Corporate Governance Leadership Skills
Transcript of Corporate Governance Leadership Skills
CORPORATE GOVERNANCE
LEADERSHIP SKILLS
Part II – Strategic Leadership
Module I –
The
Governance
of Strategy
Part 2 – Strategic Leadership
Table of Contents Table of Figures .................................................................................................................. 2 Module 1 – The Governance of Strategy ............................................................................ 3
1. Introduction ..................................................................................................................... 4 2. A Strategic Planning Framework .................................................................................... 5 3. Vision, Purpose, Values, Goals, Objectives Vision ........................................................ 7
4. Strategic Analysis ......................................................................................................... 11 5. Strategic Formulation.................................................................................................... 12 6. Strategy Implementation ............................................................................................... 15 7. Monitoring Strategy Execution ..................................................................................... 16 8. Board Role in Governance of Strategy ......................................................................... 17
9. Benefits of Developing a Strategy ................................................................................ 19
10. Reasons Why Strategies Fail ...................................................................................... 20 Appendix A3.1 .................................................................................................................. 22
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Table of Figures Figure 1 - A Strategic Planning Framework ....................................................................... 5
Figure 2 - Definition I ......................................................................................................... 7
Figure 3 - Example - Natura ............................................................................................... 7
Figure 4 - Definition II ........................................................................................................ 8
Figure 5 - Example - Tata ................................................................................................... 8
Figure 6 - Definition III ...................................................................................................... 9
Figure 7 - Definition IV ...................................................................................................... 9
Figure 8 - Definition V ..................................................................................................... 10
Figure 9 - Directors & Strategic Planning ........................................................................ 17
Figure 10 - Involvement in Strategic Decisions ............................................................... 18
Figure 11 - Example - IBM ............................................................................................... 21
Figure 12 - Strategic TechniquesA. THE ANSOFF MATRIX .............................................. 22
Figure 13 - Four Generic Strategies .................................................................................. 23
Figure 14 - Perspectives .................................................................................................... 26
Figure 15 - Product Portfolio Matrix ................................................................................ 28
Figure 16 - Forces Driving Industry Competition ............................................................ 31
Figure 17 - Value Chain .................................................................................................... 38
Figure 18 - PESTLE Analysis........................................................................................... 41
Figure 19 - SWOT Analysis ............................................................................................. 44
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Module 1 – The Governance of Strategy
Explain an effective strategy’s components
Analyze the board’s role in the governance of a company’s strategy
Identify the benefits of developing a strategy
Use the appropriate tools to formulate strategy
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1. Introduction
A strategy is a plan of action designed to achieve a specific goal. Strategy is all about
gaining (or being prepared to gain) a position of advantage over adversaries or best
exploiting emerging possibilities. As there is always an element of uncertainty about
future, strategy is more about a set of options ("strategic choices") than a fixed plan. For a
company, strategy is how a company orients itself towards its market and its competitors.
Flawed strategic thinking can create massive value destruction and even threaten a
company’s survival.
Many boards feel that their strategic planning and management could be improved. A
McKinsey study1 of more than 700 executives found that only 45 percent of the
respondents said that they were satisfied with their strategic planning process.
For most companies, the strategic planning and management processes are complex. For
example, when Professor Henry Mintzberg2 explored strategic planning processes among
large multinational companies, he was unable to identify a single process that could be
called strategic planning. Instead, he concluded that there are five types of strategies:
Plan
An intended direction or course of action
Ploy
A maneuver intended to outwit a competitor
Pattern
A consistent pattern of past behavior – realized rather than intended
Position
The locating of brands, products, or companies within a conceptual framework
created by consumers or other stakeholders - it is a strategy determined primarily
by factors outside the company
Perspective
A strategy determined primarily by a master strategist
1 “How to Improve Strategic Planning,” McKinsey Quarterly. Availableat: www.mckinseyquarterly.com/strategy/strategicthinking .
2 Henry Mintzberg, The Rise and Fall of Strategic Planning (London: Prentice Hall, 2004).
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2. A Strategic Planning Framework
A typical framework for developing and articulating a company’s strategic direction is
illustrated in the figure below.
Figure 1 - A Strategic Planning Framework
Envisioning a future state for the company
The board should develop a vision that is operationally useful; in other words, it should
be more than just wishful thinking. This vision needs to be translated into corporate goals
or objectives, usually through a purpose statement.
Strategic analysis
The board should ensure that:
• The company’s competitive advantages have been identified.
• Any gaps between the company’s present capabilities and those needed to fulfill
the vision have been identified. This involves an analysis of the external political,
social, and market environment, and the company’s internal resources. This
analysis may lead to a redefinition of the company's purpose. Boards should be
prepared to ask incisive questions, anticipating rather than reacting to major
issues.
