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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.................................................... 49 Organisation of Chapter 4 ............................................. 85 Choosing the corporation ...................................... 53 The competitive position of your business – the Strategy Clock and Competitive Advantage............................................. 86 The rationale of the corporate parent ........................................ and do not expect...................................................................... 42 Strategic group analysis ....................................................................................................................... 69 Sustaining differentiation advantages ............. 84 Introduction........ 26 Learning objectives ............................... 46 Drawing out and gathering key issues ........................... competitive strategy and competitive advantage ...................................................................................... 32 Market structures: competitive markets.................................... 92 ii ...................................................................................... 26 Organisation of Chapter 3 ............................. 48 Conclusion .......... 49 Learning objectives ....................... 50 Key questions for this chapter............................................................................................... 48 Chapter 4: The foundations of competitive strategy ........................................................ 85 Conceptual tools introduced in this chapter ......Strategy Analysis and Evaluation (SAE) Workbook Chapter 3: The transactional environment ................................................... 43 Competitor analysis.................................... 70 Hypercompetition....................................................................................................... 85 The corporate parent ............................ 78 Business idea................................................................................................. 34 The Five Forces model as a way of investigating the transactional environment ........................................................................... 27 The contextual environment.................................................................... 29 Focal questions for transactional environment ................................................................................................................................... 26 Introduction......................................................... 40 Analysis of competitors ........................................................................................ of you ................................................. 84 Organisation of Chapter 5 ............................................................................................ 63 Core competencies. 58 Identifying your business’s core competencies................... 49 Introduction...................................................................................................................................................... 56 Resources and competencies.......... 32 Market analysis: supply and demand .......................... 30 Reflections on your reading and the tasks............................................................ 88 Corporate diversity and portfolio logic .............................................. 27 The transactional environment.................................................................... 65 Obtaining differentiation advantages ...................... 84 Learning objectives .................................................... 37 Applying the Five Forces model .......................... 64 Obtaining cost advantages ......... 80 The business idea as a system of feedback loops ............................................................................................................................... 73 Rivalry and strategising .............. 27 Conceptual tools in this chapter........................ 91 Links backwards and forward .... oligopolies and monopolies........................... differentiated product markets...................................................................... 83 Chapter 5: Corporate strategy ........... 50 Conceptual tools introduced in this chapter .................................. 89 Corporate performance ........................... 81 Conclusions and looking ahead............................................... 75 Progress report ............................................................................................................ 62 What we expect.................................................................................. 51 The offering ..................... 38 Market segmentation.................................

....... 127 van der Heidjen....................................... 125 Appendix 1 ............................................... 122 Report structure.......................................... 119 Feasibility .. 120 Chapter 7: Writing the report ................... 97 Identifying key strategic issues .............. 105 The transactional environment: market segmentation ................................................................................................ K (1996) Scenarios: the Art of Strategic Conversation.................................................... 123 Executive summary .................................................................. 122 Learning objectives ........................................................................................ 94 Organisation of Chapter 6 ............................ 122 Purpose of writing the report .................................................................... 107 The SWOT table and TOWS analysis ......................................................................................................................................................................... 124 Report writing style ......... 94 Introduction............. 123 Role of analysis ................................................................ 108 From SWOT to the TOWS matrix .................... 113 Financial evaluation of strategic options .............................................................................................. 116 Acceptability....... 96 Concepts and tools introduced or developed in this chapter ......................... Chapter 3 iii ................................. 119 Strategy recommendation .............. Wiley.................................................................. 123 Main report .................................................................... 109 Strategic stretch (or leverage) .............................. 94 Learning objectives .................................. 102 The contextual environment – drivers of value creation and opportunities and threats to business performance..... 106 Strengths and weaknesses of the business ............................................................................................................ 101 Option generation....................................................................................Strategy Analysis and Evaluation (SAE) Workbook Chapter 6: Strategic options – generation and evaluation ....................................................................................... 113 Suitability ........................................................................ 118 Pulling it together .......... 110 Option evaluation................................................................................................... 96 Structure of Chapter 6 ................. 96 The overall brief................................................................ 104 The transactional environment: strategic group analysis................................................................................... 122 Introduction................................................................................. 117 Evidence ...............................

Strategy – Analysis and Evaluation (SAE) Workbook .

individual and group activity. It will help if you follow the sequence of exercises outlined here and the guidelines provided for those exercises. and SAE is intended to provide a safe learning environment for students. We believe that the most effective approach to learning is a combination of theory 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. together with exercises for you to undertake individually and with other students in groups. 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. To help facilitate your learning we have set out a number of ‘activities’ throughout the SAE workbook. is concerned with understanding the strategies of organisations. These activities are designed around a number of key questions.Strategy Analysis and Evaluation (SAE) Workbook Chapter 1: Introduction to strategy What is strategy and how will we study it? Introduction SAE. It consists of explanatory notes to support those texts. and reflection on the learning experience to identify and internalise insights and practice. This workbook is designed to accompany the texts you will be using. Learning objectives The pedagogical approach adopted to study SAE is student centred and experiential learning based. 1 . Our approach is based around a combination of individual reading. which you should address to help focus your studies.

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 longterm in terms of months. Here we take it to mean: A long term direction which seeks to meet the expectations and create value for stakeholders. 2 . 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. However. For a business that needs to make investments over a long term horizon (e. We all have views about what we mean by Strategy. Just note down any words or terms that come to mind. These might be words such as ‘planning’ or ‘analysis’.g. 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. oil exploration or heavy chemicals) long-term may mean many years. These are all influences on the strategy of an organisation. not years. They do not so much describe what strategy is as how you think strategy might be developed and managed. Do not do any reading at this stage. You might well have noted down terms such as ‘long-term direction’ or perhaps ‘competitive advantage’ or even ‘survival’. You may have noted ‘the environment’ or ‘organisational competencies’ or ‘shareholder expectations’. The forces that influence strategy. This needs a little more explanation. The purpose of strategy.1 (Individual preparatory task) In the context of an organisation with which you are familiar write down what you mean by ‘Strategy’. Long-term will differ by organisation.Strategy Analysis and Evaluation (SAE) Workbook The structure of SAE and Strategic Management Defining strategy Activity 1. • • Towards a definition There are many different definitions of what organisational strategy means.

The extent and power of these different influences will vary by organisation. but also macro level influences from the wider environment – the sort of considerations you examined in EIBE. Strategic Management has a number of parts so how does SAE relate to these different parts? 3 . • • We will revisit and reconsider these forces in Activity 1. 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. but rather by achieving advantage over others. financial resources. For example. it is likely that the organisation has to position itself to achieve some sort of advantage over others. public policy and so on will influence the strategy of an organisation. technical capabilities and so on. In competing for scarce resources (e. demographic changes. A public company is subject to the expectations of its shareholders: but it also is influenced by its workers. So influences such as economic conditions. The expectations of stakeholders: All organisations have different stakeholders. However. certainly influence the strategy of an organisation.3 below. organisational culture. its managers. trade unions. such as shareholders. Businesses in competitive environments do not make high levels of profit return by being the same as everyone else. These can include physical assets such as plant and equipment. The resources. The expectations of key stakeholders. the forces that influence strategy can be thought of under three headings: • Environmental Influences: These will include market and competitive forces. The activities of competitors also influences the strategy an organisation will follow. the community within which it exits. that defining what strategy is about also shades into understanding the forces that influence strategy.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. Remember. Public Sector organisations face a similar issue. capabilities and competencies of the organisation: What the organisation has at its disposal and its ability to use these to its advantage. a unifying need is that stakeholders expect an organisation to use the resources it has to create value (however they perceive it) for them. however.g. 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. the expectations of the shareholders and customers of a business are likely to be critical for its long-term survival. It is important to understand where SAE fits in relation to the rest of Strategic Management. Forces influencing strategy Extending this more generally. So strategy is also about how value is to be created. people skills. government and so on.

not least. and for what is it answerable? This will be picked up in Chapter 2. at the end of this chapter. The macro environment will have important influences on the organisation and these influences need to be considered. The structure of SAE Now we will turn to the structure of SAE itself. Remember. how that might change and how it might impact on an organisation. These two units are essentially concerned with processes. Components of SAE The main components of SAE. SAE (Strategy Analysis and Evaluation) which is the subject of this workbook and the purpose of which is explained below. to whom or what it is answerable. 4 . there are some overarching concepts from what you have learned in EIBE that will be built upon. which will have major influence on the organisation. In particular managers need to identify if there are structural drivers from the environment. Managing and Making Strategy are both units that are concerned with the processes of managing complexity in organisations. and it is certainly relevant to SAE (see below). In this regard they are both relevant to the management of strategy. This is a macro view of an organisation’s environment. and structured as chapters in this workbook will then be as follows: • It is important to ask how success will be measured. Remember already in this introduction we have drawn a distinction between the content of strategies and the processes by which they are managed. perhaps by applying scenario analysis. and they need to consider the likely future impact of these. as managers develop and manage strategy. Indeed you may wish to undertake such analyses when you have chosen the organisation you will study (see below). So here you will have a chance to apply the lessons of SAE but in the context of the other units. Much of this has already been covered in EIBE and the lessons from that course should be applied here. summarised in Figure 1. Strategic Consulting in Practice is an integrative exercise designed to bring all this together. This can be done by applying a number of important concepts in an analytical manner so as to manage uncertainty and complexity.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. 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. Again they certainly relate to this unit. This crucially depends on understanding the purpose of the organisation. they need to have some way of making sense of the complexity and uncertainty they face. because they raise questions about the complexity that managers face and how it is handled in practice. to identify the drivers of change.

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

due to emerging insights and understanding. so as to apply the concepts and techniques covered in the workbook and in the texts. as well as The Sixth Sense. (TSS) used previously in EIBE. and reflect on the outcome of these activities. 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. These activities in turn feed into team tasks. Business Economics (BE) by Roger Perman and John Scouller is also concerned with the strategy of organisations but from an economics point of view. Each chapter is rather like this one. This chapter is included as an Appendix to this workbook. It has a narrative. As your studies progress you may even draw conclusion that some of the earlier work is redundant. It will provide you with a broad overview of the subject. The balance between individual and group activities is dependent on the mode of study i. however there may be some students who. It provides a usefully different perspective from FS. You should prepare individually and take your individual work to the team for discussion. Chapter 3 of Scenarios. You will be briefed locally on how these teams are made up and how team-working will occur. The SAE learning experience philosophy is based on an iterative process rather than a linear one. debate and further analysis and consideration. flexible learning or internationally. referred to in this workbook as SC. Working in groups Our expectation is that you will be working with a team of students. part-time. The greatest learning is achieved when you undertake individual work and teamwork. You have two books which we will refer to extensively throughout this workbook – Fundamentals of Strategy and Business Economics. will undertake SAE individually. Do not be surprised by 6 . due to their circumstances. The Art of Strategic Conversation by Kees van der Heijden.e. Again references will be made to specific parts of this book throughout this workbook. In practice students will find themselves re-visiting earlier work to update it as the knowledge of the case study organisation deepens. supported by readings and activities and tasks that you will undertake as you work through your case. full-time. 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. With this in mind some of the activities are individual for you to undertake in conjunction with your reading. will also be used as a reference throughout this workbook. In addition.Strategy Analysis and Evaluation (SAE) Workbook How to use the workbook Each of the above issues is considered in separate chapters in this workbook. For the first chapter of this workbook you should begin by reading Chapter 1 of FS. Fundamentals of Strategy by Gerry Johnson.

(See the SAE assignment guidelines. on the new understandings or insights that you have gained. principally in groups but occasionally individually. As you work through the SAE course. This is intended to help deepen your knowledge and understanding of the subject.Strategy Analysis and Evaluation (SAE) Workbook the need to reflect on and update your analysis.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 will ask you to undertake a number of activities. 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. over time. 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. 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. We would encourage you to view this as a natural part of the learning process. Electronic copies of the activities in the seven chapters of this workbook are on the SAE page of the MBA intranet site. We would like you make explicit to yourself your aims and objectives at the outset. 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. we would like you to re-visit these aims and objectives and reflect on your past experience. and make notes in the appropriate boxes. Initial aims and objectives: Ongoing: Conclusion of studying SAE: 7 . as you progress through the workbook. expectations and learning from the course. given separately). This understanding can then be used as an input into your group discussions. Activity 1. On occasions in the workbook you will be asked to reflect. Firstly the process provides you with an on-going record of your development. As the course develops.

Obviously if you chose a business operating in many markets it makes your task a good deal more complicated. and try to avoid choosing a multi-business business. A scan through the curse syllabus shows you the sort of questions we will expect you to deal with. ideally. but be careful to check that you can get information about that business (as above) if you do. 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. Some modes of study will be able to choose freely the case study organisation. for example.Strategy Analysis and Evaluation (SAE) Workbook Selecting the organisation to study Choice of case study is dependent on the mode of studying. To address these you will certainly need to know about: • • • • • The ownership structure of the organisation. It would be more sensible to chose a business within Unilever. For offshore students your local tutor will brief you on what is required and in some circumstances specific case studies will be provided. So. The environment and possible drivers of change. • • 2) It will help if you chose an organisation operating within a fairly discrete market. If this is a business within a corporate group. it would be helpful to know about fairly internal detailed processes). the intention is to provide a collaborative and co-operative environment for learning and development. Other modes will be given a case study organisation. something about the other businesses in the group and also what the corporation itself claims it is trying to do strategically. it would not be a good idea to choose a conglomerate such as Unilever. The market and market dynamics within which the organisation operates. Even if you do choose a business. Its competitors and how they have sought to compete. 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. 3) In summary. also be careful to consider how many markets that business operates within. some do’s and don’ts about your choice of a company to study: 8 . Customers and what they expect and value. Whichever approach is relevant for your studies.

But which is manageable in scope: e. it also runs short courses for executives as well as an MBA.Strategy Analysis and Evaluation (SAE) Workbook Do: • • Ensure you can obtain relevant data – financial.g. Supposing you chose the University of Strathclyde as your organisation. consider the following. and analysts’ accounts – about the company. such as. Choose a product (e. the Graduate School of Business: it may operate different centres but its main business is in the MBA market. please select an organisation for your group to study in SAE. DBA and PhD. Choose a company that interests you. but check you can get information at the business unit level.3: (Individual and/or Group task) For full-time and part-time students. It has undergraduate students that are different from graduate students such as you.g. • • • • • • Selecting an organisation – an example To help you think this through. Actually the University of Strathclyde has many different ‘businesses’ serving different markets. Activity 1. Rely solely on personal access to an organisation: your project is at risk if this is not achieved. press. But even if you chose the Graduate School of Business as a focus for your study. 9 . Choose a business for which you can identify customers or users and take a view (or get information) on their needs and expectations. Don’t: • Focus on multi-business corporate level issues: it is fine to choose a business within a corporate portfolio. That is why Strathclyde Business School has a separate Graduate School of Business. And which you think faces an interesting strategic challenge. For students at the international centres: please ignore this activity and consult the separate assignment guidelines. but also company. Corporate level issues will be considered in the course but the business level is the primary focus. for example. remember it too operates within different markets. Clarifying the business unit early will help minimise confusion as you work through the activities and tasks in this workbook. it operates different geographical centres. our suggestion is that you need to get as close as possible to a business with a clear market definition. So it would be important to decide at which level you are considering the organisation you wish to study. a brand) as distinct from a business. Choose a business that has competitors. In terms of the above example. some companies may be so big that you could have difficulties in finding the time to access and analyse the data available on it. For example.

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. This is not surprising. Take the opportunity to discuss with your colleagues why this might be so in the context of the organisations they considered. some organisations are much more directly linked to economic conditions within the markets in which they operate. it is also quite possible that you will have noted down different ones. 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. 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. Different organisations do face different influences on their strategies. • 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? 10 . It is quite likely that you will have noted down many similar forces at work. For example. and given different emphases to these from your colleagues. 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. 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. However.

sometimes referred to as ‘the search for value’. and resources is concerned with the basis of success and how it can be leveraged.B. 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. The Environment Stakeholder Influence Resources/Capabilities and Competencies This initial list will almost certainly change as you work through this unit. Individuals have strategies. The environment is concerned with opportunities and threats. 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. 11 . This is one of the lessons of managing the strategy of organisation – the need for flexibility to understand and manage multiple conflicting goals. stakeholder influence is concerned with those actors that can make or break the strategy. Put simply. you will revisit these throughout SAE but getting an initial view might be helpful).Strategy Analysis and Evaluation (SAE) Workbook Activity 1. how it seeks to build advantage over competitors such that it can achieve profit levels greater than competitors. 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. This is sometimes thought of as the generation of rents. Put an asterisk against the forces that you think the organisation pays particular attention to currently (N. Levels of strategy The concept of strategy applies at different levels in organisations.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. Indeed it is often thought of as competitive strategy. and functional areas of businesses such as Marketing or HR have strategies.

So there is a problem of uncertainty in managing strategy. 12 . It is quite likely that in discussions on strategy words such as ‘planning’ are mentioned. 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. 4. Strategic management This leaves the ‘how’ of managing strategy. for example. in the end. Are all the expectations of stakeholders similar? Quite likely not. but others will not be. It does not mean it is the ‘right’ view but a useful one which you need to understand. 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. Which of the environmental forces you identified can be predicted with confidence into the future? Some may be predictable with some confidence. whereas the expectations of stakeholders or the inherited competencies available may suggest another. then the corporate level is merely a cost placed upon the businesses and will destroy value. It is therefore important to identify those which are within the control of managers. The forces at work in the environment may suggest the organisation should move in one direction. and understand how. This is a deceptively simple point with profound implications for the value creating capacities of such corporations and. This is not surprising because in many organisations strategy is associated with the development of a ‘strategic plan’. Consider the problems of managing strategy. 3. How is it done? There are many different accounts and explanations of how strategy is managed. Consider the following questions: 1. Underlying the notion of a plan are certain assumptions: • that despite the uncertainty and complexity. the content aspect of strategy.Strategy Analysis and Evaluation (SAE) Workbook • Corporate level strategy asks a related but different question. Are the different forces aligned? They may well not be. These in turn may differ from the expectations of government. So balancing these expectations is a complex problem that managers need to face. The expectations of shareholders may differ from the expectations or workers or managers. It asked you to think about different forces influencing the strategy of organisations. certain key issues or forces affecting the organisation can be identified. Refer back to Activity 1. for the economic well being of whole economies. What value does the corporate body add to the value generated at business level? In the absence of being able to answer this question. 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.4 above.

It could be that you have already decided on an organisation to study for this course.5: (Individual and/or group task) What is the strategy(s) of the case organisation currently? Bearing in mind the characteristics explained above. write down what you consider the strategy of the organisation to be currently. For this activity. but it could be because they regard this as something they do not wish to make over explicit in a competitive environment. and that by so doing can proactively organise itself to achieve the expectations placed upon it. You may not have found this straightforward. 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. we have introduced some of the key issues that you need to be aware of at the outset of studying SAE. In addition. or again it could simply be that you are working in an organisation. the process aspect of strategy. Don’t worry if you find this difficult to pin down. especially in terms of the purpose and components of strategy.Strategy Analysis and Evaluation (SAE) Workbook • • that managers can systematically organise resources to address these forces or influences. Activity 1. 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. Or it could be that you are using a case study. Conclusion This chapter was designed to introduce you to the approach we will adopt to studying SAE. 13 . 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. This may be because they are not clear about it themselves. You will become clearer on how to consider organisational strategies throughout this module. identifying insights from the analysis. you need to choose an organisation with which you have some familiarity. Putting all this together it is clear that the strategic manager faces a complex task quite different from normal operational. drawing out conclusions and making recommendations vis-à-vis strategy. day to day management.

