Pindelski, Mikolaj. (2015) - Competitive Strategies.

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Competitive strategies
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1
COMPETITIVE STRATEGIES
Approaches to Business Strategies
Mikolaj Pindelski
Warsaw School of Economics (SGH) 2016
2
CONTENT
Introduction .............................................................................................................................5
1. Strategy and Competiton – General Information ...................................................7
1.1. Strategies according to Michael Porter ..................................................................... 7
1.2. Strategies according to H. Igor Ansoff ..................................................................... 12
1.3. Strategies according to R.E. Miles and Ch. Snow .................................................. 15
Questions and discussions ................................................................................................................................. 18
Further readings ........................................................................................................................................................ 20
Bibliography ............................................................................................................................................................. 21
2. Company environment and its impact on managerial strategic choices. ............. 22
2.1. Macro Environment ............................................................................................................. 27
2.2. Close Environment ............................................................................................................... 33
2.3 Targeted environment ......................................................................................................... 36
2.4. Inside environment.............................................................................................................. 36
2.5. Environment and decision making and planning ..................................................... 37
Questions and discussions ..................................................................................................................................... 39
Further readings ........................................................................................................................................................ 40
Bibliography ............................................................................................................................................................. 41
3. Risk in strategic management and methods of its reduction. ................................. 42
3.1. Certainty, risk, uncertainty ............................................................................................... 43
3.2. Fighting against risk and uncertainty ........................................................................... 45
Questions and discussions ..................................................................................................................................... 46
Further readings ..................................................................................................................................................... 50
Bibliography ............................................................................................................................................................. 50
4. Company strategic segmentation methods. ...................................................... 50
4.1. Strategic segmentation ....................................................................................................... 51
4.1.1. Segments ........................................................................................................................................................ 52
4.1.2. Segmentation principles ......................................................................................................................... 57
4.1.3. Strategies based on segmentation ...................................................................................................... 59
4.2. Strategic Business Units ..................................................................................................... 65
4.2.1. Matrix Methods of analysis ...................................................................................................................... 66
4.2.2. BCG Method ................................................................................................................................................. 67
4.2.2. Arthur D. Little method (ADL)............................................................................................................... 69
Bibliography ............................................................................................................................................................. 77
5. Methods of industry attractiveness analysis. ....................................................... 78
5.1. Industry attractiveness ........................................................................................................... 79
5.2. SWOT as a tool for industry evaluation ............................................................................ 80
5.3. Point method evaluation in industry analysis ........................................................... 85
5.4. The industry life cycle analysis............................................................................................. 88
Bibliography .............................................................................................................................................................. 98
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6. Competitive analysis in industry. ......................................................................... 98
6.1. Competition in industry ...................................................................................................100
6.2. Strategic groups analysis .................................................................................................102
6.3. The map of competitors‘ groups ...................................................................................107
Questions and discussions .............................................................................................................................. 111
Further readings .................................................................................................................................................. 113
Bibliography ........................................................................................................................................................... 113
7. Michael Porter’s Five Forces that shape any market. ..................................... 114
7.1. Porter’s five forces - overview .......................................................................................115
7.2. Entry and exit barriers. ....................................................................................................117
7.3. Analysis of substitutes. .....................................................................................................126
7.4. Analysis of industry suppliers and buyers. ...............................................................134
Bibliography .......................................................................................................................................................... 143
8. Assessment of a firm's competitive position. .................................................... 144
8.1 Key Success Factors.............................................................................................................145
8.2 Value Chain ............................................................................................................................152
8.3 Balanced Scorecard (BSC).................................................................................................154
8.4 Value Dynamics Model .......................................................................................................161
Bibliography .......................................................................................................................................................... 172
9. Business models vs. competitive strategies. ...................................................... 172
9.1. Business Model ....................................................................................................................173
9.2 Construction of a Business Model ..................................................................................177
9.3 Types of business models (Strategies of Business Model Development) ........185
Questions and discussions: ............................................................................................................................. 189
Further readings:................................................................................................................................................. 192
Bibliography .......................................................................................................................................................... 193
10. Strategic Control ....................................................................................................... 194
10.1. Control – the definition ..................................................................................................195
10.2. The Control Process ........................................................................................................199
10.3. Types of control ................................................................................................................202
10.4. Functions and objectives of control ................................................................................209
10.5. Strategic Control and Balanced Scorecard ..............................................................215
Questions and discussions: ............................................................................................................................. 225
Bibliography .......................................................................................................................................................... 230
List of Tables ...................................................................................................................... 232
List of Cases ........................................................................................................................ 233
List of Exercises................................................................................................................. 234
Some hints and answers to exercisses ...................................................................... 235
Vocabulary .......................................................................................................................... 237
4
Introduction
Competition, strategies, advantages, strengths, products, markets, industry etc. are only a
few terms connected to managing a company. The management but is not a main problem.
The market success but is the factor which causes a headache in boards of managers.
What does “success” mean to the firm is the question we can pose ourselves. Is it a fat
income or defeating competitors ? Having an impressive market share or making profit ?
This book has not been written to solve that problem. It could be assumed that success is
a long term presence on the market. We can also say that it could be a long term
competitive advantage. Unfortunately, the advantage that lasts for a long time does not
exist. The moment it is achieved is the best time to create a new in order to replace the
existing one.
The whole text is to guide you through some ideas that may be helpful in creating the
advantages and strategies based on them. It is a mix of some methods of analysis,
approaches to strategy creation and competing on the market more or less known. It is
not to present all of them as this would not make sense. We can assume that competitors
and customers influence the company but we can also act as if all of them were absent.
Just imagine the firm that does what it can best and develops all its products and services
without even noticing the outer world. It could be a breakthrough innovation as well as a
monumental case of failure. Nevertheless we can probably easily imagine the autistic
company. Just think about early Apple or BMW. There was a time both seemed to be
convinced about their right to do things without customers or competition being taken
into account. Apple was creating products that many ridiculed and did not want to even
invest a penny on a stake that the company would survive. Some analysts pointed out that
the ideas would not be accepted by the audience. What could Apple get from analysing
competitors ? The faster, more equipped, more black and more ugly looking computers
that could make geeks more happy. As a matter of fact, the geeks only. BMW for a long
time did not hold dialogues with customers. They did not make bargains nor were they
responsive to market needs and they created products priced the double of all the
alternative solutions. Both of the companies mentioned were fully successful in the many
dimensions that the market success can be measured.
You could ask why all the analysis should be made. Why companies should follow the
rules of different strategy types ? The answer is simple. In order to diminish the risk of
failure. It is much easier to fight in a market battles knowing little bit more about it. It can
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not be assumed that implementing the strategy unaware of its strengths and weaknesses
can lead to the set goal. If you are not Steve Jobs then better to go through it and even if
you decide not to use it be aware of what you are not using.
The first chapter has the intention of presenting general approaches to strategy types
according to Michel Porter, Igor Ansoff, R. Miles and Ch. Snow. The second chapter
consists of the description of environment layers and their influence on managerial
decision making. The third chapter adresses the risk and fuzziness in management. The
fourth chapter presents market segmentation methods and matrix approaches to strategic
business units analysis. The fifth chapter aims to show some of the industry attractiveness
analysis methods. The sixth chapter depicts competitive analysis in the industry
particularly analysing the strategic group analysis. The seventh chpter presents
M.E.Porter’s five forces that drive markets and industries.
All of the chapters are enriched by short case studies that may help to understand the idea
of the topics presented. It is also recommended to read the pre-readings and further
reading publications which might help to prepare the broadening of the reader’s point of
view. Some of the questions the chapters contain are to rethink the text and find some
other use of the ideas described.
6
1. Strategy and Competition – General Information
1.1. Strategies according to Michael Porter1
Michael E. Porter is one of the most remarkable contemporary authors of publications

about competitive tactics of corporations and their strategies. He distinguishes two
different sources of competitive advantage:
• The ability to maintain low operating costs and their further reduction
• The ability to differentiate offers and markets in which the company operates
Based on this assumption, he developed three basic competitive strategies:

• cost leadership
• differentiation
• focus
While in the case of the first two, their scope is due to prior information and their names,
the third includes the focus on aspects such as market or target and niche audience, etc.
Cost leadership
Cost leadership is one of the conceptually simplest strategies used by companies. Both,
assumptions and results, can be relatively easily verified. This does not mean, however,
that its implementation is easy.
Sources of cost advantage can be very different, depending on the industry and the nature
of the business. Very often, the cost leaders benefit from economies of scale. Other factors
that can give cost advantage can be: advanced technology, access to lower-priced sources,
the effect of learning, etc. Companies producing at low costs, usually offer standard
products aimed at mass audiences.
The use of this strategy, which is to produce and sell at the lowest cost may, however, be
extremely short-lived. In the future, competition will almost certainly fail to produce
cheaper, and the immediate consequence of this is the loss of the only competitive
advantage.
1
The chapter is based on: Porter, M.E. (1980) Competitive Strategy, Free Press, New York, 1980, and
Porter, M.E. (1985) Competitive Advantage, Free Press, New York, 1985.
7
Case Study 1.
Phablets, Tablets, netbooks, smartphones and others
This strategy may be extremely complicated. An example here would be some products
that are given away almost for free, while effectively influencing the disappearance of
the competitors who want to offer them cheap, but not free. Network hardware stores
now complain that the phablets, cell phones, tablets, netbooks and notebooks are given
away for free by the mobile network with a client's purchase of Internet or telephone +
internet access plans. Not only are the products, that on regular basis cost at least
several hundred USD, added for nearly free to the basic mobile services, but also the
competitor appears suddenly and from outside the industry. The high tech retail market
has been attacked by mobile services providers. Mobile industry is not very familiar
with selling products, it sells services and makes money on that. Pays not much
attention to revenue from items. The heads of electronics stores seem to be helpless
against such practices.
Discussion questions:
1. What strategies are carried out by stores with electronic goods?
2. Why are they threatened by competition from outside the industry?
3. Why can the competitors outside the industry offer the goods for almost free?
Differentiation
The second strategy identified by M. Porter, is differentiation. Its essence is to develop a
company’s uniqueness to the most important in customer areas. Individuals competing
in this way usually choose one or a few features that the buyers considered crucial in the
selection and the purchasing decision. By developing these features in the products or
services offered, they are trying to be significantly differentiated from all other
competitors. This applies mainly to the level of the product, but it also affects all other
aspects of business activity. Porter emphasizes here the physical and the symbolic
differentiation.
8
• Physical differentiation relates to the physical characteristics of products and
services such as design, implementation method, channel distribution, weight,
colour, size, smell, etc.
• Symbolic differentiation refers to feelings and emotions, and includes, for
example, brand, image, perception, promotion, etc.
Figure 1. The development of differentiation strategies according to the market situation

The unique offer is
The unique offer is
appreciated and
appreciated and
noticed by a
noticed by the entire
segment of the
market
market
Value and price A positive
increase above the Improvement Specialization difference
standard offer on (an existing offer) (as part of an offer) (resulting from
the market differentiation)
Impoverishment A negative
Value and price fall Narrowing
(limiting some of difference
below the standard (limited
the differentiation (resulting from
offer on the market differentiation)
characteristics) differentiation)
Suppliers provoke Segmentation of the
segmentation market causes
differentiating the differentiation of
offer suppliers’ offers
Source: on the basis of Porter, M.E. (1980) Competitive Strategy, Free Press, New York,
1980, and Porter, M.E. (1985) Competitive Advantage, Free Press, New York, 1985.
Describing fig. 1 it is vivisble, that following strategies‘ types are limited to followig
situations:
Improvement – is about the existing offer and respond to the situation when value and
price increase above the average (standard) market offer, the offer is appreciated and
noticed by the entire market and at the same time the differentiation leads to positive
results and the difference is noticed and appreciated.
9
Specialization – is about a part of an offer and respond to the situation when the unique
offer is appreciated and noticed by a segment of the market, the value and price increase
above the standard offer on the market and the difference of the offer is appreciated by
the market.
Impoverishment - is about a part of an offer and respond to the situation when the
suppliers provoke segmentationf differentiating the offer, value and price fall below the
standard offer on the market and the unique offer is appreciated and noticed by the entire
market.
Narrowing (limited differentiation) - is about a part of an offer and respond to the
situation when the value and price fall below the standard offer on the market, the unique
offer is appreciated and noticed by a segment of the market.
Being distinguished from competitors in this way, has its tangible results. Thanks to this,
companies may require additional premiums from their customers, for example by raising
the product’s prices. In the framework of the strategy, for the features that makes the offer
stand out, customers are willing to pay more. Achieving outstanding results in the
industry through differentiation is possible only if the differentiation costs are
compensated by higher than the competitor’s price, and segmentation of the market
causes differentiation of suppliers’ offers.
Focus
The last of M.E. Porter‘s three strategies is the focus strategy. It is based on choosing a
sector or a group of sectors, and adjusting an offer with a business profile according to
one or more of the selected customer sectors. This strategy is based on the differences of
needs that exist between the entire industry and the group of clients that the company
wants to focus on. These sectors should be characterized by the presence of non-standard
customers, clearly distinct from the rest of the market needs. This may affect both, the
product itself, as well as all the activities related to the method of delivery or marketing.
The occurrence of the differences between the entire industry and the selected sectors, is
normally the result of a situation in which companies operating on a given market do not
meet all of the customers needs. Once the competition is not able to meet all the needs of
customers and meets only a small part of them, there is a possibility of focusing on
diversity. Focus, as well as differentiation, allows you to charge higher fees than the
10
average market prices. This is due to the fact that it is difficult here to maintain low costs,
and that the market is limited to a specific target group.
Case Study 2
What is the strategy?
A chain of Halal stores offers “halal” food products, which are directed towards
religious Muslims. These are relatively a few dozen small shops operated mainly on a
franchise basis. Their sizes differ significantly not only from the big supermarkets, but
also from even medium-sized delicatessens. Standards for each of them, however, are
absolutely and thoroughly inspected by management throughout the network. The most
severe punishment is to withdraw the rights to the use of the Halal brand. All shops
receive supplies from the main warehouse, as the headquarters want to regulate and
control the products they offer. Each shop constantly renews and updates their
certificates and simultaneously ensures that all of the Halal products can be consumed
by a religious Muslim. The chain does not accept any offer that does not meet this
criterion. Stores are located primarily in and around mosques. The network also
supports the Muslim poor, usually large families, by giving them vouchers for online
shopping at Halal. Although Halal welcomes all customers, it is difficult to find non-
Muslims there. However, we have to admit that the products offered in stores that have
the Halal certification guaranteed and the way they are sold, are much more expensive
than similar products available in other stores. Even if we consider the cost of obtaining
the certificates, the store is still very expensive. Asaf Amir, the president of the chain,
said that despite the huge market saturation of grocery stores, he and the chain do not
have to worry about the competition.
1. What is the strategy?
2. Why are prices of Halal higher than those of the broader competition?
3. Why are the stores relatively small?
4. Why is the localization of stores within the vicinity of mosques?
11
1.2. Strategies according to H. I. Ansoff2
Harry Igor Ansoff, Russian born, a mathematician and an economist, is

considered the founder of the concept of the "corporate strategies". He described the
strategies based on the direction of the company's growth in the market. He took the
market and product distribution criteria and defined types of strategies pursued by the
company. In his opinion, a strategy of a company, in other words is a description of a
product’s stage and the stage of the market. He also formulated four strategies used
accordingly to the degree of novelty of the product offered, along with the level of the
market’s novelty, as shown in Figure 2.
Fig.2 Competitive strategies by Harry I. Ansoff

Product
Current New
Market
Product
Market penetration
Current development
strategy
strategy
Market
Diversification
New development
strategy
strategy
Source: R. Krupski, Zarządzanie Strategiczne, Koncepcje-Metody, [in:] R. Krupski (ed.),
Wydawnictwo Akademii Ekonomicznej im. O. Langego we Wrocławiu, Wrocław 2007, p. 47
This approach to a strategy can be described as dynamic. The author claims that every
company goes through various stages of growth and development, by changing their
strategy. The inception of a business is usually a market penetration strategy, then a
strategy of product development, market development, and at last a diversification
strategy.
Market penetration strategy

According to the Ansoff’s matrix, it is recommended that a market penetration strategy
requires a focus on the currently supported market and its existing products. This strategy
2
The chapter is based on H.I.Ansoff (2007), Strategic Management Classic Edition, Palgrave Macmillan;
First Edition, New York, 2007 and H.I.Ansoff (1965), Corporate Strategy: An analytic approach to
business policy for growth and expansion, McGraw Hill, New York, 1965
12
requires a number of actions aimed at reaching the largest possible number of potential
customers and it can take various forms. It affects both, the marketing as well as the whole
operation of the company aspects. It requires the ability to present a more attractive offer
than that of its competitors, in terms of the criteria valued by buyers. It is usually done in
conjunction with an intensified ad-campaign and a use of different distribution channels.
It may also require a significant improvement in customer service, improvement in the
quality or in lowering the prices. Usually, the result should lead to possibly the highest
massive sales of a unified single product, gaining of a market at the expense of the
competition, acquiring a completely new market for all customers, creating distribution
channels, developing new habits of buyers, or learning new applications. This strategy is
widely used by both, new and mature subjects. The strategic objective here is to enhance
the market position and create the potential for the development of the entire enterprise.
In the majority of cases, the implementation of this strategy is very costly and it is either
reimbursed by the mass availability of the offer, or by the future revenue.
Market development strategy

When looking for a new market for the currently offered product, Ansoff recommends
the market development strategy. It aims to create demand for current products in new
sectors. At the same time, it supports the company’s development without having to make
changes in its current profile. It requires the creation or identification of new sectors, the
discovery of new needs that the current offer may meet, occasional modifications of
products and services, and often a creation and development of new channels of
distribution and forms of customer service. Therefore, you can use all the knowledge
gathered by a business, which is related to reasons for success and failures wthin the
current markets. Usually, they are useful in gaining new markets and can be not only used
in the operation of marketing departments, sales or analysis, but also, for example, in
advertising campaigns.
Product development strategy

When the current market is being recognized particularly well, and it seems that it could
be introduced to new products or services, a strategy of product development is applied.
The novelty can be either a completely new offer, or a present one, but modified. When
the subject is an innovator and pioneer in the market (for example, the 3M company -
Minnesota Mining and Manufacturing www.3m.com), it introduces new products in order
13
to increase its market shares. When new products are the response to the actions of
competitors, the goal here may be just the protection of market shares. This may also
apply to simply strengthening the market potential by extending the offer to current
customers. An example here would be chains of large supermarkets that introduce new
brand names and additional services to their offers, or a corporation like Coca-Cola that
is introducing mineral water or iced teas. However, this requires a fair recognition of your
own market position and for example, of the level of consumer confidence in the brand.
It is so important that even a brand like Coca-Cola, after expanding the brand’s juice
offer, gave it a brand name “Cappy”, clearly cutting themselves off from their core
brands.
Diversification strategy
When the product and its market are not being recognized or the changes are quick and
go in an unpredictable direction, Ansoff recommends the diversification strategy.
However, it is associated with a particular level of a risk. After all, the market, the product
or the services are unknown here! This strategy happens to be accomplished only by the
greatest players, mainly due to the significant costs, the need of overcoming the barriers
of market entry, lack of knowledge, the increased number of incorrect decisions or the
lack of any confidence as to the result of actions taken. It can be realized through the
purchase of licenses, mergers and acquisitions of entities from other markets, but also by
a simultaneous change in the product strategy and the target groups. The author gives
three ways in which diversification can take place. Vertical - when dealing with sources,
methods of supply, manufacturing of components, etc. Horizontal - applies to a variety
of finished products, but related in some way (for example, the broadly understood
market) to the existing business. Parallel - when a new offer is something entirely new
for the company and it differs significantly from the current one. What is more, it is also
directed towards entirely new markets.
Case study 3
Mercedes Benz
Mercedes Benz has decided to introduce to its offer in a number of countries, all kinds
of goodies with the logo and / or the name of the company. These include key chains,
14
shirts, toys, hats, belts, car models, umbrellas, corkscrews, paperweights, golf bags,
toiletry bags etc. While in Western Europe, sales of such accessories accounted for
10% and even 15% of the company’s sales, in other countries, these sales barely
reached 1% of the total income. Traditionally they were put in glass-cases in the
showrooms. Learning from the results of the study, customers who purchased a new
car would sometimes purchase an accessory as well, in the other cases, their sale was
very sporadic. Neither people waiting for a car checkup or repair, nor potentially
interested in buying a car customers, were interested in these gadgets. The staff
reported that they do not really know how to conduct the sale of these items. However,
as suspected, the problem of low sales of such products was rooted much deeper.
1. According to H. I. Ansoff, what type of strategy is it?
2. Whys is it so difficult for the salon service staff to sell such products?
3. Was it worth introducing the product or not? Why?
4. What types of problems are associated with the introduction of such offers?
5. How can they be solved?
1.3. Strategies according to R.E. Miles and Ch. Snow3
Raymond E. Miles and Charles Snow, by observing the behaviour of firms on the market,
pointed out that in some cases, sets of actions are being repeated, and for many objects,
are very similar. This applied in particular to:
• The pace of introducing an innovation.
• The degree of flexibility of production technology or the implementation of
services.
• The general method of business management.
Therefore the strategies were divided into four main categories.
Prospector strategy
3
The chapter is based on R.E.Miles, C.C.Snow (1978), Organizational Strategy, Structure and
Process, Mc Graw Hill, New York, 1978
15
It applies to companies actively seeking opportunities and chances to obtain new
customers in the market. This requires a broad target group and taking on continuous
challenges. Frequent changes, taking pioneering positions and setting new pathways
involve not only considerable expenditure (including labour), but also a significant level
of business risk. Markets and products, without any significant developmental potential,
are not really the object of interest of those implementing this strategy.
Analyzer strategy
This strategy is used by more conservative companies. The surroundings undoubtedly
affect the way they work, but they try not to use untested market actions and competing
methods, and as a rule, avoid adding any innovative products to their portfolio. However,
they carefully analyze the market, watch the competition, adopt the more effective
methods and techniques of operation and blend them into their own strategy. This strategy
is used by companies focused on the activity following a partial success and the
acceptance of a new market or product by a prospector.
Defender strategy
Defensive strategy is used by companies, whose job it is to block competition from
entering the market and to protect their own interests. Its essence is to focus on a relatively
narrow market domain and maintain its market shares. As a method of self-defence of
their own position, they improve their operations, reduce operating costs, or increase the
quality of products and services. Therefore they invest in technologies and limit their
actions to a clearly defined target groups. In determining the narrow sector, the "defender"
is trying to develop its presence by expanding the offer within, but in a way trying not to
involve a revolutionary change. For that reason, you can expect different modifications
of existing products, rather than the introduction of something new. An extremely
sensitive point is the point of the contact of a business and a client, where anything that
might upset the relationship between the two parties is beyond the subject’s scope of
interest operating accordingly to this strategy. One gets the impression that the defender
strategy is, in a sense, a combination of the analyzer and the prospector strategies.
Passive response strategy (reactor)
16
This is a strategy of organizations, which have neither a clearly defined course of action,
nor a clear theme. This strategy is characterized by fairly random movements and changes
of direction, which are usually the response to the factors of the market and when trying
to use situations identified as opportunities. The development here is the result of the
various, sometimes unrelated market events. Strategic decisions are limited to responses
to these changes. In fact, one could say that this strategy is a lack of a strategy. However
it is not, it requires a fairly active market approach, avoiding regularity and coordinated
actions, setting of one direction and adhering to it and becoming accustomed to one type
of action.
17
Questions and discussions
1. Can you name at least one example of a market (company), in which all of the
types of strategies listed in this chapter occur?
2. Why is it so difficult to follow one exact type of a strategy?
3. Do you know some examples of companies following combined strategies?
4. What may influence the managers choice of one of the strategies?
5. Which type of strategy is followed by your university (or company you work for)?
Case study 4
McDonald’s
Product offer
One may think that in many countries, it is McDonald’s that is dealing the cards in the
world of the fast food market. Last year was very successful for the chain – the income
increased by almost 17%, and the net profit by almost 40%. This is the result of a new
strategy of the company. Newly introduced items like fish, salads and healthy snacks
apparently increased the sales. The giant attracted new customers by offering, a few
weeks at a time, cuisines styled upon Greek, Latino, and Indian cuisine, etc. After
allegations of high-calorie foods, the nutritional value label was included on the
packaging of their products and free fruit added to kids Happy Meals. McDonald's
began to rebuild their restaurants to look a little more upscale. Most of them introduced
a free Internet service, began to hire young and energetic employees associated with
the new market and the use of the Web, credit card payments were accepted
everywhere, regardless of the amount, and also as a response to changing eating styles,
started to offer breakfast.
Employees
"McJob" is slang for a boring and badly paid job, with no chance of employee growth
or prospects. McDonald's management fought to remove this definition, saying that “It
is a slap in the face to all of our restaurant employees. The meaning of this word is
outdated. We have an excellent training system. For those who really want to grow,
this is a great way to a career. And almost all of the members of the Board of Directors
of our company began by working the counter or as a dishwasher”. McJob is, after all,
18
according to the Board, a “stimulating, rewarding, offering unique opportunities for
growth and filled with skills useful throughout your entire life" job. McDonald's staff
is trying to attract not only by advertising vacancies, but also by offering a way for 16
- year olds to make some extra cash, as long as they obey the local law. Under the
condition, however, that they cannot quit school, and are able to continue their work
during school holidays. Job candidates are invited to sophisticated offices, and a
conversation takes place in a relaxed atmosphere. Recruiters offer coffee or tea, and
the comfort and respect they have, is to prove that in McDonald's you are more than
just one of the many anonymous people. During the interview the candidate does not
have to answer many questions. In fact, they fill out a questionnaire, that besides the
slot for their name and the name of a school, includes a window for “when can you
start working at McDonald's." The recruiter says that employment will be offered to
everyone who does not give an impression of an unreliable person. Already approved,
they are allowed to travel to other countries and work at the local McDonald's
restaurants.
What does it look like in real life?

In Cracow, Tel Aviv or Times Square, NYC, McDonalds has large locations with
elegant designs. New furniture and trendy dark wood walls are supposed to build
competitive advantage in the fight against chains of trendy cafes like Starbucks or
Coffee Heaven. The competition is, however, not about the coffee-house atmosphere,
but rather about the quality of the coffee served. High quality coffee is made with
freshly ground beans of high quality Arabica coffee blends. It takes into consideration
the results of consumer preferences, and the coffee itself comes from plantations
carried out in a manner consistent with the principles of sustainable growth and of fair
trade. This is supported by giving the McDonald’s used sources a certificate from the
environmental organization, the Rainforest Alliance. The introduction of this offer at
McDonald's was preceded by the exchange of the coffee makers. Modern and
expensive espresso machines took the place of the old machines. It also introduced a
customer loyalty programme and launched an extensive advertising campaign.
The management of McDonald's does not hide the fact that it wants to be a major player
in the coffee sector, by intensely executing its new strategy in, for example, the U.S.,
Germany or the Netherlands, where the company introduced McCoffee. This offer was
19
originally intended to be complementary to the breakfast offer. However, it seems that
McCoffee will be a slightly separate entity, but also directed towards a restaurant
customer visiting in the morning, way before the hours of operation. This sector,
however, is very poorly developed in many countries.
Unfortunately, this strategy required the raising of prices. However, they are still lower
than in any other coffee or restaurant chains.
1. What strategies are implemented by McDonald’s?
2. Why do you think it chose exactly this/these one/s?
3. What are the risks?
4. What requires the implementation of these strategies?
Further readings
To be read and study by yourself . You can discuss the papers, materials and
conclusions during the next class.
1. R.E.Miles, C.C.Snow (1978), Organizational Strategy, Structure and

2. H.I.Ansoff (2007), Strategic Management Classic Edition, Palgrave Macmillan;
First Edition, New York, 2007
3. H.I.Ansoff (1965), Corporate Strategy: An analytic approach to business policy
for growth and expansion, McGraw Hill, New York, 1965
4. M.E. Porter, (1980) Competitive Strategy, Free Press, New York, 1980
5. M.E. Porter, (1985) Competitive Advantage, Free Press, New York, 1985
20
Bibliography
1. Porter, M.E. (1980) Competitive Strategy, Free Press, New York, 1980, and Porter,
M.E. (1985) Competitive Advantage, Free Press, New York, 1985.
2. Ansoff H.I., (2007), Strategic Management Classic Edition, Palgrave Macmillan;
First Edition, New York, 2007 and H.I.Ansoff (1965), Corporate Strategy: An
analytic approach to business policy for growth and expansion, McGraw Hill, New
York, 1965
3. Miles R.E., .Snow C.C., (1978), Organizational Strategy, Structure and
4. Krupski R., (2007), Zarządzanie Strategiczne, Koncepcje-Metody, [ed.] R. Krupski,
Wydawnictwo Akademii Ekonomicznej im. O. Langego we Wrocławiu, Wrocław
2007
21
2. Company environment and its impact on managerial strategic choices.
Pre-class readings:
1. Zukowska Joanna, Pindelski Mikolaj, Factors Determining the Competitiveness of
Entities on Global Market, [in:] red: Lachiewicz S., Zakrzewska-Bielawska A.
Fundamentals of Management in Modern Small and Medium-Sized Enterprises,
Technical University Lodz, A Series of Monographs, 2011, pp. 91-109
Available on: http://www.e-sgh.pl/Mikolaj_Pindelski/120591-0190
2. Brock David M., A., Alon Ilan, Internationalization of Professional Service Firms,
International Business: Research Teaching and Practice, 2009 3(1), pp.52-70
Available on:
http://new.aibse.org/www.aibse.org/wp-
content/uploads/2012/02/BrockAlon2009.pdf
Task: Prepare a short presentation showing the main thesis, assumptions and conclusions
of the article.
Additional questions to be answered and/or discussed after pre-class readings:

1. How do companies go global ?
2. How does globalization influence companies and their strategies ?
3. How do international companies build their competitive advantages ?
4. Are some factors to be named that help companies to cope with the trend of
globalization ?
5. How big, international companies influence local markets, what are your
thoughts?
6. Do you know some other megatrends you can name that influence companies and
their strategies ?
22
The contemporary environment seems to be largely uncertain and undoubtedly is subject
to prompt and continuous changes, while the proper business functioning and its long-
term survival to a great extent depends on the fact of whether it understands the
environment it operates within. This concerns even, or perhaps most of all, the innovators
determining new trends as they had to perfectly recognize the present and future customer
needs or situations where new ways of satisfying such needs may be promoted. Apple
can stand as an example here, setting the tone in electronics design and way of promotion
or Amazon with the teaching of how to use a new distribution channel-the Internet.
The external environment includes all the elements set outside the organization with the
potential effective impact thereon. Its structure is usually comprised of two spheres:
general environment (macro-environment) and task environment (micro-environment).
The references also suggest the term of internal environment wherein the internal
organizational conditions and forces operating therein are described.
Environment – the definition

includes overall phenomena, processes and institutions forming the mutual
relationships within a business, sales opportunities, scope of activity and development
perspectives.
Macro-environment (general, global, external, further environment) includes

dimensions and forces acting on the market that have a potential impact on business
operations. Such forces may affect the organization, while the organization is unable to
affect them or its impact is largely restricted and frequently spread over time. Such forces
also create trends occurring in the macro-environment that are transferred onto the micro-
environment and the business itself.
Trend in the environment – the definition

A trend in the environment is a set of subsequent events arranged into a certain
direction of some phenomenon’s development. Next the events are created over the
ones preceding them and are directed by the latter, being set into a uniform integrity
tending towards a certain direction. In such case the events concern one of several
dimensions of further environment.
23
Macro-environment is considered in several dimensions that include:
• economic dimension,
• technological dimension,
• sociocultural dimension,
• political-legal dimension,
• international dimension,
Micro-environment 4 (closer environment, sphere of activity) is composed of the

organization, particular persons or groups that may directly affect the business. In such
cases, however, the business may also affect the micro-environment elements. They
include competitors, customers, suppliers, some regulator, potential employees, strategic
allies, etc.
Internal environment is sometimes distinguished as a separate dimension thereof. It is

composed of the conditions and forces acting inside the organization. It is comprised of
the employees, managers, management board, trade unions, labour organizations,
shareholders, supervisory board and, for example, the organization’s culture.
4
Griffin R.W., (2012), Management, 11th edition, South – Western Cengage Learning; Mason OH, 2012,
pp.60
24
Excercise 1
Business and the environment – insert the specific elements into the appropriate
environment sphere.
25
(hints page 231)
MACROENVIRONMENT
(general environment)
MICROENVIRONMENT
(targeted environment)
INTERNAL
ENVIRONMENT
Board of Ecological
owners Industry organizations
chambers governors
distributors regulators
customers International
competitors dimension
Economic suppliers
dimension Consumers
societies Local comunities Potential emploeyees
coopetitors
Business Technological
Political and legal Top managers partners dimension
dimension
employees
Trade unions Socio-cultural
dimension
26
2.1. Macro Environment
Macro Environment includes widely understood overall conditions the business functions
within. The business is usually unable to affect them (although there are cases that entities
take up such measures, e.g. through lobbying of the political dimension) and it may only
adapt thereto. This environmental space includes all the elements of indirect impact,
affecting or potentially affecting the business activity. They are able to form its targets,
size, activity methods or even the total strategy. The search for opportunities and threats
usually refers to the macro environment. This is also the source of market trends,
recessions and prosperity periods. The importance of the macro environment is even
higher because it can only be observed, analyzed, used as a forecasting guidance source
and adapt business operations to the conditions prevalent therein. The macro environment
has been divided into several dimensions, in order to sort it out in the analyses and outline
the aspects that need to be considered.
Economic dimension is a somewhat generally understood condition of state, region or
even global economy. The spectrum of this approach most of all depends on the size of
the market an organization operates on and the remoteness of dimensions that may
effectively impact it. Recently, however, there are more and more opinions that
practically each entity should consider the dimensions on at least an international or even
global scale. Furthermore, the economic situation in the sector, economic development,
GDP [Gross Domestic Product], interest rates, the amount of cash in the economy and its
availability, state expenses, economic situation development /growth rate, average Return
On Equity [ROE], inflation rate, exchange rates, unemployment level, indebtedness and
any other macro-economic aspects are included here. In reference to the sector the factors
affecting its economic attractiveness are usually analyzed,
27
e.g. sector turnover, labour efficiency, remuneration level, functioning methods of
funding business and their availability.
Tab.1 Selected elements forming the economic dimension

Selected elements forming • national income dynamics and national income
the economic dimension • inflation, deflation
• currency devaluation,
• fiscal policy – taxes, tax relieves,
• monetary policy,
• level of prices and their changing rate,
• crediting and banking activity,
• unemployment level,
• purchasing power and population expenses
structure,
• domestic and international demand.