Strategy formulation
The next step is to broadly generate potential options and then make strategic decisions.
This process should involve cooperation between executive management and the board,
with each having an understanding of their respective roles. This activity may not be
necessary every year unless the company operates in a very volatile business
environment.
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Implementation
The choice in strategy needs to be translated into detailed operational plans by executive
management for sales, marketing, production, and research and development (R&D).
In a McKinsey survey3, more than a quarter of the respondents said that their companies
had strategic plans but no implementation path. Forty-five percent reported that the
planning processes failed to track the execution of strategic initiatives. These operational
plans should be disseminated throughout the organization by senior executive
management and then widely discussed internally. The board should monitor the
strategy’s execution against milestones and call on management to modify the strategy as
necessary. It is usually not sufficient to track the strategy’s implementation solely by
using financial performance targets.
The planning process should involve the most knowledgeable and influential participants
who stimulate and challenge each others’ thinking. Many companies fail to recognize the
importance of the various elements, and focus instead upon data gathering, neglecting the
crucial interactive components.
3 “How to Improve Strategic Planning,” op.cit.
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3. Vision, Purpose, Values, Goals, Objectives Vision
Figure 2 - Definition I
Vision statements:
Are expressed in clear, unambiguous terms that paint a vivid, memorable picture
of a bright future
Underscore the company’s distinct strengths
Act as a driving force for executive management, employees, and investors
Focus the company on working towards the same goal
Give guidance for decision-making
Provide the source for the company’s realistic, achievable goals and objectives
Despite this long, demanding list, the best vision statements are often the shortest. If
people cannot remember the vision, it will not influence their day-to-day behavior.
4
Figure 3 - Example - Natura
4 www.natura.net.
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Figure 4 - Definition II
A company’s purpose is often defined in the company’s constitution.
Figure 5 - Example - Tata
Directors frequently recognize the importance of company culture, but have difficulty
describing and discussing its nature and impact. This is because there is no agreed
“vocabulary” with which to discuss the subject. Many words that are used to describe
culture are value-laden and may have connotations of personal bias. From a pragmatic
perspective, a company’s “culture” can be summed up as the beliefs, customs and
practices that are shared by all working in the company. It is often accepted without
question. Culture is sometimes referred to as “the way things are done around here”, or
the “glue that holds the company together”. Typically, culture varies among a company’s
different divisions. Some well-known global companies have attempted to create a
consistent culture throughout their global operations.
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Figure 6 - Definition III
Figure 7 - Definition IV
The vision and purpose statements are at the top of a hierarchy of well-considered and
well-articulated goals that translate vision into operational and then tactical plans.
Strategic goals are wide-ranging and may address:
1. Market standing: an indication of the market share desired by the company or
the specification of a competitive niche
2. Innovation: recognizing the need to develop new services, products, internal
processes, and business systems to remain competitive
3. Productivity: a measure of efficiency that relates resources used to output
generated
4. Physical and financial resources: the acquisition and efficient use of resources
5. Profitability: measured by one or more financial indices, such as return on net
assets (RONA)
6. Management performance: effective management competencies and
development of individual potential
7. Staff performance and attitude: effective conduct of rolesat all levels, and
maintenance of a positive, constructive culture
8. Corporate responsibility: consideration of the company’s impact on society
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Figure 8 - Definition V
To make the goals more meaningful, the statement needs to be broken down into
corporate, divisional, or functional objectives, depending on the company’s structure, so
that each part of the company can see how it contributes to the overall corporate vision.
As a board member, you should ensure that departmental or functional objectives are
broken down into operational or tactical targets for specific individual senior executive
managers or teams. These targets can then be used to drive and monitor day-to-day
performance. Many companies tie these objectives into the personal appraisal and
development process to reinforce the message.
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4. Strategic Analysis
No matter what industrial or commercial sector a company specializes in, the business
environment has many different influences which interact with one another and change
with time. These influences are largely beyond a director’s control, but directors need to
cope with this complexity, unravel the key influences, and understand their effect on
decision making.
Strategic analysis provides an objective, structured approach to the problem. The
objective of using analytical frameworks is to build a clear picture for the board, of the
opportunities facing the company and the strategic threats that must to be overcome or
circumvented.
