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Strategy Analysis and Evaluation (SAE)

Workbook

2010 edition
Copyright © 2010
University of Strathclyde
Business School.

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Strategy Analysis and Evaluation (SAE) Workbook

Contents
Chapter 1: Introduction to strategy....................................................... 1
Introduction..................................................................................... 1
Learning objectives ..................................................................... 1
The structure of SAE and Strategic Management........................... 2
Defining strategy ......................................................................... 2
Towards a definition.................................................................... 2
Forces influencing strategy.......................................................... 3
The structure of SAE....................................................................... 4
Components of SAE .................................................................... 4
How to use the workbook............................................................ 6
Working in groups....................................................................... 6
Selecting the organisation to study ................................................. 8
Selecting an organisation – an example ...................................... 9
Beginning strategy formulation ................................................. 10
Levels of strategy ...................................................................... 11
Strategic management ................................................................... 12
Conclusion .................................................................................... 13
SAE Course syllabus..................................................................... 15

Chapter 2: Understanding organisational purpose and assessing...........


organisational performance .............................................. 15
Introduction................................................................................... 16
Learning objectives ................................................................... 16
Questions to be addressed in this chapter.................................. 16
Organisation of Chapter 2 ......................................................... 17
Conceptual tools introduced in this chapter .............................. 17
Overview of purpose and performance ......................................... 18
Value creation............................................................................ 18
The role of competition ............................................................. 18
Ends and means ......................................................................... 19
What about not-for-profit organisations? .................................. 19
Factors influencing the desire to search for and create added
value .......................................................................................... 20
Corporate governance................................................................ 21
Stakeholder expectations ........................................................... 22
Assessing organisational performance.......................................... 23
Conclusion .................................................................................... 24
SAE process reminder................................................................... 25

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Strategy Analysis and Evaluation (SAE) Workbook

Chapter 3: The transactional environment ......................................... 26


Introduction................................................................................... 26
Learning objectives ................................................................... 26
Organisation of Chapter 3 ......................................................... 27
Conceptual tools in this chapter................................................. 27
The contextual environment.......................................................... 27
The transactional environment...................................................... 29
Focal questions for transactional environment .......................... 30
Reflections on your reading and the tasks..................................... 32
Market analysis: supply and demand ............................................ 32
Market structures: competitive markets, differentiated product
markets, oligopolies and monopolies........................................... 34
The Five Forces model as a way of investigating the transactional
environment .................................................................................. 37
Applying the Five Forces model ............................................... 38
Market segmentation..................................................................... 40
Analysis of competitors ................................................................ 42
Strategic group analysis ................................................................ 43
Competitor analysis....................................................................... 46
Drawing out and gathering key issues .......................................... 48
Conclusion .................................................................................... 48

Chapter 4: The foundations of competitive strategy .......................... 49


Introduction................................................................................... 49
Learning objectives ................................................................... 49
Organisation of Chapter 4 ............................................................. 50
Conceptual tools introduced in this chapter .............................. 50
Key questions for this chapter....................................................... 51
The offering .................................................................................. 53
The competitive position of your business – the Strategy Clock
and Competitive Advantage.......................................................... 56
Resources and competencies......................................................... 58
Identifying your business’s core competencies............................. 62
What we expect, and do not expect, of you .................................. 63
Core competencies, competitive strategy and competitive
advantage ...................................................................................... 64
Obtaining cost advantages ............................................................ 65
Obtaining differentiation advantages ............................................ 69
Sustaining differentiation advantages ........................................... 70
Hypercompetition.......................................................................... 73
Rivalry and strategising ................................................................ 75
Progress report .............................................................................. 78
Business idea................................................................................. 80
The business idea as a system of feedback loops ...................... 81
Conclusions and looking ahead..................................................... 83

Chapter 5: Corporate strategy ............................................................ 84


Introduction................................................................................... 84
Learning objectives ................................................................... 84
Organisation of Chapter 5 ......................................................... 85
Conceptual tools introduced in this chapter .............................. 85
Choosing the corporation .............................................................. 85
The corporate parent ..................................................................... 86
The rationale of the corporate parent ............................................ 88
Corporate diversity and portfolio logic ......................................... 89
Corporate performance ................................................................. 91
Links backwards and forward ....................................................... 92

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Strategy Analysis and Evaluation (SAE) Workbook

Chapter 6: Strategic options – generation and evaluation .................. 94


Introduction................................................................................... 94
Learning objectives ................................................................... 94
Organisation of Chapter 6 ......................................................... 96
Concepts and tools introduced or developed in this chapter ..... 96
The overall brief............................................................................ 96
Structure of Chapter 6 ............................................................... 97
Identifying key strategic issues ................................................... 101
Option generation........................................................................ 102
The contextual environment – drivers of value creation and
opportunities and threats to business performance.................. 104
The transactional environment: strategic group analysis......... 105
The transactional environment: market segmentation ............. 106
Strengths and weaknesses of the business .................................. 107
The SWOT table and TOWS analysis ........................................ 108
From SWOT to the TOWS matrix .......................................... 109
Strategic stretch (or leverage) ..................................................... 110
Option evaluation........................................................................ 113
Suitability ................................................................................ 113
Financial evaluation of strategic options ................................. 116
Acceptability............................................................................ 117
Evidence .................................................................................. 118
Pulling it together .................................................................... 119
Feasibility ................................................................................ 119
Strategy recommendation ........................................................... 120

Chapter 7: Writing the report ........................................................... 122


Introduction................................................................................. 122
Learning objectives ................................................................. 122
Purpose of writing the report ...................................................... 122
Report structure........................................................................... 123
Executive summary ................................................................. 123
Main report .............................................................................. 123
Role of analysis ....................................................................... 124
Report writing style ................................................................. 125

Appendix 1 ....................................................................................... 127


van der Heidjen, K (1996) Scenarios: the Art of Strategic
Conversation, Wiley, Chapter 3

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Strategy – Analysis and Evaluation (SAE) Workbook
Strategy Analysis and Evaluation (SAE) Workbook

Chapter 1: Introduction to strategy


What is strategy and how will we study it?

Introduction
SAE, is concerned with understanding the strategies of organisations,
the forces that work upon organisations which influence their strategy
and how managers can set about thinking about such forces so as to
decide on strategies. This workbook is designed to accompany the
texts you will be using. It consists of explanatory notes to support
those texts, together with exercises for you to undertake individually
and with other students in groups. It will help if you follow the
sequence of exercises outlined here and the guidelines provided for
those exercises.

Learning objectives
The pedagogical approach adopted to study SAE is student centred
and experiential learning based. We believe that the most effective
approach to learning is a combination of theory and practice, and SAE
is intended to provide a safe learning environment for students. Our
approach is based around a combination of individual reading,
individual and group activity, and reflection on the learning
experience to identify and internalise insights and practice.

The questions you will address in this chapter include:

• What do we mean by strategy and strategic management?


• What are the main forces which influence strategy development in
organisations?
• How might these forces differ between different types of
organisation?
• How might these forces differ between corporate and business
levels?
• What are the characteristics of the strategy of an organisation?
• What are the difficulties in managing strategy in organisations?
• How will we study strategy in SAE?

This chapter in the workbook provides you with an introduction to the


subject and later chapters then develop in more detail the various
topics that you need to understand for your assignment and personal
development. To help facilitate your learning we have set out a
number of ‘activities’ throughout the SAE workbook. These activities
are designed around a number of key questions, which you should
address to help focus your studies.

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Strategy Analysis and Evaluation (SAE) Workbook

The structure of SAE and Strategic Management

Defining strategy

Activity 1.1 (Individual preparatory task)

In the context of an organisation with which you are familiar write


down what you mean by ‘Strategy’. Just note down any words or
terms that come to mind. Do not do any reading at this stage.

We all have views about what we mean by Strategy. However,


typically students (and managers) when asked the question above note
down three different sorts of words and terms concerned with the
following:

• How strategy is managed. These might be words such as


‘planning’ or ‘analysis’. They do not so much describe what
strategy is as how you think strategy might be developed and
managed.
• The purpose of strategy. You might well have noted down terms
such as ‘long-term direction’ or perhaps ‘competitive advantage’
or even ‘survival’. There are different views about what strategies
of organisations try to achieve – what the purpose of strategy is –
but these words are attempts to express that.
• The forces that influence strategy. You may have noted ‘the
environment’ or ‘organisational competencies’ or ‘shareholder
expectations’. These are all influences on the strategy of an
organisation.

Towards a definition
There are many different definitions of what organisational strategy
means. Here we take it to mean:

A long term direction which seeks to meet the expectations and create
value for stakeholders.

This needs a little more explanation.

Long-term will differ by organisation. For a business that needs to


make investments over a long term horizon (e.g. oil exploration or
heavy chemicals) long-term may mean many years. At the other
extreme a dot com and some high tech businesses may have extremely
short time horizons: some chief executives here talk about the long-
term in terms of months, not years.

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Strategy Analysis and Evaluation (SAE) Workbook

Most organisations will have many stakeholders however the


expectations of some are likely to be more influential than others. For
example, the expectations of the shareholders and customers of a
business are likely to be critical for its long-term survival. However, a
unifying need is that stakeholders expect an organisation to use the
resources it has to create value (however they perceive it) for them. So
strategy is also about how value is to be created.

What is missing from the definition above, but often appears in other
definitions is that in order to achieve a long-term direction which
creates value for stakeholders, it is likely that the organisation has to
position itself to achieve some sort of advantage over others.
Businesses in competitive environments do not make high levels of
profit return by being the same as everyone else, but rather by
achieving advantage over others. Public Sector organisations face a
similar issue. In competing for scarce resources (e.g. public money)
how can they demonstrate that they warrant greater resources than
others in the public sector? Charities also face a similar problem: How
can they position themselves to attract disposable income that could
be spent elsewhere?

We have already seen, however, that defining what strategy is about


also shades into understanding the forces that influence strategy. The
expectations of key stakeholders, such as shareholders, certainly
influence the strategy of an organisation. The activities of competitors
also influences the strategy an organisation will follow.

Forces influencing strategy


Extending this more generally, the forces that influence strategy can
be thought of under three headings:

• Environmental Influences: These will include market and


competitive forces, but also macro level influences from the wider
environment – the sort of considerations you examined in EIBE.
So influences such as economic conditions, demographic changes,
public policy and so on will influence the strategy of an
organisation.
• The expectations of stakeholders: All organisations have different
stakeholders. A public company is subject to the expectations of
its shareholders: but it also is influenced by its workers, its
managers, the community within which it exits, trade unions,
government and so on. The extent and power of these different
influences will vary by organisation.
• The resources, capabilities and competencies of the organisation:
What the organisation has at its disposal and its ability to use these
to its advantage. These can include physical assets such as plant
and equipment, financial resources, people skills, organisational
culture, technical capabilities and so on.

We will revisit and reconsider these forces in Activity 1.3 below.

It is important to understand where SAE fits in relation to the rest of


Strategic Management. Remember, Strategic Management has a
number of parts so how does SAE relate to these different parts?

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Strategy Analysis and Evaluation (SAE) Workbook

• You should already have completed EIBE (Exploring the


International Business Environment). Here you will have been
asked to consider the nature of the contextual environment for an
organisation, how that might change and how it might impact on
an organisation. This is a macro view of an organisation’s
environment, to identify the drivers of change, and it is certainly
relevant to SAE (see below).
• SAE (Strategy Analysis and Evaluation) which is the subject of
this workbook and the purpose of which is explained below.
• Managing and Making Strategy are both units that are concerned
with the processes of managing complexity in organisations. In
this regard they are both relevant to the management of strategy.
Remember already in this introduction we have drawn a
distinction between the content of strategies and the processes by
which they are managed. These two units are essentially
concerned with processes. Again they certainly relate to this unit,
not least, because they raise questions about the complexity that
managers face and how it is handled in practice, as managers
develop and manage strategy.
• Strategic Consulting in Practice is an integrative exercise designed
to bring all this together. So here you will have a chance to apply
the lessons of SAE but in the context of the other units.

The structure of SAE


Now we will turn to the structure of SAE itself.

If managers are to cope with the challenges they face in managing


strategy in such a way as to direct the future of their organisation, they
need to have some way of making sense of the complexity and
uncertainty they face. This can be done by applying a number of
important concepts in an analytical manner so as to manage
uncertainty and complexity.

Remember, there are some overarching concepts from what you have
learned in EIBE that will be built upon. The macro environment will
have important influences on the organisation and these influences
need to be considered. In particular managers need to identify if there
are structural drivers from the environment, which will have major
influence on the organisation; and they need to consider the likely
future impact of these, perhaps by applying scenario analysis. Much
of this has already been covered in EIBE and the lessons from that
course should be applied here. Indeed you may wish to undertake such
analyses when you have chosen the organisation you will study (see
below).

Components of SAE
The main components of SAE, summarised in Figure 1, at the end of
this chapter, and structured as chapters in this workbook will then be
as follows:

• It is important to ask how success will be measured. This crucially


depends on understanding the purpose of the organisation; to
whom or what it is answerable, and for what is it answerable?
This will be picked up in Chapter 2.

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Strategy Analysis and Evaluation (SAE) Workbook

• Whilst the macro environment will have a key influence on the


organisation, so too will the transactional environment by which
we mean how the organisation interacts with competitors,
customers and suppliers; i.e. its more immediate competitive
environment. How this can be understood is considered in the
third chapter of this workbook.
• A key question then becomes the extent to which the organisation
can achieve any sort of competitive advantage in this context so as
to generate a level of profitability greater than that of its
competitors? And linked to this is the important question of the
extent to which such an advantage might be sustainable. This is a
central question within this course and is the subject of Chapter 4.
• However, competitive advantage is usually achieved within a
particular market or market segments. Most organisations operate
within a number of markets and comprise a number of business or
business units that face different levels of competition in each
market. This is clearly the case for many businesses that are part
of multi-business businesses or conglomerates. The question then
arises as to what value is added to the businesses by levels above
the business e.g. the corporate centre or parent? Corporate
Strategy is the subject of Chapter 5.
• Most of this is about understanding the forces that influence the
strategy of an organisation; and the concepts that can be applied to
deal with this. But in the end organisations – be it at the business
or corporate level – have to take decisions about what strategies to
follow. Chapter 6 of the workbook considers the strategic options
that might be considered by organisations for future strategy; and
how these might be evaluated, prior to taking a decision.
• The final chapter of the workbook requires you to bring all this
together to make a recommendation as to the future strategy of the
organisation.
• Students often find these last two steps the most challenging. In
the preceding steps you will have gathered a great deal of data and
hopefully much insight into the organisation you are studying.
You now have to make some decisions with regard to the future
survival and success of the organisation you are studying. The
challenge you will face is how to make sense of all the data you
have in order to make those decisions. The chapters in this book
will help you do that.
• Because you have examined the strategic situation from a number
of different perspectives, you will have information and insights
on different bases. It may be difficult to reconcile all of these
when it comes to making the sort of decisions you have to make.
For example, you will have considered the opportunities and
threats arising from a changing environment and from the nature
of the markets relevant to your business. You will have considered
the expectations of shareholders and other stakeholders as well as
those of customers. You will have considered the competencies
and capabilities of the organisation you are studying. All of these
considerations have a bearing on the choices you will make and
recommend; but you will probably have to choose a primary focus
by which to drive your choice of strategy. We will return to this
point in Chapter 6.

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Strategy Analysis and Evaluation (SAE) Workbook

How to use the workbook


Each of the above issues is considered in separate chapters in this
workbook. Each chapter is rather like this one. It has a narrative,
supported by readings and activities and tasks that you will undertake
as you work through your case, so as to apply the concepts and
techniques covered in the workbook and in the texts.

You have two books which we will refer to extensively throughout


this workbook – Fundamentals of Strategy and Business Economics,
as well as The Sixth Sense, (TSS) used previously in EIBE.

Fundamentals of Strategy by Gerry Johnson, Kevan Scholes and


Richard Whittington (FS) is a new version of one of the best selling
texts on strategy in the world and provides a synthesis of different
concepts and techniques by which to understand and consider the
management of strategy in organisations. SAE draws largely on the
first nine chapters of this book and there will be reference in each
chapter of this workbook to different sections of FS.

Business Economics (BE) by Roger Perman and John Scouller is also


concerned with the strategy of organisations but from an economics
point of view. It provides a usefully different perspective from FS.
Again references will be made to specific parts of this book
throughout this workbook.

In addition, Chapter 3 of Scenarios, The Art of Strategic Conversation


by Kees van der Heijden, referred to in this workbook as SC, will also
be used as a reference throughout this workbook. This chapter is
included as an Appendix to this workbook.

For the first chapter of this workbook you should begin by reading
Chapter 1 of FS. It will provide you with a broad overview of the
subject.

Working in groups
Our expectation is that you will be working with a team of students,
however there may be some students who, due to their circumstances,
will undertake SAE individually. You will be briefed locally on how
these teams are made up and how team-working will occur. With this
in mind some of the activities are individual for you to undertake in
conjunction with your reading. These activities in turn feed into team
tasks. You should prepare individually and take your individual work
to the team for discussion, debate and further analysis and
consideration. The balance between individual and group activities is
dependent on the mode of study i.e. full-time, part-time, flexible
learning or internationally. The greatest learning is achieved when you
undertake individual work and teamwork, and reflect on the outcome
of these activities.

The SAE learning experience philosophy is based on an iterative


process rather than a linear one. In practice students will find
themselves re-visiting earlier work to update it as the knowledge of
the case study organisation deepens. As your studies progress you
may even draw conclusion that some of the earlier work is redundant,
due to emerging insights and understanding. Do not be surprised by

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Strategy Analysis and Evaluation (SAE) Workbook

the need to reflect on and update your analysis. We would encourage


you to view this as a natural part of the learning process.

As you work through the SAE course, we will ask you to undertake a
number of activities, principally in groups but occasionally
individually. On occasions in the workbook you will be asked to
reflect, and make notes in the appropriate boxes, on the new
understandings or insights that you have gained. Consequently it may
be useful to you to make a note of your initial understanding of a
subject before embarking on individual reading or group work. This
understanding can then be used as an input into your group
discussions.

Your SAE workbook should become a working or ‘living’ document


throughout the course and will be an important reference source for
you when it comes to writing your individual reflective essay on your
overall learning at the end of the course. To help make explicit to
yourself the learning that has occurred we would ask you to complete
the ‘Individual reflections and personal learning insights’ boxes.
Undertaking this task is important for two reasons. Firstly the process
provides you with an on-going record of your development. Secondly
the notes you record as ‘Individual reflections and personal
learning insights’ will provide you with material for
consideration/input into your SAE individual assignment. (See the
SAE assignment guidelines, given separately). Electronic copies of
the activities in the seven chapters of this workbook are on the SAE
page of the MBA intranet site.

Activity 1.2: (individual preparatory activity)

Developing your skills and understanding of Strategy

In the context of studying strategy what are your expectations from


the course. We would like you make explicit to yourself your aims
and objectives at the outset. As the course develops, we would like
you to re-visit these aims and objectives and reflect on your past
experience, expectations and learning from the course. This is
intended to help deepen your knowledge and understanding of the
subject, over time, as you progress through the workbook.

Initial aims and objectives:

Ongoing:

Conclusion of studying SAE:

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Strategy Analysis and Evaluation (SAE) Workbook

Selecting the organisation to study


Choice of case study is dependent on the mode of studying. Some
modes of study will be able to choose freely the case study
organisation. Other modes will be given a case study organisation.
Whichever approach is relevant for your studies, the intention is to
provide a collaborative and co-operative environment for learning and
development.

For offshore students your local tutor will brief you on what is
required and in some circumstances specific case studies will be
provided. If you are going to choose another organisation you should
use the following guidelines:

1) You will need to get hold of a great deal of information about the
organisation you chose. If you are using a case study it will need
to contain a lot of information and you will need to access further
information to support that. If you choose a business with which
you are familiar (perhaps one which a team member works for)
again remember that you will need to be able to access
information. A scan through the curse syllabus shows you the sort
of questions we will expect you to deal with. To address these you
will certainly need to know about:

• The ownership structure of the organisation.


• The market and market dynamics within which the
organisation operates.
• Its competitors and how they have sought to compete.
• Customers and what they expect and value.
• Ideally a good deal of information about the organisation’s
resources and competencies (this could prove the most
difficult area in which to get information since, ideally, it
would be helpful to know about fairly internal detailed
processes).
• If this is a business within a corporate group, something about
the other businesses in the group and also what the
corporation itself claims it is trying to do strategically.
• The environment and possible drivers of change.

2) It will help if you chose an organisation operating within a fairly


discrete market; and try to avoid choosing a multi-business
business. So, for example, it would not be a good idea to choose a
conglomerate such as Unilever. It would be more sensible to
chose a business within Unilever; but be careful to check that you
can get information about that business (as above) if you do. Even
if you do choose a business, also be careful to consider how many
markets that business operates within. Obviously if you chose a
business operating in many markets it makes your task a good
deal more complicated.

3) In summary, some do’s and don’ts about your choice of a


company to study:

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Strategy Analysis and Evaluation (SAE) Workbook

Do:

• Ensure you can obtain relevant data – financial, but also company,
press, and analysts’ accounts – about the company.
• But which is manageable in scope: e.g. some companies may be
so big that you could have difficulties in finding the time to access
and analyse the data available on it.
• Choose a company that interests you.
• And which you think faces an interesting strategic challenge.
• Choose a business for which you can identify customers or users
and take a view (or get information) on their needs and
expectations.
• Choose a business that has competitors.

Don’t:

• Focus on multi-business corporate level issues: it is fine to choose


a business within a corporate portfolio; but check you can get
information at the business unit level. Corporate level issues will
be considered in the course but the business level is the primary
focus.
• Choose a product (e.g. a brand) as distinct from a business.
• Rely solely on personal access to an organisation: your project is
at risk if this is not achieved.

Selecting an organisation – an example


To help you think this through, consider the following. Supposing you
chose the University of Strathclyde as your organisation. Actually the
University of Strathclyde has many different ‘businesses’ serving
different markets. It has undergraduate students that are different from
graduate students such as you. That is why Strathclyde Business
School has a separate Graduate School of Business. But even if you
chose the Graduate School of Business as a focus for your study,
remember it too operates within different markets. For example, it
operates different geographical centres; it also runs short courses for
executives as well as an MBA, DBA and PhD. So it would be
important to decide at which level you are considering the
organisation you wish to study. In terms of the above example, our
suggestion is that you need to get as close as possible to a business
with a clear market definition, such as, for example, the Graduate
School of Business: it may operate different centres but its main
business is in the MBA market.

Clarifying the business unit early will help minimise confusion as you
work through the activities and tasks in this workbook.

Activity 1.3: (Individual and/or Group task)

For full-time and part-time students, please select an organisation for


your group to study in SAE. For students at the international centres:
please ignore this activity and consult the separate assignment
guidelines.

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Strategy Analysis and Evaluation (SAE) Workbook

Beginning strategy formulation


Where do you start when thinking about constructing strategy? What
is the central issue that needs to be addressed? What is the priority that
needs to be recognised at the outset of this exercise? To answer these
questions, we would ask you to consider and identify the key issue
that needs to be addressed at the outset of your study of SAE / an
organisation. Here are some questions / issues to consider:

• What are the concerns of shareholders or stakeholders? Might


these concerns be the same or different? What does this imply?
• What are the key concerns or imperatives of corporate
headquarters? Are they concerned with specific revenue or profit
targets? Are they concerned with maintaining and growing market
share or are they concerned with portfolio mix?
• What markets or market segments are you operating in and is
there any change in market structure?
• What are the competencies of the organisation and are we
interested in competency building or stretching competencies into
new markets or customers?

Once you have made your list, ask yourself the question – ‘at the
outset of strategy formulation, why have we written what we have
written, and why are these important?’

Take the opportunity to compare your views here with others in your
team or in your course. It is quite likely that you will have noted down
many similar forces at work. However, it is also quite possible that
you will have noted down different ones; and given different
emphases to these from your colleagues. This is not surprising.
Different organisations do face different influences on their strategies.
Take the opportunity to discuss with your colleagues why this might
be so in the context of the organisations they considered. For example,
consider the following:

• Do the organisations face different competitive pressures?


• Are the organisations subject to different sorts of stakeholder
influence?
• Are the organisations subject to different influences from the
macro environment? For example, some organisations are much
more directly linked to economic conditions within the markets in
which they operate.
• Do some organisations depend on and owe their success to
particular capabilities and competencies or sets of capabilities and
competencies?
How do managers deal with these issues in practice?

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 1.4: Forces influencing strategy (Individual and/or group


task)

Make a note of the forces that you think are likely to play a major role
in influencing the strategy of the organisation you are studying. Put an
asterisk against the forces that you think the organisation pays
particular attention to currently (N.B. you will revisit these throughout
SAE but getting an initial view might be helpful). The environment is
concerned with opportunities and threats; stakeholder influence is
concerned with those actors that can make or break the strategy; and
resources is concerned with the basis of success and how it can be
leveraged.

The Environment Stakeholder Influence Resources/Capabilities


and Competencies

This initial list will almost certainly change as you work through this
unit. This is one of the lessons of managing the strategy of
organisation – the need for flexibility to understand and manage
multiple conflicting goals.

Levels of strategy
The concept of strategy applies at different levels in organisations.
Individuals have strategies; and functional areas of businesses such as
Marketing or HR have strategies. In this course we are not so much
concerned with those (although our considerations here have serious
implications upon such strategies) as with business level and corporate
strategy. Again these influence each other but they can be
distinguished as follows:

• Business level strategy is concerned with the position it takes


within a market. Indeed it is often thought of as competitive
strategy; how it seeks to build advantage over competitors such
that it can achieve profit levels greater than competitors. This is
sometimes thought of as the generation of rents. Put simply, why
might managers within any business expect to make profits
greater than their competitors over a long recurring period? The
equivalent question for a public sector organisation might be on
what basis should it expect to receive resources proportionately
greater than others with whom it competes for those resources?
The challenge for management is the continuing search for rent,
sometimes referred to as ‘the search for value’.

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Strategy Analysis and Evaluation (SAE) Workbook

• Corporate level strategy asks a related but different question.


What value does the corporate body add to the value generated at
business level? In the absence of being able to answer this
question, then the corporate level is merely a cost placed upon the
businesses and will destroy value. This is a deceptively simple
point with profound implications for the value creating capacities
of such corporations and, in the end, for the economic well being
of whole economies.

Strategic management
This leaves the ‘how’ of managing strategy. How is it done? There are
many different accounts and explanations of how strategy is managed.
These will be expanded upon and explained in more detail in a later
part of Strategic Management in your MBA. In SAE we take a
particular view about the management of strategy. It does not mean it
is the ‘right’ view but a useful one which you need to understand.

Consider the problems of managing strategy. Refer back to Activity


1.4 above. It asked you to think about different forces influencing the
strategy of organisations. Consider the following questions:

1. Which of the environmental forces you identified can be predicted


with confidence into the future? Some may be predictable with
some confidence, but others will not be. So there is a problem of
uncertainty in managing strategy.

2. Which of these forces can be influenced directly by the


organisation? Some may be, but others will not. So key influences
may be outside the direct control of managers. It is therefore
important to identify those which are within the control of
managers; and understand how.

3. Are all the expectations of stakeholders similar? Quite likely not.


The expectations of shareholders may differ from the expectations
or workers or managers, for example. These in turn may differ
from the expectations of government. So balancing these
expectations is a complex problem that managers need to face.

4. Is it clear what the capabilities and competencies are that provide


competitive advantage? Or do the managers assume they know
this based on received wisdom only?

5. Are the different forces aligned? They may well not be. The forces
at work in the environment may suggest the organisation should
move in one direction; whereas the expectations of stakeholders or
the inherited competencies available may suggest another.

It is quite likely that in discussions on strategy words such as


‘planning’ are mentioned. This is not surprising because in many
organisations strategy is associated with the development of a
‘strategic plan’, the content aspect of strategy. Underlying the notion
of a plan are certain assumptions:

• that despite the uncertainty and complexity, certain key issues or


forces affecting the organisation can be identified,

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Strategy Analysis and Evaluation (SAE) Workbook

• that managers can systematically organise resources to address


these forces or influences, and
• that by so doing can proactively organise itself to achieve the
expectations placed upon it.

Putting all this together it is clear that the strategic manager faces a
complex task quite different from normal operational, day to day
management, the process aspect of strategy. How is this to be
addressed?

At this stage it might be useful to try and write down some notes on
what you think the strategy is of your organisation. It could be that
you have already decided on an organisation to study for this course.
Or it could be that you are using a case study, or again it could simply
be that you are working in an organisation. For this activity, you need
to choose an organisation with which you have some familiarity.

Activity 1.5: (Individual and/or group task)

What is the strategy(s) of the case organisation currently?

Bearing in mind the characteristics explained above, especially in


terms of the purpose and components of strategy, write down what
you consider the strategy of the organisation to be currently. Don’t
worry if you find this difficult to pin down. You will become clearer
on how to consider organisational strategies throughout this module.

