146 Design of Enterprise Systems: Theory, Architecture, and Methods

4. Search on the Web for project management software tools. Include in your search
such sites as the Project Management Institute (www.pmi.org). List and provide
a brief description of some software tools that are available to help with various
project management activities.

Bibliography
[1] H.T. Goranson. The Agile Virtual Enterprise: Cases, Metrics, Tools. Quorum Press,
Westport, CT, 1999.
[2] M. Hammer and J. Champy. Reengineering the corporation: A Manifesto for Business
Revolution. Harper Business, New York, NY, 1993.
[3] M. Hammer and S.A. Stanton. The Reengineering Revolution: A Handbook. Harper-
Collins, New York, NY, 1995.
[4] A. Stellman and J. Greene. Applied Software Project Management. O’Reilly, Sebastopol,
CA, 2005.
 Part II

Enterprise Project

147
7
Strategy

“However beautiful the strategy, you should occasionally look at the results.” – Win-
ston Churchill (1874-1965), Prime Minister of the United Kingdom 1940-1945 and 1951-
1955.

Enterprise design is a strategic endeavor because it has a long-term, fundamental effect

on the enterprise. This chapter discusses the types of goals enterprises pursue. Enterprises
determine their purpose and vision, frequently to seek long-term profits and growth. Two
main schools of thought on strategy are the resource-based view and the market-based view.
The first says a company’s competitive advantage is derived from unique core capabilities the
company possesses. The second says competitive advantage is derived from the company’s
position in the marketplace. The concepts are complementary, and both are considered in
the strategy formulation method presented. The chapter also shows how to identify the
core capabilities and how to analyze the company’s market position via the strengths,
weaknesses, opportunities, and threats matrix. After completing this chapter, you should
be able to:

• Describe how mission, vision, and strategy fit together.

• List the types of strategies an enterprise might have.

• Differentiate between the resource-based view and the market-based view of strategy.

• Identify core capabilities in an enterprise.

• Describe the steps and action necessary to formulate strategy.

• Be able to conduct a SWOT analysis.

7.1 Strategy Definition

In an enterprise there are three decision levels: strategic, tactical, and operational.
Strategic-level decisions are long-term decisions that have broad impact on the enterprise.
Tactical-level decisions are medium-term decisions that impact individual business units.
Operational-level decisions are the day-to-day decisions made at low levels. The strategic
decisions set guidance and constraints for lower-level decisions. For example, a strategy to
pursue market differentiation by providing superior quality and customer service becomes
the guiding criteria for tactical and operational decisions in the enterprise. The strategy is
long-term, which is usually defined as five or more years out, but will differ by company,
industry, and country.
As described above, Strategy is a plan to achieve the long-term goals of an enterprise.
It is expressed in the pattern of decisions and actions taken about the operations of the

149
150 Design of Enterprise Systems: Theory, Architecture, and Methods

enterprise. When formulating the strategic plan, the enterprise needs to evaluate the dy-
namic environment it operates in, consider the actions of its competitors, and determine how
to meet its goals by effectively deploying its resources, competencies, and knowledge. The
result hoped for in any strategy is for the enterprise to gain a sustainable competitive ad-
vantage over its competition. Competitive advantage is the ability of an enterprise to achieve
higher than industry-average profits [11]. Sustainable means that it is not temporary, but
maintained over a long period of time.
The strategic plans an enterprise makes are developed to help the enterprise attain its
goals. All enterprises have goals, and there are only a handful of goals that make sense for
most enterprises. For-profit enterprises must have as a basic goal to make money, or more
precisely to maximize shareholder value.1 Shareholder value is derived from the profits the
enterprise generates compared to the costs to generate those profits, which is the profitability
of the enterprise. To ensure long-term profitability, an enterprise needs to satisfy its cus-
tomers and grow its business. This explains why many startups forgo profits in their early
years in order to build market share, which is intended to maximize shareholder value over
the long term. Non-profit enterprises might have a goal to help as many people as possi-
ble, or to have the greatest measurable impact possible. Government and quasi-government
enterprises might have a goal to provide a particular service.
Achievement of long-term profitability implies market growth as an enterprise goal be-
cause in order to increase profits, an enterprise must either grow market share or must
improve its products and services in terms of quality, timeliness, or cost so as to derive
more profits from the same market share [1, 13]. Growth can be measured in terms of rev-
enues, profits, return on investment, number of customers, or market share. In a growing
market all companies in the market may grow. In a stable market or a declining market it
is a zero-sum game; in other words, growth is at the expense of a competitor.
To communicate the purpose and goals of an enterprise, the organization develops a
vision statement, a mission statement, and a statement of core values. A vision statement
articulates the enterprise goals, describing what the enterprise aspires to be. It states auda-
cious goals of the enterprise and reflects the values of the enterprise. The mission statement
is a brief description of the enterprise’s purpose that projects the enterprise’s image to
customers. Usually, the mission statement describes how the enterprise provides a product
or service which satisfies the needs or desires of one or more customers. The mission must
usually be accomplished in competition with other enterprises vying for the same business.
A mission statement does not change frequently. For example, the mission of the U.S. Army
is to protect the United States, and this has been their mission since the Army’s incep-
tion more than 200 years ago. Core values are the deeply held values of the organization
that guide the enterprise’s internal conduct and how it interacts with its environment. Core
values should not change as the enterprise’s environmental circumstances change.
Figure 7.1 shows how the enterprise’s strategy is a plan to go from the current state,
to the desired state, described by the vision statement. The mission statement remains
unchanged between the two states.

