14 MBA Strategic Study Guide

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

Strategic ManagementMNG00716revised by: Ben faranda

Study GuideSixth edition

Sixth edition 2010

Southern Cross University Military Road East Lismore NSW 2480

No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher.

Copyright material indicated in this work has been copied under Part VB of the Copyright Act 1968.

ContentsWelcome ........................................................................................................................................ 1

Using.the.Study.Guide.................................................................................................... 1

Topic 1 Introduction to strategic management.............................................................. 3

Introduction..................................................................................................................... 3

Understanding.and.formulating.strategy......................................................................... 5

Difference.between.strategy.and.tactics.......................................................................... 6

Evolution.of.strategic.management................................................................................. 7

Ethics,.business.models.and.strategic.success.............................................................. 10

Summary....................................................................................................................... 11

Feedback.to.selected.activities...................................................................................... 12

Topic 2 The five phases of strategic management................................................... 13

Introduction................................................................................................................... 13

Developing.a.strategic.vision........................................................................................ 14

Setting.objectives.......................................................................................................... 16

Crafting.a.strategy......................................................................................................... 19

Implementing.and.executing.the.strategy...................................................................... 20

Evaluating.and.initiating.corrective.adjustments.......................................................... 20

Corporate.governance................................................................................................... 21

Summary....................................................................................................................... 21

Topic 3 External analysis: Industry and competitive analysis................................ 23

Introduction................................................................................................................... 23

The.strategically.relevant.components.of.a.company’s.external.environment............. 24

Thinking.strategically.about.a.company’s.industry.and.competitive.environment....... 25

Summary....................................................................................................................... 33

Topic 4 Analysing a company’s resources and competitive position............... 35

Introduction................................................................................................................... 35

The.resource-based.view.of.the.firm............................................................................. 36

Question.1:.How.well.is.the.present.strategy.working?................................................ 40

SWOT.analysis.............................................................................................................. 40

Question.2:.Are.the.company’s.prices.and.costs.competitive?..................................... 41

Question.3:.How.strong.is.the.company’s.competitive.position?................................. 45

Question.4:.What.strategic.issues.merit.attention?....................................................... 45

Summary....................................................................................................................... 47

ii MNG00716 – Strategic Management

Topic 5 The five generic competitive strategies.......................................................... 49

Introduction................................................................................................................... 49

Strategy.and.competitive.advantage.............................................................................. 51

The.five.generic.competitive.strategies......................................................................... 52

Summary....................................................................................................................... 56

Topic 6 Beyond competitive strategy.............................................................................. 57

Introduction................................................................................................................... 57

Strategic.alliances.and.collaborative.partnerships........................................................ 58

The.source.of.competitive.advantage:.Merger.and.acquisition.strategies..................... 59

Vertical.integration.strategies........................................................................................ 60

Unbundling.and.outsourcing.strategies......................................................................... 60

Business.strategy.choices.for.specific.market.situations,.including.offensive.and.defensive.strategies........................................................................................................................ 61

‘Blue.Ocean’.Strategies................................................................................................. 64

Defensive.strategy......................................................................................................... 64

First-mover.advantages................................................................................................. 65

Summary....................................................................................................................... 66

Topic 7 Competing in foreign markets............................................................................. 69

Introduction................................................................................................................... 69

Why.companies.expand.into.foreign.markets............................................................... 71

Cross-country.differences.in.cultural,.demographic.and.market.conditions................. 71

The.concepts.of.multi-country.competition.and.global.competition............................ 72

Strategy.options.for.entering.and.competing.in.foreign.markets.................................. 72

The.quest.for.competitive.advantage.in.foreign.markets.............................................. 73

Strategic.alliances.and.joint.ventures.with.foreign.partners......................................... 73

Competing.in.emerging.foreign.markets....................................................................... 74

Summary....................................................................................................................... 76

Topic 8 Diversification.............................................................................................................. 79

Introduction................................................................................................................... 79

When.to.diversify.......................................................................................................... 81

Strategies.for.entering.new.businesses.......................................................................... 81

Choosing.the.diversification.path:.Related.versus.unrelated.businesses....................... 82

Summary....................................................................................................................... 86

Unit evaluation by students................................................................................................... 89

iiiMNG00716 – Contents

Topic 9 Strategy, ethics and environmental sustainability...................................... 93

Introduction................................................................................................................... 93

Corporate.Social.Responsibility.(CSR).and.competitive.advantage............................. 94

Types.of.strategic.options:.What.do.we.mean.by.business.ethics?............................... 94

Strategy.and.social.responsibility.................................................................................. 98

Summary..................................................................................................................... 101

Feedback.to.selected.activities.................................................................................... 102

Topic 10 Building an organisation capable of good strategy execution......... 103

Introduction................................................................................................................. 103

A.framework.for.executing.strategy............................................................................ 104

Building.resource.capabilities.and.structuring.the.organisation................................. 105

Managing.internal.operations:.Actions.that.promote.good.strategy.execution........... 109

Summary..................................................................................................................... 112

Topic 11 Culture, leadership and strategic execution.............................................. 115

Introduction................................................................................................................. 115

Implementing.strategy:.Culture.and.leadership.......................................................... 117

Leading.the.strategy.execution.process....................................................................... 120

Summary..................................................................................................................... 123

iv MNG00716 – Strategic Management

Welcome

Using the Study GuideIncluded.in.your.package.of.materials.are.the.Unit.Information.Guide,.and.the.numbered.topics.collectively.referred.to.as.the.Study.Guide..The.Unit.Information.Guide.provides.the.Unit.Statement,.assignment.details,.contact.details.etc..while.the.Study.Guide.contains.the.print-based.content.and.teaching.aspects.of.the.unit..It.is.important.that.you.read.both.of.these.documents.carefully.

The.Study.Guide.and.associated.online.MySCU.site.are.designed.to.be.fully.self-instructional;.that.is,.they.take.the.place.of.traditional.face-to-face.lectures.and.tutorials..In.most.units.the.Study.Guide.is.written.around.one.or.more.textbooks.–.the.textbooks.contain.the.content.and.the.Study.Guide.and.MySCU.site.do.the.teaching..Occasionally.there.is.no.textbook,.so.the.Study.Guide.presents.all.the.content.as.well..Either.way,.the.Study.Guide.‘guides’.you.through.the.subject.matter.of.the.unit.in.a.systematic.and.structured.way,.using.features.such.as.hierarchical.headings.and.bold.type.to.highlight.key.concepts.and.terms..It.directs.you.when.to.read.your.textbook.or.other.supplied.readings,.when.to.use.the.MySCU.site.and.when.to.undertake.self-assessment.activities.to.help.you.to.see.if.you’re.handling.the.content.that.has.been.presented..

So.each.topic.is.made.up.of.three.types.of.material:.teaching.(the.lecturer/writer.‘talking’.to.you),.directions.to.read.something,.and.directions.to.do.something..Active.learning.is.really.important,.especially.when.you’re.studying.independently,.and.the.activities.in.each.topic.give.you.the.opportunity.to.do.something.with.what.you’ve.just.read.or.what.you.are.about.to.read..Activities.within.the.topic.are.designed.to.help.you.check.your.understanding.of.individual.concepts..All.activities.should.be.attempted.as.you.come.across.them,.and.you.should.always.try.to.answer.the.questions.asked.before.looking.at.the.feedback.provided!

All.units.are.structured.around.a.set.of.learning.objectives..These.are.expressed.in.terms.of.what.you.should.be.able.to.do.once.you’ve.studied.the.material..The.objectives.cover.a.wide.range.of.skills:.

•. knowledge:.recalling.information.(e.g..define,.name,.label)

•. comprehension:.interpreting.information.in.your.own.words.(e.g..classify,.describe,.discuss,.explain,.identify)

•. application:.applying.knowledge.to.a.new.situation.(e.g..apply,.illustrate,.interpret,.solve)

•. analysis:.breaking.down.knowledge.into.parts.and.showing.the.relationship.among.the.parts.(e.g..analyse,.calculate,.compare,.contrast,.criticise,.differentiate,.examine)

•. synthesis:.bringing.together.parts.of.knowledge.to.form.a.whole.and.building.relationships.for.new.situations.(e.g..construct,.create,.design,.prepare)

•. evaluation:.making.judgments.on.the.basis.of.certain.criteria.(e.g..appraise,.argue,.attack,.defend,.evaluate,.predict).

2 MNG00716 – Strategic Management

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

Topic 1 Introduction to strategic

management

Introduction

US newspapers struggling to survive

Circulation.is.dropping,.print.advertising.revenue.is.falling.and.readers.are.going.online.to.get.news.for.free,.leaving.the.US.newspaper.industry.awash.in.red.ink.and.threatening.some.of.the.biggest.names.in.journalism.

“The.business.model.that.used.to.work.at.newspapers.does.not.work.any.more,”.The.Washington.Post.Co.chairman.Donald.Graham.said.last.week,.echoing.what.many.observers.of.the.US.media.landscape.have.been.saying.for.some.time.

With.The.Tribune.Co,.owner.of.The.Los.Angeles.Times.and.other.newspapers,.seeking.bankruptcy.protection.and.vultures.circling.around.other.publications,.comedian.Jon.Stewart.got.into.the.act.with.a.new.punch.line.to.an.old.joke.

“What’s.black.and.white.and.completely.over?”.Stewart.asked.viewers.of.his.popular.mock.news.television.show.on.Comedy.Central.

“Newspapers!”

The.crisis.gripping.the.industry.is.of.course.no.laughing.matter.to.the.15,422.newspaper.employees.who.have.been.laid.off.this.year.or.taken.buyouts,.according.to.figures.compiled.by.Erica.Smith,.a.St.Louis.Post-Dispatch.journalist.who.tracks.the.cuts.on.her.blog.at.graphicdesignr.net/papercuts/

Media.job.losses.are.also.being.updated.several.times.a.day.on.a.feed.on.micro-blogging.service.Twitter.started.last.month.by.a.group.of.public.relations.agents.called.The.Media.Is.Dying.(twitter.com/themediaisdying).

Not.a.day.goes.by.without.more.bad.news.for.the.newspaper.industry.as.the.financial.slowdown.accelerates.the.decline.in.print.advertising.revenue.and.more.classified.advertisers.turn.to.free.websites.such.as.Craigslist.com.

According.to.the.Audit.Bureau.of.Circulations,.circulation.for.507.daily.US.newspapers.fell.4.64.per.cent.in.the.six.months.to.September.to.38.16.million.copies.from.40.02.million.in.the.same.period.last.year.

(Sydney Morning Herald,.14.December.2008)

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

a.continual.decline.of.original.reporter.content.as.newspapers.avariciously.approached.the.likes.of.CNN,.Reuters,.AAP.etc..for.content..However,.most.of.this.news.is.not.only.recycled.and.often.fails.to.include.a.byline,.but.it.is.also.available.through.thousands.of.sources,.rendering.it.very.difficult.for.newspapers.to.attract.revenue.from.web.savvy.news.readers.

Rupert.Murdoch.has.publicly.denounced.companies.such.as.Google.for.providing.such.ready.access.to.news.aggregation.services.for.content.generators.and.readers.alike..Murdoch.is.convinced.the.industry.will.move.to.a.premium.content.model,.which.would.be.a.bold.move,.considering.most.of.News.Limited’s.content.is.rehashed.and.reused.content.from.the.news.agencies.already.mentioned..Bear.in.mind,.readers.and.educated.people.know.this,.and.therefore.are.going.to.be.hard.to.convince.if.they.are.asked.to.hand.over.money.for.stories.

So.why.is.this.important.as.an.introduction.for.Strategic.Management?.Well.it.sets.the.scene.that.nothing.is.ever.straightforward;.there.is.perhaps.never.going.to.be.a.one.best.strategy.that.suits.the.business.models.of.contemporary.business..The.story.of.the.newspaper.industry.is.similar.to.many.others.–.think.of.travel.agencies,.retail.service.providers.and.similar.business.where.there.is.a.mass.migration.to.cheap.outsource.locations.such.as.India.and.the.Phillipines.and.to.the.Internet.where.customers.have.more.ownership.of.their.accounts.and.more.access.to.buy.online.

Coming.back.to.the.example.of.the.newspaper.industry,.it.could.be.argued.that.we.live.in.tumultuous.times,.when.organisations.are.facing.immense.challenges.brought.on.by.changes.in.their.internal.and.external.environment..This.is.clearly.seen.in.the.issues.facing.the.printed.newspaper.industry.in.the.extract.from.the.article.above..The.newspaper.industry.will.have.to.determine.a.new.course.of.action.to.address.these.challenges..It.is.the.type.of.actions.that.they.take.that.will.be.our.concern.in.this.unit.on.strategic.management..What.long-term.plans.and.direction.can.this.industry.take.to.secure.a.stable.future?.This.is.what.strategic.management.is.about.

This.topic.examines.the.concepts.surrounding.organisational.strategy..It.begins.with.an.explanation.of.the.term.strategy.and.offers.a.basis.for.how.to.identify.a.company’s.particular.strategy..This.is.followed.by.an.overview.of.the.history.of.strategic.management.so.that.we.can.see.how.it.has.evolved.as.a.business.discipline.in.its.own.right.as.well.as.pervading.other.business.disciplines..In.marketing,.information.systems,.and.human.resource.management,.for.example,.there.is.a.growing.using.of.a.strategic.focus.

The.set.of.actions.that.organisations.take.in.the.pursuit.of.some.business.objective.are.usually.designed.to.gain.some.competitive.advantage.in.the.marketplace..The.topic.examines.the.role.strategy.plays.in.achieving.this.advantage..It.is.pointed.out.that.strategy.evolves.over.time.and.is.partly.proactive.and.partly.reactive..Actions.that.organisations.take.in.the.pursuit.of.goals.can.often.be.questioned.as.to.their.ethical.nature.and.these.issues.are.addressed.in.the.next.section.

Unless.the.strategy.is.proving.profitable.for.the.organisation.then.it.is.unlikely.to.be.successful..There.is.a.need.to.ensure.that.the.strategy.fits.the.business.model.that.enables.the.organisation.to.succeed..This.link.is.discussed.in.the.next.section.of.this.topic..The.topic.concludes.with.a.discussion.of.why.we.should.be.interested.in.the.strategies.organisations.are.designing.and.implementing.

This.topic.is.introductory.by.design.and.introduces.concepts.that.are.more.fully.explored.in.later.topics..It.thus.covers.a.range.of.issues.very.briefly.but.sets.a.foundation.for.the.more.detailed.analysis.to.follow.in.later.topics.

5MNG00716 Topic 1 – Introduction to strategic management

Objectives

At.the.conclusion.of.this.topic.you.should.be.able.to:

•. define.the.concept.of.strategic.management

•. justify.the.importance.for.organisations.of.crafting.and.executing.strategic.management.actions

•. identify.the.actions.organisations.take.that.explain.their.strategy

•. explain.steps.organisations.take.to.achieve.a.sustainable.competitive.advantage

•. outline.and.distinguish.between.the.major.schools.of.thought.about.strategic.management

•. examine.moral.and.ethical.issues.facing.organisations.in.determining.their.strategic.approaches

•. assess.the.link.between.strategy.and.a.business.model.

Materials required

TextbookThompson,.Strickland.&.Gamble.2010,.Chapter.1.

Readings1.1. Mintzberg,.H.&.Lamprel,.J.1999,.‘Reflecting.on.the.strategy.process’,.Sloan

Management Review, vol..40,.no..3,.pp..21–30.

1.2. Browne,.M.1994,.‘The.evolution.of.strategic.management.thought’,.Background.Paper.for.the.Strategic.Management.Educators’.Conference,.Australian.Centre.for.Strategic.Management,.Queensland.University.of.Technology.

1.3 Kaplan,.RS.&.Norton,.DP.2004,.‘How.Strategy.Maps.Frame.an.Organization’s.Objectives’,.Financial Executive,.March/April,.pp..40–45.

Understanding and formulating strategyTurn.to.your.text.and.read.the.section.entitled.‘What.do.we.mean.by.strategy?’.on.pages.4–10.

There.is,.in.the.literature.and.in.industry,.a.general.agreement.on.the.definition.of.some.of.the.terms.used.in.strategic.management..There.has.also.been.a.large.quantity.of.research.which.has.led.to.an.understanding.of.the.tools.and.techniques.available.for.formulating.strategies..However,.strategic.decision.making.remains.an.art.requiring.not.only.an.understanding.of.the.strategic.function.and.available.data.but.also.skill,.judgment.and.experience.in.selecting.the.best.decision.from.a.range.of.strategic.options..In.essence.strategic.management.is.that.set.of.managerial.decisions.and.actions.that.determines.the.long.run.performance.of.an.organisation..The.decisions.and.actions.taken.by.the.newspaper.industry.proprietors.to.resolve.declining.sales.and.profitability.outlined.above.will.constitute.strategic.decisions.

Organisations.are.striving.to.obtain.a.sustainable.competitive.advantage.in.the.decisions.they.make.and.the.text.discusses.four.key.strategic.approaches.that.organisations.take.in.the.pursuit.of.this.sustainable.and.profitable.competitive.advantage..There.is.a.close.link.between.competitive.advantage.and.profitability.

In.order.to.identify.the.particular.strategy.being.followed.by.organisations.there.are.a.number.of.actions.that.can.be.identified.and.these.are.illustrated.in.Figure.1.1.(page.10.of.your.text)..(While.these.actions.seem.clear.for.organisations.seeking.financial.profitability.the.question.arises.as.to.whether.this.figure.would.be.useful.for.not.for.profit.organisations..Indeed.as.you.work.through.this.text,.which.places.major.

emphasis.on.organisations.that.seek.profitability.as.their.main.goal,.it.is.worthwhile.to.reflect.on.whether.the.concepts.discussed.are.just.as.relevant.in.the.not.for.profit.sector).

The.textbook.provides.an.excellent.discussion.on.the.various.activities,.functions.and.skills.brought.to.bear.within.strategy.making..They.emphasise.that.‘changing.circumstances.and.ongoing.management.efforts.to.improve.the.strategy.cause.a.company’s.strategy.to.emerge.and.evolve.over.time.–.a.condition.that.makes.the.task.of.crafting.a.strategy.a.work.in.progress,.not.a.one-time.event’.(Thompson,.p..11)..Moreover.a.company’s.strategy.is.a.blend.of.proactive.and.reactive.adjustments.and.this.blend.is.illustrated.in.Figure.1.2.(page.12).

Mintzberg.and.Lamprel.(1999).provide.a.more.personal.account.of.the.strategy.focus.

r Reading 1.1

Read ‘Reflecting on the strategy process’ by Mintzberg and Lamprel (1999).

a Activity 1.1

Having read and reflected on this literature, outline the differences and connections between the following ingredients in the strategy process:

• goals

• policies

• missions

• objectives

• programmes

• strategy.

Most.large.organisations.formulate.explicit.strategies.for.their.organisations..This.may.not.be.true.of.smaller.organisations..However,.strategies.do.form.in.almost.all.organisations,.even.if.they.are.not.formulated.in.an.ordered.and.stated.manner..These.strategies.are.termed.‘emergent’..The.owners.of.most.small.businesses,.for.example,.have.a.good.idea.of.how.to.develop.the.business,.but.many.do.not.express.this.as.a.stated.strategy.or.go.through.a.deliberate.process.of.defining.the.strategy..The.strategy.emerges.as.the.business.develops..Increasingly,.however,.due.to.the.high.rate.of.failure.of.small.businesses,.organisations.that.provide.financial.or.other.services.to.small.business.are.insisting.on.a.business.plan.being.formulated.that.includes.strategy.

Many.of.you.are.studying.for.your.Master’s.degree.to.improve.your.career.prospects..However,.you.probably.haven’t.written.this.down.as.a.formulated.strategy,.nor.will.you.have.consciously.worked.out.the.reason.or.the.outcomes.from.completing.the.post-graduate.course..You.have.adopted.an.emergent.strategy.approach.to.your.studies.

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

a Activity 1.2

Using your own organisation or one of your choosing, outline the extent to which the organisation has formulated and stated a strategy.

List some of your organisation’s strategic decisions and some of its tactical decisions.

Evolution of strategic managementSomewhat.surprisingly.the.textbook.does.not.have.a.section.on.the.history.and.evolution.of.strategic.management.so.we.must.use.some.other.readings.to.see.how.this.business.discipline.has.come.to.dominate.organisational.thinking..Strategic.management.in.business.is.a.relatively.new.and.dynamic.set.of.activities.which.are.evolving.in.response.to.ever.changing.business.environments.

Brown.(1994).states.that.strategic.management.emerged.as.a.business.‘discipline’.in.the.early.1960s.and.was.a.consequence,.in.part,.of.the.emergence.of.a.professional.management.function.separate.from.the.owner-management.which.characterised.business.in.the.early.1900s..As.corporations.grew.they.became.too.complicated.for.the.owner.to.manage..As.a.consequence.professional.managers.emerged.

r Reading 1.2

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

Mintzberg.(1990).has.proposed.ten.schools.of.strategy.formation.which.he.believes.have.emerged.over.the.years..He.has.identified.them.as:

1.. Design.School:.A.Process.of.Conception

2.. Planning.School:.A.Formal.Process

3.. Positioning.School:.An.Analytical.Process

4.. Entrepreneurial.School:.A.Visionary.Process

5.. Cognitive.School:.A.Mental.Process

6.. Learning.School:.An.Emergent.Process

7.. Power.School:.A.Process.of.Negotiation

8.. Cultural.School:.A.Social.Process

9.. Environmental.School:.A.Reactive.Process

10.. Configuration.School:.A.Process.of.Transformation.

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

The Planning School

According.to.Browne.(1994),.the.Planning.School,.credited.to.Ansoff.(1965).and.developed.in.the.1970s.was.concerned.with.the.means.of.achieving.strategic.objectives..It.led,.in.the.world.of.corporate.planning,.to.the.specialist.function.of.formulating.highly.detailed.strategies.at.the.corporate,.business.and.functional.level..These.then.formed.the.basis.for.detailed.schedules,.programs.and.budgets.

The.Planning.School.fell.into.disrepute.in.the.1980s.because.the.rigidity.of.the.process.could.not.reflect.the.dynamic.environment.of.business..Today.few.corporate.planning.departments.remain.of.the.type.that.emerged.from.the.Planning.School..Nevertheless,.some.of.the.principles.and.techniques.defined.by.Ansoff.(1965).are.relevant.today.when.used.in.a.more.flexible.way.

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

The Design School

The.Design.School.models.developed.by.Andrews.(1980).have.persisted.to.the.present.day.(Aaker.2001)..Strategic.planning.is.concerned.with.changing.strategic.thrusts.and.capabilities..It.is.different.from.the.earlier.approaches.to.planning.such.as.the.Planning.School.in.that.it.assumes.that.past.extrapolations.may.be.inadequate.

Browne.(1994,.p..11).states:

the.basic.model.of.the.‘design.school’.has.become.known.as.SWOT.–.a.process.of.assessing.an.organisation’s.strengths.and.weaknesses.as.well.as.external.opportunities.and.threats.–.in.order.to.identify.strategies.which.match.the.organisation’s.distinctive.capabilities.with.its.environment.

There.has.been.criticism.of.the.Design.School.by.authors.such.as.Mintzberg.(1990).but.the.SWOT.analysis.remains.the.tool.most.commonly.used.by.business.as.a.process.for.strategy.analysis.and.formulation,.and.is.the.basis.of.most.MBA.strategic.management.classes.and.texts.

Browne.(1994).notes.a.proliferation.of.strategic.planning.models.developed.through.the.1970s..Many.of.these.have.been.retained.as.useful.tools.in.strategic.analysis,.especially.by.consultants.

Other schools

According.to.Browne.(1994),.Michael.Porter.(1980),.through.his.book.Competitive Strategy.and.later.publications,.dominated.strategic.management.thought.in.the.1980s..Mintzberg.(1990).termed.this.work.‘the.positioning.school’..Porter’s.main.contribution.was.to.recognise.the.importance.of.a.dynamic.relationship.between.enterprise.strategy.and.the.industry.structure.in.which.the.enterprise.was.immersed.

A.number.of.streams.of.strategic.thought.have.emerged.in.the.1990s..The.resource-based view.has.identified.the.importance.of.a.‘core.competency.perspective’.and.the.concept.of.strategic.resources.and.capabilities..Capabilities.(or.competencies).are.defined.as.skills,.patents.and.similar.non-resource.factors.giving.a.competitive.advantage.to.the.organisation..Rather.than.focus.on.the.external.environment.and.the.actions.of.organisations.to.strive.to.achieve.competitive.advantage.in.this.changing.environment.the.resource.based.view.stresses.the.internal.resources.available.to.the.organisation.which.may.enable.it.to.achieve.this.strategic.advantage..The.resource-based.view.has.grown.in.importance.in.recent.years.and.underlies.several.of.the.chapters.in.the.textbook.

The.following.website.provides.additional.information.about.this.view.of.strategic.management:

w Website

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

The.next.website.is.a.PowerPoint.presentation.in.which.the.major.differences.between.the.design.school.and.the.resource.based.school.are.highlighted.in.a.series.of.slides..You.don’t.need.to.know.all.the.detail.on.these.slides.but.the.differences.between.the.two.approaches.are.clearly.delineated:

w Website

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

Browne.(1994).also.describes.more.recent.moves.to.recognise.the.knowledge.contained.in.the.organisation.and.the.human.behavioural.factors.congruent.with.organisational.structure.as.‘organisational.culture’..This.concept.has.led.to.an.assumed.relationship.between.organisational.performance.and.culture.which.attempts.to.solve.the.dilemma.referred.to.earlier,.namely.how.to.achieve.performance.while.meeting.the.needs.of.people..This.area.of.research.is.complex,.containing.many.different.definitions.and.approaches.

The.approach.and.direction.of.contemporary.research.appears.to.be.heading.towards.the.concept.of.a.culture.which.is.characterised.by.an.emphasis.on.capitalising.and.protecting.the.knowledge.contained.in.an.organisation.as.a.major.component.of.its.sustainable.competitive.advantage.

Finally,.according.to.Browne.(1994),.there.is.the.emergence.of.a.process.view.of.management..This.approach.has.emerged.from.attempts.to.define.the.process.of.policy.formulation.in.the.public.sector..It.recognises.that.the.Design.School.and.the.Positioning.School.of.strategic.management.are.concerned.with.prescriptive.models.that.fail.to.recognise.the.dynamics.of.strategic.formation..For.example,.it.was.the.highly.prescriptive.nature.of.the.Planning.School.that.led.to.its.lack.of.support.

Current sensitivities

Browne.(1994,.p..29).reports.Mintzberg.as.supporting.the.process.view.

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

Many.authors,.according.to.Browne.(1994),.have.pointed.out.the.danger.of.viewing.this.emergent.process.as.reactive.rather.than.pro-active..Incremental.adaptation,.competing.interests.and.an.uncertain.environment.lead.to.Thompson.et.al.’s.(2003).‘opportunistic.surveillance’.capabilities..Similarly.Quinn’s.(1996).view,.also.noted.by.Browne.(1994),.involves.a.view.that.incremental.decisions.should.not.be.confused.or.associated.with.‘muddling’..Rather,.such.incremental.decision.making.is.seen.as.conscious,.purposeful,.proactive.and.good.management.

