SBL Module 5: Strategy

Contents
Concepts of Strategy ................................................................................................................... 2
WHAT IS STRATEGY? ................................................................................................................ 2
LEVELS OF STRATEGY ............................................................................................................... 2
MISSION ................................................................................................................................... 3
STRATEGIC OBJECTIVES ........................................................................................................... 3
THE JOHNSON, SCHOLES AND WHITTINGTON THREE-STAGE MODEL.................................... 4
STRATEGY AND THE CHANGING ENVIRONMENT .................................................................... 4
POSSIBLE AREAS THAT MAY BE EXPLORED IN THE EXAM SCENARIO ..................................... 4
Environmental Issues .................................................................................................................. 5
THE ENVIRONMENT THE ORGANISATION OPERATES IN ......................................................... 5
PESTEL ...................................................................................................................................... 5
PORTER’S DIAMOND................................................................................................................ 6
SCENARIO PLANNING .............................................................................................................. 6
POSSIBLE AREAS THAT MAY BE EXPLORED IN THE EXAM SCENARIO ..................................... 7
Competitive Forces...................................................................................................................... 7
THE COMPETITIVE ENVIRONMENT.......................................................................................... 7
MARKET SEGMENTATION ........................................................................................................ 8
THE MARKETING MIX .............................................................................................................. 8
FIVE FORCES MODEL................................................................................................................ 9
VALUE CHAIN ........................................................................................................................... 9
POSSIBLE AREAS THAT MAY BE EXPLORED IN THE EXAM SCENARIO ................................... 10
The Internal Resources, Capabilities & Competences of an Organisation ............................... 10
COMPETITIVE ADVANTAGE ................................................................................................... 10
CAPABILITIES, RESOURCES AND COMPETENCES ................................................................... 10
THRESHOLD RESOURCES AND COMPETENCES...................................................................... 11

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 UNIQUE RESOURCES .............................................................................................................. 11
CORE COMPETENCES ............................................................................................................. 11
KNOWLEDGE MANAGEMENT ................................................................................................ 11
SWOT ANALYSIS ..................................................................................................................... 12
POSSIBLE AREAS THAT MAY BE EXPLORED IN THE EXAM SCENARIO ................................... 12
Strategic Choices ....................................................................................................................... 12
STRATEGIC CHOICES .............................................................................................................. 12
SAF (SUITABILITY, ACCEPTABILITY, FEASIBILITY) ................................................................... 13
GENERIC COMPETITIVE STRATEGIES ..................................................................................... 13
BOSTON CONSULTING GROUP (BCG) MATRIX ...................................................................... 13
ANSOFF MATRIX .................................................................................................................... 14
LYNCH EXPANSION MATRIX................................................................................................... 14
POSSIBLE AREAS THAT MAY BE EXPLORED IN THE EXAM SCENARIO ................................... 15

Concepts of Strategy
WHAT IS STRATEGY?

Johnson, Scholes and Whittington see strategy as determining the direction and scope of an
organisation over the long term. Therefore, strategy dictates the resources an organisation
requires and how these resources should be configured to meet the needs of markets and
stakeholders.

Michael Porter emphasises the need for strategy to define and communicate an organisation's
competitive position to create competitive advantage.

LEVELS OF STRATEGY

In the context of a large for-profit organisation with several business units, we can identify
three levels of strategy:

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 1. Corporate strategy is concerned with what business and markets the organisation
operates in, the products and services it provides and how it achieves competitive
advantage.
2. Business strategy is concerned with how each how each strategic business unit (SBU)
achieves its mission and within its business area.
3. Operational strategy is concerned with how different business functions support
business strategy and corporate strategy.

Strategies and each of the three levels must be consistent. For example, if corporate strategy
aims to establish the organisation as an upmarket retail chain, business strategy and
operational strategy must support this aim, for example by ensuring ongoing investment in
premises and in staff training.

MISSION

Johnson, Scholes and Whittington refer to an organisation's mission as 'the most generalised
type of objective’ and an expression of the organisation’s reason for existing or its ‘raison
d'etre'.

The mission statement outlines the vision of what the organisation wishes to become and what
it wishes to achieve.

STRATEGIC OBJECTIVES

Strategic objectives are devised to break down the general target provided by a mission
statement into a series of specific objectives.