Strategic analysis normally precedes formulation of strategy. It is very easy to generate a
long list of the changes that may affect the company. To make it useful, however, the
board should focus on the key issues to understand their strategic importance. In other
words, the aim is not to produce a definitive list, but one that focuses the board’s
attention. Useful techniques for analyzing the business environment can be found in
Appendix A3.1 include:
Competitive analysis
PESTLE analysis
SWOT analysis
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5. Strategic Formulation
In comparison with operational decisions, strategic decisions may be described as:
Relating to the full scope of a company's activities:
o Which products the board chooses to produce
o Which markets the board wishes to operate in
o Where the board wishes to focus its competitive efforts
o Where to draw the boundaries around which activities are internal or
external to the company
Matching a company's activities to the environment:
o Responding to perceived threats in the environment
o Exploiting identified opportunities
Matching a company’s activities to its resources and its capability to change:
o Building on what the company is capable of today
o Devoting necessary resources to extending and enhancing existing
capability
Allocating major resources in the organization:
o Ensuring that usually scarce resources are focused upon the critical areas
Concerning the company’s long-term direction:
o Looking beyond the next budget horizon, typically three o five years
o The implications are likely to be organization-wide and complex
Many companies see strategy as responding to environmental changes, but frequently,
large leading companies seek to shape that environment through their strategy, rather
than just responding to it.
Useful techniques for formulating strategy can be founding Appendix A3.1 and include:
Ansoff matrix
Balanced scorecard
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BCG Matrix
Competitive positioning
Generic strategies
Internal analysis
Scenario planning
Stakeholder mapping
The Strategic Plan
Many directors think of “strategy” in terms of a document, not a thinking process, since
most companies require a written record of their strategic plans in order to communicate
their intentions to stakeholders. The risk is that the document becomes too long, too
detailed, and too complicated, and recipients do not use or even read it.
Strategic plan formats vary widely, but they all contain common elements such as:
Where the company should be:
o Vision, purpose, and strategic objectives
o Basis for competition
o Desired market positioning
o Product or service development priorities
o Ideal organizational culture and values
o Key customer and supplier relationships
Where the company started from:
o Current product/service portfolio
o Current competitive position
o Current people, skills, and culture
o Financial position
o Current customer/supplier relationships and perceptions
o Strengths and weaknesses
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How the company will achieve its vision:
Where the company started from:
o Current product/service portfolio
o Product/service development plans
o Marketing plans
o Financial model
o Technical and IT investment plans
o Recruitment, training, and retention plans
o Opportunities to be exploited
o Threats to be addressed
o Milestones and responsibilities
o Business risks
o Key performance measures to monitor progress
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6. Strategy Implementation
Implementation involves:
Acquiring requisite resources
Allocation of sufficient resources (financial, personnel, time, technology support)
Establishing a chain of command or some alternative structure (such as cross-
functional teams)
Assigning responsibility of specific tasks or processes to specific individuals or
groups
Developing the process
Training
Integration and/or conversion from legacy processes
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7. Monitoring Strategy Execution
Boards must ensure that the strategy is executed. To do so, the board must receive
relevant information regularly. The board should ensure that:
Management is committed to the strategy
Sufficient resources are allocated to fulfill the strategy
Board reports are made regularly
Milestones are achieved, and, if missed, that there are action plans to remedy the
situation
This process will be discussed in detail in Part Two, Module Two, “Evaluating Strategy
and Delivery.”
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8. Board Role in Governance of Strategy
A key board role is to ensure that the company is pursuing an appropriate, effective
strategy. The only way to achieve this is for the board to be constructively engaged in
governing the strategy process. A well-developed strategy reduces a company’s risk of
failure and increases its chance of success at the expense of its rivals, who have less-
developed plans or no plan at all.
Questions directors should ask include:
Where should the company be in the long-term? What is the strategic direction?
Which markets should it compete in and what kinds of products and services
should it provide? What are the markets and the scope?
How can the business perform better than the competition in those markets? What
is the source of competitive advantage?
What resources (skills, assets, finance, relationships, technical competence and
facilities) are required to compete effectively?
What external factors within the broad business environment affect the company’s
ability to compete?
What are the values and expectations of those with influence on the company,
such as the stakeholders?
McKinsey research5 indicated that the role of directors in strategic planning was:
Figure 9 - Directors & Strategic Planning
Many companies are typically driven from the top by one or more entrepreneurs whose
“strategy” is simply transferred to the entire company by their decisions and behavior. As
business grows, or market conditions become more complex and competitive, this type of
leadership is, at best, inadequate and, at worst, dangerous. The challenge for directors,
5 “How to Improve Strategic Planning,” op.cit.
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therefore, is not just to establish a strategic thinking and planning process, but to ensure
that the process evolves in step with changing business needs.
McKinsey research6 indicated that the parties involved in strategic decisions in a
company involve:
Figure 10 - Involvement in Strategic Decisions
6 Ibid.
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9. Benefits of Developing a Strategy
Companies with effective strategies gain advantages over poorly planned and managed
companies. A strategy can:
Predict and sometimes influence the pace and direction of changes in the business
environment to their own advantage
Provide a competitive edge through easily accessible plans and dissemination of
information throughout the company
Focus monitoring on external markets and increase awareness of internal core
competencies, which can help the board and senior management to anticipate
developments, develop reactions, and even preempt developments
Encourage the board, senior management, and employees to accept the need for
continuous change and to better prepare for it, having the right attitudes and
culture in place throughout the organization
Allocate resources rationally, meeting short- and long term goals based on sound
commercial reasons. (As a result, managers have better direction and focus and
are more motivated, accept the objectives, and feel committed.)
