INTRODUCTION: WHAT IS STRATEGIC...

CHAPTER 1

INTRODUCTION: WHAT ISSTRATEGIC MANAGEMENT?

What is Strategy?

The term ‘strategy’ proliferates in discussions of business. Scholars and consultantshave provided myriad models and frameworks for analysing strategic choice(Hambrick and Fredrickson, 2001). For us, the key issue that should unite all dis-cussion of strategy is a clear sense of an organization’s objectives and a sense ofhow it will achieve these objectives. It is also important that the organization hasa clear sense of its distinctiveness. For the leading strategy guru, Michael Porter(1996), strategy is about achieving competitive advantage through being different– delivering a unique value added to the customer, having a clear and enactableview of how to position yourself uniquely in your industry, for example, in the ways in which Southwest Airlines positions itself in the airline industry and IKEAin furniture retailing, in the way that Marks & Spencer used to. To enact a successful strategy requires that there is fit among a company’s activities, that theycomplement each other, and that they deliver value to the firm and its customers.The three companies we have just mentioned illustrate that industries are fluidand that success is not guaranteed. Two of the firms came to prominence by taking on industry incumbents and developing new value propositions. The thirdwas extremely successful and lost this position. While there is much debate on substance, there is agreement that strategy is concerned with the match betweena company’s capabilities and its external environment. Analysts disagree on howthis may be done. John Kay (2000) argues that strategy is no longer about plan-ning or ‘visioning’ – because we are deluded if we think we can predict or, worse, control the future – it is about using careful analysis to understand andinfluence a company’s position in the market place. Another leading strategy guru, Gary Hamel (2000), argues that the best strategy is geared towards radicalchange and creating a new vision of the future in which you are a leader ratherthan a follower of trends set by others. According to Hamel, winning strategy =foresight + vision.

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2 INTRODUCTION

Two Approaches to Strategy

The idea of strategy has received increasing attention in the management literat-ure. The literature on strategy is now voluminous and strategic management textsgrow ever larger to include all the relevant material. In this book our aim is notto cover the whole area of strategy – that would require yet another mammoth tome– but to present a clear, logical and succinct approach to the subject that will beof use to the practising manager. We do not attempt a summary of the field, ratherwe present what we see as a useful framework for analysing strategic problems basedon our own experience of teaching the subject on a variety of courses and to avariety of audiences over the years. Our premise is that a firm needs a well definedsense of its mission, its unique place in its environment and scope and directionof growth. Such a sense of mission defines the firm’s strategy. A firm also needsan approach to management itself that will harness the internal energies of theorganization to the realization of its mission.

Historically, views of strategy fall into two camps. There are those who equatestrategy with planning. According to this perspective, information is gathered, siftedand analysed, forecasts are made, senior managers reflect upon the work of theplanning department and decide what is the best course for the organization. Thisis a top-down approach to strategy. Others have a less structured view of strategyas being more about the process of management. According to this second per-spective, the key strategic issue is to put in place a system of management that willfacilitate the capability of the organization to respond to an environment that isessentially unknowable, unpredictable and, therefore, not amenable to a planningapproach. We will consider both these views in this text. Our own view is that goodstrategic management actually encompasses elements of each perspective.

There is no one best way of strategy. The planning approach can work in a stable, predictable environment. Its critics argue that such environments arebecoming increasingly scarce, events make the plan redundant, creativity is buried beneath the weight and protocols of planning and communication rules.Furthermore, those not involved in devising the plan are never committed to its implementation. The second approach emphasizes speed of reaction and flexibility to enable the organization to function best in an environment that isfast-changing and essentially unpredictable. The essence of strategy, according tothis view, is adaptability and incrementalism. This approach has been criticized forfailing to give an adequate sense of where the organization is going and what itsmission is. Critics speak disparagingly of the ‘mushroom’ approach to management.(Place in a dark room, shovel manure/money on the seeds, close the door, waitfor it to grow!)

Elements of Strategy

Definitions of strategy have their roots in military strategy, which defines itself interms of drafting the plan of war, shaping individual campaigns and, within these,

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INTRODUCTION 3

deciding on individual engagements (battles/skirmishes) with the enemy. Strategyin this military sense is the art of war, or, more precisely, the art of the general –the key decision maker. The analogy with business is that business too is on a warfooting as competition becomes more and more fierce and survival more problematic.Companies and armies have much in common. They both, for example, pursuestrategies of deterrence, offence, defence and alliance. One can think of a welldeveloped business strategy in terms of probing opponents’ weaknesses; with-drawing to consider how to act, given the knowledge of the opposition generatedby such probing; forcing opponents to stretch their resources; concentrating one’s own resources to attack an opponent’s exposed position; overwhelmingselected markets or market segments; establishing a leadership position of domin-ance in certain markets; then regrouping one’s resources, deciding where to make the next thrust; then expanding from the base thus created to dominate abroader area.

Strategic thinking has been much influenced by military thinking about ‘the strategy hierarchy’ of goals, policies and programmes. Strategy itself sets theagenda for future action, strategic goals state what is to be achieved and when (butnot how), policies set the guidelines and limits for permissible action in pursuit ofthe strategic goals, and programmes specify the step-by-step sequence of actionsnecessary to achieve major objectives and the timetable against which progress can be measured. A well defined strategy integrates an organization’s major plans,objectives, policies and programmes and commitments into a cohesive whole. Itmarshals and allocates limited resources in the best way, which is defined by ananalysis of a firm’s unique strengths and weaknesses and of opportunities and threatsin the environment. It considers how to deal with the potential actions of intelli-gent opponents.

Management is defined both in terms of its function as those activities that serveto ensure that the basic objectives of the enterprise, as set by the strategy, are achieved,and as a group of senior employees responsible for performing this function. Our working definition of strategic management is as follows: all that is necessaryto position the firm a way that will assure its long-term survival in a competitiveenvironment. A strategy is an organization’s way of saying how it creates uniquevalue and thus attracts the custom that is its lifeblood.

To understand the strategy of a particular firm we have to understand, unlesswe are in a start-up situation, what factors have made the firm what it is today. Thisinvolves answering questions such as: How did the organization reach its presentstate? Why is it producing its particular range of products and services? What kindof products or services does it intend to produce in the future – the same or dif-ferent, and, if different, how different? If it is thinking of altering its current range, what are the reasons? Strategy usually reflects the thinking of a small groupof senior individuals, or even one strong leader, the strategic apex of a company.Why are the people who make up the strategic apex in this position? How do theythink? Are there other (more) fertile sources of strategic thinking elsewhere in the organization that could be usefully tapped? If necessary how can one go about learning from the ‘collective wit’ of the organization, the creative voice that so often remains silent? How are decisions made in the organization? What is its

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4 INTRODUCTION

management style – top-down or bottom-up, autocratic or democratic? Why is the organization structured in a particular way? What is the link between strategy andstructure?

TASKApply these questions to your own organization or to an organization thatyou know. (We will return to them later!)

Our Model of Strategy

Our working model of the strategic management process is set out in figure 1.1.This is a model that works for us in terms of organizing our thinking about strat-egy and our attempts to understand the strategic issues facing particular firms. Wedo not suggest that it is the only model that is useful or that this is the best. (Wejust think it is!) Hopefully, in the course of your reading of this book, and otherwork on the subject, you will be critically analysing the various models suggested

Environmentalanalysis

General environment

Operating environment

Competitive positioning

Directions for development

Strategichistory

Currentstrategy

Stakeholder analysis

Strategic vision

Chosenstrategy

Realizedstrategy

Organizationalanalysis

Structure

Values

Culture

Resources

Streng

ths

Wea

knes

ses

Oppor

tunit

ies

Threa

ts

Figure 1.1 The strategic management process

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INTRODUCTION 5

and the concepts upon which they rest. You may come to this text with your ownmodel, developed out of your own experience. We suggest that you try workingwith our model and examine the extent to which it complements or contradictsyour own and others. The result of such a critical appraisal will be a model withwhich you are comfortable and find useful in practice. If you feel that the modelyou develop is far superior to our own, please tell us about it! Remember, thereis no one best answer in strategic management. If a firm chooses a particular strategic direction and it works in the way that very successful firms like IBM or,on a smaller scale, Body Shop have, the fact that it is successful does not meanthat the choice of strategy was optimal, that it was the best. Another strategic decision might have led to even greater success. Conversely, if a firm makes a choice that leads to disaster, this does not necessarily mean that it could have madea better choice (though, with better decision making, it hopefully could have done). The environmental conditions in its industry might have been such thatthis was the best choice, but that no choice, given its size or history, or the powerof its competitors, could have changed its fate.

We will now explain our model, which provides the basis of subsequent chapters. Current strategy (italics indicate terms in the model) has its roots in thestrategic history of a firm and its management and employees. We mention both man-agement and employees here because, though in many cases senior managementis the source of strategic decisions, it is the employees at the point of productionor delivery of a product or service who are responsible for the actual imple-mentation of a strategy. (Of course, in the final analysis it is management who areultimately responsible for the performance of employees.) Current strategy is the resultof the interaction of intended strategy and emergent strategy. The organization’s actualstrategy (its realized strategy) can be the direct result of strategic planning, the delib-erate formulation and implementation of a plan. More often it is the outcome ofthe adaptation of such a plan to emergent issues in the environment. In some casesactual strategy can be very different from the strategy as planned or the firm maynot have a very clear plan in the first place. In such cases the strategy can be describedas emergent in the sense that strategy emerges from an ongoing series (sometimesdescribed as a pattern or stream) of decisions.

Managers can decide that they are happy with their current strategy. They cantake this decision in two ways. In a proactive sense they can scan their environ-ment and the potential for change within their own organization and decide thatto carry on doing what they are doing and what they are good at is the best wayto face the future. In a less active, and far less satisfactory, way they can proceedon the basis of tradition – ‘This is the way we have always done it. It has workedso far. That’s good enough for us’ – or inertia. Or management may decide thatchange is necessary. Again this can come about in a variety of ways. They may scantheir environment and decide that there are major changes occurring in their busi-ness world to which they have to adapt. Or they might decide, through internalanalysis, that they have the ability to develop a new way of doing business that willredefine the nature of the business they are in. Another stimulus to change canbe the new manager appointed to a senior position who wants to leave his or hermark on the company and changes strategy primarily for this self-centred reason.

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6 INTRODUCTION

If change is the order of the day, then two issues need to be addressed: envir-onmental (external) analysis and organizational (internal) analysis. (Remember, this is the ideal way of proceeding. In practice, managers may adopt only a partial solution and analyse only external or internal factors.) For a change of strategy towork there must be alignment between internal capability and external opportun-ity. This is described as ‘strategic fit’. The ideal situation is where there is a fit between the environment, a business need arising out of that environment that isstrongly felt by a firm that has the sense of purpose (mission) and a managementsystem that enables it to respond to this need with a coherent and practicable strategy. The potential to act in this way depends upon managerial judgement, managerial skill to exploit windows of opportunity and management ability to motivate other employees to support and commit themselves to the firm’s new strategic objectives.

The analysis of the environment can be segmented into four interactive elements.There is the issue of the firm’s general environment, the broad environment com-prising a mix of general factors such as social and political issues. Then there isthe firm’s operating environment, its more specific industry/business environment.What kind of industry is the firm competing in? What ‘forces’ make up its ‘indus-try structure’? Having examined its business environment, the issue then arises: how is the firm to compete in its industry? What is to be the unique source of itscompetitive positioning that will give it an edge over its competitors? Will it go for abroad market position, competing on a variety of fronts, or will it look for niches?Will it compete on the basis of cost or on the basis of added value, differentiatingits products and charging a premium? What is the range of options that managershave to choose from? How are they to prioritize between these options? Does thecompany have strategic vision, a strong sense of mission, a ‘reason for being’ thatdistinguishes it from others? If change is necessary, what is to be the firm’s direc-tion for development? Having identified the major forces affecting its environment,how is the firm to approach the future?

Organizational analysis can also be thought of as fourfold. How is the firm organ-ized? What is the structure of the organization, who reports to whom, how are thetasks defined, divided and integrated? How do the management systems work, the processes that determine how the organization gets things done from day to day– for example, information systems, capital budgeting systems, performance meas-urement systems, quality systems? What do organizational members believe in, whatare they trying to achieve, what motivates them, what do they value? What is theculture of the organization? What are the basic beliefs of organizational members?Do they have a shared set of beliefs about how to proceed, about where they aregoing, about how they should behave? We know, thanks to Peters and Waterman’sIn Search of Excellence, that the basic values, assumptions and ideologies (systems of belief) which guide and fashion behaviour in organizations have a crucial roleto play in business success (or failure). What resources does the organization haveat its disposal – for example, capital, technology, people?

Management’s role is to try to ‘fit’ the analysis of externalities and internalities,to balance the organization’s strengths and weaknesses in the light of environmental

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INTRODUCTION 7

opportunities and threats. A concept that bridges internal and external analyses is thatof stakeholders, the key groups whose legitimate interests have to be borne in mindwhen taking strategic decisions. These can be internal groups, such as managersthemselves and employees, or the owners of the firm, shareholders. They can alsobe external groups: the stock market if it is a quoted company, banks, consumers,the government.

Senior management’s task is to try and align the various interest groups in arriv-ing at its chosen strategy in the light of the creation of an appropriate strategic visionfor the organization. Increasingly important here is the issue of corporate respons-ibility, how the organization defines and acts upon its sense of responsibility to itsstakeholders. The broad responsibility to society at large is important here in, forexample, such areas as ‘green’ (ecological) issues. Sometimes the various interestgroups may be at odds with each other and management will have to perform adelicate political balancing act between them.

Having chosen a strategy, there is the issue of implementation. Very fewschemes go totally (or even approximately) according to plan. The business envir-onment changes, new issues emerge – green ones, for example. Some demand to be taken on board so that in many, perhaps the majority, of cases emergentstrategy asserts itself to the extent that the realized strategy differs markedly fromthe chosen/planned strategy. In time, the realized strategy becomes a part of thefirm’s strategic history . . . and the strategy process continues.

Strategic management in the public sector and the not-for-profitcompany

Most of what we will say in this book concerns the business firm looking to profitas the source of its survival. We would, however, contend that much of what wesay can be applied to the public-sector organization or the not-for-profit firm. Similarprinciples of internal and external analysis apply.

The Growth Vector

Strategic management involves decisions concerning what a company might do,given the opportunities in its environment; what it can do, given the resources atits disposal; what it wants to do, given the personal values and aspirations of keydecision makers; and what it should do, given the ethical and legal context in whichit is operating. A firm needs a well defined sense of where it is going in the futureand a firm concept of the business it is in. We can think of these in terms of thefirm’s ‘product–market scope’ and ‘growth vector’. This specifies the particular products or services of the firm and the market(s) it is seeking to serve. A firm’s‘growth vector’ defines the direction in which the firm is moving with respect toits current product–market scope. The key components of the ‘growth vector’ areset out in figure 1.2. One qualification is necessary here. The use of the growth

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8 INTRODUCTION

vector assumes that the firm is indeed growing. This is obviously not always thecase, and strategic decision making may therefore involve ‘downsizing’ and with-drawal from some areas of business.

The growth vector illustrates the key decisions concerning the directions in which a firm may choose to develop. Market penetration comes about when the firmchooses as its strategy to increase its market share for its present product markets.If the firm pursues product development it sets out to develop new products to complement or replace its current offerings while staying in the same markets. It retains its current mission in the sense of continuing to attempt to satisfy the sameor related consumer needs In market development the firm searches for new marketswith its existing products. If a strategy of diversification is chosen, the firm has decidedthat its product range and market scope are no longer adequate, and it activelyseeks to develop new kinds of products for new kinds of markets.

Let us illustrate the growth vector with an example concerning product–marketstrategy options in retailing. A retailing firm might decide to consolidate its posi-tion in its current markets by going for increased market share, perhaps throughincreased advertising. It might choose to develop new markets, perhaps expand-ing geographically into other areas, or even overseas, but retaining its current product range. It might choose to develop new retail products but stay in the same line of business – for example, increase its product range in clothing. It mightchoose to redefine the nature of these products. For example, the running shoemarket was radically altered and expanded by redefining running shoes as leisureitems, not merely as sports equipment. Finally, the firm might choose to move into

Figure 1.2 Product, mission and market choices. Source: adapted from Ansoff (1965)

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INTRODUCTION 9

totally different areas of business, for example, into financial services, as Marks &Spencer has done. The range of product–market strategy options in retailing isillustrated in figure 1.3.

Governing the choice between strategic options should be the notion of com-petitive advantage. The firm has to identify unique opportunities for itself in its chosen area(s). It has to identify particular characteristics within its approach to individual product–markets which will give it a strong competitive position. It might go for a large market share that would enable it to dominate particularmarkets and define the conditions of competition in them, for instance, as regardspricing policy. It might pursue technological dominance, looking for breakthroughproducts or a new manufacturing technology that would give it a technological edge over the competition, as Pilkington did, for example, with its developmentof the process for manufacturing float glass, which formed the foundation of thecompany’s subsequent success. It might go for a better quality of product and ser-vice. In the automobile industry, Japanese manufacturers have rewritten the rulesof the game regarding the quality of products and thus revolutionized consumerexpectations. In the process they have made major inroads into Western marketshistorically dominated by Western firms. Or the firm might choose to combine some of these, as Sainsbury’s has done with its ‘good food’ that ‘costs less’, anapproach combining a low-cost advantage with a quality position in the world ofsupermarkets.

Figure 1.3 Retailing product–market strategy options. Source: Knee and Walters (1985)

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10 INTRODUCTION

Mission Statements

The concept of mission has become increasingly fashionable in discussions of strategy. Indeed, some analysts go as far as asserting that a good ‘mission statement’can provide an actual worthwhile alternative to the whole task of corporate plan-ning. The definition of a firm’s strategic mission encapsulated in the mission statement can be thought of as the first stage of the strategy process. Managementguru Peter Drucker, the source of much contemporary thinking about the busi-ness mission, argues that asking the question ‘What is our business?’ is the sameas asking the question ‘What is our mission?’ A business is defined by its mission.Only a clear definition of the mission of the organization makes possible clear andrealistic business objectives, because the mission defines the purpose of the firmin terms of its enduring sense of its reason for being.

The mission defines the long-term vision of the organization in terms of what itwants to be and whom it wants to serve. A firm’s mission should be clear and con-cise and distinguish it from any other firm. The mission statement has to be backedup with specific objectives and strategies, but these objectives and strategies are farmore likely to be acted upon when there is a clear sense of mission informing action.A good mission statement will contain the following:

• the purpose of the organization – a statement of the principal activities of a business or organization;

• its principal business aims – its mission as regards the position it aims to achievein its chosen business;

• the key beliefs and values of the company;• definitions of who are the major stakeholders in the business;• the guiding principles that define the code of conduct that tells employees how

to behave.

Drucker illustrates the importance of a sense of mission with his story of three people working on a building site. All three were doing the same job but whenasked what their job was gave very different answers. One answered, ‘Breaking rocks,’another answered, ‘Earning a living,’ the third answered. ‘Helping to build a cathed-ral.’ There is a similar story told about three climbers. When asked what they weredoing, one answered, ‘Pitching camp,’ the second answered, ‘Collecting materialfor a film,’ the third answered, ‘Climbing Everest.’ There are no prizes for decid-ing who was most committed to his/her task and who would be most motivated toperform to the best of his/her ability.

