Putting Strategy in Its Place

Strategic Analysis

general environment analysis

industry analysis
competitor analysis
resource & capability analysis

Strategy
Mission

fundamental
purpose
values

Objectives

specific targets

Adapted from Hambrick & Fredrickson, AME., 19(4):53.

The central integrated,

externally oriented
concept of how
we will achieve
our objectives

Implementation

structure rewards
process people
symbols activities
functional policies
and profiles

As stated by Prof. Russel W. Olive 1) (Sloan School of Management, MIT), a vision

is a preferred future that the leaders of an organization wish to create.
Successful vision statement will be the one that
comes from the heart;
is personal, is recognizable as ours, and engenders enthusiasm;
is radical and demanding;
meets the needs and interests of important constituencies - customers, stockholders,
and employees;
is based on the organizations competencies and stresses excellence;
is one part foresight, one part insight, based on creativity and judgement, and is an
expression that embodies courage.
A mission statement is a broadly defined and enduring statement of purpose that distinguishes
a business from other firms of its type and identifies the scope of its operations in product/
service/market terms.
More specifically, it
defines the product/service areas to be offered;
specifies the primary markets, customer groups, and/or customer needs that will
be served;
states the technology to be used in the production or delivery of the products/services;
expresses the long-term desire for sustained success through growth of profitability.

1)

Russel W. Olive, Creating Manufacturing Strategies for World Class Manufacturers,

Workshop Paper. Jakarta: PITO Indonesia, 1995.

A company mission is designed to accomplish seven outcomes:

1. To ensure unanimity of purpose within the organization.
2. To provide a basis for motivating the use of the organizations resources.
3. To develop a basis, or standard, for allocating organizational resources.
4. To establish a general tone or organizational climate; for example,
to suggest a business-like operation.
5. To serve as a focal point for those who can identify with the organizations purpose
and direction and to deter those who cannot do so from participating further in its
activities.
6. To facilitate the translation of objectives and goals into a work structure involving the
assignment of tasks to responsible elements within the organization.
7. To specify organizational purposes and the translation of these purposes into goals in
such a way that cost, time, and performance parameters can be assessed and
controlled.

CORPORATE PERFORMANCE OBJECTIVES: Size, Growth,Profitability, Capital Markets, and Other Financial Measures

SIZE

Sales
Assets
Profits
Market value
Number of employees
Profit margin
Return on assets (ROA)
Return on equity (ROE)
Spread (ROE - Ke )

TURN- LEVEROVER
AGE

Dividend yield (Dividend/Price)

Total return to investors
Price/Earning ratio (P/E)
Market-to-book value ratio (M/B)
Payout (Dividend/Earning)
Price per share (P)
Book value per share (B)
Current ratio
Quick ratio
Defensive interval
Cash position
Working capital from operations
Cash flow from operations
Debt-to-equity ratio
Short-term vs. Long-term debt
Times interest earned
Cash flow vs. Interest payments

OTHER
FINANCIAL

LIQUIDITY

CAPITAL
MARKETS

PROFITABILITY

Sales
Assets
Profits
Market value
Number of employees

GROWTH

PERFORMANCE INDICATORS

Bond rating
Beta
Cost of equity capital (Ke )
Cost of debt
Weighted average cost of capital

Total assets turnover

Average collection period
Inventory turnover

CURRENT
YEAR

PAST YEARS
2011

2012

2013

2014

OBJECTIVE
TARGETS
Short Term

Long Term

Corporate Performance Objectives For Centralized Functions

CURRENT
YEAR

PAST YEARS

TECHNOLOGY

Rate of technological innovation

R & D productivity
Rate of return in R & D investment
Resources allocated to R & D
Rate of new products introduction
Technology-based diversification
Royalties or sales of technology
Cycle time of product development

PROCUREMENT

Cost
Service
Quality
Vendor relationship

MANUFACTURING

Job satisfaction
Job performance
Turnover
Absenteeism
Motivation
Job security
Career prospects
Psychological stress
Safety health conditions
Income

Cost
Delivery
Quality
Flexibility
New products introduction

MARKETING

HUMAN RESOURCES
MANAGEMENT

PERFORMANCE INDICATORS

Product strategy
Distribution
Price strategy
Promotion and advertising

2011

2012

2013

2014

OBJECTIVE
TARGETS
Short Term

Long Term

The Five Major Elements of Strategy

Where will we be active?
(and with how much emphasis?)

Which product categories?

Which market segments?
Which geographic areas?
Which core technologies?
Which value-creation stages?