Source: author’s own elaboration on the basis of Stoner J.A.F, Freeman R.E., Gilbert
D.R.Jr, (1995), Management, Prentice Hall College Div, New York
Political-legal dimension refers to all the business regulations governed by the state
apparatus and economy – state relationships. The regulations and legislation frequently
bring about opportunities or threats to the world of business. The trend emerging here is
the growing importance of trans-national legislation, for example, international copyright
laws, terrorism prevention or cash flow control between states and financial institutions.
Unions of states are established tending to the uniformization of their laws in some or
several dimensions. This is what takes place in the European Union, the Arab State
League or the Commonwealth of Independent States (the former Soviet Union). There
are numerous regulations governing the market operation, closing parts of it for some
entities, restricting or increasing the competition level thereon and regulating the internal
life of businesses, such as Labour Law, Occupational Health and Safety rules, etc. The
regulations protecting the buyers against fraud practices and preventing information
asymmetry known from courses of economics are also significant.
Tab.2 Selected elements forming the political - legal dimension
28
Selected elements forming • political stability on the national level,
the political-legal dimension • making laws,
• stability of fiscal and customs regulations,
• political impact on environmental protection,
• competition-friendly political conditions,
• market openness to competition,
• The European Union policy impact on business
functioning.
International dimension determines the international environment impact on the

organization. In particular, it refers those who operate on international markets. However,
along with vanishing, in economic terms, state boundaries, the international environment
elements are more and more difficult to be distinguished from, e.g. political-social and
sociocultural elements. Globalization causes, without limitation, the emerging close
dependencies of global economies. An example such as the recession of economic
slowdown symptoms of 2008 can be used, their effect being distinct in numerous places
and various sectors worldwide until the present. The changes occurring in the
international environment may either drive the opportunities for, e.g. expansion or the
occurrence of threats. The international environment also impacts the enterprises
operating inside one country only, because is describes, e.g. the willingness of
international players to enter the market, their determination, knowledge, wealth and
overseas goods and human capital availability. The trend of legal deregulations in the
scope of interstate commodity trading is noticeable in this environment dimension. It
consists of the withdrawal of economic, legal barriers, duties, bans, quota concerning
closed economic blocks (e.g. The European Union, NAFTA, i.e. North American Free
Trade Agreement.
Tab.3 Selected elements forming the international dimension
29
Selected elements forming • international operations of corporations,
the international dimension • unions of economies,
• changes of raw material prices on global
markets,
• progressive globalization,
• economic, scientific, cultural exchange on a
global scale caused by IT, transportation and
communication progress.
Technological dimension is created by conditions resulting from the development level

of technologies understood as all the ways and methods available enabling to transform
resources into products and services. It is a fairly variable environment sphere at present.
The technological development has become the driving force of numerous economies, so
its support is very strong. Along with the technology transfer rate growth, it is
recommended monitoring and updating it on a global scale. This is an immensely
important area for the environment of entities whose competitive advantage results from
their innovativeness.
Tab.4 Selected elements forming the technological dimension

Selected elements forming • technological innovativeness,
the technological dimension • new applications of the existing technologies,
• pro-ecological and pro-quality materials and
raw materials,
• growth of the level of knowledge and its
dissemination,
• technology transfer,
• growing informatization and computerization.
30
Sociocultural dimension includes all the behaviours and attitudes of people, their habits
and values, but also demographic features. Frequently, these elements are difficult to be
identified, verified or tested. An example is the social dimension of globalization
affecting the universalization of sample behaviours of societies, their consumption
methods and attitudes.
Tab.5 Selected elements forming the sociocultural dimension

Selected elements forming • habits, values and priorities,
the sociocultural dimension • ethical-moral standards,
• ecological awareness condition of the society,
• change of the system of values and buyers
needs,
• fashion, lifestyle, increasing quality of life,
• readiness to accept innovation,
• demographic factors: number of buyers,
dynamics of changes of the number of buyers
classified within various age groups, sex,
education, family life cycle phase, professional
structure, etc.
Case study 5
Toys in the EU
The market of toys is characterized with immense product variability, over 60% of toys
offered on the market each year are new items. It is the evidence of the large number
of products appearing on the store shelved per year and the extent of competitiveness
they must present in order to draw consumer interest. Due to the immense number of
products intended for various age groups of children and youth, to start with infants,
preschool children and teenagers, the products were classified into so-called super-
categories. The major guidelines of the division has been based on the intention/type
of toy and the child’s age. Infant/Preschool (toys for children below the age of 3),
31
Games/Puzzles, Dolls – this group is largely expanded, sports equipment and outdoor
toys, vehicles, blocks, Art & Craft, soft toys, electronics, action figures and accessories,
other.
The various consumer interests in the particular product categories may be correctly
observed basing on the diagram below.
Reference: based on NPD Group reports, 2007 – 2012
In 2012 the leading categories in the UE states were Infant / Preschool children
accounting for almost 20% of the market. The Games/Puzzle category came second
with almost a 12% market share, next were Dolls with the result slightly above 11%
32
and Sports Equipment and Outdoor Toys with slightly below an 11% share. In total the
four groups alone represented more than 50% of overall sales. The other groups were:
Vehicles 9.7%, Blocks 8.4%, Art and Craft 6.5%, Soft Toys 6%, Action Figures and
Accessories 5.9, Electronics 2.6% and Other 7.5%.
1. What trends are noticeable on the toy market in the EU?
2. What trends of further environment may they result from?
3. What should be the direction of the further development of toy traders?
2.2. Close Environment

The macro environment impact on a business is often difficult to be settled and unclear.
The trends, even though identified, still seem to be remote and frequently it is difficult to
determine whether and how they affect organizations. Undoubtedly, the effects of such
an impact may become conspicuous in the long run. However, the current issues prevail
over long-term matters in businesses. Accordingly, the managers focus on the close
environment that provides a lot of information that can be currently used. Moreover,
contrary to the further environment, not only its elements affect the business, but also a
business significantly affects the environment. The latter includes potential and current
customers, suppliers and business partners.
Potential and current customers are entities buying the offer currently or potentially.
The widely understood target groups, along with all the dimensions forming them, such
as number, structure, specific needs and relationships between them. The customers may
be both individual people, groups of people, any organizations, such as: other businesses,
public administration bodies, wholesalers, retailers or non-profit organizations. The offer
and suppliers to individual customers are usually called B2C (Business to Consumer),
while the offer and institutional buyers, further processing the values purchased – B2B
(Business to Business). Correct customer recognition and their characteristics may
decisively affect the business success on the market. Recently an opinion appeared that a
business must identify the customers, discover their needs and win them. However, it
does not seem to be so obvious. There are cases known that restricting availability,
33
opposite to winning customers, improves the attractiveness of products and services, and
the customers are those who try to acquire them, bearing significant costs sometimes.
Competitors are all the people, businesses and other organizations reaching the same
customers and offering them similar methods of satisfying their needs. The products or
services do not necessarily have to be identical They may only be linked by customers
needs, e.g. offers of cinemas, bowling alleys and discotheques. Businesses usually wish
to distinguish themselves against the competitors, they continue marketing battles and
invest in changes in areas significant for the customers. Distinction may thus refer to
almost every aspect of the entity operation, from the stage of selecting the location, the
way raw materials and equipment are ordered, through the methods of processing them
into the final product to the post-sale service. The distinction forms are dictated by the
scope of market competition. The competition may take place on the price level (price
competition) or any off-price factors. There are also more and more cases where
competitors become cooperating partners throughout or along part of their offer. The term
“coopetition” arose describing such phenomenon.
Suppliers is the term describing all the entities supplying the business with any values
representing contribution into its activity. They include suppliers of raw materials,
energy, labour (employees), landlords, etc. In other words, everything considered as an
expense made for processing or use. The selection of suppliers usually determines the
way the business operates, their type of offer and the way they present their offer. The
entities depend on the suppliers and take up numerous actions to restrict somewhat the
dependency, in order to obtain the best delivery terms possible. Either they may stimulate
competition amongst them (announcing tenders and contests), diversify suppliers of the
same raw materials, or conduct a vertical integration, i.e. take over all the more important
entities and include them in their own structure. The suppliers may also affect the strategic
and operating decisions of businesses, for example through fixing prices and delivery
principles. In the analysis of this element the number of suppliers the entity uses, their
share in the overall cost structure, relationships and general market as well as the overall
supply market image are important.
Labour organizations, e.g. trade unions play a particular part in the employee’s lives in
numerous countries. They help create a balance between the employer interest and labour
providers, i.e. employees. The better organized they are the greater impact they may have
on the labour market and employers. They negotiate special employment conditions, the
amount of remuneration and the principles of employee dismissals. Their impact on
34
numerous sectors is immense. The historical conditions sectors, on an almost global scale,
include for example automotive, mining and energy sectors. In Poland there are Trade
Union Federations, e.g. Solidarność and OPZZ, Histadrut in Israel, American Federation
of Labor and Congress of Industrial Organizations (AFL – CIO) in the USA.
Strategic allies are organizations establishing strategic alliances. The purposes of
establishing them may vary and concern both e.g. cooperation in manufacturing and sales
and fighting the competitors. Generally the businesses find common activity areas in
order to reinforce their market position. Strategic alliances are often concluded by
businesses complementary to one another, e.g. suppliers, manufacturers and distribution
channel, but also the competitors to date take up coopetition. Particularly where e.g. the
research and development costs are immense and single entities are unable to afford them.
Strategic alliances are usually characterized, however, with a certain extent of
competition amongst the entities declaring mutual cooperation willingness. Unification
of the forces in performance of the common target, however, is to help achieve better
effects, scale benefits, synergy or organizational knowledge increase.
Regulators are the entities that have or may have an impact on the formation of further
environment or may effectively affect the business from the closer environment. For
example, lobbyists who affect the law indirectly and policy and sector and industrial
governments regulating significant aspects of the sector functioning. Thus, there are two
basic groups of regulators, i.e. interest groups and regulatory agencies. The regulatory
agencies are appointed by public administration in order to protect some people and
organizations against others, e.g. Agencja Ochrony Środowiska [Environmental
Protection Agency] or Inspekcja Pracy [Department of Employment]. The interest groups
and forums representing them are usually appointed by sector representatives and in
cooperation with businesses they try to affect positively the formation of the market,
beneficial to them.
Distributors that may include wholesalers and retailers and all distribution channels, e.g.
networks of stores, on-line shops, filling stations, teams of traders, etc. Contrary to all
appearances, the principles of operation of those two groups are somewhat different. The
wholesalers are often just agents between the manufacturers and retailers. They may,
though they do not have to, do sales, but they might as well be just a specific kind of
warehouse and distribution centre. The retailers have direct contact with the end customer
to whom they sell the goods or services as both wholesalers and retailers are also used in
services. This is the way numerous tour operators act selling stays at hotels, mobile phone
35
networks buying minutes of calls under wholesale principles and reselling them to the
end subscribers, media houses buying all kinds of air time packages to resell it, etc.
2.3 Targeted environment

Some business analysts also mention targeted environment. It is created by identifiable
organizations and people. They come from closer environment, but the possibility to
indicate them is essential here. Targeted environment includes customers, competitors,
suppliers, strategic allies and owners, trade unions and so-called regulators – government
agencies and interest groups that affect the business most. The targeted environment may
be changed and formed by the organization, although it affects the organization as well.
Thus, the targeted environment analyses not only concerns specific entities, but also the
type of their links with the business the analysis is carried out for. We may find analogy
here to the analysis of organization stakeholders, which largely applies to the same.
Competitors, business partners or customers in general are not the subject here, it is about
the substantial, named and often identified as important ones.
2.4. Inside environment

Some authors studying the strategy subject also distinguish inside environment, treating
a business as environment, not necessarily a uniform entity. This obviously encounters
the opposition of others, however, in order to sort out the knowledge on the organization
and its environment, this sphere thereof is also worth mentioning. It is assumed that inside
environment is formed by the owner, management board, employees and physical
working environment.
Owners (or a single owner) are entities holding the legal ownership title to part or the
whole business. They select the management board whose task is to manage the business
and represent the interest of share- or stockholders.
36
Employees include both managerial staff and the employees. Along with the
development of globalization, aging societies and a number of other changes taking place
in the further environment, the diversification amongst them is growing. However the
rising awareness and average education level results in the fact that they gain an
increasing impact on the business operations. Several groups are distinguished here, such
as season, full-time, project employees, etc.
Physical working environment describes all the elements forming the working
environment. It applies to working tools and a number of elements creating it, e.g.
location, company building and premises appearance. It affects the motivation level and
often the general well-being of the employees, and, indirectly, their work results and
opportunities.
2.5. Environment and decision making and planning

Both the further environment dimensions and closer, targeted and inside environment
elements significantly determine the decisions made within the business and the targets
and action plans created on such a foundation. It is difficult to find whether this
environment affects the decisions of businesses or whether it is exactly the other way
round. However, it is assumed that no strategy should be built without the analysis of
what is going on around.
In numerous cases the actual opportunities for great success are created far from the
organization, in its further environment. The changes within create the environment for
the appearance of new solutions, their marketing and acceptance by the buyers. However,
businesses are usually more interested in the closer environment, or even targeted one,
rarely devoting time for observation of the further environment.
37
Fig.3 Environment versus decisions, targets and plans of businesses
ENVIRONMENT
further close internal
Strategic Goals Strategic plans
Tactical Goals Tactical plans

DECISSIONS
Operational Goals Operational plans
Reference: the author’s own study, unpublished materials
38
1. According to your knowledge can you name some global trends that will develop
in the future ?
2. How does the macro environment influence your institution (school, university) ?
Can you pick some trends you named and describe how they influence the
institution ?
3. How can the competitiors, customers and suppliers influence the company ?
4. If there was no globalization, what would your institution look like ? What would
the labour market and other companies look like ?
5. If a teleportation method of transferring goods and peoples from one place to
another were invented, how would it change the entire market ?
Case study 6
Digital Merchandising Systems
Dynamic advertising at the point of sale, so-called Digital Merchandising is a special

type of internal promotion. It uses digital transmission of multimedia promoting
contents through a network of electronic audio and visual media, which creates a
system of influencing the customers while they make their decision on the selection of
products. Digital merchandising has numerous functions and helps in the achievement
of a lot of marketing and sales targets, assisting in making the purchase impulse.
Economic environment
Due to great demand by the consumers, the need for various form of advertising is
significant. The growth of inflation in the Euro zone recently and simultaneously the
drop of disposable income of households might result in the fact that the estimated
return on advertising will not be as high as that of the previous years.
Political-legal environment
The strong integration of states and the tendency for common policies and legislation
are observed on the European market. On the other hand, however, numerous markets
seem to be overregulated and the reporting questions as well as meeting other
requirements largely impede running business. In the marketing sector there is pressure
39
on advertising control, removal thereof from city centres and protection of customers
against advertising.
Social-cultural environment
People in developed countries seem to be tired of the existing forms of advertising. The
susceptibility to advertising and its contents drops. Leaflets or posters gradually stop
to reach the customers. The tendency to spend a lot of time in shopping centres is
growing.
Technological environment
Digital Merchandising, interactive floors, large screens and development of computer
systems are significant. Simultaneously, numerous problems with linking various
systems arise. The costs of new technologies drop fast and even become available to
small businesses. The low capacity of networks is also a problem, as in the vast
majority of the shops, for example, wires were installed in the 1990’s.
1. How can the trends mentioned above impact the digital merchandising
development?
2. Which of them represent opportunities and which are threats?
3. What other trends in the particular environment dimensions that could impact this
solution can you specify?
4. Who can be a supplier and who can be a customer of digital merchandising?
Further readings
1. L. Richman, The New Worker Elite, “Fortune”, Sep 22, 1994, pp. 56-66
2. Pindelski Mikołaj, Mrówka Rafał, Limitations in Enterprise Strategy
Performance, Practice and Research in Private and Public Sector-11, Mykolas
Romeris University, Vilnius 2011, pp. 284-290
40
Bibliography
1. The Report on toys in the European Union Market, NPD Group reports, 2007 –
2012, published 2013
2. Stoner J.A.F, Freeman R.E., Gilbert D.R.Jr, (1995), Management, Prentice Hall
College Div, New York
3. Griffin R.W., (2012), Management, 11th edition, South – Western Cengage
Learning; Mason, OH, 2012
41
3. Risk in strategic management and methods of its reduction.
Pre-class readings:
1. Global Risks 2011. An Initiative of The Risk Response Network, Report, World
Economic Forum, 2011
Available on: http://reports.weforum.org/global-risks-2011/
2. Stulz M. Rene, (2009) Six Ways Companies Mismanage Risk, Harward Business
Review, March 2009.
Task: Prepare short presentation demonstrating the main thesis, assumptions and
conclusions of both the report and article.

1. What risks are of the most crucial importance to the businness ?
2. Are these risks easy to overcome ?
3. How do companies cope with these risks while doing business ?
4. What kind of inappropriate assumptions are made in companies according to risk and
strategic management ?
5. What makes business risky ?
6. How can risk be decreased in companies lives ?
42
3.1. Certainty, risk, uncertainty
First of all, risk must be distinguished from uncertainty, while uncertainty – from
certainty. In the world of management these are three generally accepted basic conditions
for making business decisions, setting targets, creating strategy and overall management.
We may also determine a scale on which “certainty” reasonably enables us to recognize
the functioning conditions and future effects of the decisions made, including strategic
decisions. Under risk conditions the recognition of trends, opportunities and threats is
restricted, but possibly with some probability of the right recognition thereof. Similarly,
the decisions, targets and plans made under risk conditions are possible to be fulfilled,
however, with some probability of the failure thereof. The uncertainty condition in turn
is the state in which neither the probability of success nor the conditions or any elements
composing it are known or determinable.
Tab.6 Certainty - risk - uncertainty

Level of ambiguity of the conditions of making decisions, setting targets and plans.
+ +/- -
CERTAINTY RISK UNCERTAINTY
Opportunities and Opportunities and Opportunities and
information on the factors information on the information on factors
affecting the business are factors affecting the affecting the business
known and the targets based business are known are unknown and
thereon attainable and and possible to be impossible to be
performable to a reasonable estimated and the estimated and the
extent. targets and plans attainability and
based thereon are fulfillment probability
attainable to an extent of the targets and plans
possible to be set cannot be settled. .
estimated.
Source: author’s own elaboration on the basis if author’s unpublished materials
Contrary to all appearances, a vast portion of decisions in modern management is made

under conditions close to certainty. It applies to e.g. selection of a supplier, business
43
partner or in some cases determining elements of target environment that affect the
business and delimiting the scope of the analysis thereof. Along with market
consolidation, but also its more and more accurate recognition and knowledge thereon,
the certainty level in some case grows as well. At present, while identifying basic current
competitors over the short-term, a situation close to certainty occurs. Uncertainty or even
risk appears indirectly, when competitors, so far operating elsewhere, enter the sector.
For example the market of laptops and palmtops has been entered by mobile phone
networks attaching the said equipment, against little payment, to web connections and
data transfer they offer.
Case study 7
Asus – certainty, risk and uncertainty
Asus, while building new lines of ultra-lightweight notebooks, were considering the
selection of CPU suppliers. Not only did they have to be very efficient and
technologically advanced, but also they had to consume little energy, avoid overheating
and be small-sized and light. Market surveillance indicated that there are three basic
CPU manufacturers in the world at present, two of whom have basically dominated the
market and offer the most advanced technologies in this scope. The brands were Intel,
AMD and VIA-Technologies. All the offers were collected, not only the current
specifications of products and delivery and sale conditions were examined in detail,
but also their development plans in the future and adaptability to the manufacturing of
notebooks, net-books and tablets. As a result, Intel CPU’s were selected as the most
suitable ones for Asus manufacturer’s requirements.
1. Under which conditions was the decision on the selection of the supplier made?
2. How should Asus behave under such conditions? What analyses should they make?
3. What would the supplier selection be like under two other types of conditions?
Unfortunately, the businesses usually encountered risk, or even uncertainty conditions. It

is often assumed that the more complex the environment is the entity operates in the
higher is their business risk, while the more variable it is, with changes difficult to foresee,
44
the more uncertainty shall characterize it. Stock exchange price fluctuations are in
numerous cases an example of operating under uncertainty conditions, as it is often
immensely difficult to estimate the stock exchange movements.
3.2. Fighting against risk and uncertainty

Businesses and their management boards, however, try to restrict the impact of negative
conditions and bring as many situations as possible to the certainty criteria. The market,
customers, consumers, competitors, suppliers and various environment dimensions are
analyzed for this purpose. Complex projections are carried out concerning the impact of
market variables on various organization activity dimensions, knowledge is gathered in
knowledge and data bases and multi-variant plans are applied5.
On the strategic level the businesses keep searching for new solutions and sometimes
diversify their business activity or expand its territory to other countries. A prerequisite
thereof is often the improvement of certainty of the entity survival. A simple principle is
applied here, namely: if something fails on one market, success on another shall
compensate the losses.
Some other principles act in an exactly opposite direction. They are restricted to a narrow
segment they try to recognize the best. The knowledge causes a restriction of the
uncertainty, or even risk, level and causes that the entity may function efficiently in the
niche it has selected. This restricts the risk of its functioning and gives it a feeling of high
certainty. However, it may appear delusive, because the entity used to the stable and
foreseeable conditions, shall have no methods of response and prevention of negative
effects should some unexpected change occur.
Some entities try to anticipate changes and set the tone for the environment themselves.
They create trends, determine new directions for competitors and become market
pioneers and innovators.
However, in spite of developing methods setting them close to certainty, still the necessity
to make unplanned decisions frequently appears. Such plans also consider the possibility
to redesign them, while sticking to the target and the path thereto may lead them astray.
Very interesting concept according to risk in management is Fuzzyiness in management
In the fuzzyiness There are five models that are distinguished in the development of
methods supporting management, usually based on advanced algorithms, statistical and
mathematical formulas, five models are distinguished:
5
Decker A, Galer D., (2013), Enterprise Risk Management. Straight to the Point, ERMSTTP LLC
45
• A non-determinist model with known states.
• A non-determinist model with known states but events that are hardly valuable.
• A non-determinist model with known states, valuable events but not measurable.
• A non-determinist model with known states, valuable and measurable events.
• A determinist model – states, events and influences are known and results are also
known.

1. What type of situations are faced by companies according to the risk and
uncertainty level?
46
2. How do companies counteract the uncertainty ?
3. How are the activities against uncertainty connected with the strategy types
described in chapter 1 ?
4. How may correctly chosen employees influence risk in the company ?
Case Study 8
Risk counteraction in Google.com
More information about the company: www.google.com
Google.com started in 1996. Two Stanford University students, Larry Page and Sergey
Brin started to work on a search engine that would beat all the so far existing solutions
in this scope. Originally it was called BackRub and constructed based on the
prioritization of specific web pages by links. The company in its present form and under
the present name was established in 1998 only. Its name originates from the word
googol i.e. 1+one hundred zeros. This was to express the infinity of information
contained on the Internet. Google.com was promptly recognized as one of the 100 most
important websites of 1998 and the most accurate search engine. 1999 saw the most
intensive development, a growing number of employees and obtaining a company
capital amounting to 25 million US $. The very platform also develops reaching a
billion web pages entered in 2000. In addition the company started to cooperate with
Yahoo! becoming at the same time the key supplier of the search engine service and
taking over smaller companies. It made available the first additional functionalities,
such as AdWords or Toolbar. Google.com home page was translated into fifteen
language versions and won numerous awards. Further development stages include
expansion by forums and making a graphic engine available to the users. In 2001 the
company opened their overseas office and became the key internet search engine for
Latin America. Two years later it took over further companies, big ones this time. It
contributes to the development and launch of the AdSence service now the major
functionality of business clients. Google was acknowledged the most useful word of
2002. In 2011 Google decided to make available its own service named Google+. The
dynamic development of the company for the last fourteen years resulted in the fact
that Google is the most recognizable and valuable business in the world now.
47
Strategy
The mission of Google is to sort out all the information resources kept on the Internet
in a way enabling one to reach and disseminate them promptly6. The company target
is to provide information search service in a fast, accurate and, most importantly,
uncomplicated way. The focus on users’ needs, expressed in the development of
solutions they need most, is emphasized. In order to provide the comfort of use and
efficiency of the solutions provided, measures are taken to make them simple, clear as
well as functioning fast. All the actions have been focused on following the mission so
far. The company concentrates on solving problems related to search for contents and
pictures on the Internet only. The indexes and other questions related to the
development of web search methods are worked upon. This was the reason for the
dialogue with the users. The solutions were matched to the developing users’ needs
and, for example, the offer included versions on the phones, available any time and
under any conditions.
However, Google earns money on advertising directed almost exactly to those who
search for them. The combination of search for perfection at looking for the web
contents with advertising for business has brought excellent effects. Google have
become an intermediary linking those who search for news, services and products with
those who offer them. The major programmes for the actual advertising campaign
management on the search engines are AdWords and AdSense whose target is to
present advertisements matched to the search object. They are displayed on the page
containing search results and are presented within the partner sites of other portals. The
key words that cause the advertisement display are selected by the advert providers.
Google also makes available tools for measurement and improvement of effectiveness
of reaching the recipients with marketing contents.
However, Google have begun to develop a number of other solutions recently, such as
Google Maps offering detailed maps of any place worldwide, also enabling display of
the pictures of numerous places from the ground level. The context translator is
developed along with the possibility of any text audio playing. The content of books
available partially or in whole for free grows on googlebooks, the statistics of any
phrases appearing on the Internet also grow. Free Gmail, Picasa-google or www
Chrome.
6
http://www.google.pl/about/corporate/company/index.html
48
On the one hand it is to encourage the use of the search-engine for other purposes than
so far. On the other hand, however, it more and more resembles diversification of
activity on the Internet. Generally, linking advert providers and advert recipients is a
philosophy. So maps may include advertising information, just like a dictionary or
googlebooks.
Google always puts stress on the measures to win new users within defined target
segments, which is to increase the value for advert providers. Although this is still the
search-engine that represents the major platform of client services and earning source,
there are further ideas developed that may become a significant profit center in the
future. One of the segments that generates revenue streams are companies advertising
themselves on the search-engine. Google, however still assumes that advertising space
purchase directly from the search-engine owner is impossible. Their positioning is
determined by the word(s) searched, or specific nature of the partner site contents. The
revenues generated in the way thus described enable the company subsequent
accomplishment of further investments in the area of solutions provided free of charge.
The continuous search for new solutions required the maintenance of an advanced
technical background and top level personnel. The level of advancement and work
immensity is unique. For example, the PageRank algorithm enabling the settlement of
the advertisement display efficiency is based on more than two hundred indexes
updated on a daily basis and determining the interest of people worldwide in the search
for specific key words. Undoubtedly the market Google operates on changes
dynamically, although, according to people skilled in the art, is well recognized and
foreseeable to a certain extent. However, the launch of new technologies that might
restrict the common nature of Google cannot be ruled out. Therefore the company must
continuously watch the environment and efficiently respond to any anomalies.
Discussions questions:
1. What are, in your opinion, the conditions Google operate in? Are they certainty,
risk or uncertainty conditions?
2. What is the reason for the type of Google activity conditions? What environment
elements affect it?
3. How do Google cope with the conditions they operate in ?
4. What other methods could Google use in such conditions?
49
Further readings
1. Jaime Gil-Aluja, Handbook of Management under Uncertainty (Applied

Optimization), Springer; 2001
How may people influence risk – uncertainty – certainty in business ?

Read an additional set of mindblowing articles by Irene Reychav and Yaacov Weisberg.
2. Reychav I., Weisberg J., Paved with good intentions: discrepancies in knowledge
sharing among high-tech workers, Int. J. of Knowledge Management Studies, 2010
Vol.4, No.3, pp.233 – 247
3. Reychav, I., Weisberg, J. Good for Workers, Good for Companies: How
Knowledge Sharing benefits Individual Employees. Knowledge and Process
Management, Volume 16, Issue 4, pages 186–197, October/December 2009
4. Reychav, I., Weisberg, J., Bridging Intention and Behavior of Knowledge Sharing,
Journal of Knowledge Management, 01/2010; Volume 14, pp.285-300
Bibliography
1. http://www.google.pl/about/corporate/company/index.html
2. Decker A, Galer D., (2013), Enterprise Risk Management. Straight to the Point,
ERMSTTP LLC
3. Stoner J.A.F, Freeman R.E., Gilbert D.R.Jr, (1995), Management, Prentice Hall
College Div, New York
4. Company strategic segmentation methods.
50
Strategic business units (SBU) separation in a company‘s
activity. Principles of industrial sector defining.
4.1. Strategic segmentation
Pre-class readings:
1. Goodman Steve., Lockshin Larry, Cohen Eli, (2006) Using the Best-Worst method
to examine market segments and identify different influences of consumer choice.
International Wine Business & Marketing Conference (3rd : 2006 : Montpellier,
France), Academy of Wine Business Research
Available on: http://ebooks.adelaide.edu.au/dspace/handle/2440/35335
Task: Prepare a short presentation demonstrating the main thesis, assumptions and
conclusions of the article.

1. What drives wine consumers to choose one of the bottles presented on the markets
shelves ?
2. What differentiates consumers in their choices ?
3. Do they behave and think the same, where do the differences come from ?
51
4.1.1. Segments
Addressing a business offer, but also e.g. enquiries for deliveries to all the market players
may in fact be equal to addressing them to no-one. The effectiveness and efficiency of
such an action could appear to be very low. Therefore, segmentation is applied, which
means distinguishing only those entities that could be most interested in purchasing. Not
only the explicitness and clarity grow concerning the recipients and their needs, but it
also enables the offer to focus on the items someone wants to pay for to improve the
efficiency of the marketing and sales actions.
Segmentation – the definition

Segmentation is distinguishing uniform customer groups in terms of characteristics,
behaviours, values and needs. Although it may also apply to suppliers, the term usually
appears in the context of distinguishing the customer group.
Concentrating on groups of buyers, with expectations coherent with the business targets
and strategy is one of the most important issues in the strategy performance. Numerous
examples of market success are based on the appropriate selection of segments, while the
mistakes in such selection result in serious problems or even bankruptcies of entities.
Therefore, it represents an integral element of business strategy and model, enabling to
set the method of creation, development and sale of the offer.
The criteria of segmentation may be divided into several areas, although it does not
exhaust the subject. Whether it applies to individual customers (B2C market), or
institutional (B2B), the following criteria can be distinguished:
• geographic,
• demographic,
• psychographic,
• behavioural.
The geographic segmentation distinguished criteria of division by limits determined
based on the map of a region. It includes states, regions, provinces, but also cities,
villages, settlements, types of housing (cottages and blocks). Distinguishing such an area
not only may result from their different needs, but also from the question whether the
business is active, whether it is present, e.g. in one city only or some rural areas.
52
Demographic segmentation is based on distinction by age, sex, life cycle periods,
education, income recognized in various ways and a number of other variables, most of
them to be found in statistical yearbooks and other documents. Several contemporary
topics are based on the very criteria as a good method reflecting the differences in needs.
The combination of such criteria with geographic ones is also applied in the form of geo-
demographic segmentations. They describe, e.g. women at the 25-40 age group, living in
small towns, with a monthly income below EUR 1000, without families. This is an
interesting target group, with specific needs. Practically a change of any of the above
criteria also changes the persons such a segment describes and results in the fact that a
totally different offer appears to be appropriate for them.
Distinguishing parameters according to those criteria usually takes place with the use of
statistical discriminative analyses, based on data collected in such databases as: OAC7,
MosaicTM, AGS, GeoSmart, FactFinder, Acorn8 or Cameo.
Exercise 2
Segment
Young men aged 18-26 unemployed, university/college students, with a monthly
income below EUR 500, single, car-owners.
1. What “eating out” services are most of all the focus of this segment’s interest?
2. What should a bar/restaurant offer addressed to them look like?
3. What times of day, how and how often do they have their meals?
4. What do they most of all search for with the supplier of such service? (price,
quality, time, service quality, interior decoration, etc.)
Additional task:
Change two criteria in this segment and describe whether and how their needs in this
scope change.
7
The Output Area Classification
8
A Classification Of Residential Neighbourhoods
53
Tab7. Individual customers segmentation criteria
Major Criterion Examples of division

Range
Customers’
characteristics
Individual customers
Geographic Region Central Europe, Western Europe,

Middle East
Urbanization City, village, academic, industrial,
military center
Urban area 10-29,9 thousand, 30-59,9
thousand, 60-149,9 thousand ,
150-499,9thousand, etc.
Demographic Age 0-1, 1-3, 3-5, 5-10, 10-14, 14-18,
18-24 etc.
Sex F, M
Family size 1-2, 3-4, 5 and more
Family life cycle stage TIPS (Tiny Income Parents

Supported), SINKS (Single
Income no Kids), DINKS (Double
Income no Kids) etc.
Monthly income per person in Up to EUR 200, EUR 201-500,
household EUR 501 EUR and more
Restitution income (after payment EUR 0-200, EUR 201-500, EUR
of basic family life costs) per 501 and more.
household
Monthly income per person in a Up to EUR 200, EUR 201-500,
household EUR 501 EUR and more
Education Primary, vocational, secondary,
tertiary [university, college]
Owning a car Class E, A, compact, estate,
sports, cross-country
Owning a pet Big, medium, small, very small
Views and personality Individualist, hedonist, altruist

Psychographic
etc.
54
Lifestyle Basic values – prioritization –
family – work – free time – own
person.
Method of spending free time At home watching TV, actively –
sports, socializing, gardening, out
– cinema, theatre, opera with
family, friends, alone, etc.
Shopping situations
Benefits searched Needs Specific for persons/situations,

for ordinary, general
Unique characteristics Ennobling, providing a sense of
being useful in society, etc.
Use Intensity / (frequency) Seldom, average, frequent
User’s status Former, occasional, regular –

seldom, regular – frequent,
potential
Awareness and Readiness to purchase Unaware, aware, interested
intentions
Brand recognition Low, medium, high
Commitment in purchase Low, active, high
The next segmentation criterion includes psychographic variables (Tab.7). They are
comprised of lifestyle, way of thinking, personality, attitudes, values and view on the
neighbourhood reality. Behavioural segmentation takes place based on identified
differences in the ways of behaviour, responses, use and approach to issues as well as
products. This is where the segmentation future is seen now as the previous groups of
variables are considered well recognized, relatively easily identifiable and widely used.
However, the psychographic variables are difficult to be identified. After all, even upon
their recognition, their explanation and translation onto the unique needs of satisfaction
ground often appears to be a difficult task. Exploratory research is applied at present,
enabling the monitoring of people in their natural conditions. The methods of watching
the customers’ movements and behaviours, for example, through monitoring the paths of
customers in the stores, analyzing telephone connections, searching for email addresses
the messages containing, e.g. the word “money” are most often sent to, etc.
55
Tab.8 Institutional customers segmentation criteria
Institutional Customers
Region Provinces, North of Poland, South
of France
Geographic
Location Big city, medium-sized cities,
outside city limits
Activity type Manufacturer, service-provider,
public organization
Number of employees 1-9, 10-19, 20-49, 50-99, 100-
249, 250 and more
Number of white-collar employees 1-9, 10-19, 20-49, 50-99, 100-
249, 250 and more
Demographic
Annual sales value Up to 1 million, 1-10 million, 10-
100million, 100 million and more
Number of divisions Employment in each plant
Location and dispersion of division Local, national, international,

transcontinental, global business.
Shopping situation
Character of Type Material, material product, service

products
Place of use Business location, customer’s
premises, manufacturing hall, offices
Purpose of use Office application, manufacturing
application, intensity of use
Purchase Purchase nature Centralized, decentralized
conditions
Purchase class New, modified repeated, simple
repeated
Type of buyer Individual, group
Source: author’s own elaboration on the basis of Kerin R., Hartley S., Rudelius W., (2012)
Marketing, 11th Edition, McGraw-Hill/Irwin, USA
56
4.1.2. Segmentation principles
Two basic approaches to the methods of classifying the buyers within somewhat
homogeneous groups can be distinguished. The first includes the application of
mathematical – statistical methods. The second is individual intuition unrecognizable to
quantitative methods. However, segmentation is not only the division of larger
communities into smaller groups. Most of all, however, the reasonability of segmentation
results from the search for the potential increase of the business revenues. The internal
segmentation criteria, from a business point of view, include:
- Potential of revenue increase,
- Improvement of financial indexes (ROI, ROE etc.)
- Achievement of economies of scale, due to the increase of a customer group of
similar needs and responses to marketing communications and sales actions.
- The use of full productive potentials or their increase with small expenses.
- The use of experiences of other markets.
- The separation of smaller segments or identification of other needs in segments
defined in a slightly different way than so far, restricting the competitors’ activity,
taking over parts of the market, restricting competitive entities’ opportunities to
launch on the market.
- Through the competitors’ wrong definition or missing the changes in the
segments’ needs, identification of similar needs reported by various segments,
combination of segments and restricting marketing, sales and also production
costs, etc. .
Segmentation restrictions:
- Impossibility to be precise about the method of presence in a given segment and
clear marketing actions directed to a specific segment.
- The segments are too shallow with too low a level of needs in a given product
category, a too low number of buyers or too low budgets.
- High fixed costs of presence in the segment or too high costs of entering the
segment.
- Difficult or unidentifiable substantial buyers classified within the segmentation
criteria.
- Too complicated and sometimes mutually exclusive segmentation criteria.
- Segmentation criteria set in a wrong way, e.g. neglecting an important criterion
or introducing criteria that do not distinguish groups of buyers with various needs.
57
- Selection of the segment unmatched to the business activity profile.
- Inhomogeneous or inaccurately specified buyers’ needs within a segment.
Exercise 3
Segments in language school
Best Mates language school is in Warsaw. It mainly offers English courses. So far 80%
of its clients were the students of the local universities and colleges. The others are
working people. The students mainly choose courses early in the afternoon, while
working people – early in the morning or evening. Weekend courses are also offered.
One of the more effective marketing actions is to reach the clients directly with the
information. Posters, leaflets and promotional stands are used for this purpose.
Discussion questions;
1. Describe the client segments served at present and potentially to be served. What
criteria are most appropriate here? Indicate them using the table of client
segmentation criteria.
2. Where can you encounter the largest concentrations of people identified as
belonging to the segments described?
3. Where and when (months) should the promotional campaign be carried out?
4. What values can be expected by specific client segments and how should the
courses’ duration and their prices be fixed?
The segmentation process usually proceeds in the form of either market analysis of
segments already served or marketing surveillance. Both qualitative and quantitative
techniques are contemporarily used for this purpose. The data obtained, most of all
quantitative, are subject to statistical processing with the use of e.g. discriminative
analysis (concentrations analysis), or multifactor analysis enabling one to find common
groups of characteristics of specific groups separated from the population. Another step
is the accurate profiling and calibration of segments in order to fix the substantial
characteristics distinguishing them. At the last stage the evaluation of the segment
58
potential in terms of its substantial needs, receptivity, availability, potential of launching
and service, etc. and the choice of ones where the business should take up market actions.
4.1.3. Strategies based on segmentation9
The definition and accurate identification of the target segment and decision which
segments should not be served, may significantly contribute to the selection of a business
activity strategy. Frequently this is the point where numerous strategic decisions should
be made concerning the activity range, willingness to match the offer to the segments’
needs, scope and intensity of fighting the competitors, etc.
The focus on a single, relatively narrow segment or focus on a niche understood in the
same way enables one to become familiar with it perfectly and satisfy their narrow needs.
This allows for gaining large shares in the segment and effective fighting with the
competitors who appear, though are not too numerous. On the one hand it enables the
raising of the prices of products and services, on the other, through the growing
knowledge and experience, to reduce the costs of their production.
Selective specialization consists in the selection of several, less frequently, more than a
dozen segments assessed as attractive. They may be alike, but also totally different, their
needs, however, must comply with the entity’s offer. The presence in several segments is
of principal importance in the business risk diversification. If the actions in one of the
segments do not bring the expected profits, there are chances that the profits of other
segments should cover such losses.
The product-selective specialization is a look from the point of the product and selection
of segments of such a product could be launched on. A business focuses here on the
product first and then defines the segments. A database supplier may be an example here.
Databases may be different for various clients, but no different solutions are offered to
businesses. Such strategy enables one to build a strong market position in this scope,
however, along with new technologies and solutions launched by competitors to replace
the existing ones, such firms might disappear from the market.
Market specialization includes satisfying numerous needs within a defined segment.
Businesses that offer hospital equipment or entities carrying out refurbishment-
construction work for power plants, satisfy a relatively wide range of needs, appropriately
9
Ferrel O.C., Hartline M., (2012), Marketing Strategy. Text and Cases, 6th edition, South - Western
Cengage Learning, Mason OH
59
modeling their portfolio of products and services. However, they restrict themselves to
the same segment from time to time. Their business might be threatened by restricting
budgets in the segments or cessation of the specific needs.
Large, diversified entities offer full coverage of the market. They satisfy numerous needs
in a lot of segments. Such a strategy is applied by Procter&Gamble, or Unilever.
1. What segments does your university/college or company serve? What segmentation

criteria can be used in order to settle them?
60
2. What strategy does it follow?
3. What problems arise while the segments are fixed?
4. What may be the effects of wrong segmentation for the business?
Case study 9
Cafe Aroma Israel (‫) קפה ארומה ישראל‬
Information about the company: http://www.aroma.co.il/en
(hints at the end of the book)
Coffee market
The coffee market is one of the largest FMCG (Fast Moving Consumer Goods eg.
Yoghurts, cheese, etc.) markets both in Israel and Poland, worth circa 1 billion US$ per
year in each of those countries. Its value has been growing by ca. 10-15% per year,
while quantity by circa 5-10%, for the last decade. The main reason for the growth is a
fast growth of the instant coffee market by 16% in value and by 10% in cups. The
higher consumption of instant coffee is the result of the comfortable, fast and simple
preparation of a good cup of coffee, which is becoming more and more popular. Polish
people work longer and lead a more and more stressful lifestyle, which is the reason
why instant coffee becomes a necessary product for them The coffee market in both
countries seems to be a market at an early stage of maturity, although the growing
tendency has been maintained. The average annual coffee consumption per person in
Poland is circa 3 kg, while circa 5 kg in Israel, i.e. still a few times less than e.g. in
Scandinavia, where the index is 10-12 kg per capita. In addition to the quantitative
growth of the consumption, the value thereof in both countries grows as well. The
consumers more and more often buy higher quality coffee, out of higher segments.
Moreover, coffee consumed out, at a cafe, coffee-shop or cafeteria gradually becomes
a habit, particularly among the inhabitants of big cities. Along with the growing pace
of life in cities and comfort of preparation, a significant growth of sales of coffee, both
instant or takeaway points of sale.
About the Company
Aroma Cafe is a company originating from Israel. It was established on the concept of
a model functioning in numerous countries and based on mobile coffee sales. It consists
61
of selling coffee in the busiest places, full of people commuting to work, i.e. traffic
jams, railway stations and near the so-called city hubs.
The company mission is “To ensure the well-being of the city inhabitants from early
morning on”. The Company tries to fulfill it through providing the clients with the best
quality coffee in the very places they are at the moment. The vendors and all the actions
taken by them are to build a friendly link between them and the customers. While
seeking for its own place on the market, Aroma has defined their competitors as:
• coffee-machines
• “drive thru” cafés, e.g. McDonald’s,
• coffee served at filling stations
• traditional cafés.
A model that would provide the usability of buying coffee at filling stations, however,
expanding the group of clients beyond drivers and their passengers only. On the other
hand, such usability was to be close to machine coffee. At the same time, such a model
had to avoid low price and quality.
General guidelines and basic strategic principles
As a result of the analyses and decisions made on the general form of the strategy,
seven basic points have been determined as a foundation for the strategy.
1) To be as close to the client as possible, on their way to work, school.
2) To offer top quality products, the freshest coffee beans, coffee freshly ground,
top quality water and coffee brewing apparatus.
3) Always to offer the same excellent taste of coffee, standardization of high
quality products.
4) Nice, always smiling, happy and professional staff encouraging the purchase
of coffee.
5) To build solid relationships with the clients, to make them want to come back.
6) To build an environment of local authorities’ and land administrators’ support.
7) Pro-eco approach, thanks to the application of ecological packages.
The first strategy

The strategy of Aroma Cafe originally was based on selling coffee at mobile units, i.e.
individual, mobile vendors, equipped with a backpack adapted for hot coffee and milk
62
transport. In addition to coffee distribution directly from the backpack, the vendor was
to be equipped with a cash register and two sizes of disposable cups, thanks to which
they could serve each client within less than one minute. The vendor also was to move
to the places of top concentration of individual clients. Like his clients, the vendor was
to move and integrate with the rhythm of their movement. All kinds of mass events
concentrating large groups of potential clients were to be served in the same way. On
the one hand it was to be an alternative to all those who use coffee machines, though
they like the quality of coffee served at good cafés. On the other hand, for those who
appreciate coffee from a café, but have no time for it. The reduction of purchase time
to the minimum, combined with its high quality was to be the foundation for the
strategy and determination of the target group of clients. The mobile vendors also
meant the reduction of costs related to the maintenance of expensive premises and, in
consequence, high quality coffee could be offered for less than half the price at a café.
The second strategy

While enforcing the first strategy a group was separated consisting of clients who
appreciate spending time at a café over a cup of coffee. Even though they buy takeaway
coffee, they purchase at a café full of noise and the smell of coffee is very important to
them. They do not associate a mobile vendor with high quality coffee, they are also
surprised that this is not a promotion and they have to pay for it. Therefore, a large part
of street vendors has been withdrawn and replaced with high quality, though with fast
service, modern cafés, slightly resembling other popular networks of cafés. Such cafés
were not only located in shopping malls and the busiest and most pedestrian traffic
loaded city centres, but also near selected hubs near motorways and other important
roads of the country.
1) Describe the segments served within the first strategy. What segmentation
criteria were used?
2) Describe the segments served within the second strategy. What segmentation
criteria were used?
3) What are the differences between the first and the second strategy?
63
4) Is there any justification possibility to serve the segments of the first and the
second strategy at the same time?
5) Do the basic principles of the strategy support serving the very segments? If so,
in what way? How do the principles meet the needs of such segments?
6) Would you recommend the first, the second or both strategies at the same time,
according to your own, subjective assessment?
Further readings
1. Roger Kerin, Steven Hartley and William Rudelius , Marketing, McGraw-Hill/Irwin;