This.approach.has.led.to.recent.research.directions.that.are.focused.on.innovation,.and.the.means.of.creating.sustainable.competitive.advantage.from.the.knowledge.contained.within.the.organisation..It.takes.the.view.that.hierarchical.organisations.(as.postulated.in.early.classical.management.theories).inhibit.the.flow.of.knowledge.and,.hence,.the.emergence.of.innovative.strategies..New.approaches.suggest.the.use.of.‘organic.structures’.based.on.teams.and.network.methods..For.example,.the.continuously.‘learning.organisation’.has.been.postulated.by.Senge.(1992).and.others.

Mintzberg.(1999).argues.that.all.these.different.approaches.represent.research.into.different.parts.of.the.complex.whole.that.is.strategic.management..Managers.have.no.choice.but.to.cope.with.the.whole..He.attempts.to.demonstrate.how.the.different.approaches.might.fit.into.strategy.formation.as.a.single.process.

We.will.also.discover.in.later.topics.that.the.world.of.strategic.management.is.evolving.and.there.have.been.significant.contributions.to.our.thinking.in.recent.years..That.is.not.to.deny.the.work.of.authors.like.Mintzberg,.Porter,.Hamel,.Kaplan.and.Norton.since.they.have.shaped.the.way.strategic.management.is.currently.practised.

We.now.return.to.the.textbook.and.consider.briefly.some.other.issues.about.strategy.that.are.identified.

Ethics, business models and strategic success

r Textbook

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

The.first.section.(pages.13–14).in.the.text.deals.with.questions.of.ethics.and.moral.behaviour.and.whether.business.strategy.should.have.ethical.and.moral.guidelines..This.is.always.a.contentious.issue.and.generates.more.heat.than.light..Just.behaving.legally.is.not.necessarily.being.morally.upright.for.a.business.and.the.text.identifies.a.range.of.‘grey.areas’.in.this.section..One.of.the.later.topics.in.this.unit.covers.these.issues.in.great.detail.as.do.several.of.the.case.studies.in.the.textbook.

a Activity 1.3

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

A.discussion.of.whether.a.strategy.being.pursued.by.an.organisation.is.the.correct.one.leads.into.considerations.of.the.business model.(pages.14–15). Unless.a.chosen.strategy.enables.a.business.to.survive.and.be.profitable.then.its.worth.is.questionable. (How.the.business.model.applies.to.not-for-profit.organisations.is.worth.contemplating.here.)

a Activity 1.4

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

Why do you think Microsoft’s model is more successful than that of Red Hat?

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

Why is strategy important?

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

As.in.all.of.the.chapters.in.this.text.the.key.points.are.a.great.summary.of.the.issues.raised.in.the.chapter.

A.final.reading.is.included.here.to.introduce.you.to.a.strategic.tool.that.will.be.used.in.later.topics.and.as.an.overview.of.the.issues.discussed.to.date.in.this.topic.

r Reading 1.3

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

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

w Website

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

Take.a.look.at.http://www.newspaperdeathwatch.com/.too.–.it’s.coming.at.the.same.problem.with.an.interesting.suggestion.that.new.life.is.springing.up.from.the.newspaper.grave.

We.now.move.onto.a.consideration.of.the.processes.and.phases.involved.in.crafting.and.executing.a.successful.strategy.in.Topic.2.

SummaryThis.topic.has.attempted.to.set.the.scene.for.the.study.of.strategic.management..It.serves.as.an.introduction.to.concepts.outlined.in.greater.detail.in.following.topics.

A.systems.approach.describes.the.purpose.of.an.organisation.as.adding.value.to.goods.or.services.provided.by.a.supplier.in.order.to.meet.the.needs.of.a.customer.in.a.competitive.and.dynamic.market.environment..The.resources.and.capabilities,.together.with.the.learned.knowledge.in.the.organisation,.allow.it.to.sustain.its.competitive.advantage.within.the.external.regulatory,.social.and.economic.environment.in.which.it.is.forced.to.operate.

The.development.of.strategic.management.theory.has.emerged.relatively.recently.as.a.result.of.the.need.to.cope.with.the.combined.effects.of.an.increasingly.competitive.global.environment.and.the.need.to.effectively.utilise.the.resources,.capabilities.and.knowledge.contained.within.the.organisation..At.its.more.proactive.form,.strategy.assumes.crisis.dimensions.

Although.there.will.be.much.emphasis.in.the.remainder.of.this.unit.on.the.processes,.tools.and.techniques.available.for.use.in.the.practice.of.strategic.management,.the.theory.and.practice.of.strategic.management,.beyond.the.application.of.prescriptive.models,.is.a.relatively.new.and.emerging.field..Strategic.management,.according.to.Browne.(1994,.p..30),.is.not.simply.a.matter.of.practice.or.of.technique.–.it.is.also.thinking.about.what.needs.to.be.done.

Feedback to selected activities

f Activity 1.4

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

Topic 2 The five phases of strategic

management

IntroductionThe.textbook.has.a.large.number.of.diverse.case.studies.that.illustrate.the.concepts.of.strategic.management.being.outlined.in.these.individual.topics..Where.it.is.thought.applicable,.use.will.be.made.of.several.of.these.cases..In.this.chapter.we.will.make.use.of.one.of.the.shorter.cases.that.has.an.international.and.technology.theme,.(Case.#.11.–.C217.of.the.text).

The.first.topic.was.concerned.with.a.general.introduction.to.strategic.management.and.identified.and.defined.a.number.of.terms.and.concepts.we.will.continue.to.use.in.other.topics..In.this.topic.we.introduce.a.model.of.strategic.management.which.forms.the.basis.for.the.rest.of.the.unit.and.upon.which.the.textbook.is.structured..The.authors.maintain.that.there.are.five.phases.to.the.process.of.creating.and.executing.a.strategic.management.approach.in.organisations.and.this.topic.reviews.these.five.elements.in.turn.using.the.Nintendo.Case.case.to.illustrate.the.various.phases.being.discussed.

In.this.topic.we.will.first.consider.the.different.types.of.strategy.that.Mintzberg.identifies.since.his.approach.is.not.always.in.accord.with.that.of.the.textbook.authors..We.will.then.present.from.the.textbook.an.overview.of.the.managerial.ins.and.outs.of.crafting.and.executing.company.strategies..Special.attention.is.given.to.management’s.direction-setting.responsibilities.–.charting.a.strategic.course,.setting.performance.targets,.and.choosing.a.strategy.capable.of.producing.the.desired.outcomes..The.topic.also.examines.which.kinds.of.strategic.decisions.are.made.at.what.levels.of.management.and.the.roles.and.responsibilities.of.the.company’s.board.of.directors.in.the.strategy-making,.strategy-executing.process.

We.will.conclude.the.topic.by.reviewing.the.university’s.own.Strategic.Plan.2005–2010.Mid-term.review;.2008.

Objectives

•. explain.the.five.Ps.of.Mintzberg’s.view.of.strategy

•. describe.the.five.phases.of.crafting.and.executing.a.strategy

•. distinguish.between.a.strategic.vision.and.a.mission.statement

•. identify.the.elements.of.effective.vision.statements

•. explain.the.importance.of.effectively.communicating.vision.statements

•. distinguish.between.financial.and.strategic.objectives

•. analyse.the.role.of.the.different.levels.of.an.organisation.in.determining.a.strategy

•. appraise.the.key.aspects.of.the.implementing.phase.of.strategy

•. explain.why.evaluation.and.adjustment.of.strategy.is.important.

Materials required

TextbookThompson,.Strickland.&.Gamble,.2010.Chapter.2.

Readings2.1. Mintzberg,.H.1996,.‘Five.Ps.for.strategy’,.in.H.Mintzberg.&.JB.Quinn.(eds),.The

Strategy Process: Concepts, Contexts, Cases,.3rd.edn,.Prentice.Hall,.New.Jersey,.pp..10–17.

2.2. Southern.Cross.University.2008,.Strategic Plan 2005–2010 Mid-term review: 2008.

Crafting.and.executing.a.strategy.are.the.heart.and.soul.of.managing.a.business.enterprise..On.page.24.of.the.text.the.five.steps.involved.in.crafting.and.executing.a.strategy.are.described.and.then.they.depicted.in.Figure.21.1.on.page.24..We.now.proceed.to.examine.each.of.these.steps.in.turn.

Developing a strategic visionIn.order.to.get.started.in.this.topic.read.the.short.case.Nintendo.Case.(Case.#12.in.your.textbook)..Then.go.to.the.website.of.Nintendo.Case.(http://www.nintendo.com).and.review.their.home.page.to.get.a.feel.for.what.the.organisation.does.and.what.strategic.issues.are.evident.

The business

Nintendo.was.the.original.#1.video.games.console..The.business.has.three.main.products.in.its.portfolio.–

1.. Nintendo.DS.(and.DS.Lite)

. Handheld.video.game.devices..These.handheld.gaming.devices.are.portable,.running.on.batteries,.and.therefore.suited.to.a.broad.range.of.consumers..In.particular.children.and.commuters..Additionally.many.of.the.games.available.on.the.Wii.are.also.available.on.the.DS.&.DS.Lite.

2.. Home-based.games.consoles,.such.as.Wii.which.superceded.the.Nintendo.as.a.device.which.promotes.physical.interaction.via.a.series.of.unique.controllers.that.enable.simulation.for.the.user,.e.g..using.it.as.a.virtual.tennis.racquet..By.far.Nintendo’s.biggest.success,.the.Wii.successfully.penetrated.a.market.by.way.of.enabling.gaming.entertainment.that.suits.multiple.users.and.multiple.user.types.

3.. Nintendo.com

. This.additional.feature.can.be.teamed.up.with.Wii.as.a.way.of.buying.games.online,.playing.with.other.people.and.interacting.with.other.Wii.users.in.various.net.portals..This.innovation.forms.a.major.step.in.B2C.commerce.and.marketing.research.for.Nintendo.

The management

From.it’s.inception,.Nintendo.had.been.a.family.run.and.controlled.business,.until.2002,.when.Nintendo.inducted.its.first.non-family.president..As.the.fourth.president.in.the.company’s.history,.and.being.unrelated.to.the.founders.(Yamauchi’s).Satoru.Iwata.oversaw.the.introduction.of.the.DS.(Duel.Screen).and.DS.Lite,.along.with.the.Wii.in.2006..Under.Iwata’s.leadership,.Nintendo.saw.massive.success.upon.introduction.of.its.innovative.products.

15MNG00716 Topic 2 – The five phases of strategic management

a Activity 2.1

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

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

r Reading 2.1

Turn now to Reading 2.1 and read pages 10–17.

a Activity 2.2

Mintzberg (1996) refers to five definitions of strategy:

• plan

• ploy

• pattern

• position

• perspective.

What are differences between these five ‘Ps’? How would you apply these five Ps to the Nintendo Case?

As discussed in Topic 1, the process of strategy formulation is not simple. It is affected by the complexity and rate of change in the external environment as well as the personal and cultural influences within the organisation.

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

r Textbook

Read pages 22 to 33.

There.are.a.number.of.elements.involved.in.developing.a.strategic.vision.for.an.organisation..The.vision.should.chart.the.course.for.the.organisation.and.give.it.an.indication.of.where.it.is.heading..Such.visions.need.to.be.distinctive.and.specific.and.understood.by.all.parties.within.the.organisation..Visions.must.form.the.basis.for.strategic.decisions..In.committing.an.organisation.to.move.in.a.certain.direction.there.are.factors.both.within.and.without.the.organisation.that.need.to.be.considered.and.these.are.depicted.in.Table.2.1.(page.25).

While.there.is.much.talk.about.the.importance.of.vision.statements.for.organisations.as.the.launching.pad.for.crafting.and.executing.an.effective.strategy,.often.scant.attention.is.paid.to.the.design.or.wording.of.such.statements..Table.2.2.(page.26).suggests.seven.desirable.characteristics.of.effective.vision.statements.while.Table.2.3.(page.26).highlights.some.of.the.shortcomings.of.vision.statements.

a Activity 2.3

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

a Activity 2.4

Turn to Exercise 1 on page 53 of the text. Go to the website of Caterpillar and from information provided in that website, write a new vision statement for the company which would improve on the one given on page 27 of the text. The vision statement should be no more than 15–20 words but following the guides given in Table 2.2. Check your new vision for Caterpillar against the recommended ways of constructing a vision statement according to the text.

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

a Activity 2.5

Find some ironies and contradictions in an organisation’s vision and or mission statement.

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

Values

We.will.be.concerned.with.values.at.different.stages.in.this.unit.and.here.we.have.the.first.discussion.of.the.importance.and.impact.of.a.company’s.values.on.the.strategic.vision.taken..(Can.an.organisation.have.values.or.are.they.a.reflection.of.the.values.of.the.leaders.within.organisations?)..A.definition.of.values.is.given.at.the.bottom.of.page.29.and.some.examples.are.given.on.pages.29–31.

The.real.question.is.whether.values.are.just.‘motherhood’.statements.without.any.substance.or.whether.they.are.a.true.reflection.of.the.organisation’s.practices..If.they.are.real.then.these.values.should.be.reflected.in.the.vision.statement.of.that.organisation..In.this.regard.see.the.link.between.Yahoo’s.mission.and.its.values.in.Illustration.Capsule.2.3.(page.31)..Some.well.known.examples.of.organisations.that.failed.to.live.up.to.their.vision.statements.are.given.on.pages.29–30.

a Activity 2.6

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

Setting objectives

r Textbook

Read pages 33–37.

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

The.experiences.of.countless.companies.and.managers.teach.that.precisely.spelling.out.how.much.of.what.kind.of.performance.by.when.and.then.pressing.forward.with.actions.and.incentives.calculated.to.help.achieve.the.targeted.outcomes.will.boost.a.company’s.actual.performance.

Ideally,.managers.ought.to.use.the.objective-setting.exercise.as.a.tool.for.truly.stretching.an.organisation.to.reach.its.full.potential.

The need for a balanced scorecard

Two.very.distinctive.types.of.performance.yardsticks.are.required:

•. Those.relating.to.financial.performance.

•. Those.relating.to.strategic.performance.

On.page.34.examples.are.given.of.both.types.of.objectives.

Achieving.acceptable.financial.results.is.a.must..Without.adequate.profitability.and.financial.strength,.a.company’s.pursuit.of.its.strategic.vision,.as.well.as.its.long-term.health.and.ultimate.survival,.is.jeopardised.

Of.equal.or.greater.importance.is.a.company’s.strategic.performance.–.outcomes.that.indicate.whether.a.company’s.market.position.and.competitiveness.are.deteriorating,.holding.steady,.or.improving.

a Activity 2.7

Illustration Capsule 2.3 on page 35 of the text, examples of company objectives, shows selected objectives of several prominent companies.

Discussion question: What do you consider is the prominent purpose of an organisation’s stated objectives?

A.company’s.financial.performance.measures.are.really.lagging.indicators.that.reflect.the.results.of.past.decisions.and.organisational.activities..The.best.and.most.reliable.leading.indicators.of.a.company’s.future.financial.performance.and.business.prospects.are.strategic.outcomes.that.indicate.whether.the.company’s.competitiveness.and.market.position.are.stronger.or.weaker..The.degree.to.which.a.company’s.managers.set,.pursue,.and.achieve.strategic.objectives.tends.to.be.a.reliable.leading.indicator.of.its.ability.to.generate.higher.profits.from.business.operations.

The.balanced.scorecard.for.measuring.company.performance.requires.setting.both.financial.and.strategic.objectives.and.tracking.their.achievement..Unless.a.company.is.in.deep.financial.difficulty,.company.managers.are.well.advised.to.put.more.emphasis.on.achieving.strategic.objectives.than.on.achieving.financial.objectives.whenever.a.trade-off.has.to.be.made..What.ultimately.enables.a.company.to.deliver.better.financial.results.from.operations.is.the.achievement.of.strategic.objectives.that.improve.its.competitiveness.and.market.strength.

a Activity 2.8

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

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

situation.in.which.short-range.objectives.differ.from.long-range.objectives.occurs.when.managers.are.trying.to.elevate.organisational.performance.and.cannot.reach.the.long-range.target.in.just.one.year.

The.issue.for.management,.especially.of.publicly.listed.companies,.is.that.their.shareholders.demand.instant.returns.and.more.often.than.not.the.management.have.a.significant.part.of.their.remuneration.based.on.the.KPIs.that.underpin.the.company.objectives..This.fact.alone.should.mean.you.can.hear.bells.clanging.in.your.head.as.these.rockstar.CEOs.belt.out.the.usual.rhetoric.of.soft.and.hard.objectives..Ultimately,.they’re.chasing.hard.(financial).objectives.as.opposed.to.say.a.‘happy.workplace’,.since.the.latter.cannot.be.quantified.in.a.way.that.appeals.to.shareholders.

The concept of strategic intent

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

The need for objectives at all organisational levels

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

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

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

a Activity 2.9

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

Crafting a strategy

r Textbook

Read pages 37–41.

The.third.step.in.crafting.and.executing.a.strategy.is.involved.with.the.‘how.to’.scenarios.that.will.ensure.the.vision.and.objectives.are.carried.out..People.within.the.organisation.have.to.be.responsible.for.crafting.the.strategy.once.the.vision.and.objectives.are.known..In.large.organisations.like.Nintendo,.individuals.like.Iwata.are.only.partially.responsible.for.the.‘doing’.aspects.of.setting.a.strategy.although.it.is.inevitable.that.he.will.get.others.involved.in.the.strategic.process..In.larger.organisations.there.are.usually.many.levels.of.the.organisation.and.many.individuals.who.have.this.role.

The.text.discusses.the.role.of.the.participants.in.crafting.a.strategy.from.the.CEO.down..While.it.is.assumed.that.senior.managers.of.large.organisations.might.be.involved.in.such.strategic.activities.this.is.not.necessarily.the.case..In.many.organisations.it.is.expected.that.all.managers.will.have.some.part.to.play.in.charting.the.future.direction.of.the.organisation.and.crafting.appropriate.strategies.

Involving.teams.of.people.to.dissect.complex.situations.and.come.up.with.strategic.solutions.is.becoming.increasingly.necessary.in.many.businesses..Not.only.are.many.strategic.issues.too.far-reaching.or.too.involved.for.a.single.manager.to.handle,.but.they.often.cut.across.functional.areas.and.departments,.thus.requiring.the.contributions.of.many.different.disciplinary.experts.and.the.collaboration.of.managers.from.different.parts.of.the.organisation..The.team.effort.is.considered.more.important.than.any.one.individual.or.group.at.the.higher.echelons.of.the.organisation..A.valuable.strength.of.collaborative.strategy.making.is.that.the.group.of.people.charged.with.crafting.the.strategy.can.easily.include.the.very.people.who.will.also.be.charged.with.implementing.and.executing.it.

In.some.companies,.top.management.makes.a.regular.practice.of.encouraging.individuals.and.teams.to.develop.and.champion.proposals.for.new.product.lines.and.new.business.ventures..The.idea.is.to.unleash.the.talents.and.energies.of.promising.‘corporate intrapreneurs’.

The strategy-making hierarchy

Since.it.is.usual.for.many.individuals.and.groups.and.departments.in.large.organisations.to.be.involved.in.crafting.a.strategy.it.follows.that.a.company’s.overall.strategy.is.really.a.collection.of.strategic.initiatives.and.actions.devised.by.managers.and.key.employees.up.and.down.the.whole.organisational.hierarchy..The.larger.and.more.diverse.the.operation.of.an.enterprise,.the.more.points.of.strategic.initiative.it.has.and.the.more.managers.and.employees.at.more.levels.of.management.that.have.a.relevant.strategy-making.role.

Figure.2.2.(page.40),.A.Company’s.Strategy-Making.Hierarchy,.shows.who.is.generally.responsible.for.devising.what.pieces.of.a.company’s.overall.strategy..In.diversified,.multibusiness.companies.where.the.strategies.of.several.different.businesses.have.to.be.managed,.the.strategy-making.task.involves.four.distinct.types.or.levels.of.strategy,.each.of.which.involves.different.facets.of.the.company’s.overall.strategy..The.types.of.strategic.involvement.at.each.level.are.outlined.on.pages.37–41.

This.extensive.amount.of.strategic.input.is.in.stark.contrast.to.smaller.organisations.where.strategic.decision.making.falls.into.the.lap.of.the.owner.and.maybe.one.or.two.other.individuals.only..(Like.so.many.management.books.across.a.range.of.business.disciplines,.this.textbook.spends.a.lot.of.time.discussing.large.organisations.and.not.much.time.is.spent.on.smaller.organisations.)

The.challenge.for.large.organisations.is.thus.to.integrate.these.diverse.inputs.into.the.strategic.formulation.process.to.ensure.there.is.a.unity.and.that.the.same.strategic.vision.and.objectives.are.being.pursued..Then.bringing.all.these.elements.together.(vision,.objectives.and.strategy).constitutes.the.strategic plan.for.the.organisation..This.is.discussed.on.pages.41.onwards.in.the.text.

Implementing and executing the strategy

r Textbook

Read pages 41–42.

So.much.of.strategic.management.is.concerned.with.the.crafting.of.strategy.that.often.its.execution.is.given.less.focus..Indeed.this.textbook.only.has.two.of.its.thirteen.chapters.specifically.devoted.to.implementation.issues.

How.strategies.are.executed.will.depend.on.a.range.of.circumstances.including.how.much.change.in.existing.strategies.is.needed.or.intended.and.how.conducive.is.the.work.culture.for.changes.needed.in.strategy..The.specific.actions.that.usually.form.part.of.the.implementation.process.are.outlined.on.pages.41–42.and.each.of.these.can.prove.to.be.a.challenge.within.itself.

Good.strategy.executing.involves.creating.strong.‘fits’.between.strategy.and.organisational.capabilities,.between.strategy.and.the.reward.structure,.between.strategy.and.internal.operating.systems,.and.between.strategy.and.the.organisation’s.climate.and.culture..The.stronger.these.fits,.the.better.the.execution.and.the.better.the.company’s.chances.of.achieving.its.performance.targets.

a Activity 2.10

What steps if any has Iwata taken to implement the strategy of Nintendo Case? Do you consider there is a close ‘fit’ between the organisation’s capabilities and its strategy?

Evaluating and initiating corrective adjustments

r Textbook

Read pages 43 to 45.

The.fifth.phase.of.the.strategy-management.process.–.evaluating.the.company’s.progress,.assessing.the.impact.of.new.external.developments,.and.making.corrective.adjustments.–.is.the.trigger.point.for.deciding.whether.to.continue.or.change.the.company’s.vision,.objectives,.strategy,.and/or.strategy-execution.methods.

Successful.strategy.execution.entails.vigilantly.searching.for.ways.to.continuously.improve.and.then.making.corrective.adjustments.whenever.and.wherever.it.is.useful.to.do.so.

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

r Reading 2.2

Turn to Reading 2.2 and note the following:

• our vision

• our mission

• our values.

This is followed by an outline of five objectives in the areas of:

• choice and esteem

• the student experience

• research

• regional engagement

• enterprise.

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

Corporate governance

r Textbook

Read pages 49–50.

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

a Activity 2.11

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

SummaryIn.this.topic.we.have.considered.the.five.phases.of.crafting.and.executing.strategic.management.after.reviewing.the.Mintzberg.perspective.on.strategy..The.importance.of.strategic.vision,.financial.and.strategic.objectives,.people.involved.in.strategic.decision.making.and.the.implementation.and.review.of.a.chosen.strategy.were.discussed.in.turn.

In.order.to.carry.out.a.process.of.formulating.strategy,.a.strategy.analysis.of.the.factors.affecting.the.organisation.needs.to.be.carried.out..This.involves.an.examination.of.the.opportunities.and.threats.in.the.external.environment.together.with.the.strengths.and.weaknesses.within.the.organisation..This.process.is.termed.a.SWOT.analysis.

The.issues.to.be.considered.in.carrying.out.a.SWOT.analysis.and.the.more.important.models.that.can.assist.are.discussed.in.the.next.topics.

f Activity 2.3

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

Topic 3 External analysis: Industry and

competitive analysis

IntroductionManagers.must.be.able.to.perceptively.diagnose.a.company’s.external.and.internal.environments.to.succeed.in.crafting.a.strategy.that.is.an.excellent.fit.with.the.company’s.situation,.is.capable.of.building.competitive.advantage,.and.promises.to.boost.company.performance.–.the.three.criteria.of.a.winning.strategy.

It.is.very.important.to.focus.any.consideration.of.the.external.domain.and.environment.on.the.key.factors.affecting.the.strategic.direction.of.the.organisation..Many.external.factors.impose.opportunities.and.threats.on.all.organisations..However,.some.opportunities.and.threats.can.assist.an.organisation.to.obtain.a.sustainable.competitive.advantage.over.competitors..It.is.these.that.need.to.be.identified.in.an.external.analysis.

Developing.company.strategy.begins.with.a.strategic.appraisal.of.the.company’s.external.and.internal.situations.to.form.a.strategic.vision.of.where.the.company.needs.to.head,.then.moves.toward.an.evaluation.of.the.most.promising.alternative.strategies.and.business.models,.and.finally.culminates.in.a.choice.of.strategy.

This.topic.presents.the.concepts.and.analytical.tools.for.assessing.a.single-business.company’s.external.environment..Attention.centres.on.the.competitive.arena.in.which.a.company.operates,.together.with.the.technological,.societal,.regulatory,.or.demographic.influences.in.the.macro-environment.that.are.acting.to.reshape.the.company’s.future.market.arena.

The.textbook.chapter.is.very.long,.but.it.is.well.set.out.with.useful.diagrams..It.relies.heavily.on.the.work.of.Michael.Porter.and.his.study.of.competitive.forces..The.thrust.of.the.chapter.is.to.do.with.competitive.pressures.that.organisations.continually.address..You.would.be.advised.to.take.this.chapter.section.by.section.rather.than.tackle.it.all.in.one.bite!

To.illustrate.the.concepts.being.covered.references.and.activities.will.use.two.case.studies.from.the.textbook,.one.of.which.was.introduced.in.the.previous.topic..The.activities.will.be.reviewed.in.teletutorials.or.in.classroom.situations.

Objectives

•. distinguish.between.a.firm’s.macroenvironment.and.its.immediate.industry.and.competitive.environment

•. identify.an.industry’s.key.economic.features

•. outline.the.five.forces.of.competition.tool.and.how.it.can.be.used.to.determine.the.degree.of.competitive.pressures.an.organisation.faces

•. analyse.the.major.forces.driving.change.in.industries

•. utilise.the.tool.of.strategic.mapping

•. outline.how.organisations.can.predict.the.strategic.moves.of.rivals

•. examine.the.concept.of.key.success.factors

•. apply.the.concepts.and.tools.in.the.chapter.to.case.studies.