Improve inter-functional relations through shared goals and clear objectives
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10. Reasons Why Strategies Fail
There are many reasons why strategic plans fail, the most common reasons include:
Failure to understand the customer
• Failure to understand why they buy the product or service
• There is no real need for the product
• There has been inadequate or incorrect marketing research
Inability to predict reaction from the business environment
• Failure to predict what competitors will do (e.g., developing brands, price wars, etc.)
• Government or regulator intervention
Overestimation of resource competence
• Staff, equipment, and processes unable to handle the new strategy
• Company failure to develop new employee and management skills
Failure to coordinate
• Reporting and control relationships inadequate
• Organizational structures too inflexible
Failure to obtain senior management commitment
• Senior management have not been involved right from the start
• Failure to obtain sufficient company resources to accomplish the tasks
Failure to obtain employee commitment
• New strategy not been well-explained to the employees
• No incentives given to workers to embrace the new strategy
Underestimation of time requirements
• No critical path analysis has been carried out
Failure to follow the plan
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• No follow-through after the initial planning
• No tracking of progress against the plan
Failure to manage change
• Inadequate understanding of the internal resistance to change
Poor communications
• Insufficient information sharing among stakeholders
• Exclusion of key stakeholders
7 Figure 11 - Example - IBM
“The board should fulfill certain key functions, including: reviewing
and guiding corporate strategy, major plans of action, risk policy,
annual budgets and business plans; setting performance objectives.”8
7 Various new reports.
8 OECD. Principles of Corporate Governance (Paris, OECD, 2004). Available at: http://www.oecd.org/dataoecd/32/18/31557724.pdf
.
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Appendix A3.1
A-Z Strategic Techniques
HANDOUT H3.1A
Strategic technique Concepts Involved
Figure 12 - Strategic Techniques
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A. THE ANSOFF MATRIX
In 1968, Igor Ansoff9 developed a matrix (figure 1 below) of four generic strategies that a
company might select:
Market penetration
Product development
Market development
Diversification.
Figure 13 - Four Generic Strategies
Market penetration
Market penetration is achieved by gaining market share in existing areas of operation by
taking customers away from the competition. The attractions of achieving market
dominance include economies of scale and reduced unit-production costs. Tactics to
achieve this include:
Improving quality or productivity
9 Igor Ansoff, “Strategies for Diversification,”Harvard Business Review, Vol. 35 Issue 5, Sep.-Oct. 1957: pp.113-124.
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Increasing marketing and promotional activity
Market development
This entails extending existing products and services into new markets, while retaining
the security of existing markets. Tactics may include:
Targeting new types of customer or market segments
Exploiting new product users
Penetrating new geographical areas
This strategy is particularly relevant to industries, in which staffs are highly and
specifically skilled in a particular technology, such as computers. It allows the company
to build on its core competencies.
Product development
Product development implies enhancing existing products, or developing new products,
to meet the changing needs of existing markets. Some markets demand ongoing
incremental change as consumer tastes develop and become more sophisticated.
Other product developments may be prompted by a desire to achieve a one-off
differentiation.
Diversification
Diversification is a term used to describe the strategic decision to enter new markets
while introducing new products or services.
Its aim is to lower dependence on any single market, achieve growth, and reduce risks.
Ansoff identified three reasons why firms diversify:
Objectives - The company’s objectives cannot be met by continuing in their existing
markets.
Financial Resources - The company has financial capacity in excess of what they need
in their existing market.
Opportunities - The company has identified greater opportunities in new market areas.
There are two broad types of diversification:
Related: keeping within the broad boundaries of the existing market
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Unrelated: entering completely different markets or introducing products and services; a
strategy for rapid growth that large holding companies may employ
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B. THE BALANCED SCORECARD
This approach was developed by Robert Kaplan, a Harvard professor of accounting, and
David Norton, an information technology consultant.10
Their alliance has produced
arguably the most successful and widely used “new” approach to total business
performance measurement. Their research was founded on working closely with 12
companies at the leading edge of performance measurement over one year. From this,
they concluded that a balanced presentation of financial and operational measures is
needed. Simple! Yet no one had previously managed to capture this premise as neatly as
Kaplan and Norton.
Their framework is designed to compel directors and managers to answer four basic
questions, which in turn provide four different perspectives. These are:
Figure 14 - Perspectives
The framework also forces directors to focus on the few measures that are critical to
sustainable, competitive success by requiring only one page for conveying the analysis.