11th Edition, 2012
2. Cooil B., Aksoy L., Keiningham T., Approaches to Customer Segmentation, 2008
3. McCarthey E.J., Brogowicz A.A., Essentials of Marketing, Homewood, 1982
64
4.2. Strategic Business Units
Pre-class readings:
1. Ocasio, William P. (1997), Towards an Attention-Based View of the Firm, Strategic
Management Journal, 18. (Summer Special Issue), 187-206.
2. Ocasio, William and John Joseph (2005), An attention-based theory of strategy
formulation: Linking decision making and guided evolution in strategy processes.”
Advances in Strategic Management, Vol. 22, 39-61.
Summary of the two above articles available on:
http://insight.kellogg.northwestern.edu/article/coupling_within_the_firm
On the website above you will also find a way to read whole versions of the articles for
free.
conclusions of the articles.
Decoupling Channels is based on William Occasio's observation and research made in
some international companies. Take a closer look into the concept and think:
1. How does one manage business units and decision channels in multinational
companies ?
2. Where is the difference between managing and strategy of small – medium and huge,
international companies ?
3. How does the environment influence international companies and their national
branches ?
65
4.2.1. Matrix Methods of analysis
Portfolio methods constitute a tool that often becomes immensely helpful in the analysis
of businesses and their management. They basically originate from the 1970’s and 1980’s
and comprise the analysis of products and services as well as specific business units called
strategic business units – SBU). They are particularly useful to those entities that have
several such units.
Strategic Business Units are parts distinguished within the organization, largely
independent or simply important and slightly different from others. Their distinction
enables better planning, strategy creation and performance, control, definition of
suppliers and customers, etc. A strategic business unit is often treated as a separate
integrity within a certain scope. It may not be easy to distinguish business units. In so far
specific services and products, for example, may be distinguished from one another
relatively easily, in as many business units may bring some problems. Territorial criteria
may be applied thereto, for example specification of business units based on the location
of the enterprise branches. This may also be based on various markets or various target
groups of customers.
The possible criteria of distinguishing a Strategic Business Unit against the whole
enterprise, [a strategic business unit]:
- has its own suppliers,
- offers its own products, different from those of the rest of the enterprise,
- has separate characteristics and skills,
- has competitors different from the rest of the enterprise,
- operates on the market specified exclusively for it,
- has its own targets and operating plans (marketing, sales, etc.) and sometimes
strategic plans,
- has been distinguished as a separate section against the whole organization,
- has its own management,
- accounts for its own profits/losses and its existence depends thereon,
- it is able to operate separately from the rest of the organization.
Thus, an enterprise is a set of strategic business units. Managing them in such a way so
that they would perform a common integrity is now a serious challenge to the
management boards, particularly those of larger entities.
66
Another important term that appears in the portfolio analyses is that of the industry sector.
It includes a range of branch activities of approximately similar profile. From the
economic point of view, there are three to more than a dozen basic sectors to be
distinguished – agriculture, forestry, fishery, industry, construction, services, IT. The
literature concerning management, however, treats the notion much more extensively. A
sector here is a national economy section, like in economics, and a type of industry or
services, such as media, automotive sector, consumer services, etc. Distinguishing one
sector from another is, without limitation, to determine the competitors, suppliers and
sector analysis limits in general. At present, however, such analyses have begun to
encounter a crisis. On the one hand, the number of difficulties grows at the determination
of limits between sectors, whatever name we call them. The enterprises manufacture,
provide services and develop real estates at the same time. Moreover, the number of trans-
sector competitors is expanding.
4.2.2. BCG Method

The BCG (Boston Consulting Group) Matrix is one of the widely known and applied
methods of portfolio analysis. It presents a system of products or strategic business units
on the matrix determined by two variables: the relative market share and the relative
market growth. They determine four basic fields the business units presented in the
picture below may be located within. Depending on the quarter of matrix they may be
plotted on, the following names have been assumed: milking cows, question marks, stars
and problems (balls and chains).
The market growth rate is defined, depending on the type of business it concerns. If
business units significantly differ from one another and apply to various markets, GNP
may be the appropriate level distinguishing high and low market growth. If it concerns
one sector, such a sector’s growth rate, etc. In the case of relative market share the
boundary value usually is 0.9 (with dispersed competition) or 1.0 (with several – more
than a dozen competitors). This is the result of using the formula:
The market share of an enterprise business unit / market share of corresponding business
unit of the largest competitor (or, if no data on competitive business units are available,
the general market share of the largest competitor).
It means that either the market shares of the largest competitor are bigger than those of
the enterprise analyzed, or the latter is the one with the biggest shares. Sometimes, while
67
determining the location of a business unit in the matrix, the size of the circle is marked
which expresses its share in the revenue structure. With such assumptions four types of
business units or products may be distinguished.
Fig. 4 BCG (Boston Consulting Group) Matrix
STARS QUESTION MARKS

high profitability low profitability
big financial demands big financial demands
SBU
2 SBU
1
Market growth
DOGS (BALLS AND

MILKING COWS CHAINS)
high profitability low profitability
low financial demands low financial demands
SBU
4
SBU 3
SBU 5
0,9 – 1,0
Relative market share*
SBU – Strategic Business Unit (1, 2 … n)

*Relative market share may be lower or higher than a market share of the main
competitor.
Source: G. Gierszewska M. Romanowska, Analiza Strategiczna Przedsiębiorstwa, PWE,
Warszawa 1997, p. 178
Milking cows are products or business units that are usually in a stable market position
and of low financial demand. However, simultaneously they generate significant financial
surplus and simply bring profits. They usually contribute to funding other business units,
68
products or services. However at the maturity or declining life cycle stage their time is
limited and without supporting actions they may soon lose their profitability and
disappear from the portfolio.
Stars are business units with a significant development potential, however currently they
need significant financial support. Their maintenance and development are related to the
necessity to bear significant costs with relatively low revenues such entities generate at
the same time. In exchange, however, there is a reasonable hope that in the future they
will become milking cows and will start to bring fair profits.
Question marks demand significant funding, however their future is not necessarily
optimistic, as in the case of stars. Actually no one knows whether they will become stars
or rather dogs.
Dogs are business units with a low market share, although with low demand for funding.
They are often failed investments or declining products. Although in general resignation
from them is recommended, there are cases where enterprises maintain them. This is the
case when such entities do not want to withdraw from a market, plan to intensify their
actions in the future or count on the future market growth.
In general, the indications for particular business units are as follows:
• pay particular attention to milking cows so that they would bring profits for as
long as possible,
• assign the financial surpluses generated by milking cows for the development of
milking cows and stars,
• reinforce the position of stars and question marks,
• eliminate weaker question marks,
• eliminate dogs,
The BCG method has both advantages and disadvantages. Most of all, it is a simple
portfolio method, easy to present, understand and interpret. Its disadvantages include
significant simplifications, only two dimensions and adaptation to less complex markets
and enterprises for which the market shares, for example, are easily settled.
4.2.2. Arthur D. Little method (ADL)

The approach suggested by Arthur D. Little is a slightly different portfolio method. In
general, the presentation and matrix preparation principle is similar to that of BCG. The
basic difference is in plotting the life cycle stage sector (market) on one of the coordinates,
from its embryo development to declining stage. The other coordinate was determined by
69
the competitive market position of the business unit. Such a dimension was transformed
into market attractiveness assessment in other methods.
The coordinates may determine from 20 to 30 fields to plot business units on. It depends
on the assumptions on the sector life cycle scale and the number of level in the strategic
position attractiveness assessment.
Fig. 6. Arthur D. Little‘s (ADL) Matrix

Competitive position S T R A T E G I C BUSINESS UNITS
attractiveness Strategy suggested
Leading BUILD BUILD BUILD BUILD

Strong BUILD BUILD BUILD MAINTAIN
Favourable BUILD BUILD MAINTAIN LIQUIDATE
Tenable BUILD MAINTAIN LIQUIDATE LIQUIDATE
Weak MAINTAIN LIQUIDATE LIQUIDATE LIQUIDATE
Nonviable LIQUIDATE LIQUIDATE LIQUIDATE LIQUIDATE
Initial Growth Matured Aging

Industry maturity
Need for financial
very high high moderate low
resources
Reference: author’s own paper on the basis of Norton P., (2007), Marketing Strategy
Desktop Guide, 2nd edition, Thorogood, London, pp.130
The maturity of the industry is based on a four stage product lifecycle. The lifecycle
concept consists of four main stages as follow: initial, growth, maturity and aging as a
final period of the product’s market presence. The other axis is defined by the business
unit’s competitive position on the market. It is measured by a real or possible competitive
impact on other market players. The method starts to be not fully clear from that moment.
It is based on assumptions and clausaltions of key success factors, how they are used,
profitability of a company and its’ business units, level of rivalry in the sector as well as
the prospects of a company’s further development.
70
In addition, as a third dimension also is included the fund needs that is connected to the
period of the product’s life. The younger the product the more money it needs. The risk
level is embedded in the model in the same way. Risk level reduces during the lifecycle.
The initial stage business units or products are highly fragile and sensitive to any changes
in the environment. That increases risk and the need for resources.
The main advantage of the ADL matrix is its’ dynamic approach. It shows the possible
development and the competitive position at the same time. Based on that only it is
possible to predict some future events and possible directions of a business units
development. To some extent of course. On the other side but, anyone who uses that
method faces all the problems related to the lifecycle concept and unimpartial market
attractivenes evaluation.
71
1. When is it required to use the matrix Methods (BCG, ADL) in analysis ? What
knowledge do they deliver ?
2. What are the limitations in the use of the BCG and ADL matrixes ?
Case study 10
Cellcom Israel SBU Portfolio ( ‫) ישראל סלקום‬
Information about the company: www.cellcom.co.il
The situation on the market and projections concerning its further development affected
the decision to create a desired portfolio of strategic business units of a firm acting in
the mobile telephone sector. Such a portfolio could become the basis for strategy for
years to come. They concern both the actions related to the selection of customers,
marketing and sales campaigns, but also the selection of hardware and software
suppliers. The appropriate combination thereof should enable the fulfillment of future
market expectations. Thus, the portfolio analysis included:
GSM and audio talks – there are numerous prerequisites that the phone call market
value will start to shrink, which should be conspicuous from next year onwards.
Although the number of users grows, the costs of calls drop. Within the present
portfolio the business unit responsible for the delivery and efficient functioning of
audio calls is basically the most important one. However, over the years to come, it is
to change. The present expanded and costly in creation and maintenance infrastructure
(GSM masts, cabling, etc.) do not demand further expenses any more. The present
expenses are related to the operation of the existing infrastructure, but the investments
in its development are scarce. The situation of the GSM hardware suppliers is similar,
they do not invest in its development, while focusing on telephony of the generations
to come, spending up to 20% of their profits on the development.
SMS and MMS – When sms as a service was launched neither any significant success
in the development of this form of communication was expected nor substantial
revenues thereon. Currently this is an immensely important source of revenue and the
business unit responsible for the sms operation is the second in the business structure
in terms of importance. Sms became particularly popular in Europe, including Poland,
but also in the Middle East, it is a form of communication well appreciated by young
72
people. At Cellcom, as with other operators, it is a very important and still promising
source of revenue. The revenue thereon still grows and it is estimated that within the 5
years to come they will be at least tripled. They are particularly popular in our country.
Poland has become the European sms leader. An average Pole transmits at least twice
as many text messages as an average German or French person. According to
“Audytem” analytic and consulting company, sms’s earned for the operators more than
2.5 billion zlotys (the revenue of the three operators amounted to ca. 20.5 billion zlotys
last year). According to the projections, the number shall grow by 5 billion within the
2 years to come. The conviction is confirmed by new records noted last Christmas and
New Year’s Eve night. Between 23rd and 26th December, Polish people transmitted
750 million sms’s generating a profit in the order of 23 million PLN. Within the 12
hours of New Year’s Eve night 250 million sms’s were transmitted, which was
translated into PLN 7.5 million.
3G, UMTS etc. (HSDPA and HSUPA) – means the services of 3rd generation mobile
telephony. Their launching was to revolutionize the world telecommunication market.
Video-connections, localization services, video-rental and a number of others were to
bring significant profits and, in the long run, to replace audio and sms services.
However, the development of third generation telephony is also related to immense
costs, both of purchasing various licenses and the change of a large part of the
infrastructure. After the first investments, however, it appeared that it was impossible
to guarantee the appropriate number of vide-connection quality. Japan was an
exceptional example on the global market scale. Excluding Japan, only the companies
present in the countries in the process of building infrastructure was being built, could
afford it. The networks in Poland or Israel were built at least more than a dozen years
ago. Their adaptation to the third generation requirements would demand almost total
replacement thereof. Moreover, telecommunication hardware and software were not
ready for it, either. A lot of users still used their phones from a few years ago, with
small screens and slow processors. The same applied to the base stations of the
operators whose calculating potentials met the requirements of the early 21st century/
late 20th century. At present there are still attempts to promote the service as a broad-
band internet access. The service is still expensive and much slower than in stationary
wifi access points. And the analysts say this direction is not really prospective.
73
HSDPA - (High Speed Downlink Packet Access) means high speed data transmission
from the operator to the user. It enables, for example, fast downloading of video
materials, data packets, etc., by the telephone user. At present the service is really
prospective with an expanding number of customers. Although against the total number
of the mobile telephone users they do not exceed 5%, the group of customers is
growing. They are also very demanding as far as the expected service quality is
concerned. Simultaneously, the revenues they generate are substantial enough to expect
that the business development is really promising. The present data transmission speeds
are increased almost every year and assure the opportunity to watch high quality video
transmission in real time, practically without delay. The service, however, requires
significant expansion of the business unit, which in turn brings about the necessity to
incur substantial costs. This is almost a new network and a new set of equipment that
should cover possibly the widest part of the country.
HSUPA – (High Speed Uplink Packet Access) this means infrastructure related to high
speed data packet transmission. However, the expenses related to the development of
this business are high as are uncertain the revenues on its operation. Thus, it is not
surprising that not only Cellcom, but also other cellular networks slowly make
decisions on the allocation of funds on such an undertaking. It is estimated that the first
systems will be installed later this year. This technology really is capital-consuming
both on the part of operators (acquisitions of new software and modernization of
infrastructure). The expenses should provide a prompt return, however, this is an
uncertain issue. Undoubtedly, the demand for high speed, broadband connections
grows at a significant rate. According to estimations, this is ca. 30-40% growth per
year.
HSPA – (High Speed Packet Access) is a combination of HSDPA and HSUPA
functionalities. It not only creates a new product, but also forces the creation of a
business unit based on the two existing ones. Thus, the possibility of bidirectional
transmission is to be produced, at lower costs, however and even faster. It requires the
development of hardware, software and preparation of new calculating formulas
enabling an appropriate acceleration of the transfer. The business unit and product,
however, are at present at an early development stage, although the market is very
prospective. Equipment suppliers agree with the operators upon the cooperation
principles and demand for appropriate equipment items.
74
I-HSPA and NGMN – new services demand both the acceleration of data transmission
and reduction of delays in information transmission. Internet-HSPA is a step towards
Next Generation Mobile Networks. It is to enable the introduction of VoIP services,
which in turn will reduce the costs and revenues on the existing phone connections and
will partly move them towards internet transfer. In the anticipated form, it will be a full
shift of transfer from cable networks into the cordless world, maintaining the usability
of fiber optics. This is also a platform for the development of brand new services,
unknown at present yet.
Mobile TV – is television on your phone. All over the world the revenues on mobile
television amounted to almost USD 0.8 billion last year. The analysts foresee that the
figures will grow in the years to come to double within two or three years. At present
almost 50% of users expressed their interest in the service, however they point out the
low strength of the phone batteries and small screen as barriers. So the market seems
attractive, although its development used to be estimated as much faster, than it is now.
The service is usually made available against an extra paid subscription.
Localization services – represent a supplementary source of income. The business unit
responsible for them achieves some success directing such services to businesses.
Thanks to them the vehicle fleet or staff managers are able to fix the location of each
staff member or vehicle. This is also a service directed to parents supervising their
children. Currently, there are also possibilities to transmit advertisements in the place
the subscriber is staying concerning the local offer. Providing such services requires
incurring the costs of acquisition of platforms responsible for fixing the location of
multiple users at the same time.
Fixed Broad Band Access (FBBA) – along with the development of competition on
the mobile telephony market, the operators expand their interest onto new groups of
customers. They include stationary telephones and internet users. The high speed
traditional connections are built or leased, which in combination with cordless
telephony enable the development of such a service. Although the market grows, it is
at a mature stage now and the growth of shares usually is connected with taking them
over from stationary telephony competitors.
Dedicated products – are directed to other operators or large companies seeking for
their own solutions in the scope of data transfer. A number of solutions has been created
for those customers, for example: Project Management – managing project teams
75
producing mobile connection networks. Turn Key Project – full production of
finished solutions of network connections, from obtaining the permits, through putting
up the masts, creating software upon the system’s start-up. There are certain costs
related thereto, while the revenues allow for elaboration of relatively low margins.
Consulting – providing consulting services for businesses building or expanding their
own cordless networks. Service repairs and post-sale services – provide the clients
with servicing supervision and build relationships with them. It requires the expansion
of servicing sections and building a mechanism of fast response and is related to some
costs. The revenues thereon are low and the market development in this scope seems
to be moderate.
All the said business units have been plotted on the BCG matrix, which will constitute
the basis for Cellcom strategies for the years to come.
Explain -
Mobile
TV
HSDPA locali
zatio
STARS HSUPA n QUESTION MARKS
Turn
IHSPA Key
NGMN
FBBA
Project
manag
SMS cons
ultin
ement
MMS g
MILKING COWS PROBLEMS
Servi
GSM ce
UMT
S
1. Create the ADL matrix for Cellcom.
2. Write recommendations resulting from the ADL matrix.
3. Based on the BCG and ADL fix strategic targets for Cellcom for the years to come.
What should be done with the particular business units?
76
4. Are there recommendations that resulting from one method are not confirmed in
the other? Could you specify such recommendations?
5. What, in your opinion, will the BCG and ADL matrixes and arrangement of the
present business units look like in three years time?
Further readings
1. HBR's 10 Must Reads on Strategy, Harvard Business Review Press, 1st ed. 2011
Bibliography
1. http://www.aroma.co.il/en
2. www.cellcom.co.il
3. Kerin R., Hartley S., Rudelius W., (2012) Marketing, 11th Edition, McGraw-
Hill/Irwin, USA
4. Ferrel O.C., Hartline M., (2012), Marketing Strategy. Text and Cases, 6th edition,
South - Western Cengage Learning, Mason OH
5. Gierszewska G., Romanowska M., (1977), Analiza Strategiczna Przedsiębiorstwa,
PWE, Warsaw
6. Norton P., (2007), Marketing Strategy Desktop Guide, 2nd edition, Thorogood,
London
77
5. Methods of industry attractiveness analysis.
Theories of industry, product, and technology life cycles.
Pre-class readings:
1. Michael Porter, The five competitive forces that shape strategy, Harvard Business
Review, January 2008, Volume 86, Number 1, pp. 78–93
Most of the article and short video interview available on: http://hbr.org/2008/01/the-five-
competitive-forces-that-shape-strategy/ar/1

1. When might Porter’s concept on the Five Competitive Forces be useful for
companies ?
2. Can you see some problems with the idea of the Five Competitive Forces ? Where
are the limitations ? When might it mislead companies ?
3. What types of critical information for the Porters forces are the most difficult to
collect ?
4. What information in the model are consultant / researcher dependent on in
accordance with their importance to company evaluation ?
78
5.1. Industry attractiveness
From an organization’s point of view, sector analysis is the key element of its business
environment. It provides significant information on the opportunities and threats related
to:
• sector profitability,
• seasonal nature of production, sales or material supplies,
• sector development stage (introduction, development, maturity, end),
• barriers to enter a sector and barriers to leave a sector,
• industrial cyclic nature, determining the length of time necessary to design,
perform, use, wear and liquidation of a specific thing,
• intrasectoral competition.10
However, the principle to be assumed is that the sector analysis should be
preceded by the general analysis of the entire industry and national economy, in order to
indicate global, macroeconomic and structural circumstances of a sector’s condition. This
type of general analysis of industry should present the course of changes to the economic
condition, special legal and systemic regulations and restructuring and privatization
programmes for the entire industry. However, before proceeding into the dimension an
enterprise functions in, i.e. country or province, we should also be reminded of the
necessity of at least a superficial analysis of the sector in a global (worldwide) as well as
regional (continental) dimension. 11
Sector analyses should be carried out regularly by enterprises functioning in a
given sector, in order to create or correct their developmental strategy and by the clients
or suppliers intending to enter long-term cooperation links, engaging funds. Such
10
H. Godlewska – Majkowska (red.), Przedsiębiorczość. Jak założyć i prowadzić własną firmę, SGH,
2009, pp. 120-121
11
G. Gierszewska M. Romanowska, Analiza Strategiczna Przedsiębiorstwa, PWE, Warszawa 1997, p. 70
79
analyses are also prepared by potential investors planning to invest their funds in a given
sector. It is worthwhile indicating that the scope of the sector analysis and the level of its
specificity will be different for various users and the fullest scope of such analysis is used
by the participants of a sector for the purposes of preparing a development strategy.12
The starting point in preparing a sector analysis is to set the territorial and product sector
limits.
5.2. SWOT as a tool for industry evaluation
SWOT analysis is a widely understood method of analyzing the internal and external
environment of the organization, but also projects, products or it is even applied to assess
the potential of the particular employees. O – Opportunities and T – Threats relate to the
external world, while, S – Strengths and W – Weaknesses – to the organization itself. O
and T are derived from the distant environment, its dimensions and trends appearing
therein as well as the close environment and actions of competitors, suppliers, business
partners, etc. S and W include the internal environment impact, i.e. that of employees,
management board, supervisory board, resources, methods of organizing them, the use of
unique production methods, competitive position, brand strength, etc.
STRENGTHS – strong points, internal positive factors, the organization elements that
distinguish it against the competitors.
WEAKNESSES – weak points, internal negative factors, consequences of restrictions in
the organization’s resources and skills,
OPPORTUNITIES – chances, external positive factors, trends and phenomena in the
environment that could have a positive impact on the entity’s development, weaken the
impact of the weak points or threats.
THREATS – threats, external negative factors, barriers coming from the environment and
impediments to the organization’s business.
It requires, however, the setting out of such factors of numerous possible ones, that
actually affect the organization functioning. The method provides a lot of freedom in their
selection, which means, however, that the person should rely on serious and proven
sources while using it and he/she should be experienced in the sector SWOT has been
12
Ibid., p. 71
80
prepared for. Such form thereof results in the fact that it can be a complex and effective
strategic analysis.
Its advantages include:
• a fairly synthetic presentation of the organization’s strategic position,
• stress on including the factors that may significantly affect the business,
• relatively easy switch from setting a list of factors and strength of their influence
to strategic planning,
• necessity to define four types of factors resulting from the SWOT acronym,
• versatility of use.
however, its undoubted disadvantages are:
• freedom of selection of factors and settling the strength of their impact, i.e. making
it dependent on the person creating it and his/her competence,
• possible chaos appearing in the identification of factors selected as significant for
the organization, their number and difficulties at defining the strength on their
impact on the organization,
• the range of meaning of the S, W, O and T fields such factors need to be searched
for,
• the necessity to supplement it with other strategic analysis methods.
The SWOT analysis can be divided into several stages sorting out the method of its
application, which requires the definition of:
1. the organization profile, its scope of business, sector and market it functions on,
2. the attractiveness of the sectors the organization is active in,
3. the resources possessed, their uniqueness, organizing methods and, in effect,
strong and weak points of the organization.
4. the organization’s strategic position,
5. strategy with definition of the organization’s primary targets.
SWOT analysis also enables the listing of strong and weak points with opportunities and
threats and determination of the extent they affect each other, for example to what extent
the strong points may increase the possibility to take the opportunities or the weak points
deteriorate the negative effects of threats. Such cross analysis enables us to define which
of the factors may be of the greatest importance for the organization’s future.
81
82
Tab.9 Sample SWOT analysis and cross analysis for X organization
Opportunities Threats
• Increasing the number of clients. • Aggressive actions of current
• Opening overseas markets of the competitors.
products offered. • Increasing the number of substitute
• Decreasing the number of products.
competitors. • Adverse changes in international trade
• Faster market growth. and state commercial policy.
• Growing requirements and legal
speculations.
Strengths Weaknesses
• Sufficient financial resources. • No strategy for the years to come.
• Good clients’ opinion. • Obsolete machinery fleet.
• Recognized brand. • High fixed costs.
• Market leader position. • No new products in the portfolio.
Source: author’s own elaboration, unpublished material
Tab.10 Sample cross analysis

Opportunities
weak points Increasing Opening Decreasing Faster market
number of overseas number of growth
clients markets to the competitors
products
offered
No strategy for - - - -
the years to come
Obsolete - - 0 -
machinery fleet
High fixed costs 0 - 0 0
No new products 0 - 0 0
in the portfolio
83
In the table 8 it is to find some answers on questions, to what extent the weak points
impede (affect the impossibility) to take the opportunities. “0” means no effect, “-” strong
impact making it impossible to take opportunities, while “+” assistance at taking
opportunities.
It is conspicuous here that weak points never help in taking chances (which,
paradoxically, happens sometimes), but they are either neutral or have a negative effect.
The conclusion of the above analysis is that no strategy is the most important element as
it impedes taking all the opportunities. Such analyses should be carried out for further
pairs/groups of factors, namely:
1. to what extent weak points enhance the threats’ impact,
2. to what extent strong points help in taking opportunities,
3. to what extent strong points weaken the impact of threats.
Such analysis may also be supplemented with its reverse application, i.e. search for the
answer to what extent the opportunities and threats affect the strong and weak points.
This also enables the determination of specific factors’ weights throughout their
structure. Thus, upon the cross analysis of weak points, we may assume that the weak
points’ impact is as follows:
Tab.11 Sample weighted evaluation SWOT analysis

Weak points (factors) Factor Assessment of Actual, weighed
weight impact on impact of factor
organization (from on organization
-2 very negative, 0
neutral, +2 very
positive)
No strategy for the years 0,5 -2 -1
to come
Obsolete machinery 0,3 -2 -0,6
fleet
High fixed costs. 0,1 -1 -0,1
No new products in the 0,1 -1 -0,1
portfolio
TOTAL 1,0 -1,8
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Thus, applying the scale -2, -1, 0, +1, +2, the weak points significantly affect the
weakening of the organization’s competitive position and we should become particularly
interested in them. The lack of strategy and slightly less urgently – the obsolete
machinery fleet should draw our interest.
5.3. Point method evaluation in industry analysis
The point method evaluation of sector (industry) attractiveness represents the

supplementation of the “five forces of competition” according to M. Porter. It is an
attempt to evaluate to what extent the entrepreneurs would invest in a specific sector. It
is also an attempt to fix the factors shaping the attractiveness and affecting the attraction
force level. The factors largely depend on a specific sector, however only a few basic
groups of them can be specified as sources of particular evaluation criteria. They refer to
both closer and further environment, therefore the environment analysis with the methods
mentioned herein, for example, is of primary importance.
Criteria groups of sector attractiveness evaluation:
• Market
the market size, growth rate, competitors’ activity and methods of competitive fighting
they use, the number of competitors and the extent of diversification or consolidation of
competitors on the market, the origin of competitors, trends from further environment
affecting the formation of competitors, as the rise of global corporations, for example.
• Financial
demand for capital, both on entering the market and while being present thereon, return
on sales, return on investments, additional costs of functioning, e.g. taxes and other fiscal
charges, existence of alternative funding sources, e.g. funding programmes of some
branches of the economy by the EU and individual states.
• Technical and technological
technological advancement level, availability of technologies and patents, technological
development pace, development foreseeability level, products and services quality level
fixed for the sector, advancement of delivery and distribution organization system.
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• Legal and political
pace of changes in the law, sector regulation level, level of sector control by the state,
state fiscalism and repressiveness towards business, banking system functioning method,
number and complexity of the need to report with state control bodies, number and
intensity of inspections, as it occurred in the first half of 2013 when the authorities of
Cyprus, at the EU’s request, froze the bank accounts of all the businesses, in order to
impose an additional tax on all the funds deposited thereon. Such a decision was equally
fast and unexpected for the depositaries.
Therefore, the sector’s attractiveness is a complex issue. The attempts to estimate it are
usually a certain approximation, which is the result of the necessity for anticipation of its
future development, for example.
Sector attractiveness – the definition

The sector’s attractiveness is a set of its properties resulting in the fact that it is attractive
or not in terms of business or for a specific group of business entities.
The evaluation criteria mentioned above are only examples and their list may be
expanded. Moreover, the sector may also be assessed in terms of substantial organization
and therefore, rank the specific criteria as more or less important from the sector’s point
of view. Such assessment is of a diagnostic nature and represents an important
prerequisite for making business decisions. It can be considered in several configurations,
e.g. in comparison to the sector’s life cycles or to other alternative sectors or recognized
as groups of sectors forming a larger integrity. Then relative analysis appears, related to
other sectors or groups thereof. For this purpose specific weights are introduced for point
evaluation of each criterion assumed.
The point analysis of sector attractiveness is preceded by selection of the sectors that may
include comparison and ones the point evaluations and weights can be related to. The
evaluation would not be entirely reliable without it, as such evaluation is not absolute in
management as a rule and always refers to the current environment condition at least. It
is only now that four directions of attractiveness evaluation can be established:
• sector’s development potential,
• freedom to enter the sector,
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• sector’s uniqueness / its niche nature,
• sector’s comprehensive attractiveness.
The evaluation of the specific criteria may be verified by the multipliers increasing the
impact of one type of criteria and reducing that of another on the general evaluation. Thus,
the criteria substantially conditioning the sector’s attractiveness or currently absolutely
necessary are given e.g. multiplier 5. The slightly less important ones are given multiplier
3, while the least important ones – multiplier 1. This can be presented in the following
way:
Tab.12 Sample sector’s point analysis

Group of Criteria group Point evaluation Multiplier Result (point
criteria description (from 0 – does not (weight) evaluation x
occur 3 – occurs to multiplier)
high extent)
A absolutely necessary 5
B required 4
C useful 3
D moderately useful 2
E of marginal 1
importance
Total of
- - - - specific
results
Upon settling the weighted total of point evaluations of the specific criteria, the whole is
usually subject to verifying or comparative evaluation, which in effect is to lead to the
conclusions on the extent and scope of the sector’s attractiveness. The sector’s
attractiveness categorization in relation to other market alternatives provides a foundation
for determination of the strategy of entering/ leaving or staying in the sector.
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Sector’s point analysis procedure:
1. Determine and define the sector the analysis is to refer to.
2. Set the sector’s attractiveness evaluation criteria.
3. For each criterion determine point ranges (e.g. 0-3) according to which they will be
evaluated. The evaluation level depends on the criterion’s intensity extent.
4. Set points of reference of the evaluation, e.g. the least or the most attractive sectors
in the economy.
5. Set the weights of each criterion in the general structure of criteria. The total of the
weights should be 100%.
6. Attribute points to the criteria, according to the scale assumed and multiply them by
the weights.
7. Summarize the weighted evaluations of the criteria. The result obtained in this way
reflects the extent of the sector’s attractiveness or the lack of it. What is important,
particularly in the evaluation of several sectors, e.g. while making a decision to enter
them.
8. Compare the sector’s attractiveness set in such a way to the attractiveness of other
sectors.
9. Draw the conclusions for the strategy of entering, leaving or staying in the sector.
5.4. The industry life cycle analysis
Life cycle is a versatile concept. It can be referred both to the sector, organization,
product, innovation and practically every component of an enterprise, management and
market. It describes, in a slightly simplified way, usually seen in terms of revenues, the
behaviours of an object within a time range. The centre of gravity here will be located on
the sector’s life cycle, however, it is worth remembering that the vast portion of the
assumptions and conclusions is of versatile nature.
In the first place, we should make some assumptions on the sector analyzed in terms of
its life cycle. From the sector’s point of view, the major assumptions include the
following:
1. the sector has a determined life period,
2. it is subjected to various life cycle stages,
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3. revenues, profits and
4. other measures are formed depending on the life cycle stage the entity is at,
5. the strategies, their characteristics and diversification are correlated with the life
cycle stage.
In terms of life cycle formation, the major assumptions include:
1. the nature of the sector, its internal conditions and specific nature,
2. possibilities to diversify the entities in the sector, applying different strategies,
3. the sector’s variability in time resulting in changes of the revenue amounts, the
sector’s growth rate, profitability,
4. sensitivity of the sector to various changes in the environment, trade cycles,
fashions, appearing technologies, etc.
5. type of needs satisfied by the sector,
6. market boundaries, e.g. geographical – country, region, continent, world within
which the aggregated data enable the determining of the life cycle.
Exercise 4
The life cycle in the construction sector
The opinion was spread that the construction sector is very sensitive to trade cycles.
Although it is disputed whether the sector influences the prosperity or vice versa,
however, both phenomena undoubtedly occur almost simultaneously. However, it is
difficult to determine the life cycle stage the sector is at. Its beginnings are lost in the
darkness of history, strong growths appear from time to time and the end cannot be
seen either. As a result, the life cycle is assumed in several episodes conditioned by the
economic situation. At present we can talk about its maturity in the USA, the UK,
Germany or Poland. However, on economic revival, it may be transformed into a phase
of growth to drop down, which is characteristic for the end, however it may grow again
in another period. The life cycle resembles stock exchange rates of some companies,
rather than the traditional life cycle model.
1. Which of the assumptions cannot be made in the construction sector?
2. What other sectors have a hard time to determine the life cycle?
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3. What assumptions are impossible to be made there?
The sector’s life cycle consists of four basic phases. It is possible to divide them into
shorter episodes, if only their characteristics actually differ from the other. However, four
of them already indicate certain specific behaviours and enable the drawing of
conclusions on the strategy and principles of competition. The length of each phase
depends on numerous variables, characteristic for the market, just like the proportions
between them.
The initial phase or introduction means the time the sector has only just appeared on
the market. It may be brand new, but it may also be separated from an existing one. It
happens particularly in the old, historically conditioned sectors that diverge into
numerous branches, becoming separate integrities possible to be distinguished from the
market. Such a situation took place on the bookselling market in which the appearing e-
book readers, audio-books and electronic versions of books have created a separate sector
that behaves in a different way as compared to traditional books. At the initial stage, it is
difficult to expect fast growing tendencies. The buyers must become convinced with the
new solutions, become familiar with the offer, some of them find the lack of choice an
issue, because at this stage there is usually one or very few suppliers. The competition is
restricted, if any, it competes with the basic characteristics of the offer directed to the
wide segments. The strategies are poorly diversified and the fighting, more often than
not, takes place inside the organization, for obtaining profitability as the expenses are
significant, while revenues vary from scarce to medium. This is a period of uncertainty
and wrong decisions. This is also a period in which the clients are getting used to the new
offer, while the other environment elements – to the new conditions. From the
organization’s point of view, this is a period of intensified investments with low turnover
and uncertain profits. The pioneers entering such markets very often “die with an arrow
in their backs” shot by the competitors who may succeed on learning of the costly
mistakes of the former. This is a stage at which the organizations learn to act, compete,
change their strategic targets and formulate the business models. At this stage the strategic
resources as well as the brand and organization method are also formed here.
The growth phase follows as the next one. The number of buyers grows, the market
expands and the competitors appear along with it. Sometimes the number of competitors
is very large and diversified. At the second half of the growth phase appear even those
who know very little or nothing about this business area. The vision of turnover and
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profits attracts numerous groups of players. Although the competition is significant, the
expanding segment results in the fact that there is still something to share and the growths
of the turnover of particular organizations are largely the result of the market growth
rather than winning it from the competitors. The appropriate strategies here consist in the
type of development that exceeds the development rate of the entire sector. The offer and
strategies gradually start to diversify and some entities already think of building barriers
to entry. However, due to the fact that these are long-term processes, they do not usually
appear at the growth stage. The organizations improve their ways of providing services
and production, gain experience and operate actively. This is a period in which the
investments, particularly those translated into work, are significant. The turnover,
although growing, not always guarantees high profits. A frequent error here is the growth
of costs and taking over suppliers and distributors at overrated prices, vertical
integration). At a later stage of growth the market begins to consolidate, some of the
organizations start to face financial problems and go bankrupt, others are taken over by
larger ones so that the number of competitors at the initial stage of another phase would
not exceed usually a few – up to a dozen or so. They try to apply the diversification
strategies in order to be effectively distinguished against all the suppliers.
Maturity phase is a period in which the market has become saturated. Upon saturation
it does not grow fast any more. It may even go through stagnation, without growth, and
sometimes with slight drops of turnover. Competition intensifies here. The growths of
turnover depend on winning them from the competitors. In as much as winning the market
was the target in the preceding phase, in so far the target here is to win it from the
competitors. The offer begins to diversify, entry barriers appear, the experience is
immense and the wealth of some players’ portfolios – significant. The fighting becomes
fiercer and the situation is pretty foreseeable in general. Obviously a vast portion of the
entities would go bankrupt or withdraw, however, these are usually those who had not
developed any competitive strategies by then or were unable to reduce costs fast. In
addition, these are often those who entered the market in the last phase of growth. Thus,
they are poorly prepared for competition, but also have insufficient experience. This
phase, particularly at its first stages, requires the reduction of costs and development of
high return rates. This is a time of wide and diversified product portfolios, distinction,
numerous strategies and ways of competing. A strategy applied with particular frequency
is that of seeking niches, narrow segmentations enabling the maintainence of a certain
level of profitability and reduction of costs, in order to be able to offer lower prices. At
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later stages of the maturity stage the number of competitors is already scarce. Weaker
entities have either been taken over by some larger ones or have gone bankrupt. At the
later stages of maturity one or few players are visible clearly and at a still later stage, in
addition to the giants, a few small niche suppliers appear, oriented to serving narrow
niches. Oligopolies and monopolies are formed. The experience curve and the production
scale achieved allow for the minimization of costs. The domination on the market enables
the mass production. Margins are often significant, like profitability and profits.
The end phase occurs when the market begins to shrink. The decreasing number of
customers ordering shrinking supplies and oriented to pay decreasing prices are
characteristic. The competition gradually vanishes, usually one or two competing players
remain and try to win the shrinking market. Finally one, with 100% share in the shrinking
market either vanishes along with it or starts to deal in the niche residue thereof.
Exercise 5
Kodak and the industry life cycle
Kodak used to be the world’s leader at the production and sales of cameras,
photographic films and photo development and processing equipment, for years.
Competing with Fuji, OrWo, Agfa, Konica and other suppliers they did not notice once
that the product had been ousted by digital matrixes. In 2012, performing one of their
strategic targets and achieving almost 100% of the market of photographic films, they
announced bankruptcy. The market simply shrank so much that the turnover could not
maintain the international structure of the company, their laboratories, distribution
channels, etc.
1. Why companies do not notice changes in a lifecycle and do not follow one ?
2. What should Kodak do to watch the lifecycle ?
Fig.7 Sector’s life cycle – turnover and profitability
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turnover,
profitability
Turnover in the
sector
Profitability in the
sector
time
Maturity
Initial phase Growth phase phase End phase
Innovator, Diversification, Analyst, cost Cost leadership, Preferred
seeker, product leadership, development of strategies
diversification, development, market new markets,
occupying penetration withdrawal
market niche,
concentration
Very high High to medium Medium to low low Relative demand
for capital
Negative to very Low to medium high From medium profitability
low to negative
Orientation to Growth above Taking over the Vertical Winning the
win clients market growth, market from integrations, market
through winning new competitors vanishing
information and clients (horizontal competition
education integration)
Low strong Very strong low Competitive
fighting in the
sector
Exercise 6
Life cycle
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Which life cycle phase corresponds to the following guidelines?
• Improvement of functioning quality and organization of an enterprise,
• Development of offer,
• Entering new market segments,
• Increasing shares in the existing segments,
• Expansion of the existing and the creation of new distribution channels,
• Preparing for reduction of costs, seeking for positions in the organization in which
costs could be reduced,
Answer: Growth
And which life cycle phase corresponds to the following sub-phases?

