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Strategic Scanning:
Integrating the Corporation

The strategic approach to shareholder value management is often called the value-based
approach to management, or simply value-based management. This is a process that
begins with strategic scanning, proceeds to strategy formulation, strategy implementation
and performance monitoring.

The following sections describe an Integrated Strategic Management (ISM) process that
we have found useful when working with companies in the Philippine situation.

The strategic scanning stage is commonly divided into two: external analysis and internal
analysis. The objective of the external analysis is the development of an understanding of
the marketplace, the dynamics facing the company, the opportunities and threats. Porter’s
four-factor analysis of competitive context (Porter, 1990) can be utilized.

This reading was written by Prof. Maria Elena B. Herrera, Asian Institute of Management. All case materials are prepared solely for
the purposes of class discussion. They are neither designed nor intended to illustrate the correct or incorrect management of problems
or issues contained in the case.

Copyright 2007, Prof. Maria Elena B. Herrera and the Asian Institute of Management, Makati City, Philippines, http://www.aim.edu.
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Strategic Scanning: Integrating the Corporation 2

- Availability of human resources - Fair and open competition

- Access to research institutions & - Intellectual property protection
Universities - Transparency
- Efficient physical infrastructure - Rule of Law
- Efficient administrative infrastructure - Meritocratic incentive systems
- Availability of scientific and technological
infrastructure
- Sustainable natural resources CONTEXT
- Efficient access to capital FOR FIRM
STRATEGY
(the rules and
incentives that
govern
FACTOR competition) LOCAL
(INPUT) DEMAND
CONDITIONS CONDITIONS
(Presence of (The nature and
high quality, sophistication of
specialized inputs local customer
RELATED &
available to firms) needs)
SUPPORTING
INDUSTRIES
(The local
availability of
supporting
- Availability of local suppliers industries) - Sophistication of local demand
- Access to firms in related fields - Demanding regulatory standards
- Presence of clusters instead of isolated - Unusual local needs that can be served
industries nationally and globally

Source: Michael Porter, The Competitive Advantage of nations, 1990

A strategy scan begins with a large-scale analysis of the environment. In particular, it is

important to understand the factors that affect the company’s value chain. The generic
categories include the socio-political situation, the macroeconomic situation, industry
regulations, technology, demographic trends and lifestyle changes. It is particularly
important to understand the factors affecting such things as availability of supply and the
characteristics and size of demand.

At the end of the analysis phase, what we have found useful in working with executives
is the development of a series of competitive grids that is an expansion of the common
competitive arena grids.

Competitive Arena Grids

The competitive arena grids provide a discipline that is often lacking in the simpler, but
often misused, SWOT (strength, weakness, opportunity, threat) matrix. Because the grids
are generated systematically, the analyst is forced to establish a logical link between
customer preferences and corporate capabilities. They are also designed to help the
analyst cast a wider net in terms of possible markets and opportunities.

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The first grid is a “product or service solution” grid; it helps identify possible product or
service alternatives. It also helps a company properly identify its key competitors. This
grid is constructed by creating a matrix with two dimensions: market segment and
demand generator. This grid allows a company to understand that market segments are
different from each other.

Competitive Arena Grid:

Product/Service Solution

Working Full-time
Moms Homemaker

Convenience
Emergency Need Store Grocery
Shopping Neighborhood Store
Service

Grocery Grocery
Bulk Shopping Warehouse Store Warehouse Store
Wet Market Wet Market

It also allows companies to understand that the same market segment has varying
requirements depending on the type of “demand generator”. The demand generator
replaces the more commonly used term of “need” in order to allow for more precisely
focused sources for generated demand. For example, in the food industry, the young adult
male segment will have many different demand generators that a restaurant can serve,
e.g. food for celebration versus food for a date. In fact, in the food industry, the so-called
“day part”, which corresponds to the type of meal also helps further identify micro
market segments.

This grid allows a company to identify its key competitors. Unless the first grid is
properly constructed, key competitors cannot be correctly identified. For example, in the
restaurant industry, the demand generator “just hungry” can be met by product solutions
such as food taken out from convenience stores – not one of the competitors that a
traditional analysis would identify. In the merchandise retailing industry, the demand
generator “relaxation” would show that many other competitors exist within, for
example, the same mall that that the retailer is located in. However, that same analysis

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would allow the retailer to develop possible complementary offerings for his retail outlet
– e.g. the coffee shops in bookstores.

Each market-demand generator cell in this two-dimensional matrix defines a very

specific market niche or micro-segment.

The second grid is the preference grid. It is similar to the first grid but identifies
preference drivers. A preference driver is a characteristic that determines which
product/service solution or alternative is preferred. It is important to separate so-called
threshold characteristics, i.e. those that are expected, from the differentiating
characteristics, the characteristics that are the primary determinants of choice. Often,
these preference drivers explain why certain product solutions are preferred over others.
Sometimes, they can point to clear alternatives for differentiating the company’s product
over competition.

Competitive Arena Grid:

Preference Driver

Working Full-time
Moms Homemaker

Location
Emergency Need Convenience Price
Price Convenience

Variety Price
Bulk Shopping Convenience Convenience
Price Variety

In some cases, where a market clearly does not exist or is too small, it is useful to ask the
opposite question: why does this target market not buy this product? What is the
“aversion driver”? Management at Nintendo, the video game developer asked precisely
this question when they designed the Wii, their game console that is capturing completely
new markets for an industry whose primary historical demographic has been the young
male with an antisocial streak. Management at Nintendo determined that their main

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opponent was the difficulty of use of most gaming controllers. Thus was born the Wii
remote, the gadget that is transforming the gaming industry. (Fortune, 11 June 2007)

The third grid is the competitive analysis grid. For many companies, this grid is
extremely large as one dimension is micro-segments: the segments produced by
combining market segments with demand drivers. What we have found useful in practice
is to create multiple tables by organizing the different micro-segments using some
organizing category such as market segment or product line. The micro-segments that
fall under the organizing category can then be arrayed against the market players.

Competitive Arena:
Competitive Analysis

It is extremely important not to forget substitutes in identifying market players. The

expectation is that the first grid addresses this. Also, the market players must always
include possible new entrants. In fact, the identification of the assets (following in asset
maps) that allow existing market players to deliver to customer preferences can often lead
to the identification of possible new competitors.

This third grid allows a company to compare itself against competition. What is key to
the successful use of this grid is the discipline of ensuring that the comparison versus
competition is guided by market preference, and not by any internal management bias.

This method allows a company to focus its efforts on strategies that offer the customer
what the customer values.

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These competitive arena grids, when combined with the larger external scanning can
allow a company to identify and characterize opportunities and threats. It will also give a
company a basis for understanding sources of competitive advantage as well as an
understanding of how easily these can be replicated. This latter piece of information
feeds directly into the value growth duration, one of the generic financial value drivers.

This analysis also provides a company with the external factors that would affect its own
critical decisions – information such as acceptable price points, expected functionalities
and preferred areas of differentiation. These, in turn, affect the generic financial value
drivers of sales growth, margin and investment requirements.

Asset Map

The second thing that we have found useful in the strategic scanning phase is the analysis
of the company’s asset portfolio as well as those of its closest competition.

The concept of asset portfolio is drawn from the model proposed by Boulton et al
(Boulton et al, 2000) as a basis for analyzing the competitiveness of businesses in the
new economy. Boulton et al proposed a classification of the assets of a company to
include intangible assets. They further categorize these assets into physical assets (land,
building, equipment, inventory), financial assets (cash, receivables, investments, debt,
equity), employee and supplier assets (employee, supplier, partner), customer assets
(customer, channel, affiliate) and organization assets (leadership, structure, process,
system, culture and values, brand, proprietary knowledge).

Boulton et al suggest that the heart of every strategy lies in identifying what assets a
company needs in order to create and sustain a competitive advantage. However, as each
company must begin with its existing portfolio of assets, the core of strategy then
becomes how to deploy existing assets in order to achieve the desired business model.
Boulton et al identify five basic asset deployment strategies: build, enhance, connect
(connecting one asset element to another or many others in order to change the business
model or create competitive advantage), convert (one asset into another) or block (use an
asset in order to block competition). The last deployment strategy differs from the first
four in that it is a defensive strategy.

Since Boulton et al have published their work, many new models have been proposed for
analyzing and managing corporate assets, especially the intangible assets that have
become an increasingly important source of competitive advantage.

What we have found useful is an adapted version of this asset portfolio that we call the
asset map.

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Asset Map
Reputation

Intellectual and Legal

M
Organization a
r
k
e
Alliances t
Channel
Supplier, Employee Customer

Systems and Process

Physical
Investor and Financial

Prof. Maya B.
Adapted by Herrera… Solutions
M.B. Herrera Inc….AIM
from a model JFC ….2003..
by Boulton et al 19
The asset map begins in the center with the core value chain of the company, tracing the
value-adding process of the company from supplier through employees and alliances
through to customer-channel and on to market-based assets. Within this context, brand is
appropriately placed within market-based assets. Strong manufacturing partnerships
would still fall within the supplier-employee-alliances asset.

This company value chain rests on a foundation of systems and processes that, in turn,
rests on a foundation of physical assets. Investor and financial assets support physical
assets.

Within this revised framework, both tangible and intangible types of assets exist within
the investor and financial asset category. For example, solid relationships with

shareholders as well as a sterling financial rating would be included as intangible assets

within this category.

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Above the value chain, we place the original asset category of organization, now limited
to those that are appropriately organization assets such as leadership, culture, structure
and values. Over all of the assets, we place the intellectual, legal and reputation assets
that make a company’s work possible.

This revision of the asset portfolio allows a company to understand its assets within the
framework of its value chain. In order to ensure that the asset map is complete as well as
to aid in prioritizing assets, it helps to review core company processes.

Assessing Core Processes

Government Senior
Innovation
Relations Management

Se Marketing
rv
ic
Core e
Purchasing
and Supplier Production Sales
Processes Processes
e
v ic
r
Se Distribution

Information Human
Finance
Technology Resources

It is particularly useful to develop an asset map for key competitors in order to

understand what assets the competitor is using in order to deliver on its value
propositions.

This analysis is useful because the most critical decision to make in strategy formulation
is the identification of which segments to address, what value to offer and how to
penetrate markets and deliver value while generating earnings. The asset map provides a
tool for analyzing the linkage between a company’s investment decisions and its ability
to compete in the market place. It also provides the foundation for the generic financial
value drivers of working capital and fixed asset investment requirements.

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After the competitive arena grids and the asset maps are analyzed, management can still
turn to the familiar SWOT (strengths, weaknesses, opportunities, threats) matrix.

However, each of the strengths and weaknesses will be seen only in relation to their
relative intensity versus competition and only in relation to how important they are to the
market.
Understanding
Business the Competitive
Context Competitive
Arena
Arena
Micro-Segment
Preference
Analysis

Own
Enterprise
Assets

Competitor
Enterprise
Assets

Analyzing these asset maps (own versus competition) with the competitive arena grids
provide management with a basis for determining the relative viability of strategic
alternatives. It will also show the sustainability of certain aspects of a company’s
competitive advantage as well as suggest areas of clear opportunity or threat.

Summary
In summary, the Integrated Strategic Management approach is anchored by the use of
shareholder value as an integrating mechanism.

Shareholder value is seen as arising from the management of three financial factors: long-
term operating cash flows, risk profile and market sentiment. However, it is important to
understand that long-term operating cash flows are the result of the careful management
of two things: the segments of the competitive arena that the company chooses to be in

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and the assets (tangible and intangible and including corporate capabilities) that the
company creates.

The Integrated Strategic Management approach relies on the development of a fit

between the company’s strategy and its business engine: the hardware of physical and
financial assets, the software of process and systems and the “liveware” of organization.
Most importantly, the Integrated Strategic Management approach uses the performance
measurement system as a tool for communicating as well as for steering. When the
performance indicators are well-designed and connected to reward systems, managerial
focus is achieved.

Integrated Strategic Management

Business
Context
Strategy Map New
Enterprise
Assets

Shareholder Value
Strategy
Strategy

Core Engine
Values
Enterprise
Scorecard

Organization

Current
Enterprise
Assets Risk Management

The process of anchoring and linking:

a) Anchoring decisions to shareholder value creation and protection; and

b) Linking competitive arena and corporate assets to strategy, strategy to business

engine, business engine to programs, programs to indicators, indicators to
organization and reward

Creates an Integrated Corporation, one that is focused clearly on creating and

protecting value for shareholders.

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SOURCES:

Boulton, Richard E.S.; Libert, Barry D. and Samek, Steve M. Cracking (2000), ‘The Value
Code’, Harper Collins, New York.

Chew, Donald H. Jr.(2001), ‘The New Corporate Finance’,McGraw-Hill Irwin Boston.

Copeland, Tom; Kollier, Tim and Murrin, Jack (1995), ‘Valuation Measuring and Managing the
Value of Companies’ ,Second Edition. Mckinsey & Company, Incorporated.

Kaplan, Robert S. and David P. Norton. ‘The Balanced Scorecard.’ Boston MA: Harvard
Business School Press, 1996.

Miller, M.H. and Modigliani, M.H. (1961), ‘Dividend Policy, Growth and the Valuation of
Shares,’ Journal of Business.

Norton, David P. (1999), ‘Use Strategy Maps to Communicate Your Strategy,’ Harvard Business
School Publishing

O’Brien, Jeffrey M.(2007), ‘How Wii Won,’ Fortune Magazine.

Paladino, Bob (2000). ‘How to Conduct a Balanced Scorecard Review to Create Strategic
Alignment,’ Harvard Business School Publishing.

Porter, Michael E.(1980), ‘Competitive Strategy,’ The Free Press, New York.

Porter, Michael E.(1985), ‘Competitive Advantage,’ The Free Press, New York.

Porter, Michael E. (1990), ‘The Competitive Advantage of Nations,’ The Free Press, New York.

Rappaport, Alfred (1998), ‘Creating Shareholder Value, A Guide for Managers and Investors,’
The Free Press, New York.

Treacy, Michael and I.Wiersema, Fred (1995),‘The discipline of market leaders: choose your
customers, narrow your focus, dominate your market,’ (IMPRINT) Reading, MA Addison-
Wesley.

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