COS – Chapter 1 – Introduction

Strategy

- Long-term plan of action designed to achieve a goal

- Intended and emergent initiatives
- Overall purpose and scope to meet expectations
- Employing forces
- Direction, market/scope, advantages, resources, environment, stakeholders
 Component of adversity (= something getting in the way on your way to the goal)

- Strategy is linked to governance (executing power)

- “social contract”  stakeholder management, CSR
- Often the shareholders are setting the goals and not the managers
- Key issue for future of organization (e.g. market entry)
- “a pattern in a stream of decisions” (Mintzberg)
- Strategy statement: goal (mission, vision, objectives) + scope + advantages
- More and more strategy consultancies evolve

Need for integration:

- Corporate level  overall scope

- Business level  competition in market
- Operational  how to operate components of the organization

Three strategy branches

Horizons

1. Extend and defend core business

2. Build emerging businesses
3. Create viable options
Exploring Strategy Model

WHERE? – Strategic Position

HOW? – Strategic Choices

HOW TO? – Strategy in Action

 All are closely related but

strategy has a non-linear
nature

Strategy lenses

- Design = planning, analyzing, designing

- Experience = influence of pas experience
- Variety (ideas) = competition of ideas  “survival of the fittest”
- Discourse = phrases, concepts, corporate jargon

Different sectors

- Small businesses  closer to environment (purpose)

- Multi-nationals  likely to be dominated by international strategy (choices) and practice
- Public sector and non-profit organizations  need to have purpose and are evaluated in
action

COS – Chapter 2 – Strategic Position

The environment

PESTEL

Five Forces
Scenario analyses to show the option and preventing a biased view on the matter:

1. Identifying the scope: subject and time span

2. Identifying key drivers for change: PESTEL can be used
3. Selecting opposing key drivers: factors with high uncertainty  divergent or opposing
outcomes but still plausible
4. Developing scenario “stories”: knit together all factors to create possible scenarios
5. Identifying impacts: robustness checks and contingency plans

Industries and sectors

- Often made up of several specific markets

- Industry can be analyzed by Porter’s five forces
o threat of entry/potential entrants
o threat of substitutes
o power of buyers/bargaining power
o power of suppliers/bargaining power
o extent of rivalry between competitors
- An attractive industry = one that offers good profit potential (five forces must be low)
- Threat of entry: attractive industry has high barriers to enter
o Scale and experience (mostly related to high entry costs, investment requirements
and efficiency)
o Access to supply or distribution channels (might be controlled)
o Expected retaliations (e.g. price war or marketing blitz)
o Legislation or government action (e.g. patent protection, regulation of the market)
o Differentiation (higher perceived value)
- Threat of substitutes
o Price/performance ratio (matters more than simple price)
o Extra-industry effects (core of substitution concept because threat comes from
outside the industry)
- Power of buyers: customers, not necessarily the consumer
o Concentrated buyers (e.g. milk in grocery sector)
o Low switching costs (typically low for weakly differentiated commodities, e.g. steel)
o Buyer competition threat (threat by DIY, backward vertical integration)
- Power of suppliers: raw material, equipment, labor, sources of finance
o Concentrated suppliers (many suppliers for one production)
o High switching costs (e.g. Microsoft  Macintosh)
o Supplier competition threat (cut out middlemen, forward vertical integration)
- Competitive rivalry: same customer group
o Competitor balance (search for dominance might be high, e.g. by price cuts)
o Industry growth rate (low growth or decline  likely to be to the expense of a rival,
industry life cycle)
o High fixed costs ( increase volume, cut prices, short-term over-capacity)
o High exit barriers (high redundancy costs or high investment)
 o Low differentiation (only competition option is by price)

The four main types of industries

- Monopolistic industry
- Oligopolistic industry
- Hypercompetitive industry (constant disequilibrium and change)
- Perfectly competitive industry (mainly competing by price)

Implication of the five forces analysis

- What industry to enter?