• Slowed growth
• Stabilization
• Gradual drop
Answer: Maturity
The enterprise may try to extend some phases, particularly the maturity phase. The
expansion of the market by those who have not used the sector’s offer so far may appear
to be effective here. They may also go to other territorial markets. They may also modify
their offer, adding for example supplementary products and services, which often requires
the development of the entire enterprise, horizontal integration or taking over entities.
They may also increase the frequency of using the offer, as Wrigley’s the chewing gum
manufacturers do at the marketing level, educating on the need to use two leaves of gum
at a time, instead of one used so far. They may also improve the quality, develop brand
new products satisfying similar needs, modify marketing mix and the way of reaching the
clients.
There are sector life cycle models that do not accurately match to the one presented above.
As the duration of each phase may be different and depends on a number of more or less
foreseeable factors, the course of the life cycle curve may be different or some phases
may even be omitted.
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Fig 8 Different types of life cycles
1. Growth – drop – maturity model
2. Cycle – recycle (double cycle) model
3. Ridge model
Turnover
Turnover
Turnover
Time Time Time
growth – drop -
cycle - recycle ridge
maturity
Exercise 7
WAP technology and life cycle
Building web pages based on WAP technology enabling one to read the internet
contents on mobile phones without advanced displays seemed to be a very interesting
emerging sector. A significant number of suppliers of the service, web page makers
and translators of contents into WAP compatible appeared. Although both web page
makers and mobile telephony operators tried to convince the market to use the said
solutions, the sector has practically vanished after a short period. They failed to
convince a sufficient number of potential customers, the product was not very attractive
visually and its construction – costly.
Questions and tasks:

1. What life cycle phases occurred here?
2. Draw a scheme of the life cycle of this sector.

1. What is SWOT analysis and what does it include?
2. Specify the basic steps in the point analysis of the sector attractiveness.
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3. Describe the foundations of life cycle analysis.
4. What is sector life cycle analysis? What conclusions can you draw depending on the
phase the sector was at?
5. Provide a point evaluation of the business school sector in your country. What criteria
of the sector attractiveness do you suggest?
Case study 11
Cafe Aroma: From Israel to Poland (‫) קפה ארומה ישראל‬
Information about the company: http://www.aroma.co.il/en
(For information on the company and their strategy - see chapter 4, in the case study.
The launching of Aroma Cafe on the Polish market will be discussed here and the
sector’s evaluation and analysis will be carried out from this point of view.)
Analysis of Macro Environment of Aroma Cafe. Further environment dimensions:

Political and legal: growing fiscalism in Poland, unstable fiscal regulations, relatively
significant freedom within the international trade, particularly with the EU states,
foreseeability of the political market.
Technological: very well developed internet and fast dissemination of information and
knowledge on new methods of organization, products and technologies, stress on
automated production and service provision, relatively easy access to global
technologies, significant saturation of business with new technologies, however low
level of pressure on research and development in businesses located in Poland.
Economic: Poland was the only EU member state that noted GNP growth for the years
2009-2011, maintenance of national currency (PLN) exposed to exchange rate risk,
surrounded by countries that have already accepted the Euro, relatively high
unemployment level (presently ca. 14%, reaching 25% in some regions), low labour
costs as for the EU, growing energy costs, however slightly below those of other EU
countries, stable and low inflation level, growing wealth of the society and cash in the
economy, growing role of public expenses, rising reluctance of banks to grant loans or
credits, particularly for higher risk business.
Social-cultural: in the circles of people with higher income (ca.. 15% of the society,
growing californization of needs and hedonism (seeking for sensations, strong
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emotions, however associated with comfort and safety and reluctance towards much
effort), the growing consumptionism in the entire society, growth of interest in staying
out, using dining services to a wider extent, taking over global trends, the appearance
of a slow life fashion, willingness to save money due to the expected recession.
Potential points of contact with the specific dimensions of further environment
Aroma Cafe and other businesses of this kind must:
• Obtain licenses and permits related to dining places and the possible vending
activity.
• Obtain loans for furnishing cafes and the possible vendors.
• Buy equipment manufactured overseas.
• Make decisions on location of the coffee parlours and the vendors (big cities,
medium small towns)
• Win customers for relatively expensive cafe services.
• Encourage clients to spend time at a cafe or buy coffee in the street.
• Increase coffee consumption.
• Blog and run web forums on drinking coffee referring to slow life.
• Decide on the purchase of less or more proeco packages and run business under
ecological principles.
• Incur labour, employment and tax costs.
• Compete and determine new fashions and trends on the coffee market.
Tab.13 Café Aroma SWOT Analysis
• medium business costs. • Necessity to acquire external funds.
• experience from overseas cafe complete with some other weaknesses
market.
complete with some other streghts
• drinking coffee trend • higher inclination to save money due
• number of coffee suppliers to expected job market situation.
• no direct competitors complete with some other threats
complete with some other opportunities
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1. Complete, according to your own observations, the closer and further
environment analysis.
2. Complete the SWOT analysis in the tab.13 according to your knowledge,
opinions and observations of the company and market.
3. What conclusions from the three analyses can be presented for the strategy? Is
the market in Poland attractive or not and why?
4. Make a point analysis of this sector’s attractiveness.
5. What is the life cycle stage the sector is at in your opinion? What conclusions
can be drawn from it?
6. Now settle whether the market is attractive and define the conclusions for the
strategy.
Further readings
1. Fleisher S. Craig, Bensoussan E.Babette, Business and Competitive Analysis:

Effective Application of New and Classic Methods, FT Press, 2007
2. Baum A.C. Joel, Business Strategy over the Industry Lifecycle, Volume 21, in:
Advances in Strategic Management, Emerald Group Publishing, 2004
Bibliography
1. H. Godlewska – Majkowska H., (ed.), (2009), Przedsiębiorczość. Jak założyć i
prowadzić własną firmę, SGH, Warsaw
2. Gierszewska G., Romanowska M., (1997), Analiza Strategiczna Przedsiębiorstwa,
PWE, Warsaw
3. Kerin R., Hartley S., Rudelius W., (2012) Marketing, 11th Edition, McGraw-
Hill/Irwin, USA
4. http://www.aroma.co.il/en
6. Competitive analysis in industry.
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Maps of strategic groups in sectors. Industry structure
analysis. Fragmented and concentrated sectors. Resistance of
both excessive industry fragmentation and concentration.
Pre-class readings:
1. Frank Robert J., George Jeffrey P., Narasimhan Laxman, (2004), When your
competitor delivers more for less. Value players will probably challenge your
company. How will you respond?, McKinsey Qaterly, February 2004,
Article available on:
http://www.mckinseyquarterly.com/When_your_competitor_delivers_more_for_less_1
383

1. What drives companies to deliver to their customers more for less ?
2. What differs markets where competition is strong to them and where competition
is weak ?
3. Are there on the market some groups of companies where the competition is
stronger or the competition is between all the companies present on the market ?
4. How do we find out and describe groups of more or less similar companies aiming
at the same market spots ?
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6.1. Competition in industry
The attractiveness of a sector is determined by numerous variables whose mutual
relations form its specifics and nature. However, one of the key variables is the intensity
of competition taking place in a given sector.
The market share distribution is a factor that partly enables the determination of the
situation in the sector. The information on the competition in that sector, the way the
market is formed, the number of competitors, whether there is monopoly or oligopoly,
can be obtained thanks to analyzing them considering the particular entrepreneurs
functioning therein. In a situation when the market shares are approximately evenly
distributed, the market leader’s position often changes and passes from one entity to
another, while there are a lot of competitors, we may presume that the conditions are close
to free competition. Such a situation may also induce other entities to enter the sector.
The market share analysis also suggests the extent of concentration of businesses in the
sector. High diversification of the market (numerous competitors with low market shares)
creates conditions that facilitate competition. Although sometimes the lack of a distinct
leader or large competitor may destabilize the situation on the market, nevertheless it is
usually not a serious threat for all the entities active in the sector. However, the dynamic
analysis of this factor refers to time lapse and enables the determination which businesses
regularly increase their market share and which are losing it. With the use of e.g. statistical
methods, we may also find out who loses to whom, i.e. the directions the shares are
moving towards. This, in turn, leads to the conclusions concerning which of the
businesses may become the strongest competitor in the future, the determinant and point
of reference of all the others.
The competition on the market is the mutual rivalry of each enterprise for:
• The best sales conditions possible. It is assumed that each business tends to obtain the
best selling conditions for their products and services. This means both economic and
appropriate legal conditions.
• The best turnover and sales volumes possible. The assumption here is that obtaining
the top sales results is particularly desired by a business. Along with the turnover
growth the profit enabling the business development at the further stages.
• Winning as many customers as possible. Winning, efficient service and general
satisfaction of the customers with the cooperation and offer is one of the more
important market success indicators or the business as we may hope that the
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customers’ willingness to use the services of a given business and to recommend it to
others would grow along with their satisfaction with the service.
• Acquisition of access to the resources in general or under preferential principles. Any
entities that base their strategy on the access to the resources also compete in this
scope. Along with the access to the resources followed by fighting for exclusiveness
or preferential conditions may gain competitive advantages or even a monopolistic
position. Such resources may include raw materials, knowledge, information in the
form of e.g. databases or upgraded and updated customer bases. It may also include
profiled employees who become such a competitive advantage of the business they
work for upon signing loyalty clauses to the contracts.
Exercise 8
Smart Media
For numerous businesses the databases of their customers represent the most
important resources. A database that is verified, well segmented, updated, including
numerous potential and active customers and upgraded by a number of useful
information pieces cannot be overestimated. Sometimes serious market fights take
place for such resource, resembling the plots originating from the 007 movies. So
businesses spend fortunes not only on creating and updating the bases but also for
their protection against hacking and thefts. Such actions targeted at the protection
of the business interest on the one hand and the customers and their data on the
other are provided by an archiving software supplier, SmartMedia from Gdańsk.
Although the resource is desired by numerous competitors, its acquisition is rather
impossible. The company is aware that the loss of this base could be equal to its
decline.
Discussion questions
1. What actions may be taken by businesses in order to obtain access to unique
resources?
2. How can businesses protect the access they have to the resources ?
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6.2. Strategic groups analysis
Strategic group is defined as a group of businesses applying similar strategies of action13,
operating in one sector and distinguishable by the same criteria, directing their offer to
the same target groups, carrying out promotion in a similar way, using approximate
distribution channels, similar technologies and are vertically integrated to the same
extent. They compete with one another in a similar way, on similar platforms, sometimes
with some deviations in intensity and pressure on both of them. They offer, for example,
products similar in terms of price and quality and different by other parameters (e.g.
brand) or sometimes they do not differ from competitors’ products at all.
Businesses of a specific strategic group usually have a similar market share and, due to
the similar strategy, they also respond to external events and competitors’ activities in a
similar way.
Similarities in the scope mentioned above are called strategic dimensions.
Strategic dimensions – the definition

The strategic dimensions are determinants defining the activity and strategies occurring
in a sector
An important term in the analysis of strategic groups is also the mobility barrier.
The mobility barrier determines the business strategy flexibility, its response to changes
and action opportunities that in effect may influence the possibility of the business
transfer from one strategic group to another.
In order to determine the strategic groups functioning in a given sector, the following
needs to be defined:
• set of significant competitors who operate in a given sector/industry14.,
• significant strategic variables that distinguish the businesses in a given
sector/industry,
• the extent such variables suit the buyers’ demands,
• on this foundation, the set of businesses competing within one strategic group.
The next step is the definition of a strategic group model functioning in a given industry.
13
M.E., Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press,
New York, 1998
14
K. Obłój, Strategia organizacji. Analiza grup strategicznych, PWE, Warszawa 2007, s. 265
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Exercise 9
Price comparers on the Internet
Price comparers on the Internet, enabling the comparison of mainly the price and
delivery costs of standard products, have introduced the formation of strategic groups
of distributors. The online stores, but also traditional ones that only use the online store
platforms started a strong competition with prices and delivery terms. The leaders in
such criteria appeared promptly who began to be chosen by masses of customers
looking for the most beneficial price offer. Another group started to compete by the
speed of delivery and the number of favourable recommendations from the customers.
It allowed for the diagnosis of two basic strategic groups. The first one offers its
products at the lowest price, however, with less stress put on the quality and delivery
speed. Another group, although offering more expensive products, guarantees delivery
terms, they are quick, the service quality is high, there are numerous options of
communication between the client and the supplier, the firm offers additional services,
such as special packaging and delivers the goods using the best couriers, at the same
time they do not object to the returns or possible complaints. As a rule, the latter is
expressed by the number of positive recommendations and e.g. “stars” given to such
firms by their customers. The two groups of businesses actually do not compete with
one another reaching the slightly different needs of their customers. Those who want
to buy at the lowest price cannot expect extended service or additional services. Those
who need the goods at an exact moment and with current access for example to the
application enabling the parcel tracing, agree to pay higher prices. The strategic groups
of competitors are built here based on the price and service quality.
1. What criteria may be the foundation for building a model of strategic groups in the
sector delivering mineral water directly to offices?
2. What criteria may help with building a model of an economic universities strategic
group?
The definition of an appropriate strategic group may become the key for the businesses
entering the sector. As it may appear that the main environment in which they will
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function is a specific strategic group and what is going on around it, not the entire industry
and all the entities participating in the market competition.
Classifications of strategic groups

Usually three basic approaches to strategic groups are distinguished:
1. The nominalistic approach. It is assumed here that strategic groups practically do not
exist and they are a theoretical entity, weakly anchored in the real world. They cannot
be examined and the idea to distinguish them appeared to be hardly useful, either in
theory or in practice.
2. The theoretical approach based on presumed and somewhat imposed strategic
variables that enable the differentiation of the methods or competition dimensions of
a business within a sector. The usual opinion is that it originates from strategic groups
definition suggested by S. M. Hunt. The author stated that strategic group represents
a group of businesses that hold similar assets, which suggests they follow similar
competition strategies15. Following this way of thinking, the explanation of business
competition within a sector consists in indicating the most significant competing
variables in the sector. On this foundation the division of the sector into strategic
groups is made.
3. The empirical approach based on research work. According to its guidelines, building
strategic groups is possible based on the market research results analysis. Such results
enable the drawing of such conclusions that would allow for the presentation of the
balance of power in the sector and distinction of the groups. This serves to reflect the
actual strategic dimensions the competitors move within. Such research may be of a
historically analystic nature and almost photographic statistical analysis of the
figures. The research of the historic development of the sector consists in tracing its
development in time. The statistical research is based on factor methods or variable
sets analysis.
In spite of the large similarities, however, the businesses usually functioning within one
sector, choose different functioning strategies. This in turn affects their development and
location within a given strategic group. Such authors as M.S.Hunt mentioned above,
15
S. M. Hunt, Competition In the Major Home Appliance Industry 1960 – 1970, Harvard University 1972
(unpublished Ph.D. dissertation); M. E. Porter, Strategia konkurencji, s. 140
104
M.Porter, or K.Obłój distinguish key factors that affect the establishment and dynamics
of strategic groups.
1. The history of the development of business and the sector the business functions
within. Practically each of the sectors includes some key stages of development,
representing a breakthrough to them. The first is the business establishment stage.
The potential customer preferences are not recognized well and sometimes entirely
unknown. It is not always known who could become such a customer, the
segmentation criteria undetermined or verified. This impedes the planning of at least
an optimum production technology and service provision, business size or nature. At
this stage, based on the market research carried out, the entities decide on the
competition methods, selection of strategy and definition of what they are going to
deal with in the periods to come. The foundations for the competition principle in the
sector are also determined at this stage. The other breakthrough moments in a sector
life are, for example, the crises that occur, revolutionary innovations implemented,
entry of new, particularly large competitors, bankruptcies and problems of businesses
playing important roles in the sector, changes in the law and politics as well as
changes of customer preferences, tiredness with some offers and growth of interest
in others.
2. The approach, method of identification and response of businesses and managers to
the environment elements. Here we may specify the risk level, appearing
competitors, etc. The responses to the information coming from the sector, even in
the form of market research and analyses results do not explicitly define the strategic
decisions. They only represent an indication to the managers, somewhat facilitating
the decision making to them. The immensely interesting and significant thing for
sector formation is the fact that different persons can draw conclusions towards
different directions, based on the same data. So in effect, the same information,
however interpreted differently, is the foundation for diverse strategies. This
contributes to establishing strategic groups based on collective decision making and
strategy performance styles.
3. The regulations affecting the decisions made by a business also form the way of its
operation as well as the method of operation of all the entities in the sector.
Government intervention, depending on the extent of its oppressiveness and
authoritarianism may refer, for example, to the support of small and medium
enterprises, blocking the establishment of monopolies, redistribution of funds
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towards particular types of business activity, etc. This enables or restricts the
concentration, but also sets the dimensions, according to which strategic groups may
be established.
4. The customers also influence the formation of strategic groups. Searching for design,
for example, applies to beauty sensitive buyers, while others are not willing to pay
additional amounts for appearance, just the basic prices for usable features.
Sometimes the buyers groups vary so much that competition arises in consequence,
within two separate areas, although concerning the same sector.
Certainly, these are only some factors out of the variety forming the strategic groups of
competitors. Nevertheless, it is conspicuous that the way of forming them does not
necessarily have to be a conscious and rational selection of businesses, it is usually the
sum of the resultants affecting the sector formation and competition within.
Analytic significance of strategic groups

The analysis of strategic groups is of an intermediary nature between the industry analysis
and that of each business separately. Thanks to it, the following can be established:
1. Mobility barriers within the sector, i.e. intra-sector regulations restricting either the
entrance within or the internal behaviours. Although there are many mobility
barriers, their role is not so significant in each sector. For example the watch making
industry, where tradition and brand largely influence the occurrence of such barriers,
while in the industry of magazines, shops or cafes the said factors are of scarce
significance.
2. The nature of the groups functioning within a sector, i.e. establishing dominating and
marginal groups setting the tone to the whole sector and those remaining meaningless
to its formation. The financial results of businesses, the time of their growth, strategy
flexibility or the general directions of the strategic development may become helpful
in determination thereof. The manufacturers of luxurious cars with conservative
strategies do not usually respond to the opportunities and threats appearing in the
environment, while they focus on a narrow group of buyers who expect some rather
traditional and well proven solutions.
3. A possible strategic shift of the business within a sector. The business may
consolidate its own position or that of its strategic group, which often enables
measurable benefits to be achieved by the whole group. The automotive
manufacturers from the EU, while lifting the standards of their own group, often try
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to consolidate its position on the local or European as well as the global market. It
may try to move to the strategic group being the better one in its opinion. Toyota,
while moving on the strategic map towards the high quality and high price group,
created the brand of Lexus. Promoted by Toyota, it has shifted towards the
manufacturers concentrating such brands as Jaguar, Maserati, Mercedes or BMW. It
may also create one’s own strategic group, so very different that the other businesses
would not be able to approach it. This is due to creating high barriers for entry into
such group. For example, Timex and Swatch, and Xerox in the copiers industry. They
created a group standard so strong that the watch brands are synonyms of high quality
and medium price, while on the copiers market the photocopying procedure is named
after the brand name – “xeroxing”.
6.3. The map of competitors‘ groups

The map of strategic groups is an analytical method also including the option of its
graphic presentation. As a tool used in the determination of the key competitors operation
strategy within the sector, it enables the settlement of strategic groups and plotting them
on the map. A characteristic of the analysis using the map or strategic groups is the
examination of competitive relationships within such groups and between the groups. The
strategic groups’ analysis is carried out in the structural and substantial aspect. The
strategic groups of a defined sector may be presented in a map.
The structural aspect directs the analysis onto16:

• carrying out the classification of businesses belonging to the sector, distinguishing
the groups and subgroups,
• identification and examination of relationships between the businesses of the
particular groups and between the groups: such relationships can be of a cooperative
link nature or formalized organizational relationships (hierarchical and functional),
• examining the groups’ dynamics, consisting in the assessment of sales growth rate
in the groups throughout a period of time,
• comparison of the changes in the structure of various sectors.
16
A. Stabryła, Zarządzanie strategiczne w teorii i praktyce firny, WN PWN, Warszawa 2012, p. 158.
107
The substantial aspect is determined by the following scope of research17:
• development of characteristics of the strategies applied in various groups, their
effectiveness and durability,
• assessment of the operational risk of the strategic group activity,
• group development analysis in terms of their average competitive position (rankings
and categorization),
• detecting market niches,
• developing multi-variant projections determining the type and chronology of a new
groups appearance.
The sector’s internal structure analysis consists of five stages:

1) identification of strategic groups and drawing a map thereof,
2) determination of the height and components of the entrance barriers that protect
the particular groups,
3) assessment of the bargaining power of the groups in relation to their suppliers and
customers,
4) assessment of threats represented by substitutes to each group,
5) analysis of competition between the particular groups.
Drawing a map according to the predetermined procedure18:

1. Identification of the major characteristics that distinguish competitive businesses
(e.g. the type of market segment served, product category, type of distribution
channels, price, quality, etc.).
2. Drawing a 2D diagram (map of strategic space), whose coordinates may be
determined by selected pairs of different variables mentioned above.
3. Dividing the particular businesses into groups by similarity classes, characteristic
for the particular strategic space.
4. Plotting particular strategic groups on the map (by circles). The circles’ size
indicates the share of a strategic group in the total value of the whole sector sales.
17
A.Stabryła, ibid., p. 159
18
A.Stabryła, ibid., p. 160
108
5. In the case of using a greater number of strategic variables, several maps are drawn
(changing the pairs of coordinates), showing the alternative location of competitive
positions of particular strategic groups.
Fig.9 Strategic groups’ map in a hypothetical sector.

Y values of Y variable (e.g. quality)
Strategic
group D Strategic group A
Strategic
group B
Strategic
strategic gap group C
X values of X variable (e.g. number of sales channels used)

Source: own elaboraion based on: K. Obłój, Strategia organizacji, Analiza grup
strategicznych, PWE, Warszawa 2007, p. 265
The drawing analysis shall help understand the strategic groups’ map better (see fig.9).
Assuming that the Y-axis means the extent of a business specialization (the higher the
business is on the Y-axis the lower specialization extent it has), while the X-axis means
the extent of vertical integration in the business (the further to the right the business is the
higher vertical integration it has), the following strategic groups in the sector can be
obtained:
The first group consists of businesses that have a low specialization extent, offer a wide
product range, high prices, performs the final assembly of the products.
The second group businesses are ones that are characterized with very high specialization
extent, narrow product range, high technology level, high prices and they perform the
final assembly of the products.
The third group consists of businesses with high vertical integration level, which
translates into low production costs, low price, poor quality, bad customer service.
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The fourth group consists of businesses with a high level of specialization, high level of
vertical integration, offer a narrow product range, high quality products at a good price
and good customer service.
The formation and description of the strategic groups’ map enables a better insight into
the sector, its main players, the groups they are concentrated in and the relationships
taking place between them. It all enables the selection and better understanding of the
mobility barriers within a sector and focusing on the competition by the businesses
belonging to the same group as they are the ones, not the whole industry, who affect a
business most.
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1. Specify the principles of drawing strategic groups’ maps.
2. Which types of strategic groups can be differentiated?
3. In what situations can the analysis of strategic groups be particularly useful?
4. Define the competitors of your business or university. What competition dimensions
can be given here? What strategic groups are formed thereupon?
Case study 12
Jamko – construction materials manufacturer
In Poland, near Warsaw and in the whole Mazowieckie Province, businesses dealing
in the production both for business, institutional as well as individual customers
operate. Jamko are a relatively young business trying to enter the local market. The
possibilities to have their own material base are rather limited, winning the customers
is not easy either as the business operating on the market have already managed to
accustom the customers to their offers. Jamko does not have any strictly defined
strategy of action yet. The first measure they decided to take is the analysis of the
industry and the mutual relationships between the businesses functioning therein,
which may appear helpful when trying to determine the performance strategy.
Upon analysis of the five forces, it was conspicuous that this is a really diverse sector
consisting of numerous (ca. 80) businesses. There is a fierce fighting in this sector - for
customers, for influences, while the selection of the proper strategy of action decides
the future of such buisinesses’. The strategic groups’ analysis should be started with
definition of the barriers of entrance and exiting for new manufacturers.
The entrance barrier is the access to materials that determines the businesses’ product
offer and forms their costs. The businesses are supplied with materials in several
different ways:
• They have their own material bases that provide them with the necessary materials;
• They get materials from other domestic material bases;
• They import materials that have been largely processed;
• They get materials from several different sources.
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An entrance barrier also is presented by competitive operations in the sector. It is
expressed by the marketing activity of the businesses. The effects of marketing and
sales wars also affect their market position and profitability. In relation to the marketing
strategies performed by businesses within the sector the following businesses can be
distinguished:
• Having well developed marketing strategies providing well considered actions
including without limitation comprehensive customer service;
• Standard marketing strategies aimed at the increase of product and service sales to
the customers;
• Inconsistent marketing strategies resulting from the changes taking place on the
market that are planned and performed with delay.
We can find a dependency between development and adaptation of marketing strategy
and the competitive position. However, the access to raw materials is not meaningless
here. On this foundation strategic groups could be determined. The businesses within
the sector form five major groups, each of which are of a different nature.
The first group consists of businesses with large production potential and good market
position resulting from their long-term presence on the market and traditional
correlations with the customers. The businesses of the first group hold a large material
base, which enables them to maintain a good market position, in spite of the lack of
pre- and post-sales service and rather narrow and shallow range of products offered on
the market. The second group occupies a position very close to that of the first group,
however it is better developed marketing that distinguishes it. In addition, the
businesses of this group offer good customer service and a wider range of services.
The third group of businesses have very restricted marketing. They offer highly
specialized services and products, which are related to the lack of their own material
base. The businesses mainly use imported, expensive, highly processed materials.
The fourth group of businesses offer modern products and conduct really aggressive
marketing actions. The businesses of this group have various sources of material
supplies.
The fifth group is the most diversified one, because the businesses included therein do
not try to build an advantage in the scope of material supply policy or in relation to the
marketing sphere.
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1. Based on the information given, please:
• define the sector’s dimensions, according to which the strategic groups are
to be distinguished,
• draw a strategic groups’ map for the sector discussed.
2. Please, describe the direction for development for businesses attributed to the
particular groups.
3. Based on the strategic groups’ analysis results, please develop the strategy of
action for Jamko. Where is the opportunity for it and what should be avoided? In
which direction should it develop? How should it use its strong points and how
should it level the deficiencies?
Further readings
1. C. S. Fleisher, B. E. Bensoussan, (2003) Strategic and Competitive Analysis, Prentice
Hall 2003.
2. Porter, M.E. (1980) Competitive Strategy, Free Press, New York, 1980
Bibliography
1. Combe C., Introduction to Management, Oxford University Press, Glasgow, 2014
2. Hunt S.M., Competition In the Major Home Appliance Industry 1960 – 1970,
Harvard University 1972 (unpublished Ph.D. dissertation)
3. Obłój K., Strategia organizacji, Analiza grup strategicznych, PWE, Warszawa
2007
4. Porter M. E. What is Strategy, [in:] HBR’s 10 Must Reads, Harvard Business
Review Press, Boston 2011, p.1-38
5. Porter M.E., Competitive Advantage: Creating and Sustaining Superior
Performance, 1st ed., Free Press, New York, 1998
6. Porter M.E., Competitive Strategy: Techniques for Analyzing Industries and
Competitors, Free Press, New York, 1998
113
7. Stabryła A., Zarządzanie strategiczne w teorii i praktyce firny, WN PWN, Warsaw
2012
7. Michael Porter’s Five Forces that shape any market19.

Pre-class readings:
383

1. What drives companies to deliver to their customers more for less ?
2. What differentiates markets where competition is strong to those where
competition is weak ?
stronger or is the competition between all the companies present on the market ?
4. How does one discover and describe groups of more or less similar companies
aiming at the same market spots ?
19
The chapter is based on: Porter, M.E. (1979), How Competitive Forces Shape Strategy, Harvard
Business Review, March/April 1979
114
7.1. Porter’s five forces - overview
An interesting method of analyzing the environment, the centre whereof being the
business after all, was presented by M.E. Porter. He has somewhat predetermined a set of
factor groups affecting each organization on any market. The versatility wins both
followers and opponents for the method as everything is slightly relative here and depends
on the type of competitive position the entity would occupy the relationships between
various entities and market forces. The author determined five basic forces that shape the
present and future competitiveness of business, namely (see fig.10):
• bargaining force of suppliers,
• bargaining force of customers,
• barriers to entry and exit,
• threat of substitute products or services,
• intensity of competition within the sector.
The model is usually presented as a centrally located business and a set of five forces
affecting it. However, the influence is usually marked unilaterally, suggesting that the
particular forces shape the market and the firm, while the latter has no possibility to
influence them, or such possibilities are largely restricted.
The model of forces (depicted on fig.10) affecting the market, sector or business (force
fields) in management appears through numerous approaches, theories and concepts. So
it has a much wider range of applications than recognized by M. Porter. Nevertheless, he
proposed a set of substantial forces, named and specified, relatively easily identifiable. In
consequence, he largely simplified the analysis itself. In the force field analysis the basic
issue is their identification and settling which forces influence the sector and businesses
and how.
115
Fig.10 M. Porter’s Model of 5 Forces of Competition
Substitutes
Industry entry bareers

Industry exit berieerrs
Industry and
company in the
industry
Competition
Legend: Bargaining power of suppliers, Sector and organization within the sector,
Competition
Source: the authors’ own paper referring to: Porter Michael E., Competitive Strategy:
Techniques for Analyzing Industries and Competitors, Free Press, New York, 1998
116
7.2. Entry and exit barriers.
Threats analysis of new entry into an industry. Entry profitability analysis.
Pre-class readings:
383

5. What drives companies to deliver to their customers more for less?
6. What distinguishes markets where competition is strong and to them where
competition is weak?
stronger or is the competition between all the companies present on the market?
8. How does one discover and describe groups of more or less similar companies
aiming at the same market spots?
The sector’s attractiveness, whether seen from the point of view of an entity belonging to
it or the candidate, is largely dependent on the potential or very realistic possibility of the
arrival of entities that may become the competitors in the sector. According to the sector’s
life cycle analysis already presented, the arrival of new competitors is associated with its
phase. At earlier stages of market and sector development, before any rigid standards
were formed, the barriers to entry are low or moderate, there are no dominating brands
and suppliers, the competitors may appear unexpectedly, in a poorly foreseeable manner.
117
The lower is the number of problems with entering the marker the more probable it is that
there will be more competitors and the market is thereby diversified. This is due to the
barriers to entry and, to a lesser extent, the barriers to exit.
The barriers to entry to the market condition the speed and force of competitors appearing
therein, if any. Depending on the fact whether the analysis is carried out for a firm already
present on the market or one being in the process of entering the market, the assessment
of barriers to entry will be different. As a rule, the entity present on the market operates
towards creating as higher barriers as possible to all the others. While entering the market,
in turn, low barriers are desirable. Such barriers arise both in relation to the market
development and its maturity, capital intensity of business, production volume, desired
market share and the number of users, but also in consequence of state governments’
actions and of other institutions regulating and law and economy. The barriers to entry
may include, without limitation:
• Financial barrier for businesses demanding significant investments, particularly
initial ones. An example could be airlines, steelworks, power plants, motorways,
or owners of mobile telephony infrastructure. The necessity to incur immense
costs at the very beginning, largely restricts the possibility to enter the market and
sometimes causes the establishment of natural monopolies or oligopolies, in fact.
• The economies of scale barrier related to the necessity to achieve a certain
production level in order to cover the costs (mainly fixed) and reach the Break
Even Point)20. Along with the growth of production volume, the unit costs of a
product drop. In numerous industries the large volume of production or services
provided is the basic requirement for reaching profitability. An example here is a
restaurant that must have a defined number of guests in order to maintain its
infrastructure. The aircraft manufacturers also must produce and sell an
appropriate number of their products per year in order to cover the high fixed
costs. The barrier is fairly strong, particularly on mature markets where the sales
of some volumes may be related to the difficult and often long-term winning of
market shares.
• The experience barrier built by the experience curve. Like economies of scale,
along with the development of skills, knowledge and experience in a sector, a
20
Break Even Point profitability threshold determining the limit between loss and profit. It is the
intersection point between the income and total cost curves.
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more efficient deposition of resources and better way of their organization become
possible. In consequence the variable costs may be reduced, production and
service provision proceed in a more efficient way, the recognition of customers’
demands is better and the firm moves within the sector more efficiently.
• The barrier combining the financial issues, economies of scale and experience
curve is the financial situation barrier, disregarding experience and scale. There
are industries in which the cost advantage is independent of the scale effect. This
may result from a better, more efficient, patented production technology,
inventories purchased before exchange rate change, exceptionally beneficially
negotiated contracts, better access to raw materials, bargain purchases of
production means or taking over the warehouses of a competitor becoming
bankrupt or other events.
• Barrier of access to distribution channels representing an immensely effective
access barrier to the market, built by some suppliers through exclusive contracts
with distributors. They are formed somewhat naturally through the
monopolization of commerce by the trading network.
• Product diversification is a barrier consisting in the creation of a wide product
portfolio reaching various sub-segments and specific requirements of relatively
small groups of customers determined, for example by the shopping situation. The
rise of the barrier is mainly due to the contribution of businesses with significant
technological, production and service provision potential, with a recognized brand
and good reputation. Each entrant into the sector with such a barrier must face the
necessity to create a wide range of products diversified to a certain extent. It is
usually related to the fact that the customers have already defined their preferences
and will search for a substantial offer. This is the situation, for example, on the
sparkling drinks market, where in addition to the standard cola type drink, diet
drinks have been prepared, of various flavours, with extra or a reduced value of
some components, etc. Each new entrant will be forced then to face the already
formed loyalty of some buyers not only to the existing brand, but also to the type
of product and the method of its selection. The strategies that appear include the
return to the original, simplest solutions, as if directed to the mass market.
However, it usually reaches the sentimental buyers who want to remember the old
looks or the “real” taste of the product.
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• The legal barrier is represented by the laws, duties, concessions, permits,
contingents, certifications and other regulations effectively closing the access to
numerous markets. The more repressive the state is the larger the number of such
regulations usually appear. The more the governments wish to regulate the
economy the more closed will be the markets for new market players. It also
happens in the case when the market access issues are taken over by trade self-
governing bodies. Such a situation is taking place in Poland now where legal
professions are strongly regulated by the regulations providing the trade self-
governing bodies with almost full powers at making decisions on closing the
market against ones and opening for others, at their sole discretion.
• The market shares or the number of network participants is a barrier on the market
on which the market leader position is of crucial importance, which other
competitors are marginalized. It takes place in internet businesses operating under
the network logic. The more participants there are here the more valuable is their
share and the more willingly further participants join. This is the case of Facebook
and other social networking services. Only the leading firm may count on
development and revenues. It appears with slightly less intensity on the fmcg [fast
moving commercial goods] market where two or three basic brands count, e.g.
deodorants or hair dyes.
• Access to technology may represent a significant barrier to entry. Some large
corporations apply the method of technology “trolling”. They buy out all the
patents and available technologies, however not in order to use them, but to
prevent any other entity from using them. This largely impedes the access to new
technologies, but also new discoveries requiring the application of one of the
solutions, already patented. The barrier built in this way, particularly among hi-
tec businesses may represent a serious problem. In 2012 Apple vs. Samsung court
proceedings were in progress, when Apple petitioned Samsung for the use of
technologies earlier patented by Apple. Although Samsung won the proceedings,
it significantly delayed the launching of new models of phones, thus being
exposed to substantial losses.
These are obviously just a few of the numerous market entry barriers. It happens
sometimes that a barrier disappears, for example due to changes in the law, which opens
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it for new businesses. This is a very unfavourable situation for those who had been on the
market by date and a very attractive opportunity for those who entered it.
Case study 13
Automotive industry
The automotive industry, although well conditioned historically, nevertheless it is

characterized with significant development dynamics, highly developed technologies
and innovative solutions. However the entry barriers that have arisen here are very
high. Obviously, it significantly reduces the threat of new competitors’ arrival,
however, at the same time, it affects the existing businesses. They are in rivallary with
each other introducing more and more new models of cars, improving and modernizing
the present ones and also developing various technical innovations. The rivalry within
the close circle of entities present therein brings about a relatively short-sighted
perception of the market as a whole. The methods of competing that are formed are not
necessarily desired by the customers, the price fighting between the suppliers takes
place and fixation of the number of suppliers whose offer can be used. It also indirectly
affects the closing of the suppliers’ market, as the basic supplier for them is a single
car manufacturer. The consolidation on the market also appears resulting in single
owners’ becoming the owners of a large number of automotive brands, e.g. .
Volkswagen is also Skoda and Seat, BMW is also Mini and Rolls Royce, and Renault
is also Dacia. Alpine, Samsung Motors, Lada and Moskvitch. Such a situation also
takes place on the part of the suppliers where one type of engine, manufactured by one
company is used in numerous car makes. Undoubtedly, it is difficult to threaten such
market giants, dictating almost everything that is going on therein. Huge plants,
immense funds invested, one hundred or more years of tradition, experience and the
acquiring of knowledge, their own distribution channels and influence on the
regulations protecting the industry form just a few of the conditions that have occurred
here.
1. Which entry barriers into the sector can be enumerated here?
2. What do such barriers result from?
121
3. What threats to the businesses already being within the sector arise as a result of
the occurrence of strong entry barriers and almost no possibility for new players
to appear thereon?
The barriers to exit the sector describe how fast and possibly without losses one may
withdraw from an investment, should such a business change its mind or the business
activity appear insufficiently attractive. In some cases the exit is not easy at all or requires
incurring substantial losses. A waste water treatment plant, or open-cut mine must not
only consider the high costs of land reclamation after finishing their operations, but they
will not recover much from the funds invested, either. Therefore, the very closure of such
a business may last a few years and the court proceedings related thereto may last even
longer. The high exit barriers increase the investment risk level and should be well
analyzed before taking up business operations.
On the other hand, there are businesses that do not invest in fixed assets, the fixed assets
are leased, the staff is employed under temporary agreements, offices are let, etc. In this
case exit from the business may only mean some losses on investments and the possible
lack of return of the costs incurred. However, they may withdraw from the market
promptly and without any special difficulties.
Substitutes are another force acting on the market. Substitutes are products and services
that, although not originating from the specific market, satisfy the same customers’ needs.
In competition analysis, in addition to direct competitors, substitute suppliers should be
considered. For restaurants, a local grocer’s store may be a substitute and if the customers
seek for interesting pastimes, a swimming-pool or a book may substitute the cinema.
The intensity of competitive fighting also is conditioned by the sector’s attractiveness.
The more competitors there are, the more difficult it is to stay thereon. The stronger they
fight with one another, the more advanced products they launch and offer at lower prices,
the higher the risk and necessity for incurring higher expenses. It is often correlated with
the industry’s life cycle. Along with obtaining maturity, the competitors’ fighting
becomes more and more fierce. The more so, because as long as the market grows, the
growth of sales is largely related to the growth of the market potential. However, on the
market saturation, satisfying all its needs and stopping the development, the growth of
sales largely results from taking over the competitors’ market shares. This means that all
122
the actions are to a great extent directed against other suppliers and they do not only
consist in encouraging the customers to use the offer. However, along with the
consolidation in the industry and establishment of oligopolies, the competition normally
softens. Such competitive fights are conducted on the pharmaceutical market or that of
cheap airlines. However, they are by far weaker among the suppliers of mobile telephony,
home appliances or air time on TV.
So, to summarize it to some extent, the general attractiveness of the sector is described
by its size measure and the volume of needs and cash amount, which results in the
turnover in a sector, its future size and development perspectives and profitability, i.e.
specification of revenues in a sector against the cost of presence therein.
Exercise 10
How do you assess the entry and exit barriers?
A relatively easy to copy business model is the rental of premises and their furnishing
on a medium level. However the rental of premises in the best locations of big cities is
relatively difficult. The necessary technologies and equipment are generally accessible.
The opportunity to acquire credits for such an activity is limited. Holding a recognized
brand towards which the customers are loyal is an important barrier.
The exit barriers are not so high. There is a secondary market of used furnishings, the
premises are usually let. The possible costs of layoffs remain.
1. Should a business present in such sector be afraid of new competitors?
2. Which sector could have been described in this way?
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1. What entry barriers affect the competition? What kind of market with particularly
high entry barriers are you aware of?
2. How could one reduce the exit barriers from the market? What measures should be
taken to make the exit from the market fast and with minimum losses?
3. Which businesses have particularly high exit barriers?
Case study 14
Arkia
Arkia (‫)ארקיע‬, Airpolonia, AirBerlin, CentralWings, Wizz and Ryannair in Poland

www.arkia.com
Along with the development of the aviation market and the simultaneous growth of
people’s mobility, numerous new airlines have been established. However, in many
cases, as in Poland, the aviation market has been strongly regulated by the law and until
2001 was practically reserved for some major airlines and no entry by any new carrier
was possible. When the market was deregulated only to a certain extent, some new
airlines arrived. However, as was shortly shown, the very fact of opening the market
did not make it easily accessible. The businesses had a serious problem with access to
ticket sales service, airports and with filling the aeroplanes with passengers. After all
they had operate regular flights as scheduled. So the number of passengers should be
significant so as to cover the costs with the money that had been spent on tickets. The
latter, however, appeared to be difficult to achieve. The wealthiest customers continued
to use the existing operators, while there were too few people willing to fly among the
others. It was particularly conspicuous in domestic flights. Moreover, the purchase of
airplanes was a problem as well. By the end of the 20th century the market of lease
businesses offering the possibility to lease a few aircraft for US$ 200 mio each was not
too expansive. After the period of the stock exchange boom, the assets of the financial
investors grew to the sufficient extent, however, whch made it possible. However, the
funding of further aircrafts was still an issue for smaller airlines. This was actually the
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case until the end of 2012. So it was no wonder that numerous carriers could not cope
with such a situation and either went bankrupt, e.g. Central Wings and Airpolonia or
have temporarily withdrawn from this market, e.g. AirBerlin or Arkia.
1. What entry barriers were encountered by airlines in Poland between the years
2001-2013?
2. How could such entry barriers be handled? Was the situation hopeless for new
airlines?
3. How could the entry barriers be used by the existing aviation carriers?
4. What exit barriers from this industry may occur?
5. How could an airline lower exit barriers?
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7.3. Analysis of substitutes.
Principles of an industry defence from substitutes.
Pre-class readings:
1. Anderson Soren T., The demand for ethanol as a gasoline substitute, Journal of
Environmental Economics and Management, Vol.63, Issue 2, March 2012, pp.151–
168
http://news.msu.edu/media/documents/2012/02/3e304492-c03c-4270-9a6d-
6864f188a84d.pdf