Drucker himself highlights the need to link a sense of mission with clear, achievable objectives. He makes the point when analysing the early success of Marks& Spencer:

Marks & Spencer redefined its business as the subversion of the class structure of nineteenth-century England by making available to the working and lower middle classesupper-class goods of better than upper-class quality, and yet at prices the working

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INTRODUCTION 11

EXHIBIT 1.1 MISSION STATEMENTS

A study of mission statements in the United States argued that everyorganization should have one to motivate its employees. It claimed thatfirms with clear motivating mission statements were likely to performbetter than those without. Classic mission statements cited include the Peter Drucker example of the men on the cathedral building site,President Kennedy’s ‘Put a man on the moon,’ Canon’s ‘Beat Xerox’and Komatsu’s ‘Encircle Caterpillar.’ The trouble is that most missionstatements tend to provoke cynicism and confusion rather than clar-ity and commitment by trying to combine statements of objectives withstatements of values.

Source: adapted from Financial Times, 3 April 1989.

and lower middle-class customer could well afford. . . . What made Marks & Spencerunique and successful . . . was its conversion of the definition of ‘what our business is,and should be’ into clear, specific, operationally effective and multiple objectives.(Drucker, 1974: 96)

In the twentieth-century computer industry Apple set as its mission ‘To make a contribution to the world by making tools for the mind that advance humankind’.Thornton’s, a UK premium chocolate manufacturer and retailer, talks about itself in this way: ‘Our aim is to delight our customers with exceptional products andcaring service. Our goal is to be widely recognized as the best specialist retailer and manufacturer of quality confectionery.’ Tesco, a major UK supermarket chain, has talked about its mission with a similar stress on service and the customer: ‘The strategy is to make our stores, our products and our people the very best in thebusiness in the opinion of our customers.’ Other companies have a different emphasis. Levi Strauss, for example, talks about its aspirations in terms of the kind of company it wants to create for its employees: ‘we want satisfaction from accomplishments and friendships, balanced personal and professional lives, andto have fun with our endeavors’.

Missions can be extremely visionary and challenging. For example, during its heyday Body Shop proclaimed the following in its annual report: ‘Make com-passion, care, harmony and trust the foundation stones of business. Fall in lovewith new ideas.’

QUESTION1 Do you agree with the view expressed in exhibit 1.1?

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12 INTRODUCTION

CASE STUDY

Ford Motor Company

Figure 1.4 contains the mission statement of a leading multinationalcompany, the Ford Motor Company. Examine this statement and askyourself the following questions:

1 Do you find it a satisfying statement of the company’s mission?2 Is there anything in the statement that you would wish to criticize?3 Would you alter the statement in any way, either taking something

out or adding more information to it?4 What is the purpose of the mission statement for Ford?5 Is it likely to fulfil this purpose?6 The mission statement was devised by Ford in America. Is the very

idea of a mission statement somehow inappropriate for the Britishcontext? Do the more reticent British, for example, feel uncomfortablewith this kind of ‘up-front’ approach? Or is it equally useful in theUnited Kingdom and Europe? If you think it inappropriate, is therean alternative?

7 What would be an appropriate mission statement for your own firmor organization?

8 How are mission statements likely to differ in small and large firms?

There are four approaches to setting a mission (Collins and Porras, 1991):

• Targeting. Setting a clear, definable target for the organization to aim at, suchas the moon (the NASA moon mission statement!), financial/growth targets orstandards of excellence in product markets.

• Focusing on a common enemy. Defeat of the common enemy guides strategic choice,e.g. Pepsi’s ‘Beat Coke’, Honda’s ‘Crush, squash, slaughter’ Yamaha, Nike’s attackon Adidas. Honda was so successful in its mission that Yamaha actually made apublic apology for its claim that it would defeat Honda.

• Role modelling. Sometimes used by smaller companies that model themselves ondominant players in their industry. In the computer industry IBM and Applehave provided – at least, until recently – very different kinds of models.

• Internal transformation. Used by older organizations faced with the need for rad-ical change. This kind of mission has as its starting point the admission that itscurrent mission is out of tune with the new realities it is facing.

QUESTION1 Which kind of mission do you think is best? Why?

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INTRODUCTION 13

The recent emphasis in strategy upon a sense of mission demonstrates the needcompanies feel to clarify their purpose and their values. In the large complex organization a sense of mission can serve as unifying factor. The mission tells employees what the company is about. It can also serve to give other stakeholdersa sense that the company is clear about what it is doing and where it is going. Thedanger with missions is that they can come to be seen as empty rhetoric if seniormanagement does not live according to their principles.

As the Ford case illustrates, strategy links with values when we consider mis-sion. Public and private-sector organizations are likely to think of these differently.

Figure 1.4 Ford Motor Company’s statement of mission, values and guiding principles

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14 INTRODUCTION

Queen’s Medical Centre, Nottingham, one of the United Kingdom’s biggestproviders of hospital-based medical services, defines its strategic aims in the fol-lowing way:

• Provide quality services designed around the patient.• Provide an environment in which the health care professional of tomorrow can be

trained.• Be knowledge organizations by promoting and investing in research and

information.• Be effective and supportive organizations for those working in both hospitals.• Use our resources wisely.

Values support the achievement of these aims because ‘values . . . drive the way wework and deliver care’. Queen’s Medical Centre values include: care and service,striving for continuous improvement and supporting staff in delivering high-quality services and achieving a balance between their work and home lives.

CRITICAL VOICES1 Some critics argue that the emphasis upon mission is misplaced,

that mission statements are often more rhetoric than substance.Do you agree?

2 If a sense of mission is not the best way to give an organization asense of direction, what is?

Identity

Mission and values are increasingly recognized as reflecting the identity of an organ-ization – its central, enduring and distinctive character, and that which makes itunique. There is evidence that those organizations that do survive and prosper overthe longer term do have a clear sense of identity, although they are also skilfulenough to know when an existing identity needs to change as a result of majorchanges in the environment. For example, US railroads needed to recognize thatthe future was perilous if they clung to the identity of a railroad company. They could perhaps have coped better with a changing environment if they hadrefashioned themselves as a transport businesses, competing with the roads andthe airlines. Such a change might have required major change, for new transporttechnologies might well have rendered their railroad identity obsolete. Firms canchange too slowly and become increasingly vulnerable to change or lose out onmajor opportunities. Xerox is a case in point. It had all the knowledge and tech-nical skills to become a major player in the computer industry but failed miserably(see chapter 8) because it could not see a way beyond its identity as a copier com-pany. Other firms struggle to create a new identity at times of change. The Boots

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INTRODUCTION 15

Company, a major UK retailer, has struggled for a number of years to rethink itsidentity (see chapter 8).

Theory of the Business

In an influential Harvard Business Review article Peter Drucker argues that everyorganization has a ‘theory of the business’ (Drucker, 1994). When this theory fitsthe external reality, is internally coherent, and known and understood by every-one in the organization, then success follows – for example, in IBM in the 1950s,1960s and 1970s; General Motors until the 1970s; Marks & Spencer until the mid-1990s. When external reality changes and the business model is taken for granted,then crisis and possibly failure ensue. Personal computers changed the driving force from hardware to software; lean manufacturing changed the economics oflong runs, and the market for clothes became more of a lifestyle issue. In thesesituations adopting management recipes such as Total Quality Management,benchmarking, re-engineering and other management fads are not enough: theorganization has to go back to re-examine its theory of the business.

Drucker argues that the theory of the business has three parts. While assumptions about the environment define what an organization is paid for, and assumptions about core competences define where an organization mustexcel, the assumptions about the specific mission ‘define what an organization con-siders to be meaningful results; in other words they point to how it envisions itselfmaking a difference in the economy and society at large’. This fits well with ourmodel of strategy and with the resource-based view of the firm (see chapter 7).

This argument is taken up by Campbell and Goold (1994), who argue that ‘people are more motivated and work more intelligently if they believe in what they are doing and trust the organization they are working with’. They acknow-ledge that motivation and commitment can also come from ‘clear strategy, fromthe excitement of achievement, from the honour of being the best and the thrillof winning’. But strategy alone is not enough. It needs to be nested in a clear senseof mission and, in Drucker’s terms, a viable and compelling theory of the firm.

Goold and Campbell define mission broadly as comprising:

• a purpose: some explanation of why the organization exists;• a strategy: defining relevant product markets and the firm’s positioning in them;• a set of values: the beliefs that underpin the organization’s management style,

its relation to employees and other stakeholders and its ethics;• standards and behaviours: a summary of some of the most important standards

and behaviours in the organization.

This leaves top management with two main tasks in relation to mission:

• the intellectual task of defining purpose, developing strategies and values thatreinforce each other and identifying the standards and behaviour that are theexpression of the mission;

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16 INTRODUCTION

• a communication and management task of making the sense of mission comealive in the organization.

This is a theme we return to in chapter 6 when we consider Collins and Porras’swork on organizations that were built to last. An enduring company’s centre consists of core values (‘the organization’s essential and enduring tenets’) and pur-pose (‘the organization’s fundamental reasons for existence beyond just makingmoney’).

Strategy Evaluation

Strategy can be neither formulated nor adjusted to changing circumstances without a process of strategy evaluation. Whether performed by an individual or as part of an organizational review procedure, strategy evaluation forms an essential step in the process of guiding an enterprise.

For many executives strategy evaluation is simply an appraisal of how well a business performs. Has it grown? Is the profit rate normal? If the answers to thesequestions are affirmative, it is argued that the firm’s strategy must be sound. Despiteits unassailable simplicity, this line of reasoning misses the whole point of strategy– that the critical factors determining the quality of current results are often notdirectly observable or simply measured, and that by the time strategic opportun-ities or threats do directly affect operating results it may well be too late for aneffective response. Thus strategy evaluation is an attempt to look beyond the obvious facts regarding the short-term health of a business and appraise insteadthose more fundamental factors and trends that govern success in the chosen fieldof endeavour.

A strategy is a set of objectives, policies and plans that, taken together, definethe scope of the enterprise and its approach to business. Rumelt suggests that threequestions are central to the challenge of strategy evaluation:

1 Are the objectives of the business appropriate?2 Are the major policies and plans appropriate?3 Do the results obtained to date confirm or refute critical assumptions on which

the strategy rests?

He further suggests that strategy must satisfy four broad criteria:

• Consistency. The strategy must not present mutually inconsistent goals and policies.

• Consonance. The strategy must represent an adaptive response to the externalenvironment and to the critical changes occurring within it.

• Advantage. Strategy must provide for the creation and/or maintenance of a competitive advantage in the selected area of activity.

• Feasibility. The strategy must neither overtax available resources nor create insoluble problems.

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INTRODUCTION 17

A strategy must be evaluated against each of these criteria; if it fails to meet oneor more of them, the strategy is flawed. We will have more to say about strategyevaluation in the chapters that follow.

The Book in Brief

Overall, the chapters that follow provide a brief history of the evolution of thinkingabout strategy. In chapters 2–4 we address the microeconomic aspects of strategicanalysis, focusing on the structure of the firm’s business environment, its internalresources and the range of strategic options open to it. In chapters 4–5 we turnto the management process aspects of strategy, looking first of all at organizationalissues such as structure and culture, then the management of strategic change. Inchapter 7 we focus on current major debates in strategy – core competence andmanagement; chapter 8 consists of ten case studies which you may like to read first.

As in chapter 1, the following chapters are interspersed with examples, cases (historical and current) and questions. There is no ‘one best way’ of strategy. Thereis, therefore, no one right answer to the questions posed. Strategic managementmeans coping with complexity and ambiguity. The examples, illustrations and ques-tions are meant to foster critical thought on the issues under discussion and tohelp you reflect critically on your own experience of strategy in action. Hopefully,you will finish the book a little closer to a ‘model’ of strategic management, a wayof thinking about strategy with which you personally feel comfortable, and able todiscuss with others engaged in the same difficult but crucially important task ofimproving their understanding of strategic issues facing their businesses.

EXHIBIT 1.2 STRATEGY

Inconsistency in strategy is not simply a flaw in logic. A key function ofstrategy is to provide coherence to organizational action. A clear andexplicit concept of strategy can foster a climate of tacit co-ordinationthat is more efficient than most administrative mechanisms. Many high-technology firms, for example, face a basic strategic choice betweenoffering high-cost products with high custom-engineering content andlower-cost products that are more standardized and sold at higher volume. If senior management does not enunciate a clear, consistentsense of where the corporation stands on these issues, there will becontinuing conflict between sales, design, engineering and manufac-turing people. A clear, consistent strategy, by contrast, allows a salesengineer to negotiate a contract with a minimum of co-ordination –the trade-offs are an explicit part of the firm’s posture.

Source: Rumelt (1988).

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Business StrategyBusiness StrategyBusiness Strategy Business Strategy and and

Strategic ManagementStrategic Managementg gg g

I t d tiI t d tiIntroductionIntroduction

Definitions of StrategyDefinitions of Strategy

•• "Strategy is the "Strategy is the directiondirection and and scopescope of an of an organization over the organization over the longlong--term:term: which achieves which achieves advantageadvantage for the organization through its for the organization through its configuration of configuration of resourcesresources within a challenging within a challenging

ii h d fh d f kk ddenvironmentenvironment, , to meet the needs of to meet the needs of marketsmarkets and and to fulfill to fulfill stakeholderstakeholder expectations".expectations".

Definitions of StrategyDefinitions of StrategyDefinitions of StrategyDefinitions of Strategy

‘A t t i ifi d h i d i t t d‘A t t i ifi d h i d i t t d‘A strategy is a unified, comprehensive and integrated ‘A strategy is a unified, comprehensive and integrated planplan that relates the strategic advantages of the firm that relates the strategic advantages of the firm

to the challenges of the en ironment and that isto the challenges of the en ironment and that isto the challenges of the environment and that is to the challenges of the environment and that is designed designed to ensure that the basic objectives of the to ensure that the basic objectives of the

enterprise are achievedenterprise are achieved through proper executionthrough proper executionenterprise are achievedenterprise are achieved through proper execution through proper execution by the organisation.’by the organisation.’

GluekGluek & & JaunchJaunch

In other words strategy isIn other words strategy isIn other words, strategy is In other words, strategy is about:about:about:about:

•• Where is the business trying to get to in theWhere is the business trying to get to in the longlong--termterm??Where is the business trying to get to in the Where is the business trying to get to in the longlong termterm? ? (direction) (direction)

•• Which Which marketsmarkets should the business compete in and should the business compete in and h f i i i i l d i h k ?h f i i i i l d i h k ?what types of activities are involved in such markets? what types of activities are involved in such markets?

(markets; scope)(markets; scope)•• How can the business perform better than theHow can the business perform better than the•• How can the business perform better than the How can the business perform better than the

competitioncompetition in those markets? (advantage)in those markets? (advantage)•• WhatWhat resourcesresources (skills, assets, finance, relationships,(skills, assets, finance, relationships,What What resourcesresources (skills, assets, finance, relationships, (skills, assets, finance, relationships,

technical competence, and facilities) are required in technical competence, and facilities) are required in order to be able to compete? (resources) order to be able to compete? (resources) Wh t t lWh t t l i t li t l f t ff t thf t ff t th•• What external What external environmental environmental factors affect the factors affect the businesses’ ability to compete? (environment) businesses’ ability to compete? (environment)

•• What are theWhat are the values and expectationsvalues and expectations of those whoof those who•• What are the What are the values and expectationsvalues and expectations of those who of those who have power in and around the business? (stakeholders)have power in and around the business? (stakeholders)

Strategic ProcessStrategic Process

• Strategic Goals• Strategic Analysis

• What is our mission ?• What is happening to ourStrategic Analysis • What is happening to our

business ?• Strategic Choice • What do we do about it ?

• Strategic • How do we do it ?Implementation

Sources of Strategy: TheorySources of Strategy: Theory

•• Planned Strategy (Deliberate or Prescriptive Planned Strategy (Deliberate or Prescriptive Strategy)Strategy)Strategy)Strategy)

•• Competitive Positioning StrategyCompetitive Positioning Strategy•• CoreCore--competence based Strategycompetence based Strategy•• Emergent (Learning) StrategyEmergent (Learning) StrategyEmergent (Learning) StrategyEmergent (Learning) Strategy•• KnowledgeKnowledge--based Strategybased Strategy

Planned (Prescriptive) StrategyPlanned (Prescriptive) Strategy

•• Focus is on Focus is on Long TermLong Term planning that planning that tries to “achieve a fit between thetries to “achieve a fit between thetries to achieve a fit between the tries to achieve a fit between the organization strategy and the organization strategy and the environment in which it operates”environment in which it operates”

•• WeaknessWeakness in today’s quickly changingin today’s quickly changing•• WeaknessWeakness-- in today’s quickly changing in today’s quickly changing environment, it may be unrealisticenvironment, it may be unrealistic, y, y

Competitive Positioning StrategyCompetitive Positioning Strategy

•• Popular in the 1980’sPopular in the 1980’sPopular in the 1980 sPopular in the 1980 s•• Based on the work of PorterBased on the work of Porter•• Focused on a Focused on a strategic fitstrategic fit between the between the

organization and it’s environment to gainorganization and it’s environment to gainorganization and it’s environment to gain organization and it’s environment to gain competitive advantagecompetitive advantagep gp g

•• An “outside in” strategyAn “outside in” strategy•• Useful strategy tools: Porter’s 5 forces Useful strategy tools: Porter’s 5 forces

analysis and generic strategyanalysis and generic strategyanalysis and generic strategyanalysis and generic strategy

Core Competence ApproachCore Competence Approach

•• From the 1990’sFrom the 1990’s•• Competitive advantage comes from an Competitive advantage comes from an

organization’sorganization’s core competencescore competences oror distinctivedistinctiveorganization s organization s core competencescore competences or or distinctive distinctive capabilitiescapabilities

•• Unlike the competitive positioning approach thisUnlike the competitive positioning approach this•• Unlike the competitive positioning approach, this Unlike the competitive positioning approach, this approach is approach is inside outinside outO i i h ld f d l h iO i i h ld f d l h i•• Organizations should focus on develop their Organizations should focus on develop their distinctive resources, capabilities and distinctive resources, capabilities and

k d f h ik d f h icompetences to take advantage of their competences to take advantage of their environmentenvironment

Emergent (Learning) StrategyEmergent (Learning) Strategy

•• Approach based on the weaknesses of theApproach based on the weaknesses of theApproach based on the weaknesses of the Approach based on the weaknesses of the Planned (Prescriptive) StrategyPlanned (Prescriptive) Strategy

•• In a rapidly changing environment, In a rapidly changing environment, organizations mustorganizations must incrementally changeincrementally changeorganizations must organizations must incrementally changeincrementally changeand adopt strategy based on and adopt strategy based on organizational learningorganizational learning

Learning and Knowledge BasedLearning and Knowledge BasedLearning and Knowledge Based Learning and Knowledge Based StrategyStrategygygy

•• An approach that uses all parts of anAn approach that uses all parts of anAn approach that uses all parts of an An approach that uses all parts of an organization (resources, capabilities, core organization (resources, capabilities, core

t d ti iti )t d ti iti ) dd ititcompetences and activities) competences and activities) andand its its interactions with the environmentinteractions with the environmentinteractions with the environmentinteractions with the environment

•• Belief that competitive advantage depends Belief that competitive advantage depends on the development of on the development of newnew and and superior superior knowledgeknowledge through a process ofthrough a process ofknowledgeknowledge through a process of through a process of organizational learningorganizational learning