- What influence can be exerted?
- How are competitors differently affected?
 judgment

Key issues

- Defining the “right” industry (e.g.

geographically)
- Converging industries
- Complementary organizations
(completing the product, creating a
value net)
- Value net to the right 

The dynamics of industry structure

- The industry life cycle

o Five forces vary accordingly
o They are not inevitable, don’t necessarily follow each other, but are a reminder of
the constant change in basically every industry
o “maturity mindset” can be dangerous, managers might not act fast enough against
new competition
 - Comparative industry structure analysis
o Radar plot of the five forces
o Comparing
o Larger area in the model below = more profit chances

- Competitive cycles
o Rapid and aggressive  unstable  hypercompetition
o Various moves and countermoves from incumbents and entrants

Competitors and Markets

- Strategic groups:
o Organizations in the industry/sector with similar strategic characteristics, following
similar strategies or competing on similar bases
o They differ in scope of activities (geography, product, market, distribution) and
resource commitment (marketing, vertical integration, technology)
o Top performers are easily identified with help of two-dimensional charts
o Understanding competition
o Analysis of strategic opportunities
o Analysis of mobility barriers (entry barriers to other groups)
- Market segments are used to identify:
o Variation in customer needs (taking psycho-demographics etc. into account)
o Possible specialization (niche marketing)
o Strategic customer
- Blue Ocean Thinking
o They are new market spaces were competition is minimized
o Looking for strategic gaps in the existing market
 o A strategy canvas compares competitors according to key success factors
 CFS (critical success factors) should be identified
 Value curves show the customers’ perception of competitors
 Value innovation means to excel in competitors’ CFS or creating new CFS for
them  re-inventing value for the customer

Opportunities and Threats

- SWOT, PESTEL, key drivers for change, Five Forces, Blue Ocean…
- Keep in mind that analyses are mostly subjective
- Managers are often biased

COS – Chapter 3 – Strategic Position

Strategic capabilities: a resource-based view
Foundations of strategic capabilities

- Resources and competences

o What we have and what we do well (physical, financial, human)
o Efficiency and effectiveness are key success factors
- Dynamic capabilities
o Renew and recreate in a changing environment
o Be flexible and visionary  Sensing, seizing, re-configuring
- Threshold and distinctive capabilities
o Meet necessary requirements to compete in a given market and achieve parity
o Threshold levels of capability will change as critical success factors change or through
competitors and new entrants
o Trade-offs may be necessary in specialized market segments
- Distinctive resources or distinctive competences – core competences of a company (skills,
activities, resources  customer value, differentiation, can be extended and developed)

VRIN – capability assessment

- V – value of strategic capabilities

o Taking advantage of opportunities and neutralizing threats
o Value to customer
o Providing potential competitive advantage
o Cost that still provides acceptable levels of return
- R – rarity
o Uniqueness of capability
o Meeting customer need
o Sustainability
- I – inimitability
o Difficult to imitate or obtain
for competitors
o Superior performance
 o Linked competences
o Complexity
o Casual ambiguity (Unklarheit)
o Culture and history
o Change
- N – non-substitutability
o Product or service substitution
o Competence substitution

- Organizational knowledge
o Collective intelligence and shared experience
o Also VRIN

Diagnosing strategic capabilities

- Benchmarking
o Industry/sector
o Best-in-class
o Surface comparison
o Measurement distortion
- Value chain

o Generic description of activities

o Analyzing the competitive position with VRIN
o Analyze cost and value
- Value network
o Cost/price structure
o Profit pools
o Make or buy?
 o Partnering

- Activity systems
o Mapping activity systems
 Identify higher order strategic themes and clusters of activities
 Relationship to value chain
 Importance of linkage and fit
 Relation to VRIN
 Disaggregation (Auflockerung)
 Superfluous activities
o SWOT

Managing strategic capabilities

- Managing activities for capability development

o Internally
 Leveraging (Einfluss nehmen)
 Stretching
o Externally
o Ceasing current activities
o Monitor output and benefits
- Managing people for capability development
o Targeted training
o Staffing policies
o Organizational learning
o Develop people’s awareness

COS – Chapter 4 – Strategic Position

Strategic Purpose
Stakeholder: individuals or groups that depend on an organization to fulfill their own goals and on
whom, in turn, the organization depends.