1. What is a substitute?
2. How can substitutes influence the industry?
3. Why do the customers switch to substitutes?
4. How does the market behave after the substitute’s arrival?
5. Can you name some other pairs (or groups) of substitutes on different markets?
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The difference between a new service on the market or a new product and the substitute
is sometimes difficult to be defined. Generally it is assumed that a totally new offer,
however slightly different from the present one, is a new product or service, whereas
something largely diverging from the known solutions, however satisfying the same
needs as the existing ones, are substitutes.
Referring to the sector’s life cycle analysis, the substitutes usually appear with particular
intensity during its maturity phase. The existing offer, has somewhat been exhausted,
desires change and the search for new forms of satisfying its needs, formed in the previous
phases. So the substitute solutions are the result of the industry evolution, but also the
expansion of its binds with related industries, search for new directions of the other
sectors’ expansion, intensive research-development activity, development of technology,
the rise and impact of new market trends, joining of various industries and rise of new
ones and a number of other factors. This is also sometimes a method to omit the entry
barriers into the market.
Exercise 11
Substitutes
In numerous cities worldwide, taxi corporations built entry barriers for themselves by
means of lobbying directed towards the issue of regulations beneficial for them. The legal
market closure seems to be a barrier impossible to be passed. However, as it appears, in
numerous places a number of substitutes were produced. Let alone the simplest one, i.e.
using one’s own car, motorcycle or bicycle, also paid or courtesy forms of giving a lift to
work by other commuters have been developed. It has been assisted by the development
of web portals enabling announcement of the time, place and destination of a driver and
the number of people he/she invites to the car. Various services, similar to taxi, appeared,
offered by individual drivers, available on the phone. The number of substitutes
effectively threatened the existing solutions and lifted the level of competition in this
industry.
1. What other substitutes for taxi services could be created here?
2. What substitutes of fast food diners occur on the market?
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There are a number of methods applied by businesses particularly threatened by
substitutes. They refer to both the strategy of basic assumptions and the operating
question of sales and also marketing sometimes. Principally almost everyone of the
strategies proposed, whether by Miles and Snow, Porter or Ansoff enable the gaining of
the advantages strong enough that a substitute threat may even disappear in some areas
or groups of customers.
Stress on the search for the new and the development of existing technologies may
prevent substitutes and form a barrier difficult which would be difficult for them to break.
The innovations continuously appearing, satisfying new needs from time to time or rising
them to a higher level would require the substitutes to follow the same path and keep up
with the innovations. Although theoretically such a situation cannot be excluded it
happens extremely rarely in reality. Along with the development of washing powder the
role of soap as a substitute disappeared. It was unable to keep up with the progress of
powders. Now such situation may await washing powders overpowered by liquids. This,
however, depends on the development of the latter.
The development of basic resources of knowledge, information and brand, for example,
may also build strong limitations for substitutes. A strong brand, for example, may be a
strong offer selection criterion. So strong that the buyers, and their basic group, in
particular, do not even think of buying a substitute. An example may be the manufacturer
of WD-40 spray lubricant. Its secure position for years was subjected to attacks by both
direct competitors and various substitutes. The combination of a good brand name and
innovativeness of solutions provides particularly good results. IMMOQEE combines a
brand name with innovativeness on the market of consulting and HR management
solutions. So it establishes standards in this scope on the Central and Eastern European
market, copied by other businesses, rather than threatened by substitutes. This is the
situation within the employee satisfaction and commitment offer, outsourcing of
processes and taking over employees on the Payroll (a position in the intermediary
company). So IMMOQEE effectively fights substitution solutions, at the same time
setting the standards on the HR market. The web retailers, such as Amazon, Netflix or
Merlin operate in a similar way. They combine the expansion of a unique resource, i.e.
customer databases and their shopping preferences with innovations in the scope of the
analysis thereof and drawing conclusions.
To some extent, fighting substitutes or perhaps reduction of threats to their operation may
be carried out through the reduction of costs and offering low prices This is a cost leader
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strategy, one which should be prepared for another price reduction. An issue in this case
can be, however, solutions not so much cheaper, but requiring significantly less
commitment and effort. Thus post cards have been replaced to a large extent by sms and
mms messages. Although their price was close to that of cards, nevertheless, the effort of
buying, writing and mailing a card was by far higher than that of transmitting a picture
taken by a phone’s camera accompanied by a short text from the mobile phone. In
numerous cases, however, the solutions that can be applied as substitutes are only
cheaper, but often less convenient. Some of the people, in spite of the ecological trend
and urban environment protection, uses alternative solutions to cars for financial reasons
only. Savings due to traveling by bus or underground do not have to mean that such a
solution is more comfortable and as easily accessible than driving a car.
The analysis of substitutes refers to establishing the extent they are able to threaten in
relation to the strategy performed or competitive advantages. Obviously, there is always
a threat that a solution of significantly preferential usable value might arise. In this case
we may talk about a technological breakthrough rather than substitutes. Substitutes,
however, restrict the level of prices in the industry, may determine the directions of its
development, combine industries and represent a bridge linking technologies. This was
the case of mobile phones and mobile music players. Telephone as a player’s substitute
not only represented a threat to it, but, combining the functionalities and technologies,
determined the development trends on the market of mobile multimedia players.
The analysis of substitutes also applies to the question of which characteristics and values
are particularly preferred by the customers. This is a permanent search for the new and
their confrontation with the particular market desires. Substitutes are often a particularly
painful threat, due to setting a new standard. They satisfy the needs somewhat omitted by
the existing suppliers. It may be the comfort of use, easier accessibility, etc. with
simultaneous maintenance of the basic need satisfaction level.
In relation to the threat created by new substitutes’ arrivals seemingly include to a large
extent the entry barriers characteristic to the whole sector. In numerous cases, however,
alternative products and services originate from outside and are able to omit such barriers.
In this case the threat created by them is particularly substantial, because there is no
method of analysis enabling one to foresee the direction a competitor might arrive from.
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1. When are substitutes a competitive threat?
2. How could we deal with the threat from substitutes?
3. How do substitutes affect the sector and the competitors therein?
Case study 15
Zelmer – the home appliances manufacturer
Zelmer is the name of a group of Polish and other EU distributors and trader in the
home appliance industry. The basic object of the Zelmer Group business is
manufacturing electrical home appliances. It also deals in the wholesale and retail of
equipment and runs an online store. Zelmer operates on numerous markets in various
continents. On the Polish market Zelmer is the leader in the small home appliances
industry. In spite of the fairly unlucky sale of the control packet of Bosch – Siemens
shares, Zelmer has significantly developed its operations on various markets,
particularly in Central and Eastern Europe. The company strategy is most of all based
on the organic growth. The business mission is the production of the best electrical
products in Poland, used for keeping homes clean and products facilitating food
preparation. Thanks to the developed R&D department, the perfect design and renewed
offer of hi-tec products it tends to consolidate the position of a significant exporter of
such products worldwide. Fulfilling the mission, the quality policy is performed with
basic assumption: “Our customer is our boss”. The major financial target is the increase
of sale by an average of 10-11% p.a. Zelmer competes in the home appliance area with
global brands, such as Philips, Panasonic, LG Amica, or Samsung. In other product
categories with SAECO, Krups, or Electrolux.
The technology of the products was built from the foundations in the company’s own
facilities. Holding several hundred patents and implemented solutions and innovations,
the business has become independent of suppliers of various subassemblies. Thus it
could control high quality standards to a much higher extent and gain subsequent
certificates of quality, such as, without limitation: ISO 9001, VSE, CSA, UL, TÜV, CE
and a lot of others.
Zelmer offers the following products: classic vacuum cleaners (6 product lines) and
multi-functional (2 product lines), food processors (3 product lines), food mixers (2
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product lines), choppers (2 product lines), food slicers (3 product lines), wireless kettles
(2 product lines), juicers (4 lines), subassemblies for home appliances, such as
electrical motors, light metal casts and plastic profiles for the production of home
appliances, spare parts for the products offered.
A sectional analysis for Porter’s 5 forces was carried out for the group, which suggests
that the threat of a substitutes’ arrival is relatively probable. There is large competition
in the sector. Although Zelmer has its own patents and permanently modernizes the
products, the buyers often follow irrational factors. In the case of small home
appliances, they are relatively easy to be replaced and obtain similar functionality by
means of other tools. In the case of body care products a spa can be used as an
alternative.
The arrival of competitors and partly manufacturers of home appliance substitutes does
not require particularly high expense. On the other hand, the market is very attractive.
The margins are fairly high, which single transaction values, in relation to other
purchases of individual customers – substantial. Part of the competitive offer,
especially the inexpensive one is from China, others from the EU countries. Generally
the threat of new competitors’ arrival on the market is high. The technology is relatively
easily accessible and not too complicated, there are no specific regulations concerning
taking up business in this sector. However, there is a certain capital barrier. However
the brand awareness and customers’ loyalty are immensely significant factors. In this
industry the consumer tends to select offers of well known businesses and that
guarantee high quality and product reliability
Tab.14 Zelmer - entry and exit barriers from the sector for substitutes and competitors:
Threat of Threat of
Marks from 0 no barrier, up to 5 – very
substitute competitor
strong barrier
arrival arrival
Economies of scale 4 5
Benefits resulting from experience curve 4 4
Access to know-how 4 5
Customers’ loyalty towards the brand 3 5
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Financial barrier 4 5
Access to distribution channels 3 4
High costs of changing product 1 2
Political and legal barriers 3 4
Access to cheap production factors 4 4
Product differentiation 3 4
Source: author’s own analysis, unpublished papers
Tab.15 The SWOT analysis for Zelmer is as follows:

• good reputation, strong brand • poor internal communication in the
• wide product range organization between departments.
• high competencies and staff • significant influence of local
qualifications community on the organization’s
• high innovation level of products actions
(patents) • numerous product groups
• quality policy • deficiencies in communication with
environment and stakeholders
• Formation of new customer groups • the growing global recession
• establishment of new sales markets • stagnation on the home appliance
• EU support and subsidies market
• limitation of investment funding
sources
• weakening of consumer demand
• changing EU regulations
• exchange rate risk as the company
mainly operates in Poland.
Source: author’s own analysis, unpublished papers
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1. What could be a substitute of home appliances? Specify 5 such substitutes.
2. Based on the data presented, assess the possibility of such substitutes’ arrival and
evaluate the threat they may represent.
3. Which is the greater threat now, competitors’ or substitutes’ arrival? Justify your
answer.
4. How should Zelmer defend itself against the arrival of substitutes and the possible
threat they may bring.
5. What is the difference between defense against competitors and defense against
substitutes ?
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7.4. Analysis of industry suppliers and buyers.
The principles of impact reduction of both suppliers and buyers on an industry.
Pre-class readings:
1. Blonska Agnes, Rozemeijer Frank, Wetzels Martin, (2008), The Influence of
Supplier Development on Gaining a Preferential Buyer Status, Supplier Adaptation
and Supplier Relational Embeddedness, 24th IMP-conference in Uppsala, Sweden,
2008
impgroup.org/uploads/papers/6853.pdf

1. How can suppliers influence buyers?
2. What might be a suppliers power (on buyer) dependent on?
3. What makes suppliers more influential on a buyers behaviour ?
4. Do the borders between buyer and supplier become more difficult to be identified?
Why is this so?
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The sector is largely conditioned by suppliers and customers. The entities operating
therein are strongly dependent on both. Suppliers and buyers may effectively influence
their actions in various ways. Two extreme situations are when a monopsony occurs on
the part of buyers and a monopoly on the part of suppliers and the notion of perfect
competition originating from exonomics. Extreme cases are rare, however, and the force
of suppliers and buyers also originates from a number of other factors.
The bargaining force of suppliers describes the extent the suppliers are able to influence
the force of action and business offer effectively. Can they, for example, reduce its
competitive position. It depends on several components, such as:
• The number of suppliers – the more of them there are on the market, the weaker
is their force, as the business may select them at its own discretion, using the
competition between them – negotiate better delivery terms, etc. The monopolistic
supplier, on its part, has an immense force towards its customers. However, it
also depends on the extent the business is associated with them and what could
be the costs of change.
• Costs of change of the supplier – although there are numerous office space
suppliers, the costs of location change are significant to such an extent that the
low force of such a service supplier is out of consideration. .
• The share of costs of the deliveries from a specific supplier within the total cost
structure. The higher the value of deliveries the higher influence it may make on
overhead costs rise. Even a slight rise or reduction of its prices may significantly
affect the final product prices. If 70% of costs result from deliveries of one raw
material, the growth of its prices by 10% causes the growth of production costs
by 7%, which cannot be neutral to the final assessment and profitability.
• Making quality or basic product and service characteristics dependent on a
specific supplier. Toyota producing Lexus for the European market originally
resigned from its facilities for the European market, stating that local suppliers
could not assure the appropriate quality and moved all the production to Japan.
• The location and transport costs from the suppliers, as such costs related to
transport from a distant supplier may arise.
• The option of taking over the entire business by a supplier or vice versa, when it
is the customer who takes over (vertical integration) or option of development of
independent production performance and service provision by the supplier to end
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the customers cause that the supplier’s force grows while the threat of its taking
over the access to the final customer is significant or drops when it is not a threat
as a potential competitor or the party taking over the business.
Case study 16
Small Breweries
The distribution channel for small breweries is often represented by small specialty
shops, frequently run by local beer enthusiasts.
Although there are not too many such places at the moment, their number significantly
grows along with the popularization of the health and “slow food” trends. Such places
are most often established in big cities, particularly in shopping malls. A support for
their development is the growing number of wealthy customers, more and more
sophisticated and conscious, searching for new impressions, even from the simplest
activities. Moreover, many people make shopping decisions under momentary
emotions. According to the surveys of breweries, 45% people between 18-29, 51%
pupils and students and 45% people of a good financial standing. Along with the
growth of local beers popularity, their price has dropped. They have become an element
of exquisite consumption directed almost to mass consumers – masclusivity, affordable
luxury. More and more beers of this kind also appear in medium-sized networks and
single stores. The beer market is strongly regulated in numerous places worldwide.
This is also the case in Poland where beers cannot be sold online, near schools and
other public utility buildings and to people below the age of 18. So the remaining
manoeuvering room is small, while licensed bars and restaurants become a very
important distribution channel. Unfortunately these are customers subject to marketing,
promotion and sales actions of the largest brewing companies. They offer much more
to them than to stores. Sometimes, this is a large part of the bar or restaurant
furnishings, such as benches, tables, parasols, heating coils, counters, refrigerators,
glasses, etc. Particular investments in the cooperation with such a customer are made
when the latter decides on the exclusiveness of buying one brand beers. In some places,
even financial remuneration to such owners is offered. Kompania Piwowarska [The
Brewing Company] offered € 0.5 mio to the well known Harenda student’s club in
exchange for taking over the patronage of it.
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Local breweries do not usually have such means, so in numerous cases wholesale
customers or distributors are unavailable to them So they mainly direct their actions
towards enthusiasts and people searching for new taste impressions. The larger circle
of consumers to be reached by mass advertising and promotion is somewhat beyond
the reach of local breweries. Thus, the present group of customers is relatively small,
concentrating on specific needs. Individual customers exchange opinions on local beers
on online portals and forums. The shops offering such products, although small,
generate the vast majority of the turnover. The niche bars and restaurants remain with
a slightly lower share in revenues, but constantly growing sales.
1. Specify and characterize the local brewery customers.
2. What is the force of the particular customers in relation to local breweries?
3. How could local breweries limit this force?
4. What is the force of licensed bars and restaurants towards the breweries? How
could they use it?
5. How could breweries increase their force as suppliers?
The bargaining force of buyers, as in the case of suppliers, presents the force they could
impact on the business form and its offers. Therefore, it depends on:
• The number of present and potential buyers. The more of them there are, the lower
force they could affect on an entity.
• The share of a specific buyer in the business revenue structure. The larger the
share is and, in consequence, the larger amounts such a buyer leaves in a company,
the more the force of impact thereon grows. It even occurs that an individual
customer is able to shake a business or even lead to its bankruptcy, e.g. resigning
from cooperation. If half of the revenues is from one customer, the latter’s
resignation from cooperation may mean that the business would not be able to
survive with only half of its existing revenues.
• The costs of change of the customer, if the production or services were matched
to a specific market.
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• Connections between the customers and the question whether they are able to
create one uniform form, e.g. through consumer organizations, shopping groups,
etc.
• Customers’ influence on other entities, e.g. media.
• Opportunities to take over by a customer part of or the whole business and the
independent performance of deliveries on its increase on the customer’s force.
The lack of integration opportunity weakens the force.
Case study 17
W.Kruk
W.Kruk is a jewellry and general fashion business. It used to be a minor supplier of

jewellry and jewellry haberdashery for the large brand clothing manufacturer Vistula
& Wólczanka. At the same time the jewellry suppliers’ market was becoming strongly
competitive and a lot of suppliers of this kind arrived. When Vistula & Wólczanka
threatened its existing supplier with a takeover through the buyout of the shares
included in the stock exchange, the management board of Kruk were immensely
surprised. It is not entirely clear whether is was a tactical move or the intention to
invest. However, Kruk decided to offer its entire portfolio of its own shares and sold
them to Vistula at a fairly high price, through relevant stock exchange transactions. At
the same time, for the monies acquired in this way they bought more than 10% of
Vistula & Wólczanka shares, which gave it control over the dispersed shareholding
structure. At the first stage, upon gaining control over its new shareholder, Kruk
dismissed its existing management board and appointed its own. Simultaneously, using
its contacts with the media, they arranged for the fact to be reported in the press as a
warning to other investors.
1. What was the barganinig force of the suppliers and customers dependent on?
2. How has the bargaining force of the supplier and customer been changing?
3. What other elements may prove the existence of the bargaining force of
suppliers and customers?
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Depending on the fact of how much the sector of suppliers is consolidated, the force may
increase or decrease. If a business is a sole supplier, in a form of simplification we may
state that it dictates the conditions to its customers. However, the greater is the customers’
force, the fewer of them there are and the fiercer fighting takes place for their preferences,
the more the suppliers must adapt to their requirements. The extremes of the impact force
of customers and suppliers are then determined by monopoly on the one hand and
monopsony on the onther.
Fig.11 From a monopoly to monopsony – force of suppliers and force of customers
+ Force – of - Force + of
suppliers customers
MONOPOLY perfect MONOPSONY

competition
Source: the authors’ own paper, unpublished materials
The monopolistic position of customer (monopsony) or supplier (see fig.11) may result
in attempts to influence the behaviours of the other party. Interestingly, the supplier’s
force may be increased in a planned manner. It is the case when a market niche is taken
over, strategy of distinction from the market offer is performed, a brand is built, unique
characteristics are created, etc. Although theoretically such a business operates on a
competitive market, within the strategic position it has occupied – it becomes a
monopolist. Obviously, even upon reaching the monopolistic or monopsonic position, the
influence on the business partner is not unlimited. For example because monopolies are,
except in legally permitted cases, prohibited and the markets which are approximately
monopolistic are usually strongly regulated. This is the case with energy suppliers who
could have almost any influence on the customers, however, for example, prices and other
energy supply conditions are often regulated by the state. Moreover, there is always a
threat that both customers and energy suppliers may seek for new supply sources or
markers more intensely, or turn towards substitutes so far unnoticed, or enter another
strategic group. Such a situation occurred in the winter capital of Poland – Zakopane. The
conviction of the monopolistic position of the town for all those who wanted to spend
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their free time in the mountains caused, in the first decade of the 21st century, a drop of
service quality and a significant growth of their prices. The belief that the customers
would always visit the town in droves has become an illusion. Along with the
development of the road network and skiing centres in the Czech Republic and Slovakia,
the customers discovered new places with lower prices and higher standards. Although
they had not searched for alternatives so far, then, in consequence of the changes the
majority of them moved into another strategic group of suppliers, spending their holidays
abroad.
However, we must remember that the analysis of the suppliers and customers forces
depends on the specific nature of the organization and context in which such a force acts.
So we must not identify the conclusions drawn therefrom without criticism with the entire
industry analysis and recommendations for all the entities existing therein.
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1. What does the suppliers force depend on?
2. What does the customers force depend on?
3. How can suppliers increase their force towards the customers?
4. How can customers increase their force towards the suppliers?
5. How can the force of customers and suppliers be reduced?
Case study 18
MPR Market Research
MPR is a research company operating in the market and marketing research area. Its
undoubted advantages include great experience and the high substantial level of the
personnel, particularly of the people responsible for the performance and development
of research. The business achieves high marks in brand recognition ratings within the
quality research area. However, it also conducts numerous quantitative research
projects. They serve business customers, mostly large ones with significant budgets
intended for this type of services. It provides them with innovative solutions, frequently
outrunning the competitive offers. The role of market innovator, however, is rather
difficult and condemns the business to struggle with the problem of winning customers
for new solutions and high costs of providing non-standard services.
MPR has numerous customers, the vast majority of them are characterized with long-
term cooperation. Nevertheless, only few of them and the cooperation with them cover
most of the turnover. At present the business’s first intent is to measure the level of
turnover within the existing customers’ group, but also with the simultaneous
expansion of the portfolio of customers and the development of the segments served.
Among the customers particularly important for the turnover and prestige of the
business the following can be specified: Glaxo Smith Klinee, BMW, Roche, Tchibo,
Orange, LG Electronics, Sandoz, Tesco, One MS, Lufthansa, Royal Unibrew, UCB
and USP Health.
The essence of cooperation with the customers of the industry is the long-term
cooperation and satisfaction of the customers’ needs in the scope of various types of
research. This is justified by the thorough learning of the industry and accurate
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recognition of its issues, which significantly affects the quality and accuracy of the
research performed. At present the organization cooperates with more than 100
customers, nevertheless, more than 17 of the above mentioned are responsible for 80%
of the turnover, which complies with the V. Pareto law. However, as the management
board indicates, the customers usually restrict themselves to the purchase of one type
of service, developing them in subsequent periods and extending the cooperation. As
customers, the food industry and production dominate. This is also an industry with
relatively constant and stable dynamics of growth. Generally, the market is emerging
and this may be stopped within the periods to come. It means that the interest of the
businesses in research is significant and that they are interested in various types thereof.
This builds a potential for the possible cross-selling and sales with each major customer
of additional research products, deviating from those already performed.
The company uses a number of individual suppliers of consulting services in the scope
of research, i.e. performance of its core products. Usually these are individuals, high
class specialists who cooperate in the performance of project tasks, under the principles
of consulting service sales. The list of suppliers of this type is relatively wide, as the
company largely tries to select the competencies and tailorcut them to the project type.
Moreover, the slightly less significant suppliers in the cost structure are IT companies
providing them with licenses for various software, necessary statistical analyses
(software for statistical processes and analyses), writing reports (Office package), etc.
Tasks and discussion questions:

1. Assess the force of MPR suppliers
2. Assess the force of MPR customers
3. How can MPR reduce the force of its customers and suppliers?
4. How could the force of MPR customers and suppliers be formed in relation to its
plans?
5. What strategic targets towards the customers and suppliers would be suitable for
MPR in this situation?
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Further readings
1. Porter Michael E., Competitive Strategy: Techniques for Analyzing Industries and
2. Pindelski M., Zukowska J., Growth Strategies. Case Study, [in:] ed. J.Czech-Rogosz,
J.Pietrucha, R.Żelazny, Wybrane aspekty przemian strukturalnych,
wydawnictwo Uniwersytetu Ekonomicznego w Katowicach, Katowice 2011, pp.
237-245
Bibliography
1. Brandenburger A.M., Nalebuff B.J., Co-opetition, Currency, Doubleday, 1996
2. Combe C., Introduction to Management, Oxford University Press, Glasgow, 2014
3. Geroski P., Gilbert R.J., Jacquemin A., Barriers to Entry and Strategic Competition,
Harwood Fundamentals of Pure and Applied Economics, Routledge, Abingdon,
Oxon, 2007
4. Porter M.E., Competitive Strategy: Techniques for Analyzing Industries and
5. Porter M.E., Strategy and the Internet, Harvard Business Review, March 2001
6. Porter, M.E. (1979), How Competitive Forces Shape Strategy, Harvard Business
Review, March/April 1979
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8. Assessment of a firm's competitive position.
Presentation and assessment of various methods of a company

strategic potential analysis.
Key success factors. Value chain analysis. Strategic balance of a firm.
Pre-class readings:
1. Ghemawat Pankaj, Rivkin Jan W., (2006), Creating Competitive Advantage, Harvard
Business School, February 25, 2006
http://www.merageinstitute.org/wp-content/uploads/2012/02/Creating-competitive-
advantage.pdf

1. What may make a company successful on an attractive market ?
2. What is the meaning of a value chain concept?
3. How does one make a profitable link between the customers willingness to pay
and a suppliers need to earn ?
4. How does one differentiate other suppliers ?
5. How does one link the defragmentation of the company with one view of the
whole ?
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8.1 Key Success Factors
The method of assessing the competitive position of companies in a sector, is the analysis
of Key Success Factors (KSF), i.e. any important resources, competences, activities and
results of the operations necessary to achieve success in a specific field of activity.
In order to identify key success factors, answers to the following questions are required:
• Who are the buyers and what influences their selection of a product and its
suppliers?
• What does the bidder need to have and do, in order to gain competitive advantage?
• How does one acquire a sustainable competitive advantage, at least short term?
Establishing the basic success factors, allows for the verification of a company's
developmental opportunities. This is done by the assessment of key success factors,
which play the role of criteria, in relation to the company and its competitors. It is
important to stress the diversity of the key success factors based on the type of business
and industry in which the company operates.
In order to effectively carry out the analysis it is necessary to find specific factors, unique
to a particular industry. As a general rule, the right number of elements is approximately
3 - 6. The elements that analysts highlight the most are the: market position, level of
business organization, profitability, contribution to production costs, external business
image and the technological level21. During the analysis of the key success factors, a
comparison with companies operating in a specific industry is also made.
Correct identification of the Key success factors (CSF) allows the right prioritization in
strategic planning, including: choosing the right operating segment, the correct allocation
of resources, improvement of competences crucial in a given field of activity.
The table below presents key success factors for a company in the dental industry and for
its largest competitor.
Tab.16 Examples of Key success factors of two dental - office chains

Prodent Max dent
Key Success Factors Average Weighted Averag Weighted
No. (KSF) Weight (1-5) Average Weight e (1-5) Average
21
http://mfiles.ae.krakow.pl/pl/index.php/Kluczowe_czynniki_sukcesu
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1 Range - area of activity 0.2 4 0.8 0.2 4 0.8
2 Prices Levels 0.2 4 0.8 0.2 1 0.2
3 Quality of services 0.05 2 0.1 0.05 4 0.2
The work organization of
dental practices and of the 0.1 5 0.5 0.1 4 0.4
4 entire company
5 Brand Knowledge 0.2 2 0.4 0.2 4 0.8
6 Position in the market 0.25 2 0.5 0.25 5 1.25
Total (weighted
1 - 3.1 1 - 3.65
average)
Source: Author’s own elaboration, unpublished material
The result obtained from the KSF analysis, indicates that mainly the low prices and the
quality of the services make it possible for a company to rise on the market. The market
position is at a low level, so the company loses the most points on the leader board, up to
0.75, which mainly affects the final evaluation.
The table below presents the company's strengths and weaknesses.
1- 3 ratings are considered to be the company's strengths, whereas the 4 - 5 form
weaknesses.
Tab.17 Examples of company's strengths and weaknesses evaluation
No. Key success factors Weaknesses Strengths

1 Activity area X
2 Price X
3 Level of organization and services
quality X
4 Image X
5 Market position X
Source: Author’s own elaboration, unpublished material
After the analysis, it is shown that image and market position are amongst the weaknesses,
whereas the activity area, competitive prices and quality of products and services form
the strengths.
During the company's analysis, all factors which impact the current and future business
position, are taken into consideration. The SWOT analysis identifies these factors and
helps to create a plan expanding the positive factors and reducing the negative ones,
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nevertheless, only those which have a critical influence on the company. Identifying the
critical factors, however, constitutes only a half of the analysis. The next step is to create
a strategy that will help to, most effectively, exploit the opportunities, improve strengths,
minimize risks and overcome weaknesses.
Establishing key success factors and their later examination are designed to identify
potential advantages of organizations on the market. The first and basic step is the
selection of the main criteria, used for further analysis. They are not only dependent on
the company, but also the type of industry, stage of development, its economic situation
and competition, etc. It is important, however, to list the industry specific factors, in
which the entity does or intends to operate. Usually the number of factors should be 5,
but not less than 3. Such a small number is based on the Pareto Principle (see: Pareto
Principle description), according to which 20% of the input generates 80% of the result.
Exercise 12
The Pareto Principle
Also known as the ABC analysis, was founded by Vilfriedo F. D. Pareto (1848-1923),
an Italian economist and sociologist. The principle assumes that finding and focusing
on 20% of the items (causes), produces 80% of the results (e.g., gains, losses, problems,
etc.). The extension of this approach, the remaining 30% of elements give a 10% effect,
and the final 50% gives another 10 %. This can be presented as, for example:
- 20% of our customers buy 80% of our goods, the next 30% buy 10% and the
remaining 50% of customers buy the rest, which is 10% of the goods.
- 20% of operations absorb 80% of our time.
- 20% of information affects 80% of the decisions made.
Simply stated, the vast majority of events are caused by a small amount of factors.
Improvement or reduction of that 20%, significantly affects the final result, the entire
process, overview of the situation or the effect. At the same time, establishing that 20%
allows you to override others and is significantly a less important factor.

1. Do you think that Pareto Principle may be related to all the businesses ?
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2. List at least 10 of your daily routine activities and evalute how long does it take to
accomplish any of them ?
3. Think, which one is the most important, and which is last important.
4. Put them into the diagram below:
Takes me a lot of Takes me not a lot I do it immediately
time of time
Is very important
to me
Is not that
important to me
Is rather
unimportant
5. Which one takes you most of the time ? Which one is most important ?
6. What do you think about your activities ? Would you like to change the way
they are accomplished ?
The most frequently cited success factors are: the business organization's manner,
competitive position on the market, the achieved level of profitability, high margin, brand
and image, the level of advancement of technology, uniqueness of the implementation
process or the crew structure.
Besides the general industry characteristics, its life cycle and current phase should also
be considered. Usually, in the first introductory phase, for example, the level of the
advancement of technology solutions is very important. In the growth phase (the second
phase), it may be the market shares and/or their potential increase. The maturity phase
(phase three) is the time, in which the dominant role includes performance and
effectiveness, and in the last, end-stage phase, cost structure and the ability to reduce
prices becomes of the most important. It is worth having a good sense of which phase a
given industry is at (e.g., segment B car manufacturing - maturity phase with the signs of
the end-stage).
Through the research carried out by Boulton and managers of leading American
companies, the question of what current measures of success will be controlling them in
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the future was answered. Answers provided in the graph below, clearly indicate that the
most important are customer satisfaction, staff stability and revenue growth. So there are
clearly some key aspects of creating a market value in today's economy. As to the
question of how organizations creat value, meaning what are their sources, authors
answer - by simply taking a risk and creating a unique combinations of assets22.
The greatest successes in this field are achieved by the entities, whose farsightedness is
reinforced by the ability of combining assets in a very unprecedented way. It is therefore
not to overestimate the role of the manager - the leader and the support of his/her team
and the board of directors.
Fig.12 The main measures of success according to managers working in the USA
patents and new products

factor price profit
rate of return on investments
rate of return on assets
company's image among stockholders
market shares
brand recognition
investments in technologies
net operating margin
net profit margin
revenue growth
staff stability
customer satisfaction
0 20 40 60 80 100
Source: Boulton, R.E.S., Libert B.D., Samek S.M., Cracking the Value Code. How Successful
Businesses are Creating Wealth in the New Economy, Harper Collins, New York, 2000, p.15
Exactly the same questions that R. Boulton and others have posed the US managers, were
also posed23 in a survey to the 32 key managers of companies listed on the WSE. The
results are shown in the table below.
Fig.13 The main measures of success according to managers working in Poland
22
Boulton, R.E.S., Libert B.D., Samek S.M., Cracking the Value Code. How Successful businesses are
Creating Wealth in the New Economy, Harper Collins, New York, 2000, p.36
23
The results of the research carried out in the Department of Management Theory, the Warsaw School
of Economics (SGH) May-July 2002. Research under the direction of M. Pindelski. Unpublished
material.
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patents and new products
company's image among stockholders
factor, price, profit
rate of return on assets
staff stability
brand recognition
rate of return on investments
net operating margin
market shares
investments in technologies
net profit margin
customer satisfaction
revenue growth
0 20 40 60 80 100
Source: author’s own elaboration on the basis of the research carried out in the Department of
Management Theory, May-July 2011. Research under the direction of M. Pindelski. Unpublished
materials.
In contrast to the results of the American researchers, Polish managers predict that the
future of success will be primarily determined by company's revenue growth.
Interestingly enough, both, the staff stability and the image among stockholders in the
companies undergoing the study, are not important aspects in this regard.
In Poland, the most traditional measures of success are the market share and the rate of
return on investment. Although, due to the scale, it is difficult to compare these studies,
and the preliminary data suggests a slightly different perspective of the Polish employees.
By the end of 2001, Cap Gemini Ernst&Young published the results of "Measures that
Matter" (measures of high importance). The primary objective of the study was to identify
non-financial measures of business entities that affect their market value. Based on the
results, a thesis was formed stating that financial measures have a progressively smaller
share in creating value. It increases in the case of difficult to measure aspects and
currently affects the value by 35%.
A confirmation of this phenomenon is the fact that more and more investors during
decision-making times, use recommendations based on non-financial factors. It can be
assumed, that in short-term expectations, the primary value-creative factor are the
finances, but certainly in the long run, more important are the non-financial measures24.
Strategy and the process of its implementation become of greater importance. Both,
historical data and perspectives based on different scenarios, are included in the strategy's
24
Barcz M., Błędy w budowaniu strategii firmy, Manager No. 1 (64), January 2003
150
creation. It is not without significance, that there are IT support systems for the planning,
knowledge management or decision-making.
Tab.18 Non-financial measures of having an impact on a company's value

No. Measure
1 Strategy implementation
2 Directors and management credibility
3 Strategy quality
4 Innovation
5 Ability to attract talented people
6 Market share
7 Executives' experience
8 Managements' wage quality
9 Quality of main processes
10 B&R Leadership
Source: CapGemini Ernst & Young report, 2010
To summarize the table above, strategy implementation and quality are of great
importance together with the directors and management's credibility. The credibility of
people in executive positions is certainly, in some way, determined by the stability of the
Supervisory Board and the Management Board, as these study results show. Given the
long-term customer relationships or the development of an employees skills, we see a
new dimension in both, the appraisal and the value creation aspects. The change of
perception of the intellectual capital and sometimes its enormous costs are also taken into
account by the intuitive market.
The lack of its appraisal or methods giving quantifiable results, prevent proper
management and increase the investment risk. In conjunction with turbulent
surroundings, unstable economy, and changing reality, managers are forced to navigate
using tools measuring inadequate parameters. Resources are therefore allocated in
different projects, not necessarily those, which could have the greatest rate of return.
Moreover, without knowing certain measures, we are unable to determine trends,
predictions, or the direction in which the organization follows.
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8.2 Value Chain
Reaching the competitive advantage is the most important functioning element of each
business. The competitive advantage allows for the increase in profitability, quality and
efficiency of activities. During the search for methods to achieve and maintain
competitive advantage, the researchers’ attention was focused on two areas:
• Cost advantage - production and services at lower costs than the competitors.
• Product advantage - achieving such a level of a product's development, making it
impossible for the competitors to reach.
Achieving the lowest costs in the sector becomes possible through the development of
economies of scale, experience curve, vertical integration and investments in high-
performance technologies. According to Porter, the market differentiation is possible by
providing as much relative value added to customers, as possible. Relative, as relating to
similar measures used by the competition25.
The value added for the buyer quickly transforms into an added value for the
manufacturer and as a result, allows it to achieve above-average profitability.
In this regard recommended is the building the of a brand, keeping up with the high
quality standards related to modern technology and a sound knowledge of the customers
market. This advantage can be maintained through the construction of entry and mobility
barriers resulting from investments in information, skills and resources. This is a typical
example of position strategy, which, however, has quickly eroded.
Changes, blurring borders, technology transfer, etc., all happening in the '90s, resulted in
the fact that the market position in a sector became less important. It is not the market
share or position but rather unique resources, that began to determine the success. The
Resource Based View, gives particular importance to resources based on knowledge and
its practical use. The end result, which is the customer's satisfaction, is based on
maximizing the efficiency of all stages of the value chain. An elaboration of this concept
is a strategic asset theory, and just like having an ace up one’s sleeve, it should always be
available to a company during a critical time, however, until then, it should remain in
hiding.
The Value Chain proposed by M.E. Porter, includes a set of activities creating value for
customers. However, these measures appear to be related not only to the value for
25
Porter M.E., Competitive Advantage. Creating and Sustaining Superior Performance, The Free Press,
New York, 1998
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customers, but also to the value of an entire organization. Ensuring the achievement of
goals and objectives within this model indirectly affects the increase in wealth of
stockholders and shareholders of a company. It may not be a condition sufficient enough
to ensure an increase in the market value, but without a doubt, it is a necessary one.
Fig.14 M.E.Porter‘s Value Chain

