CHAPTER _ 3

External Environment : Strategic Opportunities & Threat

The difference in organization strategy capabilities in term of resources and competences
due impact
Key Concept:
1.Organizations are not identical ie. are HETEROGENEOUS
2. Hard to copy capability of another company.
ISSUES TO IDENTIFY:
a) Identify strategic capability
b) How it contribute in competitive advantage/ superior performance.
c) how to diagnose strategic capabilities.
d) how to manage the development.
strategy become RBV( Resource Based View) or capability view
Competitive advantage & Superior performance = distinctiveness of capabilities.
Types of capabilities:
1. strategic capability
2. distinctive capabilities
3. dynamic capabilities
Ways for analysis
a. Benchmarking
b. Value chain analysis
c. VRIO (Value, Rarity, Inimitability & Organizational support)

FOUNDATIONS OF STRATEGIC CAPABILITY

strategic capabilities are the capabilities of an organisation that contribute to

its long-term survival or competitive advantage.

Resources (assets i.e what we have) and competences (Efficient

utilization of resources "what we do well")
Strategic capabilities: Physical, Financial, HR
Dynamic Capability:
In long term strategic capabilities can not be static, They need to change i.i. dynamic
capabilities ( i.e. organization ability to renew & recreate its strategic capabilities . to meet
the needs of changing environment.
the basis of competitive
success can over time be imitated by competitors, become common practice in an
industry or become redundant as its environment changes
Types of dynamic capabilities:
Sensing .
Seizing
Reconfiguring
New product development is a typical example of a dynamic capability and strategic planning
is another.

There could
be changing threshold resources required to meet minimum customer requirements. Identifying
and managing threshold capabilities raises a signifi cant challenge because
threshold levels of capability will change as critical success factors change or through the
activities of competitors and new entrants.
While threshold capabilities are important, they do not of themselves create competitive
advantage or the basis of superior performance. Distinctive capabilities are required to
achieve
competitive advantage

o - Organizational support
the organisation must also be suitably
organised to support these capabilities
theyloose the competitive advantage if it lacks the organisational arrangements to fully exploit
these capabilities

Organisational knowledge as a basis of competitive advantage

resources and competences may combine to produce competitive
advantage for an organisation is in terms of organisational knowledge. 17 Organisational
knowledge is organisation-specifi c, collective intelligence, accumulated through formal
systems
and peoples shared experience
As organisations become larger and more complex, the need
to share what people know becomes more and more important but increasingly challenging

So organisations that can share knowledge especially well may gain advantage over those
that do not.The distinction between e xplicit (Explicit or objective knowledge is transmitted in
formal systematic ways eg codifi ed information) and tacit organisational knowledge (more
personal, context-specifi c and
therefore hard to formalise and communicate) made by Ikijuro Nonaka
and Hiro Takeuchi 18 helps explain why this is important in terms of achieving competitive
advantage.
Many organisations that have tried to improve the sharing of knowledge by relying on
IT-based systems have come to realise that, while some knowledge can usefully be codifi ed and
built into computer-based systems, it can be very diffi cult to codify the knowledge that truly
bestows competitive advantage.

DIAGNOSING STRATEGIC CAPABILITIES

some ways
in which strategic capabilities can be understood and diagnosed.
1. Benchmarking (compares with others- Typically competitors, basically focused on outputs eg
standards of product or take account of organizational capabilities. Methods/ approaches:

a) Industry/ sector benchmarking: comparing in same industry or between same products or

services against the set of performance indicators.
Best-in-class benchmarking: comparison on organizational performance / capabilities irrespective
of industry. Challenge managers mind set that acceptable improvements by incremental changes
in resources or competences.
Benchmarking do not focus on much detailed mechanics but its impacts on reviewing the
capabilities.
Limitation in Benchmarking:

* surface Comparisons : Dont directly identify the reason of relative lower performance.
* simply achieving the competitive parity: help to develop capabilities like of competitors or
of best in class.However, the best performance that can be expected out of this exercise is to
achieve threshold
capabilities and/or competitive parity.

The value chain and value system:

The value chain describes the categories of activities within an organisation which,
together,
create a product or service. Most organisations are also part of a wider value system , the
set of
inter-organisational links and relationships that are necessary to create a product or
service.