Organizational purpose: values, mission, vision and objectives

- Statements are important for a clear goal-setting for everyone involved

- Mission statement is the overriding purpose of organization
- Vision is looking in the future (aspirations)
- Corporate values communicate underlying and enduring core principles and define its way
- Objectives are statements of a specific desired outcome (often financially)
o Objectives can be measureable
o Core objectives should be identified
o An employee’s contribution might not immediately contribute to the objective

Corporate governance

- Structures and systems of control by which managers are held accountable

- Governance has become very important:
o Separation of ownership and management
control (= hierarchy)
o Corporate failures and scandals
o Increased accountability to wider
stakeholder interest
- The governance chain varies in every kind of
business
- Principal – agent model (principals pay agents to act
on their behalf)
- Important factors/dangers can be:
o Self-interest (egocentric)
o Misalignment of incentives and control
o Passing on responsibility, to whom?
o Losing sight of the main shareholders
o The role of institutional investors
o The role of boards (e.g. the difference
executive and non-executive directors)
o Scrutiny (Untersuchung) and control
 Who? What? How?

- Shareholder model of governance

o UK and US
o Largely financially involved
o Proponents: maximizing shareholder value benefits stakeholders too
o Benefit for investors – higher rate of return, reduced risk, minority shareholding
o Benefit for the economy – high risk-taking, encouragement
o Benefit for management – more objective decisions
o Disadvantages for investors – prevented from monitoring management
 o Disadvantages for economy – risk of short-termism
o Corporate reputation and top management greed
- Stakeholder model of governance
o Germany, Italy, Japan
o Wealth is created, captured and distributed by all stakeholders
o Majority ownership
o Long-term horizon – long-term investments, reduced pressure for short-term results
o Advantages for stakeholders – long-term perspective will be in interest of others
o Advantages for investors – closer level of monitoring of management, intervention
o Disadvantages for management – interference, loss of objectivity
o Disadvantages for investors – dominance of major shareholders, lack of financial
pressure
o Disadvantages for economy – limiting growth and entrepreneurial activity, weak
corporate control, high debt financing
- Family-controlled firms
- State ownership
- Public services

- Changes and reforms can come by international pressure or history

- Some countries think about switching models, start reforming
- (Boards of directors) influence strategy
o Delegation
o Engagement
o Must operate independently
o Must be competent to scrutinize activities of managers
o Must have time to do their job properly
o Must act appropriately

Social Responsibility and Ethics

- CSR – behave ethically, contribute to economy, improving quality of life

- Laissez-faire view
o Only goal is to make a profit and provide interest to shareholders
o Government prescribes regulations
o Meet minimum obligation
o Nowadays it’s not enough for the conscious society
- Enlightened self-interest
o Looking for long-term financial benefits
o Social actions should make good business sense
o E.g. sponsorship
o More interactive with stakeholders than laissez-faire
- Forum for stakeholder interaction
o Incorporates multiple interests
o Performance should be measured more pluralistic
- Shapers of society
o Activists
o E.g. fighting poverty by fair trade
 - CSR is justified in “triple bottom line”
o Socially
o Environmentally
o Financially
- Ethics have to be faced and dealt with
- Aspects: rights, values, feelings, future, justice, answers
- Self-awareness

Stakeholder expectations

- Economic stakeholder
- Social/political stakeholder
- Technological stakeholder
- Community stakeholder
- Internal stakeholders (e.g. geographically)
- Stakeholder mapping
o Identify stakeholders’ expectations
o Identify interests and power they offer/seek
o Handling depends on governance structure
o Level of interest/power shouldn’t be underrated
o Can help identify strategy and purpose (Why? Who? What? How?)
o Can also raise ethical issues during decision-making
o Heterogeneity of stakeholder groups – supporters/ actively hostiles/ indifferents,
should be balanced, not too generically not too diverse
o The role of the individual – would it shift if changes occur?
o Look at stakeholder’s indicators of power: status, claim on resources,
representation, symbol of power, resource dependence
COS – Chapter 6 – Strategic Choices
Business Strategy
- SBU’s  business strategy
- Supplies goods or services for a distinct domain of activity
- Often called division or profit center
- Criteria to identify:
o Market-based  same customer, channel, competitor
o Capability-based  similar strategic capabilities (e.g. product-based)