Materials required

TextbookThompson.et.al..Chapter.3.

Readings3.1. Slater,.SF.&.Olson,.EM.2002,.‘A.fresh.look.at.industry.and.market.analysis.

(understanding.markets.beyond.the.Five.Competitive.Forces.Model)’,.Business Horizons,.vol..45,.no..1,.Jan–Feb,.pp..15–22.

The strategically relevant components of a company’s external environment

r Textbook

Read pages 56–60.

Managers.are.not.equipped.to.act.wisely.in.steering.a.company.in.a.different.direction.or.altering.its.strategy.until.they.have.a.deep.understanding.of.the.company’s.situation..This.understanding.requires.thinking.strategically.about.two.facets.of.the.company’s.situation:

a.. the.industry.and.the.competitive.environment.in.which.the.company.operates.and.the.forces.acting.to.reshape.that.environment

b.. the.company’s.own.market.position.and.competitiveness.–.its.resources.and.capabilities,.its.strengths.and.weaknesses.vis-à-vis.rivals,.and.its.windows.of.opportunity.

Figure.3.1.in.the.text.(page.56).depicts.the.sequence.recommended.for.managers.to.pursue.

All.companies.operate.in.a.macro-environment.shaped.by.influences.emanating.from.the.economy.at.large,.population.demographics,.societal.values.and.lifestyles,.governmental.legislation.and.regulation,.technological.factors,.and.the.industry.and.competitive.arena.in.which.the.company.operates.

Figure.3.2.in.the.text,.(page.57).identifies.the.arenas.within.an.organisation’s.macro-environment..One.of.these.is.‘general.economic.conditions’..The.importance.of.this.factor.cannot.be.overestimated.

The.global.financial.meltdown.and.accompanying.economic.crises.that.affected.the.major.economies.of.the.world.in.the.last.few.months.of.2008.had.serious.consequences.for.many.organisations..One.of.the.most.noteworthy.industries.affected.was.the.American.motor.vehicle.industry.where.the.three.major.manufacturers.were.on.the.brink.of.collapse.at.the.end.of.2008.and.were.bailed.out.only.by.government.financial.support..Organisations.that.had.been.enjoying.profitable.economic.times.for.some.years.were.caught.up.in.the.collapses.of.well.established.financial.institutions.and.many.faced.bankruptcy.and.failure.with.subsequent.massive.job.losses..At.the.time.of.writing.the.world.economy.is.still.trying.to.adjust.to.the.consequences.of.these.major.changes.

25MNG00716 Topic 3 – External analysis: Industry and competitive analysis

One.of.the.continual.challenges.for.organisations.is.to.be.able.to.respond.successfully.and.strategically.to.such.changes.as.those.imposed.by.the.collapse.of.financial.institutions.and.the.resulting.tightening.of.credit.and.borrowing.facilities.

There.are.enough.strategically.relevant.trends.and.developments.in.the.outer.ring.of.the.macro-environment.to.justify.managers.maintaining.a.watchful.eye..The.factors.and.forces.in.a.company’s.macro-environment.having.the.biggest.strategy-shaping.impact.almost.always.pertain.to.the.company’s.immediate.competitive.environment.

Thinking strategically about a company’s industry and competitive environment

Industries.differ.widely.in.their.economic.features,.competitive.character,.and.profit.outlook..An.industry’s.economic.traits.and.competitive.conditions.–.and.how.they.are.expected.to.change.–.determine.whether.its.future.profit.prospects.will.be.poor,.average,.or.excellent.

Thinking.strategically.about.a.company’s.competitive.environment.entails.using.some.well-defined.concepts.and.analytical.tools.to.get.clear.answers.to.seven.questions.listed.on.page.58..The.responses.to.these.seven.questions.constitute.the.content.of.this.chapter..We.will.use.the.Nintendo.case.in.the.textbook.to.illustrate.the.questions.being.discussed.

Question 1: What are the industry’s dominant economic traits?

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

a Activity 3.1

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

Question 2: What competitive forces are at work in the industry and how strong are they?

r Textbook

Read pages 60–79.

Michael.Porter.(1985).developed.the.Five-Forces.Model.to.help.identify.the.nature.of.competition.in.an.industry..The.aim.of.the.analysis.is.to.identify.the.main.sources.of.competitive.forces.and.to.consider.the.strength.of.these.forces..It.is.a.key.analytical.tool.in.strategic.management,.hence.it.is.critical.to.build.skills.in.undertaking.the.analysis..Figure.3.3.(page.61),The.Five-Forces.Model.of.Competition:.A.Key.Tool.for.Diagnosing.the.Competitive.Environment,.depicts.this.tool.

In.analysing.the.five.competitive.forces.it.is.necessary.to.assess.the.strength.of.each.competitive.force.(Strong?.Moderate?.Weak?).

The.aim.is.to.explain.how.each.force.acts.to.create.competitive.pressure.and.to.decide.whether.overall.competition.is.brutal,.fierce,.strong,.normal/moderate,.or.weak..Five.forces.analysis.is.a.very.difficult.concept.to.apply.to.multi-industry.companies.such.as.Wesfarmers.(WES),.a.publicly.listed.Australian.company.that.operates.in.

financial.services,.energy,.agriculture.and.retail.supermarkets..There.will.invariably.be.limitations.and.difficulties.when.applying.a.five.forces.analysis.to.such.a.firm,.which.is.important.to.remember.when.considering.your.assignment.cases..

Rivalry.among.competing.sellers.is.usually.the.most.powerful.of.the.five.forces.

The.first.step.is.to.check.which.weapons.of.competitive.rivalry.are.most.actively.used.by.rivals.in.jockeying.for.position..These.might.include:

•. price

•. quality

•. performance.features.offered

•. customer.service

•. warranties/guarantees

•. advertising/promotions

•. dealer.networks

•. product.innovation.

The.next.step.is.to.consider.the.factors.that.cause.rivalry.to.be.stronger..This.could.be.because.of.there.are.many.firms,.that.are.approximately.equal.in.size.and.capability..Rivalry.might.also.be.high.where.there.is.slow.market.growth..These.industry.conditions.tempt.some.firms.to.go.on.the.offensive.to.boost.volume.and.market.share.

The.situation.becomes.more.critical.when.customers.have.low.costs.in.switching.brands,.hence.there.is.little.brand.loyalty.protecting.the.organisation’s.market.share.

This.climate.then.creates.the.environment.where.one.or.more.firms.initiate.moves.to.bolster.their.standing.at.the.expense.of.rivals..A.successful.strategic.move.in.this.type.of.industry.carries.a.big.pay-off..Generally,.it.costs.more.to.get.out.of.a.business.than.to.stay.in,.so.the.pay-off.comes.in.terms.of.maintaining.or.improving.standing.in.the.industry.–.and.profitability.

Firms.have.diverse.strategies,.corporate.priorities,.resources,.and.countries.of.origin.and.this.will.impact.on.their.ability.and.will.to.react.to.competitive.pressures.in.the.industry.and.to.initiate.new.strategic.moves.

It.is.a.principle.of.competitive.markets.that.competitive.jockeying.among.rival.firms.is.dynamic.and.ever.changing..This.is.evidenced.by.industry.members.initiating.new.offensive.and.defensive.moves.by.changing.from.one.mix.of.competitive.weapons.to.another..Think.of.the.intense.rivalry.between.real.estate.agents,.banks,.motor.vehicle.companies,.supermarket.chains.and.television.channels.

The.key.factors.determining.rivalry.among.sellers.are:

•. the.number.of.competitors.and.their.relative.size.and.capability

•. rivalry.stronger.when.demand.is.growing.slowly

•. price.cuts.to.boost.volume.intensifies.rivalry

•. stronger.when.lower.customer.switching.costs

•. stronger.when.one.or.more.competitor.moves.to.boost.position.in.market

•. rivalry.increases.with.the.size.of.the.pay-out.for.successful.strategic.moves

•. exit.barriers.increase.rivalry

•. the.more.diverse.the.competitors,.the.more.rivalry.becomes.more.volatile.and.unpredictable

•. rivalry.increases.when.strong.companies.outside.the.industry.acquire.weak.firms.in.the.industry.

Figure.3.4.(page.63).is.a.useful.summary.of.these.factors.

a Activity 3.2

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

Competitive force of potential entry

The.seriousness.of.threat.of.the.competitive.force.of.potential.entry.depends.on.the.barriers.to.entry.and.the.reaction.of.existing.firms.to.entry..Threats.can.come.from.new.entrants.altogether.or.from.existing.firms.in.the.industry.seeking.to.extend.their.presence.in.the.market..These.threats.are.illustrated.in.Figure.3.5.on.page.67.

Barriers.to.entry.exist.when.newcomers.confront.obstacles.to.their.ability.to.enter.the.industry..Typically,.economic.factors.put.the.potential.entrant.at.a.disadvantage.relative.to.incumbent.firms.

The.common.barriers.to.entry.are.described.in.turn.on.pages.68–69.

The.competitive.force.of.new.entrants.will.be.stronger.when.entry.barriers.are.low,.incumbent.firms.are.not.inclined.to.fight.vigorously.to.prevent.new.entrants.from.gaining.a.market.foothold,.and.a.newcomer.can.expect.to.earn.attractive.profits.

a Activity 3.3

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

The competitive force of substitute products

The.competitive.force.of.substitute.products.matters.when.customers.are.attracted.to.the.products.of.firms.in.other.industries.

Substitute.products.are.a.strong.force.when.the.sales.of.substitutes.are.growing.rapidly.and/or.the.producers.of.substitutes.are.planning.to.add.new.capacity..Typically,.we.will.find.that.the.profits.of.the.producers.of.substitutes.are.up,.adding.incentive.for.them.to.compete.more.aggressively.

Competitive.pressures.from.substitute.products.are.strong.when:

•. prices.of.substitutes.are.attractive.and.they.are.readily.available

•. buyers’.switching.costs.are.low

•. buyers.believe.substitutes.have.equal.or.better.features.

a Activity 3.4

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

Competitive force of suppliers

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

As.a.general.principle.of.competitive.markets,.suppliers.are.a.stronger.force.the.more.they.can.exercise.power.over:.prices.charged,.quality/performance.of.items.supplied.and.the.amounts.and.delivery.times..Figure.3.7.(page.74).is.helpful.in.explaining.the.possible.threats.created.by.suppliers.

In.summary,.the.key.factors.determining.the.competitive.force.of.powerful.suppliers.are:

•. few.suppliers

•. unique.product

•. high.switching.costs

•. threat.of.forward.integration

•. supplier.has.cost.or.quality.advantage

•. unimportant.industry.for.supplier.

a Activity 3.5

What is the power of suppliers in the video game/console industry? Which suppliers have power? And which don’t?

Competitive force of buyers

Buyers.are.a.strong.competitive.force.when.they.are.large.and.purchase.a.sizeable.percentage.of.the.industry’s.product..Such.buyers.typically.buy.in.volume.quantities..They.may.also.be.able.to.integrate.backward,.cutting.out.the.supplier..This.situation.can.apply.when.the.industry’s.product.is.standardised,.hence.the.supplier’s.output.cannot.be.differentiated.from.other.producers.in.the.industry.

Buyers.also.have.power.when.their.costs.in.switching.to.substitutes.or.other.brands.are.low,.hence.they.can.purchase.from.several.sellers..The.situation.may.also.be.heightened.when.the.product.purchased.does.not.save.the.buyer.money.and.the.buyer.may.be.looking.for.cheaper.alternative.suppliers.

When.buyers.are.a.stronger.competitive.force.they.have.greater.leverage.over:

•. price

•. quality

•. service

•. other.terms.and.conditions.of.sale.

Figure.3.8.(page.77).sets.out.the.varying.influence.of.buyers.

In.summary,.the.key.factors.determining.the.competitive.force.of.powerful.buyers.are:

•. large.volume.purchasers

•. standard.products.and.multiple.suppliers

•. low-profit.industry.for.buyer

•. threat.of.backward.integration

•. low.switching.costs

•. few.buyers

•. buyers.are.well.informed.

Strategic implications of the five competitive forces

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

The.competitive.environment.is.ideal.when:

•. rivalry.is.moderate

•. entry.barriers.are.high

•. good.substitutes.do.not.exist

•. suppliers.and.customers.are.in.a.weak.bargaining.position.

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

•. rivalry.is.strong

•. entry.barriers.are.low

•. competition.from.substitutes.is.strong

•. suppliers.and.customers.have.considerable.bargaining.power.

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

Handling competitive forces

The.organisation’s.response.to.the.competitive.forces.is.to.craft.a.strategy.that.insulates.the.firm.from.the.five.forces.or.favourably.influences.the.forces.in.the.firm’s.favour..The.result.is.that.the.strategy.strongly.positions.the.company.in.its.industry.

In.summary,.the.objective.is.to.craft.a.strategy.that.will:

•. insulate.the.firm.from.competitive.forces

•. influence.competitive.pressures.in.ways.that.favour.the.company

•. build.a.sustainable.competitive.advantage.

a Activity 3.6

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

r Reading 3.1

Turn to Reading 3.1

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

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

r Textbook

Read pages 79–86.

Driving forces

Industries.change.because.forces.are.driving.industry.participants.to.alter.their.actions..The.driving.forces.are.the.major.underlying.causes.of.changing.industry.and.competitive.conditions..These.driving.forces.are.discussed.in.detail.on.pages.78–86.and.summarised.in.Table.3.2.on.page.80..Possibly.the.most.interesting.ones.are.the.first.two.and.last.one..There.is.a.wealth.of.information.in.these.few.pages.about.major.trends.affecting.industry.competitiveness.

In.analysing.driving.forces:

1.. identify.those.forces.likely.to.exert.greatest.influence.over.next.1–3.years..Usually.no.more.than.3–4.factors.qualify.

2.. assess.the.impact.of.the.3.or.4.factors..Ask.what.difference.will.the.forces.make.(favourable?,.unfavourable?).

A.driving-force.analysis.enables.the.firm.to.separate.the.major.causes.of.industry.change.from.the.minor.ones..There.are.usually.no.more.than.three.or.four.factors.that.qualify.as.driving.forces..Managers.can.use.environmental.scanning.to.help.identify.potential.forces.that.can.influence.their.industries..This.involves.monitoring.and.interpreting.social,.political,.economic,.ecological,.and.technological.events.to.spot.budding.trends.that.could.eventually.impact.on.the.industry.

Remember: manage elephants not rabbits..Usually.no.more.than.three.or.four.qualify.as.driving.forces.

a Activity 3.7

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

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

r Textbook

Read pages 86–92.

Strategic group mapping

One.technique.for.revealing.the.different.competitive.positions.of.industry.rivals.is.strategic.group.mapping..This.was.first.introduced.in.Topic.1.

A.strategic.group.consists.of.those.rivals.with.similar.competitive.approaches.in.an.industry.

Firms.in.the.same.strategic.group.have.two.or.more.competitive.characteristics.in.common..They.may.sell.in.the.same.price/quality.range.or.cover.the.same.geographic.areas..They.also.may.be.vertically.integrated.to.the.same.degree.or.have.a.comparable.product-line.breadth..Typically.they.emphasise.the.same.types.of.distribution.channels,.hence.offer.buyers.similar.services..In.many.cases,.they.also.use.identical.technological.approaches.

In.summary,.strategic.groups.may:

•. have.a.comparable.product.line.breadth

•. use.the.same.kinds.of.distribution.channels

•. be.vertically.integrated.to.much.the.same.extent

•. offer.buyers.similar.services.and.technical.assistance,.and/or

•. sell.in.the.same.price/quality.range.

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

Some.cautions.about.drawing.such.maps.are.given.on.page.87.

Interpreting strategic group maps

The.driving.forces.and.competitive.pressures.often.favour.some.strategic.groups.and.hurt.others..Also,.the.profit.potential.of.different.strategic.groups.varies.due.to.strengths.and.weaknesses.in.each.group’s.market.position..In.addition,.the.closer.strategic.groups.are.on.the.map,.the.stronger.the.competitive.rivalry.among.member.firms.

Learning.from.a.strategic.group.analysis.involves.answering.the.following.questions:

•. Are.specific.groups.impacted.on.more.or.less.favourably.by.competitive.pressures.and.driving.forces?

•. Is.the.profit.potential.different.for.the.various.strategic.groups?.Implications?

•. What.mobility.barriers.impede.movement.across.groups?

•. What.competitive.moves.can.we.predict.across.groups?.Who.are.the.likely.winners.and.losers.if.these.moves.occur?

Some.strategic.groups.are.usually.more.favourably.positioned.than.others.because.driving.forces.and.competitive.pressures.do.not.affect.each.group.evenly.and.because.profit.prospects.vary.among.groups.based.on.the.relative.attractiveness.of.their.market.positions.

In.summary:

•. Strategic.groups.consist.of.rival.firms.that.have.similar.competitive.approaches.and.positions.may.be.similar.along.one.or.more.dimensions.

•. A.strategic.group.map.displays.different.competitive.positions.that.rival.firms.occupy.

•. Firms.in.the.same.strategic.group.have.one.or.more.competitive.characteristics.in.common.

a Activity 3.8

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

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

r Textbook

Read pages 89–92.

A.firm’s.own.best.strategic.moves.are.affected.by.the.current.strategies.of.competitors.and.the.actions.competitors.are.likely.to.take.next..The.process.of.profiling.key.rivals.involves.studying.the.current.position.of.those.rivals.in.the.industry..This.involves.summarising.their.strategic.objectives.and.their.basic.competitive.approaches.

Successful.strategists.take.great.pains.in.scouting.competitors,.understanding.their.strategies.and.watching.their.actions..This.involves.evaluating.their.vulnerability.to.driving.forces.and.competitive.pressures.and.sizing.up.their.resource.strengths.and.weaknesses,.and.their.capabilities..Their.aim.is.to.try.to.anticipate.their.rivals’.next.moves.

Predicting.rivals’.next.moves.involves:

•. analysing.their.current.competitive.positions

•. examining.public.pronouncements.about.what.it.will.take.to.be.successful.in.the.industry

•. gathering.information.from.the.grapevine.about.current.activities.and.potential.changes

•. studying.past.actions.and.leadership

•. determining.who.has.flexibility.to.make.major.strategic.changes.and.who.is.locked.into.pursuing.the.same.basic.strategy.

a Activity 3.9

What strategic moves do you think are likely in Nintendo’s industry by its rivals and why will these moves be made?

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

r Textbook

Read pages 92–94.

Key success factors

A.sound.strategy.incorporates.industry.key.success.factors.(KSFs)..KSFs.are.the.competitive.elements.that.most.affect.every.industry.member’s.ability.to.prosper.in.the.marketplace..Generally.they.describe.specific.strategy.elements,.product.attributes,.resources,.competencies.or.competitive.capabilities..Key.success.factors.will.appear.time.and.again.in.case.studies.discussed.in.this.unit..The.major.types.KSFs.are.discussed.and.compared.in.Table.3.3.on.page.93.

The.text.lists.the.three.questions.that.help.identify.an.industry’s.KSFs.on.page.94..In.reality,.KSFs.spell.the.difference.between.profit.and.loss.AND.competitive.success.or.failure.

KSFs.consist.of.the.3–5.major.determinants.of.financial.and.competitive.success.in.an.industry.

Examples of KSFs

Beer.industry:

•. Utilisation.of.brewing.capacity.–.to.keep.manufacturing.costs.low.

•. Strong.network.of.wholesale.distributors.–.to.gain.access.to.retail.outlets.

•. Clever.advertising.–.to.induce.beer.drinkers.to.buy.a.particular.brand.

Clothing.manufacturing.industry:

•. Fashion.design.–.to.create.buyer.appeal.

•. Low-cost.manufacturing.efficiency.–.to.keep.selling.prices.competitive.

Tin.and.aluminium.can.industry:

•. Locating.plants.close.to.end-use.customers.–.to.keep.costs.of.shipping.empty.cans.low.

•. Ability.to.market.plant.output.within.economical.shipping.distances.

A.sound.strategy.incorporates.efforts.to.be.competent.on.all.industry.key.success.factors.and.to.excel.on.at.least.one.factor!

Spend.some.time.considering.its.application.within.your.own.organisation.

a Activity 3.10

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

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

r Textbook

Read pages 94–95.

Industry assessment

The.aim.of.industry.assessment.is.to.identify.the.factors.that.make.the.industry.attractive.or.unattractive..It.also.aims.to.identify.special.industry.issues/problems.and.the.overall.profit.outlook.

The.important.factors.in.assessing.the.industry.are.summarised.on.pages.94–95.

The.aim.of.this.exercise.is.to.develop.conclusions.about.whether.the.industry.and.competitive.environment.are.attractive.or.unattractive,.both.near-.and.long-term,.for.earning.good.profits.

There.are.two.things.to.keep.in.mind.in.conducting.an.industry.and.competitive.situation.analysis:

1.. Evaluating.industry.and.competitive.conditions.cannot.be.reduced.to.a.formula-like.exercise.–.thoughtful.analysis.is.essential.

2.. Sweeping.industry.and.competitive.analyses.need.to.done.every.one.to.three.years.

Again.you.can.refresh.and.reinforce.your.understanding.of.the.elements.of.this.long.chapter.by.reviewing.the.key.points.on.pages.95–98.

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

Topic 4 Analysing a company’s

resources and competitive position

IntroductionIn.the.previous.topic.we.were.concerned.with.looking.outside.the.organisation.in.order.to.assess.what.forces.it.would.have.to.face.in.determining.a.strategy..This.approach.relied.heavily.on.the.work.of.Michael.Porter.and.his.competitive.forces.model..In.this.topic.we.take.a.completely.different.perspective.and.look.within.the.organisation.in.order.to.determine.how.a.strategy.is.influenced.by.the.resources.and.capabilities.that.organisation.has..This.will.require.us.to.consider.the.increasingly.popular.strategy.known.as.the.resources-based view of.the.firm.which.is.the.opposite.approach.to.that.taken.by.Porter.

This.topic.also.covers.a.lot.of.territory.and.sometimes.the.components.seem.somewhat.disjointed..We.will.first.discuss.the.resources-based.view.of.strategic.management..The.text.does.not.cover.this.approach.as.fully.as.other.sources.so.some.additional.references.will.be.used..From.the.resources-based.view.we.move.to.the.concept.of.the.SWOT.analysis,.one.of.the.best.known.and.used.strategic.management.tools..We.then.digress.to.some.extent.to.look.at.pricing.and.cost.considerations.as.competitive.tools.which.leads.into.the.field.of.company.value.chain.analysis..The.use.of.benchmarking.as.a.tool.is.then.examined.and.strategies.are.suggested.for.remedying.cost.disadvantages.coming.out.of.this.analysis..The.topic.concludes.with.techniques.available.for.determining.a.company’s.overall.competitive.strength.and.the.‘burning’.issues.coming.out.of.such.analysis.that.merit.management.attention.

We.will.continue.to.use.our.two.case.studies.where.appropriate.in.this.topic.

Objectives

•. analyse.the.features.of.the.resource-based.view.of.strategy

•. compare.the.resource-based.view.with.the.Porter.view

•. identify.the.components.of.a.single.business.company’s.strategy

•. explain.the.features.of.SWOT.analysis

•. examine.the.techniques.of.value.chain.analysis.and.its.usefulness

•. evaluate.the.nature.of.activity-based.costing

•. explain.how.benchmarking.can.be.used.to.assist.in.determining.a.company’s.competitiveness

•. outline.the.steps.in.a.competitive.strength.assessment

•. apply.the.tools.in.this.topic.to.selected.case.studies.

Materials Required

Readings4.1. Henry,.A.2007,.Understanding Strategic Management,.Oxford.University.Press,.

London,.Chapter.5,.http://www.oup.com/uk/orc/bin/9780199288304/henry_ch05.pdf..(online only)

4.2. Scholey,.C.2005,.‘Strategy.Maps:.a.step-by-step.guide.to.measuring,.managing.and.communicating.the.plan’,.Journal of Business Strategy,.vol..26,.no..3,.pp..12–19.

The resource-based view of the firmThis.section.of.the.topic.is.somewhat.out.of.sequence.in.the.normal.flow.of.the.textbook.which.we.are.doing.our.best.to.follow..Before.working.systematically.through.the.chapter.in.the.text.we.go.off.at.a.tangent.to.discuss.this.increasingly.popular.view.of.strategy.which.is.covered.in.this.chapter.but.not.in.as.convincing.a.manner.as.in.other.places.or.textbooks.

To.introduce.you.to.the.resource-based.view.of.the.firm.you.are.encouraged.at.this.stage.to.go.to.two.entirely.different.websites..The.first.website.is.an.extract.from.Wikipedia.concerning.the.resource-based.view.and.covers.the.concepts,.terminology,.history.and.criticisms.of.the.view.

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

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

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

The.argument.put.forward.in.the.Resource-Based.View.of.the.Firm.(RBV).and.by.competence.authors.is.that.success.depends.on.identifying.and.leveraging.the.core.resources.and.capabilities.of.the.firm.regardless.of.the.external.environment.which.was.the.focus.of.the.Porter.studies..The.RBV.focuses.almost.exclusively.on.the.internal.environment,.with.passing.consideration.of.the.availability.of.the.resources.and.opportunities.in.the.external.environment.

Sustainable.competitive.advantage.(SCA).stems.from.the.development.of.unique.and.valuable.bundles.of.resources.and.capabilities.that.set.a.firm.apart.from.competitors..Why.is.Canon.so.successful,.for.example,.with.a.large.range.of.quite.different.products.in.varied.markets?.The.answer.is.that.they.have.a.very.well-developed.competence.in.optical.imaging.which.allows.them.to.compete.in.photocopiers,.printers,.cameras.and.so.on.

r Textbook

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

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

37MNG00716 Topic 4 – Analysing a company’s resources and competitive position

The.text.goes.so.far.as.to.distinguish.between.a.competence,.core.competence.and.distinctive.competence.(bottom.of.page.106.to.the.top.of.page.109)..The.relevance.of.this.distinction.is.illustrated.on.page.109.

Capabilities.are.the.ways.organisations.bring.together.and.use.the.resources..The.capabilities.are.more.likely.to.be.intangible.systems.such.as.management.ability,.culture,.informal.systems.of.integration.and.so.on..The.capabilities.tend.to.be.far.more.complex.than.resources.and,.thus,.are.the.key.to.an.advantage.that.cannot.be.imitated.by.other.firms..A.manager.can.more.easily.hire.new.recruits.to.raise.the.skill.resource.than.weave.the.new.employees.together.into.a.high-performing.team.

Competences.are.those.bundles.of.resources,.linked.by.capabilities,.that.have.the.potential.to.give.the.firm.a.sustainable.competitive.advantage..The.main.types.of.resources.are.outlined.on.page.106.and.on.page.107..To.this.list.we.can.add.financial.resources.such.as.cashflow.and.new.equity.availability.(see.key.financial.ratios.on.Table.4.1.pages.104–105).