14 . provides an introduction to the nature of strategy and strategic decisions. which have been given to you separately.Strategy Analysis and Evaluation (SAE) Workbook Assessment Now is a good time to familiarise yourself with the SAE assignment guidelines. Individual reading: FS: Chapter 1. and strategic management as a concept and in different contexts.

and links forward to managing and making strategy Figure 1: Summary of the main components of SAE 15 .Strategy Analysis and Evaluation (SAE) Workbook SAE Course syllabus Chapter 1. Introduction to SAE 2. 5. Conclusions. Competitive Strategy Identifying how (and how might) the organisation seek to create value. Identifying what are the strategic options possible for the organisation. Identifying which of these is most appropriate. Corporate Strategy The multi-business corporation Corporate value creation M&A’s as corporate means options Corporate strategy design Portfolios Parenting issues 6. The Transactional Business Environment Value creation and Rent Corporate Purpose Corporate Governance Value creation and competition Porter’s 5 forces model based on Bargaining Power and relationships Strategic group analysis Market segments Generic competitive strategies Costs and cost leadership differentiation Resources and competencies Sustainability of competitive advantage Business idea Hyper competition/Outpacing Strategy: elementary game theory Network effects/externalities Content Expected outcomes A broad understanding of what is meant by strategy A view on what is meant by success strategically in terms of the expectations of key stakeholders Identifying the key forces within a competitive environment that influence strategy and have to be taken into account to develop strategy. The Organisation: Value creation 3. Strategic options and choices: Approaches to evaluation Option generation and evaluation Scenario wind tunnelling of options Identifying how does (and how might) a corporate parent enhance the value created by business and considering why it might not. Recommendations 7. 4.

Questions to be addressed in this chapter With respect to your case study organisation. 3) Wider stakeholder influence on organisation purpose and criteria of success. On completion of this chapter you should have reached a good understanding of issues relating to business purpose and performance. 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. Many organisations do not state explicitly their goals. Learning objectives The objective of this chapter is to develop your understanding of organisational purpose and performance. 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.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. 4) Criteria of organisational success and performance. 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. 16 . This chapter will help you to understand the history and goals of the organisation. The creation of value is linked to the search for rent. as noted in Chapter 1. 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. 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. which are central to business/ corporate strategy.

Return on equity Total shareholder returns Value reporting 17 . EVA.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.

which are discussed in BE Chapter 4. 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. Economists commonly refer to this as generating economic profit or ‘creating and appropriating rents’ to express this idea of creating organisational value.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. there is an alternative view that argues for the recognition of multiple stakeholders. An organisation that fails to add value is likely to be destroying value. as signalled by the consumers willingness to pay. 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. such as a business or corporate enterprise? To address this question. There are historical reasons for adopting such terms. And not just strictly defined business organisations. 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.’ Another common way in which this is expressed is to say that organisations exist to ADD VALUE. in the sense that the value of its output to its customers/ clients is less than the value of the resources it uses. That is wants and needs we could satisfy are not met because of motivation problems or co-ordination failures. meaning simply that the value of what they produce. who all need to be considered by management. charities and other ‘non-profit’ organisations also operate in a competitive environment and have to convince contributors or providers of resources (such as 18 . In this alternative view. The search for rent argument has at its core the primacy of maximising shareholder value. exceeds the value of the resources they use up in production and distribution. To an economist therefore: ‘Organisations such as business firms exist to motivate and coordinate 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. multiple stakeholders and shareholders are mutually inter-dependent and the organisation should try to create a virtuous circle between all stakeholders. However. 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.

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 overinvest 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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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. 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. 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.1 and consider if you need to change them. Which expectations should play the greatest role in influencing the strategy and objectives of the organisation? Bearing in mind your conclusions. they will also differ in the extent to which they have influence in a given organisation. Some of these stakeholders are fairly obvious. suppliers. 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. shareholders.4. In other organisations stakeholders may be peculiar to that organisation. 22 . FS 4. discusses stakeholder expectations. Activity 2. 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. managers. They are therefore likely to exercise influence over the organisation. those defined in the governance chain. unions. After reading this undertake the next activity. revisit the objectives you identified in Activity 2.Strategy Analysis and Evaluation (SAE) Workbook Stakeholder expectations The corporate governance framework provides the formal requirements and boundaries within which strategy is developed. It is therefore useful to have an understanding of who the stakeholders are and the extent of their influence. government and so on. the workforce.

say 10 years. 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. What follows are some key points to consider. previous record.Strategy Analysis and Evaluation (SAE) Workbook Individual reading: FS: Chapter 4. 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. and longer term performance. competitors. provides a discussion on the issues of purpose. say 5 years. governance and stakeholders. Performance compared to who or what? Aspirations. 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. medium term. 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. 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. economic value added etc in commercial businesses). pages 89-119. This will depend to some extent on the specific circumstances of the industry and the characteristics of the business. return on equity. What should they be and why? 23 . 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. say a year. For example. A general judgement of a particular business and its management team might consider short term performance. 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. 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.

By taking Chapter 1 and Chapter 2 together.Strategy Analysis and Evaluation (SAE) Workbook Activity 2. Bearing these considerations in mind. b) the assessment of the likely success of future strategies. This clearer understanding is important in that. and (ii) that you are able to use your initial understanding to anchor your studies. (i) you have established a sound initial picture of the case organisation.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. we ask you to re-visit the objectives you recorded in Activity 2. as you work through the remaining chapters.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? 24 . Activity 2. and note down the advantages and disadvantages of these in relation to: a) the expectations of stakeholders considered in this chapter. The chapter has also been designed to help you consider and identify a wide range of organisational performance criteria. you should now have a clearer understanding of the case study organisation prior to commencing your analysis.4: Organisational performance measures (Group task) Identify different bases (financial and non-financial) of measuring organisational performance.

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. communicating the conclusions and recommendations of your analysis in the form of a report to the CEO of the case organisation. provides an economic perspective on the nature of organisations including purpose. the role of the parent company (Chapter 5).2. and finally. 25 . competitive capability and position (Chapter 4). FS Chapter 4.Strategy Analysis and Evaluation (SAE) Workbook SAE process reminder The following chapters are designed to study the case organisation’s transactional environment (Chapter 3). responding to opportunities and threats by developing and evaluating strategic options (Chapter 6). 4. objectives and the search for rent. Individual reading: BE: Chapter 4.

develop an understanding of how these influence the ability of management to develop and formulate strategy. It is also usually taken to include your competitors. we shall revisit some of the tools developed in this chapter. you will inevitably find yourself thinking about the future as well. Where this is the case. and we suggest that you keep a record of these ideas as you go along. the transactional environment includes all those individuals and organisations with which the business transacts in some way or other. As the name implies. others are about the future of the business and its wider organisation. Some of the above questions are mainly about the business at present. In the Options chapter later in the workbook. but in an explicitly future-looking way. many of the tasks mainly relate to the current position of the business. In this chapter. and identify opportunities and threats from this analysis. 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.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. The ideas you develop here will be important inputs to the process of generating and evaluating options. and some concern both. That is as it should be. 26 .

Strategy Analysis and Evaluation (SAE) Workbook Organisation of Chapter 3 PESTEL Scenarios Contextual environment Sustainability and/or 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. Social. Economic. you used the PESTEL framework to classify environmental forces into Political. but which can be important drivers of valuegenerating potential. 27 . In that earlier study. 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). Technological. You also developed Scenarios as a way of organising ideas about possible but uncertain environmental change. Natural Environmental or Legal categories.

and Legal drivers of change. 28 . Technological. c) Be clear also what you mean when identifying uncertainties.Strategy Analysis and Evaluation (SAE) Workbook To help you with the next stage of this course. d) There is no need to undertake two iterations in developing scenarios. Economic. Hints a) Make sure that the time horizon chosen for the scenario planning is appropriate for the case organisation concerned. 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.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.2 Scenario development (Group task) Revisit the procedures of scenario planning from EIBE course and using the PESTEL analysis developed in Activity 3. Environmental. Activity 3. we would ask you to re-read the EIBE course. the key to developing your scenarios is the identification of key external concerns that you have identified during your analysis. 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. b) Be clear when identifying the axes of the scenarios that they are independent. 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. Activity 3.1 PESTEL analysis (Group task) Undertake a review of the external environment to identify – Political. Societal. This course explains the approach to scanning the environment and scenario development in more detail.

this is clearly not the case for the collection of organisations that make up a transactional environment. Although single organisations rarely shape their contextual environment. or might interact. In doing so. and so its principal use is as a way of thinking about forces acting at the business – rather than corporate – level. your team should focus on the particular transactional environment that is most relevant to your selected business. in carrying out its various activities. In contrast. Depending on exactly how one defines a market. What happens in those ‘transactional environments’ clearly affects the pace and direction of technological change in the wider environment. The difference arises from the fact that the transactional environment consists of all those institutions and parties with which the business interacts. 29 . Very occasionally a single organisation has enough influence to significantly shape the contextual environment in which it operates. 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. and so may have several different transactional environments. Arguably. Interactions are by their nature two-way or reciprocal. But this is the exception rather than the rule. Hence. we ask you to use this tool to analyse strategic decisions at the business level. The transactional and contextual environments themselves are not independent entities. Of course. this has been true of Microsoft. These reciprocal interactions are also evident in the transport and vehicle industries and their contextual environments. its development of communications software seems to have shaped the overall direction in which information technology has evolved. 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. A clear example of this is found in the various information industries. The similarity arises from the fact that they both impact upon the business. They also present opportunities and threats. Hence the business can – to some extent at least – influence and shape its transactional environment. they do interact. throughout this chapter. You will also be asked to use scenario analysis as a framework within which options can be evaluated in terms of various performance criteria.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. for the rest of this chapter. However. an organisation may operate in several different markets. How it does so will have an important bearing on business success. There is one major similarity and one fundamental difference between the contextual and transactional environments. these environments impose constraints. a business may also operate in several (closely related) markets. and so generates an additional dimension of strategic behaviour. The transactional environment The transactional environment is an industry or market level concept. And changes in technology feed back upon various transactional environments.

segments. if the business operates in more than one market). 30 . We can then follow that up by asking what market or markets the business operates in. 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. and you will be asked to consider these questions further there. addresses the first three of these questions. Indeed. But we leave these complications till later. We shall have more to say about these matters in the next chapter on Competitive Strategy. reliability promises. and a host of other associated values and services that matter to customers. including after-sales service. Posing them now and developing provisional answers will begin to pin down what the relevant transactional environment of the business actually is (or are. (It may also depend on what market segments the business targets. 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. how will that influence the intensity of competition? What kinds of substitutes might be developed for our product. and on which strategic group it is a member of. supply chain characteristics. meaning not only material or tangible things but also intangibles.3. it is best to think about ‘products’ in terms of the whole package that you are offering to customers. collaborators. 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. and if it occurs. such as management consultancy services. product space. businesses with complementary products)? Which organisational fields does our business participate in? • • • Activity 3. Bear in mind that it is helpful to think of a ‘product’ in a broad sense.g. and geographical space)? With whom do we transact (suppliers. to which we now turn. What product or products does the business offer.) 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.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.

This is often more difficult than one first thinks. Later reading references will point you back to particular parts of that reading. Hints: It is important to be very clear about what product you are selling. types of services provided/customer needs). Now move on to the task. types of customer. national boundaries. Also try to think about the boundaries of your market (in terms of such things as geography. At this stage all you should try to do is give provisional answers. It will be useful to read this fairly quickly to get an overview. You may find that it is surprisingly difficult to answer these (apparently simple) questions. When you revisit them later on in the workbook (as you will do). Activity 3. it is likely that your answers will have changed from the ones you offer here. and to whom. which can then be studied more slowly and carefully. provides a general account of the transactional environment.Strategy Analysis and Evaluation (SAE) Workbook Individual reading: FS. Ask who are your customers. pages 23-25 and 29-57. Chapter 2. 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. are they intermediate buyers or final consumers? If you have selected a not-for-profit or public sector business. together with several case studies and examples. ask what market it would be in if it was a private business doing the same kind of thing. 31 .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.

For firms producing intermediate goods – such as car seats – it is also reasonably clear who the customers are (presumably car assemblers in this case). Pricing decisions are made. 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. the pricing decision made by the Dell computer organisation. thus creating complexity in the transactional environment. such as dolls and construction toys. for example. and final buyers of cars) matter too. For example. A second reason is that it is not always obvious what we mean by ‘customers’.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. somehow or other. One of these contexts is the market (or markets) in which the business operates. because the ‘customers’ customers’ (in this case. Do traditional toys. Price setters in Dell necessarily had to take this into 32 . those who buy cars to retail on. the market for PCs was in a relatively weak state (although the laptop computer market was faring rather better). it is a matter of customer perceptions of how easily and completely particular products can be substituted for one another. CNN. This will certainly become evident as you go through the various tasks that follow in the context of your chosen business. But it would be naive to imagine that the choice is made in an unconstrained way. even this relative simplicity disappears. This context exerted downward pressure on market prices. the relevant customer will be the final end-product ‘consumers’. businesses have several sets of customers that matter. In yet other cases. 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. Such choices are made within particular contexts and constraints. Consider. Demand growth for PCs had slowed significantly. But even then there is a complication. Each of these may have different values and expectations. Rather. Consider Yahoo. Their values and preferences matter to the seat manufacturer even though they are not direct customers. At the time of writing this workbook (early 2002). 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. pinning them down in practice may be difficult. Times Newspapers. belong to the same market as children’s computer games? The answer depends on whether customers regard them as close substitutes. What we have to recognise here is that along the supply chain. Further and Higher education institutions. In some cases. and rivalry between computer businesses was intense. Market analysis: supply and demand Business managers necessarily have to make choices. much excess capacity existed in the industry. by people within that business.

Strategy Analysis and Evaluation (SAE) Workbook account in choosing their own prices. In fact. when the downturn in prices came about. Shell held back on new exploration and development activity when many of its rivals continued to make very heavy capital investments. Understanding these aggregate market forces is one thing that can contribute to this better information. It will be interesting to see how this situation evolves. aggregate processes create forces. In the next recommended reading and its associated task. 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. indirectly. business profitability. This way of investigating market processes will also help in understanding better changes in the business environment. and in which directions are they likely to change? Answering this requires recognition of the fact that these are both prices. 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 a result. vis-à-vis its competitors. Consider. A market therefore has two sides: the demand side and the supply side of the market. even in a position of some strength in the industry. The reading shows you how we can construct a 33 . which tend to push average price levels up or down. In the Scenarios text. Dell appears to have selected a relatively aggressive price cutting policy that appears to be aimed at growing its market share. to some degree at least. It is to note that firms operate in markets where. for example. is determined by the supply of £ being converted into dollars for the purchase of US goods and assets. they are determined in the final analysis by supply and demand. and the demand for £ to be converted from $ for the purchase of UK goods and assets. 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. As you will see from the recommended reading. This left Shell in a position of relative strength. An understanding of market forces and trends can clearly be valuable to business managers. a business economics perspective requires that we look at a market in an analytically abstract way. electrical engine companies are large-scale users of copper. What determines these. (The exchange rate of the UK £ against the US $. For example. Supply and demand analysis might be useful in forming expectations about the future price of some commodity input. for example. You will see that this provides a powerful tool by means of which we can analyse the driving forces affecting market price and. A market is envisaged as a process of interaction between the potential buyers and sellers of some good or service. But the point of these comments is rather different. As with all prices. in a free market. Kees van der Heijden gives an interesting example. the rate of exchange will move until these two magnitudes are equal). interest rates and exchange rates. we ask you to use a demand and supply framework to analyse market forces.

Strategy Analysis and Evaluation (SAE) Workbook framework within which the forces influencing market price are laid out. relative to other things) in recent years because farming costs have fallen (technical progress. a value surplus or rent is available. But it can give us some insights even there. Examples include small restaurants in Toulouse. and the buyer as being the final customer. Consider the case of food products. taxi drivers in New Delhi. But who gets it? This is where supply chain analysis enters the picture. or close to. and shows with examples how this tool can be used. differentiated product markets. supply has increased quickly. Armed with this tool. and small mid price hotels in Kuala Lumpur. All parts of the supply chain between these two end points are ignored (or rather abstracted from). such as cuts of meat. If food retailers are small in number and have immense purchasing. Food prices have fallen in real terms (that is. 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). but where the offerings of competitors are differentiated in some way from each other. 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). It is important to note that supply and demand analysis is typically done at a high level of abstraction. 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. it is they who will tend to capture most of the rent. Individual reading: BE: Chapter 2. the market price for that product. use of fertilisers and pesticides etc) and total willingness to pay has been rising only very slowly. oligopolies and monopolies Some markets consist of many businesses selling similar products. Country and Western music performers in Nashville. market forces and market equilibrium. power. Economists call these kinds of markets 34 . The reading below takes you through the technique of supply and demand analysis of markets. It is usual to think of the seller as being the producer of the good. This means that supply and demand analysis is not well suited to dealing with issues that concern what is happening along the supply chain. pages 24-47 provides a discussion of the operation of the market. and so bargaining. If the market price exceeds the farm costs. In the jargon of S&D analysis. It shows which underlying factors influence demand and which influence supply. UK food supermarkets appear to be in this position. In the absence of government intervention (price support. while demand has been more or less constant. large scale. Market structures: competitive markets. plumbers or electricians in Glasgow.

with many competitors each selling products that are regarded by customers as being broadly similar. and earned Sony substantial above-normal profits (or rents). and the market becomes more-or-less purely competitive. Individual sellers have little or no market power. could make a healthy profit. imitation. they are true more generally. but the market is not ‘competitive’ in the sense we described earlier. or are forced to acquiesce in niches vacated by the successful dominant firms. other restaurants would tend to enter the market. but will find it hard to do so on a sustainable basis. Two kinds of movement in market structure are of interest here. merger and acquisition reduce the number of competitors. particular kinds of service. On the one hand. an innovative atmosphere. For example. This phrase tries to capture the idea that the market has a dual characteristic. Think about personal cassette players. Alternatively. Businesses seeking larger or more sustainable profits through size or market power might consolidate.Strategy Analysis and Evaluation (SAE) Workbook by the rather confusing name of ‘monopolistic competition’. In the first case. Businesses in these markets may be able to earn above normal profits. distinctive product. Special cuisines. We will examine how this might be done in the following chapter of this workbook. But a second kind of movement or trend may be evident. What the customer now sees in the stores are many alternative models. Processes of bankruptcy. The kinds of processes just described do not only happen in service industries. with essentially ‘commodity’ products being sold at very low margins. it is fundamentally competitive. consolidation may come about because of superior performance by some firms. The laggards are driven out of business. In such cases. If the processes we have just described go a long way. The Sony Walkman was a major innovation at one time. Factors such as these make business life relatively precarious. and must sell their products at a market price that is outside their control. On the other hand. initial advantages due to being first movers. Similar stories apply to most pharmaceutical product markets. Impersonal market forces do not determine price. So if a typical restaurant. will all be under threat of erosion. There may be competition between different businesses in these markets. and other differentiations are relatively easy to imitate. possession of patents. what we might find emerging is 35 . But the expiry of patents and processes of imitation or replication have transformed this market into one that is highly standardised. in many maturing manufacturing goods markets. markets contain a large number of businesses selling relatively undifferentiated products. or superior process technology. new entry. These firms grow more quickly. New entry into these markets is relatively easy. So the real challenge faced by business managers within differentiated goods markets is finding ways of sustaining differentiation. and so each competitor has an element of monopoly power because products are not perfect substitutes. and replication are dominant. perhaps coming to dominate markets or market segments. these processes of increasing rivalry. for example. competition is lessened by the fact that each competitor’s product is differentiated from all others to some degree. all close to each other in quality and price terms. Businesses in these kinds of markets do have market power.