1 In economics, the rent theory says the business should make more money than alternative uses of the

capital tied up in the business. If the business cannot generate more revenue than alternate uses, then
economically it is better to close the business and use the assets for these alternate uses. Consider the case
of TWA, which was taken over by the corporate raider Carl Icahn in 1985. Once in control, Icahn proceeded
to systematically sell most of TWA’s assets to competitors. In 1991, Icahn sold TWA’s prized London routes
to American Airlines for $445 million. He also took the company private, which let him recoup almost his
entire profit and saddled the ailing airline with $540 million in debt. These decisions were made not to
sustain a competitive airline, but they were done to enrich the owner, Carl Icahn. In 1992, the weakened
TWA declared bankruptcy and soon ceased to exist. – TWA - Death of a Legend by E. X. Grant, St. Louis
Magazine, Oct. 2005.
 Strategy 151
Vision
Where we
want to be
Strategy
Our plan to
get there

Mission
who we are
and
what we do
Where we are

FIGURE 7.1
Mission, vision, and strategy.

Example from Miami Children’s Hospital, Miami, FL http : //www.mch.com/

Mission
To provide excellent family-centered healthcare to children in an academic environ-
ment that meets or exceeds the expectations of those we serve and educate. To collaborate
with others in our community to improve the health status of children.
Core Values
We will always do what is best for each child. We will always value those who serve
children. We will always value diversity. We will always value integrity and honesty. We
will always value leadership.
Vision
Miami Children’s Hospital will continue to be recognized as one of America’s best chil-
dren’s hospitals and as Florida’s academic center of pediatric clinical excellence providing
a number of Centers of Specialty Pediatric Excellence nationally and internationally.

7.1.1 Strategy Hierarchy

Large enterprise will have strategies at different levels of the enterprise – one for each of
their subsystems or major functions. What strategies an enterprise does formally develop
depends on the particular enterprise. A common hierarchy of strategies is: corporate level,
business-unit level, and function level.
Large corporations that engage in multiple, different businesses will have a corporate
strategy and then each business unit will have its own strategy. Corporations do not directly
make products or provide services; it is their business units that do this. The role of the
corporation is to manage the portfolio of business units so that each one is competitive
and contributes to the corporate mission. A corporate strategy determines what markets
to compete in, what business units to have, how to allocate resources among the business
units, what values to promote, how to achieve synergies through sharing and coordinating
resources across business units, and how to govern the business units.
To illustrate corporate strategy, take the case of Johnson & Johnson, which has over
250 operating companies located in 57 countries throughout the world. The corporate head-
quarters that oversees all these companies has a corporate strategy to be a broadly based
human healthcare company for the consumer, pharmaceutical, and medical-device markets.
The corporate strategy provides a common set of values to unify its worldwide operations.
Part of the company’s corporate strategy is to broadly compete in the provision of products
and services for human healthcare, to manage its businesses for the long term, to use a
decentralized management approach, and to develop its people. Within the context of the
152 Design of Enterprise Systems: Theory, Architecture, and Methods

