Summary Fundamentals of Strategy by Johnson & Whittington, written in 2015, donated to WorldSupporter
Strategy: Long-term direction of an organisation.
Corporate level strategy: is concerned with the overall scope of an organization and how value is added tot he constituent businesses of the organizational whole.
Business-level strategy: is about how the individual businesses should compete in their particular markets.
Operational strategies: are concerned with how the components of an organisation deliver effectively the corporate- and business-level strategies in terms of resources, processes and people.
Should have three main themes: the fundamental goals (mission, vision, or objectives) that the organisation seeks; the scope or domain of the organisation’s activities; and the particular advantages or capabilities it has to deliver all of these.
Relates to goals, and refers to overriding purpose of the organisation. ‘What business are we in?’
This too relates to goals, and refers ti the desired fighter state of the organization. ‘What do we want to achieve?’
These are more precise and ideally quantifiable statements of the organisation’s goals over a period of time. ‘What do we have to achieve in the coming period?’
An organisation’s scope or domain refers to three dimensions: customers or clients; geographical locations; and extent of internal activities (‘vertical integration’). Second, which activities to do internally themselves (vertically integrate) and which to externalize to subcontractors.
This part of a strategy statement describes how the organisation will achieve the objectives it has set for itself in its chosen domain.
Exploring strategy model
includes understanding the strategic position of an organization; assessing strategic choices for the future; and managing strategy in action
concerned with the impact on strategy of the external environment, the organisation’s strategic capability (resources and competences), the organisation’s purpose and the organisation;s culture.
The options for strategy in terms of both the directions in which strategy might move and the methods by which strategy might be pursued.
This chapter provides frameworks for analysis changing and complex environments. These frameworks are organized in a series of layers:
The macro-environment is the highest-level layer. This consists of broad environmental factors that impact to a greater or lesser extent on almost all organisations. Here the PESTEL framework provides a wide overview and builds scenarios how the macro-environment might change, i.e what are the key drivers for change.
- Politics highlight the role of the state and other political forces
- Economics refers to macro-economic factors such as exchange rates, business cycles and differential economic growth rates around the world.
- Social influences include changing cultures and demographics.
- Technological factors refer to influences such as the internet, nano-technology or the rise of new composite materials.
- Ecological stands specifically for green environmental issues, such as pollution, waste and climate change.
- Legal embraces legislative and regulatory constraints or changes.
It is important to not include every possible factor. Rather think of the key drivers for change, the environmental factors that are likely to have a high impact on the future success or failure of strategy.
When the business environment has high levels of uncertainty arising from either complexity or paid change, it is impossible to develop a single view of who environmental influences might affect an organisation’s strategy. Therefore it is necessary to build several scenarios. Scenario building consists out of the following five basic steps:
- Defining scenario scope refers to the subject of the scenario analysis and the time span.
- Identifying the key drivers for change uncover issues that have a major impact upon the future of the industry, region or market.
- Developing scenario stories knit together plausible stories that incorporate both key drivers and other factors into a coherent story.
- Identifying impacts it is important for an organisation to carry out robustness checks in the face of each plausible scenario and to develop contingency plans in case they happen.
- Establishing early warning systems identify indicators that might give really warning about the final direction of environmental change, and at the same time come up with systems to monitor these.
Industry (or sector) form the next layer that provide you with frameworks to analyse the environment. An industry is a group of firms producing products and services that are essentially the same, they can also be describes as sectors (especially in public services). Industries and sectors are often made up of several specific markets. A market is a group of customers for specific products or services that are essentially the same.
Porter’s Five Forces Framework helps identify the attractiveness of an industry via five distinct forces:
- The threat of entry how easy it is to enter the industry influences the degree of competition. Barriers to entry are the factors that need to be overcome by new entrants if they are to compete in an industry. Five important barriers to entry are:
- Scale and experience Access to supply or distribution channels
- Expected retaliation
- Legislation or government action
- The threat of substitutes substitutes are products or services that offer a similar benefit to an industry’s products or services, but have a different nature. There are two important points to bear in mind about substitutes:
- The price/performance ratio is critical to substitution threats.
- Extra industry effects are the core of the substitution effect.
- The power of buyers buyers are the organisation’s immediate customers, not necessarily the ultimate consumers. Buyer power is likely to be high when some of the following three conditions prevail:
- Concentrated buyers
- Low switching costs
- Buyer competition threat (backward vertical integration)
- The power of suppliers suppliers are those who supply the organisation with what it needs to produce the product or service. The supplier power is likely to be high where there are:
- Concentrated suppliers
- High switching costs
- Supplier competition threat (forward vertical integration)
At the centre of Five Forces analysis is thus rivalry between the existing players. Competitive rivals are organisations with similar products and services aimed at the same customer group. Five factors tend to define the extent of rivalry in an industry or market:
- Competitor balance (size differences)
- Industry growth rate
- High fixed costs
- High exit barriers
- Low differentiation
Five Forces analysis can be supplemented by analysis of complementary and industry life cycles. An organisation is your complement if it enhances your business attractiveness to customers or suppliers.
The second to last layer consists out of Competitors and markets. Competitors and merkets might be a too broad concept as well. Dividing these into strategic groups and market segments provides opportunities for organisation to develop highly distinctive positioning within broader industries.
Strategic groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases. There are many characteristics that distinguish between strategic groups but these can be grouped into two major categories. First, the scope of an organisation’s activities. Second, the resource commitment. This strategic group concept is useful in at least three ways:
- Understanding competition. Managers can focus on their direct competitors within their particular strategic group, rather than the whole industry.
- Analysis of strategic opportunities. Strategic group maps can identify the most attractive strategic spaces within an industry.
- Analysis of mobility barriers. Of course, moving across the map to take advantage of opportunities is not costless. Often it will require difficult decisions and rare resources. Strategic groups are therefore characterized by mobility barriers, obstacles to movement from one strategic group to another.
A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market. For long-term success, strategies baed on market segments must keep customer need firmly in mind. two issues are particularly important in market segment analysis, therefore:
- Variation in customer needs. Focusing on customer needs that are highly distinctive from those typical in the market is one means of building a long-term segment strategy.
- Specialization within a market segment can also be an important basis for a successful segmentation strategy. This is sometimes called a niche strategy.
Any environmental analysis should also include an analysis of position relative to competitors. Kim and Mauborgne propose two concepts that help think about the relative positioning of competitors in the environment: the strategy canvas and Blue Oceans.
A strategy canvas compares competitors according to their performance on key success factors in order to establish the extent of differentiation. A strategy canvas highlights the following three factors:
- Critical success factors (CSFs) are those factors that either are particularly valued by customers (i.e. strategic customers) or provide a significant advantage in terms of cost.
- Value curves are a graphic depiction of how customers perceive competitors’ relative performance across the critical success factors.
- Value innovation is the creation of new market space by excelling on established critical success factors on which competitors are performing badly and/or by creating new critical success factors representing previously unrecognized customer wants.
A value innovator is a company that competes in Blue Oceans. Blue Oceans are new market spaces where competition is minimized. Blue Oceans contrast with Red Oceans, where industries are already well defined and rivalry is intense.
The concepts and frameworks discussed above should be helpful in understanding the factors in the marcro-, industry and competitor/market environments of an organization. However, the critical issue is the implications that are drawn from this understanding in guiding strategic division and choices. The crucial next stage, therefore, is to draw from the environmental analysis specific strategic opportunities and threats for the organisation. The techniques and concepts in this chapter should help in identifying environmental threats and opportunities, for instance:
- PESTEL analysis of the macro-environment might reveal threats and opportunities presented by technological change, or shifts in market demographics or such like factors.
- Identification of key drivers for change can help generate different scenarios for managerial discussion, some more threatening, others more favourable.
- Porter’s Five Forces analysis might, for example, identify a rise or fall in barriers to entry, or opportunities to reduce industry rivalry, perhaps by acquisition of competitors.
- Blue Ocean thinking might reveal where companies can create new market spaces; alternatively it could help identify success factors which new entrants might attack in order to turn Blue Oceans into Red Oceans
There are two key issues posed by this chapter. Firstly, organizations are not identical. They have different capabilities; they are heterogeneous in this respect. Secondly, it can be difficult for one organisation to obtain or copy the capabilities of another. The implication for managers is that they need to understand how their organisations are different from their rivals in ways that may be the basis of achieving competitive advantage and superior performance. These concepts underlie what has become known as the resource-based view (RBV) of strategy: that the competitive advantage and superior performance of an organisation are explained by the distinctiveness of its capabilities.
Strategic capabilities are the capabilities of an organisation that contribute to its long-term survival or competitive advantage. There are two components of strategic capability: resources and competences. Resources are the assets that organisations have or can call upon ‘what we have’ and competences are the ways those assets are used or deployed effectively ‘what we do well’. If they are to provide a basis for long-term success, strategic capabilities cannot be static. Dynamic capabilities is an organisation’s ability to renew and recreate its strategic capabilities to meet the needs of changing environments. There are three types of generic dynamic capabilities:
- Sensing. Sensing implies that organizations must constantly scan, search and explore opportunities across various markets and technologies (R&D).
- Seizing. Once an opportunity is sensed it must be seized and addressed through new products or services, processes, activities, etc.
- Reconfiguring. To seize an opportunity may require renewal and reconfiguration of organizational capabilities and investments in technologies, manufacturing, markets, etc.
A distinction also needs to be made between strategic capabilities that are at a threshold level and those that might help the organisation achieve competitive advantage and superior performance. Threshold capabilities are those needed for an organisation to meet the necessary requirements to compete in a given market and achieve parity with competitors in that market. While threshold capabilities are important, they do not of themselves create competitive advantage or the basis of superior performance. Distinctive capabilities are required to achieve competitive advantage.
Four criteria by which capabilities can be assessed in terms of their providing a basis for achieving such competitive advantage: value, rarity, inimitability and organisation support - or VRIO.
Value strategic capabilities are valuable when they create a product or a service that is of value to customers and if, and only if, they generate higher revenues or lower costs or both. There are three components here:
- Taking advantage of opportunities and neutralizing threats
- Value to customers
Rarity capabilities that are valuable, but common among competitors, are unlikely to be a source of competitive advantage. Rare capabilities, on the other hand, are those possessed uniquely by one organisation or by a few others. Here competitive advantage is longer-lasting (e.g. patents).