Generic competitive strategies (unspecific)

- Porter: either produce cheaper or be exceptionally valuable  third dimension is definition

of the target group
- Cost leadership:
o Input costs (labor, raw material,…)
o Economies of scale (increase sales)
o Experience
o Product design
o Don’t forget quality
o Parity/equivalence  charge same as average, gain more profit
o Proximity
- Differentiation:
o Price premium
o Perceptual maps
o Identify strategic customers
o Identify key competitors
- Focus:
o Target narrow segment
o Distinct segment needs
 o Distinct segment value chains
o Variable segment economies
- Strategy clock: price   perceived benefit
o Differentiation zone
o Low-price zone
o Hybrid strategy zone
o Non-competitive strategies
- Strategic lock-in
o “razor and blade” strategy
o E.g. Microsoft software

Interactive strategies

- Also rely on price   quality relationship

- Threat assessment
- Differentiation response
- Cost response
- Hypercompetition
o Cannibalize bases of success
o Small moves rather than big moves
o Be unpredictable
o Mislead competition
- Cooperative strategy (not entirely legal)
o Focus on Porter’s five forces
- Game theory
o Consider competitor’s moves/games
o Identify strategic signals
o Interdepend  think forward, reason backward
- Prisoner’s dilemma
o Two options  cooperate!
o Principles to help make a win-win situation:
 Ensure repetition
 Signaling
 Deterrence (“Abschreckung”)
 Commitment

COS – Chapter 7 – Strategic Choices

Corporate Strategy and diversification
- Scope: potential diversification of products and
markets
 - Concerned with corporate level and overall diversification

Strategy directions

- Diversification – increase the range

- Related diversification – diversifying into products or services with relationship to existing
business  opposite of conglomerate (unrelated) diversification
- Company can move according to Ansoff’s matrix (market penetration, market development,
new products and services, conglomerate diversification)
- Market penetration may face two constraints
o Retaliation from competitors
o Legal constraints
- Product development may involve high risks
o New strategic capabilities  heavy investments and high risk of failure
o Project management risk  delay and increased costs
- Market development has two basic forms that need to meet critical success factors
o New users
o New geographies
- Conglomerate diversification are not considered very trustworthy

Diversification drivers

- Economies of scope = applying existing resources and competencies (tangible and intangible)
to new markets or services
- Stretching corporate management competencies (dominant logics) = applying corporate-
level managerial skills/competencies to new business/portfolio of businesses
- Exploiting superior internal processes = esp. if external capital and labor market don’t work
that well yet
- Increasing market power = diversification for competitive reasons  1. mutual forbearance,
balanced moves on the market, not too aggressive; 2. Cross-subsidize one business from the
profit of others

Synergy

- Complementing each other so that effect is greater than the sum of both
- Often hard to identify and more costly than expected
- Value-destroying diversification drivers, negative synergies:
o Responding to market decline – sometimes better to let shareholders find new
growth investment opportunities than to attack competitors
o Spreading risk across range of markets – shareholders typically like to stick to one
sort of market (the core business)
o Managerial ambition – going beyond areas of true expertise might cause a disaster
Diversification and performance

- Diversification-performance relationship
follows inverted u-shape
- However, every strategy needs to be
evaluated crucially

Vertical integration

- Entering activities where the organization is

its own supplier or customer
- Up and down the value network
- Backward integration
o Development into activities
concerned with the inputs into the current business (e.g. acquiring a supplier)
- Forward integration
o Development into activities concerned with the output into the current business (e.g.
acquiring a retailer)
- Horizontal integration would be diversification with integrated aspects of processes