Strategy DevelopmentStrategy DevelopmentCore CompetenceGeneric Strategy

KnowledgeStrategic Direction

Strategy Evaluation

StrategyLearning FeasabilityExternal

CompetitiveEnvironment

Suitability

Environment

Internal Suitability

AcceptabilityResourcesCompetenciesA ti iti

Strategic Changeand

ActivitiesCultureStructure

Implementation

C lt ral str ct ral s stemic

Resource AllocationCompetence BuildingFunctional Strategies

Products

Cultural, structural, systemicChange and leadership

Functional Strategies

Different Levels of StrategyDifferent Levels of Strategy

•• At different levels of an organizationAt different levels of an organizationAt different levels of an organization, At different levels of an organization, strategy decisions differ in terms of:strategy decisions differ in terms of:–– scopescope–– time horizontime horizontime horizontime horizon–– degree of certaintydegree of certainty–– complexitycomplexity

Different Levels of StrategyDifferent Levels of Strategy

•• StrategicStrategic –– concerned with getting aconcerned with getting aStrategicStrategic concerned with getting a concerned with getting a sustainable competitive advantage and sustainable competitive advantage and involves setting long term goals andinvolves setting long term goals andinvolves setting long term goals and involves setting long term goals and objectivesobjectives

•• Tactical Tactical –– Focuses on how organizational Focuses on how organizational goals are met and how strategies aregoals are met and how strategies aregoals are met and how strategies are goals are met and how strategies are donedoneO ti lO ti l F h tF h t tt•• OperationalOperational –– Focuses on shortFocuses on short--term term objectives and dayobjectives and day--toto--day managementday managementj yj y y gy g

Congruence (“fit”)Congruence (“fit”)

•• Successful strategies will haveSuccessful strategies will haveSuccessful strategies will have Successful strategies will have congruence, or “fit”, between all 3 levelscongruence, or “fit”, between all 3 levels

•• In other words, once strategic level In other words, once strategic level objectives are set tactical and operationalobjectives are set tactical and operationalobjectives are set, tactical and operational objectives are set, tactical and operational level strategies must “agree” in order to level strategies must “agree” in order to achieve the overall strategyachieve the overall strategy

Where strategy is carried outWhere strategy is carried out

•• Corporate strategyCorporate strategyCorporate strategyCorporate strategy•• Business strategyBusiness strategy•• Functional strategyFunctional strategy

i li l•• Operational strategyOperational strategy

A Company’s StrategyA Company’s Strategy--Making HierarchyMaking Hierarchyp y gyp y gy g yg y

Orchestrated bye the CEO and

Corporatestrategy

yother senior executives

Orchestrated by the general

In the case of a single-businesscompany, these

Two- Way Influence

Orchestrated by the general managers of each of the

company's different lines ofb i ft ith d i

company, thesetwo levels ofthe strategy

making hierarchyBusinessStrategy

business, often with advice and input from the heads of

functional area activities within

making hierarchyMerge into onelevel- businesst t th t

F ti l

Two- Way Influenceeach business

Crafted by the heads of

strategy- that is orchestrated

by the company'sFunctional Strategies

major functional activities within a particular business

CEO and othertop executives

Operating

Two- Way InfluenceCrafted by brand managers; the Operating managers of plants, Distribution centers, and the p g

StrategiesManagers of strategicallyImportant activities like advertising

And website operations

Levels of StrategyLevels of Strategy--Making in Making in a Diversified Companya Diversified Companya Diversified Companya Diversified Company

Corporate-Level Managers Corporate

Strategy

Two-Way Influence

Strategy

Business StrategiesBusiness-Level Managers

Two-Way Influence

Functional ManagersFunctional Strategies

Two Way Influence

g

Operating Strategies

Two-Way Influence

OperatingManagers p g gManagers

Levels of StrategyLevels of Strategy--Making in Making in a Singlea Single--Business CompanyBusiness Companya Singlea Single Business CompanyBusiness Company

Business Executive-Level Managers

Strategy

Two-Way Influence

Managers

y

F ti l St t iFunctional

Functional StrategiesManagers

Two-Way Influence

Operating StrategiesOperatingManagers

Business Strategy Business Strategy and and

St t i M tSt t i M tStrategic ManagementStrategic Management

Missions, Goals & ObjectivesMissions, Goals & Objectives

Missions & Goals of the FirmMissions & Goals of the Firm

•• Stakeholder TheoryStakeholder Theory•• Stakeholder TheoryStakeholder Theory•• Mission Statements & Mission Statements &

StrategyStrategyObj tiObj ti•• ObjectivesObjectives

St k h ld f FiSt k h ld f FiStakeholders of a FirmStakeholders of a Firm

Inside ClaimantsInside Claimants Outside ClaimantsOutside Claimants•• ExecutivesExecutives•• B d fB d f

•• CustomersCustomers•• S liS li•• Board of Board of

DirectorsDirectors•• SuppliersSuppliers•• GovernmentsGovernments

•• ShareholdersShareholders•• EmployeesEmployees

•• CompetitorsCompetitorsL l C itiL l C iti•• EmployeesEmployees •• Local CommunitiesLocal Communities

•• General PublicGeneral PublicGeneral PublicGeneral Public

“The moral obligation of business is to increase its profits”

- Milton FriedmanJuly 31 1912 November 16 2006) was an American economistJuly 31, 1912 – November 16, 2006) was an American economist

and public intellectual, and a recipient of Nobel Prize in Economics.

St kh ld ThSt kh ld ThStockholder TheoryStockholder Theory

•• Businesses must maximize profitsBusinesses must maximize profits•• Stockholders are the most important Stockholders are the most important

concern of an organizationconcern of an organizationco ce o a o ga at oco ce o a o ga at o•• Failure to do so will reduce business Failure to do so will reduce business

performance and negatively affect otherperformance and negatively affect otherperformance and negatively affect other performance and negatively affect other stakeholdersstakeholders

St k h ld ThSt k h ld ThStakeholder TheoryStakeholder Theory

•• Shareholders (stockholders) are NOT Shareholders (stockholders) are NOT ( )( )the sole concern of organizationsthe sole concern of organizations

•• Other groups are affected and shouldOther groups are affected and should•• Other groups are affected and should Other groups are affected and should be consideredbe considered

St k h ld M iSt k h ld M iStakeholder MappingStakeholder Mapping

Stakeholder Mapping is an important partStakeholder Mapping is an important partStakeholder Mapping is an important part Stakeholder Mapping is an important part of making strategy. It consists of making of making strategy. It consists of making judgements on three issues:judgements on three issues:judgements on three issues:judgements on three issues:

•• How likely each stakeholder group is to How likely each stakeholder group is to impress its expectations on the firmimpress its expectations on the firmimpress its expectations on the firm.impress its expectations on the firm.

•• Whether they have the means to do so Whether they have the means to do so --f th t k h ldf th t k h ldpower of the stakeholder group.power of the stakeholder group.

•• The likely impact that stakeholder The likely impact that stakeholder expectations will have on future strategiesexpectations will have on future strategies

Stakeholder Mapping Stakeholder Mapping --pp gpp gPower/Dynamism MatrixPower/Dynamism Matrix

PREDICTABILITY

High Low

Low A BFew Problems Unpredictable but

ManageablePOWER

Manageable

C D

High

CPowerful but Greatest Danger orPredictable Opportunitiesg

Stakeholder MappingStakeholder Mapping --Stakeholder Mapping Stakeholder Mapping Power/Interest Matrix Power/Interest Matrix

LEVEL OF INTEREST

Low High

Low A BMinimal Effort Keep Informed

POWERC D

High

C DKeep Satisfied Key Players

High

Mission, Stakeholders & StrategyMission, Stakeholders & Strategy

I id Cl i t O t id Cl i tInside Claimants Outside Claimants

Mission StatementStatement

Strategy FormulationFormulation

The Most Successful Organizations AnalyzeThe Most Successful Organizations AnalyzeThe Most Successful Organizations AnalyzeThe Most Successful Organizations AnalyzeThe Most Successful Organizations Analyze The Most Successful Organizations Analyze and Manage Their Stakeholders Welland Manage Their Stakeholders Well

The Most Successful Organizations Analyze The Most Successful Organizations Analyze and Manage Their Stakeholders Welland Manage Their Stakeholders Well

Stakeholder AnalysisStakeholder Analysis•• Identifying and Prioritizing Identifying and Prioritizing

Key StakeholdersKey Stakeholders•• Identifying and Prioritizing Identifying and Prioritizing

Key StakeholdersKey StakeholdersKey StakeholdersKey Stakeholders

•• Assessing Their NeedsAssessing Their Needs

Key StakeholdersKey Stakeholders

•• Assessing Their NeedsAssessing Their Needs

•• Collecting Ideas From Collecting Ideas From ThemThem

•• Collecting Ideas From Collecting Ideas From ThemThem

•• Integrating this Knowledge Integrating this Knowledge into the Strategicinto the Strategic

•• Integrating this Knowledge Integrating this Knowledge into the Strategicinto the Strategicinto the Strategic into the Strategic Management ProcessManagement Processinto the Strategic into the Strategic Management ProcessManagement Process

Mission Statement & its PurposeMission Statement & its Purpose

•• Sense of Purpose & AspirationSense of Purpose & Aspiration•• Company ImageCompany Image•• Company ImageCompany Image•• Statement of Company Values, Culture Statement of Company Values, Culture

and Ethicsand Ethics•• Role as a Guide for the Strategy ProcessRole as a Guide for the Strategy ProcessRole as a Guide for the Strategy ProcessRole as a Guide for the Strategy Process

Mission StatementMission Statement

•• Business DefinitionBusiness DefinitionBusiness DefinitionBusiness Definition•• Major Goals of the Major Goals of the

FiFiFirmFirm•• PhilosophiesPhilosophiespp•• Guiding PrinciplesGuiding Principles

C id ti fC id ti f•• Considerations of Considerations of stakeholdersstakeholders

Customer Groups

Customer Needs

Who is being satisfied ?

What is being satisfied ?

Definition of

satisfied ? satisfied ?

Definition ofthe Business

How are Customer NeedsNeeds being Satisfied ?

Distinctive Competencies



Type of StrategiesType of StrategiesType of StrategiesType of Strategies

Types Of StrategiesTypes Of Strategies

• What types of strategies are used by• What types of strategies are used by organizations?

• How are strategies formulated and implemented in strategic management?implemented in strategic management?


•• Strategy is a comprehensive plan for achieving Strategy is a comprehensive plan for achieving competitive advantage. competitive advantage. O i ti t t t th t b iO i ti t t t th t b i•• Organizations use strategy at the corporate, business Organizations use strategy at the corporate, business and functional levels. and functional levels.

•• G th d di ifi ti t t i fG th d di ifi ti t t i f•• Growth and diversification strategies focus on Growth and diversification strategies focus on expansion. expansion.

•• Restructuring and divestiture strategies focus onRestructuring and divestiture strategies focus on•• Restructuring and divestiture strategies focus on Restructuring and divestiture strategies focus on consolidation. consolidation.

•• Global strategies focus on international businessGlobal strategies focus on international business•• Global strategies focus on international business Global strategies focus on international business initiatives. initiatives.

•• EE--business strategies focus on using the Internet forbusiness strategies focus on using the Internet for•• EE--business strategies focus on using the Internet for business strategies focus on using the Internet for business transactions. business transactions.


•• StrategyStrategyStrategy Strategy –– a comprehensive plan guiding resource allocation to a comprehensive plan guiding resource allocation to

achieve longachieve long--term organization goalsterm organization goalsachieve longachieve long--term organization goals. term organization goals.

•• Strategic Intent Strategic Intent –– focuses organizational energies on achieving a focuses organizational energies on achieving a

compelling goal. compelling goal.

•• Competitive AdvantageCompetitive Advantage–– operating in successful ways that are difficult tooperating in successful ways that are difficult tooperating in successful ways that are difficult to operating in successful ways that are difficult to

duplicateduplicate

TYPES OF STRATEGIESTYPES OF STRATEGIESS O S G SS O S G S

Corporate StrategiesCorporate Strategies

•• Corporate StrategyCorporate StrategyCorporate StrategyCorporate Strategy–– Sets longSets long--term direction for the total enterpriseterm direction for the total enterprise

•• B i St tB i St t•• Business StrategyBusiness Strategy–– Identifies how a strategic business unit or division will Identifies how a strategic business unit or division will

compete in its product or service domaincompete in its product or service domain

•• Functional StrategyFunctional StrategyFunctional StrategyFunctional Strategy–– Guides activities within one specific area of Guides activities within one specific area of

operationsoperationsoperationsoperations

TYPES OF STRATEGIESTYPES OF STRATEGIESS O S G SS O S G S

Corporate StrategiesCorporate Strategies

TYPES OF STRATEGIESTYPES OF STRATEGIESTYPES OF STRATEGIESTYPES OF STRATEGIES

Growth And Diversification StrategiesGrowth And Diversification Strategies

•• Growth StrategyGrowth StrategyGrowth StrategyGrowth Strategy–– Expansion through current operationsExpansion through current operations

•• C t tiC t ti•• ConcentrationConcentration–– Expansion within an existing business areaExpansion within an existing business area

•• DiversificationDiversification–– Expansion occurs by entering new business areasExpansion occurs by entering new business areasExpansion occurs by entering new business areasExpansion occurs by entering new business areas

•• Vertical IntegrationVertical Integration–– Expansion by acquiring existing suppliers or Expansion by acquiring existing suppliers or

distributors distributors

TYPES OF STRATEGIESTYPES OF STRATEGIES

R t t i d R t h tR t t i d R t h tRestructuring and Retrenchment Restructuring and Retrenchment Strategies Strategies gg

•• RetrenchmentRetrenchmentRetrenchmentRetrenchment–– Changes operations to correct weaknessesChanges operations to correct weaknesses–– LiquidationLiquidationLiquidationLiquidation

•• An extreme form of retrenchment wherein the business An extreme form of retrenchment wherein the business closes and sells off its assetscloses and sells off its assets

R t t iR t t i•• RestructuringRestructuring–– Reduces the scale or mix of operationsReduces the scale or mix of operations

•• DownsizingDownsizing–– Decreases the size of operationsDecreases the size of operations

•• DivestitureDivestiture–– Sells off part of the organization to focus on core Sells off part of the organization to focus on core

b ib ibusinessesbusinesses


Global StrategiesGlobal Strategies

•• Globalization StrategyGlobalization StrategyGlobalization StrategyGlobalization Strategy–– Adopts standardized products and advertising Adopts standardized products and advertising

for use worldwidefor use worldwidefor use worldwidefor use worldwide•• Multidomestic StrategyMultidomestic Strategy

–– Customizes advertising and products to best Customizes advertising and products to best fit local needsfit local needs

•• Transnational StrategyTransnational StrategyS k ffi i i f l b l ti ithS k ffi i i f l b l ti ith–– Seeks efficiencies of global operations with Seeks efficiencies of global operations with attention to local marketsattention to local markets


EE--Business StrategiesBusiness Strategies

•• EE--Business StrategiesBusiness StrategiesEE Business Strategies Business Strategies –– Focus on Using the Internet for Business Focus on Using the Internet for Business

TransactionsTransactionsTransactionsTransactions

•• B2B Business Strategies B2B Business Strategies –– use IT and Web portals to vertically link organizations use IT and Web portals to vertically link organizations

with members of their supply chains.with members of their supply chains.

•• B2C Business Strategies B2C Business Strategies –– use IT and Web portals to vertically link organizationsuse IT and Web portals to vertically link organizationsuse IT and Web portals to vertically link organizations use IT and Web portals to vertically link organizations

with members of their customers.with members of their customers.

Conducting a SWOT Analysis By Des Lee of Futurscope Ltd. This document is prepared as a companion to and summary of the “Conducting a SWOT” briefing sessions held in UCC as an aid to those departments and units that have to include a SWOT analysis in the Quality Review process. The examples are intended for illustration only and do not refer to any particular department in College. The list-based structure proposed here is intended to be a framework to encourage as inclusive and broad a consideration of the issues as is practicable. Strategic Planning Strategic planning is the process by which organisations plan the medium to long term; a time scale that varies between organisations from as little as 3 years to decades. For a department in UCC, the strategic planning time scale is 6 years. Strategic planning consists of 3 activities that take place simultaneously and continually: analysis, choice and implementation. Strategic analysis: a determination of the current strategic position both inside and

outside the target organisation Strategic choice: the generation and selection of possible future directions,

objectives and actions; including the assessment of risk Implementation: putting the choices into action, which in turn changes the current

position.

ResourcesEnvironment

Analysis

Choice Implement

May 2004

SWOT is a tool of strategic analysis and has two elements: an external analysis of Opportunities and Treats, and an internal analysis of Strengths and Weaknesses. Opportunities and Threats The external analysis focuses on the external environment and the opportunities and threats that may represent. An opportunity is some feature of the external environment the department could take advantage of, e.g. an increase in research funding. A threat is some feature in the external environment that could damage the department e.g. a cut in funding. Features may represent both an opportunity and a threat depending on how it is viewed, the assumptions about what the future holds, or which aspect of the environmental feature is considered. For example, a change of government could easily be considered as both an opportunity and a threat.

is usually easier to start with the external analysis in that everyone has a view and ose views are easy to express and discuss.

luences have affected the department in the past and n the future?

description of the context in which the department operates. s to generate that description:

Soc

Itth

udit the Environment A

Which environmental infwhich are likely to do so i

This question serves as a generator of ideas about the kind of environmental factors that may be important for the department to analyse. The question is best used as part of a brainstorming exercise with no assessment or categorisation at this stage. Influences from the past are readily identified, although there may be some disagreement on their causes. Influences from the future are, of course, speculative. Some, like changes in demographics, are reasonably predictable. Others, like the impact of the internet, can only be imagined and will probably turn out differently han anticipated. t

he Nature of the Environment T This yields a broad brush

se the following headingU

ial demographics, students working part time, student parents, student and staff attitudes, etc.