You may not have found this straightforward. This may be because
organisations do not make their purpose or strategy explicit in terms
of the sorts of characteristics discussed here: for example in terms of
how they seek to position themselves in the long-term to achieve
competitive advantage or what distinctive competencies they seek to
build this upon. This may be because they are not clear about it
themselves; but it could be because they regard this as something they
do not wish to make over explicit in a competitive environment.

Conclusion
This chapter was designed to introduce you to the approach we will
adopt to studying SAE. In addition, we have introduced some of the
key issues that you need to be aware of at the outset of studying SAE.
We have provided you with some guidance to help you select a case
study organisation as you work through the workbook. The rest of the
workbook will be concerned with analysing this case study
organisation, identifying insights from the analysis, drawing out
conclusions and making recommendations vis-à-vis strategy.

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Strategy Analysis and Evaluation (SAE) Workbook

Assessment
Now is a good time to familiarise yourself with the SAE assignment
guidelines, which have been given to you separately.

Individual reading:

FS: Chapter 1, provides an introduction to the nature of strategy and


strategic decisions, and strategic management as a concept and in
different contexts.

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Strategy Analysis and Evaluation (SAE) Workbook

SAE Course syllabus

Chapter Content Expected outcomes


1. Introduction to A broad understanding of what is meant by
SAE strategy

2. The Organisation: Value creation and Rent A view on what is meant by success
Value creation Corporate Purpose strategically in terms of the expectations of
key stakeholders
Corporate Governance
3. The Transactional Value creation and competition Identifying the key forces within a
Business Porter’s 5 forces model based on competitive environment that influence
Environment Bargaining Power and strategy and have to be taken into account
relationships to develop strategy.
Strategic group analysis
Market segments
4. Competitive Generic competitive strategies Identifying how (and how might) the
Strategy Costs and cost leadership organisation seek to create value.
differentiation
Resources and competencies
Sustainability of competitive
advantage
Business idea
Hyper competition/Outpacing
Strategy: elementary game theory
Network effects/externalities
5. Corporate Strategy The multi-business corporation Identifying how does (and how might) a
Corporate value creation corporate parent enhance the value created
M&A’s as corporate means by business and considering why it might
options not.
Corporate strategy design
Portfolios
Parenting issues
6. Strategic options Option generation and evaluation Identifying what are the strategic options
and choices: Scenario wind tunnelling of possible for the organisation.
Approaches to options
evaluation
Identifying which of these is most
appropriate.
7. Conclusions, and Recommendations
links forward to
managing and
making strategy

Figure 1: Summary of the main components of SAE

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Strategy Analysis and Evaluation (SAE) Workbook

Chapter 2: Understanding organisational purpose and


assessing organisational performance
Introduction
This chapter focuses on purpose of organisations and the creation of
value by them. The creation of value is linked to the search for rent, as
noted in Chapter 1. This chapter will help you to understand the
history and goals of the organisation. Many organisations do not state
explicitly their goals. However by trying to articulate the goals of your
case study organisation at the outset it will assist you as you undertake
your analysis, to help the organisation continue its search for value.

Learning objectives
The objective of this chapter is to develop your understanding of
organisational purpose and performance.

On completion of this chapter you should have reached a good


understanding of issues relating to business purpose and performance,
which are central to business/ corporate strategy. Strategic
management requires managers to understand organisational purpose
and the approach an organisation takes to fulfilling its purpose both at
present and in the future. In order to judge whether or not an
organisation is fulfilling its purpose we need to be able to assess its
performance and to consider the options for improving or sustaining
organisational performance.

Questions to be addressed in this chapter


With respect to your case study organisation, your overall brief is to
consider the question of organisational purpose – what is meant by
‘successful performance’ and ‘how this might be determined’?

For the particular case organisation, the specific issues to be addressed


in this chapter concern:

1) The purpose of the organisation in principle and in practice.

2) The nature and significance of mechanisms of governance.

3) Wider stakeholder influence on organisation purpose and criteria


of success.

4) Criteria of organisational success and performance.

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Strategy Analysis and Evaluation (SAE) Workbook

Organisation of Chapter 2

Conceptual tools introduced in this chapter

Value creation and added value


Shareholders and stakeholders
Corporate governance
The governance chain
The market for corporate control
Missions and objectives
Organisational performance
Economic value added, EVA,
Return on equity
Total shareholder returns
Value reporting

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Strategy Analysis and Evaluation (SAE) Workbook

Overview of purpose and performance


The key question to be addressed in this chapter is – what is the
fundamental purpose of an organisation, such as a business or
corporate enterprise? To address this question, we ask that you
consider the following concepts and issues:

Value creation
Economists argue that organisations such as business firms exist
essentially to motivate and co-ordinate the search for the effective use
of societies scarce resources. If there is a lack of desire to use scarce
resources effectively and/or a lack of ability to co-ordinate these
resources effectively then there is likely to be inefficiency and waste.
That is wants and needs we could satisfy are not met because of
motivation problems or co-ordination failures. To an economist
therefore:

‘Organisations such as business firms exist to motivate and co-


ordinate the SEARCH for and the EXPLOITATION of
opportunities to create value by seeking to produce and deliver
goods and services which are more highly valued by society than
the economic value of the scarce resources being used up in the
process.’

Another common way in which this is expressed is to say that


organisations exist to ADD VALUE, meaning simply that the value of
what they produce, as signalled by the consumers willingness to pay,
exceeds the value of the resources they use up in production and
distribution. Economists commonly refer to this as generating
economic profit or ‘creating and appropriating rents’ to express
this idea of creating organisational value. An organisation that fails to
add value is likely to be destroying value, in the sense that the value of
its output to its customers/ clients is less than the value of the
resources it uses. There are historical reasons for adopting such terms,
which are discussed in BE Chapter 4.

The search for rent argument has at its core the primacy of
maximising shareholder value. However, there is an alternative view
that argues for the recognition of multiple stakeholders, who all need
to be considered by management. In this alternative view, multiple
stakeholders and shareholders are mutually inter-dependent and the
organisation should try to create a virtuous circle between all
stakeholders. If this second view is acknowledged it creates a potential
problem for managers – how do you balance multiple stakeholders
when setting objectives? What is your view on this issue, and how
does it impact the case organisation?

The role of competition


Arguably the competitive market is a core device for dealing with
scarcity and encourages value creation by promoting the development
of organisations that will seek to create value rather than destroy it.
And not just strictly defined business organisations, charities and other
‘non-profit’ organisations also operate in a competitive environment
and have to convince contributors or providers of resources (such as

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Strategy Analysis and Evaluation (SAE) Workbook

taxpayers) that they are likely to add value to the resources they
obtain.

Ends and means


Of course organisations may not generally state their OBJECTIVES
as the search to add value or generate rents. Organisational objectives
in practice are stated in many different ways in order to make them
easier to understand, more motivational, and more operational, for
example:

Increasing margins, increasing turnover, increasing market share,


return on assets employed, raising quality, reducing costs, new
product development, customer satisfaction, growing the business,
employee satisfaction.

However this raises the distinction between ENDS and MEANS:


between purpose and the means of achieving that purpose. In this
chapter we are primarily discussing the end purpose of organisations.
In later chapters we will discuss means in detail. The problem is that if
an organisation loses sight of its basic purpose – its ends – it may see
actions such as quality improvement, increased market share,
‘sweating assets’, cost cutting exercises, happy employees and so on
as ends in themselves. This in turn may lead the organisation to over-
invest in certain activities, which could be wasteful and ultimately
harmful to its prospects. On the other hand a business may become so
obsessed with the ‘bottom line’ that it invests too little in quality,
product development, IT infrastructure, customer relations, cost
controls, employee training and so on.

Getting the correct balance is what matters. Assuming, the


organisation is focused on the goal of value creation then it will seek
to make those investments that it calculates are likely to produce
future benefits greater than the costs involved. Economists’ express
this requirement by saying that the business must seek to invest so that
the returns produced are likely to exceed the opportunity costs of the
resources used (the principles of investment decision making are
covered in the MBA class in Finance and is covered briefly in BE
Chapter 9).

What about not-for-profit organisations?


Of course there are many organisations that are explicitly ‘not for
profit’, such as charities, services provided by central or local
government or universities for example. ‘Not for profit’ does not or
should not however mean ‘not for value creation’. The underlying
objective remains to produce benefits that exceed the costs involved?
The difficulty of course is that for some ‘non-commercial’ type
organisations the costs may be clear (hospitals, doctors, nurses) and
measurable whilst the benefits may be more difficult to measure, so
determining what is meant by success may be more difficult.

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 2.1: Understanding organisational purpose (Group task)

Does the case organisation state anywhere (e.g. in its annual report)
what its purpose is? And does it have a stated set of objectives? If so
note these down.

If not, taking into consideration how it describes itself, what do you


perceive its purpose and objectives to be?

Do you agree with these? Or do you think the purpose and objectives
of the organisation should be something else?

What have you been thinking about and discussing – a single business
unit or an organisation with several, perhaps many, business units?
Please be clear on the distinction between the two.

Factors influencing the desire to search for and create


added value
Some textbooks, especially in economics and finance, are prone to
assume that all businesses search to maximise the amount of value
created at all times. This may be a convenient assumption for theorists
to adopt because it allows the use of mathematics to give precise
conditions for maximisation. (See for example BE Chapter 6, box
6.1). It is however not a very useful or realistic assumption for
strategists to adopt. It is not useful because strategists must deal with
specific organisations in specific circumstances and must be careful
about making assumptions about them. Strategists must therefore take
the question of strength of purpose as something to be explored for the
organisation in question. It is not realistic because it is not clear what
MAXIMISING means in the highly complex and uncertain world in
which businesses operate, except that people do their best given the
circumstances and the information available. The information

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Strategy Analysis and Evaluation (SAE) Workbook

requirements for maximising behaviour could be considerable and


expensive.

We therefore take the view that whilst, in general, firms are searching
to create economic value, which in effect is a condition for long run
success and survival, in practice the strength of this desire is likely to
vary. Important influences on this are the multiple influences on
firms’ objectives and the strategies they pursue, which we will now
consider.

Corporate governance
The corporate governance framework determines whom the
organisation is intended to serve and how purpose and priorities are to
be decided. FS 4.2 explains the nature and significance of the
‘governance chain’, the role of shareholders and the rights of lenders.
This discussion is complemented by an extended discussion of both
governance and what is called the market for corporate control in
BE Chapter 12.

It should become apparent from the reading that what might appear to
be straightforward theoretically is not straightforward in practice.
Arguably, theoretically the management of a business is responsible to
meet the expectations of shareholders. This begs questions such as: –

• Which shareholders? The final individual beneficiaries or


institutional shareholders? What role do investment analysts play
in this process, for example?
• Which managers? It is not just the top management of
organisation that influences strategy: for example would the Chief
Executive of a business within a major conglomerate see herself
answerable to the ultimate shareholder or to the corporate board?
• Do the expectations of shareholders (whoever they be) get
communicated clearly and unambiguously down the governance
chain so everyone is clear what their expectations are?
• Indeed, are the objectives and expectations at different levels in
the governance chain compatible taking into account the personal
interests at these various levels?

Activity 2.2: Governance (Group task)

Using as a guideline Exhibit 4.2 (page 92) in Chapter 4 of FS consider


the governance chain of your organisation from end beneficiaries
through to operating managers, as in the exhibit.

For each of the levels in the governance chain consider what their
personal expectations would be from the organisation.

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Strategy Analysis and Evaluation (SAE) Workbook

Stakeholder expectations
The corporate governance framework provides the formal
requirements and boundaries within which strategy is developed.
However it is important to remember that the governance chain alone
does not define all of the actors that managers must consider when
developing strategy. Stakeholder theory is an approach to business
that argues that the success of the firm depends on a variety of actors
(stakeholders) including, but not confined to, those defined in the
governance chain.

Stakeholders are defined as those individuals or groups who depend


on the organisation to fulfil their personal goals and on whom the
organisation depends to a greater or lesser extent. That is stakeholders
both make contributions to the firm and have expectations of it.
They are therefore likely to exercise influence over the organisation.
Some of these stakeholders are fairly obvious; shareholders,
managers, the workforce, unions, suppliers, government and so on. In
other organisations stakeholders may be peculiar to that organisation;
they will also differ in the extent to which they have influence in a
given organisation. It is therefore useful to have an understanding of
who the stakeholders are and the extent of their influence. It is also
helpful to ask what you consider the influence of stakeholders should
be: after all your views on this are likely to influence what you
consider to be the main expectations that the organisation should
meet. FS 4.4. discusses stakeholder expectations. After reading this
undertake the next activity.

Activity 2.3: Stakeholder analysis (Group task)

Who do you consider to be the main stakeholders for your


organisation and what are their principal expectations?

Are stakeholder expectations compatible with one another?

Rank the stakeholders in order of who you think is currently exerting


the most influence on the objectives and strategy at the organisation.

Which expectations should play the greatest role in influencing the


strategy and objectives of the organisation?

Bearing in mind your conclusions, revisit the objectives you identified


in Activity 2.1 and consider if you need to change them.

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Strategy Analysis and Evaluation (SAE) Workbook

Individual reading:

FS: Chapter 4, pages 89-119, provides a discussion on the issues of


purpose, governance and stakeholders.

Assessing organisational performance


How well or badly are we doing? What should we aspire to?

In the final part of the chapter you are asked to come to a view about
how you might measure success in terms of performance. What
follows are some key points to consider.

Performance compared to who or what?


Aspirations, previous record, competitors, business sector in general,
the minimum necessary to avoid bankruptcy? If the organisation is a
shareholder oriented value seeker the appropriate comparator might be
its share performance compared with its competitors in the same
market sector or with business in general. Looking at the performance
of the businesses in a comparative context allows managers to judge
how near or far they are from the industry leaders and provide a
benchmark for the future aspirations of the organisation.

Performance over what period of time?


Should we look at performance over one year or over 10 years? It
depends. If we are looking at the performance of a new management
team or a new strategy then we need to decide on what is a reasonable
period of time to give the new team or the new strategy to work. This
will depend to some extent on the specific circumstances of the
industry and the characteristics of the business. A general judgement
of a particular business and its management team might consider short
term performance, say a year, medium term, say 5 years, and longer
term performance, say 10 years. This would avoid too much focus on
the short-term, which is likely to be susceptible to the vagaries of a
particular market or even to accounting manipulations.

You will know from your own experience and from the Management
Accounting course that there are many different ways of measuring
performance (return on capital employed, return on equity, economic
value added etc in commercial businesses). You should consider
which of these (or others) are more or less appropriate in measuring
the success or otherwise of the strategy of your organisation. For
example, if you were putting forward a strategic proposal in an
organisation you would be expected to say what effect it would have
on performance using some performance criteria. What should they be
and why?

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 2.4: Organisational performance measures (Group task)

Identify different bases (financial and non-financial) of measuring


organisational performance, and note down the advantages and
disadvantages of these in relation to:

a) the expectations of stakeholders considered in this chapter.


b) the assessment of the likely success of future strategies.

Bearing these considerations in mind, we ask you to re-visit the


objectives you recorded in Activity 2.1: should they now be revised?

Conclusion
This chapter has been designed to help you understand the purpose of
the case study organisation that you have chosen to study. The chapter
has also been designed to help you consider and identify a wide range
of organisational performance criteria. By taking Chapter 1 and
Chapter 2 together, you should now have a clearer understanding of
the case study organisation prior to commencing your analysis.

This clearer understanding is important in that, (i) you have


established a sound initial picture of the case organisation, and (ii) that
you are able to use your initial understanding to anchor your studies,
as you work through the remaining chapters.

Activity 2.5: Individual reflection and personal learning insights

Recalling your level of knowledge and understanding at the outset of


this chapter what has been the personal learning and insight that you
have gained from:

a) The issues raised in the chapter and the related tasks?


b) The process of group discussion about the issues and your role in
this?
c) The relevance to and implications for you as a manager?

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Strategy Analysis and Evaluation (SAE) Workbook

SAE process reminder


The following chapters are designed to study the case organisation’s
transactional environment (Chapter 3), competitive capability and
position (Chapter 4), the role of the parent company (Chapter 5),
responding to opportunities and threats by developing and evaluating
strategic options (Chapter 6), and finally, communicating the
conclusions and recommendations of your analysis in the form of a
report to the CEO of the case organisation.

Individual reading:

BE: Chapter 4, provides an economic perspective on the nature of


organisations including purpose, objectives and the search for rent.
FS Chapter 4.2, 4.4 and BE Chapter 12 provide a discussion on whom
the organisation is to serve and how the purposes and priorities of the
organisation should be divided.

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Strategy Analysis and Evaluation (SAE) Workbook

Chapter 3: The transactional environment


Introduction
In this chapter of the workbook you will investigate another of the
‘environments’ within which a business operates: its transactional
environment. As the name implies, the transactional environment
includes all those individuals and organisations with which the
business transacts in some way or other. It is also usually taken to
include your competitors.

Learning objectives
The learning objectives of this chapter of the workbook are to develop
a clear understanding of the environment – contextual and
transactional – for the case organisation, develop an understanding of
how these influence the ability of management to develop and
formulate strategy, and identify opportunities and threats from this
analysis.

Some of the above questions are mainly about the business at present;
others are about the future of the business and its wider organisation;
and some concern both. In this chapter, many of the tasks mainly
relate to the current position of the business. Where this is the case,
you will inevitably find yourself thinking about the future as well.
That is as it should be, and we suggest that you keep a record of these
ideas as you go along.

In the Options chapter later in the workbook, we shall revisit some of


the tools developed in this chapter, but in an explicitly future-looking
way. The ideas you develop here will be important inputs to the
process of generating and evaluating options.

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Strategy Analysis and Evaluation (SAE) Workbook

Organisation of Chapter 3

Sustainability and/or
PESTEL Scenarios Contextual environment
Nature of competition

Strategic groups Nature of competition


Transactional
environment

Market structures
Five forces analysis

Markets

Market segmentation

Conceptual tools in this chapter


PESTEL
Scenarios
Markets and market structures
Market segmentation
Supply and demand
‘Five Forces’
Strategic Groups

The contextual environment


In the Exploring the International Business Environment (EIBE)
component of this course, you studied the contextual environment in
which organisations operate. The contextual environment (also called
remote or wider environment) consists of institutions and processes
that operate largely outside the control of any individual organisation
(except governments), but which can be important drivers of value-
generating potential. In that earlier study, you used the PESTEL
framework to classify environmental forces into Political, Economic,
Social, Technological, Natural Environmental or Legal categories.
You also developed Scenarios as a way of organising ideas about
possible but uncertain environmental change.

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Strategy Analysis and Evaluation (SAE) Workbook

To help you with the next stage of this course, we would ask you to
re-read the EIBE course. This course explains the approach to
scanning the environment and scenario development in more detail.

Activity 3.1 PESTEL analysis (Group task)

Undertake a review of the external environment to identify – Political,


Economic, Societal, Technological, Environmental, and Legal drivers
of change.

We now ask you to re-visit the application of scenario development


and use the approach as part your analysis of the case study’s context.

Activity 3.2 Scenario development (Group task)

Revisit the procedures of scenario planning from EIBE course and


using the PESTEL analysis developed in Activity 3.1 to help identify
key uncertainties develop scenarios of the future to help the case study
management consider these drivers of change in more detail.

Hints

a) Make sure that the time horizon chosen for the scenario planning
is appropriate for the case organisation concerned.
b) Be clear when identifying the axes of the scenarios that they are
independent.
c) Be clear also what you mean when identifying uncertainties. For
example if in developing scenarios for sub-Saharan Africa you
label a cluster of driving forces as ‘Effects of HIV/AIDS’ then
there is little uncertainty associated with this label. If on the other
hand you label a cluster of drivers ‘Continent wide effective
governmental response to HIV’ there is enormous uncertainty
associated with this.
d) There is no need to undertake two iterations in developing
scenarios; the key to developing your scenarios is the
identification of key external concerns that you have identified
during your analysis.

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Strategy Analysis and Evaluation (SAE) Workbook

In the Options chapter (Chapter 6) we ask you to use the scenario


framework to identify possible opportunities and threats that arise
from changes in these environmental drivers. Analysis of possible
strategic responses to such opportunities and threats constitutes one
way in which options can be generated for the business or the
organisation of which it is a part. You will also be asked to use
scenario analysis as a framework within which options can be
evaluated in terms of various performance criteria.

The transactional environment


The transactional environment is an industry or market level concept,
and so its principal use is as a way of thinking about forces acting at
the business – rather than corporate – level. Hence, throughout this
chapter, we ask you to use this tool to analyse strategic decisions at
the business level. Of course, an organisation may operate in several
different markets, and so may have several different transactional
environments. Depending on exactly how one defines a market, a
business may also operate in several (closely related) markets.
However, for the rest of this chapter, your team should focus on the
particular transactional environment that is most relevant to your
selected business.

There is one major similarity and one fundamental difference between


the contextual and transactional environments. The similarity arises
from the fact that they both impact upon the business. In doing so,
these environments impose constraints. They also present
opportunities and threats. The difference arises from the fact that the
transactional environment consists of all those institutions and parties
with which the business interacts, or might interact, in carrying out its
various activities. Interactions are by their nature two-way or
reciprocal. Hence the business can – to some extent at least –
influence and shape its transactional environment. How it does so will
have an important bearing on business success, and so generates an
additional dimension of strategic behaviour. In contrast, the contextual
environment of a business or corporation is largely outside its sphere
of influence – the direction of influence is more-or-less one way. Very
occasionally a single organisation has enough influence to
significantly shape the contextual environment in which it operates.
Arguably, this has been true of Microsoft; its development of
communications software seems to have shaped the overall direction
in which information technology has evolved. But this is the exception
rather than the rule.

Although single organisations rarely shape their contextual


environment, this is clearly not the case for the collection of
organisations that make up a transactional environment. The
transactional and contextual environments themselves are not
independent entities; they do interact. A clear example of this is found
in the various information industries. What happens in those
‘transactional environments’ clearly affects the pace and direction of
technological change in the wider environment. And changes in
technology feed back upon various transactional environments. These
reciprocal interactions are also evident in the transport and vehicle
industries and their contextual environments.

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Strategy Analysis and Evaluation (SAE) Workbook

Focal questions for transactional environment


The questions you should be thinking about in this chapter include:

• What product do we offer?


• Who are our customers?
• Who are our existing rivals?
• What is the nature of competition in the market (e.g. is
competition mainly based on price or on quality considerations)?
• How intense is that competition?
• Is it likely that new entry into the market will take place, and if it
occurs, how will that influence the intensity of competition?
• What kinds of substitutes might be developed for our product, and
how would that shape competition?
• Can we identify strategic groups in the market? What is the nature
and basis of strategic groupings? Which strategic groups do we
belong to?
• Where do we compete (in terms of market characteristics,
segments, product space, and geographical space)?
• With whom do we transact (suppliers; supply chain
characteristics; collaborators; businesses with complementary
products)?
• Which organisational fields does our business participate in?

Activity 3.3, to which we now turn, addresses the first three of these
questions.

What product or products does the business offer, and which


market (or markets) does it operate in?

The composition of a business’s transactional environment depends on


what market or markets it operates in. (It may also depend on what
market segments the business targets, and on which strategic group it
is a member of. But we leave these complications till later.) So a
convenient starting point for analysis of your business’s transactional
environment is to ask what product (or range of similar products) it is
selling. We can then follow that up by asking what market or markets
the business operates in.

Bear in mind that it is helpful to think of a ‘product’ in a broad sense,


meaning not only material or tangible things but also intangibles, such
as management consultancy services. Indeed, it is best to think about
‘products’ in terms of the whole package that you are offering to
customers, including after-sales service, reliability promises, and a
host of other associated values and services that matter to customers.

We shall have more to say about these matters in the next chapter on
Competitive Strategy, and you will be asked to consider these
questions further there. Posing them now and developing provisional
answers will begin to pin down what the relevant transactional
environment of the business actually is (or are, if the business operates
in more than one market).

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Strategy Analysis and Evaluation (SAE) Workbook

Individual reading:

FS, Chapter 2, pages 23-25 and 29-57, provides a general account of


the transactional environment, together with several case studies and
examples. It will be useful to read this fairly quickly to get an
overview. Later reading references will point you back to particular
parts of that reading, which can then be studied more slowly and
carefully.

Now move on to the task. You may find that it is surprisingly difficult
to answer these (apparently simple) questions. At this stage all you
should try to do is give provisional answers. When you revisit them
later on in the workbook (as you will do), it is likely that your answers
will have changed from the ones you offer here.

Activity 3.3: What market or markets does the business operate


in? (Individual preparatory and/or group task)

Write a short summary of your current views about which market or


markets your business operates in.

Hints:
It is important to be very clear about what product you are selling, and
to whom. This is often more difficult than one first thinks. Ask who
are your customers; are they intermediate buyers or final consumers?
If you have selected a not-for-profit or public sector business, ask
what market it would be in if it was a private business doing the same
kind of thing. It may also be helpful to think of the market for a public
sector business in terms of how it competes for funding and resources.
Also try to think about the boundaries of your market (in terms of
such things as geography, national boundaries, types of customer,
types of services provided/customer needs).

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Strategy Analysis and Evaluation (SAE) Workbook

Reflections on your reading and the tasks


You will probably have realised by now that whilst the general
principles themselves are straightforward, pinning them down in
practice may be difficult. This will certainly become evident as you go
through the various tasks that follow in the context of your chosen
business.

Why does this difficulty arise? One reason is to do with the fact that
what defines the boundary between one product category and another
(or equivalently between one market and another) is not to do with the
objective features or characteristics of the thing being produced and
sold. Rather, it is a matter of customer perceptions of how easily and
completely particular products can be substituted for one another. Do
traditional toys, such as dolls and construction toys, belong to the
same market as children’s computer games? The answer depends on
whether customers regard them as close substitutes.

A second reason is that it is not always obvious what we mean by


‘customers’. In some cases, the relevant customer will be the final
end-product ‘consumers’. For example, end users do seem to be the
appropriate customers to have in mind – at least most of the time –
when thinking about the McDonalds fast food business. But this is not
always the case. For firms producing intermediate goods – such as car
seats – it is also reasonably clear who the customers are (presumably
car assemblers in this case). But even then there is a complication,
because the ‘customers’ customers’ (in this case, those who buy cars
to retail on, and final buyers of cars) matter too. Their values and
preferences matter to the seat manufacturer even though they are not
direct customers. What we have to recognise here is that along the
supply chain, businesses have several sets of customers that matter.
Each of these may have different values and expectations, thus
creating complexity in the transactional environment. In yet other
cases, even this relative simplicity disappears. Consider Yahoo, Times
Newspapers, CNN, Further and Higher education institutions, and
Oxfam? Who are their customers?

A concept that we shall introduce in the next chapter – the ‘strategic


customer’ – will help you to cut through this complexity, and obtain
powerful insights into competitive strategy.

Market analysis: supply and demand


Business managers necessarily have to make choices. Such choices
are made within particular contexts and constraints. One of these
contexts is the market (or markets) in which the business operates.
Consider, for example, the pricing decision made by the Dell
computer organisation. Pricing decisions are made, somehow or other,
by people within that business. But it would be naive to imagine that
the choice is made in an unconstrained way. At the time of writing this
workbook (early 2002), the market for PCs was in a relatively weak
state (although the laptop computer market was faring rather better).
Demand growth for PCs had slowed significantly, much excess
capacity existed in the industry, and rivalry between computer
businesses was intense. This context exerted downward pressure on
market prices. Price setters in Dell necessarily had to take this into

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Strategy Analysis and Evaluation (SAE) Workbook

account in choosing their own prices. In fact, even in a position of


some strength in the industry, Dell appears to have selected a
relatively aggressive price cutting policy that appears to be aimed at
growing its market share.

It will be interesting to see how this situation evolves. But the point of
these comments is rather different. It is to note that firms operate in
markets where, to some degree at least, aggregate processes create
forces, which tend to push average price levels up or down, and have
positive or negative implications for sales prospects for the industry as
a whole.

Managerial decisions are likely to be better where managers are better


informed. Understanding these aggregate market forces is one thing
that can contribute to this better information. In the Scenarios text,
Kees van der Heijden gives an interesting example. He suggests that
scenario analysis – in conjunction with an appreciation of market
forces in the oil industry – led Shell to appreciate earlier than many of
its competitors the possibility of a significant fall in crude oil prices in
the early 1980s. As a result, Shell held back on new exploration and
development activity when many of its rivals continued to make very
heavy capital investments. This left Shell in a position of relative
strength, vis-à-vis its competitors, when the downturn in prices came
about. An understanding of market forces and trends can clearly be
valuable to business managers.

In the next recommended reading and its associated task, we ask you
to use a demand and supply framework to analyse market forces. You
will see that this provides a powerful tool by means of which we can
analyse the driving forces affecting market price and, indirectly,
business profitability.

This way of investigating market processes will also help in


understanding better changes in the business environment. Consider,
for example, interest rates and exchange rates. What determines these,
and in which directions are they likely to change? Answering this
requires recognition of the fact that these are both prices. As with all
prices, they are determined in the final analysis by supply and
demand. (The exchange rate of the UK £ against the US $, for
example, is determined by the supply of £ being converted into dollars
for the purchase of US goods and assets, and the demand for £ to be
converted from $ for the purchase of UK goods and assets; in a free
market, the rate of exchange will move until these two magnitudes are
equal). Supply and demand analysis might be useful in forming
expectations about the future price of some commodity input. For
example, electrical engine companies are large-scale users of copper.
The BE reading given below explains how supply and demand
analysis could have been used to predict the large fall in copper prices
in 1998.