create barriers to imitation. or it can choose quantity (and let price be determined by the market). But it is clear that there are strong incentives to searching for competitive advantage. It means that the payoff to a business from the choice it makes will depend upon what choices others make. It faces a market demand for its product. we would expect new firms to enter the market. if the single seller could earn supernormal profits. 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. Here a small number of firms dominate the market. and how they would react to your actions. leaving the firm unable to generate economic profit. so it can choose price (and then customers will purchase what they want at that price). It can choose whatever price it wants. Of course. Indeed. For a (profitable) monopoly to persist over time there must be substantial barriers to entry by new firms. The readings listed below take you through these various market structures in much more detail. and new entry into the market. replicability. Good choices cannot be made without thinking about what others might do. A small number means that each firm has a relatively high market share. 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. perhaps the most attractive. or find some other way of outperforming their rivals. Businesses are therefore strategically interdependent. But the monopolist cannot choose both price and quantity. interdependence has profound implications for business strategy.Strategy Analysis and Evaluation (SAE) Workbook oligopolistic markets. Business strategy can be seen in terms of trying to gain a competitive advantage. what might emerge out of all this is a monopoly market – a market in which there is a single seller of a good. A monopolist does not have to accept a market-determined price. As we shall see in the next chapter in this workbook. What has all this got to do with business strategy? The answer can be thought of as the search for a competitive advantage. put the innovator or differentiator in a position of selling what customers perceive to be products without any close substitute. We defer consideration of that until the next section of this workbook. But defending that position – against regulatory action and potential entrants – is likely to be very difficult. for a while at least. breaking the monopoly position. What these barriers could be is explained in the recommended reading. A monopoly position is an attractive one. We are likely to find many more examples of oligopolistic markets than ones that are pure monopolies. The major reason why many markets are not of the competitive type is that business managers take actions that differentiate their products. or gaining a (temporary) ‘monopolistic’ position by virtue of a distinctive product offering. In extreme cases. 36 . One tool for analysing business behaviour in situations of strategic interdependence is game theory. and that the behaviour of each firm affects all others in a significant way. It is about finding a way of reducing the competitive pressures on your business. How they might do so is the theme of the next chapter.

potential newcomers) of an industry. In other words. provides an introduction to business’s search for value in the competitive environment. page 31. the word market is defined in terms of customers and their preferences.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. Activity 3.) There are several ways in which this model can be used. A graphic depicting the model is shown in FS Exhibit 2. pages 150-172 discusses oligopoly and strategic competition. 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. Chapter 8. pages 110-128. discusses the monopoly model and barriers to entry. 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. In some circumstances. the model is an aggregate.2. (The word industry refers to collections of businesses producing similar goods. the Five Forces model can be used to try and explain the profit potential of an industry. pages 129-149. provides a more detailed discussion on the competitive market model. One of them is to gauge ‘attractiveness’ to incumbents (and. perhaps. industry level tool. and is not 37 . if any.Strategy Analysis and Evaluation (SAE) Workbook Individual reading: BE: pages 107-109. The Five Forces model is a framework for identifying the forces that affect the level of competition in an industry and in a market. Used in this way. Chapter 6. Chapter 7.

Or. armed with information about the determinants of competition within an industry. The model also generates implications for the ‘present’ and for the ‘future’. Applying the Five Forces model The Five Forces model can be used in other ways too. it might suggest options for the future that warrant further exploration. 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. pages 194-196 provides an introduction to the directional policy matrix which helps analyse further the competitive strength of strategic business units. customers and substitutes induce us to pay attention to what product we are offering. and in the Luxury Car market. gives insights into how one business can attain a position of strength relative to its rivals. 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. way about many aspects of the competitive game in which we are embroiled. and suppliers to whether our suppliers may disintermediate (sell direct to our customers. and so outperform them in terms of profitability. and its various implications. We will discuss these wider uses of the model later in the section on Corporate Strategy. The Five Forces model. We will take up this second – future-orientated approach – in the Options chapter. rivalry and new entry direct our attention to how well positioned we are vis à vis our actual and potential competitors. 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. The fivefold classification of forces in the transactional environment leads us to think in an enquiring. pages 194-196]). cutting us out of the supply chain). FS: Chapter 6.Strategy Analysis and Evaluation (SAE) Workbook applied to any individual business. For example. therefore. Individual reading: FS: Chapter 2. To see how this could be done. 38 . pages 29-41 describes in greater detail each of the ‘five forces’. 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. with brief applications in the Pharmaceutical and Football industries. we can investigate how one business might try to secure a competitive edge (or advantage) over its rivals. For example. and hopefully creative. you should do the FS reading recommended below. Common to these is the generation of strategic insight at the level of a single business.

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). Is it likely that the forces will change. For the industry as a whole in which your business operates.Strategy Analysis and Evaluation (SAE) Workbook Activity 3.5: Porter’s Five Forces analysis (Group task) 1). and if so how? 5). 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. 2). What are the key forces at work in the competitive environment of your business? 3). explain its ‘attractiveness’ in terms of Porter’s Five Forces.) 39 . What are the underlying forces in the macro-environment that are driving competitive forces? 4).

where more subtle classifications will be necessary. This suggests that there may be benefits from clustering users or customers into groups – or. age. Following from this is the question of which segment or segments your business could or should target. income. A more complete account of such possible differences and some illustrative examples are given in the recommended reading. But they also differ in terms of what resources and capabilities are required to successfully target them. they may concern quantities in which products are purchased. TSS: pages 250-252 40 . or gender. which discusses market segments and what customers value. Hence it is important to analyse the perceptions of value that different categories of customer have about the product. or they may relate to differences between customers in terms of their needs and wants. if you like. there may be substantial differences between users or customers. As the reading demonstrates. These differences may relate to user characteristics such as location. Within the market as a whole. the concept of a market will be sufficient for the purposes at hand. into market segments. But it may not suffice for other purposes. Individual reading: FS: Chapter 2: pages 46-51. Choosing an appropriate way (or ways) of segmenting a market is crucially important in business strategy.Strategy Analysis and Evaluation (SAE) Workbook Market segmentation For some purposes. there are several different ways in which a market could be segmented. Each of these market segments is likely to differ in terms of its attractiveness. 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. Once a basis for segmentation has been selected.

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.Strategy Analysis and Evaluation (SAE) Workbook Activity 3.) 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. 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.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. 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. or might target in the future? (We will be exploring the ideas of resources and competencies in some depth in the next chapter. What segments does your business currently target? Are there other segments that you think have value-adding potential for your business? If so. so do not attempt to do anything more here than just generate some preliminary ideas. certain segments rather than others? 41 .

you have been considering the environment within which your business carries out various forms of transactions. what has been your personal learning and insight that you have gained from: a) The issues raised from activities 3.7: Individual reflection and personal learning insights Recalling your level of knowledge and understanding at the outset of this chapter. 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.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. or businesses that are in your strategic group. for some purposes. influences and is influenced. However. 42 . 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 the fields within which it interacts. Appreciating this subtlety and complexity is important for what follows in the rest of this workbook.Strategy Analysis and Evaluation (SAE) Workbook Activity 3.2 to 3. 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. 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. You have seen that your competitors might include all other businesses operating in the same broadly defined market as you do.

Note that these characteristics might relate to the product itself. • • 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. Identifying the subsets of business operating within the same markets in terms of the different characteristics of the businesses. For example. if Ford selects a price-based strategy. For example Guinness is a global brand of beer.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. and we know the prices of the products offered by our business and by its competitors.) Evaluating the strengths and weaknesses of your competitors relative to your business in terms of those critical characteristics. not what suppliers think they value. another question that managers need to address is the extent to which they face similar competitors within their market. This is done by strategic group analysis. a sensible competitive strategy position for you to adopt also depends on what resources and competencies your competitors have. and so determine their purchasing behaviour. or they might relate to something else. 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. 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. Identifying those critical characteristics that are regarded by customers as being the most important. 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. We must be very careful here – what matters are which critical characteristics customers actually do value. 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. 2) If we can identify the competitive positions taken by our business and its competitors. But in most countries there are also local brewers who brew beer. 43 . Both operate in the same market but they are very different sorts of organisations following very different strategies. they might relate to the business offering it. this may help us to understand trade-offs between price and various critical characteristics. Most markets have different sorts of competitors within them following different sorts of strategies. (If you have access to such customers you might want to ask them. However.

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. global reach and size. pages 41-50 which provides further information on strategic groups and strategic group analysis. pages 50-51. FS: Chapter 2. and b) Influence the way they compete in markets. There is no right answer to this. Individual reading: FS: Chapter 2. So on this example alone we have distinguishing characteristics that will affect the way the organisations compete.Strategy Analysis and Evaluation (SAE) Workbook Strategic group analysis is usually undertaken by identifying the main characteristics of businesses which: a) Distinguished between them. Taking the example above: Guinness is a huge business. which provides a short discussion of the role of opportunities and threats in identifying possible strategic gaps. but thinking it through helps you consider the dynamics of competition within the market. 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. 44 . part of a conglomerate operating on a global scale.

of course have an impact on the market as a whole. These are only ideas. although organisations within different strategic groups may. 45 . With which organisations does your own organisation compete most directly? Hints: It is likely to be with organisations within the same strategic group. Use these characteristics to draw up different 2x2 matrices as shown in Illustration 2.8: 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. 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.Strategy Analysis and Evaluation (SAE) Workbook Activity 3. 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.4 in FS (pages 44-45) so as to identify different strategic groups. choose the ones that are most appropriate to the competitors in your market. 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.

The use of strategic group analysis for option generation will be taken up in the final chapter in this workbook. labelled A. B’s strengths better match customers’ value priorities. and the associated discussion.Strategy Analysis and Evaluation (SAE) Workbook Activity 3. 46 . There are several uses we could make of this type of information. 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. This investigates perceptions of value by customers in one segment of the electrical engineering industry. Are there are any opportunities for future strategic development that are suggested by the strategic group map. your Five Forces Analysis. then it is likely that the mobility barriers between groups is likely to be very difficult. The five categories shown in the diagram are those seen as most important by customers. Competitor analysis It will be useful now to look at Exhibit 2. against these values that customer’s regard as being of most importance. So this suggests strategic gaps.7 on page 49 of FS. it is evident that the particular strengths that company A possesses are not those valued most highly by customers.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. so this is worth thinking about. For example. B and C. 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. which in turn might suggest future opportunities. The exhibit profiles three different providers. For example. it can provide insight into issues of strategic capability (which will be discussed in the next chapter). Hints: For example it could be that your PESTEL analysis. In contrast.

if any. This might generate insights into how sensitive price is to variations in the degree to which particular dimensions of customer value are satisfied.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. carry out a Competitor analysis along the lines of the example we discussed above. on perceived value by customers in the electrical engineering industry. 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.7 (page 49) in FS. 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. then. in the future? Do any of these changes suggest options that you might wish to consider at more length later? 47 . together with its associated discussion. Activity 3. or both. do you think that changes in the business environment – contextual. In that chapter. This is a question to which we shall return in the next chapter on Competitive Strategy. transactional. 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.9: Competitor analysis (Group task) Your current position: Select 2 or 3 of your major competitors. might affect who your competitors might be and how you will compete with them.

We ask that you reflect on the issues and insights that you have identified from your analysis. At this point we wish to highlight that this analysis should NOT be considered as stand alone items. 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? 48 . What conclusions do you draw with regard to the nature of competition? Try to identify the essence of the competitive game being played.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.8 to 3. Now it is time to ask how our business might attempt to outperform its competitors. Conclusion We have now thought about the business’s transactional environment.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. where we deal with Competitive Strategy. We ask that you consider these issues in the context of the value creating activities of your case study organisation.11: Individual reflection and personal learning Recalling your level of knowledge and understanding at the outset then considering Activities 3. Activity 3. This takes us on to the next chapter of the workbook. These value-creating activities were discussed in the previous chapter – you may wish to re-visit your earlier analysis.10. Do you see patterns or themes emerging? Activity 3.

feel free to do so. • 49 . above industry-average profitability. and continue to achieve above average performance over time in a changing environment. Learning objectives The objective of this chapter is to develop your understanding of competitive strategy.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. Your team’s brief is to do its best to explain how your chosen business case could achieve a sustainable competitive advantage. you will need to choose a framework that allows you to express a lot of complex ideas simply and concisely. To complete this chapter. your team is expected to produce a report that lays out. 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. however. (We say ‘search for’ as you will find that there is not. any guarantee that such a thing can actually be found). If. you would prefer to organise your overall findings in some other way. Guidance will be given at appropriate places about how your ideas can be expressed in that framework. the results of the competitive strategy analysis that you and your team have undertaken with respect to your chosen business. and cannot be. or could try to achieve. Please refer to the chapter of The Art of Strategic Conversation appended to this workbook. We suggest that you use the Business Idea for this purpose. As you work through these tasks. imaginatively and creatively in strategic analysis. To help you achieve this goal. in a wellstructured form. On completion of the chapter. This should contain an account of how that business achieves. To ensure that your report is well structured and communicates its ideas effectively. and you then apply them to your selected business. 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. ideas are explained and illustrated. select a framework that he or she thinks is a good basis for developing robust competitive strategy insights appreciate the value of thinking abstractly. we take you through a series of tasks that develop ideas and tools that should prove helpful to you.

Strategy Analysis and Evaluation (SAE) Workbook Organisation of Chapter 4 Strategic capability The offering Strategy Clock The business: Resources and capabilities Foundations for Competitive Strategy competitive strategy and competitive advantage Environmental analysis: Opportunities and threats Competitors Analysis Superior cost 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. such as the Business Idea SWOT analysis 50 . including the Strategy Clock Organising frameworks. 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.

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. how? c) Not all of the concepts highlighted in bold font in the questions listed above have universally accepted definitions and usages. 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. 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. if any. 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. It is important that you ascertain the meaning being used whenever you come across one of these words. if any. is that advantage threatened. others are raised here for the first time. 51 . and developing. 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. does your case organisation possess? How can it reinforce. think about the questions in an applied way: What distinctive competencies. First. b) These questions should be interpreted in two ways. 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. Some of these questions are ones you have already been thinking about in previous parts of this workbook. if so. competitive strategy. defend and sustain those it has? Can your case organisation develop any others and.

see the Appendix of this workbook. References to particular parts of these chapters. 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. you will find it useful to read the chapters as a whole. Recommended reading: TSS: Pages 242-254. The second requires that competencies are dedicated to. though. on the business idea of an organisation. 6. on the business idea. Therefore. To give you some 52 . and explore these ideas further. The Strategy Clock is also introduced as a useful way of thinking about competitive position. We then return to resources and competencies. the ability to play strategic games effectively is likely to be an important business competence. or configured so as to. the business must possess an appropriate strategic capability. Then we focus on each of the two dimensions used in the Strategy Clock: product price and differentiation. will be made as we go along. and value creation and competitive advantage.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. oligopoly and strategic competition. A sensible strategic position must have two further properties. on strategic capability and business level strategy. 8 and 10. This brings us to consider the resources and competencies of the business. it should be feasible given what competitors have chosen. on the search for added value and the costs of production. and to other readings. respectively. At some point. First. and so competitive strategy. BE: Chapters 5. to do. 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). it must ‘fit’ with the current state (and ideally the future state) of the business’s environment. Second. we ask you to use environmental analysis and competitor analysis as inputs to the strategy developing process. The competitors are involved in a ‘game’ of rivalry. We begin by looking at what the business brings to the market – its offering. In these circumstances. 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. SC: Chapter 3. Some markets have the particular property that they are dominated by a small number of competitors. pages 127-148. To be successful in using a particular strategic position. and are able.

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). this chapter in the workbook asks you to put all these matters together into a simple. It directs our attention to three classes of actor: your customers (both actual and potential) your business (and its competencies) your competitors. your offering cannot succeed unless it addresses. 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. deals with these questions. 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.Strategy Analysis and Evaluation (SAE) Workbook appreciation of the ideas involved. and on what your competitors are bringing to the market. therefore. organised framework – the Business Idea. the values that customers require 53 . We considered the first of these – and to a lesser extent the third – in the previous chapter. Finally.) Your first task. we introduce you to some elementary principles from the theory of games. Thinking about the business offering involves several questions: • • • Who are your customers? What services do they seek. and responds to. A good business idea should be able to summarise quickly and effectively how the business seeks to obtain a sustainable competitive advantage. on the terms on which it is being offered. We bring these together in the concept of the offering. Understanding these – and translating this understanding into actually providing customers with products that they value – is crucial to building strategic capability in an organisation.) 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). Clearly. (The concept of strategic capability is defined in Chapter 3 of FS. where we established the importance of understanding your customers.

Established positions of strength can quickly be eroded. But your offering is what your business brings to the market. It is possession of these that provides the basis for above average performance and. IBM and Compaq both sell computing hardware. while still generating added value for the business? One final point before you go on to the reading and the next individual task. and used to differentiate between providers. 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. (Can you think of examples?) This implies that thinking 54 . But what do customers want this hardware for? And which of the firms is better at providing what customers want. This last point is crucial: it is always sensible to think about your competencies relative to those of your rivals. the business’s internal competencies. There can be no guarantees that successful offerings can be maintained for long. they can be thought of as necessary or minimum conditions (or ‘qualifiers’) for successful participation in a particular market.2 in FS. Threshold product features are product features and performance standards all of which must be met by providers. 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’. at prices that are perceived as being reasonable. So it leads naturally to thinking about the following questions: • • • What are the resources. and customer values systems evolve and change in subtle ways. The offering brings together customer needs and wants. 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. terms are exemplified for the example from athletics. It should be clear from this that the offering is more than merely a marketing concept. page 62 where these. critical success factors are features that are particularly valued by customers. and how well you can bring these two together compared with your rivals. rents. are they well suited to deliver the services that matter to customers?) But your offering must compete with the offerings of others. and related. Businesses compete in dynamic environments – technologies change.Strategy Analysis and Evaluation (SAE) Workbook and rate highly. 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’. You may find it useful to look now at Exhibit 3. In contrast. therefore.

your customers – we consider your business competencies and your competitors later. see the Appendix of this workbook. This focuses on just one of the three sets of actors we have mentioned here. section 2. You should now work through the readings that follow. You should draw on the results of the tasks you undertook there as appropriate. on profit potential. which provides a discussion on understanding what customers value. Does anything here imply that your offering might need to change? 55 . in effect.4. Individual reading: FS: Chapter 2. imaginative way.4. you will tentatively integrate what you have learned so far before moving on to the next stage. pages 48-50.Strategy Analysis and Evaluation (SAE) Workbook continually about your offering. and then undertake the group task. Later parts of this chapter will. and in a forward-looking. In doing this. SC: Chapter 3. test whether this tentative integration stands up to the further analysis you will undertake in subsequent tasks. pages 127-148 Activity 4. consider whether and in what ways – the needs of your customers (actual and potential) may evolve in the future. Please note that what we are asking you to do in this task should draw on material you developed in the previous chapter. Do changing customer values suggest that you may need to change or adapt future offering? Using the results of your environmental analyses. is likely to pay dividends.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.