The value chain:

to achieve the competitive advantage managers need to understand the
activities for creating value
Primary activities are directly concerned with the creation or delivery of a product or service.

The value chain can be used to understand the strategic position of an organisation and analyse
strategic capabilities in three ways:

1. As a generic description of activities : help managers to identify the cluster of activities

providing benefit in particular area of value chain.
2. In analyzing the competitive position using VRIO
3. for analyzing the cost &value of activities.
- identifying the set of value
- Relative importance of activity cost
- relative importance of activities externally
- where & how the cost can be reduced.

The value system

the organizations outsource the activities according to specialization , sp any one organization is
a part of a wider value system. it hepls us to understand:
1. what are the activities & cost structure of the value system.
ie. cost analysis of every activities
2.Where are the profit pools (Profit pools refer to the different levels of profi t available at
different
parts of the value system.)Some parts of a value system can be inherently more profi table
than
others because of the differences in competitive intensity
3. The make or buy decision for a particular activity This is the outsourcing decision.this help to
decide what activities should be kept internally in order to have competitive advantage.
4. Partnering ( with whom and what type of partnership)

ACTIVITY SYSTEMS
all orgn. have set of activities and are more likely to be configured differently across
organization. if it makes the organizational strategy unique that can be a good deal.
Value chain analysis help to identify how the activities are done & why they r valueable for
customer and how they fir together along with providing competitive advantage for
company.
Mapping activity systems:
According to porter " higher order strategic themes" the organization have way to meet its
critical success. secondaly they need to identify the activities that underpin and fit with
each other
they need to consider the 1. Relationship to each other in value chain 2. Importance of
linkage & fits . There are two implications: a) T he danger of piecemeal change
B) The consequent challenge of managing change (change probably has to be managed to the
whole system.)
3. Relationship to VRIO
However, it is not just at the conceptual level that activity maps are important; they can also
be directly helpful in the management of strategy:
Disaggregation
Useful as an activity map is, the danger is that, in seeking to explain
capabilities underpinning their strategy, managers may identify capabilities at too abstract
a level. If the strategic benefi ts of activity systems are to be understood, greater disaggregation
is likely to be needed.
there is the recognition that
the mentoring of junior staff by partners is important; but the map itself does not show
specifi cally how this is done.

2.Superfl uous activities:

It is also continually seeking further activities that can be eliminated
or outsourced to reduce cost.

SWOT:
SWOT provides a general
summary of the Strengths and Weaknesses explored in an analysis of strategic
capabilities
and the Opportunities and Threats explored in an analysis of the environment
There are two main dangers in a SWOT exercise:
1.Listing . gives long list of strength & weakness but dont priorities (What is more or less
important)
2. A summary, not a substitute
It is not, however, a substitute for that analysis. There are two dangers if it is used on its own:
The first is that, in the absence of more thorough analysis, managers rely on preconceived, often
inherited and biased views.
The second is again the danger of a lack of specificity.

SWOT can also help focus discussion on future choices and the extent to which an organisation is
capable of supporting these strategies.

MANAGING STRATEGIC CAPABILITY:

what managers might do to manage and improve resources and capabilities to the strategic
benefit of their organization.
There are several different ways in which managers might develop strategic capabilities:
1. Internal capability development.
Could capabilities be added or upgraded so that they become

more reinforcing of outcomes that deliver against critical success factors?

a) Building and recombining capabilities
b) Leveraging capabilities
c) Stretching capabilities : Managers may see the opportunity to build new products or
services out of existing capabilities
2. External Capability Development (this could be by developing new capabilities by acquisition
or entering into alliances and joint ventures)

3.Ceasing activities : not central to the delivery of value to customers,

be done away with, outsourced or reduced in cost?If managers are aware of the capabilities
central to bases of competitive advantage, they can retain these and focus on areas of cost
reduction that are less signifi cant.
4. Monitor outputs and benefi ts when it is not possible to fully understand capabilities.
5. Awareness development