overall corporate strategy, each individual business unit in Johnson & Johnson has a sepa-
rate strategy developed by the senior management groups running those business units.2
Many large enterprises exhibit a similar corporate structure of overseeing multiple busi-
ness units. Instead of the term business unit, they may be called divisions, product groups,
or national operating companies. Within a single business unit, there are strategies for
different functional areas. Most business units will have these strategies:
• Product and Marketing Strategy – All enterprises provide a product or service, and they
need a strategy for what products to make and how to position those products in the
market. The product and market strategy determines the outward face of the enterprise
to the clients and the rest of the world.
• Operational Strategy – The operations unit creates the product or service. If it is a prod-
uct, then it is a manufacturing strategy; if it is a service, then it is a service strategy. The
operational strategy determines the overall approach of operations, defining the consistent
pattern of decision making done in operations. The decisions include capacity manage-
ment, manufacturing capabilities, outsourcing, supply chain operations, and inventory
decisions.
• Information Strategy – The information an enterprise has is considered a valuable resource
and the use of IT is required for all enterprise operations. The information strategy deter-
mines the overall approach to developing and deploying information systems to support the
enterprise. It describes the relationship between technology choices and business choices.
It is important that the functional strategies are aligned with the overall enterprise strategy
[6]. Alignment means the strategic decisions all support each other. When there is mis-
alignment between functional strategies and the business strategy, then lower enterprise
performance can be expected depending on other factors such as management tenure [7].

7.2 Strategy Theory

There are two opposing views on how to formulate strategy. The first view is called the
resource-based theory of strategy, which emphasizes the acquisition of resources and devel-
opment of capabilities as the basis of competitive advantage. The second view is called the
market-based theory, and says an enterprise should identify an explicit position in the mar-
ket and develop a strategy to dominate that position. The first is internal and the second
is external. We examine these two theories.

7.2.1 Resource-Based Theory of Strategy

The resource-based theory of strategy is based on two premises: first, the resources and
capabilities of an enterprise are the basis for generating profits, and second, the enterprise
strategy should be based on exploiting these resources and capabilities. Resources are inputs
into an enterprise’s production process. The resources may be either tangible or intangi-
ble in nature. Tangible resources include real estate, production facilities, raw materials,
equipment, and other readily identified objects. Although these tangible resources may be
essential to the enterprise’s strategy, due to their standard nature, they can rarely provide
competitive advantage. It is just too easy for competitors to acquire similar resources. On
2 2007 Annual Report, Johnson & Johnson, http://www.investor.jnj.com/annual-reports.cfm
 Strategy 153

the other hand, intangible resources such as business culture, reputation, brand name, or-
ganizational knowledge, patents, or trademarks are difficult for competitors to imitate, and
thus, strategically more valuable.
Prahalad and Hamel [12] say individual resources may not in themselves create a compet-
itive advantage. It is through the synergistic combination and integration of sets of resources
that an enterprise creates competitive advantages. The authors describe a capability as the
capacity for a set of resources, people, and processes to integratively perform an activity.
Unlike physical assets, which do deteriorate over time, core competence does not diminish
with use, but grows in value. Through continued use, capabilities become stronger and more
difficult for competitors to understand and imitate. An enterprise can have the capability
for low cost production, high quality production, superior customer service, or fast product
development as a few examples. A capability differs from a resource because it describes
an end-to-end process or a combination of enterprise resources rather than a single skill or
knowledge.
Peteraf [10] uses economics to describe four conditions that must be met for a resource
or capability to provide sustained competitive advantage. These conditions are:

1. Valuable and rare resource – Superior resources are only possible if the resources
in the industry are heterogeneous. A superior resource must be valuable in that
it improves enterprise efficiency or effectiveness. Additionally, the resource must
be rare such that by exercising control over it, the enterprise can exploit it to its
advantage (and simultaneous disadvantage to its competitors).
2. Ex ante limits to competition – The resource must be imperfectly imitable to
prevent competitors from being able to easily develop the resource for themselves.
3. Imperfect resource mobility – The resource must be imperfectly mobile to dis-
courage the ex-post competition for the resource that would offset the advantages
of maintaining control of the resource.
4. Ex post limits to competition – The resource must not be substitutable; other-
wise, competitors would be able to identify different, but strategically equivalent
resources to be used for the same purpose.

