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g r a d u at e c o l l e g e o f m a n a g e m e n t

Strategic Management
MNG00716
revised by: Ben faranda

Study Guide
Sixth edition

2010 Southern Cross University Southern Cross University Military Road East Lismore NSW 2480 No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher. Copyright material indicated in this work has been copied under Part VB of the Copyright Act 1968.

Sixth edition 2010

Contents
Welcome ........................................................................................................................................ 1 Using.the.Study.Guide.................................................................................................... 1 Topic 1 Introduction to strategic management.............................................................. 3 Introduction..................................................................................................................... 3 Understanding.and.formulating.strategy......................................................................... 5 Difference.between.strategy.and.tactics.......................................................................... 6 Evolution.of.strategic.management................................................................................. 7 Ethics,.business.models.and.strategic.success.............................................................. 10 Summary....................................................................................................................... 11 Feedback.to.selected.activities...................................................................................... 12 Topic 2 The five phases of strategic management................................................... 13 Introduction................................................................................................................... 13 Developing.a.strategic.vision........................................................................................ 14 Setting.objectives.......................................................................................................... 16 Crafting.a.strategy......................................................................................................... 19 Implementing.and.executing.the.strategy..................................................................... 20 . Evaluating.and.initiating.corrective.adjustments.......................................................... 20 Corporate.governance................................................................................................... 21 Summary....................................................................................................................... 21 Feedback.to.selected.activities...................................................................................... 22 Topic 3 External analysis: Industry and competitive analysis............................... 23 . Introduction................................................................................................................... 23 The.strategically.relevant.components.of.a.companys.external.environment............. 24 Thinking.strategically.about.a.companys.industry.and.competitive.environment. ..... 25 . Summary....................................................................................................................... 33 Topic 4 Analysing a companys resources and competitive position............... 35 Introduction................................................................................................................... 35 The.resource-based.view.of.the.firm............................................................................. 36 Question.1:.How.well.is.the.present.strategy.working?................................................ 40 SWOT.analysis.............................................................................................................. 40 Question.2:.Are.the.companys.prices.and.costs.competitive?..................................... 41 Question.3:.How.strong.is.the.companys.competitive.position?................................. 45 Question.4:.What.strategic.issues.merit.attention?....................................................... 45 Summary....................................................................................................................... 47
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MNG00716 Strategic Management

Topic 5 The five generic competitive strategies......................................................... 49 . Introduction................................................................................................................... 49 Strategy.and.competitive.advantage. ............................................................................ 51 . The.five.generic.competitive.strategies......................................................................... 52 Summary....................................................................................................................... 56 Topic 6 Beyond competitive strategy.............................................................................. 57 Introduction................................................................................................................... 57 Strategic.alliances.and.collaborative.partnerships........................................................ 58 The.source.of.competitive.advantage:.Merger.and.acquisition.strategies.................... 59 . Vertical.integration.strategies........................................................................................ 60 Unbundling.and.outsourcing.strategies......................................................................... 60 Business.strategy.choices.for.specific.market.situations,.including.offensive.and.defensive. strategies........................................................................................................................ 61 Blue.Ocean.Strategies................................................................................................. 64 Defensive.strategy......................................................................................................... 64 First-mover.advantages................................................................................................. 65 Summary....................................................................................................................... 66 Feedback.to.selected.activities...................................................................................... 67 Topic 7 Competing in foreign markets............................................................................. 69 Introduction................................................................................................................... 69 Why.companies.expand.into.foreign.markets............................................................... 71 Cross-country.differences.in.cultural,.demographic.and.market.conditions................. 71 The.concepts.of.multi-country.competition.and.global.competition............................ 72 Strategy.options.for.entering.and.competing.in.foreign.markets.................................. 72 The.quest.for.competitive.advantage.in.foreign.markets.............................................. 73 Strategic.alliances.and.joint.ventures.with.foreign.partners......................................... 73 Competing.in.emerging.foreign.markets....................................................................... 74 Summary....................................................................................................................... 76 Feedback.to.selected.activities...................................................................................... 77 Topic 8 Diversification.............................................................................................................. 79 Introduction................................................................................................................... 79 When.to.diversify.......................................................................................................... 81 Strategies.for.entering.new.businesses.......................................................................... 81 Choosing.the.diversification.path:.Related.versus.unrelated.businesses...................... 82 . Summary....................................................................................................................... 86 Feedback.to.selected.activities...................................................................................... 87 Unit evaluation by students. ................................................................................................. 89 .

MNG00716 Contents

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Topic 9 Strategy, ethics and environmental sustainability...................................... 93 Introduction................................................................................................................... 93 Corporate.Social.Responsibility.(CSR).and.competitive.advantage. ........................... 94 . Types.of.strategic.options:.What.do.we.mean.by.business.ethics?............................... 94 Strategy.and.social.responsibility. ................................................................................ 98 . Summary..................................................................................................................... 101 Feedback.to.selected.activities.................................................................................... 102 Topic 10 Building an organisation capable of good strategy execution......... 103 Introduction................................................................................................................. 103 A.framework.for.executing.strategy............................................................................ 104 Building.resource.capabilities.and.structuring.the.organisation................................. 105 Managing.internal.operations:.Actions.that.promote.good.strategy.execution........... 109 Summary..................................................................................................................... 112 Feedback.to.selected.activities.................................................................................... 113 Topic 11 Culture, leadership and strategic execution.............................................. 115 Introduction................................................................................................................. 115 Implementing.strategy:.Culture.and.leadership.......................................................... 117 Leading.the.strategy.execution.process. ..................................................................... 120 . Summary..................................................................................................................... 123 Feedback.to.selected.activities.................................................................................... 124

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MNG00716 Strategic Management

Welcome
Using the Study Guide
Included.in.your.package.of.materials.are.the.Unit.Information.Guide,.and.the. numbered.topics.collectively.referred.to.as.the.Study.Guide..The.Unit.Information. Guide.provides.the.Unit.Statement,.assignment.details,.contact.details.etc..while.the. Study.Guide.contains.the.print-based.content.and.teaching.aspects.of.the.unit..It.is. important.that.you.read.both.of.these.documents.carefully. The.Study.Guide.and.associated.online.MySCU.site.are.designed.to.be.fully.selfinstructional;.that.is,.they.take.the.place.of.traditional.face-to-face.lectures.and. tutorials..In.most.units.the.Study.Guide.is.written.around.one.or.more.textbooks..the. textbooks.contain.the.content.and.the.Study.Guide.and.MySCU.site.do.the.teaching.. Occasionally.there.is.no.textbook,.so.the.Study.Guide.presents.all.the.content.as.well.. Either.way,.the.Study.Guide.guides.you.through.the.subject.matter.of.the.unit.in.a. systematic.and.structured.way,.using.features.such.as.hierarchical.headings.and.bold. type.to.highlight.key.concepts.and.terms..It.directs.you.when.to.read.your.textbook. or.other.supplied.readings,.when.to.use.the.MySCU.site.and.when.to.undertake.selfassessment.activities.to.help.you.to.see.if.youre.handling.the.content.that.has.been. presented.. So.each.topic.is.made.up.of.three.types.of.material:.teaching.(the.lecturer/writer. talking.to.you),.directions.to.read.something,.and.directions.to.do.something..Active. learning.is.really.important,.especially.when.youre.studying.independently,.and.the. activities.in.each.topic.give.you.the.opportunity.to.do.something.with.what.youve.just. read.or.what.you.are.about.to.read..Activities.within.the.topic.are.designed.to.help.you. check.your.understanding.of.individual.concepts..All.activities.should.be.attempted. as.you.come.across.them,.and.you.should.always.try.to.answer.the.questions.asked. before.looking.at.the.feedback.provided! All.units.are.structured.around.a.set.of.learning.objectives..These.are.expressed. in.terms.of.what.you.should.be.able.to.do.once.youve.studied.the.material..The. objectives.cover.a.wide.range.of.skills:. . . . . knowledge:.recalling.information.(e.g..define,.name,.label) comprehension:.interpreting.information.in.your.own.words.(e.g..classify,. describe,.discuss,.explain,.identify) application:.applying.knowledge.to.a.new.situation.(e.g..apply,.illustrate,. interpret,.solve) analysis:.breaking.down.knowledge.into.parts.and.showing.the.relationship. among.the.parts.(e.g..analyse,.calculate,.compare,.contrast,.criticise,.differentiate,. examine) synthesis:.bringing.together.parts.of.knowledge.to.form.a.whole.and.building. relationships.for.new.situations.(e.g..construct,.create,.design,.prepare) evaluation:.making.judgments.on.the.basis.of.certain.criteria.(e.g..appraise,. argue,.attack,.defend,.evaluate,.predict).

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MNG00716 Strategic Management

It.is.important.to.realise.that.recalling.knowledge.is.a.very.small.part.of.what.you. are.required.to.do.in.your.learning.for.this.unit..Rote.learning.is.not.appropriate.at. this.level.of.study..You.must.acquire.skills.of.analysis,.interpretation.etc..and.by. undertaking.the.unit.activities.and.assignments.you.will.gradually.acquire.these. important.skills..

Topic 1
Introduction to strategic management
Introduction
US newspapers struggling to survive Circulation.is.dropping,.print.advertising.revenue.is.falling.and.readers.are.going. online.to.get.news.for.free,.leaving.the.US.newspaper.industry.awash.in.red.ink. and.threatening.some.of.the.biggest.names.in.journalism. The.business.model.that.used.to.work.at.newspapers.does.not.work.any.more,. The.Washington.Post.Co.chairman.Donald.Graham.said.last.week,.echoing.what. many.observers.of.the.US.media.landscape.have.been.saying.for.some.time. With.The.Tribune.Co,.owner.of.The.Los.Angeles.Times.and.other.newspapers,. seeking.bankruptcy.protection.and.vultures.circling.around.other.publications,. comedian.Jon.Stewart.got.into.the.act.with.a.new.punch.line.to.an.old.joke. Whats.black.and.white.and.completely.over?.Stewart.asked.viewers.of.his. popular.mock.news.television.show.on.Comedy.Central. Newspapers! The.crisis.gripping.the.industry.is.of.course.no.laughing.matter.to.the.15,422. newspaper.employees.who.have.been.laid.off.this.year.or.taken.buyouts,. according.to.figures.compiled.by.Erica.Smith,.a.St.Louis.Post-Dispatch.journalist. who.tracks.the.cuts.on.her.blog.at.graphicdesignr.net/papercuts/ Media.job.losses.are.also.being.updated.several.times.a.day.on.a.feed.on.microblogging.service.Twitter.started.last.month.by.a.group.of.public.relations.agents. called.The.Media.Is.Dying.(twitter.com/themediaisdying). Not.a.day.goes.by.without.more.bad.news.for.the.newspaper.industry.as.the. financial.slowdown.accelerates.the.decline.in.print.advertising.revenue.and.more. classified.advertisers.turn.to.free.websites.such.as.Craigslist.com. According.to.the.Audit.Bureau.of.Circulations,.circulation.for.507.daily.US. newspapers.fell.4.64.per.cent.in.the.six.months.to.September.to.38.16.million. copies.from.40.02.million.in.the.same.period.last.year.
(Sydney Morning Herald,.14.December.2008)

Despite.this.article.being.somewhat.dated.at.this.point.in.time,.it.is.worth.reflecting. on.just.how.much.some.industries.will.change.in.relatively.short.time.scales..There. are.literally.thousands.of.websites,.including.blogs,.that.offer.compelling.and.salient. observations.as.to.why.newspapers.are.not.only.struggling.but.perhaps.dying.a.slow,. painful.death.as.they.seek.to.reinvent.themselves.as.information.providers.online,. whereby.one.day.they.will.ask.you.to.pay.for.content..The.last.two.decades.have.seen.


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MNG00716 Strategic Management

a.continual.decline.of.original.reporter.content.as.newspapers.avariciously.approached. the.likes.of.CNN,.Reuters,.AAP.etc..for.content..However,.most.of.this.news.is.not. only.recycled.and.often.fails.to.include.a.byline,.but.it.is.also.available.through. thousands.of.sources,.rendering.it.very.difficult.for.newspapers.to.attract.revenue.from. web.savvy.news.readers. Rupert.Murdoch.has.publicly.denounced.companies.such.as.Google.for.providing. such.ready.access.to.news.aggregation.services.for.content.generators.and.readers. alike..Murdoch.is.convinced.the.industry.will.move.to.a.premium.content.model,. which.would.be.a.bold.move,.considering.most.of.News.Limiteds.content.is.rehashed. and.reused.content.from.the.news.agencies.already.mentioned..Bear.in.mind,.readers. and.educated.people.know.this,.and.therefore.are.going.to.be.hard.to.convince.if.they. are.asked.to.hand.over.money.for.stories. So.why.is.this.important.as.an.introduction.for.Strategic.Management?.Well.it.sets.the. scene.that.nothing.is.ever.straightforward;.there.is.perhaps.never.going.to.be.a.one. best.strategy.that.suits.the.business.models.of.contemporary.business..The.story.of.the. newspaper.industry.is.similar.to.many.others..think.of.travel.agencies,.retail.service. providers.and.similar.business.where.there.is.a.mass.migration.to.cheap.outsource. locations.such.as.India.and.the.Phillipines.and.to.the.Internet.where.customers.have. more.ownership.of.their.accounts.and.more.access.to.buy.online. Coming.back.to.the.example.of.the.newspaper.industry,.it.could.be.argued.that.we. live.in.tumultuous.times,.when.organisations.are.facing.immense.challenges.brought. on.by.changes.in.their.internal.and.external.environment..This.is.clearly.seen.in.the. issues.facing.the.printed.newspaper.industry.in.the.extract.from.the.article.above..The. newspaper.industry.will.have.to.determine.a.new.course.of.action.to.address.these. challenges..It.is.the.type.of.actions.that.they.take.that.will.be.our.concern.in.this.unit. on.strategic.management..What.long-term.plans.and.direction.can.this.industry.take.to. secure.a.stable.future?.This.is.what.strategic.management.is.about. This.topic.examines.the.concepts.surrounding.organisational.strategy..It.begins.with. an.explanation.of.the.term.strategy.and.offers.a.basis.for.how.to.identify.a.companys. particular.strategy..This.is.followed.by.an.overview.of.the.history.of.strategic. management.so.that.we.can.see.how.it.has.evolved.as.a.business.discipline.in.its. own.right.as.well.as.pervading.other.business.disciplines..In.marketing,.information. systems,.and.human.resource.management,.for.example,.there.is.a.growing.using.of.a. strategic.focus. The.set.of.actions.that.organisations.take.in.the.pursuit.of.some.business.objective.are. usually.designed.to.gain.some.competitive.advantage.in.the.marketplace..The.topic. examines.the.role.strategy.plays.in.achieving.this.advantage..It.is.pointed.out.that. strategy.evolves.over.time.and.is.partly.proactive.and.partly.reactive..Actions.that. organisations.take.in.the.pursuit.of.goals.can.often.be.questioned.as.to.their.ethical. nature.and.these.issues.are.addressed.in.the.next.section. Unless.the.strategy.is.proving.profitable.for.the.organisation.then.it.is.unlikely.to. be.successful..There.is.a.need.to.ensure.that.the.strategy.fits.the.business.model.that. enables.the.organisation.to.succeed..This.link.is.discussed.in.the.next.section.of.this. topic..The.topic.concludes.with.a.discussion.of.why.we.should.be.interested.in.the. strategies.organisations.are.designing.and.implementing. This.topic.is.introductory.by.design.and.introduces.concepts.that.are.more.fully. explored.in.later.topics..It.thus.covers.a.range.of.issues.very.briefly.but.sets.a. foundation.for.the.more.detailed.analysis.to.follow.in.later.topics.

MNG00716 Topic 1 Introduction to strategic management

Objectives
At.the.conclusion.of.this.topic.you.should.be.able.to: . . . . . . . define.the.concept.of.strategic.management justify.the.importance.for.organisations.of.crafting.and.executing.strategic. management.actions identify.the.actions.organisations.take.that.explain.their.strategy explain.steps.organisations.take.to.achieve.a.sustainable.competitive.advantage outline.and.distinguish.between.the.major.schools.of.thought.about.strategic. management examine.moral.and.ethical.issues.facing.organisations.in.determining.their. strategic.approaches assess.the.link.between.strategy.and.a.business.model.

Materials required
Textbook Thompson,.Strickland.&.Gamble.2010,.Chapter.1. Readings 1.1. Mintzberg,.H.&.Lamprel,.J.1999,.Reflecting.on.the.strategy.process,.Sloan Management Review, vol..40,.no..3,.pp..2130. 1.2. Browne,.M.1994,.The.evolution.of.strategic.management.thought,.Background. Paper.for.the.Strategic.Management.Educators.Conference,.Australian.Centre.for. Strategic.Management,.Queensland.University.of.Technology. 1.3 Kaplan,.RS.&.Norton,.DP.2004,.How.Strategy.Maps.Frame.an.Organizations. Objectives,.Financial Executive,.March/April,.pp..4045.

Understanding and formulating strategy


Turn.to.your.text.and.read.the.section.entitled.What.do.we.mean.by.strategy?.on. pages.410. There.is,.in.the.literature.and.in.industry,.a.general.agreement.on.the.definition.of. some.of.the.terms.used.in.strategic.management..There.has.also.been.a.large.quantity. of.research.which.has.led.to.an.understanding.of.the.tools.and.techniques.available.for. formulating.strategies..However,.strategic.decision.making.remains.an.art.requiring. not.only.an.understanding.of.the.strategic.function.and.available.data.but.also.skill,. judgment.and.experience.in.selecting.the.best.decision.from.a.range.of.strategic. options..In.essence.strategic.management.is.that.set.of.managerial.decisions.and. actions.that.determines.the.long.run.performance.of.an.organisation..The.decisions. and.actions.taken.by.the.newspaper.industry.proprietors.to.resolve.declining.sales.and. profitability.outlined.above.will.constitute.strategic.decisions. Organisations.are.striving.to.obtain.a.sustainable.competitive.advantage.in.the. decisions.they.make.and.the.text.discusses.four.key.strategic.approaches.that. organisations.take.in.the.pursuit.of.this.sustainable.and.profitable.competitive. advantage..There.is.a.close.link.between.competitive.advantage.and.profitability. In.order.to.identify.the.particular.strategy.being.followed.by.organisations.there.are.a. number.of.actions.that.can.be.identified.and.these.are.illustrated.in.Figure.1.1.(page. 10.of.your.text)..(While.these.actions.seem.clear.for.organisations.seeking.financial. profitability.the.question.arises.as.to.whether.this.figure.would.be.useful.for.not. for.profit.organisations..Indeed.as.you.work.through.this.text,.which.places.major.

MNG00716 Strategic Management

emphasis.on.organisations.that.seek.profitability.as.their.main.goal,.it.is.worthwhile. to.reflect.on.whether.the.concepts.discussed.are.just.as.relevant.in.the.not.for.profit. sector). The.textbook.provides.an.excellent.discussion.on.the.various.activities,.functions. and.skills.brought.to.bear.within.strategy.making..They.emphasise.that.changing. circumstances.and.ongoing.management.efforts.to.improve.the.strategy.cause.a. companys.strategy.to.emerge.and.evolve.over.time..a.condition.that.makes.the.task. of.crafting.a.strategy.a.work.in.progress,.not.a.one-time.event.(Thompson,.p..11).. Moreover.a.companys.strategy.is.a.blend.of.proactive.and.reactive.adjustments.and. this.blend.is.illustrated.in.Figure.1.2.(page.12). Mintzberg.and.Lamprel.(1999).provide.a.more.personal.account.of.the.strategy.focus.

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Reading 1.1
Read Reflecting on the strategy process by Mintzberg and Lamprel (1999).

Activity 1.1
Having read and reflected on this literature, outline the differences and connections between the following ingredients in the strategy process: goals policies missions objectives programmes strategy.

Most.large.organisations.formulate.explicit.strategies.for.their.organisations..This. may.not.be.true.of.smaller.organisations..However,.strategies.do.form.in.almost.all. organisations,.even.if.they.are.not.formulated.in.an.ordered.and.stated.manner..These. strategies.are.termed.emergent..The.owners.of.most.small.businesses,.for.example,. have.a.good.idea.of.how.to.develop.the.business,.but.many.do.not.express.this.as.a. stated.strategy.or.go.through.a.deliberate.process.of.defining.the.strategy..The.strategy. emerges.as.the.business.develops..Increasingly,.however,.due.to.the.high.rate.of.failure. of.small.businesses,.organisations.that.provide.financial.or.other.services.to.small. business.are.insisting.on.a.business.plan.being.formulated.that.includes.strategy. Many.of.you.are.studying.for.your.Masters.degree.to.improve.your.career.prospects.. However,.you.probably.havent.written.this.down.as.a.formulated.strategy,.nor.will. you.have.consciously.worked.out.the.reason.or.the.outcomes.from.completing.the. post-graduate.course..You.have.adopted.an.emergent.strategy.approach.to.your.studies.

Difference between strategy and tactics


It.is.often.difficult.to.distinguish.between.strategy.and.tactics.and.we.do.need. to.understand.the.difference..Quinn.in.Mintzberg.and.Quinn.(1996).argues.that. strategic decisions.determine.the.overall.direction.of.the.enterprise.and.of.its. functional.divisions..Tactical decisions.are.those.which.are.made.to.reflect.changes. in.the.environment.in.order.to.implement.broader.strategic.decisions..For.example,. a.rubber.tyre.manufacturing.company.which.recognises.that.it.is.weak.in.research. and.development,.and.thus.at.risk.in.the.future,.may.determine.a.strategy.to.form.an. alliance.with.another.company.which.has.strong.research.and.development..It.needs.to. develop.tactics.to.identify.a.suitable.company.and.to.convince.it.to.join.the.alliance.

MNG00716 Topic 1 Introduction to strategic management

Activity 1.2
Using your own organisation or one of your choosing, outline the extent to which the organisation has formulated and stated a strategy. List some of your organisations strategic decisions and some of its tactical decisions.

Evolution of strategic management


Somewhat.surprisingly.the.textbook.does.not.have.a.section.on.the.history.and. evolution.of.strategic.management.so.we.must.use.some.other.readings.to.see.how. this.business.discipline.has.come.to.dominate.organisational.thinking..Strategic. management.in.business.is.a.relatively.new.and.dynamic.set.of.activities.which.are. evolving.in.response.to.ever.changing.business.environments. Brown.(1994).states.that.strategic.management.emerged.as.a.business.discipline.in. the.early.1960s.and.was.a.consequence,.in.part,.of.the.emergence.of.a.professional. management.function.separate.from.the.owner-management.which.characterised. business.in.the.early.1900s..As.corporations.grew.they.became.too.complicated.for.the. owner.to.manage..As.a.consequence.professional.managers.emerged.

Reading 1.2
Turn to the article by Browne and read about the evolution of strategic management thought.

Mintzberg.(1990).has.proposed.ten.schools.of.strategy.formation.which.he.believes. have.emerged.over.the.years..He.has.identified.them.as: 1.. 2.. 3.. 4.. 5.. 6.. 7.. 8.. 9.. 10.. Design.School:.A.Process.of.Conception Planning.School:.A.Formal.Process Positioning.School:.An.Analytical.Process Entrepreneurial.School:.A.Visionary.Process Cognitive.School:.A.Mental.Process Learning.School:.An.Emergent.Process Power.School:.A.Process.of.Negotiation Cultural.School:.A.Social.Process Environmental.School:.A.Reactive.Process Configuration.School:.A.Process.of.Transformation.

Some.of.these.schools.will.be.discussed.in.this.topic.but.a.number.are.still.emerging.

The Planning School


According.to.Browne.(1994),.the.Planning.School,.credited.to.Ansoff.(1965). and.developed.in.the.1970s.was.concerned.with.the.means.of.achieving.strategic. objectives..It.led,.in.the.world.of.corporate.planning,.to.the.specialist.function.of. formulating.highly.detailed.strategies.at.the.corporate,.business.and.functional.level.. These.then.formed.the.basis.for.detailed.schedules,.programs.and.budgets. The.Planning.School.fell.into.disrepute.in.the.1980s.because.the.rigidity.of.the.process. could.not.reflect.the.dynamic.environment.of.business..Today.few.corporate.planning. departments.remain.of.the.type.that.emerged.from.the.Planning.School..Nevertheless,. some.of.the.principles.and.techniques.defined.by.Ansoff.(1965).are.relevant.today. when.used.in.a.more.flexible.way.

MNG00716 Strategic Management

Long-range.planning,.according.to.Aaker.(2001),.has.a.focus.on.anticipating.growth. and.managing.complexity.but.still.stems.from.the.assumption.that.past.trends.will. continue.into.the.future.

The Design School


The.Design.School.models.developed.by.Andrews.(1980).have.persisted.to.the.present. day.(Aaker.2001)..Strategic.planning.is.concerned.with.changing.strategic.thrusts.and. capabilities..It.is.different.from.the.earlier.approaches.to.planning.such.as.the.Planning. School.in.that.it.assumes.that.past.extrapolations.may.be.inadequate. Browne.(1994,.p..11).states:
the.basic.model.of.the.design.school.has.become.known.as.SWOT..a.process. of.assessing.an.organisations.strengths.and.weaknesses.as.well.as.external. opportunities.and.threats..in.order.to.identify.strategies.which.match.the. organisations.distinctive.capabilities.with.its.environment.

There.has.been.criticism.of.the.Design.School.by.authors.such.as.Mintzberg.(1990). but.the.SWOT.analysis.remains.the.tool.most.commonly.used.by.business.as.a. process.for.strategy.analysis.and.formulation,.and.is.the.basis.of.most.MBA.strategic. management.classes.and.texts. Browne.(1994).notes.a.proliferation.of.strategic.planning.models.developed.through. the.1970s..Many.of.these.have.been.retained.as.useful.tools.in.strategic.analysis,. especially.by.consultants.

Other schools
According.to.Browne.(1994),.Michael.Porter.(1980),.through.his.book.Competitive Strategy.and.later.publications,.dominated.strategic.management.thought.in.the. 1980s..Mintzberg.(1990).termed.this.work.the.positioning.school..Porters.main. contribution.was.to.recognise.the.importance.of.a.dynamic.relationship.between. enterprise.strategy.and.the.industry.structure.in.which.the.enterprise.was.immersed. A.number.of.streams.of.strategic.thought.have.emerged.in.the.1990s..The.resourcebased view.has.identified.the.importance.of.a.core.competency.perspective.and. the.concept.of.strategic.resources.and.capabilities..Capabilities.(or.competencies). are.defined.as.skills,.patents.and.similar.non-resource.factors.giving.a.competitive. advantage.to.the.organisation..Rather.than.focus.on.the.external.environment.and.the. actions.of.organisations.to.strive.to.achieve.competitive.advantage.in.this.changing. environment.the.resource.based.view.stresses.the.internal.resources.available.to.the. organisation.which.may.enable.it.to.achieve.this.strategic.advantage..The.resourcebased.view.has.grown.in.importance.in.recent.years.and.underlies.several.of.the. chapters.in.the.textbook. The.following.website.provides.additional.information.about.this.view.of.strategic. management:

Website
http://en.wikipedia.org/wiki/RBV.

The.next.website.is.a.PowerPoint.presentation.in.which.the.major.differences.between. the.design.school.and.the.resource.based.school.are.highlighted.in.a.series.of.slides.. You.dont.need.to.know.all.the.detail.on.these.slides.but.the.differences.between.the. two.approaches.are.clearly.delineated:

MNG00716 Topic 1 Introduction to strategic management

Website
http://www.actkm.org/userfiles/File/actkm2004conf/Presentations/Paul%20James%20 Research%20Forum%20Paper.pdf.

Browne.(1994).also.describes.more.recent.moves.to.recognise.the.knowledge. contained.in.the.organisation.and.the.human.behavioural.factors.congruent.with. organisational.structure.as.organisational.culture..This.concept.has.led.to.an.assumed. relationship.between.organisational.performance.and.culture.which.attempts.to.solve. the.dilemma.referred.to.earlier,.namely.how.to.achieve.performance.while.meeting. the.needs.of.people..This.area.of.research.is.complex,.containing.many.different. definitions.and.approaches. The.approach.and.direction.of.contemporary.research.appears.to.be.heading.towards. the.concept.of.a.culture.which.is.characterised.by.an.emphasis.on.capitalising.and. protecting.the.knowledge.contained.in.an.organisation.as.a.major.component.of.its. sustainable.competitive.advantage. Finally,.according.to.Browne.(1994),.there.is.the.emergence.of.a.process.view.of. management..This.approach.has.emerged.from.attempts.to.define.the.process.of. policy.formulation.in.the.public.sector..It.recognises.that.the.Design.School.and.the. Positioning.School.of.strategic.management.are.concerned.with.prescriptive.models. that.fail.to.recognise.the.dynamics.of.strategic.formation..For.example,.it.was.the. highly.prescriptive.nature.of.the.Planning.School.that.led.to.its.lack.of.support.

Current sensitivities
Browne.(1994,.p..29).reports.Mintzberg.as.supporting.the.process.view.
Strategies.do.not.emerge.from.a.process.of.planning.or.design.or.even.of. industry.analysis,.as.a.fully.formed.blueprint.for.implementation..Rather,. Mintzberg.characterises.strategy.formation.as.an.emergent.process,.where.even. as.strategy.is.being.implemented.it.is.being.changed.at.the.margins.in.response. to.new.information.about.the.changing.environment,.the.responses.of.customers. and.competitors.externally.and.of.colleagues.and.employees.internally..This. is.a.continuous.process.of.shaping.the.organisations.strategy.to.the.changing. influences.and.circumstances.to.which.it.must.respond.

Many.authors,.according.to.Browne.(1994),.have.pointed.out.the.danger.of.viewing. this.emergent.process.as.reactive.rather.than.pro-active..Incremental.adaptation,. competing.interests.and.an.uncertain.environment.lead.to.Thompson.et.al.s.(2003). opportunistic.surveillance.capabilities..Similarly.Quinns.(1996).view,.also.noted.by. Browne.(1994),.involves.a.view.that.incremental.decisions.should.not.be.confused. or.associated.with.muddling..Rather,.such.incremental.decision.making.is.seen.as. conscious,.purposeful,.proactive.and.good.management. This.approach.has.led.to.recent.research.directions.that.are.focused.on.innovation,. and.the.means.of.creating.sustainable.competitive.advantage.from.the.knowledge. contained.within.the.organisation..It.takes.the.view.that.hierarchical.organisations. (as.postulated.in.early.classical.management.theories).inhibit.the.flow.of.knowledge. and,.hence,.the.emergence.of.innovative.strategies..New.approaches.suggest.the. use.of.organic.structures.based.on.teams.and.network.methods..For.example,.the. continuously.learning.organisation.has.been.postulated.by.Senge.(1992).and.others. Mintzberg.(1999).argues.that.all.these.different.approaches.represent.research.into. different.parts.of.the.complex.whole.that.is.strategic.management..Managers.have. no.choice.but.to.cope.with.the.whole..He.attempts.to.demonstrate.how.the.different. approaches.might.fit.into.strategy.formation.as.a.single.process.

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MNG00716 Strategic Management

We.will.also.discover.in.later.topics.that.the.world.of.strategic.management.is. evolving.and.there.have.been.significant.contributions.to.our.thinking.in.recent.years.. That.is.not.to.deny.the.work.of.authors.like.Mintzberg,.Porter,.Hamel,.Kaplan.and. Norton.since.they.have.shaped.the.way.strategic.management.is.currently.practised. We.now.return.to.the.textbook.and.consider.briefly.some.other.issues.about.strategy. that.are.identified.

Ethics, business models and strategic success

r a

Textbook
Turn to your textbook and read from the bottom of page 13 to the paragraph ending at Key Points on page 18.

The.first.section.(pages.1314).in.the.text.deals.with.questions.of.ethics.and.moral. behaviour.and.whether.business.strategy.should.have.ethical.and.moral.guidelines.. This.is.always.a.contentious.issue.and.generates.more.heat.than.light..Just.behaving. legally.is.not.necessarily.being.morally.upright.for.a.business.and.the.text.identifies. a.range.of.grey.areas.in.this.section..One.of.the.later.topics.in.this.unit.covers.these. issues.in.great.detail.as.do.several.of.the.case.studies.in.the.textbook.

Activity 1.3
Go to the web and find an example of a company that has acted in the interests of profit first, people and environment second. Find a credible source, or at least an objective source, that outlines what the company did wrong and how its actions might have been aligned to their overall strategy (e.g. a low cost leader may continue to buy from a less reputable manufacturer for cost advantages). You will likely find plenty of example such as Nike, Walmart, Nestle, Ford, more recently Toyota and so on. The point is that you will hopefully recognise how their strategy was flawed to begin with.

A.discussion.of.whether.a.strategy.being.pursued.by.an.organisation.is.the.correct. one.leads.into.considerations.of.the.business model.(pages.1415). Unless.a.chosen. strategy.enables.a.business.to.survive.and.be.profitable.then.its.worth.is.questionable. (How.the.business.model.applies.to.not-for-profit.organisations.is.worth.contemplating. here.)

Activity 1.4
There is an interesting comparison between the business models of Microsoft and Red Hat outlined in Illustration Capsule 1.2 on page 16 of the text. While most of us are familiar with the Microsoft model less is known about how Red Hat operates and seeks to compete. If you visit the website of Red Hat there is a video clip that enthusiastically spells out the virtues of their model. Why do you think Microsofts model is more successful than that of Red Hat?

Having.considered.business.models.the.merits.of.choosing.one.strategy.over.another. can.be.subject.to.three.questions.outlined.in.the.next.section.of.the.text.(page.15).. These.questions.cover.issues.of.fit,.competitive.advantage.and.performance.. measured.financially.or.by.competitive.advantage.

Why is strategy important?


The.final.section.of.this.chapter.brings.us.back.to.the.theme.of.the.whole.unit.and. asks.why.we.should.be.interested.in.the.strategic.positioning.of.organisations..The. authors.suggest.several.reasons.(page.15).why.strategic.management.is.so.important.to. organisations..not.just.its.planning.but.also.its.execution.

MNG00716 Topic 1 Introduction to strategic management

11

As.in.all.of.the.chapters.in.this.text.the.key.points.are.a.great.summary.of.the.issues. raised.in.the.chapter. A.final.reading.is.included.here.to.introduce.you.to.a.strategic.tool.that.will.be.used.in. later.topics.and.as.an.overview.of.the.issues.discussed.to.date.in.this.topic.

Reading 1.3
Turn to the article by Kaplan and Norton and read about the use of strategy maps in understanding the key elements of an organisations strategy. The reading provides a good introduction to strategy and also highlights the concept of developing strategic themes around the four key internal processes in any strategy. In later units we will revisit the concept of the balanced scorecard both in terms of mapping the key elements of strategy and as a control device its original proposed use.

Before.concluding.this.topic.we.come.back.again.to.the.issue.posed.at.the.beginning. concerning.the.future.of.print.newspapers.in.the.face.of.declining.sales..A.number.of. strategic.issues.arise.here,.the.most.pertinent.being.what.should.these.newspapers.do. about.this.situation?.Some.idea.of.responses.is.evident.in.the.latter.part.of.the.article. itself:

Website
http://news.smh.com.au/business/us-newspapers-struggling-to-survive-20081214 6y5g.html.

Take.a.look.at.http://www.newspaperdeathwatch.com/.too..its.coming.at.the. same.problem.with.an.interesting.suggestion.that.new.life.is.springing.up.from.the. newspaper.grave. We.now.move.onto.a.consideration.of.the.processes.and.phases.involved.in.crafting. and.executing.a.successful.strategy.in.Topic.2.

Summary
This.topic.has.attempted.to.set.the.scene.for.the.study.of.strategic.management..It. serves.as.an.introduction.to.concepts.outlined.in.greater.detail.in.following.topics. A.systems.approach.describes.the.purpose.of.an.organisation.as.adding.value.to. goods.or.services.provided.by.a.supplier.in.order.to.meet.the.needs.of.a.customer.in.a. competitive.and.dynamic.market.environment..The.resources.and.capabilities,.together. with.the.learned.knowledge.in.the.organisation,.allow.it.to.sustain.its.competitive. advantage.within.the.external.regulatory,.social.and.economic.environment.in.which.it. is.forced.to.operate. The.development.of.strategic.management.theory.has.emerged.relatively.recently.as. a.result.of.the.need.to.cope.with.the.combined.effects.of.an.increasingly.competitive. global.environment.and.the.need.to.effectively.utilise.the.resources,.capabilities.and. knowledge.contained.within.the.organisation..At.its.more.proactive.form,.strategy. assumes.crisis.dimensions. Although.there.will.be.much.emphasis.in.the.remainder.of.this.unit.on.the.processes,. tools.and.techniques.available.for.use.in.the.practice.of.strategic.management,.the. theory.and.practice.of.strategic.management,.beyond.the.application.of.prescriptive. models,.is.a.relatively.new.and.emerging.field..Strategic.management,.according.to. Browne.(1994,.p..30),.is.not.simply.a.matter.of.practice.or.of.technique..it.is.also. thinking.about.what.needs.to.be.done.