- Vertical is more profitable for the manufacturer, but two dangers arise
o It involved investments
o Different strategic capabilities
- Outsourcing can replace integration, but keep the following in mind:
o Transaction costs framework
o Long-term costs of opportunism by external subcontractors, relationships tend to fail
if:
 Few alternatives
 Complex and changing product or service
 Investments were made in specific assets
 Rather vertically integrate than outsource
- Two distinct factors balance the decision between outsourcing and integration
o Relative strategic capabilities
o Risk of opportunism
Value creation and the corporate parent

- Corporate parent sometimes can’t add value anymore

- Better to divest relevant businesses from the portfolio
- Value-adding activities, parenting advantage
o Envisioning – vision, strategy, clear external image, discipline
o Coaching and facilitating – develop strategic capabilities, improving synergies, cross-
business relationships
o Providing central services and resources – investment capital, center of advice,
relevant expertise, greater power e.g. for brokering, knowledge management
o Intervening – improve performance, monitor, challenge and develop ambitions
- Value-destroying activities
o Adding management costs – businesses have to generate revenues for center
o Adding bureaucratic – additional layer of management
o Obscuring financial performance – cross-subsidy of weak businesses by stronger
ones, hiding weak performance
- Three types of parenting:

Portfolio Matrices

- Keeping balance of the portfolio

- Attractiveness of the individual business units
- The fit e.g. for potential synergies
- BCG growth/share matrix, three potential
problems:
o Definition vagueness
o Capital market assumptions
o Unkind to cows and dogs
- Directional policy (GE-McKinsey) matrix 
 o Good prospects – less good prospects
o Attractiveness identified with PESTEL
o Divest or “harvest” the least attractive and weakest ones
o Either strength-attractiveness or attractiveness-strength
- Parenting matrix 
o Feel – critical success factors against
parent’s capabilities
o Benefit – parenting opportunities
against parent’s capabilities
o Heartland – core of future strategy
o Ballast – should be divested or left
alone
o Value-trap – dangerous, should be
divested
o Alien – misfits, exit
o Clear focus on how the parent benefits
the SBUs

COS - Chapter 8 – Strategic choice

International Strategy
a. To enter a foreign market, companies should make use of the Yip´s framework, which
analyzes the market and sees internationalisation potential through four different drivers:
1. Market drivers
2. Cost drivers
3. Government drivers
4. Competitive drivers

b. Geographical advantages

Poter´s Diamond can be used look for advantages that lay in the location of a business
 Firm
strategy
and rivalry

Factor Demand
conditions condition

Related
and
supporting
industries

c. The four International Strategies

Used to be also the regular order in that companies start to enter a foreign market, however
that is not exactly the case anymore. Often companies start already with the global strategy.
1. Simple Export (usually used by companies with strong location advantages; first step
when entering a market)
2. Multidomestic (markets are treated independently ; goods and services are still
produced locally)
3. Complex export (building a strong overseas network is important; branding plays an
important role)
4. Global strategy (activities are dispersed around the world; very coordination intense)

d. Market selection and Entry

The PESTEL should be used to characterise a market and its potential before entering it. But
some important characteristics that can influence the success of a market entry very much
need to be taken into consideration; this can be done by using CAGE framework.

1. Cultural distance
2. Administrative and political distance
3. Geographical distance
4. Economical distance

e. Entry modes
This modes a traditionally followed step by step, in that way risk is minimized and markets
distances, as mentioned above, can be removed, by getting to know markets better.
1. Exporting
2. License or franchise
3. Joint Venture
4. Wholly owned subsidiary
 f. Internationalization has an uncertain relationship to financial performance, with an
inverted u-curve warning against over-internationalization

g. Subsidiaries in an international firm can be managed by portfolio methods just like

businesses in a diversified firm

COS – Chapter 10 – Strategic Choices

Mergers, Acquisitions, Alliances

Organic development

- Developing and building on an organization’s own capabilities

- Advantages:
o knowledge and learning,
o spreading investments over time (flexibility)
o no availability constraints
o strategic independence (uncompromising)
- Corporate entrepreneurship = radical change in organization’s business
 can be limiting if capabilities are limited
 companies have to look externally