As you will see from the recommended reading, a business economics


perspective requires that we look at a market in an analytically
abstract way. A market is envisaged as a process of interaction
between the potential buyers and sellers of some good or service.

A market therefore has two sides: the demand side and the supply side
of the market. The reading shows you how we can construct a

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Strategy Analysis and Evaluation (SAE) Workbook

framework within which the forces influencing market price are laid
out. In many markets (so called competitive markets) individual
suppliers of a product will have little room for manoeuvre about price:
they will have to sell their product at, or close to, the market price for
that product.

It is important to note that supply and demand analysis is typically


done at a high level of abstraction. It is usual to think of the seller as
being the producer of the good, and the buyer as being the final
customer. All parts of the supply chain between these two end points
are ignored (or rather abstracted from). This means that supply and
demand analysis is not well suited to dealing with issues that concern
what is happening along the supply chain. But it can give us some
insights even there. Consider the case of food products, such as cuts of
meat. In the absence of government intervention (price support,
subsidies etc) the price of meat to the final consumer is largely
determined by the costs of producing farmed meat (supply) and what
consumers are prepared to pay for it (demand). Food prices have
fallen in real terms (that is, relative to other things) in recent years
because farming costs have fallen (technical progress, large scale, use
of fertilisers and pesticides etc) and total willingness to pay has been
rising only very slowly. In the jargon of S&D analysis, supply has
increased quickly, while demand has been more or less constant.

If the market price exceeds the farm costs, a value surplus or rent is
available. But who gets it? This is where supply chain analysis enters
the picture. If food retailers are small in number and have immense
purchasing, and so bargaining, power, it is they who will tend to
capture most of the rent. UK food supermarkets appear to be in this
position.

The reading below takes you through the technique of supply and
demand analysis of markets, and shows with examples how this tool
can be used. It shows which underlying factors influence demand and
which influence supply. Armed with this tool, you should be able to
deduce in which direction the market price of your business product
will move if you sell in a ‘competitive market’ (one with a large
number of suppliers of relatively similar products).

Individual reading:

BE: Chapter 2, pages 24-47 provides a discussion of the operation of


the market, market forces and market equilibrium.

Market structures: competitive markets,


differentiated product markets, oligopolies
and monopolies
Some markets consist of many businesses selling similar products, but
where the offerings of competitors are differentiated in some way
from each other. Examples include small restaurants in Toulouse,
plumbers or electricians in Glasgow, Country and Western music
performers in Nashville, taxi drivers in New Delhi, and small mid
price hotels in Kuala Lumpur. Economists call these kinds of markets

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Strategy Analysis and Evaluation (SAE) Workbook

by the rather confusing name of ‘monopolistic competition’. This


phrase tries to capture the idea that the market has a dual
characteristic. On the one hand, it is fundamentally competitive, with
many competitors each selling products that are regarded by
customers as being broadly similar. On the other hand, competition is
lessened by the fact that each competitor’s product is differentiated
from all others to some degree, and so each competitor has an element
of monopoly power because products are not perfect substitutes.

Businesses in these markets may be able to earn above normal profits,


but will find it hard to do so on a sustainable basis. New entry into
these markets is relatively easy. So if a typical restaurant, for example,
could make a healthy profit, other restaurants would tend to enter the
market. Special cuisines, an innovative atmosphere, particular kinds of
service, and other differentiations are relatively easy to imitate.
Factors such as these make business life relatively precarious. The
kinds of processes just described do not only happen in service
industries; they are true more generally. For example, in many
maturing manufacturing goods markets, initial advantages due to
being first movers, possession of patents, distinctive product, or
superior process technology, will all be under threat of erosion. Think
about personal cassette players. The Sony Walkman was a major
innovation at one time, and earned Sony substantial above-normal
profits (or rents). But the expiry of patents and processes of imitation
or replication have transformed this market into one that is highly
standardised, with essentially ‘commodity’ products being sold at very
low margins. What the customer now sees in the stores are many
alternative models, all close to each other in quality and price terms.
Similar stories apply to most pharmaceutical product markets. So the
real challenge faced by business managers within differentiated goods
markets is finding ways of sustaining differentiation. We will
examine how this might be done in the following chapter of this
workbook.

Two kinds of movement in market structure are of interest here. In the


first case, these processes of increasing rivalry, new entry, imitation,
and replication are dominant, and the market becomes more-or-less
purely competitive. In such cases, markets contain a large number of
businesses selling relatively undifferentiated products. Individual
sellers have little or no market power, and must sell their products at a
market price that is outside their control.

But a second kind of movement or trend may be evident. Businesses


seeking larger or more sustainable profits through size or market
power might consolidate. Processes of bankruptcy, merger and
acquisition reduce the number of competitors. Alternatively,
consolidation may come about because of superior performance by
some firms. These firms grow more quickly, perhaps coming to
dominate markets or market segments. The laggards are driven out of
business, or are forced to acquiesce in niches vacated by the
successful dominant firms.

There may be competition between different businesses in these


markets, but the market is not ‘competitive’ in the sense we described
earlier. Impersonal market forces do not determine price. Businesses
in these kinds of markets do have market power. If the processes we
have just described go a long way, what we might find emerging is

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Strategy Analysis and Evaluation (SAE) Workbook

oligopolistic markets. Here a small number of firms dominate the


market. A small number means that each firm has a relatively high
market share, and that the behaviour of each firm affects all others in a
significant way. Businesses are therefore strategically interdependent.
As we shall see in the next chapter in this workbook, interdependence
has profound implications for business strategy. It means that the
payoff to a business from the choice it makes will depend upon what
choices others make. Good choices cannot be made without thinking
about what others might do, and how they would react to your actions.
One tool for analysing business behaviour in situations of strategic
interdependence is game theory. We defer consideration of that until
the next section of this workbook.

In extreme cases, what might emerge out of all this is a monopoly


market – a market in which there is a single seller of a good. Of
course, if the single seller could earn supernormal profits, we would
expect new firms to enter the market, breaking the monopoly position.
For a (profitable) monopoly to persist over time there must be
substantial barriers to entry by new firms. What these barriers could
be is explained in the recommended reading. A monopolist does not
have to accept a market-determined price. It can choose whatever
price it wants. But the monopolist cannot choose both price and
quantity. It faces a market demand for its product; so it can choose
price (and then customers will purchase what they want at that price),
or it can choose quantity (and let price be determined by the market).

What has all this got to do with business strategy? The answer can be
thought of as the search for a competitive advantage. The major
reason why many markets are not of the competitive type is that
business managers take actions that differentiate their products, create
barriers to imitation, replicability, and new entry into the market, or
find some other way of outperforming their rivals. How they might do
so is the theme of the next chapter. But it is clear that there are strong
incentives to searching for competitive advantage.

Which of these market types is most attractive from the business point
of view? Competitive markets are not attractive – competition among
sellers of relatively undifferentiated goods will tend to push prices
down to average costs, leaving the firm unable to generate economic
profit. A monopoly position is an attractive one; perhaps the most
attractive. But defending that position – against regulatory action and
potential entrants – is likely to be very difficult. We are likely to find
many more examples of oligopolistic markets than ones that are pure
monopolies. Indeed, the only pure monopolies we are likely to
observe on a regular basis are those that emerge from new product
innovations – or substantial differentiation – that, for a while at least,
put the innovator or differentiator in a position of selling what
customers perceive to be products without any close substitute.

Business strategy can be seen in terms of trying to gain a competitive


advantage. It is about finding a way of reducing the competitive
pressures on your business, or gaining a (temporary) ‘monopolistic’
position by virtue of a distinctive product offering.

The readings listed below take you through these various market
structures in much more detail.

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Strategy Analysis and Evaluation (SAE) Workbook

Individual reading:

BE: pages 107-109, provides an introduction to business’s search for


value in the competitive environment. Chapter 6, pages 110-128,
provides a more detailed discussion on the competitive market model.
Chapter 7, pages 129-149, discusses the monopoly model and barriers
to entry. Chapter 8, pages 150-172 discusses oligopoly and strategic
competition.

Activity 3.4: Market structures (Group task)

What type of market structure does your business operate in? Does the
market type affect the way your business and others behave?

Can you identify any forces that are tending to push your product
market towards the competitive end of the market structure spectrum?
What actions or processes, if any, have moved – or are continuing to
move – the market towards the oligopolistic or monopolistic edge of
the industry structure spectrum?

The Five Forces model as a way of investigating the transactional


environment

One of the principal tools used to investigate the business’s


transactional environment is Michael Porter’s Five Forces model. A
graphic depicting the model is shown in FS Exhibit 2.2, page 31.

The Five Forces model is a framework for identifying the forces that
affect the level of competition in an industry and in a market. (The
word industry refers to collections of businesses producing similar
goods; the word market is defined in terms of customers and their
preferences. In some circumstances, there is a one-to-one relationship
between the two – so that all businesses in the industry sell in a single
market – but that is not always the case.)

There are several ways in which this model can be used. One of them
is to gauge ‘attractiveness’ to incumbents (and, perhaps, potential
newcomers) of an industry. In other words, the Five Forces model can
be used to try and explain the profit potential of an industry. Used in
this way, the model is an aggregate, industry level tool, and is not

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Strategy Analysis and Evaluation (SAE) Workbook

applied to any individual business. To see how this could be done,


with brief applications in the Pharmaceutical and Football industries,
and in the Luxury Car market, you should do the FS reading
recommended below.

Applying the Five Forces model


The Five Forces model can be used in other ways too. The list of ‘Key
Questions Arising…’ on page 37 in FS takes you through several of
the ways in which the Five Forces model might be used, and its
various implications. Common to these is the generation of strategic
insight at the level of a single business. For example, armed with
information about the determinants of competition within an industry,
we can investigate how one business might try to secure a competitive
edge (or advantage) over its rivals. The fivefold classification of
forces in the transactional environment leads us to think in an
enquiring, and hopefully creative, way about many aspects of the
competitive game in which we are embroiled. For example, customers
and substitutes induce us to pay attention to what product we are
offering; rivalry and new entry direct our attention to how well
positioned we are vis à vis our actual and potential competitors, and
suppliers to whether our suppliers may disintermediate (sell direct to
our customers, cutting us out of the supply chain).

The Five Forces model, therefore, gives insights into how one
business can attain a position of strength relative to its rivals, and so
outperform them in terms of profitability. The model also generates
implications for the ‘present’ and for the ‘future’. We might wish to
use it as one device (among others) to think about how our business
can gain a competitive advantage by managing its relationships in the
transactional environment better than its competitors. Or, it might
suggest options for the future that warrant further exploration. We will
take up this second – future-orientated approach – in the Options
chapter. The Five Forces model can also be useful in thinking about
corporate strategy (for example when it is used as an input into the
Directional Policy Matrix [FS, pages 194-196]). We will discuss these
wider uses of the model later in the section on Corporate Strategy. The
next task invites you to think about Porter’s Five Forces model in
terms of the way in which it currently affects your business.

Individual reading:

FS: Chapter 2, pages 29-41 describes in greater detail each of the ‘five
forces’.

FS: Chapter 6, pages 194-196 provides an introduction to the


directional policy matrix which helps analyse further the competitive
strength of strategic business units.

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 3.5: Porter’s Five Forces analysis (Group task)

1). For the industry as a whole in which your business operates,


explain its ‘attractiveness’ in terms of Porter’s Five Forces.

2). What are the key forces at work in the competitive environment of
your business?

3). What are the underlying forces in the macro-environment that are
driving competitive forces?

4). Is it likely that the forces will change, and if so how?

5). How do particular competitors stand in relation to these


competitive forces? What are their strengths and weaknesses in
relation to the key forces at work?

6). What can managers do to influence the competitive forces


affecting a business? (Note that we shall examine this question at
greater length in the next chapter.)

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Strategy Analysis and Evaluation (SAE) Workbook

Market segmentation
For some purposes, the concept of a market will be sufficient for the
purposes at hand. But it may not suffice for other purposes, where
more subtle classifications will be necessary. Within the market as a
whole, there may be substantial differences between users or
customers. These differences may relate to user characteristics such as
location, age, income, or gender; they may concern quantities in
which products are purchased; or they may relate to differences
between customers in terms of their needs and wants. Hence it is
important to analyse the perceptions of value that different categories
of customer have about the product. A more complete account of such
possible differences and some illustrative examples are given in the
recommended reading.

This suggests that there may be benefits from clustering users or


customers into groups – or, if you like, into market segments.
Following from this is the question of which segment or segments
your business could or should target. Each of these market segments is
likely to differ in terms of its attractiveness. But they also differ in
terms of what resources and capabilities are required to successfully
target them.

As the reading demonstrates, there are several different ways in which


a market could be segmented. Choosing an appropriate way (or ways)
of segmenting a market is crucially important in business strategy.
Once a basis for segmentation has been selected, the choice of
particular segment or segments to target has implications for what is
the relevant transactional environment for your business – different
segments will tend to have different transactional environments.

Individual reading:

FS: Chapter 2: pages 46-51, which discusses market segments and


what customers value.
TSS: pages 250-252

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 3.6: Market segments (Individual preparatory and/or


group task)

Undertake a market segmentation analysis for the market your


business operates in

Hints: It is worth considering all of the following questions.


What have been the traditional way(s) in which the market is
segmented? Is this traditional method of segmentation the most
useful? Does it reflect market dynamics?
Please note: you may find it useful to structure your analysis by
developing a 2 x 2 matrix.

What segments does your business currently target?

Are there other segments that you think have value-adding potential
for your business? If so, do these suggest options that you might wish
to explore further? (Keep a note of your findings on this for later – we
shall ask you to revisit this when thinking about Strategic Options
later in the workbook).

Does any environmental analysis you have done so far suggest that
customer needs are likely to change in the future? If so, does this have
any implications for the ways in which the patterns of market
segmentation might change over time?

Are there differences in the resources and competencies required to


perform well over different segments that your business targets, or
might target in the future? (We will be exploring the ideas of
resources and competencies in some depth in the next chapter, so do
not attempt to do anything more here than just generate some
preliminary ideas.) Does what you have concluded about
segmentation lead to any revisions to your previous Five Forces
analysis?

Do competitors focus on, or perform relatively better in, certain


segments rather than others?

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 3.7: Individual reflection and personal learning insights

Recalling your level of knowledge and understanding at the outset of


this chapter, what has been your personal learning and insight that you
have gained from:

a) The issues raised from activities 3.2 to 3.6?


b) The process of group discussion about the issues
and your role in this?
c) The relevance to and implications for you as a
manager?

Analysis of competitors
Throughout this chapter, you have been considering the environment
within which your business carries out various forms of transactions,
or the fields within which it interacts, influences and is influenced.

In the next chapter – which deals with competitive strategy – we shall


be concerned with how one business might seek to obtain a
competitive advantage over its competitors. This raises the question of
who or what are your competitors?

The activities you have undertaken in this chapter should have given
you the means to answer this question. You have seen that your
competitors might include all other businesses operating in the same
broadly defined market as you do. However, for some purposes, the
competitors that matter might be more narrowly defined – perhaps in
terms of those businesses that have chosen to target a similar profile of
market segments; or businesses that are in your strategic group. So
bear in mind that who or what counts as your competitors may vary
depending on the context or set of choices facing the business.
Appreciating this subtlety and complexity is important for what
follows in the rest of this workbook.

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Strategy Analysis and Evaluation (SAE) Workbook

Carrying out an analysis of competitors involves doing the


following:

• Identifying the competitors in your market and the way the market
is segmented.
• Identifying the subsets of business operating within the same
markets in terms of the different characteristics of the businesses.
This is done by strategic group analysis.
• Identifying those critical characteristics that are regarded by
customers as being the most important, and so determine their
purchasing behaviour. Note that these characteristics might relate
to the product itself, they might relate to the business offering it,
or they might relate to something else. We must be very careful
here – what matters are which critical characteristics customers
actually do value, not what suppliers think they value. (If you
have access to such customers you might want to ask them.)
• Evaluating the strengths and weaknesses of your competitors
relative to your business in terms of those critical characteristics.

The output we will obtain from these exercises can be useful to us in


at least two ways:

1) As we show in the next chapter, a sensible competitive strategy


position for you to adopt also depends on what resources and
competencies your competitors have. For example, if Ford selects
a price-based strategy, then whether Volkswagen could be
successful using a similar strategy will depend upon whether
Volkswagen’s resources and competencies allow it to at least
match the cost performance of Ford.

2) If we can identify the competitive positions taken by our business


and its competitors, and we know the prices of the products
offered by our business and by its competitors, this may help us to
understand trade-offs between price and various critical
characteristics. Then we can attempt to answer questions such as
‘How much additional product differentiation do we have to offer
in order to justify a price that is perceived as being higher than our
competitors?’

Strategic group analysis


Market segmentation looks for sub-sets within the overall market
based on customer differences. However, another question that
managers need to address is the extent to which they face similar
competitors within their market. Most markets have different sorts of
competitors within them following different sorts of strategies. For
example Guinness is a global brand of beer. But in most countries
there are also local brewers who brew beer. Both operate in the same
market but they are very different sorts of organisations following
very different strategies. Understanding the different strategic
characteristics of organisations helps guide managers on how they
might seek to compete and the options available to them in the future.
Strategic group analysis is a way of understanding subsets of
businesses operating within the same market in terms of the different
characteristics of those businesses.

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Strategy Analysis and Evaluation (SAE) Workbook

Strategic group analysis is usually undertaken by identifying the main


characteristics of businesses which:

a) Distinguished between them; and


b) Influence the way they compete in markets.

Taking the example above:


Guinness is a huge business, part of a conglomerate operating on a
global scale. So size and global scope are important distinguishing
characteristics of the firm. A local brewer is likely to be distinguished
in terms of its size and probably in terms of its limited market focus.
So on this example alone we have distinguishing characteristics that
will affect the way the organisations compete; global reach and size.
Of course there will be other characteristics too and the question you
need to address is which of the characteristics distinguishing between
firms are most salient in terms of explaining bases of competition.
There is no right answer to this; but thinking it through helps you
consider the dynamics of competition within the market.

Individual reading:

FS: Chapter 2, pages 41-50 which provides further information on


strategic groups and strategic group analysis.
FS: Chapter 2, pages 50-51, which provides a short discussion of the
role of opportunities and threats in identifying possible strategic gaps.

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 3.8: Strategic group analysis (Group task)

Who are your competitors?

What are the major characteristics that distinguish between the


businesses that operate in your market?

Hints: Some ideas for these tasks are given in the reading above but
be careful. These are only ideas; choose the ones that are most
appropriate to the competitors in your market.

Which of these characteristics seem to be most important in


influencing the bases of how the firms compete? You may end up with
a list of four or five key characteristics. Use these characteristics to
draw up different 2x2 matrices as shown in Illustration 2.4 in FS
(pages 44-45) so as to identify different strategic groups.

When you use different characteristics do the strategic groups change


or remain similar? Hints: You might find that they remain broadly
similar which suggests that the bases of competition within the market
are well established and fairly fixed. Or you might find that the groups
change according to the characteristics you use which might suggest
that the bases of competition are less fixed and stable.

With which organisations does your own organisation compete most


directly?

Hints: It is likely to be with organisations within the same strategic


group, although organisations within different strategic groups may, of
course have an impact on the market as a whole.

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 3.8: Strategic group analysis (Group task) continued:

How easy is it for organisations to move between strategic groups?

Hints: This is likely to be informed by the extent to which strategic


groups remain stable when you use different characteristics or not. If
the organisations remain largely within the same strategic groups no
matter which characteristics you use, then it is likely that the mobility
barriers between groups is likely to be very difficult. This has an
implication in terms of the competitive strategy an organisation may
wish to follow: trying to follow a strategy being followed by well
entrenched businesses occupying a different strategic group will not
be easy.

Are there are any opportunities for future strategic development that
are suggested by the strategic group map.

Hints: For example it could be that your PESTEL analysis, your Five
Forces Analysis, or your Scenarios suggest that the market may
develop in certain ways but that no organisations appear to be
positioning themselves to take advantage of this. So this suggests
strategic gaps, which in turn might suggest future opportunities. The
use of strategic group analysis for option generation will be taken up
in the final chapter in this workbook, so this is worth thinking about.

Competitor analysis
It will be useful now to look at Exhibit 2.7 on page 49 of FS, and the
associated discussion. This investigates perceptions of value by
customers in one segment of the electrical engineering industry. The
five categories shown in the diagram are those seen as most important
by customers. The exhibit profiles three different providers, labelled
A, B and C, against these values that customer’s regard as being of
most importance.

There are several uses we could make of this type of information. For
example, it can provide insight into issues of strategic capability
(which will be discussed in the next chapter). For example, it is
evident that the particular strengths that company A possesses are not
those valued most highly by customers. In contrast, B’s strengths
better match customers’ value priorities.

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Strategy Analysis and Evaluation (SAE) Workbook

The information shown in Exhibit 2.7 (page 49) could also be related
to prices charged by our business and its competitors. This might
generate insights into how sensitive price is to variations in the degree
to which particular dimensions of customer value are satisfied. This is
a question to which we shall return in the next chapter on Competitive
Strategy. In that chapter, we shall also pursue two related questions:

1) What resources and competencies do we (and our competitors)


need to have to be able to successfully adopt particular
competitive strategies? And do we (and they) actually possess the
required resources and competencies?

2) Is the current strategic position of our business sensible, given the


choices of its rivals? Is there a superior position that we could
take? What kinds of trade-offs would be involved in moving to
another position?

Individual reading:

Read Exhibit 2.7 (page 49) in FS, together with its associated
discussion, on perceived value by customers in the electrical
engineering industry.

Activity 3.9: Competitor analysis (Group task)

Your current position:

Select 2 or 3 of your major competitors, then, carry out a Competitor


analysis along the lines of the example we discussed above. Does
anything you have just concluded lead you to think that your
understanding of ‘Rivalry’ in the Five Forces model needs to be
revised?

And for use later:

In what ways, if any, do you think that changes in the business


environment – contextual, transactional, or both, might affect who
your competitors might be and how you will compete with them, in
the future? Do any of these changes suggest options that you might
wish to consider at more length later?

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Strategy Analysis and Evaluation (SAE) Workbook

Drawing out and gathering key issues


You have now conducted a significant amount of strategic analysis by
applying the analytical tools and techniques set out in this and
previous chapters. At this point we wish to highlight that this analysis
should NOT be considered as stand alone items. We ask that you
reflect on the issues and insights that you have identified from your
analysis. Do you see patterns or themes emerging?

Activity 3.10: Drawing out and gathering key issues (Individual


preparatory and/or group task)

To try to draw this analysis together we suggest that you identify the
key issues emerging to date. We ask that you consider these issues in
the context of the value creating activities of your case study
organisation. These value-creating activities were discussed in the
previous chapter – you may wish to re-visit your earlier analysis.
What conclusions do you draw with regard to the nature of
competition? Try to identify the essence of the competitive game
being played.

Conclusion
We have now thought about the business’s transactional environment.
Now it is time to ask how our business might attempt to outperform its
competitors. This takes us on to the next chapter of the workbook,
where we deal with Competitive Strategy.

Activity 3.11: Individual reflection and personal learning

Recalling your level of knowledge and understanding at the outset


then considering Activities 3.8 to 3.10, what have you learned about
the competitors and basis of competition of your case study firm?
Particularly what has been the personal learning and insight that you
have gained from:

a) The issues raised in the chapter and the related tasks?


b) The process of group discussion about the issues and your role in
this?
c) The relevance to and implications for you as a manager?

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Strategy Analysis and Evaluation (SAE) Workbook

Chapter 4: The foundations of competitive strategy


Introduction
The main theme of this section of the workbook is the search for a
sustainable competitive advantage. (We say ‘search for’ as you will
find that there is not, and cannot be, any guarantee that such a thing
can actually be found). Your team’s brief is to do its best to explain
how your chosen business case could achieve a sustainable
competitive advantage.

To help you achieve this goal, we take you through a series of tasks
that develop ideas and tools that should prove helpful to you. As you
work through these tasks, ideas are explained and illustrated, and you
then apply them to your selected business. To complete this chapter,
your team is expected to produce a report that lays out, in a well-
structured form, the results of the competitive strategy analysis that
you and your team have undertaken with respect to your chosen
business. This should contain an account of how that business
achieves, or could try to achieve, above industry-average profitability.
It should also address the issue of sustainability: by what means could
it attempt to defend its above average performance against the actions
of its business rivals, and continue to achieve above average
performance over time in a changing environment.

To ensure that your report is well structured and communicates its


ideas effectively, you will need to choose a framework that allows you
to express a lot of complex ideas simply and concisely. We suggest
that you use the Business Idea for this purpose. Please refer to the
chapter of The Art of Strategic Conversation appended to this
workbook. Guidance will be given at appropriate places about how
your ideas can be expressed in that framework. If, however, you
would prefer to organise your overall findings in some other way, feel
free to do so.

Learning objectives
The objective of this chapter is to develop your understanding of
competitive strategy.

On completion of the chapter, it is expected that you will:

• understand what is meant by competitive strategy


• know which tools and techniques are available to help in
developing competitive strategy
• have experience in using these tools and techniques in the context
of his or her selected business case
• be able to critically assess the value of these various tools and
techniques
• in conjunction with other team members, select a framework that
he or she thinks is a good basis for developing robust competitive
strategy insights
• appreciate the value of thinking abstractly, imaginatively and
creatively in strategic analysis.

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Strategy Analysis and Evaluation (SAE) Workbook

Organisation of Chapter 4

Strategic capability

The business:
The offering Strategy Clock
Resources and capabilities

Foundations for
Competitive Strategy
competitive strategy and
competitive advantage
Environmental analysis:
Competitors Superior cost
Opportunities and threats
Analysis performance

Successful
The Business Idea differentiation

Sustainable Competitive
Advantage

The way in which this part of the workbook is organised is described


in the diagram above.

Conceptual tools introduced in this chapter


The business offering
Competitive advantage
Sustainable competitive advantage
Competitive strategy
Business and organisational resources
Competencies
Competitors analysis
Core (distinctive) competencies
Generic strategy tools, including the Strategy Clock
Organising frameworks, such as the Business Idea
SWOT analysis

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Strategy Analysis and Evaluation (SAE) Workbook

Key questions for this chapter


The tasks below require that you address a number of questions that
are central to thinking about, and developing, competitive strategy.
Some of these questions are ones you have already been thinking
about in previous parts of this workbook; others are raised here for the
first time. The questions we address are:

1) What is the product or service being offered by this business


unit?
2) Which market does the business operate in?
3) How does the consumer obtain value from this product or service?
4) Who are the business’s rivals or competitors in this market?
5) What competitive strategy does the business appear to be
pursuing currently?
6) What competitive advantage does the business seek to achieve
over its rivals?
7) Does the business actually have a competitive advantage over its
rivals; is that advantage threatened; and can it be sustained under
present competitive strategies?
8) Which resources are critical to the business in generating and
sustaining competitive advantage?
9) What competencies (or capabilities) does the firm possess in this
market? Which of these, if any, are distinctive to the business?
How do these distinctive competencies derive from the resources
identified in question 7 above?
10) How can the business’s existing competitive strategy be described
in terms of a Business Idea diagram?

It is worth making three general observations about these questions


right now:

a) There is not a ‘right answer’ to any of these questions. Your


objective should be to obtain useful answers in that they should
contribute to an understanding of the business and of its possible
competitive strategies.

b) These questions should be interpreted in two ways. First, they


should be thought about generically – for example: What in
general is a distinctive competence? Where could such a thing
come from? Why is a distinctive competence important? Second,
think about the questions in an applied way: What distinctive
competencies, if any, does your case organisation possess? How
can it reinforce, defend and sustain those it has? Can your case
organisation develop any others and, if so, how?

c) Not all of the concepts highlighted in bold font in the questions


listed above have universally accepted definitions and usages. It is
important that you ascertain the meaning being used whenever
you come across one of these words.

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Strategy Analysis and Evaluation (SAE) Workbook

Individual reading:

The main reading for this chapter is to be found in the following


chapters of the three course texts:

FS: Chapters 3, 6, on strategic capability and business level strategy,


respectively.
BE: Chapters 5, 8 and 10, on the search for added value and the costs
of production, oligopoly and strategic competition, and value creation
and competitive advantage.
SC: Chapter 3, on the business idea of an organisation, see the
Appendix of this workbook, pages 127-148.

Recommended reading:

TSS: Pages 242-254, on the business idea.

References to particular parts of these chapters, and to other readings,


will be made as we go along. At some point, though, you will find it
useful to read the chapters as a whole.

We begin by looking at what the business brings to the market – its


offering.

The Strategy Clock is also introduced as a useful way of thinking


about competitive position, and so competitive strategy. To be
successful in using a particular strategic position, the business must
possess an appropriate strategic capability. This brings us to consider
the resources and competencies of the business.

A sensible strategic position must have two further properties. First, it


must ‘fit’ with the current state (and ideally the future state) of the
business’s environment. Second, it should be feasible given what
competitors have chosen, and are able, to do. Therefore, we ask you to
use environmental analysis and competitor analysis as inputs to the
strategy developing process.