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MNG00716 Strategic Management

Feedback to selected activities

Activity 1.4
The prominent difference in the business models employed by Microsoft and Red Hat Linux can be found in their respective different revenue-cost-profit economics. Microsoft sells proprietary code software while giving away service. Red Hat Linux, on the other hand, gives software away and depends heavily on sales of technical support services, training, and consultancy services.

Topic 2
The five phases of strategic management
Introduction
The.textbook.has.a.large.number.of.diverse.case.studies.that.illustrate.the.concepts.of. strategic.management.being.outlined.in.these.individual.topics..Where.it.is.thought. applicable,.use.will.be.made.of.several.of.these.cases..In.this.chapter.we.will.make.use. of.one.of.the.shorter.cases.that.has.an.international.and.technology.theme,.(Case.#.11. .C217.of.the.text). The.first.topic.was.concerned.with.a.general.introduction.to.strategic.management.and. identified.and.defined.a.number.of.terms.and.concepts.we.will.continue.to.use.in.other. topics..In.this.topic.we.introduce.a.model.of.strategic.management.which.forms.the. basis.for.the.rest.of.the.unit.and.upon.which.the.textbook.is.structured..The.authors. maintain.that.there.are.five.phases.to.the.process.of.creating.and.executing.a.strategic. management.approach.in.organisations.and.this.topic.reviews.these.five.elements.in. turn.using.the.Nintendo.Case.case.to.illustrate.the.various.phases.being.discussed. In.this.topic.we.will.first.consider.the.different.types.of.strategy.that.Mintzberg. identifies.since.his.approach.is.not.always.in.accord.with.that.of.the.textbook.authors.. We.will.then.present.from.the.textbook.an.overview.of.the.managerial.ins.and.outs.of. crafting.and.executing.company.strategies..Special.attention.is.given.to.managements. direction-setting.responsibilities..charting.a.strategic.course,.setting.performance. targets,.and.choosing.a.strategy.capable.of.producing.the.desired.outcomes..The. topic.also.examines.which.kinds.of.strategic.decisions.are.made.at.what.levels.of. management.and.the.roles.and.responsibilities.of.the.companys.board.of.directors.in. the.strategy-making,.strategy-executing.process. We.will.conclude.the.topic.by.reviewing.the.universitys.own.Strategic.Plan.2005 2010.Mid-term.review;.2008.

Objectives
At.the.conclusion.of.this.topic.you.should.be.able.to: . . . . . . . . . explain.the.five.Ps.of.Mintzbergs.view.of.strategy describe.the.five.phases.of.crafting.and.executing.a.strategy distinguish.between.a.strategic.vision.and.a.mission.statement identify.the.elements.of.effective.vision.statements explain.the.importance.of.effectively.communicating.vision.statements distinguish.between.financial.and.strategic.objectives analyse.the.role.of.the.different.levels.of.an.organisation.in.determining.a.strategy appraise.the.key.aspects.of.the.implementing.phase.of.strategy explain.why.evaluation.and.adjustment.of.strategy.is.important.
13

14

MNG00716 Strategic Management

Materials required
Textbook Thompson,.Strickland.&.Gamble,.2010.Chapter.2. Readings 2.1. Mintzberg,.H.1996,.Five.Ps.for.strategy,.in.H.Mintzberg.&.JB.Quinn.(eds),.The Strategy Process: Concepts, Contexts, Cases,.3rd.edn,.Prentice.Hall,.New.Jersey,. pp..1017. 2.2. Southern.Cross.University.2008,.Strategic Plan 20052010 Mid-term review: 2008. Crafting.and.executing.a.strategy.are.the.heart.and.soul.of.managing.a.business. enterprise..On.page.24.of.the.text.the.five.steps.involved.in.crafting.and.executing. a.strategy.are.described.and.then.they.depicted.in.Figure.21.1.on.page.24..We.now. proceed.to.examine.each.of.these.steps.in.turn.

Developing a strategic vision


In.order.to.get.started.in.this.topic.read.the.short.case.Nintendo.Case.(Case.#12.in.your. textbook)..Then.go.to.the.website.of.Nintendo.Case.(http://www.nintendo.com).and. review.their.home.page.to.get.a.feel.for.what.the.organisation.does.and.what.strategic. issues.are.evident. The business Nintendo.was.the.original.#1.video.games.console..The.business.has.three.main. products.in.its.portfolio. 1.. Nintendo.DS.(and.DS.Lite) . Handheld.video.game.devices..These.handheld.gaming.devices.are.portable,. running.on.batteries,.and.therefore.suited.to.a.broad.range.of.consumers..In. particular.children.and.commuters..Additionally.many.of.the.games.available.on. the.Wii.are.also.available.on.the.DS.&.DS.Lite. 2.. Home-based.games.consoles,.such.as.Wii.which.superceded.the.Nintendo.as.a. device.which.promotes.physical.interaction.via.a.series.of.unique.controllers. that.enable.simulation.for.the.user,.e.g..using.it.as.a.virtual.tennis.racquet..By.far. Nintendos.biggest.success,.the.Wii.successfully.penetrated.a.market.by.way.of. enabling.gaming.entertainment.that.suits.multiple.users.and.multiple.user.types. 3.. Nintendo.com . This.additional.feature.can.be.teamed.up.with.Wii.as.a.way.of.buying.games. online,.playing.with.other.people.and.interacting.with.other.Wii.users.in.various. net.portals..This.innovation.forms.a.major.step.in.B2C.commerce.and.marketing. research.for.Nintendo. The management From.its.inception,.Nintendo.had.been.a.family.run.and.controlled.business,.until. 2002,.when.Nintendo.inducted.its.first.non-family.president..As.the.fourth.president.in. the.companys.history,.and.being.unrelated.to.the.founders.(Yamauchis).Satoru.Iwata. oversaw.the.introduction.of.the.DS.(Duel.Screen).and.DS.Lite,.along.with.the.Wii.in. 2006..Under.Iwatas.leadership,.Nintendo.saw.massive.success.upon.introduction.of. its.innovative.products.

MNG00716 Topic 2 The five phases of strategic management

15

a r a

Activity 2.1
From this information, and from your reading of the case, suggest the strategic vision of Iwata. You will find the tables on pages 25 and 26 of the text helpful in this regard as well as some examples of vision statements detailed in Illustration Capsule 2.1 on page 27. (This is an early exercise and we will review your effort later in the topic.)

Before.examining.what.the.textbook.says.about.vision.we.will.consider.the.views.of. Mintzberg.on.strategy..This.well.known.writer.on.management.issues.has.some.views. on.strategy.that.take.a.different.approach.to.what.we.will.find.in.our.textbook.

Reading 2.1
Turn now to Reading 2.1 and read pages 1017.

Activity 2.2
Mintzberg (1996) refers to five definitions of strategy: plan ploy pattern position perspective.

What are differences between these five Ps? How would you apply these five Ps to the Nintendo Case? As discussed in Topic 1, the process of strategy formulation is not simple. It is affected by the complexity and rate of change in the external environment as well as the personal and cultural influences within the organisation.

We.now.consider.the.textbook.approach.to.crafting.and.executing.a.strategy.

Textbook
Read pages 22 to 33.

There.are.a.number.of.elements.involved.in.developing.a.strategic.vision.for.an. organisation..The.vision.should.chart.the.course.for.the.organisation.and.give.it.an. indication.of.where.it.is.heading..Such.visions.need.to.be.distinctive.and.specific.and. understood.by.all.parties.within.the.organisation..Visions.must.form.the.basis.for. strategic.decisions..In.committing.an.organisation.to.move.in.a.certain.direction.there. are.factors.both.within.and.without.the.organisation.that.need.to.be.considered.and. these.are.depicted.in.Table.2.1.(page.25). While.there.is.much.talk.about.the.importance.of.vision.statements.for.organisations. as.the.launching.pad.for.crafting.and.executing.an.effective.strategy,.often.scant. attention.is.paid.to.the.design.or.wording.of.such.statements..Table.2.2.(page.26). suggests.seven.desirable.characteristics.of.effective.vision.statements.while.Table.2.3. (page.26).highlights.some.of.the.shortcomings.of.vision.statements.

Activity 2.3
Read the vision statements on page 27 of the textbook (Illustration Capsule 2.1). What do you think is missing from the vision statement of Caterpillar?

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MNG00716 Strategic Management

Activity 2.4
Turn to Exercise 1 on page 53 of the text. Go to the website of Caterpillar and from information provided in that website, write a new vision statement for the company which would improve on the one given on page 27 of the text. The vision statement should be no more than 1520 words but following the guides given in Table 2.2. Check your new vision for Caterpillar against the recommended ways of constructing a vision statement according to the text.

It.is.important.to.distinguish.between.a.vision.statement.and.a.mission.statement.since. these.are.often.considered.to.be.the.same..As.the.text.points.out.(pages.28.and.29).the. vision.statement.is.concerned.with.the.future.while.the.mission.statement.is.concerned. with.the.present..Perusing.any.major.organisations.website.will.usually.reveal.their. vision.and.mission.statements..With.your.knowledge.of.what.is.recommended.for. each,.consider.where.you.might.find.some.examples.of.good.and.not.so.good.mission. statements.

Activity 2.5
Find some ironies and contradictions in an organisations vision and or mission statement.

A.good.example.is.something.like.Woolworths,.or.similar,.who.invariably.evoke.a. bunch.of.corporate.rhetoric.about.their.people,.yet.if.you.ask.the.staff,.nothing.could. be.further.from.the.reality.

Values
We.will.be.concerned.with.values.at.different.stages.in.this.unit.and.here.we.have.the. first.discussion.of.the.importance.and.impact.of.a.companys.values.on.the.strategic. vision.taken..(Can.an.organisation.have.values.or.are.they.a.reflection.of.the.values.of. the.leaders.within.organisations?)..A.definition.of.values.is.given.at.the.bottom.of.page. 29.and.some.examples.are.given.on.pages.2931. The.real.question.is.whether.values.are.just.motherhood.statements.without.any. substance.or.whether.they.are.a.true.reflection.of.the.organisations.practices..If. they.are.real.then.these.values.should.be.reflected.in.the.vision.statement.of.that. organisation..In.this.regard.see.the.link.between.Yahoos.mission.and.its.values.in. Illustration.Capsule.2.3.(page.31)..Some.well.known.examples.of.organisations.that. failed.to.live.up.to.their.vision.statements.are.given.on.pages.2930.

a r

Activity 2.6
Review your vision statement from Activity 2.1. Would you make any changes to your vision statement now?

Setting objectives
Textbook
Read pages 3337.

The.managerial.purpose.of.setting.objectives.is.to.convert.the.strategic.vision.into. specific.performance.targets..results.and.outcomes.the.companys.management.wants. to.achieve..and.then.use.these.objectives.as.yardsticks.for.tracking.the.companys. progress.and.performance..Well-stated.objectives.are.quantifiable.or.measurable.and. contain.a.deadline.for.achievement.

MNG00716 Topic 2 The five phases of strategic management

17

The.experiences.of.countless.companies.and.managers.teach.that.precisely.spelling. out.how.much.of.what.kind.of.performance.by.when.and.then.pressing.forward.with. actions.and.incentives.calculated.to.help.achieve.the.targeted.outcomes.will.boost.a. companys.actual.performance. Ideally,.managers.ought.to.use.the.objective-setting.exercise.as.a.tool.for.truly. stretching.an.organisation.to.reach.its.full.potential.

The need for a balanced scorecard


Two.very.distinctive.types.of.performance.yardsticks.are.required: . Those.relating.to.financial.performance. . Those.relating.to.strategic.performance. On.page.34.examples.are.given.of.both.types.of.objectives. Achieving.acceptable.financial.results.is.a.must..Without.adequate.profitability.and. financial.strength,.a.companys.pursuit.of.its.strategic.vision,.as.well.as.its.long-term. health.and.ultimate.survival,.is.jeopardised. Of.equal.or.greater.importance.is.a.companys.strategic.performance..outcomes.that. indicate.whether.a.companys.market.position.and.competitiveness.are.deteriorating,. holding.steady,.or.improving.

Activity 2.7
Illustration Capsule 2.3 on page 35 of the text, examples of company objectives, shows selected objectives of several prominent companies. Discussion question: What do you consider is the prominent purpose of an organisations stated objectives?

A.companys.financial.performance.measures.are.really.lagging.indicators.that.reflect. the.results.of.past.decisions.and.organisational.activities..The.best.and.most.reliable. leading.indicators.of.a.companys.future.financial.performance.and.business.prospects. are.strategic.outcomes.that.indicate.whether.the.companys.competitiveness.and. market.position.are.stronger.or.weaker..The.degree.to.which.a.companys.managers. set,.pursue,.and.achieve.strategic.objectives.tends.to.be.a.reliable.leading.indicator.of. its.ability.to.generate.higher.profits.from.business.operations. The.balanced.scorecard.for.measuring.company.performance.requires.setting.both. financial.and.strategic.objectives.and.tracking.their.achievement..Unless.a.company.is. in.deep.financial.difficulty,.company.managers.are.well.advised.to.put.more.emphasis. on.achieving.strategic.objectives.than.on.achieving.financial.objectives.whenever.a. trade-off.has.to.be.made..What.ultimately.enables.a.company.to.deliver.better.financial. results.from.operations.is.the.achievement.of.strategic.objectives.that.improve.its. competitiveness.and.market.strength.

Activity 2.8
Explain why a growing number of companies are utilising both financial and strategic objectives to create a balanced scorecard approach to measuring company performance.

As.a.rule,.a.companys.set.of.financial.and.strategic.objectives.ought.to.include.both. short-term.and.long-term.performance.targets..Targets.of.three.to.five.years.prompt. considerations.of.what.to.do.now.to.put.the.company.in.position.to.perform.better. down.the.road..Short-range.objectives.can.be.identical.to.longer-range.objectives.if.an. organisation.is.already.performing.at.the.targeted.long-term.level..The.most.important.

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MNG00716 Strategic Management

situation.in.which.short-range.objectives.differ.from.long-range.objectives.occurs. when.managers.are.trying.to.elevate.organisational.performance.and.cannot.reach.the. long-range.target.in.just.one.year. The.issue.for.management,.especially.of.publicly.listed.companies,.is.that.their. shareholders.demand.instant.returns.and.more.often.than.not.the.management.have. a.significant.part.of.their.remuneration.based.on.the.KPIs.that.underpin.the.company. objectives..This.fact.alone.should.mean.you.can.hear.bells.clanging.in.your.head.as. these.rockstar.CEOs.belt.out.the.usual.rhetoric.of.soft.and.hard.objectives..Ultimately,. theyre.chasing.hard.(financial).objectives.as.opposed.to.say.a.happy.workplace,. since.the.latter.cannot.be.quantified.in.a.way.that.appeals.to.shareholders.

The concept of strategic intent


A.companys.objectives.sometimes.play.another.role..that.of.signalling.unmistakable. strategic.intent.to.make.quantum.gains.in.competing.against.key.rivals.and.establish. itself.as.a.clear-cut.winner.in.the.marketplace,.often.against.long.odds..A.companys. strategic.intent.can.entail.becoming.the.dominant.company.in.the.industry,.unseating. the.existing.industry.leader,.delivering.the.best.customer.service.of.any.company. in.the.industry.or.the.world,.or.turning.a.new.technology.into.products.capable.of. changing.the.way.people.work.and.live..Some.examples.of.strategic.intent.are.given. on.page.35.

The need for objectives at all organisational levels


Objective.setting.should.not.stop.with.top.managements.establishing.of.companywide.performance.targets..Company.performance.cannot.reach.full.potential.unless. each.area.of.the.organisation.does.its.part.and.contributes.directly.to.the.desired. company-wide.outcomes.and.results..This.means.setting.performance.targets.for.each. organisation.unit.that.support,.rather.than.conflict.with.or.negate,.the.achievement.of. company-wide.strategic.and.financial.objectives..The.ideal.situation.is.a.team.effort. in.which.each.organisational.unit.strives.to.produce.results.in.its.area.of.responsibility. that.contributes.to.the.achievement.of.the.companys.performance.targets.and.strategic. vision..The.joke.is.that.its.mostly.a.case.of.do.as.I.say,.not.as.I.do..Performance.is. nearly.entirely.linked.to.financial.or.ROI.objectives,.anyone.who.thinks.otherwise.is. probably.more.familiar.with.government.and.NGOs.

The need for top-down rather than bottom-up objective setting


A.top-down.process.of.setting.objectives.ensures.that.the.financial.and.strategic. performance.targets.established.for.business.units,.divisions,.functional.departments,. and.operating.units.are.directly.connected.to.the.achievement.of.company-wide. objectives..This.integration.of.objectives.has.two.powerful.advantages:.(1).it.helps. produce.cohesion.among.the.objectives.and.strategies.of.different.parts.of.the. organisation.and.(2).it.helps.unify.internal.efforts.to.move.the.company.along.the. chosen.strategic.path..Bottom-up.objective.setting,.with.little.or.no.guidance.from. above,.nearly.always.signals.an.absence.of.strategic.leadership.on.the.part.of.senior. executives.

Activity 2.9
Set out some financial and strategic objectives for Nintendo Case for the next year and next five years. Use some of the data in the case study to assist you to determine some objectives. The company website might prove useful here.

MNG00716 Topic 2 The five phases of strategic management

19

Crafting a strategy

Textbook
Read pages 3741.

The.third.step.in.crafting.and.executing.a.strategy.is.involved.with.the.how.to. scenarios.that.will.ensure.the.vision.and.objectives.are.carried.out..People.within. the.organisation.have.to.be.responsible.for.crafting.the.strategy.once.the.vision.and. objectives.are.known..In.large.organisations.like.Nintendo,.individuals.like.Iwata. are.only.partially.responsible.for.the.doing.aspects.of.setting.a.strategy.although. it.is.inevitable.that.he.will.get.others.involved.in.the.strategic.process..In.larger. organisations.there.are.usually.many.levels.of.the.organisation.and.many.individuals. who.have.this.role. The.text.discusses.the.role.of.the.participants.in.crafting.a.strategy.from.the.CEO. down..While.it.is.assumed.that.senior.managers.of.large.organisations.might. be.involved.in.such.strategic.activities.this.is.not.necessarily.the.case..In.many. organisations.it.is.expected.that.all.managers.will.have.some.part.to.play.in.charting. the.future.direction.of.the.organisation.and.crafting.appropriate.strategies. Involving.teams.of.people.to.dissect.complex.situations.and.come.up.with.strategic. solutions.is.becoming.increasingly.necessary.in.many.businesses..Not.only.are.many. strategic.issues.too.far-reaching.or.too.involved.for.a.single.manager.to.handle,.but. they.often.cut.across.functional.areas.and.departments,.thus.requiring.the.contributions. of.many.different.disciplinary.experts.and.the.collaboration.of.managers.from. different.parts.of.the.organisation..The.team.effort.is.considered.more.important.than. any.one.individual.or.group.at.the.higher.echelons.of.the.organisation..A.valuable. strength.of.collaborative.strategy.making.is.that.the.group.of.people.charged.with. crafting.the.strategy.can.easily.include.the.very.people.who.will.also.be.charged.with. implementing.and.executing.it. In.some.companies,.top.management.makes.a.regular.practice.of.encouraging. individuals.and.teams.to.develop.and.champion.proposals.for.new.product.lines.and. new.business.ventures..The.idea.is.to.unleash.the.talents.and.energies.of.promising. corporate intrapreneurs.

The strategy-making hierarchy


Since.it.is.usual.for.many.individuals.and.groups.and.departments.in.large. organisations.to.be.involved.in.crafting.a.strategy.it.follows.that.a.companys.overall. strategy.is.really.a.collection.of.strategic.initiatives.and.actions.devised.by.managers. and.key.employees.up.and.down.the.whole.organisational.hierarchy..The.larger.and. more.diverse.the.operation.of.an.enterprise,.the.more.points.of.strategic.initiative.it. has.and.the.more.managers.and.employees.at.more.levels.of.management.that.have.a. relevant.strategy-making.role. Figure.2.2.(page.40),.A.Companys.Strategy-Making.Hierarchy,.shows.who.is. generally.responsible.for.devising.what.pieces.of.a.companys.overall.strategy.. In.diversified,.multibusiness.companies.where.the.strategies.of.several.different. businesses.have.to.be.managed,.the.strategy-making.task.involves.four.distinct.types. or.levels.of.strategy,.each.of.which.involves.different.facets.of.the.companys.overall. strategy..The.types.of.strategic.involvement.at.each.level.are.outlined.on.pages.3741.

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MNG00716 Strategic Management

This.extensive.amount.of.strategic.input.is.in.stark.contrast.to.smaller.organisations. where.strategic.decision.making.falls.into.the.lap.of.the.owner.and.maybe.one.or.two. other.individuals.only..(Like.so.many.management.books.across.a.range.of.business. disciplines,.this.textbook.spends.a.lot.of.time.discussing.large.organisations.and.not. much.time.is.spent.on.smaller.organisations.) The.challenge.for.large.organisations.is.thus.to.integrate.these.diverse.inputs.into.the. strategic.formulation.process.to.ensure.there.is.a.unity.and.that.the.same.strategic. vision.and.objectives.are.being.pursued..Then.bringing.all.these.elements.together. (vision,.objectives.and.strategy).constitutes.the.strategic plan.for.the.organisation.. This.is.discussed.on.pages.41.onwards.in.the.text.

Implementing and executing the strategy

Textbook
Read pages 4142.

So.much.of.strategic.management.is.concerned.with.the.crafting.of.strategy.that.often. its.execution.is.given.less.focus..Indeed.this.textbook.only.has.two.of.its.thirteen. chapters.specifically.devoted.to.implementation.issues. How.strategies.are.executed.will.depend.on.a.range.of.circumstances.including.how. much.change.in.existing.strategies.is.needed.or.intended.and.how.conducive.is.the. work.culture.for.changes.needed.in.strategy..The.specific.actions.that.usually.form. part.of.the.implementation.process.are.outlined.on.pages.4142.and.each.of.these.can. prove.to.be.a.challenge.within.itself. Good.strategy.executing.involves.creating.strong.fits.between.strategy.and. organisational.capabilities,.between.strategy.and.the.reward.structure,.between. strategy.and.internal.operating.systems,.and.between.strategy.and.the.organisations. climate.and.culture..The.stronger.these.fits,.the.better.the.execution.and.the.better.the. companys.chances.of.achieving.its.performance.targets.

a r

Activity 2.10
What steps if any has Iwata taken to implement the strategy of Nintendo Case? Do you consider there is a close fit between the organisations capabilities and its strategy?

Evaluating and initiating corrective adjustments


Textbook
Read pages 43 to 45.

The.fifth.phase.of.the.strategy-management.process..evaluating.the.companys. progress,.assessing.the.impact.of.new.external.developments,.and.making.corrective. adjustments..is.the.trigger.point.for.deciding.whether.to.continue.or.change.the. companys.vision,.objectives,.strategy,.and/or.strategy-execution.methods. Successful.strategy.execution.entails.vigilantly.searching.for.ways.to.continuously. improve.and.then.making.corrective.adjustments.whenever.and.wherever.it.is.useful.to. do.so.

MNG00716 Topic 2 The five phases of strategic management

21

This.is.an.appropriate.place.to.now.see.how.all.the.theory.in.this.topic.is.put.into. practice..In.2008.Southern.Cross.University.undertook.a.mid-term.review.of.its.five. year.strategic.plan..This.plan.is.included.as.Reading.2.2.

Reading 2.2
Turn to Reading 2.2 and note the following: our vision our mission our values.

This is followed by an outline of five objectives in the areas of: choice and esteem the student experience research regional engagement enterprise.

Within each of these objectives there are included some strategies to be used in the pursuit of these objectives, some indicators of progress and some targets. This document illustrates precisely the issues that this topic has covered to date.

Corporate governance

r a

Textbook
Read pages 4950.

The.authors.have.included.a.section.in.the.textbook.here.on.corporate.governance. which.has.less.relevance.for.smaller.organisations.but.significant.importance.for. larger.organisations..A.board.of.directors.can.support.or.oppose.or.even.determine. a.strategic.direction..The.text.points.out.the.obligations.of.the.board.of.directors.in. the.strategic.area.and.the.need.for.such.corporate.governors.to.be.independent.and. forceful.is.highlighted.although.these.requirements.are.sometimes.sorely.lacking.. Too.many.boards.of.directors.are.ineffective.or.merely.become.rubber.stamps.of.the. organisations.leadership.team.

Activity 2.11
Suggest some future strategies for Nintendo Case. Ensure these strategies are in line with the vision and objectives you have identified for the company.

Summary
In.this.topic.we.have.considered.the.five.phases.of.crafting.and.executing.strategic. management.after.reviewing.the.Mintzberg.perspective.on.strategy..The.importance.of. strategic.vision,.financial.and.strategic.objectives,.people.involved.in.strategic.decision. making.and.the.implementation.and.review.of.a.chosen.strategy.were.discussed.in. turn. In.order.to.carry.out.a.process.of.formulating.strategy,.a.strategy.analysis.of.the.factors. affecting.the.organisation.needs.to.be.carried.out..This.involves.an.examination.of.the. opportunities.and.threats.in.the.external.environment.together.with.the.strengths.and. weaknesses.within.the.organisation..This.process.is.termed.a.SWOT.analysis. The.issues.to.be.considered.in.carrying.out.a.SWOT.analysis.and.the.more.important. models.that.can.assist.are.discussed.in.the.next.topics.

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MNG00716 Strategic Management

Feedback to selected activities

Activity 2.3
Vision statements are presented by organisations to portray the companys future business scope and thus respond to the question of where we are going. The Caterpillar vision statement appears to be: vague, bland, not distinctive enough, too reliant on superlatives, and very broad in wording.

Topic 3
External analysis: Industry and competitive analysis
Introduction
Managers.must.be.able.to.perceptively.diagnose.a.companys.external.and.internal. environments.to.succeed.in.crafting.a.strategy.that.is.an.excellent.fit.with.the. companys.situation,.is.capable.of.building.competitive.advantage,.and.promises.to. boost.company.performance..the.three.criteria.of.a.winning.strategy. It.is.very.important.to.focus.any.consideration.of.the.external.domain.and.environment. on.the.key.factors.affecting.the.strategic.direction.of.the.organisation..Many.external. factors.impose.opportunities.and.threats.on.all.organisations..However,.some. opportunities.and.threats.can.assist.an.organisation.to.obtain.a.sustainable.competitive. advantage.over.competitors..It.is.these.that.need.to.be.identified.in.an.external. analysis. Developing.company.strategy.begins.with.a.strategic.appraisal.of.the.companys. external.and.internal.situations.to.form.a.strategic.vision.of.where.the.company.needs. to.head,.then.moves.toward.an.evaluation.of.the.most.promising.alternative.strategies. and.business.models,.and.finally.culminates.in.a.choice.of.strategy. This.topic.presents.the.concepts.and.analytical.tools.for.assessing.a.single-business. companys.external.environment..Attention.centres.on.the.competitive.arena.in. which.a.company.operates,.together.with.the.technological,.societal,.regulatory,. or.demographic.influences.in.the.macro-environment.that.are.acting.to.reshape.the. companys.future.market.arena. The.textbook.chapter.is.very.long,.but.it.is.well.set.out.with.useful.diagrams..It.relies. heavily.on.the.work.of.Michael.Porter.and.his.study.of.competitive.forces..The.thrust. of.the.chapter.is.to.do.with.competitive.pressures.that.organisations.continually. address..You.would.be.advised.to.take.this.chapter.section.by.section.rather.than.tackle. it.all.in.one.bite! To.illustrate.the.concepts.being.covered.references.and.activities.will.use.two.case. studies.from.the.textbook,.one.of.which.was.introduced.in.the.previous.topic..The. activities.will.be.reviewed.in.teletutorials.or.in.classroom.situations.

Objectives
At.the.conclusion.of.this.topic.you.should.be.able.to: . . . distinguish.between.a.firms.macroenvironment.and.its.immediate.industry.and. competitive.environment identify.an.industrys.key.economic.features outline.the.five.forces.of.competition.tool.and.how.it.can.be.used.to.determine.the. degree.of.competitive.pressures.an.organisation.faces
23

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MNG00716 Strategic Management

. . . . .

analyse.the.major.forces.driving.change.in.industries utilise.the.tool.of.strategic.mapping outline.how.organisations.can.predict.the.strategic.moves.of.rivals examine.the.concept.of.key.success.factors apply.the.concepts.and.tools.in.the.chapter.to.case.studies.

Materials required
Textbook Thompson.et.al..Chapter.3. Readings 3.1. Slater,.SF.&.Olson,.EM.2002,.A.fresh.look.at.industry.and.market.analysis. (understanding.markets.beyond.the.Five.Competitive.Forces.Model),.Business Horizons,.vol..45,.no..1,.JanFeb,.pp..1522.

The strategically relevant components of a companys external environment

Textbook
Read pages 5660.

Managers.are.not.equipped.to.act.wisely.in.steering.a.company.in.a.different.direction. or.altering.its.strategy.until.they.have.a.deep.understanding.of.the.companys.situation.. This.understanding.requires.thinking.strategically.about.two.facets.of.the.companys. situation: a.. the.industry.and.the.competitive.environment.in.which.the.company.operates.and. the.forces.acting.to.reshape.that.environment b.. the.companys.own.market.position.and.competitiveness..its.resources.and. capabilities,.its.strengths.and.weaknesses.vis--vis.rivals,.and.its.windows.of. opportunity. Figure.3.1.in.the.text.(page.56).depicts.the.sequence.recommended.for.managers.to. pursue. All.companies.operate.in.a.macro-environment.shaped.by.influences.emanating. from.the.economy.at.large,.population.demographics,.societal.values.and.lifestyles,. governmental.legislation.and.regulation,.technological.factors,.and.the.industry.and. competitive.arena.in.which.the.company.operates. Figure.3.2.in.the.text,.(page.57).identifies.the.arenas.within.an.organisations.macroenvironment..One.of.these.is.general.economic.conditions..The.importance.of.this. factor.cannot.be.overestimated. The.global.financial.meltdown.and.accompanying.economic.crises.that.affected. the.major.economies.of.the.world.in.the.last.few.months.of.2008.had.serious. consequences.for.many.organisations..One.of.the.most.noteworthy.industries.affected. was.the.American.motor.vehicle.industry.where.the.three.major.manufacturers.were. on.the.brink.of.collapse.at.the.end.of.2008.and.were.bailed.out.only.by.government. financial.support..Organisations.that.had.been.enjoying.profitable.economic.times.for. some.years.were.caught.up.in.the.collapses.of.well.established.financial.institutions. and.many.faced.bankruptcy.and.failure.with.subsequent.massive.job.losses..At.the. time.of.writing.the.world.economy.is.still.trying.to.adjust.to.the.consequences.of.these. major.changes.

MNG00716 Topic 3 External analysis: Industry and competitive analysis

25

One.of.the.continual.challenges.for.organisations.is.to.be.able.to.respond.successfully. and.strategically.to.such.changes.as.those.imposed.by.the.collapse.of.financial. institutions.and.the.resulting.tightening.of.credit.and.borrowing.facilities. There.are.enough.strategically.relevant.trends.and.developments.in.the.outer.ring.of. the.macro-environment.to.justify.managers.maintaining.a.watchful.eye..The.factors. and.forces.in.a.companys.macro-environment.having.the.biggest.strategy-shaping. impact.almost.always.pertain.to.the.companys.immediate.competitive.environment.

Thinking strategically about a companys industry and competitive environment


Industries.differ.widely.in.their.economic.features,.competitive.character,.and.profit. outlook..An.industrys.economic.traits.and.competitive.conditions..and.how.they. are.expected.to.change..determine.whether.its.future.profit.prospects.will.be.poor,. average,.or.excellent. Thinking.strategically.about.a.companys.competitive.environment.entails.using.some. well-defined.concepts.and.analytical.tools.to.get.clear.answers.to.seven.questions. listed.on.page.58..The.responses.to.these.seven.questions.constitute.the.content.of.this. chapter..We.will.use.the.Nintendo.case.in.the.textbook.to.illustrate.the.questions.being. discussed.

Question 1: What are the industrys dominant economic traits?


Here.we.are.concerned.with.the.structure.of.the.industry.in.which.organisations. compete.rather.than.the.organisation.itself..In.Table.3.1.(page.59).we.have.a.list.of. eleven.economic.features.which.help.identify.an.industrys.dominant.features.

a r

Activity 3.1
Use Table 3.1 to identify the relevant industry traits of the video game/console industry.

Question 2: What competitive forces are at work in the industry and how strong are they?
Textbook
Read pages 6079.

Michael.Porter.(1985).developed.the.Five-Forces.Model.to.help.identify.the.nature.of. competition.in.an.industry..The.aim.of.the.analysis.is.to.identify.the.main.sources.of. competitive.forces.and.to.consider.the.strength.of.these.forces..It.is.a.key.analytical. tool.in.strategic.management,.hence.it.is.critical.to.build.skills.in.undertaking.the. analysis..Figure.3.3.(page.61),The.Five-Forces.Model.of.Competition:.A.Key.Tool.for. Diagnosing.the.Competitive.Environment,.depicts.this.tool. In.analysing.the.five.competitive.forces.it.is.necessary.to.assess.the.strength.of.each. competitive.force.(Strong?.Moderate?.Weak?). The.aim.is.to.explain.how.each.force.acts.to.create.competitive.pressure.and.to.decide. whether.overall.competition.is.brutal,.fierce,.strong,.normal/moderate,.or.weak.. Five.forces.analysis.is.a.very.difficult.concept.to.apply.to.multi-industry.companies. such.as.Wesfarmers.(WES),.a.publicly.listed.Australian.company.that.operates.in.

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MNG00716 Strategic Management

financial.services,.energy,.agriculture.and.retail.supermarkets..There.will.invariably.be. limitations.and.difficulties.when.applying.a.five.forces.analysis.to.such.a.firm,.which. is.important.to.remember.when.considering.your.assignment.cases.. Rivalry.among.competing.sellers.is.usually.the.most.powerful.of.the.five.forces. The.first.step.is.to.check.which.weapons.of.competitive.rivalry.are.most.actively.used. by.rivals.in.jockeying.for.position..These.might.include: . . . . . . . . price quality performance.features.offered customer.service warranties/guarantees advertising/promotions dealer.networks product.innovation.

The.next.step.is.to.consider.the.factors.that.cause.rivalry.to.be.stronger..This.could.be. because.of.there.are.many.firms,.that.are.approximately.equal.in.size.and.capability.. Rivalry.might.also.be.high.where.there.is.slow.market.growth..These.industry. conditions.tempt.some.firms.to.go.on.the.offensive.to.boost.volume.and.market.share. The.situation.becomes.more.critical.when.customers.have.low.costs.in.switching. brands,.hence.there.is.little.brand.loyalty.protecting.the.organisations.market.share. This.climate.then.creates.the.environment.where.one.or.more.firms.initiate.moves.to. bolster.their.standing.at.the.expense.of.rivals..A.successful.strategic.move.in.this.type. of.industry.carries.a.big.pay-off..Generally,.it.costs.more.to.get.out.of.a.business.than. to.stay.in,.so.the.pay-off.comes.in.terms.of.maintaining.or.improving.standing.in.the. industry..and.profitability. Firms.have.diverse.strategies,.corporate.priorities,.resources,.and.countries.of.origin. and.this.will.impact.on.their.ability.and.will.to.react.to.competitive.pressures.in.the. industry.and.to.initiate.new.strategic.moves. It.is.a.principle.of.competitive.markets.that.competitive.jockeying.among.rival.firms. is.dynamic.and.ever.changing..This.is.evidenced.by.industry.members.initiating.new. offensive.and.defensive.moves.by.changing.from.one.mix.of.competitive.weapons.to. another..Think.of.the.intense.rivalry.between.real.estate.agents,.banks,.motor.vehicle. companies,.supermarket.chains.and.television.channels. The.key.factors.determining.rivalry.among.sellers.are: . . . . . . . . the.number.of.competitors.and.their.relative.size.and.capability rivalry.stronger.when.demand.is.growing.slowly price.cuts.to.boost.volume.intensifies.rivalry stronger.when.lower.customer.switching.costs stronger.when.one.or.more.competitor.moves.to.boost.position.in.market rivalry.increases.with.the.size.of.the.pay-out.for.successful.strategic.moves exit.barriers.increase.rivalry the.more.diverse.the.competitors,.the.more.rivalry.becomes.more.volatile.and. unpredictable . rivalry.increases.when.strong.companies.outside.the.industry.acquire.weak.firms. in.the.industry. Figure.3.4.(page.63).is.a.useful.summary.of.these.factors.

MNG00716 Topic 3 External analysis: Industry and competitive analysis

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Activity 3.2
Refer again to the Nintendo Case. Using the concepts just discussed determine how intense the rivalry is in the video game industry in which Nintendo competes. Could it be that Nintendo actually operates in two distinct markets?