Inimitability having capabilities that are valuable to customers and relatively rare is important, but this may not be enough. Sustainable competitive advantage also involves identifying inimitable capabilities - those that competitors find difficult and costly to imitate or obtain or substitute. This inimitability is most likely to be determined by the way in which resources are deployed and managed in terms of an organization’s activities. They often include linkages that integrate activities, skills, knowledge and people both inside and outside the organisation in distinct and mutually compatible ways. The three reasons that these linkages are so hard to imitate are discussed below:
- Complexity. The capabilities of an organisation can be difficult to imitate because they are complex and involve interlinkages. This may be for two main reasons:
- internal linkages. There may be linked activities and processes that, together, deliver customer value.
- external interconnectedness. Organisations can make it difficult for other to imitate or obtain their bases of competitive advantage by developing activities together with customers or partners such that they become dependent on them. This is sometimes referred to as co-specialization.
- Causal ambiguity. Another reason why capabilities might be difficult to imitate is that competitors find it difficult to discern the causes and effects underpinning an organisation’s advantage. This is called causal ambiguity.
- Culture and history. Competences that involve complex social interactions and interpersonal relations within an organisation can be difficult and costly for competitors to imitate systematically and manage.
Organizational support providing value to customers and possessing capabilities that are rare and difficult to imitate provides a potential for competitive advantage. However, the organisation must also be suitably organized to support these capabilities.
So far this chapter has been concerned with explaining concepts associated with the strategic significance of organisations’ resources and capabilities. This section now provides some ways in which strategic capabilities can be understood and diagnosed.
The value chain describes the categories of activities within an organisation which, together, create a product or service. Most organisations are also part of a wider value system, the set of inter-organizational links and relationships that are necessary to create a product or service.
The value chain if organisations are to achieve competitive advantage by delivering value to customers, managers need to understand which activities add value and which don’t. Primary activities are directly concerned with the creation or delivery of a product or service. For example,
- Inbound logistics are activities concerned with receiving, storing and distributing inputs to the product or service including materials handling, stock control, transport, etc.
- Operations transform these inputs into the final product or service: machining, assembly, etc.
- Outbound logistics collect, store and distribute the product or service to customers.
- Marketing and sales provide the means whereby consumers or users are made aware of the product or service and are able to purchase it.
- Service includes those activities that enhance or maintain the value of a product or service.
Each of these groups of primary activities is linked to support activities which help to improve the effectiveness or efficiency of primary activities:
• Procurement are processes that occur in many parts of the organisation for acquiring the various resource inputs to the primary activities.
- Technology development are all value activities that are directly concerned with the product (R&D) or with processes (process development) or with a particular resource (raw materials improvements).
- Human resource management transcends all primary activities and is concerned with recruiting, managing, training, developing and rewarding people within the organisation.
- The infrastructure regards the formal systems of planning, finance, quality control, information management and the structure of an organisation.
The value chain can be used to understand the strategic position of an organization and analyse strategic capabilities in three ways:
- As a generic description of activities it can help managers understand if there is a cluster of activities providing benefit to customers located within particular areas of the value chain
- In analyzing the competitive position using the VRIO criteria
- To analyse the cost and value of activities of an organisation. This could involve the following steps:
- Identifying sets of value activities: (i) which separate categories of activities best describe the operations of the organization and (ii) which of these are most significant in delivering the strategy and achieving advantage over competitors?
- Relative importance of activity costs internally. Which activities are most significant in terms of the costs of operations? Does the significance of costs align with the significance of activities? Which activities add most value to the final product or service and which do not?
- Relative importance of activities externally. How does value and the cost of a set of activities compare with the similar activities of competitors?
- Where and how can costs be reduced? Given the picture that emerges from such an analysis it should be possible to ask some important questions about the cost structure of the organisation in terms of the strategy being followed.
The value system a single organisation rarely undertakes in-house all of the value activities form design through to the delivery of the final product or service to the final consumer. An organisation is usually part of a wider value system of different interacting organisations. There are questions that arise here that build on an understanding of the value chain itself:
- What are the activities and cost/price structures of the value system?
- The ‘make or buy’ decision for a particular activity is critical given some of the above questions. This is the outsourcing decision.
- Partnering. Who might be the best partners in the various part of the value system? And what kinds of relationships are important to develop with each partner?
Activity systems a number of writers, including Michael Porter, have written about the importance of mapping activity systems and shown how this might be done. The starting point is to identify ‘higher order strategic themes’, the ways in which the organisation meets the critical success factors determining them in the industry. The next step is to identify the clusters of activities that underpin each of these themes and how these do or do not fit together. The result is a picture of the organisation represented in terms of activity systems. Three points need to be emphasized here:
- The importance of linkages and fit. The need is to understand (i) the fit between the various activities and how these reinforce each other and (ii) the fit externally with the needs of clients.
- Relationship to VRIO. It is these linkages and this fit that can be the bases of sustainable competitive advantage.
- Superfluous activities. Just as in value chain analysis, but at a more detailed level, the question can be asked: are there activities that are not required in order to pursue a particular strategy?
SWOT provides a general summary of the Strengths and Weaknesses explored in an analysis of strategic capabilities and the Opportunities and Threats explored in an analysis of the environment. There are two main dangers in a SWOT exercise:
- Listing. A SWOT exercise can generate very long lists of apparent strengths, weaknesses, opportunities and threats, whereas what matters is to be clear about what is really important and what is less important.
- A summary, not a substitute. SWOT analysis is an engaging and fairly simple tool. It is also useful in summarizing and consolidating other analysis that has been explained in Chapter 2 and 3.
Stakeholders: those individuals or groups that depend on an organization to fulfill their own goals and on whom, in turn, the organization depends.
4.2) Mission, Vision, Values and Objectives
Four ways to express the purpose statement:
- A mission statement aims to provide employees and stakeholders with clarity about what the organization is fundamentally there to do. ‘What business are we in?’
- A vision statement is concerned with the future the organization seeks to create. ‘What do we want to achieve?’
- Statements of corporate values communicate the underlying and enduring core principles that guide an organisation’s strategy and define the way that the organization should operate. Values that are enduring and lay at the core of the company.
- Objectives are statements of specific outcomes that are to be achieved. E.g desired level of sales, profit or share valuations.
Three ways to make vision, mission and values statements meaningful:
- Focus: statements should focus attention and help guid decisions.
- Motivational: statements should motivate employees to do their best.
- Clear: in order to motivate employees in their day-to-day work, visions, missions and values should be easy to communicate, understand and remember.
4.3) Owners and Managers
The eight types of ownership are:
- Public companies sell their shares to the public, with ownership typically in the hands of individual investors or institutions such as pension funds, banks or insurance companies. Usually owners do not manage public companies themselves, but delegate that function to professional managers.
- State-owned enterprises are wholly or majority owned by governments. Their focus typically lays beyond making profits.
- Entrepreneurial businesses are businesses substantially owned and controlled by their founders. Their focus is usually on making profits in order to survive and grow. Yet, the personal missions of the founder may well alter the purpose.
- Family businesses are where ownership by the founding entrepreneur has passed on to his or her family. Typically they are SMEs, but can be very big.
- Not-for-profit organisations are typically owned by a charitable foundation. they may need to make a surplus to fund investment and protect against hard times, but fundamentally exist to pursue social missions.
- The partnership model, in which the organization is owned and controlled by senior employees (its partners), is important in many professional services such as law and accounting.
- Employee-owned firms spread ownership among employees.
- Mutual firms are owned by their customers or members.
Corporate governance is concerned with the structures and systems of control by which managers are held accountable to those who have a legitimate stake in an organization.
The governance chain shows the roles and relationships of different groups involved in the governance of an organisation.
At the most general level there are two governance models, though there are variants on each:
- The shareholder model priorities shareholder interests and is dominant in public companies, especially in the USA and UK. There is a separation of ownership and management, arguably meaning that strategic decision making by managers is more objective. Shareholders can vote for the board of directors according to the number if their shares. There are, however, a few drawbacks to this system:
- Diluted monitoring: Where there are many shareholders, each with small stakes and often with many other investments, any single shareholder may not think it worthwhile monitoring performance closely.
- Vulnerable minority shareholders: Where corporate governance regulation is weak, the shareholder model can be abused to allow the mergence of dominant shareholders who may exploit their voting power to the disadvantage of minority shareholders.
- Short-termism: The need to make profits for shareholders may encourage managers to focus on short-term gains at the expense of long-term projects, such as research and development.
- The stakeholder model recognizes the wider set of interest that have a stak in an organisation’s success such as employees, local communities, local governments, major suppliers and customers and banks. Shareholders are also stakeholders, of course, but in the stakeholder model they are likely to take larger stakes in companies than in the pure shareholder model and to hold these stakes longer term, thus reducing pressure on management for short-term results. There are also argued disadvantages to the stakeholder model:
- Weaker decision making: Close monitoring by powerful stakeholders could lead to interference, slowing down of decision processes and the loss of management objectivity on critical decisions
- Uneconomic investment: Due to lack of financial pressure from shareholders, long-term investments may be made in projects where the returns may be below market expectations.
- Reduced innovation and entrepreneurship: Because investors fear conflicts with the interests of other stakeholders, and because selling shares may be harder, they are less likely to provide capital for risky new opportunities.
4.4) Stakeholder Expectations
It should be clear by now that managers’ decisions about the purpose and strategy of their organisation are influenced by the expectations of various stakeholders. This poses a challenge because there may be many stakeholders, especially for a large organisation, with different, perhaps conflicting, expectations. This means that managers need to take view on (i) which stakeholders will have the greatest influence, (ii) which expectations they need to pay most attention to and (iii) to what extent the expectations and influence of different stakeholders vary.
External stakeholders van be divided into four types in terms of nature of their relationship with the organisation and who they might affect the success or failure of a strategy:
- Economic stakeholders, including suppliers, competitors, customers, distributors, banks and shareholders.
- Social/political stakeholders, such as policy makers, regulators and government agencies that may directly influence the organisation or the context in which it operates.
- Technological stakeholders, such as key adopters, standards agencies and suppliers of complementary products or services.
- Community stakeholders, who are affected by what an organisation does; e.g those who live close to a factory.
Stakeholder mapping can be used to gain an understanding of stakeholder influence. Stakeholder mapping identifies stakeholder interest and power and helps in understanding political priorities
Stakeholder mapping can also help in understanding three other issues:
- Who the key blockers and facilitators of a strategy are likely to be and the appropriate response.
- Whether repositioning of certain stakeholders is desirable and/or feasible: for example, to lessen the influence of a key player or to ensure that there are more key players who will champion the strategy.
- Maintaining the level of interest or power of some key stakeholders: for example, public endorsement by powerful suppliers or customers may be critical to the success of a strategy (C).
4.5) Corporate Social Responsibility
Corporate social responsibility (CSR) is the commitment by organisations to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large.
Four stereotypes illustrate the stance organisations take on CSR:
- The laissez-faire view represents an extreme stance: that the only responsibility of business is to make a profit and provide for the interests of shareholders.
- Enlightened self-interest is guided by the recognition of the long-term financial benefit to the shareholder of well-managed relationships with other stakeholders
- A forum for stakeholder interaction explicitly incorporates multiple stakeholder interests and expectations rather than just shareholders as influences on organisations purposes and strategies. Social responsibility can be measured in terms of the triple bottom line.
- Shapers of society regard financial considerations as of secondary importance or a constraint. These are visionary organisations, seeking to change society and social norms
4.6) Cultural influences
Organisational culture is the taken-for-granted assumptions and behaviors that make sense of people’s organizational context and therefore contributes to how groups of people respond to and behave in relation to issues they face.
Geographically based cultures: Many writers, perhaps the most well known of whom is Geert Hofstede, have shown how attitudes to work, authority, equality and other factors differ from one country to another.
Organisational culture: Edgar Schein suggests that culture can be conceived as consisting of four different layers;
- Values as formally stated by an organisation may be easy to identify since they are explicit, perhaps written down. The values driving a strategy may, however, be different from those in formal statements.
- Beliefs are more specific. They can typically be discerned in how people talk about issues the organisation faces.
- Behaviours are the day-to-day ways in which an organisation operates and can be seen by people both inside and often outside the organisation. Taken-for-granted assumptions are the core of an organisation’s culture which in this book we refer to as the organizational paradigm. The paradigm is the set if assumptions held in common and taken for granted in an organisation which guide people about how to view and respond to different circumstances that organsation faces.
Organisational subcultures: There may be aspects of culture that pervade the whole organisation. However, there may also be important organisational subcultures. E.g the differences between geographical divisions in a multinational company.
Culture’s influence on strategy: The taken-for-granted nature of culture is what makes it centrally important in relation to strategy and the management of strategy. There are at least two potential benefits:
- Cultural glue. If there is coherence around that which is taken for granted and that is in line with the strategy it can mean that the organisation is easier to manage.
- A basis of competitive advantage: It may be possible for competitors to imitate products or technologies. It is more difficult for them to imitate that which is taken for granted (sustaining competitive advantage).
There are, however, potential problems:
- Captured by culture. Managers, faced with a changing business environment, are more likely to attempt to deal with the situation by searching for what they can understand and cope with in terms of the existing culture.
- Cultural barriers to change. Significant strategic change may be problematic because the culture is difficult to change.
- Managing culture. Because it is difficult to observe, identify and control that which is taken for granted, it is also difficult to manage.
The cultural web is a means of analyzing culture. The cultural web shows the behavioral, physical and symbolic manifestations of a culture that inform and are informed by the taken-for-granted assumptions, or paradigm (see figure in textbook).
This chapter is about strategic choices at the level of strategic business units. A strategic business unit supplies goods or services for a distinct domain of activity. It elaborates on two main themes: Generic comparative strategies, including cost leadership, differentiation, focus and hybrid strategies; interactive strategies, building on the notion of generic strategies to consider interaction with competitors, especially in hyper competitive environments, including cooperative strategies.
This section introduces the generic competitive strategies. Competitive strategy is concerned with how an SBU achieves competitive advantage in its domain of activity. In turn, competitive advantage is about how an SBU creates value for its users both greater than the costs of supplying them and superior to that of rival SBUs. There are two important features of competitive advantage. To be competitive at all, the SBU must ensure that customers see sufficient value that they are prepared to pay more than the costs of supply. To have an advantage, the SBU must be able to create greater value than competitors.
Cost leadership is the first generic comparative strategy. It involves becoming the lowest-cost organisation in a domain of activity. Thera are four key drivers that can help deliver cost leadership, as follows:
- Input costs are often very important, for example labour or raw materials
- Economies of scale refer to how increasing scale usually reduces the average costs of operation over a particular time period, perhaps a month or a year. Economies of scale are important wherever there are high fixed costs.
- Experience can be a key source of cost efficiency. The experience curve implies that the cumulative experience gained by an organisation with each unit of output leads to reductions in unit costs. The efficiencies are basically of two sorts. Firstly, there are gains in labour productivity as staff simply learn to do things more cheaply over time (learning curve effect). Secondly, costs are saved through more efficient designs or equipments as experience shows what works best. The experience curve has three important implications for business strategy: First, entry timing into a market is important, early entrants will have more experience. Second, it is important to gain and hold market share, as companies with higher market share have more cumulative experience. Finally, although the gains form experience are typically the greatest at the start, improvements normally continue over time.
- Product/process design also influences cost. Efficiency can be ‘designed in’ at the outset. It is important to recognize the whole-life costs of a product: in other words, the costs to the customer not just of purchase but of subsequent use and maintenance.
Porter underlines two tough requirements for cost-based strategies. First of all, the principle of competitive advantage indicates that a business’s cost structure needs to be the lowest cost (i.e lower than all competitors). Second, low cost should not be pursued in total disregard for quality. Cost-leaders have two options here:
- Parity (equivalence) with competitors in product or service features valued by customers. Parity allows the cost-leader to charge the same prices as the average competitor in the marketplace, while translating its cost advantage wholly into extra profit.
- Proximity (closeness) to competitors in terms of features. Where a competitor is sufficiently close to competitors in terms of product or service features, customers may only require small cuts in prices to compensate for the slightly lower quality.
Differentiation strategies are an alternative for cost leadership. Differentiation involves uniqueness along some dimension that is sufficiently valued by customers to allow a price premium. The attributes on which to differentiate need to be chosen carefully. Differentiation strategies require clarity about two key factors:
- The strategic customer. It is vital to identify clearly the strategic customer on whose needs the differentiation is based.
- Key competitors. It is very easy for a differentiator to draw the boundaries for comparison too tightly, concentrating on a particular niche.
There is an important condition for a successful differentiation strategy. Differentiation allows higher prices, but usually comes at a cost. To create a point of valuable differentiation typically involves additional investments, for example in R&D, branding or staff quality. Yet, just as cost-leaders should not neglect quality, so should differentiators attend closely to costs, especially in areas irrelevant to their sources of differentiation.
The third generic strategy is a Focus strategy. It targets a narrow segment or domain of activity and tailors its products or services to the need of that specific segment to the exclusion of others. Focus strategies come in two variants: cost focus strategy and differentiation focus strategy. Focus strategies are able to seek out the weak spots of broad cost-leaders and differentiators:
- Cost focusers identify areas where broader cost-based strategies fail because of the added costs of trying to satisfy a wide range of needs.
- Differentiation focusers look for specific needs that broader differentiators do not serve so well. Focus on one particular need helps to build specialist knowledge and technology, increases commitment to service and can improve brand recognition and customer loyalty.
Successful focus strategies depend on at least one of three key factors:
- Distinct segment needs. Focus strategies depend on the distinctiveness of segment needs. If segment distinctiveness erodes, it becomes harder to defend the segment against broader competitors.
- Distinct segment value chains. Focus strategies are strengthened if the have distinctive value chain that will be difficult or costly for rivals to construct
- Viable segment economics . Segments van easily become too small to serve economically as demand or supply conditions change.
Porter claims that managers face a crucial choice between the generic strategies. According to him, it is unwise to blur this choice. Then there is a danger of being stuck in the middle, doing no strategy well.
the Strategy clock provides another way of approaching the generic strategies, one which gives more scope for hybrid strategies. The Strategy Clock has two distinctive features. First, it is focused on prices to customers rather than costs to the organisation. Second, the circular design of the clock allows for more continuous choices than Michael Porter’s sharp contrast between cost leadership and differentiation. The Strategy Clock identifies three zones of feasible strategies, and one zone likely to lead to ultimate failure:
- Differentiation. This zone contains a range of feasible strategies for building on high perceptions of product ors service benefits among customers. Close to the 12 o’clock position is a strategy of differentiation without price premium. Differentiation without a price premium combines high perceived benefits and moderate prices, typically used to gain market share. Once increased market share is achieved, it might be logical to move closer to 2 o’clock.
- Low-price. This zone allows for different combinations of low prices and low perceived value. Close to the 9 o’clock position, a standard low-price strategy would gain market share, by combining low prices with reasonable value. To be sustainable this strategy needs to be underpinned by some cost advantage. Close to 7 o’clock is the no-frill strategy involving both low benefits and low prices.
- Hybrid strategy. A distinctive feature of the Strategy Clock is the space it allows between low-price and differentiation strategies. Hybrid strategies involve both lower prices than differentiation strategies, and higher benefits than low-price strategies. These strategies are often used to increase market share or enter a market.
- Non-competitive strategies. The final set of strategies occupies a zone of unfeasible economics, with low benefits and high prices. These strategies usually lead to failure.
Interactive price and quality strategies
Richard D’Aveni depicts competitor interactions in terms of movements against the variables of price (the vertical axis) and perceived quality (the horizontal axis), similar to the Strategy Clock. Although D’Aveni applies his analysis to the very fast- moving environment he terms ‘hypercompetitive’, similar reasoning applies wherever competitors’ moves are interdependent.
So far the emphasis has been on competition and competitive advantage. However, the interactive moves and counter-moves in ‘interactive price and quality strategies’ make it clear that sometimes competition can escalate in a way that is dangerous to all competitors. Cooperation between some organisations in a market may give them advantage over other competitors in the same market, or potential new entrants. Key benefits of cooperations are as follows:
- Suppliers. Sometimes increased cooperation is used to simply squeeze supplier prices. However, cooperation leading to standardized requirements, allowing suppliers to make cost reductions (economies of scale) might benefit all parties.
- Buyers. It will be harder for buyers to shop around. Such collusion between rivals can help maintain or raise prices, though it might well attract penalties. On the other hand, buyers may benefit if their inputs are standardized, again enabling reductions in costs that all can share.
- Rivals. If cooperative competitors are getting benefits with regard to both buyers and supplies, other competitors without such agreements with be squeezed out of the market.
- Entrants. Similarly, potential entrants will likely lack the advantages of the combined rivals. Moreover, cooperation lays foundation for retaliation.
Substitutes. Finally, the improved costs or efficiencies that come form cooperation between rivals reduce the incentives for buyers to look to substitutes.
Chapter 5 was concerned with competitive strategy, focusing on a single SBU in a given market space. However, as organisations enter new markets and diversify their products, there may be corporate-level choices concerning different businesses or markets. The ‘scope’ of an organisation is central to corporate strategy and the focus of this chapter. Scope is concerned with how far an organisation should be diversified in terms of products and markets. A way of increasing the scope of an organisation is vertical integration, where an organisation acts as an internal supplier or a customer to itself. The organisation may also decide to outsource certain activities.
Scope raises two other key themes. If an organisation has decided to operate in different areas of activity, what should be the role of the ‘corporate-level’ executives, who act as ‘parents’ to the individual business units that make up the organisation’s portfolio? How do corporate-level activities, decisions and resources add value to the actual businesses? The second them is, within an overall diversification strategy, which specific business units should be included in the corporate portfolio and how should they be managed financially? This is what this chapter is about.
The Ansoff product/market matrix (see textbook) is a corporate strategy framework for generating four basic directions for organizational growth. An organisation may choose between further penetrating (A) within its existing sphere or increasing its diversity along the two axes. This last process is known as diversification. It involves increasing the range of products or markets served by an organisation. Related diversification involves expanding into products or services with relationships to the existing business. Alternatively, the organisation can move in both directions at one, following a conglomerate diversification strategy with altogether new markets and new products (D). Thus, conglomerate diversification involves diversifying into products or services with no relationships to existing businesses.
Market penetration implies increasing share of current markets with the current product range. It is often the most obvious and simplest strategic option for an undiversified business. Greater market share implies increased power vis-à-vis buyers and suppliers (PFF), greater economies of scale and experience curve benefits. However, organisations seeking greater market penetration may face three constraints:
- Retaliation from competitors. Where retaliation is a danger, organisations seeking market penetration need strategic capabilities that give a clear competitive advantage. In low-growth or declining markets, it can be more effective to simply acquire competitors.
- Legal constraints. Greater market penetration can raise concerns from official competition regulators concerning excessive market power. Most countries have regulators with the powers to restrain powerful companies or prevent mergers and acquisitions that would create such excessive power.
- Economic constraint. Market penetration may also not be an option where economic constraints are severe, for instance during a market downturn or public-sector funding crisis.
Product development is where organisations deliver modified or new product toe existing markets. Despite the potential for benefits from relatedness, product development can be expensive and high-risk activity for at least two reasons:
- New strategic capabilities. Product development strategies typically involve mastering new processes or technologies that are unfamiliar to the organisation. This typically involves heavy investments and can have high risk of project failures.
- Project management risk. Even within fairly familiar domains, product development projects are typically subject to the risk of delays and increased costs due to project complexity and changing project specifications over time.
Market development involves offering existing products to new markets. Again, the degree of diversification varies along the downward axis. Typically, of course, market development entails some product developments as well, if only in terms of packaging or service, Nonetheless, market development rains a form of related diversification given its origins in similar products. Market development takes two basic forms:
- New users. e.g car manufacturers replace aerospace in the use of aluminum.
- New geographies. e.g. internationalisation.
Conglomerate diversification takes the organisation beyond both its existing markets and its existing products. In this sense, it radical increases the organisation’s scope. Conglomerate diversification strategies can create value as businesses may benefit form being part of a larger group. This may allow consumers to have greater confidence in the business unit’s products and services than before and larger size may also reduce the costs of finance.
Four potentially value-creating Drivers for diversification are:
- Exploiting economies of scope. Economies of scope refer to efficiency gains through applying the organisation’s existing resources or competences to new markets or services. Economies of scope may apply to both tangible resources such as halls of residence, and intangible resources and competences, such as brands or staff skills.
- Stretching corporate management competences. This is a special case of economies of scope, and refers to the potential for applying the skills of talented corporate-level managers to new businesses. The dominant logic is the set of corporate-level managerial competences applied across the portfolio of businesses.
- Exploiting superior internal processes. Internal processes within a diversified corporation can often be more efficient than external processes in the open market. This is especially the case where external capital and labour markets do not yet work well, as in many developing economies.
- Increasing market power. Being diversified in many businesses van increase power vis-à-vis competitors in at least two ways. First, having the same wide portfolio of products as a competitor increases the potential for mutual forbearance. Second, having a diversified range of businesses increases the power to cross-subsidies one business form the profits to the others.
Where diversification creates value, it is described as synergistic. Synergy refers to the benefits gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts. There are also driver for diversification involving negative synergies. Three potentially value-destroying diversification drivers are:
- Responding to market decline is one common but doubtful driver for diversification. Rather than let the managers of a declining invest spare funds in a new business, conventional finance their suggests it is usual best to let shareholders find new growth investment opportunities for themselves.
- Spreading risk across a range of markets is another common justification for diversification. Again, conventional finance theory is very skeptical about risk-spreading by diversification. Shareholders can easily spread their risk by taking small stakes in dozens of very different companies themselves.
- Managerial ambition can sometimes drive inappropriate diversification. Going beyond their areas of true expertise often brings financial disaster.
Vertical integration describes entering activities where the organisation is its own supplier or customer. This section both includes vertical integration and vertical dis-integration, outsourcing. There are two types of integration:
- Backward integration refers to development into activities concerned with the inputs into the company’s current business.
- Forward integration refers to development into activities concerned with the outputs of a company’s current business.
Thus vertical integration is like diversification in increasing corporate scope. The difference is that it brings together activities up and down the same value network, while diversification typically involves more or less different value networks. However, because realizing sunrise involves bringing together different value networks, diversification is sometimes described as horizontal integration.
Vertical integration is often favoured because it seems to capture more of the profits in a value network. However, it is important to be aware to two dangers. First, vertical integration involves investments. An increasing return on investment could scare shareholders. Second, even if there is a degree of relatedness through the value network, vertical integration is likely to involve quite different strategic capabilities.
Growing appreciation of both the risk of diluting overall returns on investment and the distinct capabilities involved at different stages of the value network has led many companies in recent years to vertically dis-integrate. Outsourcing is the process by which activities previously carried out internally are subcontracted to external suppliers. Oliver Williamson has argued that the decision to integrate or outsource involves more than just relative capabilities. He warns against underestimating the long-term costs of opportunism by external subcontractors. Market relationships tend to fail in controlling subcontractor opportunism where:
- There are few alternatives to the subcontractor and it is hard to shop around
- The product or service is complex and changing, and therefore impossible to specify fully in a legally binding contract
- Investments have been made in specific assets, which the subcontractor knows will have little value if the withhold their product or service.
- Therefore, the decision to integrate or subcontract rests on the balance between two distinct factors:
- Relative strategic capabilities. Does the subcontractor have the potential to do the work significantly better?
- Risk of opportunism. Is the subcontractor likely to take advantage of the relationship over time?
Value adding and value-destroying activities of corporate parents
Competition takes place between different corporate parents for the right town and control businesses. In this market for corporate control, corporate parents must show that they have parenting advantage, on the same principle that business units must demonstrate competitive advantage. They must demonstrate that they are the very best possible parent for the businesses they control. Parents must therefor have a very clear cut to how they create value.
There are five main types of activity by which a corporate parent can add value:
- Envisioning. The corporate parent can provide a clear overall vision or strategic intent for its business units. This vision should guide and motivate the business unit managers in order to maximize corporation-wide performance though commitment to a common purpose. Besides this, a vision provides a clear external image (to reassure shareholders) and provides discipline.
- Facilitating synergies. The corporate parent can facilitate cooperation and sharing across the business units, so improving the synergies from being within the same corporate organization.
- Coaching. The corporate parent can help business unit managers develop strategic capabilities.
- Providing central services and resources. The centre is obviously a provider of capital for investment. The centre can also provide central services such as treasury, tax and human resource advice, which if centralized can have sufficient scale to be efficient and to build up relevant expertise.
- Intervening. The corporate parent can also intervene within its business units in order to ensure appropriate performance.
However, there are also three broad ways in which the corporate parent can inadvertently destroy value:
- Adding management costs. Most simply, the staff and facilities of the corporate centre are expensive
- Adding bureaucratic complexity. As well as these direct financial costs, there is the ‘bureaucratic fog’ created by an additional layer of management and the need to coordinate with sister businesses.
- Obscuring financial performance. One danger in a large diversified company is that the under-performance of weak businesses can be obscured.
Corporate parenting roles tend to fall into three main types, each coherent within itself but distinct from the others.
The first type is the Portfolio manager that operates as an active investor in a wau that shareholders in the stock market are either too dispersed or too inexpert to be able to do. In effect, the portfolio manager is acting as an agent on behalf of financial markets and shareholder with a view to extracting more value from the various businesses than they could achieve themselves. Its role is to identify and acquire under-valued assets or businesses and om[rove them
The second type is the Synergy manager, acting as a corporate parent seeking to enhance value for business units by managing synergies across business units. Such synergistic benefits involve at least three challenges:
- Excessive costs. The benefits in sharing and cooperation need to outweigh the costs of undertaking such integration, both direct financial costs and opportunity costs.
- Overcoming self-interest. Managers in the business units have to want o cooperate
- Illusory synergies. Claimed synergies often prove illusory when managers actually have to put them into practice.
The third, and last, type is the parental developer, which seeks to employ its own central capabilities to add value to its businesses. This is not so much about how the parent can develop benefits across business units or transfer capabilities between business units, as in the case of managing synergy. Rather, parental developers focus on the resources or capabilities they have as parents which they can transfer downwards to enhance the potential of business units.
The BCG Matrix
Many models exist by which managers can determine financial investment and divestment within their portfolios businesses. These models give more or less attention to:
- The balance of the portfolio
- The attractiveness of the business units in terms of how strong the are individually and who profitable their markets or industries are likely to be
- The fit that the business units have with each other in terms of potential synergies or the extent to which the corporate parent will be good at looking after them.
The BCG (Boston Consultancy Group) matrix uses market share and market growth criteria for determining the attractiveness and balance of a business portfolio. The growth/share axes of the BCG matrix define four sorts of business:
- Star. A business unit with a high market share in a growing market
- Question mark. A business within a portfolio that is in a growing market, but does not yet have high market share. Developing into a star requires heavy investments.
- Cash cow. A business unit within a portfolio that has a high market share in a mature market. Requires low investments.
- Dogs. Business units within a portfolio that have low share in static or dealing markets and are thus the worst of all combinations. Recommended to divest or close.
There are at least four potential problems with the BCG matrix:
- Definitional vagueness.
- Capital market assumptions
- Unkink to animals. Both cash cows and dogs receive ungenerous treatment, this can cause motivation problems. There is also the danger for self-fulfilling prophecy.
- Ignores commercial linkages. The matrix assumes there are no commercial ties to other business units in the portfolio.
This chapter focuses on a specific but important kind of market development, operating in different geographic markets. The chapter takes a cautious view on international strategy. It distinguishes between international strategy and global strategy. International strategy refers to a range of option for operating outside an organisation’s country of origin. Global strategy involves high coordination of extensive actives dispersed geographically in many countries around the world.
George Yip provides a framework for analyzing ‘drivers of globalization’. In the terms of this chapter, these globalization driver can be thought of as ‘internationalization drivers’ more generally. in this book, therefore, Yip’s globalization framework sees international strategy potentials as determined by market drivers, cost drivers, government drivers and competitive drivers. In more detail, the four drivers are as follows:
- Market drivers. A critical facilitator of internationalization is standardization of market characteristics. First, the presence of similar customer need and tastes are crucial. Second, the presence of global customers. Finally, transferable marketing promotes market globalization.
- Cost drivers. Cost can be reduced by operating internationally. First, increasing volume beyond what a national market might support can give scale economies. Second, internationalization is promoted where it is possible to take advantage of variations in country-specific differences. The third element is favorable logistics, or the costs of moving products or services across borders relative to their final value.
- Government drivers. First, reduction of barriers to trade and investment has accelerated internationalization. Similarly, the emergence of regional economic integration partnerships like the EU and NAFTA has promoted this development. The liberalization and adoption of free markets many countries around the glove have also encouraged international trade and investments. A third important government factor is technology standardization. compatible technical standards make it easier for companies to access different markets as they can enter many markets with the same product or service without adapting to local idiosyncratic standards.
- Competitive drivers. These rate specifically to globalization as an integrated worldwide strategy rather than simpler international strategies. First, interdependence between country operations increases the pressure for global coordination. The second element relates directly to competitor strategy. the presence of globalized competitors increases the pressure to adopt a global strategy in response because competitors may use on country;s profits to cross-subsidize their operation in another.
Porter’s Diamond suggests that locational advantages may stem form local factor conditions: local demand conditions, local related and supporting industries; and from local firm strategy structure and rivalry. These four interacting determinants of locational advantage work as follows:
- Factor conditions. These refer to the ‘factors of production’ that go into making a product or service.
- Home demand conditions. The nature of the domestic customer can become a source of competitive advantage.
- Related and supporting industries. Local ‘clusters’ of related and mutually supporting industries can be an important source of competitive advantage.
- Firm strategy, industry structure and rivalry. The characteristic strategies, industry structures and rivalries in different countries can also be bases of advantage.
The sources of geographic advantage need not, however, be purely domestic. This implies that international companies, advantage also needs to be drawn from the international configuration of their value system. Here the different skills, resources and costs of countries around the world can be systematically exploited in order to locate each element of the value chain in hat country or region where it can be conducted most effectively and efficiently. This may be achieved through both FDI and JV but also through global sourcing: purchasing services and components from the most appropriate suppliers around the world, regardless of their location. Different locational advantages can be identified:
- Cost advantages include labour costs, transportation and communications costs and taxation and investment incentives.
- Unique local capabilities may allow an organisation to enhance its competitive advantage. Internationalization is increasingly not only about exploiting an organisation;s existing capabilities in new national markets, but also about developing strategic capabilities by drawing on capabilities found elsewhere in the world.
- National market characteristics can enable organizations to develop differentiated product offering aimed at different market segments.
The global-local dilemma refers to the extent to which products and services may be standardized across national boundaries or need to be adapted to meet the requirements of specific national markets. The dilemma between global integration and local responsiveness suggests that several possible international strategies emphasizing one one of the dimensions to complex responses that try to combine both. The four basic international strategies are:
- Export strategy. This strategy leverages home country capabilities, innovations and products in different foreign countries. It is advantageous when both pressures for global integration and local responsiveness are low.
- Multi-domestic strategy. This is a strategy that maximizes local responsiveness. It i based on different product or service offerings and operations in each country depending on local market conditions and customer preferences.
- Global strategy. This is a strategy that maximizes global integration. In this strategy the world is seen as one marketplace with standardized products and services that fully exploits integration and efficiency in operations.
- Transnational strategy. This is the most complex strategy that tries to maximize both responsiveness and integration. Its aim is to unite the key advantages of the multi-domestic and global strategies while minimizing their disadvantages. In addition, it maximizes learning and knowledge exchange between dispersed units.
Having decided on an international strategy build on significant sources of competitive advantage and supported by strong internationalization drivers, managers need next to decide which country to enter. At least four elements of the PESTEL framework are particularly important in comparing countries for entry:
- Political. Political environments vary widely between countries and can alter rapidly.
- Economic. Key comparators in deciding entry are levels of GDP and disposable income.
- Social. Social factors will clearly be important, for example the size of the workforce and demographic market segments.
- Legal. Countries vary widely in their legal regime, determine the extent tow which businesses can enforce contract, protect intellectual property or avoid corruption.
Ghemawat’s ‘CAGE framework’ measures the match between countries and companies according to four dimension of distance, reflected by the letters of the acronym. Thus the CAGE framework emphasizes the importance of cultural, administrative, geographical and economic distance, as follows:
- Cultural distance. the distance dimension here relates to differences in language, ethnicity, religion and social norms.
- Administrative and political distance. Here distance is in terms of incompatible administrative, political or legal traditions. Colonial ties can diminish difference.
- Geographical distance. This is not just a matter of kilometers separating one country from another, but involves other geographical characteristics of the country such as size, sea-access and the quality of communications infrastructure.
- Economic distance. The final element of the CAGE framework refers particularly to wealth distances. There are huge disparities in wealth internationally.
Assessing the relative attractiveness of markets by PESTEL and CAGE analyses is only the first step. The second element relates to competition. Here, of course Michael Porter’s Five Forces Framework can help. Country markets can be assessed according to three criteria:
- Market attractiveness to new entrant, based on PESTEL and five forces analyses.
- Defender’s reactiveness, likely to be influenced by the market’s attractiveness to the defender but also by the extent to which the defender is working with a globally integrated, rather than multi-domestic.
- Defender’s clout, which is the power that the defender is able to muster in order to fight back. Clout is typically a function of share in the particular market, but might be influenced by connection to other powerful local players, such as retailers or governments.
Once a particular national market has been selected for entry, an organisation needs to choose how to enter that market. Entry modes differ in the degree of resource commitment and the extent to which an organisation is operationally involved in a particular location. In order of increasing resource commitment, the four key entry mode types are: exporting, licensing and franchising, JV’s, wholly owned subsidiaries. The staged international expansion model emphasizes the role of experience in determining entry mode. Internationalization typically brings organisations into unfamiliar territory, requiring managers to learn new ways of doing business. The staged international expansion model proposes a sequential process whereby companies gradually increase their commitment to newly entered markets, as they build market knowledge and capabilities. However, the gradualism of staged international expansion is now challenged by two phenomena:
- ‘Born-global firms’, in other words new small firms that internationalize rapidly at early stages in their development. New technologies now help small firms link up to international forces of expertise, supply and customers worldwide.
- Emerging-country multinationals also often move quickly through entry modes. Such companies typically develop unique capabilities in their home market that then need to be rolled out quickly worldwide before competitors catch up.
This chapter is about taking new products, services and business models into the market. This chapter examines innovation under four main themes: dilemmas, diffusion, leadership and entrepreneurship.
Innovation can come from different sources. Innovation is more complex than just invention. Invention involves the conversion of new knowledge. However, innovation involves the conversion of new knowledge into a new product, process or service and the putting of this new product, process or service into actual use.
People often see innovation as driven by technology. In the pure version of this technology push view, it is the new knowledge created by technologists or scientists that pushes the innovation process. This is often combined with high R&D expenses.
An alternative view is market pull, this reflects a view of innovation that goes beyond invention and sees the importance of actual use. Organisations should in the first place listen to users rather than their own scientists and technologists. Two contrasting approaches to market pull are:
- Lead users: In many markets it is lead users who are the principal source of innovation. Marketing and sales function identify the lead users (e.g. sporting champions) and technologists translate their ideas into commercial products, processes or services that the wider market can use.
- Frugal innovation: At the other end of the user continuum is the pull exerted by ordinary consumers, particularly the poor in emerging markets. Frugal innovation involves sensitivity to poor people’s real needs.
Technology push and market pull are best seen as extreme views, helping to focus attention on a fundamental choice: relatively how much to rely on science and technology as sources of innovation, rather than what people are actually doing in the marketplace. The key is balance!
Just as managers must manage the balance between technology and market pull, so must they determine the relative importance of product or process as sources of innovation. Product innovation relates to the final product (or service) to be sold, especially with regard to the features; process innovation relates to the way in which this product is produced and distributed, especially with regard to improvements in cost or reliability.
The relative importance of product innovation and process innovation typically changes as industries evolve over time. Usually the first stages of an industry are dominated by product innovation based on new features. Industries eventually coalesce around a dominant design, the standard configuration of basic features. A general model of the relationship between product and process innovation over time is described below:
- New developing industries typically favour product innovation, as competition is still around defining the basic features of the product or service.
- Maturing industries typically favour process innovation, as competition shifts towards efficient production of a dominant design of product or service
- Small new entrants typically have the greatest opportunity when dominant designs are either not yet established or beginning to collapse.
- Large incumbent firms typically have the advantage during periods of dominant design stability, when scale economies and the ability to roll out process innovations matter most.
This sequence of product innovation is not always a neat one. However, the model does help managers confront the issue of where to focus, whether more on product features or more on process efficiency. It also points out to whether competitive advantage is likely to be with small new entrants or large incumbent firms. Other things being equal, small start-ups should time their entry for periods instability in dominant design and focus on product rather than process innovation.
The traditional approach to innovation has been to rely on the organisation’s own internal resources for generating innovations - its laboratories and marketing departments. This ‘closed’ model of innovation contrasts with the newer ‘open model’ of innovation. Open innovation involves the deliberate import and export of knowledge by an organisation in order to accelerate and enhance its innovation.
Crowdsourcing is an increasingly popular form of open innovation and means that a company or organization broadcasts a specific problem to a crowd of individuals or teams often in tournaments with prizes awarded to the best solution. The balance between open and closed innovation depends on three key factors:
- Competitive rivalry. In highly rivalrous industries, partners are liable to behave opportunistically and steal innovations. Closed innovation is better where such rivalrous behaviors can be anticipated.
- One-shot innovation. Opportunistic behavior is more likely where innovation involves a major shift in technology, likely to put winners substantially ahead and losers permanently behind. Open innovation works best where innovation is more continuous, so encouraging more reciprocal behavior over time.
- Tight-linked innovation. Where technologies are complex and tightly interlinked, open innovation risks introducing damagingly inconsistent elements, with knock-on effect throughout the product rage.
Another source where innovation comes from is the way customers, producers and suppliers are brought together, with or without new technologies. A business model describes how an organisation manages income and costs through the structural arrangement of its activities. Opportunities for business model innovation can be analyzed in terms of the value chain, value net or activity systems frameworks. These frameworks point managers and entrepreneurs to two basic areas for potential innovation:
- The product. A new business model may redefine what the product or service is and how it is produced. In terms of the value chain specifically, this concerns technology development, procurement, inbound logistics, operation and procurement
- The selling. A new business model may change the way in which the organisation generates its revenues, with implications for selling and distributions. In terms of the value chain, this concerns outbound logistics, marketing, sales and service.
So far, this chapter has been concerned with sources and types of innovation. This section moves to the diffusion of innovation after they have been introduced. Diffusion is the process by which innovations spread among users. The pace of diffusion can vary widely according to the nature of the products concerned. The pace of diffusion is influenced by a combination of supply-side and demand-side factors, over which managers have considerable control. On the supply side, pace is determined by product features such as:
- Degree of improvement in performance above current products (from a customer’s perspective) that provides incentive to change
- Compatibility with other factors, managers and entrepreneurs need to appropriate complementary products and services are in place.
- Complexity, either in the product itself or in the marketing methods being used to commercialize the product. Simple pricing structures typically accelerate adoptions of the product.
- Experimentation - the ability to test product before commitment to a final decision - either directly or through the availability of information about the experience of other customers.
- Relationship management, in other words how easy it is to get information, place orders and receive support. Managers and entrepreneurs need to put in place an appropriate relationship management process to assist new users.
On the demand side, simple affordability is of course key. Beyond this, there are three further factor that tend to drive the pace of diffusion.
- Market awareness. Many potentially successful products have failed through lack of consumer awareness - particularly when the promotional effort of the innovator has been confined to ‘push’ promotion to its intermediaries (e.g. retailers).
- Network effects refer to the way that demand growth for some products accelerates as more people adopt the product or service. Once a critical mass of users have adopted it becomes of much greater benefit, or even necessary, for other to adopt it too.
- Customer propensity to adopt: the distribution of potential customers from early-adopter groups through to laggards. Innovations are often targeted initially at early-adopter groups - typically the young and the wealthy - in order to build the critical mass that will encourage more laggardly groups - the poorer and the older - to join the bandwagon.
The pace of diffusion is typically not steady. Successful innovation often diffuse according to a broad S-curve pattern. The shape of the S-curve reflects a process of initial slow adoption of innovation, followed by a rapid acceleration in diffusion, leading to a plateau representing the limit to demand. The height of the S-curve shows the extent of diffusion; the length of the S-curve shows the speed. The S-curve points to four likely decision points:
- Timing of the ‘tipping point’: Demand for a new product or service may initially be slow but then reaches a tipping point when it explodes onto rapid upwards path of growth. A tipping point is here demand for a product or service suddenly takes off, with explosive growth.
- Timing of the plateau. The S-curve also alerts managers to likely eventual slowdown in demand growth
- Extent of diffusion. The S-curve does not necessarily lead to one hundred per cent diffusion among potential users. A critical issue for managers then is to estimate the final ceiling on diffusion, being careful not to assume that tipping point growth will necessarily take over the whole market.
- Timing of the ‘tripping point’. The tripping point is the opposite of the tipping point, referring to a sudden collapse of demand. The tripping point warns managers all the tome that a small dip in quarterly sales could presage a rapid collapse.
A key choice for managers is whether to lead or to follow in innovation. A first-mover exists where an organisation is better off than its competitors as a result of being first to market with a new product, process or service. There are five potential first-mover advantages:
- Experience curve benefits accrue to first-movers, as their rapid accumulation of experience with the innovation gives them greater expertise than late entrants still relatively unfamiliar with the new product, process or service.
- Scale benefits are typically enjoyed by first-movers, as they establish earlier than competitors the volumes for mass production and bulk purchasing.
- Pre-emption of scarce resources is an opportunity for first-movers as late-movers will not have the same access to key raw materials etc.
- Reputation can be enhanced by being first, especially since consumers have little ‘mind-space’ to recognize new brands once a dominant brand has been established in the market.
- Buyer switching costs can be exploited by first-movers, by locking in their customers with privileged or sticky relationships that later challengers can only break with difficulty. Switching costs can be increased by establishing and exploiting a technological standard.
Late-movers have two principal potential advantages:
- Free-riding. Late-movers can imitate technological and other innovation at less expense than originally incurred by the pioneers.
- Learning. Late-movers can observe what worked well and what did not work well for innovators.
Sometimes the most appropriate response to innovation, especially with radical innovation, is often not be a first-mover, but to be a ‘fast second’. There are three contextual factors in choosing between innovating and imitating.
- Capacity for profit capture. It is important for innovators to able to capture for themselves the profits of their innovation. First, imitation is likely if the innovation is easy to replicate. Second, imitation is facilitated if intellectual property rights are weak.
- Complementary assets. Possession of the assets or resources necessary to scale up the production and marketing of the innovation is often critical.
- Fast-moving arenas. Where markets or technologies are moving very fast and especially where both are highly dynamic, first-movers are unlikely to establish a durable advantage.
For established companies in a market, innovation is often not so much an opportunity as a threat. First, managers can become too attached to existing assets and skills. Second, relationships between incumbent organisations and their customers van become too close. The challenge for incumbents, however, is disruptive innovation. A disruptive innovation creates substantial growth by offering a new performance trajectory that, even if initially inferior to the performance of existing technologies, has the potential to become markedly superior. Incumbents can follow two policies to help keep them responsive to potentially disruptive innovations:
- Develop a portfolio of real options. Companies that are most challenged by disruptive innovation tend to be those built upon a single business model and with one main product or service.
- Develop new venture units. New ventures, especially when undertaken from a real options perspective, may need protection from the usual systems and disciplines of a core business.
Entrepreneurial ventures are often seen as going through four stages of a life cycle. The entrepreneurial life cycle progresses through start-up, growth, maturity and exit. Each of these four stages raises key question for entrepreneurs:
- Start-up. One key question with implications for both survival and growth are sources of capital. Loans of family and friends are common, yet limited. Bank loans and credit cars can provide funding too. And for a select group there are venture capitalists.
- Growth. Entrepreneurs have to be ready to move from doing to managing. The choice entrepreneurs have to make at this stage is whether to rely on their own managerial skills or to bring in professional managers.
- Maturity. The challenge at thus stage is mostly retaining enthusiasm and commitment and generating new growth. Also, diversification is often an important topic to be dealt with.
- Exit. At the point of exit, entrepreneurs and investors will seek to release capital as a reward for their input and risk-taking. Entrepreneurs may consider two prime routes to exit. A simple trade sale of the venture to another company is a common route. Another exit route for highly successful enterprises is an initial public offering (IPO), the sale of shares to the public.
Entrepreneurs who have successfully exited a first venture often become serial entrepreneurs. Serial entrepreneurs are people who set p a succession of enterprises, investing the capital raised on exit from earlier ventures into new growing ventures.
Entrepreneurs usually start with one main business, though over time they will often experiment with other ventures and the original business itself may evolve quite radically. There are two characteristics of entrepreneurial business that can be particularly influential for strategic choice:
- Resource scarcity: start-up enterprises usually face very considerable resource constraints, in terms of finances and managerial capacity especially.
- Relative invisibility: as new and small players, entrepreneurial businesses are typically less visible to larger, established businesses.
This combination of resource disadvantage and invisibility advantage influences business strategy choices differently according to the kind of market the entrepreneur is operating in:
- New markets: entrepreneurial firms in new markets, where products and customer segments are not yet settled, generally do best by exploring potential opportunities fast.
- Established markets: in more established markets, where large firms are already present, entrepreneurial firms are more successful if they can find niches that are still not occupied.
This chapter dresses mergers, acquisitions and alliances as key methods for pursuing strategic options. It will consider them alongside the principal alternative of ‘organic; development, in other words the pursuit of strategy relying on a company’s own resources.
The default method for pursuing strategy is to ‘do it yourself’, relying on internal capabilities. Thus organic development is where a strategy is pursued by building on and developing an organisation’s own capabilities. There are five principal advantages to relying on organic development:
- Knowledge and learning. Using the organisation’s existing capabilities to pursue a new strategy can enhance organizational knowledge and learning.
- Spreading investment over time. Acquisitions typically require an immediate upfront payment for the target company. Organic development allows the spreading of investment over the whole time span of the strategy’s development.
- No availability constraints. Organic development has the advantage of not being dependent on the availability of suitable acquisition targets or potential alliance partners.
- Strategic independence. The independence provided by organic development means that an organization does not need to make the same compromises as might be necessary if it made an alliance with a partner organisation.
- Culture management. Organic development allows new activities to be created in the existing cultural environment, which reduces the risk of culture clash.
The reliance of organic development on internal capabilities can be slow, expensive and risky. However, it can be very successful and sufficiently radical to merit the term ‘corporate entrepreneurship’. Corporate entrepreneurship refers to radical change in the organisation’s business, driven principally by the organisation’s own capabilities.
mergers and acquisition are typically about the combination of two or more organisations. An acquisition is achieved by purchasing a majority of shares in a target company. Most acquisitions are ‘friendly’, where target’s management recommends accepting the acquirer’s deal to its shareholders. Sometimes acquisition are ‘hostile’, where target management refuses the acquirer’s offer. On the other hand, a merger is the combination of two previously separate organizations in order to form a new company.
Strategic motives for M&A involve improving the competitive advantage of the organisation. These motives are often related to the reasons for diversification in general. Strategic motives can be categorized in three main ways:
- Extension. M&As can be used to extend the reach of a firm in terms of geography, products or markets. Acquisitions can be speedy ways of extending international reach.
- Consolidation. M&As can be used to consolidate the competitors in an industry. Bringing together two competitors can have at least three beneficial effects. Firstly, it increases market power by reducing competition. Secondly, the combination of two competitors can increase efficiency through reducing surplus capacity or sharing resources. Thirdly, the greater scale of the combined operations may increase production efficiency or increase bargaining power with suppliers, forcing them to reduce prices.
- Capabilities. The third broad strategic motive for M&As is to increase a company’s capabilities.
Financial motives concern the optimal use of financial resources, rather than directly improving the actual business. There are three main financial motives:
- Financial efficiency. It may be efficient to bring together a company with strong balance sheet with another company that has a weak balance sheet.
- Tax efficiency. Sometimes there may be tax advantages from bringing together different companies. Naturally, there are legal restriction on this strategy.
- Asset stripping or unbundling. Some companies are effective at spotting other companies whose underlying assets are worth more than the price of the company as a whole. This makes it possible to buy such companies and then rapidly sell off different business units to various buyers for a total price substantially in excess of what was originally paid for the whole.
Acquisitions may sometimes serve managers’ interests rather than shareholders’ interests. Managerial motives are so called, therefore, because they are self-serving rather than efficiency driven and may be of two types:
- Personal ambition. There are three ways that acquisitions can satisfy the personal ambition of senior managers, regardless of the real value being created. First, senior managers’ personal financial incentives may be tied to short-term growth targets or share-price targets that are more easily achieved by large and spectacular acquisitions than the more gradualist and lower-profile alternative of organic growth. Second, large acquisitions attract media attention, with opportunities to boost personal reputations through flattering media interviews and appearances. Finally, acquisitions provide opportunities to give friends and colleagues greater responsibility.
- Bandwagon effects. Acquisitions are highly cyclical, with booms in activity followed by slumps. In an upswing, there are three kinds of pressure on senior managers to join the acquisition bandwagon. First, when many other firms are making acquisitions, financial analysts and the business media may criticize more cautious managers for undue conservatism. Second, shareholders will fear that their company is being left behind, as they see opportunities for their business being snatched by rivals. Lastly, managers will worry that if their company is not acquiring, it will become the target of a hostile bid itself.
M&A’s take time. This section dresses the three key steps before a M&A is completed: target choice, negotiation and integration.
in the Target choice in M&A there are two main criteria to apply: strategic fit and organizational fit.
- Strategic fit: this refers to the extent to which the target firm strengthens or complements the acquiring firm’ strategy. Strategic fit relates to the original strategic motives for the acquisition: extension, consolidation and capabilities.
- Organizational fit: this refers to the match between the management practices, cultural practices and staff characteristics between the target and the acquiring firms. Large mismatches between the two are likely to cause significant integration problems.
Together, strategic and organizational fit determine the potential for the acquirer to add value. Where there is bad organizational fit, attempts by the acquirer to integrate the target are likely to destroy value regardless of how well the target fits strategically.
The Negotiation process in M&A is critical to the outcome of friendly deals. If top management cannot agree because the price is not right, the terms and conditions are unacceptable, or they cannot get on with each other, the deal will not take place. It is very important for the acquirer to be disciplined regarding the price that it will pay. Acquisitions are liable to the winner’s curse - in order to win acceptance of the bid, the acquirer may pay so much that the original cost can never be earned back. In the vicious circle of overvaluation, over-paying firms can easily undermine the original rationale of the acquisition by imposing savings on exactly the assets that made up the strategic value of the target company in the first place.
Integration in M&A is frequently challenging because of problems of organizational fit. Poor integration van cause acquisition failure so getting the right approach to integration of merged or acquired companies is crucial. The most suitable approach to integration depend on two key criteria:
- The extent of strategic interdependence. This is the need for the transfer or sharing of capabilities or resources.
- The need for organizational autonomy. Where an acquired firm has a very distinct culture, or is geographically distant, or is dominated by prima donna professionals or star performers, integration might be problematic.
These two criteria drive four integration approaches, which have important implications for the length of integration period and choice of top management for the acquired company:
- Absorption is preferred where there is strong strategic interdependence and little need for organizational autonomy. Absorption requires rapid adjustment of the acquired company’s old strategies and structures to the needs of the new owners
- Preservation is appropriate where the acquired company is well run but not very compatible with the acquirer. The high end for autonomy and low need for integration may be found in conglomerate deals.
- Symbiosis is indicated where there is strong need for strategic interdependence, but also o a requirement for high autonomy. Symbiosis implies that both acquired firm and acquiring firm learn the best qualities forth other.
- Holding is a residual category where there is little to be gained by integration and it is envisaged that the acquisition will be held temporarily before being sold.
Mergers and Acquisitions bring together companies through complete changes in ownership. However, companies also often work together in strategic alliances that involve collaboration with only partial changes in ownership, or no ownership changes at all as the parent companies remain distinct. Thus a strategic alliance is where two or more organisations share resources and activities to pursue a common strategy. In terms of ownership, there are two main kinds of strategic alliance:
- Equity alliances involve the creation of a new entity that is owned separately by the partners involved. The most common form of equity alliance is the JV, where two organisations remain independent but set up a new organisation jointly owned by the parents.
- Non-equity alliances are typically loser, without the commitment implied by ownership. Non-equity alliances are often based on contracts. One common form of contractual alliance is franchising, where one organisation gives another organisation the right to sell the franchisor’s products or services in a particular location in return for a fee or royalty.
Strategic alliances allow an organisation to rapidly extend its strategic advantage and generally require less commitment than other forms of expansion. A key motivator is sharing resources or activities although there may be less obvious reasons as well. Four broad alliances for alliances can be identifies:
- Scale alliances. Here organisations combine in order to achieve necessary scale. The capabilities of each partner may be quite similar, but together they can achieve advantages that they could not easily manage on their own.
- Access alliances. Organisations frequently ally in order to access the capabilities of another organisation that are required in order to produce or sell its products and services
- Complementary alliances. These can be seen as a form of access alliance but involve organisations at similar points in the value network combining their distinctive resources so that they bolster each partner’s particular gaps or weaknesses.
- Collusive alliances. Occasionally organisation secretly could together in order to increase their market power. By combining together into cartels, they reduce competition in the marketplace, enabling them to extract higher prices from their customers or lower prices from suppliers.
Like M&A’s, strategic alliances need to be understood as processes unfolding over time. Many alliances are relatively short-lived although there are examples of some which last for very long periods indeed. The fact that neither partner is in control, while alliances must typically be managed over time, highlights the importance of two themes in the various stages of the alliance process:
- Co-evolution. Rather than thinking of strategic alliances as fixed at a particular point of time, they are better seen as co-evolutionary processes. The concept of co-evolution underlines the way in which partners, strategies, capabilities and environments are constantly changing.
- Trust. Given the probable co-evolutionary nature of alliances, and the lack of control of one partner over the other, trust becomes highly important to the success of alliances over time.
- The themes of trust and co-evolution surface in various ways at different stages in the lifespan of a strategic alliance. The amount of committed resources changes at each stage, but issues of trust and co-evolution recur throughout:
- Courtship. First there is the initial process of courting potential partners, where the main resource commitment is managerial time. This courtship process should not be rushed, as the willingness of both partners is required.
- Negotiation. Partners need of course to negotiate carefully their mutual roles at the outset. In equity alliances the partners also have to negotiate the proportion of ownership each will have in the final joint venture, the profit share and managerial responsibilities.
- Start-up. This involves considerable investment of material and human resources and trust is very important. First, the initial operation of the alliance puts the original alliance agreements to the test. Also, people from outside the original negotiation team are typically now obliged to work together on a day-to-day basis.
- Maintenance. This refers to the ongoing operation of the strategic alliance, with increasing resources likely to be committed. The lesson of co-evolution is that alliance maintenance is not a simple matter of stability. Alliances have to be actively managed to allow for changing external circumstances.
Termination. Often an alliance will have had an agreed time span or purpose right form the start, so termination is a matter of completion rather than failure. Here separation is amicable.
This chapter focuses on three topics fundamental to achieving strategy in action: organizational structures - the formal roles, responsibilities and lines of reporting in organisations -, organizational systems - supporting and controlling people within and around an organizations -, and leading strategic change - the style of leadership employed and the purposes and characteristics of different strategic change programs -.
This section reviews three basic structural types: functional, multidivisional and matrix. The most appropriate structure depends on the characteristics of an organisation. This implies that the first step in organizational design is deciding what the key challenges facing the organization are that is form the questions considered in the previous chapters.
Even a small entrepreneurial start-up, once it involves more than on person, needs to divide up responsibilities between different people. The functional structure divides responsibilities according to the organisation’s primary specialist roles such as production, research and sales (see figure in textbook).
This is a particular example. A functional structure has potential advantages en disadvantages. Advantages include giving senior management direct hands-on involvement in operations and allowing greater operational control from the top. It also provides a clear definition of roles and tasks, increasing accountability. Functional departments also provide concentrations of expertise, thus fostering knowledge development in areas of functional specialism. However, there are disadvantages, particularly as organisations become larger or more diverse. A major concern in a fast-moving world is that senior managers focus too much on their functional responsibilities, becoming overburdened with routine operations and too concerned with narrow functional interests. As a result, they find it hard either to take a strategic view on the organization as a whole or to coordinate separate function quickly. Separate functional departments - functional silos - tend also to be inward-looking.
A divisional structure (see textbook) is built up of separate divisions on the basis of products, services or geographical areas. Divisionalization often comes about as an attempt to overcome the problems that functional structures have in dealing with the diversity mentioned above. The potential advantages of a multidivisional structure are:
A matrix structure combines different structural dimensions simultaneously, for example product divisions and geographical territories or product divisions and functional specialisms.
Matrix structures have several advantages. They promote knowledge-sharing because they allow separate areas of knowledge to be integrated across organizational boundaries. Matrix organizations are flexible, because they allow different dimensions of the organisation to be mixed together.
However, because a matrix structure replaces single lines with multiple ross-matrix relationships, this often brings problems. In particular, it will typically take longer to reach devisions because of bargaining between the managers of different dimensions. There may also be conflict because staff find themselves responsible to managers from two structural dimensions. In short, matrix organisations are hard to control.
Structure is a key ingredient of organizing for success. But structure can only work if they are supported by formal and informal organizational systems, the ‘muscles’ of the organization. All organizations, but especially large organizations, are faced with the challenge of deciding how to support a strategy with appropriate resources. Planning systems plan and control the allocation of resources and monitor their utilization. There are three strategy styles in which systems are exploited, they will be explained below with corresponding advantages and disadvantages.
The strategic planning style is the archetypal planning system, hence its name. The strategic planning style combines both a strong planning influence on strategic direction from the corporate centre with relatively relaxed performance accountability for the business units.
The financial control style involves very little central planning. The business units each develop their own strategic plans, probably after some negotiation with the corporate centre, and are then held strictly accountable for the results against these plans.
The strategic control style is in the middle, with a more consensual development of the strategic plan between the corporate centre and the business units and moderate levels of business unit accountability. Under the strategic control style, the centre will typically act as coach to its business unit managers, helping them to see and seize opportunities.
Three cultural systems are:
- Recruitment. Here cultural conformity may be attempted by the selection of appropriate staff who will fit with the desired strategy.
- Socialization. Here employee behaviors are shaped by social processes. This often starts with the integration of new staff though training, induction and mentoring programs.
- Reward. Appropriate behavior can be encourage through pay, promotion or symbolic processes.
It is important to recognize, however, that organisations’ cultures are not fully under formal management control. Sometimes aspects of organizational culture may persistently contradict managerial intentions, as with peer-group pressure not to respond to organizational strategy.
Performance targets focus on the outputs of an organisation (or part of an organisation), such as product quality, revenues or profits. These targets are often known as key performance indicators (KPIs).
Within large businesses, corporate centre may choose performance targets to control,m their business units without getting involved in the details of who they achieve them.
In regulated markets, such as privatized utilities, government-appointed regulators increasingly exercise control through agreed KPIs.
In the public services, where control of resource inputs was the dominant approach historically, governments are attempting to move control processes towards outputs and outcomes.
There are three potential problems with targets:
- Inappropriate measures of performance are quite common. For example, managers often prefer indicators that are easily measured or choose measures based on inadequate understanding of real needs on the ground.
- Inappropriate target levels are a common problem. Managers may give their superiors pessimistic forecasts so that targets are set at undemanding levels, which van then be easily met. On the other hand, superiors may over-compensate for their managers’ pessimism, and end up setting excessively demanding targets.
- Excessive internal competition can be a result of targets focused on individual or sub-unit performance. Although organisation by definition should be more than the sum of its parts, if individuals or sub-units are being rewarded on their performance in isolation, they will have little incentive to collaborate with the other parts of the organisation.
The acknowledged difficulties with targets have led to the development of techniques designed to encourage a more balanced approach to target-setting. The most fundamental has been the development of the balance scorecard approach. Balanced scorecards set performance targets according to a range of perspectives, not only financial. They typically combine four perspectives: the financial perspective, the internal perspective, and the future-orientated innovation and learning perspective.
It is important that there is compatibility between the structures and systems of organisations. One way of thinking about this is in terms of the concept of organizational configuration. A configuration is the set of organizational design elements that interlink in order to support the intended strategy. A well-known means of considering this is the McKinsey 7-S framework which highlight the importance of fit between strategy, structure, systems, staff, style, skill and superordinate goals. The first three elements are already introduced in this chapter. The remaining four are:
- Style here refers to the leadership of style of top managers in an organisation. The important point to emphasis is that leadership style should fit other aspects of the 7-S framework.
- Staff is about the kinds of people in the organisation and who the are developed. This relates to systems of recruitment, socialization and reward.
- Skills relates to staff, but in the 7-S framework refers more broadly to capabilities in general.
- Superordinate goals refers to the overarching goals or purpose of the organisation as a while, in other words the mission, vision and objectives that form the organizational purpose.
Turning an intended strategy into strategy in action invariably involves change. Coping with change is what distinguishes leadership from the bringing of order and consistency to operational aspects of organisation that characterizes good management. There are three roles that are especially significant for top management, especially a CEO, in leading strategic change:
- Envisioning future strategy. There is a need to ensure there exists a clear and compelling vision of the future and to communicate clearly a strategy to achieve it both internally and to external stakeholders.
- Aligning the organisation to deliver the strategy. This involves ensuring that people are committed to the strategy, motivated to make the changes needed and empowered to deliver those changes. It can, however, also be necessary to change the management of the organisation to ensure such commitment, which is why top teams often change as a precursor to or during strategic change.
- Embodying change. Top managers will be seen by others, not least those within the organisation, but also other stakeholders and outside observers, as intimately associated with a future strategy and a strategic change program.
Middle managers are typically seen as implementers of top management strategic plans. In the context of strategic change there are four roles to emphasize middle managers:
- Advisers to top management on requirements for change, given they are often the closest to indication of market or technological changes.
- Sense making of strategy. Top management may set a strategic direction, but how it is explained and made sense of in specific contexts may be left to middle managers.
- Reinterpretation and adjustment of strategic responses as events unfold; this is a vital role for which middle managers are uniquely qualified because they are in day-to-day contact with such aspects of the organization and its environment.
- Local leadership of change: middle mangers therefor have the roles of aligning and embodying change, as do top management, but at a local level.
Leaders are often categorized in two ways:
- Transformational leaders, whose emphasis is on building a vision for the organisation and energizing people to achieve it.
- Transactional leaders, who focus more on hard levers of change such as designing systems and controlling the organization’s
Within these two generic approaches there are different styles of strategic leadership:
Gain support for change by generating understanding and commitment through e.g. small-group briefings and delegation of responsibility.
Develops support for change and a wide base of understanding
Time consuming. Fact-based argument and logic may not convince others of need for change. Or may gain national support without active change.
Widespread involvement of employees on decisions about both what and how to change.
Spreads not only support but also ownership of change by increasing levels of involvement.
Time consumer. Little control over decisions made.
Change leaders retain overall coordination and authority but delegate elements of the change process.
Spreads ownership and support of change, but within a controlled framework. Easier to shape decisions.
Can be perceived as manipulation.
Change leaders make most decisions about what to change and how. Use of authority to direct change.
Less time consumer. Provides a clear change direction and focus.
Potentially less support and commitment, so changes may be resisted.
There are four generic types of strategic change. The mainly differ in the extent of change and the nature and urgency of change. They are listed below:
- Adaptation. Strategies often build on rather than fundamentally change prior strategy. This is referred to as adaptation. Change is gradual, building on or amending what the organisation has been doing in the past and in line with the current business model and organizational culture. The extent of change is marginal and the nature of change is incremental.
- Reconstruction: turnaround strategy. Reconstruction is change that may be rapid and involve a good deal of upheaval in an organisation, but which does not fundamentally change the culture or the business model. Some main elements of turnaround strategies are as follows:
- Crisis stabilization. The aim is to regain control over the deteriorating position. This requires a focus on cost reduction and/or revenue increase, typically involving a reduction of labour and senior management costs etc.
- Management changes. Changes in management may be required, especially at the top. This usually includes the introduction of a new chairman or chief executive.
- Gaining stakeholder support. Poor quality information may have been provided to key stakeholders. In a turnaround situation it is vital that key stakeholders, perhaps the bank are kept clearly informed on the situation and improvements as they are being made.
- Clarifying the target market(s) and core products. Central to turnaround success is ensuring clarity on the target market or market segments most likely to generate cash and grow profits
- Financial restructuring. The financial structure of the organisation may need to be changed. This typically involves changing the existing capital structure, raising additional finance or renegotiating agreements with creditors, especially bank.
- Revolution. Revolution differs from turnaround in two ways that make managing change especially challenging. First, the end is not only for fast change but, very likely, also for cultural change. Second, it may be that the need for change is not as evident to people in the organisation as in a turnaround situation, or that they have reasons to deny the need for change. Leading to change is such circumstances is likely to involve:
- Clear strategic direction. The need for articulation of a clear strategy direction and decisive action in line with that direction is crucial.
- Top management changes. The replacement of the CEO or other board members is common.
- Multiple styles of change management. Wile a directive style of management is likely to be evident, this may need to be accompanied by other styles. It may be supported by determined efforts to persuade people about the need for change and the use of participation to involve people in aspects of change in which they have specific expertise or to overcome their resistance to change.
- Culture change. It may be possible to work with elements of the existing culture rather than attempt wholesale culture change.
- Monitoring change. Revolutionary change is likely to require the setting and monitoring of unambiguous targets that people have to achieve.
- Evolution. Evolution change in strategy that results in transformation, but incrementally. Here two ways in which this might be achieved and considered. (i) Organizational ambidexterity means both the exploitation of existing capabilities and the search for new capabilities. If transformational change is to be achieved, however, there needs to be exploration for new capabilities and innovation. This is likely to be problematic because the different processes associated with exploitation and exploration pose contradictions such being both focused and flexible. There are, however, suggestions how this might be possible:
- Structural ambidexterity. Organisations may maintain the main core of the business devoted to exploitation with tighter control and careful planning but create separate units or temporary, perhaps project-based, teams for exploration.
- Diversity rather than conformity. Contradictory behaviors may be beneficial, so there may be benefits from a diversity of mangers’ experience or different views on future strategy, which can give rise to useful debate.
- The role of leadership. Leaders therefore need to encourage and value different views and potentially contradictory behavior rather than demanding uniformity.
- Tight and loose systems. All this suggests that there needs to be a balance between tight systems of strategy of development that can exploit existing capabilities and looser systems that encourage new ideas and experimentation.
(ii) in terms of stages of strategic change, perhaps over many years. Here principles that might guid change leaders are these:
- Stages of transistor. Identifying interim stages in the change process is important.
- Irreversible changes. It may be possible to identify changes that, while not necessarily having immediate major impact, will have long-term and irreversible impact
- Sustained top management commitment will be required. The danger is that the momentum for change falters because people do not perceive consistent commitment to it from the top.
- Winning hearts and minds. Culture change is likely to be required in any transformational change.
Leaders of change will need to identify levers for change. A forcefield analysis provides a view of forces at work in an organisation that act to prevent or facilitate change. It allows some key questions to be asked:
- What aspects of the current situation would block change, and how can these be overcome?
- What aspects of the current situation might aid change in the desired direction, and how might these be reinforced?
- What needs to be introduced or developed to aid change?
A forcefield analysis can be informed by concepts and frameworks explained in this text:
- Mapping activity systems can provide insights into aspects of an organisation that have underpinned its past success.
- Stakeholder mapping can provide insight into the power of different stakeholders to promote change or to resist change.
- The cultural web. Strategic change often goes hand in hand with a perceived need to change the culture of the organisation. The cultural web is a mean of diagnosing organizational culture and therefor an understanding of the symbolic.
- The 7-S framework can highlight aspects of the infrastructure of an organisation that may act to promote or block change.