If a resource or capability meets these four criteria then it is a core competency. Core com-
petencies are those resources or capabilities that are a source of the enterprise’s competitive
advantage. The core competence idea is useful to managers not only for focusing them on
the essentials, but also for identifying those things that were not “at the core.” The en-
terprise should not expend effort, money, and time on non-essential things that are not at
the core. This idea has led to many companies outsourcing non-critical activities such as
payroll, IT support, or food services for the employee cafeteria. This allows the enterprise
to focus on core capabilities that create value.
To illustrate a core competency, consider Dell Computers’ order fulfillment process that
allows them to quickly assemble computers to order and deliver directly to the customer.
Dell’s order fulfillment process is a capability because it involves the integration of many
resources, knowledge, processes, and culture. It is not any single resource, tangible or in-
tangible, that gives Dell its competitive advantage. It is its overall business model that
Dell developed and improved over many years. Dell’s assemble-to-order process, tight in-
tegration with suppliers, and IT prowess helps Dell keep inventory very low. This frees up
capital, which Dell used to fuel its growth. Because Dell’s core competency is the integra-
tion of many capabilities, it is not easy for its competitors to replicate. Compaq created an
assemble-to-order process and made other changes, but it only got inventory down to 25
154 Design of Enterprise Systems: Theory, Architecture, and Methods

days compared to Dell’s 13 days. Collectively, Dell’s core competency gives it a 10-15% cost
advantage over its rivals, which is a good profit in a low-margin business.3,4
The key observation of the resource-based view of strategy is that a strategically valuable
resource or capability cannot be easily duplicated by rivals. Otherwise, the competitive
advantage gained is only temporary. To illustrate, consider the technology that enabled
FedEx to let customers track their packages in real-time via the Internet. The technology
is widely available and easy to copy. Soon after FedEx introduced the service, its chief rival
UPS also introduced the service. Nowadays, tracking packages is expected by customers!
This example illustrates two ideas: first, tangible resources such as technology are often
easy to duplicate and consequently offer only fleeting competitive advantage; second, what
is at first considered a value-added service can soon become an expected service that must
be provided just in order to stay competitive.

7.2.2 Market-Based Theory of Strategy

The market-based theory of strategy says that competitive advantage comes from the opti-
mized position of the enterprise in a market vis-a-vis its competitors. In the market-based
theory, it is the enterprise’s position in the external competitive environment that is ex-
amined, not the internal resources or capabilities of the enterprise. The foremost author
promoting the market-based theory is Porter [11], who argues compellingly that there are
two basic strategies an enterprise can pursue. A company can either provide value more
efficiently than competitors by being the low-cost provider, or provide greater value than
competitors by differentiating how it provides that value.

Low-cost leadership – The enterprise emphasizes its cost leadership to its customers. In
a market, there can usually be only a single low-cost leader.

Differentiation – The enterprise attempts to differentiate its products or services from

other enterprises in its market. Differentiation may be in terms of product features,
product quality, or any other characteristic valued by customers.

The low-cost leadership strategy seeks to be the low-cost producer by achieving economies
of scale. The company works to realize the cost advantage by: using process technology to
improve efficiency; negotiate for lower raw material and other input costs due to volume
discounts; and maintain strict control on all costs, especially overhead costs. Examples of
a low-cost strategy can be found in the airline industry with Southwest Airlines, Ryan
Air, and Spirit Airlines. These low-cost carriers keep costs down by flying only one type
of plane to limit maintenance and other operating costs, fly between smaller airports with
lower fees and shorter waiting times, have non-union employees, and provide little services
beyond the basic provision of transportation. To illustrate the low-cost mentality, a visit to
Spirit Airlines corporate offices will reveal they have no receptionist and there is almost no
janitorial staff.
Within a single market only one company can be the low-cost leader. If several enterprises
simultaneously pursue this strategy, then you have a price war, and eventually, one of the

