Professional Documents
Culture Documents
Workbook
2010 edition
Copyright © 2010
University of Strathclyde
Business School.
Contents
Chapter 1: Introduction to strategy....................................................... 1
Introduction..................................................................................... 1
Learning objectives ..................................................................... 1
The structure of SAE and Strategic Management........................... 2
Defining strategy ......................................................................... 2
Towards a definition.................................................................... 2
Forces influencing strategy.......................................................... 3
The structure of SAE....................................................................... 4
Components of SAE .................................................................... 4
How to use the workbook............................................................ 6
Working in groups....................................................................... 6
Selecting the organisation to study ................................................. 8
Selecting an organisation – an example ...................................... 9
Beginning strategy formulation ................................................. 10
Levels of strategy ...................................................................... 11
Strategic management ................................................................... 12
Conclusion .................................................................................... 13
SAE Course syllabus..................................................................... 15
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Strategy – Analysis and Evaluation (SAE) Workbook
Strategy Analysis and Evaluation (SAE) Workbook
Introduction
SAE, is concerned with understanding the strategies of organisations,
the forces that work upon organisations which influence their strategy
and how managers can set about thinking about such forces so as to
decide on strategies. This workbook is designed to accompany the
texts you will be using. It consists of explanatory notes to support
those texts, together with exercises for you to undertake individually
and with other students in groups. It will help if you follow the
sequence of exercises outlined here and the guidelines provided for
those exercises.
Learning objectives
The pedagogical approach adopted to study SAE is student centred
and experiential learning based. We believe that the most effective
approach to learning is a combination of theory and practice, and SAE
is intended to provide a safe learning environment for students. Our
approach is based around a combination of individual reading,
individual and group activity, and reflection on the learning
experience to identify and internalise insights and practice.
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Defining strategy
Towards a definition
There are many different definitions of what organisational strategy
means. Here we take it to mean:
A long term direction which seeks to meet the expectations and create
value for stakeholders.
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What is missing from the definition above, but often appears in other
definitions is that in order to achieve a long-term direction which
creates value for stakeholders, it is likely that the organisation has to
position itself to achieve some sort of advantage over others.
Businesses in competitive environments do not make high levels of
profit return by being the same as everyone else, but rather by
achieving advantage over others. Public Sector organisations face a
similar issue. In competing for scarce resources (e.g. public money)
how can they demonstrate that they warrant greater resources than
others in the public sector? Charities also face a similar problem: How
can they position themselves to attract disposable income that could
be spent elsewhere?
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Remember, there are some overarching concepts from what you have
learned in EIBE that will be built upon. The macro environment will
have important influences on the organisation and these influences
need to be considered. In particular managers need to identify if there
are structural drivers from the environment, which will have major
influence on the organisation; and they need to consider the likely
future impact of these, perhaps by applying scenario analysis. Much
of this has already been covered in EIBE and the lessons from that
course should be applied here. Indeed you may wish to undertake such
analyses when you have chosen the organisation you will study (see
below).
Components of SAE
The main components of SAE, summarised in Figure 1, at the end of
this chapter, and structured as chapters in this workbook will then be
as follows:
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For the first chapter of this workbook you should begin by reading
Chapter 1 of FS. It will provide you with a broad overview of the
subject.
Working in groups
Our expectation is that you will be working with a team of students,
however there may be some students who, due to their circumstances,
will undertake SAE individually. You will be briefed locally on how
these teams are made up and how team-working will occur. With this
in mind some of the activities are individual for you to undertake in
conjunction with your reading. These activities in turn feed into team
tasks. You should prepare individually and take your individual work
to the team for discussion, debate and further analysis and
consideration. The balance between individual and group activities is
dependent on the mode of study i.e. full-time, part-time, flexible
learning or internationally. The greatest learning is achieved when you
undertake individual work and teamwork, and reflect on the outcome
of these activities.
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Strategy Analysis and Evaluation (SAE) Workbook
As you work through the SAE course, we will ask you to undertake a
number of activities, principally in groups but occasionally
individually. On occasions in the workbook you will be asked to
reflect, and make notes in the appropriate boxes, on the new
understandings or insights that you have gained. Consequently it may
be useful to you to make a note of your initial understanding of a
subject before embarking on individual reading or group work. This
understanding can then be used as an input into your group
discussions.
Ongoing:
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For offshore students your local tutor will brief you on what is
required and in some circumstances specific case studies will be
provided. If you are going to choose another organisation you should
use the following guidelines:
1) You will need to get hold of a great deal of information about the
organisation you chose. If you are using a case study it will need
to contain a lot of information and you will need to access further
information to support that. If you choose a business with which
you are familiar (perhaps one which a team member works for)
again remember that you will need to be able to access
information. A scan through the curse syllabus shows you the sort
of questions we will expect you to deal with. To address these you
will certainly need to know about:
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Do:
• Ensure you can obtain relevant data – financial, but also company,
press, and analysts’ accounts – about the company.
• But which is manageable in scope: e.g. some companies may be
so big that you could have difficulties in finding the time to access
and analyse the data available on it.
• Choose a company that interests you.
• And which you think faces an interesting strategic challenge.
• Choose a business for which you can identify customers or users
and take a view (or get information) on their needs and
expectations.
• Choose a business that has competitors.
Don’t:
Clarifying the business unit early will help minimise confusion as you
work through the activities and tasks in this workbook.
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Once you have made your list, ask yourself the question – ‘at the
outset of strategy formulation, why have we written what we have
written, and why are these important?’
Take the opportunity to compare your views here with others in your
team or in your course. It is quite likely that you will have noted down
many similar forces at work. However, it is also quite possible that
you will have noted down different ones; and given different
emphases to these from your colleagues. This is not surprising.
Different organisations do face different influences on their strategies.
Take the opportunity to discuss with your colleagues why this might
be so in the context of the organisations they considered. For example,
consider the following:
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Make a note of the forces that you think are likely to play a major role
in influencing the strategy of the organisation you are studying. Put an
asterisk against the forces that you think the organisation pays
particular attention to currently (N.B. you will revisit these throughout
SAE but getting an initial view might be helpful). The environment is
concerned with opportunities and threats; stakeholder influence is
concerned with those actors that can make or break the strategy; and
resources is concerned with the basis of success and how it can be
leveraged.
This initial list will almost certainly change as you work through this
unit. This is one of the lessons of managing the strategy of
organisation – the need for flexibility to understand and manage
multiple conflicting goals.
Levels of strategy
The concept of strategy applies at different levels in organisations.
Individuals have strategies; and functional areas of businesses such as
Marketing or HR have strategies. In this course we are not so much
concerned with those (although our considerations here have serious
implications upon such strategies) as with business level and corporate
strategy. Again these influence each other but they can be
distinguished as follows:
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Strategic management
This leaves the ‘how’ of managing strategy. How is it done? There are
many different accounts and explanations of how strategy is managed.
These will be expanded upon and explained in more detail in a later
part of Strategic Management in your MBA. In SAE we take a
particular view about the management of strategy. It does not mean it
is the ‘right’ view but a useful one which you need to understand.
5. Are the different forces aligned? They may well not be. The forces
at work in the environment may suggest the organisation should
move in one direction; whereas the expectations of stakeholders or
the inherited competencies available may suggest another.
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Putting all this together it is clear that the strategic manager faces a
complex task quite different from normal operational, day to day
management, the process aspect of strategy. How is this to be
addressed?
At this stage it might be useful to try and write down some notes on
what you think the strategy is of your organisation. It could be that
you have already decided on an organisation to study for this course.
Or it could be that you are using a case study, or again it could simply
be that you are working in an organisation. For this activity, you need
to choose an organisation with which you have some familiarity.
You may not have found this straightforward. This may be because
organisations do not make their purpose or strategy explicit in terms
of the sorts of characteristics discussed here: for example in terms of
how they seek to position themselves in the long-term to achieve
competitive advantage or what distinctive competencies they seek to
build this upon. This may be because they are not clear about it
themselves; but it could be because they regard this as something they
do not wish to make over explicit in a competitive environment.
Conclusion
This chapter was designed to introduce you to the approach we will
adopt to studying SAE. In addition, we have introduced some of the
key issues that you need to be aware of at the outset of studying SAE.