Competitive force of potential entry


The.seriousness.of.threat.of.the.competitive.force.of.potential.entry.depends.on.the. barriers.to.entry.and.the.reaction.of.existing.firms.to.entry..Threats.can.come.from. new.entrants.altogether.or.from.existing.firms.in.the.industry.seeking.to.extend.their. presence.in.the.market..These.threats.are.illustrated.in.Figure.3.5.on.page.67. Barriers.to.entry.exist.when.newcomers.confront.obstacles.to.their.ability.to.enter. the.industry..Typically,.economic.factors.put.the.potential.entrant.at.a.disadvantage. relative.to.incumbent.firms. The.common.barriers.to.entry.are.described.in.turn.on.pages.6869. The.competitive.force.of.new.entrants.will.be.stronger.when.entry.barriers.are.low,. incumbent.firms.are.not.inclined.to.fight.vigorously.to.prevent.new.entrants.from. gaining.a.market.foothold,.and.a.newcomer.can.expect.to.earn.attractive.profits.

Activity 3.3
To what extent is the threat of new entry a problem for Nintendo. Use the right hand box in Figure 3.5 to help answer the question.

The competitive force of substitute products


The.competitive.force.of.substitute.products.matters.when.customers.are.attracted.to. the.products.of.firms.in.other.industries. Substitute.products.are.a.strong.force.when.the.sales.of.substitutes.are.growing.rapidly. and/or.the.producers.of.substitutes.are.planning.to.add.new.capacity..Typically,.we.will. find.that.the.profits.of.the.producers.of.substitutes.are.up,.adding.incentive.for.them.to. compete.more.aggressively. Competitive.pressures.from.substitute.products.are.strong.when: . . . prices.of.substitutes.are.attractive.and.they.are.readily.available buyers.switching.costs.are.low buyers.believe.substitutes.have.equal.or.better.features.

Activity 3.4
To what extent does Nintendo face competitive pressure from sellers of substitute products? (What are the substitutes for both these businesses?) Use Figure 3.6 (page 71) as a guide to answering this question.

Competitive force of suppliers


Suppliers.are.a.strong.competitive.force.when.the.item.makes.up.a.large.portion.of. product.costs,.is.crucial.to.production.process,.and/or.significantly.affects.product. quality..Generally.in.such.cases.it.is.costly.for.buyers.to.switch.suppliers,.which.have. good.reputations.and.growing.demand..Suppliers.also.have.a.competitive.edge.when. they.can.supply.a.component.cheaper.than.industry.members.can.make.it.themselves.. They.are.in.the.strongest.position.when.they.do.not.have.to.contend.with.substitutes. themselves..When.these.factors.exist,.buying.firms.are.not.important.customers.

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MNG00716 Strategic Management

As.a.general.principle.of.competitive.markets,.suppliers.are.a.stronger.force.the.more. they.can.exercise.power.over:.prices.charged,.quality/performance.of.items.supplied. and.the.amounts.and.delivery.times..Figure.3.7.(page.74).is.helpful.in.explaining.the. possible.threats.created.by.suppliers. In.summary,.the.key.factors.determining.the.competitive.force.of.powerful.suppliers. are: . . . . . . few.suppliers unique.product high.switching.costs threat.of.forward.integration supplier.has.cost.or.quality.advantage unimportant.industry.for.supplier.

Activity 3.5
What is the power of suppliers in the video game/console industry? Which suppliers have power? And which dont?

Competitive force of buyers


Buyers.are.a.strong.competitive.force.when.they.are.large.and.purchase.a.sizeable. percentage.of.the.industrys.product..Such.buyers.typically.buy.in.volume.quantities.. They.may.also.be.able.to.integrate.backward,.cutting.out.the.supplier..This.situation. can.apply.when.the.industrys.product.is.standardised,.hence.the.suppliers.output. cannot.be.differentiated.from.other.producers.in.the.industry. Buyers.also.have.power.when.their.costs.in.switching.to.substitutes.or.other.brands. are.low,.hence.they.can.purchase.from.several.sellers..The.situation.may.also.be. heightened.when.the.product.purchased.does.not.save.the.buyer.money.and.the.buyer. may.be.looking.for.cheaper.alternative.suppliers. When.buyers.are.a.stronger.competitive.force.they.have.greater.leverage.over: . price . quality . service . other.terms.and.conditions.of.sale. Figure.3.8.(page.77).sets.out.the.varying.influence.of.buyers. In.summary,.the.key.factors.determining.the.competitive.force.of.powerful.buyers.are: . . . . . . . large.volume.purchasers standard.products.and.multiple.suppliers low-profit.industry.for.buyer threat.of.backward.integration low.switching.costs few.buyers buyers.are.well.informed.

Strategic implications of the five competitive forces


A.companys.competitive.position.is.increasingly.effective.the.more.it.provides. defences.against.the.five.forces.and.the.more.it.influences.the.industrys.competitive. rules.in.the.companys.favour..A.strong.competitive.position.helps.create.sustainable. competitive.advantage.

MNG00716 Topic 3 External analysis: Industry and competitive analysis

29

The.competitive.environment.is.ideal.when: . . . . . . . . rivalry.is.moderate entry.barriers.are.high good.substitutes.do.not.exist suppliers.and.customers.are.in.a.weak.bargaining.position. rivalry.is.strong entry.barriers.are.low competition.from.substitutes.is.strong suppliers.and.customers.have.considerable.bargaining.power.

The.competitive.environment.is.unattractive.when:

As.a.general.principle,.the.stronger.the.competitive.forces,.the.lower.the.collective. profitability.of.industry.participants..When.competitive.forces.are.not.collectively. strong,.the.industry.is.favourable.or.attractive.for.earning.superior.profits.

Handling competitive forces


The.organisations.response.to.the.competitive.forces.is.to.craft.a.strategy.that. insulates.the.firm.from.the.five.forces.or.favourably.influences.the.forces.in.the.firms. favour..The.result.is.that.the.strategy.strongly.positions.the.company.in.its.industry. In.summary,.the.objective.is.to.craft.a.strategy.that.will: . . . insulate.the.firm.from.competitive.forces influence.competitive.pressures.in.ways.that.favour.the.company build.a.sustainable.competitive.advantage.

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Activity 3.6
To what extent do you consider that Nintendo has created a strategy that will achieve the three objectives listed above?

Reading 3.1
Turn to Reading 3.1 The Five Forces model was developed by Porter over twenty years ago. This reading by Salter and Olson aims to bring this up to date, cover the main criticism of the model and develop a model with more market-related elements. You will find an augmented model in this reading that adds the dimensions of market growth and turbulence, and the impact of networks on strategy.

Question 3: What forces are at work to change industry conditions?


Textbook
Read pages 7986.

Driving forces
Industries.change.because.forces.are.driving.industry.participants.to.alter.their. actions..The.driving.forces.are.the.major.underlying.causes.of.changing.industry.and. competitive.conditions..These.driving.forces.are.discussed.in.detail.on.pages.7886. and.summarised.in.Table.3.2.on.page.80..Possibly.the.most.interesting.ones.are.the. first.two.and.last.one..There.is.a.wealth.of.information.in.these.few.pages.about.major. trends.affecting.industry.competitiveness.

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MNG00716 Strategic Management

In.analysing.driving.forces: 1.. identify.those.forces.likely.to.exert.greatest.influence.over.next.13.years..Usually. no.more.than.34.factors.qualify. 2.. assess.the.impact.of.the.3.or.4.factors..Ask.what.difference.will.the.forces.make. (favourable?,.unfavourable?). A.driving-force.analysis.enables.the.firm.to.separate.the.major.causes.of.industry. change.from.the.minor.ones..There.are.usually.no.more.than.three.or.four.factors.that. qualify.as.driving.forces..Managers.can.use.environmental.scanning.to.help.identify. potential.forces.that.can.influence.their.industries..This.involves.monitoring.and. interpreting.social,.political,.economic,.ecological,.and.technological.events.to.spot. budding.trends.that.could.eventually.impact.on.the.industry. Remember: manage elephants not rabbits..Usually.no.more.than.three.or.four. qualify.as.driving.forces.

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Activity 3.7
What would you consider to be the three major factors driving change in the video game industry?

Question 4: Which companies are in the strongest/weakest positions?


Textbook
Read pages 8692.

Strategic group mapping


One.technique.for.revealing.the.different.competitive.positions.of.industry.rivals.is. strategic.group.mapping..This.was.first.introduced.in.Topic.1. A.strategic.group.consists.of.those.rivals.with.similar.competitive.approaches.in.an. industry. Firms.in.the.same.strategic.group.have.two.or.more.competitive.characteristics.in. common..They.may.sell.in.the.same.price/quality.range.or.cover.the.same.geographic. areas..They.also.may.be.vertically.integrated.to.the.same.degree.or.have.a.comparable. product-line.breadth..Typically.they.emphasise.the.same.types.of.distribution. channels,.hence.offer.buyers.similar.services..In.many.cases,.they.also.use.identical. technological.approaches. In.summary,.strategic.groups.may: . . . . . have.a.comparable.product.line.breadth use.the.same.kinds.of.distribution.channels be.vertically.integrated.to.much.the.same.extent offer.buyers.similar.services.and.technical.assistance,.and/or sell.in.the.same.price/quality.range.

The.steps.for.constructing.a.strategic.group.map.are.given.on.page.82.in.the.text. and.an.example.of.such.a.map.for.selected.American.retail.chains.is.presented.in. Illustration.Capsule.3.1.on.page.88. Some.cautions.about.drawing.such.maps.are.given.on.page.87.

MNG00716 Topic 3 External analysis: Industry and competitive analysis

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Interpreting strategic group maps


The.driving.forces.and.competitive.pressures.often.favour.some.strategic.groups. and.hurt.others..Also,.the.profit.potential.of.different.strategic.groups.varies.due.to. strengths.and.weaknesses.in.each.groups.market.position..In.addition,.the.closer. strategic.groups.are.on.the.map,.the.stronger.the.competitive.rivalry.among.member. firms. Learning.from.a.strategic.group.analysis.involves.answering.the.following.questions: . . . . Are.specific.groups.impacted.on.more.or.less.favourably.by.competitive.pressures. and.driving.forces? Is.the.profit.potential.different.for.the.various.strategic.groups?.Implications? What.mobility.barriers.impede.movement.across.groups? What.competitive.moves.can.we.predict.across.groups?.Who.are.the.likely. winners.and.losers.if.these.moves.occur?

Some.strategic.groups.are.usually.more.favourably.positioned.than.others.because. driving.forces.and.competitive.pressures.do.not.affect.each.group.evenly.and.because. profit.prospects.vary.among.groups.based.on.the.relative.attractiveness.of.their.market. positions. In.summary: . . . Strategic.groups.consist.of.rival.firms.that.have.similar.competitive.approaches. and.positions.may.be.similar.along.one.or.more.dimensions. A.strategic.group.map.displays.different.competitive.positions.that.rival.firms. occupy. Firms.in.the.same.strategic.group.have.one.or.more.competitive.characteristics.in. common.

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Activity 3.8
Construct a strategic map for Nintendo, Xbox and Sony PS. What does this map reveal?

Question 5: What strategic moves are rivals likely to make next?


Textbook
Read pages 8992.

A.firms.own.best.strategic.moves.are.affected.by.the.current.strategies.of.competitors. and.the.actions.competitors.are.likely.to.take.next..The.process.of.profiling.key.rivals. involves.studying.the.current.position.of.those.rivals.in.the.industry..This.involves. summarising.their.strategic.objectives.and.their.basic.competitive.approaches. Successful.strategists.take.great.pains.in.scouting.competitors,.understanding.their. strategies.and.watching.their.actions..This.involves.evaluating.their.vulnerability.to. driving.forces.and.competitive.pressures.and.sizing.up.their.resource.strengths.and. weaknesses,.and.their.capabilities..Their.aim.is.to.try.to.anticipate.their.rivals.next. moves.

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MNG00716 Strategic Management

Predicting.rivals.next.moves.involves: . . . . . analysing.their.current.competitive.positions examining.public.pronouncements.about.what.it.will.take.to.be.successful.in.the. industry gathering.information.from.the.grapevine.about.current.activities.and.potential. changes studying.past.actions.and.leadership determining.who.has.flexibility.to.make.major.strategic.changes.and.who.is. locked.into.pursuing.the.same.basic.strategy.

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Activity 3.9
What strategic moves do you think are likely in Nintendos industry by its rivals and why will these moves be made?

Question 6: What are the key factors for competitive success?


Textbook
Read pages 9294.

Key success factors


A.sound.strategy.incorporates.industry.key.success.factors.(KSFs)..KSFs.are.the. competitive.elements.that.most.affect.every.industry.members.ability.to.prosper.in. the.marketplace..Generally.they.describe.specific.strategy.elements,.product.attributes,. resources,.competencies.or.competitive.capabilities..Key.success.factors.will.appear. time.and.again.in.case.studies.discussed.in.this.unit..The.major.types.KSFs.are. discussed.and.compared.in.Table.3.3.on.page.93. The.text.lists.the.three.questions.that.help.identify.an.industrys.KSFs.on.page.94..In. reality,.KSFs.spell.the.difference.between.profit.and.loss.AND.competitive.success.or. failure. KSFs.consist.of.the.35.major.determinants.of.financial.and.competitive.success.in.an. industry. Examples of KSFs Beer.industry: . . . . . . . Utilisation.of.brewing.capacity..to.keep.manufacturing.costs.low. Strong.network.of.wholesale.distributors..to.gain.access.to.retail.outlets. Clever.advertising..to.induce.beer.drinkers.to.buy.a.particular.brand. Fashion.design..to.create.buyer.appeal. Low-cost.manufacturing.efficiency..to.keep.selling.prices.competitive. Locating.plants.close.to.end-use.customers..to.keep.costs.of.shipping.empty.cans. low. Ability.to.market.plant.output.within.economical.shipping.distances.

Clothing.manufacturing.industry:

Tin.and.aluminium.can.industry:

A.sound.strategy.incorporates.efforts.to.be.competent.on.all.industry.key.success. factors.and.to.excel.on.at.least.one.factor! Spend.some.time.considering.its.application.within.your.own.organisation.

MNG00716 Topic 3 External analysis: Industry and competitive analysis

33

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Activity 3.10
What do you consider are the KSFs in the video game/console industry?

Question 7: Is the industry attractive or unattractive and why?


Textbook
Read pages 9495.

Industry assessment
The.aim.of.industry.assessment.is.to.identify.the.factors.that.make.the.industry. attractive.or.unattractive..It.also.aims.to.identify.special.industry.issues/problems.and. the.overall.profit.outlook. The.important.factors.in.assessing.the.industry.are.summarised.on.pages.9495. The.aim.of.this.exercise.is.to.develop.conclusions.about.whether.the.industry.and. competitive.environment.are.attractive.or.unattractive,.both.near-.and.long-term,.for. earning.good.profits. There.are.two.things.to.keep.in.mind.in.conducting.an.industry.and.competitive. situation.analysis: 1.. Evaluating.industry.and.competitive.conditions.cannot.be.reduced.to.a.formulalike.exercise..thoughtful.analysis.is.essential. 2.. Sweeping.industry.and.competitive.analyses.need.to.done.every.one.to.three. years. Again.you.can.refresh.and.reinforce.your.understanding.of.the.elements.of.this.long. chapter.by.reviewing.the.key.points.on.pages.9598.

Summary
In.this.topic.we.have.covered.the.main.elements.of.undertaking.an.industry.and. competitive.analysis.for.a.firm..We.discussed.the.answers.to.the.seven.main.questions. asked.in.undertaking.an.assessment.of.the.external.environment.faced.by.a.firm..The. main.tools.of.analysis.discussed.were.the.Five-Forces.Model.developed.by.Michael. Porter.and.strategic.mapping..We.also.considered.the.development.of.key.success. factors.considering.the.steps.necessary.to.develop.them..We.concluded.with.a.brief. discussion.of.some.of.the.techniques.that.can.be.employed.in.undertaking.research. into.the.market.and.our.customers..In.the.next.topic.we.proceed.to.look.within.the.firm. itself.at.its.resources.and.the.competitive.strengths.they.might.or.might.not.produce.

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MNG00716 Strategic Management

Topic 4
Analysing a companys resources and competitive position
Introduction
In.the.previous.topic.we.were.concerned.with.looking.outside.the.organisation.in.order. to.assess.what.forces.it.would.have.to.face.in.determining.a.strategy..This.approach. relied.heavily.on.the.work.of.Michael.Porter.and.his.competitive.forces.model..In.this. topic.we.take.a.completely.different.perspective.and.look.within.the.organisation.in. order.to.determine.how.a.strategy.is.influenced.by.the.resources.and.capabilities.that. organisation.has..This.will.require.us.to.consider.the.increasingly.popular.strategy. known.as.the.resources-based view of.the.firm.which.is.the.opposite.approach.to.that. taken.by.Porter. This.topic.also.covers.a.lot.of.territory.and.sometimes.the.components.seem.somewhat. disjointed..We.will.first.discuss.the.resources-based.view.of.strategic.management.. The.text.does.not.cover.this.approach.as.fully.as.other.sources.so.some.additional. references.will.be.used..From.the.resources-based.view.we.move.to.the.concept.of. the.SWOT.analysis,.one.of.the.best.known.and.used.strategic.management.tools..We. then.digress.to.some.extent.to.look.at.pricing.and.cost.considerations.as.competitive. tools.which.leads.into.the.field.of.company.value.chain.analysis..The.use.of. benchmarking.as.a.tool.is.then.examined.and.strategies.are.suggested.for.remedying. cost.disadvantages.coming.out.of.this.analysis..The.topic.concludes.with.techniques. available.for.determining.a.companys.overall.competitive.strength.and.the.burning. issues.coming.out.of.such.analysis.that.merit.management.attention. We.will.continue.to.use.our.two.case.studies.where.appropriate.in.this.topic.

Objectives
At.the.conclusion.of.this.topic.you.should.be.able.to: . . . . . . . . . analyse.the.features.of.the.resource-based.view.of.strategy compare.the.resource-based.view.with.the.Porter.view identify.the.components.of.a.single.business.companys.strategy explain.the.features.of.SWOT.analysis examine.the.techniques.of.value.chain.analysis.and.its.usefulness evaluate.the.nature.of.activity-based.costing explain.how.benchmarking.can.be.used.to.assist.in.determining.a.companys. competitiveness outline.the.steps.in.a.competitive.strength.assessment apply.the.tools.in.this.topic.to.selected.case.studies.
35

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MNG00716 Strategic Management

Materials Required
Textbook Thompson.et.al..Chapter.4. Readings 4.1. Henry,.A.2007,.Understanding Strategic Management,.Oxford.University.Press,. London,.Chapter.5,.http://www.oup.com/uk/orc/bin/9780199288304/henry_ch05. pdf..(online only) 4.2. Scholey,.C.2005,.Strategy.Maps:.a.step-by-step.guide.to.measuring,.managing. and.communicating.the.plan,.Journal of Business Strategy,.vol..26,.no..3,. pp..1219.

The resource-based view of the firm


This.section.of.the.topic.is.somewhat.out.of.sequence.in.the.normal.flow.of.the. textbook.which.we.are.doing.our.best.to.follow..Before.working.systematically. through.the.chapter.in.the.text.we.go.off.at.a.tangent.to.discuss.this.increasingly. popular.view.of.strategy.which.is.covered.in.this.chapter.but.not.in.as.convincing.a. manner.as.in.other.places.or.textbooks. To.introduce.you.to.the.resource-based.view.of.the.firm.you.are.encouraged.at.this. stage.to.go.to.two.entirely.different.websites..The.first.website.is.an.extract.from. Wikipedia.concerning.the.resource-based.view.and.covers.the.concepts,.terminology,. history.and.criticisms.of.the.view.
http://en.wikipedia.org/wiki/RBV

The.second.website.is.a.composite.of.windows.dealing.with.the.resource-based.view,. powerpoint.slides.and.other.strategic.issues..There.is.a.brief.summary.of.the.RBV.on. the.home.page..There.is.also.lots.of.useful.information.on.other.pages.


http://www.1000ventures.com/business_guide/mgmt_strategic_resource-based.html

The.argument.put.forward.in.the.Resource-Based.View.of.the.Firm.(RBV).and.by. competence.authors.is.that.success.depends.on.identifying.and.leveraging.the.core. resources.and.capabilities.of.the.firm.regardless.of.the.external.environment.which. was.the.focus.of.the.Porter.studies..The.RBV.focuses.almost.exclusively.on.the. internal.environment,.with.passing.consideration.of.the.availability.of.the.resources. and.opportunities.in.the.external.environment. Sustainable.competitive.advantage.(SCA).stems.from.the.development.of.unique.and. valuable.bundles.of.resources.and.capabilities.that.set.a.firm.apart.from.competitors.. Why.is.Canon.so.successful,.for.example,.with.a.large.range.of.quite.different. products.in.varied.markets?.The.answer.is.that.they.have.a.very.well-developed. competence.in.optical.imaging.which.allows.them.to.compete.in.photocopiers,. printers,.cameras.and.so.on.

Textbook
Read from the bottom of page 100 through to the end of the first paragraph on page 110.

The.core.competence.approach.distinguishes.between.core.competences.(such.as. small-engine.expertise.for.Honda).and.capabilities.(such.as.the.service.and.distribution. of.Honda.cars)..However,.others.distinguish.between.the.competences.and.capabilities. in.terms.of.whether.they.are.embedded.in.the.organisation.or.embedded.in.the.people..

MNG00716 Topic 4 Analysing a companys resources and competitive position

37

The.text.goes.so.far.as.to.distinguish.between.a.competence,.core.competence.and. distinctive.competence.(bottom.of.page.106.to.the.top.of.page.109)..The.relevance.of. this.distinction.is.illustrated.on.page.109. Capabilities.are.the.ways.organisations.bring.together.and.use.the.resources..The. capabilities.are.more.likely.to.be.intangible.systems.such.as.management.ability,. culture,.informal.systems.of.integration.and.so.on..The.capabilities.tend.to.be.far.more. complex.than.resources.and,.thus,.are.the.key.to.an.advantage.that.cannot.be.imitated. by.other.firms..A.manager.can.more.easily.hire.new.recruits.to.raise.the.skill.resource. than.weave.the.new.employees.together.into.a.high-performing.team. Competences.are.those.bundles.of.resources,.linked.by.capabilities,.that.have.the. potential.to.give.the.firm.a.sustainable.competitive.advantage..The.main.types.of. resources.are.outlined.on.page.106.and.on.page.107..To.this.list.we.can.add.financial. resources.such.as.cashflow.and.new.equity.availability.(see.key.financial.ratios.on. Table.4.1.pages.104105). With.unique.resource.and.capability.bundles.existing.as.relatively.permanent. characteristics.of.firms,.SCA.can.be.achieved.by.leveraging.off.these.unique.aspects.of. the.firm..Very.often,.this.takes.the.form.of.developing.economies.of.scope..Honda,. for.example,.produces.lawn.mowers,.cars,.motorcycles,.generators.and.so.on..The. economy.of.scope.is.in.the.ability.of.Honda.to.use.its.core.competence.to.produce.a. broad.range.(scope).of.products.for.very.different.markets. From.an.industry,.market.or.product.perspective,.firms.such.as.Honda.appear.to.be. involved.in.unrelated.diversification..But,.from.the.RBV.perspective,.Honda.is.very. focused.on.the.development.and.use.of.its.core.competence.

The source of competitive advantage


The.competitive.power.of.a.resource.strength.can.be.measured.by.how.well.it.passes. the.four.tests.outlined.on.page.109..Most.organisations.would.not.pass.all.of.these. tests.easily.

Characteristics of resources that underpin SCA


The.first.step.to.developing.a.strategy.based.on.the.resources.and.capabilities.of.a. firm.is.to.identify.which.of.the.firms.resources.have.the.potential.to.deliver.SCA.. However,.there.are.four.characteristics.that.have.become.widely.accepted.as.critical,. easily.remembered.by.the.acronym.VIRA: 1.. Value..a.resource.or.capability.has.value.if.it.contributes.to.an.outcome.that. meets.the.needs.of.stakeholders..In.the.well.used.buggy.whip.example,.the. resources.that.allow.production.of.buggy.whips.have.little.value.because.there.is. little.need.for.the.product..On.the.other.hand,.the.resources.and.capabilities.that. provide.service.in.a.hotel.do.have.value..But.value.is.a.necessary.but.insufficient. condition.for.SCA..Resources.must.also.have.the.following.three.characteristics. 2.. Imitability..for.all.the.case.studies.and.texts.that.have.examined.the.innovation. and.coating.resources.and.capabilities.of.3M,.few,.if.any,.other.companies.have. been.able.to.emulate.the.firm..The.intangibility.and.complexity.of.resource. bundles.and.capabilities.often.defy.imitation..Even.the.people.within.a.firm.may. have.trouble.putting.into.words.the.elements.that.make.a.capability.effective.. Rather,.it.is.a.tacit.knowledge.that.cannot.be.made.explicit..Thus,.it.is.very. common.to.see.capability-destroying.behaviour.by.new.CEOs.or.owners.who.do. not.understand.the.strengths.or.the.institutional.characteristics.of.the.firm. 3.. Rareness..like.any.supply.and.demand.situation,.the.rarity.of.a.resource.can. contribute.to.the.development.of.an.SCA..Whether.it.is.the.waterfront.location.of. a.resort.or.the.distribution.capability.of.a.major.pharmaceutical.firm,.the.rareness.

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MNG00716 Strategic Management

of.the.resource.gives.the.firm.a.competitive.advantage..The.catch.is.that.it.must. allow.for.the.production.of.an.output.that.is.needed.by.stakeholders..If.a.firm.has. a.rare.resource.then.the.search.should.be.for.market.opportunities. 4.. Appropriability..if.a.resource.can.be.appropriated.(taken.away).from.the.firm. then.any.competitive.advantage.will.not.be.sustainable..The.most.common.way. resources.may.be.taken.away.from.a.firm.is.by.head-hunter.firms.luring.the.best. staff.to.move.to.competitors..A.dramatic.example.of.the.effect.of.appropriability. on.sustainability.of.competitive.advantage.is.the.advertising.firm.Saatchi.and. Saatchi..Once.the.most.famous.and.dominant.advertising.agency.in.the.world,.the. creative.teams,.almost.en.masse,.walked.out.of.the.firm..Saatchi.and.Saatchi.never. fully.recovered.from.this.disaster.

Implications for strategy development


The.analytical.process.of.strategy.development,.using.the.RBV.perspective,.is. different.from.the.SWOT.or.Positioning.Schools..Typically.the.following.steps.are. taken: 1.. The.group.or.individual.developing.a.firms.strategy.must.first.identify.what.the. firm.is.good.at.(or.could.become.good.at).in.terms.of.resources.and.capabilities.. This.is.not.the.same.as.industry,.product,.service.or.market.analysis. . Consider.a.rail.company..Rail.companies.often.determine.that.they.are.in.the. transport.industry..Looking.at.customers.in.this.industry,.they.can.try.to.develop. integrated.transport.solutions.demanded.by.the.customers..As.a.result,.they.can. end.up.running.trucks,.buses,.terminals,.warehouses,.port.facilities.and.so.on.. Generally,.they.dont.do.it.very.well. . But.a.resource.perspective.may.deliver.a.very.different.solution..If.a.rail.company. concluded.its.core.competence.was.heavy.engineering.and.construction.at. physically.remote.sites,.then.integrated.transport.solutions.would.not.be.the. obvious.strategy..The.rail.company.may.move.into.a.consulting.business.built. around.this.core.competence,.much.as.Queensland.Rail.has.done.in.Asia. 2.. It.is.after.the.core.competencies.are.identified.that.strategists.turn.their.attention.to. the.industries,.products,.services.and.markets.where.they.will.be.able.to.compete. effectively..One.of.the.largest.corporate.disasters.in.Australia.was.the.focus.on. product.synergies.rather.than.competences.by.Burns.Philp.as.it.moved.into.spices. . Burns.Philp.dominated.world.yeast.production..Yeast.was.produced.in.small. plants.scattered.around.the.world,.and.distributed.in.small.packages..Burns.Philp. was.very.good.at.managing.these.remote.plants. . However,.the.decision.to.move.into.the.spice.business.appears.to.have.been. driven.by.superficial.similarities.between.spice.packaging.and.an.argument.that. spices.fitted.with.a.food.ingredients.focus..Note.that.this.was.a.product.synergy. not.a.competence.synergy. . In.fact,.spices.did.not.fit.with.the.core.competence.of.remote.plant.operation.. Spices.were.not.produced.in.small.remote.locations.owned.and.operated.by.Burns. Philp..Unable.to.bring.their.core.competence.into.play,.Burns.Philp.was.at.the. mercy.of.the.US.spice.giant.McCormicks..McCormicks.had.competencies.in. the.distribution.of.ingredients,.control.of.supermarket.slots.and.huge.financial. reserves..The.collapse.of.Burns.Philp.was.inevitable. 3.. A.strategy.built.on.competencies.requires.the.protection.and.development.of. those.competences..It.is.important.to.remember.at.this.point.that.most.of.these. competencies.derive.from.intangible.resources.and.capabilities..In.fact,.except.for. patents.and.some.real.estate.locations,.most.tangible.competencies.can.either.be. imitated.or.traded,.and.thus.cannot.provide.SCA.

MNG00716 Topic 4 Analysing a companys resources and competitive position

39

Because.the.capabilities.are.so.intangible,.investment.in.resources.and.capabilities. is.often.not.possible.on.the.basis.of.objective.data..Singapore.Airlines.puts.all. of.its.pilots.through.management.training.(at.an.annual.cost.of.many.millions. of.dollars).even.though.these.pilots.will.never.hold.management.positions..The. reasoning.is.that.the.strength.of.the.company.comes.from.shared.values.and.the. perception.by.staff.that.the.company.cares..Attendance.at.management.training.is. about.developing.these.values.as.a.core.competence.

In.this.Singapore.example,.managers.are.assigning.resources.and.operating.according. to.the.shared.understanding.of.what.makes.the.firm.strong..Such.firms.tend.to.promote. from.within.rather.than.hire.from.without,.a.clear.institutional.sensitivity.to.ensure.that. the.resources.are.not.destroyed.by.managers.lacking.the.appropriate.intangible.and. tacit.knowledge.uniquely.embedded.within.the.organisation.

Summary What to make of RBV?


There.is.no.doubt.that.many.of.the.shining.successes.in.business.can.be.understood. in.terms.of.firms.developing.strategies.based.on.competencies.rather.than.industry. position,.service,.product.or.market.demands. But.it.would.also.be.foolish.to.ignore.the.effect.of.positioning.or.the.importance.of. fit.with.the.opportunities.and.threats.of.the.environment..It.would.also.be.foolish. to.overlook.a.firms.weaknesses.while.focusing.on.the.strengths.derived.from. competencies. The.RBV.is.not.without.criticism..The.most.important.criticism.is.that.it.is. tautological..How.do.I.know.what.the.right.mix.of.resources.is?.The.answer.is.that.it. is.the.mix.that.gives.success..Success.is.both.the.outcome.of.resources.and.the.way.the. value.of.the.resources.is.judged..It.is.not.possible.to.identify.the.correct.mix.before.the. success.or.failure.occurs. Nevertheless,.the.RBV.approach.is.rapidly.gaining.credibility.and.a.firm.developing. its.strategies.would.ignore.its.competencies.at.its.peril.

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Reading 4.1 (online only)


Before proceeding further in this topic you would be well advised to review the concepts discussed so far by reading the whole of Reading 4.1. This is a chapter on the resource-based view taken from another textbook. It will give an overview and illustrations of the concepts we have been outlining so far in the topic. You will need to access this chapter online at the following address: http://www.oup.com/uk/orc/ bin/9780199288304/henry_ch05.pdf.

Activity 4.1
What are the resource strengths and competitive capabilities of Nintendo? Be as specific as you can.

Having.considered.the.resource-based.view.of.strategy.as.a.mainly.one-off.part.of.this. chapter.we.can.return.to.the.start.of.the.chapter.in.the.textbook.and.follow.its.themes.

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MNG00716 Strategic Management

Question 1: How well is the present strategy working?

Textbook
Read the section (Question 1) from pages 102103.

Effectiveness of current strategy


The.elements.involved.in.evaluating.an.organisations.current.strategy.include. considering.whether.the.firms.market.share.is.rising.or.falling;.whether.profit.margins. are.increasing.or.decreasing;.what.are.the.trends.in.profit.and.return.on.investment. trends;.and.what.are.the.trends.in.sales? There.are.two.steps.involved..First.determine.the.current.strategy.of.the.company.and. then.examine.the.key.indicators.of.strategic.and.financial.performance.

Identify competitive approach


In.identifying.the.current.competitive.approach,.there.are.a.number.of.issues.that. should.be.considered..These.are.outlined.on.pages.106107..Other.indicators.of.how. well.a.strategy.is.working.are.outlined.on.pages.107111. It.is.also.useful.to.identify.the.functional.strategies.that.the.company.has.employed.. This.can.be.seen.by.examining.recent.strategic.moves,.such.as:.the.investment.in.a. new.distribution.centre;.notable.changes.in.marketing.strategies;.or,.the.development. of.a.new.customer.response.centre. These.components.of.the.current.strategy.are.brought.together.in.an.effective.manner. in.Figure.4.1.(page.102). In.summary,.the.key.indicators.of.how.well.the.strategy.is.working.are: . . . . . . . . . trend.in.market.share trend.in.profit.margins trend.in.net.profits,.return.on.investment,.and.EVA trend.in.sales.growth credit.ranking trend.in.stock.price.and.stockholder.value image.and.reputation.with.customers leadership.role(s)..technology,.quality,.etc. competitive.advantages.or.disadvantages.

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Activity 4.2
Would you consider that the strategies of Nintendo are working effectively? Why or why not?

We.can.now.move.onto.a.consideration.of.SWOT.analysis.

SWOT analysis
Textbook
Read from halfway down page 106 to halfway down page 116.

MNG00716 Topic 4 Analysing a companys resources and competitive position

41

This.well.known.and.well.used.strategic.management.tool.is.discussed.next.in.the.text. with.some.very.useful.figures.included..We.have.been.considering.resource.strengths. at.some.length.in.the.topic.to.date..But.a.SWOT.analysis.requires.that.we.also. examine.a.firms . . . resource.weaknesses.and.competitive.deficiencies market.opportunities external.threats.to.future.profitability.

These.are.reviewed.in.turn.and.brought.together.in.a.wonderful.summary.table.on. page.105..(Whenever.you.are.asked.to.conduct.a.SWOT.analysis.this.table.would.be.a. great.tool.to.use). The.lesson.and.implications.from.conducting.a.SWOT.are.outlined.on.pages.114116. while.the.three.steps.in.conducting.such.an.analysis.are.illustrated.in.Figure.4.2.

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Activity 4.3
Conduct a SWOT for Nintendo.

Question 2: Are the companys prices and costs competitive?


Textbook
Read pages 116128.

Assessing.whether.a.firms.costs.are.competitive.with.those.of.rivals.is.a.crucial.part. of.company.analysis..There.are.three.key.analytical.tools.that.we.will.consider,.these. are: . . . strategic.cost.analysis value.chain.analysis benchmarking.

Strategic cost analysis


Strategic.cost.analysis.focuses.on.a.firms.costs.relative.to.its.rivals.and.compares. a.firms.costs.activity.by.activity.against.costs.of.key.rivals..The.activities.may.be. from.raw.materials.purchase.to.the.price.paid.by.the.ultimate.customer..The.aim.is. to.pinpoint.which.internal.activities.are.a.source.of.cost.advantage.or.disadvantage.. Strategic.cost.analysis.focuses.on.a.firms.cost.position.relative.to.its.rivals.and.looks. to.identify.the.sources.of.cost.differences. Companies.do.not.have.the.same.costs.because.of.differences.in: . . . . . . . prices.paid.for.raw.materials,.component.parts,.energy,.and.other.supplier. resources basic.technology.and.age.of.plant.and.equipment economies.of.scale.and.experience.curve.effects wage.rates.and.productivity.levels marketing,.promotion,.and.administration.costs inbound.and.outbound.shipping.costs forward.channel.distribution.costs.

The.higher.a.companys.costs.are.above.those.of.close.rivals,.the.more.competitively. vulnerable.it.becomes!

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MNG00716 Strategic Management

Activity-based costing: A key tool in strategic cost analysis


Determining.whether.a.companys.costs.are.in.line.with.those.of.rivals.requires. measuring.how.a.companys.costs.compare.with.those.of.rivals.activity-by-activity.. from.one.end.of.the.value.chain.to.the.other. This.requires.having.accounting.data.that.measures.the.cost.of.each.value.chain. activity..Activity-based.accounting.systems.provide.a.way.of.measuring.costs.for.each. relevant.value.chain.activity.

The value chain


The.value.chain.identifies.the.separate.activities.and.business.processes.performed. to.design,.produce,.market,.deliver,.and.support.a.product/service..It.consists.of.two. types.of.activities: . . primary.activities support.activities.