Political HEA, college, change of government Technological e-learning, data storage and transmission, different modes of

delivery Economic funding, numbers of students, attractiveness of college versus jobs,

ability to attract staff Legal Universities Act, health and safety, equality legislation

Page 2 of 9

Market Analysis

ollege operates in at least two recognised markets, for students and for staff. Those commercial market for products and services and

an be analysed in similar ways. They have a supply and demand, a market price

Competitor Ana

of technology and But the competition is also with international colleges and

valuable information about the advantages the competitors have over the department e versa.

ote: where headings are suggested, they are merely intended to help organise e no mutually exclusive and there may well be overlap between

em. There is no need to worry which heading an item comes under, the aim is to

ade to synthesise or assess the contributions. As the process evelops, items from different headings will naturally become associated, leading to a radual process of synthesis.

redicting the future is notoriously difficult and the external analysis is, in part, a

trengths and Weaknesses

not good at, e.g. ttracting post grads, gaining research funding.

eaknesses initially involves an examination of the dequacy of resources in terms of quantity, quality and availability. Adequacy is in

threats. Resources may be physical – buildings, office space, labs, computing

Cmarkets have all the features of a c(which includes many non-monetary elements) and are affected by information, opinion, and image.

lysis There are many competitors for students and staff – other Irish universities, institutes

PLC’s. employers, both here and abroad. An analysis of the key competitors will give

and vic Nthinking. They arthencourage thought and gain as comprehensive a view as possible. In the initial stages of the external analysis the focus should be on generating as broad and as rich a description of the external environment, now and into the future. No attempt should be mdg Pcreative, imaginative process in which the salient features of the external environment in the future are identified. There is no way of getting this right, but the richer the initial description, the more accurate and useful the analysis is likely to be. S The internal analysis examines the department’s strengths and weaknesses. A strength is something the department is particularly good at, e.g. student focus, research output. A weakness is something the department isa Resources Analysis of strengths and waterms of meeting the goals and objectives of the department, and meeting the challenges presented by the external environment as represented by opportunities and

Page 3 of 9

facilities; informational – access to data, availability and usability of data; human – people and their skills which will be considered in more detail later. Power Departments differ in their ability to get resources from college and other sources. Some departments have a high profile and are able, as a result, to command greater attention, get more resources, get decisions made in their favour and generally create a more favourable position for themselves. These differences in power are inevitable,

ut have a significant impact on the ability of departments to take advantage of pportunities and to counter threats.

ow powerful is your department in college? In its field? With the HEA? And with

Seven S’s is a onvenient tool for examining the internal aspects of a department. Under each of the ven headings, what are the strengths and weakness of the department?

trategy

bo Hwhatever other areas of significance? It is essential to be realistic about the status of the department and to note that changes in status are very slow and hard won. Seven S’s A technique borrowed from one the big accountancy firms, thecse S – does the department have a written strategy? Is it communicated to members of the department and others? Is it monitored? Is the strategy being worked? Structure – a pattern of roles, both formal and informal, within the department. Does the structure support members of the department in meeting the department’s objectives? Are there gaps? Do some roles conflict? Are the formal and informal

les compatible? ro Systems – how work gets done. Includes manual as well as computerised systems. Are there clear systems of work that ensure that everything gets done in an accurate nd efficient manner? Do some things get done twice? Do some things get forgotten r left out? What is the incidence of rework, in which tasks have to be repeated

y weren’t done properly the first time? Is adequate information available enable each member of staff to carry out their function?

aobecause theto Staff – the right people in the right jobs. Does the department have the right number of staff, of the right kind? Skills – Does each staff member have the skill set to adequately carry out their function? Style – the way in which the department interacts interpersonally with customers,

colleagues and others. There is no one correct style, just appropriate styles for different situations. Does the department have an appropriate style?

Page 4 of 9

Shared values – the underpinning values that drive our decisions and behaviour. These can be difficult to describe and discuss but can also be very powerful in xplaining why we do things in certain ways and how we need to change to adapt to

for the purposes of Quality Review it is necessary to add one further step. s a result of the position described in the SWOT, what is the department proposing

e department go in? This is a consideration of possibilities, not a decision. Again, this is

nal analysis.

3. Prioritise the actions. Some of the action items will be short term, some long term. Some will be regarded as critical, others as options.

ising them allows the next stage of strategic planning to take place, the setting of objectives with clear, achievable outcomes and deadlines.

he analytical aspects of a SWOT described above are logical and straightforward. Con ctingconsideredfunctioning Definition Som

1. embers, including part

time staff, academic support functions, etc.

ecircumstances. These seven headings are intended to organise thought, not to be exhaustive. The internal analysis is more difficult for groups to carry out. Everyone has a view and is experienced, but expressing that view inevitably can be interpreted as a direct criticism of a colleague’s work performance. Future Actions The stages above complete the SWOT from a strategic planning point of view. However, Ato do about it? This has three elements:

1. As a result of the SWOT analysis, what directions could th

an imaginative, creative process that identifies possible future positions for the department in the light of the environment that is predicted by the external analysis, and given the strengths and weaknesses identified by the inter

2. What actions could/should the department take? Once the possibilities are identified, this is an assessment of their feasibility and risk, leading to a decision on the actions the department should take.

Priorit

Issues to Consider T

du a SWOT, however, also involves human aspects that must be carefully if the analysis is to make a successful contribution to the future of the department.

s

e definitions are needed to provide clarity and to avoid misunderstanding. The SWOT is an introspective view of the department carried out by all member of the department. This includes all staff m

Page 5 of 9

2. The boundary between the internal and external analysis is the department. College is an opportunity or a threat, so are other departments along with the wider environment outside college.

. Strengths and weaknesses are inherently relative to some standard. Before

considering strengths and weaknesses it is useful to get agreement on the hat is being used, a kind of intuitive benchmark. The easiest way

is to use a number of other institutions as examples. The members of the

tics and be considered a good example for their size and resources. There is no point in picking a world leader if that department has vastly different resources, catchment, etc. There is no need

engage in a quantitative benchmarking process, an intuitive qualitative benchmark is perfectly adequate.

greed, qualitative standard by which strengths and weaknesses can be intuitively identified.

Level of In

Who is goiindividual might haveunlikely thwould the ongoing su An individcredibility A commitattempt to consultation would lead to the same difficulties as for an individual. Extensive and time consultation would be needed over an exnumbers icommittee

he ideal is for everyone in the department to be fully involved. This leads to the ighest level of engagement by all staff in all stages of the process, including

ons arising from decisions taken as a consequence of the WOT analysis.

3

standard t

department, through contacts with other institutions will have a good idea of the appropriate institutions with which to compare the department. The salient department(s) that are used as a benchmark should be of similar size and characteris

to

The simplest way is to ask the department members to brainstorm comparable institutions/departments. Ideally, identify two or three, on which everyone can agree. This gives an a

volvement

ng to be involved in carrying out the SWOT? It is conceivable that an from outside the department could produce a SWOT. Indeed, an outsider a more comprehensive view of the external environment. But it is very at person would be able to capture the diversity of the internal analysis, nor SWOT have the credibility and commitment to implementation needed for ccess.

ual from the department would have similar difficulties in gaining and commitment for the SWOT and its resulting actions.

tee, representative or otherwise, could also conduct the SWOT. Any carry out the analysis without

tended period to try to assimilate all views into the end result. Where the n the department are high i.e. greater than 30 people, some form of process may be inevitable.

Thimplementation of actiS Methodology

Page 6 of 9

The SWOT is intended to be an introspective view of the current and future position of the department. To achieve this, the views of staff must be canvassed and ompiled.

eadings under which further discussion could take place. Given sensitivities around

this should followed by assembly and synthesis y a committee, followed by further consultation, and so on until a satisfactory

sed and discussed face to face. Brainstorming is an effective and nergising technique for generating ideas that is ideally suited to the early stages of a WOT. Bringing people together enables detailed explanation and exploration of

ns and opinions. In many cases, initially conflicting views become ight variations on a theme once they have been fully explained by those who hold

acilitation

n ounter-productive.

space for inority views to be discussed, summarising, challenging and generally ensuring the

College but outside the department who is redible to the whole department, who is seen as neutral and who has the skills to cilitate. Where such a person cannot be identified, or where the process is expected

arly contentious, an external facilitator may be a better option. While an utsider has no knowledge of the issues involved, neither has s/he any history or

c Questionnaires could be useful in large departments to set an initial agenda or list of hthe confidentiality of questionnaire data and their impersonal nature, questionnaires are unlikely to elicit the enthusiasm, honesty or commitment necessary for success. In the initial stages, or where the number of people involved is greater than 30, consultation in small groups may be the only practical method available. Once the smaller groups have made their inputs boutcome is obtained. Note that this will be a very time consuming process. The ideal is for the SWOT to be developed in one or more group meetings where issues can be raieSdiverse positioslthem, and explored openly by the group. F Discussing and analysing the department will, undoubtedly, elicit strong opinions, strong values and strongly held views. For this reason, a facilitator of some kind is necessary to prevent the meeting(s) becoming sidetracked, unproductive or evec A facilitator is someone who provides a process for the group but who is neutral on the content. As such a facilitator will “chair” a meeting, managing the communication process, ensuring that the agenda is followed, policing any abrasive comments, encouraging the quieter members to make their case, making mprocess is productive. A facilitator has no stake or input in the outcome and will not express an opinion or attempt to sway the process in any particular direction. A key decision is the choice of facilitator. It is possible that a small department may not feel the need for anyone to assist them, particularly if communication patterns are very open, collaborative and supportive. Any larger group will need a facilitator and the first choice should be someone withincfato be particulobaggage to impede them.

Page 7 of 9

Inclusion of minority views. There will always be some individuals who hold views that are at odds with the

itfalls

evels is that some may lter their behaviour to conform to the expectations of those above them. This may ad to self-censorship, agreeing with the majority view, not disagreeing with the

erful, etc.

uration of tenure in College is frequently lengthy and staff members have long ting with other department members. Inevitably, some of those

lationships are friendly, close and open. Others are not. It is unreasonable to expect

ships can make it difficult for some people disagree.

majority. A SWOT is not the place to enforce majority rule; to do so is to alienate those who “lost”. Instead it is an opportunity to draw out and discuss these minority views, attempting to understand the values and judgements that have led to them, and, as far as possible, incorporate them into the end result. Failure to adequately explore minority views leads to reduced commitment to the end result. P Putting a group together to achieve any outcome is prone to a number of pitfalls, and conducting a SWOT is no different. These difficulties are latent, they may not happen, but they are regular features of human interaction. They cannot be wished away or ignored. The best we can hope for is that they can be managed in such a way that they intrude in minimal ways on the process. The facilitator is the manager of these issues and the objective of the facilitator is to find means and techniques that reduce the impact of these issues. Power structures Every social grouping has patterns of power within it. Some group members are more powerful than others. Some have formal power conferred on them by the office or hierarchical rank they occupy. There is also a social power structure that is just as strong in its influence on group members. The effect of combining people of different power and status lalemore pow There are also informal power structures based around cliques. Again, their impact is to affect what people are prepared to say, how honest they are prepared to be, how much they are likely to express divergent views and how they are likely to view the entire process – an opportunity or a threat at a personal level. Relationships Dhistories of interacrea SWOT to take precedence over the history of relationships. The effect of ruptured relationships may be for two people to score points off each other, to niggle and nit pick what is said, to make dismissive comments, to say nothing for fear of reprisal, etc. On the other hand, very warm relationto

Page 8 of 9

Mixed Agendas Each individual will come to the SWOT with their own agenda, which may include doing a good analysis of the department and may include other factors like ensuring

est presentation for their own piece of the department, protecting themselves or their

ics

ach of the pitfalls above is inherent in human group relations. There is no way of . The facilitation of the group must manage

ese factors so as to prevent them from overly intruding on the process.

bpet project from criticism, and so on. Equally, each individual has a different way of looking at things and of expressing their views. These differences may be related to age, position, previous training, profession, gender, etc. Whatever the reasons, it is certain that there will be a huge diversity of opinion and style. Group Dynam Behaviour changes in groups and any group working together takes on a character and mood all of its own. During the SWOT, each group will be affected by the group dynamics operating at that particular moment and in that context. In many cases, this dynamic is a very stimulating and positive feature that makes group working more enjoyable. However, there are always undercurrents that affect some more than others. Occasionally, the group will develop in a way that reduces its capacity to fulfil its function. Eeliminating them, nor of preventing themth

Page 9 of 9

Porter's Five Forces

A MODEL FOR INDUSTRY ANALYSIS

The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure.

Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.

Diagram of Porter's 5 Forces

SUPPLIER POWER Supplier concentration

Importance of volume to supplier Differentiation of inputs

Impact of inputs on cost or differentiation Switching costs of firms in the industry

Presence of substitute inputs Threat of forward integration

Cost relative to total purchases in industry

BARRIERS TO ENTRY

Absolute cost advantages Proprietary learning curve

Access to inputs Government policy

Economies of scale Capital requirements

Brand identity Switching costs

Access to distribution Expected retaliation Proprietary products

THREAT OF SUBSTITUTES -Switching costs -Buyer inclination to substitute -Price-performance trade-off of substitutes

BUYER POWER Bargaining leverage

Buyer volume Buyer information

Brand identity Price sensitivity

Threat of backward integration Product differentiation

Buyer concentration vs. industry Substitutes available

Buyers' incentives

DEGREE OF RIVALRY -Exit barriers -Industry concentration -Fixed costs/Value added -Industry growth -Intermittent overcapacity -Product differences -Switching costs -Brand identity -Diversity of rivals -Corporate stakes

I. Rivalry

In the traditional economic model, competition among rival firms drives profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences.

Economists measure rivalry by indicators of industry concentration. The Concentration Ratio (CR) is one such measure. The Bureau of Census periodically reports the CR for major Standard Industrial Classifications (SIC's). The CR indicates the percent of market share held by the four largest firms (CR's for the largest 8, 25, and 50 firms in an industry also are available). A high concentration ratio indicates that a high concentration of market share is held by the largest firms - the industry is concentrated. With only a few firms holding a large market share, the competitive landscape is less competitive (closer to a monopoly). A low concentration ratio indicates that the industry is characterized by many rivals, none of which has a significant market share. These fragmented markets are said to be competitive. The concentration ratio is not the only available measure; the trend is to define industries in terms that convey more information than distribution of market share.

If rivalry among firms in an industry is low, the industry is considered to be disciplined. This discipline may result from the industry's history of competition, the role of a leading firm, or informal compliance with a generally understood code of conduct. Explicit collusion generally is illegal and not an option; in low-rivalry industries competitive moves must be constrained informally. However, a maverick firm seeking a competitive advantage can displace the otherwise disciplined market.

When a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies. The intensity of rivalry commonly is referred to as being cutthroat, intense, moderate, or weak, based on the firms' aggressiveness in attempting to gain an advantage.

In pursuing an advantage over its rivals, a firm can choose from several competitive moves:

• Changing prices - raising or lowering prices to gain a temporary advantage.

• Improving product differentiation - improving features, implementing innovations in the manufacturing process and in the product itself.

• Creatively using channels of distribution - using vertical integration or using a distribution channel that is novel to the industry. For example, with high-end jewelry stores reluctant to carry its watches, Timex moved into drugstores and other non-traditional outlets and cornered the low to mid-price watch market.

• Exploiting relationships with suppliers - for example, from the 1950's to the 1970's Sears, Roebuck and Co. dominated the retail household appliance market. Sears set high quality standards and required suppliers to meet its demands for product specifications and price.

The intensity of rivalry is influenced by the following industry characteristics:

1. A larger number of firms increases rivalry because more firms must compete for the same customers and resources. The rivalry intensifies if the firms have similar market share, leading to a struggle for market leadership.

2. Slow market growth causes firms to fight for market share. In a growing market, firms are able to improve revenues simply because of the expanding market.

3. High fixed costs result in an economy of scale effect that increases rivalry. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry.

4. High storage costs or highly perishable products cause a producer to sell goods as soon as possible. If other producers are attempting to unload at the same time, competition for customers intensifies.

5. Low switching costs increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers.

6. Low levels of product differentiation is associated with higher levels of rivalry. Brand identification, on the other hand, tends to constrain rivalry.

7. Strategic stakes are high when a firm is losing market position or has potential for great gains. This intensifies rivalry.

8. High exit barriers place a high cost on abandoning the product. The firm must compete. High exit barriers cause a firm to remain in an industry, even when the venture is not profitable. A common exit barrier is asset specificity. When the plant and equipment required for manufacturing a product is highly specialized, these assets cannot easily be sold to other buyers in another industry. Litton Industries' acquisition of Ingalls Shipbuilding facilities illustrates this concept. Litton was successful in the 1960's with its contracts to build Navy ships. But when the Vietnam war ended, defense spending declined and Litton saw a sudden decline in its earnings. As the firm restructured, divesting from the shipbuilding plant was not feasible since such a large and highly specialized investment could not be sold easily, and Litton was forced to stay in a declining shipbuilding market.

9. A diversity of rivals with different cultures, histories, and philosophies make an industry unstable. There is greater possibility for mavericks and for misjudging rival's moves. Rivalry is volatile and can be intense. The hospital industry, for example, is populated by hospitals that historically are community or charitable institutions, by hospitals that are associated with religious organizations or universities, and by hospitals that are for-profit enterprises. This mix of philosophies about mission has lead occasionally to fierce local struggles by hospitals over who will get expensive diagnostic and therapeutic services. At other times, local hospitals are highly cooperative with one another on issues such as community disaster planning.

10. Industry Shakeout. A growing market and the potential for high profits induces new firms to enter a market and incumbent firms to increase production. A point is reached where the industry becomes crowded with competitors, and demand cannot support the new entrants and the resulting increased supply. The industry may become crowded if its growth rate slows and the market becomes saturated, creating a situation of excess capacity with too many goods chasing too few buyers. A shakeout ensues, with intense competition, price wars, and company failures.

BCG founder Bruce Henderson generalized this observation as the Rule of Three and Four: a stable market will not have more than three significant competitors, and the largest competitor will have no more than four times the market share of the smallest. If this rule is true, it implies that:

o If there is a larger number of competitors, a shakeout is inevitable

o Surviving rivals will have to grow faster than the market o Eventual losers will have a negative cash flow if they attempt to

grow o All except the two largest rivals will be losers o The definition of what constitutes the "market" is strategically

important.

Whatever the merits of this rule for stable markets, it is clear that market stability and changes in supply and demand affect rivalry. Cyclical demand tends to create cutthroat competition. This is true in the disposable diaper industry in which demand fluctuates with birth rates, and in the greeting card industry in which there are more predictable business cycles.

II. Threat Of Substitutes

In Porter's model, substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A product's price elasticity is affected by substitute products - as more substitutes become available, the demand becomes more elastic since customers have more alternatives. A close substitute product constrains the ability of firms in an industry to raise prices.

The competition engendered by a Threat of Substitute comes from products outside the industry. The price of aluminum beverage cans is constrained by the price of glass bottles, steel cans, and plastic containers. These containers are substitutes, yet they are not rivals in the aluminum can industry. To the manufacturer of automobile tires, tire retreads are a substitute. Today, new tires are not so expensive that car owners give much consideration to retreading old tires. But in the trucking industry new tires are expensive and

tires must be replaced often. In the truck tire market, retreading remains a viable substitute industry. In the disposable diaper industry, cloth diapers are a substitute and their prices constrain the price of disposables.

While the treat of substitutes typically impacts an industry through price competition, there can be other concerns in assessing the threat of substitutes. Consider the substitutability of different types of TV transmission: local station transmission to home TV antennas via the airways versus transmission via cable, satellite, and telephone lines. The new technologies available and the changing structure of the entertainment media are contributing to competition among these substitute means of connecting the home to entertainment. Except in remote areas it is unlikely that cable TV could compete with free TV from an aerial without the greater diversity of entertainment that it affords the customer.

III. Buyer Power

The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monopsony - a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the price. In reality few pure monopsonies exist, but frequently there is some asymmetry between a producing industry and buyers. The following tables outline some factors that determine buyer power.

Buyers are Powerful if: Example

Buyers are concentrated - there are a few buyers with significant market share DOD purchases from defense contractors

Buyers purchase a significant proportion of output - distribution of purchases or if the product is standardized

Circuit City and Sears' large retail market provides power over appliance manufacturers

Buyers possess a credible backward integration threat - can threaten to buy producing firm or rival Large auto manufacturers' purchases of tires

Buyers are Weak if: Example

Producers threaten forward integration - producer can take over own distribution/retailing

Movie-producing companies have integrated forward to acquire theaters

Significant buyer switching costs - products not standardized and buyer cannot easily switch to another product

IBM's 360 system strategy in the 1960's

Buyers are fragmented (many, different) - no buyer has any particular influence on product or price

Most consumer products

Producers supply critical portions of buyers' input - distribution of purchases Intel's relationship with PC manufacturers

IV. Supplier Power

A producing industry requires raw materials - labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. The following tables outline some factors that determine supplier power.