With.unique.resource.and.capability.bundles.existing.as.relatively.permanent.characteristics.of.firms,.SCA.can.be.achieved.by.leveraging.off.these.unique.aspects.of.the.firm..Very.often,.this.takes.the.form.of.developing.‘economies.of.scope’..Honda,.for.example,.produces.lawn.mowers,.cars,.motorcycles,.generators.and.so.on..The.economy.of.scope.is.in.the.ability.of.Honda.to.use.its.core.competence.to.produce.a.broad.range.(scope).of.products.for.very.different.markets.

From.an.industry,.market.or.product.perspective,.firms.such.as.Honda.appear.to.be.involved.in.unrelated.diversification..But,.from.the.RBV.perspective,.Honda.is.very.focused.on.the.development.and.use.of.its.core.competence.

The source of competitive advantage

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

Characteristics of resources that underpin SCA

The.first.step.to.developing.a.strategy.based.on.the.resources.and.capabilities.of.a.firm.is.to.identify.which.of.the.firm’s.resources.have.the.potential.to.deliver.SCA..However,.there.are.four.characteristics.that.have.become.widely.accepted.as.critical,.easily.remembered.by.the.acronym.VIRA:

1.. Value.–.a.resource.or.capability.has.value.if.it.contributes.to.an.outcome.that.meets.the.needs.of.stakeholders..In.the.well.used.‘buggy.whip’.example,.the.resources.that.allow.production.of.buggy.whips.have.little.value.because.there.is.little.need.for.the.product..On.the.other.hand,.the.resources.and.capabilities.that.provide.service.in.a.hotel.do.have.value..But.value.is.a.necessary.but.insufficient.condition.for.SCA..Resources.must.also.have.the.following.three.characteristics.

2.. Imitability.–.for.all.the.case.studies.and.texts.that.have.examined.the.innovation.and.coating.resources.and.capabilities.of.3M,.few,.if.any,.other.companies.have.been.able.to.emulate.the.firm..The.intangibility.and.complexity.of.resource.bundles.and.capabilities.often.defy.imitation..Even.the.people.within.a.firm.may.have.trouble.putting.into.words.the.elements.that.make.a.capability.effective..Rather,.it.is.a.tacit.knowledge.that.cannot.be.made.explicit..Thus,.it.is.very.common.to.see.capability-destroying.behaviour.by.new.CEOs.or.owners.who.do.not.understand.the.strengths.or.the.institutional.characteristics.of.the.firm.

3.. Rareness.–.like.any.supply.and.demand.situation,.the.rarity.of.a.resource.can.contribute.to.the.development.of.an.SCA..Whether.it.is.the.waterfront.location.of.a.resort.or.the.distribution.capability.of.a.major.pharmaceutical.firm,.the.rareness.

of.the.resource.gives.the.firm.a.competitive.advantage..The.catch.is.that.it.must.allow.for.the.production.of.an.output.that.is.needed.by.stakeholders..If.a.firm.has.a.rare.resource.then.the.search.should.be.for.market.opportunities.

4.. Appropriability.–.if.a.resource.can.be.appropriated.(taken.away).from.the.firm.then.any.competitive.advantage.will.not.be.sustainable..The.most.common.way.resources.may.be.taken.away.from.a.firm.is.by.head-hunter.firms.luring.the.best.staff.to.move.to.competitors..A.dramatic.example.of.the.effect.of.appropriability.on.sustainability.of.competitive.advantage.is.the.advertising.firm.Saatchi.and.Saatchi..Once.the.most.famous.and.dominant.advertising.agency.in.the.world,.the.creative.teams,.almost.en.masse,.walked.out.of.the.firm..Saatchi.and.Saatchi.never.fully.recovered.from.this.disaster.

Implications for strategy development

The.analytical.process.of.strategy.development,.using.the.RBV.perspective,.is.different.from.the.SWOT.or.Positioning.Schools..Typically.the.following.steps.are.taken:

1.. The.group.or.individual.developing.a.firm’s.strategy.must.first.identify.what.the.firm.is.good.at.(or.could.become.good.at).in.terms.of.resources.and.capabilities..This.is.not.the.same.as.industry,.product,.service.or.market.analysis.

. Consider.a.rail.company..Rail.companies.often.determine.that.they.are.in.the.transport.industry..Looking.at.customers.in.this.industry,.they.can.try.to.develop.‘integrated.transport.solutions’.demanded.by.the.customers..As.a.result,.they.can.end.up.running.trucks,.buses,.terminals,.warehouses,.port.facilities.and.so.on..Generally,.they.don’t.do.it.very.well.

. But.a.resource.perspective.may.deliver.a.very.different.solution..If.a.rail.company.concluded.its.core.competence.was.heavy.engineering.and.construction.at.physically.remote.sites,.then.integrated.transport.solutions.would.not.be.the.obvious.strategy..The.rail.company.may.move.into.a.consulting.business.built.around.this.core.competence,.much.as.Queensland.Rail.has.done.in.Asia.

2.. It.is.after.the.core.competencies.are.identified.that.strategists.turn.their.attention.to.the.industries,.products,.services.and.markets.where.they.will.be.able.to.compete.effectively..One.of.the.largest.corporate.disasters.in.Australia.was.the.focus.on.product.synergies.rather.than.competences.by.Burns.Philp.as.it.moved.into.spices.

. Burns.Philp.dominated.world.yeast.production..Yeast.was.produced.in.small.plants.scattered.around.the.world,.and.distributed.in.small.packages..Burns.Philp.was.very.good.at.managing.these.remote.plants.

. However,.the.decision.to.move.into.the.spice.business.appears.to.have.been.driven.by.superficial.similarities.between.spice.packaging.and.an.argument.that.spices.fitted.with.a.food.ingredients.focus..Note.that.this.was.a.product.synergy.not.a.competence.synergy.

. In.fact,.spices.did.not.fit.with.the.core.competence.of.remote.plant.operation..Spices.were.not.produced.in.small.remote.locations.owned.and.operated.by.Burns.Philp..Unable.to.bring.their.core.competence.into.play,.Burns.Philp.was.at.the.mercy.of.the.US.spice.giant.McCormicks..McCormicks.had.competencies.in.the.distribution.of.ingredients,.control.of.supermarket.slots.and.huge.financial.reserves..The.collapse.of.Burns.Philp.was.inevitable.

3.. A.strategy.built.on.competencies.requires.the.protection.and.development.of.those.competences..It.is.important.to.remember.at.this.point.that.most.of.these.competencies.derive.from.intangible.resources.and.capabilities..In.fact,.except.for.patents.and.some.real.estate.locations,.most.tangible.competencies.can.either.be.imitated.or.traded,.and.thus.cannot.provide.SCA.

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

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

Summary – What to make of RBV?

There.is.no.doubt.that.many.of.the.shining.successes.in.business.can.be.understood.in.terms.of.firms.developing.strategies.based.on.competencies.rather.than.industry.position,.service,.product.or.market.demands.

But.it.would.also.be.foolish.to.ignore.the.effect.of.positioning.or.the.importance.of.fit.with.the.opportunities.and.threats.of.the.environment..It.would.also.be.foolish.to.overlook.a.firm’s.weaknesses.while.focusing.on.the.strengths.derived.from.competencies.

The.RBV.is.not.without.criticism..The.most.important.criticism.is.that.it.is.tautological..‘How.do.I.know.what.the.right.mix.of.resources.is?’.The.answer.is.that.it.is.the.mix.that.gives.success..Success.is.both.the.outcome.of.resources.and.the.way.the.value.of.the.resources.is.judged..It.is.not.possible.to.identify.the.correct.mix.before.the.success.or.failure.occurs.

Nevertheless,.the.RBV.approach.is.rapidly.gaining.credibility.and.a.firm.developing.its.strategies.would.ignore.its.competencies.at.its.peril.

r Reading 4.1 (online only)

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

a Activity 4.1

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

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

Question 1: How well is the present strategy working?

r Textbook

Read the section (Question 1) from pages 102–103.

Effectiveness of current strategy

The.elements.involved.in.evaluating.an.organisation’s.current.strategy.include.considering.whether.the.firm’s.market.share.is.rising.or.falling;.whether.profit.margins.are.increasing.or.decreasing;.what.are.the.trends.in.profit.and.return.on.investment.trends;.and.what.are.the.trends.in.sales?

There.are.two.steps.involved..First.determine.the.current.strategy.of.the.company.and.then.examine.the.key.indicators.of.strategic.and.financial.performance.

Identify competitive approach

In.identifying.the.current.competitive.approach,.there.are.a.number.of.issues.that.should.be.considered..These.are.outlined.on.pages.106–107..Other.indicators.of.how.well.a.strategy.is.working.are.outlined.on.pages.107–111.

It.is.also.useful.to.identify.the.functional.strategies.that.the.company.has.employed..This.can.be.seen.by.examining.recent.strategic.moves,.such.as:.the.investment.in.a.new.distribution.centre;.notable.changes.in.marketing.strategies;.or,.the.development.of.a.new.customer.response.centre.

These.components.of.the.current.strategy.are.brought.together.in.an.effective.manner.in.Figure.4.1.(page.102).

In.summary,.the.key.indicators.of.how.well.the.strategy.is.working.are:

•. trend.in.market.share

•. trend.in.profit.margins

•. trend.in.net.profits,.return.on.investment,.and.EVA

•. trend.in.sales.growth

•. credit.ranking

•. trend.in.stock.price.and.stockholder.value

•. image.and.reputation.with.customers

•. leadership.role(s).–.technology,.quality,.etc.

•. competitive.advantages.or.disadvantages.

a Activity 4.2

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

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

SWOT analysis

r Textbook

Read from halfway down page 106 to halfway down page 116.

This.well.known.and.well.used.strategic.management.tool.is.discussed.next.in.the.text.with.some.very.useful.figures.included..We.have.been.considering.resource.strengths.at.some.length.in.the.topic.to.date..But.a.SWOT.analysis.requires.that.we.also.examine.a.firm’s

•. resource.weaknesses.and.competitive.deficiencies

•. market.opportunities

•. external.threats.to.future.profitability.

These.are.reviewed.in.turn.and.brought.together.in.a.wonderful.summary.table.on.page.105..(Whenever.you.are.asked.to.conduct.a.SWOT.analysis.this.table.would.be.a.great.tool.to.use).

The.lesson.and.implications.from.conducting.a.SWOT.are.outlined.on.pages.114–116.while.the.three.steps.in.conducting.such.an.analysis.are.illustrated.in.Figure.4.2.

a Activity 4.3

Conduct a SWOT for Nintendo.

Question 2: Are the company’s prices and costs competitive?

r Textbook

Read pages 116–128.

Assessing.whether.a.firm’s.costs.are.competitive.with.those.of.rivals.is.a.crucial.part.of.company.analysis..There.are.three.key.analytical.tools.that.we.will.consider,.these.are:

•. strategic.cost.analysis

•. value.chain.analysis

•. benchmarking.

Strategic cost analysis

Strategic.cost.analysis.focuses.on.a.firm’s.costs.relative.to.its.rivals.and.compares.a.firm’s.costs.activity.by.activity.against.costs.of.key.rivals..The.activities.may.be.from.raw.materials.purchase.to.the.price.paid.by.the.ultimate.customer..The.aim.is.to.pinpoint.which.internal.activities.are.a.source.of.cost.advantage.or.disadvantage..Strategic.cost.analysis.focuses.on.a.firm’s.cost.position.relative.to.its.rivals.and.looks.to.identify.the.sources.of.cost.differences.

Companies.do.not.have.the.same.costs.because.of.differences.in:

•. prices.paid.for.raw.materials,.component.parts,.energy,.and.other.supplier.resources

•. basic.technology.and.age.of.plant.and.equipment

•. economies.of.scale.and.experience.curve.effects

•. wage.rates.and.productivity.levels

•. marketing,.promotion,.and.administration.costs

•. inbound.and.outbound.shipping.costs

•. forward.channel.distribution.costs.

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

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

Determining.whether.a.company’s.costs.are.in.line.with.those.of.rivals.requires.measuring.how.a.company’s.costs.compare.with.those.of.rivals.activity-by-activity.–.from.one.end.of.the.value.chain.to.the.other.

This.requires.having.accounting.data.that.measures.the.cost.of.each.value.chain.activity..Activity-based.accounting.systems.provide.a.way.of.measuring.costs.for.each.relevant.value.chain.activity.

The value chain

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

•. primary.activities

•. support.activities.

The.aim.of.the.value.chain.system.is.to.assess.a.company’s.cost.competitiveness.and.involves.comparing.costs.all.along.the.industry’s.value.chain..Suppliers’.value.chains.are.relevant.because.costs,.quality,.and.performance.of.inputs.provided.by.suppliers.influence.a.firm’s.own.costs.and.product.performance..Forward.channel.allies’.value.chains.are.also.relevant.because.forward.channel.allies’.costs.and.margins.are.part.of.price.paid.by.the.ultimate.end-user..As.a.rule,.all.activities.performed.should.affect.end-user.satisfaction.

A.representative.value.chain.distinguishing.between.primary.and.secondary.activities.is.illustrated.in.Figure.4.3.(page.118).

Examples of key value chain activities

Paper.industry:

•. timber.farming

•. logging

•. pulp.mills

•. papermaking

•. printing.and.publishing.

Manufacturing:

•. parts.and.components.manufacture

•. assembly

•. wholesale.distribution

•. retail.sales.

Food.industry:

•. processing.of.basic.ingredients

•. syrup.manufacture

•. bottling.and.can.filling

•. wholesale.distribution

•. retailing.

Software.industry:

•. programming

•. disk.loading

•. marketing

•. distribution.

An.important.aspect.of.value.chain.analysis.is.the.specification.of.broad.performance.indicators.at.the.overall.organisational.level,.such.as.the.delivery.of.high.levels.of.customer.satisfaction,.and.the.articulation.of.measures.at.the.operational.level.to.indicate.how.tasks.contribute.to.the.achievement.of.these.broad.goals.

This.cascading.process.provides.the.potential.for.individuals.to.direct.their.efforts.in.ways.consistent.with.the.primary.goal.of.delivering.customer.satisfaction.in.cost-effective.ways.

It.also.enables.management.to.set.only.a.few.well-chosen.goals.at.the.core.of.the.organisation,.and.let.those.close.to.the.work.situation.determine.the.specific.details.that.will.enable.their.operations.to.contribute.to.the.achievement.of.the.primary.organisational.goals.

The.value.chain.helps.identify.the.critical.things.that.add.value..Having.identified.the.core.functions.and.activities.that.create.value,.the.organisation.can.send.elements.to.a.team.for.further.study..These.teams.can.study.the.current.situation,.identify.its.cost.and.options.to.improve.the.activity.i.e..What.have.we.got?.What.needs.to.be.done.to.get.better?

The.value.chain.helps.decide.what.the.core.competencies.really.are.and.enables.decisions.about.outsourcing.and.downsizing.

It.is.necessary.to.create.two.value.chains.–.one.for.the.present.and.one.for.the.ideal..This.enables.gap.analysis.

It.is.also.possible.to.encapsulate.the.organisation’s.core.competence.in.one.sentence.….a.capability.statement.

Without.ignoring.the.need.to.be.efficient.we.must.take.care.that.concerns.over.efficiency.do.not.override.the.need.for.effectiveness.

Criticism of the value chain•. It.is.too.generic.and.is.sometimes.difficult.to.apply.to.organisations.

•. It.is.difficult.to.apply.to.service.organisations.

Usefulness of the value chain

As.a.concept.the.value.chain.is.useful.because:

•. it.focuses.on.the.needs.of.the.end.user.of.the.product.or.service.(the.value.to.the.customer.as.determined.by.price,.quality.and.accessibility)

•. it.shows.how.all.organisational.activities.and.resources.are.linked.in.the.creation.of.this.‘value’

•. it.shows.that.organisational.activities.and.resources.can.be.combined.in.different.ways.in.order.to.create.value.more.efficiently.and.effectively

•. it.demonstrates.how.‘value’.can.be.created.using.resources.which.the.organisation.does.not.own.but.over.which.it.has.some.influence.

Benchmarking

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

•. purchase.of.materials

•. payment.of.suppliers

•. management.of.inventories

•. training.of.employees

•. processing.of.payrolls

•. getting.new.products.to.market

•. performance.of.quality.control

•. filling.and.shipping.of.customer.orders.

The.objectives.of.benchmarking.are.to:.1).understand.best.practices,.2).learn.how.to.lower.costs.and.3).take.action.to.improve.cost.competitiveness.

Benchmarking.can.be.seen.as.the.manager’s.best.tool.for.determining.how.efficient.the.firm.is.in.performing.key.functions.and.activities,.the.firm’s.cost.position.and.if.processes.need.improvement..This.often.requires.in-depth.analysis.of.competing.and.non-competing.firms’.practices.and.infrastructure.

The.results.of.a.benchmarking.exercise.enable.the.company.to.determine.whether.a.company.is.performing.particular.value.chain.activities.efficiently..It.helps.develop.understanding.of.the.best.practices.in.performing.an.activity..Finally,.it.enables.an.assessment.of.whether.costs.are.in.line.with.competitors.

Benchmarking.also.helps.the.company.learn.how.lower.costs.are.achieved.and.enables.it.to.take.action.to.improve.cost.competitiveness.

Ethical standards in benchmarking: Dos and don’ts•. Avoid.talk.about.pricing.or.competitively.sensitive.costs.

•. Don’t.ask.rivals.for.sensitive.data.

•. Don’t.share.proprietary.data.without.clearance.

•. Have.an.impartial.third.party.assemble.and.present.competitive.data.with.no.names.attached.

•. Don’t.disparage.a.rival’s.business.to.outsiders.based.on.data.obtained.

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

Cost competitiveness

A.company’s.cost.competitiveness.depends.on.how.well.it.manages.its.value.chain.relative.to.competitors..There.are.three.areas.that.contribute.to.cost.differences:

1.. suppliers’.activities

2.. the.company’s.own.internal.activities

3.. forward.channel.activities.

Some.suggested.remedies.for.each.of.these.areas.are.described.from.the.bottom.of.page.124.to.halfway.down.page.126.

A.company.can.create.competitive.advantage.by.managing.its.value.chain.so.as.to.integrate.the.knowledge.and.skills.of.employees.in.competitively.valuable.ways.and.leverage.economies.of.learning/experience.

It.can.also.coordinate.related.activities.in.ways.that.build.valuable.capabilities.and.build.dominating.expertise.in.a.value.chain.activity.that.are.critical.to.customer.satisfaction.or.market.success..Some.suggestions.as.to.how.an.organisation.can.use.value.chain.analysis.to.outperform.competitors.more.proficiently.or.more.cheaply.is.outlined.in.Figure.4.5.(page.127).

a Activity 4.4

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

Question 3: How strong is the company’s competitive position?

r Textbook

Assessing competitive position

At.this.point.there.is.the.need.to.ask.whether.the.firm’s.position.can.be.expected.to.improve.or.deteriorate.if.the.present.strategy.is.continued..This.requires.consideration.of.how.the.firm.ranks.relative.to.key.rivals.on.each.industry.KSF.and.each.relevant.measure.of.competitive.strength.

We.are.concerned.with.whether.the.firm.has.a.sustainable.competitive.advantage.or.disadvantage.and.the.ability.of.the.firm.to.defend.its.position.in.the.light.of.industry.driving.forces..The.main.industry.driving.forces.are.the.competitive.pressures.faced.and.the.anticipated.moves.of.rivals.

An.approach.to.assessing.a.company’s.competitive.strength.versus.key.rivals.is.outlined.in.a.series.of.five.steps.on.pages.127..An.illustration.of.the.use.of.these.steps.is.given.in.Table.4.5.(page.127).

A.competitive.strength.assessment.reveals.the.strength.of.a.firm’s.competitive.position.and.shows.how.the.firm.stacks.up.against.rivals,.measure-by-measure..It.pinpoints.the.company’s.competitive.strengths.and.competitive.weaknesses.and.indicates.whether.the.firm.is.at.a.competitive.advantage/disadvantage.against.each.rival.

A.competitive.strength.assessment.may.also.identify.possible.offensive.attacks.(pit.company.strengths.against.rivals’.weaknesses),.and.at.the.same.time,.identify.possible.defensive.actions.(a.need.to.correct.competitive.weaknesses)..Hence.interpreting.the.competitive.strength.analysis.is.a.vital.step.once.the.analysis.has.been.undertaken.

Question 4: What strategic issues merit attention?

r Textbook

Strategic issues

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

A.good.strategy.must.address.each.and.every.strategic.issue!

The.following.questions.help.in.identifying.the.strategic.issues:

•. Is.present.strategy.adequate.in.light.of.competitive.pressures.and.driving.forces?

•. Is.the.strategy.well-matched.to.the.industry’s.key.success.factors?

•. Does.the.company.need.new.or.different.resource.strengths.and.competitive.capabilities?

•. Does.the.present.strategy.adequately.protect.against.external.threats.and.resource.deficiencies?

•. Is.the.firm.vulnerable.to.competitive.attack.by.rivals?

•. Where.are.the.strong/weak.spots.in.present.strategy?

The.issues.must.be.then.stated.clearly.and.precisely..A.well-stated.issue.involves.such.phrases.as:

•. ‘What.should.be.done.about.….?’

•. ‘How.to.….?’

•. ‘Whether.to.….?’

•. ‘Should.we.….?’

Issues.need.to.be.precise,.specific,.and.‘cut.straight.to.the.quick’.

In.summary,.the.strategic.issues.raise.questions.about.what.actions.need.to.be.considered.and.what.to.think.about.doing.

a Activity 4.5

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

Strategic mapping

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

r Reading 4.2

Turn to Reading 4.2 and read pages 12–19.

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

Having.introduced.some.tools.of.analysis.in.this.topic.and.Topic.3.we.can.now.consider.the.major.generic.strategies.available.to.organisations..We.do.this.in.Topic.5.

Topic 5 The five generic competitive

strategies

Introduction

New ways to LA mean cheaper fares to United States

January 31 2009, Sydney Morning HeraldThe debut of two more carriers on the route from Australia to Los Angeles means cheaper fares, writes Clive Dorman.

After.waiting.out.a.decade-long.pricing.winter,.spring.has.sprung.for.travellers.heading.to.the.US,.with.fares.almost.halving.as.two.new.competitors.muscle.in.

During.its.last.Christmas.as.the.price.dominator,.Qantas.held.peak.holiday.fares.to.Los.Angeles.as.high.as.$3300.return..Its.only.competitor,.United.Airlines,.has.struggled.to.maintain.its.flights.to.Australia,.reeling.from.the.effects.of.September.11,.2001,.and.trading.while.under.bankruptcy.protection.

Virgin.Blue’s.new.long-haul.carrier,.V.Australia,.starts.services.between.Sydney.and.Los.Angeles.next.month..In.the.lead-up,.it.has.pitched.its.best.fares.as.low.as.$1200.return..They.have.settled.at.$1400-$1600.return.for.travel.in.the.next.few.months,.compared.with.$1800-$2500.last.year.on.Qantas.and.United,.which.is.following.suit.

More.competition.will.arrive.in.July.when.the.world’s.biggest.airline,.Delta.(after.taking.over.Northwest.Airlines),.starts.flying.from.LA.to.Sydney.daily.

Overall.the.number.of.seats.on.the.market.will.increase.by.about.30.per.cent,.which.means,.in.simple.terms,.the.airlines.will.have.to.drop.their.ticket.prices.by.30.per.cent.if.they.hope.to.fill.their.planes.

Qantas,.however,.is.hoping.to.command.a.premium.on.its.fares.to.LA.as.it.replaces.Boeing.747.jumbos.with.the.“sex.appeal”.of.its.new.Airbus.A380.super-jumbos..Qantas.claims.the.A380.gives.passengers.more.space.in.all.classes..Economy.seats.slide.forward.instead.of.falling.back.on.the.seat.row.behind,.offering.increased.recline.and.the.addition.of.a.foot.net..Seat.rows.are.still.spaced.31.inches.(78.7.centimetres).apart,.which.is.an.inch.less.than.the.so-called.seat.pitch.on.V.Australia’s.new.Boeing.777–300s.

All.four.competitors.have.indicated.they.will.try.to.raise.fares.in.the.US.summer,.starting.in.June..Online.fares.for.travel.in.the.middle.of.the.year.start.at.$1800..But.this.should.be.regarded.only.as.an.early.bid;.if.all.those.extra.seats.aren’t.filling,.discounts.will.be.rolled.out.in.the.next.few.months.and.the.price.will.fall.

However,.almost.as.important.is.what.happens.at.the.other.end.when.passengers.disembark.at.Los.Angeles.airport.(LAX),.which.regularly.gets.some.of.the.world’s.worst.reviews.from.consumers.for.its.shabbiness,.overcrowding.and.surliness.from.customs.and.security.staff.

“LAX.is.a.total.disgrace.and.I.live.in.a.so-called.Third.World.country,”.a.foreign.visitor.wrote.recently.in.a.review.at.www.airlinequality.com.–.a.comment.typical.of.many.

Qantas.will.pit.its.Oneworld.alliance.connections.from.LAX.with.American.Airlines.against.United’s.Star.Alliance.and.Delta’s.SkyTeam..V.Australia.will.go.into.battle.with.no.alliance.but.a.series.of.agreements.with.airlines,.some.even.members.of.rival.groupings.

One.of.V.Australia’s.advantages.is.it.is.the.only.service.to.leave.Sydney.for.the.US.at.night.but.this.will.also.be.one.of.its.limitations,.as.it.arrives.at.LAX.at.4.30pm.after.east-coast.connections.have.departed..However,.you.will.be.able.to.catch.the.Virgin.America.red-eye.to.New.York,.for.example,.at.9.15pm.

Developments.subsequent.to.the.publication.of.the.above.article.have.seen.Virgin.and.Delta.enter.into.a.code.share.partnership..However.industry.data.suggests.that.costs.per.passenger.are.20%.lower.on.Qantas’.new.A380.which.gives.Qantas.a.major.cost.advantage,.let.alone.the.marketing.advantage.of.having.the.world’s.biggest.and.newest.aircraft.in.its.fleet.

Recent.financial.performance.of.V.Australia.suggests.it.has.a.long.way.to.go.to.be.profitable.for.VBA..Last.year.it.lost.approximately.$40M.from.it’s.longhaul.operations..Finally,.Virgin.is.competing.with.the.elephant.in.the.room..Qantas.not.only.has.scale,.a.war.chest.of.cash.and.significant.code.share.alliances,.it.also.has.a.government.that.protects.Qantas.from.real.competition.wherever.possible..Singapore.Airlines.for.example.have.been.precluded.from.the.transpacific.route.from.Australia.to.the.USA.for.more.than.15.years..This.is.despite.Singapore.Airlines.offering.reports.indicating.an.increase.in.inbound.tourism.for.Australia.

If.you.are.interested.in.reading.more.about.this.and.seeing.just.how.convenient.government.can.be.in.setting.strategy,.visit.this.URL:.http://sauder.ubc.ca/en/Faculty/Research_Centres/Centre_for_Transportation_Studies/~/media/Files/Faculty%20Research/Publications/Hodgkinson%20-%20Restrictions.ashx.