Kaplan and Norton propose that the framework meet two needs:
1. It provides a single report of seemingly disparate elements on a company’s
competitive agenda.
2. It guards against sub-optimization, forcing managers to consider how changes in
one area affect the entire company.
10
Robert Kaplan and D. Norton, “The Balanced Scorecard – Measures that Drive Performance.” Harvard Business Review
(January 1992). Available at: http://www.hbr.com.
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This framework has many advantages over the otherwise ad hoc approach to bringing
financial and non-financial measures together at a strategic level. It is:
Simple and understandable
Concise
Designed to put strategy and vision, rather than control, at the agenda’s center
Forward looking
Consistent with other contemporary initiatives, such as cross-functional
integration, customer/supplier partnerships, continuous improvement, team, and
individual accountability
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C. BOSTON CONSULTING GROUP MATRIX
In the 1960s, the Boston Consulting Group (BCG) developed a tool for analyzing a
company’s portfolio (its range of products and services).11
The BCG has suggested a
model of the product or service portfolio (also known as the growth/share matrix) that
assists managers and directors in considering the spread of their activities and skills.
The model is developed from the concept the “learning curve.” As a product market
evolves from its introduction to its growth, output rises and unit costs fall. This is because
the producers introduce more efficient production methods. It also implies that
dominance in any market by a company will increase profitability through economies of
scale and greater bargaining power. Dominance is most easily achieved at the growth
stage; producers wish to expand their market share faster than the competition, which is
relatively easy in an expanding market. Once the market reaches maturity, overall growth
is slower and customer loyalties may be fixed. However, even at the mature stage,
competition can be fierce to maintain market share and only those producers who are
willing to invest in advertising or customer relations will retain their position.
Figure 15 - Product Portfolio Matrix
The matrix plots market growth rate against market share, and uses four “labels” in the
quadrants to make their significance easier to recall:
Star
High market share and high growth rate. Products/services in this category are typically
supported by heavy expenditure on advertising, sales incentives, and, perhaps, inefficient
production runs in order to dominate a market while there is overall growth. The rationale
is that costs should eventually decline and turn the “star” into a “cash cow.”
11
Boston Consulting Group. Available at: http://www.bcg.com/this_is_bcg/mission/ growth_share_matrix.html.
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Cash cow
High market share in a mature market. Once market dominance is achieved and market
growth subsides, there is less need for high investment, and costs may continue to fall as
experience increases. This provides a high level of cash income for the producer (who is
“milking” the earlier investment). This cash may then be fed back into the business to
create and support the next “star.”
Question mark(or problem child)
Growing market but low share. Products/ services in this category may be tomorrow’s
“stars” if they are given sufficient resource and attention, or they might never blossom
into viable options. It is a difficult management decision to determine which to back and
which to abandon. This early stage in a product’s life can be extremely costly.
Dog
Low-market share in a static market. The BCG model suggests that this situation is not
sustainable in the long run since these products may become a cash drain. The company
has to decide when to divest itself of these business parts. There are occasions, however,
where producers are using their product’s range as a unique selling point.
Hence, a “dog” may be retained in the short term in order to make a product range
comprehensive, or because it represents the foundation of a reputation built on that brand.
The matrix can be used to assess the balance of resources in three ways:
Is the overall mix of products/services balanced across the organization? Some to
provide funds (cash cows) and some to provide for the business’s future (stars and
question marks)?
Are resources being allocated appropriately to each activity? If dogs are receiving
a disproportionate amount of attention while question marks are being starved, the
long-term potential for turning the latter into stars is being undermined.
Does the balance of products and services match the resources available?
If the organization has high R&D skills, but most of its products are in mature
markets, it suggests a need to develop marketing skills.
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D. COMPETITIVE ANALYSIS OF THE INDUSTRY ENVIRONMENT
To assist in understanding why an industry may be a good one to be in (or not) and to
help identify possible strategic moves for a firm’s better positioning, you will find it
useful to apply a framework to understand better what influences shape industry trends.
The classic work in the field is by Michael E. Porter12
, who describes the competitive
environment by examining the underlying economic forces. He has identified five
“generic” forces:
Threat of entry
Suppliers’ bargaining power
Buyers’ bargaining power of buyers
Threat of substitutes
Extent of competitive rivalry
Porter’s framework provides a generic structure, which can be overlaid on any industry to
assist analysis of its characteristics. The concept is usually illustrated as follows
12
Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: The Free Press, 1980).
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Figure 16 - Forces Driving Industry Competition
Force 1: The threat of entry
The perceived likelihood of a new competitor will alter the strategies adopted by existing
market players. The extent of the threat will depend on the existence of “barriers to
entry,” which make it difficult or unattractive for new competitors to enter the market.