We then return to resources and competencies, and explore these ideas


further. Then we focus on each of the two dimensions used in the
Strategy Clock: product price and differentiation. What can be said
about the resources and competencies needed to support strategies
based on price competition and on differentiation based competition?
The former requires that some form of cost advantage is acquired. The
second requires that competencies are dedicated to, or configured so
as to, deliver what customers particularly value (with the implication
that the business will be able to more than recover the extra costs that
will be incurred as a result of differentiation).

Some markets have the particular property that they are dominated by
a small number of competitors. Small numbers means that the
behaviour of competitors is highly interdependent – the payoffs to a
choice made by one firm will depend on the choices selected by
others. The competitors are involved in a ‘game’ of rivalry. In these
circumstances, the ability to play strategic games effectively is likely
to be an important business competence. To give you some

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Strategy Analysis and Evaluation (SAE) Workbook

appreciation of the ideas involved, we introduce you to some


elementary principles from the theory of games.

Finally, this chapter in the workbook asks you to put all these matters
together into a simple, organised framework – the Business Idea. A
good business idea should be able to summarise quickly and
effectively how the business seeks to obtain a sustainable competitive
advantage.

The offering
An important element in any strategy process is to think carefully
about who your customers are and what they value (or might value in
the future). Understanding these – and translating this understanding
into actually providing customers with products that they value – is
crucial to building strategic capability in an organisation. (The
concept of strategic capability is defined in Chapter 3 of FS.) Your
first task, therefore, deals with these questions. We bring these
together in the concept of the offering.

Thinking about the business offering involves several questions:

• Who are your customers?


• What services do they seek, and what needs or wishes do they
wish to be satisfied?
• What product does your business bring to the market?
(Throughout this workbook the term ‘product’ includes both
physical/tangible items and services/intangibles.)
• Do customers want to buy this product? The answer to this will
depend on the configuration of services that the product offers
(and whether these align well with what customers value), on the
terms on which it is being offered, and on what your competitors
are bringing to the market. Hence:
• What are the services (and so the value) that customers derive
from your product?
• How effectively does your product satisfy the services that
customers are hoping to get? And how does it compare with the
offerings of your competitors?
• Are there ways in which your offering could be changed to make
it generate more value to customers?

It is evident from this list of questions that thinking about your


offering takes us right to the heart of business strategy. It directs our
attention to three classes of actor:

your customers (both actual and potential)


your business (and its competencies)
your competitors.

We considered the first of these – and to a lesser extent the third – in


the previous chapter, where we established the importance of
understanding your customers. Clearly, your offering cannot succeed
unless it addresses, and responds to, the values that customers require

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Strategy Analysis and Evaluation (SAE) Workbook

and rate highly. But your offering is what your business brings to the
market. So it leads naturally to thinking about the following questions:

• What are the resources, competencies and capabilities of your


business?
• What types of competencies are required to support the product or
products that you offer?
• Are your actual competencies well aligned with those that are
necessary to support the products you offer? (Or put another way,
are they well suited to deliver the services that matter to
customers?)

But your offering must compete with the offerings of others. So we


must ask questions concerning our strategic position relative to that of
our competitors:

• Are you able to deliver services to customers in a way that is


superior to your rivals?
• If the answer to the previous question is ‘Yes’, what is it about
your business that enables you to deliver these services to
customers in a better way than your rivals are able to do?
• If the answer is ‘No’, how might matters be changed in an attempt
to deliver these services better in the future?

Two concepts that you may find useful in undertaking the next
Individual task are threshold product features and critical success
factors. Threshold product features are product features and
performance standards all of which must be met by providers; they
can be thought of as necessary or minimum conditions (or ‘qualifiers’)
for successful participation in a particular market. In contrast, critical
success factors are features that are particularly valued by customers,
and used to differentiate between providers. It is possession of these
that provides the basis for above average performance and, therefore,
rents. You may find it useful to look now at Exhibit 3.2 in FS, page 62
where these, and related, terms are exemplified for the example from
athletics.

It should be clear from this that the offering is more than merely a
marketing concept. The offering brings together customer needs and
wants, the business’s internal competencies, and how well you can
bring these two together compared with your rivals. This last point is
crucial: it is always sensible to think about your competencies relative
to those of your rivals. IBM and Compaq both sell computing
hardware. But what do customers want this hardware for? And which
of the firms is better at providing what customers want, at prices that
are perceived as being reasonable, while still generating added value
for the business?

One final point before you go on to the reading and the next individual
task. Businesses compete in dynamic environments – technologies
change, and customer values systems evolve and change in subtle
ways. There can be no guarantees that successful offerings can be
maintained for long. Established positions of strength can quickly be
eroded. (Can you think of examples?) This implies that thinking

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Strategy Analysis and Evaluation (SAE) Workbook

continually about your offering, and in a forward-looking, imaginative


way, is likely to pay dividends.

You should now work through the readings that follow, and then
undertake the group task. This focuses on just one of the three sets of
actors we have mentioned here, your customers – we consider your
business competencies and your competitors later. Please note that
what we are asking you to do in this task should draw on material you
developed in the previous chapter. In doing this, you will tentatively
integrate what you have learned so far before moving on to the next
stage. Later parts of this chapter will, in effect, test whether this
tentative integration stands up to the further analysis you will
undertake in subsequent tasks.

Individual reading:

FS: Chapter 2, section 2.4.4, pages 48-50, which provides a discussion


on understanding what customers value.
SC: Chapter 3, on profit potential, see the Appendix of this workbook,
pages 127-148

Activity 4.1: The offering (individual preparatory and/or group


task)

The current offering

What is the ‘product’ being offered now by our business (and by its
rivals)? Who are the customers? What services does the customer
obtain from this product (and so how does it generate customer
value)?

Hint: Much of the analysis needed for this task will already have been
undertaken in the last chapter. You should draw on the results of the
tasks you undertook there as appropriate.

Do changing customer values suggest that you may need to change or


adapt future offering?

Using the results of your environmental analyses, consider whether -


and in what ways – the needs of your customers (actual and potential)
may evolve in the future. Does anything here imply that your offering
might need to change?

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Strategy Analysis and Evaluation (SAE) Workbook

The competitive position of your business –


the Strategy Clock and Competitive Advantage
In the previous activity, we introduced the idea of the business’s
offering. That offering is, of course, a matter of strategic choice. A
major factor that affects this choice is whether a particular offering
will generate a competitive advantage for the business.

What is meant by competitive advantage? Simply performing well is


not what we mean by competitive advantage. A business might have a
strong financial performance because it happens to belong to an
industry that currently earns higher than average profits. (Recall our
earlier discussions on this matter in thinking about the organisation’s
transactional environment.)

The meaning for competitive advantage that we have in mind –


although there are others in the strategy literature – relates to the
ability of one business to outperform others in the same industry.
Something the business is doing allows it to achieve strong
performance relative to other businesses in the industry.

Later we shall examine the sustainability of competitive advantage:


how can superior performance be sustained over a lengthy span of
time? But your first task is to consider how a competitive advantage
could be acquired. That is, what are the foundations of competitive
advantage?

A method of trying to achieve a competitive advantage is a business


strategy. A business strategy will comprise various things: a choice of
position in the market, a view about how the resources and
competencies of the business can be organised so as to support the
successful maintenance of that position, and a notion of organisational
architecture and culture that will enable the strategy to be pursued
effectively.

Looked at in this way, business strategy is about getting an edge over


your rivals. Not surprisingly, the strategy and business policy
literature is liberally supplied with models that purport to offer
managers general strategic directions (generic strategies) that might be
used to gain such an edge.

In this section, we begin to apply one business strategy tool – the


Strategy Clock. The Strategy Clock is described and explained in
Exhibit 6.2 and section 6.2 of FS (pages 149-156). This tool has
several attractive qualities: it is simple, it brings together several
important dimensions of strategy choice, and it serves as a good
foundation for deeper analysis of the foundations of competitive
advantage. Its chief value lies in forcing the manager to be clear about
the fundamental basis of the advantage he or she seeks. In doing so, it
raises a number of fundamental questions.

We start with the observation that value creation at the business unit
level depends on:

• providing benefits to customers,


• that are greater than the benefits available from our competitors,

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Strategy Analysis and Evaluation (SAE) Workbook

• or obtained at lower cost.


The Strategy Clock illustrates a space that spans two dimensions: the
perceived benefit that customers obtain from the product, and the
customers’ perception of the price. You should be able to appreciate
that these two dimensions capture the three determinants of value
creation listed above.

With a slight variation of notation, this Strategy Clock is shown in


Exhibit 6.2 in FS, page 150; that exhibit uses ‘Perceived added value’
instead of ‘Perceived benefit’ and ‘Price’ instead of ‘Perceived price’.

The Strategy Clock describes five logically feasible positions (or


viable competitive strategy options) defined in terms of the two
aspects of the business offering that we have chosen to focus upon.
These strategic positions can be clustered into a smaller number of
strategic approaches:

• price-based strategies (‘no frills’ and low price)


• differentiation strategies
• focussed differentiation strategies
• hybrid strategy

Please refer to the Strategy Clock (Exhibit 6.2 in FS, page 150)

It is very important to be careful in how we use the Strategy Clock. A


successful competitive strategy is not, and cannot be only about
selecting a position in the Strategy Clock space. Any position taken –
and so any competitive strategy – can only be successful if it can be
supported by the appropriate kind, and quality of, business
resources and competencies. The next few activities of the workbook
will explore the notions of business resources and competencies in
some depth, and so address more completely the question we
addressed earlier: what is the fundamental basis of the advantage a
manager seeks in any chosen competitive strategy.

In the following task, though, we have a more limited objective: we


ask you merely to identify what position the business appears to be
taking on the Strategy Clock. Subsequently, we shall examine whether
the resources and competencies of the business do provide a good
foundation for that strategic position.

Individual reading:

FS: Chapter 6, section 6.2, pages 149-156, which discusses bases of


competitive advantage and the ‘Strategy Clock’.

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 4.2: Competitive strategies and the Strategy Clock


(Group task)

Using the Strategy Clock framework, identify which competitive


strategy position the business appears to have selected currently.

Try to justify and explain your answer. In doing this, the following
questions may be useful:

Is the current choice of strategic position clear?


If it is clear, explain why it is, and if not, explain why not.
Are the firm’s competitors following the same strategy?

Activity 4.3: Individual reflection and personal learning insights

Considering Activities 4.1 to 4.2 what have you learned about your
case study firm’s offering?

Recalling your level of knowledge and understanding at the outset


then considering activities 4.1 to 4.2, what have you learned about
your case study firm’s offering? Particularly what has been the
personal learning and insight that you have gained from:

a) The issues raised in the chapter and the related tasks?


b) The process of group discussion about the issues and your role in
this?
c) The relevance to and implications for you as a manager?

Resources and competencies


We have argued that a successful competitive strategy requires that its
resources and competencies support the strategic position taken by a
business. Let us now turn to consider these.

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Strategy Analysis and Evaluation (SAE) Workbook

The resources available to a business include tangible items such as


its capital equipment, land, buildings, workforce, information
processing hardware systems, and so on. Resources also include
intangibles such as managerial know-how, quality and skills levels of
its workforce, size of customer base, brand images and so on.
Resources can be thought of as the necessary ‘raw material’
components of business activity. They are acquired and accumulated
through investment behaviour by organisations.

Competencies are routines, processes, behaviours, and abilities to do


things. Some authors (such as John Kay in Foundations of Corporate
Success) regard competencies as being derived from resources
combined in special ways. Many of the competencies that matter are
functional in nature; they refer to the abilities to carry out various
business functions such as manufacturing, inventory control, using
accounting systems, and so on. But competencies have a wider
meaning than just narrowly defined functional abilities. They can refer
to abilities that the business (or the wider organisation of which it is a
part) may have, such as the ability to innovate quickly and effectively,
systems which give/generate awareness of customer needs,
organisational structures that allow the firm to be more responsive to
changes in its environment. Please refer to Illustration 3.2 in FS, page
71 for an example of competencies in the consumer goods business.

Competencies can also be thought of as forms of ‘software’. They


tend to be embodied not in individual persons or particular assets that
the business hires or owns, but instead arise from particular ways in
which the assemblage of resources as a whole has been put together
(intentionally or unintentionally). Once again, this makes clear the
fundamental nature of competencies; they are organisational
processes.

For both resources and competencies, it is useful to draw a distinction


between threshold and core forms. This generates the following four
classes:

Threshold resources Core (or unique) resources


Threshold competencies Core competencies

These concepts can be defined in various ways. The meanings we


shall use will be explained as we go along. However, it is useful to
give a preliminary definition for each, based on the way those terms
are used in FS (see Exhibit 3.2 in FS, page 62 for fuller definitions
and an example of each from athletics).

Resources
• Threshold resources: Resources needed for the ability to
participate in the industry (also known as Qualifiers).
• Core (or unique resources): Resources that form the foundation
of a competitive advantage and that are hard to imitate. Their
special worth may be due to favourable position [such as a major
waterfall for a hydroelectric generating business, or a city centre
location for a bank] or special privilege [such as possession of
patents, statutory monopolies, or exclusive franchise].

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Strategy Analysis and Evaluation (SAE) Workbook

We could also classify resources as inadequate if they fail to even


adequately underpin the meeting of threshold product features.
However, such resources are not necessarily without value as they
may be adequate for other segments or uses than those to which they
are currently put. A related idea to inadequate resources is that of
‘hygiene factors’; a business is said to have hygiene problems if it
fails to use its resources in ways that allow it to meet threshold
product features at industry-standard cost levels. It is imperative that
hygiene problems are put right if the business is to have any chance of
obtaining a competitive advantage. Clearly, if the majority of a
business’s resources are inadequate (or if it has pervasive hygiene
problems) there is little prospect of it surviving in the long run without
appropriate resource restructuring.

Competencies
• Threshold competencies are activities, processes and abilities
that underpin the meeting of threshold product features.
• Core competencies are activities, processes and abilities that
underpin the meeting of critical success factors and also give
competitive advantage.

Essence of success
Resources and competencies are of crucial importance because they
are the means by which competitive strategies can be supported and
realised. They are the foundations of competitive advantage. A
necessary condition for business success is ‘getting the basics right’.
This is one way of thinking about threshold competencies and
resources.

But possession of threshold resources and competencies – or qualifiers


if you like – is not a sufficient condition for success. Using the relay
team racing analogy, certain threshold resources (basic speed and
stamina) and competencies (baton changing) may allow you to enter
the race, but these are not sufficient to give you a medal winning
position.

What is of special interest to competitive strategy is which, if any, of


the competencies a business possesses are core competencies and so
are unique or distinctive to that business. In this view, outstanding
business performance arises from the possession and exploitation of
its core (or distinctive) competencies.

As you follow the reading for this task, you will notice that the usage
of the various ideas in the strategy literature is not always consistent
or uniform. In particular, Chapter 10 in Business Economics briefly
surveys several ‘classic’ works in this area. There you will see the
variety of ways in which a set of closely related ideas are labelled,
defined, and used.

To summarise this section, we need to think about the role of


resources and competencies in developing strategy that involves trying
to answer the following two types of question.

The first type is a set of generic questions:

• Which resources look to be critical to support a business’


competitive strategy?

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Strategy Analysis and Evaluation (SAE) Workbook

• How do business resources create competencies?


• What is, or what are, the foundations of unique competencies?
• How can unique competencies be protected and sustained?

The second type of questions is the application of these generic


questions to your specific case organisation:

• Which unique competencies, if any, does the business possess?


• How are these exploited to create value?
• Can the business develop its unique competencies further and if
so, how?
• Can its existing unique competencies be exploited (‘leveraged’)
in other ways?

This last question has very profound implications. It implies that


competencies your business may have, as a car producer may be
exploitable in very different business contexts. It therefore begins to
take us away from competitive (i.e. business level) strategy into the
area of corporate strategy. However, that is not a thread we shall ask
you to take any further here, though it could be very important to what
follows in the next two chapters.

In an earlier task, we asked you to identify which competitive strategy


position the business appears to be pursuing currently. In the task that
follows, we ask you to consider what kinds of core competencies are
required in order that the business can be successful in following that
strategy.

Individual reading:

FS: Chapter 3, pages 60-83, which introduces the concept of strategic


capability, and discusses in greater detail critical success factors, the
strategic importance of resources and competencies and core
competencies.
BE: Chapter 10, pages 193-204, on value creation and sustainable
competitive advantage.
SC: Chapter 3, on distinctive competencies, see the Appendix of this
workbook, pages 127-148.

Activity 4.4: What kinds of resources and competencies are


needed to support the competitive strategy that your business
currently pursues? (Individual preparatory and/or group task)

What resources and competencies are necessary if the case


organisation is to be successful (that is, obtain a competitive
advantage) in pursuing the competitive strategy you identified in
Activity 4.2

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Strategy Analysis and Evaluation (SAE) Workbook

Identifying your business’s core competencies


Identifying the core competencies that a business actually possesses is
likely to be a very difficult task. But it is important to be clear about
what these competencies are, and how they support its ability to
deliver those things that its customers value highly.

In this task (which you are asked to do with your team), we show you
one way in which you might try to explore what core competencies a
business possesses. It involves what could be called ‘mapping
competencies’. Consider the following graphic, Mapping
competencies.

Mapping Competencies

A B

Success
C

E D

Exhibit 1: Starting the process of mapping competencies

Think about Exhibit 1 as describing the outcome of a process of


investigation. We begin by establishing a criterion of success,
represented by the central oval in the picture. Next, we explore what
characteristics of the offering seem to be important in generating that
success. A, B and C denote three characteristics that are highly valued
by customers, and so which are important to competitive advantage
for the business. To do this, you may find it useful to re-visit the
Strategy Canvas, Exhibit 2.7 in FS, page 49 and your answers to
Activity 3.9 (Competitor analysis) in the previous chapter.

We now explore each of these characteristics in turn, searching for


what (if anything) gives our business the ability to deliver these
qualities in relatively strong ways. The investigation should be guided
by the objective of trying to find exactly what it is about the business
that leads to it having the ability to deliver the characteristic in
question. That is, we are looking for the business’s core competencies.

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Strategy Analysis and Evaluation (SAE) Workbook

Activity System Map

Exhibit 2: An Activity system map (source: Johnson, G, Scholes, K. and


Whittington, R. (2005) Exploring Corporate Strategy. 7th ed. London: Pearson
Education.

An example of how this might be done is provided in Exhibit 2 above.


Note that there may be several linked steps that have to be gone
through before we succeed in pinning down the competencies.
Furthermore, we may discover connections and linkages that cut
across different product characteristics. Finally, note that what could
turn out to be very important may at first sight look rather mundane. It
may even be entirely unknown to the senior management, or be totally
unplanned!

What we expect, and do not expect, of you


Clearly, as you are working on a case organisation about which you
have limited information, and because you are inevitably an outsider
without privy to inside information, you will be limited in the amount
of detail that you will be able to achieve in your analysis. However, it
is important for you to appreciate that doing strategic analysis in
practice would ideally involve you understanding a significant level
of detail about the case organisation’s operations.

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 4.5: Mapping the core competencies of your business


(Individual preparatory and/or group task)

Current position of the business: In previous tasks, you have tried to


identify what strategic position the business is currently taking, what
product characteristics are likely to be critical if that position is to be
successful, and what kind of core competencies are likely to be
necessary to underpin that competitive strategy. Now use the
technique of competence mapping that we have just described to
analyse whether your business does have the appropriate kinds of core
competencies. In doing this, we recommend that you should make this
task manageable by focusing on just one or two factors in terms of
which you can claim some success relative to your rivals.

Looking forward:
Depending on whether or not the business does possess appropriate
competencies for its current choice of competitive strategy, answer
either (a) or (b) below:

a) Which core competencies does the business not have that seem to
be important to its current competitive strategy? Could these be
feasibly developed?

b) What might the business be able to do to enhance and reinforce its


existing core competencies? If the organisation had funds for
investment, what types of investment activity could reinforce its
competencies?

Core competencies, competitive strategy and competitive


advantage
Having now come to grips with the ideas of competitive advantage,
strategic position, core competencies and competitors analysis, it is a
good time to continue working with other members of your team, to
pool ideas and see whether your team can agree on one overall vision
of the linkages between these various ideas for your chosen case study
organisation.

Before meeting your fellow team members to undertake this task, you
should review your findings so far. It will also be useful to email an
electronic version of your annotated workbook to your team members
before you meet up to undertake the following team task.

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Strategy Analysis and Evaluation (SAE) Workbook

Reading

SC: Chapter 3 (see the Appendix to this workbook).

Activity 4.6: The use of core competencies to underpin competitive


success (Group task)

Using the results of your team members’ analysis so far, your team
should now:

a) describe the business’s current competitive strategy


b) explain whether or not the business’s resources and competencies
are appropriate to underpin its current competitive strategy
c) identify which competencies may need to be strengthened in
order to provide a more solid foundation for competitive
advantage.

Activity 4.7: Individual reflection and personal learning insights

Recalling your level of knowledge and understanding at the outset


then considering Activities 4.4 to 4.6, what have you learned about
the resources and competencies of your case study firm? Particularly
what has been the personal learning and insight that you have gained
from:

a) The issues raised in the chapter and the related tasks


b) The process of group discussion about the issues and your role in
this?
c) The relevance to and implications for you as a manager?

Obtaining cost advantages


Two of the positions that might be taken on the Strategy Clock entail a
price-based strategy (the ‘Low price’ or ‘No frills’ routes). Adopting
such positions is tantamount to believing that your business can attain
a competitive advantage over its rivals through superior cost
performance. Indeed, Michael Porter used the phrase ‘cost leadership’
when thinking about low price based competition.

However, we need to be a little careful here. From the customers point


of view business costs are irrelevant; what matters to them is price
(relative to their perception of the value of the product). A price-based

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Strategy Analysis and Evaluation (SAE) Workbook

strategy entails some belief that customers are highly price sensitive,
and so selling at lower prices than others can generate considerable
extra sales volumes and sales value. It seems reasonable to insist,
therefore, that if a price-based approach is taken to competitive
strategy, managers should be able to provide evidence that price is
seen by customers as being beneficially lower than those of the
competitors, and that customer demand is sufficiently responsive to
that perception.

But what matters to the business is the amount of added value it


generates for itself. Selling at lower prices may generate more sales
volume, but it also compresses margins. Furthermore, a price-based
strategy may induce retaliation in kind from its rivals, thereby
restricting its sales volume increases. So if a firm intends to achieve
high profits on a sustainable basis from a price-based strategy, it
must be confident that it can outperform its rivals in cost terms (and so
enjoy margins that others cannot match). Is this possible and if so
how?

Irrespective of its strategic choice, any business should endeavour to


keep its costs as low as is reasonably possible, given the scale and
composition of activities it has chosen to undertake. Indeed, unless the
business does ‘get its costs right’ it will be unable to compete
effectively in the long term. ‘Getting costs right’ is largely about
qualifiers (and the absence of hygiene factors). A qualifier is a
minimum condition to enter the competitive race; you do not stand
any chance of success without having satisfied qualification standards,
and having got rid of any hygiene problems. A firm has a (cost-
related) hygiene problem if it does not attain the lowest cost structure
for what it is doing given currently codified technologies and best
practices. Clearly, any firm with serious – and avoidable – cost
overruns must address these hygiene problems.

But this is not sufficient for attaining a competitive advantage,


because competitive pressures are likely to mean that all competitors
will be struggling to get their cost basis right. A sustainable cost
advantage requires that you have some special or unique quality that
generates above normal returns. It is a matter of doing more than just
‘best practice’,

It may be possible to outperform others in cost terms, even where


others are doing as well as they can in terms of current best practice. If
so, then superior cost performance becomes a strategic issue, and a
firm might seek to gain a competitive advantage over its rivals by
charging lower prices, supported by its distinctive cost performance.
This is likely to be much more difficult to attain than is often thought.
Nevertheless, analysis may suggest possible ways in which it could be
achieved. The reading in ‘Business Economics’ suggests several ways
in which a firm might obtain a cost advantage over others. In going
through the readings recommended below, pay particular attention to
the following matters:

• cost advantages over others gained from superior ways of dealing


with other players in the transactional environment (in particular
by developing special relationships with buyers and with
suppliers),
• economies of scale,

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Strategy Analysis and Evaluation (SAE) Workbook

• economies of scope,
• learning-by doing, the learning (or experience) curve, and first-
mover advantages, and
• synergies.

As the reading explains, economies of scale are cost-savings that


accrue from doing one activity on a large scale. It is unlikely that size
alone can give a business a competitive advantage, as this option is
available to others too. But if producing at a large scale is combined
with doing so first, or if learning/experience can be accumulated more
quickly than rivals succeed in doing, then real distinctiveness becomes
possible.

Economies of scope is also a ‘size’ matter, but with a subtle


difference. A scope economy arises when activities are done at lower
cost when combined rather than being done separately. Thinking
about scope leads us to consider possible synergies between activities;
and it invites us to consider whether gains are possible from stretching
or leveraging competencies from one use into others. This brings
corporate questions into the story, and we explore these fully later.
But it is important to remember that one way in which your business
could outperform others is if it benefits from synergies that have not
been (or could not be) exploited by your rivals.

Bearing in mind what has come in earlier sections of this workbook,


you should note that a cost advantage over others is likely to come
from core competencies: routines or processes that your business has
developed over time, which others find difficult to imitate or acquire.
For many successful firms, it is in this area that one is likely to find
the explanation of their superior performance.

Finally, note that in developing appropriate business strategy, it is also


important to be clear about what you DON’T need to do. For this, the
previous exercise on competence mapping should be helpful. By
identifying what your core competencies are, you may be able to
identify which processes do not contribute to competitive advantage.
This can suggest where costs savings are possible that do not threaten
the business’s competitive strategy.

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Strategy Analysis and Evaluation (SAE) Workbook

Individual reading:

FS: Chapter 3, section 3.5.1, pages 74-79, explains the concept of the
‘value chain’ and the relationship to costs and profits (also see section
3.3 on cost efficiency, pages 65-67); Chapter 6, section 6.3, pages
157-162, discusses the sustaining of competitive advantage and in part
relates this to the value chain concept.
BE: Chapter 4, pages 63-67, on costs and market transactions; and
Chapter 5, pages 80-109 on the search for added value and the costs of
production.
SC: Chapter 3, on cost leadership, see the Appendix of this workbook,
page 137.

Activity 4.8: Obtaining cost advantages (Group task)

The current position:


Does your business currently have any cost advantages over your
competitors?
Are there any activities you perform that seem to be unrelated to your
search for competitive advantage, and so could be deleted?
(Hint: You may find some useful and relevant information here from
the earlier Competence Mapping exercise.)

Sustaining existing advantages:


Investigate the extent to which the cost advantages you have identified
are sustainable. (That is, they are not easily replicable by others)
If the advantages are not replicable, why are they not?

Looking to the future:


Using the various cost concepts discussed in this section and in the
recommended readings identify whether there might be ways in which
the business might be able to outperform its rivals in cost terms that it
has not yet exploited

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Strategy Analysis and Evaluation (SAE) Workbook

Obtaining differentiation advantages


The Strategy Clock has shown us that rather than trying to make its
product cheaper, a business might aim to make its offering different
(in a way that is attractive to customers). Put another way, the position
that a business might try to take in the market is to produce an offering
(or range of related offerings) that customers regard as being
qualitatively superior to those offered by rival businesses, and for
which they are willing to pay a premium price. Such superiority might
come from it being faster, newer, more appealing, or, more generally,
from having any property that melds well with final consumer value
systems or the needs and preferences of other buyers. In terms of the
Strategy Clock framework, routes 3, 4 and 5 are differentiation
strategies.

Note that differentiation relates to the product as a whole, not just its
direct or physical characteristics. So after-sales service, reliability,
convenience of using with other products etc can all matter. This
suggests that differentiation may come not only from the more
obvious forms of product innovation, but also from relationships the
business develops with suppliers, and with intermediate and final
buyers.

Does this generate a competitive advantage for the business? Maybe it


will, but not necessarily. It is almost always possible to produce
something of higher quality than your competitors, or something
perceived as being significantly different. But doing so will usually
incur additional costs. If the business is to outperform others, the price
premium that consumers will pay should exceed the additional costs
of the differentiation. There is, of course, no guarantee that this will be
the case. (Try and think of some examples of businesses where
differentiation appears to have been successful in adding value, and
others where it has not).

The extent to which a business can successfully raise price to cover


(or more than cover) the additional costs of differentiation will depend
on the price sensitivity of the demand for the offering of the business.
That is, it will depend on the business-specific price elasticity of
demand, [Technically speaking, this is a measure of the proportionate
change in the quantity demanded on one businesses product when it
changes its price by a small proportion, assuming that the prices
charged by competitors, and all other relevant factors, remain
unchanged.] A high price elasticity of demand means that a relatively
small increase in price will choke off demand to a relatively large
degree – demand is highly sensitive to price.