SUMMARY

The competitive advantage of an organisation is likely to be based on the strategic capabilities

it has that are
valuable to customers and that its rivals do not have or have diffi culty in obtaining. Strategic
capabilities
comprise both resources and competences .
The concept of dynamic capabilities highlights that strategic capabilities need to change as the
market and
environmental context of an organisation changes .
Sustainability of competitive advantage is likely to depend on an organisations capabilities
being of at
least threshold value in a market, but also being valuable , relatively rare, inimitable and
supported by the
organisation and consequently fulfi lling the VRIO criteria.
Ways of diagnosing organisational capabilities include:
VRIO analysis of strategic capabilities as a tool to evaluate if they contribute to competitive
advantage.
Benchmarking as a means of understanding the relative performance of organisations.
Analysing an organisations value chain and value system as a basis for understanding how
value to a
customer is created and can be developed.
Activity mapping as a means of identifying more detailed activities which underpin strategic
capabilities.
SWOT analysis as a way of drawing together an understanding of the strengths, weaknesses,
opportunities
and threats an organisation faces.
M anagers need to think about how and to what extent they can manage the development of
strategic
capabilitie s of their organisation by internal and external capability development and by the way
they
manage people in their organisation.

Chapter 4

STRATEGIC PURPOSE:

examines how external pressures and internal aspirations interact in the setting of organisational
purpose are typically complex and diverse.It is important
to be clear about what purposes drive strategy, who infl uences such purposes and who
monitors performance against them.
stakeholders , those individuals or groups that depend
on an organisation to fulfi l their own goals and on whom, in turn, the organisation
depends .
the strategic purpose of the organisation should reflect
the expectations of a particular stakeholder,
different ways in which organisations express strategic purpose , including statements of mission,
vision, values and objectives .
the ownership structures and the corporate governance framework
within which organisations operate

In determining purpose : depend on the stakeholders involvement.

- For CSR & ethics.

MISSION, VISION, VALUES AND OBJECTIVES:

defi ning and expressing a clear and

motivating purpose for the organisation is the core of a strategists job.
According to Montgomery, the stated purpose of the organisation should address two related
questions:
1. how does the organisation make a difference;
2. and for whom does the organisation make that difference?
There are four ways in which organisations typically defi ne their purpose:
a. A mission statement aims to provide employees and stakeholders with clarity about
what the organisation is fundamentally there to do.
b. vision statement is concerned with the future the organisation seeks to create
c. Statements of corporate values communicate the underlying and enduring core
principles that guide an organisations strategy and define the way that the
organisation should operate.
d. Objectives are statements of specifi c outcomes that are to be achieved.
vision, mission and values are wide ranging and longer term view with its underlying strategyand
enduring source of direction and motivation where as objective are precise which guides and
monitors in short term.

Three principles are helpful in creating meaningful vision, mission and values statements:
1. Focus: help/ guide the real decision (i.e. what is excluded and what is included)
2.Motivational : to do their best and should be applicable to the particular organisation. so it
stretch performance to next level.
3. Clear; easy to communicate , undertsnad & remember.

OWNERS AND MANAGERS:

Owners and managers are
not always the same and their interests can diverge.

Ownership models:
There are many types of ownership to distinguish four main ownership models, each with
different implications for
strategic purpose.
1. Public companies (often called publicly traded companies or public limited companies) sell
their shares to public. Usually owners do not manage public
companies themselves, but delegate that function to professional managers. In principle,
company managers work to make a financial return for their owners that is why the public
usually buy the shares in the first place.
2. State-owned enterprises a re wholly or majority owned by national or sometimes regional
governments.
3. Entrepreneurial businesses are businesses that are substantially owned and controlled by their
founders. (e.g. mittal industies, Virgin Group)
4. Family businesses a re typically businesses where ownership by the founding entrepreneur has
passed on to his or her family, on account of the founders death or retirement for instance.
Typically family businesses are small to medium-sized enterprises, but can be very big. Quite
often
the family retains a majority of the voting shares, while releasing the remainder to the public on
the stock market . eg. samsung, walmart.

other type of organization:

1. Not-for-profi t organisations - fundamentally exist to pursue social missions.
2. The partnership model, in which the organisation is owned and controlled by senior employees.
3. employee-owned firms, which spread ownership among employees as a whole.