Despite.the.free.market.rhetoric.and.mentality,.along.with.a.free.trade.agreement.between.Australia.and.Singapore,.there’s.no.doubt.that.Qantas.have.powerful.allies,.and.put.simply,.Virgin.does.not..The.key.message.here.is.that.you.can.never.underestimate.the.strategic.advantage.of.having.a.government.behind.your.firm.

Australians.travelling.to.the.USA.have.long.complained.that.the.existing.few.carriers.had.been.able.to.set.prices.at.high.levels.because.there.were.so.few.competitors.flying.this.route..As.the.article.above.suggests.the.entry.of.two.new.competitors.into.the.market.might.have.the.effect.of.reducing.these.fares..V.Australia.intends.to.use.its.low-cost.pricing.strategies.as.its.means.of.breaking.into.this.lucrative.market..It.is.strategies.such.as.this.(low-cost.pricing).that.will.be.our.focus.in.this.topic.

In.this.unit.we.will.consider.the.ways.in.which.an.organisation.may.compete.in.its.industry..The.discussion.flows.from.the.initial.work.of.Michael.Porter.who.originally.argued.that.there.were.only.two.generic.strategies.for.competition:.low.cost.or.through.differentiating.the.firm’s.product.from.that.of.its.competitors..This.has.been.advanced.over.the.years.and.at.least.five.generic.competitive.strategies.have.been.identified..We.will.consider.each.of.these.strategies.in.this.unit..We.will.conclude.the.unit.by.considering.some.competitive.options.that.firms.might.take.after.considering.their.internal.and.external.environment..The.issue.of.positioning.has.developed.since.the.original.work.of.Porter.in.the.1980s.and.now.it.is.common.to.consider.positioning.as.conscious.decisions.about.the.balance.of.value.offered.to.the.customer,.at.what.price.

We.will.continue.to.use.our.two.cases.to.illustrate.points.being.made.in.the.discussion.

51MNG00716 Topic 5 – The five generic competitive strategies

Objectives

•. outline.and.compare.the.five.main.generic.strategies

•. explain.how.and.when.a.low-cost.strategy.can.be.used.to.achieve.competitive.advantage

•. analyse.the.types.of.differentiation.strategies.and.when.such.a.strategy.is.most.likely.to.be.successful

•. explain.the.nature.of.a.best-cost.strategy.and.its.benefits.and.risks

•. assess.the.types.of.niche.market.strategies.available.and.when.such.strategies.should.be.used.and.avoided

•. illustrate.the.use.of.these.generic.strategies.in.case.studies.

Materials required

Reading5.1. Parnell,.JA.2006,.‘Generic.Strategies.after.two.decades:.a.reconceptualization.of.

competitive.strategy’,.Management Decision,.vol..44,.no..8,.pp..1139–1154.

Strategy and competitive advantageCompetitive.advantage.exists.when.a.firm’s.strategy.gives.it.an.edge.in.defending.itself.against.competitive.forces.and.securing.customers..Such.advantage.occurs.when.a.firm.can.convince.customers.that.the.firm’s.product/service.offers.superior.value,.that.is,.offering.buyers.a.good.product.at.a.lower.price..It.might.also.be.gained.by.using.differentiation.to.provide.a.better.product.buyers.think.is.worth.a.premium.price.

Competitive.strategy.consists.of.business.approaches.to.attracting.customers,.fulfilling.their.expectations.while.withstanding.competitive.pressures.with.the.aim.of.strengthening.market.position..It.includes.offensive.and.defensive.moves.to.counter.actions.of.key.rivals.and.shifting.resources.to.improve.the.firm’s.long-term.market.position..A.key.element.is.being.willing.and.able.to.respond.to.prevailing.market.conditions.

The.objectives.of.competitive.strategy.are.to:

•. build.a.competitive.advantage

•. cultivate.a.clientele.of.loyal.customers

•. ‘knock.the.socks.off.rivals’,.ethically.and.honourably.

The five generic competitive strategies

r Textbook

There.are.five.generic.competitive.strategies.discussed.in.the.text.and.illustrated.in.Figure.5.1.(page.134)..From.the.figure.we.see.the.most.interesting.one.is.the.best-cost.provider.since.it.sits.in.the.middle.of.the.other.four..The.broad.characteristics.of.each.strategy.are.summarised.within.the.chapter..Porter,.as.a.leader.and.significantly.influential.scholar.in.the.field,.argued.successfully.for.years.that.you.needed.to.have.one.strategy.or.another,.since.to.have.more.than.one.meant.being.stuck.in.the.middle..Fast.forward.a.few.years.and.the.academics.have.caught.on.that.Porter.not.only.pertains.to.an.era.of.industrialised.economics.and.economies,.he.is.blatantly.contradicting.himself.when.he.created.best-cost.provider,.since.it.sits.precisely.in.the.middle.of.his.four.generic.strategies..Criticisms.of.Porter’s.concepts.are.probably.best.handled.by.critical.scholars.who.avidly.debate.the.merits.of.many.of.Porter’s.concepts..However,.you.as.a.strategic.management.student.will.likely.come.up.with.some.of.your.own.misgivings.about.some.of.Porter’s.concepts.too.

If.you.are.interested.in.gaining.more.perspective.on.this.issue.from.a.practitioner.and.scholar’s.perspective,.then.it.is.recommended.that.you.obtain.a.copy.of.Mintzberg,.Alstrand.and.Lampel’s.excellent.book,.A Strategy Safari: The complete guide through the wilds of strategic management..This.book.critiques.the.prescriptive.nature.of.Porter’s.concepts.and.of.the.positioning.school.in.general..An.SCU.academic,.Dr.Steven.French,.has.also.published.significant.works.on.not.only.strategic.management,.but.also.on.Michael.Porter’s.work.and.concepts.

These.are.briefly.discussed.below.

Low-cost leadership strategy

A.low-cost.leadership.strategy.is.where.the.aim.is.to.open.up.a.sustainable.cost.advantage.over.rivals,.using.the.lower-cost.edge.as.a.basis.either.to.under-price.rivals.and.reap.market.share.gains.or.earn.a.higher.profit.margin.selling.at.the.going.price.

Low-cost.leadership.makes.achievement.of.low.cost.relative.to.rivals.the.theme.of.the.firm’s.business.strategy..It.is.dependent.on.finding.ways.to.drive.costs.out.of.the.business.year.after.year..Virgin.Blue,.Jetstar.and.Tiger.airlines.are.all.examples.of.companies.pursuing.this.strategy.in.Australia.and.from.the.newspaper.example.at.the.beginning.of.this.topic.it.seems.that.V.Australia.will.follow.a.similar.approach..Another.example.of.a.low-cost.strategy.is.given.in.Illustration.Capsule.5.1.on.page.146.

Approaches to securing a cost advantage

One.of.the.approaches.to.securing.a.cost.advantage.is.based.upon.doing.a.better.job.than.rivals.in.performing.value.chain.activities.efficiently.and.cost.effectively..In.striving.to.control.cost.drivers.there.are.a.number.of.actions.that.can.be.taken.and.these.are.considered.on.pages.147–149.with.several.additional.possibilities.added.at.the.bottom.of.page.139.

The.second.approach.is.to.revamp.the.value.chain.to.eliminate.or.curb.unnecessary.activities..The.six.ways.of.achieving.this.are.described.on.pages.144–147..This.is.followed.by.some.American.examples.but.the.strategies.of.Nucor.and.Southwest.airlines.are.well.known.and.clearly.described.on.page.146..Naturally,.if.this.strategy.is.to.be.successful.there.are.some.necessary.actions.to.take..Is.a.low.cost.strategy.a.

good.strategy?.The.text.suggests.that.such.a.strategy.will.be.more.successful.when.some.conditions.are.met.and.these.are.described.on.pages.143–144..The.dangers.of.following.such.a.strategy.are.then.mentioned.(page.144).

a Activity 5.1

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

Differentiation strategies

r Textbook

The.aim.of.differentiation.strategies.is.to.incorporate.differentiating.features.that.cause.buyers.to.prefer.the.firm’s.product.or.service.over.the.brands.of.rivals..The.manager’s.challenge.is.to.find.ways.to.differentiate.that.create.value.for.buyers.and.that.are.not.easily.matched.or.cheaply.copied.by.rivals..The.limiting.factor,.however,.is.to.not.spend.more.to.achieve.differentiation.than.the.price.premium.that.can.be.charged.for.the.final.product.

The.appeal.of.a.differentiation.strategy.is.that.it.is.a.powerful.competitive.approach.when.uniqueness.can.be.achieved.in.ways.that:

•. buyers.perceive.as.valuable

•. rivals.find.hard.to.match.or.copy

•. can.be.incorporated.at.a.cost.well.below.the.price.premium.that.buyers.will.pay.

The.key.to.competitive.advantage.is.sustaining.differentiation..Hence,.the.most.appealing.approaches.to.differentiation.are.those.that.are.hardest.for.rivals.to.match.or.imitate.and.those.that.buyers.will.find.most.appealing.

The.best.choices.for.gaining.a.longer-lasting,.more.profitable.competitive.edge.are.as.follows:

•. new.product.innovation

•. technical.superiority

•. product.quality.and.reliability

•. comprehensive.customer.service.

The.text.gives.some.examples.of.different.types.of.differentiation.themes.(page.149).

Differentiation.opportunities.can.be.found.at.a.number.of.stages.in.the.value.chain.and.these.are.outlined.on.page.150.

There.are.a.number.of.methods.to.achieve.a.differentiation-based.competitive.advantage.and.these.are.described.in.turn.on.page.152.and.include.product.attributes.and.performance,.buyer.satisfaction.and.competencies.and.capabilities.that.are.hard.to.imitate..Examples.are.given.of.each.of.these.methods.

The.signals.of.value.may.be.as.important.as.actual.value.when.the.nature.of.differentiation.is.hard.to.quantify.and/or.buyers.are.making.first-time.purchases.or.repurchase.is.infrequent..It.is.also.difficult.in.cases.where.buyers.are.unsophisticated.

There.are.circumstances.under.which.a.differentiation.strategy.will.work.best.and.when.it.will.have.pitfalls..The.text.first.outlines.four.market.situations.where.differentiation.is.likely.to.be.successful.(page.152)..It.then.warns.of.some.of.the.pitfalls.of.such.a.strategy.(pages.153).

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

a Activity 5.2

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

a Activity 5.3

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

Best-cost provider strategies

r Textbook

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

The competitive strength of a best-cost provider strategy

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

Focus/niche strategies

r Textbook

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

strategy.is.to.choose.a.market.niche.where.buyers.have.distinctive.preferences,.special.requirements,.or.unique.needs.and.then.develop.unique.capabilities.to.serve.the.needs.of.the.target.buyer.segment.

Competitive.advantage.for.focus/niche.strategies.flows.from.being.able.to.offer.niche.buyers.something.different.from.rivals.–.a.differentiation.strategy..The.text.provides.some.examples.(pages.158–159).of.organisations.that.have.taken.this.narrow.focus.in.their.strategic.approach.

The.focus.or.niche.can.be.based.upon.low-cost.strategies.or.on.product.or.service.differentiation.

Pursuing.this.type.of.strategy.is.likely.to.be.most.effective.in.the.conditions.outlined.on.pages.158–159..But.such.a.strategy.has.inherent.risks.and.these.are.briefly.considered.in.the.text,.on.pages.159–160.

Having.outlined.the.features.of.these.strategies.we.can.then.bring.them.together.in.one.table.(Table.5.1.page.161).where.the.differences.and.similarities.can.be.compared..There.is.a.brief.discussion.about.this.table.on.pages.160.and.162.

a Activity 5.4

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

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

Beyond generic strategies

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

r Reading 5.1

SummaryIn.this.topic.we.have.discussed.the.main.generic.approaches.to.competing.within.an.industry..These.generic.strategies.emerged.from.the.work.of.Porter.who.initially.argued.that.there.were.only.four.ways.to.compete:.low.cost.or.differentiation.with.a.broad.or.a.narrow.focus.

We.considered.the.features.of.each.of.these.strategic.options.and.assessed.those.situations.where.they.might.or.might.not.be.successful..While.each.of.these.strategies.has.appeal.in.different.ways.there.are.always.some.challenges.and.potential.difficulties.to.emerge.in.pursuing.the.chosen.direction..We.gave.examples.from.the.text.of.each.of.these.strategies.and.used.our.two.case.studies.as.illustrations.of.the.use.of.these.generic.strategies..The.approach.to.focusing.strategic.options.depends.on.the.developmental.culture.of.the.organisation,.the.circumstances.in.the.external.environment.and.its.approach.to.risk.management..A.number.of.alternative.strategic.thrusts.can.be.defined,.including.differentiation,.cost.leadership,.focus,.pre-emption.and.synergy..Choice.of.these.approaches.allows.strategic.options.to.be.narrowed.and.focused.

These.are.the.broad.strategies..In.the.next.topic.we.will.consider.some.supplementary.strategies.that.organisations.can.use.to.supplement.these.generic.options.

Topic 6 Beyond competitive strategy

IntroductionThe.following.email.was.unexpectedly.received.by.all.staff.at.the.university.in.mid-December.2008..It.was.sent.by.the.then.vice.chancellor,.Paul.Clarke.

Southern.Cross.University.has.joined.forces.with.Charles.Sturt.University.to.undertake.a.groundbreaking.study.on.the.establishment.of.a.new.regionally-based.Commonwealth.university,.with.our.two.institutions.as.foundation.partners.

This.new.national.institution.would.combine.the.strengths.of.our.institutions.and.initially.a.third.interstate.university,.and.would.ensure.the.sustainable.provision.of.quality.higher.education.and.research.to.regional.communities.in.Australia.

We.have.been.invited.by.the.Deputy.Prime.Minister.and.Minister.for.Education.Julia.Gillard.to.submit.a.funding.application.to.conduct.a.feasibility.study,.which.we.expect.will.be.conducted.in.the.first.half.of.next.year.

As.two.of.the.leading.regional.institutions.with.complementary.capabilities.we.envisage.greatly.enhanced.opportunities.for.all.regional.students.and.for.our.research,.while.maintaining.our.existing.campuses..Southern.Cross.University.will.bring.to.the.table.considerable.research.strengths.

We.envisage.a.national.institution.crossing.State.borders.with.a.specific.focus.on.accelerating.the.application.of.digital.technology.to.deliver.a.quality.and.flexible.educational.experience.in.Australia,.at.a.level.which.has.not.been.seen.before.

There.are.significant.challenges.facing.the.Higher.Education.sector.and.this.proposal.ensures.that.our.regional.universities.will.be.best-placed.to.take.control.of.their.own.futures.and.play.a.leading.role.in.the.reforms.which.will.be.under.way.over.the.coming.months.

Many.of.you.will.have.questions.about.the.possible.impacts.of.this.proposal..We.will.be.working.closely.with.all.our.staff,.students.and.stakeholders.and.will.provide.opportunity.for.input.in.the.New.Year.

This.proposed.alliance.between.several.Australian.universities.is.a.great.example.of.one.of.the.supplementary.strategies.discussed.in.this.topic..In.Topic.5.we.outlined.the.generic.business.strategies.but.here.we.are.concerned.with.a.number.of.other.strategies.that.can.complement.the.chosen.generic.strategy..In.a.sense.this.topic.is.somewhat.like.a.grab-bag.of.extra.strategies.since.it.covers.a.broad.spectrum.of.possible.additional.strategies.

We.will.systematically.work.through.each.of.these.supplementary.strategies..We.start.with.alliances.and.partnerships.similar.to.the.one.involving.SCU.and.mentioned.at.the.start.of.this.topic..We.then.take.this.a.step.further.by.looking.at.mergers.and.acquisitions.as.strategies..This.is.followed.by.a.consideration.of.vertical.integration.strategies.and.their.advantages.and.disadvantages..There.is.then.a.brief.section.on.the.

growing.importance.of.outsourcing.as.a.business.strategy.and.why.it.is.often.chosen..The.topic.then.moves.on.to.discuss.a.wide.range.of.offensive.strategies.available.to.organisations..One.of.these.strategies.is.increasingly.attracting.attention.and.that.is.the.‘blue.ocean’.strategy.and.we.spend.some.time.examining.its.features.and.attraction..After.the.offensive.strategies.we.review.the.use.of.defensive.strategies,.web.strategies.and.functional.area.strategies..The.topic.finishes.with.an.evaluation.of.the.strategy.of.being.a.first.mover.

There.is.an.attempt.to.link.these.supplementary.strategies.in.Figure.6.1.on.page.162.of.the.textbook.and.it.would.be.useful.to.keep.referring.to.this.figure.as.you.work.through.the.topic.

Objectives

•. assess.the.types.of.strategic.alliances.organisations.can.form,.and.evaluate.such.alliances

•. analyse.what.objectives.organisations.seek.to.achieve.by.undergoing.mergers.or.making.acquisitions

•. outline.the.types.of.vertical.integration.moves.available.to.organisations.and.assess.their.merits.and.challenges

•. describe.the.reasons.that.organisations.use.outsourcing.as.a.strategy

•. explain.a.range.of.offensive.strategies.available.to.organisations.and.why.they.might.be.adopted

•. evaluate.the.elements.of.a.blue.ocean.strategy.and.the.reasons.for.its.increasing.prominence.

Materials required

Reading6.1. Blue.Ocean.Strategy.(Online),.Available:.http://en.wikipedia.org/wiki/Blue_Ocean_

Strategy..Accessed.24.March.2010.

Strategic alliances and collaborative partnerships

r Textbook

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

During.the.past.decade,.companies.in.all.types.of.industries.and.in.all.parts.of.the.world.have.elected.to.form.strategic.alliances.and.partnerships.to.complement.their.own.strategic.initiatives.and.strengthen.their.competitiveness.in.domestic.and.international.markets.

Globalisation.of.the.world.economy,.revolutionary.advances.in.technology.across.a.broad.front,.and.untapped.opportunities.in.national.markets.in.Asia,.Latin.America,.and.Europe.that.are.opening.up,.deregulating,.and/or.undergoing.privatisation.have.made.partnerships.of.one.kind.or.another.integral.to.competing.on.a.broad.geographic.scale.

59MNG00716 Topic 6 – Beyond competitive strategy

The.text.discusses.two.very.competitive.forces.impacting.on.organisations.and.how.a.strategic.alliance.can.be.useful.in.addressing.these.forces..The.particular.features.of.a.strategic alliance are.described.and.the.text.then.gives.some.examples.of.strategic.alliances.among.major.corporations.around.the.world..In.the.global.financial.meltdown.of.late.2008–2009.it.is.to.be.expected.that.there.will.be.many.attempts.at.forming.such.alliances.often.as.a.matter.of.survival.

The.text.spells.out.in.detail.(pages.168–170).how.strategic.alliances.can.be.beneficial.especially.in.a.growing.global.market.and.the.factors.which.will.determine.how.successful.such.an.alliance.will.prove..A.note.of.caution.is.given.about.some.potential.problems.with.such.alliances.

In.the.case.of.the.proposed.strategic.alliance.involving.SCU.the.driving.forces.have.been.the.competitive.forces.in.the.university.sector,.changing.student.demographics.and.different.funding.approaches.to.universities.by.the.Australian.government..An.isolated.regional.university.stands.to.gain.by.being.part.of.a.larger.and.broader.institution.while.still.being.able.to.retain.what.it.considers.to.be.its.competitive.advantages.

Strategic.alliances.go.beyond.normal.company-to-company.dealings.but.fall.short.of.mergers.or.full.joint.venture.partnerships.with.full.ownership.ties.

a Activity 6.1

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

The source of competitive advantage: Merger and acquisition strategies

r Textbook

Mergers.and.acquisitions.are.especially.suited.to.situations.where.alliances.and.partnerships.do.not.go.far.enough.in.providing.a.company.with.access.to.the.needed.resources.and.capabilities.

No.company.can.afford.to.ignore.the.strategic.and.competitive.benefits.of.acquiring.or.merging.with.another.company.to.strengthen.its.market.position.and.open.up.avenues.of.new.opportunity.

The.text.first.makes.a.distinction.between.a.merger.and.an.acquisition (page.171).since.sometimes.the.terms.are.confused..It.then.goes.on.to.outline.five.strategic.objectives.of.mergers.and.acquisitions.and.a.number.of.examples.are.given.of.successful.mergers..One.successful.merger.and.acquisition.strategy.is.described.in.Illustration.Capsule.6.1.(page.174)..However.it.is.also.pointed.out.(page.174–175).that.for.several.reasons.some.mergers.and.acquisitions.have.not.lived.up.to.promised.expectations.

a Activity 6.2

Illustration Capsule 6.1, How Clear Channel Has Used Mergers and Acquisitions to Become a Global Market Leader.

Discuss the impact loosening of rules by the FCC had on Clear Channel’s business strategy. Describe how acquisitions benefited this company.

Vertical integration strategies

r Textbook

Vertical.integration.as.a.strategy.involves.a.firm.extending.its.competitive.scope.within.the.same.industry.either.by.movingbackward.into.the.sources.of.supply.or.forward.toward.the.end-users.of.the.final.product..A.firm.can.aim.at.either.full.or.partial.integration.

The.appeal.of.backward.integration.is.that.it.generates.cost.savings.but.only.if.the.volume.needed.is.big.enough.to.capture.the.efficiencies.currently.employed.by.suppliers.

There.is.potential.to.reduce.costs.through.backward.integration.when.suppliers.have.sizeable.profit.margins;.when.the.item.supplied.is.a.major.cost.component;.or,.where.the.resource.requirements.of.production.are.easily.met.

It.is.possible.to.produce.a.differentiation-based.competitive.advantage.when.it.results.in.a.better-quality.part.being.produced.through.taking.control.of.production.in.backward.integration.

Backward.integration.can.also.reduce.the.risk.of.depending.on.suppliers.of.crucial.raw.materials/parts/components.

It.can.be.advantageous.for.a.firm.to.establish.its.own.distribution.network.if:

•. undependable.distribution.channels.undermine.steady.production.operations

•. integrating.forward.into.distribution.and.retailing

•. it.may.be.cheaper.than.going.through.independent.distributors

•. it.may.help.achieve.stronger.product.differentiation,.allowing.escape.from.price.competition

•. it.may.provide.better.access.to.users.

The.strategic.disadvantages.of.vertical.integration.are.that.it.increases.resource.requirements;.locks.the.firm.deeper.into.the.same.industry;.and.results.in.fixed.sources.of.supply.and.less.flexibility.in.accommodating.buyer.demands.for.product.variety.

Vertical.integration.can.also.pose.problems.of.balancing.capacity.at.each.stage.of.the.value.chain.and.may.require.radically.different.skills/capabilities.which.the.firm.may.need.to.develop.or.buy..Accordingly,.it.can.reduce.manufacturing.flexibility,.lengthening.design.time.and.the.ability.to.introduce.new.products..The.disadvantages.of.integration.strategies.are.outlined.on.pages.173–175.and.the.need.for.a.balanced.assessment.are.given.at.the.top.of.page.175.

Unbundling and outsourcing strategies

r Textbook

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

functions.to.outsourcing.specialists,.many.of.these.companies.being.resident.overseas..There.has.been.considerable.political.and.industrial.unrest.about.the.wisdom.and.effectiveness.of.such.moves.

Outsourcing.can.streamline.operations.which.may.result.in:

•. a.shorter.cycle.time

•. quicker.decision.making

•. a.reduction.in.coordination.costs.

It.is.also.argued.that.outsourcing.allows.the.firm.to.concentrate.on.its.core.business..Overall,.the.real.benefit.of.outsourcing.lies.in.its.ability.to.create.a.competitive.advantage.

Outsourcing.strategies.can.be.successful.where.outside.specialists.can.perform.the.activity.better.or.more.cheaply.and.the.activity.is.not.crucial.to.achieving.competitive.advantage..Outsourcing.reduces.the.risk.exposure.to.changing.technology.for.the.firm.and/or.the.risk.of.changing.buyer.preferences..The.situations.which.warrant.the.use.of.such.outsourcing.strategies.are.discussed.on.pages.179–180.before.some.of.the.risks.are.identified.at.the.bottom.of.page.180.

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

r Textbook

As.the.text.illustrates,.there.are.numerous.strategic.choices.depending.on.the.market.conditions..A.good.way.to.determine.the.market.for.a.given.industry.is.to.conduct.an.industry.lifecycle.analysis,.which.helps.one.to.decide.whether.or.not.the.market.is.characterised.as.being.fragmented,.fast-.or.slow-growing.or.emerging.(such.as.technology.and.high.spec.R&D.critical.industries)..The.following.strategic.choices.include.a.range.of.typical.offensive.and.defensive.strategies.

Offensive.and.defensive.strategies.are.undertaken.to.build.new.or.stronger.market.positions.and/or.create.competitive.advantage..Any.competitive.advantage.currently.held.will.eventually.be.eroded.by.the.actions.of.competent,.resourceful.competitors.Aldi,.the.German.supermarket.is.aggressively.challenging.the.two.major.supermarket.chains.in.Australia.with.some.of.the.strategies.mentioned.in.this.section.of.the.text..Wal.Mart.in.America.is.an.aggressive.competitor.while.Dell.in.the.computer.industry.is.also.known.for.its.aggressive.strategies.

Previous.editions.of.the.text.offered.nine.different.offensive.strategy.options.open.to.organisations,.giving.examples.of.how.each.of.these.strategies.have.been.used..It.is.worthwhile.to.note.that.the.strategies.outlined.below.are.still.relevant.today.and.apply.particularly.in.hotly.competitive.situations..Some.of.the.following.tactics.warrant.further.discussion.

Attacking competitor strengths

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

However,.challenging.strong.competitors.with.a.lower.price.is.foolhardy.unless.the.aggressor.has.a.cost.advantage.or.advantage.of.greater.financial.strength!

Possible.offensive.options.for.attacking.competitors’.strengths:

•. under-price.rivals

•. boost.advertising

•. introduce.new.features.to.appeal.to.rivals’.customers

•. attack.with.equally.good.product.and.lower.price

•. develop.a.low-cost.edge,.and.use.it.to.under-price.rivals

•. offer.a.better.product.at.the.same.price

•. leapfrog.into.next-generation.technologies

•. add.appealing.new.features

•. run.comparison.ads

•. construct.new.plant.capacity

•. offer.a.wider.product.line

•. develop.better.customer.service.capabilities.

Attacking competitor weaknesses

The.basic.approach.is.to.concentrate.a.company’s.strengths.and.resources.directly.against.a.rival’s.weaknesses.

The.weaknesses.to.attack:

•. geographic.regions.where.a.rival.is.weak

•. segments.which.the.rival.is.neglecting

•. go.after.those.customers.a.rival.is.least.equipped.to.serve

•. rivals.with.weaker.marketing.skills

•. introduce.new.models.exploiting.gaps.in.rivals’.product.lines.

Launching simultaneous offensives on many fronts

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

End-run offensives

End-run.offensives.have.the.objective.to.dodge.head-to-head.confrontations.that.escalate.competitive.intensity.or.risk.cutthroat.competition..The.aim.is.to.attempt.to.manoeuvre.around.areas.of.strong.competition.and.concentrate.on.those.areas.of.the.market.where.competition.is.the.weakest.