The.aim.of.the.value.chain.system.is.to.assess.a.companys.cost.competitiveness.and. involves.comparing.costs.all.along.the.industrys.value.chain..Suppliers.value.chains. are.relevant.because.costs,.quality,.and.performance.of.inputs.provided.by.suppliers. influence.a.firms.own.costs.and.product.performance..Forward.channel.allies.value. chains.are.also.relevant.because.forward.channel.allies.costs.and.margins.are.part.of. price.paid.by.the.ultimate.end-user..As.a.rule,.all.activities.performed.should.affect. end-user.satisfaction. A.representative.value.chain.distinguishing.between.primary.and.secondary.activities. is.illustrated.in.Figure.4.3.(page.118). Examples of key value chain activities Paper.industry: . . . . . . . . . . . . . . . . timber.farming logging pulp.mills papermaking printing.and.publishing. parts.and.components.manufacture assembly wholesale.distribution retail.sales. processing.of.basic.ingredients syrup.manufacture bottling.and.can.filling wholesale.distribution retailing. programming disk.loading

Manufacturing:

Food.industry:

Software.industry:

MNG00716 Topic 4 Analysing a companys resources and competitive position

43

. .

marketing distribution.

An.important.aspect.of.value.chain.analysis.is.the.specification.of.broad.performance. indicators.at.the.overall.organisational.level,.such.as.the.delivery.of.high.levels.of. customer.satisfaction,.and.the.articulation.of.measures.at.the.operational.level.to. indicate.how.tasks.contribute.to.the.achievement.of.these.broad.goals. This.cascading.process.provides.the.potential.for.individuals.to.direct.their.efforts. in.ways.consistent.with.the.primary.goal.of.delivering.customer.satisfaction.in.costeffective.ways. It.also.enables.management.to.set.only.a.few.well-chosen.goals.at.the.core.of.the. organisation,.and.let.those.close.to.the.work.situation.determine.the.specific.details. that.will.enable.their.operations.to.contribute.to.the.achievement.of.the.primary. organisational.goals. The.value.chain.helps.identify.the.critical.things.that.add.value..Having.identified.the. core.functions.and.activities.that.create.value,.the.organisation.can.send.elements.to.a. team.for.further.study..These.teams.can.study.the.current.situation,.identify.its.cost.and. options.to.improve.the.activity.i.e..What.have.we.got?.What.needs.to.be.done.to.get. better? The.value.chain.helps.decide.what.the.core.competencies.really.are.and.enables. decisions.about.outsourcing.and.downsizing. It.is.necessary.to.create.two.value.chains..one.for.the.present.and.one.for.the.ideal.. This.enables.gap.analysis. It.is.also.possible.to.encapsulate.the.organisations.core.competence.in.one.sentence. .a.capability.statement. Without.ignoring.the.need.to.be.efficient.we.must.take.care.that.concerns.over. efficiency.do.not.override.the.need.for.effectiveness.

Criticism of the value chain


. . It.is.too.generic.and.is.sometimes.difficult.to.apply.to.organisations. It.is.difficult.to.apply.to.service.organisations.

Usefulness of the value chain


As.a.concept.the.value.chain.is.useful.because: . . . . it.focuses.on.the.needs.of.the.end.user.of.the.product.or.service.(the.value.to.the. customer.as.determined.by.price,.quality.and.accessibility) it.shows.how.all.organisational.activities.and.resources.are.linked.in.the.creation. of.this.value it.shows.that.organisational.activities.and.resources.can.be.combined.in.different. ways.in.order.to.create.value.more.efficiently.and.effectively it.demonstrates.how.value.can.be.created.using.resources.which.the.organisation. does.not.own.but.over.which.it.has.some.influence.

Benchmarking
Benchmarking.the.costs.of.key.value.chain.activities.focuses.on.cross-company. comparisons.of.how.well.activities.are.performed.in.respect.to: . . purchase.of.materials payment.of.suppliers

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MNG00716 Strategic Management

. . . . . .

management.of.inventories training.of.employees processing.of.payrolls getting.new.products.to.market performance.of.quality.control filling.and.shipping.of.customer.orders.

The.objectives.of.benchmarking.are.to:.1).understand.best.practices,.2).learn.how.to. lower.costs.and.3).take.action.to.improve.cost.competitiveness. Benchmarking.can.be.seen.as.the.managers.best.tool.for.determining.how.efficient. the.firm.is.in.performing.key.functions.and.activities,.the.firms.cost.position.and.if. processes.need.improvement..This.often.requires.in-depth.analysis.of.competing.and. non-competing.firms.practices.and.infrastructure. The.results.of.a.benchmarking.exercise.enable.the.company.to.determine.whether.a. company.is.performing.particular.value.chain.activities.efficiently..It.helps.develop. understanding.of.the.best.practices.in.performing.an.activity..Finally,.it.enables.an. assessment.of.whether.costs.are.in.line.with.competitors. Benchmarking.also.helps.the.company.learn.how.lower.costs.are.achieved.and.enables. it.to.take.action.to.improve.cost.competitiveness.

Ethical standards in benchmarking: Dos and donts


. . . . . Avoid.talk.about.pricing.or.competitively.sensitive.costs. Dont.ask.rivals.for.sensitive.data. Dont.share.proprietary.data.without.clearance. Have.an.impartial.third.party.assemble.and.present.competitive.data.with.no. names.attached. Dont.disparage.a.rivals.business.to.outsiders.based.on.data.obtained.

Other.principles.for.ethical.conduct.when.benchmarking.are.found.in.Illustration. Capsule.4.2.(page.124).

Cost competitiveness
A.companys.cost.competitiveness.depends.on.how.well.it.manages.its.value.chain. relative.to.competitors..There.are.three.areas.that.contribute.to.cost.differences: 1.. suppliers.activities 2.. the.companys.own.internal.activities 3.. forward.channel.activities. Some.suggested.remedies.for.each.of.these.areas.are.described.from.the.bottom.of. page.124.to.halfway.down.page.126. A.company.can.create.competitive.advantage.by.managing.its.value.chain.so.as.to. integrate.the.knowledge.and.skills.of.employees.in.competitively.valuable.ways.and. leverage.economies.of.learning/experience. It.can.also.coordinate.related.activities.in.ways.that.build.valuable.capabilities.and. build.dominating.expertise.in.a.value.chain.activity.that.are.critical.to.customer. satisfaction.or.market.success..Some.suggestions.as.to.how.an.organisation.can.use. value.chain.analysis.to.outperform.competitors.more.proficiently.or.more.cheaply.is. outlined.in.Figure.4.5.(page.127).

MNG00716 Topic 4 Analysing a companys resources and competitive position

45

a r

Activity 4.4
Turn to Exercise 1 on page 136 and complete the five questions asked on either Nintendo or a company you work for or have worked for.

Question 3: How strong is the companys competitive position?


Textbook
Read pages 128131.

Assessing competitive position


At.this.point.there.is.the.need.to.ask.whether.the.firms.position.can.be.expected.to. improve.or.deteriorate.if.the.present.strategy.is.continued..This.requires.consideration. of.how.the.firm.ranks.relative.to.key.rivals.on.each.industry.KSF.and.each.relevant. measure.of.competitive.strength. We.are.concerned.with.whether.the.firm.has.a.sustainable.competitive.advantage.or. disadvantage.and.the.ability.of.the.firm.to.defend.its.position.in.the.light.of.industry. driving.forces..The.main.industry.driving.forces.are.the.competitive.pressures.faced. and.the.anticipated.moves.of.rivals. An.approach.to.assessing.a.companys.competitive.strength.versus.key.rivals.is. outlined.in.a.series.of.five.steps.on.pages.127..An.illustration.of.the.use.of.these.steps. is.given.in.Table.4.5.(page.127). A.competitive.strength.assessment.reveals.the.strength.of.a.firms.competitive.position. and.shows.how.the.firm.stacks.up.against.rivals,.measure-by-measure..It.pinpoints.the. companys.competitive.strengths.and.competitive.weaknesses.and.indicates.whether. the.firm.is.at.a.competitive.advantage/disadvantage.against.each.rival. A.competitive.strength.assessment.may.also.identify.possible.offensive.attacks.(pit. company.strengths.against.rivals.weaknesses),.and.at.the.same.time,.identify.possible. defensive.actions.(a.need.to.correct.competitive.weaknesses)..Hence.interpreting.the. competitive.strength.analysis.is.a.vital.step.once.the.analysis.has.been.undertaken.

Question 4: What strategic issues merit attention?

Textbook
Read pages 131132.

Strategic issues
The.final.question.seeks.to.determine.what.issues.the.company.needs.to.address.. That.is,.what.should.management.be.worried.about.and.what.items.should.be.on. the.companys.worry.list..This.requires.thinking.strategically.about.the.pluses.and. minuses.in.the.industry.and.competitive.situation;.the.companys.resource.strengths. and.weaknesses.and.the.attractiveness.of.its.competitive.position.

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MNG00716 Strategic Management

A.good.strategy.must.address.each.and.every.strategic.issue! The.following.questions.help.in.identifying.the.strategic.issues: . . . . . . Is.present.strategy.adequate.in.light.of.competitive.pressures.and.driving.forces? Is.the.strategy.well-matched.to.the.industrys.key.success.factors? Does.the.company.need.new.or.different.resource.strengths.and.competitive. capabilities? Does.the.present.strategy.adequately.protect.against.external.threats.and.resource. deficiencies? Is.the.firm.vulnerable.to.competitive.attack.by.rivals? Where.are.the.strong/weak.spots.in.present.strategy?

The.issues.must.be.then.stated.clearly.and.precisely..A.well-stated.issue.involves.such. phrases.as: . . . . What.should.be.done.about..? How.to..? Whether.to..? Should.we..?

Issues.need.to.be.precise,.specific,.and.cut.straight.to.the.quick. In.summary,.the.strategic.issues.raise.questions.about.what.actions.need.to.be. considered.and.what.to.think.about.doing.

Activity 4.5
With regards to Nintendo what would be your assessment of their competitive strength. Which strategic issues should be on the front burner for both companies. Why?

Strategic mapping
A.convenient.way.of.identifying.strategic.issues.and.themes.is.to.use.a.strategy.map.. We.read.about.the.approach.earlier.in.this.unit.in.Reading.1.3.by.the.creators.of.the. Balanced.Scorecard,.Kaplan.and.Norton..The.next.reading.provides.a.step-by-step. guide.to.the.preparation.of.a.strategy.map..Mapping.provides.a.visual.representation. of.the.key.elements.of.strategy,.allows.for.the.development.of.strategic.themes,.and. can.be.used.in.internal.assessment.to.identify.gaps.in.capabilities.that.need.to.be. addressed.for.successful.strategic.implementation.

Reading 4.2
Turn to Reading 4.2 and read pages 1219.

MNG00716 Topic 4 Analysing a companys resources and competitive position

47

Summary
In.this.topic.we.have.completed.a.review.of.the.steps.necessary.to.undertake. an.internal.analysis.of.a.company..We.did.this.by.first.considering.the.growing. importance.of.a.resource-based.view.of.strategy.focusing.on.the.internal.competencies. and.capabilities.that.can.give.an.organisation.a.competitive.advantage..One.of.the. most.common.outputs.of.the.internal.and.external.analysis.is.a.SWOT.analysis.. We.also.considered.one.of.the.most.valuable.tools.in.Strategic.Management..the. value.chain..A.value.chain.can.be.used.to.describe.a.whole.industry.or.the.internal. activities.within.a.company..When.coupled.with.activity.based.costing,.the.result.is. a.comprehensive.view.of.where.the.firm.adds.costs.in.its.processes..Benchmarking. is.also.facilitated.through.use.of.the.value.chain..This.analysis.can.lead.to.the. consideration.of.a.range.of.strategic.options.including.outsourcing. Having.introduced.some.tools.of.analysis.in.this.topic.and.Topic.3.we.can.now. consider.the.major.generic.strategies.available.to.organisations..We.do.this.in.Topic.5.

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MNG00716 Strategic Management

Topic 5
The five generic competitive strategies
Introduction
New ways to LA mean cheaper fares to United States January 31 2009, Sydney Morning Herald The debut of two more carriers on the route from Australia to Los Angeles means cheaper fares, writes Clive Dorman. After.waiting.out.a.decade-long.pricing.winter,.spring.has.sprung.for.travellers. heading.to.the.US,.with.fares.almost.halving.as.two.new.competitors.muscle.in. During.its.last.Christmas.as.the.price.dominator,.Qantas.held.peak.holiday.fares. to.Los.Angeles.as.high.as.$3300.return..Its.only.competitor,.United.Airlines,. has.struggled.to.maintain.its.flights.to.Australia,.reeling.from.the.effects.of. September.11,.2001,.and.trading.while.under.bankruptcy.protection. Virgin.Blues.new.long-haul.carrier,.V.Australia,.starts.services.between.Sydney. and.Los.Angeles.next.month..In.the.lead-up,.it.has.pitched.its.best.fares.as.low.as. $1200.return..They.have.settled.at.$1400-$1600.return.for.travel.in.the.next.few. months,.compared.with.$1800-$2500.last.year.on.Qantas.and.United,.which.is. following.suit. More.competition.will.arrive.in.July.when.the.worlds.biggest.airline,.Delta. (after.taking.over.Northwest.Airlines),.starts.flying.from.LA.to.Sydney.daily. Overall.the.number.of.seats.on.the.market.will.increase.by.about.30.per.cent,. which.means,.in.simple.terms,.the.airlines.will.have.to.drop.their.ticket.prices.by. 30.per.cent.if.they.hope.to.fill.their.planes. Qantas,.however,.is.hoping.to.command.a.premium.on.its.fares.to.LA.as.it. replaces.Boeing.747.jumbos.with.the.sex.appeal.of.its.new.Airbus.A380.superjumbos..Qantas.claims.the.A380.gives.passengers.more.space.in.all.classes.. Economy.seats.slide.forward.instead.of.falling.back.on.the.seat.row.behind,. offering.increased.recline.and.the.addition.of.a.foot.net..Seat.rows.are.still.spaced. 31.inches.(78.7.centimetres).apart,.which.is.an.inch.less.than.the.so-called.seat. pitch.on.V.Australias.new.Boeing.777300s. All.four.competitors.have.indicated.they.will.try.to.raise.fares.in.the.US.summer,. starting.in.June..Online.fares.for.travel.in.the.middle.of.the.year.start.at.$1800.. But.this.should.be.regarded.only.as.an.early.bid;.if.all.those.extra.seats.arent. filling,.discounts.will.be.rolled.out.in.the.next.few.months.and.the.price.will.fall. However,.almost.as.important.is.what.happens.at.the.other.end.when.passengers. disembark.at.Los.Angeles.airport.(LAX),.which.regularly.gets.some.of.the. worlds.worst.reviews.from.consumers.for.its.shabbiness,.overcrowding.and. surliness.from.customs.and.security.staff.
49

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MNG00716 Strategic Management

LAX.is.a.total.disgrace.and.I.live.in.a.so-called.Third.World.country,.a.foreign. visitor.wrote.recently.in.a.review.at.www.airlinequality.com..a.comment.typical. of.many. Qantas.will.pit.its.Oneworld.alliance.connections.from.LAX.with.American. Airlines.against.Uniteds.Star.Alliance.and.Deltas.SkyTeam..V.Australia.will.go. into.battle.with.no.alliance.but.a.series.of.agreements.with.airlines,.some.even. members.of.rival.groupings. One.of.V.Australias.advantages.is.it.is.the.only.service.to.leave.Sydney.for.the. US.at.night.but.this.will.also.be.one.of.its.limitations,.as.it.arrives.at.LAX.at. 4.30pm.after.east-coast.connections.have.departed..However,.you.will.be.able.to. catch.the.Virgin.America.red-eye.to.New.York,.for.example,.at.9.15pm.

Developments.subsequent.to.the.publication.of.the.above.article.have.seen.Virgin.and. Delta.enter.into.a.code.share.partnership..However.industry.data.suggests.that.costs. per.passenger.are.20%.lower.on.Qantas.new.A380.which.gives.Qantas.a.major.cost. advantage,.let.alone.the.marketing.advantage.of.having.the.worlds.biggest.and.newest. aircraft.in.its.fleet. Recent.financial.performance.of.V.Australia.suggests.it.has.a.long.way.to.go.to. be.profitable.for.VBA..Last.year.it.lost.approximately.$40M.from.its.longhaul. operations..Finally,.Virgin.is.competing.with.the.elephant.in.the.room..Qantas.not. only.has.scale,.a.war.chest.of.cash.and.significant.code.share.alliances,.it.also.has.a. government.that.protects.Qantas.from.real.competition.wherever.possible..Singapore. Airlines.for.example.have.been.precluded.from.the.transpacific.route.from.Australia. to.the.USA.for.more.than.15.years..This.is.despite.Singapore.Airlines.offering.reports. indicating.an.increase.in.inbound.tourism.for.Australia. If.you.are.interested.in.reading.more.about.this.and.seeing.just.how.convenient. government.can.be.in.setting.strategy,.visit.this.URL:.http://sauder.ubc.ca/en/Faculty/

Research_Centres/Centre_for_Transportation_Studies/~/media/Files/Faculty%20 Research/Publications/Hodgkinson%20-%20Restrictions.ashx.

Despite.the.free.market.rhetoric.and.mentality,.along.with.a.free.trade.agreement. between.Australia.and.Singapore,.theres.no.doubt.that.Qantas.have.powerful. allies,.and.put.simply,.Virgin.does.not..The.key.message.here.is.that.you.can.never. underestimate.the.strategic.advantage.of.having.a.government.behind.your.firm. Australians.travelling.to.the.USA.have.long.complained.that.the.existing.few.carriers. had.been.able.to.set.prices.at.high.levels.because.there.were.so.few.competitors.flying. this.route..As.the.article.above.suggests.the.entry.of.two.new.competitors.into.the. market.might.have.the.effect.of.reducing.these.fares..V.Australia.intends.to.use.its. low-cost.pricing.strategies.as.its.means.of.breaking.into.this.lucrative.market..It.is. strategies.such.as.this.(low-cost.pricing).that.will.be.our.focus.in.this.topic. In.this.unit.we.will.consider.the.ways.in.which.an.organisation.may.compete.in.its. industry..The.discussion.flows.from.the.initial.work.of.Michael.Porter.who.originally. argued.that.there.were.only.two.generic.strategies.for.competition:.low.cost.or.through. differentiating.the.firms.product.from.that.of.its.competitors..This.has.been.advanced. over.the.years.and.at.least.five.generic.competitive.strategies.have.been.identified.. We.will.consider.each.of.these.strategies.in.this.unit..We.will.conclude.the.unit.by. considering.some.competitive.options.that.firms.might.take.after.considering.their. internal.and.external.environment..The.issue.of.positioning.has.developed.since.the. original.work.of.Porter.in.the.1980s.and.now.it.is.common.to.consider.positioning.as. conscious.decisions.about.the.balance.of.value.offered.to.the.customer,.at.what.price. We.will.continue.to.use.our.two.cases.to.illustrate.points.being.made.in.the.discussion.

MNG00716 Topic 5 The five generic competitive strategies

51

Objectives
At.the.conclusion.of.this.topic.you.should.be.able.to: . . . . . . outline.and.compare.the.five.main.generic.strategies explain.how.and.when.a.low-cost.strategy.can.be.used.to.achieve.competitive. advantage analyse.the.types.of.differentiation.strategies.and.when.such.a.strategy.is.most. likely.to.be.successful explain.the.nature.of.a.best-cost.strategy.and.its.benefits.and.risks assess.the.types.of.niche.market.strategies.available.and.when.such.strategies. should.be.used.and.avoided illustrate.the.use.of.these.generic.strategies.in.case.studies.

Materials required
Textbook Thompson.et.al..Chapter.5. Reading 5.1. Parnell,.JA.2006,.Generic.Strategies.after.two.decades:.a.reconceptualization.of. competitive.strategy,.Management Decision,.vol..44,.no..8,.pp..11391154.

Strategy and competitive advantage


Competitive.advantage.exists.when.a.firms.strategy.gives.it.an.edge.in.defending. itself.against.competitive.forces.and.securing.customers..Such.advantage.occurs.when. a.firm.can.convince.customers.that.the.firms.product/service.offers.superior.value,. that.is,.offering.buyers.a.good.product.at.a.lower.price..It.might.also.be.gained.by. using.differentiation.to.provide.a.better.product.buyers.think.is.worth.a.premium.price. Competitive.strategy.consists.of.business.approaches.to.attracting.customers,. fulfilling.their.expectations.while.withstanding.competitive.pressures.with.the.aim.of. strengthening.market.position..It.includes.offensive.and.defensive.moves.to.counter. actions.of.key.rivals.and.shifting.resources.to.improve.the.firms.long-term.market. position..A.key.element.is.being.willing.and.able.to.respond.to.prevailing.market. conditions. The.objectives.of.competitive.strategy.are.to: . . . build.a.competitive.advantage cultivate.a.clientele.of.loyal.customers knock.the.socks.off.rivals,.ethically.and.honourably.

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MNG00716 Strategic Management

The five generic competitive strategies

Textbook
Read pages 140162.

There.are.five.generic.competitive.strategies.discussed.in.the.text.and.illustrated.in. Figure.5.1.(page.134)..From.the.figure.we.see.the.most.interesting.one.is.the.bestcost.provider.since.it.sits.in.the.middle.of.the.other.four..The.broad.characteristics.of. each.strategy.are.summarised.within.the.chapter..Porter,.as.a.leader.and.significantly. influential.scholar.in.the.field,.argued.successfully.for.years.that.you.needed.to. have.one.strategy.or.another,.since.to.have.more.than.one.meant.being.stuck.in.the. middle..Fast.forward.a.few.years.and.the.academics.have.caught.on.that.Porter.not. only.pertains.to.an.era.of.industrialised.economics.and.economies,.he.is.blatantly. contradicting.himself.when.he.created.best-cost.provider,.since.it.sits.precisely.in.the. middle.of.his.four.generic.strategies..Criticisms.of.Porters.concepts.are.probably.best. handled.by.critical.scholars.who.avidly.debate.the.merits.of.many.of.Porters.concepts.. However,.you.as.a.strategic.management.student.will.likely.come.up.with.some.of. your.own.misgivings.about.some.of.Porters.concepts.too. If.you.are.interested.in.gaining.more.perspective.on.this.issue.from.a.practitioner.and. scholars.perspective,.then.it.is.recommended.that.you.obtain.a.copy.of.Mintzberg,. Alstrand.and.Lampels.excellent.book,.A Strategy Safari: The complete guide through the wilds of strategic management..This.book.critiques.the.prescriptive.nature.of. Porters.concepts.and.of.the.positioning.school.in.general..An.SCU.academic,.Dr. Steven.French,.has.also.published.significant.works.on.not.only.strategic.management,. but.also.on.Michael.Porters.work.and.concepts. These.are.briefly.discussed.below.

Low-cost leadership strategy


A.low-cost.leadership.strategy.is.where.the.aim.is.to.open.up.a.sustainable.cost. advantage.over.rivals,.using.the.lower-cost.edge.as.a.basis.either.to.under-price.rivals. and.reap.market.share.gains.or.earn.a.higher.profit.margin.selling.at.the.going.price. Low-cost.leadership.makes.achievement.of.low.cost.relative.to.rivals.the.theme.of. the.firms.business.strategy..It.is.dependent.on.finding.ways.to.drive.costs.out.of.the. business.year.after.year..Virgin.Blue,.Jetstar.and.Tiger.airlines.are.all.examples.of. companies.pursuing.this.strategy.in.Australia.and.from.the.newspaper.example.at. the.beginning.of.this.topic.it.seems.that.V.Australia.will.follow.a.similar.approach.. Another.example.of.a.low-cost.strategy.is.given.in.Illustration.Capsule.5.1.on. page.146.

Approaches to securing a cost advantage


One.of.the.approaches.to.securing.a.cost.advantage.is.based.upon.doing.a.better.job. than.rivals.in.performing.value.chain.activities.efficiently.and.cost.effectively..In. striving.to.control.cost.drivers.there.are.a.number.of.actions.that.can.be.taken.and. these.are.considered.on.pages.147149.with.several.additional.possibilities.added.at. the.bottom.of.page.139. The.second.approach.is.to.revamp.the.value.chain.to.eliminate.or.curb.unnecessary. activities..The.six.ways.of.achieving.this.are.described.on.pages.144147..This.is. followed.by.some.American.examples.but.the.strategies.of.Nucor.and.Southwest. airlines.are.well.known.and.clearly.described.on.page.146..Naturally,.if.this.strategy. is.to.be.successful.there.are.some.necessary.actions.to.take..Is.a.low.cost.strategy.a.

MNG00716 Topic 5 The five generic competitive strategies

53

good.strategy?.The.text.suggests.that.such.a.strategy.will.be.more.successful.when. some.conditions.are.met.and.these.are.described.on.pages.143144..The.dangers.of. following.such.a.strategy.are.then.mentioned.(page.144).

a r

Activity 5.1
Think of an organisation that is truly observing a low-cost leadership model. I suggest you avoid saying Virgin, since they are in no mans land strategically. They have a higher cost base than Jetstar and Tiger and ultimately have gone down the road of me too, less the actual tangibles which Qantas for example still offer (meals, blankets and entertainment etc.)

Differentiation strategies
Textbook
Read pages 149154.

The.aim.of.differentiation.strategies.is.to.incorporate.differentiating.features.that.cause. buyers.to.prefer.the.firms.product.or.service.over.the.brands.of.rivals..The.managers. challenge.is.to.find.ways.to.differentiate.that.create.value.for.buyers.and.that.are.not. easily.matched.or.cheaply.copied.by.rivals..The.limiting.factor,.however,.is.to.not. spend.more.to.achieve.differentiation.than.the.price.premium.that.can.be.charged.for. the.final.product. The.appeal.of.a.differentiation.strategy.is.that.it.is.a.powerful.competitive.approach. when.uniqueness.can.be.achieved.in.ways.that: . . . buyers.perceive.as.valuable rivals.find.hard.to.match.or.copy can.be.incorporated.at.a.cost.well.below.the.price.premium.that.buyers.will.pay.

The.key.to.competitive.advantage.is.sustaining.differentiation..Hence,.the.most. appealing.approaches.to.differentiation.are.those.that.are.hardest.for.rivals.to.match.or. imitate.and.those.that.buyers.will.find.most.appealing. The.best.choices.for.gaining.a.longer-lasting,.more.profitable.competitive.edge.are.as. follows: . new.product.innovation . technical.superiority . product.quality.and.reliability . comprehensive.customer.service. The.text.gives.some.examples.of.different.types.of.differentiation.themes.(page.149). Differentiation.opportunities.can.be.found.at.a.number.of.stages.in.the.value.chain.and. these.are.outlined.on.page.150. There.are.a.number.of.methods.to.achieve.a.differentiation-based.competitive. advantage.and.these.are.described.in.turn.on.page.152.and.include.product.attributes. and.performance,.buyer.satisfaction.and.competencies.and.capabilities.that.are.hard.to. imitate..Examples.are.given.of.each.of.these.methods. The.signals.of.value.may.be.as.important.as.actual.value.when.the.nature.of. differentiation.is.hard.to.quantify.and/or.buyers.are.making.first-time.purchases.or. repurchase.is.infrequent..It.is.also.difficult.in.cases.where.buyers.are.unsophisticated. There.are.circumstances.under.which.a.differentiation.strategy.will.work.best. and.when.it.will.have.pitfalls..The.text.first.outlines.four.market.situations.where. differentiation.is.likely.to.be.successful.(page.152)..It.then.warns.of.some.of.the. pitfalls.of.such.a.strategy.(pages.153).

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MNG00716 Strategic Management

A.firm.considering.a.differentiation.strategy.must.ensure.that.it.is.listening.to.its. buyers..Failure.can.result.through.not.understanding.what.buyers.want.or.prefer.which. may.lead.to.differentiating.on.the.wrong.things.

a a r

Activity 5.2
Apart from price what differentiation strategies does V Australia intend to use in its international flights? (Cynically I would suggest they use a hybrid of ironic campaigns such as to suggest that by consuming Virgin as a brand makes you an individual, and secondly that they will create an image of a low-cost carrier, but when you compare fares theres little or no difference. It would be highly likely that Virgin will give it one more year to get North America to profit, else I suspect they will redeploy their new planes to more profitable leisure routes.) Can you please find some fair and likely examples?

Activity 5.3
To what extent does Nintendo use differentiation strategies and what methods are they using? What dangers might these strategies pose for them?

Best-cost provider strategies


Textbook
Read pages 154156.

Best-cost.provider.strategies.combine.a.strategic.emphasis.on.low.cost.with.a.strategic. emphasis.on.differentiation..The.aim.is.to.make.an.up-scale.product.at.a.lower.cost.. In.this.way.the.firm.aims.to.give.customers.more.value.for.their.money..The.overall. goal.is.to.create.superior.value.by.meeting.or.exceeding.buyer.expectations.on.product. attributes.and.beating.their.price.expectations..that.is,.to.be.the.low-cost.producer.of.a. product.with.good-to-excellent.product.attributes,.and.to.use.cost.advantage.to.underprice.comparable.brands..In.this.sense.they.are.a.hybrid.strategy.balancing.low.cost. against.differentiation..It.worth.pointing.out.that.Porters.original.thinking.on.selecting. only.one.generic.strategy.is.once.again.challenged,.which.is.highlighted.here.

The competitive strength of a best-cost provider strategy


Competitive.advantage.for.a.best-cost.provider.comes.from.matching.close.rivals.on. key.product.attributes.and.beating.them.on.price..Ultimate.success.depends.on.having. the.skills.and.capabilities.to.provide.attractive.performance.and.features.at.a.lower. cost.than.rivals..A.best-cost.producer.can.often.out-compete.both.a.low-cost.provider. and.a.differentiator.when.standardised.features/attributes.will.not.meet.the.diverse. needs.of.buyers.and.many.buyers.are.price.and.value.sensitive..The.target.market.for. the.best-cost.provider.is.the.value-conscious.buyer,.one.looking.for.lowest.cost.but. with.some.extra.features.in.the.product.or.service.provided..The.text.(page.151).sets. out.those.situations.when.a.best-cost.provider.strategy.will.work.best.but.also.the.risks. for.firms.of.following.such.a.strategy.

Focus/niche strategies

Textbook
Read pages 156160.

This.section.is.concerned.with.two.of.the.strategies.presented.in.Figure.5.1.(page. 141)..Focus.or.niche.strategies.involve.concentrated.attention.on.a.narrow.piece.of. the.total.market..The.aim.is.to.serve.niche.buyers.better.than.rivals..The.managers.

MNG00716 Topic 5 The five generic competitive strategies

55

strategy.is.to.choose.a.market.niche.where.buyers.have.distinctive.preferences,.special. requirements,.or.unique.needs.and.then.develop.unique.capabilities.to.serve.the.needs. of.the.target.buyer.segment. Competitive.advantage.for.focus/niche.strategies.flows.from.being.able.to.offer.niche. buyers.something.different.from.rivals..a.differentiation.strategy..The.text.provides. some.examples.(pages.158159).of.organisations.that.have.taken.this.narrow.focus.in. their.strategic.approach. The.focus.or.niche.can.be.based.upon.low-cost.strategies.or.on.product.or.service. differentiation. Pursuing.this.type.of.strategy.is.likely.to.be.most.effective.in.the.conditions.outlined. on.pages.158159..But.such.a.strategy.has.inherent.risks.and.these.are.briefly. considered.in.the.text,.on.pages.159160. Having.outlined.the.features.of.these.strategies.we.can.then.bring.them.together.in. one.table.(Table.5.1.page.161).where.the.differences.and.similarities.can.be.compared.. There.is.a.brief.discussion.about.this.table.on.pages.160.and.162.

Activity 5.4
To what extent do Nintendo, Xbox, Sony PS3, etc. conduct niche strategies? Would it be correct to say that Xbox goes closer to using the focused differentiation strategy than Nintendo does?

Overall.which.strategies.from.the.generic.list.discussed.in.this.chapter.best.fit.the. companies.in.our.two.case.studies?

Beyond generic strategies


A.major.criticism.of.the.generic.strategies.discussed.above.is.the.inability.to.explain. how.companies,.who.may.have.been.stuck.in.the.middle,.survive.and.thrive..This.is. partly.addressed.in.the.notion.of.the.best-cost.producer,.but.it.is.probably.best.to.think. of.positioning.in.terms.of.conscious.decisions.about.the.delivery.of.value.to.the.buyer.. That.is,.positioning.is.the.conscious.decision.of.the.organisation.about.how.it.will. deliver.value.to.the.buyers.of.its.product.and.at.what.price.relative.to.the.competition.. The.next.reading.updates.our.thinking.over.generic.strategies.and.introduces.the. notion.of.value..It.also.introduces.the.concept.of.Market.Control.as.a.determinant. of.the.positioning.decision..Market.control.or.position.will.be.explored.in.greater. depth.in.Topic.8.in.relation.to.the.relative.position.that.an.organisation.has.in.its. market.which.leads.to.a.range.of.strategic.options.

Reading 5.1
Turn to Reading 5.1 and read pages 11391154.

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MNG00716 Strategic Management

Summary
In.this.topic.we.have.discussed.the.main.generic.approaches.to.competing.within. an.industry..These.generic.strategies.emerged.from.the.work.of.Porter.who.initially. argued.that.there.were.only.four.ways.to.compete:.low.cost.or.differentiation.with.a. broad.or.a.narrow.focus. We.considered.the.features.of.each.of.these.strategic.options.and.assessed.those. situations.where.they.might.or.might.not.be.successful..While.each.of.these. strategies.has.appeal.in.different.ways.there.are.always.some.challenges.and.potential. difficulties.to.emerge.in.pursuing.the.chosen.direction..We.gave.examples.from.the. text.of.each.of.these.strategies.and.used.our.two.case.studies.as.illustrations.of.the. use.of.these.generic.strategies..The.approach.to.focusing.strategic.options.depends. on.the.developmental.culture.of.the.organisation,.the.circumstances.in.the.external. environment.and.its.approach.to.risk.management..A.number.of.alternative.strategic. thrusts.can.be.defined,.including.differentiation,.cost.leadership,.focus,.pre-emption. and.synergy..Choice.of.these.approaches.allows.strategic.options.to.be.narrowed.and. focused. These.are.the.broad.strategies..In.the.next.topic.we.will.consider.some.supplementary. strategies.that.organisations.can.use.to.supplement.these.generic.options.

Topic 6
Beyond competitive strategy
Introduction
The.following.email.was.unexpectedly.received.by.all.staff.at.the.university.in.midDecember.2008..It.was.sent.by.the.then.vice.chancellor,.Paul.Clarke.
Southern.Cross.University.has.joined.forces.with.Charles.Sturt.University.to. undertake.a.groundbreaking.study.on.the.establishment.of.a.new.regionallybased.Commonwealth.university,.with.our.two.institutions.as.foundation. partners. This.new.national.institution.would.combine.the.strengths.of.our.institutions.and. initially.a.third.interstate.university,.and.would.ensure.the.sustainable.provision. of.quality.higher.education.and.research.to.regional.communities.in.Australia. We.have.been.invited.by.the.Deputy.Prime.Minister.and.Minister.for.Education. Julia.Gillard.to.submit.a.funding.application.to.conduct.a.feasibility.study,.which. we.expect.will.be.conducted.in.the.first.half.of.next.year. As.two.of.the.leading.regional.institutions.with.complementary.capabilities.we. envisage.greatly.enhanced.opportunities.for.all.regional.students.and.for.our. research,.while.maintaining.our.existing.campuses..Southern.Cross.University. will.bring.to.the.table.considerable.research.strengths. We.envisage.a.national.institution.crossing.State.borders.with.a.specific.focus.on. accelerating.the.application.of.digital.technology.to.deliver.a.quality.and.flexible. educational.experience.in.Australia,.at.a.level.which.has.not.been.seen.before. There.are.significant.challenges.facing.the.Higher.Education.sector.and.this. proposal.ensures.that.our.regional.universities.will.be.best-placed.to.take.control. of.their.own.futures.and.play.a.leading.role.in.the.reforms.which.will.be.under. way.over.the.coming.months. Many.of.you.will.have.questions.about.the.possible.impacts.of.this.proposal.. We.will.be.working.closely.with.all.our.staff,.students.and.stakeholders.and.will. provide.opportunity.for.input.in.the.New.Year.

This.proposed.alliance.between.several.Australian.universities.is.a.great.example.of. one.of.the.supplementary.strategies.discussed.in.this.topic..In.Topic.5.we.outlined.the. generic.business.strategies.but.here.we.are.concerned.with.a.number.of.other.strategies. that.can.complement.the.chosen.generic.strategy..In.a.sense.this.topic.is.somewhat.like. a.grab-bag.of.extra.strategies.since.it.covers.a.broad.spectrum.of.possible.additional. strategies. We.will.systematically.work.through.each.of.these.supplementary.strategies..We. start.with.alliances.and.partnerships.similar.to.the.one.involving.SCU.and.mentioned. at.the.start.of.this.topic..We.then.take.this.a.step.further.by.looking.at.mergers.and. acquisitions.as.strategies..This.is.followed.by.a.consideration.of.vertical.integration. strategies.and.their.advantages.and.disadvantages..There.is.then.a.brief.section.on.the.
57

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growing.importance.of.outsourcing.as.a.business.strategy.and.why.it.is.often.chosen.. The.topic.then.moves.on.to.discuss.a.wide.range.of.offensive.strategies.available.to. organisations..One.of.these.strategies.is.increasingly.attracting.attention.and.that.is.the. blue.ocean.strategy.and.we.spend.some.time.examining.its.features.and.attraction.. After.the.offensive.strategies.we.review.the.use.of.defensive.strategies,.web.strategies. and.functional.area.strategies..The.topic.finishes.with.an.evaluation.of.the.strategy.of. being.a.first.mover. There.is.an.attempt.to.link.these.supplementary.strategies.in.Figure.6.1.on.page.162. of.the.textbook.and.it.would.be.useful.to.keep.referring.to.this.figure.as.you.work. through.the.topic.