Corporate governance:
Corporate governance is concerned with the structures and systems of control by which
managers are held accountable to those who have a legitimate stake in an
organisation.
Managers and stakeholders are linked together via the governance chain. The governance
chain shows the roles and relationships of different groups involved in the governance
of an
organisation.

down the chain, company boards can be considered as principals too, with senior executives their
agents in managing the company. Thus there are many layers of agents between ultimate
principals and the managers at the bottom, with the reporting mechanisms between each layer
liable to be imperfect.
The governance issues in principalagent theory arise from three problems:
Knowledge imbalances : agents typically know more than principals about what can and
should be done. as they have presumably been hired for their expertise.
Monitoring limits : it is very diffi cult for principals to monitor closely the performance of their
agents as their attention is likely to be split several ways.
Misaligned incentives :agents are liable to pursue other objectives that reward them better.
Principalagent theory therefore stresses the importance of knowledgeable principals, effective
monitoring systems and well-designed incentives in order to make sure that large organisations
actually pursue the purposes that their owners set for them.
DIFFERENT GOVERANCE MODELS:
The governing body of an organisation is typically a board of directors mightbe stakeholder or
directors only.
At the most general level there are two governance models:
*the shareholder model, prioritising shareholder interests.
*the stakeholder model, recognising the wider set of interests for organisations success.

A shareholder model of governance

dominant in public companies i.e. profit focused.

down the chain, company boards can be considered as principals too, with senior executives
their agents in managing the company. Thus there are many layers of agents between ultimate
principals and the managers at the bottom, with the reporting mechanisms between each layer
liable to be imperfect.
The governance issues in principalagent theory arise from three problems:
Knowledge imbalances : agents typically know more than principals about what can and
should be done. as they have presumably been hired for their expertise.
Monitoring limits : it is very diffi cult for principals to monitor closely the performance of their
agents as their attention is likely to be split several ways.
Misaligned incentives :agents are liable to pursue other objectives that reward them better.
Principalagent theory therefore stresses the importance of knowledgeable principals, effective
monitoring systems and well-designed incentives in order to make sure that large organisations
actually pursue the purposes that their owners set for them.
DIFFERENT GOVERANCE MODELS:
The governing body of an organisation is typically a board of directors mightbe stakeholder or
directors only.
At the most general level there are two governance models:
*the shareholder model, prioritising shareholder interests.
*the stakeholder model, recognising the wider set of interests for organisations success.

A shareholder model of governance

dominant in public companies i.e. profit focused.

large no. of shareholders not dominated by 1 stakeholder. Dissatisfi ed shareholders

may sell their shares, leading to a drop in the companys share price and an increased
threat to directors of takeover by other fi rms.
There are arguments for and against the shareholder model.
Advantages:
1. Higher return
2. reduced risk
3. increased innovation & entrepreneurship

4. Better decision making.

Disadvantages:
1. Diluted monitoring.
2. Vulnerable minority shareholders.
3. short termism

The stakeholder model of governance:

This is founded on the principle that wealth is created, captured and distributed by a variety of
stakeholders. Managers need to be responsible for multiple stake holders ( <employees,
shareholders, local government)
Advantages:
Long term horizon: they prefer to work for large term profit rather than short term gains.

Less resklessnes risk taking: discourage excess risk taking.

Better Management: Long term prosperity focused , so closer monitoring by
management with greater demand of information, thus high pressure on
management to perform.

Disadvantages:

Weaker decision making: Due to high involvement of managers, increases the time in
decision making and might loose the objectivity in critical decision making.

Uneconomic investment: due to less pressure from shareholder may fovus for long
term gains only which might will give lesser reatun than the market expectations.
Reduced innovation & entrepreneurship : due to conflict of interest of shareholders, it
become hard to raise further money by selling shares which reduces the capital for
new opportunity.

IMPACT OF BORD OF DIRECTORS ON STRATEGY:

Central governance comes to BOD, as theyhave ultimate responsibility of success.

In shareholder model: single tire board structure (majority non executive directors
only provide view on behalf of shareholders not responsible for daily activities so
gives freedom to managers andkeeping interest of shareholders)
In stake holder model: 2 tier structure (supervisory board taking care of interest
of shareholders & employees or so on & management board- strategic planning &
operational role)
Issues faced:
Delegation: strategic management can be delegated with final approval with board,
so managers should not stake shareholders, where in 2 tier board structure this can
be prevented.
Engagement: If board is with strategic management than problem might be for
knowledge & time of non executive directors.
Ways to overcome the issues:
1. board should operate independently of management i.e. non executive
directors role would be high lighted.
2. Board should be able to scrutinize the activities of managers.
3. Directors should have time to give in company operations.