Arenas
How will we get there?

What will be our speed and sequence

of moves?

Speed of expansion?
Sequence of initiatives?
How will we obtain our returns?

Lowest costs through scale advantages?

Lowest costs through scope and replication advantages?
Premium prices due to unmatchable service?
Premium prices due to proprietary product features?

Staging

Economic
Logic

Differentiators

How will we win?

Image?
Customization?
Price?
Styling?
Product reliability?
Source: Hambrick & Fredrickson, AME.,19(4):54.

Vehicles

Internal development?
Joint ventures?
Licensing/franchising?
Acquisitions?

Resources and Capabilities

Resources are the source of a firms
capabilities

Capabilities are the main source of a firms

competitive advantage

Resources = Capabilities

1. Financial Resources
2. Physical Resources
3. Human Resources
4. Technological Resources
5. Reputation Resources
6. Organizational Resources
Grant, CMR., Spring 1991, p. 119

The collective learning in the organization, especially how to

coordinate diverse production skills and integrate multiple
streams of technology, e.g.
NECs integration of computer and telecommunications
technology
Philips optical-media expertise
Casios harmonization of know-how in miniaturization,
microprocessor design, material science, and ultrathin
precision casting
Canons integration of optical, microelectronic, and precision-mechanical technologies which forms the basis of
its success in cameras, copiers, and facscimile machines
Black and Deckers competence in the design and manufacture of small electric motors
Prahalad & Hamel, HBR., May-June 1990, p. 82.

The Resource-Based Perspective : Why ?

Patents
Brands
Retaliatory capability

Barriers to Entry

Market share

Monopoly

Firm size
Financial resources

Vertical
Bargaining Power

Process technology
Size of Plants
Access to Low-cost inputs

Industry Attractiveness

Rate of Profit
in Excess of the
Competitive Level

Cost Advantage

Competitive Advantage
Brands
Product technology
Marketing, distribution,
and service capabilities
Source: Grant, CMR., Spring 1991, p. 118.

Differentiation
Advantage

The Relationship Between Resource Heterogeneity and Immobility,

Value, Rareness, Imperfect Imitability, and Substitutability,
and Sustained Competitive Advantage

Firm Resource
Heterogeneity
Firm Resource
Immobility

Source : Barney, JM., No. 1, 1991, p. 112.

Value
Rareness
Imperfect Imitability
- History Dependent
- Causal Ambiguity
- Social Complexity
Substitutability

Sustained
Competitive
Advantage

The cornerstones of competitive advantage

Ex Post Limits to
Competition

Heterogeneity
Rents
(Monopoly or Ricardian)

Rents Sustained

Competitive
Advantage
Rents Sustained
within the firm

Imperfect Mobility

Source : Petreraf, SMJ., No. 3, 1993, p. 186.

Rents not offset

by costs

Ex Ante Limits to
Competition

Desired characteristics of the firms recources and capability

Complementarity

Scarcity

Overlap with
Strategic Industry
Factors

Rents due to
Firms Resources
& Capabilities
(Strategic Assets)

Durability

Appropriability

Source: Amit & Schoemaker, SMJ., No. 1, 1993, p. 38.

Low Tradeability

Inimitability

Limited
Substitutability

Industry

Firm
Resources

Capabilities

externally
available &
transferable
owned or
controlled by
the firm
convertible

Rivals

Customer

information
based
organizational
processes
firm specific
tangible or
intangible
intermediate
goods

Strategic
Industry
Factors

Strategic Assets
non-tradable
a subset of the
firms R&C subject complementary
scarce
to market failure
overlap with strategic appropriable
firm specific
industry factors
uncertain ex-ante
form the basis of the
firms competitive
strategy
determine organizational
rents

Source: Amit & Schoemaker, SMJ., No. 1, 1993, p. 37.

industry
speciffic
R&C subject to
market failure
affect industry
profitability
change &
subject to
ex-ante
uncertainty

Environmental
Suppliers
Factors
(e.g. technology, regulation)

Substitutes

Entrants

Sources of Competitive Advantage and Superior Performance

Performance Outcomes

Strategy

Competitive Advantage

DISTINCTIVE CAPABILITY
* Based on superiority in process
management x integration of
knowledge x diffusion of learning

Business Assets
* Scale, scope, and
efficiency
* Financial condition
* Brand equity
* Location
Adapted from: Day, JMkt., No. 4, 1994, p. 40.