Objectives
At.the.conclusion.of.this.topic.you.should.be.able.to: . . . . . . assess.the.types.of.strategic.alliances.organisations.can.form,.and.evaluate.such. alliances analyse.what.objectives.organisations.seek.to.achieve.by.undergoing.mergers.or. making.acquisitions outline.the.types.of.vertical.integration.moves.available.to.organisations.and. assess.their.merits.and.challenges describe.the.reasons.that.organisations.use.outsourcing.as.a.strategy explain.a.range.of.offensive.strategies.available.to.organisations.and.why.they. might.be.adopted evaluate.the.elements.of.a.blue.ocean.strategy.and.the.reasons.for.its.increasing. prominence.

Materials required
Textbook Thompson.et.al..Chapter.6. Reading 6.1. Blue.Ocean.Strategy.(Online),.Available:.http://en.wikipedia.org/wiki/Blue_Ocean_ Strategy..Accessed.24.March.2010.

Strategic alliances and collaborative partnerships

Textbook
Read from the beginning of the chapter on page 166 to the end of the section at the top of page 169.

During.the.past.decade,.companies.in.all.types.of.industries.and.in.all.parts.of.the. world.have.elected.to.form.strategic.alliances.and.partnerships.to.complement. their.own.strategic.initiatives.and.strengthen.their.competitiveness.in.domestic.and. international.markets. Globalisation.of.the.world.economy,.revolutionary.advances.in.technology.across.a. broad.front,.and.untapped.opportunities.in.national.markets.in.Asia,.Latin.America,. and.Europe.that.are.opening.up,.deregulating,.and/or.undergoing.privatisation.have. made.partnerships.of.one.kind.or.another.integral.to.competing.on.a.broad.geographic. scale.

MNG00716 Topic 6 Beyond competitive strategy

59

The.text.discusses.two.very.competitive.forces.impacting.on.organisations.and.how. a.strategic.alliance.can.be.useful.in.addressing.these.forces..The.particular.features. of.a.strategic alliance are.described.and.the.text.then.gives.some.examples.of. strategic.alliances.among.major.corporations.around.the.world..In.the.global.financial. meltdown.of.late.20082009.it.is.to.be.expected.that.there.will.be.many.attempts.at. forming.such.alliances.often.as.a.matter.of.survival. The.text.spells.out.in.detail.(pages.168170).how.strategic.alliances.can.be.beneficial. especially.in.a.growing.global.market.and.the.factors.which.will.determine.how. successful.such.an.alliance.will.prove..A.note.of.caution.is.given.about.some.potential. problems.with.such.alliances. In.the.case.of.the.proposed.strategic.alliance.involving.SCU.the.driving.forces.have. been.the.competitive.forces.in.the.university.sector,.changing.student.demographics. and.different.funding.approaches.to.universities.by.the.Australian.government.. An.isolated.regional.university.stands.to.gain.by.being.part.of.a.larger.and.broader. institution.while.still.being.able.to.retain.what.it.considers.to.be.its.competitive. advantages. Strategic.alliances.go.beyond.normal.company-to-company.dealings.but.fall.short.of. mergers.or.full.joint.venture.partnerships.with.full.ownership.ties.

a r

Activity 6.1
Despite the proposed SCU & CSU merger not proceeding after a consultants report revealed too many complexities, what would you consider to be the advantages and disadvantages of SCU becoming part of a strategic partnership with two other regional universities in Australia?

The source of competitive advantage: Merger and acquisition strategies


Textbook
Read pages 171175.

Mergers.and.acquisitions.are.especially.suited.to.situations.where.alliances.and. partnerships.do.not.go.far.enough.in.providing.a.company.with.access.to.the.needed. resources.and.capabilities. No.company.can.afford.to.ignore.the.strategic.and.competitive.benefits.of.acquiring.or. merging.with.another.company.to.strengthen.its.market.position.and.open.up.avenues. of.new.opportunity. The.text.first.makes.a.distinction.between.a.merger.and.an.acquisition (page.171). since.sometimes.the.terms.are.confused..It.then.goes.on.to.outline.five.strategic. objectives.of.mergers.and.acquisitions.and.a.number.of.examples.are.given.of. successful.mergers..One.successful.merger.and.acquisition.strategy.is.described.in. Illustration.Capsule.6.1.(page.174)..However.it.is.also.pointed.out.(page.174175). that.for.several.reasons.some.mergers.and.acquisitions.have.not.lived.up.to.promised. expectations.

Activity 6.2
Illustration Capsule 6.1, How Clear Channel Has Used Mergers and Acquisitions to Become a Global Market Leader. Discuss the impact loosening of rules by the FCC had on Clear Channels business strategy. Describe how acquisitions benefited this company.

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MNG00716 Strategic Management

Vertical integration strategies

Textbook
Read pages 175178.

Vertical.integration.as.a.strategy.involves.a.firm.extending.its.competitive.scope. within.the.same.industry.either.by.movingbackward.into.the.sources.of.supply.or. forward.toward.the.end-users.of.the.final.product..A.firm.can.aim.at.either.full.or. partial.integration. The.appeal.of.backward.integration.is.that.it.generates.cost.savings.but.only.if.the. volume.needed.is.big.enough.to.capture.the.efficiencies.currently.employed.by. suppliers. There.is.potential.to.reduce.costs.through.backward.integration.when.suppliers.have. sizeable.profit.margins;.when.the.item.supplied.is.a.major.cost.component;.or,.where. the.resource.requirements.of.production.are.easily.met. It.is.possible.to.produce.a.differentiation-based.competitive.advantage.when.it. results.in.a.better-quality.part.being.produced.through.taking.control.of.production.in. backward.integration. Backward.integration.can.also.reduce.the.risk.of.depending.on.suppliers.of.crucial.raw. materials/parts/components. It.can.be.advantageous.for.a.firm.to.establish.its.own.distribution.network.if: . . . . . undependable.distribution.channels.undermine.steady.production.operations integrating.forward.into.distribution.and.retailing it.may.be.cheaper.than.going.through.independent.distributors it.may.help.achieve.stronger.product.differentiation,.allowing.escape.from.price. competition it.may.provide.better.access.to.users.

The.strategic.disadvantages.of.vertical.integration.are.that.it.increases.resource. requirements;.locks.the.firm.deeper.into.the.same.industry;.and.results.in.fixed.sources. of.supply.and.less.flexibility.in.accommodating.buyer.demands.for.product.variety. Vertical.integration.can.also.pose.problems.of.balancing.capacity.at.each.stage.of. the.value.chain.and.may.require.radically.different.skills/capabilities.which.the.firm. may.need.to.develop.or.buy..Accordingly,.it.can.reduce.manufacturing.flexibility,. lengthening.design.time.and.the.ability.to.introduce.new.products..The.disadvantages. of.integration.strategies.are.outlined.on.pages.173175.and.the.need.for.a.balanced. assessment.are.given.at.the.top.of.page.175.

Unbundling and outsourcing strategies

Textbook
Read pages 178180.

Unbundling.and.outsourcing.strategies.involve.not.performing.certain.value.chain. activities.internally.and.instead.relying.on.outside.vendors.to.perform.needed.activities. and.services..Outsourcing.has.become.a.strategy.increasingly.used.by.organisations. around.the.world..Many.Australian.organisations.have.outsourced.many.of.their.

MNG00716 Topic 6 Beyond competitive strategy

61

functions.to.outsourcing.specialists,.many.of.these.companies.being.resident.overseas.. There.has.been.considerable.political.and.industrial.unrest.about.the.wisdom.and. effectiveness.of.such.moves. Outsourcing.can.streamline.operations.which.may.result.in: . . . a.shorter.cycle.time quicker.decision.making a.reduction.in.coordination.costs.

It.is.also.argued.that.outsourcing.allows.the.firm.to.concentrate.on.its.core.business.. Overall,.the.real.benefit.of.outsourcing.lies.in.its.ability.to.create.a.competitive. advantage. Outsourcing.strategies.can.be.successful.where.outside.specialists.can.perform.the. activity.better.or.more.cheaply.and.the.activity.is.not.crucial.to.achieving.competitive. advantage..Outsourcing.reduces.the.risk.exposure.to.changing.technology.for.the.firm. and/or.the.risk.of.changing.buyer.preferences..The.situations.which.warrant.the.use.of. such.outsourcing.strategies.are.discussed.on.pages.179180.before.some.of.the.risks. are.identified.at.the.bottom.of.page.180.

Business strategy choices for specific market situations, including offensive and defensive strategies

Textbook
Read pages 181198.

As.the.text.illustrates,.there.are.numerous.strategic.choices.depending.on.the.market. conditions..A.good.way.to.determine.the.market.for.a.given.industry.is.to.conduct. an.industry.lifecycle.analysis,.which.helps.one.to.decide.whether.or.not.the.market. is.characterised.as.being.fragmented,.fast-.or.slow-growing.or.emerging.(such.as. technology.and.high.spec.R&D.critical.industries)..The.following.strategic.choices. include.a.range.of.typical.offensive.and.defensive.strategies. Offensive.and.defensive.strategies.are.undertaken.to.build.new.or.stronger.market. positions.and/or.create.competitive.advantage..Any.competitive.advantage.currently. held.will.eventually.be.eroded.by.the.actions.of.competent,.resourceful.competitors. Aldi,.the.German.supermarket.is.aggressively.challenging.the.two.major.supermarket. chains.in.Australia.with.some.of.the.strategies.mentioned.in.this.section.of.the.text.. Wal.Mart.in.America.is.an.aggressive.competitor.while.Dell.in.the.computer.industry. is.also.known.for.its.aggressive.strategies. Previous.editions.of.the.text.offered.nine.different.offensive.strategy.options.open.to. organisations,.giving.examples.of.how.each.of.these.strategies.have.been.used..It.is. worthwhile.to.note.that.the.strategies.outlined.below.are.still.relevant.today.and.apply. particularly.in.hotly.competitive.situations..Some.of.the.following.tactics.warrant. further.discussion.

Attacking competitor strengths


The.appeal.of.attacking.a.competitors.strengths.is.that.it.may.enable.the.firm.to.gain. market.share.by.out-matching.the.strengths.of.weaker.rivals.and.in.this.way.it.can. whittle.away.at.a.rivals.competitive.advantage.

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However,.challenging.strong.competitors.with.a.lower.price.is.foolhardy.unless.the. aggressor.has.a.cost.advantage.or.advantage.of.greater.financial.strength! Possible.offensive.options.for.attacking.competitors.strengths: . . . . . . . . . . . . under-price.rivals boost.advertising introduce.new.features.to.appeal.to.rivals.customers attack.with.equally.good.product.and.lower.price develop.a.low-cost.edge,.and.use.it.to.under-price.rivals offer.a.better.product.at.the.same.price leapfrog.into.next-generation.technologies add.appealing.new.features run.comparison.ads construct.new.plant.capacity offer.a.wider.product.line develop.better.customer.service.capabilities.

Attacking competitor weaknesses


The.basic.approach.is.to.concentrate.a.companys.strengths.and.resources.directly. against.a.rivals.weaknesses. The.weaknesses.to.attack: . . . . . geographic.regions.where.a.rival.is.weak segments.which.the.rival.is.neglecting go.after.those.customers.a.rival.is.least.equipped.to.serve rivals.with.weaker.marketing.skills introduce.new.models.exploiting.gaps.in.rivals.product.lines.

Launching simultaneous offensives on many fronts


The.objective.of.launching.simultaneous.offensives.on.many.fronts.is.to.throw.rivals. off.balance.and.splinter.their.attention..This.is.intended.to.force.them.to.use.substantial. resources.to.defend.their.position..The.appeal.of.the.strategy.lies.in.the.belief.that.a. challenger.with.superior.resources.can.overpower.weaker.rivals.by.out-competing. them.across.the.board.long.enough.to.become.a.market.leader.

End-run offensives
End-run.offensives.have.the.objective.to.dodge.head-to-head.confrontations.that. escalate.competitive.intensity.or.risk.cutthroat.competition..The.aim.is.to.attempt.to. manoeuvre.around.areas.of.strong.competition.and.concentrate.on.those.areas.of.the. market.where.competition.is.the.weakest. There.are.several.optional.approaches.for.end-run.offensives..These.include.building. a.presence.in.geographic.areas.where.rivals.have.little.presence.or.exposure..The.firm. might.alternatively.introduce.products.with.different.attributes.and.features.to.better. meet.buyer.needs.or.introduce.next-generation.technologies.with.an.aim.to.leapfrog. rivals..Another.strategy.is.to.add.more.support.services.for.customers.

MNG00716 Topic 6 Beyond competitive strategy

63

Guerrilla offensives
Guerrilla.offensives.encourage.the.organisation.to.use.principles.of.surprise.and.hitand-run.to.attack.in.locations.and.at.times.where.conditions.are.most.favourable.to.it. as.the.initiator.of.the.offensive..This.approach.is.well-suited.to.small.challengers.with. limited.resources. Some.of.the.options.for.employing.guerrilla.tactics.include: . . . . . . focus.on.a.narrow.target.weakly.defended.by.rivals challenge.rivals.where.they.are.overextended.and.when.they.are.encountering. problems make.random.scattered.raids.on.leaders occasional.low-balling.on.price intense.bursts.of.promotional.activity legal.actions.charging.antitrust.violations,.patent.infringements,.or.unfair. advertising.

Pre-emptive strikes
Pre-emptive.strikes.involve.moving.first.to.secure.an.advantageous.position.that.rivals. are.unable.to.gain.or.are.discouraged.from.duplicating! Some.of.the.options.include: . . . . . . . expand.capacity.ahead.of.demand.in.hopes.of.discouraging.rivals.from.following. suit tie.up.best.or.cheapest.sources.of.essential.raw.materials move.to.secure.best.geographic.locations obtain.business.of.prestigious.customers build.an.image.in.buyers.minds.that.is.unique.and.hard.to.copy secure.exclusive.or.dominant.access.to.best.distributors acquire.desirable,.but.struggling,.competitors.

Choosing whom to attack in an offensive move


There.are.four.types.of.firms.that.can.be.the.target.of.an.offensive:.market.leaders,. runner-up.firms,.struggling.rivals.on.the.verge.of.going.under,.and.small.local.or. regional.firms.not.doing.a.good.job.for.their.customers. The.following.strategic.offensive.options.offer.the.strongest.basis.for.competitive. advantage: . . . . . . . develop.lower-cost.product.design make.changes.in.production.operations.that.lower.costs.or.enhance.differentiation develop.product.features.that.deliver.superior.performance.or.lower.users.costs give.more.responsive.customer.service escalate.marketing.efforts pioneer.new.distribution.channel sell.direct.to.end-users.

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A.fundamental.principle.in.an.offensive.strategy.is.that.the.chances.for.a.successful. offensive.initiative.are.improved.when.it.is.based.on.a.companys.resource.strengths. and.strongest.competencies.and.capabilities..Moreover.the.aggressive.company.needs. to.know.who.to.target.with.their.attacks.and.the.text.suggests.(pages.181182).who. the.best.targets.might.be.and.what.should.be.the.basis.for.competitive.attacks.

Blue Ocean Strategies

r r

Textbook
Read page 200 to the top of page 201.

One.of.the.strategies.that.has.gained.increasing.interest.since.it.was.first.suggested.in. the.1990s.is.the.blue.ocean.strategy.which.is.a.special.kind.of.offensive..It.is.a.strategy. not.designed.to.compete.in.existing.markets.but.in.a.totally.new.and.distinctive. market. There.is.a.brief.coverage.of.the.blue.ocean.strategy.in.the.text.and.some.examples.are. given.of.how.it.has.been.used..A.more.detailed.discussion.of.the.strategy.is.found.in. Reading.6.1.

Reading 6.1
Turn to Reading 6.1 which is an article that outlines in detail the origins and features of the blue ocean strategy and gives examples of where it has been used. It is an offensive strategy of a different kind.

Defensive strategy
Just.as.in.the.case.of.having.offensive.strategies,.firms.may.utilise.what.are.known. as.defensive.strategies,.which.are.designed.to.counter.attacks.and.ultimately.the. offensive.strategies.of.rival.firms..Previous.editions.of.the.text.have.alluded.to.these. strategies,.which.in.my.opinion.are.still.worthy.of.discussion.and.thought,.since.they. apply.in.any.economic.cycle. The.objectives.of.a.defensive.strategy.are.to.fortify.the.firms.present.position.and. help.sustain.any.competitive.advantage.currently.held..A.defensive.move.can.also. lessen.the.risk.of.being.attacked.by.a.rival.and.can.help.blunt.the.impact.of.any.attack. that.may.occur..A.company.employing.successful.defensive.tactics.can.influence. challengers.to.aim.attacks.at.other.rivals.rather.than.at.it. There.are.two.general.defensive.approaches: . . block.avenues.challengers.can.take.in.mounting.offensive.attacks make.it.clear.any.challenge.will.be.met.with.a.strong.counterattack.

Blocking avenues for rivals offensives


One.method.to.block.challengers.involves.broadening.the.product.line.to.fill.the.gaps. that.rivals.may.see.as.attractive.and.go.after..Alternatively,.the.company.may.keep. prices.low.on.those.models.that.match.the.rivals.products. Another.blocking.strategy.involves.signing.exclusive.marketing.agreements.with. distributors..Some.companies.block.competition.by.offering.free.training.to.buyers. personnel,.locking.the.buyer.into.using.the.product.that.its.staff.have.been.trained.to. use.

MNG00716 Topic 6 Beyond competitive strategy

65

Some.of.the.other.blocking.strategies.include: . . . . . . giving.better.credit.terms.to.buyers.than.those.offered.by.rivals reducing.delivery.times.for.spare.parts,.reducing.the.potential.down-time.of. buyers increase.warranty.coverage patent.alternative.technologies sign.exclusive.contracts.with.best.suppliers protect.proprietary.know-how.

The.text.suggests.that.signals.can.be.given.that.any.aggression.will.be.defended.and. some.of.these.signals.are.identified.on.page.183.

First-mover advantages

Textbook
Read pages 199201.

The.decision.over.when.to.make.a.strategic.move.is.often.as.crucial.as.what.move.to. make..There.are.a.number.of.first-mover.advantages.that.a.company.may.achieve..A. good.example.of.these.can.be.found.in.Illustration.Capsule.6.4.on.page.200,.where. amazon.com.shows.the.significant.advantage.of.having.entered.online.retailing.back. at.the.beginning.of.this.century..It.could.be.argued.that.this.has.given.Amazon.clear. branding.and.consumer.awareness.since.they.are.established.and.trusted.When.a. company.is.a.first.mover.it.is.likely.to.make.early.commitments.to.raw.material. suppliers,.new.technologies,.and.distribution.channels..This.can.produce.cost. advantages.for.the.company.over.its.later-entering.rivals. Strategically,.moving.first.can.be.a.pre-emptive.strike.against.rivals,.generating.the. element.of.surprise.and.catching.rivals.off.guard.

First-mover disadvantages
A.company.moving.early.can.be.at.a.disadvantage,.or.fail.to.produce.an.advantage,. when.the.costs.of.pioneering.are.sizeable.and.the.loyalty.of.first-time.buyers.is.weak.. The.company.may.commit.significant.resources.to.the.strategy.but.find.that.the.sales. levels.and.competitive.position.are.not.sustainable. There.is.also.the.risk.that.rapid.technological.change.may.allow.followers.to.leapfrog. pioneers..In.many.electronic.industries.this.may.be.the.case..Who.owns.a.Beta.VCR. today? Another.risk.lies.where.the.achievements.of.the.pioneers.can.be.easily.and.quickly. imitated.by.late.movers..In.these.cases.it.may.be.relatively.easy.for.latecomers.to. crack.into.the.market.

Activity 6.3
Using Nintendo as a reference point, consider their relative position on entry choices. Do you think early or late mover is the best choice? Consider that Apple entered the MP3 industry relatively late, and therefore even though it is a technology-based product, Apple were perhaps able to more successfully differentiate based on their market intelligence and current offerings. Examples can be found even in industries and markets which are characterised by rapid change, disruptive technologies and innovations, yet as producers it is precisely this space where companies like Apple have prospered.

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A final point to consider is that in many cases products that are developed in Nintendos labs may take years to recover their investment. Also their business model, like that of printer manufacturers, is to profit on the consumables, not the device. This apparent paradox will hopefully make this activity slightly more interesting.

When being a late mover can be advantageous


The.text.provides.a.reasonable.summary.of.relative.advantages.of.late.mover.strategy.. The.authors.contend.that.there.can.be.advantages.as.a.follower.versus.a.first-mover.. They.go.on.to.point.out.that.there.are.four.instances.in.which.this.is.the.case.(page. 201)..Finally,.on.page.202,.the.text.offers.a.very.good.summary.of.issues.to.consider. when.deciding.to.be.an.early.mover.or.late.mover.

Summary
This.topic.adds.to.the.strategic.issues.discussed.in.the.previous.topic..We.have.covered. a.number.of.supplementary.strategies.organisations.use.including.collaborative. strategies,.vertical.integration.strategies.and.outsourcing.strategies..We.then.examined. a.range.of.offensive.strategies.available.to.organisations.especially.the.popular.blue. ocean.strategy..This.was.followed.by.a.range.of.defensive.strategies.that.can.be.used. as.well.as.an.evaluation.of.being.the.first.mover.in.pursuing.a.particular.strategy..You. would.be.well.advised.to.read.the.Key.Points.at.the.end.of.this.chapter.to.review.your. understanding.of.the.issues.in.this.topic.

MNG00716 Topic 6 Beyond competitive strategy

67

Feedback to selected activities

Activity 6.2
In the late 1980s, following the decision by the FCC to loosen rules regarding the ability of one company to own both radio and TV stations, Clear Channel broadened its strategy and began acquiring small, struggling TV stations. Its new strategy was to buy radio, TV, and outdoor advertising properties with operations in many of the same local markets, to share facilities and staffs to cut costs, to improve programming, and to sell advertising for all three media simultaneously. By 1998, Clear Channel had used acquisitions to build a leading position in radio and television stations. In 2003, this company owned radio and television stations, outdoor advertising, and entertainment venues in 66 countries around the world.

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MNG00716 Strategic Management

Topic 7
Competing in foreign markets
Introduction
250 jobs created when Costco opens in Docklands UP TO 250 jobs will be created when US discount retailer Costco opens its first Australian warehouse at Docklands next year. The.1.3ha.shopping.barn.will.sell.a.range.of.products.including.groceries,. hardware,.white.goods,.jewellery,.electronic.equipment,.sporting.goods,.office. materials.and.homewares. Plans.to.build.the.project.were.formally.approved.by.the.State.Government.this. morning. Construction.on.the.site,.next.to.the.120m-high.Southern.Star.wheel,.will.start.in. September. The.$60.million.project.will.signal.a.major.shake-up.of.Australian.shopping. in.a.similar.way.to.the.arrival.of.German.discounter.Aldi.when.it.launched.in. Australia.in.2001. State.Planning.Minister.Justin.Madden.formally.announced.that.the.two-storey. bulk.goods.warehouse.would.go.ahead.on.the.northern.side.of.Waterfront.City,. off.Footscray.Rd. This.is.another.milestone.in.the.evolution.of.Docklands,.Mr.Madden.said. Costco.Australia.general.manager.Patrick.Noone.said.the.company.chose. Docklands.as.its.first.Australian.outlet.because.of.the.proximity.to.transport.and. the.CBD. He.said.customers.should.expect.dramatic.discounts. We.are.a.tight.operation.with.extremely.low.overheads,.he.said. The.store.will.have.parking.for.553.cars. Costco.operates.a.customer.membership.scheme..People.pay.an.annual.fee.of. about.$50.to.enter.the.store..Goods.are.said.to.be.as.much.as.70.per.cent.less. than.in.other.stores.
(Herald-Sun,.Melbourne,.20.June.2008)

While.perhaps.this.is.old.news,.since.Costco.opened.in.Melbourne.in.2009,.it.is.a.good. example.of.strategy.by.way.of.international.expansion..Costco.is.a.major.American. discounter.in.the.retail.industry.with.huge.wholesale.stores.across.many.states.and.also. in.other.countries..While.the.article.called.it.a.retailer.it.is.more.accurately.known.as. a.wholesaler..When.it.was.announced.in.June.2008.that.Costo.was.to.start.operating.in.


69

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MNG00716 Strategic Management

several.locations.in.Australia.(Docklands,.Sydney,.and.the.Gold.Coast).it.was.greeted. with.delight.by.those.people.in.Australia.who.have.visited.Costco.outlets.in.the.US. or.Sams.Stores.which.is.the.major.competitor.of.Costco..The.arrival.of.this.giant. wholesale.discounter.is.set.to.revolutionise.shopping.in.this.country.much.as.it.and.its. competitors.have.done.in.North.America. Costco.is.offered.as.the.second.case.study.in.this.edition.of.the.textbook..While. its.international.operations.are.only.a.minor.part.of.the.case.content.we.will.use. this.case.as.our.example.of.the.issues.being.addressed.in.this.topic.on.competing. internationally..The.challenge.will.be.to.see.how.the.range.of.going.international.. strategies.in.this.chapter.of.the.textbook.can.be.applied.to.the.Costco.expansion.plans. A.good.starting.point.for.this.topic.would.be.to.read.the.case.in.its.entirety.as.it.covers. some.of.the.issues.we.have.been.covering.so.far.in.this.unit..Moreover.for.those.of. you.unfamiliar.with.how.Costco.operates.this.will.be.a.learning.experience..A.visit. to.their.website.would.add.value.to.this.experience.and.keep.you.updated.on.recent. happenings.too..It.is.would.be.remiss.not.to.mention.that.Costcos.central.business. model.centres.on.membership.fees.and.its.economies.of.scale.when.purchasing..In.fact. Noone,.a.Costco.spokesperson,.is.quoted.as.saying.Costco.have.a.fully.transparent. pricing.structure,.that.is,.cost.+.15%.which.he.believes.gives.consumers.more. confidence.in.their.value.proposition.and.membership.arrangement. This.topic.focuses.on.strategy.options.for.expanding.beyond.domestic.boundaries. and.competing.in.the.markets.of.either.a.few.or.a.great.many.countries..The.spotlight. will.be.on.four.strategic.issues.unique.to.competing.multinationally..It.will.introduce. a.number.of.core.concepts.including.multi-country.competition,.global.competition,. profit.sanctuaries,.and.cross-market.subsidisation..The.textbook.includes.sections.on. cross-country.differences.in.cultural,.demographic,.and.market.conditions;.strategy. options.for.entering.and.competing.in.foreign.markets;.the.growing.role.of.alliances. with.foreign.partners;.the.importance.of.locating.operations.in.the.most.advantageous. countries;.and.the.special.circumstances.of.competing.in.such.emerging.markets.as. China,.India.and.Brazil..We.will.use.references.to.the.Costco.case.where.appropriate. Be.aware.that.this.is.another.long.chapter.(arent.they.all?).and.is.best.taken.in.several. doses.making.sure.each.section.is.read.thoroughly.and.understood.before.proceeding. further.

Objectives
At.the.conclusion.of.this.topic.you.should.be.able.to . . . . . . . . . . outline.the.reasons.organisations.seek.to.expand.into.foreign.markets identify.a.range.of.cultural,.demographic.and.business.challenges.facing. organisations.wishing.to.compete.internationally distinguish.between.multicountry.and.global.competition evaluate.the.range.of.strategy.options.available.for.entering.and.competing.in. foreign.markets examine.the.options.available.to.firms.seeking.competitive.advantage.in.foreign. markets analyse.the.concepts.of.profit.sanctuaries,.and.cross.market.subsidisation compare.offensive.strategies.available.for.competing.in.foreign.markets evaluate.the.use.of.strategic.alliances.for.firms.wishing.to.enter.foreign.markets identify.the.challenges.of.competing.in.emerging.countries.and.the.range.of. strategies.available.for.competing.in.these.markets appraise.how.local.firms.can.compete.against.global.competition.

MNG00716 Topic 7 Competing in foreign markets

71

Materials required
Textbook Thompson.et.al..Chapter.7. Readings Nil. The.starting.point.for.this.topic.is.to.familiarise.yourself.with.the.Costco.company.and. especially.the.small.section.on.its.international.operations.

r r a r

Textbook
Turn to the case study Costco Wholesale Corporation: Mission, Business Model and Strategy on pages C-32 to C-50 of your textbook and read the whole case highlighting references to its international operations.

Why companies expand into foreign markets


Textbook
Read pages 206209.

The.text.outlines.four.reasons.why.companies.seek.to.expand.overseas.(page.208).and. suggests.that.a.distinction.needs.to.be.made.between.competing.internationally.and. competing.globally..In.the.case.of.Costco.it.would.seem.that.the.first.and.third.reasons. are.dominant.in.the.Costco.decision.to.come.to.Australia.with.the.fourth.reason. possibly.coming.into.consideration.as.well..But.it.would.be.true.to.say.that.the.second. reason.is.the.driving.force.in.Costcos.expansion.into.Mexico.

Activity 7.1
From the case study of Costco can you determine where the drive to go international originated and why?

Cross-country differences in cultural, demographic and market conditions


Textbook
Read from page 209 to the top of page 213.

There.is.a.long.section.in.the.text.concerning.a.range.of.issues.that.organisations.have. to.address.when.contemplating.a.strategy.of.operating.overseas..The.first.range.of. issues.are.those.of.a.cultural,.demographic.and.economic.basis..The.text.discusses. at.length.a.range.of.these.issues.in.other.countries.that.need.to.be.addressed.before. a.decision.to.move.overseas.it.taken..One.of.the.critical.decisions.to.be.made.is.the. degree.of.localisation.or.standardisation.of.the.product.or.service. Overseas.locations.can.offer.significant.economic.advantages.as.discussed.on.page. 210..Costco.has.exploited.some.of.these.advantages.in.its.overseas.operations..As.well. as.labour.costs.there.are.taxation.factors.that.figure.prominently.in.such.decisions. The.increasing.globalisation.of.international.trade.has.generated.significant.risks.in. fluctuating.exchange.rates.which.can.have.serious.and.even.devastating.impacts.on. decisions.made.to.operate.in.other.countries..These.exchange.rate.risks.are.discussed. on.pages.211212..Added.to.the.risk.of.adverse.exchange.rate.movements.are. sometimes.fickle.and.unpredictable.government.policies.discussed.on.pages.212213.

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MNG00716 Strategic Management

The concepts of multi-country competition and global competition

r a r

Textbook
Read pages 213214.

The.text.is.careful.in.making.a.distinction.between.multicountry.and.global competition.In.multicountry.competition.there.is.no.close.relationship.between. competition.in.one.national.market.and.competition.in.another.national.market..In. global.competition.national.markets.are.similar.and.many.similar.companies.compete. in.these.different.national.markets..This.distinction.can.be.a.little.tricky.so.read.it. several.times.to.check.understandings..Some.examples.are.given.of.both.types.of. competition..Interestingly.retailing.is.considered.to.be.an.example.of.multi-country. competition.

Activity 7.2
From the Costco case study what can we learn about the challenges and opportunities Costco faces in expanding into new international markets? Which issues discussed so far in this topic have relevance to the Costco situation discussed in this reading?

Strategy options for entering and competing in foreign markets


Textbook
Read pages 215224.

This.section.can.be.a.little.confusing.so.we.need.to.take.it.carefully..The.text.suggests. that.there.are.six.generic.strategies.that.a.company.can.choose.when.venturing. internationally.(pages.215224)..It.proceeds.to.discuss.each.of.the.first.three.in.a. logical.manner.but.then.combines.the.fourth.and.fifth.(beginning.on.page.216)..The. sixth.strategy.is.taken.up.on.page.220..There.is.a.long.discussion.of.the.localised. versus.global.choice.in.strategy.making.and.Figure.7.1.(page.221).assists.in.bringing. the.discussion.into.some.summary.form..In.Figure.7.2.(page.223).the.distinction. between.localised.multicountry.and.globalised.strategies.is.depicted.and.Illustration. Capsule.7.1.gives.some.examples.to.assist.in.understanding.the.differences.

a a

Activity 7.3
Review Illustration Capsule 7.2 in the textbook, Multi-country Strategies of Electronic Arts and Coca-Cola. Describe Electronic Arts strategy as either localisation or globalisation. Identify how these companies have adapted their original organisational strategies to better serve their multi-country operational needs. Has this proven to be advantageous for these organisations? Explain why or why not.

Activity 7.4
On the basis of the preceding section concerning strategy options what can we conclude about the options Costco has taken or plans to take in its international ventures.

MNG00716 Topic 7 Competing in foreign markets

73

The quest for competitive advantage in foreign markets

Textbook
Read pages 224228.

There.are.three.ways.in.which.a.firm.can.gain.competitive.advantage.or.offset. domestic.disadvantages.by.expanding.outside.its.domestic.markets: . . . use.location.to.lower.costs.or.achieve.greater.product.differentiation transfer.competitively.valuable.competencies.and.capabilities.from.its.domestic. markets.to.foreign.markets use.cross-border.coordination.in.ways.that.a.domestic-only.competitor.cannot.

Each.of.these.options.is.discussed.in.turn.and.examples.are.given.of.when.each.of. these.options.have.been.used.by.particular.companies..With.regard.to.locations.the. decision.can.be.made.to.choose.few.or.many.locations;.the.possibilities.of.using. competencies.and.capabilities.across.borders.are.mixed;.while.technological.advances. have.made.international.coordination.much.more.feasible.

a r

Activity 7.5
At this stage review and reflect on the move by Costco to enter the Australian market. What do you consider are the strategic advantages and potential dangers of such a move?

Strategic alliances and joint ventures with foreign partners


Textbook
Read pages 216 to the bottom of page 220.

In.the.previous.topic.we.considered.strategic.alliances.as.one.of.the.supplementary. strategies..In.the.foreign.domain.such.arrangements.can.also.be.a.useful.method.for. gaining.access.to.overseas.markets..The.text.(pages.218220).discusses.the.appeal.of. such.cooperative.arrangements.highlighting.that.the.big.attraction.of.such.alliances. over.mergers.and.acquisitions.is.that.the.firm.retains.its.independence..In.Illustration. Capsule.7.1.five.examples.of.cross-border.strategic.alliances.are.briefly.described. If.a.company.can.gather.together.and.use.the.international.experiences.of.its.senior. managers.then.it.may.not.be.necessary.to.engage.in.strategic.alliances.

The risks of strategic alliances with foreign partners


Achieving.effective.collaboration.between.independent.companies,.each.with.different. motives.and.perhaps.conflicting.objectives,.is.not.easy. Some.of.the.pitfalls.of.alliances.and.joint.ventures.include: . . . . . language.and.cultural.barriers decision.making.in.a.timely.fashion effective.collaboration.in.competitively.sensitive.areas clashes.of.egos.and.culture becoming.overly.dependent.on.another.company.for.essential.expertise.and. capabilities.over.the.long.term.

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MNG00716 Strategic Management

If.a.company.is.aiming.for.global.market.leadership,.then.cross-border.merger.or. acquisition.may.be.a.better.alternative.than.cross-border.alliances.or.joint.ventures.

Making the most of strategic alliances with foreign partners


Whether.or.not.a.company.realises.the.potential.of.alliances.and.collaborative. partnerships.with.foreign.enterprises.seems.to.be.a.function.of.six.factors: . . . . . . picking.a.good.partner being.sensitive.to.cultural.differences recognising.that.the.alliance.must.benefit.both.sides ensuring.that.both.parties.live.up.to.their.commitments structuring.the.decision-making.process.so.that.actions.can.be.taken.swiftly.when. needed managing.the.learning.process.and.then.adjusting.the.alliance.agreement.over. time.to.fit.new.circumstances.

Most.alliances.with.foreign.companies.that.aim.at.technology.sharing.or.providing. market.access.turn.out.to.be.temporary. Alliances.are.more.likely.to.be.long.lasting.when: . . they.involve.collaboration.with.suppliers.or.distribution.allies.and.each.partys. contribution.involves.activities.in.different.portions.of.the.industry.value.chain both.parties.conclude.that.continued.collaboration.is.in.their.mutual.interest.

a r

Activity 7.6
Review Illustration Capsule 7.2 in the textbook: five examples of cross-border strategic alliances. How is Airbus able to compete with Boeing for world leadership in large commercial aircraft? If Airbus were an independent firm that was not formed of an alliance, do you think it could have successfully entered Boeings industry?

Competing in emerging foreign markets


Textbook
Read pages 230231.