Elasticity of demand for the product of one business depends, in turn,


on two things:

1. the price elasticity of demand for the product type in the market as
a whole, [Technically speaking, this is a measure of the
proportionate change in the quantity demanded of the product type
in the whole market when all businesses simultaneously change
their prices by the same small proportion.]
2. the extent to which customers regard the individual business’s
product as being substitutable by products of other businesses.

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Strategy Analysis and Evaluation (SAE) Workbook

So, for example, the elasticity of demand the Honda car business faces
for one of its family saloon car models will be shaped by the price
responsiveness of customers as a whole for family saloon cars (point
1. above) and by how successful Honda has been in developing
critical success factors that give its model distinctiveness and so a
perception that it cannot be easily substituted by the offerings of
others (point 2. above).

Now, go through the recommended reading about differentiation


strategies given below, and then undertake Activity 4.9 below.

Individual reading:

FS: Chapter 6, pages 149-156 (the Strategy Clock), and pages


159-162 (which discuss sustaining differentiation based advantage,
including a discussion of lock-in).
BE: Chapter 6, pages 125-127 and elasticity of demand pages 38-46.
SC: Chapter 3, introducing the offering, see the Appendix to this
workbook, pages 130-131.

Activity 4.9: Obtaining differentiation advantages (Group task)

Using the concepts discussed in this section of the chapter, together


with previous information you have found about critical
characteristics from the customers’ point of view, and the
competencies of your case organisation identify ways in which the
business might be able to pursue a differentiation strategy.

Hints:
Explain what mix (or linkage) of competencies supports the strategy.
Try to describe this in terms of a revised explanation of the business
offering.

Sustaining differentiation advantages


In the previous activity, you saw that successful differentiation
strategies depend on customer perceptions of high value-for-money.
But there are several reasons why we might expect value-for-money
advantages to be transitory. The two main reasons are to do with
imitation and innovation. A good idea – or more precisely a good idea
that generates commercial success – is a target for others to imitate or
replicate. And it is likely to be quite difficult to prevent this
happening. So with the passage of time, good ideas tend to become
‘commoditised’ or standardised products. Differentiation advantages

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Strategy Analysis and Evaluation (SAE) Workbook

tend to drain away. Secondly, the speed of technical, social, cultural


and economic change means that innovation is likely to render any
particular established product increasingly less attractive, or even
obsolete.

These, and other similar, arguments suggest that it is likely to be


difficult to sustain a competitive advantage, particularly one that is
based on a differentiation strategy. Indeed, the most difficult part of a
differentiation approach to competitive advantage is likely to be
protecting value-enhancing differentiations, rather than creating them
in the first place. Can businesses do anything to sustain positions of
strength over long periods of time? We now examine some ways in
which they may be able to do so.

In many circumstances – and especially when it comes to the purchase


of consumer durables by final consumers – customers simply do not
have the ability to test carefully prior to purchase (washing machines,
cars, hi-fi systems, for example). Moreover, when purchases are
relatively infrequent, as they are with consumer durables, information
learned from previous purchases may have little or no relevance to
subsequent purchases.

In these circumstances, reputation is of great importance. An


organisation that has a reputation for something is in a position where
customers will take that something on trust, to a degree at least. This
is akin to having the advantages of a successful advertising campaign
for the product without having incurred the costs of that campaign.
(Ask yourself where such a reputation might come from or how one
could be developed and enhanced). Possession of a (good) reputation
is one way in which a differentiation advantage can be sustained, as it
gives some kind of quality assurance that what is currently on offer
will deliver the anticipated value for money. It is likely to be
particularly valuable in a market in which product development is
taking place quite rapidly, so that learning about individual products
by experience is limited.

Of course, to keep a reputation, a business must ensure that it can and


does deliver what is expected. For example, when the Mercedes Benz
A class car was found to be unstable around bends in extreme driving
conditions, the company moved swiftly and decisively to make the
necessary investments to overcome this problem – Mercedes has a
huge value-generating potential riding on its quality and safety
reputation. Not all car producers will find it beneficial to act in such a
way.

Finally, a special kind of differentiation is based on network effects or


‘lock-in’. A network effect exists where the value to a customer of a
particular product depends on the extensiveness of the installed base
of users and the breadth and compatibility of complementary goods
and services. (Think how important such effects are to Microsoft. Can
you think of other examples?) A network-product business that has,
for one reason or another, a large proportion of the market in its
customer base, has a valuable strategic asset, akin to a kind of
differentiation advantage. The fact that network effects tend to create
large switching costs for buyers generates barriers to replicability, thus
helping to sustain any initial competitive advantage.

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Strategy Analysis and Evaluation (SAE) Workbook

Individual reading:

FS: Chapter 6, pages 159-165 – sustaining differentiation based


advantage and ‘lock-in’
BE: Chapter 6, pages 125-127, on obtaining value through
differentiation and monopolistic competition.

Activity 4.10: Sustaining differentiation advantages (Group task)

What factors threaten the ability of your business to sustain a


differentiation-based competitive advantage?

Are there any ways in which you might be able to overcome these
factors, and so succeed in generating a sustainable competitive
advantage?

Hints:
Look at the criteria of sustainability given in FS pages 159-165.
Identify which criteria you think are fulfilled by your business. If your
business does not meet any of these criteria, how does it expect to
achieve sustainability of competitive advantage?
Does the Porter’s Five Forces analysis you performed earlier suggest
that there are any ways in which relationships with other players in
your transactional environment could be developed to reinforce a
competitive edge you may possess?
How important is reputation in your market, and how is a good
reputation cultivated? Are network effects or lock-in present?

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 4.11: Individual reflection and personal learning insights

Recalling your level of knowledge and understanding at the outset


then considering Activities 4.8 to 4.10, what have you learned?
Particularly what has been the personal learning and insight that you
have gained from:

a) The issues raised in the chapter and the related tasks?


b) The process of group discussion about the issues and your role in
this?
c) The relevance to and implications for you as a manager?

Hypercompetition
In the previous activity, you saw that successful differentiation
advantages might only be transitory. One reason for this was said to
be that the speed of technical, social, cultural and economic change
means that innovation is likely to render any particular established
product increasingly less attractive, or even obsolete.

We have to admit the possibility that conditions may make it


impossible to protect perceptions of uniqueness or distinctiveness in
any particular product. In that case (and continuing a previous
example) it would not be sensible for Honda to attempt to sustain a
differentiation advantage of a particular, successful year 2000 model.
But suppose instead that it attempts to establish critical success factors
not in any single product but rather in the stream of offerings being
developed over time.

Then some exciting possibilities arise. A business might try to develop


and also protect its differentiation advantages by outpacing strategies
(also known as time-based competition). If product life cycles are
very short and product innovation very rapid, the ability of others to
add value by imitation is very limited. A business might, therefore, try
to promote the pace of product change (if it is confident that it can
outpace others). What kind of resources or competencies do you think
would be necessary to support such a strategy?

We can interpret the idea of hypercompetition – a concept often


associated with Rich D’Aveni – in this way. Hypercompetition refers
to an environmental state in which rapid change is the outcome of
businesses continually making competitive moves to gain advantages.
Firms obtain and build advantages by moving faster than others, and
in the process deliberately destroy established positions and the
competitive advantages of others.

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Strategy Analysis and Evaluation (SAE) Workbook

Another way to see hypercompetition is provided by Selsky and Goes


(“Contrasting logics of strategy making: Applications in Hyper
environment”, Academy of Management Proceeding, Best paper
2000). According to them, hyper environment

“is characterized by two key properties, viz., stimulation of


positive feedback processes in narrow fields of action that
(2) produce emergent structural effects in larger fields of
action. First, actions by players in hyper environments tend
to be self-reinforcing. E.g., in hypercompetition the “mutual
understandings” between competitors that act as brakes to
keep the competitive system in dynamic equilibrium break
down (Barney, 1986). These are negative feedback
processes, or a self-correcting causal loop. Eliminating those
brakes introduces a positive feedback process into an
industry’s competitive dynamics, which can become a self-
reinforcing causal loop. Second, emergent structural effects
result from the build up of many individual instances of
trying to externalize costs. These effects tend to lodge in the
larger field of action, often outside a firm’s (or all of an
industry’s firms’) strategic scope. Turbulence then amplifies
in the shared field, creating new instabilities. Successful
triage in such turbulent conditions serves as a temporary,
negative-feedback process that dampens turbulence.”

This view is different from that of D’ Aveni. For D’Aveni the way to
face hyper competition is to become faster than the competitors and
upstage them with speed, surprise and agility. The latter view,
however, takes the position that hypercompetition is a shared social
phenomenon that if capitalized upon for only individual benefit would
be too adventurous. For social theorists such as Selsky and Goes, the
successful firms in such circumstances would therefore tend to foster
shared values among the participants. Cooperation, they claim, would
“cohere the fragmented parts”. Naturally a call for more competition
would be replaced by one for cooperation and joint-action. The
proponents of the social view also believe that it is nearly impossible
to predict the unintended consequences of “more of the same
competition” approach that would result in volatility and uncertainly;
this, in turn, would adversely impact everyone in the industry,
something that industry players would like to avoid. With efforts to
externalize costs, the fiercely competitive approach, the social view
claims, would lead to adverse environmental and ecological
consequences. 1

1
"Externalities could be understood with an example. Let us say a company pollutes a
river through its affluent discharge and it does not have to pay for its clean-up. In such
a case the company externalizes the cost, meaning the cost of cleaning up the river to
what it would have been is borne by outside parties. Even if there is no clean-up these
could be costs imposed by the firm in the form of local people suffering on account of
pollution. In the same way, hypercompetition may drive companies to take extreme
steps such as cost cutting that may compromise on product safety. Or it may lead to
desperate acts such as extreme price reductions (resulting in price wars) that adversely
impacts long-term productive investments in R&D. In effect, the firm is imposing a
long-term cost to the entire industry or it is externalising the cost."

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 4.12: Sustaining differentiation advantages outpacing and


hypercompetition (Individual preparation and/or group task)

Does your business, or do your competitors, employ any outpacing or


time-based competition strategies?
Will it be forced to do so in the future?
Could your business successfully pursue a hyper-competitive
strategy?

Is it possible, in the face of hypercompetition or time-based


competition, for your (or any other) business to sustain a
differentiation-based competitive advantage?

Rivalry and strategising


In some industries, there are so many individual competing businesses
that each individual business is analogous to one drop of water in a
large ocean. Its behaviour has no significant impact on any others, or
on the industry in aggregate. (See BE, Chapter 6).

However, in others there is a relatively small number of rivals.


Alternatively, while there may be many businesses in total, the
industry is dominated by a small number of key players. In these
circumstances, businesses are strategically interdependent. The
actions of each affect the others, and so each is likely to take the
possible responses of others into account in determining its own
actions. (See BE, Chapter 8).

Why does this matter? Think back to our earlier discussions about the
Strategy Clock and competitors analysis. There we invited you to
think about questions like: Given knowledge about the positions taken
by our competitors, what competitive position would be sensible for
us to take? Suppose that your competitors do not react to actions or
positions that you take. In that case, the previous Activities in this
workbook have given you some idea about how to address
competitive strategy questions of this kind.

But is it reasonable to assume that our competitors will not react? It


may be appropriate in some circumstances, but in general it will not.
When there are a small number of businesses contesting a market, or
market segment, the behaviour of each of them is interdependent with

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Strategy Analysis and Evaluation (SAE) Workbook

the behaviour of others. What you do affects them, and what they do
affects you. So in general, we would expect some form of reaction to
any significant changes you make. Whether or not you are conscious
of this, you are inevitably involved in playing a ‘strategic game’.

There is a huge literature – known as game theory – which has


emerged in the study of strategic games. Much of this is complex and
mathematical, although the additional readings we give below are
simple, non-technical, and directed at a business audience. We can do
no more here than touch the tip of the iceberg. It is up to you to take
your additional reading as far as you feel is useful.

What interests us here is that the (successful) playing of a strategic


‘game’ may allow one business to attain a competitive advantage over
others. Think about the sorts of situations where game theory might be
relevant. Should one soap powder producer advertise heavily or not?
Does this depend on what others do? Or more precisely, does the
payoff to your firm of each option (Advertise Heavily, or Do Not
Advertise Heavily) depend on what option the other player(s) select? If
it does, then is game theory relevant? Another example where game
theory can give useful insight is the choice by one electronics firm of
whether or not to invest heavily in a new technology. (See sections 8.2
and 8.3 in BE, pages 154-171). This game is also, and more
extensively, analysed by Dixit and Nalebuff (1991), reference below.

There are many types of business decisions that have been explored
using game theory. Here are some examples:

• the potential benefits to be gained by co-operation with ones rivals


• pricing rivalry: price leadership, predatory pricing
• competing on quality compared with competing on price
• the construction of barriers to entry and exit
• changing payoffs by making it necessary to incur large sunk costs
in order to compete.

In this workbook, we shall focus on just one issue that game theory
can shed some light on: pricing policy.

Approaches to game theory fall into two general classes: non-


cooperative and cooperative games. In the former, players are aware
of their interdependence with others, and so realise that the net
rewards (or ‘payoffs’) from any choice will depend on what others
choose. Nevertheless they still operate individualistically, doing the
best they can, given their expectations of what others will do. In the
second case – cooperative games – players collude (or cooperate),
acting in concert to maximise joint returns, and sometimes agreeing
how to divide the spoils.
Cooperative games are often illegal, contravening national or
international competition legislation. Because of this, we do not
explore cooperative games any further here. But note that many forms
of cooperative behaviour are legal. Indeed, John Kay in Foundations
of Corporate Success makes a convincing case that cooperation is a
key determinant of business success.

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Strategy Analysis and Evaluation (SAE) Workbook

The illustration that follows uses some elementary game theory.


Considering a major choice that a business might make: whether or
not to cut its price. To keep things simple, we will make this a simple
binary choice – CUT (PRICE) or DON’T CUT (PRICE). Again for
simplicity, we deal with the case where there is just one rival. This can
be conceptualised as a fictitious rival consisting of all the business
rivals acting as if they were a single player.

We also assume that the game is played simultaneously (both players


have to make their decisions at the same time, and so do not wait to
observe the choice of the other) and that it is played just once (it is a
one-shot game).

Printed below is one possible payoff matrix for this game. The choices
open to the business (CUT, DON’T CUT) are set out at the left of the
two rows. The choices open to the rival (also CUT, DON’T CUT) are
set out at the top of the two columns. The numbers in the four cells of
the matrix refer to the net payoff to each firm for each configuration
of choices. The first number in each cell is the payoff to your
business. The second number in each cell is the payoff to your rival.

Note that the absolute value of the payoffs does not matter. What
matters here are the relative sizes of the payoffs. We have assumed
here that both businesses not cutting price is the ‘status quo’, and so
payoffs to each are zero (i.e. no change from the present) if they both
choose Don’t Cut.

Your competitor
Cut price Don’t cut price
Cut price -2, – 2 8, – 4
Your business
Don’t cut price -4, 8 0,0

What outcome would we expect from this game, assuming it is played


non-cooperatively? Try playing it once with each member of your
team, or some friends or family and see what comes out of this.

Game theory predicts that both players will choose to Cut Price. This
is the individually rational thing to do, even though it is not
collectively rational. (Compare the outcomes of both cutting with both
not cutting). To see why it is individually rational to cut price, ask
whether you have one choice which is better the other irrespective of
what the other player chooses to do. Cutting price satisfies this
criterion; it is said to be a dominant strategy (and game theory predicts
that dominant strategies will be chosen where they exist).

You might like to enquire whether the outcome would be different if


you and your rival were allowed to (or were able to collude). One
might predict that if they did collude, both would agree to not cut
price. But would that agreement be stable? If you did make an
agreement with your rival, would you be able to do any better by
cheating and actually cutting price despite the agreement? Or even if
you behaved honourably, what would happen if your rival behaved
dishonourably? Would that affect your choice?

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There is not space in this workbook – and you do not have enough
time – to take these matters any further. Game theory is fascinating
and insightful. We give below some ideas about easy further reading
that you might pursue if you wish to follow up on this topic.

Individual reading:

FS: Chapter 6, pages 163-1645, which discusses competition and


collaboration.
BE: Chapter 8, pages 150-155, and 163-171 on strategic competition.

Additional reading:

To see some examples of game theory in action., we also recommend


the following:
Dixit, A. and Nalebuff, B.J. (1991) Thinking Strategically: The
Competitive edge in Business, Politics and Everyday Life.
Nalebuff, B.J. and Brandenburger, A.M. (1997) Co-opetition, Harper
Collins, London.
Kay, J. (1993) Foundations of Corporate Success.

Progress report
At this point in your study of competitive strategy, you have
accumulated a vast amount of information, and undertaken much
preliminary analysis of that information. You may feel in danger of
being swamped by it all!

So now is a good time for you and your fellow team members to share
information and to enter into a dialogue about the best way of making
use of what your team has discovered.

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 4.13: Progress report to date (Group task)

Agree a single team version of your findings with regard to each of


the following (applied specifically to your chosen case organisation):

The current position:


Taking into account your case organisation and those of your
competitors, what competitive advantage do you think your case
organisation has, if any?

Sustainability:
Is your case organisation’s current competitive advantage (if any
exists) sustainable? If so, what is the basis of that sustainability? If
not, what seems to be undermining sustainability?

Looking to the future:


What resources and competencies do you think need to be
strengthened and reinforced in your case organisation? What
constraints need to be overcome?
What do you consider is the most promising basis for the future
performance of your case organisation? In other words, what should
be the basis of its future competitive strategy?

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Business idea
What we want you to do now is put all the ideas you have thought
about together into a single, organised framework. Once again, we ask
you to do this as a team (although you may find it useful to work
through this task individually first). What you should be aiming for in
this team task is to produce a forward-looking Business Idea. This
should represent what your team thinks is a competitive strategy that
has the best chance of creating sustainable competitive advantage
for your case organisation.

The particular framework that we call the ‘Business Idea’ is briefly


explained below, and at more length in the further readings. This
adopts a simple systems approach, where the ideas you have looked at
so far are related by a set of sequential linkages in what is known as a
‘positive feedback loop’.

The reason why we ask you to use this approach is that it forces you to
give a convincing, and consistent account of how the business can
attain a competitive advantage, but in a very simple way.

Look at Figure 8 on page 137 of the Appendix, which shows the


generic form of the Business Idea expressed as a loop. Starting at the
top right, the diagram begins with the offering: the business must
understand its customers, and provide them with the services they
want at a reasonable price. If the business does actually have a
competitive advantage, then by definition it will have found some way
of delivering a unique offering – it will have some critical success
factors. The diagram uses the term ‘Entrepreneurial invention’ to
capture this idea.

You know from earlier tasks that the business can only achieve a
competitive advantage if it has built some core (or distinctive)
competencies. The entrepreneurial invention also applies here: the
business may have found a special way of using and combining its
resources to generate distinctive competencies. Hence the diagram is
structured to show that the offering (entrepreneurial invention),
supported by distinctive competencies (also generated by
entrepreneurial invention), creates a competitive advantage.

But, of course, the outcome of a competitive advantage is outstanding


(or supernormal) results. In the final analysis, that means value and
wealth creation in the business. These results are important for two
kinds of reasons. First, they enable the business to satisfy or reward
the various stakeholders in appropriate ways. Second, results generate
the means to accumulate resources in ways that further enhance,
protect and sustain the business’s distinctive competencies. And so the
loop is completed.

Why do we call it a positive feedback loop? It is because – in the


language of systems theory – a positive loop means that when one
element of a linkage changes, the other element of the linkage changes
in the same direction. So we have here a single loop, consisting of a
set of linkages all of which show positive linkages. A virtuous cycle is
thus possible – as the level of strength of any element in the loop
increases, so it strengthens or increases other elements too.

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Strategy Analysis and Evaluation (SAE) Workbook

The systems theory part of all this is not essential. What matters is that
we have a framework here which allows you to write down all your
ideas in a simple, consistent way, and which shows that success can be
self-reinforcing (although there may be limits to this). Implicit in here
is an emphasis on sustainability. This is seen in terms of continual
investments in resources, designed to reinforce and strengthen
distinctive competencies. Those competencies are not things acquired
once and for all. They are being regenerated continuously.

Finally, note that the Business Idea as we have described it is


cumulatively reinforcing. The results of successful business
performance provide funds for investment; if these are made in
resources critical to the businesses distinctive competencies, the
organisation can go from strength to strength. But by the same token,
a positive feedback system can also exhibit cumulative collapse if
things go spiralling downwards. This should alert us to an ever-
present possibility: business failure can escalate into a cycle of decline
unless it is transformed by a new, well designed, and well-supported
competitive strategy.

In summary, the Business Idea answers to the following questions:

• What customer needs are being satisfied by the business?


• Which resources does the business have to satisfy those needs?
• How are those resources used to generate distinctive competencies
that allow the business to get a competitive edge over its rivals?
• What particular method of competing does the business use (i.e.
what is its competitive strategy)?
• How does pursuit of this competitive strategy generate value for
the business, and allow it to build up, enhance or stretch its
resource base?

A fuller explanation of the contents of the boxes and their linkages, if


you need it, is given in the SC Chapter 3, attached as an Appendix to
this workbook.

The business idea as a system of feedback loops


Look at Figure 8: The Generic Business Idea on page 137 of the
Appendix of this workbook.

This way of putting ideas together becomes of most use when it is


used to look forward. The kind of additional questions suggested by
the model then include:

• How are customers’ needs changing and evolving?


• Which resources look to be critical for the business’ future
competitive strategy?
• How can retained profits be channelled into investment in
resources that will strengthen, protect and sustain distinctive
competencies?

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Strategy Analysis and Evaluation (SAE) Workbook

Another important use of the business idea is to evaluate the current


competitive strategy of the organisation, asking the following
questions:
a) Does the business look attractive given environmental conditions,
and competitors’ resources and strategies?
b) Relate strengths and weaknesses of the business to the
business/firm’s resources and capabilities? Can these be leveraged
to either reinforce strengths and/or overcome weaknesses?

Individual reading:

SC: Chapter 3, on the systemic structure of the business idea, see the
Appendix of this workbook, pages 136-148.

Activity 4.14: Business idea (Group task)

From your investigations to date, draw a Business Idea diagram for


your chosen business, adapting as you see fit the generic form shown
above (and explained and illustrated at more length in the book
Scenarios Chapter 3 - see the Appendix to this workbook). The
diagram should be supported by a brief explanatory commentary.

Hints:
1. Your ‘business idea’ should be able to communicate quickly and
clearly the basis of the businesses competitive strategy. In doing
so pay particular attention to the customers needs being satisfied,
which resources are critical for the business and what you believe
are its distinctive competencies.
2. Try and put as much emphasis as possible on the sustainability of
the business idea. If, despite your best efforts, you come to the
conclusion that competitive advantages cannot be sustained, that
leads to the very difficult question of how businesses have to then
operate.
3. Is your business idea robust to what your rivals are doing or
considering doing, and how they might react to any moves you
make?
4. Adopt the perspective of a competitor. What can it do to beat you?
Critically reassess what is really distinctive about your business.
How does it, or could it, protect its advantages, or are they not
sustainable in the long run?

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Strategy Analysis and Evaluation (SAE) Workbook

Conclusions and looking ahead


In this section of the workbook, you have analysed (one) case
organisation and considered how that organisation outperforms its
rivals, or might be able to do so in the future. This has required you to
develop a detailed understanding of the organisation and its
competencies, the market(s) in which it operates, and the nature and
intensity of competition.

Undertaking such analysis will have highlighted opportunities and


threats for the case organisation. Responding to these opportunities
and threats will require you to consider if the existing competencies
are appropriate to exploit these opportunities, or overcome the threats,
and whether the case organisation will require to invest and develop
new competencies. This will be the focus of Chapter 6 – Option
Generation and Evaluation. You should however carry forward the
competitive insights that you have gained from completing this
chapter.

In the next section, we broaden our attention from the single business
unit level to the organisation as a whole. That is, we consider
corporate strategy. There we think about the appropriate scope for the
firm’s activities, and the role of the corporate centre.

Once the chapter on Corporate Strategy is completed, you should


review all your analyses to identify opportunities and threats, from
which you will generate strategic options. Strategic options are
designed to ensure future survival and success.

Activity 4.15: Individual reflection and personal learning insights

Recalling your level of knowledge and understanding at the outset


then considering Activities 4.13 to 4.14, what have you learned?
Particularly what has been the personal learning and insight that you
have gained from:

a) The issues raised in the chapter and the related tasks?


b) The process of group discussion about the issues and your role in
this?
c) The relevance to and implications for you as a manager?

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Strategy Analysis and Evaluation (SAE) Workbook

Chapter 5: Corporate strategy


Introduction
A central theme of this course is the value-creating role of strategy. In
pursuing this we have asked you to focus on business strategy and in
particular competitive strategy. However, as explained in Chapter 1,
there are other levels of strategy and these too can contribute to value
creation (or destruction). The purpose of this chapter is to develop
your understanding of corporate level strategy in organisations and the
relationship between corporate and business level strategy.

There are not so many activities to undertake in this section, but your
consideration of the reading is as important as the activities that you
will be undertaking. The relationship between corporate and business
strategy can be very significant for your deliberations.

Learning objectives
This chapter should help you understand:

• What is meant by corporate level strategy


• What constitutes the corporate centre of a multi-business business;
and therefore represents the corporate parent
• The impact of the corporate parent on business level strategy and
vice-versa.

In particular:

• Different rationales of corporate bodies in relation to how they


might add value to business units.
• Arguments for and against the value adding capacity of multi-
business corporations.
• Different bases of explaining the portfolio logic of corporations.
• Different bases of diversification and the relationship between
diversification and corporate performance.

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Strategy Analysis and Evaluation (SAE) Workbook

Organisation of Chapter 5

Rationale of
Parent as adding
Corporate Corporate strategy
value
parent

Diversification

Portfolio management

Relatedness

Conceptual tools introduced in this chapter


Value creating rationales of corporations
Synergy
Bases of portfolio analyses including the growth share matrix, the
directional policy matrix, the parenting matrix, the relatedness matrix
Related and unrelated diversification
Forward, backward and horizontal integration

Your team’s overall brief


By the end of this section your team should have an understanding of
how the corporate and business levels interact and relate to each other.
In particular how decisions at one level may impact on the decisions at
the other.

Key questions you will address


The key questions you will need to consider are:

1. what is the role of the corporate level of organisations?


2. what is meant by corporate level strategy?
3. what is meant by the corporate parent?
4. how might corporate parents add value to that created by
businesses within their portfolio?
5. how might the portfolio of corporations be considered; and how
do these relate to the overall rationales of corporate bodies?
6. what is the nature of the diversification of a multi-business
corporation; and does this make sense in terms of its corporate
rationale?

Choosing the corporation


Even small businesses may be ‘multi-business’ businesses insofar as
they deal with different markets or types of customer. But for the

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Strategy Analysis and Evaluation (SAE) Workbook

purposes of this section it is probably helpful to consider a ‘multi-


business business’ that has a corporate centre (or headquarters) and
separate divisions and/or businesses with their own management
teams. Indeed the business you are studying for SAE may well be part
of just such a corporation.

If this is not so you should choose a multi-business business to


examine. This could be the organisation that you work for; it could be
a well-known organisation for which you can obtain published data; or
it could be a case study which covers the sort of ground required to
deal with this topic.

What is important is that you have an understanding of business level


strategy for some of the businesses within the corporation: so if you
are able to use the corporation within which is the business you are
studying, this would be useful.

Individual preparatory reading:

In this chapter, the following reading will be useful. More specific


guidance on reading will be given later.

FS: Chapters 7 and 8 on corporate level and international strategy.


BE: Chapter 11, on the scope of the firm and acquisitions.

The corporate parent


Most of the concerns so far in the course have been to do with
business level strategy and, in particular, the importance of
competitive strategy to achieve competitive advantage. The
underlying theme has been to do with the importance of generating
value by achieving advantage over competition so as to generate rents;
and a good deal of attention has been paid to the particular capabilities
and competencies of business that might allow them to do this. So the
successful business is one, which is creating value, greater than
competition, on the basis of meeting customer needs and expectations,
based on unique or difficult to imitate resources and competencies.

If this is so, then why is there a need for levels above that business?
Or more particularly, how, and to what extent, are levels above that
business able to add value to that created by the business; or might
they be destroying value? Clearly this is an important question from a
number of points of view:

• It is important from a business level point of view. Executives at


that level will not be happy if levels of management above them
subsequently diminish the value they are creating. On the other
hand, if those levels of management were able to add further to
the value created by businesses, then their role would presumably
be welcomed.
• Shareholders and investors will be concerned because the value-
adding capacity of the corporate centre will influence the overall
value or potential growth of the corporation and the businesses
within it. Or, again, could be diminishing these.

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Strategy Analysis and Evaluation (SAE) Workbook

• However, there is an even bigger issue. Some of the multi-


business corporations that exist play a major role in the well being
of whole economies: so how they conduct themselves, which
businesses they invest in or disinvest from are important economic
factors for whole regions or even countries.

There is another important reason why levels above the business level
are important. Decisions at that level may affect what a business does,
the strategy it follows, the structural form it take, how it is managed;
or indeed who owns it and whether it continues to exist. Further
decisions (or at least strategic proposals) at the business level may
affect the corporate level. For example a proposal by a business to
diversify may affect the extent and nature of the corporate portfolio;
and in turn how the corporation as a whole is seen (for example, by
investors).