Organization's Infrastructure
Human Resources Management
Technology Development
Supporting Actions
Logistics, Supply Chain System
Margin
Outward Flows
Marketing and
Inward Flows
Operations
Additional
Services
Basic
Sales
Basic set of operations
Source: own elaboration based on Porter M.E., Competitive Advantage. Creating and Sustaining
Superior Performance, The Free Press, New York 1985.
According to this model, the operations of an organization used in creating value, can be
divided into the following activities:
• Primary - including the inward flows (supplies of raw materials), basic operations
(processing raw materials), outward flows (product localization on the market),
marketing, sales, and additional services (sales service, delivery, etc.).
• Supporting- these activities include the supply system (purchase of necessary
elements to each of the processes), technology development (improvements at
each stage), human resources management (planning and personnel
management), infrastructure (management, finance, accounting, administration,
etc. ).
Porter draws special attention to the need of focusing on improvements in each of these
spheres, as well as mutual interactions between all departments, simultaneously giving it
a new, much broader context. Even the finest and most effective operations within one
process, do not guarantee success. It is closely related to the fact that interests of
individual cells may vary considerably. Clearly this model corresponds to the rules of
creating business value, which is a much broader concept than the customer value one.
Besides ensuring smooth operations of a company's value chain, a similar analysis for
suppliers and distributors appears to be of a similar importance. Only such a
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comprehensive approach may determine the competitive advantage. Building an effective
system for creating value is the key element in strategy building. This concept can be
represented as a variable function.
• Wc - company - basic and supporting operations of a company
• Ws- supplier - basic and supporting operations of suppliers
• Wd - distributor - basic and supporting operations of distributors
The relationship between the different components can be expressed in the following
way: W (Wc, Ws, Wd) = Total value offered by a company is read as a concentration of
contracts.
The increase in system value is possible by increasing the W function value. The
weakening of each variable, causes a decrease in function values. It is not without
significance that modern technologies prevail for the quality of created systems. Using
the data transfer or commonly known computerization, does not only make it easier to
build appropriate structures, but also ensures their smooth operation. The focus on values
supplied to individual stakeholders of an organization, should be based on the value
analysis and the costs necessary for its achievement.
8.3 Balanced Scorecard (BSC)

The Balanced Scorecard consists of performance indicators, which influence a
participant’s motivation and monitor the achievement of a chosen strategy. It is a tool that
helps to measure business effectiveness through four perspectives:
• The Customer Perspective;
• The Financial Perspective;
• The Business Process Perspective;
• The Learning and Growth Perspective.
Within each of these perspectives, an organization sets goals to achieve, and then
measures them by using individually chosen indicators.
The Customer Perspective
A balanced scorecard allows the identification of potential customers and segments in
which the company has a chance to surpass competitors.
This identification serves two purposes - the first one is to draw up a value definition,
which the company intends to offer to a limited number of clients. The second purpose is
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to establish the way in which a company intends to examine the validity of its decisions
and if such, produce expected outcomes.
After the identification, a company has to work on objectives and measures, thanks to
which it will be able to offer its customers higher added value. This condition will be met,
if during the process of goal setting and formulating its indicators, the company will
consider the following:
• Features of the offered product (with services assigned to it), including the
product's functionality, quality and price.
• Relationships with customers, that allow keeping the customers and maintain their
further interest in a company's offer.
• Company image, i.e forming a company's reputation on the market, which affects
choices made by the customers.
Among the indicators that embrace attributes associated with product characteristics,
customer relationship or image, also included are, inter alia, market shares, customer
maintenance, customer acquisition, customer satisfaction and customer profitability.
One of the key values of the company is to maintain their customer satisfaction, and thus
keeping them to themselves. A company, which has updated information on their
customer groups and treats them as key customers, is able to keep the collaboration at a
satisfactory level for both sides. This can be done, provided that the preferences of
selected customers, considered them being essential, actually coincide with their
expectations.
Therefore the company, should examine their needs, use information collected during
product development, and monitor the value of purchases made by existing customers by
using, for example, a sales growth factor. Such activities help to better adapt
to the emerging customer needs and their higher satisfaction.
The Financial Perspective

The Balanced Scorecard retains the financial perspective, because the financial measures
summarize the calculable economic effects of past activities, extremely well. The
financial measures show that implementation and execution of the strategy, contribute to
improving a company's economic performance. Financial goals are usually formulated in
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relation to; for example, operating profit, rate of return on capital employed and, in the
final period, economic added value. On the other hand, a fast growth of sales or positive
cash flow can be some of the alternative financial objectives.
A look at a business from a financial point of view, allows, in its life cycle, the generation
of three phases:
• Growth Phase (increase in sales).
• Maintenance Phase (increase in profitability).
• Maturity Phase (increase in flow of funds).
Growth phase is the period in which the company needs financial resources for product
development, distribution network growth or investments related to creating customer
relationships. It is possible that in this phase of life, a company shows negative cash flow,
and its rate of return on the capital invested is low. This does not mean, however, that the
company is doomed to fail- such data shows that future investments made by the
company, absorb more financial resources than achieved revenues. The objective of this
stage of development should be the company's financial revenue growth or the sales
growth – where both of these objectives should relate to the segments identified by the
company as key segments.
A company's maintenance phase is the time in which investors perceive it as an attractive
one, but with expectations for high return on equity. This means that the company should
increase its market share and focus its investments on bottlenecks removal and increase
in production capacity. Therefore, a company's financial goals should apply to
profitability, and in order to measure their achievement, an accounting category like -
profit, can be used.
The measurement includes, for example, operating profit, gross margin, return on
investment, return on equity and economic added value. The Maturity phase for
companies is the focus on collecting profits generated in the previous two phases of
investments. A company seeks to maintain, and not to increase its capital. Potential
investment projects are subjected to increasing cash flows and choosing those that will
bring the fastest return on earlier invested capital. In this phase of the development, the
financial goal of a company is to maximize the cash flow, measured by using the rate of
return from previously generated funds. A key to effectively applying a selected set of
measures, is to link them with long-term business objectives. Measures chosen by a
company should include such factors as a competitors nature or the company‘s strategy.
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Internal Process Perspective
The Balanced Scorecard allows the identification and improvement of the efficiency of
activities and processes that lead to a strategy's execution. It combines the objectives of
processes with already pre-defined segments of the key customers, and therefore allows
meeting consumer expectations and needs. Using measures for operational and customer
relations purposes, allows the understanding of how internal processes translate into
company results.
Internal processes of a company, within the balanced scorecard, can be divided into:
• Innovation processes.
• Operational processes.
• After-sales service processes.
These processes form a so-called value chain, thanks to which a company delivers value
to its customers. This is the way a company also gains a supervision of objectives
execution, which relate to products and services offered.
Innovation processes include customer needs analysis, and take into account the needs,
which the company has identified as new or as hidden ones. For this purpose, a company
collects information on the size of the market and consumer preferences, and it determines
which product qualities will be recognized as key qualities by these customers. Next,
based on such information, it creates a product subjected to the consumer's assessment
and - depending on the results of this assessment - introduces it to the market or modifies
it.
As a measure of effectiveness, a company may adopt, for example, a number of new
products introduced to the market (as compared to the competition), or a time frame for
the development of a new product.
Operational Processes start from the time when a customer places an order, and ends
when the order is received by that customer. Therefore, including the product delivery, it
puts an emphasis on the efficiency and meeting deadlines. These processes are repetitive
and result from procedures take on by a company. And for the monitoring purposes
quality measures and duration of operating cycle measures can be used. Quality measures
are based on such indicators as the number of returns or defective units per million
produced.
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In turn, the measurement of a process duration time, assumes certain cut-off points (the
start of a process can be the point of placing an order, and the end - when shipping it to a
client). Selection of the cut-off points depends on the preferences of each business.
The sales service processes are repairs under warranty, return service and receiving
payments. During their execution, the company increases effectiveness measures by
offering its customers a competent support in order to eliminate the potential product,
reduce the repair time or offers conditions under which it may replace a defective product,
which are very attractive to a client. A company may improve its after-sale processes
quality by using a speed of service measuring tool (from the time reporting the defect -
to its elimination) or a cost measuring tool (cost of resources involved in repair). Similar
measures can be applied during payment collections - the company then measures quality
and time of the invoicing process.
The Learning and Growth Perspective

The fourth perspective of the balanced scorecard - learning and growth- identifies
resources that an organization must develop, in order to build a long-term growth and
improvement. Customer perspective and internal processes are determined by factors of
the highest importance for the current and future success. Companies, however, are
unable to meet future objectives through those perspectives, even when using today's
technologies and skills, and therefore their operations must focus also on searching for
learning and growth perspectives (chances).
This perspective includes three elements, through which a company is able to increase
efficiency:
• People, who by performing work contribute to the growth of a business;
• Systems, which are the tool for work and support people in the performance of
their work;
• Procedures, which allow employees to move with greater confidence in areas of
business.
Objectives based on the financial perspective, customer perspective and internal
processes perspective usually reveal a gap between people’s capabilities, systems,
procedures, and what will be needed to achieve future success. In order to fill the gap, a
company is required to invest in altering staff qualifications, improve technology and
information systems and to adapt to organizational procedures.
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The card allows the measurement of the stakeholder satisfaction and simplifies the
decision making on planned improvements, which will influence the adaptation of the
business with the expectations of its members.
Balanced Scorecard – short overview
A Balanced Scorecard helps to determine business goals, which go beyond the financial
targets. With it, the company can assess how the value is created for the current and
future customers, as well as how to increase the potential of your business and to invest
in people, systems, and procedures necessary to improve future results. The scorecard
indicates actions, which are critical from the value creation point of view. It clearly
emphasizes short-term effectiveness (from a financial perspective) and the essential
factors of value creation influencing a company's long-term market and financial
success.
Fig.15 Balanced Scorecard philosophy and areas of interest
FINANCIAL PLAN
Strategic Unit of Size Operation

Objectives measurement
How should we approach the shareholders

(the owners), in order159
to achieve financial
success?
CUSTOMER INTERNAL PROCESSES LEVEL
LEVEL
Objectives measure
ment
Objectives measure Visions and What processes should we
ment improve, in order to effectively
Strategies
How should we present implement our strategy and
ourselves to customers, in order satisfy both, the shareholders and
to effectively implement our customers?
strategy?
THE PLAN OF KNOWLEDGE AND

GROWTH POTENTIAL

Objectives measurement
How can we support our ability to

change and improve?
Source: Horvath P., Balanced Scorecard, Skuteczne wdrażanie strategii, Congress

Proceedings, 7th Controllers Congress, Jastrzębia Góra 1999, [ed.] S. Olech, od DROGI
do Balanced Scorecard, Controlling i rachunkowość zarządcza, 2000, No. 2
160
8.4 Value Dynamics Model
Value Dynamic Model – the definition
In accordance with the definition developed by E.S.R.Boulton, et al.26, in the Value

Dynamic Model, it is assumed that the source of value and competitive advantages
of companies are their employees, suppliers, customers and the right organization of
assets.
For specific subjects, the weight of each of these factors is different. Specifying the
interdependence between the individual asset groups leads to a clear definition of a
business model, and at the same time, it expedites the process of a company's valuation.
Each asset carries some sort of an investment risk, and its distinction allows the
determination of the impact it has on a company and to objectively assess its market value.
The Value Dynamic Model (VDM) assumes that an effective management consists of:
• management strategy;
• risk management;
• process and information management.
In accordance with the introduction of these elements in the VDM, a proper balance
allows you to achieve the desired objectives.
The VDM is connected to the concept of Value Based Management or as it is said now –
ValueS Based Management. The Value Based Management approach is massively
critisized now as not humanitarian and ommiting many social problems of nowadays, not
taking into consideration other stakeholders than shareholders only. The term value is
concerned as a financial resources and money created by the company in many ways (eg.
as income or shares‘ value), the values term however points out that a firm has different
types of values as market value and corporate social value at the same time. There are
way more of types of values the company creates and posseses. All of them drive the
managers from money focus only to dispersed activities not necessarily connected to the
mone measured value.
Fig.16 Classification of Processes in Value Dynamic Model
26
Boulton, R.E.S. , Libert B.D. , Samek S.M., Cracking the Value Code. How Successful Businesses are
Creating Wealth in the New Economy, Harper Collins, Now York, 2000, p.5
161
No Designing the Assets and markets
business model Development of strategies and vision
Allocating investments
Phases
I II III IV
1 Financial Offer Financial Financial Liquidation
Assets Assessment and Management operations
Offer restructuring
Formation
2 Tangible Assessment of Management Strengthening Liquidation
assets needs and
acquisition
3 Customers Understanding
Delivery of Development Ending the
the needs and
products and of new relationship
creating an offer
services products and
Asset portfolio management
services
4 Employees Assessment of Creating a Support and Redefining
and suppliers needs, relationship rewarding relationships
recruitment, management
employment
5 Organization Needs Creation and Knowledge Redirection of
s Assessment and improvement coding and its assets
structure design of systems and sharing
processes
6 Measures and Identification of necessary information and sources of acquisition
reporting Measurement of risk and of added value
Continuous improvement
Source: own elaboration based on Boulton, R.E.S. , Libert B.D. , Samek S.M., Cracking the Value
Code. How Successful Businesses are Creating Wealth in the New Economy, Harper Collins,
Now York, 2000, p.152
This model also shows substantial differences in the organization's resources and their
impact on the market value (fig.17). It starts to be visible the shifts in value drivers. As
10-20 years ago the fixed asset, brick and mortar were the crucial sources of value, and
income now plenty of very successful companies tend to be an alomst zero gravity
business. It is not of machinery and building anymore but organizational asset, people
and intangible values.
Zero gravity business – the definition
The zero gravity business describes firms that do not possess a lot but are doing well
on the market. Mainly it is connected to e-business and related businesses. But it
162
reflects the trends in nowadays management where traditional companies even as
clothes producers, car manufacturers or airlines lease the fleet, machinery and office
space, outsource most of the activities and use payroll services in order not to hire
workers directly in the mother company. The core of the business remaining in the zero
gravity company is connected to the organizational assets, customers relations and
employees that fit the company needs perfectly.
Fig.17 Sources of values in traditional and contemporary businesses
A. Traditional Business
Fixed Assets
Customers
Organizational Assets
Financial Assets Employees and suppliers
B. Contemporary Business
Fixed Assets Customers
Organizational Assets
Financial Assets
Employees and suppliers
Source: own elaboration based on Boulton, R.E.S., Libert B.D., Samek S.M., Cracking the Value
Now York, 2000, p.112
Based on three types of measures, for example, ownership (the number or value of the
assets), flow (the life-cycle or rate of changes in assets) and effectiveness (achieving
planned and measurable results) and by referring them to various, listed here, categories
of assets, the authors of the Value Dynamic Model proposed the key factors for success.
163
Tab.19 Key success factors for the Value Dynamic Model
No. Categories of Status of Transfer Efficiency
Assets ownership
1 Financial Investment value Free cash flow The rate of return on
Cash in hand Accounts receivable investment
The debt ratio of turnover ratio Cash flow per employee
equity
2 Tangible Investment Depreciation rate of The rate of return on assets
Stocks turnover stocks Storage Costs
Office Space Dynamic growth of The use of fixed assets
office space Use of space
3 Customers Number of clients Client rotation Revenue per customer
Market share Customer Satisfaction
4 Employees Number of Employee turnover Revenue per customer
and suppliers employees indicator The cost of purchase
Number of Number of strategic Ability to gain staff and
suppliers suppliers and suppliers
suppliers meeting the Staff competencies
right standards
5 Organization Number of Expenditure on Income from patents and
patents research and licenses in respect to the
development expenditure on B&R
Business Strategy
Revenue from products in the
first three years
Source: own elaboration based on Boulton, R.E.S. , Libert B.D. , Samek S.M., Cracking the Value
Now York, 2000, p.169
This method is also valuable, because it draws attention to the particular needs of using
the parallel measuring of all assets, along with the analysis of their mutual relationships.
By comparing the traditional model of critical factors influencing market value, with the,
so called Value Dynamic Model27, we can observe, that in the traditional model, the main
market value components are the assets, liabilities, equity (balance sheet), income and
expenses (profit and loss account) and finally the cash flow (profits and expenditure). On
the other hand, the VDM takes into account such factors as physical, financial, customer,
employee, supplier assets and the so-called, organizational assets including leadership,
structure, strategy, organizational culture, systems, processes, knowledge, innovation,
etc. So it is a wider recognition of the business activity issue and it appears to be much
more responsive to modern business specifics.
27
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Exercise 13
Charles Schwab
Charles Schwab built his brokerage empire and created its value based on the
combination of three modern distribution leads in contacting customers. He used
service bureaus, telephone service and the Internet. Such a combination of traditional
and new technologies has created an ability to acquire almost an unlimited number of
customers without incurring significant additional costs.
Tasks and discussion questions

1. What are the differences between a traditional bank and a zero gravity financial
institution ?
2. What do you think creates value in businesses as Charles Schwab ?
3. What creates value in traditional bank ?
4. What would be the difference in Charles Schwab between value and values
creation ?
5. Do you think financial institutions follow the ValueS Based Management
principles ?

1. What is a key success factor ? Name some of them at your institution or university.
2. Using a balanced scorecard model – name all the perspectives. Prepare a draft of a
balanced scorecard for your institution or university.
165
3. Describe the Value Dynamics Model.
Case Study 19
Groupon.pl in Poland and its' Key success factors
To assess Groupon.pl Company we have to clearly define the phenomenon of high

volume shopping on Groupon.pl. The business model constituents of the Groupon.pl
Company.
The Groupon.pl Company has a database of over 7 millions subscribers, who get a
daily email with an offer prepared especially that week. Groupon.pl focuses on the
mass market, it does not distinguish between different clientèle in any way and its
newsletter is the same for each subscriber. In other words, every resident of Warsaw
gets exactly the same email on a given day. In the American Groupon, segmentation
went further, being at the same time fully automated. Initially, the subscriber has to
only select which specific market areas he or she would like to receive offers from, and
from that date on, they will be notified only about the offers according to their interest.
This allows you to better match an offer to a subscriber and prevent quickly losing
interest in group shopping, where "the same thing is out over and over again". However,
there is a huge disadvantage of such a system. Group buying phenomenon is based on
impulsive purchases, i.e. a person subscribed does not think much when making a
purchase, considering it worth testing. When presenting a customer with an offer only
within his/her interest range, we lose an opportunity to sell products or services from
different categories, which could possibly appear interesting to such a customer.
Another part of the competitive strategy is the offer Groupon.pl presents. This is the
main reason why Groupon.pl users decide to subscribe and shop through its website
rather than turning towards competitor's offers. It would seem that Groupon.pl and its
competitors offer precisely the same thing. But exactly why a customer should shop at
Groupon.pl and not other company from the group buying industry? Well, Groupon.pl
as the biggest player in the market, can personally choose partners with whom they
want to work with. In the case of smaller group buying portals, which do not have such
capabilities as Groupon.pl does, they virtually work with any partner interested in them.
Also, all offers are analyzed in detail, so they are the most beneficial for the subscribers
and better than those offered by the competition. This allows the maintaining of an
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opinion, that only Groupon.pl has the best discounts with the best quality of its partners.
In addition, the level of outside sales is very high. Customer service is running very
efficiently and quickly solves any problems, and any refunds are applied within one
week of submitting such a request. Moreover, while other companies are quite often
accused of applying artificial discounts or cheating their partners, then in Groupon.pl,
partners are screened in many ways. In order to verify their financial capacity, the so-
called "mystery calls" are made to check, whether the price given by a partner is real,
or if s/he is lying to the Groupon.pl company and its subscribers. Only such a partner
may work together with the Polish branch of Groupon. The website on which the
company bases its activity, is very simple and user friendly and yet it contains all the
information needed. In addition, the offers are described in an unusual way, using its
editorial writing technique called the Groupon Voice. The Bloomberg Businessweek
describes these text writers as the "Wunderwaffe" (wonder weapon) of the Polish,
increasingly tight market. 28
All of these characteristics make Groupon.pl boast about the largest number of users,
and have a high level of service satisfaction with a small amount of returns.
The channels constitute the element of the business model, which determines how a
company goes on to their customers and provides them with an offer. Effective
communications, distribution and product sales depend on the character and the nature
of each channel. Groupon uses several channels. First and foremost, it is the Groupon.pl
website and the sales platform available on it. The website allows you to make
purchases, obtain a company's information, and their way of cooperation. The
dropdown-list offers a selection of several dozen cities, according to the users’ interest.
Additional sales channels were created about a year ago, together with separate tabs,
like Groupon Shopping and Groupon Travel. Offers in these categories are sent out to
users only once every few days. And in contrast to the newsletters emailed only to users
of specific cities, these get to all users simultaneously, across the country. A completely
new channel of sales is Groupon Mobile. It is a phone application used for browsing,
buying, and redeeming vouchers over the phone. It is very easy to use, and due to the
increased mobility of society, such an application appears to be a very good idea. The
application is running on operating systems such as: Symbian, Android, IOS and
Windows Phone 7, being the vast majority of smartphone users in Poland. An
28
http://www.bbwp.pl/artykul/copyfighterzy-zrobia-nawet-lewatywe/ [Access: 5.10.2012]
167
additional channel - Groupon Now, has been activated in the USA, which seems to be
quite fitting to start using it in Poland as well. The idea is to use mobile phones as a
new channel. In the case of traditionally presented offers on a website, a purchase may
be made only over a short period of time (a few days). In the case of Groupon Now,
offers would be available at all times, due to the different characteristics of this channel.
The programme would show a list of offers in the area near a customer, and not
necessarily discounted by more than 50%. For example, while walking through the city
a user becomes hungry. Instead of walking into a random restaurant, s/he opens the
Groupon Now application and goes to the dining/food tab. The user now can
momentarily see what is within several kilometres of him/her, for example, there are
10 restaurants with discounts, from which 3 offer 30% off the entire menu, one - 50%
off, and the remaining - only have lunch offers. The user makes a purchase and shows
the voucher at that restaurant, thoroughly enjoying the discount.
This business model describes the relationship between the company and its customers.
The company, at the very beginning, should determine what type of relationship they
want to have with their customers. Customer relationships in the Groupon Company
can be divided into two separate components. The first one can include support for
users in the form of customer care. This is a form of personal support, given to the
portal users. It works well, and any problems are quickly solved. The second aspect for
building relationships with users is the widespread use of social media. The most
important medium for communication is Facebook, where newly available offers are
posted onto the site on a daily basis. Each of the users can evaluate offers, comment
on them and ask any questions, with are typically answered the same day. Keeping in
mind, that Groupon.pl has a few hundred thousand fans on Facebook.pl, it creates huge
opportunities in maintaining positive relations with users. Additionally, Groupon.pl
uses Tweeter and writes its own blog.
A very important, if not the most important element is the revenue stream, meaning the
amount of funds generated by the company through services offered. Determining price
levels for services offered is seen as the "be or not to be" of the company. Groupon.pl
generates the cash flow in only one way. Namely it sells low-priced products from
other companies via its website. As an alternative, it charges roughly a 50% fee of the
sale’s value. Groupon takes advantage of its dominant position in the market and,
almost without any exceptions, does not agree to smaller shares. This provides an
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incomparably greater revenue stream than the competitions. An extra money source is
the voucher accounting policy. The competitors usually pay their partners immediately
after their offer expires. They pay them the entire amount received from customers
minus the commission fee for the group buying service. In the case of the Groupon.pl
website, this looks a bit different. Money is deposited into a partner's account for each
coupon at the time of its redemption. That is why cash from all unused vouchers does
not go to the partner, but becomes an additional source of income for Groupon.pl. In
the case of cheap offers, unused and forgotten vouchers may constitute up to 30% of
all sold coupons. In addition, not paying right of the bet, but rather after using the
voucher, also affects the state of Groupon's cash. This considerably enhances the
fluency of a company and simplifies the realization of returns.
The Groupon.pl website seeks to facilitate the payment system. That is why customers
trying to make a payment can use a credit card, PayPal or a bank transfer via dotpay.pl
service cooperating with 23 major Polish banks. This type of payment does not exclude
any Internet user and allows generating an even greater cash flow.
The key resources are an element which indicate the most important resources, without
which a company would not be able to compete. These can include physical,
intellectual, human and financial resources.
For Groupon.pl, the most important resources are human resources and intellectual
resources. The Polish Groupon branch hires more than 300 people, most of whom have
at least a college degree. Traders signing contracts with partners have experience in
trade and receive additional, full range training. People in managerial positions have
business experience from working at consulting firms or companies similar to Groupon
industries. However, the most important resource is the intellectual resource. Groupon
is a very recognizable brand and often at times by the term "Groupon" we think of the
entire market of group buying29. This can help against competition, because a brand
new user will most likely subscribe to a well known website. Additionally, Groupon
has the largest mailing database in Poland, having access to more than 7 million emails.
The know-how companies should be included into the intellectual resources. Groupon
has a competitive advantage, being a subsidiary of a global giant. It immediately,
without having to sacrifice its own time and money for such development, gets ready-
made patterns, proven designs or proposals for new sale channels.
29
Http://biznes.onet.pl/trudne-poczatki-groupona-rzadu,49674,5091343,news-detal (Access 05.11.2012).
169
The most important actions are those, without which it is impossible to keep the smooth
operation of a business model. For Groupon, the most important action is to maintain
and continually improve their sales website, which is the only place that generates the
company's income. The Groupon website continues to develop in terms of graphics and
content. New cities and new sales channels, as the aforementioned Groupon Travel or
Groupon Shopping, are constantly being added. For companies operating in the group
buying sector, it is extremely important to show new offers. That's why Groupon is
urgently seeking new potential partners with interesting for users industries, because
they generate a much larger income than the remaining offers do. Searching and
persuading new partners is a key business operation.
Key partners constitute a business model described by the most important company
suppliers. In the case of group buying websites, suppliers are the partners, meaning
they chose to work together with that website. Any business wishing to cooperate with
Groupon.pl is considered important. Unfortunately, some companies operate in
industries in which signing a contract misses the point, because the partner's offer
would not satisfy the mass taste. There are also a lot of businesses, whose premises do
not meet the quality requirements of Groupon. These types of businesses do not belong
to the website key partners. On the other hand, there is a large group of companies
characterized by good quality and business location. Such partners are key elements of
the business model. And the Groupon.pl does everything in order to acquire and
maintain as many of such partners as possible. Long-term cooperation is profitable for
both parties. Groupon uses various techniques in order to improve relationships with
such partners. First of all, there is a special team within the company strictly dedicated
to ensuring positive contacts with businesses. This team continuously resolves any
problems acquired by the partners. In addition, certain applications have been
developed in order to facilitate work with website cooperating companies. This is,
among others, the Groupon Partners app, working on the same operating systems as
the Groupon Mobile. It allows the partner to avoid the retrieval of printed coupons,
writing down the protection codes or sending them to Groupon. Simply, by using this
application and your phone's camera, scanned codes are automatically sent to the
headquarters and are accounted for. A partner may, at any time, check if vouchers are
already accounted for, for how many it has already received the money and how many
customer payments they still have to receive. In addition, more recently tested is the
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application that allows for convenient booking appointments with the partner, without
the need for calling the facility directly. Companies are very pleased with that feature,
because it can assign part of their responsibilities to Groupon.pl, and minimize the risk
of making mistakes in reservations. An organization of big events can also be carried
out by using Groupon. In the case of major events, where many people come to redeem
a voucher, scanners are delivered to partners making it easier to settle all of the
vouchers. Partners attend specially created for them seminars and training, on which
they can learn how to make the most out of a marketing campaign in order to improve
the performance of their business. What's more, in each of the major cities there are
occasional events for commercial teams and partners, who aim to improve relationships
with old partners and/or want to establish new business contacts.
Cost Structure of the Groupon.pl Company

The costs include all company expenses related to the use of a specific business model.
Because of its model Groupon.pl does not bear large costs. It is not a production
company, so there is no cost of production, distribution or material expenses. Groupon
is an agent applying a fee for placing an offer on its website. Therefore, the only costs
incurred by Groupon are the costs related to salaries, offices, vehicle fleet leasing and
website maintenance and development. In addition, the high cost includes mail
distribution to seven million users, as well as an intensive Internet advertising
campaign. These costs are necessary to attract and maintain new users. Being the
intermediary, Groupon doesn't focus on low costs or high-value for the user.
1. Describe the key success factors for the industry in which Groupon.pl operates.
2. Evaluate the key success factors for Groupon.pl and present, what should be the
focus of strategic actions.
3. Set a value chain for the company and determine what may be its competitive
advantage.
Further readings
171
1. Pindelski M., Competitive advantage in retail industry through innovative
approach to the core competence. How Jeronimo Martins won Polish retail
market, International Academic Breckenridge Conference, Clute Institute,
Breckenridge, Colorado, USA, 2013
Bibliography
1. Boulton, R.E.S., Libert B.D., Samek S.M., Cracking the Value Code. How Successful
Businesses are Creating Wealth in the New Economy, Harper Collins, New York,
2000
2. Brandenburger A., Harborne Stuart S., Value Based Business Strategy, Journal of
Economics and Management Strategy, 1996, vol.5
3. Horvath P., Balanced Scorecard, Skuteczne wdrażanie strategii, 7th Controllers
Congress Proceedings, Jastrzębia Góra 1999, [ed.] S. Olech, od DROGI do Balanced
Scorecard, Controlling i rachunkowość zarządcza, 2000, No. 2
4. Porter M.E., Competitive Advantage. Creating and Sustaining Superior
Performance, The Free Press, New York 1985.
5. Barcz M., Błędy w budowaniu strategii firmy, Manager No. 1 (64), January 2003
6. Porter M.E., Competitive Advantage. Creating and Sustaining Superior
Performance, The Free Press, New York, 1998
Other sources:
1. Http://biznes.onet.pl/trudne-poczatki-groupona-rzadu,49674,5091343,news-
detal
2. http://www.bbwp.pl/artykul/copyfighterzy-zrobia-nawet-lewatywe/
3. http://mfiles.ae.krakow.pl/pl/index.php/Kluczowe_czynniki_sukcesu
4. CapGemini Ernst & Young report, 2010
9. Business models vs. competitive strategies.

Pre-class readings:
Osterwalder Alexander, Pigneur Yves, Businessmodel Generation
Available on: http://www.businessmodelgeneration.com/
172
conclusions of the Business Model Generation method.

1. What is a business model ?
2. How is it connected to the strategy ?
3. How does one discover or simply name competitive advantages on the basis of
the business model ?
9.1. Business Model

According to Scott Fox, a business model is "the right product or service, which appears
in the right place, at the right time, for the right group of customers". Fox also states that
"a business model is the key to creating a business that will succeed". 30
30
S. Fox, Internetowi milionerzy czyli jak zdobyć fortunę online, Helion, Gliwice 2008, p.125
173
Further discussions about the concept of a business model should be enriched by an
approach presented by T. R. Eisenmann. According to him, "business models differ in
nature of services provided to customers and differ in actions taken in order to provide
these services. A business model is the hypothesis of how a business intends to make a
long term profit: what and to whom it intends to sell, how it will generate revenue, what
technologies it will use, and will it co-operate with business partners"31.
H. Chesbrough and. R. Rosenbloom, both took a look at a business model through the
prism of roles it plays in a company, like i.e.:
• "defining offer value, which is the value generated for the user by an offer based
on appropriate technology;
• identifying the market segment, being the consumers for which the technology is
useful;
• defining the company's value chain, necessary in creating offers and their relevant
distribution;
• estimating cost and potential profits of offers, including range values and structure
value chain;
• describing the company's position within the network connecting suppliers and
customers, including the identification of potential partners and competitors;
• competitive strategy formulation, thanks to which an innovative business can gain
and maintain advantage over the competitors".32
When trying to understanding the essence of what a business model is, it is worth taking
a closer look at Allan Afuah's point of view. According to Afuah, a "business model is a
method adopted by a company, that allows it to expand and use resources in order to
provide customers with a product and service offer, whose value exceeds the
competition's offer and which, at the same time, ensures the company's profitability. Such
a model sets out a detailed plan of earning money today, as well as the long term,
including factors determining the maintenance of the company's sustainable competitive
31
T. R. Eisenmann, Internet Business model: text and cases, McGraw-Hill, 2002, p. XII.
32
H. Chesbrough, R. Rosenbloom, The Role of the Business Model in Capturing Value from Innovation:
Evidence from Xerox Corporation’s Technology Spin-Off Companies, Harvard Business School
Working Paper 01-002, p. 7. http://www.hbs.edu/research/facpubs/workingpapers/papers2/0001/01-
002.pdf
174
advantage, which is to achieve better results than the results of the competition over an
extended period of time".33
For private company owners, the most important long-term objective is to maximize their
business value. A business value can be determined by:
• profits;
• dividends paid out to its shareholders;
• current market position;
• shares value. 34
In accordance with the theories of contemporary companies, the main business objective
is to raise its value, and meet the needs of its stakeholders 35 (subjects, which are involved
in its operation, including: supplier, employees, local communities), but there is no doubt
that a company, which does not benefit the owners, has no raison d'être, and when it is
liquidated, it will prevent all the remaining stakeholders from achieving their goals.
A smoothly functioning company must produce added value resulting from the activities,
whose results are higher than the expenditures incurred.
Exercise 14
Business model and success factors
The previously quoted Allan Afuah believes that the deciding success factor is the economic
efficiency defined by three components:
• the company's Business Model;
• the environment in which the company operates;
• change factors.36
1. What is a company’s success ? How could it be measured ?
2. According to your opinion list company’s success factors and discuss them.
3. How environment may influence firm’s business model ?
Aufah’s determinants of economic efficiency, and a position of a business model within this
system are presented in a diagram below.
33
A. Afuah, Ch. L. Tucci, Biznes internetowy - strategie i modele, Oficyna Ekonomiczna, Krakow 2003,
p. 20.
34
Based on C. Suszyński, Teoria przedsiębiorstwa – materiał do wykładu, Warsaw 2005, p. 13.
35
http://en.wikipedia.org/wiki/Stakeholder_theory .
36
A. Afuah, Ch. L. Tucci, Op. cit., p. 19.
175
Fig.18 Determinants of economic efficiency
Business Model
• Elements and relationships between
others
• Dynamics (time variability)
Change factor
• Characteristics
Results
• Causes
Surroundings
• Competition surrounding
• Macroeconomics surrounding
Source: A. Afuah, Ch. L. Tucci, Biznes internetowy - strategie i modele, Oficyna Ekonomiczna, Krakow
2003, p. 20
Based on the definitions above, we can create a coherent picture of what a business model
actually is. But some questions still remain – for instance: what does it consist of, how
does one build it and how does one analyze it?
Afuah proposes how to identify individual stages of a business model development37,
starting from a simple observation that all business models operating in companies are to
generate a long-term profit.
Achieving profit is a result of taking a series of actions, including to:

1- offer your customers value, which may take the form of either a product or a
distinctive quality, or lower price than the competition's;
2- set a segment of customers, since different consumers have different needs;
3 - determine offers range;
37
Cf. A. Afuah, Ch. L. Tucci, ibidem., p. 90.
176
4 - offer the right price;
5 - report sources of revenue for the company, the price of the offer (company still
has to decide, what will be the source of its revenue).
Once the plan is ready, the company should proceed with specific actions, as a result of
which, offered value will be produced. Whether the activities will end up being successful
depends on the skills of a company's employees. After achieving success, an advantage
over the competitors products has to be maintained, which helps in achieving a long-term
profit, as well as when new players become interested in the market. Finally, the
effectiveness of plans depends on how the listed items are implemented, which on one
hand is influenced by resource management skills, and on the other hand the reality of
assumptions used when creating the business model. Therefore, particular attention must
be paid to relationships between different components being consistent, and the entire
unit to consider and use the surrounding environment, which completes a business model.
9.2 Construction of a Business Model

A business model is a description of conditions and methods used in an organization's
value creation, and the means of its delivery and reaping profits from it 38. In general, it
is understood as a total concept of an organization's functioning39. Through the analysis
of individual aspects of a business model, there are nine components that make up its
structure: segment of clients; set of values; the right relationships with customers;
distribution, sales and communication channels; key resources; key business partners;
key business actions; revenue streams; business cost structure.
Fig.19 Company's business model components
38
Osterwalder A., Pigneur Y., Business Model Generation. A Handbook for Visionaries, Game Changers,
and Challengers, Published by John Wiley & Sons, Inc., Hoboken, New Jersey, 2010
39
Obłój K. Tworzywo skutecznych strategii. Na rynku starych i nowych reguł konkurencji, Polish
Economics Publisher, Warsaw, 2002
177
Client
Segment
Cost Value
Structure Proposition
Key
Channels
Partners
Key Customer
Operations Relationships
Key Revenue
Resources Streams
Source: author’s own elaboration based on Osterwalder A., Pigneur Y., Business Model
Generation. A Handbook for Visionaries, Game Changers, and Challengers, Published by John
Wiley & Sons, Inc., Hoboken, New Jersey, 2010
Alexander Osterwalder and Yves Pigneur proposed a Business Model Canvas40 that can
be called: the business model template (graphic template here:
http://www.businessmodelgeneration.com/canvas/). It consists of nine blocks
representing different aspects of the business operations. The components filled with
content and interchangeably connected describe a product, a service or the entire
organization and its market proposal. The nine elements are: key partners, key activity,
key resources, added value, distribution channels, cost structure, revenue streams,
customer segment and customer relationships. A description of individual components
should start from the most important one, the customer segment.
Customer segment
According to the authors above, this is a very important, if not the most important element
of a business model. It defines customer segments supplied with added value (with a
product or a service) created by the company. Clients are the core of each business model,
therefore meeting their needs is very important here. Hence the division of segments
differing from one another in terms of needs, behaviour and a number of other
40
A. Osterwalder, Y. Pigneur, Business Model Generation: A Handbook for Visionaries, Game
Changers, and Challengers, New Jersey 2010.
178
characteristics. From a company point of view, the reasons for determining segments
according to the rules of a business model may be:
• Isolated segment requires a business- reasoned, distinctive offer.
• Getting into a segment is possible only through specific distribution channels
• A segment requires specific ways of behaviour and relationship building.
• Each segment has a different, but attractive profitability
• Customers from separate segments prefer different forms of payments.
With this in mind, customers may be grouped together, according to the following
segments:
Mass Market. A business model based on such client description does not specify
customer target groups. Value proposition, customer relationship or distribution channels
focus on a major, potential group of buyers, described by similar needs. An example of
this would be Faster Moving Consumer Goods (FMCG), like: home care products,
groceries, electronics, etc.
Niche market. In the case of a business in a limited, niche segment, the value proposition,
distribution channels and customer relationships are tailored to the specific needs of
buyers of the niche market. Some of the examples are: products and services for
hobbyists, narrowly-themed TV channel, and themed portals.
Multi-Segmented Market. In certain business models, different segments are distinct,
but in general, they may be quite similar to each other. For example, suppliers of
carbonated beverages distinguish their wholesalers by their size (large, medium or small)
which simultaneously is segmenting its customers. These segments are similar, but yet
very different in certain characteristic needs for each of the groups. It has an impact on
the remaining elements of such a business model, meaning on the value proposition,
distribution channels, customer relationships and the revenue structure.
Diversified Market. By isolating diversified segments, a company provides products and
services only to several selected target groups with different needs. The Israeli “Hapoalim
Bank” is known as the largest online bookstore in the world. Using its experience in the
field of running a massive Internet web server, Amazon.com began selling services,
called "Cloud Computing". This is how virtual servers and data storages started to be
available to Internet based businesses. It offers personal or business accounts, capital
investment support, and the experience Amazon has in the banking industry it uses by
investing in start-ups.
179
Value Proposition
Products and services provided by a company form a value proposition. In a slightly
simplified manner, this can be explained as a reason why customers choose certain
supplier, and not any other one. The value for a customer is the level at which the needs
will be met. So the value proposition is a unique pool of benefits for a customer.
Sometimes the value proposal may be innovative and unprecedented. Often, however,
this is a portfolio of products or services already existing on the market, but enriched by
a certain characteristic, slightly modified, etc. Value proposition can be expressed
quantitatively (price, size, weight, duration of the service) or qualitatively (appearance,
customer experience with a product or service, a unique service). By specifying a unique
value offered to customers and their segments, a legitimate question is: what needs are
satisfied with a product or service, or what type of issues it helps buyers to solve. In the
case of innovation and its value, it may just be the fact, that the product is new, such as
new car models. Qualitative criteria may be based on a specific product design, to which,
for example, the Alfa Romeo car manufacturer refers. It may also be that of the image of
an ecological or socially responsible company. The proposal can be expressed
quantitatively by punctuality, size of passenger seats, increased deposit interest rates, low
prices, or lightweight mobile devices. In the B2B segment, the value offer often includes
a promise to reduce costs, improve operations, reduce the time of completion, etc., offered
by, i.e., companies that supply CRM systems (Customer Relationship Management).
This can also be risk reduction offered by insurance companies or bidders of extended
warranties. Its value can also be in the form of great availability of a service at a place
where it is needed, such as Veturilo, Warsaw's urban system of renting bicycles.
Value proposition can be divided into a number of factors, which generate value for
customers, eg.:
• Price (one of the most important factors),