These barriers may include:
Economies of scale. It is not cost effective to enter and set up in a small way
(e.g., the chemical processing industry).
High set-up costs. New competitors would have to invest heavily and take high
risks on their investment returns.
Lack of access to distribution channels.
A new manufacturer may be able to produce competitive goods, but cannot
distribute them to customers.
Legislation and government action.
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These may protect industries from competition, but are less common in many countries
because of the work of the World Trade Organization (WTO) and widespread adoption of
deregulation and privatization policies.
Differentiation: As perceived by the consumer; would-be imitators are discouraged from
trying to compete.
These barriers vary from industry to industry, but are a useful means of focusing on:
Which, if any, exist?
To what extent do they prevent new entrants?
How do they affect your company’s strategy?
Carrying out a structured analysis in this way will help to decide whether the threat of a
new entrant is high, medium, or low.
Force 2: Suppliers’ bargaining power
It is the relative balance of power between the two elements of the supply chain that is of
importance here. In general, where the relative power of suppliers is high, profit margins
are likely to be low. The suppliers will be able to dictate terms to the industry and raise
their prices which, in turn, raises the industry’s costs. The power of suppliers is likely to
be high when:
There is a concentration, with a few large suppliers; it is expensive to switch from
one supplier to another.
The supplier places a low importance on its customers, perhaps particularly
smaller customers, with whom it has little interest in building or sustaining a long-
term relationship.
Consideration of the relative balance of power between an industry and its suppliers will
produce a verdict of high, medium, or low.
Force 3: Buyers’ bargaining power
Again, when there is a balance of power in favor of customers or buyers from an
industry, margins within the industry are likely to be depressed. Buyer power is likely to
be high when:
There is a concentration of buyers, especially if they buy in large volumes
Alternative suppliers are available and it is inexpensive and convenient to switch
between them
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Customers are prepared to “shop around” and squeeze prices within the industry,
which they will do if the product represents a major part of their total cost
Customers could decide to “integrate backwards,” that is, to establish their own
suppliers
Force 4: Threat of substitutes
It is not always straightforward to identify a company’s competitors. There may be a
limited number of competitive products, but consumers may perceive other different
products as substitutes (note: it is the customer’s perception that matters here). Obvious
examples include artificial sweeteners for sugar and man-made fiber for natural fiber; less
obvious ones are a second family car for a holiday, and a boxed set of CDs for a theatre
ticket. A company’s strategy needs to reflect a clear understanding of how its customers
perceive their alternative purchasing decisions.
For example, will a low-price policy, or a differentiated policy help to minimize the
threat of substitutes? There is, of course, always a threat of substitutes in any given
market.
Force 5: Extent of competitive rivalry
This force is the “jostling for position” that continually happens between the existing
industry players. Its strength will depend upon:
The overall rate of the industry’s growth.
Competition is likely to be more intense when the overall growth rate is low.
The level of fixed costs. High fixed costs tend to induce price competition in
order to achieve high turnover volumes.
Increments of additional capacity. If it is only possible to expand in large steps,
such as a complete new assembly line, it will lead to over-capacity in the short
term, and depressed profit margins.
Differentiation. If all competing products are viewed as the same by consumers,
and there is little to prevent them from switching, it will lead to increased rivalry.
The existence of “exit barriers.” The converse to entry barriers, it is not always
easy to leave an industry; the costs of closing down organizations in both money
and emotional terms can lead to over-capacity and increased competition within
the whole industry.
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E. COMPETITIVE POSITIONING
Once a board has formed a clear view of the forces that shape its industry, the next level
of analysis is the company’s position within that industry. With which other
organizations is it most closely competing, and on what criteria?
Tools and techniques exist for identifying more closely the industry boundaries, but one
of the most practical and useful devices has been proposed by Porter13
, specifically,
strategic group analysis. This is a simple means of grouping companies that share similar
strategic characteristics. The choice of appropriate dimensions will be different for each
industry. A checklist of possible suggestions includes:
Product diversity
Geographic coverage
Number of market segments
Distribution channels
Branding
Marketing effort
Vertical integration
Quality of product/service
R&D capability
Cost position
Utilization of capacity
Pricing policy
Gearing
Ownership structure
Influence groups
Size
Of course, the analysis is only as valid as the initial choice of the characteristics, but it
provides a useful way of identifying your competitors.
13
Ibid.
Part 2 – Strategic Leadership
F. GENERIC STRATEGIES
In the 1980s and early 1990s, Porter gained immense popularity for his simple, concise
approach to competitive strategy. His work has become the most widely adopted
framework for understanding strategic behavior.