All this assumes an understanding of what is meant by a multi-


business corporation, a corporate centre, a corporate parent and how
such corporate centres may add or destroy value. You should begin
this activity by doing some basic reading that introduces you to these
ideas. You should then use some of these concepts as a way of
undertaking an initial examination of the corporation you would like
to understand and analyse.

As suggested above, please check that you are confident that you can
obtain adequate information to address the sorts of questions that will
be raised.

A key question you should consider is what is meant by the corporate


parent. Following your reading on this you should consider what parts
of the corporation you are examining constitute the corporate parent,
Be careful here. Your work on business level and competitive strategy
should have shown you that real value is created at the business level
in markets where there is an interaction between the business and its
customers usually in competition with other businesses. If this is the
level at which value creation really takes place, then theoretically, at
least, all levels above that constitute the corporate parent, since they
are not in direct relationship with customers or experiencing direct
competition for customers. This raises some conceptual difficulties
because for many businesses, it is possible to break down markets
(e.g. in terms of market segments) to a fine level of specificity. In
some cases, for example, it might make sense to consider each
individual customer as a separate market segment. So you will have to
exercise some judgement as to what is the most appropriate level at
which you consider corporate parents as distinct from businesses. A
useful guideline is to ask at what level you think managers are
primarily concerned with identifiable customers and the competitive
strategy of their business in relation to those customers. Above that
level executives will, of course, have a concern about such matters but
will have corporate level responsibilities and concerns too.

For many corporations this divide will take place at the divisional
level. In other words divisional managers are concerned with
multiples of businesses. Whilst they will be concerned with
competitive strategy within those businesses, they are also concerned
with managing across those businesses. In this sense they may be
regarded as part of the corporate parent for two reasons:

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Strategy Analysis and Evaluation (SAE) Workbook

1. they have a responsibility for a multi-business entity,


2. in the absence of adding value to the businesses within their
division, they are a cost to those businesses and will diminish the
value created by them.

Activity 5.1 Individual preparatory task

Read FS: Chapter 7 section 7.4.1, pages 187-191, a discussion on


whether the corporate parent is adding or destroying value of the
business.

Now draw an organisational chart representing the different levels in


the corporation and showing the different divisions and businesses
where appropriate. Identify on this chart what you mean by the
corporate centre. Consider how your description of the corporate
centre relates to the concept of a ‘corporate parent’.

The rationale of the corporate parent


This exercise raises the question: what is the rationale and added value
role of the corporate parent of the organisation?

Either by design or by history, the executives at corporate level,


responsible for the choice and control of the businesses within their
corporation (and therefore acting in the capacity of a corporate parent)
have some view about what they are trying to achieve. In other words
there must be some rationale for the activities of the corporate parent,
in particular in terms of how they expect to create value through their
own activities. This is the theme of this activity. What is the espoused
or implied rationale of the corporate parent? How does it believe it
adds or might add value to the businesses within its portfolio? It is
possible that this will be explicitly stated within an annual report or
publicly available document. On the other hand, there are many
instances of corporations that do not publicly state such a rationale.
This may be because they have not considered what it is: or because
for some reason they feel it is not appropriate to declare it. If a
corporation has some public declaration of its corporate rationale, it
may not be stated in exactly the same way as your text or readings will
explain it. In any event it is likely that you will have to do some
interpretation of statements made by corporations; and quite possibly
some detective work to identify what you think the corporate rationale
is.
Begin by doing the reading that explains different corporate rationales.
Then try to identify the fit between what corporations say they are
trying to do; and what the evidence is that they have done. How do
these explanations or histories fit with the conceptual explanations
provided?

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Strategy Analysis and Evaluation (SAE) Workbook

Individual reading:

BE: 209-213, Michael Porter’s conclusions on diversification, from


his paper From Competitive Advantage to Corporate Strategy.
FS: section 7.4, pages 187-191 and in particular Exhibit 7.5, page 191.

Activity 5.2: Corporate rationale (Individual task)

What is the rationale or purposes of the corporate parent of your case


study organisation?

Corporate diversity and portfolio logic


You have chosen a multi-business corporation; this activity is
designed to encourage you to consider how diverse it is and why.

Presumably the businesses within a corporation are not chosen at


random. There should be some logic to the choice. What is it?

This question can be addressed in different ways:

1. The nature and extent of diversity of those businesses. In


particular, is there any apparent link between the nature of the
businesses within the portfolio? Conventionally this is thought of
in terms of relatedness. In other words are the businesses related
to each other and how? Often this has been considered in terms of,
for example, relatedness markets in which they operate or
technologies that they have. However, this may also be considered
in terms of the competencies that they have in common. So for
example, whilst on the face of it there may be similarities between
a business which produces food products (a manufacturer) and
one which sells food products (a retailer) – and therefore they may
be considered as related in market terms – there may be very
different competencies required in these businesses to achieve
success. So in terms of competencies they may be considered as
unrelated.

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Strategy Analysis and Evaluation (SAE) Workbook

The key question here, then is:

2. What is the basis of the relatedness between businesses in a


portfolio? Is there a fit between the needs of the business and
some particular value adding competencies of the corporate
parent? Here you are not necessarily so concerned with
relatedness between businesses as fit between the businesses and
the parent.

Another way of thinking about this is to ask why, if relatedness


between businesses is useful, this necessarily needs a corporate parent
to broker it. There are many organisations that now are working in
joint ventures or in network arrangements for mutual benefits. What is
it that a corporate parent can do that such business-to-business
arrangements might not achieve?

Is there an overall logic to the portfolio of businesses? By portfolio is


meant the collection of businesses within the corporation. There are
different ways of thinking about the logics of portfolios. Here you
should address the question as to what you think the logic is and
whether this makes sense in terms of the rationale of the corporate
parent and the nature of the diversity of the businesses. Different ways
of considering portfolios in terms of matrices are provided in the
readings, so that you can consider these in relation to these questions.

What is the fit with the corporate rationale of the parent? As


emphasised throughout the whole of this section, there needs to be a
consideration of the extent to which there is a fit between the various
questions being considered. So you need to consider the ways in
which the mix of businesses makes sense in terms of the logic of the
portfolio and, in turn, in terms of the corporate rationale of the parent.
For example, if the corporate rationale suggests that the corporate
centre is going to be substantially involved in guiding the businesses
or achieving synergies between the businesses, then it is important
that they understand those businesses; and therefore the likelihood of
them being able to cope with very diverse sets of businesses is low.
On the other hand, if the corporate centre is aiming to run the
businesses at arms length, then greater diversity might be possible.

Individual reading:

FS: Chapter 7, sections 7.2 and 7.3, pages 173-187, on strategic


directions.
BE: Chapter 11, pages 205-209, on diversification.

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Strategy Analysis and Evaluation (SAE) Workbook

Activity 5.3: Bases of diversity (Individual task)

Consider the extent and nature of the diversification of this


corporation:

a) Extent: identify the main business units in the corporation.


b) Are these businesses related or unrelated? If related, on what
bases?

Note: there are many different bases of relatedness that are possible.

However, consider the bases of competitive advantage you will have


identified for your business (if you are examining one) in the previous
chapter. An interesting question to ask is whether the bases of
relatedness relate to:

c) the competencies that give rise to competitive advantage within a


business (i.e. are there mutually advantageous related
competencies across a portfolio of business?).
d) the competencies that can be enhanced by the corporate centre?

Clearly c) above could, conceivably, be relevant in relatedness across


businesses and therefore be concerned for the achievement of synergy;
whereas d) would be more about how the parent can help the business;
and therefore would be more about a parental development rationale.

e) Given these considerations why is the business you are studying


part of the portfolio of the corporate parent? Is this clearly stated
(for example in the annual report) and do you agree with the
explanation?

Corporate performance
Presumably all of your considerations should have some relationship
to the performance of the corporation. There has been a great deal of
research undertaken on the relationship between the extent and nature
of diversity in corporations and the comparative performance of such

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Strategy Analysis and Evaluation (SAE) Workbook

corporations. Your reading will explain that the results of this are
somewhat mixed and equivocal. However, if there is a pattern in those
findings, it seems to suggest the following:

• Relatedness between businesses within a portfolio may be useful


because there if more chance of the corporate parent adding value
to those businesses given such relatedness.
• However this depends on whether the corporation can understand
those businesses sufficiently to add value. So if it is seeking to do
so, two factors would seem to matter in particular:

1. that there is a basis of relatedness which executives from the


corporate centre can understand.
2, that notwithstanding such bases of relatedness, the size of the
portfolio is manageable. For example, even if relatedness is
present, a very large portfolio may mean it is difficult to
manage from the centre (e.g. in terms of understanding,
management time and management cost).

The logic of this section would also suggest that it is important that
there is a need for compatibility between the answers to the questions
you have been asking so far: namely between the corporate rationale,
the extent and nature of diversity, the logic of the portfolio and the
means of corporate control. So in this activity, look back over the
work you have done and consider the corporation in comparison with
others of a similar type. Does this corporation out-perform its rivals or
not? Why might this be so? This will involve you in examining your
organisation against other organisations in comparative terms. Of
course in this exercise you cannot do this to the same extent as you
will have done for the corporation you are considering: but you may
be able to obtain commentaries by others that do make such
comparisons (eg investors’ reports and press commentary). Each team
member must also take responsibility for one other organisation.

Individual reading:

FS: Chapter 7, section 7.3.3 on diversification and performance, pages


186-187 and sections 8.1-8.4, pages 204-217, on international
strategy.
BE: pages 212-213, on diversification.

Links backwards and forward


This chapter has required you to look at corporate level strategy. A
great deal of the rest of this course has been concerned with business
level strategy. Obviously the two are interlinked. Corporate level
strategy is informed by business level strategy; in turn business level
strategy may be influenced by corporate level strategy. So considering
both levels is important.

Issues of corporate strategy also raise matters of corporate governance


and the purpose of the corporation: a central question is: how is the

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strategy seeking to create value and for whom? (Worth looking back at
Chapter 2.)
There is also a direct link between issues of corporate rationale,
diversity and portfolio logic and policy as mergers and acquisitions –
and therefore strategy options available to firms.

In turn corporate level strategy will influence the structure and nature
of management within the corporation. So, for example, whether the
corporation is divisionalised and on what basis; how many levels of
divisions there are, and how control is exercised throughout that
corporation will all be related to corporate level strategy.

Activity 5.4: Corporate centre – value adding or value destroying


(Group activity)

Given your individual reading and deliberation consider the following


in your group:

a) Is there a clear value adding role of the corporate centre you have
examined?
b) In light of this what is the logic of the business you are studying
for SAE within the corporate portfolio?
c) What constraints, if any, might the corporate centre place on
business level strategic decisions?

Activity 5.5: Individual reflections and personal learning insights

Recalling your level of knowledge and understanding at the outset of


this chapter, what have you learned? Particularly what has been the
personal learning and insight that you have gained from:

a) The issues raised in the chapter and the related tasks?


b) The process of group discussion about the issues and your role in
this?
c) The relevance to and implications for you as a manager?

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Chapter 6: Strategic options – generation and evaluation


Introduction
The purpose of this chapter is to generate and evaluate the strategic
options open to your case study organisation; and to determine which
of these it should follow.

The intention is to provide you with a wide ranging and diverse


portfolio of approaches to strategic option generation and evaluation,
together with the rationale behind a particular approach. The challenge
for you is to apply the various approaches to help with option
generation and evaluation.

As part of making sense of the options that you generate, you may
wish to consider a particular approach, for example Ansoff’s Matrix,
and use the approach to help you to begin to understand the nature and
implications of your options. For example, are your options
suggesting market development with existing products and/or
services? What would this option then imply for your organisation’s
distinctive competencies?

Once you have generated (and evaluated) a number of options, using


the various approaches, we would ask that you reflect on the
usefulness of that approach for the world of practice in the future.

Learning objectives
The objective of this chapter is to develop your understanding and
approach to option generation and evaluation.

On completion of this section it is expected that you will have:

• Considered the key issues arising from your previous analysis,


that is the opportunities and threats that face the case organisation.
• Used and considered the benefits of various frameworks and
concepts for the generation of strategic options.
• Identified a range of strategic options.
• Considered if these are appropriate at the business or corporate
levels.
• Identified any boundaries or constraints on strategic options that
might be considered.
• Evaluated these strategic options, again using a variety of
frameworks and concepts.
• Identified and recommended which of those strategic options the
organisation should follow.

Hints
As you work through this chapter of SAE, you will be required to
constantly manage the complexity of the options that you generate. To
manage this complexity, we would suggest that you develop a
conceptualisation of these options. It may be helpful for you to
address options at two levels. The first level would be about
organisational purpose. The second level would be at thinking through
the implications of options.

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For example, first level issues may concern an organisation that is


manufacturing orientated that wishes to move into service provision.
How would you conceptualise such a change to organisational
purpose?

Second level thinking about the implications of options may require


students to consider across several orders of options. For example, 1st
order options may be about geographic expansion. 2nd order options
may be about specific countries. 3rd order options may concern means
and methods of implementation.

Once this conceptualisation is complete, students will be required to


think about evaluation of options for sustainable competitive
advantage.

Most students fall into the trap of producing long lists of generic
possibilities. To move beyond the generation of such lists requires
students to carefully consider potential options using the above
guidance. Failure to address the implication of this conceptualisation
is likely to result in:

• inability to prioritise options;


• inability to develop clear underpinning of the recommendations;
• inability to link/reconcile the option to competitive advantage;
• inability to link/reconcile the option to the business idea (of the
case organisation) and as a consequence balance continuity and
change.

The reading for this chapter is from parts of Chapters 2, 3 and 7 of FS,
Chapter 3 of SC and Chapter 8 of TSS. You will find specific
directions within the text.

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Organisation of Chapter 6

Strategic issues arising


Option generation
From analysis

Issues/options matching

Option evaluation

Business idea

Recommendation

Concepts and tools introduced or developed in this chapter


Opportunities and threats – issues/options matching
The TOWS matrix
Up-framing
Scenario evaluation and risk analysis of options
Tests of ‘good’ business strategy

The overall brief


Your overall brief as a team is to recommend which strategy (or
strategies) your organisation should follow in the future. To do this
you need to generate possible strategic options and evaluate them to
identify those that address the issues that your analysis has identified.

The main focus in doing this is at the business level or business unit
for your organisation. However you should recognise that there could
be corporate level issues involved in these considerations. For

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example, you might decide that the business should develop through
diversification. If so you may, in effect, be adding new businesses to
the portfolio of the organisation. Clearly this has corporate level
implications. It needs considering in the context of the corporate
strategy you considered in the previous chapter.

However, before we proceed with the discussion on strategic option


generation and evaluation we wish to clarify the decision levels in
which strategic options may be generated.

Corporate strategy decisions – the longer term organisational


priorities, outlined in the mission statement and certainly in corporate
objectives, are a much more likely focus of the CEOs attention. These
objectives are likely to include maximisation of shareholder wealth,
exercising social responsibility, and developing the skills and
opportunities for executives and workforce, while creating unique
value for customers.

Business unit decisions – the broad scope of all the functional areas of
the business. In addition, their links with the external environment
especially the operating environment. The latter is of critical
importance because marketplace reaction to an organisation’s offering
ultimately decides whether the business unit succeeds or fails.
Therefore, the focus of the business unit manager’s attention has to be
the medium term reaction of customers and potential customers to the
business and those of its competitors. Short- term variables like
operating efficiency, effectiveness, and productivity are more likely to
be devolved to functional managers.

Functional decisions – focus on functional distinctive competencies.


These include operating efficiency, effectiveness and productivity, but
in many cases extend into customer and/or product/service
competencies. Many of these are crucial parts of your case study
organisation’s Business Idea, which is embedded in the functional
capabilities of the organisation.

We ask you to consider these differences as you work through


strategic option generation and evaluation, and differentiate your
responses accordingly.

Structure of Chapter 6
The structure of this chapter is as follows:

1. The chapter begins by asking you to consider the analysis you


have undertaken so far in other chapters. What are the key
challenges that you have identified from your analysis? These key
challenges are likely to be in the form of opportunities and/or
threats faced by the organisation. This is an important exercise,
not least because you may need to revisit some of your analyses in
order to both generate and evaluate strategic options; but also
because some of those considerations may place boundaries or
constraints around which options are worth considering. For
example, do the capabilities and competencies that you have
identified give clues as to the acceptability and suitability of your
options?

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2. The chapter then asks you to develop strategic options. A range of


ways of doing this is suggested here. You may chose to employ all
these different approaches, or you may be selective as to which
ones you use. You should certainly use more than one. If you are
working in a group you might decide that different individuals
within the group employ different approaches; and then compare
the output from these different exercises.
3. Finally, you are asked to evaluate the options that you have
generated. Again, different techniques and bases of evaluation are
suggested as to how you might do this.

Starting point
The initial challenge is to determine your starting point. There are a
number of issues that you will require to consider and address as you
begin the task of option generation and evaluation.

The first issue concerns the analysis that you have undertaken and the
insights, opportunities and threats that you will have identified.
During your studies, you are likely to have identified a wide range of
challenges, which are likely to be diverse in nature, for the case
organisation. What do you do with this wide range of issues?

The second issue concerns the level of sophistication in your analysis.


If you increase the range of analysis, does this increase or decrease the
clarity that you can determine in a complex set of circumstances?

Linked to the two previous issues is, the third issue, which concerns
the challenge of reconciliation of your insights and findings from your
analysis. How and/or what should be your focus? Are you
concentrating on a limited number of absolute drivers of change in the
environment? Or, are you concentrating on overcoming a number of
hygiene issues? Or, are you trying to find a strategic break-through,
that is, a new entrepreneurial idea for your case organisation? You
need to undertake an initial ‘sift’ of your analysis to help you stand
back from the detail of your analysis, and make sense of the insights
that your analysis is suggesting. To help you undertake this initial
‘sift’, we pose a number of questions for you to consider:

• are there any imperatives in the external environment that you


must address?
• are there demands from the parent company, for example, growth
targets?
• is there a strategic customer, who is key to the organisation’s
future destiny?

In addition to these questions, we would ask that you also consider:

• will your options generate rent for the case organisation?


• Will your options fit with the business idea?

One final consideration is, how will you operationalise your options?
For example, if you recommend – introduce new product(s), what
exactly does this involve?

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Overview of activities in Chapter 6


The following is a summary of the activities for this chapter. Our
purpose is to provide students with a number of issues to consider as
they move into developing strategic response for the case study
organisation. In addition, we wish to provide students with a wide
range of tools and techniques to assist in strategic option generation
and evaluation. We do not favour a particular approach and wish to
encourage you to explore and experiment with all techniques as part
of your learning process. This will require you to revisit some of your
previous work and reflect on the benefits of each approach, the
differences between approaches, and how you would apply these
techniques in your own organisation.

Group/ Activity description Purpose


Individual
activities

6.1 Identifying key strategic Identification of issues emerging as


issues and challenges important/key from your strategic
analysis. This may require you to
undertake an initial synthesis of the
issues.
6.2 Extant options Identification of options that emerged
from your strategic analysis.
6.3 Ansoff’s Product/Market Identifying the direction and purpose
matrix of the case study organisation and the
possible methods open to the
organisation to achieve its purpose.
6.4 Upframing the offering Identifying new customer
needs/changes in customer lifestyles
and ways to create additional
customer value.
6.5 External environment – Identifying key drivers of change in
opportunities & threats the contextual environment, that is,
(drivers of value creation) the specific factors that may impact
the business.
Identifying specific opportunities and
threats from analysis of contextual
and transactional environment.
6.6 Strategic group analysis Identification of changes in
positioning of organisations into the
market, this may create the possibility
of a new strategic space/position for
your case study organisation.
6.7 Market segmentation Identify the characteristics of the
product/service and position of
incumbent organisations to identify
possible new market segments.

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Overview of activities continued:


Group/ Activity description Purpose
Individual
activities
6.8 Strengths and weaknesses of Identifying the case study
the business organisation’s strengths and
weaknesses to respond/constrain
action to opportunities and threats.
6.9 TOWS analysis Application of the TOWS matrix to
generate a set of strategic thrusts from
particular configurations of external
environment and internal factors.
6.10 Stretch or leverage? Application of DCs in new
configurations to create customer
value.
6.11 Option identification Cluster options and develop specific
options.
6.12 Pulling it together – themes Identify patterns or dominant themes
(clustering and from application of option generation
conceptualisation of options) approaches.
6.13 Option / issues ranking Developing a matrix to compare
matrix strategic issues and options, for
robustness of response.
6.14 Financial evaluation of Identification of NPV etc of options
options across a number of scenarios.
6.15 Scenario evaluation of Comparing risk of options in terms of
options financial, scenario, strategic and
organisational risk.
6.16 Stakeholder expectations Identifying key expectations and
comparing these with options.
6.17 Checking the evidence Assess the options against a range of
desirable outcomes.
6.18 Pulling it together – options Taking all options you have generated
and creating a higher-level conceptual
framework. This conceptual
framework may be based on the
organisational purpose, or sustainable
competitive advantage, or be based on
value creation for customers.
6.19 Feasibility Applying a number of tests to those
options as a way of prioritising
options.
6.20 Deciding the recommendation Developing the logic of your
argument to support your response to
strategic issues.
6.21 Individual reflection Developing your personal learning
insight.

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Identifying key strategic issues


You have undertaken a number of analytical exercises in previous
chapters designed to get you to think about the influences on the
strategy of this organisation. You should now revisit these exercises
for two purposes:

1. to summarise the key issues arising from these exercises which


will have the most important influences on the future of the
organisation. It is vital that you are clear on this because you
need to show that the strategic proposals you make clearly
address these.
2. to identify any constraints which will influence the strategies
followed by the organisation.

You will recall in Chapter 2 we suggested to you that the amount of


data you have now got from the analysis, whilst insightful, may well
pose you with a problem. Just where do you start in trying to identify
strategic options and evaluate them. What is the focus, which drives
strategic choice? There is no right answer here, You have to decide. In
our experience some of the more usual starting points are these:

• Who is the strategic customer? This is important because it can


help clarify the basis of competitive advantage.
• What are the key expectations placed upon the business? For
example is there a key shareholder expectation; or perhaps a key
requirement by the corporate head office; or perhaps some other
stakeholder exercising a powerful influence on the choice of
strategy.
• Should the strategy be driven around seeking opportunities in the
environment (or markets), avoiding threats in the environment or
stretching the competencies of the organisation? The first two tend
to argue that competencies need to be adjusted to the needs of the
environment; the latter argues that environmental opportunities
should be sought on the basis of the competencies.

This is not an exhaustive list, but deciding where you start from can
provide a helpful initial ‘sift’ of the strategic options available to you.
For example if you decide on a particular strategic customer for the
focus of the strategy; or determine that a particular expectation of
shareholders has to be met, that may very well rule some strategic
options out and raise in importance other options. So making this
decision on focus is an important precursor to generating and
evaluating options.

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Activity 6.1: Identifying key issues (Individual preparation and


group discussion)

First, individually, review the analyses so far and note down:

a) the key issues which should be taken into account (for example,
organisational purpose, distinctive competencies and bases of
competitive advantage) in deciding the strategy of this
organisation.
b) any constraints that will have to be taken into account (e.g.
corporate constraints, stakeholder constraints, environmental
constrains or prior decisions on generic strategies).

You should then share these views with your team, for two purposes:

a) to agree, as a team, the key issues and constraints


b) to decide if you need to revisit any of the previous analyses and
revise your previous conclusions.

Option generation
When you have decided on the key issues, which will need to be taken
into account, you should then move on to thinking about possible
strategic options that might be worth considering. It is important to
emphasise that these options are not just a ‘wish list’; nor are they a
summary of every conceivable possibility. Rather, there needs to be a
rationale arising from your prior analyses for any option you might
consider.

You should use different approaches to generate these options. In


particular:

1. by revisiting some previous activities and using these to generate


options.
2. by using a number of additional frameworks and concepts which
suggest different rationales for strategic options.

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It is, therefore, important that you try out different approaches to


generating strategic options rather than following any one framework
or concept. Part of the reason for this is to get you to think about
which frameworks and concepts are most, and least, helpful. It is,
therefore, worth noting that the concepts and frameworks suggested
here are not exhaustive. You may know of others, or have read of
others. If you feel you would like to try other approaches do so
providing you can be clear as to the rationale underpinning that
approach and make it explicit.

We suggest you try a number of these exercises individually and then


share your conclusions within a group if you are working within one.
One idea is for individual members of the group to take responsibility
for different approaches.

Activity 6.2: Extant options (Individual task)

It is likely that during your prior analyses you will have generated,
explicitly or implicitly, a number of strategic options that the business
(or the organisation as a whole) might adopt. Note these down with a
brief explanation of the rationale for each of them.

Activity 6.3: Directions and methods (Individual preparation for


Group task)

Chapter 7 of FS employs ‘Ansoff’s matrix’ to generate a checklist of


directions of strategic development. A checklist of methods for
strategic development follows this.

Use these frameworks to identify what each of the directions and each
of the methods would entail for your business and/or organisation.
Based on your previous analyses is there a rationale for any of these?

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Activity 6.4: Upframing your offering (Group task)

As you work through your analysis what issues have you identified
that suggest customer’s needs are changing? Explain the impact of
these changes for your case study organisation. In trying to develop a
response, use the following organising question: How does our
activity create value for our customers, ie: what does it contribute to
the furthering of their lives and life’s goals and processes? What does
this imply for the case study organisation’s current offering? How
might your options be considered and/or reconciled with the current
offering? What changes would be needed to the offering to enable it to
be relevant to customers in the future?

The contextual environment – drivers of value creation and


opportunities and threats to business performance
What is happening in the contextual environment of the business is of
vital importance when it comes to thinking about business options.
The term ‘contextual environment’ refers to that part of the world
outside the business over which it has little or no control.

Although your business may not be able to control its contextual


environment, much of what is going on there will have significant
impacts on the business. Environmental forces can be viewed as
‘drivers’, shaping the value-adding potential of the business. Some of
these forces create opportunities for improving business performance;
others pose threats to future performance. Ideally, we would like to be
able to understand, and perhaps even predict, how these forces will
evolve. There are, of course, major limitations to a business’s
comprehension and predictive abilities. But that should not stop us
devoting some (reasonable amount of) effort to forming some views
about plausible ‘states of the world’, if just to develop scenarios that
are of relevance to our business. Indeed, scenario analysis is
sometimes used as a way of generating business options (although, as
we shall see later, it can also be used to evaluate options).

In EIBE you used the PESTEL framework, as a scanner for what


changes are taking place in the contextual environment. Having now
chosen a particular business for strategy analysis, it will be useful to
undertake the same analyses and apply them to your business
specifically. (Of course you may have already decided to do this as a
way of thinking about your business; in which case you can draw on
the work you have already done for this exercise.) In doing so the
major questions that should be addressed are:

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• What are the major drivers of the performance of my case


organisation, and how do they relate to current and potential
future environmental change?
• What threats to, and opportunities for, good performance of my
case organisation are posed by changes in environmental driving
forces?
• Do the scenarios that you develop suggest new opportunities (as
well as threats) for your case organisation?

Individual reading:

Much reading material for contextual environment analysis has been


listed previously in the EIBE workbook. We recommend that you
read the following account if you have not yet done so:
FS: Chapter 2, pages 24-29 on the macro-economic environment, and
pages 50-51 on ‘opportunities and threats’.

Activity 6.5: The contextual environment – opportunities and


threats (Individual preparation for group task)

Revisit your PESTEL analysis and the scenario analysis for your
business.

Which factors you have identified might have significant strategic


implications for your case organisation, and why?

Do any of these opportunities or threats suggest business options that


are worthy of consideration? If so, what are they?

The transactional environment: strategic group analysis


In the transactional environment section you were asked to undertake
an exercise on strategic group analysis. You will recall that this asked
you to consider the structure of the industry or market in terms of
firms with similar strategic characteristics. We suggest you re-
examine this analysis – or variants of it – as a means of looking for
strategic opportunities.

As explained in that section, strategic group analysis can be


undertaken using different characteristics. Try revisiting the exercise,
but this time looking for strategic gaps or opportunities. Look at
Illustration 2.4 on pages 44-45 of FS. Figure 3 illustrates the search
for strategic space i.e. possible spaces not currently occupied by
existing firms (or in the case of this illustration business schools). By
trying different ways of drawing up strategic groups (i.e. using

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different characteristics) it is possible that you will identify different


strategic spaces or opportunities.

Individual reading:

FS: Chapter 2, pages 42-46, on strategic groups.

Activity 6.6: The transactional environment – using strategic


group analysis to search for strategic space/opportunities
(Individual preparation for group task)

Revisit the strategic group analysis you undertook in the transactional


environment section. Consider the following:

1. In the analysis (or analyses) you undertook were there strategic


spaces that might provide future opportunities for development?
2. Are there strategic characteristics you did not use in the previous
analysis (analyses) that might be useful to try in order to see if
there are different strategic group patterns which emerge and
which suggest different strategic spaces? If so re-do the analysis
using them.
3. Consider the previous task on changes that may occur in the
contextual environment. Do any of these possible changes suggest
either:
a) different characteristics you should try for the purpose of
strategic group analysis or
b) the future importance of any strategic spaces in any the
analyses you have carried out so far?