Emerging.countries.such.as.China,.India.and.Brazil.pose.some.different.challenges.for. organisations..Tailoring.products.to.meet.social.and.cultural.norms.in.these.countries. is.a.real.challenge.discussed.on.page.231..Illustration.Capsule.7.3.gives.a.clear. example.of.how.Yum!.Brands.has.altered.its.strategy.in.China.and.India. There.are.at.least.four.strategy.options.available.for.firms.when.dealing.with.emerging. countries.and.these.are.described.on.pages.230231. A.significant.update.to.the.previous.edition.of.this.textbook.reveals.that.more.attention. is.being.paid.to.emerging.economies..You.may.of.course.be.familiar.with.the.acronym,. BRICS,.which.encompasses.the.energy.and.human.resource.rich.nations.of.Brazil,. Russia,.India,.China.and.now.South.Africa.and.South.Korea..These.important.markets. are.not.only.growing.in.terms.of.their.GDP.and.economic.might,.they.have.rising. affluence.and.growing.middle.classes,.who.are.more.and.more.becoming.ideal.for. multi-national.corporations.seeking.growth.in.the.aspirational.classes.of.consumers.

MNG00716 Topic 7 Competing in foreign markets

75

It.is.also.worth.pointing.out.that.there.is.a.consolidated.effort.on.behalf.of.MNCs. and.particular.European.and.North.American.firms.to.establish.themselves.in.these. markets.for.future.growth.and.to.stake.a.claim.in.what.could.be.the.new.gold.fields. in.this.century..However,.it.would.be.remiss.not.to.examine.the.relative.risks.and. long-term.nature.of.investment.in.these.markets,.based.on.macro.factors.such.as. political.stability,.military.conflict.and.currency.movements..These.markets,.whilst. charactarised.as.full-steam-ahead.markets,.are.also.in.many.ways.ripe.with.risks. that.cannot.necessarily.be.detected.or.countered.easily..Therefore,.after.reading.this. section,.be.mindful.that.in.many.cases.it.is.more.about.establishing.a.footprint.within. these.emerging.economies,.rather.than.a.straight.out.profit.motive. Another.reason.for.an.international.focus.might.be.the.desire.to.use.the.profits.from. the.profit.sanctuaries.to.subsidise.competitive.actions.in.other.markets.such.as. reducing.prices..However,.anti-dumping.legislation.is.a.growing.reality.for.much.of. the.developed.and.developing.world..Therefore,.whilst.this.could.be.an.appealing. strategy,.there.are.bound.to.be.regulatory.risks.at.some.point.if.an.industry.or.firm.is. being.examined.for.dumping..A.good.local.example.can.be.found.at:.http://www.news. com.au/couriermail/story/0,23739,26693066952,00.html.

Strategy implications
Consumers.in.emerging.markets.are.highly.focused.on.price,.in.many.cases.giving. local.low-cost.competitors.the.edge..Companies.wishing.to.succeed.in.these.markets. have.to.attract.buyers.with.bargain.prices.as.well.as.better.products..an.approach.that. can.entail.a.radical.departure.from.the.strategy.used.in.other.parts.of.the.world. Because.managing.a.new.venture.in.an.emerging.market.requires.a.blend.of.global. knowledge.and.local.sensitivity.to.the.culture.and.business.practices,.the.management. team.must.usually.consist.of.a.mix.of.expatriates.and.local.managers.

Strategies for local companies in emerging markets

Textbook
Read pages 231234.

How.should.local.companies.respond.to.the.threat.or.actual.presence.of.global. companies?.Capsule.7.4.offers.a.good.overview.of.how.Ctrip.became.Chinas.largest. online.travel.agency..Some.companies.are.even.able.to.contend.on.a.global.level. themselves.(Lenovo.computers.being.a.prime.example)..Other.examples.are.given.in. this.section.on.how.local.companies.can.defend.their.territory.

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Summary
A.company.that.strives.for.the.domestic.competitive.advantage.must.also.think.about. how.to.craft.a.strategy.outside.its.national.boundaries..It.is.of.utmost.importance. for.the.strategist.to.understand.the.differences.in.cultural,.demographic.and.market. conditions..The.geographic.location,.exchange.rate.fluctuations.and.host.government. restrictions.are.factors.that.need.to.be.considered..It.is.also.important.to.identify.the. difference.between.multi-country.competition.and.global.competition..Multi-country. competition.is.where.there.exists.no.global.or.world.market.but.rather.just.a.collection. of.self-contained.country.markets..Global.competition,.on.the.other.hand,.is.when. leading.competitors.compete.in.many.different.countries. When.a.company.decides.to.expand.in.a.different.destination.culture,.it.must. understand.the.available.strategic.options.such.as.exporting.goods,.licensing,. franchising.or.crafting.a.multi-country.or.global.strategy..Seeking.competitive. advantage.in.foreign.markets.would.be.achieved.through.location,.using.cross-border. transfer.of.competencies.and.capabilities.and/or.using.cross-border.coordination.. Other.foreign.competitive.strategies.would.be.profit.sanctuaries,.cross-market. subsidisation.or.global.strategic.offences..If.a.company.is.seeking.global.market. leadership,.then.cross-border.mergers.or.acquisitions.may.be.a.better.alternative.than. strategic.alliances.or.joint.ventures..As.a.new.entrant.the.strategic.implications.for. obtaining.profitability.in.emerging.markets.will.come.from.being.patient.and.sensitive. to.local.conditions..This.requires.the.strategist.to.tailor-make.strategy.to.fit.specific. industry.and.company.situations. We.now.move.on.in.the.next.topic.to.consider.how.particular.strategies.can.be.crafted. to.suit.a.number.of.specific.industry.and.company.situations.

MNG00716 Topic 7 Competing in foreign markets

77

Feedback to selected activities

Activity 7.3
EA uses a localisation strategy to fit its games to local markets. It develops games that are locally targeted in specific regions to match with the games material and content. It produces games in multiple languages, on multiple platforms, and markets them in up to 75 different countries. Both of these companies have modified their original home-country strategies in order to better meet and satisfy the needs of their customers around the world. The applied modifications include such actions as language changes, alteration of menu offerings, utilisation of local host-country suppliers, and designing packaging to reflect the various foreign cultures. These organisations have benefited from adopting multi-country strategies through increased sales and maintaining a strong competitive presence in the global marketplace.

Activity 7.6
Airbus is able to compete because of the pooling of resources from several companies in different countries throughout Europe. The alliance infused Airbus with resources and knowledge for competing with Boeing. The company likely would not have been successful on the same scale if it were independently started and was trying to break into the industry without the alliances resources to back it up. As the chairman of British Aerospace stated, a strategic alliance with a foreign company is one of the quickest and cheapest ways to develop a global strategy. The text indicates that strategic alliances, joint ventures, and other cooperative agreements with foreign companies are a favourite and potentially fruitful means for entering a foreign market or strengthening a firms competitiveness in world markets.

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Topic 8
Diversification
Introduction
The.following.item.appeared.on.an.Internet.site.on.the.day.this.topic.was.being. written:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aap1rO5zXpvs&refer=ho me Spectrum Brands, Battery Maker, Seeks Bankruptcy (Update3)
By.Christopher.Scinta

Feb..3.(Bloomberg).--.Spectrum.Brands.Inc.,.the.maker.of.Rayovac.batteries.and. Spectracide.lawn-care.products,.filed.for.bankruptcy.protection.with.agreement. from.most.of.its.bondholders.to.trim.debt. The.company.listed.assets.of.$10.1.billion.and.debt.of.$4.4.billion.in.papers.filed. today.in.U.S..Bankruptcy.Court.in.San.Antonio..Fewer.than.10,000.creditors. have.claims.against.Spectrum.Brands,.according.to.the.court.filing. The.company,.which.also.makes.Remington.razors,.Cutter.insect.repellent.and. Natures.Miracle.pet.care.products,.said.today.in.a.statement.that.it.reached. agreements.with.noteholders.representing.about.70.percent.of.the.face.value.of. its.outstanding.bonds.to.pursue.a.refinancing. A.refinancing.on.the.agreed.terms.would.enable.Spectrum.Brands.to.reduce.the. amount.of.debt.on.its.balance.sheet.by.approximately.$840.million,.according. to.the.statement. U.S..Bank.N.A..of.St..Paul,.Minnesota,.was.named.as.the.largest.unsecured. creditor.in.its.role.as.indenture.trustee.for.more.than.$1.billion.in.bonds.. Harbinger.Capital.Partners.Master.Fund.I.Ltd..was.listed.as.the.next.largest. creditor,.though.the.amount.of.the.debt.was.withheld.in.the.court.filing. Spectrum.Brands.failed.to.make.a.$25.8.million.interest.payment.due.yesterday. on.its.7.3/8.percent.senior.subordinated.notes.due.2015,.triggering.a.default,. according.to.the.companys.statement. Bonds, Shares Under.the.reorganization.plan.the.company.will.ask.the.court.to.approve,. Spectrum.Brands.would.eliminate.about.$1.05.billion.in.existing.bond. obligations.by.issuing.new.bonds.to.current.noteholders.equal.to.20.percent.of. the.unpaid.principal.and.interest.on.existing.bonds..The.noteholders.would.also. receive.shares.of.new.common.stock.to.be.created.under.a.reorganization.plan,. the.company.said.in.the.statement. We.estimate.that.when.this.refinancing.has.been.completed,.the.company.will. generate.in.excess.of.$100.million.in.annual.free.cash.flow,.Chief.Executive. Kent.Hussey.said.in.the.statement.
79

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The.claims.of.existing.secured.and.other.general.unsecured.creditors.would.be. unimpaired,.while.existing.common.stock.would.be.cancelled.and.shareholders. wouldnt.receive.any.distribution,.Spectrum.Brands.said. Spectrum.Brands.fell.64.percent,.to.1.6.cents.in.Over-the-.Counter.Bulletin. Board.trading..Existing.term.and.asset-based.loans.had.about.$1.47.billion. outstanding.the.company.said.in.a.regulatory.filing..Spectrum.Brands.has. commitments.for.$235.million.in.loans.to.fund.it.through.the.bankruptcy.case,. which.it.expects.to.take.less.than.six.months,.from.some.of.its.existing.lenders,. the.company.said.in.the.filing.

In.this.topic.we.move.up.one.level.in.the.strategy-making.hierarchy,.from.strategy. making.in.a.single.business.enterprise.to.strategy.making.in.a.diversified.enterprise.. The.topic.begins.with.a.description.of.the.various.paths.through.which.a.company. can.become.diversified.and.provides.an.explanation.of.how.a.company.can.use. diversification.to.create.or.compound.competitive.advantage.for.its.business.units.. The.topic.also.examines.the.techniques.and.procedures.for.assessing.the.strategic. attractiveness.of.a.diversified.companys.business.portfolio.and.surveys.the.strategic. options.open.to.already-diversified.companies.

Objectives
At.the.conclusion.of.this.topic.you.should.be.able.to: . . . . . . . . assess.those.circumstances.that.make.diversification.a.desirable.strategy identify.the.three.tests.an.organisation.must.pass.if.a.diversification.strategy.is.to. have.a.reasonable.chance.of.success evaluate.the.three.main.diversification.strategies.open.to.organisations analyse.the.circumstances.when.diversification.into.related.businesses.is.most. attractive.and.the.importance.of.strategic.fit describe.the.circumstances.when.diversification.into.unrelated.businesses.is.an. attractive.option.and.the.potential.drawbacks.of.such.a.strategy use.the.tools.of.strategic.management.to.evaluate.a.range.of.possible.strategies.for. a.diversified.company.following.the.six.suggested.steps identify,.describe.and.evaluate.the.potential.continuing.strategies.for.an. organisation.once.it.has.determined.its.diversification.course use.a.case.study.to.illustrate.how.these.concepts.apply.to.a.real.world.diversified. company.

Materials required
Textbook Thompson.et.al..Chapter.8. Readings Nil. This.is.a.very.long.chapter.and.dry.at.times.so.it.needs.to.be.digested.in.small.doses. only..Break.the.topic.up.into.three.or.four.main.sections.and.work.through.the.sections. systematically.but.with.breaks.from.study.interspersed..We.will.use.the.case.to.try. to.apply.the.concepts.being.discussed..In.the.back.of.our.mind.is.the.fact.that.the. company.has.declared.bankruptcy.

MNG00716 Topic 8 Diversification

81

r r

Textbook
Read Case 19 PepsiCos Diversification Strategy in the textbook, pages C-346 to C-361 from start to finish glancing at the financial data and other exhibits. Note the financial data on C-360 reveals significant increases in shareholder value and profitability. The interesting information is which areas Pepsi has deliberately entered into and acquired in its snack, salty and beverage products.

When to diversify
Textbook
Read pages 238244.

When.there.are.substantial.risks.that.a.single.business.companys.market.may.dry. up.or.when.opportunities.to.grow.revenues.and.earnings.in.the.companys.mainstay. business.begin.to.peter.out,.managers.usually.have.to.make.diversifying.into.other. businesses.a.top.consideration. We.are.first.told.in.the.text.(pages.239240).that.there.are.four.distinct.facets.to. crafting.a.diversified.strategy..Since.these.facets.are.time.consuming.they.are.often. delegated.to.specific.business.units. There.are.at.least.four.situations.which.may.arise.that.suggest.or.impel.the.company.to. consider.diversification..These.situations.are.explained.on.page.241. A.company.can.diversify.into.closely.related.businesses.or.into.totally.unrelated. businesses..There.is.no.tried-and-true.method.for.determining.when.it.is.time.to. diversify..Judgements.about.diversification.timing.are.best.made.case.by.case,. according.to.the.companys.own.unique.situation. Not.only.must.organisations.diversify.to.spread.business.risk.but.the.strategy.must. produce.added.shareholder.value..Such.a.strategy.must.pass.the.three.tests.outlined.on. page.270: . . . the.industry.attractiveness.test the.cost-of-entry.test the.better-off.test.

Activity 8.1
From your reading of Case 19 suggest why Pepsi considered a diversification strategy. From the evidence in the Exhibits did these diversification moves improve shareholder value? (Do you see any problems emerging in areas Pepsi has ventured into?)

Strategies for entering new businesses


Entry.into.new.businesses.can.take.any.of.three.forms: . . . acquisition internal.start-up joint.ventures/strategic.partnerships.

Each.of.these.is.discussed.in.turn.on.pages.243244.with.the.merits.and.demerits.of. each.considered.

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Choosing the diversification path: Related versus unrelated businesses

Textbook
Read pages 244250.

When.we.consider.the.diversification.strategies.of.Pepsi.the.critical.question.(in.view. of.what.happened).is.whether.the.successful.moves.in.North.America.were.able.to. be.replicated.internationally..The.text.first.outlines.the.arguments.why.diversification. should.be.into.related.businesses.(page.244) Strategic.fits.can.occur.anywhere.along.the.value.chain.and.the.text.discusses.(pages. 246247).the.potential.for.such.fits.in.the.areas.of.R&D,.supply.chain,.manufacturing,. distribution,.sales.and.marketing.and.administrative.support. These.potential.advantages.are.illustrated.well.in.Figure.8.2.(page.246)..Some. examples.of.companies.that.have.diversified.successfully.into.related.industries.are. given.in.Illustration.Capsule.8.1.(page.245). When.the.potential.for.economies of scope.is.added.to.these.other.benefits.there.is.a. great.opportunity.for.added.shareholder.value.provided.management.has.successfully. pursued.internal.actions.to.capture.these.benefits.

a r

Activity 8.2
To what extent did Pepsi diversify into related businesses? Which synergies were evident in the companies they acquired?

The case for diversifying into unrelated businesses


Textbook
Read pages 250256.

As.an.alternative.to.related.businesses.an.organisation.can.diversify.into.unrelated. and.uncharted.waters.by.moving.into.a.completely.different.line.of.business.. The.aim.here.is.to.grow.revenue.and.earnings..Much.time.is.thus.spent.screening. potential.businesses.to.acquire.or.joint.venture.with..A.number.of.criteria.are.used. by.organisations.contemplating.this.type.of.diversification.and.these.are.spelt.out.on. pages.251..It.is.unusual.to.undertake.unrelated.diversification.by.starting.up.a.new. business.entity. Pursuing.an.unrelated.strategy.has.several.distinct.attractions.and.these.are.described. on.pages.252.and.254..There.is.an.inherent.attractiveness.in.not.having.all.ones. eggs.in.the.same.basket.and.an.unrelated.strategy.offers.this.possibility..However.in. order.to.get.the.desired.gains.from.such.a.strategy.there.are.some.challenging.tasks. ahead.for.company.executives.and.these.are.outlined.on.page.254..While.there.are. advantages,.there.are.two.big.drawbacks.to.following.this.strategic.approach:.the. demanding.managerial.requirements.and.the.limited.competitive.advantage.potential.. These.are.explained.on.pages.254255.

Activity 8.3
Review Illustration Capsule 8.2 on page 254 from the textbook, Unrelated Diversification at General Electric, United Technologies, American Standard, and Lancaster Colony.

MNG00716 Topic 8 Diversification

83

Pick one of the four companies listed and explain why you think that company has an unrelated diversification strategy. Check on the Internet if the strategy seems to be working.

There.is.nothing.to.preclude.a.company.from.diversifying.into.both.related.and. unrelated.businesses..Indeed,.in.actual.practice.the.business.makeup.of.diversified. companies.varies.considerably..The.possible.strategies.using.both.related.and. unrelated.business.entities.is.briefly.considered.at.the.bottom.of.page.256..In. Figure.8.4.(page.257).some.key.questions.are.posed.that.enable.the.elements.of.a. diversification.strategy.to.be.identified. (Before.proceeding.to.the.next.detailed.section.of.this.topic.it.is.suggested.you.reread. what.has.been.covered.so.far.and.maybe.even.take.a.break.as.the.going.gets.more. rigorous.and.demanding.in.the.next.section).

Evaluating the strategy of a diversified company

Textbook
Read pages 257282.

Having.come.this.far.in.the.topic.in.considering.alternative.strategic.diversification. options.we.now.need.to.consider.whether.the.effort.is.justified. This.requires.us.to.introduce.several.new.tools.of.analysis..The.text.spells.out.in.great. details.a.series.of.six.steps.that.should.be.used.to.determine.whether.the.diversifying. move.will.prove.successful.or.not..It.starts.by.first.listing.the.steps.on.pages.257258. 1.. 2.. 3.. 4.. 5.. Evaluating.industry.attractiveness. Evaluating.business-unit.competitive.strength. Checking.the.competitive.advantage.potential.of.cross-business.strategic.fits. Checking.for.resources.fit. Ranking.the.business.units.on.the.basis.of.performance.and.priority.for.resource. allocation. 6.. Crafting.new.strategic.moves.to.improve.overall.corporate.performance.

Step 1: Evaluating industry attractiveness


It.is.necessary.for.organisations.to.answer.at.least.three.questions.(page.258).in. determining.if.an.industry.is.attractive.for.a.diversification.strategy..The.more. attractive.the.industry.in.which.the.company.is.seeking.to.diversify.the.more.the. prospects.for.success..A.simple.analytical.tool.is.used.to.measure.the.attractiveness. for.each.industry.in.which.the.company.has.diversified..To.determine.attractiveness. a.range.of.measures.are.used.and.these.are.spelt.out.on.page.260..A.weighting.is. allocated.to.each.of.these.factors.and.a.scale.of.1.to.10.is.used.to.determine.the.degree. of.attractiveness.of.each.of.these.measures..How.the.scores.are.interpreted.using.the. weighting.factors.is.set.out.in.Table.8.1.on.page.260..On.pages.259260.there.is.also. an.explanation.of.the.meaning.of.the.scores.although.some.difficulties.in.calculating. the.scores.are.identified.on.page.260.

Step 2: Evaluating business unit competitive strength


The.second.step.is.to.break.the.industry.attractiveness.into.the.individual.business. units.involved.in.the.diversification.strategy..In.a.similar.approach.to.industry. attractiveness.a.scoring.model.is.used.with.a.range.of.factors.given.a.weighting.and.

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a.score..These.factors.are.outlined.on.pages.261262.and.the.scoring.technique.is. explained.and.interpreted.on.page.262.with.Table.8.2.used.to.give.an.example.of.how. this.scoring/weighting.tool.is.used. Using.a.nine-cell.matrix.to.simultaneously.portray.industry.attractiveness.and. competitive.strength:.the.industry.attractiveness.and.business.strength.scores.can. be.used.to.portray.the.strategic.positions.of.each.business.in.a.diversified.company.. How.this.is.done.is.illustrated.in.Figure.8.5.(page.264).and.the.meaning.of.the. cells.is.explained.on.pages.264.to.the.bottom.of.265..The.nine-cell.attractivenessstrength.matrix.provides.clear,.strong.logic.for.why.a.diversified.company.needs.to. consider.both.industry.attractiveness.and.business.strength.in.allocating.resources.and. investment.capital.to.its.different.businesses.

Step 3: Checking competitive advantage


The.third.step.involves.checking.the.competitive.advantage.potential.of.cross-business. strategic.fits..This.in.turn.involves.searching.and.evaluating.how.much.benefit.a. diversified.company.can.gain.from.four.types.of.value.chain.match.ups.which.are. outlined.on.page.267.

Step 4: Checking for resource fit


But.more.than.just.strategic.fit.identification.is.needed..The.real.test.is.what. competitive.value.can.be.generated.from.these.fits..This.involves.Step.4.which.is. checking.for.resource.fit..The.text.explains.when.resource.fit.exists.(page.266)..One. critical.consideration.of.resource.fit.is.whether.cash.flows.from.the.diversification.will. be.sufficient,.since.some.businesses.might.be.cash.cows.and.others.cash.hogs..These. concepts.are.outlined.in.detail.on.pages.267268..Note.the.links.between.cash.cows. and.cash.hogs.with.cash.hogs.often.considered.first.for.divestiture. Viewing.the.diversified.group.of.businesses.as.a.collection.of.cash.flows.and.cash. requirements.is.a.major.step.forward.in.understanding.what.the.financial.ramifications. of.diversification.are.and.why.having.businesses.with.good.financial.resource.fit.is.so. important. Resource.fit.involves.more.than.cash.flow.considerations.and.these.other. considerations.are.described.in.detail.on.pages.269270. A.diversified.companys.strategy.must.aim.at.producing.a.good.fit.between.its. resource.capability.and.the.competitive.and.managerial.requirements.of.its.businesses.. Diversification.is.more.likely.to.enhance.shareholder.value.when.the.company.has.or. can.develop.the.strong.competitive.and.managerial.requirements.of.its.businesses..A. mismatch.between.the.companys.resource.strengths.and.the.key.success.factors.in. a.particular.business.can.be.serious.enough.to.warrant.divesting.an.existing.business. or.not.acquiring.a.new.business..A.diversified.company.can.fail.the.resource.fit.test. by.not.having.sufficient.resource.depth.to.support.all.of.its.businesses..A.diversified. company.has.to.guard.against.stretching.its.resource.base.too.thin.and.trying.to.do.too. many.things..A.business.has.good.financial.fit.when.it.contributes.to.the.achievement. of.corporate.performance.objectives.and.when.it.materially.enhances.shareholder. value.via.helping.drive.increases.in.the.companys.stock.price.

Step 5: Ranking performance prospects of business units


The.most.important.considerations.in.judging.business-unit.performance.are.sales. growth,.profit.growth,.contribution.to.companys.earnings,.and.the.return.on.capital.. The.industry.attractiveness/business.strength.evaluations.provide.a.basis.for.judging.

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a.businesss.prospects..It.is.a.short.step.from.ranking.the.prospects.of.business.units. to.drawing.conclusions.about.whether.the.company.as.a.whole.is.capable.of.strong,. mediocre,.or.weak.performance..These.issues.are.discussed.on.pages.270271. The.rankings.of.future.performance.generally.determine.what.priority.the.corporate. parent.should.give.to.each.business.in.terms.of.resource.allocation..Business. subsidiaries.with.the.brightest.profit.and.growth.prospects.and.solid.strategic.and. resource.fits.generally.should.head.the.list.for.corporate.resource.support. For.a.companys.diversification.strategy.to.generate.ever-higher.levels.of.performance,. corporate.managers.have.to.do.an.effective.job.of.steering.resources.out.of.low. opportunity.areas.into.high-opportunity.areas..The.text.(page.271).suggests.how. decisions.might.be.made.as.to.which.subsidiaries.might.receive.most.of.the.available. resources.while.Figure.8.7.(page.271).sets.out.the.options.(strategic.and.financial).for. allocating.resources.among.competing.business.units.in.the.diversified.structure.

Step 6: Crafting new strategic moves to improve overall corporate performance


The.diagnosis.and.conclusions.flowing.from.the.five.preceding.analytical.steps.set. the.agenda.for.crafting.strategic.moves.to.improve.a.diversified.companys.overall. performance..The.strategic.options.boil.down.to.five.broad.categories.of.actions. and.these.are.listed.on.pages.271282..The.key.strategies.are.doing.nothing.new,. broadening.the.business.base,.divesting,.restructuring,.and.going.multinational.with. diversifying.

Activity 8.4
At this stage refer again to the PepsiCo case study. Use the concepts and tools discussed in the previous six steps to try to determine the industry attractiveness and the relative attractiveness of the different acquired businesses and whether there were appropriate strategic fits with Pepsi. Should the low growth internationally have been obvious given your analysis?

After a company diversifies: The four main strategy alternatives


There.are.two.options.for.divesting.a.business:.selling.it.off.and.spinning.it.off.to.an. independent.company..The.text.gives.examples.of.both.these.strategies.on.pages.275 276..There.can.be.great.difficulties.in.finding.a.buyer.for.a.business.that.a.company.is. wanting.to.divest. A.third.strategy.for.a.business.is.to.restructure.by.getting.rid.of.some.unprofitable. business.units.and.acquiring.others..The.text.points.out.(page.276).when.this.is.an. appealing.strategy..Some.examples.are.given.of.American.companies.that.have. pursued.these.strategies..What.is.not.clear.is.if.the.strategy.has.led.to.long-term. success.in.the.examples.given..The.final.strategy.is.the.broadest.of.all.and.it.involves. going.multinational.in.diversification.endeavours..Here.there.are.a.diversity.of. businesses.and.a.number.of.different.national.markets..Such.a.strategy.has.an.appeal. for.a.variety.of.reasons.and.these.are.outlined.in.detail.on.page.279..Significantly.these. strategies.can.be.pursued.simultaneously..In.Illustration.Capsule.8.5.page.280.we.are. shown.four.examples.of.companies.pursuing.this.diversification.approach..Spectrum. could.also.be.identified.with.this.type.of.business.strategy.with.its.multinational.focus. The.text.concludes.this.chapter.(page.282).by.pointing.out.the.potential.competitive. advantages.such.a.strategy.presents.but.also.gives.some.cautionary.warnings.about.the. dangers.such.a.diversification.strategy.might.create.

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Activity 8.5
Complete Exercises 2 and 3 on page 287 of the text.

Summary
Diversification.becomes.an.attractive.strategy.when.a.company.runs.out.of.profitable. growth.opportunities,.and.its.purpose.is.to.build.shareholder.value.which.is.the. ultimate.justification.for.diversifying..Strategies.for.entering.new.businesses.would.be. acquisition,.internal.start-up.or.either.a.joint.venture.or.strategic.partnership..The.path. of.diversification.would.be.through.a.related.or.unrelated.business..Related.businesses. possess.competitively.valuable.cross-business.value.chain.matchups,.and.unrelated. businesses.have.very.dissimilar.value.chains,.containing.no.competitively.useful. cross-business.relationships..Moreover,.there.is.nothing.that.would.prevent.a.company. from.subscribing.to.a.combination.of.the.two.related-unrelated.diversification. strategies. When.examining.a.diversified.companys.strategy.to.decide.on.how.to.improve.its. performance,.a.strategic.analyst.must.evaluate.the.industry.attractiveness,.businessunit.competitive.strength,.check.for.cross-business.strategic.and.resource.fits,.rank. the.business.units.on.the.basis.of.performance.and.priority.for.resource.allocation,. and.craft.new.strategic.moves.to.improve.overall.corporate.performance..After.the. company.diversifies,.it.needs.to.broaden.its.business.base,.narrow.its.diversification. base,.restructure.its.business.line-up.and/or.consider.the.diversity.of.its.national. markets..This.will.then.require.acting.socially.responsible.when.considering.strategic. ethical.decisions.

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Feedback to selected activities

Activity 8.3
Students can pick from GE, United Technologies, American Standard, and Lancaster Colony. In their answers, students should reflect an understanding of the basic premise of unrelated diversification, which is that any company that can be acquired on good financial terms and that has satisfactory growth and earnings potential represents a good acquisition and a good business opportunity for the diversifying enterprise.

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GCM

graduate college of management

Unit evalUation by stUdents


To.ensure.that.the.units.offered.in.our.graduate.management.programs.are.of.the. highest.standard,.we.ask.for.a.few.minutes.of.your.time.to.complete.the.brief. evaluation.questionnaires.. Please.note.that.there.are.two.evaluation.forms.associated.with.this.unit..You.will. have.an.opportunity.to.comment.on.matters.relating.to.teaching/learning and unit content.via.an.electronic.evaluation.form..This.form.will.become.available.on. the.MySCU.site.for.this.unit.late.in.the.trimester..You.are.strongly.encouraged.to. provide.comment.via.the.MySCU.site.. In.addition,.the.below.evaluation.form.provides.an.opportunity.for.you.to.comment. on.administrative matters.associated.with.the.unit..Please.complete.this.form.and. return.it.in.the.reply-paid.envelope.provided..Your.feedback.is.important.to.our. review.process.. Thank.you.

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Feedback RegaRding administRative matteRs


If.you.wish.to.add.written.comments.please.do.so.in.the.spaces.provided. Please.return.your.evaluation.to.the.Graduate.College.of.Management,.SCU,.Locked.Bag.4,.Coolangatta. QLD.4225.Australia. Thanks.for.your.participation.
Unit name and code: MNG00716 Strategic Management Name of teaching staff: Country are you studying in: Tri. offered:

Unit evalUation
For.Items.113,.please.indicate.the.extent.to.which.you.agree.or.disagree.with.the.statements.about.the.unit.by. using.the.following.scale:
1 = Strongly agree 2 = Agree 3 = Neutral 4 = Disagree 5 = Strongly disagree

In.response.to.each.statement.please.circle.the.number.that.most.accurately.reflects.your.opinion.

Materials provided for the unit


. 1.. The.unit.print.materials.were.delivered.on.time.to.meet.my.learning.needs.. . 2.. The.unit.print.materials.were.suitably.formatted.and.presented.. . 3.. The.units.MySCU.site.was.available.on.time.to.meet.my.learning.needs.. . 4.. I.was.able.to.readily.access.the.MySCU.site.. . 5.. Material.provided.on.the.MySCU.site.was.of.suitable.format.and.size.. 1. 1. 1. 1. 1. 2. 2. 2. 2. 2. 3. 3. 3. 3. 3. 4. 4. 4. 4. 4. 5 5 5 5 5

Assessment
. 6.. The.arrangements.for.submitting.assignments.were.suitable.. . 7.. My.work.was.marked.and.returned.within.a.reasonable.time.. 1. 1. 2. 2. 3. 3. 4. 4. 5 5

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Other activities/resources in the unit


You.may.have.participated.in.one.or.more.of.the.following.activities.in.this.unit..teletutorials,.workshops,. online.discussion.forums..or.received.audiotapes..If.so,.please.answer.the.appropriate.question(s). . 8.. The.teletutorials.for.this.unit.were.beneficial.to.my.learning.. . 9.. The.workshop.for.this.unit.was.beneficial.to.my.learning.. . 10.. Online.resources.were.beneficial.to.my.learning.. . 11.. The.online.discussion.forums.were.beneficial.to.my.learning.. . 12.. The.audiotapes.for.this.unit.were.beneficial.to.my.learning.. . 13.. The.digital.recordings.for.this.unit.were.beneficial.to.my.learning..
Comments on Items 113

1. 1. 1. 1. 1. 1.

2. 2. 2. 2. 2. 2.

3. 3. 3. 3. 3. 3.

4. 4. 4. 4. 4. 4.

5 5 5 5. 5. 5

If.you.provided.a.strongly.disagree.response,.please.indicate.why.

Staff contact
For.Items.1419,.the.15.scale.means.the.following:
1 = Always 2 = Usually 3 = Sometimes 4 = Rarely 5 = Never

Please.circle.the.number.that.most.accurately.reflects.your.experience. . 14.. When.I.had.queries.about.administrative.matters: . . . (a).I.was.easily.able.to.access.information.via.the.Handbook.or.website.. (b).I.was.easily.able.to.make.contact.with.the.appropriate.staff.. (c).I.was.able.to.get.an.answer.to.my.query.within.a.reasonable.time.. 1. 1. 1. 2. 2. 2. 3. 3. 3. 4. 4. 4. 5 5 5

. 15.. When.I.had.queries.about.academic.matters: . . (a).I.was.easily.able.to.make.contact.with.the.appropriate.staff.. (b).I.was.able.to.get.an.answer.to.my.query.within.a.reasonable.time.. 1. 1. 2. 2. 3. 3. 4. 4. 5 5

. 16.. When.I.had.technical.queries.regarding.use.of.MySCU: . . (a).I.was.easily.able.to.make.contact.with.the.appropriate.staff.. (b).I.was.able.to.get.an.answer.to.my.query.within.a.reasonable.time.. 1. 1. 1. 1. 1. 2. 2. 2. 2. 2. 3. 3. 3. 3. 3. 4. 4. 4. 4. 4. 5 5 5. 5. 5.

. 17.. Messages.left.for.the.tutor.were.responded.to.in.a.timely.manner.. . 18.. The.tutor.was.responsive.and.supportive.in.interacting.with.me.. . 19.. The.tutor.had.a.good.knowledge.of.the.subject..

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Comments on Items 1419

Administrative support for the unit overall


For.Item.20,.the.15.scale.means.the.following:
1 = Excellent 2 = Good 3 = Adequate 4 = Poor 5 = Very poor

Please.circle.the.number.that.most.accurately.reflects.your.opinion. . 20.. All.things.considered.I.would.rate.this.unit:..


Additional comments on the unit

1.

2.

3.

4.

On.a.separate.piece.of.paper,.please.suggest.ways.we.could.improve.any.aspect.of.administrative.support.in.this. unit..You.may.wish.to.include.comments.under.the.headings.of: Administrative support University services General (e.g. Would you recommend this course/unit?)

Topic 9
Strategy, ethics and environmental sustainability
Introduction
In.this.topic.and.Topic.11.we.take.a.different.approach.to.strategy.than.we.find.in.other. topics..These.two.topics.are.concerned.with.the.people.who.lie.behind.the.making. of.strategy.and.their.behaviour..We.deal.with.some.issues.that.are.complex.and.often. emotional..In.between.we.focus.in.Topic.10.on.the.implementation.of.strategy. Let.us.start.this.topic.in.a.completely.different.and.thought.provoking.way..We.will. commence.with.two.activities.that.will.highlight.the.types.of.issues.to.be.raised.

Activity 9.1
Turn to page 306 in the textbook. Answer the questions under Illustration Capsule 9.1. It is suggested that your responses might give some indication of your ethical stance.

This.topic.has.a.focus.on.examining.what.link,.if.any,.there.should.be.between.a. companys.efforts.to.craft.and.execute.a.winning.strategy.and.its.duties.to.conduct. its.activities.in.an.ethical.manner.and.demonstrate.socially.responsible.behaviour. by.being.committed.corporate.citizens.and.attending.to.the.needs.of.non-owner. stakeholders..employees,.the.communities.in.which.it.operates,.the.disadvantaged,. and.society.as.a.whole..The.topic.falls.into.two.sections..In.the.first.and.longer.section. we.are.dealing.with.issues.relating.to.business.ethics.(some.people.suggest.that.is.an. oxymoron)..In.the.shorter.part.of.the.topic.we.focus.on.social.responsibility.matters.

Objectives
At.the.conclusion.of.this.topic.you.should.be.able.to: . . . . . . . . . . explain.the.concept.of.business.ethics distinguish.between.the.schools.of.thought.concerning.business.ethics evaluate.the.three.categories.of.management.morality describe.the.main.drivers.of.unethical.behaviour explain.the.various.approaches.organisations.can.take.towards.managing.ethical. conduct appraise.why.business.practices.should.be.ethical distinguish.between.social.responsibility.and.social.conscience explain.various.ways.in.which.businesses.can.exhibit.socially.responsible. behaviour examine.the.moral.and.business.cases.for.social.responsibility assess.the.controversy.concerning.the.actions.of.business.executives.in.their. approaches.to.social.responsibility.

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Materials required
Textbook Thompson.et.al..Chapter.9 Reading 9.1. Branco,.MC.&.Rodrigues,.LL.2006,.Corporate.Social.Responsibility.and. Resource-Based.Perspectives,.Journal of Business Ethics,.vol..69,.iss..2,. December,.pp..111132. There.are.two.cases.in.our.textbook.that.will.be.used.to.illustrate.the.content.of. this.topic..They.are.Cases.25.and.26..The.first.deals.with.the.ethics.and.social. responsibility.of.a.very.large.liquor.and.wine.producer,.Gallo.in.the.USA;.the.second. focuses.on.the.use.of.cheap.foreign.labour.in.the.manufacture.of.goods.for.Western. markets.

Textbook
Read Cases 25 and 26 in the textbook identifying issues of ethics and social responsibility in the cases. It is interesting to point out that since the previous edition of the text, there has been a name change to this chapter: that is, it now includes the concept of environmental sustainability too. Being mindful of greenwash and the general popularist policy directions of many governments (particularly northern European), it is interesting to note an American textbook now considers it important to make this inclusion.

