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Strategy Formulation:
Integrating the Corporation

The strategic approach to shareholder value management is often called the value-based
approach to management, or simply value-based management. This is a process that
begins with strategic scanning, proceeds to strategy formulation, strategy implementation
and performance monitoring.

The following sections describe an Integrated Strategic Management (ISM) process that
we have found useful when working with companies in the Philippine situation.

Strategy Formulation
At the heart of strategy formulation are two key decisions: the primary target market and
the core value proposition. Who will buy from us? Why will they buy from us? What
makes a strategy viable is a proposition that a) creates a basis for enough customers to
prefer the company’s product offerings, and b) is reasonable enough that the company
can turn an acceptable profit while delivering the customer promise.

For some industries, the price point can be a differentiator. For others, the price point
determines which market segments become accessible. In certain industries, the strategy
lies in understanding the product cycle and managing the intricate balance between
development costs, new product pricing and the marketing and pricing of the product
once it is standardized and widely available.
This reading was written by Prof. Maria Elena B. Herrera, Asian Institute of Management. All case materials are prepared
solely for the purposes of class discussion. They are neither designed nor intended to illustrate the correct or incorrect
management of problems or issues contained in the case.

Copyright 2007, Asian Institute of Management, Makati City, Philippines, https://aim.edu. No part of this publication may
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Generic Strategies:

Porter proposes three generic strategies: cost leadership, differentiation and focus.
Hamel and Prahalad have compared what they see as the two basic models of
strategic management: the avoidance of confrontation and strategic intent. For
example, the generic strategy of focus can be seen as an avoidance strategy. They
have also argued that a confrontation strategy can be successful if a firm has a
“core competence” that allows it to sustain a significant competitive
advantage.Treacy and Wieserma (Treacy & Wiserma, 1995) propose three
generic value propositions: operational excellence, customer intimacy and product
leadership. Other authors (e.g. Hamel and Prahalad) propose an amalgam of
propositions that address the triple factors of price, functionality and quality.

The strategy that is correct for a company is one that allows it to successfully compete in
a market that of a size that allows it to generate enough sales to turn a profit. This, of
course, requires that the company use its own unique set of assets in order to attain
relative advantage in its chosen market.

The competitive arena grids can be used to identify a set of market-demand generator
cells (micro-segments) in order to characterize its target markets. In practice, these sets of
micro-market cells tend to have some logical order. Some companies respond to a broad
set of demand generators across a single market segment: a market segment focus. For
example, the Philippine consumer brand Bench provides a wide array of products aimed
at a particular segment of the market, one that they define by a particular attitude and
lifestyle. Some companies, on the other hand, respond to a single demand generator
across a wide swathe of market segments: a demand generator focus. An example of this
would be many of the fast food chains that predominantly target the demand generator of
the need for affordable, convenient, clean and acceptable food. Of course, some
companies truly target very precisely – one or two specific micro-segments.

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Strategy Formulation: Integrating the Corporation 3

Choosing a
Business Micro-Segment
Context Preference Target Market
Analysis

Enterprise
Assets

•Unique
•Sustainable

Competitor
Enterprise
Assets

The choice of which micro-segments to focus on is dependent on two things: consumer

preference and corporate assets, including capabilities. In both cases, we look for some
form of defensible and sustainable competitive advantage. It is corporate assets and
capabilities that allow a company to deliver on a customer promise while earning a
reasonable return on capital.

This means that the target market and value proposition offering decisions must be
made together.

In the area of customer preference, it is extremely important that a company be able to

determine its relative consumer advantage only in relation to what the consumer truly
prefers. This is why understanding markets has become a key capability requirement to
participate in today’s more competitive environments.

A value proposition addresses a specific set of customer preferences in a specific way. A

generic value proposition can be seen as a balanced composition of three basic elements:
price, features, quality. Within this framework, features refers to more than just
functionality, it refers to characteristics such as “ease of use” and design. Quality refers to
the degree to which each feature attains certain specific benchmark measures. For
example, for “ease of use”, a benchmark could be that a normal user (say, a homemaker
aged 35 to 45) could use the machine straight out of the box.

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Strategy Formulation: Integrating the Corporation 4

We can see that these factors are clearly interdependent. Both quality and features require
a certain cost to deliver and this cost creates constraints around the price point. More
importantly, a company must understand that, while one of these factors might be the key
differentiator (in the way design was the key differentiator for the Apple iPod or the
Motorola Razor), the other two parameters must still be maintained within an acceptable
range. In fact, the factor of features is actually a decision set and the factor of quality
applies individually to each of the features.

Of course, the practical reality is that there will be products that the consumer will not
know he prefers. This is part of the art of analysis and market understanding and
companies that excel at this excel in answering not the question of why, but the question
of why not. These are the companies that create “blue ocean” strategies.

For most companies, however, ignoring the market can be a painful and expensive
exercise.

What is useful about using the competitive arena to identify target markets is that it can
also be used to define long-term expansion programs.

For example, we have seen this grid used by a services company to analyze institutional
markets. It was determined that industry expertise was necessary to complement
technical expertise in closing large accounts. It was also determined that a certain
minimum size of account was necessary in order to turn a profit. As the predominant
industry expertise was in banking, the company decided that its primary focus would be
on the banking industry. They then identified two possible directions for future
expansion depending on how their learning progressed. One way was to expand across
demand generators within the banking industry. The second was to address the same
demand generator but to reach out to other industries.