The transactional environment: market segmentation


Section 2.4.2 of Chapter 2 of FS, pages 46-47, highlights the
importance of market segmentation, Exhibit 2.6, page 47 in that
section suggests many different ways in which markets can be
segmented. This exercise invites you to consider different ways in
which the market in which you are operating can be segmented. Do
any of these bases of market segmentation suggest different strategic
opportunities or options? For example, it might be that your product is
currently aimed at one market segment but could be relevant to others.
Or it might be that product variants could be made available to
different market segments?

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Activity 6.7: The transactional environment: market segmentation


(Individual preparation of group task)

Review a market segmentation exercise using different bases of


market segmentation. Do any of these different market segments
suggest strategic options that might be worth considering?

Strengths and weaknesses of the business


Another tool that is sometimes used as an ‘options-generating device’
is internal analysis. We shall make use of internal analysis below
when discussing the TOWS matrix. Right now, it will be useful to say
a few words about what internal analysis might consist of.

The bottom line is that it attempts to identify the strengths and


weaknesses of the case organisation itself. We have not made any
explicit use of strengths and weaknesses analysis in our discussions in
earlier chapters, but much of what you have found in previous
activities could easily be listed in the format of lists of strengths and
weaknesses.

As you work through the next task, try to distinguish between hygiene
factors and more fundamental structural weaknesses. The reading
listed below will explain these terms. Also, consider whether some of
the weaknesses you identify are better thought of as symptoms of
some underlying hygiene or structural factor.

A similar classification can also be applied to strengths. If you think


that your business has a particular strength, ask whether that arises
from carrying out a business function well (or, if you like, having no
hygiene problem in that area) or is it a reflection of something more
structural: the business has found a way of doing things better than
its rivals, even when those others are using publicly available
techniques and knowledge to the full?

The reason why these distinctions matter is that it is structural factors


that ultimately drive business strategy. Getting rid of hygiene
weaknesses (equivalently, doing functions as well as can be
reasonably expected given present industry knowledge) is akin to
qualifying to enter a race. Obtaining a leading, or winning position in
that race, depends on having something special that others cannot, or
find hard to replicate. These are structural factors.

Information about strengths and weaknesses comes principally from


internal analysis of the business. But don’t ignore the Five Forces
analysis you did earlier. That tool, developed initially to help
understand forces within an industry (the organisation’s transactional
environment) can also give insight into how one business is placed
relative to its rivals in the competitive processes within the industry.

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For example, has it found a better way of protecting itself against


supplier power than its rivals?

Individual reading:

FS: Chapter 3, on strategic capability.

Activity 6.8: Internal analysis: identifying strengths and


weaknesses of the business (Individual and/or group task)

Using any relevant information you have obtained so far, identify the
strengths and weaknesses of the business.

Given your findings, do any options appear (based on means of


overcoming weaknesses or taking advantage of your strengths)?

The SWOT table and TOWS analysis


Information derived from internal and external analyses is often
combined together into one of the most well-known strategy ideas, the
SWOT table. This uses two types of information. The first – the SW
bit – concerns the strengths and weaknesses of the business. The
second – the OT bit, relates to opportunities and threats.

In its most simple form, SWOT consists of just classifying and listing
strengths and weaknesses, opportunities and threats. It does not
involve any analysis in itself – although you will have had to do some
previous analysis to get to this point.

However, added value starts to emerge when we filter out what is of


importance to the business from what is trivial. We then go on to
cluster this filtered information in some way. The aim here is to find
configurations of internal and external factors that might suggest
serious difficulties that the business is heading into, and/or
configurations which offer the prospect of valuable strategic options.

One way this can be done is by mapping the SWOT information into a
TOWS matrix form.

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From SWOT to the TOWS matrix


The TOWS matrix tries to systematically integrate the threats (T) and
opportunities (O) generated by changes in the external environment,
with the internal weaknesses (W) and strengths (S) of your case study
organisation. The intention of the TOWS matrix is to generate a set of
‘Strategic Thrusts’ from particular configurations of external
environmental and internal factors.

Strategies Internal strengths Internal weaknesses


Actions
Tactics
External opportunities S-O strategy W-O strategy

External threats S-T strategy W-T strategy

We use the TOWS matrix to cluster internal and external factors in an


attempt to identify possible strategic options. The TOWS matrix
provides the opportunity for four distinct aspects to leverage in
developing strategic options. These four aspects are:

1. the S-O strategy, sometimes called the maxi-max strategy, aims at


generating strategic options to maximise both strengths and
opportunities concurrently.
2. the S-T strategy, sometimes called the maxi-min strategy, aims at
generating strategic options by using strengths to minimise threats
from the external environment.
3. the W-O strategy, sometimes called the mini-maxi strategy, aims
at generating strategic options designed to minimise or overcome
weaknesses and to take advantage of opportunities. The W-O
strategy is used by organisations as a developmental approach, to
help the organisation transform weaknesses as it moves forward.
4. the W-T strategy, sometimes called the mini-mini strategy, aims at
generating strategic options that are designed to minimise both
weaknesses and threats concurrently. Strategic options generated
here are likely to be options which if implemented will provide a
platform for the organisation to successfully implement the S-O
strategy.

Individual reading:

FS: Chapter 3, pages 81-83, for Strengths and Weaknesses and the
SWOT framework.

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Activity 6.9: TOWS matrix – from SWOT to TOWS (Group task)

If you have already constructed a SWOT table for your business,


update it if necessary in the light of any of your strategic analysis
findings. If you have not done one so far, write out a SWOT table for
your case study business.

Now transform the information in your SWOT table into the form of a
TOWS matrix. Using this technique, describe and explain the strategic
options that this exercise has generated.

Strategic stretch (or leverage)


In doing environmental analyses in previous sections in this course,
you will have identified various possible future changes in
environmental conditions. If your Business Idea was well thought out,
it will already have taken some of these changes into account. But no
single Business Idea (or competitive strategy) could take them all into
account.

Revisiting those earlier analyses could suggest other directions that


the organisation might take, other segments it might target, or
additional activities the organisation might undertake. Hence
opportunities and threats thrown up by environmental analysis is one
way of beginning the process of generating options.

To qualify as an ‘option’ however, any idea generated in this way


must have a reasonable prospect of being successful. And that requires
that the organisation’s resources and capabilities adequately support it.
The organisation already has a set of resources and competencies,
hopefully well suited to its present competitive strategy. But is it
possible to extract even more value from them through ‘stretch’ or
‘leverage’? That is, can we – at relatively modest costs – use our
resources and competencies in additional ways without detracting
from the uses to which they are put?

Note that some of your business’s resources and competencies are


likely to be ‘non-depletable’, at least to a degree. That is, they can be
used without diminishing the total amount available. For example, this
may apply to reputation (Sony), to customer awareness (Safeway), or
to organisational structures, which facilitate innovation (Canon). It is
easy to see how stretch applies in this case. Another possibility is that

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a competence could be extended at relatively small cost to support a


wider range of business products or services. What we have in mind
here is an economy of scope – the cost of stretching the resource to
make it support an additional task is smaller than the cost of building
up from scratch the resources to underpin that task.

Activity 6.10: Strategic stretch (or leverage) (Group task)

Bearing in mind all the points in the previous comments, use your
previous analysis of competencies, Business Idea and Environmental
analyses to identify strategic options that could be built on the basis of
stretching or leveraging existing resources and competencies.

In doing this, pay particular attention to the following matters:

Do your analyses of the macro and transactional environments suggest


that the existing business idea may need to be changed in the future?
If so how?

Note that a change in how the organisation will deal with its
environment may suggest a change in required competencies. In turn
this may suggest a change in strategic direction. Do you believe that
existing competencies need to be changed (or stretched) to meet the
requirements of the future?

What does this suggest is needed for the future strategic direction?

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Activity 6.11: Option identification (group task)

The group should now consider the extant options discussed in


Activity 6.2 and once more review all the tasks undertaken by the
group and individuals in the course of SAE. First, list all potential
options that your team have identified. Next, try to cluster and label
them into a small number of themes – in terms of similarity of various
dimensions, such as strategic direction, implications for focus or
breadth of the organisation, resource / competencies support, and fit
with the existing business idea.

At the end of this exercise, your team should arrive at a preferred set
of strategic options to be evaluated. Each one should be accompanied
by a brief rationale as to why it should be considered based on the
prior analyses and the work done in the individual tasks above.

In order to make the next stage of this section practical, it would help
if the number of options to be considered was limited to four or five.

Activity 6.12: Pulling it all together – themes (Group task)

Now go back over these exercises on option generation.

Do you see any common themes running through the different


exercises? If so, what are they? Do they suggest similar sorts of
possible strategic options?

Note down here the common strategic options that seem to emerge.

Also, keep a list of other options that may have emerged, but note that
those in this list did not appear to have emerged in common from a
variety of different option-generating mechanisms.

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Option evaluation
You should now have a list of options, and an associated rationale for
each individual option. This section requires you to systematically
analyse these options using a number of criteria and some frameworks
of evaluation linked to these criteria.

There are a variety of criteria that might be used to evaluate strategic


options. Here we employ:

• suitability: does the strategy address the circumstances the


organisation faces.
• acceptability: do the likely performance outcomes of the strategy
meet the needs of key stakeholders?
• empirical evidence (based on evidence from other organisations
about what works and what does not work and why, does the
proposed strategy make sense).
• feasibility: do the resources and competencies required to make
the strategy work exist; or can they be obtained; and what is the
extent of organisational change required to accommodate the
option.
• does the strategy fit with the existing business idea?

Suitability
The test of suitability asks you to undertake a ‘first cut’ evaluation of
options against the key issues that have arisen from your previous
analyses.

The suitability exercise that follows asks you to undertake a simple


ranking exercise for the options. To do this, it can be useful to
complete entries in a matrix of the form shown below. List the options
along the top of the matrix below and the key issues down the side.
Now, consider each individual option against each individual key
issue. The questions you should be considering include these:

• If the business followed this option would it have a positive or


negative effect (or no effect at all) in relation to the key issue. For
example, the key issue could be a major threat: if the option would
reduce the threat, it is a positive advantage; if it has no
implications for that threat – that is, it does nothing to overcome
the threat – the option would be given a zero score. If the option
would increase the impact of the threat, this is a negative
implication (warranting a negative score).
• If the key issue concerns an opportunity, does the option build on
that, or not?

So, there are negative, zero, or positive implications of following


these options.

Try scoring on the impact of the option against the issue. Try using a
scale of -3 through 0 to +3. Where there is a highly positive
interaction, score +3 and where there is a highly negative interaction
score -3. If there is no relationship or impact score 0.

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You should end up with a matrix full of positive, negative and zero
numbers. This gives you a chance to consider the variety of options in
a numerical way and see which scores the highest (in terms of column
totals) and why.

You may wish to take this analysis one step further. There is a
limitation of the scoring system proposed above. If all ‘key issues’ are
scored in the range –3 to +3, and we simply total them, then the one
with the highest score is only best if:

a) all issues have equal weight


b) all issues are perfect substitutes (so that one -1 and one -2 are
exactly compensated by one -3)

We could deal with the first of these two limitations by asking


whether equal weighting should be given to all issues, or whether the
various key issues should be given different weights. For example if
you think a particular key issue is of much greater importance than
any other, try weighting the scores along that line. Using different
weights forces us to think carefully about which issues matter most,
and to what degree.

Even if we were reluctant to attach weights in this way, there is a


second reason why it might be done. Trying alternative weightings to
different key issues allows you to consider the sensitivity of options
to various key issues. It will show the extent to which a given option
is (in your judgement) particularly sensitive to that issue; and will of
course change the totals at the bottom of the option column.

A fully blown ‘sensitivity analysis’ would involve identifying how


much an assumption about each issue can be worsened before what –
under baseline assumptions – was a preferred option is no longer the
preferred one. However, doing that may go beyond the information
(and time) you have available.
However a warning: do not be fooled by the heavy use of numerical
technique here. These numbers are no more than a reflection of your
judgements, So the technique should only be a guide to your thinking.

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Activity 6.13: Options/issues matching (Group task)

Use the techniques described above to undertake a ranking exercise


for the options. Adapt the matrix below so that you list the options
along the top of the matrix and the key issues down the side.

Now consider what this analysis has told you. Does it mean you
should knock out certain options? Has it suggested other options?
Why would it do that? Has it suggested that future option
consideration should take particular account of some issues to a
greater extent than others?

Options Option Option Option


1 2 ‘n’
Issues

Issue 1

Issue 2

Issue ‘n’

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Financial evaluation of strategic options


In assessing strategic options we would like you to now think of this
stage of SAE as an investment project and apply the financial risk
assessment tools, such as NPV, Payback etc, taught on the Finance
course.

Activity 6.14: Financial risk assessment (Individual and/or Group


task)

Select one of your strategic options, then choose and apply one of the
financial risk assessment tools that you have been taught on the
Strathclyde MBA Finance course.

Once you have applied the financial risk assessment tools we would
like you to consider how the problem of uncertainty impacts
investment appraisal approaches. What issues have you identified and
what impact does this have on the evaluation of strategic options?

Individual reading:

FS: Chapter 9, Section 9.3, pages 240-255, provides further


information on risk and return.

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Portraying the strategies graphically

DECISION CRITERIA
FINANCIAL SCENARIO STRATEGIC ORGANISATIONAL
RETURNS RISK RISK RISK
Best position Good risk
High Good fit Good fit
NPV profile with BI

Strategy C

Strategy A Poor risk Poor fit


Low
profile with BI Poor fit
NPV

Worst position

Activity 6.15: Option/scenario risk analysis (Group task)

Go back to the scenario analysis you should have undertaken. Update


and extend this, if necessary, so that you have a set of scenarios that
are appropriate for your case study business.

Using the methods and techniques described above, evaluate each of


your business’s strategic options via scenario analysis.

Acceptability
You may have decided to eliminate one or more options at this stage.
Be careful: do not eliminate too many on the basis of this first cut
evaluation because there are other criteria which influence the
selection of strategic options. We now move to the criterion of
acceptability. Here you are considering the extent to which any given
strategic option is acceptable to key stakeholders of the organisation.

Go back to Chapter 1, which asked you to consider key stakeholders


and bases of success. Who are the key stakeholders of this
organisation and what do they expect from it? For example, if you
consider the shareholders to be the primary stakeholders, what do they
expect as a level of return? What degree of risk would they be
prepared to accept in order to gain such a return?

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If the case organisation is part of a group of companies, what does that


parent company expect of its SBVs? This may not just be a matter of
financial performance. Go back to Chapter 5 and consider the
corporate rationale and parenting style of the corporate body. What
does this say about what the corporate parent expects of businesses?
For example, does it expect businesses to share activities or
competencies with other businesses? Does it expect a business to
generate surpluses as a cash cow? Does it expect rapid growth in
market share?

Activity 6.16: Stakeholder expectations (Group task)

Please refer to Activity 2.3 and note down the main revised
expectations of the key stakeholder(s) for your case organisation.

Against each expectation state what you consider to be the strategic


imperatives placed upon the business.

Evidence
There have been many studies of the strategic moves made by
organisations. These have resulted in bodies of evidence which can be
used to suggest what makes sense and what does not make sense. It is
not possible to review all that literature here. However it is worth
considering some of the main implications from such work in order to
ask if you have taken the implications into account. In the activities
below there are a series of such implications against which you can
evaluate your options.

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Activity 6.17: Checking the evidence (Group task)

Here is a checklist of some of the evidence from research across


organisations as to the characteristics of effective strategies. Of course
these are generalised characteristics, which do not relate specifically
to your organisation: but they do raise questions that you can consider.
How do your proposed strategies profile against these characteristics:

• Improved relative market share


• Improved relative quality
• Improved capacity utilisation
• Improved productivity
• Avoids product proliferation
• Not reliant on trying to ‘buy share’?

Pulling it together
At this stage the group should consider the evaluation of the options
undertaken above. On the basis of the various criteria informing these
exercises the group should consider which options ‘remain on the list’.
Your aim should be to bring the list of possible options down to one or
a few that are worthy of pursuit and suggest a rationale based on the
previous exercises for pursuing them.

Activity 6.18: Pulling it together – options

The group should now review all the exercises in this section and
identify the limited number of options that meet the criteria of
evaluation and appear to be viable.

For each of these options provide a brief rationale as to why it might


be pursued, It is important that this rationale explicitly builds on the
exercises undertaken above.

Feasibility
All of the above assumes that a given strategy can be made to work.
The criterion of feasibility asks you to consider this explicitly. We
suggest you review the options you are left with and ask the sort of
questions outlined in the group task below. We are aware that you

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may not have the data to work these through in detail. But having
some views about them is helpful.

Activity 6.19: Feasibility of the options/proposal recommendations

Ask the following questions:

• Is it likely that you would be able to finance the options(s) that


you are ending up with?

• Can you obtain the necessary resources, or build the necessary


competencies, to implement the option(s)?

• Does the option require major strategic changes in the


organisation that may be heavily resisted (e.g. in cultural terms).
Is it possible that these can be overcome?

Strategy recommendation
You have now:

• considered the key issues that a strategy would need to address,


• generated a range of strategic options with an initial rationale as to
why they might be appropriate,
• taken an initial view of the suitability of these options against the
key issues,
• considered the options in terms of the acceptability to
stakeholders,
• considered the options in terms of evidence on whether they are
appropriate,
• considered if they could be made to work.

You have therefore taken a number of evaluative exercises to consider


the appropriateness of strategic options. In this final section you
should recommend what the organisation should do. To do so you
should employ all your previous analyses and the evaluation of these
options to make a specific recommendation and to justify it.

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Activity 6.20: Deciding on the recommendation (individual


preparation and group discussion)

Before you discuss the recommendation as a whole with your group,


individually note down here the key dimensions of the argument that
you intend to use in your group to propose what the organisation
should do. Assume you are doing this within a management team so
seek to make a number of key points and be very clear how you would
defend them.

Each member of the group should have a view as to what the team
should be recommending. It is now your responsibility to draw these
together, agree what the team wishes to recommend and draw up an
executive summary which makes those recommendations clear and
justifies them. This should draw on previous analyses and evaluation
but should be concise.

Optional individual task:

There may be an occasion when an individual in a group cannot agree


with the recommendation and wishes to write their own report. If this
occurs, we would suggest that the individual writes his/her own report
and submit it separately.

Please note: We would encourage everyone to submit a group report.

Activity 6.21: Individual reflection and personal learning insights

Recalling your level of knowledge and understanding at the outset of


this chapter, what have you learned? Particularly what has been the
personal learning and insight that you have gained from:

a) The issues raised in the chapter and the related tasks?


b) The process of group discussion about the issues and your role in
this?
c) The relevance to, and implications for you as a manager?

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Chapter 7: Writing the report


Introduction
The group assignment for this class is based on writing a report to the
Chief Executive or Managing Director of the case organisation your
group has studied. The purpose of the report is to communicate to the
Chief Executive or Managing Director your findings and
recommendations regarding the key strategic opportunities and
challenges that your analysis has identified. You should be able to
support your recommendations with clear and concise argument.

In addition, your report will also be fully supported by the output of


the application of the analytical tools that you have applied throughout
SAE. We would recommend that once you have developed the
structure of your report, you should identify the relevant pieces of
analysis required to support your recommendations and attach these as
an appendix to your report.

Learning objectives
The objective of this chapter is to write a report to the CEO of your
case organisation. Undertaking strategic analysis is one challenge to
students. Another challenge for students is to convince the CEO of:

• the problem identified from the analysis,


• the logic of the proposal, and
• the advantages to be gained by adopting and implementing the
proposal.

Purpose of writing the report


The report is a communication device in which you can record the key
recommendations for the future strategy of the organisation. The
report should therefore communicate the following:

• the clear relationship between the recommendations, the purpose,


objectives and strategy of the case study organisation, and the
supporting analysis,
• the strategic situation facing the organisation, particularly in terms
of its competitive environment,
• any major threat(s) to the case study organisation, (especially if
the threat would undermine the ability of the organisation to
survive in the future,) and how your recommendations will
address these threats,
• the (competitive) advantage that the case study organisation, or
more specifically the business unit that you analysed, will gain in
the future by implementing your recommendations,
• the report may also identify issues of a hygiene nature that may
prevent the case study organisation from achieving these long-
term objectives and how these will be overcome,
• the actions necessary to implement recommendations,
• the implications for resources and resource requirements, and
• the basis of measuring future performance.

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When supported by financial statements such as cash flow forecasts


and budgets, the report would provide the criteria to measure future
performance. This will assist management with the efficient allocation
of resources that are targeted to achieve competitive advantage. Please
note however, we are not asking you as part of this assignment to
prepare financial statements. However you should note any major
financial issues that arise from your recommendations.

Report structure

Executive summary
The executive summary should be a short, high-level report in its own
right, in which you should communicate concisely the key
opportunities and challenges, the recommendations you wish to make,
together with a statement which sets out the benefits and advantages
the case study organisation are likely to gain in the future as a
consequence of your report.

The executive summary should then discuss very briefly the


implications of each of the key opportunities and challenges that you
have identified from your strategic analysis. The intention is to
provide enough detail and understanding of these issues for the Chief
Executive or Managing Director of the case organisation. We work on
the assumption that he or she will initially only wish to read a high-
level summary. The task is to convince the Chief Executive or
Managing Director of the case organisation that the report is helpful
so that he or she will read the specifics in more detail. This would be
contained in the main report.

The executive summary will also provide a discussion of the strategic


benefits to be gained by the organisation, together with a note about
resource implications in the future. The strategic benefits to be gained
are likely to take the form of leveraging existing distinctive
competencies to create customer value from the offering, or
alternatively the investment in new resources that taken together with
existing distinctive competencies create new competencies that will
provide customer value in the future.

We would suggest that each major recommendation is discussed in a


short, concise paragraph of its own. We would suggest that the
‘Executive Summary’ should be no more than two pages in length.

Main report
The main report should include a brief note about the approach
adopted to undertake the strategic analysis of the organisation. This
should NOT include an in-depth discussion of the analytical tools
applied to conduct the analysis. There should also be a note about the
purpose of the report and how it could be used by the organisation in
the future.

You should discuss the outcome of your environmental and


competitive analysis, to highlight the key future drivers of change and
the key competitive forces in the transactional environment.

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There should be a discussion of each key or strategic opportunity or


challenge separately. In doing so, your discussion should provide
enough evidence to support your findings. This evidence may arise
from more than one source. If this is the case, your argument is
enhanced by the fact that more than one piece of analysis supports
your findings. Your discussion should also include a discussion of the
implications of the issue for the case study organisation.

From this discussion it is now possible to develop your strategic


response to either safeguard the case study organisation from threats
or capture the opportunity that you have identified. In doing so, you
are likely to discuss the ways and means to achieve these objectives.
The recommendations that you propose should be set in terms of both
action to capture customer value and action to develop distinctive
competencies that provide competitive advantage in the future.

For example, if you have identified a new market opportunity your


recommendation should discuss – the typical target customers, the
channels to market, the exploitation of existing resources and
distinctive competencies, or the development of new distinctive
competencies that both capture the market and protect the organisation
from future competitive threats. In this instance, the discussion of the
barrier to competition is as important as the route to market. However,
students traditionally find no difficulty in discussing the route to
market, but omit the basis of protecting the market. Remember, the
focus of SAE is to apply strategic tools of analysis to identify
opportunities for the case study organisation, and develop these
findings in terms of sustainable competitive advantage.

We emphasise the importance of building a coherent argument as


distinct from making a series of points. The key to developing a
coherent argument is the ability to synthesise and integrate findings
from a number of analytical tools. In addition, we would ask you to
think carefully about the implications of your recommendations in
terms of creating a sustainable competitive advantage for the
organisation. This will require you to consider resource implications
and actions necessary for implementation.

Role of analysis
The role of the strategic analysis is to help you apply the analytical
tools to identify insights that will impact the case study organisation in
the future. The insights may concern either opportunities or challenges
facing the organisation. Your ability to synthesise insights from more
than one analytical tool will help develop clearly the key strategic
focus for the case organisation.

Once you have achieved the key strategic focus, you should use your
analysis to support the points you wish to highlight, together with a
discussion of their implications for the case organisation. By doing so
you will provide the reader, the Chief Executive or Managing
Director, with the degree of comfort that he or she requires to support
your recommendations with other key decision-makers in the
organisation.

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Report writing style


In writing your report, the intention is to induce in the reader, the
Chief Executive or Managing Director, a belief that what we are
saying is true or at least plausible. The report is intended to influence
the beliefs and actions of others. Effective persuasion is not just a
matter of style, but is also about the nature of the argument you are
presenting.

The report should be written as objectively as possible. There should


be no unsupported assertions. All recommendations should be
supported by evidence from your analysis as well as a discussion of
the implications of the recommendations in terms of creating
competitive advantage. This will require you to firstly, focus clearly
on the task, and secondly, not regurgitate theory in the report.

You should be clear as to the higher-level conceptualisation of your


recommendations that are in line with the case organisation’s purpose.
You should also be clear about the nature of the competitive
advantage you wish to achieve in your recommendations. Your
writing should be aimed at achieving these objectives in the mind of
the reader.

Please consult the assignment guidelines, supplied separately, for


more information on the evaluation criteria.

You should now read through the assignment guidelines carefully and
prepare your submissions. We wish you all the best.

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Scenarios: The Art of Strategic Conversation: Chapter 3

Appendix
Taken from, van der Heijden, K, (1996) Scenarios: The Art of Strategic
Conversation, Wiley, Chapter 3, pp59-80
Copyright © 1996 by John Wiley & Sons Ltd. Reproduced by
permission of John Wiley & Sons Ltd.

The Business Idea of an Organisation


In this chapter we define the notion of a Business Idea, discuss the main
underlying principles and work through their implications. As we saw,
the Business Idea is the organisation’s mental model of the forces
behind its current and future success. The scenario planner, aiming to
accelerate organisational learning, needs to articulate the Business Idea.
Only when articulated can it be studied, discussed, modified and
improved.

As an organisational device, the articulated Business Idea is embedded


in the language of the organisation. Organisational language is rational.
Therefore, in order to work effectively in the organisation, the
articulated Business Idea must be a rational explanation of why the
organisation has been successful in the past, and how it will be
successful in the future. This implies that the Business Idea needs to be
built up from first principles.

First Principles: Profit Potential


Firms mostly represent success by establishing value. This can be done
in two ways:

• They create a surplus for stakeholders, which the latter can use for
their own purposes or (totally or in part) for protecting and
developing the strength of the enterprise.
• They create the expectation among existing or potential
stakeholders that they will be able to create a surplus and grow in
the future.

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One of the main purposes of strategy development is to feed this


expectation, by indicating how circumstances will be created in the
longer term which are considered favourable for corporate value
generation. The aim can be defined as creating profit potential. This is
not the same as profit. Management cannot rely on strategy alone for
profitability. Strategy facilitates, but the actual profit is earned in day-
to-day hands-on operations. Because of this there cannot be a one-to-
one relationship between strategy and profit. The typical business
situation manifests a high level of complexity, so the time period over
which the system is predictable is short – days or weeks rather than
months or years. On the other hand many management decisions have
long term repercussions. They affect future profit potential, and need to
be considered in that light. Quality of execution is the other part of the
profit equation.

To understand the concept of profit potential, consider the thought


process of the new entrepreneur. This focuses first of all on an idea of a
possible activity, believed to create value for a customer group, for
which they consequently will be prepared to pay a price. The idea
specifies how this value can be created through bringing together a
number of factors and competencies in a new distinctive combination
that has not been thought of before. Entrepreneurial success results from
a combination of three ideas:

• Discovering a new way of creating value for customers.


• Bringing together a combination of competencies, which creates
this value.
• Creating uniqueness in this formula in order to appropriate part of
the value created.

The ‘offering’ is the vehicle by which the seller and customer systems
are linked together to exploit the supplier competencies in the customer
value system. The offering includes all aspects of the supplier/customer
interface, including the physical product, but also intangible aspects
such as service, risk management, information, etc. As Richard
Normann points out, each product represents a division of work
between the supplier and the customer (Normann 1984). Therefore the
creation of a successful product is the result of a process of
optimisation, aiming for the maximum effect of the supplier
competencies in the total customer value creation potential. In the
process the supplier incurs costs translating the idea into a product. The
customer derives value from its use. The overall optimum relates to

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Total system optimisation

Buyer’s
value
system
The offering
Seller’s
distinctive
competencies

Value
Figure 7. Overlap between competencies and value creation

configuring the product so as to maximise the difference between


customer value and supplier cost. The product which represents this
optimum will normally incorporate both tangible and service elements.
In some aspects of the product the cost/benefit balance indicates work
by the supplier (e.g. performance guarantees), sometimes the balance
shifts to the buyer (e.g. self-service, Normann & Ramirez 1994). In this
way consideration is given to the best bundling of tangible product and
service elements in an overall offering such that supplier competencies
are exploited to the maximum effect in the customer value system.

This surplus of value over cost is shared between the two parties. The
degree to which it accrues to the customer or to the supplier depends on
the relative bargaining power of each party (see below).