Corporate Social Responsibility (CSR) and competitive advantage


It.is.often.argued.that.firms.should.engage.in.corporate.social.responsibility.because.of. the.competitive.advantage.that.would.accrue.to.them..The.next.reading.contends.that. resource-based.perspectives.(RBP),.as.discussed.in.Topic.4,.are.useful.to.understand. why.firms.engage.in.CSR.activities.and.disclosure..The.reading.notes.that.from.a. resource-based.perspective.CSR.is.seen.as.providing.internal.or.external.benefits,. or.both..Internal.benefits.might.flow.in.helping.a.firm.to.develop.new.resources.and. capabilities.which.are.related.to.know-how.and.corporate.culture..fundamental. intangible.resources..External.benefits.of.CSR.flow.in.terms.of.corporate.reputation.. a.fundamental.intangible.resource.

r r

Reading 9.1
Turn to Reading 9.1 and read pages 111132.

Types of strategic options: What do we mean by business ethics?


Textbook
Read pages 287321.

Discussing.issues.of.business.ethics.generates.a.lot.of.emotions.and.often.more.heat. than.light..The.text.section.(page.291).seeks.a.definition.of.business.ethics.in.terms. of.right.and.wrong,.good.and.bad.and.what.standards.of.behaviour.are.acceptable.in. the.community..Business.must.draw.its.ideas.of.the.right.thing.to.do.and.the.wrong. thing.to.do.from.the.same.sources.as.anyone.else..A.business.should.not.make.its.own. rules.about.what.is.right.and.wrong.

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Business ethics in the global community


Notions.of.right.and.wrong,.fair.and.unfair,.moral.and.immoral,.ethical.and.unethical. are.present.in.all.societies,.organisations,.and.individuals..Some.concepts.of.what. is.right.and.what.is.wrong.are.universal.and.transcend.almost.all.cultures..There.are. important.instances.in.which.what.is.deemed.fair.or.unfair,.what.constitutes.proper. regard.for.human.rights.and.what.is.considered.ethical.or.unethical.in.business. situations.varies.from.one.society.or.country.to.another..Hence,.there.are.occasions. when.it.is.relative.whether.certain.actions.or.behaviours.are.right.or.wrong. Religious.beliefs,.historic.traditions,.social.customs,.and.prevailing.political.and. economic.doctrines.all.heavily.affect.what.is.deemed.ethical.or.unethical.in.a. particular.society.or.country..There.are.differences.in.the.degree.to.which.some.ethical. behaviours.are.considered.more.important.than.others..Apart.from.certain.universal. basics,.there.are.variations.in.what.societies.generally.agree.to.be.right.and.wrong.in. the.conduct.of.business.activities.and.certainly.there.are.cross-country.variations.in.the. degree.to.which.certain.behaviours.are.considered.unethical. The.view.that.what.constitutes.ethical.or.unethical.conduct.can.vary.according.to.time,. circumstance,.local.cultural.norms,.and.religious.convictions.leads.to.the.conclusion. that.there.is.no.objective.way.to.prove.that.some.countries.or.cultures.are.correct.and. others.are.wrong.about.proper.business.ethics..To.some.extent,.therefore,.there.is.merit. in.the.school.of.ethical.relativisms.view.that.what.is.deemed.right.or.wrong,.fair.or. unfair,.moral.or.immoral,.ethical.or.unethical.in.business.situations.has.to.be.viewed.in. the.context.of.each.countrys.local.customs,.religious.traditions,.and.societal.norms. One.of.the.thorniest.ethical.problems.that.multinational.companies.face.is.the.degree. of.cross-country.variability.in.paying.bribes.as.part.of.business.transactions..In.many. countries.it.is.normal.to.make.payments.to.prospective.customers.in.order.to.win.or. retain.their.business..According.to.a.1999.Wall.Street.Journal.report,.30.to.60.per.cent. of.all.business.transactions.in.Eastern.Europe.involved.paying.bribes.and.the.costs. of.bribe.payments.averaged.2.to.8.per.cent.of.revenues..The.2005.Global.Corruption. Report.found.that.corruption.among.public.officials.and.in.business.transactions.is. widespread.across.the.world. Companies.that.forbid.the.payment.of.bribes.and.kickbacks.in.their.codes.of.ethical. conduct.and.that.are.serious.about.enforcing.this.prohibition.face.a.formidable. challenge.in.those.countries.where.bribery.and.kickback.payments.have.been. entrenched.as.a.local.custom.for.decades.and.are.not.considered.unethical.by.many. people..The.same.goes.for.multinational.companies.that.do.business.in.countries. where.bribery.is.legal.and.also.in.countries.where.bribery.or.kickbacks.are.tolerated. or.customary..Some.people.say.that.bribes.and.kickbacks.are.no.different.from.tipping. for.service.at.restaurants..you.pay.for.a.service.rendered. Cross-country.variability.in.business.conduct.and.ethical.standards.make.it.a. formidable.challenge.for.multinational.companies.to.educate.and.motivate.their. employees.worldwide.to.respect.customs.and.traditions.of.other.nations.and.at.the. same.time.adhere.to.the.companys.own.particular.code.of.ethical.behaviour. While.it.is.indisputable.that.cultural.differences.abound.in.global.business.activities. and.that.these.cultural.differences.sometimes.give.rise.to.differences.in.ethical. principles.and.standards,.it.might.be.the.case.that.in.many.instances.of.crosscountry.differences.one.side.is.more.right.than.the.other..If.so,.then.the.task.of.the. multinational.manager.is.to.discover.what.the.right.ethical.standards.are.and.act. accordingly.

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A.company.that.elects.to.conform.to.local.ethical.standards.necessarily.assumes.that. what.prevails.as.local.morality.is.an.adequate.guide.to.ethical.behaviour..This.can.be. ethically.dangerous.

Schools of thought about ethics


This.section.in.the.textbook.(pages.291297).is.heavy.going.and.delves.into.some. philosophical.considerations..In.turn.the.text.discusses.three.schools.of.ethics: . . . ethical.universalism.where.right.and.wrong.concepts.are.universal ethical.relativism.where.right.and.wrong.decisions.need.to.be.culturally.based integrative.social.contracts.which.is.a.combination.of.the.previous.two.and.takes. a.middle.ground.recognising.that.some.standards.are.universal.and.others.are. culturally.relevant.

In.the.school.of.ethical.relativism.two.examples.are.given.of.where.behaviour.has.to. be.seen.in.cultural.context: . . underage.and.unsafe.labour.practices.(here.is.where.Case.26.is.very.pertinent) bribes.and.kickbacks.

These.examples.would.suggest.that.there.need.to.be.some.multiple.sets.of.ethical. standards.but.the.dangers.of.such.an.approach.are.outlined.on.pages.294295. The.text.then.goes.on.to.argue.that.the.integrative social contracts theory is.the. preferred.approach.because.it.accommodates.the.best.features.of.the.other.two. approaches.without.endorsing.the.extreme.position.of.either.

The three categories of management morality


It.is.possible.to.consider.ethics.in.terms.of.three.moral.approaches.that.managers. might.take.to.business.behaviour..These.three.categories.are.described.on.pages. 297299: . The.moral.manager..moral.managers.are.dedicated.to.high.standards.of.ethical. behaviour,.both.in.their.own.actions.and.in.their.expectations.of.how.the. companys.business.is.to.be.conducted. The.immoral.manager..immoral.managers.are.actively.opposed.to.ethical. behaviour.in.business.and.wilfully.ignore.ethical.principles.in.their.decision. making. The.amoral.manager..amoral.managers.appear.in.two.forms:.the.intentionally. amoral.manager.and.the.unintentionally.amoral.manager..Intentionally.amoral. managers.consciously.believe.business.and.ethics.are.not.to.be.mixed.because. different.rules.apply.in.business.versus.other.realms.of.life..Unintentionally. amoral.managers.do.not.pay.much.attention.to.the.concept.of.business.ethics. either,.but.for.different.reasons.

There.is.considerable.evidence.that.many.managers.are.either.amoral.or.immoral. and.some.of.this.evidence.is.presented.in.Tables.9.1.(page.299)..The.extent.of.these. practices.poses.considerable.challenges.for.organisations.wishing.to.behave.in.a.moral. manner.

Activity 9.2
What approach to business ethics would you say Nike and Walmart take? Considering where Nike was some years back, accused of child and human exploitation, it is fascinating to see where they are now. Take a look at the following website http:// ethisphere.com/wme2009/ and note how many firms there are that you wouldnt have thought eligible.

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The.discussion.so.far.has.not.addressed.the.fundamental.question.as.to.whether. company.strategies.should.be.ethical..The.textbook.suggests.(pages.307310).that. what.is.preached.in.this.regard.is.not.always.practiced..For.an.example.of.an.ethically. aligned.and.progressive.strategy,.got.to.GEs.examples.on.Illustration.Capsule.9.2. (page.311).

What are the drivers of unethical strategies and business behaviour?


Why.do.the.people.in.business.engage.in.unethical.behaviour?.The.text.suggests.three. main.reasons.and.then.discusses.each.of.them.in.turn.with.examples.(pages.299303): . . . overzealous.or.obsessive.pursuit.of.personal.gain,.wealth,.and.other.selfish. interests heavy.pressures.on.company.managers.to.meet.or.beat.earnings.targets a.company.culture.that.puts.the.profitability.and.good.business.performance.ahead. of.ethical.behaviour.

Imagine.for.a.moment.how.a.CEO.of.a.cigarette.or.alcohol.producer.might.balance.the. need.to.appear.ethical.with.voracious.investor.expectations.and.requirements.

Approaches to managing a companys ethical conduct

Textbook
Read page 307.

The.stance.a.company.takes.in.dealing.with.or.managing.ethical.conduct.at.any.given. point.can.take.any.of.four.basic.forms: . . . . the.unconcerned.or.non-issue.approach the.damage.control.approach the.compliance.approach the.ethical.culture.approach.

Each.of.these.is.discussed.in.turn..Examples.are.given.in.each.approach.as.to.how. managers.in.these.businesses.might.behave.when.ethical.considerations.are.at. stake..Some.hope.is.given.(page.310).that.it.might.be.possible.to.change.the.ethics. management.approach.

a r

Activity 9.3
Which ethical approach would you suggest Gallo are taking in Case 25? What would you do differently, if anything?

Social responsibility and corporate citizenship strategies


Textbook
Read pages 310321.

There.are.solid.business.reasons.to.adopt.ethical.strategies.even.if.most.company. managers.are.not.of.strong.moral.character.and.personally.committed.to.high.ethical. standards..These.reasons.are.outlined.in.this.section..It.must.also.be.said.however.that. the.ruthless.expectations.of.investors.and.money.markets.creates.very.solid.challenges. to.the.long-term.view.of.the.ethical.manager,.and.ultimately.may.cost.careers.unless.a. very.solid.business.case.is.put.forward,.which.is.discussed.more.on.page.319.

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MNG00716 Strategic Management

. . . .

Pursuing.unethical.strategies.puts.a.companys.reputation.at.high.risk.and.can.do. lasting.damage Rehabilitating.a.companys.shattered.reputation.is.time-consuming.and.costly Customers.shun.companies.known.for.their.shady.behaviour Companies.with.reputations.for.unethical.conduct.have.considerable.difficulty.in. recruiting.and.retaining.talented.employees.

Numerous.textbooks.and.management.journals.espouse.the.value.of.being.ethical;. we.usually.see.this.in.the.form.of.case.studies.that.indicate.failure.of.the.firm.due. to.unethical.or.unsustainable.conduct..However,.it.is.also.worthwhile.considering. just.how.many.firms.prosper.despite.their.apparent.lack.of.regard.for.people,.the. environment,.broad.stakeholder.view.and.even.their.customers..Think.of.businesses. engaged.in.casinos,.tobacco,.alcohol,.adult.and.the.military.for.starters. Many.companies.have.adopted.codes.of.ethical.behaviour.and.put.these.out.in.the. public.domain..A.good.example.of.this.is.found.in.Illustration.9.2.on.page.311.. Consider.the.challenges.when.it.comes.to.employing.cheap.labour.in.locations. where.many.companies.source.their.imports..Bear.in.mind.the.added.pressure.of. globalisation.and.the.penchant.of.consumers.wanting.the.cheapest.prices.on.all.sorts.of. products.and.services..These.have.to.be.sourced.in.fiercely.competitive.conditions. At.this.stage.it.might.be.interesting.to.re-evaluate.your.own.business.ethics.from. Illustration.Capsule.9.1.(page.306).which.you.may.have.completed.at.the.beginning.of. the.topic.

Activity 9.4
Consider how difficult it would be to lead a global or MNC firm, ensuring you are behaving ethically according to the universalist and relativist ethical schools. What, for example, would you do if you were a CEO of a large timber logging company which was restricted from cutting down old growth timber. Consider the following: Would you look to obtain sources from other countries? Would you apply the same rigorous environmental standards in say Penang that you would have to apply in say Tasmania? What choices do you have? How do you please your shareholders and the communities you harvest your product from?

So.far.we.have.been.focussing.only.on.business.ethics..We.now.move.to.the.second. area.affecting.business.practice.and.that.is.the.issue.of.social.responsibility.

Strategy and social responsibility

Textbook
Read pages 310321

Social.responsibility.is.a.huge.area.of.study.and.has.been.debated.for.over.two. centuries..There.are.many.aspects.to.be.considered.but.we.will.try.to.focus.on.the. meaning.of.the.term.and.its.use.when.studying.business.strategy..We.can.do.no.more. than.skim.over.the.surface.of.this.heavily.researched.area. The.first.issue.is.to.define.social.responsibility,.and.this.concept.and.that.of.business. having.a.social conscience.are.covered.in.this.section.

MNG00716 Topic 9 Strategy, ethics and environmental sustainability

99

Organisations.have.a.number.of.different.strategies.they.can.adopt.to.demonstrate.that. they.are.seeking.to.behave.in.a.socially.responsible.manner..Five.of.these.actions.are. described.in.turn.on.pages.311.to.321: . . efforts.to.employ.an.ethical.strategy.and.observe.ethical.principles.in.operating. the.business making.charitable.contributions,.donating.money.and.the.time.of.company. personnel.to.community.service.endeavours,.supporting.various.worthy. organisational.causes,.and.reaching.out.to.make.a.difference.in.the.lives.of.the. disadvantaged actions.to.protect.or.enhance.the.environment.and.in.particular,.to.minimise.or. eliminate.any.adverse.impact.on.the.environment.stemming.from.the.companys. own.business.activities actions.to.create.a.work.environment.that.enhances.the.quality.of.life.for. employees.and.makes.the.company.a.great.place.to.work actions.to.build.a.workforce.that.is.diverse.with.respect.to.gender,.race,.national. origin,.and.perhaps.other.aspects.that.different.people.bring.to.the.workplace.

. .

These.five.components.are.neatly.summarised.in.Figure.9.2.(page.313).

Linking strategy and social responsibility


There.can.be.no.generic.approach.linking.a.companys.strategy.and.business.conduct. to.social.responsibility..The.combination.of.socially.responsible.endeavours.a. company.elects.to.pursue.defines.its.social.responsibility.strategy..Starbucks.is.a. classic.example.of.a.company.seeking.to.put.something.back.into.the.community.it. serves..While.the.strategies.and.actions.of.all.socially.responsible.companies.have. a.sameness.in.the.sense.of.drawing.on.the.five.categories.of.socially.responsible. behaviour.shown.in.Figure.9.2.each.companys.version.of.being.socially.responsible.is. unique. Another.interesting.example.of.corporate.social.responsibility.is.that.of.BP.Wild.Bean. cafes.and.McDonalds.McCafe..In.each.case.both.companies.have.moved.to.100%. rainforest.alliance.certified.coffee.(Google.it.for.more.information)..However,.whilst. BPs.Wild.Bean.cafes.have.always.had.100%.Rainforest.alliance.beans.(something. they.dont.brag.about.or.heavily.publicise),.McDonalds.only.recently.went.down.this. path,.after.a.heavy.publicity.campaign.espousing.their.corporate.social.responsibility. values.when.they.ventured.into.having.15%.rainforest.alliance.certified.coffee.. It.is.somewhat.pleasing.to.see.competitive.forces.upping.the.ante,.and.therefore. McDonalds.have.gone.to.100%..However.the.question.still.remains,.what.if.BP. and.others.hadnt.done.this,.would.McDonalds.have.been.so.keen.to.get.on.board?. Doubtful.is.my.answer.

The moral case for corporate social responsibility


The.moral.case.for.why.businesses.should.actively.promote.the.betterment.of.society. and.act.in.a.manner.that.benefits.all.of.the.companys.stakeholders.boils.down.to.a. basic.concept..it.is.the.right.thing.to.do.

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The business case for socially responsible behaviour


A.revisitation.of.this.section.reveals.there.are.several.reasons.why.the.exercise.of. social.responsibility.is.good.business: . . . it.generates.internal.benefits.particularly.as.concerns.employee.recruiting,. workforce.retention,.and.training.costs it.reduces.the.risk.of.reputation-damaging.incidents.and.can.lead.to.increased. buyer.patronage it.is.in.the.best.interest.of.shareholders.

Each.of.these.reasons.is.explained.in.detail.on.pages.319321..Companies.that.take. social.responsibility.seriously.can.improve.their.business.reputations.and.operational. efficiency.while.also.reducing.their.risk.exposure.and.encouraging.loyalty.and. innovation.

The controversy over do-good executives


While.there.is.substantial.agreement.that.businesses.have.stakeholder.and.societal. obligations.and.that.these.must.be.incorporated.into.a.companys.overall.strategy.and. into.the.conduct.of.its.business.operations,.there.is.much.less.agreement.about.the. extent.to.which.do-good.executives.should.pursue.their.personal.vision.of.a.better. world.using.company.funds..The.text.offers.a.sound.discussion.on.this.point,.on.page. 320,.where.they.discuss.what.is.in.the.best.interest.of.shareholders..Whilst.there.are. real.problems.with.disconnecting.business.behaviour.from.the.wellbeing.of.nonowner.stakeholders.and.the.wellbeing.of.society.at.large,.a.broad.stakeholder.view.is. probably.highly.appropriate.for.modern.managers. While.there.is.legitimate.concern.about.the.use.of.company.resources.for.do-good. purposes.and.the.motives.and.competencies.of.business.executives.in.functioning. as.social.engineers,.it.is.tough.to.argue.that.businesses.have.no.obligation.to.nonowner.stakeholders.or.to.society.at.large..How.much.attention.should.organisations. pay.to.questions.of.social.responsibility.and.how.much.attention.should.they.pay.to. shareholders.interests?

Linking social performance targets to executive compensation


Perhaps.the.most.sure.fire.way.to.enlist.genuine.commitment.to.corporate.social. responsibility.initiatives.is.to.link.the.achievement.of.social.performance.targets.to. executive.compensation. According.to.one.survey,.80.per.cent.of.surveyed.CEOs.believe.that.environmental. and.social.performance.metrics.are.a.valid.part.of.measuring.a.companys.overall. performance.

MNG00716 Topic 9 Strategy, ethics and environmental sustainability 101

Summary
Business.ethics.means.the.application.of.general.ethical.principles.and.standards.to. business.behaviour,.and.business.actions.are.judged.by.the.general.ethical.standards. of.society,.not.by.a.special.set.of.permissive.standards..The.three.categories.of. management.morality.would.be.the.moral,.immoral.and.amoral.manager..The. drivers.of.unethical.strategies.would.be.overzealous.pursuit.of.personal.gain,.heavy. pressure.on.company.managers,.and.a.company.culture.that.puts.profitability.ahead.of. ethical.behaviour..The.school.of.ethical.universalism.holds.that.human.nature.is.the. same.everywhere.and.thus.that.ethical.rules.are.cross-culture..The.school.of.ethical. relativism.holds.that.different.societal.cultures.and.customs.give.rise.to.divergent. values.and.ethical.principles.of.right.and.wrong. The.approaches.taken.to.manage.a.companys.ethical.conduct.would.be.the. unconcerned.or.non-issue,.the.damage.control,.compliance.and.ethical.culture. approach..The.essence.of.socially.responsible.business.behaviour.is.that.a.company. should.strive.to.balance.the.benefits.of.strategic.actions.to.benefit.shareholders. and.to.proactively.mitigate.any.harmful.effects.on.the.environment.that.its.actions. and.business.can.have..Each.companys.strategic.efforts.to.operate.in.a.socially. responsible.manner.should.be.custom-tailored.and.matched.to.its.core.values.and. business.mission,.thereby.representing.its.own.statement.about.how.we.do.business,. and.how.we.intend.to.fulfil.our.duties.to.all.stakeholders.and.society.at.large. (Hang.in.there..We.only.have.two.more.topics.and.three.more.chapters.to.negotiate.)

102 MNG00716 Strategic Management

Feedback to selected activities

Activity 9.4
Student answers will vary depending on their personal perspectives. Some students will agree with the prosecutors, that the commissions are the same as kickbacks. Others will look for ways to make such arrangements beneficial and practical without abuse.

Topic 10
Building an organisation capable of good strategy execution
Introduction
Implementing.strategy.is.an.action-oriented,.operations-driven.activity.revolving. around.managing.people.and.business.processes..It.is.tougher.and.more.timeconsuming.than.crafting.strategy.and.it.is.where.most.strategies.fail..It.is.often.said. that.successful.strategy.is.10%.crafting.and.90%.implementation..Success.depends.on. the.manager.doing.a.good.job.of.leading,.motivating.and.working.with.others.to.create. fits.between.strategy.and.how.an.organisation.does.things. In.this.topic.we.will.initially.tackle.the.first.of.the.strategy.implementation.tasks:. building.resource.capabilities.and.structuring.the.organisation..We.will.see.that.it. is.largely.a.people.management.issue,.finding.the.right.people.and.motivating.the. organisation.to.build.the.necessary.capabilities.to.implement.strategies.that.lead.to.the. development.of.competitive.advantage. Chapter.10.examines.the.process.of.executing.an.organisational.strategy..It.has. an.emphasis.on.the.conversion.of.a.strategy.into.actions.and.good.results.for. organisations..The.chapter.explores.how.executing.strategy.is.an.operations-driven. activity.that.revolves.around.the.management.of.people.and.business.processes.. It.asserts.that.successfully.executing.a.strategy.depends.on.doing.a.good.job.of. working.with.and.through.others,.building.and.strengthening.competitive.capabilities,. motivating.and.rewarding.people.in.a.strategy-supportive.manner,.and.instilling.a. discipline.of.getting.things.done. Chapter.11.discusses.five.additional.managerial.actions.that.facilitate.the.success. of.a.companys.strategy.execution.efforts..These.include.(1).marshalling.resources. to.support.the.strategy.execution.effort,.(2).instituting.policies.and.procedures.that. facilitate.strategy.execution,.(3).adopting.best.practices.and.striving.for.continuous. improvement.in.how.value.chain.activities.are.performed,.(4).installing.information. and.operating.systems.that.enable.company.personnel.to.carry.out.their.strategic. roles.proficiently,.and.(5).tying.rewards.and.incentives.directly.to.the.achievement.of. strategic.and.financial.targets.and.to.good.strategy.execution. In.the.final.topic.of.this.unit.(Topic.11).we.will.look.at.corporate.culture.and.the. leadership.that.is.needed.to.ensure.that.the.strategies.that.have.been.crafted.will.be. executed.and.implemented..That.will.involve.reviewing.Chapter.12.in.the.textbook. The.last.three.chapters.need.to.be.considered.as.a.unit.on.their.own..There.are.eight. separate.but.inter-related.aspects.of.implementation.that.we.will.now.embark.upon.. These.are.broken.up.across.three.chapters.in.the.textbook.but.only.two.topics.in.this. Study.Guide..This.topic.also.has.a.lot.of.content.but.the.concepts.are.not.difficult.and. need.to.be.taken.slowly.with.time.to.reflect.on.each.of.the.many.issues.raised.
103

104 MNG00716 Strategic Management

Objectives
At.the.conclusion.of.this.topic.you.should.be.able.to: . . . . . . . . . . outline.the.critical.components.of.an.effective.strategic.implementation.strategy differentiate.the.components.of.the.strategy.execution.process explain.the.elements.of.an.effective.staffing.plan.for.an.organisation.implementing. a.strategy explain.the.importance.of.building.core.competencies.and.capabilities.in. organisations outline.how.choices.are.made.about.outsourcing.or.keeping.activities.in-house assess.the.elements.required.in.structuring.the.work.effort.to.achieve.strategy. execution explain.how.new.policies.and.procedures.can.assist.in.strategy.implementation describe.the.types.of.best.practices.that.can.be.used.to.monitor.strategy.execution. processes examine.the.key.features.needed.in.information.and.operating.systems.to.assist.in. strategy.execution explain.the.essential.elements.involved.in.tying.rewards.and.incentives.to.strategy. execution.

Materials required
Textbook Thompson.et.al..Chapters.10.and.11. Readings Nil.
Unless.you.have.a.trained,.literate,.motivated.Work.force,.and.give.them. decision-making.authority,.you.dont.get.satisfied.customers.
(Anthony.Rucci. Chief.Administrative.Officer,.Sears.Roebuck)

A framework for executing strategy

Textbook
Read pages 329331.

Strategy.is.a.tough.management.job.because.of.the.demanding.variety.of.managerial. activities.that.have.to.be.performed..There.are.numerous.ways.to.tackle.each.activity.. It.also.requires.a.high.level.of.people.management.skills.and.demands.perseverance. to.successfully.launch.a.variety.of.initiatives..Managers.find.that.there.are.a.large. number.of.bedevilling.issues.to.be.worked.out.and.they.constantly.find.themselves. battling.resistance.to.change.within.the.organisation..This.compounds.the.difficulties. of.integrating.the.efforts.of.work.groups.into.a.smoothly.functioning.whole. Implementing.a.new.strategy.takes.adept.leadership.to: . . . . overcome.pockets.of.doubt build.consensus secure.commitment.of.concerned.parties get.all.implementation.pieces.in.place.and.coordinated.

MNG00716 Topic 10 Building an organisation capable of good strategy execution 105

The.simple.message.on.pages.329331.is.that.executing.strategy.is.more.difficult. than.formulating.it.and.it.requires.the.involvement.of.all.managers.in.an.organisation.. Moreover.we.are.reminded.on.page.331.that.there.is.no.one-best-fit.for.executing. strategy.and.that.the.execution.process.must.be.tailor.made.to.fit.the.companys.own. circumstances. There.are.eight.components.identified.as.being.essential.for.the.successful. implementation.of.a.strategy.and.these.are.listed.on.pages.329330.and.well.illustrated. in.Figure.10.1..(page.330)..These.eight.segments.in.Figure.10.1.are.the.content.of.the. next.three.chapters.in.the.textbook..The.starting.point.for.implementing.strategy.is.for. an.organisation.to.know.what.needs.to.be.done.better.and.differently..How.this.is.done. will.differ.between.large.and.small.organisations.(page.330331).

Building resource capabilities and structuring the organisation


The.ultimate.goal.of.strategy.implementation.is.to.unite.the.total.organisation.behind. the.chosen.strategy..The.aim.is.to.see.that.activities.are.done.in.a.manner.that.tightly. matches.first-rate.strategy.execution..There.is.a.need.to.generate.commitment.among. staff.so.enthusiastic.crusaders.emerge.to.carry.out.the.strategy..This.should.create.a. series.of.strategy-supportive.fits.within.the.organisation. To.be.successful.implementation.involves.a.companys.whole.management.team.. Every.organisation.unit.and.all.employees.have.a.role.and.need.to.be.committed.. The.CEO,.other.senior.executives.and.heads.of.major.organisational.units.must.lead. the.process.and.orchestrate.major.initiatives..However,.they.must.rely.on.middle.and. lower-level.managers.to.push.things.on.the.front.line.and.see.that.strategy.is.wellexecuted.on.a.daily.basis. In.order.to.lead.the.implementation.process,.managers.must.take.either.an.active,. visible.role.or.a.low-key,.behind.the.scenes.role..They.may.make.decisions. authoritatively.or.based.on.consensus;.they.may.delegate.much.or.little;.they.may.be. personally.involved.in.details.or.coach.others.to.carry.day-to-day.burdens;.and.they. may.proceed.swiftly.to.achieve.results.or.move.deliberately,.content.with.gradual. progress. There.are.a.number.of.factors.influencing.how.managers.lead.the.implementation. process..It.really.depends.on: . . . . . . their.experience.and.knowledge.of.business whether.they.are.new.to.the.job.or.seasoned.in.the.job the.extent.of.their.network.of.personal.relationships their.individual.diagnostic,.administrative,.interpersonal,.and.problem-solving. skills the.level.of.authority.given.to.the.manager.to.implement.the.strategy the.leadership.style.that.the.manager.is.most.comfortable.with.to.get.things.done.

The.first.of.the.components.in.Figure.10.2.is.building.the.organisation.capable.of. executing.the.strategy..This.requires.three.types.of.organisation.building.actions. summarised.at.the.bottom.of.page.331.and.then.below.Figure.10.2.on.page.332.and. then.discussed.in.detail.in.turn..They.are.also.depicted.well.in.Figure.10.2.(page.332).

106 MNG00716 Strategic Management

Staffing the organisation


This.involves.determining.the.skills.required.by.the.core.management.team.that.will. be.needed.to.carry.out.strategy..The.next.task.is.to.find.the.right.people.to.fill.each.slot.. The.existing.management.team.may.be.suitable.or.the.core.executive.group.may.need. strengthening..The.company.may.choose.to.promote.from.within.or.to.bring.in.skilled. outsiders..The.text.discusses.(page.332.to.the.bottom.of.page.333).the.importance.of. putting.together.a.strong.management.team.and.the.need.to.recruit.and.retain.capable. employees. The.main.considerations.in.selecting.people.for.key.positions.begin.with.determining. the.mix.of: . . . . backgrounds experiences.and.know-how beliefs.and.values styles.of.managing.and.personalities.

It.is.important.that.the.personal.chemistry.is.right.and.the.talent.base.needs.to.be. appropriate..Picking.a.solid.management.team.needs.to.be.acted.on.early.in.the. implementation.process. The.key.objective.in.organisation.building.is.to.staff.organisational.units.with.the. specialised.talents,.skills,.and.technical.expertise.needed.to.develop.and.build.core. competencies..The.aim.is.to.build.competitively.valuable.organisational.capabilities.. Suggestions.are.given.(pages.335336).as.to.what.practices.can.be.adopted.in.trying.to. find.the.best.people.for.positions.

Building core competencies

Textbook
Read pages 336341.

Building.core.competencies,.resource.strengths,.and.organisational.capabilities.that. rivals.cannot.match.is.a.sound.foundation.for.sustainable.competitive.advantage! Some.of.the.strategically-relevant.core.or.distinctive.competencies.that.may.need.to.be. built.include: . . . . . . . . . . greater.proficiency.in.product.development better.manufacturing.know-how capability.to.provide.better.after-sale.service faster.response.to.changing.customer.needs superior.cost-cutting.skills capacity.to.speed.new.products.to.market superior.inventory.management.systems better.marketing.and.merchandising.skills specialised.depth.in.unique.technologies greater.effectiveness.in.promoting.union-management.cooperation.

MNG00716 Topic 10 Building an organisation capable of good strategy execution 107

The.text.gives.a.very.useful.framework.for.building.capabilities,.suggesting.three. stages.in.building.capabilities.(page.337).are.necessary: Step 1 Step.1.is.to.select.people.with.relevant.skills/experience.and.broaden.or.deepen.their. individual.abilities.as.needed..The.aim.is.to.mould.the.energies.and.work.products.of. individuals.into.a.cooperative.group.effort.to.create.organisational.ability. Step 2 As.experience.builds,.such.that.the.organisation.learns.to.accomplish.the.activity. consistently.well.and.at.acceptable.cost,.the.ability.translates.into.a.competence.and. an.organisational.capability. Capabilities.emerge.from.establishing.and.nurturing.collaborative.working. relationships.between.individuals.and.groups.in.departments.and.between.a.company. and.its.external.allies. Step 3 If.mastery.of.a.core.competence.is.achieved.to.the.point.where.the.organisation.has. the.capability.to.perform.the.activity.better.than.rivals,.the.capability.becomes.a. distinctive.competence.and.holds.potential.for.competitive.advantage..This.is.the. optimal.outcome.of.the.capability-building.process!

Building core competencies


Four.characteristics.concerning.core.competencies.and.capabilities.are.important.and. these.are.detailed.on.pages.337338: 1.. Core.competencies.are.rarely.grounded.in.skills.or.know-how.of.a.single. department. 2.. They.typically.emerge.from.the.collaborative.efforts.of.different.work.groups. 3.. The.leveraging.of.competencies.into.competitive.advantage.requires.concentrating. more.effort.and.more.talent.than.rivals.on.strengthening.those.competencies.and. creating.valuable.organisational.capabilities. 4.. Sustaining.competitive.advantage.requires.adapting.competencies.to.new. conditions. The.process.of.building.competitively.valuable.competencies.and.capabilities.involves. managing.human.skills,.knowledge.bases,.and.intellect.and.coordinating.the.efforts.of. related.work.groups..In.addition.there.may.be.the.need.for.collaborative.networking. among.internal.groups.and.with.external.partners..Once.again.senior.managers.have.to. guide.the.process. The.ongoing.challenge.is.to.broaden,.deepen,.or.modify.competencies.and.capabilities. in.response.to.customer/market.changes..Indeed.a.company.can.be.considered.to.be.a. bundle.of.evolving.competencies.and.capabilities. Building.core.competencies,.resource.strengths,.and.organisational.capabilities.that. rivals.cant.match.is.a.sound.basis.for.sustainable.competitive.advantage. The.keys.to.success.in.building.competencies.and.capabilities.involve: . . . . . superior.selection training cultural.influences cooperative.networking motivation.

108 MNG00716 Strategic Management

The.important.role.of.training.is.mentioned.on.pages.339341. The.most.valuable.organisational.capabilities.contribute.heavily.to.better.strategy. execution.and.provide.a.differentiating.factor.that.customers.can.see.and.that. customers.value..This.is.hard.for.rivals.to.match.because.it.is.time.consuming.to.build. and.hard.to.replicate.or.imitate..It.is.also.not.easily.obtained.or.purchased.from.others.

a r

Activity 10.1
Review Illustration Capsule 10.1 on page 334, How General Electric Develops a Talented and Deep Management Team from the textbook. Identify the four key elements that support General Electrics efforts to build a talentrich stable of managers. Has this approach proven to be successful? Explain.

Execution-related aspects of organising the work effort


Textbook
Read pages 341352.

Part.of.strategy.execution.is.the.organising.of.tasks.and.work.groups.to.carry.out. the.implementation..While.all.organisations.will.have.their.own.way.to.organise. these.tasks.there.are.considerations.that.are.common.to.all.companies.and.these.are. presented.in.Figure.10.3.(page.342).and.discussed.in.detail.on.pages.343345. One.of.the.first.decisions.is.to.determine.which.activities.to.perform.internally.and. which.to.outsource..The.advantages.of.outsourcing.activities.are.spelt.out.on.pages. 342.with.some.examples.given.of.successful.outsourcing.arrangements..However. there.are.some.dangers.in.excessive.or.unwise.outsourcing.and.these.are.discussed.on. page.344. The.second.step.is.to.determine.which.activities.will.be.the.main.building.blocks.of. the.organisational.structure.and.the.task.here.(pages.345346).is.to.determine.which. structures.best.fit.which.strategies. The.next.challenge.in.implementation.is.to.decide.how.much.authority.and. independence.is.to.be.given.to.each.business.unit.and.employee..The.advantages.and. disadvantages.of.centralised.and.decentralised.structures.are.discussed.on.pages.346 349.and.summarised.well.in.Table.10.1.(page.347)..While.many.organisations.have. moved.towards.more.decentralised.structures.this.creates.challenges.in.maintaining. control.and.capturing.strategic.fit.and.these.issues.are.discussed.on.pages.348349. There.are.two.other.issues.that.remain.here.and.the.first.of.these.is.the.need.to.provide. for.some.degree.of.internal.cross-unit.coordination.(pages.349351)..There.are.many. strategy-critical.activities.that.cut.across.different.functions.and.these.need.to.be. coordinated..The.second.issue.is.to.maintain.collaboration.with.outside.suppliers.and. strategic.allies.(page.351). Since.the.latest.edition.of.this.text,.the.section.on.organisational.structure.has.been. left.out,.however.in.the.opinion.of.the.writer,.it.is.no.less.important,.regarding.the. execution.of.strategy..In.fact,.strategy.101,.or.even.elementary.management.texts. allude.the.need.of.having.a.strategy.before.a.structure..Mintzberg.engages.with.this. concept.in.his.elaboration.of.the.Design.School.

MNG00716 Topic 10 Building an organisation capable of good strategy execution 109

a a

Activity 10.2
Review Illustration Capsule 10.2 on page 340 from the textbook, Toyotas Legendary Production System: A Capability That Translates into Competitive Advantage What two TPS techniques do you think are the most unusual? How do you think these help Toyota to pursue a more efficient manufacturing operation?

Activity 10.3
Complete Exercise 1 on pages 355 of the text.