There.are.several.optional.approaches.for.end-run.offensives..These.include.building.a.presence.in.geographic.areas.where.rivals.have.little.presence.or.exposure..The.firm.might.alternatively.introduce.products.with.different.attributes.and.features.to.better.meet.buyer.needs.or.introduce.next-generation.technologies.with.an.aim.to.leapfrog.rivals..Another.strategy.is.to.add.more.support.services.for.customers.

Guerrilla offensives

Guerrilla.offensives.encourage.the.organisation.to.use.principles.of.surprise.and.hit-and-run.to.attack.in.locations.and.at.times.where.conditions.are.most.favourable.to.it.as.the.initiator.of.the.offensive..This.approach.is.well-suited.to.small.challengers.with.limited.resources.

Some.of.the.options.for.employing.guerrilla.tactics.include:

•. focus.on.a.narrow.target.weakly.defended.by.rivals

•. challenge.rivals.where.they.are.overextended.and.when.they.are.encountering.problems

•. make.random.scattered.raids.on.leaders

•. occasional.low-balling.on.price

•. intense.bursts.of.promotional.activity

•. legal.actions.charging.antitrust.violations,.patent.infringements,.or.unfair.advertising.

Pre-emptive strikes

Pre-emptive.strikes.involve.moving.first.to.secure.an.advantageous.position.that.rivals.are.unable.to.gain.or.are.discouraged.from.duplicating!

Some.of.the.options.include:

•. expand.capacity.ahead.of.demand.in.hopes.of.discouraging.rivals.from.following.suit

•. tie.up.best.or.cheapest.sources.of.essential.raw.materials

•. move.to.secure.best.geographic.locations

•. obtain.business.of.prestigious.customers

•. build.an.image.in.buyers’.minds.that.is.unique.and.hard.to.copy

•. secure.exclusive.or.dominant.access.to.best.distributors

•. acquire.desirable,.but.struggling,.competitors.

Choosing whom to attack in an offensive move

There.are.four.types.of.firms.that.can.be.the.target.of.an.offensive:.market.leaders,.runner-up.firms,.struggling.rivals.on.the.verge.of.going.under,.and.small.local.or.regional.firms.not.doing.a.good.job.for.their.customers.

The.following.strategic.offensive.options.offer.the.strongest.basis.for.competitive.advantage:

•. develop.lower-cost.product.design

•. make.changes.in.production.operations.that.lower.costs.or.enhance.differentiation

•. develop.product.features.that.deliver.superior.performance.or.lower.users’.costs

•. give.more.responsive.customer.service

•. escalate.marketing.efforts

•. pioneer.new.distribution.channel

•. sell.direct.to.end-users.

A.fundamental.principle.in.an.offensive.strategy.is.that.the.chances.for.a.successful.offensive.initiative.are.improved.when.it.is.based.on.a.company’s.resource.strengths.and.strongest.competencies.and.capabilities..Moreover.the.aggressive.company.needs.to.know.who.to.target.with.their.attacks.and.the.text.suggests.(pages.181–182).who.the.best.targets.might.be.and.what.should.be.the.basis.for.competitive.attacks.

‘Blue Ocean’ Strategies

r Textbook

Read page 200 to the top of page 201.

One.of.the.strategies.that.has.gained.increasing.interest.since.it.was.first.suggested.in.the.1990s.is.the.blue.ocean.strategy.which.is.a.special.kind.of.offensive..It.is.a.strategy.not.designed.to.compete.in.existing.markets.but.in.a.totally.new.and.distinctive.market.

There.is.a.brief.coverage.of.the.blue.ocean.strategy.in.the.text.and.some.examples.are.given.of.how.it.has.been.used..A.more.detailed.discussion.of.the.strategy.is.found.in.Reading.6.1.

r Reading 6.1

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

Defensive strategyJust.as.in.the.case.of.having.offensive.strategies,.firms.may.utilise.what.are.known.as.‘defensive’.strategies,.which.are.designed.to.counter.attacks.and.ultimately.the.offensive.strategies.of.rival.firms..Previous.editions.of.the.text.have.alluded.to.these.strategies,.which.in.my.opinion.are.still.worthy.of.discussion.and.thought,.since.they.apply.in.any.economic.cycle.

The.objectives.of.a.defensive.strategy.are.to.fortify.the.firm’s.present.position.and.help.sustain.any.competitive.advantage.currently.held..A.defensive.move.can.also.lessen.the.risk.of.being.attacked.by.a.rival.and.can.help.blunt.the.impact.of.any.attack.that.may.occur..A.company.employing.successful.defensive.tactics.can.influence.challengers.to.aim.attacks.at.other.rivals.rather.than.at.it.

There.are.two.general.defensive.approaches:

•. block.avenues.challengers.can.take.in.mounting.offensive.attacks

•. make.it.clear.any.challenge.will.be.met.with.a.strong.counterattack.

Blocking avenues for rivals’ offensives

One.method.to.block.challengers.involves.broadening.the.product.line.to.fill.the.gaps.that.rivals.may.see.as.attractive.and.go.after..Alternatively,.the.company.may.keep.prices.low.on.those.models.that.match.the.rivals’.products.

Another.blocking.strategy.involves.signing.exclusive.marketing.agreements.with.distributors..Some.companies.block.competition.by.offering.free.training.to.buyers’.personnel,.locking.the.buyer.into.using.the.product.that.its.staff.have.been.trained.to.use.

Some.of.the.other.blocking.strategies.include:

•. giving.better.credit.terms.to.buyers.than.those.offered.by.rivals

•. reducing.delivery.times.for.spare.parts,.reducing.the.potential.down-time.of.buyers

•. increase.warranty.coverage

•. patent.alternative.technologies

•. sign.exclusive.contracts.with.best.suppliers

•. protect.proprietary.know-how.

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

First-mover advantages

r Textbook

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

Strategically,.moving.first.can.be.a.pre-emptive.strike.against.rivals,.generating.the.element.of.surprise.and.catching.rivals.off.guard.

First-mover disadvantages

A.company.moving.early.can.be.at.a.disadvantage,.or.fail.to.produce.an.advantage,.when.the.costs.of.pioneering.are.sizeable.and.the.loyalty.of.first-time.buyers.is.weak..The.company.may.commit.significant.resources.to.the.strategy.but.find.that.the.sales.levels.and.competitive.position.are.not.sustainable.

There.is.also.the.risk.that.rapid.technological.change.may.allow.followers.to.leapfrog.pioneers..In.many.electronic.industries.this.may.be.the.case..Who.owns.a.Beta.VCR.today?

Another.risk.lies.where.the.achievements.of.the.pioneers.can.be.easily.and.quickly.imitated.by.late.movers..In.these.cases.it.may.be.relatively.easy.for.latecomers.to.crack.into.the.market.

a Activity 6.3

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

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

When being a late mover can be advantageous

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

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

f Activity 6.2

In the late 1980s, following the decision by the FCC to loosen rules regarding the ability of one company to own both radio and TV stations, Clear Channel broadened its strategy and began acquiring small, struggling TV stations. Its new strategy was to buy radio, TV, and outdoor advertising properties with operations in many of the same local markets, to share facilities and staffs to cut costs, to improve programming, and to sell advertising for all three media simultaneously.

By 1998, Clear Channel had used acquisitions to build a leading position in radio and television stations. In 2003, this company owned radio and television stations, outdoor advertising, and entertainment venues in 66 countries around the world.

Topic 7 Competing in foreign markets

Introduction

250 jobs created when Costco opens in Docklands

UP TO 250 jobs will be created when US discount retailer Costco opens its first Australian warehouse at Docklands next year.

The.1.3ha.shopping.barn.will.sell.a.range.of.products.including.groceries,.hardware,.white.goods,.jewellery,.electronic.equipment,.sporting.goods,.office.materials.and.homewares.

Plans.to.build.the.project.were.formally.approved.by.the.State.Government.this.morning.

Construction.on.the.site,.next.to.the.120m-high.Southern.Star.wheel,.will.start.in.September.

The.$60.million.project.will.signal.a.major.shake-up.of.Australian.shopping.in.a.similar.way.to.the.arrival.of.German.discounter.Aldi.when.it.launched.in.Australia.in.2001.

State.Planning.Minister.Justin.Madden.formally.announced.that.the.two-storey.bulk.goods.warehouse.would.go.ahead.on.the.northern.side.of.Waterfront.City,.off.Footscray.Rd.

“This.is.another.milestone.in.the.evolution.of.Docklands,’’.Mr.Madden.said.

Costco.Australia.general.manager.Patrick.Noone.said.the.company.chose.Docklands.as.its.first.Australian.outlet.because.of.the.proximity.to.transport.and.the.CBD.

He.said.customers.should.expect.“dramatic’’.discounts.

“We.are.a.tight.operation.with.extremely.low.overheads,’’.he.said.

The.store.will.have.parking.for.553.cars.

Costco.operates.a.customer.membership.scheme..People.pay.an.annual.fee.of.about.$50.to.enter.the.store..Goods.are.said.to.be.as.much.as.70.per.cent.less.than.in.other.stores.

(Herald-Sun,.Melbourne,.20.June.2008)

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

several.locations.in.Australia.(Docklands,.Sydney,.and.the.Gold.Coast).it.was.greeted.with.delight.by.those.people.in.Australia.who.have.visited.Costco.outlets.in.the.US.or.Sam’s.Stores.which.is.the.major.competitor.of.Costco..The.arrival.of.this.giant.wholesale.discounter.is.set.to.revolutionise.shopping.in.this.country.much.as.it.and.its.competitors.have.done.in.North.America.

Costco.is.offered.as.the.second.case.study.in.this.edition.of.the.textbook..While.its.international.operations.are.only.a.minor.part.of.the.case.content.we.will.use.this.case.as.our.example.of.the.issues.being.addressed.in.this.topic.on.competing.internationally..The.challenge.will.be.to.see.how.the.range.of.‘going.international.‘.strategies.in.this.chapter.of.the.textbook.can.be.applied.to.the.Costco.expansion.plans.

A.good.starting.point.for.this.topic.would.be.to.read.the.case.in.its.entirety.as.it.covers.some.of.the.issues.we.have.been.covering.so.far.in.this.unit..Moreover.for.those.of.you.unfamiliar.with.how.Costco.operates.this.will.be.a.learning.experience..A.visit.to.their.website.would.add.value.to.this.experience.and.keep.you.updated.on.recent.happenings.too..It.is.would.be.remiss.not.to.mention.that.Costco’s.central.business.model.centres.on.membership.fees.and.its.economies.of.scale.when.purchasing..In.fact.Noone,.a.Costco.spokesperson,.is.quoted.as.saying.Costco.have.a.fully.transparent.pricing.structure,.that.is,.cost.+.15%.which.he.believes.gives.consumers.more.confidence.in.their.value.proposition.and.membership.arrangement.

This.topic.focuses.on.strategy.options.for.expanding.beyond.domestic.boundaries.and.competing.in.the.markets.of.either.a.few.or.a.great.many.countries..The.spotlight.will.be.on.four.strategic.issues.unique.to.competing.multinationally..It.will.introduce.a.number.of.core.concepts.including.multi-country.competition,.global.competition,.profit.sanctuaries,.and.cross-market.subsidisation..The.textbook.includes.sections.on.cross-country.differences.in.cultural,.demographic,.and.market.conditions;.strategy.options.for.entering.and.competing.in.foreign.markets;.the.growing.role.of.alliances.with.foreign.partners;.the.importance.of.locating.operations.in.the.most.advantageous.countries;.and.the.special.circumstances.of.competing.in.such.emerging.markets.as.China,.India.and.Brazil..We.will.use.references.to.the.Costco.case.where.appropriate.

Be.aware.that.this.is.another.long.chapter.(aren’t.they.all?).and.is.best.taken.in.several.doses.making.sure.each.section.is.read.thoroughly.and.understood.before.proceeding.further.

Objectives

At.the.conclusion.of.this.topic.you.should.be.able.to

•. outline.the.reasons.organisations.seek.to.expand.into.foreign.markets

•. identify.a.range.of.cultural,.demographic.and.business.challenges.facing.organisations.wishing.to.compete.internationally

•. distinguish.between.multicountry.and.global.competition

•. evaluate.the.range.of.strategy.options.available.for.entering.and.competing.in.foreign.markets

•. examine.the.options.available.to.firms.seeking.competitive.advantage.in.foreign.markets

•. analyse.the.concepts.of.profit.sanctuaries,.and.cross.market.subsidisation

•. compare.offensive.strategies.available.for.competing.in.foreign.markets

•. evaluate.the.use.of.strategic.alliances.for.firms.wishing.to.enter.foreign.markets

•. identify.the.challenges.of.competing.in.emerging.countries.and.the.range.of.strategies.available.for.competing.in.these.markets

•. appraise.how.local.firms.can.compete.against.global.competition.

71MNG00716 Topic 7 – Competing in foreign markets

Materials required

ReadingsNil.

The.starting.point.for.this.topic.is.to.familiarise.yourself.with.the.Costco.company.and.especially.the.small.section.on.its.international.operations.

r Textbook

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

Why companies expand into foreign markets

r Textbook

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

a Activity 7.1

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

Cross-country differences in cultural, demographic and market conditions

r Textbook

Read from page 209 to the top of page 213.

There.is.a.long.section.in.the.text.concerning.a.range.of.issues.that.organisations.have.to.address.when.contemplating.a.strategy.of.operating.overseas..The.first.range.of.issues.are.those.of.a.cultural,.demographic.and.economic.basis..The.text.discusses.at.length.a.range.of.these.issues.in.other.countries.that.need.to.be.addressed.before.a.decision.to.move.overseas.it.taken..One.of.the.critical.decisions.to.be.made.is.the.degree.of.localisation.or.standardisation.of.the.product.or.service.

Overseas.locations.can.offer.significant.economic.advantages.as.discussed.on.page.210..Costco.has.exploited.some.of.these.advantages.in.its.overseas.operations..As.well.as.labour.costs.there.are.taxation.factors.that.figure.prominently.in.such.decisions.

The.increasing.globalisation.of.international.trade.has.generated.significant.risks.in.fluctuating.exchange.rates.which.can.have.serious.and.even.devastating.impacts.on.decisions.made.to.operate.in.other.countries..These.exchange.rate.risks.are.discussed.on.pages.211–212..Added.to.the.risk.of.adverse.exchange.rate.movements.are.sometimes.fickle.and.unpredictable.government.policies.discussed.on.pages.212–213.

The concepts of multi-country competition and global competition

r Textbook

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

a Activity 7.2

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

Strategy options for entering and competing in foreign markets

r Textbook

This.section.can.be.a.little.confusing.so.we.need.to.take.it.carefully..The.text.suggests.that.there.are.six.generic.strategies.that.a.company.can.choose.when.venturing.internationally.(pages.215–224)..It.proceeds.to.discuss.each.of.the.first.three.in.a.logical.manner.but.then.combines.the.fourth.and.fifth.(beginning.on.page.216)..The.sixth.strategy.is.taken.up.on.page.220..There.is.a.long.discussion.of.the.localised.versus.global.choice.in.strategy.making.and.Figure.7.1.(page.221).assists.in.bringing.the.discussion.into.some.summary.form..In.Figure.7.2.(page.223).the.distinction.between.localised.multicountry.and.globalised.strategies.is.depicted.and.Illustration.Capsule.7.1.gives.some.examples.to.assist.in.understanding.the.differences.

a Activity 7.3

Review Illustration Capsule 7.2 in the textbook, Multi-country Strategies of Electronic Arts and Coca-Cola.

Describe Electronic Arts strategy as either localisation or globalisation.

Identify how these companies have adapted their original organisational strategies to better serve their multi-country operational needs. Has this proven to be advantageous for these organisations? Explain why or why not.

a Activity 7.4

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

The quest for competitive advantage in foreign markets

r Textbook

There.are.three.ways.in.which.a.firm.can.gain.competitive.advantage.or.offset.domestic.disadvantages.by.expanding.outside.its.domestic.markets:

•. use.location.to.lower.costs.or.achieve.greater.product.differentiation

•. transfer.competitively.valuable.competencies.and.capabilities.from.its.domestic.markets.to.foreign.markets

•. use.cross-border.coordination.in.ways.that.a.domestic-only.competitor.cannot.

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

a Activity 7.5

At this stage review and reflect on the move by Costco to enter the Australian market.

What do you consider are the strategic advantages and potential dangers of such a move?

Strategic alliances and joint ventures with foreign partners

r Textbook

Read pages 216 to the bottom of page 220.

In.the.previous.topic.we.considered.strategic.alliances.as.one.of.the.supplementary.strategies..In.the.foreign.domain.such.arrangements.can.also.be.a.useful.method.for.gaining.access.to.overseas.markets..The.text.(pages.218–220).discusses.the.appeal.of.such.cooperative.arrangements.highlighting.that.the.big.attraction.of.such.alliances.over.mergers.and.acquisitions.is.that.the.firm.retains.its.independence..In.Illustration.Capsule.7.1.five.examples.of.cross-border.strategic.alliances.are.briefly.described.

If.a.company.can.gather.together.and.use.the.international.experiences.of.its.senior.managers.then.it.may.not.be.necessary.to.engage.in.strategic.alliances.

The risks of strategic alliances with foreign partners

Achieving.effective.collaboration.between.independent.companies,.each.with.different.motives.and.perhaps.conflicting.objectives,.is.not.easy.

Some.of.the.pitfalls.of.alliances.and.joint.ventures.include:

•. language.and.cultural.barriers

•. decision.making.in.a.timely.fashion

•. effective.collaboration.in.competitively.sensitive.areas

•. clashes.of.egos.and.culture

•. becoming.overly.dependent.on.another.company.for.essential.expertise.and.capabilities.over.the.long.term.

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

Making the most of strategic alliances with foreign partners

Whether.or.not.a.company.realises.the.potential.of.alliances.and.collaborative.partnerships.with.foreign.enterprises.seems.to.be.a.function.of.six.factors:

•. picking.a.good.partner

•. being.sensitive.to.cultural.differences

•. recognising.that.the.alliance.must.benefit.both.sides

•. ensuring.that.both.parties.live.up.to.their.commitments

•. structuring.the.decision-making.process.so.that.actions.can.be.taken.swiftly.when.needed

•. managing.the.learning.process.and.then.adjusting.the.alliance.agreement.over.time.to.fit.new.circumstances.

Most.alliances.with.foreign.companies.that.aim.at.technology.sharing.or.providing.market.access.turn.out.to.be.temporary.

Alliances.are.more.likely.to.be.long.lasting.when:

•. they.involve.collaboration.with.suppliers.or.distribution.allies.and.each.party’s.contribution.involves.activities.in.different.portions.of.the.industry.value.chain

•. both.parties.conclude.that.continued.collaboration.is.in.their.mutual.interest.

a Activity 7.6

Review Illustration Capsule 7.2 in the textbook: five examples of cross-border strategic alliances.

How is Airbus able to compete with Boeing for world leadership in large commercial aircraft? If Airbus were an independent firm that was not formed of an alliance, do you think it could have successfully entered Boeing’s industry?

Competing in emerging foreign markets

r Textbook

Emerging.countries.such.as.China,.India.and.Brazil.pose.some.different.challenges.for.organisations..Tailoring.products.to.meet.social.and.cultural.norms.in.these.countries.is.a.real.challenge.discussed.on.page.231..Illustration.Capsule.7.3.gives.a.clear.example.of.how.Yum!.Brands.has.altered.its.strategy.in.China.and.India.

There.are.at.least.four.strategy.options.available.for.firms.when.dealing.with.emerging.countries.and.these.are.described.on.pages.230–231.

A.significant.update.to.the.previous.edition.of.this.textbook.reveals.that.more.attention.is.being.paid.to.emerging.economies..You.may.of.course.be.familiar.with.the.acronym,.‘BRICS’,.which.encompasses.the.energy.and.human.resource.rich.nations.of.Brazil,.Russia,.India,.China.and.now.South.Africa.and.South.Korea..These.important.markets.are.not.only.growing.in.terms.of.their.GDP.and.economic.might,.they.have.rising.affluence.and.growing.middle.classes,.who.are.more.and.more.becoming.ideal.for.multi-national.corporations.seeking.growth.in.the.aspirational.classes.of.consumers.

It.is.also.worth.pointing.out.that.there.is.a.consolidated.effort.on.behalf.of.MNCs.and.particular.European.and.North.American.firms.to.establish.themselves.in.these.markets.for.future.growth.and.to.stake.a.claim.in.what.could.be.the.new.gold.fields.in.this.century..However,.it.would.be.remiss.not.to.examine.the.relative.risks.and.long-term.nature.of.investment.in.these.markets,.based.on.macro.factors.such.as.political.stability,.military.conflict.and.currency.movements..These.markets,.whilst.charactarised.as.full-steam-ahead.markets,.are.also.in.many.ways.ripe.with.risks.that.cannot.necessarily.be.detected.or.countered.easily..Therefore,.after.reading.this.section,.be.mindful.that.in.many.cases.it.is.more.about.establishing.a.footprint.within.these.emerging.economies,.rather.than.a.straight.out.profit.motive.

Another.reason.for.an.international.focus.might.be.the.desire.to.use.the.profits.from.the.profit.sanctuaries.to.subsidise.competitive.actions.in.other.markets.such.as.reducing.prices..However,.anti-dumping.legislation.is.a.growing.reality.for.much.of.the.developed.and.developing.world..Therefore,.whilst.this.could.be.an.appealing.strategy,.there.are.bound.to.be.regulatory.risks.at.some.point.if.an.industry.or.firm.is.being.examined.for.dumping..A.good.local.example.can.be.found.at:.http://www.news.com.au/couriermail/story/0,23739,26693066–952,00.html.

Strategy implications

Consumers.in.emerging.markets.are.highly.focused.on.price,.in.many.cases.giving.local.low-cost.competitors.the.edge..Companies.wishing.to.succeed.in.these.markets.have.to.attract.buyers.with.bargain.prices.as.well.as.better.products.–.an.approach.that.can.entail.a.radical.departure.from.the.strategy.used.in.other.parts.of.the.world.

Because.managing.a.new.venture.in.an.emerging.market.requires.a.blend.of.global.knowledge.and.local.sensitivity.to.the.culture.and.business.practices,.the.management.team.must.usually.consist.of.a.mix.of.expatriates.and.local.managers.

Strategies for local companies in emerging markets

r Textbook

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

SummaryA.company.that.strives.for.the.domestic.competitive.advantage.must.also.think.about.how.to.craft.a.strategy.outside.its.national.boundaries..It.is.of.utmost.importance.for.the.strategist.to.understand.the.differences.in.cultural,.demographic.and.market.conditions..The.geographic.location,.exchange.rate.fluctuations.and.host.government.restrictions.are.factors.that.need.to.be.considered..It.is.also.important.to.identify.the.difference.between.multi-country.competition.and.global.competition..Multi-country.competition.is.where.there.exists.no.global.or.world.market.but.rather.just.a.collection.of.self-contained.country.markets..Global.competition,.on.the.other.hand,.is.when.leading.competitors.compete.in.many.different.countries.

When.a.company.decides.to.expand.in.a.different.destination.culture,.it.must.understand.the.available.strategic.options.such.as.exporting.goods,.licensing,.franchising.or.crafting.a.multi-country.or.global.strategy..Seeking.competitive.advantage.in.foreign.markets.would.be.achieved.through.location,.using.cross-border.transfer.of.competencies.and.capabilities.and/or.using.cross-border.coordination..Other.foreign.competitive.strategies.would.be.profit.sanctuaries,.cross-market.subsidisation.or.global.strategic.offences..If.a.company.is.seeking.global.market.leadership,.then.cross-border.mergers.or.acquisitions.may.be.a.better.alternative.than.strategic.alliances.or.joint.ventures..As.a.new.entrant.the.strategic.implications.for.obtaining.profitability.in.emerging.markets.will.come.from.being.patient.and.sensitive.to.local.conditions..This.requires.the.strategist.to.tailor-make.strategy.to.fit.specific.industry.and.company.situations.

We.now.move.on.in.the.next.topic.to.consider.how.particular.strategies.can.be.crafted.to.suit.a.number.of.specific.industry.and.company.situations.

f Activity 7.3

EA uses a localisation strategy to fit its games to local markets. It develops games that are locally targeted in specific regions to match with the games’ material and content. It produces games in multiple languages, on multiple platforms, and markets them in up to 75 different countries.

Both of these companies have modified their original home-country strategies in order to better meet and satisfy the needs of their customers around the world. The applied modifications include such actions as language changes, alteration of menu offerings, utilisation of local host-country suppliers, and designing packaging to reflect the various foreign cultures.

These organisations have benefited from adopting multi-country strategies through increased sales and maintaining a strong competitive presence in the global marketplace.

f Activity 7.6

Airbus is able to compete because of the pooling of resources from several companies in different countries throughout Europe. The alliance infused Airbus with resources and knowledge for competing with Boeing. The company likely would not have been successful on the same scale if it were independently started and was trying to break into the industry without the alliance’s resources to back it up.

As the chairman of British Aerospace stated, ‘a strategic alliance with a foreign company is one of the quickest and cheapest ways to develop a global strategy.’

The text indicates that strategic alliances, joint ventures, and other cooperative agreements with foreign companies are a favourite and potentially fruitful means for entering a foreign market or strengthening a firm’s competitiveness in world markets.

Topic 8 Diversification

IntroductionThe.following.item.appeared.on.an.Internet.site.on.the.day.this.topic.was.being.written:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aap1rO5zXpvs&refer=home

Spectrum Brands, Battery Maker, Seeks Bankruptcy (Update3)

By.Christopher.Scinta

Feb..3.(Bloomberg).--.Spectrum.Brands.Inc.,.the.maker.of.Rayovac.batteries.and.Spectracide.lawn-care.products,.filed.for.bankruptcy.protection.with.agreement.from.most.of.its.bondholders.to.trim.debt.

The.company.listed.assets.of.$10.1.billion.and.debt.of.$4.4.billion.in.papers.filed.today.in.U.S..Bankruptcy.Court.in.San.Antonio..Fewer.than.10,000.creditors.have.claims.against.Spectrum.Brands,.according.to.the.court.filing.

The.company,.which.also.makes.Remington.razors,.Cutter.insect.repellent.and.Nature’s.Miracle.pet.care.products,.said.today.in.a.statement.that.it.reached.agreements.with.noteholders.representing.about.70.percent.of.the.face.value.of.its.outstanding.bonds.to.pursue.a.refinancing.

“A.refinancing.on.the.agreed.terms.would.enable.Spectrum.Brands.to.reduce.the.amount.of.debt.on.its.balance.sheet.by.approximately.$840.million,”.according.to.the.statement.