Porter14
identified three types of generic strategy:
Low-cost leadership
Differentiation
Focus
Low-cost leadership
A common strategy is to concentrate on achieving lower costs overall than those of your
competitors and, in doing so, develop economies of scale that create entry barriers for
potential rivals. It does not happen by accident, however, and deliberate effort is required
to ensure the strategy is pursued throughout the chain of operation.
Differentiation
This strategy is based upon establishing a consumer perception of unique or superior
products and services, when compared to rival products or services. The emphasis is on
perception. Differentiation is only relevant if it is recognized by the consumers.
This recognition can be achieved in different ways including:
Higher quality
The incorporation of special technical features
Superior customer service
The design of special brand images.
Focus
The third generic strategy is concerned with selecting only certain parts of the market on
which to concentrate efforts. This could be particular products, buyers, or geographical
areas. In a sense, focus is a pre-requisite to the decision about whether to be a cost leader
or a differentiated supplier. By focusing in this way, Porter argues that it becomes
feasible for a firm to dominate its chosen areas.
14
Ibid.
Part 2 – Strategic Leadership
Porter supports the view that the cost leadership and differentiation strategies are distinct
and should not be mixed. Organizations need to define and maintain their generic strategy
as the basis for building and sustaining competitive advantage. Failure to make this
conscious decision will result in mediocre competitive performance.
Although it is possible to find examples that clearly fall into one extreme case or another,
there are also many examples of companies that have successfully combined some
elements of both strategies. In reality, most companies sit somewhere between the two
extremes, offering a balance of quality and price. Nevertheless, Porter’s simple model is a
useful starting point for analyzing and considering strategies.
Part 2 – Strategic Leadership
G. INTERNAL ANALYSIS
This process strives to understand a company’s strategic capability, knowing what
resources it has, how they are balanced, and the interrelationships between them.
Resources that aren’t owned by the company but do influence its strategic capability
should also be considered. Many businesses are only part of the “value chain of tasks”
from a product’s conception through to its consumption. For example, a manufacturer of
food packaging is part of the farming-processing- packaging-distribution-supermarket-
customer chain. The quality and delivery of the product depends on many resource
variables beyond the manufacturer’s control. While internal analysis aims to be objective,
it is not easy to take a dispassionate view. However, a systematic analysis is helpful and
should include:
Value chain
Core competencies
Portfolio
SWOT
Comparative
Value chain analysis
Value chain analysis is associated with Professor Porter15
. This approach describes the set
of activities that are required to satisfy customers’ needs, starting with suppliers and
procurement, and going through production, selling, marketing, and delivery. Each stage
of the value chain is linked to the next one. Each stage should form part of the basis for
competitive advantage. It must either be provided at lower cost or add more value by
superior quality or differentiated features. The figure below illustrates a typical value
chain.
15
Ibid.
Part 2 – Strategic Leadership
Figure 17 - Value Chain
Core competencies
Core competencies can be regarded as the collective learning within a company
especially the knowledge and understanding associated with how to coordinate diverse
production skills and integrate multiple streams of technology. Core competencies were
extremely fashionable in the 1990’s, but have become less so in recent years. To be
valuable, core competencies must:
Add something substantial to customers
Be rare
Be difficult to imitate
Be used effectively by the company
In reality, it is extremely difficult to decide what core competencies are and how to
exploit them within a company. Some critics have also noted that core competency theory
tends to start with the characteristics of the operating business rather than the parent
organization.
Portfolio analysis
See earlier section on BCG analysis.
SWOT analysis
See later section on SWOT analysis.
Part 2 – Strategic Leadership
Comparative analysis
There are three bases for comparing a company’s performance:
Historical analysis
Industrial comparative analysis.
Benchmarking (e.g., best practice comparison)
Historical analysis
A historical analysis examines a company’s current performance by comparing it with
performance in previous years in order to identify any significant changes.
Industrial comparative analysis
This analysis compares the organization’s performance with that of other organizations
within the same industry.
Benchmarking
This process identifies competitors and/or companies that exemplify best practice in
some activity, function or process and then compares one’s own company performance to
the “world class” leaders.
Part 2 – Strategic Leadership
H. PEST, PESTLE ANALYSIS
PEST analysis starts from a broad, general perspective that considers the key influences
to be Political, Economic, Social, and Technological. There is nothing sacrosanct about
the categories or the boundaries between them. For example, if unemployment is
considered to have a strong impact on a company, it may be classified as either a social or
an economic influence. It does not matter in which “box” the influence is put, so long as
it is identified. Many boards now use PESTLE analysis, which stands for political,
economic, social, technological, legal, and environmental analysis.
Either technique works well as a brainstorming exercise, creating a preliminary list of
issues that would be refined through further consideration. At the end, the board should
identify perhaps no more than two or three issues under each heading. They can then be
tabulated against their predicted impact on the company. An example is given in the
adjacent figure.