We define structural profit potential as an attribute of a system capable


of creating value for customers in a unique way that others find difficult
to emulate. A specification of these two elements together (value
creation making a unique contribution) constitutes what is defined here
as the Business Idea of the firm.

Distinctive Competencies
Sometimes the entrepreneur finds that the new combination can be
easily emulated by others. In that case cost of entry is relatively

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modest, new competitors flock in and success is short-lived.


Alternatively, there may be something distinct or unique about the
combination of competencies, making it difficult for others to copy. In
this way a powerful Business Idea appropriates part of the value
created. The degree to which this can be done depends on the relative
power of the firm vis-à-vis the customers in the bargaining process.
Customer power is determined by possible alternatives open to them. If
customers have no alternatives offered by competitors they have no
power and the entrepreneur is in a position to appropriate a larger part
of the value created. Therefore a Business Idea needs to address the
relative position vis-à-vis potential competition.

In addition the entrepreneur has to consider the power of other


stakeholders in the battle for the value created. These include among
others (Freeman 1984):

• Suppliers
• Employees
• Competitors
• Money providers
• Government

Ultimately the power of the supplying firm to appropriate value relates


to the degree of uniqueness of the competencies brought to bear in
generating the product. Appropriation requires that the competencies
individually, or the system of competencies with their interactions, are
difficult to imitate by potential competitors.

The word ‘distinctive’ in the concept Distinctive Competency needs


some further elaboration. Company ‘strengths’ are not the same thing as
Distinctive Competencies. Many strengths companies believe they have
are not very unique and can be easily copied by existing or new
competitors. If a strength can be bought, e.g. by acquisition or alliance,
it cannot be a Distinctive Competency. If a Business Idea consists only
of such components long-term profit potential is vulnerable, and
therefore the Business Idea weak. A strong Business Idea contains
elements that have been created in the organisation over time, and
which uniquely belong to that organisation.

Therefore, in considering the Business Idea one needs to ask the Devil’s
Advocate question: ‘What is unique about this particular formula, and
why are others unable to emulate it?’.

Teece (1986) investigated the reasons why Distinctive Competencies


might arise, and why competitors would be restrained from copying

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any successful formula. Based on his and Rumelt’s work mapping out
‘Barriers to Entry’, we can derive a list of five fundamental sources of
distinctiveness in two main categories (Rumelt, 1987, Rumelt et al.
1991):

• Uncodified institutional knowledge


In networked people
In embedded processes
• Sunk costs/irreversible investments
Investments in reputation
In legal protection
In specialised assets

If the competency is based on tacit uncodified institutional knowledge it


cannot be copied. In this area unique knowledge in itself is not enough.
The competencies must also belong to the firm as an institution, and not
exclusively to its members individually. If the company relies only on
an individual expert for its business success profits will eventually be
appropriated by him personally. In those circumstances it is unlikely
that the firm will find it possible to translate these strengths into profit
potential for the company on a sustainable basis. However, if a Business
Idea is based on institutional knowledge profit potential can be
sustained. Therefore a distinction needs to be made between Personal
Knowledge and Institutional Knowledge. Often the individual can
exploit personal strengths only when supported by the strengths of the
organisation. This support may be tangible (e.g. in the form of
computing facilities) or intangible (e.g. in the complementary
knowledge and ‘sounding board’ function provided by colleagues in the
organisation). An institution’s knowledge base is created through
people networking with each other, and through processes embedded in
the organisation.

The second source of distinctiveness relates to competitors having to


incur costs in order to be able to compete for the profit potential. For
example, a new competitor might have to make investments that
existing companies have already made. If these investments are in
marketable assets, then on this score there is no competitive distinction
between existing and new players. Existing players have to consider
their option of realising their assets in the same way as new players
have to consider their acquisition, i.e. not selling the asset creates the
same sacrifice and barrier for the existing players as making the
investment in the first place for the newcomers (‘opportunity cost’).

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However, many investments are irreversible, at least to some extent,


and in relation to the fact that the existing players do not face the hurdle
of the economic decision facing the newcomers. Their opportunity cost
is lower.

Examples of Distinctive Competencies


The following examples of Distinctive Competencies illustrate these
principles over a range of real life cases:

Institutional knowledge
• Institutional R&D capability
• Company know-how
• Functional knowledge pools
• Knowledge of customer value systems
• Shared assumptions and values

Embedded processes
• Leadership style and commitment
• Links into (institutional understanding for) the world of the
consumer
• Access to distribution channels
• Institutional relationships with government
• Internal communication, systems/culture
• Staff identification and commitment

Reputation and trust
• Brand
• Dominant size and presence
• Installed base
• Financial clout

Legal protection
• Concession agreements
• Patents
• Ownership of prime sites

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Activity specific assets


• Investments in dominant size, market share and image
• Sunk investment in sites, exploration, experimentation, specialised
equipment etc
• Investments in economies of scale, e.g. in distribution (e.g. low unit
stock levels, low unit delivery cost)
• First mover investments in production capacity

Uniqueness can derive from Distinctive Competencies individually or


from their combination. It may be that some aspects of specific
Distinctive Competencies are difficult to emulate. However, the
strongest Business Ideas derive from a set of Competencies which are
unique because of the way they are combined systemically. Most strong
Business Ideas contain Distinctive Competencies which feed on each
other. Synergy between even a handful creates distinctiveness at a
wholly superior level of strength. The overall Business Idea is
particularly strong and difficult to emulate if the set of underlying
Distinctive Competencies reinforce each other. This is why drawing a
causal loop diagram (a way of showing such mutual causal interaction)
provides a powerful level of insight into the driving forces for success
(see below Figure 8 on page 137).

Distinctive Competencies depreciate over time. Business is


fundamentally dynamic, change is an essential part of organisational
life. In an evolving world survival implies continuous updating of the
organisation’s Business Idea. This is necessary for two reasons:

• Eventually a competitor finds a way to emulate the essence of the


competency, or
• The overlap between the competency and the customer value
system reduces, because of evolving customer values.

As a consequence a Business Idea is not valid for ever. It needs to be


kept up to date. Existing Distinctive Competencies need to be
strengthened, and new ones created. Although entrepreneurial invention
and luck may present the perceptive organisation with potential new
Distinctive Competencies, normally new Distinctive Competencies
must be created out of the exploitation of old ones. The organisation
does not have another source of distinctiveness.

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Schoemaker (1992) has analysed the nature of Distinctive


Competencies. His suggestions for hallmarks of real distinctiveness
summarise the points made:

• Investments are largely irreversible.


• Distinctive Competencies cannot be transferred (sold) to other
firms.
• There is a limit to which development can be speeded up by ever-
increasing investments.
• Development is a process of gradual evolution through collective
learning and information sharing.
• Strong Business Ideas exploit multiple Distinctive Competencies
reinforcing each other in a synergetic way.
• Distinctive Competencies create competitive advantage in the eye
of customers.

Competitive Advantage
If the Business Idea and its Distinctive Competencies are effective it
creates Competitive Advantage. Competitive Advantage translates into
profit potential in two ways (Porter 1985):

• The Distinctive Competencies are used to create a differentiated


product, the characteristics of which cannot be matched by the
competition and for which the customer is prepared to pay a
superior price compared to what they would pay the competition.
Profit potential derives from a premium price.

• The Distinctive Competencies are used to create a unique low-cost


way of creating or making available a non-differentiated product.
This allows the supplier to make available a competitively priced
alternative, with some additional margin left to create a profitable
operation. Profit potential derives from cost leadership.

Differentiation
A firm producing a product that is distinguished in characteristics from
others on the market in a way that results in additional customer value
enjoys a competitive advantage. If competitors cannot match the
distinctive element, part of the additional customer value can be
appropriated by the supplier.

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In considering how to create such a product it is helpful to distinguish


two categories of sources of differentiation (Normann 1994):

• Generational, i.e. a capability to produce offerings with unique


attributes, including quality, design, cost, availability and support.
• Relational, i.e. a dynamic capability to produce a uniquely fitting
product, based on a superior relationship between supplier and
customer, including aspects such as image and access, resulting
from effective communication and understanding

Differentiation requires a deep understanding of what creates value for


customers. A Distinctive Competency of the supplier may be based on
an ability to ‘read the customer’s mind’ better than competitors.
Researching customer needs is not enough. Customers cannot articulate
their needs if they are not aware of the supplier’s competencies. The
unique differentiated product can be created only out of the optimisation
of the total customer’s supplier system. It must be a joint conceptual
project. Product research is not enough, the differentiated product
company also needs to engage in continuous concept research.

Cost leadership
Sometimes customer value is relatively easy to determine. This happens
when products have become ‘commodities’, i.e. when open market
trading has created standardised and clearly defined products for which
there is a continuing market. In that case the value an individual
supplier contributes to the customer is equal to the established market
price of the product (as the customer has plenty of alternative
opportunities to acquire the product at that price). In a commodity
market it may still be possible to create significant long-term profit
potential, by means of a uniquely superior cost performance.

Most businesses believe that it ought to be possible to develop some


unique customer value, and companies for this reason try to distinguish
themselves by creating a differentiated offering. But some companies
accept the commodity market as their strategic starting point and
concentrate on creating a uniquely favourable cost position.

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Systemic Structure of the Business Idea


Generic strategies cannot be freely selected. The result from a set of
Distinctive Competencies which through their interaction in a Business
Idea create the differentiated product or the cost leadership. The
Business Idea is prime; the Competitive Advantage is its manifestation.

The process of articulating the Business Idea usefully starts with


identifying the Competitive Advantage that the firm exploits
(differentiation, cost leadership, or both). Starting from there the
analysis then searches for underlying causes of this Competitive
Advantage until characteristics are uncovered that pass the test of
‘distinctiveness’.

As we discussed above, Distinctive Competencies depreciate so a firm


needs to spend resources in maintaining and renewing its Business Idea
itself. A Business Idea contains a ‘Positive Feedback Loop’, which can
create a self-reinforcing system. In such a system, activities generate
resources which are used to strengthen the competencies driving the
activities. But a positive feedback loop can also create collapse (less
surplus leading to fewer resources, leading to weaker competencies,
leading to less surplus, etc). The primary concern of the entrepreneur is
to keep the loop working in the upward direction.

Bateson (1967) suggested that the fundamental nature of organisations


can only be understood by conceptualising them as a cybernetic system
of loops in a network of relationships, both internal as well as external.
In such networks people influence each other. Influence does not only
cascade downwards. Alleged inferiors have influence over alleged
superiors. As we saw, suppliers influence clients as much as clients
influence suppliers. While hierarchy identifies formal relationships,
informal influences can loop around through long pathways, that
include indirect effects. Social systems tend to be heavily influenced by
such influence loops, which are often more determining of behaviour
then hierarchies. Loops tend to create the behaviour, and therefore the
identity, of organisations. If you focus only on physical or legal
representations of organisations you will miss entirely the fundamental
forces driving organisations and change!

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Firms can be interpreted as systems of negative feedback loops,


designed to maintain favourable conditions for one dominant positive
feedback loop, based on its Business Idea, which creates the growth of
the enterprise.

Summarising the above we see that the following four elements need to
be specified in order to define a complete Business Idea:

1. The societal/customer value created.


2. The nature of the Competitive Advantage exploited.
3. The Distinctive Competencies which, in their mutually reinforcing
interaction, create Competitive Advantage.

Then, these three elements must be configured into the fourth element:

4. A positive feedback loop, in which resources generated drive


growth.

Due to its systemic nature a Business Idea is best represented as an


influence diagram. Figure 8 shows this in its generic form, containing
the elements listed above in context, as well as the role of
entrepreneurial invention in creating the idea in the first place.

An influence diagram shows the cause-effect relationships between key


variables in the situation under consideration, expressed by arrows.

Understanding
evolving needs
Entrepreneurial in society
invention

Resources

Distinctive
Competencies
+
Results

Competitive
Advantage

Figure 8. The generic Business Idea.

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The head of the arrow points towards the effect, caused by the variable,
indicated by the tail of the arrow. If an arrow is annotated by a plus
sign, or if no sign is shown (as in Figure 8) both variables change in the
same direction, an increase in the causing variable leading to an
increase in the effect, or a decrease in the causing variable leading to an
decrease in the effect, and the other way around. In Figure 8 increasing
competitive advantage leads to increasing results, which cause
increasing resources to be available for investment in enhancing
distinctive competencies, which in turn lead to increased competitive
advantage, producing the positive feedback loop discussed. As shown
distinctive competencies can also be enhanced or added to by increasing
entrepreneurial invention, based on enhanced understanding of evolving
needs in society.

A useful Business Idea diagram contains the elements of the generic


diagram, made specific in its elements and their interrelationships for
the situation under consideration. This can best be explained by means
of a few examples.

Examples of Business Ideas

Kinder-Care
Our first example is the Business Idea concept for Kinder-Care, the
largest private provider of day-care in the US. The description given
here is based on the entrepreneur’s own account (Smith et al. 1986,
Bougon et al. 1990).

Kinder-Care was started by Perry Mendel who perceived a need for


innovative child care. He reasoned that many mothers and fathers
experience a feeling of guilt when they provide their children with
simple custodial child-care. His entrepreneurial idea was to create
centres where children would not only be cared for but would also be
provided with a learning environment similar to pre-schools, thus
creating a positive image in the minds of the parents. In an early attempt
to franchise the centres Mendel found that the type of individual
attracted to a franchise was typically an ex-schoolteacher. While having
professional expertise, these individuals did not have the management
and financial expertise (or interest) required for running a

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franchise. If the learning centres were to be financially successful they


would have to be kept by Kinder-Care management.

The strategy based on these observations created a set of


interdependencies in a system of loops. Figure 9 is derived from the
diagram developed by Bougon from Mendel’s report (Bougon et al.
1990).

Professional/
management/
financial resources

Land/buildings

Retention of
Revenue
ex-teachers

Innovative
child care
Teacher
satisfaction
Pay for
service

Parents’
good feelings
Reputation
Working Parents’ –
parents financial
resources

Figure 9. The Kinder-Care Business Idea.

The Kinder-Care system can be understood by reference to the four


elements making up its Business Idea:

1. The societal/customer value created


The creation of customer value starts with the recognition of parent’s
guilt feelings associated with custodial day-care for their children. The
ability to overcome this by the provision of a learning environment
makes parents feel better and allows some to seek employment where
this was considered inappropriate before. The entrepreneurial invention
creates value for customers, inducing reallocation of resources, or in the
latter case generation of additional income.

2. The nature of the competitive advantage exploited


The purpose of the Kinder-Care operation is to offer a new enhanced
product: innovative child care, which creates value for customers
through its differentiated nature. Kinder-Care does not aim to be a cost
leader.

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3. The Distinctive Competencies exploited, in their mutually


reinforcing configuration
Kinder-Care has developed a number of competencies allowing the
realisation of the entrepreneurial idea, including:

• Knowledge of characteristics required in personnel: retention of ex-


teachers
• Knowledge of facilities: land/buildings
• Management system and expertise: professional/management/finan-
cial resources
• Access to specialised facilities: land/buildings
• Reputation, resulting in parent’s trust.

These competencies reinforce each other as shown in the diagram. Note


that having hired the appropriate personnel (a scarce resource) does not
as such create a Distinctive Competency for the firm, as any value
resulting from that alone would eventually be appropriated by the
individuals with the requisite characteristics.

4. The positive feedback loop, driving growth


The system contains a number of loops. For example, more innovative
child care leads to more teacher satisfaction, which leads to more
retention of motivated ex-schoolteachers, which leads to more
innovative child care. Or, innovative child care allows a parent to feel
better about going to frequent or full-time work, increasing willingness
and ability to pay for the use of more innovative child care.

We see that the main strategic loop is a positive feedback loop. This
explains the successful growth of Kinder-Care – innovative child care
induces customers to pay for a service which creates increased
management and financial capability, which causes an increase in the
amount and quality of innovative child care offered.

It does not seem very difficult to emulate the individual competencies


that Kinder-Care incorporates in its Business Idea. The reason why the
company nevertheless has been successful lies in the idea’s dynamic
nature, and the relatively slow response of its competitors. By growing
fast, well ahead of the ability of the competition to catch up, the
company has exploited scale effects to the maximum. It has built up and
strengthened both its management system and its reputation, associated
with the name Kinder-Care, well before others could catch

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up, thus creating barriers to entry for newcomers. The company needs
to consider whether these are high enough for sustainable competitive
advantage.

The Business Idea of a construction company


Figure 10 shows the diagrammatic representation of the Business Idea
of a construction company. In the market where this company operates,
a building project tends to be a relatively significant investment for
most customers which needs to serve them for a long time to come. As
a consequence, customers in this industry tend to be risk averse. As the
product cannot be inspected before the sale, the reputation of
construction companies for the quality of the work they typically
deliver is important. Construction companies need to be able to
demonstrate the quality of their products by reference to the ‘installed
base’. Therefore existing, well-established companies are protected by
the positive feedback loop, from the installed base to reputation for
quality work to new contracts which add to the installed base. This
creates a considerable barrier to entry for newcomers, and is a
fundamental part of the Business Idea of every established construction
company. However, a company cannot entirely rely on this loop for its
success. There is potential competition from other established
Investments Probability

Training Installed
base

Reputation
Communication
Skills
workforce
+

Quality Contracts
of work
Customer need
responsiveness

Cohesion
loyalty Motivation
workforce

Flexibility
contract
conditions

Figure 10. The Business Idea of a construction company.

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companies in the industry, and from time to time new entrants make the
investment to break in. Therefore the Business Idea needs to be
strengthened by company specific Distinctive Competencies. In the
example in Figure 10 a construction company tries to distinguish itself
by creating an internal culture which differentiates the company in the
eyes of the clients as a flexible collaborative business partner in contrast
to the traditional legalistic and sometimes adversarial customer-
contractor relationship. Such collaborative customer relationships
require:

• An internal culture based on collaborative relationships. The


company portrayed in Figure 10 develops and stimulates this
culture by organisational measures and investments in people.
• A flexible approach to developing customised contract conditions.
The company has invested heavily in an ability to customise every
contract to the needs of the individual client.
• Financial strength to deal with the specific financing requirements
of every contract.

In this way the company stays ahead in its chosen market niche where
clients are prepared to pay a premium price for the security of proven
quality as well as non-adversarial co-operative relationships.

The strength of the Business Idea of Figure 10 lies in its cultural


embeddedness. Companies setting out to change their corporate culture
are embarking on a long term project that must be measured in years
rather than months. Companies that have made such investments in the
past are generally well-protected, provided that there is a good match
between the resulting behavioural characteristics and customer needs.

Limits to growth
The Kinder-Care example contains a negative feedback loop which will
eventually limit the growth created by the positive feedback loop as
explained. This negative feedback loop indicates that growth of the
activity will lead to a reduction of demand, based on saturation in
customer value creation and willingness to pay. Michael Porter’s Five-
Force competitive model (Porter 1980) provides a useful framework to
consider the limits to growth in a Business Idea:

• Demand limits
• Supply limits

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• Competition limits
• Limits imposed by the possibility of new entrants
• Limits imposed by possible alternatives and substitutes.

The Kinder-Care example demonstrates a demand limited Business


Idea. Examples of limitations in the other categories include:

• Supply limits. The Business Idea of a mining company may be


largely based on ‘legal protection’ through a concession agreement.
The company may not be able to extend this beyond what it already
enjoys. In this case the exploitation of the Business Idea is limited
on the supply side, dictated by the potential in the available reserve.
• Competition limits. In an oligopolistic market situation the growing
company must expect retaliation from its competitors when the
exploitation of its Business Idea leads to unacceptable dominance.
• As we have seen all Distinctive Competencies depreciate. At a cost
most Business Ideas can be emulated. Any firm working a
successful Business Idea will reach a point in the growth curve
where it has become attractive for new entrants to incur the
emulation cost, and enter the market as alternative suppliers.
• The same applies to substitute products.

In each of these examples we see a mechanism at work which, at some


point in the growth process, introduces a negative feedback loop in the
Business Idea, which first diminishes, and then negates its surplus
creation potential. At that point growth stops.

If the Business Idea creates its own compensating negative feedback


loop it need not be invalidated, as the two tend to remain in balance. If
compensating negative feedback emanates from an independent source
the situation may be more dangerous, as there is a possibility that
balance will not be maintained. For this reason negative feedback loops
introduced through existing or new competition are more dangerous
than those resulting from supply or demand constraints.

Levels of Business Ideas


Wherever a management team pursues a business purpose, a Business
Idea will emerge. Management teams can be found at various levels in

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the organisation, e.g. at the level of the corporation and the business
unit. Business Ideas can be found at all these levels.

The Business Unit has external customers. At this level it is easier to


define the contribution made to customer value. Taking this as a starting
point the Business Idea can be articulated by considering what specific
Distinctive Competencies in the company are brought to bear to create
value. At the business unit level the problem around defining the
Business Idea for the future revolves primarily around the question of
what will be considered value creation by future customers. This is a
creative task. The customers themselves cannot be aware of how their
value systems will evolve in the future because the potential
contribution of suppliers is unknown to them.

Articulating a corporate Business Idea is complicated by the fact that


the external customer is one step removed. The corporate unit does not
interact with external customers; this takes place via the Business Units.
Business logic at the corporate level is based on developing shared
resources, visible or invisible, that exploit synergy between Business
Units and the Corporate Units. This can take place in a number of
different ways:

• Business Units may include in their Business Idea the Distinctive


Competencies of other Business Units. For example, marketing may
rely on manufacturing flexibility to approach their customers with
customised offerings. Manufacturing flexibility then becomes a
Corporate Distinctive Competency.
• More than one Business Unit may pursue the same Distinctive
Competencies, which then may become Corporate Distinctive
Competencies, e.g. an open culture through participative
management.
• Some features of the company are corporate in a fundamental way,
and any distinctiveness in those can only be developed at the
corporate level, e.g. financial strength, risk spreading, corporate
reputation etc.
• The corporate parent may develop a Business Idea around value
creation in the interaction between the parent and the Business
Units (‘parenting advantage,’ Goold, Campbell & Alexander 1994).

The Corporate Business Idea needs to be based on the Business Unit


Business Ideas, concentrating on Distinctive Competencies which
operate across business boundaries.

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Segmentation
This raises the issue of what can be considered a Business Unit for the
purpose of articulating a Business Idea. Many schemes have been
invented to segment an organisation for the purpose of analysing its
underlying characteristics. For the purpose of developing a Business
Idea most of these schemes can be short-circuited. The Business Idea is
in the first place a cognitive device. It is a vision that lives in the minds
of individuals, managers and others in the unit being considered. It is
they who determine the identity of their operation, and who develop the
vision for its future. Therefore the single criterion whether it is
worthwhile to attempt to surface a Business Idea is the question whether
people, mostly in a management team, are aware of its separate identity.

Mapping out and comparing the Business Ideas of a number of Business


Units, making up a corporation, may lead to reconsideration of the
segmentation of the business within the organisation. Putting the lower
level maps next to each other quickly reveals possible ways in which
the same business can be reorganised more coherently, leading to more
concise Business Ideas with more clear-cut overlap and
interdependence, and simplified inter-unit interfaces.

The holistic nature of a Business Idea


A Business Idea becomes a powerful driving force in the organisation if
it can be held in the mind as one holistic concept. Its essential nature
follows from the way that the elements work together. The positive
feedback loop cannot be understood in terms of its elements in
isolation. Only the overview makes the important point. If complex
systems cannot be understood holistically, the mind will break down the
system into parts. In the case of a Business Idea this fragmentation
destroys the essential holistic meaning of the idea.

The human mind can retain only a limited number of concepts at the
same time. (Miller suggests a number of seven concepts, plus or minus
two (Miller 1956)). Our experience has shown that the most effective
Business Idea diagrams indeed do not contain many more than (say) ten
elements. A representation much beyond that seems to reduce its power
as a direction indicating device. Therefore it is advisable to draw up the
diagram at this level of granularity. If further detail is required this can
be included as an expansion of individual elements in the Business Idea

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in separate diagrams. The art of Business Idea articulation lies in


defining the major elements of the system at the appropriate resolution
level and maintaining consistency of this across the diagram.

This seems in the first place a point of good practice. But it is worth
considering other more fundamental aspects of the human inability to
overview large systems. Pursuing an entrepreneurial Business Idea
requires a high degree of consistency and persistence across the
organisation and over time. Staying on course requires a clear
unambiguous compass. Activities that are not a crucial part of the
Business Idea can be, and often are, contracted out to another firm.

Management Teams find it cognitively difficult to simultaneously


pursue more than one Business Idea. Financial markets tend to discount
management’s ability to pursue more than one Business Idea, as
manifest from the frequent phenomenon of enhanced market value
resulting from de-mergers.

The fact that a management team pursues only one Business Idea does
not mean that the company is only one business. For example the
management of a conglomerate company may be pursuing the
overarching corporate Business Idea of providing parenting advantages
to its subsidiaries, without getting involved in the detail of the
subsidiaries’ Business Idea (Goold & Quinn 1990).

The concept of the Business Idea throws a new light on the notion of
synergy as a precondition for success in acquisitions. The overarching
Business Idea is important not only because of the ‘shared resources’
aspect, but also because of its function as complexity reducer. It creates
one holistic gestalt around the businesses, enabling management to
manage the set as one.

The issue comes into focus clearly where companies consider mergers
of different businesses. The above reasoning argues that the invention
of one overall synergetic Business Idea is a prerequisite for a successful
acquisition.

Considering the Business Idea in the Management Team


As discussed, a positive feedback loop can spiral upwards or
downwards. Near the switch-over point it takes only a small nudge to
flip-flop from growth into decline. Company managers are generally
intuitively aware of this danger-point and try to maintain a margin of

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safety. The purpose of a company is defined as maximising profit for


the shareholders. But the urge to be profitable is often related less to
shareholder considerations, than to the need to keep the positive
feedback loop away from the precipice.

Sometimes companies find themselves exploiting a successful Business


Idea, based on a strong set of Distinctive Competencies, built up in the
past. The unique Business Idea is not always well articulated. Although
initially the underlying entrepreneurial idea was clearly understood it
often happens in successful organisations that attention moves to the
product and the efficiency of its production system. Companies that
have been in business for a while often lose sight of the complex
reasons why customers buy their particular products or services. While
things are going well, many managers get on with the day-to-day
business, implicitly relying on the ongoing tacit Business Idea to protect
them from competitive onslaught. As time goes on, people in the
business often come to take customer value for granted and managers in
the company may gradually diverge in their intuitive interpretation of
the Business Idea. There are considerable dangers lurking here because,
as we saw, Distinctive Competencies depreciate over time.

If the Business Idea is not any longer clearly and jointly understood the
danger of the positive feedback loop slipping unnoticed into its
declining mode is particularly strong. Considering the long lead times
required to build most Distinctive Competencies the company may run
into serious difficulties trying to turn things round once profitability has
started to decline. There may not be time or resources to adjust the
Business Idea to the current market.

To avoid this situation arising the management team needs to jointly


articulate and understand the basis of a company’s success. Divergent
notions of the Business Idea in the management team need to be
confronted in open debate. The Business Idea concept assists the team
in managing this process more explicitly, through the introduction of a
thinking framework and language, allowing joint rational consideration
in terms of:

• The current Business Idea.


• The strengths/weaknesses of the current Distinctive Competencies
in their systemic interaction.
• The outlook for the strength of the Distinctive Competencies
against the ever changing values in society.

Once a Business Idea has been articulated, strategic priorities need to be


determined to maintain its health. Selection of strategic options for the

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Scenarios: The Art of Strategic Conversation: Chapter 3

future needs to be guided by their relevance to maintaining and


enhancing the Business Idea. How this can be done operationally is
discussed in Part Three.

Summary of main points of the Business Idea concept


We have introduced the concept of the ‘Business Idea’ and suggested
that it should drive the strategy of organisations. This is not presented as
a new tool that managers are urged to use to increase their success. We
believe that the Business Idea already exists in the mental models used
by managers to make sense of the world. We are suggesting that
managers should try to articulate their implicit Business Idea, to focus
the dialogue which needs to take place in each organisation on the
emerging strategic direction.

Strategy has as its main aim the continuation and growth of the
organisation. For this purpose a surplus of resources needs to be created
in its day-to-day operations. The conditions required for this to happen
are specified by the Business Idea. The basic motor of the Business Idea
is the system of Distinctive Competencies created and exploited by the
organisation. Understanding the nature of this leads to an awareness of
the intrinsic constraints in the scope of their deliberate development.

As we saw there is evidence to suggest that a successful organisation


concentrates on one Business Idea only. This is not the same as
concentrating on only one business, sometimes called the Core
Business. A Business Idea may encompass more than one business. It is
a more dynamic concept than a core business. A successful Business
Idea implies continuous renewal of the business concept.
Entrepreneurial invention continues to be a pre-condition for survival
and success. The concept of the Business Idea puts entrepreneurial
invention back on the agenda.

In entrepreneurship, invention goes together with risk. The entrepreneur


needs to think about his Business Idea against an uncertain future. The
same applies for organisations. In the next chapter we discuss various
ways of thinking about uncertainty in the future business environment.
This will lead to a discussion of scenario planning in comparison with
other ways of describing the future world.

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