Capabilities of the
Business
* Skills and accumulated
knowledge
* Enable the activities in a
business process to be
carried out

Core Competencies of
the Corporation
* Span and support
multiple lines of business

Intangible Resources and Capabilities

Functional
People Dependent

Capabilities
Cultural

Positional

Regulatory

Know-how of employees,
suppliers, distributors,
stockbrokers, lawyers,
advertising agents,
etc.

Skills

Perception of quality,
ability to learn,
ability to react to challenge,
ability to change,
etc.
Reputation,
networks
People Independent

Data bases

Contracts,
Licenses, trade
secrets (incl.
some data bases),
Intellectual property.rights

Assets

Functional capability relates to the ability to do specific things.

Cultural capability incorporates the habits, attitudes, beliefs and values, which permeate the individuals and groups which comprise
the organization.
Positional capability is a consequence of past or previous actions and decisions.
Regulatory capability results from the possession of legal entities. Such legal entities are all defendable, in some fashion, in law.

Source : Hall, SMJ., No. 8, 1993, pp. 610-611.

Intangible resources, capability differentials and sustainable competitive advantage

TYPE OF RESOURCE
ASSETS
ASSETS WITHIN A LEGAL CONTEXT
Contracts
Licenses
Intellectual Property
Trade Secrets
Owned Physical Resources
ASSETS WITHOUT A LEGAL CONTEXT
Reputation
Networks
Databases

TYPE OF
CAPABILITY
DIFFERENTIAL

REGULATORY
DIFFERENTIAL
(Protectable in Law)

POSITIONAL
DIFFERENTIAL
(Due to Previous
Endeavor)

COMPETENCIES
KNOW-HOW
Employee Know-How
Supplier Know-How
Distributor Know-How
etc.

FUNCTIONAL
DIFFERENTIAL
(Due to Skills
& Experience )

ORGANIZATIONAL CULTURE
Perception of quality
Ability to Manage Change
Perception of Service
etc.

CULTURAL
DIFFERENTIAL
(Aptitudes of
the Organization)

Source: Hall, SMJ., No. 2, 1992, p. 144.

S
U
S
T
A
I
N
A
B
L
E
C
O
M
P
E
T
I
T
I
V
E
A
D
V
A
N
T
A
G
E

The relationship between the flexibility of resources and

the type of market

Unrelated

T
Y O
P F
E

Financial Resources:
(Internal Funds)
(Low-Risk Debts)

M
A
R
K
E
T

Related

Intangible
Assets

Physical
Resources

Intangible
Assets

Financial Resources:
(Equity Capital)
(Junk Bonds)

Low

High

FLEXIBILITY OF RESOURCE CLASSES

Source: Chatterjee & Wernerfelt, SMJ., No. 1, 1991, p. 37.

Last

A skill or important expertise

low-cost manufacturing capabilities
strong e-commerce expertise
technological know-how
skills in improving production processes
a proven track record in defect-free manufacture
expertise in providing consistently good customer service
excellent mass merchandising skills
unique advertising and promotional talents
Valuable physical assets
state-of-the-art plants and equipment
attractive real estate locations
worldwide distribution facilities
ownership of valuable natural resource deposits
Valuable human assets
an experienced and capable workforce
talented employees in key areas
cutting-edge knowledge and intellectual capital
collective learning embedded in the organization and built up over time
proven managerial know-how

Valuable organizational assets

proven quality control systems
proprietary technology
key patents
mineral rights
a cadre of highly trained customer service representatives
sizable amounts of cash and marketable securities
a strong balance sheet and credit rating
a comprehensive list of customers e-mail addresses
Valuable intangible assets
a powerful or well-known brand name
a reputation for technological leadership
strong buyer loyalty and goodwill
Competitive capabilities
product innovation capabilities
short development times in bringing new products to market
a strong dealer network
cutting-edge supply chain management capabilities
quickness in responding to shifting market conditions and emerging opportunities
state-of-the-art systems for doing business via the Internet

An achievement or attribute that puts the company in

a position of market advantage
low overall costs relative to competitors
market share leadership
a superior product
a wider product line than rivals
wide geographic coverage
a well-known brand name
superior e-commerce capabilities
exceptional customer service
Competitively valuable alliances or cooperative ventures
fruitful partnerships with suppliers that reduce costs and/or enhance
product quality and performance
alliances or joint ventures that provide access to valuable technologies,
competencies, or geographic markets
Source: Thomson Jr., Strickland III, and Gamble, 2005:89-90.