The SMART mnemonic provides a useful framework when evaluating objectives. Objectives
should be:

Specific

Measurable

Achievable

Results orientated, and

Time-bound

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THE JOHNSON, SCHOLES AND WHITTINGTON THREE-STAGE MODEL

1. Establish strategic position (‘where we are’)

2. Chose our strategic direction (‘where we want to be’)
3. Put our strategy into action (‘how we get there’)

Johnson, Scholes and Whittington point out that a successful organisation ‘will have found a
way of operating such that environmental forces, organisational resources and competences,
and stakeholder expectations mutually reinforce one another’.

STRATEGY AND THE CHANGING ENVIRONMENT

Most observers agree that the extent and pace of change in the business environment has
increased significantly over the past two or three decades.

Some believe that the rapid pace of change means long-tern planning is pointiness and possibly
wasteful. Others argue that a successful organisation must have a direction and a plan, even if
this needs to be reviewed and updated regularly.

Several approaches have been developed to help ensure strategic objectives and strategies
remain appropriate in times of environmental change.

 Emergent strategies evolve over time (emerge) rather than resulting from an analysis of
the environment and an evaluation of viable alternatives. These strategies often result
from a series of ad hoc choices or patterns of behaviour; one idea leads to another, until
a new pattern is formed and a new strategy has emerged.
 The logical incrementalism view of strategy is that strategy is not developed by
evaluating all possible options. Instead, strategic managers tend to only consider a few
alternatives. ‘New’ strategies tend to involve small-scale extensions of past policy - an
‘increment’ to existing strategy rather than a radical shift.
 The freewheeling opportunism approach rejects the need for extensive, detailed
planning. Instead, entrepreneurs identify and pursue opportunities as they arise.

POSSIBLE AREAS THAT MAY BE EXPLORED IN THE EXAM SCENARIO

 Evaluate an organisation’s mission and objectives and the ‘fit’ with the organisation’s
competencies and resources.
 Identify inconsistencies in strategies and the actions of the CEO or senior managers. For
example, imposing budgetary cuts that prevent strategic objectives being achieved.

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  Identify an unrealistic, inflexible long-term strategy that has failed to adapt to
environmental change and suggest a more flexible approach.

Environmental Issues
THE ENVIRONMENT THE ORGANISATION OPERATES IN

In these notes, and in the video the notes relate to, we are concerned with the environment in
which a business operates in. We are therefore using the wider meaning of the word
‘environment’, rather than only concerning ourselves with issues related to the natural or
physical environment.

The modern business environment is dynamic, by which we mean it is changing constantly and
quickly. This has shortened the planning timeframe of many business organisation’s and has
produced a need for constant and on-going monitoring or scanning of the environment.

Several models are available to help analyse an organisation’s environment. Rather than
viewing these models as an attempt to predict what will happen in the environment, think of
them simply as tools or frameworks to help ensure key issues are considered. Models also
provide a useful framework to provide structure to your discussion or evaluation in the SBL
exam.

PESTEL

The PESTEL model identifies the main factors to consider when analysing the business
environment.

Political factors include government policy and developments such as Brexit.

Economic factors are related to the economy, for example the rates of economic growth,
inflation and unemployment.

Social factors include changing attitudes, tastes and fashions. Demographics may also be
relevant, for example an aging population.

Technical factors include the development of new technologies.

Environmental factors include the need to ensure sustainability of resources and to protect the
natural environment.

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Legal factors include changes in regulations in areas such as employment, health and safety,
regulation and competition.

When using PESTEL, ensure the points you make are directly relevant to the environment and
organisation you are analysing. Refer regularly to the organisation to ensure your analysis
remains relevant.

PORTER’S DIAMOND

Porter suggested that there are four factors which determine a nation’s ability to establish
national competitive advantage.

 Factor conditions include physical resources such as land and minerals, capital, human
resources and the country’s infrastructure such as transport links and technological
infrastructure.
 Demand conditions. Porter identified strong demand for the product or service in the
home market as a contributor towards national competitive advantage and
international success.
 Firm, strategy, structure and rivalry. This element of the diamond is concerned with the
impact of the firm’s strategy, ownership structure and domestic competition. Domestic
competition encourages efficiency and innovation.
 Related and supporting industries. Successful industries often enjoy a network of
related, supporting industries located close by. For example, ‘silicon valley’ in California.

Porter’s model is not perfect, particularly in today’s environment in which (in some industries)
even very small businesses are able to operate globally regardless of where the business is
located.

However, the model does not need to be perfect to provide a useful starting point and a helpful
framework for discussion.

SCENARIO PLANNING

Scenario planning involves the development of possible outcomes based on predicted

behaviours of key environmental influences (such as those identified in PESTEL analysis).