STAKEHOLDERS EXPECTATIONS:
In both models the management can not ignore both shareholders & stakeholders
thus in large company there are chances of higher conflict due to large number of
stakeholders ( a. Having maximum impact b) need to pay max attention c) extend
of difference in expectations)

STAKEHOLDERS GROUP:

SOCIAL/ POLITICAL (policy makers,

govt.

ECONOMIC (supplier, vendors,

customers bank)

TYPES OF
STAKEHOLDERS (ON
BASIS OF NATURE
OF RELATIONSHIP)
COMMUNITY STAKE HOLDERS ( who
are affected by what comapny do)

TECHNOLOGICAL (standard
agencies,ecosystem members) eg.
new product development

stakeholders group might be internal o external as well.

STAKEHOLDERS MAPPING:
<it identifies the stakeholder interest and power and help in understanding the
political priorities majorly their level of interest & level of impact they made.
It will help in:
1. key blockers & facilitators
2. whether repositioning of certain stakeholder sis desirable or feasible.
3. Maintaining the level of interest or power of some stakeholders.

POWER:
Ability of individual or groups to persuade . induce or coerce others following
certain course of action.

It is generally derived by individual hierarchical position or corporate

governance arrangements. The changes in environment may shift the power
balance. The sources of power may varies thus significant to look at the
indicators of power it might be by:

1.
2.
3.
4.

looking the position of individual or group

claim on resources
Positions
Symbol of power( size of office

SOCIAL RESPONSIBILITY & ETHICS:

The purpose of organization is for the benefit of primary stakeholders. Or for wider
group of stakeholders.

Corporate social responsibility:

It is the commitment by organization to behave ethically & contribute for the
economic development while improving the quality of life of the workforce and their
family as well as the local community and society at large.
CSR leads to minimum legal implications. Managers with the enlightened take view
of responsibility not only towards society but also towards the stakeholders.

ETHICS OF INDIVIDUAL & MANAGERS

Ethics are for both managers & individual. If they know something is wrong than
they should whistle blow to local or concern authorities. The biggest challenge for
managers is to develop self awareness for their own behavior.

CHAPTER 5 (CULTURE & STRATEGY)

Companies get strongly influenced by their historical legacies that have embedded
in their culture, which can be advantage for them as it is difficult to replicate by its
competitors.
Problematic as it can be significant barrier for change.
INFLUECNCE OF HISTORY & CULTURE:
Historical Influence----------------Cultural Influence
Cultural analysis (the cultural web)
The problem of strategic drift

The study of organizational history & culture help to understand the organizational
opportunities & constraints.

IMPORTANCE OF HISTORY:
BENEFITS:
1. HISTORY & MANAGERS EXPERINCE: experience of managers made great
impact on their decision making what they have learnt from the past
experience. If managers stand apart from history than they can identify the
impact of history on the decision-making.
2. Learning from the past. learning the current strategic position in term of past
( historical trends)
3. Innovation based on historic capabilities:
4. History as legitimization: can be used to have strategic change.

PATH DEPENDENCY:
Early decision and events establish policy path which impact current & future
situation. Eg. QWERTY key pad for typewriter.

Advantages of path dependency:

1. building strategy around the path dependency capabilities
2. path creation suggest that some managers might will deviate or amend
from path dependents.
3. Management style might be in roots
Historical Analysis can be done by:

key events &

cyclical decision
( what &
Historical
chronological analysis influences how managers
( how organizational (economic reacted in that narratives ( how
strategy changed cycle, industry situations & organization talk
with what
cycle - duration, what were the and explain
consequences) when and its
history)
impacts)
impact)
CULTURE & ITS IMPORTANCE:
Basic assumptions & beliefs shared in organization that forms the organizational
fashion. The way we do things around. So organizational culture is for granted
assumptions & behavior that make sense of people organizational context.