Example
Thomson Jr., Strickland III, and Gamble (2005:93) suggest that
market share leadership of Toshibas laptop computers throughout
most of the 1990s stemmed from a combination of good resource
strengths and capabilities, i.e., its strategic partnerships with suppliers
of laptop components, efficient assembly capability, design expertise,
skills in choosing quality components, a wide selection of models,
the attractive mix of built-in performance features found in each
model when balanced against price, the better-than-average reliability
of its models (based on buyer ratings), and good technical support
services (based on buyer ratings).

The Drivers of Cost Advantage

Technical input-output relationships

ECONOMIES OF SCALE

Indivisibilities
Specialization
Increased individual skills

ECONOMIES OF LEARNING

Improved organizational routines

Process innovation

PRODUCTION TECHNIQUES
Reengineering of business processes
Standardization of designs and components

PRODUCT DESIGN

Design for manufacture

Location advantages
Ownership of low-cost inputs

INPUT COSTS

Nonunion labor
Bargaining power
Ratio of fixed to variable costs

CAPACITY UTILIZATION

Fast and flexible capacity adjustment

Organization slack/X-inefficiency

RESIDUAL EFFICIENCY

Motivation and organizational culture

Managerial effectiveness

Source : Grant, 2008:227.

The Rarity of
Sources of Cost
Advantage

Likely to Be Rare
Sources of Cost Advantage

Less Likely to Be Rare

Sources of Cost Advantage

Learning-curve economies of scale

(especially in emerging industries)

Economies of scale (except when efficient plant

size approximately equals total industry demand)

Differential low-cost access to

factors of production

Diseconomies of scale

Technological software

Technological hardware (unless a firm has proprietary

hardware development skills)
Policy choices

Direct Duplication of Cost Leadership

Basis for Costly Duplication
Source of cost advantage

History
-----

Uncertainty
-----

Social Complexity
-----

Low-cost duplication
possible

1. Economies of scale
2. Diseconomies of scale

May be costly to duplicate

3. Learning-curve economies
4. Technological hardware
5. Policy choices

*
--*

--*
---

--*
---

Usually costly to duplicate

6. Differential low-cost access

to factors of production
7. Technological software

***

---

**

***

**

***

--*
**
***

=
=
=
=

not a source of costly imitation

somewhat likely to be a source of costly imitation
likely to be a source of costly imitation
very likely to be a source of costly imitation

Source: Barney, 2007:187.

Identifying the Potential for Differentiation on the Demand Side

THE PRODUCT

What needs does it satisfy ?

What are key

attributes ?

FORMULATE
DIFFERENTIATION
STRATEGY

* Select product positioning

in relation to product
attributes

Relate patterns of
customer preferences to
product attributes

* Select target customer

group

By what criteria do they

choose ?
What price premiums
do product attributes
command ?

* Ensure customer / product

What are demographic,

sociological, psychological
correlates of customer
behavior ?

* Evaluate costs and benefit

compatibility

THE CUSTOMERS

What motivates them ?

Source : Grant, 2008:248..

of differentiation .

Identifying the Potential for Differentiation on the Supply Side:

Sources of Differentiation in Porters Generic Value Chain
Unique product features.
Fast new product development.
Design for reliability/
serviceability

Training that supports goals

of quality and responsiveness.
Incentives that are consistent
with differentiation goals.
Developing commitment to
customer service.

INFRASTRUCTURE ACTIVITIES:
RESEARCH, DEVELOPMENT, DESIGN

PURCHASING,
INVENTORY
HOLDING,
MATERIALS
HANDLING

Quality and
reliability
of components
and materials

PRODUCTION

WAREHOUSING
&
DISTRIBUTION

Fast
manufacturing.
Defect-free
manufacturing.
Ability to
produce to
customer
specification.
Wide variety.

SALES
&
MARKETING

Fast delivery.
Efficient order
processing.
Sufficient
inventories
to meet
unexpected
orders.

DEALER
SUPPORT
&
CUSTOMER
SERVICE

Advertising that
enhances brand
reputation.
Effective sales
force.
Quality sales
literature.
Building brand
reputation.

GI
N

HUMAN RESOURCE DEVELOPMENT

M
AR

PRIMARY ACTIVITIES

SUPPORT ACTIVITIES

Buyers build corporate reputation.

MIS that supports innovation
and responsiveness to customer needs
through close internal coordination.

Training for customers.

Fast, reliable repairs.
Availability of spare parts.
Training for dealers.
Customer credit.

Source : Grant, 1995:223; 2002:297;

2008:256 (cf. Porter, 1985:122).