So.far.in.this.topic.we.have.been.focussing.only.on.the.top.circle.in.Figure.10.1.(page. 330)..We.now.move.on.to.consider.the.next.five.circles.(in.a.clockwise.manner)..This. takes.us.in.to.the.final.chapters.in.the.textbook.

Managing internal operations: Actions that promote good strategy execution


Moving.into.a.new.chapter,.the.rest.of.this.topic.focuses.on.Chapter.11.of.the. textbook,.however.it.relates.well.to.the.previous.chapter.

Textbook
Read pages 358359.

From.Figure.11.1.on.page.360.we.can.see.the.five.areas.to.consider.in.this.chapter.are: . . . . . marshalling.resources instituting.policies.and.procedures adopting.best.practices installing.information.and.operating.systems linking.rewards.and.incentives.to.strategy.execution.

Linking budgets to strategy


Much.of.this.topic.relates.to.setting.budgets.and.allocating.resources.in.order. to.support.effective.strategy.execution..This.is.discussed.on.pages.358359.. This.involves.funding.capital.projects.that.can.make.a.contribution.to.strategy. implementation.and.funding.efforts.to.strengthen.competencies.and.capabilities.or. to.create.new.ones..Often.the.firm.must.shift.resources..downsizing.some.areas,. upsizing.others;.killing.those.activities.that.are.no.longer.justified,.and.funding.new. activities.with.a.critical.strategy.role. New strategies usually call for significant budget reallocations.

Instituting policies and procedures that facilitate strategy implementation


There.are.at.least.three.ways.that.new.policies.and.procedures.can.assist.strategy. execution.and.these.are.illustrated.in.Figure.11.1.and.described.on.pages.359361.. Illustration.Capsule.11.1.shows.how.new.policies.and.procedures.can.be.made.to. work. Policies.and.procedures.provide.top-down.guidance.regarding.expected.behaviours. and.can.help.align.internal.actions.with.strategy,.channelling.efforts.along.the.intended. path.

110 MNG00716 Strategic Management

They.may.also.enforce.consistency.in.performance.of.activities.in.geographically. scattered.units.and.serve.as.powerful.lever.for.changing.corporate.culture.to.produce.a. stronger.fit.with.a.new.strategy. The.role.of.new.policies.is.to.channel.behaviours.and.decisions.to.promote.strategy. execution..They.can.be.useful.in.counteracting.the.tendencies.of.people.to.resist.the. chosen.strategy..Too.much.policy.can.be.as.stifling.as.wrong.policy.or.as.chaotic.as.no. policy,.but.often,.the.best.policy.is.a.willingness.to.empower.employees.

Adopting best practices and striving for continuous improvement


The.third.circle.from.Figure.10.1.on.page.330.(Chapter.10).concerns.the.adoption. of.best.practice..Searching.out.and.adopting.best.practices.is.integral.to.effective. implementation..One.of.the.key.tools.is.benchmarking..Benchmarking.has.spawned. a.number.of.new.approaches.to.improve.strategy.execution,.including.reengineering,. TQM.and.continuous.improvement.programs..Best.practice.and.benchmarking. techniques.are.discussed.on.pages.361370. The.objectives.of.quality.improvement.programs.are.to.instigate.defect-free. manufacture,.leading.to.superior.product.quality.and.superior.customer.service..The. aim.is.total.customer.satisfaction. In.implementing.a.philosophy.of.continuous.improvement,.management.must.ensure. that.they.instil.enthusiasm.to.do.things.right.throughout.the.company.and.strive.to. achieve.little.steps.forward.each.day,.i.e..Kaizen..Successfully.instigated,.a.continuous. improvement.philosophy.can.ignite.creativity.in.employees.to.improve.performance. of.value-chain.activities..The.leaders.of.the.program.must.preach.that.there.is.no.such. thing.as.good.enough..In.many.cases.this.requires.significant.reform.to.the.corporate. culture. In.turn.the.text.outlines.the.characteristics.of.business.process.engineering.(pages. 363368),.TQM.(page.364).and.Six.Sigma.Quality.Control.(pages.364368).and.the. differences.between.these.tools.is.commented.on.on.page.368..The.text.then.goes.on. to.outline.how.the.benefits.of.these.initiatives.can.be.captured.(page.368370)..The. five.steps.listed.in.this.regard.on.page.369.are.worthy.of.attention. A.TQM.culture.starts.with.management.commitment.and.the.installation.of.TQMsupportive.employee.practices..This.requires.management.to.empower.employees. to.do.the.right.things..It.also.requires.the.company.to.provide.employees.with.quick. access.to.required.information..Overall,.management.must.preach.that.performance. can.be.improved.

Installing information and operating systems

Textbook
Read pages 370373.

Appropriate.support.systems.are.essential.to.promote.successful.strategy.execution. Some.of.the.types.of.support.systems.include: . . . . online.data.systems Internet.and.company.intranets electronic.mail web.pages.

MNG00716 Topic 10 Building an organisation capable of good strategy execution 111

Examples.are.given.on.pages.370371.of.types.of.systems.that.have.been.put.to.good. use..The.author.of.this.Study.Guide.has.also.had.a.good.deal.of.experience.with.SAP,. a.specialist.in.Enterprise.Resource.Planning.(ERP).and.Business.Intelligence.systems.. The.direct.benefit.of.using.an.ERP.is.that.it.integrates.all.parts.of.the.business,. reduces.reporting.times.and.offers.managers.and.users.enhanced.visibility.and.process. improvement. There.are.many.competitors.in.the.ERP.market,.but.predominantly.SAP,.Microsoft,. Oracle.and.Accenture.are.the.bigger.players,.and.ultimately.this.group.makes.up.the. vast.majority.of.market.share.for.ERP.in.large.enterprises.(LEs).and.even.small.to. medium.enterprise.(SMEs)..Think.of.any.franchise.business.and.you.will.see.systems. which.are.easily.replicated.to.each.new.site,.store.or.territory.and.ultimately.backend. systems.which.give.strategic.information.and.data.that.support.management.decisions. and.operations.management. Mobilising.information.and.creating.systems.to.use.knowledge.effectively.can.yield. competitive.advantage. Innovative,.state-of-the-art.support.systems.can.be.a.basis. for.competitive.advantage.if.they.give.a.firm.capabilities.that.rivals.cant.match!.The. systems.in.place.must.not.only.provide.information.but.also.act.as.controls..The.roles. and.requirements.of.such.systems.are.explained.on.pages.371372. Accurate,.timely.information.is.essential.to.guide.action.in.implementing.strategy.. Prompt.feedback.on.implementation.activities.is.needed.before.actions.are.fully. completed..Key.strategic.performance.indicators.must.be.tracked.as.often.as.practical. because.they.provide.the.barometers.of.overall.performance..Information.systems. should.provide.data.on.customers,.operations,.employees,.suppliers/partners/ collaborative.allies,.and.of.course,.financial.performance. The.challenge.in.exercising.adequate.control.over.empowered.employees.lies.in.how. to.ensure.the.actions.of.employees.stay.within.acceptable.bounds..Diagnostic.control. systems.can.be.of.use.with.the.benefit.that.they.relieve.managers.of.the.burden.of. constant.monitoring..Some.of.the.control.methods.include: . establishing.boundaries.on.what.not.to.do,.allowing.freedom.to.act.with.limits . face-to-face.meetings.to.assess.performance. The.importance.of.adequate.controls.is.discussed.on.pages.372373.

Components of an effective reward system


The.last.section.in.this.topic.deals.with.reward.and.incentive.systems..Staff.are.more. likely.to.support.the.execution.of.a.strategy.if.they.feel.adequately.recognised.and. rewarded..Some.of.the.key.motivational.practices.are.explained.on.pages.373380.. Examples.of.how.companies.use.such.reward.systems.are.illustrated.in.Illustration. Capsule.11.3.(page.378). The.aim.of.the.reward.system.should.be.to.gain.commitment.to.the.changes.necessary. for.successful.strategy.implementation..Monetary.incentives.may.include.salary.rises,. performance.bonuses,.stock.options,.retirement.packages,.promotions.and.perks..The. result.of.these.measures.is.intended.to.inspire.employees.to.do.their.best.and.get.the. employees.to.buy.into.strategy. There.can.be.non-monetary.elements.as.well..Reorganising.work.to.structure. individual.efforts.in.teams.may.facilitate.a.supportive.climate..A.feature.of.these. programs.is.to.allow.employees.to.participate.in.decisions.about.their.jobs..This.makes. employees.jobs.seem.interesting.and.satisfying.

112 MNG00716 Strategic Management

Elements.of.both.positive.and.negative.rewards.are.necessary..However,.it.is.generally. recognised.that.challenge.and.competition.is.necessary.for.self-satisfaction..Hence.the. prevailing.view.is.that.positive.approaches.work.better.than.negative.ones..Positive. rewards.can.lead.to.enthusiasm,.effort.and.initiative. Rewards.are.the.single.most.powerful.tool.to.win.commitment.to.the.strategy..The. objectives.are.to.generously.reward.those.achieving.objectives.and.to.deny.rewards. to.those.who.do.not..As.a.general.principle,.the.company.should.make.strategic. performance.measures.the.dominant.basis.for.designing.incentives..A.properly. designed.reward.structure.is.managements.most.powerful.strategy-implementing.tool.. An.example.of.linking.incentives.to.strategy.execution.is.given.in.Illustration.Capsule. 11.2.(page.376). The.challenge.of.striking.the.right.balance.between.reward.and.punishment.is. described.on.page.375.and.the.importance.of.basing.rewards.on.results.is.stressed.on. pages.375377. Some.guidelines.for.designing.effective.compensation.systems.are.outlined.on.pages. 379380..It.is.critical.that.these.guidelines.are.both.communicated.and.understood. In.summary,.the.guidelines.for.designing.an.effective.compensation.system.are: . . . . the.payoff.must.be.a.major,.not.a.minor,.piece.of.the.total.compensation.package the.incentive.plan.should.extend.to.all.employees the.company.must.administer.the.system.with.scrupulous.fairness incentives.must.be.linked.only.to.achieving.the.performance.targets.in.the. strategic.plan.

Summary
In.this.unit.we.have.covered.a.wide.range.of.the.issues.and.principles.involved.in. implementing.strategy..It.is.by.far.the.hardest.element.of.strategic.management,. because.it.is.where.we.leave.the.realm.of.analysis.and.creative.thinking.and.set.about. convincing.the.organisation.to.accept.and.run.with.the.chosen.strategy..It.is.also.where. most.strategies.that.fail.have.problems. You.should.focus.most.of.your.attention.on.the.issues.of.leadership.and.building.core. competencies.because.these.lie.at.the.heart.of.the.new.approaches.to.management. including.programs.like.TQM.and.benchmarking..They.are.also.the.keys.to.successful. strategies.into.the.next.era.in.business.

MNG00716 Topic 10 Building an organisation capable of good strategy execution 113

Feedback to selected activities

f f

Activity 10.1
The four key elements employed by this organisation include: transferring managers across divisional, business, or functional lines for sustained periods of time, exhibition of the four Es by potential executive candidates, proficiency in what is termed workout, and attendance in the Leadership Development Centre. This approach has proven to be highly successful for the organisation. Today, General Electric is widely considered to be one of the best-managed companies in the world, partly because of its concerted effort to develop outstanding managers.

Activity 10.2
Students should select two choices from among the eight listed in this example. Student responses will vary, but students should be exhibiting some personal viewpoints or perspectives that otherwise may not have been brought to light. This sharing should facilitate further classroom discussion about quality control.

114 MNG00716 Strategic Management

Topic 11
Culture, leadership and strategic execution
Introduction
Planet Google As Google celebrates its 10th birthday, its control of the Internet seems unassailable. But is the search engine as benign as its creators intended? Gerard Wright reports.
This.is.a.Google.search..Eric.Schmidt.has.just.introduced.himself,.waiting,. unannounced.and.unassuming,.until.a.conversation.finishes..He.is.a.tallish.man. with.a.face.surprisingly.youthful.for.its.53.years,.its.upper.reaches.obscured.by. large,.rimless.glasses. The.meeting.has.been.planned.and.co-coordinated.across.ocean.and.continent. over.several.weeks:.a.sit-down.with.the.CEO.of.the.world-changing,.futurechallenging,.multi-billion-dollar.company.that.is.Google..We.each.have.a. minder;.polite,.diligent.young.men,.at.least.one.of.whom.has.an.already. staggering.to-do.list:.the.examination.and.explanation.of.the.companys. philosophy,.prospects.and.challenges.on.its.tenth.anniversary. All.that.is.missing.is.a.place.to.stage.the.interview..A.conference.room.door.is. opened..Schmidt.looks.in,.the.occupants.look.up..Its.taken..So.is.the.next.one. Schmidt.(Dr.Schmidt,.with.a.PhD.in.electrical.engineering.and.computer. sciences,.as.his.business.card.introduces.him).speaks.matter.of.factly.and.his. pronouncements.can.sound.science-fictional,.but.its.clear.his.public.ego.has.long. since.abandoned.the.commute.to.this.corner.of.Californias.Silicon.Valley..I.let. go.of.that.a.long.time.ago,.says.the.chief.executive.who.cant.command.his.own. conference.room.as.we.walk.along.a.hallway. Recalls.Miriam.Rivera,.one.of.the.companys.first.in-house.lawyers:.Less. management.was.a.hallmark.of.Googles.early.days..There.wasnt.much.of.a. desire.for,.and.respect.for,.management. Googles.campus,.or.Googleplex,.in.Mountain.View,.one.of.a.string.of.suburbs. along.the.101.Freeway.south.of.San.Francisco,.is.spacious.and.airy,.a.network.of. two-storey,.glass-enclosed.buildings.redesigned.in.2004..In.ways.large.and.small. it.mirrors.Googles.outlook.and.ambitions:.a.company.that.is.the.21st.century. version.of.the.quintessential.American.dream,.but.is.no.longer.of.America..As. of.July,.52.per.cent.of.its.revenue.comes.from.outside.the.country..Its.websites. are.two.of.the.10.most.viewed.in.India..Its.social.networking.site.dominates. discourse.in.Brazil..Last.year.it.answered.47.3.per.cent.of.the.worlds.internet. search.queries.(61.9.per.cent.in.June.in.the.US),.around.250.million.a.day.

115

116 MNG00716 Strategic Management

This.is.reflected.on.a.computer.screen.in.the.buildings.lobby..It.is.an.image.of. Earth,.a.real-time.satellite.view.of.the.globe,.surrounded.by.the.infinity.of.space.. The.planet.slowly.rotates.and,.as.it.does,.coloured.beams.of.light.shoot.into.the. atmosphere..These.represent.Google.searches,.2800.a.second,.in.English,.French,. Spanish,.Portuguese,.German. This.place.is.where.the.internet.resides,.which.is.almost.everywhere..The. exception.is.Africa,.sunlit.and.arid.across.its.northern.third,.timeless.and. disconnected,.but.otherwise.the.image.on.this.oversized.flat.screen.is.beyond. cool,.and.a.powerful,.wordless.statement..Earth.in.the.grip.of.Google. The.globe.revolves..Its.11am.in.Mountain.View..The.familiar,.beloved. continental.outline.between.the.Pacific.and.Indian.oceans.appears..A.beam.of. light.shoots.up..The.cursor.scrolls.across.it..At.2am,.western.time,.a.search. request.has.been.typed.in.Bunbury..Ditto.at.4am.in.Horsham.and.Moe. The.layout.of.the.Google.offices.was.conceived.in.a.way.that.echoed.the.conceits. and.personalities.of.its.youthful.founders,.both.25.when.the.company.was. launched.in.1998..Larry.Page.and.Sergey.Brin.overlaid.the.design.blueprint.with. a.map.of.the.world,.with.a.view.to.naming.conference.rooms.and.other.meeting. places.by.their.proximity.to.the.worlds.cities..Thus,.the.small.square.room.on. the.second.floor,.with.whiteboard,.table,.chairs.and.phone,.with.Timbuktu.affixed. to.one.of.its.windows. Back.at.the.search,.another.assistant.answers.the.request.for.space..She.tells. Schmidt.that.Santiago.may.be.available..Santiago?.Schmidt.replies,.perplexed.. Wheres.that? The.yurts..small,.noise-proof.meeting.rooms.that.can.be.quickly.assembled.in. any.open.space..are.occupied..Every.third.person.walking.the.hallways.seems.to. be.engrossed.in.an.open.laptop.computer..A.partly.opened.door.beckons.and.an. interview.space.is.found..Schmidt.scans.my.business.card.quoting.a.decade-old. Hotmail.address..Microsoft!.Those.bastards!.Well.have.to.get.you.a.Gmail. address,.he.says.
(The Australian.Magazine,.September.2008)

The.15th.edition.of.this.textbook.had.Google.as.one.of.its.case.studies..(Indeed.this. case.was.used.as.a.final.examination.case.in.one.particular.trimester.this.unit.was. offered)..Google.is.an.extremely.interesting.case.to.study.mainly.because.it.is.so.well. known.as.the.major.search.engine.but.also.because.of.its.unusual.culture.and.strong. leadership..Some.of.this.is.evident.in.the.extract.above.from.Reading.11.1 This.topic.covers.Chapter.12.of.the.textbook.which.explores.the.two.remaining. managerial.tasks.that.shape.the.outcome.of.efforts.to.execute.a.companys.strategy.. These.two.tasks.include.(1).creating.a.strategy-supportive.corporate.culture.and. (2).exerting.the.internal.leadership.needed.to.drive.the.implementation.of.strategic. initiatives.forward. In.this.final.topic.we.will.complete.our.discussion.of.implementing.strategy.by. considering.the.important.issues.of.culture.and.leadership.and.their.impact.on. implementing.strategy.

Objectives
At.the.conclusion.of.this.topic.you.should.be.able.to: . . . identify.the.key.features.of.a.companys.corporate.culture differentiate.between.strong.and.weak.cultures identify.the.characteristics.of.unhealthy.cultures

MNG00716 Topic 11 Culture, leadership and strategic execution 117

. . . . .

outline.the.characteristics.of.an.adaptive.culture analyse.the.link.between.culture.and.strategy.execution describe.the.steps.needed.to.change.a.problem.culture outline.the.links.between.culture,.values.and.ethics assess.the.actions.needed.by.leaders.if.strategy.execution.is.to.have.a.good.chance. of.success.

Materials required
Textbook Thompson.et.al..Chapter.12. Reading 11.1.Planet.Google.(online),.available:.http://www.theaustralian.com.au/news/ features/planet-google/story-e6frg8h61111117404083..Accessed.March.24.2010.

Implementing strategy: Culture and leadership


This.topic.falls.into.two.discrete.sections.which.are.the.final.two.circles.in.Figure.10.1. page.330.of.text..Almost.two.thirds.of.the.chapter.is.concerned.with.issues.of.culture. while.the.remaining.third.deals.with.aspects.of.leadership..Many.of.these.issues.in. this.topic.are.considered.in.detail.in.other.units.of.the.Masters.degrees.you.might.be. studying..Here.in.the.final.topic.of.the.capstone.unit.in.your.degree.these.issues.appear. again..So.much.of.the.content.should.be.familiar.to.you.and.just.presented.from. another.context.

Corporate culture

Textbook
Read pages 384410.

A.companys.culture.includes.its.beliefs.about.how.business.ought.to.be.conducted. and.the.values.and.principles.of.management..It.is.represented.by.the.patterns.of.how. we.do.things.around.here..It.is.evidenced.by.oft-told.stories.illustrating.the.companys. values,.the.taboos.and.political.donts,.traditions.and.ethical.standards.

Examples of corporate culture


Features.of.the.corporate.culture.at.Wal-Mart: . . . . . . dedication.to.customer.satisfaction zealous.pursuit.of.low.costs belief.in.treating.employees.as.partners Sam.Waltons.legendary.frugality ritualistic.Saturday.morning.meetings executive.commitment.to.visit.stores,.talk.to.customers,.solicit.employees. suggestions.

Other.examples.of.culture.are.depicted.in.Illustration.Capsule.12.1.(page.387).for. Google.and.Alberto-Culver.

Reading 11.1
Turn to Reading 11.1 and read the full Planet Google article.

118 MNG00716 Strategic Management

Activity 11.1
Compare the section on Google in Illustration Capsule 12.1 with the culture described in Reading 11.1.

In.trying.to.identify.and.describe.a.culture.there.are.a.number.of.factors.to.consider. and.these.are.outlined.on.pages.386390..Corporate.culture.usually.comes.from.the. founder.or.early.leader,.and.becomes.entrenched.through.an.influential.individual. or.work.group..The.culture.becomes.reflected.in.policies,.vision,.or.strategies.and. traditions,.supervisory.practices,.employee.attitudes..Organisational.politics.reinforce. the.culture..The.culture.also.dictates.the.way.relationships.with.stakeholders.are. developed. Corporate.culture.is.sustained.through.the.continuity.of.leadership.and.HR.policies. that.select.new.employees.based.on.how.well.their.personalities.fit.the.culture.. The.culture.becomes.entrenched.further.by.the.systematic.indoctrination.of.new. employees..A.culture.can.also.be.evident.in.the.behaviour.of.senior.employees.to. reinforce.core.values..Culture.is.also.evidenced.by.features.like.story-telling.of. company.legends.and.ceremonies.honouring.employees.who.display.cultural.ideals. This.is.considered.on.pages.388389..This.is.followed.by.a.listing.and.brief.discussion. of.a.number.of.ways.in.which.the.established.culture.can.be.perpetuated.(page.389). It.also.needs.to.be.reckoned.that.sub-cultures.can.arise.within.organisations.and.pose. problems.for.the.established.culture..This.issue.is.highlighted.on.page.390. Culture.can.contribute.to..or.hinder..successful.strategy.execution..This.is.because. the.requirements.for.successful.strategy.execution.may..or.may.not..be.compatible. with.the.culture..Overall,.a.close.match.between.culture.and.strategy.promotes. effective.strategy.execution. Strategy-supportive.cultures.shape.the.mood.and.temperament.of.the.work.force.. positively.affecting.organisational.energy,.work.habits,.and.operating.practices..The. culture.may.provide.standards,.values,.informal.rules.and.peer.pressures.that.nurture. and.motivate.people.to.do.their.jobs.in.ways.that.promote.good.strategy.execution..It. can.also.strengthen.employee.identification.with.the.company,.its.performance.targets,. and.strategy. Strategy-supportive.cultures.stimulate.people.to.take.on.the.challenge.of.realising.the. companys.vision,.do.their.jobs.competently.and.with.enthusiasm,.and.collaborate. with.others.to.execute.the.strategy..The.optimal.condition.is.a.work.environment.that. promotes.can.do.attitudes.and.accepts.change..This.can.breed.the.capabilities.needed. to.execute.strategy.effectively.

Strong and weak cultures


A.distinction.can.be.made.between.strong-culture.and.weak-culture.organisations.and. the.characteristics.of.both.types.of.culture.are.outlined.on.pages.390392..Companies. with.a.strong.culture.conduct.business.according.to.a.clear,.widely-understood. philosophy..Management.spends.considerable.time.communicating.and.reinforcing. values.and.these.values.are.widely.shared.and.deeply.rooted..Such.companies.often. have.a.values.statement.and.carefully.screen.new.employees.to.be.sure.they.will.fit. in..They.also.provide.visible.rewards.for.those.following.norms,.and.penalties.for. those.who.dont.

MNG00716 Topic 11 Culture, leadership and strategic execution 119

A.culture.comes.to.be.strong.through.a.leader.who.establishes.values.consistent.with. customer.needs,.competitive.conditions.and.the.strategic.requirements.of.the.company.. This.instils.a.deep,.abiding.commitment.to.espoused.values.and.business.philosophy:. Practising.what.is.preached!.There.is.also.a.genuine.concern.for.the.wellbeing.of. customers,.employees.and.shareholders. Strong.cultures.promote.good.strategy.execution.where.theres.fit..They.hurt.execution. where.theres.little.fit. Weak.culture.companies.have.many.subcultures.where.few.values.and.norms. are.widely.shared..They.have.few.strong.traditions.and.little.cohesion.among.the. departments..This.is.evidenced.by.weak.employee.allegiance.to.the.companys.vision. and.strategy.and.a.lack.of.a.strong.sense.of.company.identity. The.characteristics.of.low.performance.cultures.include.a.politicised.internal. environment.where.issues.are.resolved.on.the.basis.of.turf..a.culture.of.disparate.subunits..There.is.usually.hostility.to.change.such.that.experimentation.and.efforts.to.alter. the.status.quo.are.discouraged..Employees.avoid.risks.because.of.the.fear.of.failure.. Low-performance.cultures.promote.managers.who.are.more.concerned.about.process. than.about.results..They.also.demonstrate.an.aversion.to.look.outside.for.superior. practices,.preferring.instead.a.must-be-invented.here.syndrome. Some.cultures.are.particularly.unhealthy.and.the.text.discusses.four.of.these.unhealthy. characteristics.on.pages.392394.

High performance and adaptive cultures


The.text.outlines.some.features.of.a.high-performance.culture.(pages.394395).and. compares.this.with.adaptive.cultures.(pages.395396).where.the.emphasis.is.on.the. willingness.to.accept.change..The.changes.that.are.made.must.satisfy.the.interests.of. the.stakeholders.if.the.culture.is.to.remain.adaptive.

Culture and strategy execution


The.need.for.culture.and.strategy.execution.to.be.aligned.closely.cannot.be.overemphasised..If.the.culture.is.supportive.of.a.companys.execution.process.than.success. is.much.more.likely.to.occur..This.is.discussed.in.detail.on.pages.396398.with.three. major.benefits.of.a.close.fit.spelt.out.on.page.397..The.onus.is.on.management.to. ensure.this.fit.remains.close.to.encourage.employee.behaviour.and.commitment.to.the. execution.effort.

Changing a problem culture


If.the.culture.is.weak.or.unhealthy.then.it.needs.to.be.changed.if.there.is.to.be.a. successful.implementation.of.the.strategy..Competent.leadership.is.the.first.step.in. bringing.about.a.change.and.the.sequence.of.steps.that.needs.to.be.taken.is.illustrated. in.Figure.12.1.(page.399).and.then.described.in.detail.on.page.398.to.the.bottom.of. page.402..In.order.to.bring.about.a.change.in.culture,.sceptics.have.to.be.convinced. and.ways.of.doing.this.are.indicated.on.page.400..After.a.compelling.case.has.been. made.for.change.substantive.actions.need.to.be.taken..These.actions.are.set.out.on. pages.400401..As.well.as.these.substantive.actions.there.needs.to.be.some.symbolic. culture-changing.actions.and.some.examples.are.given.of.what.these.symbols.might. be.such.as.reduced.executive.perks.and.employee.recognition.ceremonies.

120 MNG00716 Strategic Management

Bringing.about.cultural.change.can.take.a.long.time.and.there.can.be.no.rule.of.thumb. about.how.long.this.might.take..Some.of.the.challenges.affecting.how.long.this. cultural.change.might.take.are.described.on.page.402..An.example.of.how.cultural. change.can.be.successfully.brought.about.is.found.in.Illustration.Capsule.12.2.(page. 403).

Culture, ethics and core values


The.heart.of.a.companys.continuing.culture.will.be.in.its.values..Values.were. discussed.in.earlier.topics.and.some.examples.of.core.values.are.illustrated.in.Table. 12.1.(page.404)..The.text.gives.some.examples.of.the.link.between.culture.and.values. on.pages.403405. In.Figure.12.2.(page.405).it.is.shown.that.a.companys.stated.values.and.ethical. principles.have.two.roles.in.culture.building:.helping.to.create.the.appropriate.work. climate.and.providing.employees.with.guidance.about.how.they.are.expected.to. behave.

Activity 11.2
From Reading 11.1 describe the key values that you feel are part of the Google work environment. In what ways have they contributed to the success of the company?

Once.core.values.and.an.ethical.stance.have.been.determined.(and.this.is.no.easy.task). these.values.have.to.be.instilled.into.the.companys.norms..The.text.discusses.how. these.core.values.can.be.hammered.in.(page.406). In.the.broader.global.context.it.becomes.more.important.but.more.difficult.to.establish. a.strategyculture.fit.that.travels.across.country.borders..The.challenge.is.to.develop. corporate.values.that.have.universal.appeal..Some.suggestions.as.to.how.this.might.be. achieved.are.given.on.pages.407408.

a r

Activity 11.3
Review Illustration Capsule 12.2 from the textbook, The Culture-Change Effort at Alberto-Culvers North American Division. What resulted from this organisations concerted effort to implement cultural change?

We.can.now.move.on.into.the.second.part.of.this.topic.which.is.leadership.and.its.role. in.the.strategy.execution.process.

Leading the strategy execution process


Textbook
Read pages 408410.

The.leadership.challenges.are.significant.and.diverse.in.managing.the.strategy.process. For.the.most.part,.leading.the.strategy-execution.process.has.to.be.top-down.and. driven.by.mandates.to.get.things.done.and.show.good.results. In.general,.leading.the.drive.for.good.strategy.execution.and.operating.excellence. calls.for.several.actions.on.the.part.of.the.manager.in.charge..The.rest.of.the.topic. summarises.the.actions.that.a.leader.needs.to.take.to.drive.for.good.strategy.execution. (page.409).and.the.rest.of.the.topic.is.an.expansion.of.these.five.points..(Note.much. of.the.following.topic.material.comes.from.the.existing.edition.of.the.textbook,.but.it. could.still.be.considered.relevant.and.hence.it.is.still.included.in.this.Study.Guide.)

MNG00716 Topic 11 Culture, leadership and strategic execution 121

1. Staying on top of how well things are going Regular.visits.to.the.field.and.talking.with.many.different.people.at.many.different. levels..to.stay.on.top.of.how.well.the.strategy.execution.process.is.going,.a.manager. needs.to.develop.a.broad.network.of.contacts.and.sources.of.information,.both.formal. and.informal. The.regular.channels.include.talking.with.key.subordinates,.attending.presentations. and.meetings,.reading.reviews.of.the.latest.operating.results,.talking.to.customers,. watching.the.competitive.reactions.of.rival.firms,.exchanging.emails.and.holding. telephone.conversations.with.people.in.outlying.locations,.making.onsite.visits,.and. listening.to.rank-and-file.employees. One.of.the.best.ways.for.executives.in.charge.of.strategy.execution.to.stay.on.top.of. things.is.by.making.use.of.the.technique.often.labelled.managing.by.walking.around. 2. Putting constructive pressure on the organisation to achieve good results Managers.have.to.be.out.front.in.mobilising.organisational.energy.behind.the.drive. for.good.strategy.execution.and.operating.excellence..A.culture.where.there.is. constructive.pressure.to.achieve.good.results.is.a.valuable.contributor.to.good.strategy. execution.and.operating.excellence..Results-oriented.cultures.are.permeated.with.a. spirit.of.achievement.and.have.a.good.track.record.in.meeting.or.beating.performance. targets. Successfully.leading.the.effort.to.instil.a.spirit.of.high.achievement.into.the.culture. generally.entails.such.leadership.actions.and.managerial.practices.as: . . . . . . treating.employees.with.dignity.and.respect making.champions.of.people.who.turn.in.winning.performances encouraging.employees.to.use.initiative.and.creativity.in.performing.their.work setting.stretch.objectives.and.clearly.communicating.an.expectation.that.company. personnel.are.to.give.their.best.in.achieving.performance.targets granting.employees.enough.autonomy.to.stand.out,.excel,.and.contribute using.the.full.range.of.motivational.techniques.and.compensation.incentives.to. inspire.company.personnel,.nurture.a.results-oriented.work.climate,.and.enforce. high-performance.standards celebrating.individual,.group,.and.company.successes.

. 3.

Leading the development of better competencies and capabilities A.third.avenue.to.better.strategy.execution.and.operating.excellence.is.proactively. strengthening.organisational.competencies.and.competitive.capabilities..This.often. requires.top.management.intervention..Aside.from.leading.efforts.to.strengthen. existing.competencies.and.capabilities,.effective.strategy.leaders.try.to.anticipate. changes.in.customer-market.requirements.and.proactively.build.new.competencies.and. capabilities.that.offer.a.competitive.edge.over.rivals. Proactively.building.new.competences.and.capabilities.ahead.of.rivals.to.gain.a. competitive.edge.is.strategic.leadership.of.the.best.kind,.but.strengthening.the. companys.resource.base.in.reaction.to.newly.developed.capabilities.of.pioneering. rivals.occurs.more.frequently.

122 MNG00716 Strategic Management

4.

Displaying ethical integrity and leading social responsibility initiatives For.an.organisation.to.avoid.the.pitfalls.of.scandal.and.disgrace.and.consistently. display.the.intent.to.conduct.its.business.in.a.socially.acceptable.manner,.the.CEO.and. those.around.the.CEO.must.be.openly.and.unswervingly.committed.to.ethical.conduct. and.socially.redeeming.principles.and.core.values. Leading.the.effort.to.operate.the.companys.business.in.an.ethically.principled.fashion. has.three.pieces: . . the.CEO.and.other.senior.executives.must.set.an.excellent.example.in.their. actions.and.decisions top.management.must.declare.unequivocal.support.for.the.companys.ethical. code.and.take.an.uncompromising.stand.on.expecting.all.company.personnel.to. conduct.themselves.in.an.ethical.fashion.at.all.times top.management.must.be.prepared.to.act.as.the.final.arbiter.on.hard.calls.

The.16th.edition.of.the.text.suggests.some.actions.that.senior.executives.need.to.do.if. they.are.serious.about.enforcing.ethical.behaviour.(page.444). As.well.as.the.creation.of.an.effective.ethics.compliance.process.leaders.need.to. demonstrate.genuine.commitment.to.a.strategy.of.social.responsibility..Business. leaders.who.want.their.companies.to.be.regarded.as.exemplary.corporate.citizens.must. not.only.see.that.their.companies.operate.ethically.but.also.take.a.lead.role.in.crafting. a.social.responsibility.strategy.that.positively.improves.the.wellbeing.of.employees,. the.environment,.the.communities.in.which.they.operate,.and.society.at.large..What. separates.companies.that.make.a.sincere.effort.to.carry.their.weight.in.being.good. corporate.citizens.from.companies.that.are.content.to.do.only.what.is.legally.required. of.them.are.company.leaders.who.believe.strongly.that.just.making.a.profit.is.not.good. enough..Such.leaders.are.committed.to.a.higher.standard.of.performance.that.includes. social.and.environmental.metrics.as.well.as.financial.and.strategic.metrics. 5. Leading the process of making corrective adjustments The.leadership.challenge.of.making.corrective.adjustments.is.twofold:.deciding.when. adjustments.are.needed.and.deciding.what.adjustments.to.make. The.process.of.corrective.action.varies.according.to.the.situation..Some.suggestions.of. the.processes.that.might.be.involved.are.given.on.page.446.of.the.16th.edition.of.the. text. Success.in.initiating.corrective.actions.usually.hinges.on.a.thorough.analysis.of.the. situation,.the.exercise.of.good.business.judgment.in.deciding.what.actions.to.take,.and. good.implementation.of.the.corrective.actions.that.are.initiated. A.final.word.on.managing.the.process.of.crafting.and.executing.strategy:.The.best.tests. of.good.strategic.leadership.are.whether.the.company.has.a.good.strategy.and.whether. the.strategy.execution.effort.is.delivering.the.hoped.for.results..If.these.two.conditions. exist,.the.chances.are.excellent.that.the.company.has.good.strategic.leadership.

MNG00716 Topic 11 Culture, leadership and strategic execution 123

Summary
In.summary,.it.is.worth.repeating.that.culture.can.contribute.to..or.hinder..successful. strategy.execution..This.is.because.the.requirements.for.successful.strategy.execution. may..or.may.not..be.compatible.with.the.culture..Overall,.a.close.match.between. culture.and.strategy.promotes.effective.strategy.execution..And.culture.needs.to.be. supported.by.strong.leadership.practice..We.outlined.some.of.the.actions.needed.to.be. taken.by.managers.if.the.strategy.is.to.be.successfully.implemented. You.have.now.reached.the.end.of.the.information.contained.in.this.unit..Not.only.have. you.been.presented.with.the.content.of.strategic.models.but.the.application.of.these. has.also.been.addressed.and.you.have.had.the.opportunity.of.applying.them.yourself. to.a.number.of.case.studies..It.has.been.assumed.that.you.have.a.good.knowledge. of.functional.and.process.management.from.your.previous.studies..From.this.base. this.unit.has.tried.to.link.them.into.a.holistic.approach.to.strategic.management.of.an. organisation. Although.there.has.been.a.concentration.on.larger,.commercial.organisations,.the. concepts,.approaches.and.methods.of.thinking.about.organisational.development.can. be.applied.to.all.types.of.organisations..This.is,.again,.to.emphasise.the.importance.of. comparative.analysis.in.organisations.and.analytical.perspectives.on.how.organisations. tend.to.behave.under.contingent.circumstances..Your.task.is.also.to.understand.the. ways.in.which.these.can.be.applied.in.various.organisational.contexts.

124 MNG00716 Strategic Management

Feedback to selected activities

Activity 11.3
The culture change effort at Alberto-Culver North America was viewed as a major contributor to improved performance. Since 1993, when the change effort began, until 2001, the divisions sales increased from $350 million to over $600 million.