Mergers and acquisitions

- Combination or takeover
 - Usually cyclical (high peaks, deep troughs) driven by economy cycle
 over-optimism of a company in an upturn = acquire businesses
 exaggerated loss of confidence in downturn = sell businesses
- Strategic motives:
o extension of reach (geography, products, markets)
o consolidation of industry  possibility to raise prices, increase efficiency, increase
production efficiency
o capabilities  often used where industries are converging
- Financial motives:
o Financial efficiency
o Tax efficiency
o Asset stripping or unbundling  buy, then sell off business units
- Managerial motives:
o Self-serving rather than efficiency driven
o Personal ambition (vanity, fame)
o Bandwagon effect in economy cycle  do what critics, worriers, etc. do
- Target choice: strategic fit, organizational fit
- Valuation : evaluate the merger/acquisition, especially the price to pay, carefully
- Integrate the new unit:

- Organizational justice (during a merger/acquisition) = perceived fairness

o Distributive justice = rewards and posts
o Procedural justice = decision-making
o Informational justice = communication
- Serial acquirers: multiple acquisitions at a time, need specialist teams to do so
- Divesture: asset stripping, doesn’t mean the business failed  could show dynamics

Strategic alliances

- Collective success is part of the company’s strategy  compete against rival alliances
- Collaborative advantage is about managing alliances better than competitors
- Equity alliance = creation of new entry, e.g. joint venture
- Non-equity alliance = one part is the “looser”, e.g. franchises
- Motives:
 o Scale alliances, e.g. for output (product, service, etc.) or input (raw material, etc.)
o Access alliances, e.g. to access others’ capabilities in a foreign market
o Complementary alliances, bolster each other’s gaps or weaknesses (strength 
weakness adjustment)
o Collusive alliances, e.g. cartels
- Processes:
o Co-evolution = constant change demands realignment constantly
o Trust has to be earned
o 1. Courtship  needs to be wanted from both sides
o 2. Negotiations  equal, harmonic, appropriate
o 3. Start-up  material and human resources
o 4. Maintenance  active management
o 5. Termination  agreement

Conclusion

- Acquisitions and mergers have high failure rate (50%)

- Key factors to success:
o Urgency of the action  acquisition
o Uncertainty  alliance
o Type of capabilities:
 “hard” capabilities  acquisition
 “soft” capabilities  organic development
o Modularity of capabilities  alliance

COS - Chapter 11 – Strategy in action

Evaluating strategies
Three success criteria for evaluating strategic options:

Suitability
Suitability is concerned with the overall rationale of the strategy:
 • Does it exploit the opportunities in the environment and avoid the threats?

• Does it capitalise on the organisation’s strengths and strategic capabilities and avoid or
remedy the weaknesses?

Acceptability
Acceptability is concerned with whether the expected performance outcomes of a proposed strategy
meet the expectations of stakeholders. These are three key aspects of acceptability, the 3Rs: risk,
return and stakeholder reaction.

RISK concerns the extent to which the outcomes of a strategy can be predicted.

Risk can be assessed using:

 Sensitivity analysis (also known as “what if analysis”, as an example see graphs in PP).
 Financial ratios – e.g. gearing and liquidity.
 Break-even analysis.

Feasibility
is concerned with whether a strategy could work in practice i.e. whether an organisation has the
capabilities to deliver a strategy

Two key questions:

• Do the resources and competences currently exist to implement the strategy effectively?

• If not, can they be obtained?

The focus is on three areas:

 Finance
 people (and their skills)
 importance of resource integration

Summary

• Proposed strategies may be evaluated using the three SAFe criteria:

 Suitability is concerned with assessing which proposed strategies address the key
opportunities and constraints an organisation faces. It is about the rationale of a strategy.
 The acceptability of a strategy relates to three issues: the level of risk of a strategy, the
expected return from a strategy and the likely reaction of stakeholders.
 Feasibility is concerned with whether an organisation has or can obtain the capabilities
to deliver a strategy.