• Freshness (novelty) of a product,
• Product personalization,
• Efficiency and product reliability,
• Product brand,
• Unique product design (execution),
• Cost and risk reduction (resulting from the purchase of a given product),
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• Product availability and convenience of its operation,41
Distribution Channels
Channels are routes, which a company takes in order to reach towards segments of its
existing or potential customers, in order to introduce them to their offer. Communication,
distribution and sales are points of contact of a company and its offer with customers,
definitely playing a major role in the entire business model. They have the following
functions:
• Provide information on products and services of a company - a bidder.
• Help customers to get to know the proposed value.
• Allow the purchase of new products and services.
• Support after making a purchase.
• Allow the collection of information about the market and customer.
In determining the business model diagram, five stages of development and use of
channels need to be taken into consideration. The first stage is to provide clients with
information about products and services. In the second stage, review of proposed values
should be available. The third stage is when the purchase happens. In the fourth stage, a
product or a service is delivered. The fifth stage is for post-purchase client support.
Customer Relationships
Companies operating on the market must pay constant attention to the level of their
customer relationships. Relationships are built in order to achieve three main objectives:
to attract new customers; maintaining the old ones; to increase the sales of products and
services. There are two main types of relationships, between which a businessman may
choose the right one for himself.
Personal Relationship - in this type of a relationship the main emphasis is on building a
real, long-term relationship with a customer. The client gets full and direct support from
the company, support in the form of call-centres or live chats. The business model, in
which the biggest emphasis is on the positive relationship with customers, the consumer
has his own account manager, dedicated only to him. This is the most complete, the
deepest and the most expensive form of client contact, and simultaneously, the one that
takes the most time to establish.
41
A. Osterwalder, Y. Pigneur, ibidem, p.26-29
181
Automated relationship - self-service model, in which the relationship with a customer is
not the most important one. The service provider creates an opportunity for a customer to
use tools that allow troubleshooting, without the need to contact the company.
Availability and easy use of such tools may result in the fact that these relationships may
almost resemble personal relationships. We need to keep in mind that mainly the market
and the customers generate a demand for a services automation, and a company wanting
to meet the expectations, should offer such possibilities.
Far more important in the customer relationship seems to be creating communities,
through which companies can establish close relations with users. Relationships are also
formed among users themselves. A company then is gaining access to communities that
are interested in the fate of the company, and therefore able to help in product
development and/or improvement. 42
Revenue Streams
Funds generated by a company related to the operation channel sales, are one of the most
essential components of a business model. With regards to the revenue stream, the most
important thing here is to determine the price which customers will be able to pay for a
product or a service offered, since the right price selection ensures high impact revenue
for the company.
Revenue Streams may operate in other pricing mechanisms:
• Rigid prices,
• Appropriate negotiations rates,
• Auctions,
• Amount of purchased goods.
Revenue Streams are generated in a number of ways, whose choice depends on the
specifics of a given industry; desired impact speed; impact robustness; among the main
revenue streams of a company are:
• sales of assets,
• user fees,
• subscriber fee,
• rental/leasing,
• licence fees,
42
182
• intermediary commissions,
• advertising.43
Key Resources
In order to ensure its proper functioning, a company requires appropriate resources.
Access to resources can help your business build value for your customers, penetrate new
markets and generate revenue. According to its general division, we can distinguish:
Physical Resources - all physical assets, and therefore mainly buildings, vehicles, and
machinery owned by a business.
Financial Resources - cash and/or credit lines. Having these resources is necessary for
the proper conduct of a business model.
Human Resources - respectively skilled employees whose work generates profit for the
company. Their knowledge, skills and characteristics play a significant role in shaping
innovation.
Intellectual Resources - brand, patents, copyrights, trademarks, customer database,
customer relationships. Examples of businesses, which mainly rely on intellectual
resources, are technological industry companies. 44
Key actions
The term, key actions, includes all the steps taken by a company in order to achieve its
smooth functioning.
Usually, there are a few key actions taken by most businesses necessary to create value,
maintain customer relationships and to generate revenue.
Such key actions can be divided into three groups:
• Production operation activities, which are focused on design, manufacturing and
product delivery.
• Problem solving activities, allowing for the understanding of difficulties, finding
a solution, and then implementing it.
• Tasks responsible for smooth operations of a platform or a network, which allow
consistent and stable business operations. 45
Key Partners
43
44
45
A. Osterwalder, Y. Pigneur, ibidem,, p.40-41
183
This is an extremely important component of a business model, because it describe the
network of co-workers and suppliers. An appropriate management of relationships with
key partners keeps the business running smoothly.
Companies decide to cooperate with one another because of various reasons, however, if
relationships are carefully selected, they become the foundation of a business model
based on process optimization, cost reduction and greater resource access.
The main goal of this partnership is to increase resource allocation and to achieve
economies of scale. A company that decides to cooperate can extend the range of its own
capabilities by moving some of the responsibilities for obtaining resources onto other
companies. Such cooperation may include, for example, purchasing licenses from other
partners or using ready-made structures and existing contacts, rather than building
relevant departments within the company from scratch. Having access to all resources
and their self-management is not rational from a business point of view. This behaviour
generates costs and involves tremendous responsibility. Cooperation allows cost
reduction, and is usually carried out in the form of outsourcing or shared infrastructure,
which spreads out the responsibilities and risks. The cooperation of two businesses in a
certain area, and their simultaneous, hard and fierce competition in another area, is no
longer seen as something abnormal.46
Cost Structure
Cost structure contains all expenses incurred by a company as a result of using a specific
business model. Generated costs arise from creating value for customers, maintaining
partner relationships and revenue production. Cost calculation happens after having
defined key activities, resources and partners. There are two types of structures in the
framework of a given business model:
• Structure based on costs, which is to reduce company costs in every possible area.
Ensuring the right quality drops to second place, and the competitive advantage
of such companies is based on offering services cheaper than the competition.
• Value focused structure. In this structure, the level of costs is not as an important
aspect as is the generation of the right value for customers. In this case, the offer
is generally very attractive, and the level of services - very individualized.
46
184
The cost structure of a company is affected by fixed costs, variable costs, economies of
scale and economies of scope.47
Fig.20 Business Model Canvas

Key Partners Key Activities Value Customer Customer
Proposition Relationship Segments
Key Resources Channels
Cost Structure Revenue Streams
Source: Osterwalder A., Pigneur Y., Business Model Generation. A Handbook for Visionaries,
Game Changers, and Challengers, Published by John Wiley & Sons, Inc., Hoboken, New Jersey,
2010
All of these components form a business model canvas, which is a kind of a template for
creating business models. While you are working on a template you can use sticky notes
with ideas written on them, later placed in specific positions of the template. A business
model described in this way is quite simple to both, create and define. It can be used for
many industries and any organization. The advantage here is also the placement of the
value proposition as a main, central element. It requires focusing the efforts on creating
a unique value proposition for a customer.
9.3 Types of business models (Strategies of Business Model Development)
Components of a business model have a direct impact on the four, main areas of business
operations:
• offer for clients;
• clients, who generate corporate profits;
• infrastructure, which allows for efficient production and customer service;
• profitability, which determines the degree of cost-effectiveness of business
activities undertaken by a company.
47
185
Each of the above components is the basis for business strategy, which is reflected within
an organization’s systems, structures and processes and ultimately becoming the
organization's foundation of capabilities to generate profit.
Two key parameters should be analyzed before choosing the right strategy of business
model development:
1. Easy imitation of the technology solution. This parameter allows you to specify
the level of technological lead over its competitors, as the more difficult it is to
copy a product, the greater becomes a company's market advantage.
2. Availability and validity of complementary assets. This parameter is used to
specify assets, which enable you to take full advantage of potential solutions (e.g.,
brand, manufacturing potential, available distribution channels)48.
Relationships occurring between these two parameters are used to construct an array,
which is the basis for evaluating strategy, which should be adopted by a company in a
given situation. A company, when making a decision on which business model to use,
should make sure that it will be able to adopt the appropriate strategy required in a given
business situation.
Fig.21 Strategies of business model development

Complementary assets holder reaches
Achieving profit is difficult profit
Large
Possibility to imitate
Escape into the future Combining forces / Internal asset

development
Profit reaches any entity having
technology and assets or a party with
Inventor reaches profit
Small
greater bargaining power

Blocking competition
Blocking competition / Joining
forces
Easily available and unimportant Strictly controlled and important
Complementary assets
Source: Own elaboration based on: A. Afuah, Ch. L. Tucci, Biznes internetowy - strategie
i modele, Oficyna Ekonomiczna, Krakow 2003, p. 128-129
48
A. Afuah, Ch. L. Tucci, Biznes internetowy - strategie i modele, Oficyna Ekonomiczna, Krakow 2003,
p. 127
186
The analysis of an array for strategies of a business model development indicates 4 main
types of strategy. Each type must be matched to the relevant situation.
The first strategy type is an escape into the future, necessary in an environment of
constant changes, in which each new solution can be easily imitated, and complementary
assets necessary in using this solution are readily available. As a part of this strategy the
company should make continual improvements, even at the expense of cannibalization
(literally the copying of solutions already applied in other products/services) of an
existing product portfolio, so as to leave the competition always a step behind - what they
will be able to copy, should already be outdated. Selecting a different strategy is very
difficult, because the market is full of entities possessing similar offers.
Another type is the combining forces strategy, involving either the strategic alliance, the
appointment of the joint venture or the merger or acquisition of another company. The
use of this strategy is indicated in situations where complementary assets, not held by a
company, are importantly difficult to acquire in the market, as having them gives a
company a significant advantage. The price of this solution is, however, the necessity to
share profits with a new partner.
The third strategy type adopted by companies is to Block competition. This strategy is
based on the elevation of barriers by a company in order to protect its market before the
entry of competitors. This type of strategy is applied in situations where the opportunity
of imitating an already used solution is limited, such as used patent or company's know-
how. It is a strategy effective only as long as it is possible to keep barriers preventing the
entry of new competitors onto the market. Technological progress is the main threat to
this strategy. This may allow the competition to work around the solutions used by a
business.
Fourth, and the last type of strategy for business model development, is the internal asset
development. This development is made by an organic expansion of a company's
abilities, which is cost-effective only if it happens within the complementary assets, so
far unavailable to the company. Its main advantage is that it allows for the full use of the
opportunities of having a technological advantage. This solution also has its
disadvantages, including high costs, risk of failure and a long time required for process
completion.
A business model is a tool that enables you to understand, analyze, and build your
business from the bottom up. It is important to remember that it is not of a universal
nature, that just one group of business models suitable for any business, in any situation,
187
simply does not exist. A business model should always be chosen according to a situation,
which is to take place, because together with the change in the economic performance of
the business, the needs of the model change as well.
188
Questions and discussions:
1. What is a business model ? How it differs form a strategy ?
2. Can a company not follow any business model and why ?
3. List the business model components and describe them in short.
4. Describe and present the business model of your company, school or university.
Case study 20
The Stealth
Stealth was created in 1990. It currently produces high quality protective cases for
mobile phones. For more than ten years of activity in the market, the company tried to
get to know its clients taste and develop their own quality standards. The production of
cases for various devices had already started in 1990, as one of the first productions in
Poland. The products were manufactured using the vacuum-molding method. One year
later, the company decided to use the injection manufacturing method that has been in
use until today. In the year 2000, it started producing cases for the more and more
popular smartphones. Previously, the company was a successful manufacturer of cases
for traditional phones. From the start of its activity, the company has been focusing on
quality, and therefore gaining clients like the largest phone distributors and mobile
networks around.
The manufacturing process is fully automated and based on cutting-edge technologies,
high-quality machines and materials. The Stealth Company has been the holder of the
community industrial design patent rights RCD 3232, assigned to the smartphone case
and therefore, have the right for the commercial use of this design throughout the entire
European Union, since 2005. A full description of the design, among other things, can
be found on the website of the Office for Harmonization in the Internal Market (OHIM)
and was published on its bulletin in May of 2005.
In 2010, thanks to the purchase of a top-quality sealing machine, the company adapted
its products for automatic packaging. In subsequent years, i.e. in 2011 and 2012, it has
expanded its offer to Supersafe and Slimsafe cases. At the end of 2013, the company
launched an innovative, first in Poland, robotized technological line for the production
of cases. Currently, none of the Polish competitive solutions manufacturers produces
such cases, and the substitutes available on the market, are imported from China. With
189
this solution, Stealth will gain even more customers and enter new product and
geographical market segments by increasing foreign sales.
The Stealth Company, in collaboration with the consulting - training firm IMMOQEE,
has developed its own business model. This model was composed of 8 elements, whose
formulation enabled the company to develop the proper assessment of the company's
situation and determine its future business strategies.
Customer Segment
The Stealth Company operates on the market in which the major buyers are:
• mobile telephone networks,
• telephone and smartphone manufacturers,
• wholesale distributors of smartphones and telephones
• consumer electronics stores.
Value Proposition
The Stealth Company offers its customers a product, whose value is determined by:
1. timeliness and regularity of deliveries;
2. attractive price offer;
3. a wide range of products and promotion;
4. product innovation.
Channels
The main channel of contact with customers is its own sales department.
Representatives interact with mobile telephone networks, telephone retailers and
wholesale distributors in the country, as well as with companies abroad that are
attracted by the price and quality of the product.
Customer Relationships
Stealth has chosen a very personal type of a relationship. Each customer has his own
representative, who ensures the timeliness of the product and the right logistics of the
product's delivery. Contact with the customer is usually via email, telephone, and if
necessary, a direct, face to face contact. The customer can arrive at the company,
familiarize himself with the production cycle and decide to place an order.
190
Key Resources
The key resources of Stealth are:
• The company has experienced staff,
• The offered products have a very attractive price,
• Products are of high-quality having - certificates, protecting patents, a specially
designed mounting clip for the protective case,
• The company has business agreements with companies guaranteeing a fixed market
(for the customer as well).
• The company introduces new solutions and uses the experience effect;
• Smooth order processing of raw materials from suppliers allows undertaking large-
scale orders.
• It is environmentally friendly - high energy efficiency and water consumption
efficiency;
• Each lot undergoes strict quality control before reaching a customer.
Key actions
The most important key action introduced by Stealth is innovation creation and its
implementation.
Innovation of Stealth's production process consists of three elements:
• Process Innovation - related to the implementation of 3 automated technological
production lines using advanced designs, fully computerized and robotic injection
molding machines.
• Product Innovation - this is due to the possibility of introducing for the first time
in Poland new products with a special catch.
• Technological Innovation - involving the application of the new, innovative
injection molding machines with enhanced performance, making a serial
production of new assortment possible.
Key Partners
The key partners of the Stealth Company are:
• Suppliers of raw materials (polypropylene, regranulate PP, milling PP);
• Suppliers of manufacturing materials (polypropylene film, cartons, stretch tape,
gray tape, pallets.);
191
• Suppliers of electricity;
• Competitive companies that operate within the industry, with whom the company
does research on product development.
Cost Structure
The Stealth Company has a cost structure based on the value, which means that the
main focus is on the quality of products, not so much on the costs, which directly shows
in the products price. However, customers are willing to pay for the high quality.
1. By using the business model description by Osterwalder and Pigneur, describe
Stealth's business model and its value proposition.
2. How could one expand/develop Stealth's business model?
3. Which element of the business model would be the most difficult to copy by the
competitors?
Further readings:
1. Osterwalder A., Pigneur Y., Business Model Generation. A Handbook for

Visionaries, Game Changers, and Challengers, Published by John Wiley & Sons,
Inc., Hoboken, New Jersey, 2010
192
Bibliography
1. Osterwalder A., Pigneur Y., Business Model Generation. A Handbook for
Visionaries, Game Changers, and Challengers, Published by John Wiley & Sons,
Inc., Hoboken, New Jersey, 2010
2. Afuah A., Tucci Ch.L., Biznes internetowy - strategie i modele, Oficyna
Ekonomiczna, Krakow 2003
3. Obłój K. Tworzywo skutecznych strategii. Na rynku starych i nowych reguł
konkurencji, Polish Economics Publisher, Warsaw, 2002
4. Fox S., Internetowi milionerzy czyli jak zdobyć fortunę online, Helion, Gliwice
2008, p.125
5. Eisenmann T.R., Internet Business model: text and cases, McGraw-Hill, 2002,
p. XII.
6. Chesbrough H., Rosenbloom R., The Role of the Business Model in Capturing
Value from Innovation: Evidence from Xerox Corporation’s Technology Spin-
Off Companies, Harvard Business School Working Paper 01-002, p. 7.
http://www.hbs.edu/research/facpubs/workingpapers/papers2/0001/01-002.pdf
193
10. Strategic Control
Pre-class readings:
Flamholz Eric, Effective Organizational Control: A Framework, Apllications and
Implications, European Management Journal, Vol.14 No.6, December 1996
Available on: http://personal.anderson.ucla.edu/eric.flamholtz/article1.pdf
Task: Prepare a short presentation demonstrating what is a control in the company and
how it could be pursued.

1. What is a control, what does it mean to you ?
2. Do you like to be controlled ?
3. When and where the control is needed and when is necessary ?
194
10.1. Control – the definition
Control is one of the most important functions in business management. It allows a correct
flow of processes, an appropriate business making decisions and continuous correction
of imperfections. By control and examination of actual state deviations to planned one.
The past of an organization can be observed along with all the decisions and changes
already made through control and examination of deviations. Control enables to outline
company’s future of and adjust to it accordingly.
It also has a great impact on other management functions (administration). We can
actually state, that it is a necessary tool, which allows correct implementation and goal
achievement. Control is related to following functions:
• Planning, where correction of goals and standards is allowed;
• Organizing, where follow-up applications are submitted to different levels of
management;
• Motivating, where as a result of follow-up operations, changes to systems of
selection, training or governance may be applied.
Exercise 15
Administration functions
Administration Functions (later, not very aptly named management functions) have
been proposed by Henri Fayol (1841 - 1925). He stated that there are 5 functions of
management in business administration:
• Planning
• Organizing
• Commanding
• Coordinating
• Controlling
Currently, there are 4 functions of management: organizing, directing, coordinating
and controlling.
Read more in: Henri Fayol, General and Industrial Management, Martino Fine Books,
New York, 2013
And about Henri Fayol and other important authors in: Tim Hindle, The Economist
Guide to Management Ideas and Gurus, Economist Books, London, 2008
195
1. Do you think that any manager must fulfill all the administration functions ?
2. How all the functions are connected ? Do they result from each – other and
may be organized in a process ?
3. Which of the functions are connected with resources as: financial, items,
people, buildings, machinery and tools, offices, information, data ?
There is no single, general definition of control, which could give way to the full meaning
of this term. The concept itself is very wide and is still evolving. The scope of the business
is constantly changing as well. In accordance with the approach of the Polish economist,
and the pioneer in the development of management studies, K. Adamiecki, control can be
49
understood as "checking whether the implementation is according to the plan". In
accordance with this definition, control refers to activities used to validate the correctness
and the accuracy of task execution within the adopted plan. Such action is necessary for
a proper assessment of a product or service. In this regard, control refers to the already
completed work and is only used as an assessment tool. We know it as the final control.
Exercise 16
4 stages of control
There are four stages of control listed below:

a) Entry control (ex ante) - checking organizations resources prior to their
utilization (e.g. for a manufacturing process). Those can be, for example,
ordered goods, raw materials, but also e.g. employee recruitment.
b) Process control (current) - checking the processing of raw and regular materials,
during work.
c) Exit control (ex post) - final product control, at the end of the manufacturing
process.
d) Final control, product with a client (ex-post) - watching for damages and defects
occurring during use, complaints analysis, satisfaction and customer
49
K. Adamiecki, O nauce organizacji, PWE, Warsaw, 1985, p. 232.
196
satisfaction survey. Also, for instance, mystery shopping, an observation and
surveying of the method of client cooperation and conversation.
1. Which of the following steps of control is the most expensive for the company
and why ?
2. If you can divide resources (100 units) spent for control, what ratio would you
propose for each of the stages ? (eg. 25/25/25/25)
3. When entry control is not efficient and does not result with any effect ?
H. Koontz and C. O'Donnell give us another definition of control. According to them,

control shall be understood as “comparing implementation with adopted standards and
correcting deviations from standards to ensure achievement of planned objectives. “50
Control – the definition
Control is about comparing implementation with adopted standards and correcting

deviations from standards to ensure achievement of planned objectives.
The definition draws a much more complete picture of what control actually is and how
important of a job it plays within an organization. It is not just limited to activities aimed
at comparing the implementation of adopted plans, but it also includes ongoing
verification of performance within certain standards, and taking corrective actions in
response to observed deviations.
Control in such approach, is no longer a passive and cold description of existing state of
affairs, but rather a great tool, which affects the quality and the entire accomplishment of
work. In addition, Koontz and O'Donnell pointed out that “control is the checking
and correcting of subordinates in order to ensure that tasks are completed, and business
plans are developed in such way to guarantee the achievement of these tasks51.
50
H. Koontz, C. O’Donnell, Principles of Management an Analysis of Managerial Functions, McGraw-
Hill; 3rd edition edition, New York, 1964, p. 557
51
H. Koontz, C. O’Donnell, ibidem., p. 560
197
By trying to define "control", it is worth to mention J. Gnoiński's reflections on this topic.
According to him, control should lead the way to achieve efficiency and effectiveness of
operations. This state can be achieved through the following:
• Determining the method of how to remove the incompatibilities noted between
the actual state, and the one intended (the goals).
• Establishing necessary changes in the processes of implementation of objectives
or their correction.
• Identifying positive measures, actions, or results of operations, which favorably
affect the implementation of objectives and effectiveness of operations within
given range.
• Ensuring proper and comprehensive information about the actual state, for the
needs of management. 52
According to T. Pszczolowski, control is the "comparison of goals and actual results of
actions in order to perform praxeological evaluation, and in case of repetitive actions, to
introduce modifications in relation to goals or individual elements of action."53 Such
interpretation of “control” refers to the goal of action and the level of its implementation.
However, if we find reality different from plans, then it is necessary to determine the
elements that need to be modified and consequently improve them. This is particularly
important with repetitive actions, where quick detection of errors and their correction
allows error cost reduction, therefore, improving the production process or service
delivery. For the reason that control should be performed:
• systematically,
• consistently,
• based on scheduled frameworks and range,
• in conjunction with various types of reactions related to control results,
• in a manner to permit continuous correction and improvement of processes and
operations.
In accordance with the standards suggested by the institutions of the European Union for
the different types of national Chambers of Commerce, for the purpose of control carried
52
J. Gnoiński, Zasady organizacji i funkcjonowania systemu kontroli w resorcie komunikacji, WKiŁ,
Warsaw 1967, p. 50-51
53
T. Pszczołowski, Mała encyklopedia prakseologii i teorii organizacji, Ossolineum, Wrocław – Warsaw
– Cracow – Gdańsk 1978, p. 104-105
198
out by the public administration authorities, it is accepted that control may have two
meanings:
1. functional,
2. managerial.
Control, in a functional meaning, is a review or examination that helps to determine an
actual status of a given unit; a comparison with the required state, followed by accurate
interpretation and evaluation of information acquired. Evaluation includes three areas:
• conducting subject (controls carried out by internal / external authorities)
• length of time (ex-ante / ex post / current controls)
• tested area (financial job control).
Control, within the managerial meaning, presents an adopted system of managing, which
consists of procedures, instructions, rules and different mechanisms. All these elements
are designed to give a reasonable assurance that goals will be achieved.54
It should be noted that control is a highly dynamic process. Control tools and tasks may
vary depending on the area and incoming information. Control is also a fully integrated
activity. This means, that it is a process covering the entire area of an organization and is
carried out by properly trained team, both substantively and technically.
Therefore, control of managing and competitive advantages creation can be considered
within three aspects:
• a general aspect, understood as leadership,
• a technical aspect, where only facts count,
• an organizational - legal aspect, as a study of actual and model behaviors of
people, machinery and equipment along with behavior causes.55
10.2. The Control Process

The control process is, or rather should be, a very well organized process. Indirect actions
falling into the process description are an adequate preparation, smooth control
conduction, drawing and generating correct conclusions, and finally, appropriate solution
application. Correctly used control process allows achieving its main objective, i.e.
detection and repair of irregularities and errors. The control process consists of three main
phases marked in figure below (fig.22).
54
B. R. Kuc, Kontrola jako funkcja zarządzania, Difin, Warsaw 2009, p. 22.
55
Ibid., s. 24.
199
Fig.22 An outline of organization's control process
Setting standards Effectiveness Is effectiveness No

and methods of measure consistent with Take corrective actions
effectiveness standards?
measure
Yes
Not to take action
Source: own elaboration based on: J.F.Smuts, Process Control for Practicioners,
OptiControls Inc., USA, 2011, p.211
So as we can see in figure 22, the steps in the process are finalized with a decision based
on responses. Should we take corrective actions, or should we not? This is a very
important decision and therefore, in order to make it a little easier, assumptions are made
according to planned effect levels or acceptable margins of error. Going beyond this
margin, should result in a decision about the reaction or lack thereof.
Phase 1 - Setting standards and methods of effectiveness measure

Initiation of control should begin with proper preparations. First action is to identify
appropriate criteria for the measurement process allowing assessment of current results.
Established measure criteria will result from plans and market standards, competitors
data, statistical data and various experiences of an organization. Methods of measurement
must be, after all, adapted to selected criteria and specific characteristics of an
organization. Standards of conduct should, therefore, be of a strategic nature, be clear to
all participants, but also very importantly, be understood and accepted by both the
controllers and the ones undergoing control. Extremely important is to decide on what
type of standards and examples to take into account when comparing and measuring the
deviations from the desired state. If the example will be only the intent or plan of action,
then control may be carried out during the process. However, if we adopt a result of action
as a comparison model, then we can perform an assessment based on the final stages of
control.
For example, during control of operations carried out by employees (e.g. sending 100
emails per day), actions can be taken at any point in the process. If, however, we assume
that the objective is the effect of already sent emails, i.e. accepting the meeting invitation,
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then the final control is of greater importance (i.e. how many people have accepted
invitations sent via email). So as we can see, everything is relative and depends on the
decision of what is an action, what is an operational activity, and what is tactical or
strategical. Writing an email may also be a result, so the action would be a use of
appropriate number of characters, words and lack of spelling errors.
Stage II Effectiveness Measure

The second stage of control process is to measure company's actual state, which is to
gather relevant information in regards to approved standards. This is a sustainable and
repeatable process, which frequency of use and range of activities depends on the type of
a process being measured. Correctly performed measure should include the following
elements:
• up-to-date information, which guarantee making the appropriate decision,
• compatibility of collected information with adopted control standards,
• complete information, which means that as a result of the comparison, all
necessary information was gathered in order to present the entire controlled
situation,
• value of collected data (representativeness), giving the confidence that collected
data is actually very important and necessary for the evaluation of subjects
undergoing control,
• information flexibility, allowing to use it during changes of plans, activities and
surroundings,
• objectivity, allowing safe receipt and analysis of data, in which there is no
subjective feelings, presumptions or conjectures.
Step III Corrective Actions Introduction

The third step is to take actions in order to correct what turned out to be incompatible
with expectations or simply incorrect. Control is very closely related to the entire
management process; therefore, it is necessary to take actions that result from control
recommendations. The desired situation is, when accepted standards of control, include
in an early stage business organization structure and are used to measure performance of
individual processes. In this situation, it is easier to take actions to correct deviations.
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Control is only effective when it is carried out systematically and follows certain rules. It
is important to continue control activities, even if there are no identified deviations from
standards. This situation indicates that the organization made right assumptions, and the
whole process is carried out properly and efficiently. This does not mean, however, that
such state will continue infinitively long. This may be a result of scheduled job, but also
an advantageous coincidence. Even more so, regardless of final results, control activities
should be carried out consistently and continuously.
Control process should be recognized in two ways: narrow or broad. The narrow control
term recognition refers only to the final inspection and formulation of conclusion for an
organization to adjust to. The broad control term recognition refers to making changes of
the realistic process components, business strategies, various adapted patterns, or
operational activities. Here, a broadly understood and omnipresent control, thanks to the
maintenance of proper response rate and proper prioritization of reactions to deviations,
allows for its most efficient utilization and benefits the entire organization.
10.3. Types of control

Control is one of the basic functions of management (administration), which significantly
affects the efficiency and effectiveness of organization's strategy. Control takes many
different forms and variations. It appears as one of the phases of a business cycle, a
management function, as well as an institution of a specific nature.
Both, in theory and in practice, one of the key problems are the criteria for assessment
selection, which is the foundation for choosing the appropriate control type. Therefore,
the type of control and appropriate tools and application methods will depend on the
specific control criteria. While making a distinction and evaluation of control activities,
typically there are different types of control, due to the subject and the object of control,
methods and techniques, procedures used, duration, location and scope of research.
Depending on a certain criterion, we can distinguish specific control types, presented in
table below (tab.18).
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Tab.20 Control criteria and types
No. Control Criterion Control Type

1. Control according to subject • Internal control
criterion • External control
• Statutory control
• Societal control
• Professional control
2. Control according to object • Economy control
criterion • Financial control
• Legal and administrative control
• Technical control
• Organizational and legal control
• Inspection control (work, health,
environmental protection, materials
management, etc. )
3. Control according to technology • Audits, inspections, visitations, visual
and methodology criteria inspections
• Control incorporated into work
processes and computer programs
• Automatic and machine control
• Computer control in an IT accounting
environment
4. Control according to control • Preliminary control
execution time criterion • Ongoing control
• Subsequent control
5. Control according to decision- • Scheduled control
making in control planning • Unscheduled control (ad hoc, casual)
criterion
6. Control according to range • Problematic control
criteria • Comprehensive control
• Documentary control and review
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• Formal, accounting and substantive
control
• Intimate control, performed on-site (of
object inspected)
7. Control according to purpose and • Preventive control
tasks criterion • Repressive control
8. Control according to • Functional control
organizational criterion • Institutional control
• Self-control
9. Control according to human • Manual control
intervention, machines, vending • Machine control
machines or computers criteria • Automatic control
• IT control
10. Unit control with advanced notice • Announced control
criterion • Unannounced control
Source: own elaboration based on B. R. Kuc, Kontrola jako funkcja zarządzania, Difin,
Warsaw, 2009, p. 32-33.
An organization can easily choose from various types and scopes of control that best
match its needs and allow achievement of best results. However, it can be noted, that
regardless of the form, type or location of control, the control activities performed are in
general similar to each other as to their character, goal or scope.
Case Study 21
The HAKO Company
It all started in the year 2000. Several young hardcore enthusiasts, even computers
fanatics, decided to turn their passion into money by founding a company. The HAKO
company, from the very beginning of its existence, dealt with server sales, entire
computer systems and wireless connectivity. The beginning of the XXI century in
Poland was still a period of formation of many domestic and foreign offices and office
branches. In the early stages of its activity, the company did not have too many
204
competitors offering such low prices with relatively high quality, and gaining new
number of customers at an extremely fast pace. In its third year of operation, the
company had already more than 1% of the market and a full portfolio of future orders.
Such enviable situation. The increase in sales and market shares combined with
market's incredible absorption caused the company to rapidly expand to more than 200
employees. The increase in number of employees went along with the increase of
company's assets. The company's CEO, John Mullen, used to say that "The measure of
company's wealth are not only the people but also the company's proprietorship",
speaking particularly about the real estate across Poland, which in the years 2003 to
2007 the company purchased for nearly 20 million Euro, becoming the holder of nearly
10 hectares of land and two large office buildings. There were also purchases of fleets
of cars and all types of equipment. This was, to a large extent, an escape from taxes.
And who would be worried anyways, if in 2007, the net profit of the company exceeded
fifty million PLN. The great fortune of the company would have probably been
growing, if it were not for the fact that since HAKO was founded, a number of similar
businesses were introduced to the market, becoming its competition.
Fig.23 Hako market share

10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: authors own elaboration on the basis of unpublished material Hako’s reports.
With the increased aggression of similar businesses, it turned out that products offered
do not meet client expectations and requirements, especially considering hardware
failure. Until recently, the most important factor was the low price of PCs (even though
fairly high in relation to potential buyers’ earnings). In order to meet these expectations,
low-cost sub-parts were imported from Asia, immediately assembled and put out for
sale. Despite the fact that the late XX and XXI century was the time of many producers
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of such components consolidating or bankrupting, limiting the choice of supplier,
HAKO made sure to buy parts for the lowest price available. Such activities were the
basis for maintaining the low price of their products.
2011 can be considered as a breakthrough year in the HAKO company activity. The
revenue, together with the market shares, dropped for the first time in company's
history. The consolation was that this is certainly due to the general world economical
crisis and buyers whims; in other words, there was nothing to worry about. First major
problems related to equipment returns by dissatisfied customers and costly warranty
repairs, often associated with replacement of all components, begun to arise. As the
repair-service department was not too large, customers often had to wait more than a
month for repairs. Imagine dissatisfied buyers of equipment without systems and tools
necessary for their work for a dozen or several dozen of days? It didn't take long for
the results to take effect. There was a drastic drop in sales and increased customer
dissatisfaction. HAKO performed a survey about the level of contractors’ satisfaction
and hired a survey company as well. This single, quite expensive move, showed very
interesting results. Buyers score of HAKO company (on a scale from 1-10) was 3.5. So
there was nothing to be happy about. The main reasons for dissatisfaction were:
frequent server failures, only a one-year warranty and long wait for repairs. As a result
of such findings, all customers received New Year's greeting cards, with invitations to
extend the warranty period to one year, expand the post-sales services (particularly
warranty and repair) and additional discounts and coupons. Everything was supposed
to go back to normal by 2012. The problem was that as early as in June, it was already
clear that things will get even worse than before. Figures spoke for themselves. And
clearly things did not get better by the end of 2012.
The company's president, Mr Mullen, despite the will of acting solo, decided to confer
on the subject with his closest associates. During the meeting summarizing the
reporting period for 2012, he announced his recovery plan. "This is outrageous! - Mr.
Mullen fulminated - You must meet all the promises made to customers! And nothing,
absolutely nothing has been done in this matter!" "You're right, Mr. President, you are
so wonderful," Lucy Smith, the secretary, added astutely. "In order to provide what we
have committed to, we must reduce the costs of operation" - Mr Mullen continued,
slightly blushing. And quite frankly, not much in this matter was added. The entire
focus was on the issues that something has to be done about the existing situation.
206
After the discussion on the means and methods of improvement, the associates came
to the conclusion, that an essential element of corrective actions should be the
introduction of an adequate control system. High costs, to a large extent, were due to
the fact that the product manufactured was simply cheap and of low quality. With the
use of professional resources, the company’s president, together with his closest
colleagues, came to the conclusion that the cost of server testing and verification before
it leaves the factory, is at least several times lower than the price of repairs. Such
occurrence could lead to a rapid disaster, in accordance with the principle that an
unhappy customer will tell several other people about his bad experience, causing a
chain reaction of bad reputation. Another factor was also the quite unique IT work
environment, where scheduled work times were never followed. This was all about to
change.
The President ordered the use of time cards, and requested Henry Smart, the Vice
President of Engineering, to develop so-called "Rules for efficient server assembly",
highly approved by the board. He described in detail all the steps an employee must go
through, in order to effectively complete a product. Each worker had to pay close
attention to what components are to be inserted into a case and make sure they are all
working, which slightly lengthened times of entire operation. Moreover, new quality
controller job positions were created, in order to perform components verification on
delivery and inspection of entire computers at the final production phase, and even
before their packaging process verifying such inspection with placing a 'quality
guaranteed' sticker on them. H. Smart also created a special survey that each employee
had to fill out before and after performing a job. It was created to keep the workplace
organized and to help control components during their installation. Shortly after, it was
noticed that employees taking cigarette breaks worked less efficiently. Firstly, they lose
at least half an hour a day on smoking, and secondly, they get quite distracted and end
up spending the first fifteen minutes after their break working quite ineffectively. Each
employee got a magnetic badge that would track their movement throughout the course
of a day. This became the criteria for giving out bonuses. The service department would
rigorously be following the standard of "five working days" schedule, meaning that
within these five days a failed server was to be repaired immediately on location, or
taken from the customer, fixed and delivered back to that customer. Daily reports and
information from both, the hardware and service departments, were supposed to be
207
delivered to company's president who made heroic efforts to encompass all this and
distribute appropriate assignments. The Accounting and Controlling Department
performed monthly cost control analysis that would indicate the place of their initiation.
After each period there would be a special report of results prepared for the president.
Maybe these actions resulted in some disruptions in processes and often offset delivery
deadlines, but the operating costs were significantly reduced and at the end of 2013,
the financial results were at a "tiny advantage". Therefore it was possible to slightly
lower the prices. The board, encouraged by such results, decided to allocate additional
resources to the service department and expand control system of finished computer
systems.
The year 2014 was looking to be pretty good. It turned out, however, that there was
higher employee turnover, and despite the documented profit, money was nowhere to
be found.
"Maybe it's because we didn't do any intensive promotional activities?" – the vice
president Smart wrung his hands in despair. "What impertinence, I beg to differ" -
quickly remarked Alf Connor, the director of marketing, - "It's rather all this control
activity that's been going on that’s unnecessary and is messing with our lives".
Fig.24 Role of claims in sales – Hako company

7,00%
6,80%
6,60%
6,40%
6,20%
6,00%
5,80%
5,60%
5,40%
2008 2009 2010 2011 2012 2013
Source: authors own elaboration on the basis of unpublished material Hako’s reports.
1. Please specify what resources have been inspected?
2. What control phases have been included and when? Are all of these necessary?
3. What control criteria can be distinguished here?
208
4. Which of the elements of the repair program should be evaluated positively,
and which negatively?
5. What do you think the Board should do next?
10.4. Functions and objectives of control