Suppliers are Powerful if: Example

Credible forward integration threat by suppliers Baxter International, manufacturer of hospital supplies, acquired American Hospital Supply, a distributor

Suppliers concentrated Drug industry's relationship to hospitals Significant cost to switch suppliers Microsoft's relationship with PC manufacturers

Customers Powerful Boycott of grocery stores selling non-union picked grapes

Suppliers are Weak if: Example

Many competitive suppliers - product is standardized

Tire industry relationship to automobile manufacturers

Purchase commodity products Grocery store brand label products

Credible backward integration threat by purchasers Timber producers relationship to paper companies

Concentrated purchasers Garment industry relationship to major department stores

Customers Weak Travel agents' relationship to airlines

V. Barriers to Entry / Threat of Entry

It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms may enter the industry also affects competition. In theory, any firm should be able to enter and exit a market, and if free entry and exit exists, then profits always should be nominal. In reality, however, industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market. These are barriers to entry.

Barriers to entry are more than the normal equilibrium adjustments that markets typically make. For example, when industry profits increase, we would expect additional firms to enter the market to take advantage of the high profit levels, over time driving down profits for all firms in the industry. When profits decrease, we would expect some firms to exit the market thus restoring a market equilibrium. Falling prices, or the expectation that future prices will fall, deters rivals from entering a market. Firms also may be reluctant to enter markets that are extremely uncertain, especially if entering involves expensive start-up costs. These are normal accommodations to market conditions. But if firms individually (collective action would be illegal collusion) keep prices artificially low as a strategy to prevent potential entrants from entering the market, such entry-deterring pricing establishes a barrier.

Barriers to entry are unique industry characteristics that define the industry. Barriers reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry. From a strategic perspective, barriers can be created or exploited to enhance a firm's competitive advantage. Barriers to entry arise from several sources:

1. Government creates barriers. Although the principal role of the government in a market is to preserve competition through anti-trust actions, government also restricts competition through the granting of monopolies and through regulation. Industries such as utilities are considered natural monopolies because it has been more efficient to have one electric company provide power to a locality than to permit many electric companies to compete in a local market. To restrain utilities from exploiting this advantage, government permits a monopoly, but regulates the industry. Illustrative of this kind of barrier to entry is the local cable company. The franchise to a cable provider may be granted by competitive bidding, but once the franchise is awarded by a community a monopoly is created. Local governments were not effective in monitoring price gouging by cable operators, so the federal government has enacted legislation to review and restrict prices.

The regulatory authority of the government in restricting competition is historically evident in the banking industry. Until the 1970's, the markets that banks could enter were limited by state governments. As a result, most banks were local commercial and retail banking facilities. Banks competed through strategies that emphasized simple marketing devices such as awarding toasters to new customers for opening a checking account. When banks were deregulated, banks were permitted to cross state boundaries and expand their markets. Deregulation of banks intensified rivalry and created uncertainty for banks as they attempted to maintain market share. In the late 1970's, the strategy of banks shifted from simple marketing tactics to mergers and geographic expansion as rivals attempted to expand markets.

2. Patents and proprietary knowledge serve to restrict entry into an industry. Ideas and knowledge that provide competitive advantages

are treated as private property when patented, preventing others from using the knowledge and thus creating a barrier to entry. Edwin Land introduced the Polaroid camera in 1947 and held a monopoly in the instant photography industry. In 1975, Kodak attempted to enter the instant camera market and sold a comparable camera. Polaroid sued for patent infringement and won, keeping Kodak out of the instant camera industry.

3. Asset specificity inhibits entry into an industry. Asset specificity is the extent to which the firm's assets can be utilized to produce a different product. When an industry requires highly specialized technology or plants and equipment, potential entrants are reluctant to commit to acquiring specialized assets that cannot be sold or converted into other uses if the venture fails. Asset specificity provides a barrier to entry for two reasons: First, when firms already hold specialized assets they fiercely resist efforts by others from taking their market share. New entrants can anticipate aggressive rivalry. For example, Kodak had much capital invested in its photographic equipment business and aggressively resisted efforts by Fuji to intrude in its market. These assets are both large and industry specific. The second reason is that potential entrants are reluctant to make investments in highly specialized assets.

4. Organizational (Internal) Economies of Scale. The most cost efficient level of production is termed Minimum Efficient Scale (MES). This is the point at which unit costs for production are at minimum - i.e., the most cost efficient level of production. If MES for firms in an industry is known, then we can determine the amount of market share necessary for low cost entry or cost parity with rivals. For example, in long distance communications roughly 10% of the market is necessary for MES. If sales for a long distance operator fail to reach 10% of the market, the firm is not competitive.

The existence of such an economy of scale creates a barrier to entry. The greater the difference between industry MES and entry unit costs, the greater the barrier to entry. So industries with high MES deter entry of small, start-up businesses. To operate at less than MES there must be a consideration that permits the firm to sell at a premium price - such as product differentiation or local monopoly.

Barriers to exit work similarly to barriers to entry. Exit barriers limit the ability of a firm to leave the market and can exacerbate rivalry - unable to leave the industry, a firm must compete. Some of an industry's entry and exit barriers can be summarized as follows:

Easy to Enter if there is:

• Common technology

Difficult to Enter if there is:

• Patented or proprietary know-how

• Little brand franchise • Access to distribution channels • Low scale threshold

• Difficulty in brand switching • Restricted distribution channels • High scale threshold

Easy to Exit if there are:

• Salable assets • Low exit costs • Independent businesses

Difficult to Exit if there are:

• Specialized assets • High exit costs • Interrelated businesses

DYNAMIC NATURE OF INDUSTRY RIVALRY

Our descriptive and analytic models of industry tend to examine the industry at a given state. The nature and fascination of business is that it is not static. While we are prone to generalize, for example, list GM, Ford, and Chrysler as the "Big 3" and assume their dominance, we also have seen the automobile industry change. Currently, the entertainment and communications industries are in flux. Phone companies, computer firms, and entertainment are merging and forming strategic alliances that re-map the information terrain. Schumpeter and, more recently, Porter have attempted to move the understanding of industry competition from a static economic or industry organization model to an emphasis on the interdependence of forces as dynamic, or punctuated equilibrium, as Porter terms it.

In Schumpeter's and Porter's view the dynamism of markets is driven by innovation. We can envision these forces at work as we examine the following changes:

Top 10 US Industrial Firms by Sales 1917 - 1988

1917 1945 1966 1983 1988

1 US Steel General Motors General Motors Exxon General Motors

2 Swift US Steel Ford General Motors Ford

3 Armour Standard Oil -NJ

Standard Oil -NJ (Exxon) Mobil Exxon

4 American Smelting US Steel General Electric Texaco IBM

5 Standard Oil -NJ Bethlehem Steel Chrysler Ford General

Electric 6 Bethlehem Steel Swift Mobil IBM Mobil 7 Ford Armour Texaco Socal (Oil) Chrysler 8 DuPont Curtiss-Wright US Steel DuPont Texaco

9 American Sugar Chrysler IBM Gulf Oil DuPont

10 General Electric Ford Gulf Oil Standard Oil of Indiana Philip Morris

10 Largest US Firms by Assets, 1909 and 1987

1909 1987

1 US STEEL GM (Not listed in 1909)

2 STANDARD OIL, NJ (Now, EXXON #3) SEARS (1909 = 45)

3 AMERICAN TOBACCO (Now, American Brands #52) EXXON (Standard Oil trust broken up in 1911)

4 AMERICAN MERCANTILE MARINE (Renamed US Lines; acquired by Kidde, Inc., 1969; sold to McLean Industries, 1978; bankruptcy, 1986

IBM (Ranked 68, 1948)

5 INTERNATIONAL HARVESTER (Renamed Navistar #182); divested farm equipment FORD (Listed in 1919)

6 ANACONDA COPPER (acquired by ARCO in 1977) MOBIL OIL

7 US LEATHER (Liquidated in 1935) GENERAL ELECTRIC (1909= 16)

8 ARMOUR (Merged in 1968 with General Host; in 1969 by Greyhound; 1983 sold to ConAgra)

CHEVRON (Not listed in 1909)

9 AMERICAN SUGAR REFINING (Renamed AMSTAR. In 1967 =320) Leveraged buyout and sold in pieces)

TEXACO (1909= 91)

10 PULLMAN, INC (Acquired by Wheelabrator Frye, 1980; spun-off as Pullman-Peabody, 1981; 1984 sold to Trinity Industries) DU PONT (1909= 29)

GENERIC STRATEGIES TO COUNTER THE FIVE FORCES

Strategy can be formulated on three levels:

• corporate level • business unit level • functional or departmental level.

The business unit level is the primary context of industry rivalry. Michael Porter identified three generic strategies (cost leadership, differentiation, and focus) that can be implemented at the business unit level to create a competitive advantage. The proper generic strategy will position the firm to leverage its strengths and defend against the adverse effects of the five forces.

Recommended Reading

Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors

Competitive Strategy is the basis for much of modern business strategy. In this classic work, Michael Porter presents his five forces and generic strategies, then discusses how to recognize and act on market signals and how to forecast the evolution of industry structure. He then discusses competitive strategy for emerging, mature, declining, and fragmented industries. The last part of the book covers strategic decisions related to vertical integration, capacity expansion, and entry into an industry. The book concludes with an appendix on how to conduct an industry analysis.

© Copy Right: Rai University11.351 97

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LESSON 24:BOSTON MATRIX

The BCG matrix

Description of the BCG matrixTo ensure long-term value creation, a company should havea portfolio of products that contains both high-growthproducts in need of cash inputs and low-growth products thatgenerate a lot of cash. The BCG matrix is a tool that can beused to determine what priorities should be given in theproduct portfolio of a business unit. It has 2 dimensions:market share and market growth. The basic idea behind it is thatthe bigger the market share a product has or the faster theproduct’s market grows the better it is for the company.

Product Portfolio Method

Placing Products in the Bcg Matrix Results in 4Categories in a Portfolio of a Company:

1. Stars(=high growth, high market share)- use large amounts of cash and are leaders in the business sothey should also generate large amounts of cash.- frequently roughly in balance on net cash flow. However ifneeded any attempt should be made to hold share, because therewards will be a cash cow if market share is kept.2. Cash Cows (=low growth, high market share)- profits and cash generation should be high , and because ofthe low growth, investments needed should be low. Keepprofits high- Foundation of a company3. Dogs(=low growth, low market share)- avoid and minimize the number of dogs in a company.

- beware of expensive ‘turn around plans’.- deliver cash, otherwise liquidate4. Question Marks(= high growth, low market share)- have the worst cash characteristics of all, because high de-mands and low returns due to low market share- if nothing is done to change the market share, question markswill simply absorb great amounts of cash and later, as thegrowth stops, a dog.- either invest heavily or sell off or invest nothing and generate

whatever cash it can. Increase market share or deliver cash

Using the BCG Matrix can help understand a frequentlymade strategy mistake: having a one-size-fits-all-approachto strategy, such as a generic growth target (9 percent per year)or a generic return on capital of say 9,5% for an entire corpora-tion.In such a scenario:A. Cash Cows Business Units will beat their profit target easily;

their management have an easy job and are often praisedanyhow. Even worse, they are often allowed to reinvestsubstantial cash amounts in their businesses which aremature and not growing anymore.

B. Dogs Business Units fight an impossible battle and, evenworse, investments are made now and then in hopelessattempts to ‘turn the business around.

C. As a result (all) Question Marks and Stars Business Units getmediocre size investment funds. In this way they are unableto ever become cash cows. These inadequate invested sumsof money are a waste of money. Either these SBUs shouldreceive enough investment funds to enable them to achieve areal market dominance and become a cash cow (or star), orotherwise companies are advised to disinvest and try to getwhatever possible cash out of the question marks that werenot selected



St t F l tiSt t F l tiStrategy FormulationStrategy Formulation

Strategy FormulationStrategy Formulation

•• Strategy formulation begins with the organization’sStrategy formulation begins with the organization’sStrategy formulation begins with the organization s Strategy formulation begins with the organization s mission and objectives. mission and objectives.

•• SWOT analysis identifies strengths, weaknesses, SWOT analysis identifies strengths, weaknesses, y g , ,y g , ,opportunities, and threats. opportunities, and threats.

•• Porter’s five forces model examines industry Porter’s five forces model examines industry yyattractiveness. attractiveness.

•• Porter’s competitive strategies model examines Porter’s competitive strategies model examines business or product strategies. business or product strategies.

•• Portfolio planning examines strategies across Portfolio planning examines strategies across l i l b i dl i l b i dmultiple businesses or products. multiple businesses or products.

•• Strategic leadership activates organizations for Strategic leadership activates organizations for t t i l t tit t i l t tistrategy implementation. strategy implementation.

Strategy FormulationStrategy Formulation

•• Mission StatementMission Statement•• Mission StatementMission Statement–– The reason for the organizations existence in The reason for the organizations existence in

societysocietyyy•• Operating ObjectivesOperating Objectives

–– Specific results that organizations attempt to Specific results that organizations attempt to Spec c esu ts t at o ga at o s atte pt toSpec c esu ts t at o ga at o s atte pt toachieveachieveCommon Operating Objectives of Organizationsp g j g

•Profitability •Market share High quality workforce•High-quality workforce

•Cost efficiency •Product and service quality q y•Innovativeness •Social responsibility

3 levels of strategic flow3 levels of strategic flow

•• Strategic managementStrategic managementStrategic management Strategic management –– the the process of formulating process of formulating and and

i l i ii l i iimplementing strategies. implementing strategies. •• Strategy FormulationStrategy FormulationStrategy Formulation Strategy Formulation

–– the process of creating strategies the process of creating strategies •• Strategy Implementation Strategy Implementation

the process of putting strategies into actionthe process of putting strategies into action–– the process of putting strategies into action. the process of putting strategies into action.

Strategic FlowStrategic FlowA word onA word on SWOTSWOT (Strengths(StrengthsA word on A word on SWOTSWOT (Strengths, (Strengths, Weaknesses, Opportunities, ThreatsWeaknesses, Opportunities, ThreatsWeaknesses, Opportunities, ThreatsWeaknesses, Opportunities, Threats

•• SWOT is a summary of the internal andSWOT is a summary of the internal and•• SWOT is a summary of the internal and SWOT is a summary of the internal and external analysisexternal analysis

•• Strengths and weaknesses are based on Strengths and weaknesses are based on the internal analysisthe internal analysisthe internal analysisthe internal analysis

•• Opportunities and Threats are based on Opportunities and Threats are based on th t l l ith t l l ithe external analysisthe external analysis

•• It is NOT a strategy, but providesIt is NOT a strategy, but providesIt is NOT a strategy, but provides It is NOT a strategy, but provides information to help MAKE strategyinformation to help MAKE strategy

SWOTSWOTSWOTSWOT•• SWOT Analysis SWOT Analysis

–– Identifies Organization’s Strengths, Weaknesses, Opportunities, Identifies Organization’s Strengths, Weaknesses, Opportunities, and Threatsand Threats

•• Core CompetencyCore Competency–– A special strength that gives an organization a competitive A special strength that gives an organization a competitive

advantageadvantageadvantageadvantage

Porter’s Five ForcesPorter’s Five Forces

•• Porter’s Competitive StrategiesPorter’s Competitive StrategiesPorter s Competitive Strategies Porter s Competitive Strategies –– Differentiation Strategy Differentiation Strategy

•• Offers products and services that are uniquely different fromOffers products and services that are uniquely different from•• Offers products and services that are uniquely different from Offers products and services that are uniquely different from the competitionthe competition

–– Focused Differentiation StrategyFocused Differentiation StrategyFocused Differentiation StrategyFocused Differentiation Strategy•• offers a unique product to a special market segment. offers a unique product to a special market segment.

–– Cost Leadership StrategyCost Leadership Strategy–– Cost Leadership StrategyCost Leadership Strategy•• Seeks to operate at lower costs than competitorsSeeks to operate at lower costs than competitors

Focused Cost Leadership StrategyFocused Cost Leadership Strategy–– Focused Cost Leadership StrategyFocused Cost Leadership Strategy•• uses cost leadership and target needs of a special market. uses cost leadership and target needs of a special market.

Porter’s Five ForcesPorter’s Five ForcesP t ’ fi f id i d th h t iPorter’s five forces provide a unique and thorough way to view your position. Each of these forces provide different strategies for achieving your objectives.g y j

Porter’s Five ForcesPorter’s Five ForcesE W l M t i it t l d hi iti th hEx.: Wal-Mart gains its cost leadership position through a proprietary inventory and ordering system that allows the company to buy the right products at the right time from the right people.y g p g g p p

Boston Consulting Group (BCG)Boston Consulting Group (BCG)•• BCG MatrixBCG Matrix

–– Analyzes business opportunities according to Analyzes business opportunities according to h d k hh d k hgrowth rate and market sharegrowth rate and market share

Blue Ocean Strategy

The trick is to ‘‘stop trying to beat the competition’’ and focus instead on developing a

compelling new value proposition that can create uncontested market space.

Competition-based strategies have been the dominant focus of academics and

corporations for most of the past 25 years. Companies strive to capture the greatest share

of existing demand by building a defensible position against the competition within the

industry. So strategy is usually seen as making a choice between value and cost.Market

structure, determined by supply and demand conditions, shapes sellers’ and buyers’

conduct. The result of all this experience has been a rich understanding of how to

compete skillfully in existing market space by dividing up existing demand. By focusing

on outpacing each other, companies battle in what we call the red ocean of bloody

competition.

Value innovation: the simultaneous pursuit of differentiation and low cost. In our

research we have found that those who seek to create blue oceans – totally new markets –

do not benchmark against the competition. Instead, they attempt what we call value

innovation. A value innovation strategy focuses on creating a leap in value for both

buyers and the company, thereby opening up new and uncontested market space. Value

innovation can occur anywhere in the entire range of a firm’s activities – product, service,

delivery, costs, pricing, and the business model. Our point is that value and innovation

are inseparable. Value innovation places equal emphasis on value and innovation. Value

without innovation tends to produce incremental value that is not sufficient to stand out in

the marketplace. Innovation without a strong enough emphasis on value too often leads to

development of new product or service functionalities that exceed what buyers are ready

to accept and pay for.

Value innovation is a new way of thinking about and executing strategy that defies

one of the most commonly accepted dogmas of competition-based strategy – the value-

cost tradeoff. The conventional belief is that companies can either create greater value for

customers at a higher cost or create acceptable value at a lower cost. Here strategy is seen

as making a choice between differentiation and low cost. In contrast, those that attempt to

create blue oceans seek differentiation and low cost simultaneously. To create blue

oceans, the central issue is not innovating in terms of technology or science, but bringing

innovation to bear on the value deliverable to the mass of buyers.

Once a company successfully creates a blue ocean, sooner or later imitators appear

on the horizon. However, a blue ocean strategy brings with it considerable barriers to

imitation. The first barrier is often cognitive. Competitors are often blocked from

imitating because of brand image conflicts, or the blue ocean strategy just does not fit

conventional strategic logic. For example, established players in the telecom industry

initially mocked CNN by calling it ‘‘chicken noodle news.’’

The second barrier is organizational. Because imitation often requires companies to

make substantial changes to their existing business practices, politics often kick in,

delaying for years a company’s commitment to imitate a blue ocean strategy.

The third barrier arises from the economic forces of blue oceans. The high volume

generated by a value innovation leads to rapidly increasing economies, placing potential

imitators at an ongoing cost disadvantage.