What we found interesting in this instance was that the discipline of creating competitive
arena grids that were logically developed (e.g. similar industries lay next to each other
and similar demand generators lay next to each other) facilitated the strategy formulation.

Implementing a Value-Creating Strategy

The implementation of strategy involves three key areas: hardware, software and
liveware.

Hardware refers to the mainly tangible assets necessary to pursue strategy. This includes
building and equipment. In some cases, it also includes intangible assets such as licenses
and concessions.

Software refers to the key processes, systems and structures necessary to pursue strategy.
It includes such things as procurement strategy, marketing communication strategy and
new manufacturing processes.

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Clearly, the hardware and software components of strategy must be designed and
managed in tandem. Finally, liveware refers to the management of human resources in
order to implement strategy. Together, these three components comprise the engine of
strategy.

Planning the Engine

for Strategy
Business
Context
Micro-Segment
Preference New
Analysis Enterprise
Competitor STRATEGY Asset
Enterprise Map
Assets Target
Market
&
Preference Hardware Software
Core
Values Driver

Own Liveware
Enterprise
Assets

The “liveware” or organization component can be seen as having six levers, or factors
that can be used to affect or control the organization.

The first two are intrinsically related and must be designed together taking into account
the process involved in strategy. These two are: (i) the shape or structure of the
organization (which includes which processes to outsource or to share across business
units) and (ii) the types of people and competencies required by the structure and process.
The next two take into account both shape and competencies: (iii) the type of leadership
appropriate for the organization and (iv) the reward mechanisms most appropriate for the
people the organization requires and the behaviors it requires of them. The fifth lever is
both result and foundation: (v) culture. Culture affects all of the other decisions and, as it
is the manifestation of a necessarily organic entity, it is also affected by all the other
levers. Finally, at the heart of the organization model are the (vi) change and governance
mechanisms of the organization. These are the systems that moderate the organization
and manage change.

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Organization
Hardware Software
Model

Organization Capability
Business Liveware
Context

Shape Competencies

Core Strategy
Values
Change &
Governance

Enterprise Leadership Rewards

Assets

Culture

Summary
In summary, the Integrated Strategic Management approach is anchored by the use of
shareholder value as an integrating mechanism.

Shareholder value is seen as arising from the management of three financial factors: long-
term operating cash flows, risk profile and market sentiment. However, it is important to
understand that long-term operating cash flows are the result of the careful management
of two things: the segments of the competitive arena that the company chooses to be in
and the assets (tangible and intangible and including corporate capabilities) that the
company creates.

The Integrated Strategic Management approach relies on the development of a fit

between the company’s strategy and its business engine: the hardware of physical and
financial assets, the software of process and systems and the “liveware” of organization.
Most importantly, the Integrated Strategic Management approach uses the performance
measurement system as a tool for communicating as well as for steering. When the
performance indicators are well-designed and connected to reward systems, managerial
focus is achieved.

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Strategy Formulation: Integrating the Corporation 7

Integrated Strategic Management

Business
Context
Strategy Map New
Enterprise
Assets

Shareholder Value
Strategy
Strategy

Core Engine
Values
Enterprise
Scorecard

Organization

Current
Enterprise
Assets Risk Management

The process of anchoring and linking:

a) Anchoring decisions to shareholder value creation and protection; and

b) Linking competitive arena and corporate assets to strategy, strategy to business

engine, business engine to programs, programs to indicators, indicators to
organization and reward

creates an Integrated Corporation, one that is focused clearly on creating and

protecting value for shareholders.

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SOURCES:

Boulton, Richard E.S.; Libert, Barry D. and Samek, Steve M. Cracking (2000), ‘The Value
Code’, Harper Collins, New York.

Chew, Donald H. Jr.(2001), ‘The New Corporate Finance’,McGraw-Hill Irwin Boston.

Copeland, Tom; Kollier, Tim and Murrin, Jack (1995), ‘Valuation Measuring and Managing the
Value of Companies’ ,Second Edition. Mckinsey & Company, Incorporated.

Kaplan, Robert S. and David P. Norton. ‘The Balanced Scorecard.’ Boston MA: Harvard
Business School Press, 1996.

Miller, M.H. and Modigliani, M.H. (1961), ‘Dividend Policy, Growth and the Valuation of
Shares,’ Journal of Business.

Norton, David P. (1999), ‘Use Strategy Maps to Communicate Your Strategy,’ Harvard Business
School Publishing

O’Brien, Jeffrey M.(2007), ‘How Wii Won,’ Fortune Magazine.

Paladino, Bob (2000). ‘How to Conduct a Balanced Scorecard Review to Create Strategic
Alignment,’ Harvard Business School Publishing.

Porter, Michael E.(1980), ‘Competitive Strategy,’ The Free Press, New York.

Porter, Michael E.(1985), ‘Competitive Advantage,’ The Free Press, New York.

Porter, Michael E. (1990), ‘The Competitive Advantage of Nations,’ The Free Press, New York.

Rappaport, Alfred (1998), ‘Creating Shareholder Value, A Guide for Managers and Investors,’
The Free Press, New York.

Treacy, Michael and I.Wiersema, Fred (1995),‘The discipline of market leaders: choose your
customers, narrow your focus, dominate your market,’ (IMPRINT) Reading, MA Addison-
Wesley.

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