The control process within a business has four basic functions, which allow meeting
critical needs of an organization. These functions are as follows:
1. Indicative
2. Stimulative
3. Instructive
4. Preventive.
The indicative function, also called informative, is to give a response signaling certain
irregularities. It is linked between the transfer of relevant information obtained during
control, and to arising, or potential problems, which may cause interference with the
efficiency and effectiveness in functioning of a certain area (e.g. production process). The
information with control results is forwarded to management, which thanks to such signal
and post-control information is able to take appropriate corrective action. It is important
that the collected data becomes an inspiration to the management to take corrective action.
Otherwise, control seems to be unnecessary and an unreasonable expense.
Hence the importance of not only the relevance, suitability and rank of gathered
information, but also of all working managers. In order for control to bring desirable
results, they should have an array of tools enabling introduction of changes and, perhaps
more importantly, be motivated to enhance and improve existing state of affairs.
The stimulative function, also known as inspirative, is intended to help an organization
to find ways to observe undesirable factors which cause divergence from planned
activities and already set goals. This stimulates an organization and especially its
management, to feel obliged to take appropriate steps. They will aim to reduce the
probability of occurrence of situations in which the achievement of goals is at risk.
The instructive function, also called educative, is expressed through offering advice and
assistance to people, teams and entire organizations undergoing control, through for
example, giving advice, indicating appropriate interpretation of the rules and regulations,
briefing on the proper task performance, etc. This function appears to be particularly
important for the executives. One could even call it a tool of governance, strongly
supporting managerial work.
209
The preventive function refers to the prevention of activities and events, which may
prove to be very detrimental to an organization. Control enables to disclose irregularities
in action ways and effects. The use alone causes omission of adverse activities, and
sometimes, even taking steps to fully eliminate them. 56
In addition to the four, previously mentioned, main control function, the following may
also be included:
• increasing quality in company,
• raising labor standards,
• increasing safety at work,
• supporting managers in the management of change,
• avoiding further errors,
• avoiding effects of errors and unresolved problems accumulation,
• maintaining certain stimulation of organization and its employees to search for
better solutions,
• reducing negative effects arising from complexity of operations of an
organization,
• facilitating the delegation of powers and work in an organization.
Control is to streamline an organization and processes occurring in it. It should help in

the regularity of actions assessment in relation to agreed norms and standards of conduct
as well as to a goal to be achieved (e.g., a product of relevant parameters, properly carried
out service, or appropriately performed manual process). Control is to contribute to the
detection of irregularities, the determination of their sources and the constructive action
to improve existing methods of work. Completed control should help to find the answers
to the questions such as:
Is the present quality adequate and sufficient and will it satisfy customers and suppliers
in the near future?
Are the activities and operations effective enough and executed efficiently enough to
ensure the best quality and cost-effectiveness?
What should be the next direction of work and processes development?
56
B. R. Kuc, Kontrola jako funkcja zarządzania, Difin, Warsaw, 2009, p. 45 -46.
210
The main incentives to take control actions are57:
• Objective and systematic examination of all elements effectiveness of the quality
management system.
• Identification of weak points of the quality management system, which do or may
result in non-compliance and reduce certain level of quality.
• An analysis of non-compliance causes, proposal of corrective actions.
• Implementing actions to prevent non-compliance occurrence.
• Assessment of earlier taken actions.
• Prevention of irregularities - encouraging and initiating measures to boost
efficiency of operations of a business undergoing control.
• Searching for information necessary for right decision making, as well as
notifying of any recorded irregularities.
• Identifying examples of proper operations.
• Applying stimulating measures in order to help improve the operations of
controlled unit.
• Preventing occurrence of disadvantageous events.
Control Criteria
Control, regardless of its definition, is based on certain criteria, which form the basis of
its operations and push it the right direction.
References suggest four main control criteria at a general and strategic level. These are:
1. legality,
2. purposefulness,
3. diligence,
4. economic management.
These criteria are often referred to as the traditional criteria. Currently, however, more
and more attention is being paid to the economic criteria, i.e. economic management,
saving, productivity, effectiveness, efficiency, etc., as well as to the transparency and
openness criteria58, resulting from a new form of control, the internal audit.
57
ibidem, p. 44.
58
Ibidem, p. 47.
211
The control legality criterion refers to the conformity of actions or decisions with
applicable laws, social determinants as a sense of justice, cultural norms, as well as
regulations or organization's unit statutes. 59 Such view of control refers only to the
possibility of performing it in the light of applicable legislation, standards and values,
without reference to other aspects of inspection.
Control purposefulness criterion is a supplement to the legality criterion. It comes
down to the substantive assessment of operations, control activities, goals, their proof,
and then reference to already set goals. This criterion is very important, as it refers to
control itself, organization as a whole and goals to be achieved.
Control diligence is understood as documented compliance with an actual subject of
control and inspection activities. Diligence also refers to acknowledging already existing
business rules, standards, external directives, which all relate to the business. It allows
specifying organization's reliability of operation and conduct.
Control economy is understood as accurate management of available financial and
material resources, which is to lead to the achievement of intended purpose. According
to references, there are two approaches of economy management. On one hand, it is
understood as a way to fully achieve the planned goal, while limiting the use of funds to
a certain level; we are talking about effectiveness here. On the other hand, however,
economy management refers to goal achievement at the lowest cost and concerns savings
measures. Control performed in an economical way simply means achieving control goals
in an effective manner. It requires certain type of coverage and use of control tools that
will be appropriate to the effect, weight and rank of inspected objects, operations and
processes. There is no economic justification of using complex inspection processes,
hiring inspectors and expanding control supporting systems, only to e.g.: correct errors
of staff in-mail.
Sticking to these control criteria is extremely important, however, in today's changing
economy, such criteria must be further enhanced by earlier mentioned transparency and
accountability criteria.
The most popular definition of these terms may be classified as those which are to define
transparency as the accuracy in classification of revenue and expenditure, following the
principles and rules of law or the correct management of reports. Drawn up in a
transparent manner, they are easy to read and interpret and do not give an impression of
59
S. Kałużny, J. Szczepanik, Kontrola państwowa w Polsce, Libra, Warsaw 1980, p. 17
212
facts manipulation. A business applying to these rules of conduct becomes simply more
reliable for its stakeholders.
Disclosure, however, allows access to financial statements and business reports showing
60
organization's transparency to its stakeholders and to control authorities. An
organization may provide control input data not only to the internal units or authorized
controllers, but also to its suppliers, customers and even competitors. This can be the case
for customer satisfaction survey, where the final report may be available online for
everyone to view.
An organization that adopts these principles becomes credible to business partners and
public administration authorities. In addition, through the adaption and conscious use of
specific guidelines, it reduces the risk of high costs or additional loss, as a result of
statements and exposure e.g.: media abnormalities.
Control Study Methods

Study methods should be viewed as a specific way of a rational approach to control
processes, which should be reflected in the right type and order of activities during
inspection. All of this will allow to achieve the purpose and effects in the simplest way
possible, while maintaining its full transparency, and letting such approach to be repeated.
According to references, there are two dominant research approaches used during
inspection:
• the deductive reasoning method,
• the inductive reasoning method,
Deductive reasoning refers to performing initial inspection, which findings set the range
and areas of thorough inspection. Conclusions from a detailed inspection of selected areas
primarily refer to these specific areas. If another area needs attention, control activities
should be redirected towards it. Conclusions coming from other areas may prove to be
false and incorrect for other points of the process. It's a bit like work inspection of a
singular job position and the conclusions drawn from it, relate only to that specific
position.
In turn, the inductive reasoning method consists of looking at the sequence of operations
and events as a whole, determining, sometimes intuitively, where undesirable events
60
Glosariusz terminów dotyczących kontroli i audytu w administracji publicznej, Wydany przez
Najwyższą Izbę Kontroli, Warsaw 2005.
213
occur or simply where exactly control seems to be necessary, inspecting them and
consequently transferring conclusions onto the processes. Results of inspection of a
specific job position should be applied to all the remaining ones and performance
adjustments should be applied accordingly.
Control methods include both, traditional and modern ones. Among traditional methods,
we should mention a comparison method, internal confrontation method, external
confrontation method, as well as a detailed economic analysis and calculations method.
Comparison method probably occurs in all types and forms of inspection. We can find
them in very simple, uncomplicated processes, as well as in very complex control systems
that investigate entire connections and activities. The essence of this method involves
comparison of the actual state with the state desired. It’s often emphasized that a
comparison is the essence of inspection, something without which, inspection loses its
true meaning.
Internal confrontation method involves comparing e.g. content of inspected documents
with the facts found at inspection site. In case of irregularities found during fragmentary
control (i.e. deviations of documented state with the factual state), a full inspection should
be performed, which will cover all existing documentation and actual activities, like:
processes or operations.
External confrontation method occurs in the form of a compilation of facts or clues
resulting from evidence held by a company, with equivalents held by competition,
customers, contractors or other entities, which may be used as an object for comparison.
This is simply a comparison of control results with other similar results. This method is
associated with benchmarking, i.e. referring to accepted standards.
Detailed economic analysis and calculations method. This method involves the
division of events into components and examining each of them separately. Economic
analysis refers to the evaluation of simple factors and cause- and- effect relationships
occurring between them, which allows a synthetic assessment of conditions and economic
processes from the rational management point of view. An economic calulation is the
basis for this type of analysis. It is a logically and economically justified system
measuring inputs, costs, revenue and a range of other economic results of a business. An
ideal situation is when a detailed economic analysis precedes economic decisions, is
present during their implementation and or used after their completion.
214
In the context of constantly changing economic environment followed by an even greater
computerization, control methods are evolving as well. The so-called modern control
methods can be divided into IT control methods or PERT control methods.
IT inspections are any methods and forms of control processes occurring in electronic
data processing, information systems or in information systems control processes for
regular and financial accounting. The essence of an IT inspection is to ensure correct data
processing, and create the best possible reliability protection of the "input" and "output"
data. IT control methods frequently include control of input data processing, various
information media, user data transfer to a computing center, computer data download,
electronic data processing (so-called calculations control) or a final results input data
control.61
The second type of modern control is the PERT method (Program Evaluation and
Review Technique), which is also known as the network method. It's mostly used in
project control process or in investment process, where it supports the ongoing operation
inspection, or the implementation stages monitoring, which are considered the critical
path elements of processes. Any deviations observed during control should be kept under
constant review and corrected/adjusted along with ongoing interventions. Only such
action can ensure timely project or investment completion. The PERT control method
forces up-to-date planning, efficient decision-making and fast actions implementation. A
project, after all, must be completed without any unnecessary delay, therefore control
should be performed along with it. If you wait till project completion, control may be
extremely troublesome and costly.
10.5. Strategic Control and Balanced Scorecard

Strategic control is one of the most important types and forms of control in an
organization. Its main aim is to ensure that all implemented activities are according to a
previously approved plan and a strategic goal. R. Kuc points out that with such perception
of control, one needs to ask two basic questions:
Is the strategy implemented in the way it was designed?
If achieved results coincide with what was initially intended?
61
B. R. Kuc, op. cit., p. 64.
215
They underline the importance of operational and strategic plans, which are the basis for
strategy implementation and give a significant rank to the effects of its implementation.62
Strategic control is also associated with a process designed for continuous monitoring and
measurement of:
• Operations, which are carried out by a business
• Changes of strategic importance for a business
• Designed for actions execution
• Overestimation and change of core objectives.
At this point, the Strategic Issue Management (SIM) should be mentioned, already
introduced by H. I. Ansoff. According to this author, the objective of strategic control is
to establish issues that are critical from strategical point of view. It is assumed that a list
of such strategic issues should be drawn up periodically, being the basis for determining
ranges and areas of a business subjected to observation. This, in turn, allows signals to be
recorded, which may have an impact on successful implementation of business strategy.
H. I. Ansoff draws attention to three types of signals. These signals, by being the result
of observation and control, will become an important resource in determining further
policies and improving current systems, ways and methods of strategy implementation.
• Signals impacting a business in a very urgent and strong manner are referred to as
type I signals.
• Signals impacting a business in a less urgent but still very strong manner are
referred to as type II signals.
• Signals that are barely urgent and have a weak impact on a business are referred
to as type III signals.
While considering issues related to control strategy, we should bare in mind that
according to L. R. Bittel, "control should be located in strategic points, i.e.: where there
is highest probability that it detects existing conditions before they get out of control".63
Such approach allows almost complete management of the control process, because the
organization no longer has to control its entire internal and external environment. It may
focus on several most important points and causing the biggest effects on the entire
system. This provides necessary information and allows making key decisions, with
relatively little involvement in control activities. A previous establishment of such
62
Ibid., p. 207.
63
J.W.Newstrom, L. R. Bittel, Supervision: Managing for Results, 8th ed, MCGraw Hill, Glencoe, 2001,
p. 185-186.
216
strategic points is required, or determining what areas have the highest impact on an
organization and implementation of its strategy, yet still producing very positive results.
This type of control, as opposed to a very broad, time- consuming, and expensive
traditional control, is more cost-effective, does not distract managers and controllers,
shows the entire crew issues that are really important, it helps to focus attention on the
important, eliminating the less important, and restricts freedom of choice of control range
and area, which can lead to chaos in control systems and strategy implementation
methods.
Control Areas
Control may include, in particular, organizational resources, i.e. focusing on people
(although they are not so much a resource, per say), information and data, finance,
machinery, equipment, real estate, etc. It affects the merit of their ownership, forms of
ownership (full-time hold, property, leasing, rental, etc.), related costs, ways of use,
economy and safety of their use, effects they bring, plans for further use, and potentially
methods of their disposal along with costs associated with this. Resource control is not
only an important procedure, but it is also forms a prerequisite for the appropriate control
methods application. Without a doubt, however, it is important that the applied control
and its vectors are coherent, especially on the strategic control level.
From a slightly different perspective, the range that should be determine and observed on
regular basis by an organization should cover three very broad areas:
• Financial area control methods of raising assets, control of its revenue and
expenditure structure and control methods of financial management.
• Operating area- control of supplies, inventories, schedules, production norms
and costs, quality standards and production methods and the effects of the jobs
performed.
• Human resources area - control of employee check lists, expenses related to
wage bills, absence and tardiness, complaints, motivation and commitment levels.
In order to determine appropriate control points in the above-mentioned areas, it requires
the executives to have high management skills. Staff responsible for this area could get
some support from a set of guiding questions:
What best reflects the tasks that must be performed by an organization?
What indicates that they are performed at an expected level?
217
What is the best way to measure any deviation between the plan and the implementation?
What is the source of information about who is to blame for any shortcomings?
What norms and standards will bring decent effects and be at a fairly low cost?
For what kind of norms and standards obtaining information is the easiest, for example
on the range of achievements, but also on indicators for comparison?64
Control, especially strategic control, is very strongly focused on the future. Its purpose is
to detected future errors and takes immediate corrective actions, even before any
problems arise. Predicting error effects is carried out on the basis of observation and
recording of current deviations.
The strategic control, as opposed to other types of control, puts a very strong emphasis
on observation of so-called "process entry factors". A correct response here is to avoid a
number of problems which may arise in subsequent stages. This is also a fairly
inexpensive way to avoid errors. If, for example, a reduced quality plastic enters the
manufacturing process, then the modern and eye-catching cellphone cases begin to crack
and cause the customer to file complaints and return the entire product, not just the case
itself. In this instance, control of other aspects may not bring as many effects as the
process entry control. Applicably concentrated on this area control, enables to make
appropriate changes, before their effects escalate.
Strategic control is also directed towards continuous verification of the strategic goal in
such way, that in the event of threat identification, it is able to make appropriate changes.
It focuses on selected key areas of organization, which adds additional protection against
the adverse effects of selectivity in planning and conducting subjective decision as to the
control areas and range. This is because these actions may effectively block business
growth and even contribute to its failure.65
Balanced Scorecard
One of the tools of strategic control is the Balanced Scorecard - BSC. The Balanced
Scorecard concept was developed by R. Kaplan and D. Norton. Its main objective is to
monitor (control) business strategy. Properly designed system of financial and non-
financial indicators is used here to assess the business condition. The strategy is presented
as a set of measurable goals and objectives, which are necessary for the company's vision
64
B. R. Kuc, op. cit., p. 212.
65
Ibid., p. 2017-214.
218
implementation process. We use it in order to ensure consistency between the objectives
and actions taken, measurement and control of strategic effects and motivational impact
on employees.
Balanced Scorecard allows the management to translate the vision and strategy of the
organization into a set of logically linked performance indicators, which can be easily
explained to employees and convince them about the importance of their implementation.
There are many companies out there, which mission is basically a memorandum of
fundamental values and beliefs of its employees. It is important to remember that a
mission is a source of inspiration, from which an organization should get its energy and
motivation to act, however, it is not sufficient enough for a company to become
successful. A company should have an established vision, i.e. a coherent approach across
an organization, allowing the achievement of the set objective. However, the Balanced
Scorecard converts the mission, vision and strategy into objectives and measures. Only
they can help maintaining the balance between short-term and long-term objectives.
Although it may seem that the various measures included in the Scorecard may look
complicated and difficult to describe, in reality this type of juxtaposition is a great
facilitator of strategy implementation, as all enclosed data and intermediate objectives
describe the one, main, strategic goal.
Based on the Balanced Scorecard, organizations objectives are looked at through four
main perspectives:
• financial perspective;
• customer's perspective;
• internal processes perspective;
• growth perspective.66
Balanced Scorecard usually identifies various processes within the context of
"perspectives" that should be improved, in order to achieve financial and market strategic
objectives. Moreover, it indicates the fact that the factors of a long-term financial success
depend not only on finances or cost control, but also on a number of other areas and
activities. This may require that an organization, for instance creates entirely new
products and services, which will satisfy the needs of present and future customers.
66
R. S. Kaplan, D. P. Norton, The Balanced Scorecard, Harvard Business Review Press, Boston, 1996,
p. 41
219
The Financial perspective
This perspective relates to the revenue growth and structure, including growth rate of
sales of individual segments; the revenue from new products, services and customers;
share of sales to target customers; sales volume; revenue from new applications; product
and customer profitability; percentage of unprofitable customers. The financial
perspective allows using easy to summarize economic effects of future activities.
The Customer Perspective

Client's perspective measures are not as precise as financial measures, therefore causing
many controversies. Management team of a company determines the customers and
market segments, in which the organization will begin to compete and will identify
measures necessary to assess their effectiveness, such as: the size of market shares,
activity and effectiveness in maintaining customers, customer acquisition, customer
satisfaction or profitability of customer collaboration.
Internal Processes Perspective

From this perspective’s point of view, the management identifies key internal processes,
which an organization must take into account. This can be for example: percentage of
new product sales in total sales, percentage of sales of specific and expensive products,
the number of new products on the market, production process opportunity, utilization of
production capacity, development and creation time of new generation of products,
number of returns of already purchased products, number of complaints and claims for
services and many others, which depend on the nature of organization (manufacturing or
service business). Focusing on internal processes helps a company to create value that
will attract and retain customers of a target market segment, as well as it will satisfy
stakeholders’ expectations in regards to financial results.
The Growth Perspective.

The growth perspective is focused on identification of resources that an organization
needs to expand in order to create a long-term growth and processes improvement.
Organization's ability to learn and develop is rooted in three main sources: people,
systems and procedures. Among development perspective measures we can find:
220
employee satisfaction, employee turnover, employee productivity, skills or employee
commitment.67
Fig.25 A sample Balanced Scorecard (BSC) for IT industry businesses.

Desired Next year plan (quarters)
Units of
Perspective Projects Objectives Measures direction of
measure I II III IV
changes
Entering new
market
segments
(commercial
companies)
and Acquiring
Financial
An increase
diversificatio new
Sales in Number of in the number
n of customers
commercial acquired new of customers
customers (number of - - 10 20
business customers in new
portfolio new
segments
(including customers)
sales
improvement
in
commercial
business)
% of
customers
An increase in
satisfied from
the output
Customers
% of satisfied the total

level at the
Marketing and customers - number of
Improvement end of
sales support as the result company's
in customer previous year 70% 75%
(indirect - of customer customers - -
satisfaction (annual
brand building) satisfaction (summary of
summary) in
survey study results
the relevant
performed
quarter
every 6
months)
Internal Processes
Building
employee task Decrease
maturity (and from last
indirectly Product year's
changing Improving return as a baseline, by
% / Quarter 10% 10% 10% 10%
attitudes - quality percentage in appropriate %
building sales value in the
employee- corresponding
oriented culture quarter
of success)
Increase in
Development
Changing number of Number of

attitudes - new ideas, already
Improvement
building enhancing implemented,
of Increase 2 2 3 4
employee- innovations new
engagement
oriented culture and their occupational
to succeed implementati ideas
on.
Source: author’s own elaboration, unpublished lecture materials.
67
B. R. Kuc, op. cit., p. 235-236.
221
Balanced Scorecard is a tool that allows an organization to clearly set business objectives
that are both, related to financial, as well as to many other aspects of business functioning.
Based on the scorecard information, we can draw conclusions concerning the way we can
create value for current and future customers by investing in human resources
development, as well as systems and internal processes. We can also manage all this,
while still following certain financial perspective limitations.
The financial and non-financial measures within the Balanced Scorecard should be
emphasized among organization’s employees in order to have full knowledge that their
decisions and actions have consequences for the entire organization and occurring
processes, and eventually on its market success. It is very important that the chosen
measures were a true reflection of a mission and strategy of the business. Only such
approach will allow using BSC effectively, which in addition to quantifiable measures
(objectives), also allows capturing difficult to measure indicators of company's future
success.
Balanced Scorecard gives a significant support to an organization during strategy

implementation, particularly during:
• refinement of vision, strategy and strategic objectives,
• clarification of objectives and strategic measures;
• planning, goal setting and strategic initiatives taking;
• improving systems for strategy implementation monitoring and organization's
learning processes monitoring.
Refinement of Vision and Strategy

The process of creating the scorecard starts with the senior management's meeting and
transformation of the adopted business strategy into specific strategic objectives. Next,
they set the objectives for the financial and customer perspective. After establishing the
financial and customer perspectives, the company identifies the objectives and measures
of the internal processes. This particular objectives’ setting approach allows successful
achievement of customer and owner's satisfaction. All of a sudden, new, previously
undetected processes may appear, hence it is important to immediately akcnowledge and
often name and describe them using the objectives and measures given, since all of the
222
new processes affect the implementation of the adopted strategy. The final stage is to set
goals according to the growth perspective. These new objectives allow us to make sense
of activities (training, technology and systems investments, inter-organizational
procedure improvements), which translate into company's long-term survival on the
market.
Clarification of objectives and strategic measures;

Usually there are activities throughout the entire organization that present to all
employees the strategic objectives and adopted measures of the Balanced Scorecard.
Presentations are delivered via newsletters, bulletin boards, video, e-mails or the intranet
(internal network). The essence of the presentation is to build employee awareness that
achieving goals leads to achieving success within the implementation process of the entire
strategy. In some organizations we come across situations where there is a subdivision of
measures and goals: strategic and operational. Such division shows employees how
objective and operational action, often at the lowest level of organization, are linked to
the strategic goal, and observing such connection helps employees realize their impact on
organization's success. It also allows an even better use of BSC to control strategic
objectives.
Planning, goal setting and taking strategic initiatives

Certain strategic objectives defined by the management, should be included in the
Balanced Scorecard (usually with a several years perspective), which will contribute to
organization’s development. Identification of strategic objectives also allows their fuller
integration with the budget creating process, which is then more calculated and optimally
distributed. Very often, the method for calculating of so-called milestones is used. These
milestones are the exact moments of short-term goals achievement, after which an
organization is gradually entering the stages of strategy implementation.
Strategy Milestones – Definition
Strategy milestones are defined in time and scope, and are the measurable partial
goals forming achievement of the entire strategy. Only after crossing a milestone, an
organization can gradually fall into successive stages of strategy implementation.
223
Improving control systems for strategy implementation monitoring and
organization's learning processes monitoring.
The process of improving the monitoring system for strategy implementation creates
organization's capacity to learn at the highest level of management, as well as to perform
relevant analyzes and draw appropriate conclusions, which may force a change in already
selected strategy. The Balanced Scorecard enables companies to obtain feedback on the
activity of adopted strategy and its objectives.
From the management point of view, a balanced scorecard is an extremely important tool
in organization's control process, as it is impossible to effectively manage the process, if
there is no other way to measure results of its activities. Company's approach to
measuring results and processes, very strongly influences the behavior of its employees
and external environment. Many companies, as a main direction of the development,
choose operation strategies related to customer relationship management, critical skills
management and organization's developmental capabilities management. Balanced
Scorecard offers measures that allow the assessment of company's effectiveness and
efficiency, indicating the degree of conformity of individual elements of an organization,
such as: customers, processes, employees and internal systems.
224
Questions and discussions:
1. What does control mean ?
2. How Control may influence the strategy, competitiveness and company’s
performance ?
3. What types of control do you know ?
4. What and how should be controlled ?
5. What do you know about the Balanced Scorecard ?
6. Do the employees like the control ? Could you explain resons ?
7. How to deal with those who dislike control ?
Case study 22
IMMOQEE
IMMOQEE is an international company that deals with human resources

management, staff outsourcing and gives overall support to managers at work. In its
sales department, in the telemarketing organizational unit, a control system was
constructed. The subject of control is the quality of calls carried out by employees.
Because of a large number of employees and interviews, it was necessary to
introduce a multi-level control, which representatives were divided into level I
controller, level II controller and a level III controller.
Level III controller:
The job of the 3rd level controller is to work with telemarketing representatives,
coordination and control of their activities. Control of telemarketers’ performance is
carried out while they work, through ongoing call monitoring and verification of data
correctness recorded in the system. Control is performed in a random fashion, while
maintaining a certain frequency, which raises its effectiveness. The duty of a level
III controller comes down to operational control and it does not fall within the scope
of strategic control.
Level II controller
225
A level II controller coordinates and verifies activities of a level III controller. Level
II controllers verify work performed by level III controllers, how they manage the
employees assign to them, and also, how well and proper is the control carried out
by them. Another part of work performed by level II controllers is monitoring the
quality of calls performed by telemarketers. Mainly how they perform the calls. It is
verified by listening to recorded calls and checking the regularity of notes entered by
employees. For this purpose controllers use the internal confrontation methods,
economic comparison methods, statistical analysis, as well as the strategic control.
The control on the Iind level is not formalized thus there are some hints for
controllers as – charts and questionnaires that help in ordering the control activities.
Most of the control activities are not described well however.
Level I controller
Level I controller is to control both, level II and III controllers, as well as compliance
of measures taken with approved sales plan. The position of level I controller is the
highest in the hierarchy; however, it is not strictly related to control, but mainly to
the achievement of company's objectives. The tasks performed by a level I controller
include action planning across an entire department and control of its employees,
level II controllers, level III controllers, telemarketers, granting premiums and giving
raises. The Ist level control depends on the controller as a person and her/his attitude
to control activities. There are some guidances but most of the activities are
controller’s dependant. There was a plan to formalize the Ist level control but most
of the activites remain unformalized.
Fig.26 Diagram of control of specific stages of control

Level I controller:
-financial control -comparative control
-operational control -accounting control
Level II controller:
-internal confrontation -comparison
-economic calculation -statistical analysis
Level III controller:

-comparison -quantitative
-accounting control -qualitative
-Human Resources control -randomized
226
Telemarketers
Source: author’s own elaboration based on IMMOQEE materials and reports
Objectives of control performed at IMMOQEE
Prevention of irregularities. Due to the importance of this objective, its
implementation is carried out by controllers of every level. It should be noted that,
depending on control activities hierarchy level, they are all carried out in a different
manner. The level III controller constantly monitors telemarketers’ performance,
reviews their recorded conversations, and checks the validity of data entered into the
system. The level II controller also verifies the work carried out by the telemarketers.
The type of control carried out by the level I controller comes down to the conformity
assessment of all undertaken activities with company strategy.
Informative. A company using control methods gains relevant information
concerning the degree of correctly carried out calls and correctness of data entered
into the system. With this information, it is possible to implement a sales plan
together with a business strategy plan.
Instructive. The implementation of this objective goes through all of the control
stages. Because an indication of correct work methods of controlled entities affects
the implementation of remaining objectives it is important to have an ongoing control
over telemarketers’ calls. This can be done through listening to recorded calls,
verifying data entered into the system and correcting detected errors.
Stimulative. Level I and II controllers are responsible for implementation of this
objective. Employees, who reach specific goals and positively pass work verification
during company inspection (control), receive financial bonuses for performing
quality work. Control is seen as an integral part of the employee bonus assignment
process.
Preventative. Telemarketers, who are aware of the control process, pay more
attention to their job performance and make fewer errors. The correctness of their
work performance gradually increases.
Suggested corrective actions
227
Corrective actions suggested for the IMMOQEE company, can be divided into three
group types:
• Primary type actions- very urgent and highly influential.
This group includes activities used for correction of significant deviations from the
standards, which may have an impact on a major decline in the quality of services.
They are designed to correct significant deviations from the standards, the effect of
which may be a significant decline in the quality of offered services. As an example
here, we can think of a situation in which a telemarketer, during a call with a
customer, gives out incorrect information, that is misleading to the potential client.
The customer will be dissatisfied and may submit a complaint claim, and even stop
to cooperate with the company, which will be directly translated into drop in revenue.
In this situation, the controller must ensure that calls are carried out in the correct
and professional way and that the telemarketers always give out accurate and reliable
information. Extremely important here are actions which are used to clarify conflict
customer situations, to propose a solution to the problem and to cooperate with the
telemarketers in order to improve their work performance.
• Secondary type actions - less urgent and highly influential.
The secondary type actions significantly affect the quality of services, but are
performed less urgently. For example, a company, in addition to their standard
product, develops a new solution, which is very strongly promoted via online sales
channels. However, telemarketing representatives do not mention anything about it
to their customers. The company spends a lot of funds on promoting the product,
which should be supported by the telephone sales representatives as well. Therefore,
actions should be aimed towards providing employees with new product information
an putting significant pressure on effective promotion and customer education about
the new product.
• Tertiary type actions - slightly urgent and slightly influential.
The third type can be described as activities minimally affecting an organization,
with fairly low level of priority. An example may be a situation where telemarketers
offer a product via phone and back it up with an email with the product offer. These
offers, rather than in color, are sent to clients as black and white presentations. Such
actions have little impact on the effectiveness of sales activities, however, they
should be considered as a deviation from accepted standards. In this situation, the
228
corrective action is limited to informing employees to verify the accuracy of sent out
offers.
1. What should be the new system of control in the IMMOQEE company?
2. How to ensure control disclosure and transparency?
3. How to apply control test tools?
4. In which direction should the IMMOQEE company control develop?
Further readings
1. Pappas J.M., Flaherty K.E., Hunt C.S., The Joint Influence of Control Strategies
and Market Turbulence on Strategic Performance in Sales-Driven
Organizations, Institute of Behavioral and Applied Management, 2007
Available at: http://www.ibam.com/pubs/jbam/articles/vol8/no2/JBAM_8_2_4.pdf
229
2. Mulazzani F., Russo1 B., Succi G., Developing Business Process Monitoring
Probes to Enhance Organization Control, internal papers and case studies of
Free University of Bolzano, Faculty of Computer Science, 2014
Available at:
www.researchgate.net%2Fpublication%2F220708829_Developing_Business_Process_
Monitoring_Probes_to_Enhance_Organization_Control%2Ffile%2F3deec51a8b36deab
ab.pdf&ei=6H1zU5S3JMzV4QSYjIDADw&usg=AFQjCNG4FJgSZsg_oNWc8xo62jM
IvDdqBQ&sig2=N7X2MfSmmv57W8trx8NY8g
Bibliography
1. Adamiecki,i K. O nauce organizacji, PWE, Warsaw, 1985

2. Fayol H., General and Industrial Management, Martino Fine Books, New York,
2013
3. Glosariusz terminów dotyczących kontroli i audytu w administracji publicznej,
Wydany przez Najwyższą Izbę Kontroli, Warsaw, 2005
4. Gnoiński J., Zasady organizacji i funkcjonowania systemu kontroli w resorcie
komunikacji, WKiŁ, Warsaw, 1967
5. Hindle T., The Economist Guide to Management Ideas and Gurus, Economist Books,
London, 2008
6. Kałużny S., Szczepanik J,, Kontrola państwowa w Polsce, Libra, Warsaw, 1980
230
7. Kaplan R.S., Norton D.P., The Balanced Scorecard, Harvard Business Review
Press, Boston, 1996
8. Koontz H., O’Donnell C., Principles of Management an Analysis of Managerial
Functions, McGraw-Hill; 3rd edition edition, New York, 1964
9. Kuc B.R., Kontrola jako funkcja zarządzania, Difin, Warsaw 2009, p. 22.
10. Newstrom J.W., Bittel L.R., Supervision: Managing for Results, 8th ed, MCGraw
Hill, Glencoe, 2001.
11. Pszczołowski T., Mała encyklopedia prakseologii i teorii organizacji, Ossolineum,
Wrocław – Warsaw – Cracow – Gdańsk, 1978
12. Smuts J.F., Process Control for Practicioners, OptiControls Inc., USA, 2011
Figure No Title Page

1 The development of differentiation strategies according to the 8
market situation
2 Competitive strategies Harry I. Ansoff 11
3 Environment versus decisions, targets and plans of businesses 36
4 BCG (Boston Consulting Group) Matrix 66
6 Arthur D. Little‘s (ADL) Matrix 68
7 Sector’s life cycle – turnover and profitability 90
8 Different types of life cycles 92
9 Strategic groups’ map in a hypothetical sector. 106
231
10 M. Porter’s Model of 5 Forces of Competition 113
11 From a monopoly to monopsony – force of suppliers and force 136
of customers
12 The main measures of success according to managers working 146
in the USA
13 The main measures of success according to managers working 147
in Poland
14 M.E.Porter‘s Value Chain 150
15 Balanced Scorecard philosophy and areas of interest 157
16 Classification of Processes in Value Dynamic Model 159
17 Sources of values in traditional and contemporary businesses 160
18 Determinants of economic efficiency 173
19 Company's business model components 175
20 Business Model Canvas 182
21 Strategies of business model development 183
22 An outline of organization's control process 197
23 Hako market share 202
24 Role of claims in sales – Hako company 205
25 A sample Balanced Scorecard (BSC) for IT industry 218
businesses.
26 Diagram of control of specific stages of control 223
List of Tables
Table No Title Page
1 Selected elements forming the economic dimension 26
2 Selected elements forming the political - legal dimension 27
3 Selected elements forming the international dimension 28
4 Selected elements forming the technological dimension 28
5 Selected elements forming the sociocultural dimension 29
6 Certainty – risk - uncertainty 41
7 Customer segmentation criteria 52
232
8 Institutional customers segmentation criteria 54
9 Sample SWOT analysis and cross analysis for X 80
organization
10 Sample cross analysis 80
11 Sample weighted evaluation SWOT analysis 81
12 Sample sector’s point analysis 84
13 Café Aroma SWOT Analysis 94
14 Zelmer - entry and exit barriers from the sector for 128
substitutes and competitors
15 The SWOT analysis for Zelmer 129
16 Examples of Key success factors of two dental - office 143
chains
17 Examples of company's strengths and weaknesses evaluation 143
18 Non-financial measures of having an impact on a company's 148
value
19 Key success factors for the Value Dynamic Model 161
20 Control criteria and types 200
List of Cases
Case study Title Page

No
1 Phablets, Tablets, netbooks, smartphones and others 7
2 What is the strategy? 10
233
3 Mercedes Benz 13
4 McDonalds 17
5 Toys in the EU 29
6 Digital Merchandising Systems 38
7 Asus – certainty, risk and uncertainty 42
8 Risk counteraction in Google.com 45
9 Cafe Aroma Israel 59
10 Cellcom Israel SBU Portfolio 70
11 Cafe Aroma: From Israel to Poland 93
12 Jamko – construction materials manufacturer 108
13 Automotive industry 118
14 Arkia 121
15 Zelmer – the home appliances manufacturer 127
16 Small Breweries 133
17 W.Kruk 135
18 MPR Market Research 138
19 Groupon.pl in Poland and its' Key success factors 163
20 The Stealth 186
21 The Hako company 201
22 IMMOQEE 222
List of Exercises
Exercise Title Page
No
1 Business and the environment 24
234
2 Segment 51
3 Segments in language school 56
4 The life cycle in the construction sector 86
5 Kodak and the industry life cycle 89
6 Life cycle 91
7 WAP technology and life cycle 92
8 Smart Media 98
9 Price comparers on the Internet 101
10 How do you assess the entry and exit barriers? 120
11 Substitutes 124
12 The Pareto principle 144
13 Charles Schwab 162
14 Business model and success factors 172
15 Administration functions 192
16 4 stages of control 193
Some hints and answers to exercisses
Chapter 2
235
Exercise 1
Business and environment – insert the specific elements into the appropriate environment
sphere.
MACROENVIRONMENT ecoomical
(general environment) dimension
technological
Eco logical oranizations
dimension
MICROENVIRONMENT
(targeted environment) cooperants
Potential employees socio – cultural

distributors dimension
customers
suppliers
OTOCZENIE legal and political
WEWNĘTRZNE competitors dimension
workers
board of supervisory industry
managers board chambers
international
owners
dimension
labor unions local societies
business partners
regulators
Chapter 5
Case study 9
Case Study, Aroma Cafe – from Israel to Poland
236
Point analysis of coffee industry attractiveness
Industry evaluation Weigh of the criteria Value of the criteria Weighted value
criteria (multiplier) (1-3) in the industry
1.1 size of a market
Size 3 2 6
Growth 3 3 9
1.2 market values
Industry profitability 3 3 9
Position on a licecycle 3 2 6
curve
ease in price shaping 2 1 2
Investment activity 3 2 6
Numer of potential 2 2 4
users
Entry barieers 2 2 4
Possibility of 2 1 2
substitutes
1.3 Environment
Market situation 1 1 1
dependance
Results of inflation 1 3 3
The government 1 3 3
ingerence
Vocabulary
237
Control - is about comparing implementation with adopted standards and correcting
deviations from standards to ensure achievement of planned objectives.
Environment – includes overall phenomena, processes and institutions forming the
mutual relationships within a business, sales opportunities, scope of activity and
development perspectives.
Milestones strategic - are defined in time and scope, and are the measurable partial goals
forming achievement of the entire strategy. Only after crossing a milestone, an
organization can gradually fall into successive stages of strategy implementation.
Sector attractiveness – is a set of its properties resulting in the fact that it is attractive or
not in terms of business or for a specific group of business entities.
Segmentation – is distinguishing uniform customer groups in terms of characteristics,
behaviours, values and needs. Although it may also apply to suppliers, the term usually
appears in the context of distinguishing the customer group.
Strategic dimensions – are determinants defining the activity and strategies occurring in
a sector
Trend in the environment – is a set of subsequent events arranged into a certain
direction of some phenomenon’s development. Next the events are created over the ones
preceding them and are directed by the latter, being set into a uniform integrity tending
towards a certain direction. In such case the events concern one of several dimensions of
further environment.
Value Dynamic Model - in accordance with the definition developed by E.S.R.Boulton,
et al. 68 , in the Value Dynamic Model, it is assumed that the source of value and
competitive advantages of companies are their employees, suppliers, customers and the
right organization of assets.
Zero gravity business – describes firms that do not possess a lot but are doing well on
the market. Mainly it is connected to e-business and related businesses. But it reflects the
trends in nowadays management where traditional companies even as clothes producers,
car manufacturers or airlines lease the fleet, machinery and office space, outsource most
of the activities and use payroll services in order not to hire workers directly in the mother
company. The core of the business remaining in the zero gravity company is connected
68
238
to the organizational assets, customers relations and employees that fit the company needs
perfectly.
239
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Approaches to Business Strategies

Warsaw School of Economics (SGH) 2016

1.1. Strategies according to Michael Porter1

Michael E. Porter is one of the most remarkable contemporary authors of publications

Based on this assumption, he developed three basic competitive strategies:

Figure 1. The development of differentiation strategies according to the market situation

Harry Igor Ansoff, Russian born, a mathematician and an economist, is

Fig.2 Competitive strategies by Harry I. Ansoff

Market penetration strategy

Market development strategy

Product development strategy

1.3. Strategies according to R.E. Miles and Ch. Snow3

Passive response strategy (reactor)

What does it look like in real life?

1. R.E.Miles, C.C.Snow (1978), Organizational Strategy, Structure and

Additional questions to be answered and/or discussed after pre-class readings:

Environment – the definition

Macro-environment (general, global, external, further environment) includes

Trend in the environment – the definition

Micro-environment 4 (closer environment, sphere of activity) is composed of the

Internal environment is sometimes distinguished as a separate dimension thereof. It is

Tab.1 Selected elements forming the economic dimension

• domestic and international demand.

International dimension determines the international environment impact on the

Tab.3 Selected elements forming the international dimension

Technological dimension is created by conditions resulting from the development level

Tab.4 Selected elements forming the technological dimension

Tab.5 Selected elements forming the sociocultural dimension

Reference: based on NPD Group reports, 2007 – 2012

2.2. Close Environment

2.3 Targeted environment

2.4. Inside environment

2.5. Environment and decision making and planning

Strategic Goals Strategic plans

Tactical Goals Tactical plans

Operational Goals Operational plans

Reference: the author’s own study, unpublished materials

Dynamic advertising at the point of sale, so-called Digital Merchandising is a special

Additional questions to be answered and/or discussed after pre-class readings:

Tab.6 Certainty - risk - uncertainty

Source: author’s own elaboration on the basis if author’s unpublished materials

Contrary to all appearances, a vast portion of decisions in modern management is made

Unfortunately, the businesses usually encountered risk, or even uncertainty conditions. It

3.2. Fighting against risk and uncertainty

Questions and discussions

1. Jaime Gil-Aluja, Handbook of Management under Uncertainty (Applied

How may people influence risk – uncertainty – certainty in business ?

4. Company strategic segmentation methods.

4.1. Strategic segmentation

Additional questions to be answered and/or discussed after pre-class readings:

Segmentation – the definition

Major Criterion Examples of division

Geographic Region Central Europe, Western Europe,

Family size 1-2, 3-4, 5 and more

Family life cycle stage TIPS (Tiny Income Parents

Views and personality Individualist, hedonist, altruist

Benefits searched Needs Specific for persons/situations,

User’s status Former, occasional, regular –

Commitment in purchase Low, active, high

Location and dispersion of division Local, national, international,