Something the business is doing allows it to achieve strong performance relative to other businesses in the industry.Strategy Analysis and Evaluation (SAE) Workbook The competitive position of your business – the Strategy Clock and Competitive Advantage In the previous activity. (Recall our earlier discussions on this matter in thinking about the organisation’s transactional environment. a matter of strategic choice. That offering is.) 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. A business strategy will comprise various things: a choice of position in the market. What is meant by competitive advantage? Simply performing well is not what we mean by competitive advantage. A major factor that affects this choice is whether a particular offering will generate a competitive advantage for the business. and a notion of organisational architecture and culture that will enable the strategy to be pursued effectively. Its chief value lies in forcing the manager to be clear about the fundamental basis of the advantage he or she seeks. In this section. The Strategy Clock is described and explained in Exhibit 6. That is. we introduced the idea of the business’s offering. This tool has several attractive qualities: it is simple. and it serves as a good foundation for deeper analysis of the foundations of competitive advantage. Looked at in this way. business strategy is about getting an edge over your rivals. 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. of course. we begin to apply one business strategy tool – the Strategy Clock. it brings together several important dimensions of strategy choice. A business might have a strong financial performance because it happens to belong to an industry that currently earns higher than average profits. that are greater than the benefits available from our competitors. Not surprisingly. a view about how the resources and competencies of the business can be organised so as to support the successful maintenance of that position. In doing so.2 and section 6. We start with the observation that value creation at the business unit level depends on: • • providing benefits to customers.2 of FS (pages 149-156). 56 . what are the foundations of competitive advantage? A method of trying to achieve a competitive advantage is a business strategy. it raises a number of fundamental questions. 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 the following task. this Strategy Clock is shown in Exhibit 6. section 6. 57 . we shall examine whether the resources and competencies of the business do provide a good foundation for that strategic position. You should be able to appreciate that these two dimensions capture the three determinants of value creation listed above. that exhibit uses ‘Perceived added value’ instead of ‘Perceived benefit’ and ‘Price’ instead of ‘Perceived price’. 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. 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. 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. Individual reading: FS: Chapter 6. With a slight variation of notation. The Strategy Clock illustrates a space that spans two dimensions: the perceived benefit that customers obtain from the product.Strategy Analysis and Evaluation (SAE) Workbook • or obtained at lower cost. which discusses bases of competitive advantage and the ‘Strategy Clock’.2. A successful competitive strategy is not. and cannot be only about selecting a position in the Strategy Clock space.2 in FS. Any position taken – and so any competitive strategy – can only be successful if it can be supported by the appropriate kind. business resources and competencies. Subsequently. 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. page 150. page 150) It is very important to be careful in how we use the Strategy Clock. and the customers’ perception of the price. pages 149-156.2 in FS. and quality of.

identify which competitive strategy position the business appears to have selected currently. the following questions may be useful: Is the current choice of strategic position clear? If it is clear. Let us now turn to consider these.1 to 4. explain why not. explain why it is. 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. In doing this. 58 . and if not. Are the firm’s competitors following the same strategy? Activity 4.Strategy Analysis and Evaluation (SAE) Workbook Activity 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. Try to justify and explain your answer.3: Individual reflection and personal learning insights Considering Activities 4.2.2: Competitive strategies and the Strategy Clock (Group task) Using the Strategy Clock framework.

page 71 for an example of competencies in the consumer goods business. But competencies have a wider meaning than just narrowly defined functional abilities. they are organisational processes. workforce. based on the way those terms are used in FS (see Exhibit 3. systems which give/generate awareness of customer needs. buildings. using accounting systems. Competencies are routines. They can refer to abilities that the business (or the wider organisation of which it is a part) may have.2 in FS. 59 . For both resources and competencies. Competencies can also be thought of as forms of ‘software’. Their special worth may be due to favourable position [such as a major waterfall for a hydroelectric generating business. Resources can be thought of as the necessary ‘raw material’ components of business activity. Many of the competencies that matter are functional in nature. They are acquired and accumulated through investment behaviour by organisations. but instead arise from particular ways in which the assemblage of resources as a whole has been put together (intentionally or unintentionally). They tend to be embodied not in individual persons or particular assets that the business hires or owns. 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). and so on. Some authors (such as John Kay in Foundations of Corporate Success) regard competencies as being derived from resources combined in special ways. statutory monopolies. such as the ability to innovate quickly and effectively. Resources also include intangibles such as managerial know-how. they refer to the abilities to carry out various business functions such as manufacturing. Once again. brand images and so on. or a city centre location for a bank] or special privilege [such as possession of patents. size of customer base. and abilities to do things. it is useful to draw a distinction between threshold and core forms. this makes clear the fundamental nature of competencies. processes. information processing hardware systems. and so on. organisational structures that allow the firm to be more responsive to changes in its environment. land.2 in FS. it is useful to give a preliminary definition for each. quality and skills levels of its workforce. inventory control. Core (or unique resources): Resources that form the foundation of a competitive advantage and that are hard to imitate. This generates the following four classes: Threshold resources Threshold competencies Core (or unique) resources Core competencies These concepts can be defined in various ways. However. Please refer to Illustration 3. The meanings we shall use will be explained as we go along. or exclusive franchise].Strategy Analysis and Evaluation (SAE) Workbook The resources available to a business include tangible items such as its capital equipment. behaviours.

you will notice that the usage of the various ideas in the strategy literature is not always consistent or uniform. But possession of threshold resources and competencies – or qualifiers if you like – is not a sufficient condition for success. Clearly. defined. It is imperative that hygiene problems are put right if the business is to have any chance of obtaining a competitive advantage. processes and abilities that underpin the meeting of critical success factors and also give competitive advantage. A necessary condition for business success is ‘getting the basics right’. Using the relay team racing analogy. Competencies • • Threshold competencies are activities. 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. Essence of success Resources and competencies are of crucial importance because they are the means by which competitive strategies can be supported and realised. Core competencies are activities. There you will see the variety of ways in which a set of closely related ideas are labelled. In particular. This is one way of thinking about threshold competencies and resources. What is of special interest to competitive strategy is which. of the competencies a business possesses are core competencies and so are unique or distinctive to that business. but these are not sufficient to give you a medal winning position. A related idea to inadequate resources is that of ‘hygiene factors’. 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. 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. if any. As you follow the reading for this task. outstanding business performance arises from the possession and exploitation of its core (or distinctive) competencies. certain threshold resources (basic speed and stamina) and competencies (baton changing) may allow you to enter the race. 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. They are the foundations of competitive advantage. The first type is a set of generic questions: • Which resources look to be critical to support a business’ competitive strategy? 60 . However. and used.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. To summarise this section. In this view. Chapter 10 in Business Economics briefly surveys several ‘classic’ works in this area. processes and abilities that underpin the meeting of threshold product features.

on distinctive competencies. does the business possess? How are these exploited to create value? Can the business develop its unique competencies further and if so. which introduces the concept of strategic capability. Individual reading: FS: Chapter 3. we ask you to consider what kinds of core competencies are required in order that the business can be successful in following that strategy. It implies that competencies your business may have. or what are. and discusses in greater detail critical success factors. the strategic importance of resources and competencies and core competencies. Activity 4. on value creation and sustainable competitive advantage.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. In an earlier task. though it could be very important to what follows in the next two chapters. SC: Chapter 3.2 61 . if any. pages 127-148. obtain a competitive advantage) in pursuing the competitive strategy you identified in Activity 4. It therefore begins to take us away from competitive (i. we asked you to identify which competitive strategy position the business appears to be pursuing currently. BE: Chapter 10. how? Can its existing unique competencies be exploited (‘leveraged’) in other ways? This last question has very profound implications. pages 193-204. However.Strategy Analysis and Evaluation (SAE) Workbook • • • How do business resources create competencies? What is. see the Appendix of this workbook.e. pages 60-83. In the task that follows. that is not a thread we shall ask you to take any further here. as a car producer may be exploitable in very different business contexts. business level) strategy into the area of corporate strategy. 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.

9 (Competitor analysis) in the previous chapter. That is. 62 . 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. searching for what (if anything) gives our business the ability to deliver these qualities in relatively strong ways. A. and how they support its ability to deliver those things that its customers value highly. we explore what characteristics of the offering seem to be important in generating that success. Consider the following graphic. page 49 and your answers to Activity 3. Mapping competencies. We begin by establishing a criterion of success. It involves what could be called ‘mapping competencies’.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. and so which are important to competitive advantage for the business. We now explore each of these characteristics in turn. represented by the central oval in the picture. we show you one way in which you might try to explore what core competencies a business possesses. But it is important to be clear about what these competencies are.7 in FS. you may find it useful to re-visit the Strategy Canvas. we are looking for the business’s core competencies. To do this. Next. In this task (which you are asked to do with your team). 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. Exhibit 2. B and C denote three characteristics that are highly valued by customers.

An example of how this might be done is provided in Exhibit 2 above. as you are working on a case organisation about which you have limited information. Note that there may be several linked steps that have to be gone through before we succeed in pinning down the competencies.Strategy Analysis and Evaluation (SAE) Workbook Activity System Map Exhibit 2: An Activity system map (source: Johnson. London: Pearson Education. 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. G. R. Furthermore. of you Clearly. It may even be entirely unknown to the senior management. However. or be totally unplanned! What we expect. and because you are inevitably an outsider without privy to inside information. and Whittington. 7th ed. (2005) Exploring Corporate Strategy. note that what could turn out to be very important may at first sight look rather mundane. Finally. K. Scholes. and do not expect. we may discover connections and linkages that cut across different product characteristics. 63 . you will be limited in the amount of detail that you will be able to achieve in your analysis.

what product characteristics are likely to be critical if that position is to be successful. core competencies and competitors analysis. 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. and what kind of core competencies are likely to be necessary to underpin that competitive strategy. 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. you have tried to identify what strategic position the business is currently taking. what types of investment activity could reinforce its competencies? Core competencies. In doing this. 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. competitive strategy and competitive advantage Having now come to grips with the ideas of competitive advantage. 64 .Strategy Analysis and Evaluation (SAE) Workbook Activity 4. strategic position. 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. Before meeting your fellow team members to undertake this task. it is a good time to continue working with other members of your team.5: Mapping the core competencies of your business (Individual preparatory and/or group task) Current position of the business: In previous tasks. you should review your findings so far. 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.

From the customers point of view business costs are irrelevant.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. Indeed. Adopting such positions is tantamount to believing that your business can attain a competitive advantage over its rivals through superior cost performance. 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). what matters to them is price (relative to their perception of the value of the product). Activity 4.Strategy Analysis and Evaluation (SAE) Workbook Reading SC: Chapter 3 (see the Appendix to this workbook). Michael Porter used the phrase ‘cost leadership’ when thinking about low price based competition. Activity 4.6. However.7: Individual reflection and personal learning insights Recalling your level of knowledge and understanding at the outset then considering Activities 4.4 to 4. A price-based 65 . we need to be a little careful here.

A firm has a (costrelated) hygiene problem if it does not attain the lowest cost structure for what it is doing given currently codified technologies and best practices. 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). Indeed. thereby restricting its sales volume increases. any business should endeavour to keep its costs as low as is reasonably possible. If so. A sustainable cost advantage requires that you have some special or unique quality that generates above normal returns. a price-based strategy may induce retaliation in kind from its rivals. A qualifier is a minimum condition to enter the competitive race. any firm with serious – and avoidable – cost overruns must address these hygiene problems. Furthermore. and a firm might seek to gain a competitive advantage over its rivals by charging lower prices.Strategy Analysis and Evaluation (SAE) Workbook strategy entails some belief that customers are highly price sensitive. analysis may suggest possible ways in which it could be achieved. economies of scale. that if a price-based approach is taken to competitive strategy. and that customer demand is sufficiently responsive to that perception. Nevertheless. So if a firm intends to achieve high profits on a sustainable basis from a price-based strategy. It is a matter of doing more than just ‘best practice’. ‘Getting costs right’ is largely about qualifiers (and the absence of hygiene factors). you do not stand any chance of success without having satisfied qualification standards. Clearly. and having got rid of any hygiene problems. But this is not sufficient for attaining a competitive advantage. it must be confident that it can outperform its rivals in cost terms (and so enjoy margins that others cannot match). It may be possible to outperform others in cost terms. It seems reasonable to insist. supported by its distinctive cost performance. The reading in ‘Business Economics’ suggests several ways in which a firm might obtain a cost advantage over others. This is likely to be much more difficult to attain than is often thought. then superior cost performance becomes a strategic issue. even where others are doing as well as they can in terms of current best practice. In going through the readings recommended below. 66 • . because competitive pressures are likely to mean that all competitors will be struggling to get their cost basis right. Is this possible and if so how? Irrespective of its strategic choice. given the scale and composition of activities it has chosen to undertake. But what matters to the business is the amount of added value it generates for itself. and so selling at lower prices than others can generate considerable extra sales volumes and sales value. managers should be able to provide evidence that price is seen by customers as being beneficially lower than those of the competitors. Selling at lower prices may generate more sales volume. unless the business does ‘get its costs right’ it will be unable to compete effectively in the long term. therefore. but it also compresses margins.

This brings corporate questions into the story. Economies of scope is also a ‘size’ matter. 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. 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. but with a subtle difference. economies of scale are cost-savings that accrue from doing one activity on a large scale. it is also important to be clear about what you DON’T need to do. But if producing at a large scale is combined with doing so first. the previous exercise on competence mapping should be helpful. and synergies. This can suggest where costs savings are possible that do not threaten the business’s competitive strategy. which others find difficult to imitate or acquire. Finally. It is unlikely that size alone can give a business a competitive advantage. A scope economy arises when activities are done at lower cost when combined rather than being done separately. and we explore these fully later. and firstmover advantages. note that in developing appropriate business strategy.Strategy Analysis and Evaluation (SAE) Workbook • • • economies of scope. For this. Bearing in mind what has come in earlier sections of this workbook. as this option is available to others too. learning-by doing. Thinking about scope leads us to consider possible synergies between activities. By identifying what your core competencies are. then real distinctiveness becomes possible. or if learning/experience can be accumulated more quickly than rivals succeed in doing. For many successful firms. it is in this area that one is likely to find the explanation of their superior performance. you may be able to identify which processes do not contribute to competitive advantage. the learning (or experience) curve. and it invites us to consider whether gains are possible from stretching or leveraging competencies from one use into others. As the reading explains. 67 .

Strategy Analysis and Evaluation (SAE) Workbook Individual reading: FS: Chapter 3. and Chapter 5. Activity 4. pages 63-67. and so could be deleted? (Hint: You may find some useful and relevant information here from the earlier Competence Mapping exercise. section 3.) Sustaining existing advantages: Investigate the extent to which the cost advantages you have identified are sustainable. Chapter 6. page 137. pages 80-109 on the search for added value and the costs of production. pages 74-79. on costs and market transactions. 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 68 . pages 157-162.3 on cost efficiency. BE: Chapter 4. (That is.5. discusses the sustaining of competitive advantage and in part relates this to the value chain concept. pages 65-67). they are not easily replicable by others) If the advantages are not replicable.1. explains the concept of the ‘value chain’ and the relationship to costs and profits (also see section 3. on cost leadership.3. SC: Chapter 3. section 6. see the Appendix of this workbook.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.

a business might aim to make its offering different (in a way that is attractive to customers). routes 3. But doing so will usually incur additional costs. more generally. remain unchanged. assuming that the prices charged by competitors. Put another way. [Technically speaking. of course. If the business is to outperform others. on two things: 1.Strategy Analysis and Evaluation (SAE) Workbook Obtaining differentiation advantages The Strategy Clock has shown us that rather than trying to make its product cheaper. In terms of the Strategy Clock framework. or. 69 . This suggests that differentiation may come not only from the more obvious forms of product innovation. That is.] 2. (Try and think of some examples of businesses where differentiation appears to have been successful in adding value. reliability. in turn. the price premium that consumers will pay should exceed the additional costs of the differentiation. and for which they are willing to pay a premium price. and others where it has not). 4 and 5 are differentiation strategies. 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. Elasticity of demand for the product of one business depends. the extent to which customers regard the individual business’s product as being substitutable by products of other businesses. and all other relevant factors. Note that differentiation relates to the product as a whole. [Technically speaking. Such superiority might come from it being faster. There is. 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. convenience of using with other products etc can all matter. more appealing. So after-sales service. not just its direct or physical characteristics. the price elasticity of demand for the product type in the market as a whole. 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 with intermediate and final buyers.] 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. or something perceived as being significantly different. no guarantee that this will be the case. but also from relationships the business develops with suppliers. but not necessarily. from having any property that melds well with final consumer value systems or the needs and preferences of other buyers. it will depend on the business-specific price elasticity of demand. newer. It is almost always possible to produce something of higher quality than your competitors. Does this generate a competitive advantage for the business? Maybe it will. 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.

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. Activity 4. you saw that successful differentiation strategies depend on customer perceptions of high value-for-money. Now. see the Appendix to this workbook. SC: Chapter 3. Differentiation advantages 70 . pages 149-156 (the Strategy Clock). And it is likely to be quite difficult to prevent this happening. BE: Chapter 6. and the competencies of your case organisation identify ways in which the business might be able to pursue a differentiation strategy. together with previous information you have found about critical characteristics from the customers’ point of view. But there are several reasons why we might expect value-for-money advantages to be transitory. good ideas tend to become ‘commoditised’ or standardised products. 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. go through the recommended reading about differentiation strategies given below. and pages 159-162 (which discuss sustaining differentiation based advantage. So with the passage of time. and then undertake Activity 4. Sustaining differentiation advantages In the previous activity.9: Obtaining differentiation advantages (Group task) Using the concepts discussed in this section of the chapter. introducing the offering. above).9 below. pages 130-131. including a discussion of lock-in). pages 125-127 and elasticity of demand pages 38-46. The two main reasons are to do with imitation and innovation. Individual reading: FS: Chapter 6.Strategy Analysis and Evaluation (SAE) Workbook So. for example. A good idea – or more precisely a good idea that generates commercial success – is a target for others to imitate or replicate. 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.