We have provided you with some guidance to help you select a case
study organisation as you work through the workbook. The rest of the
workbook will be concerned with analysing this case study
organisation, identifying insights from the analysis, drawing out
conclusions and making recommendations vis-à-vis strategy.
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Assessment
Now is a good time to familiarise yourself with the SAE assignment
guidelines, which have been given to you separately.
Individual reading:
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2. The Organisation: Value creation and Rent A view on what is meant by success
Value creation Corporate Purpose strategically in terms of the expectations of
key stakeholders
Corporate Governance
3. The Transactional Value creation and competition Identifying the key forces within a
Business Porter’s 5 forces model based on competitive environment that influence
Environment Bargaining Power and strategy and have to be taken into account
relationships to develop strategy.
Strategic group analysis
Market segments
4. Competitive Generic competitive strategies Identifying how (and how might) the
Strategy Costs and cost leadership organisation seek to create value.
differentiation
Resources and competencies
Sustainability of competitive
advantage
Business idea
Hyper competition/Outpacing
Strategy: elementary game theory
Network effects/externalities
5. Corporate Strategy The multi-business corporation Identifying how does (and how might) a
Corporate value creation corporate parent enhance the value created
M&A’s as corporate means by business and considering why it might
options not.
Corporate strategy design
Portfolios
Parenting issues
6. Strategic options Option generation and evaluation Identifying what are the strategic options
and choices: Scenario wind tunnelling of possible for the organisation.
Approaches to options
evaluation
Identifying which of these is most
appropriate.
7. Conclusions, and Recommendations
links forward to
managing and
making strategy
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Learning objectives
The objective of this chapter is to develop your understanding of
organisational purpose and performance.
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Organisation of Chapter 2
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Value creation
Economists argue that organisations such as business firms exist
essentially to motivate and co-ordinate the search for the effective use
of societies scarce resources. If there is a lack of desire to use scarce
resources effectively and/or a lack of ability to co-ordinate these
resources effectively then there is likely to be inefficiency and waste.
That is wants and needs we could satisfy are not met because of
motivation problems or co-ordination failures. To an economist
therefore:
The search for rent argument has at its core the primacy of
maximising shareholder value. However, there is an alternative view
that argues for the recognition of multiple stakeholders, who all need
to be considered by management. In this alternative view, multiple
stakeholders and shareholders are mutually inter-dependent and the
organisation should try to create a virtuous circle between all
stakeholders. If this second view is acknowledged it creates a potential
problem for managers – how do you balance multiple stakeholders
when setting objectives? What is your view on this issue, and how
does it impact the case organisation?
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taxpayers) that they are likely to add value to the resources they
obtain.
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Does the case organisation state anywhere (e.g. in its annual report)
what its purpose is? And does it have a stated set of objectives? If so
note these down.
Do you agree with these? Or do you think the purpose and objectives
of the organisation should be something else?
What have you been thinking about and discussing – a single business
unit or an organisation with several, perhaps many, business units?
Please be clear on the distinction between the two.
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We therefore take the view that whilst, in general, firms are searching
to create economic value, which in effect is a condition for long run
success and survival, in practice the strength of this desire is likely to
vary. Important influences on this are the multiple influences on
firms’ objectives and the strategies they pursue, which we will now
consider.
Corporate governance
The corporate governance framework determines whom the
organisation is intended to serve and how purpose and priorities are to
be decided. FS 4.2 explains the nature and significance of the
‘governance chain’, the role of shareholders and the rights of lenders.
This discussion is complemented by an extended discussion of both
governance and what is called the market for corporate control in
BE Chapter 12.
It should become apparent from the reading that what might appear to
be straightforward theoretically is not straightforward in practice.
Arguably, theoretically the management of a business is responsible to
meet the expectations of shareholders. This begs questions such as: –
For each of the levels in the governance chain consider what their
personal expectations would be from the organisation.
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Stakeholder expectations
The corporate governance framework provides the formal
requirements and boundaries within which strategy is developed.
However it is important to remember that the governance chain alone
does not define all of the actors that managers must consider when
developing strategy. Stakeholder theory is an approach to business
that argues that the success of the firm depends on a variety of actors
(stakeholders) including, but not confined to, those defined in the
governance chain.
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Individual reading:
In the final part of the chapter you are asked to come to a view about
how you might measure success in terms of performance. What
follows are some key points to consider.
You will know from your own experience and from the Management
Accounting course that there are many different ways of measuring
performance (return on capital employed, return on equity, economic
value added etc in commercial businesses). You should consider
which of these (or others) are more or less appropriate in measuring
the success or otherwise of the strategy of your organisation. For
example, if you were putting forward a strategic proposal in an
organisation you would be expected to say what effect it would have
on performance using some performance criteria. What should they be
and why?
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Conclusion
This chapter has been designed to help you understand the purpose of
the case study organisation that you have chosen to study. The chapter
has also been designed to help you consider and identify a wide range
of organisational performance criteria. By taking Chapter 1 and
Chapter 2 together, you should now have a clearer understanding of
the case study organisation prior to commencing your analysis.
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Individual reading:
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Learning objectives
The learning objectives of this chapter of the workbook are to develop
a clear understanding of the environment – contextual and
transactional – for the case organisation, develop an understanding of
how these influence the ability of management to develop and
formulate strategy, and identify opportunities and threats from this
analysis.
Some of the above questions are mainly about the business at present;
others are about the future of the business and its wider organisation;
and some concern both. In this chapter, many of the tasks mainly
relate to the current position of the business. Where this is the case,
you will inevitably find yourself thinking about the future as well.
That is as it should be, and we suggest that you keep a record of these
ideas as you go along.
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Organisation of Chapter 3
Sustainability and/or
PESTEL Scenarios Contextual environment
Nature of competition
Market structures
Five forces analysis
Markets
Market segmentation
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To help you with the next stage of this course, we would ask you to
re-read the EIBE course. This course explains the approach to
scanning the environment and scenario development in more detail.
Hints
a) Make sure that the time horizon chosen for the scenario planning
is appropriate for the case organisation concerned.
b) Be clear when identifying the axes of the scenarios that they are
independent.
c) Be clear also what you mean when identifying uncertainties. For
example if in developing scenarios for sub-Saharan Africa you
label a cluster of driving forces as ‘Effects of HIV/AIDS’ then
there is little uncertainty associated with this label. If on the other
hand you label a cluster of drivers ‘Continent wide effective
governmental response to HIV’ there is enormous uncertainty
associated with this.
d) There is no need to undertake two iterations in developing
scenarios; the key to developing your scenarios is the
identification of key external concerns that you have identified
during your analysis.
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Activity 3.3, to which we now turn, addresses the first three of these
questions.
We shall have more to say about these matters in the next chapter on
Competitive Strategy, and you will be asked to consider these
questions further there. Posing them now and developing provisional
answers will begin to pin down what the relevant transactional
environment of the business actually is (or are, if the business operates
in more than one market).
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Individual reading:
Now move on to the task. You may find that it is surprisingly difficult
to answer these (apparently simple) questions. At this stage all you
should try to do is give provisional answers. When you revisit them
later on in the workbook (as you will do), it is likely that your answers
will have changed from the ones you offer here.
Hints:
It is important to be very clear about what product you are selling, and
to whom. This is often more difficult than one first thinks. Ask who
are your customers; are they intermediate buyers or final consumers?
If you have selected a not-for-profit or public sector business, ask
what market it would be in if it was a private business doing the same
kind of thing. It may also be helpful to think of the market for a public
sector business in terms of how it competes for funding and resources.
Also try to think about the boundaries of your market (in terms of
such things as geography, national boundaries, types of customer,
types of services provided/customer needs).
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Why does this difficulty arise? One reason is to do with the fact that
what defines the boundary between one product category and another
(or equivalently between one market and another) is not to do with the
objective features or characteristics of the thing being produced and
sold. Rather, it is a matter of customer perceptions of how easily and
completely particular products can be substituted for one another. Do
traditional toys, such as dolls and construction toys, belong to the
same market as children’s computer games? The answer depends on
whether customers regard them as close substitutes.
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It will be interesting to see how this situation evolves. But the point of
these comments is rather different. It is to note that firms operate in
markets where, to some degree at least, aggregate processes create
forces, which tend to push average price levels up or down, and have
positive or negative implications for sales prospects for the industry as
a whole.
In the next recommended reading and its associated task, we ask you
to use a demand and supply framework to analyse market forces. You
will see that this provides a powerful tool by means of which we can
analyse the driving forces affecting market price and, indirectly,
business profitability.
A market therefore has two sides: the demand side and the supply side
of the market. The reading shows you how we can construct a
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framework within which the forces influencing market price are laid
out. In many markets (so called competitive markets) individual
suppliers of a product will have little room for manoeuvre about price:
they will have to sell their product at, or close to, the market price for
that product.
If the market price exceeds the farm costs, a value surplus or rent is
available. But who gets it? This is where supply chain analysis enters
the picture. If food retailers are small in number and have immense
purchasing, and so bargaining, power, it is they who will tend to
capture most of the rent. UK food supermarkets appear to be in this
position.
The reading below takes you through the technique of supply and
demand analysis of markets, and shows with examples how this tool
can be used. It shows which underlying factors influence demand and
which influence supply. Armed with this tool, you should be able to
deduce in which direction the market price of your business product
will move if you sell in a ‘competitive market’ (one with a large
number of suppliers of relatively similar products).
Individual reading:
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What has all this got to do with business strategy? The answer can be
thought of as the search for a competitive advantage. The major
reason why many markets are not of the competitive type is that
business managers take actions that differentiate their products, create
barriers to imitation, replicability, and new entry into the market, or
find some other way of outperforming their rivals. How they might do
so is the theme of the next chapter. But it is clear that there are strong
incentives to searching for competitive advantage.
Which of these market types is most attractive from the business point
of view? Competitive markets are not attractive – competition among
sellers of relatively undifferentiated goods will tend to push prices
down to average costs, leaving the firm unable to generate economic
profit. A monopoly position is an attractive one; perhaps the most
attractive. But defending that position – against regulatory action and
potential entrants – is likely to be very difficult. We are likely to find
many more examples of oligopolistic markets than ones that are pure
monopolies. Indeed, the only pure monopolies we are likely to
observe on a regular basis are those that emerge from new product
innovations – or substantial differentiation – that, for a while at least,
put the innovator or differentiator in a position of selling what
customers perceive to be products without any close substitute.
The readings listed below take you through these various market
structures in much more detail.
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Individual reading:
What type of market structure does your business operate in? Does the
market type affect the way your business and others behave?
Can you identify any forces that are tending to push your product
market towards the competitive end of the market structure spectrum?
What actions or processes, if any, have moved – or are continuing to
move – the market towards the oligopolistic or monopolistic edge of
the industry structure spectrum?
The Five Forces model is a framework for identifying the forces that
affect the level of competition in an industry and in a market. (The
word industry refers to collections of businesses producing similar
goods; the word market is defined in terms of customers and their
preferences. In some circumstances, there is a one-to-one relationship
between the two – so that all businesses in the industry sell in a single
market – but that is not always the case.)
There are several ways in which this model can be used. One of them
is to gauge ‘attractiveness’ to incumbents (and, perhaps, potential
newcomers) of an industry. In other words, the Five Forces model can
be used to try and explain the profit potential of an industry. Used in
this way, the model is an aggregate, industry level tool, and is not
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The Five Forces model, therefore, gives insights into how one
business can attain a position of strength relative to its rivals, and so
outperform them in terms of profitability. The model also generates
implications for the ‘present’ and for the ‘future’. We might wish to
use it as one device (among others) to think about how our business
can gain a competitive advantage by managing its relationships in the
transactional environment better than its competitors. Or, it might
suggest options for the future that warrant further exploration. We will
take up this second – future-orientated approach – in the Options
chapter. The Five Forces model can also be useful in thinking about
corporate strategy (for example when it is used as an input into the
Directional Policy Matrix [FS, pages 194-196]). We will discuss these
wider uses of the model later in the section on Corporate Strategy. The
next task invites you to think about Porter’s Five Forces model in
terms of the way in which it currently affects your business.
Individual reading:
FS: Chapter 2, pages 29-41 describes in greater detail each of the ‘five
forces’.
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2). What are the key forces at work in the competitive environment of
your business?
3). What are the underlying forces in the macro-environment that are
driving competitive forces?
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Market segmentation
For some purposes, the concept of a market will be sufficient for the
purposes at hand. But it may not suffice for other purposes, where
more subtle classifications will be necessary. Within the market as a
whole, there may be substantial differences between users or
customers. These differences may relate to user characteristics such as
location, age, income, or gender; they may concern quantities in
which products are purchased; or they may relate to differences
between customers in terms of their needs and wants. Hence it is
important to analyse the perceptions of value that different categories
of customer have about the product. A more complete account of such
possible differences and some illustrative examples are given in the
recommended reading.
Individual reading:
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Are there other segments that you think have value-adding potential
for your business? If so, do these suggest options that you might wish
to explore further? (Keep a note of your findings on this for later – we
shall ask you to revisit this when thinking about Strategic Options
later in the workbook).
Does any environmental analysis you have done so far suggest that
customer needs are likely to change in the future? If so, does this have
any implications for the ways in which the patterns of market
segmentation might change over time?
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Analysis of competitors
Throughout this chapter, you have been considering the environment
within which your business carries out various forms of transactions,
or the fields within which it interacts, influences and is influenced.
The activities you have undertaken in this chapter should have given
you the means to answer this question. You have seen that your
competitors might include all other businesses operating in the same
broadly defined market as you do. However, for some purposes, the
competitors that matter might be more narrowly defined – perhaps in
terms of those businesses that have chosen to target a similar profile of
market segments; or businesses that are in your strategic group. So
bear in mind that who or what counts as your competitors may vary
depending on the context or set of choices facing the business.
Appreciating this subtlety and complexity is important for what
follows in the rest of this workbook.
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• Identifying the competitors in your market and the way the market
is segmented.
• Identifying the subsets of business operating within the same
markets in terms of the different characteristics of the businesses.
This is done by strategic group analysis.
• Identifying those critical characteristics that are regarded by
customers as being the most important, and so determine their
purchasing behaviour. Note that these characteristics might relate
to the product itself, they might relate to the business offering it,
or they might relate to something else. We must be very careful
here – what matters are which critical characteristics customers
actually do value, not what suppliers think they value. (If you
have access to such customers you might want to ask them.)
• Evaluating the strengths and weaknesses of your competitors
relative to your business in terms of those critical characteristics.
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Individual reading:
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Hints: Some ideas for these tasks are given in the reading above but
be careful. These are only ideas; choose the ones that are most
appropriate to the competitors in your market.
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Are there are any opportunities for future strategic development that
are suggested by the strategic group map.
Hints: For example it could be that your PESTEL analysis, your Five
Forces Analysis, or your Scenarios suggest that the market may
develop in certain ways but that no organisations appear to be
positioning themselves to take advantage of this. So this suggests
strategic gaps, which in turn might suggest future opportunities. The
use of strategic group analysis for option generation will be taken up
in the final chapter in this workbook, so this is worth thinking about.
Competitor analysis
It will be useful now to look at Exhibit 2.7 on page 49 of FS, and the
associated discussion. This investigates perceptions of value by
customers in one segment of the electrical engineering industry. The
five categories shown in the diagram are those seen as most important
by customers. The exhibit profiles three different providers, labelled
A, B and C, against these values that customer’s regard as being of
most importance.
There are several uses we could make of this type of information. For
example, it can provide insight into issues of strategic capability
(which will be discussed in the next chapter). For example, it is
evident that the particular strengths that company A possesses are not
those valued most highly by customers. In contrast, B’s strengths
better match customers’ value priorities.
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The information shown in Exhibit 2.7 (page 49) could also be related
to prices charged by our business and its competitors. This might
generate insights into how sensitive price is to variations in the degree
to which particular dimensions of customer value are satisfied. This is
a question to which we shall return in the next chapter on Competitive
Strategy. In that chapter, we shall also pursue two related questions:
Individual reading:
Read Exhibit 2.7 (page 49) in FS, together with its associated
discussion, on perceived value by customers in the electrical
engineering industry.
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To try to draw this analysis together we suggest that you identify the
key issues emerging to date. We ask that you consider these issues in
the context of the value creating activities of your case study
organisation. These value-creating activities were discussed in the
previous chapter – you may wish to re-visit your earlier analysis.
What conclusions do you draw with regard to the nature of
competition? Try to identify the essence of the competitive game
being played.
Conclusion
We have now thought about the business’s transactional environment.
Now it is time to ask how our business might attempt to outperform its
competitors. This takes us on to the next chapter of the workbook,
where we deal with Competitive Strategy.
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To help you achieve this goal, we take you through a series of tasks
that develop ideas and tools that should prove helpful to you. As you
work through these tasks, ideas are explained and illustrated, and you
then apply them to your selected business. To complete this chapter,
your team is expected to produce a report that lays out, in a well-
structured form, the results of the competitive strategy analysis that
you and your team have undertaken with respect to your chosen
business. This should contain an account of how that business
achieves, or could try to achieve, above industry-average profitability.
It should also address the issue of sustainability: by what means could
it attempt to defend its above average performance against the actions
of its business rivals, and continue to achieve above average
performance over time in a changing environment.
Learning objectives
The objective of this chapter is to develop your understanding of
competitive strategy.
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Organisation of Chapter 4
Strategic capability
The business:
The offering Strategy Clock
Resources and capabilities
Foundations for
Competitive Strategy
competitive strategy and
competitive advantage
Environmental analysis:
Competitors Superior cost
Opportunities and threats
Analysis performance
Successful
The Business Idea differentiation
Sustainable Competitive
Advantage
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Individual reading:
Recommended reading:
Some markets have the particular property that they are dominated by
a small number of competitors. Small numbers means that the
behaviour of competitors is highly interdependent – the payoffs to a
choice made by one firm will depend on the choices selected by
others. The competitors are involved in a ‘game’ of rivalry. In these
circumstances, the ability to play strategic games effectively is likely
to be an important business competence. To give you some
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Finally, this chapter in the workbook asks you to put all these matters
together into a simple, organised framework – the Business Idea. A
good business idea should be able to summarise quickly and
effectively how the business seeks to obtain a sustainable competitive
advantage.
The offering
An important element in any strategy process is to think carefully
about who your customers are and what they value (or might value in
the future). Understanding these – and translating this understanding
into actually providing customers with products that they value – is
crucial to building strategic capability in an organisation. (The
concept of strategic capability is defined in Chapter 3 of FS.) Your
first task, therefore, deals with these questions. We bring these
together in the concept of the offering.
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and rate highly. But your offering is what your business brings to the
market. So it leads naturally to thinking about the following questions:
Two concepts that you may find useful in undertaking the next
Individual task are threshold product features and critical success
factors. Threshold product features are product features and
performance standards all of which must be met by providers; they
can be thought of as necessary or minimum conditions (or ‘qualifiers’)
for successful participation in a particular market. In contrast, critical
success factors are features that are particularly valued by customers,
and used to differentiate between providers. It is possession of these
that provides the basis for above average performance and, therefore,
rents. You may find it useful to look now at Exhibit 3.2 in FS, page 62
where these, and related, terms are exemplified for the example from
athletics.
It should be clear from this that the offering is more than merely a
marketing concept. The offering brings together customer needs and
wants, the business’s internal competencies, and how well you can
bring these two together compared with your rivals. This last point is
crucial: it is always sensible to think about your competencies relative
to those of your rivals. IBM and Compaq both sell computing
hardware. But what do customers want this hardware for? And which
of the firms is better at providing what customers want, at prices that
are perceived as being reasonable, while still generating added value
for the business?
One final point before you go on to the reading and the next individual
task. Businesses compete in dynamic environments – technologies
change, and customer values systems evolve and change in subtle
ways. There can be no guarantees that successful offerings can be
maintained for long. Established positions of strength can quickly be
eroded. (Can you think of examples?) This implies that thinking
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You should now work through the readings that follow, and then
undertake the group task. This focuses on just one of the three sets of
actors we have mentioned here, your customers – we consider your
business competencies and your competitors later. Please note that
what we are asking you to do in this task should draw on material you
developed in the previous chapter. In doing this, you will tentatively
integrate what you have learned so far before moving on to the next
stage. Later parts of this chapter will, in effect, test whether this
tentative integration stands up to the further analysis you will
undertake in subsequent tasks.
Individual reading:
What is the ‘product’ being offered now by our business (and by its
rivals)? Who are the customers? What services does the customer
obtain from this product (and so how does it generate customer
value)?
Hint: Much of the analysis needed for this task will already have been
undertaken in the last chapter. You should draw on the results of the
tasks you undertook there as appropriate.
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We start with the observation that value creation at the business unit
level depends on:
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Please refer to the Strategy Clock (Exhibit 6.2 in FS, page 150)
Individual reading:
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Try to justify and explain your answer. In doing this, the following
questions may be useful:
Considering Activities 4.1 to 4.2 what have you learned about your
case study firm’s offering?
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Resources
• Threshold resources: Resources needed for the ability to
participate in the industry (also known as Qualifiers).
• Core (or unique resources): Resources that form the foundation
of a competitive advantage and that are hard to imitate. Their
special worth may be due to favourable position [such as a major
waterfall for a hydroelectric generating business, or a city centre
location for a bank] or special privilege [such as possession of
patents, statutory monopolies, or exclusive franchise].
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Competencies
• Threshold competencies are activities, processes and abilities
that underpin the meeting of threshold product features.
• Core competencies are activities, processes and abilities that
underpin the meeting of critical success factors and also give
competitive advantage.
Essence of success
Resources and competencies are of crucial importance because they
are the means by which competitive strategies can be supported and
realised. They are the foundations of competitive advantage. A
necessary condition for business success is ‘getting the basics right’.
This is one way of thinking about threshold competencies and
resources.
As you follow the reading for this task, you will notice that the usage
of the various ideas in the strategy literature is not always consistent
or uniform. In particular, Chapter 10 in Business Economics briefly
surveys several ‘classic’ works in this area. There you will see the
variety of ways in which a set of closely related ideas are labelled,
defined, and used.
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Individual reading:
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In this task (which you are asked to do with your team), we show you
one way in which you might try to explore what core competencies a
business possesses. It involves what could be called ‘mapping
competencies’. Consider the following graphic, Mapping
competencies.
Mapping Competencies
A B
Success
C
E D
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Looking forward:
Depending on whether or not the business does possess appropriate
competencies for its current choice of competitive strategy, answer
either (a) or (b) below:
a) Which core competencies does the business not have that seem to
be important to its current competitive strategy? Could these be
feasibly developed?
Before meeting your fellow team members to undertake this task, you
should review your findings so far. It will also be useful to email an
electronic version of your annotated workbook to your team members
before you meet up to undertake the following team task.
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Reading
Using the results of your team members’ analysis so far, your team
should now:
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strategy entails some belief that customers are highly price sensitive,
and so selling at lower prices than others can generate considerable
extra sales volumes and sales value. It seems reasonable to insist,
therefore, that if a price-based approach is taken to competitive
strategy, managers should be able to provide evidence that price is
seen by customers as being beneficially lower than those of the
competitors, and that customer demand is sufficiently responsive to
that perception.
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• economies of scope,
• learning-by doing, the learning (or experience) curve, and first-
mover advantages, and
• synergies.
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Individual reading:
FS: Chapter 3, section 3.5.1, pages 74-79, explains the concept of the
‘value chain’ and the relationship to costs and profits (also see section
3.3 on cost efficiency, pages 65-67); Chapter 6, section 6.3, pages
157-162, discusses the sustaining of competitive advantage and in part
relates this to the value chain concept.
BE: Chapter 4, pages 63-67, on costs and market transactions; and
Chapter 5, pages 80-109 on the search for added value and the costs of
production.
SC: Chapter 3, on cost leadership, see the Appendix of this workbook,
page 137.
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Note that differentiation relates to the product as a whole, not just its
direct or physical characteristics. So after-sales service, reliability,
convenience of using with other products etc can all matter. This
suggests that differentiation may come not only from the more
obvious forms of product innovation, but also from relationships the
business develops with suppliers, and with intermediate and final
buyers.
1. the price elasticity of demand for the product type in the market as
a whole, [Technically speaking, this is a measure of the
proportionate change in the quantity demanded of the product type
in the whole market when all businesses simultaneously change
their prices by the same small proportion.]
2. the extent to which customers regard the individual business’s
product as being substitutable by products of other businesses.
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So, for example, the elasticity of demand the Honda car business faces
for one of its family saloon car models will be shaped by the price
responsiveness of customers as a whole for family saloon cars (point
1. above) and by how successful Honda has been in developing
critical success factors that give its model distinctiveness and so a
perception that it cannot be easily substituted by the offerings of
others (point 2. above).
Individual reading:
Hints:
Explain what mix (or linkage) of competencies supports the strategy.
Try to describe this in terms of a revised explanation of the business
offering.
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Individual reading:
Are there any ways in which you might be able to overcome these
factors, and so succeed in generating a sustainable competitive
advantage?
Hints:
Look at the criteria of sustainability given in FS pages 159-165.
Identify which criteria you think are fulfilled by your business. If your
business does not meet any of these criteria, how does it expect to
achieve sustainability of competitive advantage?
Does the Porter’s Five Forces analysis you performed earlier suggest
that there are any ways in which relationships with other players in
your transactional environment could be developed to reinforce a
competitive edge you may possess?
How important is reputation in your market, and how is a good
reputation cultivated? Are network effects or lock-in present?
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Hypercompetition
In the previous activity, you saw that successful differentiation
advantages might only be transitory. One reason for this was said to
be that the speed of technical, social, cultural and economic change
means that innovation is likely to render any particular established
product increasingly less attractive, or even obsolete.
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This view is different from that of D’ Aveni. For D’Aveni the way to
face hyper competition is to become faster than the competitors and
upstage them with speed, surprise and agility. The latter view,
however, takes the position that hypercompetition is a shared social
phenomenon that if capitalized upon for only individual benefit would
be too adventurous. For social theorists such as Selsky and Goes, the
successful firms in such circumstances would therefore tend to foster
shared values among the participants. Cooperation, they claim, would
“cohere the fragmented parts”. Naturally a call for more competition
would be replaced by one for cooperation and joint-action. The
proponents of the social view also believe that it is nearly impossible
to predict the unintended consequences of “more of the same
competition” approach that would result in volatility and uncertainly;
this, in turn, would adversely impact everyone in the industry,
something that industry players would like to avoid. With efforts to
externalize costs, the fiercely competitive approach, the social view
claims, would lead to adverse environmental and ecological
consequences. 1
1
"Externalities could be understood with an example. Let us say a company pollutes a
river through its affluent discharge and it does not have to pay for its clean-up. In such
a case the company externalizes the cost, meaning the cost of cleaning up the river to
what it would have been is borne by outside parties. Even if there is no clean-up these
could be costs imposed by the firm in the form of local people suffering on account of
pollution. In the same way, hypercompetition may drive companies to take extreme
steps such as cost cutting that may compromise on product safety. Or it may lead to
desperate acts such as extreme price reductions (resulting in price wars) that adversely
impacts long-term productive investments in R&D. In effect, the firm is imposing a
long-term cost to the entire industry or it is externalising the cost."
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Why does this matter? Think back to our earlier discussions about the
Strategy Clock and competitors analysis. There we invited you to
think about questions like: Given knowledge about the positions taken
by our competitors, what competitive position would be sensible for
us to take? Suppose that your competitors do not react to actions or
positions that you take. In that case, the previous Activities in this
workbook have given you some idea about how to address
competitive strategy questions of this kind.
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the behaviour of others. What you do affects them, and what they do
affects you. So in general, we would expect some form of reaction to
any significant changes you make. Whether or not you are conscious
of this, you are inevitably involved in playing a ‘strategic game’.
There are many types of business decisions that have been explored
using game theory. Here are some examples:
In this workbook, we shall focus on just one issue that game theory
can shed some light on: pricing policy.
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Strategy Analysis and Evaluation (SAE) Workbook
Printed below is one possible payoff matrix for this game. The choices
open to the business (CUT, DON’T CUT) are set out at the left of the
two rows. The choices open to the rival (also CUT, DON’T CUT) are
set out at the top of the two columns. The numbers in the four cells of
the matrix refer to the net payoff to each firm for each configuration
of choices. The first number in each cell is the payoff to your
business. The second number in each cell is the payoff to your rival.
Note that the absolute value of the payoffs does not matter. What
matters here are the relative sizes of the payoffs. We have assumed
here that both businesses not cutting price is the ‘status quo’, and so
payoffs to each are zero (i.e. no change from the present) if they both
choose Don’t Cut.
Your competitor
Cut price Don’t cut price
Cut price -2, – 2 8, – 4
Your business
Don’t cut price -4, 8 0,0
Game theory predicts that both players will choose to Cut Price. This
is the individually rational thing to do, even though it is not
collectively rational. (Compare the outcomes of both cutting with both
not cutting). To see why it is individually rational to cut price, ask
whether you have one choice which is better the other irrespective of
what the other player chooses to do. Cutting price satisfies this
criterion; it is said to be a dominant strategy (and game theory predicts
that dominant strategies will be chosen where they exist).
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Strategy Analysis and Evaluation (SAE) Workbook
There is not space in this workbook – and you do not have enough
time – to take these matters any further. Game theory is fascinating
and insightful. We give below some ideas about easy further reading
that you might pursue if you wish to follow up on this topic.
Individual reading:
Additional reading:
Progress report
At this point in your study of competitive strategy, you have
accumulated a vast amount of information, and undertaken much
preliminary analysis of that information. You may feel in danger of
being swamped by it all!
So now is a good time for you and your fellow team members to share
information and to enter into a dialogue about the best way of making
use of what your team has discovered.
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Sustainability:
Is your case organisation’s current competitive advantage (if any
exists) sustainable? If so, what is the basis of that sustainability? If
not, what seems to be undermining sustainability?
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Business idea
What we want you to do now is put all the ideas you have thought
about together into a single, organised framework. Once again, we ask
you to do this as a team (although you may find it useful to work
through this task individually first). What you should be aiming for in
this team task is to produce a forward-looking Business Idea. This
should represent what your team thinks is a competitive strategy that
has the best chance of creating sustainable competitive advantage
for your case organisation.
The reason why we ask you to use this approach is that it forces you to
give a convincing, and consistent account of how the business can
attain a competitive advantage, but in a very simple way.
You know from earlier tasks that the business can only achieve a
competitive advantage if it has built some core (or distinctive)
competencies. The entrepreneurial invention also applies here: the
business may have found a special way of using and combining its
resources to generate distinctive competencies. Hence the diagram is
structured to show that the offering (entrepreneurial invention),
supported by distinctive competencies (also generated by
entrepreneurial invention), creates a competitive advantage.
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The systems theory part of all this is not essential. What matters is that
we have a framework here which allows you to write down all your
ideas in a simple, consistent way, and which shows that success can be
self-reinforcing (although there may be limits to this). Implicit in here
is an emphasis on sustainability. This is seen in terms of continual
investments in resources, designed to reinforce and strengthen
distinctive competencies. Those competencies are not things acquired
once and for all. They are being regenerated continuously.
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Individual reading:
SC: Chapter 3, on the systemic structure of the business idea, see the
Appendix of this workbook, pages 136-148.
Hints:
1. Your ‘business idea’ should be able to communicate quickly and
clearly the basis of the businesses competitive strategy. In doing
so pay particular attention to the customers needs being satisfied,
which resources are critical for the business and what you believe
are its distinctive competencies.
2. Try and put as much emphasis as possible on the sustainability of
the business idea. If, despite your best efforts, you come to the
conclusion that competitive advantages cannot be sustained, that
leads to the very difficult question of how businesses have to then
operate.
3. Is your business idea robust to what your rivals are doing or
considering doing, and how they might react to any moves you
make?
4. Adopt the perspective of a competitor. What can it do to beat you?
Critically reassess what is really distinctive about your business.
How does it, or could it, protect its advantages, or are they not
sustainable in the long run?
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In the next section, we broaden our attention from the single business
unit level to the organisation as a whole. That is, we consider
corporate strategy. There we think about the appropriate scope for the
firm’s activities, and the role of the corporate centre.
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There are not so many activities to undertake in this section, but your
consideration of the reading is as important as the activities that you
will be undertaking. The relationship between corporate and business
strategy can be very significant for your deliberations.
Learning objectives
This chapter should help you understand:
In particular:
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Organisation of Chapter 5
Rationale of
Parent as adding
Corporate Corporate strategy
value
parent
Diversification
Portfolio management
Relatedness
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If this is so, then why is there a need for levels above that business?
Or more particularly, how, and to what extent, are levels above that
business able to add value to that created by the business; or might
they be destroying value? Clearly this is an important question from a
number of points of view:
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There is another important reason why levels above the business level
are important. Decisions at that level may affect what a business does,
the strategy it follows, the structural form it take, how it is managed;
or indeed who owns it and whether it continues to exist. Further
decisions (or at least strategic proposals) at the business level may
affect the corporate level. For example a proposal by a business to
diversify may affect the extent and nature of the corporate portfolio;
and in turn how the corporation as a whole is seen (for example, by
investors).
As suggested above, please check that you are confident that you can
obtain adequate information to address the sorts of questions that will
be raised.
For many corporations this divide will take place at the divisional
level. In other words divisional managers are concerned with
multiples of businesses. Whilst they will be concerned with
competitive strategy within those businesses, they are also concerned
with managing across those businesses. In this sense they may be
regarded as part of the corporate parent for two reasons:
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Individual reading:
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Individual reading:
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Note: there are many different bases of relatedness that are possible.
Corporate performance
Presumably all of your considerations should have some relationship
to the performance of the corporation. There has been a great deal of
research undertaken on the relationship between the extent and nature
of diversity in corporations and the comparative performance of such
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corporations. Your reading will explain that the results of this are
somewhat mixed and equivocal. However, if there is a pattern in those
findings, it seems to suggest the following:
The logic of this section would also suggest that it is important that
there is a need for compatibility between the answers to the questions
you have been asking so far: namely between the corporate rationale,
the extent and nature of diversity, the logic of the portfolio and the
means of corporate control. So in this activity, look back over the
work you have done and consider the corporation in comparison with
others of a similar type. Does this corporation out-perform its rivals or
not? Why might this be so? This will involve you in examining your
organisation against other organisations in comparative terms. Of
course in this exercise you cannot do this to the same extent as you
will have done for the corporation you are considering: but you may
be able to obtain commentaries by others that do make such
comparisons (eg investors’ reports and press commentary). Each team
member must also take responsibility for one other organisation.
Individual reading:
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strategy seeking to create value and for whom? (Worth looking back at
Chapter 2.)
There is also a direct link between issues of corporate rationale,
diversity and portfolio logic and policy as mergers and acquisitions –
and therefore strategy options available to firms.
In turn corporate level strategy will influence the structure and nature
of management within the corporation. So, for example, whether the
corporation is divisionalised and on what basis; how many levels of
divisions there are, and how control is exercised throughout that
corporation will all be related to corporate level strategy.
a) Is there a clear value adding role of the corporate centre you have
examined?
b) In light of this what is the logic of the business you are studying
for SAE within the corporate portfolio?
c) What constraints, if any, might the corporate centre place on
business level strategic decisions?
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As part of making sense of the options that you generate, you may
wish to consider a particular approach, for example Ansoff’s Matrix,
and use the approach to help you to begin to understand the nature and
implications of your options. For example, are your options
suggesting market development with existing products and/or
services? What would this option then imply for your organisation’s
distinctive competencies?
Learning objectives
The objective of this chapter is to develop your understanding and
approach to option generation and evaluation.
Hints
As you work through this chapter of SAE, you will be required to
constantly manage the complexity of the options that you generate. To
manage this complexity, we would suggest that you develop a
conceptualisation of these options. It may be helpful for you to
address options at two levels. The first level would be about
organisational purpose. The second level would be at thinking through
the implications of options.
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Most students fall into the trap of producing long lists of generic
possibilities. To move beyond the generation of such lists requires
students to carefully consider potential options using the above
guidance. Failure to address the implication of this conceptualisation
is likely to result in:
The reading for this chapter is from parts of Chapters 2, 3 and 7 of FS,
Chapter 3 of SC and Chapter 8 of TSS. You will find specific
directions within the text.
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Organisation of Chapter 6
Issues/options matching
Option evaluation
Business idea
Recommendation
The main focus in doing this is at the business level or business unit
for your organisation. However you should recognise that there could
be corporate level issues involved in these considerations. For
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example, you might decide that the business should develop through
diversification. If so you may, in effect, be adding new businesses to
the portfolio of the organisation. Clearly this has corporate level
implications. It needs considering in the context of the corporate
strategy you considered in the previous chapter.
Business unit decisions – the broad scope of all the functional areas of
the business. In addition, their links with the external environment
especially the operating environment. The latter is of critical
importance because marketplace reaction to an organisation’s offering
ultimately decides whether the business unit succeeds or fails.
Therefore, the focus of the business unit manager’s attention has to be
the medium term reaction of customers and potential customers to the
business and those of its competitors. Short- term variables like
operating efficiency, effectiveness, and productivity are more likely to
be devolved to functional managers.
Structure of Chapter 6
The structure of this chapter is as follows:
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Starting point
The initial challenge is to determine your starting point. There are a
number of issues that you will require to consider and address as you
begin the task of option generation and evaluation.
The first issue concerns the analysis that you have undertaken and the
insights, opportunities and threats that you will have identified.
During your studies, you are likely to have identified a wide range of
challenges, which are likely to be diverse in nature, for the case
organisation. What do you do with this wide range of issues?
Linked to the two previous issues is, the third issue, which concerns
the challenge of reconciliation of your insights and findings from your
analysis. How and/or what should be your focus? Are you
concentrating on a limited number of absolute drivers of change in the
environment? Or, are you concentrating on overcoming a number of
hygiene issues? Or, are you trying to find a strategic break-through,
that is, a new entrepreneurial idea for your case organisation? You
need to undertake an initial ‘sift’ of your analysis to help you stand
back from the detail of your analysis, and make sense of the insights
that your analysis is suggesting. To help you undertake this initial
‘sift’, we pose a number of questions for you to consider:
One final consideration is, how will you operationalise your options?
For example, if you recommend – introduce new product(s), what
exactly does this involve?
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This is not an exhaustive list, but deciding where you start from can
provide a helpful initial ‘sift’ of the strategic options available to you.
For example if you decide on a particular strategic customer for the
focus of the strategy; or determine that a particular expectation of
shareholders has to be met, that may very well rule some strategic
options out and raise in importance other options. So making this
decision on focus is an important precursor to generating and
evaluating options.
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a) the key issues which should be taken into account (for example,
organisational purpose, distinctive competencies and bases of
competitive advantage) in deciding the strategy of this
organisation.
b) any constraints that will have to be taken into account (e.g.
corporate constraints, stakeholder constraints, environmental
constrains or prior decisions on generic strategies).
You should then share these views with your team, for two purposes:
Option generation
When you have decided on the key issues, which will need to be taken
into account, you should then move on to thinking about possible
strategic options that might be worth considering. It is important to
emphasise that these options are not just a ‘wish list’; nor are they a
summary of every conceivable possibility. Rather, there needs to be a
rationale arising from your prior analyses for any option you might
consider.
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It is likely that during your prior analyses you will have generated,
explicitly or implicitly, a number of strategic options that the business
(or the organisation as a whole) might adopt. Note these down with a
brief explanation of the rationale for each of them.
Use these frameworks to identify what each of the directions and each
of the methods would entail for your business and/or organisation.
Based on your previous analyses is there a rationale for any of these?
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As you work through your analysis what issues have you identified
that suggest customer’s needs are changing? Explain the impact of
these changes for your case study organisation. In trying to develop a
response, use the following organising question: How does our
activity create value for our customers, ie: what does it contribute to
the furthering of their lives and life’s goals and processes? What does
this imply for the case study organisation’s current offering? How
might your options be considered and/or reconciled with the current
offering? What changes would be needed to the offering to enable it to
be relevant to customers in the future?
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Individual reading:
Revisit your PESTEL analysis and the scenario analysis for your
business.
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Individual reading:
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As you work through the next task, try to distinguish between hygiene
factors and more fundamental structural weaknesses. The reading
listed below will explain these terms. Also, consider whether some of
the weaknesses you identify are better thought of as symptoms of
some underlying hygiene or structural factor.
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Individual reading:
Using any relevant information you have obtained so far, identify the
strengths and weaknesses of the business.
In its most simple form, SWOT consists of just classifying and listing
strengths and weaknesses, opportunities and threats. It does not
involve any analysis in itself – although you will have had to do some
previous analysis to get to this point.
One way this can be done is by mapping the SWOT information into a
TOWS matrix form.
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Individual reading:
FS: Chapter 3, pages 81-83, for Strengths and Weaknesses and the
SWOT framework.
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Now transform the information in your SWOT table into the form of a
TOWS matrix. Using this technique, describe and explain the strategic
options that this exercise has generated.
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Bearing in mind all the points in the previous comments, use your
previous analysis of competencies, Business Idea and Environmental
analyses to identify strategic options that could be built on the basis of
stretching or leveraging existing resources and competencies.
Note that a change in how the organisation will deal with its
environment may suggest a change in required competencies. In turn
this may suggest a change in strategic direction. Do you believe that
existing competencies need to be changed (or stretched) to meet the
requirements of the future?
What does this suggest is needed for the future strategic direction?
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At the end of this exercise, your team should arrive at a preferred set
of strategic options to be evaluated. Each one should be accompanied
by a brief rationale as to why it should be considered based on the
prior analyses and the work done in the individual tasks above.
In order to make the next stage of this section practical, it would help
if the number of options to be considered was limited to four or five.
Note down here the common strategic options that seem to emerge.
Also, keep a list of other options that may have emerged, but note that
those in this list did not appear to have emerged in common from a
variety of different option-generating mechanisms.
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Option evaluation
You should now have a list of options, and an associated rationale for
each individual option. This section requires you to systematically
analyse these options using a number of criteria and some frameworks
of evaluation linked to these criteria.
Suitability
The test of suitability asks you to undertake a ‘first cut’ evaluation of
options against the key issues that have arisen from your previous
analyses.
Try scoring on the impact of the option against the issue. Try using a
scale of -3 through 0 to +3. Where there is a highly positive
interaction, score +3 and where there is a highly negative interaction
score -3. If there is no relationship or impact score 0.
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You should end up with a matrix full of positive, negative and zero
numbers. This gives you a chance to consider the variety of options in
a numerical way and see which scores the highest (in terms of column
totals) and why.
You may wish to take this analysis one step further. There is a
limitation of the scoring system proposed above. If all ‘key issues’ are
scored in the range –3 to +3, and we simply total them, then the one
with the highest score is only best if:
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Now consider what this analysis has told you. Does it mean you
should knock out certain options? Has it suggested other options?
Why would it do that? Has it suggested that future option
consideration should take particular account of some issues to a
greater extent than others?
Issue 1
Issue 2
Issue ‘n’
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Select one of your strategic options, then choose and apply one of the
financial risk assessment tools that you have been taught on the
Strathclyde MBA Finance course.
Once you have applied the financial risk assessment tools we would
like you to consider how the problem of uncertainty impacts
investment appraisal approaches. What issues have you identified and
what impact does this have on the evaluation of strategic options?
Individual reading:
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DECISION CRITERIA
FINANCIAL SCENARIO STRATEGIC ORGANISATIONAL
RETURNS RISK RISK RISK
Best position Good risk
High Good fit Good fit
NPV profile with BI
Strategy C
Worst position
Acceptability
You may have decided to eliminate one or more options at this stage.
Be careful: do not eliminate too many on the basis of this first cut
evaluation because there are other criteria which influence the
selection of strategic options. We now move to the criterion of
acceptability. Here you are considering the extent to which any given
strategic option is acceptable to key stakeholders of the organisation.
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Please refer to Activity 2.3 and note down the main revised
expectations of the key stakeholder(s) for your case organisation.
Evidence
There have been many studies of the strategic moves made by
organisations. These have resulted in bodies of evidence which can be
used to suggest what makes sense and what does not make sense. It is
not possible to review all that literature here. However it is worth
considering some of the main implications from such work in order to
ask if you have taken the implications into account. In the activities
below there are a series of such implications against which you can
evaluate your options.
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Pulling it together
At this stage the group should consider the evaluation of the options
undertaken above. On the basis of the various criteria informing these
exercises the group should consider which options ‘remain on the list’.
Your aim should be to bring the list of possible options down to one or
a few that are worthy of pursuit and suggest a rationale based on the
previous exercises for pursuing them.
The group should now review all the exercises in this section and
identify the limited number of options that meet the criteria of
evaluation and appear to be viable.
Feasibility
All of the above assumes that a given strategy can be made to work.
The criterion of feasibility asks you to consider this explicitly. We
suggest you review the options you are left with and ask the sort of
questions outlined in the group task below. We are aware that you
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may not have the data to work these through in detail. But having
some views about them is helpful.
Strategy recommendation
You have now:
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Each member of the group should have a view as to what the team
should be recommending. It is now your responsibility to draw these
together, agree what the team wishes to recommend and draw up an
executive summary which makes those recommendations clear and
justifies them. This should draw on previous analyses and evaluation
but should be concise.
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Learning objectives
The objective of this chapter is to write a report to the CEO of your
case organisation. Undertaking strategic analysis is one challenge to
students. Another challenge for students is to convince the CEO of:
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Report structure
Executive summary
The executive summary should be a short, high-level report in its own
right, in which you should communicate concisely the key
opportunities and challenges, the recommendations you wish to make,
together with a statement which sets out the benefits and advantages
the case study organisation are likely to gain in the future as a
consequence of your report.
Main report
The main report should include a brief note about the approach
adopted to undertake the strategic analysis of the organisation. This
should NOT include an in-depth discussion of the analytical tools
applied to conduct the analysis. There should also be a note about the
purpose of the report and how it could be used by the organisation in
the future.
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Role of analysis
The role of the strategic analysis is to help you apply the analytical
tools to identify insights that will impact the case study organisation in
the future. The insights may concern either opportunities or challenges
facing the organisation. Your ability to synthesise insights from more
than one analytical tool will help develop clearly the key strategic
focus for the case organisation.
Once you have achieved the key strategic focus, you should use your
analysis to support the points you wish to highlight, together with a
discussion of their implications for the case organisation. By doing so
you will provide the reader, the Chief Executive or Managing
Director, with the degree of comfort that he or she requires to support
your recommendations with other key decision-makers in the
organisation.
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You should now read through the assignment guidelines carefully and
prepare your submissions. We wish you all the best.
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Scenarios: The Art of Strategic Conversation: Chapter 3
Appendix
Taken from, van der Heijden, K, (1996) Scenarios: The Art of Strategic
Conversation, Wiley, Chapter 3, pp59-80
Copyright © 1996 by John Wiley & Sons Ltd. Reproduced by
permission of John Wiley & Sons Ltd.
• They create a surplus for stakeholders, which the latter can use for
their own purposes or (totally or in part) for protecting and
developing the strength of the enterprise.
• They create the expectation among existing or potential
stakeholders that they will be able to create a surplus and grow in
the future.
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The ‘offering’ is the vehicle by which the seller and customer systems
are linked together to exploit the supplier competencies in the customer
value system. The offering includes all aspects of the supplier/customer
interface, including the physical product, but also intangible aspects
such as service, risk management, information, etc. As Richard
Normann points out, each product represents a division of work
between the supplier and the customer (Normann 1984). Therefore the
creation of a successful product is the result of a process of
optimisation, aiming for the maximum effect of the supplier
competencies in the total customer value creation potential. In the
process the supplier incurs costs translating the idea into a product. The
customer derives value from its use. The overall optimum relates to
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Buyer’s
value
system
The offering
Seller’s
distinctive
competencies
Value
Figure 7. Overlap between competencies and value creation
This surplus of value over cost is shared between the two parties. The
degree to which it accrues to the customer or to the supplier depends on
the relative bargaining power of each party (see below).
Distinctive Competencies
Sometimes the entrepreneur finds that the new combination can be
easily emulated by others. In that case cost of entry is relatively
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• Suppliers
• Employees
• Competitors
• Money providers
• Government
Therefore, in considering the Business Idea one needs to ask the Devil’s
Advocate question: ‘What is unique about this particular formula, and
why are others unable to emulate it?’.
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any successful formula. Based on his and Rumelt’s work mapping out
‘Barriers to Entry’, we can derive a list of five fundamental sources of
distinctiveness in two main categories (Rumelt, 1987, Rumelt et al.
1991):
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Institutional knowledge
• Institutional R&D capability
• Company know-how
• Functional knowledge pools
• Knowledge of customer value systems
• Shared assumptions and values
Embedded processes
• Leadership style and commitment
• Links into (institutional understanding for) the world of the
consumer
• Access to distribution channels
• Institutional relationships with government
• Internal communication, systems/culture
• Staff identification and commitment
•
Reputation and trust
• Brand
• Dominant size and presence
• Installed base
• Financial clout
Legal protection
• Concession agreements
• Patents
• Ownership of prime sites
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Competitive Advantage
If the Business Idea and its Distinctive Competencies are effective it
creates Competitive Advantage. Competitive Advantage translates into
profit potential in two ways (Porter 1985):
Differentiation
A firm producing a product that is distinguished in characteristics from
others on the market in a way that results in additional customer value
enjoys a competitive advantage. If competitors cannot match the
distinctive element, part of the additional customer value can be
appropriated by the supplier.
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Cost leadership
Sometimes customer value is relatively easy to determine. This happens
when products have become ‘commodities’, i.e. when open market
trading has created standardised and clearly defined products for which
there is a continuing market. In that case the value an individual
supplier contributes to the customer is equal to the established market
price of the product (as the customer has plenty of alternative
opportunities to acquire the product at that price). In a commodity
market it may still be possible to create significant long-term profit
potential, by means of a uniquely superior cost performance.
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Summarising the above we see that the following four elements need to
be specified in order to define a complete Business Idea:
Then, these three elements must be configured into the fourth element:
Understanding
evolving needs
Entrepreneurial in society
invention
Resources
Distinctive
Competencies
+
Results
Competitive
Advantage
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The head of the arrow points towards the effect, caused by the variable,
indicated by the tail of the arrow. If an arrow is annotated by a plus
sign, or if no sign is shown (as in Figure 8) both variables change in the
same direction, an increase in the causing variable leading to an
increase in the effect, or a decrease in the causing variable leading to an
decrease in the effect, and the other way around. In Figure 8 increasing
competitive advantage leads to increasing results, which cause
increasing resources to be available for investment in enhancing
distinctive competencies, which in turn lead to increased competitive
advantage, producing the positive feedback loop discussed. As shown
distinctive competencies can also be enhanced or added to by increasing
entrepreneurial invention, based on enhanced understanding of evolving
needs in society.
Kinder-Care
Our first example is the Business Idea concept for Kinder-Care, the
largest private provider of day-care in the US. The description given
here is based on the entrepreneur’s own account (Smith et al. 1986,
Bougon et al. 1990).
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Professional/
management/
financial resources
Land/buildings
Retention of
Revenue
ex-teachers
Innovative
child care
Teacher
satisfaction
Pay for
service
Parents’
good feelings
Reputation
Working Parents’ –
parents financial
resources
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We see that the main strategic loop is a positive feedback loop. This
explains the successful growth of Kinder-Care – innovative child care
induces customers to pay for a service which creates increased
management and financial capability, which causes an increase in the
amount and quality of innovative child care offered.
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up, thus creating barriers to entry for newcomers. The company needs
to consider whether these are high enough for sustainable competitive
advantage.
Training Installed
base
Reputation
Communication
Skills
workforce
+
Quality Contracts
of work
Customer need
responsiveness
Cohesion
loyalty Motivation
workforce
Flexibility
contract
conditions
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companies in the industry, and from time to time new entrants make the
investment to break in. Therefore the Business Idea needs to be
strengthened by company specific Distinctive Competencies. In the
example in Figure 10 a construction company tries to distinguish itself
by creating an internal culture which differentiates the company in the
eyes of the clients as a flexible collaborative business partner in contrast
to the traditional legalistic and sometimes adversarial customer-
contractor relationship. Such collaborative customer relationships
require:
In this way the company stays ahead in its chosen market niche where
clients are prepared to pay a premium price for the security of proven
quality as well as non-adversarial co-operative relationships.
Limits to growth
The Kinder-Care example contains a negative feedback loop which will
eventually limit the growth created by the positive feedback loop as
explained. This negative feedback loop indicates that growth of the
activity will lead to a reduction of demand, based on saturation in
customer value creation and willingness to pay. Michael Porter’s Five-
Force competitive model (Porter 1980) provides a useful framework to
consider the limits to growth in a Business Idea:
• Demand limits
• Supply limits
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• Competition limits
• Limits imposed by the possibility of new entrants
• Limits imposed by possible alternatives and substitutes.
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the organisation, e.g. at the level of the corporation and the business
unit. Business Ideas can be found at all these levels.
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Segmentation
This raises the issue of what can be considered a Business Unit for the
purpose of articulating a Business Idea. Many schemes have been
invented to segment an organisation for the purpose of analysing its
underlying characteristics. For the purpose of developing a Business
Idea most of these schemes can be short-circuited. The Business Idea is
in the first place a cognitive device. It is a vision that lives in the minds
of individuals, managers and others in the unit being considered. It is
they who determine the identity of their operation, and who develop the
vision for its future. Therefore the single criterion whether it is
worthwhile to attempt to surface a Business Idea is the question whether
people, mostly in a management team, are aware of its separate identity.
The human mind can retain only a limited number of concepts at the
same time. (Miller suggests a number of seven concepts, plus or minus
two (Miller 1956)). Our experience has shown that the most effective
Business Idea diagrams indeed do not contain many more than (say) ten
elements. A representation much beyond that seems to reduce its power
as a direction indicating device. Therefore it is advisable to draw up the
diagram at this level of granularity. If further detail is required this can
be included as an expansion of individual elements in the Business Idea
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This seems in the first place a point of good practice. But it is worth
considering other more fundamental aspects of the human inability to
overview large systems. Pursuing an entrepreneurial Business Idea
requires a high degree of consistency and persistence across the
organisation and over time. Staying on course requires a clear
unambiguous compass. Activities that are not a crucial part of the
Business Idea can be, and often are, contracted out to another firm.
The fact that a management team pursues only one Business Idea does
not mean that the company is only one business. For example the
management of a conglomerate company may be pursuing the
overarching corporate Business Idea of providing parenting advantages
to its subsidiaries, without getting involved in the detail of the
subsidiaries’ Business Idea (Goold & Quinn 1990).
The concept of the Business Idea throws a new light on the notion of
synergy as a precondition for success in acquisitions. The overarching
Business Idea is important not only because of the ‘shared resources’
aspect, but also because of its function as complexity reducer. It creates
one holistic gestalt around the businesses, enabling management to
manage the set as one.
The issue comes into focus clearly where companies consider mergers
of different businesses. The above reasoning argues that the invention
of one overall synergetic Business Idea is a prerequisite for a successful
acquisition.
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If the Business Idea is not any longer clearly and jointly understood the
danger of the positive feedback loop slipping unnoticed into its
declining mode is particularly strong. Considering the long lead times
required to build most Distinctive Competencies the company may run
into serious difficulties trying to turn things round once profitability has
started to decline. There may not be time or resources to adjust the
Business Idea to the current market.
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Strategy has as its main aim the continuation and growth of the
organisation. For this purpose a surplus of resources needs to be created
in its day-to-day operations. The conditions required for this to happen
are specified by the Business Idea. The basic motor of the Business Idea
is the system of Distinctive Competencies created and exploited by the
organisation. Understanding the nature of this leads to an awareness of
the intrinsic constraints in the scope of their deliberate development.
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