Frames of culture:

organizational field
(culture shaped by work
based grouping ie.
community of
organizations that
intract most frequently
& have developed the
shared meaning
system. more comman
technology , set of
regulations, norms,
routine. leads to the
idea of legitimacy

national/ regional ( the authority,

attitude, equality varies in
nations, so international
organization should understand
this scope

the
individu
organizational culture
al

Funtional/
divisional'Org
anizational
subculture

1.Shares Value
2. beliefs are more
speficic
3. Behavior
4. Taken for granted
assumptions( paradigm
)

Cultures influence on strategy:

Cultural glue .: will become base of all behavior in company, so need less supervision.
Captured by culture: Organisations can, however, be captured by their culture. Culture is, in
effect, an unintended driver of strategy.
Managing culture :it is difficult to identify,monitor, and control so its taken for granted and thus
hard to manage.
There is dominant influence of culture on the strategy of the business.
The change in culture is taken as last option in order to achieve the corporate performance.
Analyzing culture: Culture web
For analyzing organizational culture it is important to understand the existing culture & its
impact. cultural web shows the behavioural, physical and symbolic manifestations of a
culture. The elements of the cultural web are as follows:

1. The paradigm is at the core ie. the set of assumptions held in common and taken for
granted in an organisation.
2. Routines are the way we do things around here on a day-to-day basis
3. The rituals 28 of organisational life are particular activities or special events that
emphasise,
highlight or reinforce what is important in the culture.
4. The stories told by members of an organisation to each other, to outsiders, to new
recruits,
and so on, may act to embed the present in its organisational history and also fl ag up
5. Symbols are objects, events, acts or people that convey, maintain or create meaning over
and above their functional purpose.
6. Power
7. Organizational structures
8. Cultural system.

Undertaking cultural analysis:

1.
2.
3.
4.

Question to ask
Statement of cultural values
Pulling it together: taking information from by cultural web
Strategy development . An understanding of organisational culture sensitises managers to
the
way in which historical and cultural infl uences will likely affect future strategy for good or ill
5. Managing strategic change .
6. Leadership and management style .
7. Culture and experience

STRATEGIC DRIFT:
S trategic drift 29 is the tendency for
strategies to develop incrementally on the basis of historical and cultural infl uences,
but fail to
keep pace with a changing environment.

Incremental strategic change:

There is a tendency for strategies to
develop on the basis of what the organisation has done in the past . the company grows with the
time, but strategy remains same because of following reasons:

Alignment with environmental change .

Experimentation around a theme .managers learned how to build variation around successful
formula.

The success of the past.

The tendency towards strategic drift:

To maintain the position in market organization

need for more fundamental

change to their business model there does not
need to be sudden or dramatic environmental changes for the strategy to become less aligned
with the environment. Company strategy was not keeping pace with environmental changes
because of:
1.Steady as you go .
2. Building on the familiar
Managers may see changes in the environment about which they are uncertain or which they do
not entirely understand.
3. Core rigidities .
4.. Relationships become shackles . 33 Success may have been built on excellent relationships with
customers, suppliers and employees. Maintaining these may quite rightly be seen as
fundamental
to the long-term health of the organisation.
5. Lagged performance effects . The effects of such drift may not be easy to see in terms of the

performance of the organization

A period of flux:
period of fl ux triggered by the downturn in performance.
Strategies may change but in no very clear direction. There may also be management changes,
There may be internal rivalry

Transformational change or death

As things get worse it is likely that the outcome (phase 4) will be one of three possibilities.
(a) The organisation may die;
(b) It may get taken over by another organisation.
(c) Or it may go through a period of transformational change .
Such change could take form in multiple changes
related to the organisations strategy; perhaps a change to its whole business model
as well as changes in the top management of the organisation and perhaps the
way the organisation is structured.

SUMMARY
The history and culture of an organisation may contribute to the distinct and unique nature of
an organisations
strategic capabilities.
Historical, path-dependent processes may play a signifi cant part in the success or failure of an
organisation
and need to be understood by managers. There are historical analyses that can be conducted to
help
uncover these infl uences.
Cultural and institutional infl uences both inform and constrain the strategic development of
organisations.
Organisational culture i s the basic taken-for-granted assumptions, beliefs and behaviours
shared by members
of an organisation.
An understanding of the culture of an organisation and its relationship to organisational
strategy can be
gained by using the cultural web .
H istoric and cultural infl uences may give rise to strategic drift as strategy develops
incrementally on the
basis of such infl uences and fails to keep pace with a changing environment.