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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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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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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actions by players in hyper environments tend to be self-reinforcing. Turbulence then amplifies in the shared field. the social view claims. According to them. Best paper 2000). meaning the cost of cleaning up the river to what it would have been is borne by outside parties. takes the position that hypercompetition is a shared social phenomenon that if capitalized upon for only individual benefit would be too adventurous. With efforts to externalize costs.. surprise and agility. 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. First. hyper environment “is characterized by two key properties. Successful triage in such turbulent conditions serves as a temporary. 1 1 "Externalities could be understood with an example. E. however. would lead to adverse environmental and ecological consequences. Second. they claim. which can become a selfreinforcing causal loop. For D’Aveni the way to face hyper competition is to become faster than the competitors and upstage them with speed. or a self-correcting causal loop. negative-feedback process that dampens turbulence. For social theorists such as Selsky and Goes. Cooperation.g. In effect. often outside a firm’s (or all of an industry’s firms’) strategic scope." 74 . would “cohere the fragmented parts”. Let us say a company pollutes a river through its affluent discharge and it does not have to pay for its clean-up. Naturally a call for more competition would be replaced by one for cooperation and joint-action. These are negative feedback processes. the fiercely competitive approach. viz. Eliminating those brakes introduces a positive feedback process into an industry’s competitive dynamics. emergent structural effects result from the build up of many individual instances of trying to externalize costs. something that industry players would like to avoid.” This view is different from that of D’ Aveni. the firm is imposing a long-term cost to the entire industry or it is externalising the cost. These effects tend to lodge in the larger field of action. in hypercompetition the “mutual understandings” between competitors that act as brakes to keep the competitive system in dynamic equilibrium break down (Barney. this. in turn. 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. 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. In such a case the company externalizes the cost.. would adversely impact everyone in the industry. In the same way. creating new instabilities. hypercompetition may drive companies to take extreme steps such as cost cutting that may compromise on product safety. 1986). the successful firms in such circumstances would therefore tend to foster shared values among the participants. Academy of Management Proceeding.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”. stimulation of positive feedback processes in narrow fields of action that (2) produce emergent structural effects in larger fields of action. The latter view.

in others there is a relatively small number of rivals. Alternatively. (See BE. the previous Activities in this workbook have given you some idea about how to address competitive strategy questions of this kind. (See BE. the behaviour of each of them is interdependent with 75 . and so each is likely to take the possible responses of others into account in determining its own actions. Chapter 6).12: Sustaining differentiation advantages outpacing and hypercompetition (Individual preparation and/or group task) Does your business. the industry is dominated by a small number of key players. or market segment. while there may be many businesses in total. In these circumstances. 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. Why does this matter? Think back to our earlier discussions about the Strategy Clock and competitors analysis. what competitive position would be sensible for us to take? Suppose that your competitors do not react to actions or positions that you take. However. In that case.Strategy Analysis and Evaluation (SAE) Workbook Activity 4. 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. The actions of each affect the others. for your (or any other) business to sustain a differentiation-based competitive advantage? Rivalry and strategising In some industries. When there are a small number of businesses contesting a market. There we invited you to think about questions like: Given knowledge about the positions taken by our competitors. businesses are strategically interdependent. Chapter 8). or do your competitors. there are so many individual competing businesses that each individual business is analogous to one drop of water in a large ocean. in the face of hypercompetition or time-based competition. or on the industry in aggregate. Its behaviour has no significant impact on any others.

Should one soap powder producer advertise heavily or not? Does this depend on what others do? Or more precisely. In the former. does the payoff to your firm of each option (Advertise Heavily. and sometimes agreeing how to divide the spoils. There is a huge literature – known as game theory – which has emerged in the study of strategic games. doing the best they can. Whether or not you are conscious of this. and more extensively. In this workbook. acting in concert to maximise joint returns. we do not explore cooperative games any further here. There are many types of business decisions that have been explored using game theory.2 and 8. Nevertheless they still operate individualistically. Think about the sorts of situations where game theory might be relevant.Strategy Analysis and Evaluation (SAE) Workbook the behaviour of others. and what they do affects you. reference below.3 in BE. John Kay in Foundations of Corporate Success makes a convincing case that cooperation is a key determinant of business success. or Do Not Advertise Heavily) depend on what option the other player(s) select? If it does. we would expect some form of reaction to any significant changes you make. contravening national or international competition legislation. Cooperative games are often illegal. players are aware of their interdependence with others. (See sections 8. and so realise that the net rewards (or ‘payoffs’) from any choice will depend on what others choose. 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. you are inevitably involved in playing a ‘strategic game’. Much of this is complex and mathematical. non-technical. What interests us here is that the (successful) playing of a strategic ‘game’ may allow one business to attain a competitive advantage over others. we shall focus on just one issue that game theory can shed some light on: pricing policy. In the second case – cooperative games – players collude (or cooperate). Here are some examples: • • • • • the potential benefits to be gained by co-operation with ones rivals pricing rivalry: price leadership. 76 . Because of this. We can do no more here than touch the tip of the iceberg. 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. pages 154-171). and directed at a business audience. It is up to you to take your additional reading as far as you feel is useful. What you do affects them. But note that many forms of cooperative behaviour are legal. Indeed. analysed by Dixit and Nalebuff (1991). So in general. Approaches to game theory fall into two general classes: noncooperative and cooperative games. given their expectations of what others will do. This game is also. although the additional readings we give below are simple.

You might like to enquire whether the outcome would be different if you and your rival were allowed to (or were able to collude). DON’T CUT) are set out at the left of the two rows. What matters here are the relative sizes of the payoffs. no change from the present) if they both choose Don’t Cut. and so payoffs to each are zero (i. it is said to be a dominant strategy (and game theory predicts that dominant strategies will be chosen where they exist). 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). Considering a major choice that a business might make: whether or not to cut its price. The second number in each cell is the payoff to your rival. we deal with the case where there is just one rival.0 Cut price Don’t cut price -2. ask whether you have one choice which is better the other irrespective of what the other player chooses to do. The choices open to the rival (also CUT. – 2 -4. even though it is not collectively rational. To keep things simple. DON’T CUT) are set out at the top of the two columns. or some friends or family and see what comes out of this. This is the individually rational thing to do. The choices open to the business (CUT. One might predict that if they did collude. assuming it is played non-cooperatively? Try playing it once with each member of your team. Cutting price satisfies this criterion. would you be able to do any better by cheating and actually cutting price despite the agreement? Or even if you behaved honourably. Printed below is one possible payoff matrix for this game. We also assume that the game is played simultaneously (both players have to make their decisions at the same time.e. Game theory predicts that both players will choose to Cut Price. The first number in each cell is the payoff to your business. what would happen if your rival behaved dishonourably? Would that affect your choice? 77 . To see why it is individually rational to cut price.Strategy Analysis and Evaluation (SAE) Workbook The illustration that follows uses some elementary game theory. – 4 0. both would agree to not cut price. 8 What outcome would we expect from this game. We have assumed here that both businesses not cutting price is the ‘status quo’. But would that agreement be stable? If you did make an agreement with your rival. (Compare the outcomes of both cutting with both not cutting). This can be conceptualised as a fictitious rival consisting of all the business rivals acting as if they were a single player. Note that the absolute value of the payoffs does not matter. Again for simplicity. we will make this a simple binary choice – CUT (PRICE) or DON’T CUT (PRICE). Your competitor Cut price Your business Don’t cut price 8. The numbers in the four cells of the matrix refer to the net payoff to each firm for each configuration of choices.

B. which discusses competition and collaboration. Game theory is fascinating and insightful. and Nalebuff. and undertaken much preliminary analysis of that information.. and 163-171 on strategic competition. A. 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. We give below some ideas about easy further reading that you might pursue if you wish to follow up on this topic. Additional reading: To see some examples of game theory in action. 78 .M. and Brandenburger. (1991) Thinking Strategically: The Competitive edge in Business. we also recommend the following: Dixit. London. J. BE: Chapter 8. Progress report At this point in your study of competitive strategy. pages 163-1645. Harper Collins.J.Strategy Analysis and Evaluation (SAE) Workbook There is not space in this workbook – and you do not have enough time – to take these matters any further. Nalebuff. you have accumulated a vast amount of information.J. A. (1993) Foundations of Corporate Success. Politics and Everyday Life. B. pages 150-155. (1997) Co-opetition. Individual reading: FS: Chapter 6. Kay.

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? 79 . if any? Sustainability: Is your case organisation’s current competitive advantage (if any exists) sustainable? If so.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.Strategy Analysis and Evaluation (SAE) Workbook Activity 4. what competitive advantage do you think your case organisation has. what is the basis of that sustainability? If not.

and provide them with the services they want at a reasonable price. they enable the business to satisfy or reward the various stakeholders in appropriate ways.Strategy Analysis and Evaluation (SAE) Workbook Business idea What we want you to do now is put all the ideas you have thought about together into a single. The diagram uses the term ‘Entrepreneurial invention’ to capture this idea. supported by distinctive competencies (also generated by entrepreneurial invention). Second. You know from earlier tasks that the business can only achieve a competitive advantage if it has built some core (or distinctive) competencies. then by definition it will have found some way of delivering a unique offering – it will have some critical success factors. In the final analysis. and at more length in the further readings. Hence the diagram is structured to show that the offering (entrepreneurial invention). which shows the generic form of the Business Idea expressed as a loop. that means value and wealth creation in the business. The particular framework that we call the ‘Business Idea’ is briefly explained below. A virtuous cycle is thus possible – as the level of strength of any element in the loop increases. protect and sustain the business’s distinctive competencies. Look at Figure 8 on page 137 of the Appendix. and consistent account of how the business can attain a competitive advantage. Starting at the top right. so it strengthens or increases other elements too. 80 . Once again. the other element of the linkage changes in the same direction. This adopts a simple systems approach. What you should be aiming for in this team task is to produce a forward-looking Business Idea. But. of course. creates a competitive advantage. consisting of a set of linkages all of which show positive linkages. First. If the business does actually have a competitive advantage. So we have here a single loop. The reason why we ask you to use this approach is that it forces you to give a convincing. we ask you to do this as a team (although you may find it useful to work through this task individually first). the outcome of a competitive advantage is outstanding (or supernormal) results. the diagram begins with the offering: the business must understand its customers. results generate the means to accumulate resources in ways that further enhance. 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. 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’. but in a very simple way. The entrepreneurial invention also applies here: the business may have found a special way of using and combining its resources to generate distinctive competencies. organised framework. 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. These results are important for two kinds of reasons.

consistent way. and well-supported competitive strategy. designed to reinforce and strengthen distinctive competencies. note that the Business Idea as we have described it is cumulatively reinforcing. enhance or stretch its resource base? A fuller explanation of the contents of the boxes and their linkages. what is its competitive strategy)? How does pursuit of this competitive strategy generate value for the business.Strategy Analysis and Evaluation (SAE) Workbook The systems theory part of all this is not essential. 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. Those competencies are not things acquired once and for all. Implicit in here is an emphasis on sustainability. But by the same token. Finally. This way of putting ideas together becomes of most use when it is used to look forward. if you need it. and allow it to build up. The results of successful business performance provide funds for investment.e. 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. well designed. This should alert us to an everpresent possibility: business failure can escalate into a cycle of decline unless it is transformed by a new. 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. This is seen in terms of continual investments in resources. a positive feedback system can also exhibit cumulative collapse if things go spiralling downwards. protect and sustain distinctive competencies? 81 . They are being regenerated continuously. and which shows that success can be self-reinforcing (although there may be limits to this). attached as an Appendix to this workbook. the organisation can go from strength to strength. is given in the SC Chapter 3. In summary. What matters is that we have a framework here which allows you to write down all your ideas in a simple. if these are made in resources critical to the businesses distinctive competencies.

pages 136-148. Hints: 1. What can it do to beat you? Critically reassess what is really distinctive about your business. that leads to the very difficult question of how businesses have to then operate. see the Appendix of this workbook. or are they not sustainable in the long run? 82 . Your ‘business idea’ should be able to communicate quickly and clearly the basis of the businesses competitive strategy. 3. The diagram should be supported by a brief explanatory commentary. adapting as you see fit the generic form shown above (and explained and illustrated at more length in the book Scenarios Chapter 3 . Activity 4. How does it. protect its advantages. Is your business idea robust to what your rivals are doing or considering doing.see the Appendix to this workbook). 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. If. asking the following questions: a) Does the business look attractive given environmental conditions. Try and put as much emphasis as possible on the sustainability of the business idea. and how they might react to any moves you make? 4. which resources are critical for the business and what you believe are its distinctive competencies. or could it. 2. despite your best efforts. In doing so pay particular attention to the customers needs being satisfied. draw a Business Idea diagram for your chosen business.Strategy Analysis and Evaluation (SAE) Workbook Another important use of the business idea is to evaluate the current competitive strategy of the organisation. you come to the conclusion that competitive advantages cannot be sustained. Adopt the perspective of a competitor. on the systemic structure of the business idea.14: Business idea (Group task) From your investigations to date.

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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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 multibusiness 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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Organisation of Chapter 5

Rationale of Corporate parent

Corporate strategy

Parent as adding value

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: what is the role of the corporate level of organisations? what is meant by corporate level strategy? what is meant by the corporate parent? 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? 1. 2. 3. 4.

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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the following reading will be useful. Individual preparatory reading: In this chapter. The corporate parent Most of the concerns so far in the course have been to do with business level strategy and. Shareholders and investors will be concerned because the valueadding capacity of the corporate centre will influence the overall value or potential growth of the corporation and the businesses within it. BE: Chapter 11. greater than competition. On the other hand. based on unique or difficult to imitate resources and competencies. if those levels of management were able to add further to the value created by businesses. on the basis of meeting customer needs and expectations. Or. again. the importance of competitive strategy to achieve competitive advantage. on the scope of the firm and acquisitions. then their role would presumably be welcomed. this would be useful. and to what extent. or it could be a case study which covers the sort of ground required to deal with this topic. 86 • . it could be a well-known organisation for which you can obtain published data. This could be the organisation that you work for. Indeed the business you are studying for SAE may well be part of just such a corporation. in particular. could be diminishing these. If this is not so you should choose a multi-business business to examine. which is creating value. 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. are levels above that business able to add value to that created by the business. The underlying theme has been to do with the importance of generating value by achieving advantage over competition so as to generate rents. Executives at that level will not be happy if levels of management above them subsequently diminish the value they are creating. how. FS: Chapters 7 and 8 on corporate level and international strategy. More specific guidance on reading will be given later. So the successful business is one. then why is there a need for levels above that business? Or more particularly.Strategy Analysis and Evaluation (SAE) Workbook purposes of this section it is probably helpful to consider a ‘multibusiness business’ that has a corporate centre (or headquarters) and separate divisions and/or businesses with their own management teams. If this is so. and a good deal of attention has been paid to the particular capabilities and competencies of business that might allow them to do this. 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.

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. For example a proposal by a business to diversify may affect the extent and nature of the corporate portfolio. There is another important reason why levels above the business level are important. Be careful here. the strategy it follows. A key question you should consider is what is meant by the corporate parent. please check that you are confident that you can obtain adequate information to address the sorts of questions that will be raised. since they are not in direct relationship with customers or experiencing direct competition for customers. In other words divisional managers are concerned with multiples of businesses. which businesses they invest in or disinvest from are important economic factors for whole regions or even countries. then theoretically. all levels above that constitute the corporate parent.Strategy Analysis and Evaluation (SAE) Workbook • However. If this is the level at which value creation really takes place. have a concern about such matters but will have corporate level responsibilities and concerns too. In this sense they may be regarded as part of the corporate parent for two reasons: 87 . Some of the multibusiness corporations that exist play a major role in the well being of whole economies: so how they conduct themselves. of course. how it is managed. the structural form it take. As suggested above. In some cases. You should begin this activity by doing some basic reading that introduces you to these ideas. they are also concerned with managing across those businesses. Whilst they will be concerned with competitive strategy within those businesses. for example. All this assumes an understanding of what is meant by a multibusiness corporation. it is possible to break down markets (e. a corporate parent and how such corporate centres may add or destroy value. Following your reading on this you should consider what parts of the corporation you are examining constitute the corporate parent. 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. 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. For many corporations this divide will take place at the divisional level.g. Further decisions (or at least strategic proposals) at the business level may affect the corporate level. Above that level executives will. at least. in terms of market segments) to a fine level of specificity. Decisions at that level may affect what a business does. 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. a corporate centre. there is an even bigger issue. This raises some conceptual difficulties because for many businesses. or indeed who owns it and whether it continues to exist. and in turn how the corporation as a whole is seen (for example. it might make sense to consider each individual customer as a separate market segment. by investors).

in particular in terms of how they expect to create value through their own activities. the executives at corporate level. they are a cost to those businesses and will diminish the value created by them. 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. and quite possibly some detective work to identify what you think the corporate rationale is. Consider how your description of the corporate centre relates to the concept of a ‘corporate parent’. in the absence of adding value to the businesses within their division. If a corporation has some public declaration of its corporate rationale. 2. pages 187-191.Strategy Analysis and Evaluation (SAE) Workbook 1. there are many instances of corporations that do not publicly state such a rationale. 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.1 Individual preparatory task Read FS: Chapter 7 section 7. it may not be stated in exactly the same way as your text or readings will explain it. 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. Identify on this chart what you mean by the corporate centre. Then try to identify the fit between what corporations say they are trying to do. they have a responsibility for a multi-business entity. Begin by doing the reading that explains different corporate rationales.4.1. a discussion on whether the corporate parent is adding or destroying value of the business. On the other hand. 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 any event it is likely that you will have to do some interpretation of statements made by corporations. In other words there must be some rationale for the activities of the corporate parent. Activity 5. Now draw an organisational chart representing the different levels in the corporation and showing the different divisions and businesses where appropriate. This is the theme of this activity. and what the evidence is that they have done. How do these explanations or histories fit with the conceptual explanations provided? 88 .

In other words are the businesses related to each other and how? Often this has been considered in terms of. The nature and extent of diversity of those businesses. What is it? This question can be addressed in different ways: 1.4. Presumably the businesses within a corporation are not chosen at random. Michael Porter’s conclusions on diversification. this may also be considered in terms of the competencies that they have in common. 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. FS: section 7. So for example. relatedness markets in which they operate or technologies that they have. There should be some logic to the choice. In particular. However. 89 .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. is there any apparent link between the nature of the businesses within the portfolio? Conventionally this is thought of in terms of relatedness. for example. from his paper From Competitive Advantage to Corporate Strategy. this activity is designed to encourage you to consider how diverse it is and why.5. page 191.Strategy Analysis and Evaluation (SAE) Workbook Individual reading: BE: 209-213. So in terms of competencies they may be considered as unrelated. pages 187-191 and in particular Exhibit 7. Activity 5.

Another way of thinking about this is to ask why. 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. in turn. if relatedness between businesses is useful. 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. 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. There are different ways of thinking about the logics of portfolios.2 and 7. There are many organisations that now are working in joint ventures or in network arrangements for mutual benefits. What is the fit with the corporate rationale of the parent? As emphasised throughout the whole of this section. then is: 2. 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. on diversification. So you need to consider the ways in which the mix of businesses makes sense in terms of the logic of the portfolio and. on strategic directions. this necessarily needs a corporate parent to broker it. and therefore the likelihood of them being able to cope with very diverse sets of businesses is low. BE: Chapter 11.Strategy Analysis and Evaluation (SAE) Workbook The key question here. For example. 90 . so that you can consider these in relation to these questions. pages 205-209. pages 173-187. sections 7. in terms of the corporate rationale of the parent. if the corporate centre is aiming to run the businesses at arms length. Different ways of considering portfolios in terms of matrices are provided in the readings. Individual reading: FS: Chapter 7. On the other hand. then greater diversity might be possible.3. there needs to be a consideration of the extent to which there is a fit between the various questions being considered. then it is important that they understand those businesses.

However. 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. b) Are these businesses related or unrelated? If related.e. and therefore would be more about a parental development rationale. d) the competencies that can be enhanced by the corporate centre? Clearly c) above could. are there mutually advantageous related competencies across a portfolio of business?).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.Strategy Analysis and Evaluation (SAE) Workbook Activity 5. consider the bases of competitive advantage you will have identified for your business (if you are examining one) in the previous chapter. 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 91 . be relevant in relatedness across businesses and therefore be concerned for the achievement of synergy. on what bases? Note: there are many different bases of relatedness that are possible. whereas d) would be more about how the parent can help the business. 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. conceivably.