Product Differentiation and Firm Performance: The Analysis of Monopolistic Competition

Bases of Product Differentiation and the Cost of Duplication

Source of Costly Duplication
Basis of Product Differentiation

History

Uncertainty

Social Complexity

Low-cost duplication
possible

1.

Product features

---

---

---

May be costly to duplicate

2.
3.
4.
5.
6.

Product mix
Linkages with other firms
Product customization
Product complexity
Consumer marketing

*
*
*
*
---

*
------**

*
**
**
*
---

Usually costly to duplicate

Linkages among functions

within a firm
8. Timing of product introduction
9. Location
10. Product reputation
11. Distribution channels
12. Service and support

**

***
***
***
**
*

*
--**
*
*

----***
**
**

Source: Barney, 2007:217.

--*
**
***

=
=
=
=

not likely to be a source of costly duplication

somewhat likely to be a source of costly duplication
likely to be a source of costly duplication
very likely to be a source of costly duplication

The Strategy clock: competitive strategy options

HIGH
Differentiation
4
Hybrid

PERCEIVED
ADDED
VALUE

Low
price

Focused
5 differentiation

No frills

1
8

Strategies
destined for
ultimate failure

LOW
LOW

PRICE

HIGH

Likely to be segment specific

2. Low price

Risk of price war and low margins/need to be cost leader

3. Hybrid

Low cost base and reinvestment in low price and differentiation

4. Differentiation
(a) Without price premium

Perceived added value by user, yielding market share benefits

(b) With price premium

Perceived added value sufficient to bear price premium

5. Focused differentiation

Perceived added value to a particular segment, warranting price

premium

6. Increased price/standard value

Higher margins if competitors do not follow/risk of losing market

share

7. Increased price/low value

Only feasible in monopoly situation

8. Low value/standard price

Loss of market share

Source: Johnson, Scholes, and Whittington, 2008:.225.

Likely failure

1. No frills

Differentiation

Needs/risks

Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

Firm
Infrastructure

Procurement

Consistent policies
to reduce turnover costs.

Intense and effective training

programs to improve worker
efficiency and effectiveness

Easy-to-use manufacturing
technologies.

Investments in technologies in order

to reduce costs associated with a firms
manufacturing processes.

Systems and procedures to find the

lowest cost (with acceptable quality)
products to purchase as raw materials.

Frequent evaluation
processes to monitor
suppliers performances.

Use of
economies of
scale to reduce
production
costs

A delivery
schedule that
reduces costs.

A small,
highly trained
sales force.

Construction of
efficient-scale
production
facilities.

Selection of
low-cost
transportation
carriers.

Products
priced so
as to
generate
significant
sales
volume.

Inbound
Logistics

Operations

Source: Hitt, Hoskisson & Ireland, 2007:111.

Outbound
Logistics

Marketing
and Sales

Efficient and
proper product
installations
in order to
reduce the
frequency
and
severity
of
recalls.

Service

M
A
R
GI
N

Highly
efficient
systems to link
suppliers
products with
the firms
production
processes.

Technology
Development

Simplified
planning practices to
reduce planning costs.

I
RG
MA

Human Resource
Management

Relatively few
managerial layers in order
to reduce overhead costs.

Cost-effective
management
information systems.

Examples of Value-Creating Activities Associated with the Differentiation Strategy

Firm
Infrastructure

Procurement

Somewhat extensive use of

subjective rather than
objective performance measures.

Superior
personnel
training.

Strong capability in
basic research

Investments in technologies that will

allow the firm to produce highly
differentiated products.

Systems and procedures used

to find the highest quality
raw materials.

Purchase of highest quality

replacement parts.

Inbound
Logistics
Source: Hitt, Hoskisson & Ireland, 2007:117.

Consistent
manufacturing
of attractive
products.

Accurate and
responsive
orderprocessing
procedures.

Extensive
granting of
credit buying
arrangements
for customers.

Extensive buyer training

to assure high-quality
product installations.

Rapid responses
to customers
unique
manufacturing
specifications.

Rapid and
timely product
deliveries
to customers.

Extensive
personal
relationships
with buyers
and suppliers.

Complete
field stocking of
replacement
parts.

Operations

Outbound
Logistics

Marketing
and Sales

Service

M
A
R
GI
N

Superior
handling of
incoming raw
materials so as
to minimize
damage and
improve the
quality of the
final product.

Technology
Development

Compensation programs
intended to encourage worker
creativity and productivity

A company-wide emphasis on
the importance of producing
high-quality products.

I
RG
MA

Human Resource
Management

Highly developed information

systems to better understand
customers purchasing preferences.