It is also very important for the board to look for relationships between factors, question
the causes of trends, look for driving forces, and consider the pressures of timeframes for
changes to occur.
The PEST and PESTLE techniques are crude but simple. Several research projects
examined whether such broad environmental scanning actually improves a company’s
performance. Most researchers support the theory that it does. But it may be very difficult
to filter out the other myriad influences on performance. The benefits arise from the
process, rather than purely from the product.
Directors arrive at a better understanding of their company’s environment and are better
able to cope with anticipated changes.
Part 2 – Strategic Leadership
I. SCENARIO PLANNING
This technique was brought to fame by Shell during the 1970s and is an important tool
for boards to promote visionary company strategy. Traditional projections are based upon
extrapolations of the past and present and they tend to assume a stable, predictable
environment. Extrapolation-based strategy is, however, very poor at coping with rapidly
changing environments. In contrast, scenarios are a way of capitalizing on change and in
doing so, helping business leaders to cope with uncertainty.
In strategic planning, a scenario is a coherent story about the business environment with
the contemporary situation the starting point. The business environment is impossible to
forecast, but with carefully chosen scenarios, a range of alternative lines of development
can be described and considered. Part of the skill lies in identifying which components
are likely to change, and with what impact.
Part 2 – Strategic Leadership
J. SWOT ANALYSIS
This framework looks at Strengths, Weaknesses, opportunities, and threats.
Although the technique is familiar to many directors, there is a two-fold danger in its
common use:
It is often not preceded by structured, rigorous thought and analysis, and in such
cases it is little more than a summary of current perceptions rather than an
objective analysis
Once completed, it is not often used to best effect as a basis upon which to build
strategic options
If the SWOT analysis is well done, it will provide a clear statement of a company’s
current strategic position. It can then act as a tool for evaluating, selecting, and
communicating the company’s strategy to all concerned.
The value of analyzing strengths and weaknesses is greatly increased if the same is done
for the company’s competitors; since it is the relative strengths and weaknesses that will
point to the company’s distinctive competence (what it is able to do better than anyone
else).
Constructing a SWOT analysis
1. List the key strengths, weaknesses, etc. under each heading. This is best
achieved by the team brainstorming to arrive at the first draft list, which
will inevitably be too long to be manageable.
2. Prioritize the points, aiming for a maximum of two or perhaps three points
under each heading.
3. Tabulate these key points against the impact that they are likely to have on
the company so that the directors and management can ask, “What can we
do about them and how can the company respond?” The strategic options
can subsequently be developed from a firm view of current capabilities
and the key environmental forces. See the Table (below) for an example.
Part 2 – Strategic Leadership
References
The following references provide additional information.
Please note that the Global Corporate Governance Forum cannot provide assistance in
obtaining books, articles, or other materials Some of the references listed below may be
difficult to obtain and will probably require the assistance of a librarian who is an expert
in business information.
Professional articles
• Kaplan, R. and D. Norton. 1992. “The
Balanced Scorecard Measures that Drive
Performance.” Harvard Business
Review. January
1992. Available at: http://www.hbr.com.
• Townsend, D. 2006. “Balancing
Strategy and Oversight: How Boards
Find More Time for the Long View.”
Directors Monthly,
NACD, January 2006. Available at:
http://www.nacdonline.org.
Books
• Barney, J. 2006. Entrepreneurial
Strategies: New Technologies and
Emerging Markets. London: Blackwell.
• Batts, W. and R. Stobaugh. 2006. Blue
Ribbon Report on the Role of the Board
in Corporate Strategy. Washington, DC:
NACD. Available at:
http://www.nacdonline.org.
• Collins, J. 2001. Good to Great. New
York: Random House.
• Coulson–Thomas, C. 2007. Winning
Companies: Winning People.
Chichester, UK: Kingsham.
• Daniell, M. 2006. Elements of
Strategy: A Pocket Guide to the Essence
of Successful Business Strategy. New
York: Palgrave
Macmillan.
• Garratt, B. 2003. Developing Strategic
Thought — A Collection of the Best
Thinking on Business Strategy. London:
Profile Books Ltd.
• Goldsmith, M. 2006. Vision, Strategies
and Practices for the New Era. San
Francisco: Jossey-Bass.
• Hamilton, S. and A. Micklethwait.
2006. Greed and Corporate Failure:
Lessons from Recent Disasters. London:
Palgrave Macmillan.
• Johnson, G., K. Scholes, and R.
Whittington. 2004. Exploring Corporate
Strategy. Hemel Hempstead, UK:
Prentice Hall.
• Koch, R. 2006. The Financial Times
Guide to Strategy. London: Pearson.