Obviously the two are interlinked. look back over the work you have done and consider the corporation in comparison with others of a similar type. So considering both levels is important. 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.g. the logic of the portfolio and the means of corporate control. For example. However.3. that notwithstanding such bases of relatedness. two factors would seem to matter in particular: 1. So if it is seeking to do so.Strategy Analysis and Evaluation (SAE) Workbook corporations. A great deal of the rest of this course has been concerned with business level strategy. 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. in terms of understanding. a very large portfolio may mean it is difficult to manage from the centre (e. 2. So in this activity. 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.3 on diversification and performance. the size of the portfolio is manageable. Links backwards and forward This chapter has required you to look at corporate level strategy. that there is a basis of relatedness which executives from the corporate centre can understand. in turn business level strategy may be influenced by corporate level strategy. Each team member must also take responsibility for one other organisation.4. pages 204-217. management time and management cost). 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). if there is a pattern in those findings. on international strategy. • Individual reading: FS: Chapter 7. even if relatedness is present. Issues of corporate strategy also raise matters of corporate governance and the purpose of the corporation: a central question is: how is the 92 . the extent and nature of diversity. section 7. However this depends on whether the corporation can understand those businesses sufficiently to add value. on diversification. Your reading will explain that the results of this are somewhat mixed and equivocal. Corporate level strategy is informed by business level strategy. BE: pages 212-213.1-8. pages 186-187 and sections 8.

So. might the corporate centre place on business level strategic decisions? Activity 5. how many levels of divisions there are. In turn corporate level strategy will influence the structure and nature of management within the corporation. for example. if any.) There is also a direct link between issues of corporate rationale.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? 93 .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.Strategy Analysis and Evaluation (SAE) Workbook strategy seeking to create value and for whom? (Worth looking back at Chapter 2. and how control is exercised throughout that corporation will all be related to corporate level strategy. whether the corporation is divisionalised and on what basis. Activity 5. diversity and portfolio logic and policy as mergers and acquisitions – and therefore strategy options available to firms.

Identified a range of strategic options. again using a variety of frameworks and concepts. The first level would be about organisational purpose. you will be required to constantly manage the complexity of the options that you generate. 94 . Hints As you work through this chapter of SAE. To manage this complexity. we would ask that you reflect on the usefulness of that approach for the world of practice in the future. Evaluated these strategic options. together with the rationale behind a particular approach. Identified any boundaries or constraints on strategic options that might be considered. Learning objectives The objective of this chapter is to develop your understanding and approach to option generation and evaluation. and use the approach to help you to begin to understand the nature and implications of your options. 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. It may be helpful for you to address options at two levels. we would suggest that you develop a conceptualisation of these options. Considered if these are appropriate at the business or corporate levels. On completion of this section it is expected that you will have: • • • • • • • Considered the key issues arising from your previous analysis. The intention is to provide you with a wide ranging and diverse portfolio of approaches to strategic option generation and evaluation. for example Ansoff’s Matrix.Strategy Analysis and Evaluation (SAE) Workbook 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. 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. you may wish to consider 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. For example. using the various approaches. Identified and recommended which of those strategic options the organisation should follow. The second level would be at thinking through the implications of options. and to determine which of these it should follow.

For example. To move beyond the generation of such lists requires students to carefully consider potential options using the above guidance. 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. 1st order options may be about geographic expansion. inability to link/reconcile the option to competitive advantage. Once this conceptualisation is complete. The reading for this chapter is from parts of Chapters 2. 2nd order options may be about specific countries. inability to link/reconcile the option to the business idea (of the case organisation) and as a consequence balance continuity and change. Failure to address the implication of this conceptualisation is likely to result in: • • • • inability to prioritise options. Most students fall into the trap of producing long lists of generic possibilities. 95 . inability to develop clear underpinning of the recommendations. students will be required to think about evaluation of options for sustainable competitive advantage.Strategy Analysis and Evaluation (SAE) Workbook For example. 3rd order options may concern means and methods of implementation. You will find specific directions within the text. Chapter 3 of SC and Chapter 8 of TSS. 3 and 7 of FS. first level issues may concern an organisation that is manufacturing orientated that wishes to move into service provision.

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. However you should recognise that there could be corporate level issues involved in these considerations.Strategy Analysis and Evaluation (SAE) Workbook Organisation of Chapter 6 Strategic issues arising From analysis Option generation 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. The main focus in doing this is at the business level or business unit for your organisation. For 96 .

effectiveness. Therefore. The chapter begins by asking you to consider the analysis you have undertaken so far in other chapters. Structure of Chapter 6 The structure of this chapter is as follows: 1. do the capabilities and competencies that you have identified give clues as to the acceptability and suitability of your options? 97 . It needs considering in the context of the corporate strategy you considered in the previous chapter. while creating unique value for customers. and differentiate your responses accordingly. The latter is of critical importance because marketplace reaction to an organisation’s offering ultimately decides whether the business unit succeeds or fails. If so you may. and developing the skills and opportunities for executives and workforce. effectiveness and productivity. This is an important exercise.Strategy Analysis and Evaluation (SAE) Workbook example. and productivity are more likely to be devolved to functional managers. 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. their links with the external environment especially the operating environment. outlined in the mission statement and certainly in corporate objectives. are a much more likely focus of the CEOs attention. In addition. However. For example. Clearly this has corporate level implications. which is embedded in the functional capabilities of the organisation. you might decide that the business should develop through diversification. exercising social responsibility. Functional decisions – focus on functional distinctive competencies.term variables like operating efficiency. in effect. 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. 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. be adding new businesses to the portfolio of the organisation. Many of these are crucial parts of your case study organisation’s Business Idea. These objectives are likely to include maximisation of shareholder wealth. but in many cases extend into customer and/or product/service competencies. Business unit decisions – the broad scope of all the functional areas of the business. Short. These include operating efficiency. but also because some of those considerations may place boundaries or constraints around which options are worth considering. We ask you to consider these differences as you work through strategic option generation and evaluation. not least because you may need to revisit some of your analyses in order to both generate and evaluate strategic options. Corporate strategy decisions – the longer term organisational priorities.

The chapter then asks you to develop strategic options. The first issue concerns the analysis that you have undertaken and the insights. To help you undertake this initial ‘sift’. who is key to the organisation’s future destiny? In addition to these questions.Strategy Analysis and Evaluation (SAE) Workbook 2. you are likely to have identified a wide range of challenges. 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. does this increase or decrease the clarity that you can determine in a complex set of circumstances? Linked to the two previous issues is. If you increase the range of analysis. growth targets? is there a strategic customer. 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. Finally. which concerns the challenge of reconciliation of your insights and findings from your analysis. are you concentrating on overcoming a number of hygiene issues? Or. Again. or you may be selective as to which ones you use. for example. Starting point The initial challenge is to determine your starting point. and make sense of the insights that your analysis is suggesting. You may chose to employ all these different approaches. the third issue. what exactly does this involve? 98 . if you recommend – introduce new product(s). During your studies. and then compare the output from these different exercises. for the case organisation. are you trying to find a strategic break-through. How and/or what should be your focus? Are you concentrating on a limited number of absolute drivers of change in the environment? Or. opportunities and threats that you will have identified. which are likely to be diverse in nature. A range of ways of doing this is suggested here. different techniques and bases of evaluation are suggested as to how you might do this. you are asked to evaluate the options that you have generated. 3. You should certainly use more than one. that is. how will you operationalise your options? For example. 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. What do you do with this wide range of issues? The second issue concerns the level of sophistication in your analysis. If you are working in a group you might decide that different individuals within the group employ different approaches. There are a number of issues that you will require to consider and address as you begin the task of option generation and evaluation.

1 Activity description Purpose Identifying key strategic issues and challenges Identification of issues emerging as important/key from your strategic analysis. that is. Identifying specific opportunities and threats from analysis of contextual and transactional environment. Group/ Individual activities 6.Strategy Analysis and Evaluation (SAE) Workbook Overview of activities in Chapter 6 The following is a summary of the activities for this chapter. Identification of options that emerged from your strategic analysis. In addition. Identifying new customer needs/changes in customer lifestyles and ways to create additional customer value.7 Market segmentation 99 . we wish to provide students with a wide range of tools and techniques to assist in strategic option generation and evaluation. This may require you to undertake an initial synthesis of the issues. Identify the characteristics of the product/service and position of incumbent organisations to identify possible new market segments.4 Upframing the offering 6.6 Strategic group analysis 6.3 Extant options Ansoff’s Product/Market matrix 6. the differences between approaches. this may create the possibility of a new strategic space/position for your case study organisation.2 6. This will require you to revisit some of your previous work and reflect on the benefits of each approach. and how you would apply these techniques in your own organisation. 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. 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. Identification of changes in positioning of organisations into the market.5 External environment – opportunities & threats (drivers of value creation) 6. the specific factors that may impact the business. Identifying the direction and purpose of the case study organisation and the possible methods open to the organisation to achieve its purpose. 6. Identifying key drivers of change in the contextual environment.

Applying a number of tests to those options as a way of prioritising options. or be based on value creation for customers.10 Stretch or leverage? 6.18 6. Application of DCs in new configurations to create customer value. 6. strategic and organisational risk.17 6. Application of the TOWS matrix to generate a set of strategic thrusts from particular configurations of external environment and internal factors. Comparing risk of options in terms of financial.8 Activity description Purpose Strengths and weaknesses of the business Identifying the case study organisation’s strengths and weaknesses to respond/constrain action to opportunities and threats.16 6.21 100 .14 6.15 6.12 Option identification Pulling it together – themes (clustering and conceptualisation of options) Option / issues ranking matrix Financial evaluation of options Scenario evaluation of options Stakeholder expectations Checking the evidence Pulling it together – options 6.Strategy Analysis and Evaluation (SAE) Workbook Overview of activities continued: Group/ Individual activities 6. Individual reflection Developing your personal learning insight. Identification of NPV etc of options across a number of scenarios. Developing a matrix to compare strategic issues and options.11 6. Assess the options against a range of desirable outcomes.19 Feasibility 6.20 Deciding the recommendation Developing the logic of your argument to support your response to strategic issues. Identify patterns or dominant themes from application of option generation approaches. for robustness of response. 6.9 TOWS analysis 6. This conceptual framework may be based on the organisational purpose. Taking all options you have generated and creating a higher-level conceptual framework. scenario. Identifying key expectations and comparing these with options. Cluster options and develop specific options.13 6. or sustainable competitive advantage.

What is the focus. Should the strategy be driven around seeking opportunities in the environment (or markets). So making this decision on focus is an important precursor to generating and evaluating options. You should now revisit these exercises for two purposes: 1. It is vital that you are clear on this because you need to show that the strategic proposals you make clearly address these. to identify any constraints which will influence the strategies followed by the organisation. or determine that a particular expectation of shareholders has to be met. but deciding where you start from can provide a helpful initial ‘sift’ of the strategic options available to you. 2. 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. You have to decide. to summarise the key issues arising from these exercises which will have the most important influences on the future of the organisation.Strategy Analysis and Evaluation (SAE) Workbook 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. which drives strategic choice? There is no right answer here. 101 . or perhaps some other stakeholder exercising a powerful influence on the choice of strategy. that may very well rule some strategic options out and raise in importance other options. What are the key expectations placed upon the business? For example is there a key shareholder expectation. Just where do you start in trying to identify strategic options and evaluate them. whilst insightful. 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. You will recall in Chapter 2 we suggested to you that the amount of data you have now got from the analysis. For example if you decide on a particular strategic customer for the focus of the strategy. may well pose you with a problem. or perhaps a key requirement by the corporate head office.

You should then share these views with your team. corporate constraints. review the analyses so far and note down: a) the key issues which should be taken into account (for example. individually. for two purposes: a) to agree. 2. which will need to be taken into account. b) any constraints that will have to be taken into account (e.1: Identifying key issues (Individual preparation and group discussion) First. It is important to emphasise that these options are not just a ‘wish list’. organisational purpose. there needs to be a rationale arising from your prior analyses for any option you might consider. by using a number of additional frameworks and concepts which suggest different rationales for strategic options. as a team. stakeholder constraints. Option generation When you have decided on the key issues. you should then move on to thinking about possible strategic options that might be worth considering. distinctive competencies and bases of competitive advantage) in deciding the strategy of this organisation.g. 102 . nor are they a summary of every conceivable possibility.Strategy Analysis and Evaluation (SAE) Workbook Activity 6. by revisiting some previous activities and using these to generate options. You should use different approaches to generate these options. environmental constrains or prior decisions on generic strategies). the key issues and constraints b) to decide if you need to revisit any of the previous analyses and revise your previous conclusions. In particular: 1. Rather.

One idea is for individual members of the group to take responsibility for different approaches.2: Extant options (Individual task) It is likely that during your prior analyses you will have generated. therefore. helpful. important that you try out different approaches to generating strategic options rather than following any one framework or concept. 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. a number of strategic options that the business (or the organisation as a whole) might adopt.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. We suggest you try a number of these exercises individually and then share your conclusions within a group if you are working within one. Note these down with a brief explanation of the rationale for each of them. 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? 103 . and least. Activity 6. worth noting that the concepts and frameworks suggested here are not exhaustive. You may know of others. or have read of others. It is.Strategy Analysis and Evaluation (SAE) Workbook It is. Activity 6. A checklist of methods for strategic development follows this. explicitly or implicitly. Part of the reason for this is to get you to think about which frameworks and concepts are most. therefore.

it can also be used to evaluate options). as we shall see later. Some of these forces create opportunities for improving business performance. The term ‘contextual environment’ refers to that part of the world outside the business over which it has little or no control. major limitations to a business’s comprehension and predictive abilities. Having now chosen a particular business for strategy analysis. 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. scenario analysis is sometimes used as a way of generating business options (although. it will be useful to undertake the same analyses and apply them to your business specifically. Ideally. in which case you can draw on the work you have already done for this exercise. how these forces will evolve. of course. use the following organising question: How does our activity create value for our customers. Although your business may not be able to control its contextual environment. In trying to develop a response. others pose threats to future performance. and perhaps even predict. much of what is going on there will have significant impacts on the business. if just to develop scenarios that are of relevance to our business. shaping the value-adding potential of the business. Environmental forces can be viewed as ‘drivers’.) In doing so the major questions that should be addressed are: 104 . Indeed.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. as a scanner for what changes are taking place in the contextual environment. (Of course you may have already decided to do this as a way of thinking about your business. we would like to be able to understand. In EIBE you used the PESTEL framework. There are. But that should not stop us devoting some (reasonable amount of) effort to forming some views about plausible ‘states of the world’.Strategy Analysis and Evaluation (SAE) Workbook Activity 6.

Figure 3 illustrates the search for strategic space i. 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. using 105 . and how do they relate to current and potential future environmental change? What threats to. We recommend that you read the following account if you have not yet done so: FS: Chapter 2. You will recall that this asked you to consider the structure of the industry or market in terms of firms with similar strategic characteristics. pages 24-29 on the macro-economic environment. Look at Illustration 2.e. and why? Do any of these opportunities or threats suggest business options that are worthy of consideration? If so. and opportunities for. By trying different ways of drawing up strategic groups (i.e. but this time looking for strategic gaps or opportunities. Which factors you have identified might have significant strategic implications for your case organisation.4 on pages 44-45 of FS. and pages 50-51 on ‘opportunities and threats’. possible spaces not currently occupied by existing firms (or in the case of this illustration business schools). Activity 6. We suggest you reexamine this analysis – or variants of it – as a means of looking for strategic opportunities.5: The contextual environment – opportunities and threats (Individual preparation for group task) Revisit your PESTEL analysis and the scenario analysis for your business. 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.Strategy Analysis and Evaluation (SAE) Workbook • • • What are the major drivers of the performance of my case organisation. As explained in that section. Try revisiting the exercise. strategic group analysis can be undertaken using different characteristics.

Individual reading: FS: Chapter 2. This exercise invites you to consider different ways in which the market in which you are operating can be segmented.Strategy Analysis and Evaluation (SAE) Workbook different characteristics) it is possible that you will identify different strategic spaces or opportunities. 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. on strategic groups. Consider the following: 1. it might be that your product is currently aimed at one market segment but could be relevant to others. Do any of these bases of market segmentation suggest different strategic opportunities or options? For example. page 47 in that section suggests many different ways in which markets can be segmented.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. highlights the importance of market segmentation. In the analysis (or analyses) you undertook were there strategic spaces that might provide future opportunities for development? 2. pages 42-46. Exhibit 2. pages 46-47. Or it might be that product variants could be made available to different market segments? 106 .4. Consider the previous task on changes that may occur in the contextual environment. 3. 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.2 of Chapter 2 of FS. Activity 6.

consider whether some of the weaknesses you identify are better thought of as symptoms of some underlying hygiene or structural factor.7: The transactional environment: market segmentation (Individual preparation of group task) Review a market segmentation exercise using different bases of market segmentation. try to distinguish between hygiene factors and more fundamental structural weaknesses. depends on having something special that others cannot. it will be useful to say a few words about what internal analysis might consist of. But don’t ignore the Five Forces analysis you did earlier. or winning position in that race. That tool. 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. or find hard to replicate. ask whether that arises from carrying out a business function well (or. Information about strengths and weaknesses comes principally from internal analysis of the business. 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. A similar classification can also be applied to strengths. but much of what you have found in previous activities could easily be listed in the format of lists of strengths and weaknesses. doing functions as well as can be reasonably expected given present industry knowledge) is akin to qualifying to enter a race.Strategy Analysis and Evaluation (SAE) Workbook Activity 6. These are structural factors. The bottom line is that it attempts to identify the strengths and weaknesses of the case organisation itself. If you think that your business has a particular strength. Also. We have not made any explicit use of strengths and weaknesses analysis in our discussions in earlier chapters. 107 . We shall make use of internal analysis below when discussing the TOWS matrix. As you work through the next task. Obtaining a leading. 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. Getting rid of hygiene weaknesses (equivalently. Right now. The reading listed below will explain these terms. 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.

In its most simple form. However. relates to opportunities and threats. One way this can be done is by mapping the SWOT information into a TOWS matrix form. 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. This uses two types of information. on strategic capability. The aim here is to find configurations of internal and external factors that might suggest serious difficulties that the business is heading into. 108 . 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. Given your findings. opportunities and threats.Strategy Analysis and Evaluation (SAE) Workbook For example. added value starts to emerge when we filter out what is of importance to the business from what is trivial. It does not involve any analysis in itself – although you will have had to do some previous analysis to get to this point. has it found a better way of protecting itself against supplier power than its rivals? Individual reading: FS: Chapter 3. and/or configurations which offer the prospect of valuable strategic options. The first – the SW bit – concerns the strengths and weaknesses of the business. The second – the OT bit. identify the strengths and weaknesses of the business. We then go on to cluster this filtered information in some way. the SWOT table. SWOT consists of just classifying and listing strengths and weaknesses.

The intention of the TOWS matrix is to generate a set of ‘Strategic Thrusts’ from particular configurations of external environmental and internal factors. aims at generating strategic options to maximise both strengths and opportunities concurrently. sometimes called the maxi-max strategy. aims at generating strategic options designed to minimise or overcome weaknesses and to take advantage of opportunities. pages 81-83. The W-O strategy is used by organisations as a developmental approach. sometimes called the mini-mini strategy. Individual reading: FS: Chapter 3. to help the organisation transform weaknesses as it moves forward. sometimes called the mini-maxi strategy.Strategy Analysis and Evaluation (SAE) Workbook 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. 109 . aims at generating strategic options by using strengths to minimise threats from the external environment. for Strengths and Weaknesses and the SWOT framework. sometimes called the maxi-min 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. with the internal weaknesses (W) and strengths (S) of your case study organisation. These four aspects are: 1. The TOWS matrix provides the opportunity for four distinct aspects to leverage in developing strategic options. 3. the S-O strategy. Strategies Actions Tactics External opportunities Internal strengths Internal weaknesses 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. 2. the W-T strategy. the S-T strategy. 4. the W-O strategy.