3 MichaelDell: Whirlwind on the Web, by Gary McWilliams, BusinessWeek,April 7, 1997.

4 Kraemer,K.L., Dedrick, J., and Yamashiro, S., Refining and Extending the Business Model with Infor-
mation Technology: Dell Computer Corporation, The Information Society, 16(1), March 2000, pp. 5-21.
 Strategy 155

enterprises will be driven out of business. Once a company establishes itself as the low-cost
leader, this creates formidable barriers to entry against potential competitors.
The alternative to a low-cost strategy must be a differentiation strategy because the
enterprise must offer some unique product features or service that the customer values and is
willing to pay a premium for. The differentiation strategy seeks to achieve a unique position
in the market. A company can differentiate itself in one of several ways. It can pursue
a variety-based position in which it produces only a subset of an industry’s products or
services. The company can then develop distinctive capabilities to excel in that one area. For
example, Jiffy Lube specializes in automotive lubricants and does not provide any other car
repair or maintenance services. They design their shops, processes, and technology so that
cars can enter quickly, get their oil changed, and leave. Their competition, the traditional
automotive repair shop, cannot compete in both cost and speed for this market. A second
way to differentiate is through needs-based position. In this approach the company identifies
a particular group of customers. The company then tailors its capabilities and processes to
achieve excellence for that single customer segment. Ikea follows this strategy by trying
to meet all the home furnishing needs of young customers. Access-based position seeks to
differentiate by segmenting customers based on their access to a product or service. For
example, Carmike Theatres focuses on rural movie theaters in cities and towns with less
than 200,000 people.

7.3 Strategy Formulation

Strategy formulation is the process by which an organization creates a strategy. Interestingly,
many academic and business sources on strategy discuss different types of strategies, case
studies of successful and unsuccessful strategies, but few provide actual guidance on how a
company should go about formulating a strategy. Hamel [5] says, “the dirty little secret of
the strategy industry is that it does not have any theory of strategy creation.” Mintzberg
[9] examined the strategic formulation process and concluded it was much more fluid and
unpredictable than people had thought. More recently, Grant [4] assessed this research and
concludes that strategy is both due to deliberate design via a strategy formulation process
and emergence as the result of multiple decisions at many levels in the enterprise.
Ulwick [14] studied how companies formulate strategy and found that successful com-
panies searched the universe of possible strategies to find the strategy that best satisfies
the largest number of desired outcomes while adhering to any constraints imposed on the
solution and the competitive position of the enterprise. The approach called the Univer-
sal Strategy Formulation Model (USFM) is conceptually a straightforward application of
the operations research idea of optimization: search for an optimal solution subject to con-
straints. The difficulty involved in strategy formulation is that the solution space is ill-
defined and ambiguous; there are no easy means to evaluate candidate solutions to see if
they are the best; and it is difficult to identify all of the constraints on potential solutions.
Figure 7.2 presents a strategy formulation process that gives equal weight to internal
strategy development and external strategy development. The starting point is the enter-
prise vision, goals, and mission. Using this as the context for the analysis, the enterprise
needs to examine its internal resources and capabilities and its external position in the
market. To do this a frequently used technique is the SWOT analysis. The SWOT analysis
is a technique to examine a company’s internal strengths and weaknesses and the exter-
nal opportunities and threats facing the company in its environment. SWOT stands for
Strengths, Weaknesses, Opportunities, and Threats. In a SWOT analysis a team uses vari-
156 Design of Enterprise Systems: Theory, Architecture, and Methods

Enterprise
Vision,
Goals, &
Mission
INTERNAL VIEW EXTERNAL VIEW

Strengths &
Market
Weaknesses of SWOT
Opportunities &
Resources & Analysis Threats
Capabilities

Core Critical Success

Competencies Factors

What are
strategic
options?

Evaluate & Select

FIGURE 7.2
Strategy formulation process.

ous techniques and tools to identify their strengths, weaknesses, opportunities, and threats.
Most teams use a checklist (see the SWOT checklist in Figure 7.3) to help the team identify
strengths, weaknesses, opportunities, and threats.
In conducting a SWOT analysis, it is important to consider that something can be both
a strength and a weakness, or an opportunity and a threat at the same time. To illustrate,
in the year 2008, the world experienced a rapid rise in oil prices. This is an external trend
that affects many industries, especially the airline industry. The market trend of higher
fuel prices is both a threat because it is a major input to providing air transportation,
and an opportunity if you can somehow twist it to your advantage. Southwest Airlines did
just that. Southwest pursued an aggressive hedging strategy that locked in more than 70%
of the company’s expected fuel consumption at about $51 a barrel, far below the going
market price of $126 a barrel.5 All the airlines engage in some hedging but none as much as
Southwest. When a company enters into a hedge contract they must pay a deposit, which
can be a significant outlay of cash. Some airlines believe there are alternate, better uses of
that money. Additionally, hedging involves significant risk because if oil prices drop instead
of rise, then the company could find itself paying more for fuel than the current prices
available on the open market.
Figure 7.4 shows the possible results of a SWOT analysis for Amazon.com. It identifies
Amazon’s strengths as its reputation, established customer base, and IT capabilities espe-
cially for CRM. Weaknesses are that online retail has low barriers to entry and the potential
of muddling its brand name by branching out beyond books. Notice most of the strengths
and weaknesses are intangibles. The opportunities and threats deal with external business