As the future is, by its nature, uncertain, scenarios should be restricted to key environmental
influences, to avoid making the scenarios too complex.

How are scenarios prepared?

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Step 1: Identify the scope of the scenario (the key PESTEL factors)

Step 2: Identify different possible futures for each factor

Step 3: Build scenarios

Step 4: Eliminate highly improbable scenarios

Step 5: Flesh out plausible scenarios

Each scenario is not intended to accurately predict the future. Instead, the scenarios provide a
focus for strategic thinking and help decision makers quantify the impact of different situations.

POSSIBLE AREAS THAT MAY BE EXPLORED IN THE EXAM SCENARIO

 Evaluate an organisation’s environment identifying areas most significant in the context

of the organisation’s competitive position.
 Identify a failure to consider the environment and inconsistencies in strategies and the
actions of the CEO or senior managers. For example, imposing budgetary cuts that
prevent strategic objectives being achieved.
 Evaluate the international competitiveness of an organisation attempting to establish
itself in a global industry while being based in a country without a history in the
industry.
 Identify the main environmental factors to include in a scenario planning exercise
relevant to the examination scenario.

Competitive Forces
THE COMPETITIVE ENVIRONMENT

The competitive environment comprises the elements of the environment most directly linked
to how a business competes and functions.

Put simply, the more sellers of a similar product or service the more competitive the business
environment. For example, in a large city a restaurant is likely to face a very competitive
environment with many restaurants for potential customers to choose from.

Two of Michael Porter’s models which focus on the level of competition in an industry and an
organisation’s ability to compete are the Five Forces model and the Value Chain.

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As with the models we considered when covering the organisation’s general environment, think
of the models simply as frameworks to help ensure key issues are considered.

MARKET SEGMENTATION

Before we look at the Five Forces and Value Chain model we will consider how a business
decides which segment of the market it will target to compete in.

Market segmentation involves identifying customer groups based on characteristics or

variables, for example:

 Demographic variables, such as age, gender, sexual orientation, income, occupation,

education, socio-economic status, religion, nationality, race and others.
 Psychographic variables, such as personality, values and attitudes.
 Geographic variables, such as a country, region or city.
 Behavioural variables, such as benefit sought (quality, value, convenience), brand loyalty
and product end use.

THE MARKETING MIX

An appropriate marketing mix is required for each market segment that will be targeted. The
traditional marketing mix contains the four Ps.

 Price. Whether relatively high or relatively low, the price should be perceived as offering
value for money – even if the value comes from the exceptional quality and premium
branding.
 Product. By ‘product’, we mean what the organisation offers to the market to satisfy
customer wants or needs. The product may be a service. The term product also includes
surrounding elements such as after sales service.
 Place refers to sales and distribution channels. For example, most motor vehicle
manufacturers make their new products available through an approved dealer network.
Many organisations follow a multi-channel approach including their own website, retail
stores and third-party sellers such as Amazon.
 Promotion activities aim to raise awareness and encourage action, for example
advertising, discount coupons and special offers.

Beyond the four Ps, three additional elements of the marketing mix may be added to create the
seven Ps model. The additional Ps are most applicable to service delivery.

 People - staff and others involves in providing the service to satisfy customer needs.

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  Processes - the systems through which the service is delivered.
 Physical evidence – a physical representation of a service, for example an insurance
certificate.

FIVE FORCES MODEL

Porter’s five forces model identifies five external competitive threats.

 The threat from new entrants. A profitable industry that lacks barriers to entry will
attract new entrants, raising the level of competition.
 The bargaining power of customers (buyers). If customers have a large number of
potential suppliers to choose from, they are likely to be able to negotiate price
reductions.
 The bargaining power of suppliers. If there are only a few viable suppliers, these
suppliers are in a strong bargaining position and may increase their prices.
 The threat from substitute products. If similar are able to be used as substitute, then
the price of the substitute will affect the price able to be charged for the product or
service. An often quoted example is butter and margarine.
 The extent of competitive rivalry. Relevant factors here include the number of
competitors, the rate of growth of the industry and industry exit costs.

The five forces model is one that, generally, is easy to apply to an examination scenario. If you
do use the model to frame a discussion, ensure your analysis is geared towards the organisation
and scenario described – and that the points you make are relevant to the question
requirement.

VALUE CHAIN

Porter’s value chain groups the activities that organisations carry out into primary activities and
support activities.

Primary activities are identified as: inbound logistics, operations, outbound logistics, marketing
and sales, and after sales service.