If you have not done one so far. update it if necessary in the light of any of your strategic analysis findings. Revisiting those earlier analyses could suggest other directions that the organisation might take. any idea generated in this way must have a reasonable prospect of being successful. If your Business Idea was well thought out. they can be used without diminishing the total amount available. Now transform the information in your SWOT table into the form of a TOWS matrix. Strategic stretch (or leverage) In doing environmental analyses in previous sections in this course. Another possibility is that 110 . It is easy to see how stretch applies in this case. write out a SWOT table for your case study business.9: TOWS matrix – from SWOT to TOWS (Group task) If you have already constructed a SWOT table for your business. That is. To qualify as an ‘option’ however. But is it possible to extract even more value from them through ‘stretch’ or ‘leverage’? That is. The organisation already has a set of resources and competencies. hopefully well suited to its present competitive strategy. at least to a degree. 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’. describe and explain the strategic options that this exercise has generated. to customer awareness (Safeway).Strategy Analysis and Evaluation (SAE) Workbook Activity 6. And that requires that the organisation’s resources and capabilities adequately support it. you will have identified various possible future changes in environmental conditions. Hence opportunities and threats thrown up by environmental analysis is one way of beginning the process of generating options. or additional activities the organisation might undertake. this may apply to reputation (Sony). it will already have taken some of these changes into account. other segments it might target. Using this technique. But no single Business Idea (or competitive strategy) could take them all into account. which facilitate innovation (Canon). or to organisational structures. For example.

use your previous analysis of competencies. 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? 111 . 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 turn this may suggest a change in strategic direction.10: Strategic stretch (or leverage) (Group task) Bearing in mind all the points in the previous comments. 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.Strategy Analysis and Evaluation (SAE) Workbook a competence could be extended at relatively small cost to support a wider range of business products or services. Activity 6. 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.

what are they? Do they suggest similar sorts of possible strategic options? Note down here the common strategic options that seem to emerge.Strategy Analysis and Evaluation (SAE) Workbook Activity 6. At the end of this exercise. try to cluster and label them into a small number of themes – in terms of similarity of various dimensions.12: Pulling it all together – themes (Group task) Now go back over these exercises on option generation.2 and once more review all the tasks undertaken by the group and individuals in the course of SAE. but note that those in this list did not appear to have emerged in common from a variety of different option-generating mechanisms. keep a list of other options that may have emerged. Do you see any common themes running through the different exercises? If so. it would help if the number of options to be considered was limited to four or five. Next.11: Option identification (group task) The group should now consider the extant options discussed in Activity 6. Activity 6. implications for focus or breadth of the organisation. First. resource / competencies support. and fit with the existing business idea. Also. In order to make the next stage of this section practical. 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. 112 . list all potential options that your team have identified. such as strategic direction.

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. feasibility: do the resources and competencies required to make the strategy work exist. Try scoring on the impact of the option against the issue. there are negative. and an associated rationale for each individual option. the key issue could be a major threat: if the option would reduce the threat. and what is the extent of organisational change required to accommodate the option. 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. Try using a scale of -3 through 0 to +3. consider each individual option against each individual key issue. Here we employ: • • • suitability: does the strategy address the circumstances the organisation faces. If the option would increase the impact of the threat. For example. 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.Strategy Analysis and Evaluation (SAE) Workbook Option evaluation You should now have a list of options. or positive implications of following these options. score +3 and where there is a highly negative interaction score -3. it is a positive advantage. does the proposed strategy make sense). Where there is a highly positive interaction. There are a variety of criteria that might be used to evaluate strategic options. If there is no relationship or impact score 0. does the option build on that. List the options along the top of the matrix below and the key issues down the side. or can they be obtained. Now. To do this. If the key issue concerns an opportunity. The suitability exercise that follows asks you to undertake a simple ranking exercise for the options. or not? • So. this is a negative implication (warranting a negative score). 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. zero. 113 . it can be useful to complete entries in a matrix of the form shown below. This section requires you to systematically analyse these options using a number of criteria and some frameworks of evaluation linked to these criteria.

Strategy Analysis and Evaluation (SAE) Workbook

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 Issues

Option 1

Option 2

Option ‘n’

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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Strategy Analysis and Evaluation (SAE) Workbook Portraying the strategies graphically DECISION CRITERIA FINANCIAL RETURNS Best position High NPV SCENARIO RISK Good risk profile STRATEGIC RISK Good fit with BI ORGANISATIONAL RISK Good fit Strategy C Strategy A Low NPV Worst position Poor risk profile Poor fit with BI Poor fit Activity 6. 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? 117 . evaluate each of your business’s strategic options via scenario analysis. Here you are considering the extent to which any given strategic option is acceptable to key stakeholders of the organisation. Using the methods and techniques described above. Update and extend this. We now move to the criterion of acceptability. if you consider the shareholders to be the primary stakeholders. Who are the key stakeholders of this organisation and what do they expect from it? For example. which asked you to consider key stakeholders and bases of success. 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. if necessary. so that you have a set of scenarios that are appropriate for your case study business. Go back to Chapter 1.15: Option/scenario risk analysis (Group task) Go back to the scenario analysis you should have undertaken.

118 .Strategy Analysis and Evaluation (SAE) Workbook If the case organisation is part of a group of companies. What does this say about what the corporate parent expects of businesses? For example. Go back to Chapter 5 and consider the corporate rationale and parenting style of the corporate body. 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. 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. In the activities below there are a series of such implications against which you can evaluate your options.16: Stakeholder expectations (Group task) Please refer to Activity 2. Against each expectation state what you consider to be the strategic imperatives placed upon the business. It is not possible to review all that literature here. what does that parent company expect of its SBVs? This may not just be a matter of financial performance.3 and note down the main revised expectations of the key stakeholder(s) for your case organisation. 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.

which do not relate specifically to your organisation: but they do raise questions that you can consider. Activity 6. We suggest you review the options you are left with and ask the sort of questions outlined in the group task below. The criterion of feasibility asks you to consider this explicitly. Feasibility All of the above assumes that a given strategy can be made to work. Of course these are generalised characteristics.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. 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. 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.Strategy Analysis and Evaluation (SAE) Workbook 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. We are aware that you 119 . On the basis of the various criteria informing these exercises the group should consider which options ‘remain on the list’. It is important that this rationale explicitly builds on the exercises undertaken above.

Is it possible that these can be overcome? Strategy recommendation You have now: • • • • • • considered the key issues that a strategy would need to address. taken an initial view of the suitability of these options against the key issues. to implement the option(s)? • Does the option require major strategic changes in the organisation that may be heavily resisted (e.Strategy Analysis and Evaluation (SAE) Workbook may not have the data to work these through in detail. considered if they could be made to work. Activity 6. 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. considered the options in terms of evidence on whether they are appropriate.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. In this final section you should recommend what the organisation should do. in cultural terms). But having some views about them is helpful. considered the options in terms of the acceptability to stakeholders. generated a range of strategic options with an initial rationale as to why they might be appropriate. 120 . or build the necessary competencies.g. You have therefore taken a number of evaluative exercises to consider the appropriateness of strategic options.

Each member of the group should have a view as to what the team should be recommending. and implications for you as a manager? 121 . Activity 6.20: Deciding on the recommendation (individual preparation and group discussion) Before you discuss the recommendation as a whole with your group. If this occurs.21: Individual reflection and personal learning insights Recalling your level of knowledge and understanding at the outset of this chapter. we would suggest that the individual writes his/her own report and submit it separately. 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. Please note: We would encourage everyone to submit a group report. It is now your responsibility to draw these together. 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. 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.Strategy Analysis and Evaluation (SAE) Workbook Activity 6. 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. 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.

the strategic situation facing the organisation. you should identify the relevant pieces of analysis required to support your recommendations and attach these as an appendix to your report. In addition. We would recommend that once you have developed the structure of your report. the actions necessary to implement recommendations. the (competitive) advantage that the case study organisation. the logic of the proposal. Another challenge for students is to convince the CEO of: • • • the problem identified from the analysis. 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. and the supporting analysis. the report may also identify issues of a hygiene nature that may prevent the case study organisation from achieving these longterm objectives and how these will be overcome.Strategy Analysis and Evaluation (SAE) Workbook 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. Undertaking strategic analysis is one challenge to students.) and how your recommendations will address these threats. objectives and strategy of the case study organisation. Learning objectives The objective of this chapter is to write a report to the CEO of your case organisation. the implications for resources and resource requirements. particularly in terms of its competitive environment. (especially if the threat would undermine the ability of the organisation to survive in the future. any major threat(s) to the case study organisation. and the basis of measuring future performance. You should be able to support your recommendations with clear and concise argument. or more specifically the business unit that you analysed. will gain in the future by implementing your recommendations. your report will also be fully supported by the output of the application of the analytical tools that you have applied throughout SAE. the purpose. The report should therefore communicate the following: • the clear relationship between the recommendations. 122 • • • • • • • .

123 . we are not asking you as part of this assignment to prepare financial statements. This will assist management with the efficient allocation of resources that are targeted to achieve competitive advantage. This would be contained in the main report. You should discuss the outcome of your environmental and competitive analysis. The executive summary will also provide a discussion of the strategic benefits to be gained by the organisation. 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. the recommendations you wish to make. Report structure Executive summary The executive summary should be a short. The strategic benefits to be gained are likely to take the form of leveraging existing distinctive competencies to create customer value from the offering. the report would provide the criteria to measure future performance. However you should note any major financial issues that arise from your recommendations. There should also be a note about the purpose of the report and how it could be used by the organisation in the future. Main report The main report should include a brief note about the approach adopted to undertake the strategic analysis of the organisation. to highlight the key future drivers of change and the key competitive forces in the transactional environment.Strategy Analysis and Evaluation (SAE) Workbook When supported by financial statements such as cash flow forecasts and budgets. together with a note about resource implications in the future. This should NOT include an in-depth discussion of the analytical tools applied to conduct the analysis. 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. high-level report in its own right. 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. Please note however. 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. The intention is to provide enough detail and understanding of these issues for the Chief Executive or Managing Director of the case organisation. in which you should communicate concisely the key opportunities and challenges. concise paragraph of its own. We would suggest that the ‘Executive Summary’ should be no more than two pages in length. We work on the assumption that he or she will initially only wish to read a highlevel summary.

Remember. 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. For example. the discussion of the barrier to competition is as important as the route to market. We emphasise the importance of building a coherent argument as distinct from making a series of points. Your discussion should also include a discussion of the implications of the issue for the case study organisation. we would ask you to think carefully about the implications of your recommendations in terms of creating a sustainable competitive advantage for the organisation. In doing so. you should use your analysis to support the points you wish to highlight. and develop these findings in terms of sustainable competitive advantage. if you have identified a new market opportunity your recommendation should discuss – the typical target customers. your argument is enhanced by the fact that more than one piece of analysis supports your findings. the Chief Executive or Managing Director. your discussion should provide enough evidence to support your findings. By doing so you will provide the reader. In this instance.Strategy Analysis and Evaluation (SAE) Workbook There should be a discussion of each key or strategic opportunity or challenge separately. This evidence may arise from more than one source. the focus of SAE is to apply strategic tools of analysis to identify opportunities for the case study organisation. 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. or the development of new distinctive competencies that both capture the market and protect the organisation from future competitive threats. In doing so. This will require you to consider resource implications and actions necessary for implementation. with the degree of comfort that he or she requires to support your recommendations with other key decision-makers in the organisation. the exploitation of existing resources and distinctive competencies. 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. If this is the case. students traditionally find no difficulty in discussing the route to market. together with a discussion of their implications for the case organisation. In addition. Once you have achieved the key strategic focus. However. you are likely to discuss the ways and means to achieve these objectives. The key to developing a coherent argument is the ability to synthesise and integrate findings from a number of analytical tools. the channels to market. but omit the basis of protecting the market. Your ability to synthesise insights from more than one analytical tool will help develop clearly the key strategic focus for the case organisation. 124 .

There should be no unsupported assertions. the intention is to induce in the reader. You should be clear as to the higher-level conceptualisation of your recommendations that are in line with the case organisation’s purpose. and secondly. but is also about the nature of the argument you are presenting. 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. supplied separately. You should now read through the assignment guidelines carefully and prepare your submissions. This will require you to firstly. Your writing should be aimed at achieving these objectives in the mind of the reader. You should also be clear about the nature of the competitive advantage you wish to achieve in your recommendations. We wish you all the best. for more information on the evaluation criteria. focus clearly on the task. a belief that what we are saying is true or at least plausible. The report should be written as objectively as possible. the Chief Executive or Managing Director. The report is intended to influence the beliefs and actions of others. Please consult the assignment guidelines. Effective persuasion is not just a matter of style. not regurgitate theory in the report. 125 .Strategy Analysis and Evaluation (SAE) Workbook Report writing style In writing your report.

Strategy Analysis and Evaluation (SAE) Workbook 126 .

This can be done in two ways: • They create a surplus for stakeholders. the articulated Business Idea is embedded in the language of the organisation. As an organisational device. Only when articulated can it be studied. discussed. • 127 . 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. 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. The scenario planner. which the latter can use for their own purposes or (totally or in part) for protecting and developing the strength of the enterprise. K. van der Heijden. needs to articulate the Business Idea. They create the expectation among existing or potential stakeholders that they will be able to create a surplus and grow in the future. modified and improved. Chapter 3. First Principles: Profit Potential Firms mostly represent success by establishing value. the Business Idea is the organisation’s mental model of the forces behind its current and future success. As we saw. Organisational language is rational.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 Appendix Taken from. aiming to accelerate organisational learning. Therefore. This implies that the Business Idea needs to be built up from first principles. (1996) Scenarios: The Art of Strategic Conversation. discuss the main underlying principles and work through their implications. and how it will be successful in the future. pp59-80 Copyright © 1996 by John Wiley & Sons Ltd. Wiley.

by indicating how circumstances will be created in the longer term which are considered favourable for corporate value generation. but also intangible aspects such as service. etc. each product represents a division of work between the supplier and the customer (Normann 1984). As Richard Normann points out. On the other hand many management decisions have long term repercussions. This is not the same as profit. believed to create value for a customer group.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 One of the main purposes of strategy development is to feed this expectation. 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. 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 customer derives value from its use. Creating uniqueness in this formula in order to appropriate part of the value created. consider the thought process of the new entrepreneur. which creates this value. for which they consequently will be prepared to pay a price. so the time period over which the system is predictable is short – days or weeks rather than months or years. Quality of execution is the other part of the profit equation. Management cannot rely on strategy alone for profitability. and need to be considered in that light. Strategy facilitates. They affect future profit potential. aiming for the maximum effect of the supplier competencies in the total customer value creation potential. Therefore the creation of a successful product is the result of a process of optimisation. but the actual profit is earned in dayto-day hands-on operations. The typical business situation manifests a high level of complexity. The aim can be defined as creating profit potential. information. To understand the concept of profit potential. This focuses first of all on an idea of a possible activity. The offering includes all aspects of the supplier/customer interface. risk management. Because of this there cannot be a one-toone relationship between strategy and profit. Entrepreneurial success results from a combination of three ideas: • • • Discovering a new way of creating value for customers. Bringing together a combination of competencies. including the physical product. The overall optimum relates to 128 . In the process the supplier incurs costs translating the idea into a product.

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. 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). Normann & Ramirez 1994). 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.g. performance guarantees). Overlap between competencies and value creation configuring the product so as to maximise the difference between customer value and supplier cost. self-service. sometimes the balance shifts to the buyer (e. In that case cost of entry is relatively 129 .Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 Total system optimisation Buyer’s value system The offering Seller’s distinctive competencies Value Figure 7. Distinctive Competencies Sometimes the entrepreneur finds that the new combination can be easily emulated by others. In some aspects of the product the cost/benefit balance indicates work by the supplier (e.g. The product which represents this optimum will normally incorporate both tangible and service elements. 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.

and which uniquely belong to that organisation. are difficult to imitate by potential competitors. The word ‘distinctive’ in the concept Distinctive Competency needs some further elaboration. Alternatively. it cannot be a Distinctive Competency. and why are others unable to emulate it?’. by acquisition or alliance. and why competitors would be restrained from copying 130 . Appropriation requires that the competencies individually. Customer power is determined by possible alternatives open to them. A strong Business Idea contains elements that have been created in the organisation over time. Therefore. Company ‘strengths’ are not the same thing as Distinctive Competencies. new competitors flock in and success is short-lived. and therefore the Business Idea weak. 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. e. 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.g. In addition the entrepreneur has to consider the power of other stakeholders in the battle for the value created. Many strengths companies believe they have are not very unique and can be easily copied by existing or new competitors. 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.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 modest. there may be something distinct or unique about the combination of competencies. In this way a powerful Business Idea appropriates part of the value created. or the system of competencies with their interactions. in considering the Business Idea one needs to ask the Devil’s Advocate question: ‘What is unique about this particular formula. Therefore a Business Idea needs to address the relative position vis-à-vis potential competition. If a Business Idea consists only of such components long-term profit potential is vulnerable. Teece (1986) investigated the reasons why Distinctive Competencies might arise. making it difficult for others to copy. If a strength can be bought.

Existing players have to consider their option of realising their assets in the same way as new players have to consider their acquisition. we can derive a list of five fundamental sources of distinctiveness in two main categories (Rumelt. Based on his and Rumelt’s work mapping out ‘Barriers to Entry’. if a Business Idea is based on institutional knowledge profit potential can be sustained. in the form of computing facilities) or intangible (e. and through processes embedded in the organisation. then on this score there is no competitive distinction between existing and new players. 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. and not exclusively to its members individually. If these investments are in marketable assets.e. in the complementary knowledge and ‘sounding board’ function provided by colleagues in the organisation). a new competitor might have to make investments that existing companies have already made. Often the individual can exploit personal strengths only when supported by the strengths of the organisation.g. The competencies must also belong to the firm as an institution. i. An institution’s knowledge base is created through people networking with each other. The second source of distinctiveness relates to competitors having to incur costs in order to be able to compete for the profit potential. 131 . 1987. For example. 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’).Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 any successful formula. However. 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. This support may be tangible (e. Rumelt et al.g. Therefore a distinction needs to be made between Personal Knowledge and Institutional Knowledge. If the company relies only on an individual expert for its business success profits will eventually be appropriated by him personally. In this area unique knowledge in itself is not enough.

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. and in relation to the fact that the existing players do not face the hurdle of the economic decision facing the newcomers. 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 132 . Their opportunity cost is lower.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 However. at least to some extent. many investments are irreversible.

normally new Distinctive Competencies must be created out of the exploitation of old ones. This is necessary for two reasons: • • Eventually a competitor finds a way to emulate the essence of the competency.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 Activity specific assets • • • • Investments in dominant size. e. specialised equipment etc Investments in economies of scale. market share and image Sunk investment in sites. in distribution (e. Business is fundamentally dynamic. the strongest Business Ideas derive from a set of Competencies which are unique because of the way they are combined systemically. Although entrepreneurial invention and luck may present the perceptive organisation with potential new Distinctive Competencies. because of evolving customer values. exploration. and new ones created. In an evolving world survival implies continuous updating of the organisation’s Business Idea. The overall Business Idea is particularly strong and difficult to emulate if the set of underlying Distinctive Competencies reinforce each other. 133 . low unit delivery cost) First mover investments in production capacity Uniqueness can derive from Distinctive Competencies individually or from their combination.g. change is an essential part of organisational life. It may be that some aspects of specific Distinctive Competencies are difficult to emulate. Synergy between even a handful creates distinctiveness at a wholly superior level of strength. low unit stock levels. 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). The organisation does not have another source of distinctiveness. Most strong Business Ideas contain Distinctive Competencies which feed on each other. However. It needs to be kept up to date. As a consequence a Business Idea is not valid for ever. Existing Distinctive Competencies need to be strengthened. Distinctive Competencies depreciate over time. experimentation.g. or The overlap between the competency and the customer value system reduces.

• 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. There is a limit to which development can be speeded up by everincreasing investments. Distinctive Competencies cannot be transferred (sold) to other firms. with some additional margin left to create a profitable operation. His suggestions for hallmarks of real distinctiveness summarise the points made: • • • • • • Investments are largely irreversible. This allows the supplier to make available a competitively priced alternative. 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. Development is a process of gradual evolution through collective learning and information sharing. Profit potential derives from a premium price. 134 . The Distinctive Competencies are used to create a unique low-cost way of creating or making available a non-differentiated product. Competitive Advantage translates into profit potential in two ways (Porter 1985): • The Distinctive Competencies are used to create a differentiated product. part of the additional customer value can be appropriated by the supplier. Strong Business Ideas exploit multiple Distinctive Competencies reinforcing each other in a synergetic way. Competitive Advantage If the Business Idea and its Distinctive Competencies are effective it creates Competitive Advantage. If competitors cannot match the distinctive element. Profit potential derives from cost leadership.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 Schoemaker (1992) has analysed the nature of Distinctive Competencies. Distinctive Competencies create competitive advantage in the eye of customers.

e. i. 135 . Customers cannot articulate their needs if they are not aware of the supplier’s competencies.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 In considering how to create such a product it is helpful to distinguish two categories of sources of differentiation (Normann 1994): • • Generational. Most businesses believe that it ought to be possible to develop some unique customer value. But some companies accept the commodity market as their strategic starting point and concentrate on creating a uniquely favourable cost position. A Distinctive Competency of the supplier may be based on an ability to ‘read the customer’s mind’ better than competitors. a dynamic capability to produce a uniquely fitting product. design. by means of a uniquely superior cost performance. including aspects such as image and access.e. 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). i. Researching customer needs is not enough. availability and support.e. a capability to produce offerings with unique attributes. resulting from effective communication and understanding Differentiation requires a deep understanding of what creates value for customers. Relational. the differentiated product company also needs to engage in continuous concept research. i. and companies for this reason try to distinguish themselves by creating a differentiated offering. when open market trading has created standardised and clearly defined products for which there is a continuing market. based on a superior relationship between supplier and customer. cost. including quality. In a commodity market it may still be possible to create significant long-term profit potential. Product research is not enough. It must be a joint conceptual project. This happens when products have become ‘commodities’. The unique differentiated product can be created only out of the optimisation of the total customer’s supplier system. Cost leadership Sometimes customer value is relatively easy to determine.

A Business Idea contains a ‘Positive Feedback Loop’. informal influences can loop around through long pathways. The result from a set of Distinctive Competencies which through their interaction in a Business Idea create the differentiated product or the cost leadership. suppliers influence clients as much as clients influence suppliers. The process of articulating the Business Idea usefully starts with identifying the Competitive Advantage that the firm exploits (differentiation. As we saw. that include indirect effects. leading to less surplus. of organisations. Starting from there the analysis then searches for underlying causes of this Competitive Advantage until characteristics are uncovered that pass the test of ‘distinctiveness’. But a positive feedback loop can also create collapse (less surplus leading to fewer resources. which can create a self-reinforcing system. leading to weaker competencies. activities generate resources which are used to strengthen the competencies driving the activities. In such a system. The Business Idea is prime. Influence does not only cascade downwards. cost leadership. or both). Distinctive Competencies depreciate so a firm needs to spend resources in maintaining and renewing its Business Idea itself. which are often more determining of behaviour then hierarchies. Loops tend to create the behaviour. and therefore the identity. the Competitive Advantage is its manifestation. Social systems tend to be heavily influenced by such influence loops. 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. As we discussed above. both internal as well as external. The primary concern of the entrepreneur is to keep the loop working in the upward direction. Alleged inferiors have influence over alleged superiors.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 Systemic Structure of the Business Idea Generic strategies cannot be freely selected. While hierarchy identifies formal relationships. In such networks people influence each other. etc). If you focus only on physical or legal representations of organisations you will miss entirely the fundamental forces driving organisations and change! 136 .

which creates the growth of the enterprise. based on its Business Idea. Understanding evolving needs in society Entrepreneurial invention Resources Distinctive Competencies + Results Competitive Advantage Figure 8. The nature of the Competitive Advantage exploited. An influence diagram shows the cause-effect relationships between key variables in the situation under consideration. expressed by arrows.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 Firms can be interpreted as systems of negative feedback loops. Then. designed to maintain favourable conditions for one dominant positive feedback loop. 2. create Competitive Advantage. Summarising the above we see that the following four elements need to be specified in order to define a complete Business Idea: 1. Due to its systemic nature a Business Idea is best represented as an influence diagram. Figure 8 shows this in its generic form. these three elements must be configured into the fourth element: 4. The generic Business Idea. The Distinctive Competencies which. in their mutually reinforcing interaction. 137 . as well as the role of entrepreneurial invention in creating the idea in the first place. The societal/customer value created. containing the elements listed above in context. A positive feedback loop. 3. in which resources generated drive growth.

1986. 1990). indicated by the tail of the arrow. He reasoned that many mothers and fathers experience a feeling of guilt when they provide their children with simple custodial child-care. the largest private provider of day-care in the US. This can best be explained by means of a few examples. In Figure 8 increasing competitive advantage leads to increasing results.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 The head of the arrow points towards the effect. an increase in the causing variable leading to an increase in the effect. which cause increasing resources to be available for investment in enhancing distinctive competencies. made specific in its elements and their interrelationships for the situation under consideration. The description given here is based on the entrepreneur’s own account (Smith et al. Examples of Business Ideas Kinder-Care Our first example is the Business Idea concept for Kinder-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. Bougon et al. producing the positive feedback loop discussed. While having professional expertise. or if no sign is shown (as in Figure 8) both variables change in the same direction. or a decrease in the causing variable leading to an decrease in the effect. and the other way around. A useful Business Idea diagram contains the elements of the generic diagram. In an early attempt to franchise the centres Mendel found that the type of individual attracted to a franchise was typically an ex-schoolteacher. caused by the variable. which in turn lead to increased competitive advantage. Kinder-Care was started by Perry Mendel who perceived a need for innovative child care. As shown distinctive competencies can also be enhanced or added to by increasing entrepreneurial invention. If an arrow is annotated by a plus sign. thus creating a positive image in the minds of the parents. based on enhanced understanding of evolving needs in society. these individuals did not have the management and financial expertise (or interest) required for running a 138 .

Professional/ management/ financial resources Land/buildings Retention of ex-teachers Innovative child care Teacher satisfaction Revenue Pay for service Parents’ good feelings Reputation Working parents Parents’ – financial resources Figure 9. 2. 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.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 franchise. which creates value for customers through its differentiated nature. The Kinder-Care Business Idea. 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. or in the latter case generation of additional income. inducing reallocation of resources. The Kinder-Care system can be understood by reference to the four elements making up its Business Idea: 1. 1990). The entrepreneurial invention creates value for customers. The nature of the competitive advantage exploited The purpose of the Kinder-Care operation is to offer a new enhanced product: innovative child care. Kinder-Care does not aim to be a cost leader. 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. 139 . Figure 9 is derived from the diagram developed by Bougon from Mendel’s report (Bougon et al.

Note that having hired the appropriate personnel (a scarce resource) does not as such create a Distinctive Competency for the firm. in their mutually reinforcing configuration Kinder-Care has developed a number of competencies allowing the realisation of the entrepreneurial idea. Or. as any value resulting from that alone would eventually be appropriated by the individuals with the requisite characteristics. which causes an increase in the amount and quality of innovative child care offered. By growing fast. and the relatively slow response of its competitors. which leads to more retention of motivated ex-schoolteachers. innovative child care allows a parent to feel better about going to frequent or full-time work. which leads to more innovative child care. We see that the main strategic loop is a positive feedback loop. the company has exploited scale effects to the maximum. It does not seem very difficult to emulate the individual competencies that Kinder-Care incorporates in its Business Idea. driving growth The system contains a number of loops. 4. well before others could catch 140 . resulting in parent’s trust. well ahead of the ability of the competition to catch up. For example. The positive feedback loop. The reason why the company nevertheless has been successful lies in the idea’s dynamic nature.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 3. 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. associated with the name Kinder-Care. more innovative child care leads to more teacher satisfaction. The Distinctive Competencies exploited. These competencies reinforce each other as shown in the diagram. increasing willingness and ability to pay for the use of more innovative child care. including: • • • • • Knowledge of characteristics required in personnel: retention of exteachers Knowledge of facilities: land/buildings Management system and expertise: professional/management/financial resources Access to specialised facilities: land/buildings Reputation. It has built up and strengthened both its management system and its reputation.

thus creating barriers to entry for newcomers. As the product cannot be inspected before the sale. customers in this industry tend to be risk averse. 141 . a company cannot entirely rely on this loop for its success. The company needs to consider whether these are high enough for sustainable competitive advantage.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 up. Construction companies need to be able to demonstrate the quality of their products by reference to the ‘installed base’. As a consequence. and is a fundamental part of the Business Idea of every established construction company. In the market where this company operates. The Business Idea of a construction company. However. from the installed base to reputation for quality work to new contracts which add to the installed base. well-established companies are protected by the positive feedback loop. Therefore existing. There is potential competition from other established Investments Probability Training Installed base Reputation Communication Skills workforce Quality of work + Contracts Customer need responsiveness Cohesion loyalty Motivation workforce Flexibility contract conditions Figure 10. the reputation of construction companies for the quality of the work they typically deliver is important. a building project tends to be a relatively significant investment for most customers which needs to serve them for a long time to come. This creates a considerable barrier to entry for newcomers. The Business Idea of a construction company Figure 10 shows the diagrammatic representation of the Business Idea of a construction company.

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.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 companies in the industry. The company portrayed in Figure 10 develops and stimulates this culture by organisational measures and investments in people. • • 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. A flexible approach to developing customised contract conditions. Michael Porter’s FiveForce competitive model (Porter 1980) provides a useful framework to consider the limits to growth in a Business Idea: • • Demand limits Supply limits 142 . Such collaborative customer relationships require: • An internal culture based on collaborative relationships. The strength of the Business Idea of Figure 10 lies in its cultural embeddedness. Therefore the Business Idea needs to be strengthened by company specific Distinctive Competencies. provided that there is a good match between the resulting behavioural characteristics and customer needs. Companies that have made such investments in the past are generally well-protected. and from time to time new entrants make the investment to break in. 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 customercontractor relationship. Financial strength to deal with the specific financing requirements of every contract. based on saturation in customer value creation and willingness to pay. This negative feedback loop indicates that growth of the activity will lead to a reduction of demand. The company has invested heavily in an ability to customise every contract to the needs of the individual client. Companies setting out to change their corporate culture are embarking on a long term project that must be measured in years rather than months.

Competition limits. and enter the market as alternative suppliers. For this reason negative feedback loops introduced through existing or new competition are more dangerous than those resulting from supply or demand constraints. In this case the exploitation of the Business Idea is limited on the supply side.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 • • • Competition limits Limits imposed by the possibility of new entrants Limits imposed by possible alternatives and substitutes. as the two tend to remain in balance. • • • In each of these examples we see a mechanism at work which. Levels of Business Ideas Wherever a management team pursues a business purpose. introduces a negative feedback loop in the Business Idea. as there is a possibility that balance will not be maintained. If the Business Idea creates its own compensating negative feedback loop it need not be invalidated. If compensating negative feedback emanates from an independent source the situation may be more dangerous. 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. 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 then negates its surplus creation potential. dictated by the potential in the available reserve. a Business Idea will emerge. Examples of limitations in the other categories include: • Supply limits. The Kinder-Care example demonstrates a demand limited Business Idea. at some point in the growth process. Management teams can be found at various levels in 143 . 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. As we have seen all Distinctive Competencies depreciate. At that point growth stops. At a cost most Business Ideas can be emulated. which first diminishes. The same applies to substitute products.

and any distinctiveness in those can only be developed at the corporate level. an open culture through participative management. this takes place via the Business Units. that exploit synergy between Business Units and the Corporate Units. e.g. • • • The Corporate Business Idea needs to be based on the Business Unit Business Ideas. Some features of the company are corporate in a fundamental way. at the level of the corporation and the business unit. visible or invisible. marketing may rely on manufacturing flexibility to approach their customers with customised offerings. Business Ideas can be found at all these levels. 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. The corporate parent may develop a Business Idea around value creation in the interaction between the parent and the Business Units (‘parenting advantage. Manufacturing flexibility then becomes a Corporate Distinctive Competency. The corporate unit does not interact with external customers. concentrating on Distinctive Competencies which operate across business boundaries.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 the organisation. The Business Unit has external customers. financial strength.’ Goold.g. 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.g. corporate reputation etc. e. More than one Business Unit may pursue the same Distinctive Competencies. 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. e. which then may become Corporate Distinctive Competencies. 144 . At this level it is easier to define the contribution made to customer value. Articulating a corporate Business Idea is complicated by the fact that the external customer is one step removed. 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. This is a creative task. Campbell & Alexander 1994). For example. risk spreading. Business logic at the corporate level is based on developing shared resources.

If complex systems cannot be understood holistically. Many schemes have been invented to segment an organisation for the purpose of analysing its underlying characteristics. the mind will break down the system into parts. (Miller suggests a number of seven concepts. The Business Idea is in the first place a cognitive device. In the case of a Business Idea this fragmentation destroys the essential holistic meaning of the idea. Mapping out and comparing the Business Ideas of a number of Business Units. For the purpose of developing a Business Idea most of these schemes can be short-circuited. Only the overview makes the important point. making up a corporation. plus or minus two (Miller 1956)). Therefore it is advisable to draw up the diagram at this level of granularity. 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. and simplified inter-unit interfaces. are aware of its separate identity. The human mind can retain only a limited number of concepts at the same time. Its essential nature follows from the way that the elements work together. If further detail is required this can be included as an expansion of individual elements in the Business Idea 145 . may lead to reconsideration of the segmentation of the business within the organisation. The positive feedback loop cannot be understood in terms of its elements in isolation.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 Segmentation This raises the issue of what can be considered a Business Unit for the purpose of articulating a Business Idea. Our experience has shown that the most effective Business Idea diagrams indeed do not contain many more than (say) ten elements. and who develop the vision for its future. A representation much beyond that seems to reduce its power as a direction indicating device. leading to more concise Business Ideas with more clear-cut overlap and interdependence. mostly in a management team. managers and others in the unit being considered. It is they who determine the identity of their operation. Putting the lower level maps next to each other quickly reveals possible ways in which the same business can be reorganised more coherently. Therefore the single criterion whether it is worthwhile to attempt to surface a Business Idea is the question whether people. It is a vision that lives in the minds of individuals.

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. 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. Near the switch-over point it takes only a small nudge to flip-flop from growth into decline. But it is worth considering other more fundamental aspects of the human inability to overview large systems. enabling management to manage the set as one. For example the management of a conglomerate company may be pursuing the overarching corporate Business Idea of providing parenting advantages to its subsidiaries. Company managers are generally intuitively aware of this danger-point and try to maintain a margin of 146 . It creates one holistic gestalt around the businesses. contracted out to another firm. Activities that are not a crucial part of the Business Idea can be. and often are. The concept of the Business Idea throws a new light on the notion of synergy as a precondition for success in acquisitions. Pursuing an entrepreneurial Business Idea requires a high degree of consistency and persistence across the organisation and over time. Financial markets tend to discount management’s ability to pursue more than one Business Idea.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 in separate diagrams. The overarching Business Idea is important not only because of the ‘shared resources’ aspect. without getting involved in the detail of the subsidiaries’ Business Idea (Goold & Quinn 1990). Considering the Business Idea in the Management Team As discussed. Staying on course requires a clear unambiguous compass. but also because of its function as complexity reducer. a positive feedback loop can spiral upwards or downwards. This seems in the first place a point of good practice. 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. Management Teams find it cognitively difficult to simultaneously pursue more than one Business Idea.

The outlook for the strength of the Distinctive Competencies against the ever changing values in society. than to the need to keep the positive feedback loop away from the precipice. Selection of strategic options for the 147 . based on a strong set of Distinctive Competencies. The strengths/weaknesses of the current Distinctive Competencies in their systemic interaction. as we saw.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 safety. As time goes on. Divergent notions of the Business Idea in the management team need to be confronted in open debate. To avoid this situation arising the management team needs to jointly articulate and understand the basis of a company’s success. built up in the past. The purpose of a company is defined as maximising profit for the shareholders. through the introduction of a thinking framework and language. 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. There are considerable dangers lurking here because. The unique Business Idea is not always well articulated. 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. 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. Once a Business Idea has been articulated. Companies that have been in business for a while often lose sight of the complex reasons why customers buy their particular products or services. But the urge to be profitable is often related less to shareholder considerations. many managers get on with the day-to-day business. The Business Idea concept assists the team in managing this process more explicitly. 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. strategic priorities need to be determined to maintain its health. Sometimes companies find themselves exploiting a successful Business Idea. allowing joint rational consideration in terms of: • • • The current Business Idea. While things are going well. There may not be time or resources to adjust the Business Idea to the current market. implicitly relying on the ongoing tacit Business Idea to protect them from competitive onslaught.

A successful Business Idea implies continuous renewal of the business concept. In entrepreneurship. 148 . For this purpose a surplus of resources needs to be created in its day-to-day operations. Strategy has as its main aim the continuation and growth of the organisation. Understanding the nature of this leads to an awareness of the intrinsic constraints in the scope of their deliberate development. to focus the dialogue which needs to take place in each organisation on the emerging strategic direction. How this can be done operationally is discussed in Part Three. invention goes together with risk. As we saw there is evidence to suggest that a successful organisation concentrates on one Business Idea only. The concept of the Business Idea puts entrepreneurial invention back on the agenda. A Business Idea may encompass more than one business. This will lead to a discussion of scenario planning in comparison with other ways of describing the future world. sometimes called the Core Business. We are suggesting that managers should try to articulate their implicit Business Idea. 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. In the next chapter we discuss various ways of thinking about uncertainty in the future business environment. The same applies for organisations. This is not presented as a new tool that managers are urged to use to increase their success.Strategy Analysis and Evaluation (SAE) Workbook: Appendix 1 Scenarios: The Art of Strategic Conversation: Chapter 3 future needs to be guided by their relevance to maintaining and enhancing the Business Idea. The basic motor of the Business Idea is the system of Distinctive Competencies created and exploited by the organisation. We believe that the Business Idea already exists in the mental models used by managers to make sense of the world. The entrepreneur needs to think about his Business Idea against an uncertain future. Entrepreneurial invention continues to be a pre-condition for survival and success. The conditions required for this to happen are specified by the Business Idea. This is not the same as concentrating on only one business. It is a more dynamic concept than a core business.

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