U.S..Bank.N.A..of.St..Paul,.Minnesota,.was.named.as.the.largest.unsecured.creditor.in.its.role.as.indenture.trustee.for.more.than.$1.billion.in.bonds..Harbinger.Capital.Partners.Master.Fund.I.Ltd..was.listed.as.the.next.largest.creditor,.though.the.amount.of.the.debt.was.withheld.in.the.court.filing.

Spectrum.Brands.failed.to.make.a.$25.8.million.interest.payment.due.yesterday.on.its.7.3/8.percent.senior.subordinated.notes.due.2015,.triggering.a.default,.according.to.the.company’s.statement.

Bonds, Shares Under.the.reorganization.plan.the.company.will.ask.the.court.to.approve,.Spectrum.Brands.would.eliminate.about.$1.05.billion.in.existing.bond.obligations.by.issuing.new.bonds.to.current.noteholders.equal.to.20.percent.of.the.unpaid.principal.and.interest.on.existing.bonds..The.noteholders.would.also.receive.shares.of.new.common.stock.to.be.created.under.a.reorganization.plan,.the.company.said.in.the.statement.

“We.estimate.that.when.this.refinancing.has.been.completed,.the.company.will.generate.in.excess.of.$100.million.in.annual.free.cash.flow,”.Chief.Executive.Kent.Hussey.said.in.the.statement.

The.claims.of.existing.secured.and.other.general.unsecured.creditors.would.be.unimpaired,.while.existing.common.stock.would.be.cancelled.and.shareholders.wouldn’t.receive.any.distribution,.Spectrum.Brands.said.

Spectrum.Brands.fell.64.percent,.to.1.6.cents.in.Over-the-.Counter.Bulletin.Board.trading..Existing.term.and.asset-based.loans.had.about.$1.47.billion.outstanding.the.company.said.in.a.regulatory.filing..Spectrum.Brands.has.commitments.for.$235.million.in.loans.to.fund.it.through.the.bankruptcy.case,.which.it.expects.to.take.less.than.six.months,.from.some.of.its.existing.lenders,.the.company.said.in.the.filing.

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

Objectives

•. assess.those.circumstances.that.make.diversification.a.desirable.strategy

•. identify.the.three.tests.an.organisation.must.pass.if.a.diversification.strategy.is.to.have.a.reasonable.chance.of.success

•. evaluate.the.three.main.diversification.strategies.open.to.organisations

•. analyse.the.circumstances.when.diversification.into.related.businesses.is.most.attractive.and.the.importance.of.strategic.fit

•. describe.the.circumstances.when.diversification.into.unrelated.businesses.is.an.attractive.option.and.the.potential.drawbacks.of.such.a.strategy

•. use.the.tools.of.strategic.management.to.evaluate.a.range.of.possible.strategies.for.a.diversified.company.following.the.six.suggested.steps

•. identify,.describe.and.evaluate.the.potential.continuing.strategies.for.an.organisation.once.it.has.determined.its.diversification.course

•. use.a.case.study.to.illustrate.how.these.concepts.apply.to.a.real.world.diversified.company.

Materials required

ReadingsNil.

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

81MNG00716 Topic 8 – Diversification

r Textbook

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

When to diversify

r Textbook

When.there.are.substantial.risks.that.a.single.business.company’s.market.may.dry.up.or.when.opportunities.to.grow.revenues.and.earnings.in.the.company’s.mainstay.business.begin.to.peter.out,.managers.usually.have.to.make.diversifying.into.other.businesses.a.top.consideration.

We.are.first.told.in.the.text.(pages.239–240).that.there.are.four.distinct.facets.to.crafting.a.diversified.strategy..Since.these.facets.are.time.consuming.they.are.often.delegated.to.specific.business.units.

There.are.at.least.four.situations.which.may.arise.that.suggest.or.impel.the.company.to.consider.diversification..These.situations.are.explained.on.page.241.

A.company.can.diversify.into.closely.related.businesses.or.into.totally.unrelated.businesses..There.is.no.tried-and-true.method.for.determining.when.it.is.time.to.diversify..Judgements.about.diversification.timing.are.best.made.case.by.case,.according.to.the.company’s.own.unique.situation.

Not.only.must.organisations.diversify.to.spread.business.risk.but.the.strategy.must.produce.added.shareholder.value..Such.a.strategy.must.pass.the.three.tests.outlined.on.page.270:

•. the.industry.attractiveness.test

•. the.cost-of-entry.test

•. the.better-off.test.

a Activity 8.1

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

Strategies for entering new businessesEntry.into.new.businesses.can.take.any.of.three.forms:

•. acquisition

•. internal.start-up

•. joint.ventures/strategic.partnerships.

Each.of.these.is.discussed.in.turn.on.pages.243–244.with.the.merits.and.demerits.of.each.considered.

Choosing the diversification path: Related versus unrelated businesses

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When.we.consider.the.diversification.strategies.of.Pepsi.the.critical.question.(in.view.of.what.happened).is.whether.the.successful.moves.in.North.America.were.able.to.be.replicated.internationally..The.text.first.outlines.the.arguments.why.diversification.should.be.into.related.businesses.(page.244)

Strategic.fits.can.occur.anywhere.along.the.value.chain.and.the.text.discusses.(pages.246–247).the.potential.for.such.fits.in.the.areas.of.R&D,.supply.chain,.manufacturing,.distribution,.sales.and.marketing.and.administrative.support.

These.potential.advantages.are.illustrated.well.in.Figure.8.2.(page.246)..Some.examples.of.companies.that.have.diversified.successfully.into.related.industries.are.given.in.Illustration.Capsule.8.1.(page.245).

When.the.potential.for.economies of scope.is.added.to.these.other.benefits.there.is.a.great.opportunity.for.added.shareholder.value.provided.management.has.successfully.pursued.internal.actions.to.capture.these.benefits.

a Activity 8.2

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

The case for diversifying into unrelated businesses

r Textbook

As.an.alternative.to.related.businesses.an.organisation.can.diversify.into.unrelated.and.uncharted.waters.by.moving.into.a.completely.different.line.of.business..The.aim.here.is.to.grow.revenue.and.earnings..Much.time.is.thus.spent.screening.potential.businesses.to.acquire.or.joint.venture.with..A.number.of.criteria.are.used.by.organisations.contemplating.this.type.of.diversification.and.these.are.spelt.out.on.pages.251..It.is.unusual.to.undertake.unrelated.diversification.by.starting.up.a.new.business.entity.

Pursuing.an.unrelated.strategy.has.several.distinct.attractions.and.these.are.described.on.pages.252.and.254..There.is.an.inherent.attractiveness.in.not.having.all.one’s.eggs.in.the.same.basket.and.an.unrelated.strategy.offers.this.possibility..However.in.order.to.get.the.desired.gains.from.such.a.strategy.there.are.some.challenging.tasks.ahead.for.company.executives.and.these.are.outlined.on.page.254..While.there.are.advantages,.there.are.two.big.drawbacks.to.following.this.strategic.approach:.the.demanding.managerial.requirements.and.the.limited.competitive.advantage.potential..These.are.explained.on.pages.254–255.

a Activity 8.3

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

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

There.is.nothing.to.preclude.a.company.from.diversifying.into.both.related.and.unrelated.businesses..Indeed,.in.actual.practice.the.business.makeup.of.diversified.companies.varies.considerably..The.possible.strategies.using.both.related.and.unrelated.business.entities.is.briefly.considered.at.the.bottom.of.page.256..In.Figure.8.4.(page.257).some.key.questions.are.posed.that.enable.the.elements.of.a.diversification.strategy.to.be.identified.

(Before.proceeding.to.the.next.detailed.section.of.this.topic.it.is.suggested.you.reread.what.has.been.covered.so.far.and.maybe.even.take.a.break.as.the.going.gets.more.rigorous.and.demanding.in.the.next.section).

Evaluating the strategy of a diversified company

r Textbook

Having.come.this.far.in.the.topic.in.considering.alternative.strategic.diversification.options.we.now.need.to.consider.whether.the.effort.is.justified.

This.requires.us.to.introduce.several.new.tools.of.analysis..The.text.spells.out.in.great.details.a.series.of.six.steps.that.should.be.used.to.determine.whether.the.diversifying.move.will.prove.successful.or.not..It.starts.by.first.listing.the.steps.on.pages.257–258.

1.. Evaluating.industry.attractiveness.

2.. Evaluating.business-unit.competitive.strength.

3.. Checking.the.competitive.advantage.potential.of.cross-business.strategic.fits.

4.. Checking.for.resources.fit.

5.. Ranking.the.business.units.on.the.basis.of.performance.and.priority.for.resource.allocation.

6.. Crafting.new.strategic.moves.to.improve.overall.corporate.performance.

Step 1: Evaluating industry attractiveness

It.is.necessary.for.organisations.to.answer.at.least.three.questions.(page.258).in.determining.if.an.industry.is.attractive.for.a.diversification.strategy..The.more.attractive.the.industry.in.which.the.company.is.seeking.to.diversify.the.more.the.prospects.for.success..A.simple.analytical.tool.is.used.to.measure.the.attractiveness.for.each.industry.in.which.the.company.has.diversified..To.determine.attractiveness.a.range.of.measures.are.used.and.these.are.spelt.out.on.page.260..A.weighting.is.allocated.to.each.of.these.factors.and.a.scale.of.1.to.10.is.used.to.determine.the.degree.of.attractiveness.of.each.of.these.measures..How.the.scores.are.interpreted.using.the.weighting.factors.is.set.out.in.Table.8.1.on.page.260..On.pages.259–260.there.is.also.an.explanation.of.the.meaning.of.the.scores.although.some.difficulties.in.calculating.the.scores.are.identified.on.page.260.

Step 2: Evaluating business unit competitive strength

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

a.score..These.factors.are.outlined.on.pages.261–262.and.the.scoring.technique.is.explained.and.interpreted.on.page.262.with.Table.8.2.used.to.give.an.example.of.how.this.scoring/weighting.tool.is.used.

Using.a.nine-cell.matrix.to.simultaneously.portray.industry.attractiveness.and.competitive.strength:.the.industry.attractiveness.and.business.strength.scores.can.be.used.to.portray.the.strategic.positions.of.each.business.in.a.diversified.company..How.this.is.done.is.illustrated.in.Figure.8.5.(page.264).and.the.meaning.of.the.cells.is.explained.on.pages.264.to.the.bottom.of.265..The.nine-cell.attractiveness-strength.matrix.provides.clear,.strong.logic.for.why.a.diversified.company.needs.to.consider.both.industry.attractiveness.and.business.strength.in.allocating.resources.and.investment.capital.to.its.different.businesses.

Step 3: Checking competitive advantage

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

Step 4: Checking for resource fit

But.more.than.just.strategic.fit.identification.is.needed..The.real.test.is.what.competitive.value.can.be.generated.from.these.fits..This.involves.Step.4.which.is.checking.for.resource.fit..The.text.explains.when.resource.fit.exists.(page.266)..One.critical.consideration.of.resource.fit.is.whether.cash.flows.from.the.diversification.will.be.sufficient,.since.some.businesses.might.be.cash.cows.and.others.cash.hogs..These.concepts.are.outlined.in.detail.on.pages.267–268..Note.the.links.between.cash.cows.and.cash.hogs.with.cash.hogs.often.considered.first.for.divestiture.

Viewing.the.diversified.group.of.businesses.as.a.collection.of.cash.flows.and.cash.requirements.is.a.major.step.forward.in.understanding.what.the.financial.ramifications.of.diversification.are.and.why.having.businesses.with.good.financial.resource.fit.is.so.important.

Resource.fit.involves.more.than.cash.flow.considerations.and.these.other.considerations.are.described.in.detail.on.pages.269–270.

A.diversified.company’s.strategy.must.aim.at.producing.a.good.fit.between.its.resource.capability.and.the.competitive.and.managerial.requirements.of.its.businesses..Diversification.is.more.likely.to.enhance.shareholder.value.when.the.company.has.or.can.develop.the.strong.competitive.and.managerial.requirements.of.its.businesses..A.mismatch.between.the.company’s.resource.strengths.and.the.key.success.factors.in.a.particular.business.can.be.serious.enough.to.warrant.divesting.an.existing.business.or.not.acquiring.a.new.business..A.diversified.company.can.fail.the.resource.fit.test.by.not.having.sufficient.resource.depth.to.support.all.of.its.businesses..A.diversified.company.has.to.guard.against.stretching.its.resource.base.too.thin.and.trying.to.do.too.many.things..A.business.has.good.financial.fit.when.it.contributes.to.the.achievement.of.corporate.performance.objectives.and.when.it.materially.enhances.shareholder.value.via.helping.drive.increases.in.the.company’s.stock.price.

Step 5: Ranking performance prospects of business units

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

a.business’s.prospects..It.is.a.short.step.from.ranking.the.prospects.of.business.units.to.drawing.conclusions.about.whether.the.company.as.a.whole.is.capable.of.strong,.mediocre,.or.weak.performance..These.issues.are.discussed.on.pages.270–271.

The.rankings.of.future.performance.generally.determine.what.priority.the.corporate.parent.should.give.to.each.business.in.terms.of.resource.allocation..Business.subsidiaries.with.the.brightest.profit.and.growth.prospects.and.solid.strategic.and.resource.fits.generally.should.head.the.list.for.corporate.resource.support.

For.a.company’s.diversification.strategy.to.generate.ever-higher.levels.of.performance,.corporate.managers.have.to.do.an.effective.job.of.steering.resources.out.of.low.opportunity.areas.into.high-opportunity.areas..The.text.(page.271).suggests.how.decisions.might.be.made.as.to.which.subsidiaries.might.receive.most.of.the.available.resources.while.Figure.8.7.(page.271).sets.out.the.options.(strategic.and.financial).for.allocating.resources.among.competing.business.units.in.the.diversified.structure.

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

The.diagnosis.and.conclusions.flowing.from.the.five.preceding.analytical.steps.set.the.agenda.for.crafting.strategic.moves.to.improve.a.diversified.company’s.overall.performance..The.strategic.options.boil.down.to.five.broad.categories.of.actions.and.these.are.listed.on.pages.271–282..The.key.strategies.are.doing.nothing.new,.broadening.the.business.base,.divesting,.restructuring,.and.going.multinational.with.diversifying.

a Activity 8.4

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

After a company diversifies: The four main strategy alternatives

There.are.two.options.for.divesting.a.business:.selling.it.off.and.spinning.it.off.to.an.independent.company..The.text.gives.examples.of.both.these.strategies.on.pages.275–276..There.can.be.great.difficulties.in.finding.a.buyer.for.a.business.that.a.company.is.wanting.to.divest.

A.third.strategy.for.a.business.is.to.restructure.by.getting.rid.of.some.unprofitable.business.units.and.acquiring.others..The.text.points.out.(page.276).when.this.is.an.appealing.strategy..Some.examples.are.given.of.American.companies.that.have.pursued.these.strategies..What.is.not.clear.is.if.the.strategy.has.led.to.long-term.success.in.the.examples.given..The.final.strategy.is.the.broadest.of.all.and.it.involves.going.multinational.in.diversification.endeavours..Here.there.are.a.diversity.of.businesses.and.a.number.of.different.national.markets..Such.a.strategy.has.an.appeal.for.a.variety.of.reasons.and.these.are.outlined.in.detail.on.page.279..Significantly.these.strategies.can.be.pursued.simultaneously..In.Illustration.Capsule.8.5.page.280.we.are.shown.four.examples.of.companies.pursuing.this.diversification.approach..Spectrum.could.also.be.identified.with.this.type.of.business.strategy.with.its.multinational.focus.

The.text.concludes.this.chapter.(page.282).by.pointing.out.the.potential.competitive.advantages.such.a.strategy.presents.but.also.gives.some.cautionary.warnings.about.the.dangers.such.a.diversification.strategy.might.create.

a Activity 8.5

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

SummaryDiversification.becomes.an.attractive.strategy.when.a.company.runs.out.of.profitable.growth.opportunities,.and.its.purpose.is.to.build.shareholder.value.which.is.the.ultimate.justification.for.diversifying..Strategies.for.entering.new.businesses.would.be.acquisition,.internal.start-up.or.either.a.joint.venture.or.strategic.partnership..The.path.of.diversification.would.be.through.a.related.or.unrelated.business..Related.businesses.possess.competitively.valuable.cross-business.value.chain.matchups,.and.unrelated.businesses.have.very.dissimilar.value.chains,.containing.no.competitively.useful.cross-business.relationships..Moreover,.there.is.nothing.that.would.prevent.a.company.from.subscribing.to.a.combination.of.the.two.related-unrelated.diversification.strategies.

When.examining.a.diversified.company’s.strategy.to.decide.on.how.to.improve.its.performance,.a.strategic.analyst.must.evaluate.the.industry.attractiveness,.business-unit.competitive.strength,.check.for.cross-business.strategic.and.resource.fits,.rank.the.business.units.on.the.basis.of.performance.and.priority.for.resource.allocation,.and.craft.new.strategic.moves.to.improve.overall.corporate.performance..After.the.company.diversifies,.it.needs.to.broaden.its.business.base,.narrow.its.diversification.base,.restructure.its.business.line-up.and/or.consider.the.diversity.of.its.national.markets..This.will.then.require.acting.socially.responsible.when.considering.strategic.ethical.decisions.

f Activity 8.3

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

Unit evalUation by stUdents

To.ensure.that.the.units.offered.in.our.graduate.management.programs.are.of.the.highest.standard,.we.ask.for.a.few.minutes.of.your.time.to.complete.the.brief.evaluation.questionnaires..

Please.note.that.there.are.two.evaluation.forms.associated.with.this.unit..You.will.have.an.opportunity.to.comment.on.matters.relating.to.teaching/learning and unit content.via.an.electronic.evaluation.form..This.form.will.become.available.on.the.MySCU.site.for.this.unit.late.in.the.trimester..You.are.strongly.encouraged.to.provide.comment.via.the.MySCU.site..

In.addition,.the.below.evaluation.form.provides.an.opportunity.for.you.to.comment.on.administrative matters.associated.with.the.unit..Please.complete.this.form.and.return.it.in.the.reply-paid.envelope.provided..Your.feedback.is.important.to.our.review.process..

Thank.you.

GCM graduate college of management

Feedback RegaRding administRative matteRs

If.you.wish.to.add.written.comments.please.do.so.in.the.spaces.provided.

Please.return.your.evaluation.to.the.Graduate.College.of.Management,.SCU,.Locked.Bag.4,.Coolangatta.QLD.4225.Australia.

Thanks.for.your.participation.

Unit name and code: MNG00716 – Strategic Management

Name of teaching staff: Tri. offered:

Country are you studying in:

Unit evalUation

For.Items.1–13,.please.indicate.the.extent.to.which.you.agree.or.disagree.with.the.statements.about.the.unit.by.using.the.following.scale:

1 = Strongly agree 2 = Agree 3 = Neutral 4 = Disagree 5 = Strongly disagree

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

Materials provided for the unit

. 1.. The.unit.print.materials.were.delivered.on.time.to.meet.my.learning.needs.. 1. 2. 3. 4. 5

. 2.. The.unit.print.materials.were.suitably.formatted.and.presented.. 1. 2. 3. 4. 5

. 3.. The.unit’s.MySCU.site.was.available.on.time.to.meet.my.learning.needs.. 1. 2. 3. 4. 5

. 4.. I.was.able.to.readily.access.the.MySCU.site.. 1. 2. 3. 4. 5

. 5.. Material.provided.on.the.MySCU.site.was.of.suitable.format.and.size.. 1. 2. 3. 4. 5

Assessment

. 6.. The.arrangements.for.submitting.assignments.were.suitable.. 1. 2. 3. 4. 5

. 7.. My.work.was.marked.and.returned.within.a.reasonable.time.. 1. 2. 3. 4. 5

91MNG00716 – Unit evaluation by students

Other activities/resources in the unit

You.may.have.participated.in.one.or.more.of.the.following.activities.in.this.unit.–.teletutorials,.workshops,.online.discussion.forums.–.or.received.audiotapes..If.so,.please.answer.the.appropriate.question(s).

. 8.. The.teletutorials.for.this.unit.were.beneficial.to.my.learning.. 1. 2. 3. 4. 5

. 9.. The.workshop.for.this.unit.was.beneficial.to.my.learning.. 1. 2. 3. 4. 5

.10.. Online.resources.were.beneficial.to.my.learning.. 1. 2. 3. 4. 5

. 11.. The.online.discussion.forums.were.beneficial.to.my.learning.. 1. 2. 3. 4. 5.

. 12.. The.audiotapes.for.this.unit.were.beneficial.to.my.learning.. 1. 2. 3. 4. 5.

. 13.. The.digital.recordings.for.this.unit.were.beneficial.to.my.learning.. 1. 2. 3. 4. 5

Comments on Items 1–13

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

Staff contact

For.Items.14–19,.the.1–5.scale.means.the.following:

1 = Always 2 = Usually 3 = Sometimes 4 = Rarely 5 = Never

Please.circle.the.number.that.most.accurately.reflects.your.experience.

. 14.. When.I.had.queries.about.administrative.matters:

. (a).I.was.easily.able.to.access.information.via.the.Handbook.or.website.. 1. 2. 3. 4. 5

. (b).I.was.easily.able.to.make.contact.with.the.appropriate.staff.. 1. 2. 3. 4. 5

. (c).I.was.able.to.get.an.answer.to.my.query.within.a.reasonable.time.. 1. 2. 3. 4. 5

.15.. When.I.had.queries.about.academic.matters:

. (a).I.was.easily.able.to.make.contact.with.the.appropriate.staff.. 1. 2. 3. 4. 5

. (b).I.was.able.to.get.an.answer.to.my.query.within.a.reasonable.time.. 1. 2. 3. 4. 5

.16.. When.I.had.technical.queries.regarding.use.of.MySCU:

. (a).I.was.easily.able.to.make.contact.with.the.appropriate.staff.. 1. 2. 3. 4. 5

. (b).I.was.able.to.get.an.answer.to.my.query.within.a.reasonable.time.. 1. 2. 3. 4. 5

.17.. Messages.left.for.the.tutor.were.responded.to.in.a.timely.manner.. 1. 2. 3. 4. 5.

. 18.. The.tutor.was.responsive.and.supportive.in.interacting.with.me.. 1. 2. 3. 4. 5.

. 19.. The.tutor.had.a.good.knowledge.of.the.subject.. 1. 2. 3. 4. 5.

Comments on Items 14–19

Administrative support for the unit overall

For.Item.20,.the.1–5.scale.means.the.following:

1 = Excellent 2 = Good 3 = Adequate 4 = Poor 5 = Very poor

Please.circle.the.number.that.most.accurately.reflects.your.opinion.

.20.. All.things.considered.I.would.rate.this.unit:.. 1. 2. 3. 4. 5

Additional comments on the unit

On.a.separate.piece.of.paper,.please.suggest.ways.we.could.improve.any.aspect.of.administrative.support.in.this.unit..You.may.wish.to.include.comments.under.the.headings.of:

Administrative support

University services

General (e.g. Would you recommend this course/unit?)

Topic 9 Strategy, ethics and

environmental sustainability

IntroductionIn.this.topic.and.Topic.11.we.take.a.different.approach.to.strategy.than.we.find.in.other.topics..These.two.topics.are.concerned.with.the.people.who.lie.behind.the.making.of.strategy.and.their.behaviour..We.deal.with.some.issues.that.are.complex.and.often.emotional..In.between.we.focus.in.Topic.10.on.the.implementation.of.strategy.

Let.us.start.this.topic.in.a.completely.different.and.thought.provoking.way..We.will.commence.with.two.activities.that.will.highlight.the.types.of.issues.to.be.raised.

a Activity 9.1

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

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

Objectives

•. explain.the.concept.of.business.ethics

•. distinguish.between.the.schools.of.thought.concerning.business.ethics

•. evaluate.the.three.categories.of.management.morality

•. describe.the.main.drivers.of.unethical.behaviour

•. explain.the.various.approaches.organisations.can.take.towards.managing.ethical.conduct

•. appraise.why.business.practices.should.be.ethical

•. distinguish.between.social.responsibility.and.social.conscience

•. explain.various.ways.in.which.businesses.can.exhibit.socially.responsible.behaviour

•. examine.the.moral.and.business.cases.for.social.responsibility

•. assess.the.controversy.concerning.the.actions.of.business.executives.in.their.approaches.to.social.responsibility.

Materials required

TextbookThompson.et.al..Chapter.9

Reading9.1. Branco,.MC.&.Rodrigues,.LL.2006,.‘Corporate.Social.Responsibility.and.

Resource-Based.Perspectives’,.Journal of Business Ethics,.vol..69,.iss..2,.December,.pp..111–132.

There.are.two.cases.in.our.textbook.that.will.be.used.to.illustrate.the.content.of.this.topic..They.are.Cases.25.and.26..The.first.deals.with.the.ethics.and.social.responsibility.of.a.very.large.liquor.and.wine.producer,.Gallo.in.the.USA;.the.second.focuses.on.the.use.of.cheap.foreign.labour.in.the.manufacture.of.goods.for.Western.markets.

r Textbook

Read Cases 25 and 26 in the textbook identifying issues of ethics and social responsibility in the cases.

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

Corporate Social Responsibility (CSR) and competitive advantage

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

r Reading 9.1

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

r Textbook

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

95MNG00716 Topic 9 – Strategy, ethics and environmental sustainability

Business ethics in the global community

Notions.of.right.and.wrong,.fair.and.unfair,.moral.and.immoral,.ethical.and.unethical.are.present.in.all.societies,.organisations,.and.individuals..Some.concepts.of.what.is.right.and.what.is.wrong.are.universal.and.transcend.almost.all.cultures..There.are.important.instances.in.which.what.is.deemed.fair.or.unfair,.what.constitutes.proper.regard.for.human.rights.and.what.is.considered.ethical.or.unethical.in.business.situations.varies.from.one.society.or.country.to.another..Hence,.there.are.occasions.when.it.is.relative.whether.certain.actions.or.behaviours.are.right.or.wrong.

Religious.beliefs,.historic.traditions,.social.customs,.and.prevailing.political.and.economic.doctrines.all.heavily.affect.what.is.deemed.ethical.or.unethical.in.a.particular.society.or.country..There.are.differences.in.the.degree.to.which.some.ethical.behaviours.are.considered.more.important.than.others..Apart.from.certain.universal.basics,.there.are.variations.in.what.societies.generally.agree.to.be.right.and.wrong.in.the.conduct.of.business.activities.and.certainly.there.are.cross-country.variations.in.the.degree.to.which.certain.behaviours.are.considered.unethical.

The.view.that.what.constitutes.ethical.or.unethical.conduct.can.vary.according.to.time,.circumstance,.local.cultural.norms,.and.religious.convictions.leads.to.the.conclusion.that.there.is.no.objective.way.to.prove.that.some.countries.or.cultures.are.correct.and.others.are.wrong.about.proper.business.ethics..To.some.extent,.therefore,.there.is.merit.in.the.school.of.ethical.relativism’s.view.that.what.is.deemed.right.or.wrong,.fair.or.unfair,.moral.or.immoral,.ethical.or.unethical.in.business.situations.has.to.be.viewed.in.the.context.of.each.country’s.local.customs,.religious.traditions,.and.societal.norms.

