient perceived valuefor-money in terms of product features, price or both.
Increased price without similarly increasing product/service benefit Reduced benefits for customer, whilst maintaining price

Comparison of typologies

Sustaining competitive advantage

Achieving low prices

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

Dangers of low price strategies

Competitors might follow suit Customers associate low price with low benefits Cost reductions may result in inability to pursue differentiation strategy

Competition and collaboration - Collaborate to achieve advantage or avoid competition - Organizations may compete in some markets and collaborate in others - Collaborate when the transaction costs (with collaboration) are lower than when operating alone - Collaboration can help to build switching costs - Collaboration can vary between potential competitors or between buyers and sellers

Chapter summary Business level strategy

-

Competing better/providing best value Strategye development for each SBU No frills, low price, differentiation, hybrid, focused differentiation Linked competences, difficult to imitate Ability to achieve lock-in as industry standard

Competitive strategies

Sustainable competitive advantage requires: Collaboration strategies may offer alternatives to or complement competitive advantages.

Management Chapter 7: Corporate-level strategy

Strategic directions and corporate strategy

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

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

Consolidation refers to a strategy by which an organization focuses defensively on their current markets with current products.
Forms: - Defending market share - Downsizing or divestment

Product development refers to a strategy by which an organization delivers modified or new products to existing markets
Risks: - Overstretch? You may need new capabilities - Project management risk

Diversification refers to a strategy by which an organization pursues new product offerings and new markets.
Related: Unrelated: 1. 2. 3. 4. 5. 6. - Within the current capabilities or value network of the organization - Beyond the current capabilities or value network of the organization

Reasons for diversification:

Efficiency gains Stretching corporate managerial capabilities Increasing market power Responding to market decline Spreading risk Expectations of powerful stakeholders

Related diversification:

Diversification problems Related: - Underestimating the required new capabilities

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

Unrelated:

- Generally unfavorable, because: No economics of scope and higher cost of - Can succeed in some cases, because: when exploiting dominant logic and in countries with underdeveloped markets

headquarters

Degree of diversity performance

Value creation and corporate parent Value-adding activities of corporate parents - Envisioning - Coaching and facilitating - Providing central services and resources - Intervening Three corporate parenting roles

Value destroying corporate parents - Bureaucracy adds cost and hinders responsiveness increases complexity - Buffers away from reality/obscures performance financial safety net - Too diverse lack of clarity on overall vision - Managerial ambition empire building (hubris) Corporate portfolio management Portfolio balance (BCG-matrix)
Markets Organizations needs

Attractiveness of BUs (GE-McKinsey matrix)

Profitability Growth rates

Portfolio fit

Synergies between business units Synergies with corporate parent

Market growth/share (or BCG) matrix

Directional policy (GE-McKinsey) matrix

Guidelines based on

directional policy matrix Chapter summary - Corporate strategy Product diversity Parenting roles Portfolio models
o o o o o

Decisions on product an international scope How to add value to business units Related/unrelated diversification Portfolio manager, synergy manager, parental developer BCG-matrix, directional policy matrix, parenting matrix