5 Pae, P., Southwest Airlines reaps benefits of fuel hedging strategy, Los Angeles Times, May 30, 2008.
 Strategy 157

SWOT
Internal Factors (Strengths and Weaknesses)
1. What resources, people, and knowledge give us an advantage in the marketplace?
(a) Tangible resources (e.g., natural resources, location)?
(b) Intangible resources (e.g., reputation, intellectual property, brand names, cost ad-
vantage due to proprietary know-how)?
(c) Human resources (e.g., training, culture)?
2. What capabilities give us an advantage in the marketplace?
(a) Processes (e.g., order fulfillment, product development)?
(b) Technology expertise (e.g., small part manufacture, chemical knowledge)?
3. What is the strongest resource?
4. Are any of the resources unique?
5. What resources, people, or knowledge can be improved?
6. In what areas are we deficient vis-a-vis our competitors?
7. What resources, people, or knowledge is lacking?
External Factors (Opportunities and Threats)
1. What trends (political, economic, social, or technological sometimes abbreviated PEST)
might impact your industry?
2. What obstacles in the marketplace might affect you? Regulatory environment?
3. What is the competition doing that you are not?
4. What are the advantages/disadvantages due to location (e.g., access to markets, work-
force, capital)?
5. What are your competitors doing?
(a) Market segments? Products? Prices?
6. Are there new entrants?
7. Is there product substitution?
8. Who are the suppliers?
9. How are the relationships with partners, suppliers, distributors?

FIGURE 7.3
SWOT analysis.
158 Design of Enterprise Systems: Theory, Architecture, and Methods

Strengths
Online reputation and brand
name.
Large established user base.
Good IT capabilities for CRM.
Weaknesses
Low barriers to entry.
By expanding business beyond
books, Amazon risks diluting
its brand name and confusing
customers.

Opportunities Threats
Use strengths (reputation and Products are not unique to
CRM) to partner with other Amazon; others can copy its
companies. business.

Foreign markets with low International competition can

ecommerce penetration. enter U.S. market.

FIGURE 7.4
SWOT analysis for Amazon.com.

trends. One opportunity for Amazon is to enter foreign markets. A threat is international
competitors who could enter the U.S. market. Another threat is increases in distribution
costs due to increasing fuel prices.
After completing the SWOT analysis, the team needs to appraise the resources’ and
capabilities’ potential for sustainable competitive advantage. They need to determine what
are the critical success factors or things that must be done to solidify a competitive position
in the market.
To determine the strategy, the enterprise should generate as many alternatives as possible
and then evaluate each alternative.6 Usually there are constraints on what the enterprise
can do. The basic strategy approaches identified by Porter [11] are a good starting point.
The output of strategy formulation is the strategic plan to attain the enterprise’s vision.

7.3.1 Strategy in Highly Dynamic Environments

Whether the aforementioned strategy formulation process will work well in dynamic, quick-
changing environments is a question being investigated by some researchers. The traditional
conceptualization of strategy that we discussed sees an enterprise focusing its efforts on a
single strategy. Beinhocker [2] makes a compelling argument that in very complex market
environments managers cannot predict with any confidence what strategies will be effective.
He says an enterprise is better viewed as a complex adaptive system that must seek out the
best strategy to survive. In this paradigm, an enterprise simultaneously pursues multiple
strategies because it cannot predict which strategy will be successful. As an example, the au-
thor cites Microsoft’s apparent “lack of strategy” in 1988 with respect to operating systems.
6 Chapter 9 describes techniques for generating alternatives.
 Strategy 159

Microsoft was simultaneously extending DOS, the current market-leader, while promoting
Windows, working with IBM on OS/2, developing applications such as Word and Excel for
the Apple-MacIntosh Operating System, and building a Unix operating system. Microsoft’s
management could not know that DOS would eventually dominate the market, so to make
sure that Microsoft remained a major provider of operating systems, they were essentially
betting on all possible outcomes.
Contrast Microsoft’s pursuit of multiple products simultaneously with GM’s over-
reliance on the sales of large trucks and SUVs for profits. In 2008, gas prices soared from
an average of $2/gallon to $4/gallon; moreover, the worldwide economy suffered a finan-
cial crisis that made it much more difficult for customers to obtain credit. Suddenly, GM’s
profit-makers (SUVs and trucks) no longer seemed attractive to many customers. GM did
not have fuel-efficient automobiles available for the market. Meanwhile, competitors such
as Toyota and Honda had hybrid product lines and highly fuel-efficient automobiles. Not
surprising given that GM budgeted $13.7 billion for capital spending and research and de-
velopment in 2005, vs. $15.3 billion for Toyota, a smaller company.7 In 2008, GM announced
it was developing a hybrid car, but it would not be available until 2010. It is possible that
if GM pursued multiple technologies simultaneously, then it would not have been caught
off-guard when the market suddenly changed.8
The above discussion is about product strategies, not necessarily enterprise-level strate-
gies. It may not be possible to simultaneously pursue multiple enterprise strategies because
many of them are incompatible. In other words, you cannot simultaneously be both the
low-cost producer and differentiate yourself by serving customers who demand high quality,
luxury products. Instead of pursuing multiple strategies, a more appropriate approach is to
design the enterprise so that it is agile. An agile enterprise can react quickly to environ-
mental changes and even anticipate some changes and use the changes to its advantage [3].
Some strategy authors are studying real options theory as a way to inform management on
how to invest resources for strategic advantage. A real option is an investment in physical
assets, human competence, and organizational capabilities that provides the opportunity
to respond to future contingent events [8]. Using real options theory, the enterprise know-
ingly considers all possible futures and invests its resources so that it will have the ability to
quickly respond to environmental changes. In this way, the enterprise is constantly adapting
to its environment and searching for ways to improve its position vis-a-vis its rivals.

7.4 Summary
This chapter described enterprise strategy and its components of mission, vision, and core
values. This chapter also described both the resource-based theory of the firm and the
market-based theory of the firm. The resource-based theory instructs firms to identity their
core competencies that lead to competitive advantage. The market-based theory provides
the SWOT tool to help firms develop a strategic position in the market. The chapter pre-
sented a method to formulate strategy.
The strategic decisions set the direction for the entire enterprise. An appropriate strategy
can lead to enterprise growth and above-average profits, and a bad strategy can lead to

7 Why GM’s plan won’t work, Business Week, May 9, 2005.

8 GM’s problems did not just occur because of changes in fuel prices – GM has been declining from
its dominating position in the automotive industry for several decades suggesting a more deeply ingrained
deficiency.
160 Design of Enterprise Systems: Theory, Architecture, and Methods

diminishing market position and financial losses. This can happen even if the enterprise has
well-run operations.
Strategy establishes the context for enterprise design. Different strategies require differ-
ent enterprise designs. This is the notion of fit. A company that wants to employ a strategy
of being first to market with new products to obtain above-average profits (e.g., Intel)
requires a different organizational structure, different processes, and different technology
support than a company in the same industry that seeks economies of scale for commodity
products (e.g., memory chip manufacturers). The strategy adopted by an enterprise sets
priorities on what types of enterprise projects should be done. For these reasons, it is im-
portant to understand the enterprise strategy and how the enterprise engineering project
aligns with the strategy.

Review Questions
1. Describe the three decision-making levels.

2. Contrast a vision statement from a mission statement.

3. Describe the different types of strategies that an enterprise might have.

4. Describe the relationship between resources and capabilities in the resource-based

view of strategy.

5. Summarize the four conditions necessary for a resource to be considered a core

competency.

6. Compare and contrast the low-cost leadership strategy and the differentiation
strategy.

7. Compare and contrast the resource-based view and the market-based view of
strategy.

8. Describe what a SWOT analysis accomplishes.

Exercises
1. Select a company and do a SWOT analysis of the company. Support your analysis
with citations from the business literature and elsewhere as appropriate.

2. Use the Internet to find the mission, vision, and core value statements for a large
corporation. What do the statements say about the company?

3. Select a company and identify what core competencies the company has.

4. Select an industry or market that you are familiar with. Identify the companies
in that industry and categorize their strategies using the strategy types discussed
in this chapter.
 Strategy 161

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