One.of.the.thorniest.ethical.problems.that.multinational.companies.face.is.the.degree.of.cross-country.variability.in.paying.bribes.as.part.of.business.transactions..In.many.countries.it.is.normal.to.make.payments.to.prospective.customers.in.order.to.win.or.retain.their.business..According.to.a.1999.Wall.Street.Journal.report,.30.to.60.per.cent.of.all.business.transactions.in.Eastern.Europe.involved.paying.bribes.and.the.costs.of.bribe.payments.averaged.2.to.8.per.cent.of.revenues..The.2005.Global.Corruption.Report.found.that.corruption.among.public.officials.and.in.business.transactions.is.widespread.across.the.world.

Companies.that.forbid.the.payment.of.bribes.and.kickbacks.in.their.codes.of.ethical.conduct.and.that.are.serious.about.enforcing.this.prohibition.face.a.formidable.challenge.in.those.countries.where.bribery.and.kickback.payments.have.been.entrenched.as.a.local.custom.for.decades.and.are.not.considered.unethical.by.many.people..The.same.goes.for.multinational.companies.that.do.business.in.countries.where.bribery.is.legal.and.also.in.countries.where.bribery.or.kickbacks.are.tolerated.or.customary..Some.people.say.that.bribes.and.kickbacks.are.no.different.from.tipping.for.service.at.restaurants.–.you.pay.for.a.service.rendered.

Cross-country.variability.in.business.conduct.and.ethical.standards.make.it.a.formidable.challenge.for.multinational.companies.to.educate.and.motivate.their.employees.worldwide.to.respect.customs.and.traditions.of.other.nations.and.at.the.same.time.adhere.to.the.company’s.own.particular.code.of.ethical.behaviour.

While.it.is.indisputable.that.cultural.differences.abound.in.global.business.activities.and.that.these.cultural.differences.sometimes.give.rise.to.differences.in.ethical.principles.and.standards,.it.might.be.the.case.that.in.many.instances.of.cross-country.differences.one.side.is.‘more.right’.than.the.other..If.so,.then.the.task.of.the.multinational.manager.is.to.discover.what.the.right.ethical.standards.are.and.act.accordingly.

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

Schools of thought about ethics

This.section.in.the.textbook.(pages.291–297).is.heavy.going.and.delves.into.some.philosophical.considerations..In.turn.the.text.discusses.three.schools.of.ethics:

•. ethical.universalism.where.right.and.wrong.concepts.are.universal

•. ethical.relativism.where.right.and.wrong.decisions.need.to.be.culturally.based

•. integrative.social.contracts.which.is.a.combination.of.the.previous.two.and.takes.a.middle.ground.recognising.that.some.standards.are.universal.and.others.are.culturally.relevant.

In.the.school.of.ethical.relativism.two.examples.are.given.of.where.behaviour.has.to.be.seen.in.cultural.context:

•. underage.and.unsafe.labour.practices.(here.is.where.Case.26.is.very.pertinent)

•. bribes.and.kickbacks.

These.examples.would.suggest.that.there.need.to.be.some.multiple.sets.of.ethical.standards.but.the.dangers.of.such.an.approach.are.outlined.on.pages.294–295.

The.text.then.goes.on.to.argue.that.the.integrative social contracts theory is.the.preferred.approach.because.it.accommodates.the.best.features.of.the.other.two.approaches.without.endorsing.the.extreme.position.of.either.

The three categories of management morality

It.is.possible.to.consider.ethics.in.terms.of.three.moral.approaches.that.managers.might.take.to.business.behaviour..These.three.categories.are.described.on.pages.297–299:

•. The.moral.manager.–.moral.managers.are.dedicated.to.high.standards.of.ethical.behaviour,.both.in.their.own.actions.and.in.their.expectations.of.how.the.company’s.business.is.to.be.conducted.

•. The.immoral.manager.–.immoral.managers.are.actively.opposed.to.ethical.behaviour.in.business.and.wilfully.ignore.ethical.principles.in.their.decision.making.

•. The.amoral.manager.–.amoral.managers.appear.in.two.forms:.the.intentionally.amoral.manager.and.the.unintentionally.amoral.manager..Intentionally.amoral.managers.consciously.believe.business.and.ethics.are.not.to.be.mixed.because.different.rules.apply.in.business.versus.other.realms.of.life..Unintentionally.amoral.managers.do.not.pay.much.attention.to.the.concept.of.business.ethics.either,.but.for.different.reasons.

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

a Activity 9.2

What approach to business ethics would you say Nike and Walmart take? Considering where Nike was some years back, accused of child and human exploitation, it is fascinating to see where they are now. Take a look at the following website http://ethisphere.com/wme2009/ and note how many firms there are that you wouldn’t have thought eligible.

The.discussion.so.far.has.not.addressed.the.fundamental.question.as.to.whether.company.strategies.should.be.ethical..The.textbook.suggests.(pages.307–310).that.what.is.preached.in.this.regard.is.not.always.practiced..For.an.example.of.an.ethically.aligned.and.progressive.strategy,.got.to.GE’s.examples.on.Illustration.Capsule.9.2.(page.311).

What are the drivers of unethical strategies and business behaviour?

Why.do.the.people.in.business.engage.in.unethical.behaviour?.The.text.suggests.three.main.reasons.and.then.discusses.each.of.them.in.turn.with.examples.(pages.299–303):

•. overzealous.or.obsessive.pursuit.of.personal.gain,.wealth,.and.other.selfish.interests

•. heavy.pressures.on.company.managers.to.meet.or.beat.earnings.targets

•. a.company.culture.that.puts.the.profitability.and.good.business.performance.ahead.of.ethical.behaviour.

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

Approaches to managing a company’s ethical conduct

r Textbook

Read page 307.

The.stance.a.company.takes.in.dealing.with.or.managing.ethical.conduct.at.any.given.point.can.take.any.of.four.basic.forms:

•. the.unconcerned.or.non-issue.approach

•. the.damage.control.approach

•. the.compliance.approach

•. the.ethical.culture.approach.

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

a Activity 9.3

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

Social responsibility and corporate citizenship strategies

r Textbook

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

•. Pursuing.unethical.strategies.puts.a.company’s.reputation.at.high.risk.and.can.do.lasting.damage

•. Rehabilitating.a.company’s.shattered.reputation.is.time-consuming.and.costly

•. Customers.shun.companies.known.for.their.shady.behaviour

•. Companies.with.reputations.for.unethical.conduct.have.considerable.difficulty.in.recruiting.and.retaining.talented.employees.

Numerous.textbooks.and.management.journals.espouse.the.value.of.being.ethical;.we.usually.see.this.in.the.form.of.case.studies.that.indicate.failure.of.the.firm.due.to.unethical.or.unsustainable.conduct..However,.it.is.also.worthwhile.considering.just.how.many.firms.prosper.despite.their.apparent.lack.of.regard.for.people,.the.environment,.broad.stakeholder.view.and.even.their.customers..Think.of.businesses.engaged.in.casinos,.tobacco,.alcohol,.adult.and.the.military.for.starters.

Many.companies.have.adopted.codes.of.ethical.behaviour.and.put.these.out.in.the.public.domain..A.good.example.of.this.is.found.in.Illustration.9.2.on.page.311..Consider.the.challenges.when.it.comes.to.employing.cheap.labour.in.locations.where.many.companies.source.their.imports..Bear.in.mind.the.added.pressure.of.globalisation.and.the.penchant.of.consumers.wanting.the.cheapest.prices.on.all.sorts.of.products.and.services..These.have.to.be.sourced.in.fiercely.competitive.conditions.

At.this.stage.it.might.be.interesting.to.re-evaluate.your.own.business.ethics.from.Illustration.Capsule.9.1.(page.306).which.you.may.have.completed.at.the.beginning.of.the.topic.

a Activity 9.4

Consider how difficult it would be to lead a global or MNC firm, ensuring you are behaving ethically according to the universalist and relativist ethical schools. What, for example, would you do if you were a CEO of a large timber logging company which was restricted from cutting down old growth timber. Consider the following:

• Would you look to obtain sources from other countries?

• Would you apply the same rigorous environmental standards in say Penang that you would have to apply in say Tasmania?

• What choices do you have?

• How do you please your shareholders and the communities you harvest your product from?

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

Strategy and social responsibility

r Textbook

Read pages 310–321

Social.responsibility.is.a.huge.area.of.study.and.has.been.debated.for.over.two.centuries..There.are.many.aspects.to.be.considered.but.we.will.try.to.focus.on.the.meaning.of.the.term.and.its.use.when.studying.business.strategy..We.can.do.no.more.than.skim.over.the.surface.of.this.heavily.researched.area.

The.first.issue.is.to.define.social.responsibility,.and.this.concept.and.that.of.business.having.a.social conscience.are.covered.in.this.section.

Organisations.have.a.number.of.different.strategies.they.can.adopt.to.demonstrate.that.they.are.seeking.to.behave.in.a.socially.responsible.manner..Five.of.these.actions.are.described.in.turn.on.pages.311.to.321:

•. efforts.to.employ.an.ethical.strategy.and.observe.ethical.principles.in.operating.the.business

•. making.charitable.contributions,.donating.money.and.the.time.of.company.personnel.to.community.service.endeavours,.supporting.various.worthy.organisational.causes,.and.reaching.out.to.make.a.difference.in.the.lives.of.the.disadvantaged

•. actions.to.protect.or.enhance.the.environment.and.in.particular,.to.minimise.or.eliminate.any.adverse.impact.on.the.environment.stemming.from.the.company’s.own.business.activities

•. actions.to.create.a.work.environment.that.enhances.the.quality.of.life.for.employees.and.makes.the.company.a.great.place.to.work

•. actions.to.build.a.workforce.that.is.diverse.with.respect.to.gender,.race,.national.origin,.and.perhaps.other.aspects.that.different.people.bring.to.the.workplace.

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

Linking strategy and social responsibility

There.can.be.no.generic.approach.linking.a.company’s.strategy.and.business.conduct.to.social.responsibility..The.combination.of.socially.responsible.endeavours.a.company.elects.to.pursue.defines.its.social.responsibility.strategy..Starbucks.is.a.classic.example.of.a.company.seeking.to.put.something.back.into.the.community.it.serves..While.the.strategies.and.actions.of.all.socially.responsible.companies.have.a.sameness.in.the.sense.of.drawing.on.the.five.categories.of.socially.responsible.behaviour.shown.in.Figure.9.2.each.company’s.version.of.being.socially.responsible.is.unique.

Another.interesting.example.of.corporate.social.responsibility.is.that.of.BP.Wild.Bean.cafes.and.McDonalds.McCafe..In.each.case.both.companies.have.moved.to.100%.rainforest.alliance.certified.coffee.(Google.it.for.more.information)..However,.whilst.BP’s.Wild.Bean.cafes.have.always.had.100%.Rainforest.alliance.beans.(something.they.don’t.brag.about.or.heavily.publicise),.McDonalds.only.recently.went.down.this.path,.after.a.heavy.publicity.campaign.espousing.their.corporate.social.responsibility.values.when.they.ventured.into.having.15%.rainforest.alliance.certified.coffee..It.is.somewhat.pleasing.to.see.competitive.forces.upping.the.ante,.and.therefore.McDonalds.have.gone.to.100%..However.the.question.still.remains,.what.if.BP.and.others.hadn’t.done.this,.would.McDonalds.have.been.so.keen.to.get.on.board?.Doubtful.is.my.answer.

The moral case for corporate social responsibility

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

The business case for socially responsible behaviour

A.revisitation.of.this.section.reveals.there.are.several.reasons.why.the.exercise.of.social.responsibility.is.good.business:

•. it.generates.internal.benefits.particularly.as.concerns.employee.recruiting,.workforce.retention,.and.training.costs

•. it.reduces.the.risk.of.reputation-damaging.incidents.and.can.lead.to.increased.buyer.patronage

•. it.is.in.the.best.interest.of.shareholders.

Each.of.these.reasons.is.explained.in.detail.on.pages.319–321..Companies.that.take.social.responsibility.seriously.can.improve.their.business.reputations.and.operational.efficiency.while.also.reducing.their.risk.exposure.and.encouraging.loyalty.and.innovation.

The controversy over do-good executives

While.there.is.substantial.agreement.that.businesses.have.stakeholder.and.societal.obligations.and.that.these.must.be.incorporated.into.a.company’s.overall.strategy.and.into.the.conduct.of.its.business.operations,.there.is.much.less.agreement.about.the.extent.to.which.‘do-good’.executives.should.pursue.their.personal.vision.of.a.better.world.using.company.funds..The.text.offers.a.sound.discussion.on.this.point,.on.page.320,.where.they.discuss.what.is.in.the.best.interest.of.shareholders..Whilst.there.are.real.problems.with.disconnecting.business.behaviour.from.the.wellbeing.of.non-owner.stakeholders.and.the.wellbeing.of.society.at.large,.a.broad.stakeholder.view.is.probably.highly.appropriate.for.modern.managers.

While.there.is.legitimate.concern.about.the.use.of.company.resources.for.do-good.purposes.and.the.motives.and.competencies.of.business.executives.in.functioning.as.social.engineers,.it.is.tough.to.argue.that.businesses.have.no.obligation.to.non-owner.stakeholders.or.to.society.at.large..How.much.attention.should.organisations.pay.to.questions.of.social.responsibility.and.how.much.attention.should.they.pay.to.shareholders’.interests?

Linking social performance targets to executive compensation

Perhaps.the.most.sure.fire.way.to.enlist.genuine.commitment.to.corporate.social.responsibility.initiatives.is.to.link.the.achievement.of.social.performance.targets.to.executive.compensation.

According.to.one.survey,.80.per.cent.of.surveyed.CEOs.believe.that.environmental.and.social.performance.metrics.are.a.valid.part.of.measuring.a.company’s.overall.performance.

SummaryBusiness.ethics.means.the.application.of.general.ethical.principles.and.standards.to.business.behaviour,.and.business.actions.are.judged.by.the.general.ethical.standards.of.society,.not.by.a.special.set.of.permissive.standards..The.three.categories.of.management.morality.would.be.the.moral,.immoral.and.amoral.manager..The.drivers.of.unethical.strategies.would.be.overzealous.pursuit.of.personal.gain,.heavy.pressure.on.company.managers,.and.a.company.culture.that.puts.profitability.ahead.of.ethical.behaviour..The.school.of.ethical.universalism.holds.that.human.nature.is.the.same.everywhere.and.thus.that.ethical.rules.are.cross-culture..The.school.of.ethical.relativism.holds.that.different.societal.cultures.and.customs.give.rise.to.divergent.values.and.ethical.principles.of.right.and.wrong.

The.approaches.taken.to.manage.a.company’s.ethical.conduct.would.be.the.unconcerned.or.non-issue,.the.damage.control,.compliance.and.ethical.culture.approach..The.essence.of.socially.responsible.business.behaviour.is.that.a.company.should.strive.to.balance.the.benefits.of.strategic.actions.to.benefit.shareholders.and.to.proactively.mitigate.any.harmful.effects.on.the.environment.that.its.actions.and.business.can.have..Each.company’s.strategic.efforts.to.operate.in.a.socially.responsible.manner.should.be.custom-tailored.and.matched.to.its.core.values.and.business.mission,.thereby.representing.its.own.statement.about.‘how.we.do.business,.and.how.we.intend.to.fulfil.our.duties.to.all.stakeholders.and.society.at.large’.

(Hang.in.there..We.only.have.two.more.topics.and.three.more.chapters.to.negotiate.)

f Activity 9.4

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

Topic 10 Building an organisation

capable of good strategy execution

IntroductionImplementing.strategy.is.an.action-oriented,.operations-driven.activity.revolving.around.managing.people.and.business.processes..It.is.tougher.and.more.time-consuming.than.crafting.strategy.and.it.is.where.most.strategies.fail..It.is.often.said.that.successful.strategy.is.10%.crafting.and.90%.implementation..Success.depends.on.the.manager.doing.a.good.job.of.leading,.motivating.and.working.with.others.to.create.fits.between.strategy.and.how.an.organisation.does.things.

In.this.topic.we.will.initially.tackle.the.first.of.the.strategy.implementation.tasks:.building.resource.capabilities.and.structuring.the.organisation..We.will.see.that.it.is.largely.a.people.management.issue,.finding.the.right.people.and.motivating.the.organisation.to.build.the.necessary.capabilities.to.implement.strategies.that.lead.to.the.development.of.competitive.advantage.

Chapter.10.examines.the.process.of.executing.an.organisational.strategy..It.has.an.emphasis.on.the.conversion.of.a.strategy.into.actions.and.good.results.for.organisations..The.chapter.explores.how.executing.strategy.is.an.operations-driven.activity.that.revolves.around.the.management.of.people.and.business.processes..It.asserts.that.successfully.executing.a.strategy.depends.on.doing.a.good.job.of.working.with.and.through.others,.building.and.strengthening.competitive.capabilities,.motivating.and.rewarding.people.in.a.strategy-supportive.manner,.and.instilling.a.discipline.of.getting.things.done.

Chapter.11.discusses.five.additional.managerial.actions.that.facilitate.the.success.of.a.company’s.strategy.execution.efforts..These.include.(1).marshalling.resources.to.support.the.strategy.execution.effort,.(2).instituting.policies.and.procedures.that.facilitate.strategy.execution,.(3).adopting.best.practices.and.striving.for.continuous.improvement.in.how.value.chain.activities.are.performed,.(4).installing.information.and.operating.systems.that.enable.company.personnel.to.carry.out.their.strategic.roles.proficiently,.and.(5).tying.rewards.and.incentives.directly.to.the.achievement.of.strategic.and.financial.targets.and.to.good.strategy.execution.

In.the.final.topic.of.this.unit.(Topic.11).we.will.look.at.corporate.culture.and.the.leadership.that.is.needed.to.ensure.that.the.strategies.that.have.been.crafted.will.be.executed.and.implemented..That.will.involve.reviewing.Chapter.12.in.the.textbook.

The.last.three.chapters.need.to.be.considered.as.a.unit.on.their.own..There.are.eight.separate.but.inter-related.aspects.of.implementation.that.we.will.now.embark.upon..These.are.broken.up.across.three.chapters.in.the.textbook.but.only.two.topics.in.this.Study.Guide..This.topic.also.has.a.lot.of.content.but.the.concepts.are.not.difficult.and.need.to.be.taken.slowly.with.time.to.reflect.on.each.of.the.many.issues.raised.

Objectives

•. outline.the.critical.components.of.an.effective.strategic.implementation.strategy

•. differentiate.the.components.of.the.strategy.execution.process

•. explain.the.elements.of.an.effective.staffing.plan.for.an.organisation.implementing.a.strategy

•. explain.the.importance.of.building.core.competencies.and.capabilities.in.organisations

•. outline.how.choices.are.made.about.outsourcing.or.keeping.activities.in-house

•. assess.the.elements.required.in.structuring.the.work.effort.to.achieve.strategy.execution

•. explain.how.new.policies.and.procedures.can.assist.in.strategy.implementation

•. describe.the.types.of.best.practices.that.can.be.used.to.monitor.strategy.execution.processes

•. examine.the.key.features.needed.in.information.and.operating.systems.to.assist.in.strategy.execution

•. explain.the.essential.elements.involved.in.tying.rewards.and.incentives.to.strategy.execution.

Materials required

TextbookThompson.et.al..Chapters.10.and.11.

ReadingsNil.

Unless.you.have.a.trained,.literate,.motivated.Work.force,.and.give.them.decision-making.authority,.you.don’t.get.satisfied.customers.

(Anthony.Rucci.Chief.Administrative.Officer,.Sears.Roebuck)

A framework for executing strategy

r Textbook

Strategy.is.a.tough.management.job.because.of.the.demanding.variety.of.managerial.activities.that.have.to.be.performed..There.are.numerous.ways.to.tackle.each.activity..It.also.requires.a.high.level.of.people.management.skills.and.demands.perseverance.to.successfully.launch.a.variety.of.initiatives..Managers.find.that.there.are.a.large.number.of.bedevilling.issues.to.be.worked.out.and.they.constantly.find.themselves.battling.resistance.to.change.within.the.organisation..This.compounds.the.difficulties.of.integrating.the.efforts.of.work.groups.into.a.smoothly.functioning.whole.

Implementing.a.new.strategy.takes.adept.leadership.to:

•. overcome.pockets.of.doubt

•. build.consensus

•. secure.commitment.of.concerned.parties

•. get.all.implementation.pieces.in.place.and.coordinated.

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

The.simple.message.on.pages.329–331.is.that.executing.strategy.is.more.difficult.than.formulating.it.and.it.requires.the.involvement.of.all.managers.in.an.organisation..Moreover.we.are.reminded.on.page.331.that.there.is.no.one-best-fit.for.executing.strategy.and.that.the.execution.process.must.be.tailor.made.to.fit.the.company’s.own.circumstances.

There.are.eight.components.identified.as.being.essential.for.the.successful.implementation.of.a.strategy.and.these.are.listed.on.pages.329–330.and.well.illustrated.in.Figure.10.1..(page.330)..These.eight.segments.in.Figure.10.1.are.the.content.of.the.next.three.chapters.in.the.textbook..The.starting.point.for.implementing.strategy.is.for.an.organisation.to.know.what.needs.to.be.done.better.and.differently..How.this.is.done.will.differ.between.large.and.small.organisations.(page.330–331).

Building resource capabilities and structuring the organisation

The.ultimate.goal.of.strategy.implementation.is.to.unite.the.total.organisation.behind.the.chosen.strategy..The.aim.is.to.see.that.activities.are.done.in.a.manner.that.tightly.matches.first-rate.strategy.execution..There.is.a.need.to.generate.commitment.among.staff.so.enthusiastic.crusaders.emerge.to.carry.out.the.strategy..This.should.create.a.series.of.strategy-supportive.‘fits’.within.the.organisation.

To.be.successful.implementation.involves.a.company’s.whole.management.team..Every.organisation.unit.and.all.employees.have.a.role.and.need.to.be.committed..The.CEO,.other.senior.executives.and.heads.of.major.organisational.units.must.lead.the.process.and.orchestrate.major.initiatives..However,.they.must.rely.on.middle.and.lower-level.managers.to.push.things.on.the.front.line.and.see.that.strategy.is.well-executed.on.a.daily.basis.

In.order.to.lead.the.implementation.process,.managers.must.take.either.an.active,.visible.role.or.a.low-key,.behind.the.scenes.role..They.may.make.decisions.authoritatively.or.based.on.consensus;.they.may.delegate.much.or.little;.they.may.be.personally.involved.in.details.or.coach.others.to.carry.day-to-day.burdens;.and.they.may.proceed.swiftly.to.achieve.results.or.move.deliberately,.content.with.gradual.progress.

There.are.a.number.of.factors.influencing.how.managers.lead.the.implementation.process..It.really.depends.on:

•. their.experience.and.knowledge.of.business

•. whether.they.are.new.to.the.job.or.seasoned.in.the.job

•. the.extent.of.their.network.of.personal.relationships

•. their.individual.diagnostic,.administrative,.interpersonal,.and.problem-solving.skills

•. the.level.of.authority.given.to.the.manager.to.implement.the.strategy

•. the.leadership.style.that.the.manager.is.most.comfortable.with.to.get.things.done.

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

Staffing the organisation

This.involves.determining.the.skills.required.by.the.core.management.team.that.will.be.needed.to.carry.out.strategy..The.next.task.is.to.find.the.right.people.to.fill.each.slot..The.existing.management.team.may.be.suitable.or.the.core.executive.group.may.need.strengthening..The.company.may.choose.to.promote.from.within.or.to.bring.in.skilled.outsiders..The.text.discusses.(page.332.to.the.bottom.of.page.333).the.importance.of.putting.together.a.strong.management.team.and.the.need.to.recruit.and.retain.capable.employees.

The.main.considerations.in.selecting.people.for.key.positions.begin.with.determining.the.mix.of:

•. backgrounds

•. experiences.and.know-how

•. beliefs.and.values

•. styles.of.managing.and.personalities.

It.is.important.that.the.personal.chemistry.is.right.and.the.talent.base.needs.to.be.appropriate..Picking.a.solid.management.team.needs.to.be.acted.on.early.in.the.implementation.process.

The.key.objective.in.organisation.building.is.to.staff.organisational.units.with.the.specialised.talents,.skills,.and.technical.expertise.needed.to.develop.and.build.core.competencies..The.aim.is.to.build.competitively.valuable.organisational.capabilities..Suggestions.are.given.(pages.335–336).as.to.what.practices.can.be.adopted.in.trying.to.find.the.best.people.for.positions.

Building core competencies

r Textbook

Building.core.competencies,.resource.strengths,.and.organisational.capabilities.that.rivals.cannot.match.is.a.sound.foundation.for.sustainable.competitive.advantage!

Some.of.the.strategically-relevant.core.or.distinctive.competencies.that.may.need.to.be.built.include:

•. greater.proficiency.in.product.development

•. better.manufacturing.know-how

•. capability.to.provide.better.after-sale.service

•. faster.response.to.changing.customer.needs

•. superior.cost-cutting.skills

•. capacity.to.speed.new.products.to.market

•. superior.inventory.management.systems

•. better.marketing.and.merchandising.skills

•. specialised.depth.in.unique.technologies

•. greater.effectiveness.in.promoting.union-management.cooperation.

The.text.gives.a.very.useful.framework.for.building.capabilities,.suggesting.three.stages.in.building.capabilities.(page.337).are.necessary:

Step 1

Step.1.is.to.select.people.with.relevant.skills/experience.and.broaden.or.deepen.their.individual.abilities.as.needed..The.aim.is.to.mould.the.energies.and.work.products.of.individuals.into.a.cooperative.group.effort.to.create.organisational.ability.

Step 2

As.experience.builds,.such.that.the.organisation.learns.to.accomplish.the.activity.consistently.well.and.at.acceptable.cost,.the.‘ability’.translates.into.a.competence.and.an.organisational.capability.

Capabilities.emerge.from.establishing.and.nurturing.collaborative.working.relationships.between.individuals.and.groups.in.departments.and.between.a.company.and.its.external.allies.

Step 3

If.mastery.of.a.core.competence.is.achieved.to.the.point.where.the.organisation.has.the.capability.to.perform.the.activity.better.than.rivals,.the.‘capability’.becomes.a.distinctive.competence.and.holds.potential.for.competitive.advantage..This.is.the.optimal.outcome.of.the.capability-building.process!

Building core competencies

Four.characteristics.concerning.core.competencies.and.capabilities.are.important.and.these.are.detailed.on.pages.337–338:

1.. Core.competencies.are.rarely.grounded.in.skills.or.know-how.of.a.single.department.

2.. They.typically.emerge.from.the.collaborative.efforts.of.different.work.groups.

3.. The.leveraging.of.competencies.into.competitive.advantage.requires.concentrating.more.effort.and.more.talent.than.rivals.on.strengthening.those.competencies.and.creating.valuable.organisational.capabilities.

4.. