Professional Documents
Culture Documents
This item contains selected online content. It is for use alongside, not as a replacement for
the module website, which is the primary study format and contains activities and
resources that cannot be replicated in the printed versions.
Contents
Introduction 5
Learning Outcomes 6
1 What do we mean by strategy? 7
1.1 Activity 1 7
1.2 Organisational purposes 7
1.3 Stakeholders 8
2 Market-based approach to strategy 10
2.1 The ‘near environment’ 10
2.2 Porter's five forces framework 10
2.3 Applying the five forces model 11
2.4 Strategy as fit between organisation and environment 13
3 Resource-based approach to strategy 15
3.1 Understanding organisational capabilities 15
3.2 Building capabilities and relationships 17
3.3 Understanding the value chain 19
4 Strategy as rational planning 23
4.1 Emergent strategy 23
Conclusion 27
Keep on learning 28
References 28
Acknowledgements 29
Introduction
In this session we take a closer look at what is meant by strategy. The classical approach
to strategic management treats strategic planning and control as purely the province of
senior managers. More recent approaches accept that middle-level managers may have
an important role to play, not only in implementing strategy but also in the emergence and
formulation of strategic direction. We will look at three broad approaches to understanding
strategy. First, we examine the idea of strategy as a formal, top-down process of analysis
and planning based on a considered response to the environment in which the
organisation operates, and its core mission. Second, we consider strategy as the
identification and development of core capabilities and networks of relationships, as a
source of competitive advantage. Third, we turn to one important aspect of strategy:
understanding and managing the creation of value, within and between organisations.
Finally, we consider the ways in which strategic direction can emerge over time as the
accumulation of smaller tactical decisions, as opposed to a formal, top-down process of
analysis and planning.
This OpenLearn course provides a sample of postgraduate study in Business
1.1 Activity 1
Activity 1
Take a couple of minutes to think about what you understand by the word ‘strategy’.
The first context in which many of us will have come across the word ‘strategy’ is
military. In military parlance, strategy describes the broad set of principles and
objectives determining the conduct of a war. Strategy is contrasted with the day-to-day
‘tactical’ decisions taken in the field as events unfold. Similarly, we often talk about
strategy in the context of games. A football team may develop a strategy for a match
based on an understanding of the strengths and weaknesses of the other side, the
nature and condition of the pitch, and their own strengths and weaknesses. The team's
tactics in response to the unfolding events of the match will be guided by that strategy.
The idea of strategy has also come to be adopted in the world of business and, to
some extent, in not-for-profit organisations.
First, strategy is concerned with the broad pattern of an organisation's activities, not the
day-to-day detail. Second, strategy is concerned with the long term. Finally, strategy is
concerned with organisational purposes: these may have a commercial focus, such as
market penetration, profitability and growth; or, for some organisations, they may concern
political or social goals.
1.3 Stakeholders
The balanced scorecard framework (Kaplan and Norton, 1998) is one approach to taking
account of stakeholder interests. It is based on the principle that organisations need to
serve the interests of multiple stakeholder groups simultaneously. Failure to serve the
needs of one is likely to prevent them from effectively serving the needs of the others. For
example, failure to serve the needs of customers will damage a firm's ability to serve the
financial needs of shareholders.
Kaplan and Norton explicitly recognise three stakeholder groups in their work on the
balanced scorecard: employees, customers and shareholders. However, for most
A market-based approach to strategy starts by analysing the near environment and the
organisation's resources, and seeks through a process of further analysis and planning to
fit the organisation to its environment.
The near environment is usually contrasted to the far environment (the macro influences
on the organisation such as general economic and political trends).
business development and marketing skills. An important strand of the strategy was to
promote the growth of businesses with low environmental impact in environmentally
sensitive areas to reduce tension between conservation and local economic health and
employment prospects.
(Source: Howard and Magretta, 1995)
Activity 2
1. In relation to a product or service offered by your organisation, make some notes
on the nature of its near environment, using either Porter's or McKevitt's models
(or a sensible adaptation).
2. What are the most important external forces faced by your organisation, that need
to be taken account of in formulating strategy for this product or service?
One of the first things that may have struck you is that, in order to answer these
questions in other than a very superficial way, you require a great deal of information.
The activity may have left you with more questions than answers about your
organisation's near environment. Often the information that we have – about
competitors (current and potential), customers, suppliers and potential substitutes for
our products or services – is heavily anecdotal. Although many organisations invest
significant resources in scanning their environment and understanding the competitive
forces they face, the information they gain is often partial and quickly outdated.
Gathering information is of course only the start. How is that information analysed and
used? Is the organisation involved in double-loop learning, questioning its basic
assumptions about its activities (like the US Nature Conservancy in the example
above), or is information discounted if it does not fit basic assumptions?
In the previous section, we discussed how organisations fit into their competitive
environment. In this section, we shift the emphasis from the external to the internal
context of strategy: the resources that an organisation possesses, or needs to possess,
as the basis for a robust strategy. We shift from the sector to the organisation, by
looking at:
● what are the organisation's capabilities, and its important networks of relationships
● how relevant they are to the objectives of the organisation
● what new capabilities and relationships may be needed over time
● how these should be built or acquired.
● Inimitability – They should be difficult for other organisations to imitate or acquire. For
example, if key capabilities rest on the competence of particular individuals, other
organisations may tempt them away with a better offer. By contrast the capability to
generate effective learning within the organisation may be rather harder to copy
or buy.
● Durability – They should be durable. For example, many technological innovations
are quickly superseded by new developments. An individual technological innovation
may be too short-lived to confer real advantage. However, the capability to generate
technological innovations may confer a more lasting advantage.
● Relevance – They should be relevant. For example, in the banking sector, the size of
the branch network used to be a key source of strategic advantage. Those banks that
were able to deliver services geographically close to the customer were more likely
to secure their business. As telephone and Internet banking become more prevalent,
branch networks become less strategically relevant.
● Appropriability – Not all profits generated by a resource flow to the owner of that
resource. The division of the value generated is subject to negotiation between the
organisation, its employees, customers, suppliers, distributors and partners. For
example, a farming business that develops a capability to produce more cheaply
may reap some benefits in increased profitability but, faced with powerful retail
chains as its customers, it may come under pressure to pass on much of the cost
savings to them. This will result partly in increased profits for the retail chains and
partly in reduced prices for the consumer. Similarly, capabilities that rest on the skills
of individual employees may result in the organisation having to pay a large
proportion of the value generated to those employees in order to keep them from
taking jobs elsewhere.
John Kay (an influential economist and writer on business strategy) identifies three main
classes of organisational capability that meet the above criteria: innovation, architecture
and reputation.
● A base of properties in prime retail locations which help M&S achieve occupancy
costs well below sector averages.
● A brand reputation with a wide base of customers which has not required
reinforcement or building through advertising or promotions.
● Employee loyalty leading to lower than average turnover and retention of
employee skills.
● Close and effective management of supply chains leading to lower costs and
higher quality.
● Flat management structure combined with effective management systems.
(Source: Collis and Montgomery, 1995)
Despite these strengths, Marks and Spencer's performance declined at the end of
the 1990s. It became increasingly apparent that these capabilities were no longer
sufficient to maintain competitive advantage. In particular the reliance on own-brand
goods, and on a brand reputation unsupported by advertising, were creating difficulties.
Consumer tastes had changed, and the target market was placing increased value on
named clothing brands. At the same time competitors were increasingly sourcing goods
overseas while M&S had relied on a high proportion of UK suppliers, so driving up its
relative cost base. It became clear it would have to develop new capabilities if it were to
survive and prosper.
Activity 3
Consider the Marks and Spencer example just given. Categorise M&S's resources and
capabilities in terms of John Kay's categories, leading to competitive advantage and
later to their down turn.You can use Table 1 to help you think about these issues.
Innovation
Architecture: Relationships within
firm
Architecture: Relationships
between firm and suppliers
Architecture: Relationships
between firm and customers/
buyers
Reputation
A base of properties in prime retail locations which help M&S achieve occupancy costs
well below sector averages.
This property base can be seen as a resource that translates into a particular capability
(the ability to present goods to the customer in a wide range of locations they want to
shop, consistently and at low cost). In itself this does not translate into a competitive
advantage – other retailers can purchase prime locations. However, over time the
persistent effect of this widespread network of retail locations has been to help build
reputation.
A brand reputation with a wide base of customers which has not required
reinforcement or building through advertising or promotions.
Again, this is about reputation – although, as Kay points out, this reputation is at heart
about the long-term relationships Marks and Spencer has built up with its customers
(who are also an important referral market).
Employee loyalty leading to lower than average turnover and retention of employee
skills.
This concerns the relationships M&S has built up over time with its employees. We
might call this the human resource architecture.
Close and effective management of supply chains leading to lower costs and higher
quality.
Again this concerns architecture: this time, the network of relationships with suppliers.
Flat management structure combined with effective management systems.
This final point again concerns architecture: the routines and systems for managing
internal relationships.
The downturn in the fortunes of M&S rests on two main problems with the relevance of
its traditional capabilities to a changing environment. First, it suffered a decay in
reputation as M&S lost track of what was required to maintain its customer and
reference market architecture. Second, the relevance of its supply chain architecture
was lost in the face of competitive cost pressures.
You may find that even a very simple overview of an organisation's value chain gives a
great deal of insight into its relative strengths and weaknesses. It is also the case that
imaginative approaches to reconstructing (‘reconfiguring’) the value chain can release
new ways of clustering resources and therefore new types of capability within
organisations.
Analysis of the value chain enables us to identify where an organisation's distinctive
capabilities are based. They may arise from clear advantages in particular functions
(e.g. R& D, manufacture), or from the integration of individual functional capabilities.
These distinctive capabilities give rise to core competencies, which are what make the
organisation what it is. They are the key to the continued success of the institution, and
effective strategies need to recognise and build on them.
Such close attention to the value chain enables Li & Fung both to drive down costs and to
reduce the time from order to delivery, buying their customers (retail chains) vital time in
which to track customer tastes and deliver products that correspond to quickly shifting
fashions.
Activity 4
Consider the description of Li & Fung above. What would you say are the distinctive
capabilities of this organisation? You can use Table 2 to help you to analyse their
capabilities and consider what may lead to future problems.
Innovation
Architecture: Relationships within firm
Architecture: Relationships with firms in
value chain, manufacturers and suppliers
Architecture: Relationships with firms in
value chain, customers/ buyers
Reputation
It seems likely that Li & Fung see themselves as having good skills in the areas of
design, product planning, engineering, quality control and logistics. They also have an
important capability in their supply chain architecture: their network of relationships
with suppliers over a large and diverse geographical region. However, all of these are,
at least in some degree, common and imitable. Underlying the importance of these
factors is the capability they have developed to bring them together by managing large
and complex value chains.
While Intel is widely regarded as one of the most innovative and adroitly
managed high-technology firms, the DRAM exit story suggests that even
extraordinarily capable and technically sophisticated top managers, such as
Gordon Moore and Andy Grove, do not always have the foresight of the
mythical Olympian CEO making strategy. Rational justification, emotional
attachment, and bounded rationality, mixed with valid concerns about
protecting a core technology of the firm, made it very difficult for Intel's top
management to exit from DRAMs. At the same time, actions by some middle-
level managers responding to external and internal selection pressures had
already begun to dissolve the strategic context of DRAMs and undermine the
reality of Intel, the memory company. Incremental shifts in the allocation of
scarce manufacturing resources from DRAMs to microprocessors and
technological trade-offs favouring microprocessors over DRAMs happened
before the official corporate strategy was restated. The study of strategic
business exit thus confirms that strategic actions often diverge from statements
of strategy, that resource allocation and official strategy are not necessarily
tightly linked, and that strategic actions of complex firms involve multiple levels
of management simultaneously.
(Burgelman, 1994, pp. 48–9)
An important point here is that emergent strategy should not be equated with lack of
management. It may reflect organisational systems and routines that enable the
organisation to respond quickly and flexibly to threats and opportunities. Planned and
emergent strategy may also co-exist, as illustrated in Figure 7. Emergent strategy and
intended strategy both affect the organisational resource allocation process. The pattern
of actions that emerges is the actual strategy of the organisation.
Upward
Synthesising information:
Championing:
Downward
Facilitating adaptability:
Conclusion
Our first learning outcome for this session was that you should be able to explain the
difference between a ‘markets approach’ and a ‘resource-based approach’ to strategy,
and how they complement each other . We first looked at how analysis of the near
environment forms a basis for planning a strategy to achieve an organisation’s purposes.
As part of this, we discussed Porter’s five forcesframework for competitive analysis, and
how it may need to be adapted for some organisations and sectors. Activity 2 asked you
tothink about the near environment faced by your own organisation. We then turned to the
resource-based view of strategy, andconsidered how analysis and development of an
organisation’s resources and capabilities form another basis for strategic planning.We
looked at four prerequisites for the capability to deliver competitive advantage:
inimitability, durability, relevance, and appropriability. We discussed three main categories
of capability: innovation, architecture and reputation. Activity 3 asked you to apply these
ideas to the example of Marks and Spencer. Activity 4 asked you to analyse the distinctive
capabilities of Li & Fung.
Our second learning outcome was that you should be able to explain what is meant by
‘the value chain’, and how it applies to yourorganisation. We looked at how a careful
analysis of the value chain could reveal opportunities for performance improvement both
withinthe organisation and by managing the value chain outside the organisation. We
looked at Li & Fung as an example of effective management across a value chain
involving multiple organisations
Our third learning outcome was that you should be able to explain what is meant by
‘emergent strategy’ and why intended and actualstrategy may differ . We first looked at a
formal rational process of strategic planning, and then observed that unexpected crises
and opportunities and quickly changing environments may produce a significant gap
between intended and realised strategy. Consequently the quality of an organisation’s
strategy is as much determined by its systems and routines for responding to crises and
opportunities as it is by the quality of its formal strategic planning process.
Our final learning outcome was that you should be equipped to contribute more effectively
to developing and implementing strategy in your organisation. We noted that strategy is
increasingly seen as not only the province of a top team, but involving a wide range
ofmanagers throughout the organisation. The Floyd and Wooldridge framework will help
you to look at your role in developing and implementing strategy. This session should
leave you better prepared to play that role.
Keep on learning
References
Burgelman, R. A. (1994) ‘Fading memories – a process theory of strategic business exit’,
Administrative Science Quarterly, Vol. 39, No. 1, pp. 24–56.
Acknowledgements
Except for third party materials and otherwise stated (see terms and conditions), this
content is made available under a
Creative Commons Attribution-NonCommercial-ShareAlike 4.0 Licence
Grateful acknowledgement is made to the following sources for permission to reproduce
material in this session:
Course image: Images Money in Flickr made available under
Creative Commons Attribution 2.0 Licence.
Figure 2 From ‘How competitive forces shape strategy’, by E. Porter, Vol. 57, No. 2 1979.
Figure 3 Figure 3 (B700_3_003i.jpg) based on McKevitt, D., ‘Strategy implementation in
public sector organisations’ in Flood, P., Dromgoole, T., Caroll, S.J. and Gorman, L., (eds)
“Managing Strategy Implementation”, Blackwell Publishers Ltd, 2000;
Figure 4 Grant, R.M., “Contemporary Strategy Analysis”, (3rd edition), Blackwell
publishers Ltd, 1998;
Figure 5 Grant, R. M. (1998) Contemporary Images Money
Strategy Analysis (3rd edition), Blackwell Publishers Ltd;
Figure 8 From ‘The processes of strategy definition and implementation’, by C. C.
Christensen and J. B. Dann
Every effort has been made to trace all copyright owners, but if any have been
inadvertently overlooked, the publishers will be pleased to make the necessary
arrangements at the first opportunity.
Don't miss out:
If reading this text has inspired you to learn more, you may be interested in joining the
millions of people who discover our free learning resources and qualifications by visiting
The Open University - www.open.edu/openlearn/free-courses