Support activities are identified as: procurement, human resource management, technology
development and the firm’s infrastructure.

All activities have costs. To be profitable, the business must organise and carry out their
activities in such a way that value is added. Adding value enables a price to be charged that
exceeds costs, generating sufficient revenue to exceed costs and earn profit.

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When using the model, for each activity the key question is: How can more value be added?
This usually requires either reducing costs or increasing quality.

The value chains of different organisations involved in producing and delivering a product or
service to an end customer many be joined together to create a value network or supply chain
network. Inventory can be minimised and customer service improved if all parties in the supply
chain are closely synchronised and have the ability to react quickly.

POSSIBLE AREAS THAT MAY BE EXPLORED IN THE EXAM SCENARIO

 Identify an emerging market segment that could provide an opportunity.

 Use the Five Forces model to evaluate a market or industry and suggest actions that
could protect or improve the organisation’s position.
 Evaluate an organisation’s competitive environment identifying key competitors and
possible sources of competitive advantage.
 Use the value chain to identify functions that require improvement to add value, either
by reducing costs or improving quality - or a combination of both.

The Internal Resources, Capabilities & Competences of an

Organisation
COMPETITIVE ADVANTAGE

Competitive advantage is the ability to outperform the competition. Sustainable competitive

advantage is competitive advantage that is maintained over the long term.

Competitive advantage may be obtained through resources or through competences.

CAPABILITIES, RESOURCES AND COMPETENCES

Capabilities enable an organisation to produce goods or provide services. A capability usually

requires a combination of resources and competences.

Resources are things the organisation has. Competencies are things the organisation does.

A factory equipped with machinery and staff is a resource. How resources are used is a
‘competence’. For example, two organisations may have very similar resources but one
organisation be very profitable, producing products which are in demand and have a healthy
profit margin, while the other organisation is not profitable as it produces products which are

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not popular and carry a low or non-existent profit margin. The profitable organisation has
superior competence.

THRESHOLD RESOURCES AND COMPETENCES

Threshold resources and competences are the resources and competences the organisation
needs to compete at a level that enables it to survive.

If an organisation has threshold resources and competences only it may survive but is unlikely
to prosper. Stronger competitors will be able to outperform it, offering superior value to
customers, and will also be able to invest more in product development and marketing.

UNIQUE RESOURCES

To provide competitive advantage, resources need to be unique. To be unique, a resource must

not be available to a competitor or be able to be duplicated by a competitor. If a resource is not
unique, competitors are able to access an equivalent resource which would eliminate any
competitive advantage.

Unique resources are rare. An example would be a patent belonging to a pharmaceutical

company. Resources involved in routine manufacturing or retailing are unlikely to be unique.

CORE COMPETENCES

Core competences are sometimes called distinctive competences. Core competences are the
things the organisation does to deploy its resources that enable it to outperform competitors.

For example, it could be argued that Microsoft and Apple have similar resources, but in recent
years Apple’s competences have enabled it to innovate more successfully than Microsoft. It is
difficult to pin down what it is that Apple does which has allowed it to consistently develop
successful devices and services.

KNOWLEDGE MANAGEMENT

Organisational knowledge is a resource, whereas the knowledge management process which

captures knowledge and makes it available throughout the organisation is a competence.

Don’t become bogged down worrying about whether an item such as knowledge is an
intangible resource or a competence. What is important is to recognise the importance of
knowledge management and that outperforming competitors in the area of knowledge
management is a source of competitive advantage.

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SWOT ANALYSIS

SWOT analysis looks at an organisation’s internal Strengths and Weaknesses, and the
Opportunities available and Threats faced in the external environment.

A SWOT analysis can help identify the competences and resources that provide the organisation
with a source of competitive advantage. The analysis should also help identify the most
significant external issues that require the organisation’s attention.

The analysis should include suggestions for action, for example identifying a strength that will
enable the organisation to pursue an opportunity. If viable, action should be taken to convert
significant weaknesses into strengths. A threat may also be an opportunity. For example, if a
competitor has embraced a new technology which has provided them with competitive
advantage, this is a threat to the organisation. However, there is also an opportunity to adopt
the technology and perhaps to use it more effectively than the competitor.

POSSIBLE AREAS THAT MAY BE EXPLORED IN THE EXAM SCENARIO

 Evaluate the organisation’s resources and competences and distinguish between

threshold and unique resources, and threshold and core competences.
 Compare two organisations and identify the factors that drive an organisation’s success
and / or the factors which are hindering performance.
 Identify knowledge management and an organisation’s ability to learn as a source of
competitive advantage.
 Evaluate the organisation’s strategic position using a SWOT analysis.

Strategic Choices
STRATEGIC CHOICES

Models which may be applied to assess strategic direction or choices include:

 SAF (Suitability, Acceptability, Feasibility)

 Generic competitive strategies
 Boston Consulting Group matrix
 Ansoff matrix
 Lynch matrix

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As we have mentioned previously, think of these models as frameworks that help ensure key
issues are considered, rather than as attempts to predict or dictate behaviour.

SAF (SUITABILITY, ACCEPTABILITY, FEASIBILITY)

The SAF approach, developed by Johnson, Scholes and Whittington, identifies three key areas
to scrutinise any initiative or proposed plan.

 Suitability is concerned with strategic fit and capability.

 Acceptability refers to whether the initiative would be acceptable to stakeholders. Risk
and return are often relevant.
 Feasibility focuses on whether the initiative would work, for example whether the
technology required is available.

To remain as an option under consideration, a potential initiative must be suitable, acceptable

and feasible.

GENERIC COMPETITIVE STRATEGIES

Michael Porter identified three generic strategies for achieving competitive advantage.

 Cost leadership. Under this strategy, the business aims to be the lowest cost producer in
the industry and compete on price.
 Differentiation. A business that differentiates seeks competitive advantage through
providing something unique that is valuable to buyers. The differentiated product is able
to achieve a premium price in the market.
 Focus. A focus strategy involves segmenting the market and focusing on a particular
market niche. A cost-focus strategy aims to appeal to the market niche with a low cost
offering. A differentiation-focus strategy aims to appeal to the market niche by
providing something unique.

BOSTON CONSULTING GROUP (BCG) MATRIX

The BCG matrix is a two-by-two matrix that classifies businesses or products according to
present market share and the future growth of the market. The model sees market share as an
indicator of competitive strength.

 A cash cow has a high market share in a low-growth market and should be generating
substantial cash inflows.

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  A star has a high market share in a high-growth market. Funds may need to be spent to
defend an organisation's position against competitors.
 A question mark or problem child has a low market share in a high-growth market.
Funds are likely to be required to maintain or increase market share.
 A dog has a low market share in a low-growth market. Dog products may be
unprofitable, although this is not always the case.

Most organisations aim for a balanced portfolio. Cash cows support other products in the
portfolio. Stars will provide cash generation when the current cash cows can no longer do so.
Question marks have reasonable prospects of becoming future stars. If a dog product is
unprofitable and is expected to continue to be, the likelihood is that the product should be
discontinued. However, there may be other, non-financial factors that justify continuing with
the product.

ANSOFF MATRIX

The Ansoff matrix is a two-by-two matrix of product development and market development.

 Market penetration involves increasing market share in the organisation’s current

market with the current product range, for example through improved quality or
increased marketing activity.
 Product development involves introducing new products into the organisation’s existing
market(s).
 Under market development the organisation attempts to introduce existing products to
new markets.
 Diversification involves the introduction of new products into new markets. Related
diversification involves a new product and a new market, but within the broad confines
of the existing industry. Unrelated diversification involves a new product and a new
market and an unrelated industry.

Diversification is the strategy that carries most risk, as it involves both new products and new
markets. As always though, risk is related to reward. To achieve higher rewards may require
bigger risks to be taken.

LYNCH EXPANSION MATRIX

The Lynch expansion matrix is a two-by-two matrix of company growth (internal and external
development) and geographic location (home/domestic and overseas).

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  Internal development in the home country is expansion through organic growth in the
home market.
 Internal development overseas is expansion through exporting or setting up an
overseas facility.
 External development in the home country involves a merger or acquisition within the
home market.
 External development overseas involves a merger or acquisition of an organisation
based overseas.

This model may be useful to frame a discussion of different options available to a business
seeking to grow. Internal development tends to take longer to achieve growth than external
development.

POSSIBLE AREAS THAT MAY BE EXPLORED IN THE EXAM SCENARIO

 Identify possible opportunities available to a business in the context of the environment

described in the scenario and the organisation’s strategic aims.
 Evaluate proposed courses of action using one or more appropriate models to frame
your evaluation (ensure the points you make are relevant to the question
requirement!).
 How the concept of risk and reward is relevant to strategic choice and to the risk
appetite of stakeholders.
 Evaluate a corporation’s business unit portfolio or an organisation’s product portfolio
and suggest ways of maintaining or improving portfolio balance.

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