Once a company has created a blue ocean, the key is to sail as far as possible in it

by lengthening, widening, and deepening the revenue and profit streams via geographic

expansion, operational improvements, and refining your offering. This further makes

imitation difficult.

The Four Actions Framework

Strategy Canvas Chart of Yellow Tail

The Four Action Framework used in concert with the strategy canvas drives

companies to pursue differentiation and low cost in redefining their strategy. It asks four

questions:

1. Which of the factors that the industry takes for granted should be eliminated?

2. Which factors should be reduced well below the industry’s standard?

3. Which factors should be raised well above the industry’s standard?

4. Which factors should be created that the industry has never offered?

(See Figure 3).

The first question forces managers to consider eliminating factors that companies in

your industry have long competed on. Often those factors are taken for granted, even long

after they have ceased to add value and in many cases have even begun to erode it. The

second question drives managers to assess where they are over-serving customers,

increasing their cost structure for no gain. The third question pushes managers to uncover

and eliminate the compromises your industry forces customers to make. The fourth

question helps managers to discover entirely new sources of value for buyers and to

create new demand and shift the strategic pricing of the industry. It is by pursuing the

first two questions (of eliminating and reducing) that managers gain insight into how to

drop cost structure vis-a` -vis competitors.

The second two questions, by contrast, provide managers with insight into how to

lift buyer value and create new demand. Collectively, they allow managers to

systematically explore how to reconstruct buyer value elements across alternative

industries to offer buyers an entirely new experience, while simultaneously keeping cost

structure low.

Following the Four Actions Framework, we return to the strategy canvas where it is

used as an action framework for building, and later communicating, a compelling blue

ocean strategy.

Blue ocean strategies reconstruct market boundaries, thereby freeing companies

from head-to-head competition and instead opening new market space to achieve a leap

in value for both buyers and for themselves. Identifying a potentially successful strategic

move does not require any special capacities, vision or foresight about the future. All new

insights come through looking at familiar data from a new perspective.

Figure 3: Eliminate-Raise-Reduce-Create Grid: The case of Yellow Tail

How is this undertaken? To break out of red oceans, companies must breach the

accepted boundaries that define how they compete. Instead of looking within these

boundaries, managers need to look systematically across them to create blue oceans. We

have found that most managers bind their strategic vision within six boundaries of

competition. These are: industry, strategic group, buyer group, complementary product

and service offerings, the functional-emotional orientation of their industry, and within a

given period of time. Yet, we’ve found if they switch their focus from looking within to

looking across these six boundaries of competition, they gain keen insight into how to

reconstruct market realities to open up blue oceans. In the book we introduce a tool called

the Six Paths Framework to help in systematically reconstructing market realities across

the six boundaries of competition (see Figure 4).

You also advise those attempting to formulate a blue ocean strategy to focus on the

big picture, not the numbers. Can you explain what you mean and how it improves the

development of blue ocean strategies in practice?

Kim and Mauborgne: Traditional numbers-driven strategic planning processes

usually involve the preparation of large, complicated spreadsheet documents. A closer

look reveals that most of these ‘‘strategic’’ plans don’t contain a strategy at all but rather

amount to a loose collection of tactics that individually make sense, but lack a compelling

collective logic. Taken as a whole, they don’t provide a unified, clear, distinctive

direction that sets a company apart from its rivals – let alone makes the competition

irrelevant. We have developed an alternative approach to the existing strategic planning

process that is based not on preparing a spreadsheet document but on drawing a strategy

canvas. This approach consistently produces strategies that unlock the creativity of a

wide range of people within an organization, open companies’ eyes to blue oceans, and

are easy to understand and communicate for effective execution.

Six-paths Frameworks: From head-to-head competition to blue ocean creation

Two of the most counter-intuitive elements in the blue ocean approach to strategy

development involve the approach to customers and segmentation. You advise strategists

to focus more on non-customers and also less on finer and finer segmentation. Can you

elaborate?

Kim and Mauborgne: The natural strategic orientation of many companies is toward

retaining existing customers and seeking further segmentation opportunities. This often

leads to finer segmentation and greater tailoring of offerings to better meet customer

preferences. The more intense the competition is, the greater the resulting customization

of offerings. Although this might be a good way to gain a focused competitive advantage

and increase share of the existing market space, it is not likely to produce a blue ocean

that expands the market and creates new demand.

To create and capture blue oceans, companies need to take a reverse course. Instead

of concentrating on customers, they need to look to noncustomers. And instead of

focusing on customer differences, they need to build on powerful commonalities in

what buyers value. This allows companies to reach beyond existing demand to

unlock a new mass of customers that did not exist before.

Although the universe of noncustomers typically offers substantial blue ocean

opportunities, few companies have keen insight into who noncustomers are and how to

unlock them. To convert this huge latent demand into real demand in the form of thriving

new customers, companies need to deepen their understanding of the universe of

noncustomers. The book identifies three tiers of noncustomers to further guide this

process. Once identified, companies should look to the commonalities across

noncustomers. If you focus on these, and not on the differences between them, you will

glean insight into how to desegment buyers and unleash enormous latent untapped

demand.

Strategy & Leadership: You say that executives trying to lead their companies through

blue ocean strategy development, particularly for the first time, typically encounter a

number of major organizational hurdles. Can you explain what these are, and how a

manager can overcome them?

Kim and Mauborgne: As blue ocean strategy represents a significant departure from the

status quo, we have found that managers typically face four hurdles to execution. The

first hurdle is cognitive: waking employees up to the need for a strategic shift. Red

oceans may not be the paths to future profitable growth, but they feel comfortable to

people and may have even served an organization well. This leads mangers to ask, why

shake things up? The second hurdle is limited resources. The greater the shift in strategy,

the greater the resources believed to be needed to execute it. Third is motivation. How do

you inspire key players to move fast and tenaciously to carry out a break from the status

quo? The final hurdle is organizational politics. Leaders must identify and effectively

deal with internal opponents to change.

The book outlines how to get over these four key hurdles and manage strategic change

effectively in a timely fashion, within existing resource constraints, using a technique we

call tipping point leadership.

B i St tB i St tBusiness Strategy Business Strategy andandand and

Strategic ManagementStrategic ManagementStrategic ManagementStrategic Management

Strategy Formulation:Strategy Formulation:

Bl O St tBl O St tBlue Ocean StrategyBlue Ocean StrategyCreating uncontested market spaceCreating uncontested market spaceand make the competition irrelevantand make the competition irrelevantand make the competition irrelevantand make the competition irrelevant

Strategy Formulation: Blue Ocean StrategyStrategy Formulation: Blue Ocean StrategyAbout the About the FoundersFounders: Chan & Renee: Chan & Renee

W. Chan Kim

• The Boston Consulting GroupBruce D. Henderson ChairP f f St t dProfessor of Strategy and International Management

Renée Mauborgne

• The INSEAD Distinguished Fellow and Professor of Strategyand International Management

Two worlds …Two worlds …Two worlds …Two worlds …

Red OceanCompete in crowdedcrowded markets

Blue OceanCreate and

capture newcapture new market space

Creating Blue OceansCreating Blue Oceans

•• Two types of markets:Two types of markets:

R d OR d O ll i d t i i i tll i d t i i i t––Red Oceans Red Oceans –– all industries in existence all industries in existence today (known market space)today (known market space)today (known market space)today (known market space)

––Blue Oceans Blue Oceans –– all industries not in all industries not in existence today (unknown marketexistence today (unknown marketexistence today (unknown market existence today (unknown market space)space)

New Market SpaceNew Market Space

•• There is a fairly good understanding of how toThere is a fairly good understanding of how toThere is a fairly good understanding of how to There is a fairly good understanding of how to compete in Red Oceanscompete in Red Oceans

•• Bl e Oceans a e kno n to e ist ho e e the eBl e Oceans a e kno n to e ist ho e e the e•• Blue Oceans are known to exist, however, there Blue Oceans are known to exist, however, there is little practical guidance on how to create themis little practical guidance on how to create them

•• This book focuses This book focuses on the analytical frameworks the analytical frameworks necessary to create Blue Oceans and thenecessary to create Blue Oceans and thenecessary to create Blue Oceans and the necessary to create Blue Oceans and the managerial strategy needed to sustain themmanagerial strategy needed to sustain them

New Market SpaceNew Market Space

•• In Red Oceans, industry boundaries are definedIn Red Oceans, industry boundaries are definedIn Red Oceans, industry boundaries are defined In Red Oceans, industry boundaries are defined and accepted, and the competitive rules of the and accepted, and the competitive rules of the game are knowngame are knowngame are knowngame are known

•• In Blue Oceans, there exists untapped market In Blue Oceans, there exists untapped market space, demand creation, and the opportunity for space, demand creation, and the opportunity for highly profitable growthhighly profitable growthg y p gg y p g

•• Most Blue Oceans are created from within red Most Blue Oceans are created from within red oceans by expanding industry boundariesoceans by expanding industry boundariesoceans by expanding industry boundariesoceans by expanding industry boundaries

The Continuing Creation of BlueThe Continuing Creation of BlueThe Continuing Creation of Blue The Continuing Creation of Blue OceansOceans

•• How many of today’s industries wereHow many of today’s industries wereHow many of today s industries were How many of today s industries were unknown unknown 100 100 years ago?years ago?

•• Blue Oceans have continuously been Blue Oceans have continuously been created over timecreated over timecreated over timecreated over time

•• The key to strength in the business world The key to strength in the business world y gy gis to create new, uncontested market is to create new, uncontested market spacespacespacespace

Two worlds …Two worlds …Two worlds …Two worlds …

Red Ocean Strategy Blue Ocean Strategy

Compete in existing market Create uncontested marketCompete in existing market space.

Create uncontested market space.

Beat the competition Make the competitionBeat the competition. Make the competition irrelevant.

Exploit existing demand Create and capture newExploit existing demand. Create and capture new demand.

Make the value cost trade off Break the value cost trade offMake the value-cost trade-off. Break the value-cost trade-off.

Align the whole system of a Align the whole system of aAlign the whole system of a strategic firm's activities with its choice of differentiation or

Align the whole system of a firm's activities in pursuit of differentiation and low cost.

low cost. VALUE INNOVATION

The rising Imperative of Creating The rising Imperative of Creating g p gg p gBlue OceansBlue Oceans

• Supply exceeds demandSupply exceeds demand

•• Accelerated commoditization of products Accelerated commoditization of products

and servicesand services

•• Increasing price warsIncreasing price wars

•• Shrinking profit marginsShrinking profit margins

•• Brands are becoming more similar Brands are becoming more similar

•• select based on priceselect based on price

The Rising Imperative of Creating BlueThe Rising Imperative of Creating BlueThe Rising Imperative of Creating Blue The Rising Imperative of Creating Blue OceansOceans•• Globalism has made many brands Globalism has made many brands

become increasingly similar and more of a become increasingly similar and more of a

commoditycommodity

•• Technological improvement has caused Technological improvement has caused

supply to outweigh demandsupply to outweigh demand

•• It is now harder than ever to differentiate It is now harder than ever to differentiate

among brandsamong brands

The Impact of Creating BlueThe Impact of Creating BlueThe Impact of Creating Blue The Impact of Creating Blue OceansOceans

•• In a study of the launches ofIn a study of the launches of 108108In a study of the launches of In a study of the launches of 108 108 companies, companies, 8686% were line extensions % were line extensions (R d O )(R d O )(Red Ocean)(Red Ocean)

•• However these only accounted forHowever these only accounted for 6262%%•• However, these only accounted for However, these only accounted for 6262% % of total revenues and of total revenues and 3939% of total profits% of total profits

•• The other The other 1414% of launches were aimed at % of launches were aimed at creating blue oceans and accounted forcreating blue oceans and accounted forcreating blue oceans and accounted for creating blue oceans and accounted for 3838% of revenue and % of revenue and 6161% of total profit% of total profit

The Profit and GrowthThe Profit and GrowthThe Profit and Growth The Profit and Growth Consequences of Blue OceansConsequences of Blue OceansConsequences of Blue OceansConsequences of Blue Oceans

Launches With Red OceansLaunches With Red Oceans

86% 14%Business LaunchBusiness Launch

Launches With Blue OceansLaunches With Blue Oceans

86% 14%Business LaunchBusiness Launch

62% 38%revenue impactrevenue impact

39% 61%Profit ImpactProfit Impact 39% 61%Profit ImpactProfit Impact

From Company and Industry toFrom Company and Industry toFrom Company and Industry to From Company and Industry to Strategic MoveStrategic Movegg

•• The company is not the appropriate unit ofThe company is not the appropriate unit ofThe company is not the appropriate unit of The company is not the appropriate unit of analysis for exploring blue oceansanalysis for exploring blue oceans

•• Bl e Oceans foc s on the st ategic mo e atheBl e Oceans foc s on the st ategic mo e athe•• Blue Oceans focus on the strategic move rather Blue Oceans focus on the strategic move rather than the company or industrythan the company or industry

•• This book focuses on 150 strategic moves made This book focuses on 150 strategic moves made from 1880 to 2000 in various industriesfrom 1880 to 2000 in various industriesfrom 1880 to 2000 in various industriesfrom 1880 to 2000 in various industries

•• Blue Oceans were found to be created by new Blue Oceans were found to be created by new d ld i tt ti d tt tid ld i tt ti d tt tiand old companies, attractive and unattractive and old companies, attractive and unattractive

industries, and both private and public industries, and both private and public companiescompanies

Value Innovation: The CornerstoneValue Innovation: The CornerstoneValue Innovation: The Cornerstone Value Innovation: The Cornerstone of Blue Ocean Strategyof Blue Ocean Strategygygy

•• Value creation alone improves value but is not sufficient Value creation alone improves value but is not sufficient ppto make you stand out in the marketplaceto make you stand out in the marketplace

•• Innovation alone will often create a product that buyersInnovation alone will often create a product that buyersInnovation alone will often create a product that buyers Innovation alone will often create a product that buyers are not willing to pay forare not willing to pay for

•• Value innovation occurs only when companies alignValue innovation occurs only when companies align•• Value innovation occurs only when companies align Value innovation occurs only when companies align innovation with utility, price, and cost positionsinnovation with utility, price, and cost positions

•• Value innovation:Value innovation:•• Value innovation:Value innovation:–– Make the competition irrelevantMake the competition irrelevant–– Create a leap in value for both buyers and your Create a leap in value for both buyers and your

companycompany–– Open up new and uncontested market spaceOpen up new and uncontested market space

Unlocking nonUnlocking non--customercustomerUnlocking nonUnlocking non customer customer demanddemand

Value Innovation

UtilityCreate new

PriceSet a price that

CostSet the structureCreate new

buyerutilities

Set a price that attracts a mass

of buyers

Set the structure based on a

targety g

Generic Strategies vs. Value InnovationGeneric Strategies vs. Value Innovationgg

Red Ocean Strategy Blue Ocean Strategy

HighHigh

V1•V1

QualityQuality

•

LowLow

•

LowC1

CostHighHigh LowLow

Low

CostC1

Structuralist Reconstructionist

Minimizing Risks and MaximizingMinimizing Risks and MaximizingMinimizing Risks and Maximizing Minimizing Risks and Maximizing Opportunities in Formulating and Executing Opportunities in Formulating and Executing Blue Ocean StrategyBlue Ocean StrategyBlue Ocean StrategyBlue Ocean Strategy

Formulation Risks

Search Risk

Core/Formulation Principles

Reconstruct market boundaries

Planning RiskFocus on the big picture, not the numbers

Scale Risk

Business Model Risk

Reach beyond existing demand

Get the strategic sequence right

Execution Risks

Business Model RiskGet the strategic sequence right

Execution Principles

Organizational Risk

M t Ri k

Overcome key organizational hurdles

B ild ti i t t t Management RiskBuild execution into strategy

© Kim & Mauborgne 2006

BOS Logic: The Core PrinciplesBOS Logic: The Core PrinciplesBOS Logic: The Core PrinciplesBOS Logic: The Core Principles

Reconstruct Market Reconstruct Market BoundariesBoundariesBoundariesBoundaries… overcome believes.

Reach beyondexisting Demandexisting Demand… go for uncontested space. COST

Get the strategic i ht

VIVI

sequence right… value [innovation] first. VALUE

BOS Logic: Reconstruct market boundariesBOS Logic: Reconstruct market boundaries

Boundaries of Head-to-Head Creating

Industry Focuses on rivals within its Looks across alternative industries

Boundaries of Competition

Head to HeadCompetition

Creating New Market Space

Industry industry

Strategic Group Focuses on competitive position

industries

Looks across strategic groups within its industryStrategic Group within strategic group

Buyer Group Focuses on better serving the buyer group

within its industry

Redefines the buyer group of the industrybuyer group

Scope of Product and Focuses on maximizing the value of product and service offerings

industry

Looks across to complementary product and service offerings that

Service Offerings of product and service offerings within the bounds of its industry

F ti l ti l Focuses on improving price-

p ggo beyond the bounds of its industry

Rethinks the functional-emotional Functional-emotional Orientation of an

Industry

p g pperformance with the functional-emotional orientation of this industry

orientation of its industry

Time/Trends Focuses on adapting to external trends as they occur

Participation in shaping external trends over time

BOS Logic: The Core PrinciplesBOS Logic: The Core Principles

Reconstruct Market Boundaries… overcome believes.

Reach beyondReach beyondexisting Demandexisting Demandexisting Demandexisting Demand… go for uncontested space

COST

space.Get the strategic

i ht

VIVI

sequence right… value [innovation] first. VALUE

BOS Logic: Reach beyond existing d ddemand

Core Customer Noncostumer

Soon-to-be-NC Refusing Customer

Three Tiers of CustomersThree Tiers of CustomersThree Tiers of CustomersThree Tiers of Customers

There is a universe ofThere is a universe ofThere is a universe of There is a universe of noncustomers which can be noncustomers which can be turned into customers to offer a big turned into customers to offer a big

3rdblue ocean market.blue ocean market.

11st tier: “Soonst tier: “Soon--toto--be”be”2nd

11st tier: Soonst tier: Soon--toto--be be noncustomers who are on the noncustomers who are on the edge of your marketedge of your market

1st22nd tier: “Refusing” nd tier: “Refusing” noncustomers whononcustomers whononcustomers who noncustomers who consciously choose against consciously choose against your marketyour market

33rd tier: “Unexplored” rd tier: “Unexplored” noncustomers who are innoncustomers who are innoncustomers who are in noncustomers who are in markets distant from yoursmarkets distant from yours

Three Tiers of CustomersThree Tiers of Customers

•• Three tiers of nonThree tiers of non--customers:customers:

Three Tiers of CustomersThree Tiers of Customers

•• Three tiers of nonThree tiers of non customers:customers:–– 1: buyers who purchase your industry offerings out of 1: buyers who purchase your industry offerings out of

necessity; will jump ship if given an opportunity.necessity; will jump ship if given an opportunity.necessity; will jump ship if given an opportunity.necessity; will jump ship if given an opportunity.–– 2: buyers who purchase alternative offerings that serve the 2: buyers who purchase alternative offerings that serve the

same function same function –– 3: people who don’t consume even the alternatives to your 3: people who don’t consume even the alternatives to your

offeringsofferings

•• NonNon--customer demand is unlocked by providing customer demand is unlocked by providing new buyer utilities, at a price that attracts a mass new buyer utilities, at a price that attracts a mass of buyers, given target costs. of buyers, given target costs.

•• Buyers could be not only endBuyers could be not only end--users, but also other users, but also other y yy y ,,participants in a value chain (e.g. distributors)participants in a value chain (e.g. distributors)

BOS Logic: The Core PrinciplesBOS Logic: The Core Principles

Reconstruct Market Boundaries… overcome believes.

Reach beyondexisting Demandexisting Demand… go for uncontested space. COST

Get the strategic Get the strategic i hti ht

VIVI

sequence rightsequence right… value [innovation] first. VALUE

BOS Logic: Get the Strategic Sequence right

Buyer utilityIs there exceptional buyer

utility in your business idea?utility in your business idea?

YESNo Rethink

PriceIs your price easily accessible to

the mass of buyers?N R thi k

CostYES

No Rethink

Can you attain your cost target to profit at your strategic price?

YESNo Rethink

AdoptionWhat are the adoption hurdles in

YES

pactualizing your business idea?

Are you addressing them up front?

No Rethink

A commercially viable Blue Ocean StrategyYES

Four Actions Framework: Key to Value CurveFour Actions Framework: Key to Value CurveyyReduceWhat factors shouldThe key to discovering a What factors should be reduced well below the industry standard?

y gnew value curve lies in answering four basic questions standard?questions

Eli i t C t /AddCreatingCreatingnew markets:A l

EliminateWhat factors that the industry has taken for

Create/AddWhat factors that the industry has never

curveA new valuecurve

industry has taken for granted should be eliminated?

industry has never offered should be created or added?

RaiseWh t f t h ld Cirque du Soleil exampleWhat factors should be raised well above the industry

Cirque du Soleil example

standard?

St t CSt t Chigh

Strategy CanvasStrategy Canvashigh

low

Industry Variables

F St f Vi li iF St f Vi li iFour Steps of VisualizingFour Steps of Visualizing1 Vi l 2 Vi l 3 Vi l 4 Vi l1. Visual Awakening

2. Visual Exploration

3. Visual Strategy Fair

4. Visual Communication

•Compare your business with your competitors’ by d i “ i ”

•Go into the field to explore the six paths to creating blue

•Draw your “to be” canvas based on insights from field

b ti

•Distribute your before-and-after strategic profiles on

fdrawing your “as is” canvas

•See where your

oceans

•Observe the distinctive advantages

observations

•Get feedback on alternative strategy

one page for easy comparison

•Support only those•See where your strategy needs to change

distinctive advantages of alternative products and services

alternative strategy canvases from customers, competitors’

•Support only those projects and operational moves that allow your

•See which factors you should eliminate, create or change

customers, and non-customers

U f db k t b ild

company to close gaps and actualize the new strategy

•Use feedback to build the best “to be” future strategy

The Case of Cirque du SoleilThe Case of Cirque du SoleilThe Case of Cirque du SoleilThe Case of Cirque du Soleil

•• Cirque du Soleil achieved rapid growth inCirque du Soleil achieved rapid growth inCirque du Soleil achieved rapid growth in Cirque du Soleil achieved rapid growth in a declining industry with low profit a declining industry with low profit

t ti lt ti lpotentialpotential•• Cirque du Soleil created uncontested newCirque du Soleil created uncontested new•• Cirque du Soleil created uncontested new Cirque du Soleil created uncontested new

market space that made the competition market space that made the competition irrelevant irrelevant

•• httphttp://www youtube com/watch?v=M://www youtube com/watch?v=M44lAPIlAPI•• httphttp://www.youtube.com/watch?v=M://www.youtube.com/watch?v=M44lAPIlAPI55BAukBAuk

Example: Cirque du SoleilExample: Cirque du Soleil

•• Instead of simply trying to outpace theInstead of simply trying to outpace theInstead of simply trying to outpace the Instead of simply trying to outpace the competition, Cirque du Soleil offered competition, Cirque du Soleil offered

l b th th f d th ill f th il b th th f d th ill f th ipeople both the fun and thrill of the circus people both the fun and thrill of the circus and the intellectual sophistication of theand the intellectual sophistication of theand the intellectual sophistication of the and the intellectual sophistication of the theatertheater

•• Because of this, Cirque du Soleil appealed Because of this, Cirque du Soleil appealed to both circus customers andto both circus customers andto both circus customers and to both circus customers and noncustomersnoncustomers


•• Each show like a theater production hadEach show like a theater production hadEach show, like a theater production, had Each show, like a theater production, had its own unique theme and storylineits own unique theme and storyline

•• This allowed customers to return to the This allowed customers to return to the show more frequentlyshow more frequentlyshow more frequentlyshow more frequently

•• They also did away with the traditional They also did away with the traditional y yy yhighhigh--priced concessions and vendors priced concessions and vendors thereby cutting coststhereby cutting coststhereby cutting coststhereby cutting costs


•• Cirque du Soleil effectively combined theCirque du Soleil effectively combined theCirque du Soleil effectively combined the Cirque du Soleil effectively combined the best of both the circus and the theater best of both the circus and the theater

hil li i ti thi lhil li i ti thi lwhile eliminating everything elsewhile eliminating everything else•• This allowed them to achieve bothThis allowed them to achieve both•• This allowed them to achieve both This allowed them to achieve both

differentiation and low costdifferentiation and low cost

EliminateEliminate--ReduceReduce--RaiseRaise--CreateCreateEliminateEliminate ReduceReduce RaiseRaise CreateCreate

EliminateEliminateSt P f

RaiseRaiseU iStar Performers

Animal showsUnique venues

Aisle concession salesM lti l hMultiple show arenas

ReduceReduce CreateCreateFun and humorTh ill d d

ThemeR fi d iThrill and danger Refined environmentMultiple productionsMultiple productionsArtistic music and dance

The Strategy Canvas The Strategy Canvas gygyof Cirque du Soleilof Cirque du Soleil

Ringling Brothershi

Cirque du Soleil

Smaller Regional Circusng le

vel

Smaller Regional Circus

offe

rin

loPrice

Fun & Humor Unique VenueAisle Concessions

Multiple Show Arenas Thrills & DangerAnimal Shows

Star Performers

Theme

Refined Viewing Environment

MultipleProductions

Artistic Music & Dance


The Strategy Canvas The Strategy Canvas gygyof Cirque du Soleilof Cirque du Soleilhi ReduceEliminate Raise Create

Ringling Brothers

Cirque du Soleil

ng le

vel

Smaller Regional Circus

offe

rin Smaller Regional Circus

loPrice

Fun & Humor Unique VenueAisle Concessions

Multiple Show Arenas Thrills & DangerAnimal Shows

Star Performers

Theme

Refined Viewing Environment

MultipleProductions

Artistic Music & Dance


The Case of Yellow TailThe Case of Yellow TailEliminate-Reduce-Raise-Create Grid:

Eliminate RaiseEnological terminology and distinctions

A i liti

Price versus budget wines

Retail store involvementAging qualities

Above-the-line marketing

ReduceWine complexity

CreateEasy drinking

Wine range

Vineyard prestige

Ease of selection

Fun and adventure

Source: Blue Ocean Strategy, Kim and MauborgneMauborgne

Source: Blue Ocean Strategy, Kim and Mauborgne

Value Curve for US Wine Industry Value Curve for US Wine Industry vsvsYellow TailYellow Tail Expensive wines

Yellow tailCheap winesp

High

Low

Price

Use of technical

Above-the-linemarketing

Aging

Vineyardprestige

Wine

Winerange

Eas

Ease ofselection

F n and

3838

Use of technicalwine terminology

Agingquality

Winecomplexity

Easydrinkability

Fun andadventure

Strategy CanvasCosts

EliminateEnological terminology and distinctions

RaisePrice versus budget wines

Retail store involvementStrategy CanvasValue

Innovation

Aging qualities

Above-the-line marketing

Reduce Create

Buyer ValueWine complexity

Wine range

Vineyard prestige

Easy drinking

Ease of selection

Fun and adventure

Four Actions FrameworkERRC Grid

Source: Blue Ocean Strategy, Kim and MauborgneMauborgne

The Case of Accor's The Case of Accor's FormuleFormule 1 1 Budget HotelBudget Hotel

Cost per room 100 000 FF ↔ 270 000 FF

From Formule 1’s perspective:Cost per room 100,000 FF ↔ 270,000 FFCost of staff 20-23% of sales vs. 23-25% Profit Margins > 2x industry averageg y gOccupancy rates > 3x industry average

From customers’ perspective:H i 2* h t lHygiene > average 2* hotelBed quality > average 2* hotelSilence > average 2* hotelSilence > average 2 hotelPrice 100 FF ↔ 200 FF of industry

Source: HBR: Value Innovation Logic, Kim and Mauborgne

Results of Formule 1’s StrategyResults of Formule 1’s Strategy

The value curve of Formule 1 in the French Low Budget Hotel Industry

gygy

g y

The Strategy Canvas of SouthwestThe Strategy Canvas of SouthwestThe Strategy Canvas of Southwest The Strategy Canvas of Southwest AirlinesAirlinesHigh

Southwest

The value curve of Southwest Airline

A Ai li

Southwest

Average Airline

Car Transport

LowLowPrice

MealsLounges

Seating Hub

connectivity Friendly Speed Frequent point-

to point Classchoices

yservice to-point

departure

Strategy Canvas of Personal Finance Strategy Canvas of Personal Finance gygySoftware IndustrySoftware Industryhi

Quicken

Personal Finance Software

ng le

vel

offe

rin

The Pencil

lo

Price Speed AccuracyOptional FeaturesEase of Use


3. Draw the Strategy Canvas: 1 on left, 4 on right

Factors of Competition / Value Factors:

Blue Ocean Strategy1. List 8 to 12 important Factors of Competition2. Enter top 2 or 3 in each ERRC Grid QuadrantExerciseExercise p

•• 11. List Factors of . List Factors of CompetitionCompetitionCompetitionCompetition

•• 22. Top . Top 2 2 or or 3 3 in ERRC in ERRC G id Q ad antsG id Q ad antsGrid QuadrantsGrid Quadrants

1. Eliminate: 3. Raise:

2 Reduce: 4 Create:2. Reduce: 4. Create:

Rev: 2006.02.21

Project Name:ExerciseExercise

8

Very High

10

93.3. Write on Write on

Worksheet: Worksheet: 7

6

5 Medium

HighE left, C rightE left, C right

4.4. Draw “As Is”Draw “As Is”5

4

3

2

Medium

Low

5.5. Draw “To Be”Draw “To Be”

2

1

0

Very Low

Fact

ors

Valu

e

ExamplesExamplesExamplesExamples

ExamplesExamplespp ExamplesExamplespp

ReferencesReferences

• W. Chan Kim, Renée Mauborgne, Blue Ocean Strategy, 2005,H d B i S h l PHavard Business School Press.

• http://www.blueoceanstrategy.com

• HANDELSBLATT, Donnerstag, 06. Oktober 2005, Mit Nichtkunden neue Märkte findenMit Nichtkunden neue Märkte finden.

htt // h t lf l 1• http://www.hotelformule1.com

Assignment:gChoose a company, product or industry and use BOS to do

the competitive analysis of the company. Brainstorm the l f t f th d t i d t dvalue factors of the company, product or industry and develop the Strategy Canvas. The objective of this

assignment is to show basically how can aassignment is to show basically how can a company/organisation create an uncontested market space

and make their competitor irrelevant.

Thank youThank you

Business Strategy Business Strategy gygyand and


St t i PSt t i PStrategic ProcessStrategic Process

Strategic Process: 3 StagesStrategic Process: 3 Stages

•• Stage 1: StrategicStage 1: StrategicStage 1: Strategic Stage 1: Strategic AnalysisAnalysis

•• Stage 2 Selection ofStage 2 Selection of•• Stage 2: Selection of Stage 2: Selection of StrategyStrategy

•• Stage 3: Implement Stage 3: Implement and Manage Strategyand Manage Strategyand Manage Strategyand Manage Strategy

Stage 1: Strategic AnalysisStage 1: Strategic Analysis Purpose of Strategic AnalysisPurpose of Strategic Analysis

•• Purpose: Gather information in order toPurpose: Gather information in order toPurpose: Gather information in order to Purpose: Gather information in order to determine which strategy to pursuedetermine which strategy to pursue

Two Steps of Strategic AnalysisTwo Steps of Strategic Analysis

•• Internal AnalysisInternal Analysis•• Internal AnalysisInternal Analysis•• External AnalysisExternal Analysisyy

Factors Shaping theFactors Shaping theChoice of Company StrategyChoice of Company StrategyChoice of Company StrategyChoice of Company Strategy

E te nal Facto sExternal FactorsSocial, political, regulatory and

community

Competitive conditions and

industry

Company opportunities and threats to

community factors

industry attractiveness

company’s well-being

Compan ’s St ategic Sit ationCraftthe

Identify and evaluate

Determine relevance of internal

Company’s Strategic Situation thestrategy

evaluate alternatives

and external factors

Resource strengths Shared values

Internal Factors

strengths, capabilities,

and weaknesses

Influences of key executives

Shared values and company

cultureweaknesses

Internal AnalysisInternal Analysis

•• Internal analysisInternal analysis of an organizationof an organizationInternal analysisInternal analysis of an organization of an organization looks at what the strengths and looks at what the strengths and

k f th i tik f th i tiweaknesses of the organizations areweaknesses of the organizations are•• The questions asked by the organizationThe questions asked by the organization•• The questions asked by the organization The questions asked by the organization

are: are: What are we good at doing?What are we good at doing?Wh t t d t d i ?Wh t t d t d i ?What are we are we not so good at doing?What are we are we not so good at doing?

Second Step: External AnalysisSecond Step: External Analysis

•• External AnalysisExternal Analysis itself looks at 2itself looks at 2External AnalysisExternal Analysis itself looks at 2 itself looks at 2 things:things:

Micro (or “near”) environmentMicro (or “near”) environment–– Micro (or near ) environmentMicro (or near ) environment

–– Macro (or “far”) environmentMacro (or “far”) environment

Micro EnvironmentMicro Environment

•• Micro environment contains theMicro environment contains theMicro environment contains the Micro environment contains the industryindustry in which the organization in which the organization

ttcompetescompetes•• It includes:It includes:•• It includes:It includes:

−− competitorscompetitors−− supplierssuppliers−− distributorsdistributors−− customerscustomers

Macro EnvironmentMacro Environment

•• Macro environment includes forces that affect Macro environment includes forces that affect bothboth the the organization AND the entire organization AND the entire industryindustryyy

•• Macro environment includes the following Macro environment includes the following influences:influences:influences:influences:−− SocioSocio--demographicdemographic−− politicalpolitical−− politicalpolitical−− economiceconomic−− technologicaltechnologicalgg−− legallegal

After the Internal and ExternalAfter the Internal and ExternalAfter the Internal and External After the Internal and External AnalysisAnalysisAnalysisAnalysis

•• The inte nal and e te nal anal sis p o ideThe inte nal and e te nal anal sis p o ide•• The internal and external analysis provide The internal and external analysis provide information for the organization to use in information for the organization to use in ggmaking a strategy decisionmaking a strategy decisionB t h d th it?B t h d th it?•• But how do they use it?But how do they use it?

•• Answer: SWOT analysis (StrengthsAnswer: SWOT analysis (Strengths•• Answer: SWOT analysis (Strengths, Answer: SWOT analysis (Strengths, Weaknesses, Opportunities, Threats)Weaknesses, Opportunities, Threats)

Strategy SelectionStrategy Selection

After Strategic AnalysisAfter Strategic Analysis

•• AfterAfter Strategic AnalysisStrategic Analysis the informationthe informationAfter After Strategic AnalysisStrategic Analysis, the information , the information gathered is used choose a strategygathered is used choose a strategy

•• ThereforeTherefore accurate and sufficientaccurate and sufficient•• ThereforeTherefore, accurate and sufficient , accurate and sufficient information is very importantinformation is very important--if it is not, if it is not, y py p ,,selection of a good strategy is difficultselection of a good strategy is difficult

Steps of Selecting a StrategySteps of Selecting a Strategy

•• First look at the strategic analysisFirst look at the strategic analysisFirst, look at the strategic analysisFirst, look at the strategic analysis•• Second, make a list of strategy optionsSecond, make a list of strategy options•• Third, Third, evaluateevaluate each optioneach option

ll h hll h h•• Finally, choose the most appropriate Finally, choose the most appropriate strategystrategystrategystrategy

Strategy Implementation andStrategy Implementation andStrategy Implementation and Strategy Implementation and ManagementManagementgg Putting the Strategy into EffectPutting the Strategy into Effect

•• AfterAfter strategic analysisstrategic analysis and afterand afterAfter After strategic analysisstrategic analysis, and after , and after selecting a strategyselecting a strategy, an organization , an organization

tt dd th l t d t tth l t d t tmust must dodo the selected strategythe selected strategy

What to Think About WhenWhat to Think About WhenWhat to Think About When What to Think About When “Doing” the Strategy“Doing” the Strategyg gyg gy

•• Do we have enough resources?Do we have enough resources?gg•• Organizational culture and structureOrganizational culture and structure•• What changes are needed to “do” the strategy?What changes are needed to “do” the strategy?What changes are needed to do the strategy?What changes are needed to do the strategy?•• Is growth or development of the organization Is growth or development of the organization

needed?needed?needed?needed?•• Are the operations of the organization ready to Are the operations of the organization ready to

“do” the strategy, and are there any quality“do” the strategy, and are there any qualitydo the strategy, and are there any quality do the strategy, and are there any quality issuesissues

•• The organization’s positionThe organization’s position geographicallygeographically andandThe organization s position The organization s position geographicallygeographically and and internationallyinternationally

Feedback and MonitoringFeedback and MonitoringFeedback and MonitoringFeedback and Monitoring

Does it End with “Doing” theDoes it End with “Doing” theDoes it End with Doing the Does it End with Doing the Strategy?Strategy?gygy

O i ti t i h iO i ti t i h i•• Organizations operate in changing Organizations operate in changing environmentsenvironments

•• ThereforeTherefore, it is important to look at how , it is important to look at how the strategy is working and if things havethe strategy is working and if things havethe strategy is working and if things have the strategy is working and if things have changed and new strategy is neededchanged and new strategy is needed

•• In fact, the process should always In fact, the process should always continuecontinuecontinuecontinue

SummarySummary

•• TheThe Strategy ProcessStrategy Process contains 3 stages:contains 3 stages:The The Strategy ProcessStrategy Process contains 3 stages:contains 3 stages:•• First, Strategic AnalysisFirst, Strategic Analysis•• Second, Selecting a StrategySecond, Selecting a Strategy

h d l d hh d l d h•• Third, Implementing and Managing the Third, Implementing and Managing the selected strategyselected strategyselected strategyselected strategy

Summary (continue)Summary (continue)

•• Strategic Analysis involves 2 steps:Strategic Analysis involves 2 steps:Strategic Analysis involves 2 steps: Strategic Analysis involves 2 steps: 1)1) Internal Analysis (Strengths and Internal Analysis (Strengths and Weaknesses)Weaknesses)2)2) External Analysis (of both the microExternal Analysis (of both the micro2)2) External Analysis (of both the micro External Analysis (of both the micro environment and the macro environment)environment and the macro environment)))


•• After the internal and external analysisAfter the internal and external analysisAfter the internal and external analysis, After the internal and external analysis, SWOT may be used to summarize the SWOT may be used to summarize the t th k t iti dt th k t iti dstrengths, weaknesses, opportunities and strengths, weaknesses, opportunities and

threats of the organizationthreats of the organizationthreats of the organizationthreats of the organization


•• After strategic analysis, the organization then After strategic analysis, the organization then g y , gg y , gselects a strategyselects a strategy

•• Then, after selecting a strategy, the organization Then, after selecting a strategy, the organization implements or “does” the strategy and managesimplements or “does” the strategy and managesimplements, or does the strategy and manages implements, or does the strategy and manages the “doing” of the strategythe “doing” of the strategy

•• Finally, the organization constantly takes Finally, the organization constantly takes y, g yy, g yfeedback and monitors the feedback and monitors the strategy processstrategy process

In conclusion the Five Tasks of Strategic In conclusion the Five Tasks of Strategic MMManagement are:Management are:

Task 1 Task 2 Task 3 Task 4 Task 5

Formulate

Task 1 Task 2 Task 3 Task 4 Task 5

MonitorFormulateStrategy

to AchieveG l &

SetGoals &

Obj i

DevelopVisionand

Implementand

Execute

Monitor,Evaluate,and Take

Goals &Objectives

Objectivesand

MissionExecuteStrategy Corrective

Action

Improve/Change

Revise asNeeded

Revise asNeeded

Improve/Change

Recycleas Needed

Business Strategy Business Strategy ddand and

St t i M tSt t i M tStrategic ManagementStrategic Management

Strategic ImplementationStrategic ImplementationStrategic ImplementationStrategic Implementation

IntroductionIntroduction

•• U S managers spend more than $10U S managers spend more than $10U.S. managers spend more than $10 U.S. managers spend more than $10 billion each year on strategic analysis and billion each year on strategic analysis and

ki t tki t tmaking strategymaking strategy•• Managers report that less than half theManagers report that less than half the•• Managers report that less than half the Managers report that less than half the

strategic plans made are implementedstrategic plans made are implemented•• Outside observers estimate that only 10% Outside observers estimate that only 10%

of strategic plans are implementedof strategic plans are implementedof strategic plans are implementedof strategic plans are implemented

Implementation: “Doing” theImplementation: “Doing” theImplementation: Doing the Implementation: Doing the StrategyStrategygygy

•• 3 questions:3 questions:3 questions:3 questions:–– How well is the strategy resourced?How well is the strategy resourced?–– How well do the culture, structure and How well do the culture, structure and

internal systems fit the strategy?internal systems fit the strategy?internal systems fit the strategy?internal systems fit the strategy?–– How will the process of change be managed?How will the process of change be managed?

Strategy ImplementationStrategy ImplementationStrategy ImplementationStrategy Implementation

StructureStructure

TaskTask--FocusFocusDecision Decision ProcessesProcesses

FirmFirmSS

Firm Firm PerformancePerformance

(Value)(Value)ProcessesProcessesand and ControlsControls

StrategyStrategy PerformancePerformance

RewardRewardSystemsSystems

PeoplePeople

Implementation LeversImplementation Levers

DescriptionImplementation

levers

pp

Descriptionlevers

Structure is the manner in which responsibilities, tasks, and people are organized It includes the organization’s authorityOrganizational people are organized. It includes the organization s authority structure, hierarchy, units, divisions, and coordinating mechanisms structure

Systems are all the organizational processes and procedures used in daily operations. These include control and incentive systems, resource-allocation procedures, information systems,

Systems andprocesses systems, resource allocation procedures, information systems,

budgeting and distribution processes

The people and rewards lever points to the importance of using allThe people and rewards lever points to the importance of using all organization members to implement a strategy. Competitive advantage is generally tied to your human resources. Successful implementation depends on ha ing the right people and thenPeople and implementation depends on having the right people and then developing and training them in ways that support the firm’s strategy. In addition, rewards – how you pay your people – can

prewards

55

accelerate the implementation of your strategy or undermine it

How well is the strategy resourced?How well is the strategy resourced?

•• Do the resources need to be increased orDo the resources need to be increased orDo the resources need to be increased or Do the resources need to be increased or decreased?decreased?

•• R i l dR i l d•• Resources include:Resources include:–– PhysicalPhysicalyy–– FinancialFinancial

HumanHuman–– HumanHuman–– Intellectual/intangibleIntellectual/intangible

Resource AuditResource Audit

•• Used to assess resources for:Used to assess resources for:Used to assess resources for:Used to assess resources for:–– SufficiencySufficiency–– AdequacyAdequacy–– AvailabilityAvailabilityAvailabilityAvailability

Resource PlanningResource Planning

•• Hand in hand with resource audits are plans to Hand in hand with resource audits are plans to ppmake sure the needs of the strategy are metmake sure the needs of the strategy are met

•• Includes:Includes:•• Includes:Includes:–– Financial planning (budgeting)Financial planning (budgeting)

Human resource planningHuman resource planning–– Human resource planningHuman resource planning–– Physical resource planningPhysical resource planning

Intellectual resource planningIntellectual resource planning–– Intellectual resource planningIntellectual resource planning

Does the culture fit the strategy?Does the culture fit the strategy?

•• Assessment of the culture determines if theAssessment of the culture determines if theAssessment of the culture determines if the Assessment of the culture determines if the organization is ready to take on the strategyorganization is ready to take on the strategy

•• Use Miles and Sno ’s c lt e t pesUse Miles and Sno ’s c lt e t pes•• Use Miles and Snow’s culture typesUse Miles and Snow’s culture types–– DefenderDefender–– ProspectorProspector–– AnalyserAnalyserAnalyserAnalyser–– ReactorReactor

Does the structure fit the strategy?Does the structure fit the strategy?

•• Height Height –– layers of the organizationlayers of the organizationgg y gy g•• Width Width –– the extent to which power is the extent to which power is

decentralizeddecentralized•• Complexity Complexity –– the extent to which there is a the extent to which there is a

formal hierarchyformal hierarchyyy–– Formal/informalFormal/informal–– matrixmatrix

•• Methods of division Methods of division –– Simple StructureSimple Structurepp–– FunctionalFunctional–– ProductProduct–– NetworkNetwork

Strategy ImplementationStrategy Implementation

Organization StructuresOrganization Structures

•• Simple StructureSimple Structure

PresidentPresident OwnerOwner--manager makes decisions.manager makes decisions.Little specialization of tasks.Little specialization of tasks.Little specialization of tasks.Little specialization of tasks.Few rules, little formalization.Few rules, little formalization.Advantages:Advantages:

E lE l

-- Provides high flexibilityProvides high flexibility-- Rapid product introductionRapid product introduction-- Few coordination problemsFew coordination problemsEmployeesEmployees -- Few coordination problemsFew coordination problems

Organization structureOrganization structureOrganization structureOrganization structure

•• Functional structureFunctional structure

PresidentPresident

AccountingAccounting LegalLegalAffairsAffairsAffairsAffairs

HRMHRM FinanceFinance MarketingMarketing R&DR&D ProductionProductiongg


Organization structureOrganization structure•• Functional structureFunctional structure

AdvantagesAdvantagesgg

-- Centralized control of operationsCentralized control of operations-- Promotes inPromotes in--depth functional expertisedepth functional expertise-- Promotes inPromotes in--depth functional expertisedepth functional expertise-- Enhances operating efficiency where tasks are routineEnhances operating efficiency where tasks are routine

DisadvantagesDisadvantages

-- Functional coordination problemsFunctional coordination problemsu c o a coo d a o p ob e su c o a coo d a o p ob e s-- InterInter--functional rivalryfunctional rivalry-- Overspecialization and narrow viewpointsOverspecialization and narrow viewpoints

Hi d d l t fHi d d l t f f ti l if ti l i-- Hinders development of crossHinders development of cross--functional experiencefunctional experience-- Slower to respond in turbulent environmentsSlower to respond in turbulent environments

Organization structureOrganization structuregg

•• ProductProduct--divisional structuredivisional structure

PresidentPresident

GovernmentGovernmentAffairsAffairs

LegalLegalAffairsAffairsAffairsAffairs AffairsAffairs

CorporateCorporateR&D LabR&D Lab

StrategicStrategicPlanningPlanning

CorporateCorporateHumanHuman CorporateCorporate

MarketingMarketingCorporateCorporateFinanceFinanceR&D LabR&D Lab PlanningPlanning ResourcesResources MarketingMarketing FinanceFinance

ProductProduct ProductProduct ProductProduct ProductProduct ProductProductDivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision


Organization structureOrganization structure•• ProductProduct--divisional structuredivisional structure

Organization based on products versus functionsOrganization based on products versus functions

Each division is a separate business in which dayEach division is a separate business in which day--toto--day day decisions are delegated to divisional managers.decisions are delegated to divisional managers.

Divisions are managed using strategic controls Divisions are managed using strategic controls –– detaileddetailedknowledge of firm operations allows managers to remain activelyknowledge of firm operations allows managers to remain activelyinvolved.involved.OverdiversificationOverdiversification leads to inability to process detailed informationleads to inability to process detailed informationOverdiversificationOverdiversification leads to inability to process detailed informationleads to inability to process detailed informationand a reliance on financial controls to evaluate managers.and a reliance on financial controls to evaluate managers.


Organization structureOrganization structure

•• ProductProduct--divisional structuredivisional structure

AdvantagesAdvantagesgg

-- Decentralized decision makingDecentralized decision making-- Each business is organized around productsEach business is organized around productsEach business is organized around productsEach business is organized around products

-- Puts profit/loss accountability on managersPuts profit/loss accountability on managers

-- Facilitates rapid response to environmental changesFacilitates rapid response to environmental changesFacilitates rapid response to environmental changesFacilitates rapid response to environmental changes

-- Allows efficient management of a large number of unitsAllows efficient management of a large number of units

DisadvantagesDisadvantages

-- May lead to costly duplication of functionsMay lead to costly duplication of functions

-- InterInter--divisional rivalrydivisional rivalry

-- Corporate managers may lose inCorporate managers may lose in--depth understandingdepth understanding

PresidentPresident•• Matrix StructureMatrix Structure

R&DR&D ProductionProduction MarketingMarketing FinanceFinance

BusinessBusinessProjectProject

SpecialistsSpecialists SpecialistsSpecialists SpecialistsSpecialists SpecialistsSpecialists

BusinessBusiness

jj

S i li tS i li tBusinessBusinessProjectProject

SpecialistsSpecialists SpecialistsSpecialists SpecialistsSpecialists SpecialistsSpecialists

BusinessBusinessP jP j SpecialistsSpecialists SpecialistsSpecialists SpecialistsSpecialists SpecialistsSpecialistsProjectProject SpecialistsSpecialists SpecialistsSpecialists SpecialistsSpecialists SpecialistsSpecialists


Organization structureOrganization structure

•• Matrix structureMatrix structure

Contains aspects of both functional and productContains aspects of both functional and product--divisional divisional p pp pstructures.structures.Advantages:Advantages:

-- Creates checks and balances between competing viewpointsCreates checks and balances between competing viewpoints

-- Promotes holistic view of the firmPromotes holistic view of the firm

-- Encourages cooperation and consensus buildingEncourages cooperation and consensus building

Disadvantages:Disadvantages:

-- Very complex and costlyVery complex and costly

-- Shared authority increases communication timeShared authority increases communication timeyy

-- Difficult to respond rapidlyDifficult to respond rapidly

-- May promote bureaucracy and reduce innovation (in large firms).May promote bureaucracy and reduce innovation (in large firms).y p y ( g )y p y ( g )


•• Network structureNetwork structureGroup of firms combine resources to Group of firms combine resources to achieve together what they can’t achieveachieve together what they can’t achieve

PartnerPartnerPartnerPartner

achieve together what they can t achieveachieve together what they can t achievealone.alone.

Advantages:Advantages:PartnerPartnerPartnerPartner Advantages:Advantages:

-- Firm’s emphasize their own core Firm’s emphasize their own core competenciescompetencies

FocalFocal

-- Rapid response timeRapid response time

-- Very flexibleVery flexibleFocalFocalFirmFirm

-- Reduces capital intensityReduces capital intensity

DisadvantagesDisadvantagesgg

-- Asymmetric informationAsymmetric information

-- Technology expropriationTechnology expropriation

PartnerPartnerPartnerPartner

Technology expropriationTechnology expropriation

-- Trustworthiness of partnersTrustworthiness of partners

-- Asset holdAsset hold--upupAsset holdAsset hold upup

C St dC St dCase Study Case Study betweenbetween

Sears &Sears & WalmartWalmartSears & Sears & WalmartWalmart

A TALE OF TWO STORESA TALE OF TWO STORESSears

Rapid growth, driven by end-

Experts believe Sears way was the only way to FinancialSears

launches catalog business

Takes control of production and distribution

ybased locations and company-controlled factories

compete “The paragon of retailers”

Financial trouble; sells off all non-retail businesses

Acquired by KMart

1891

1970

1990 20051924 1960 20001980

Moves into on-premise retailing/General Robert Wood takes over

Expands into banking, investments, real estate services, and insurance

A Firm’s performance is directly related to the

Sam Walton opens first Wal-Mart with focus on Dizzying

th

Perfects model; grows; expands into new markets (international) and store concepts (Sam’s clubs)

related to the quality of its strategy and its competency in implementing it

low-prices growth concepts (Sam s clubs) implementing it

1970

30 stores located in “one-

1962 20001980

Invests $500 million in

2121

horse towns which everybody else was ignoring”; Sam Walton

inventory management technology

TWO RETAILERS AT A GLANCETWO RETAILERS AT A GLANCE

Sears Wal-Mart

Year founded 1891 1962Year founded 1891 1962

Stores 1980 864 6005289Stores 2004 2026 5289

Revenues 1980 $25,194 million $1,643 million$

Revenues 1980Revenues 2004

$25,194 million$36,100 million $285,222 million

Net profits 1980 606M (2.4% return on sales) $55 M(3.3% return on Net profits 2004 507M (-1.4% return on

sales)sales)$10,267 M

(3.6% return on M k t it li ti USD 4 8 billi USD 1 billi(sales)Market capitalization

1980Market capitalization

USD 4.8 billionUSD 12.2 billion

USD 1 billionUSD 200.2 billion

2222

2004

A TALE OF TWO RETAILERS A TALE OF TWO RETAILERS ––PERFORMANCE MEASURESPERFORMANCE MEASURESPERFORMANCE MEASURESPERFORMANCE MEASURESUSD millionsUSD millions

2323

STRATEGY AND IMPLEMENTATION STRATEGY AND IMPLEMENTATION ITERATEITERATEITERATEITERATE

Compete as LeverageStrategy:The

Compete as discount retailer in

l k

Leverage inventory and sourcing systems

b lprocess of deciding what to do

rural markets to be low-cost leader

Implementationp:The process of performing all theperforming all the activities necessary to do

h t h b

Invest heavily in organizational structure, systems,what has been

plannedstructure, systems, and processes

2424


•• Sears exampleSears example

ll h b kh b kIn 1983 Sears implements oneIn 1983 Sears implements one--stop shopping bankingstop shopping banking--financial services power. financial services power.

Sears retail unit fell to #3 behind lowSears retail unit fell to #3 behind low--cost providers (cost providers (WalmartWalmartand Kand K--Mart).Mart).

Specialty retailers (focused differentiators) such as The Gap, Specialty retailers (focused differentiators) such as The Gap, The Limited, ToysThe Limited, Toys--RR--Us, and KidsUs, and Kids--RR--Us took market share. Us took market share. Sears was outperformed by both lowSears was outperformed by both low cost and focused differentiatorscost and focused differentiatorsSears was outperformed by both lowSears was outperformed by both low--cost and focused differentiators.cost and focused differentiators.

Sears initiated restructuring in 1992 after losing $3.8 billion.Sears initiated restructuring in 1992 after losing $3.8 billion.


•• Sears exampleSears example

What happened? Why did Sears fail so dramatically?What happened? Why did Sears fail so dramatically?

Lost ability to control core business (too diversified)Lost ability to control core business (too diversified)-- Lost ability to control core business (too diversified).Lost ability to control core business (too diversified).

-- Resources were taken from retail and given to new ventures.Resources were taken from retail and given to new ventures.

-- Managers spent too much time on diversified businesses.Managers spent too much time on diversified businesses.

-- Managed retail segment using financial controls.Managed retail segment using financial controls.g g gg g g-- Lost operational understanding of the competitive dynamics Lost operational understanding of the competitive dynamics

in the retail industry.in the retail industry.

Contemporary Strategy Analysis, 6th editionby

Robert M. Grant

Current Trends in Strategic ManagementCurrent Trends in Strategic Management

OUTLINE

• New realities of the new century• The strategy model of the 1990s—no longer working• Forces shaping 21st century business strategies• Emerging developments in strategy, structure,

management systems, and leadership

New Realities of the 21st Century

Collapse of New E

Corporate ScandalsEconomy

•Subprime crisis•The fall of capitalism

• Enron, WorldCom, Parmalat• Excessive executive pay

Sept. 11, 2001• Invasion of Afghanistan & IraqInternational

• Middle East mayhem• Shrinking status and influence

of the USA

competition intensifies• Rise of BRIC (Brazil, Russia,

India China)

Fragility of N t l E i t

Decline of

India, China)

Natural Environment•Global warming

• Water shortages

Multilateralism•Collapse of Doha round

• Trade wars between US, EU, China

Fear of DiseaseFear of Disease•SARS Mad Cow Bird

Market i t bilit

, ,•Weakening of UN

SARS, Mad Cow, Bird Flu

• Commodity prices

instability• Currencies

• Commodity prices

The Strategy Model of the 1990s

K T d f th 1990 Major Themes of BusinessKey Trend of the 1990s:• Quest for shareholder value

Major Themes of Business Strategy:• Cost cutting—squeezing

Influential Strategy Concepts:• Modern financial analysis

g q goverhead, business process re-engineering, increasing labor productivity• Modern financial analysis

—shareholder value, economic profit,option theory

productivity• Outsourcing/refocusing/divestment

• Core competences and intangibleassets

• Dynamically competitive markets

• Performance management andincentive alignment

Dynamically competitive markets(“hypercompetition”) –competitiveadvantage requires speed,entrepreneurship alliances controlentrepreneurship, alliances, controlof standards

Forces Currently Shaping Company Strategies

Future Sources of ProfitFuture Sources of Profit• Limits of downsizing/cost cutting

• Where are future sources of The Business Environment

profit? •Uncertainty•Intense competition

TechnologyConcepts & Theories

•Resources & capabilities as gy• Digitization

• Convergence

Resources & capabilities asbasis for competitive advantage

•Knowledge-based theoryof the firm

•Option theory•Complexity theory•Complexity theory

Demands of society•Social & environmental responsibility

Ethi & f i•Ethics & fairness•Quest for meaning

Emerging Developments

STRATEGY

g g

STRATEGY• Firm goals: rethinking profit maximization• Multiple competitive advantages/multiple capabilitiesg• Role of innovation: Developing new products & newbusinesses

• Strategy as creating & managing options• Strategy as creating & managing options

MANAGEMENT SYSTEMSORGANIZATION

STRUCTUREMANAGEMENT SYSTEMS• Knowledge management

(incl. best-practice transfer)

STRUCTURE• Reconciling flexibility& integration ( )

• Redesigning incentive systems• Rethinking performance management

C t i h ti it

• Multidimensional structures• Informal organization &

self organization• Capturing human creativity• New approaches to leadership

self-organization• Modular structures

NEW MODELS OF LEADERSHIP

INTRODUCTION: WHAT IS STRATEGIC...

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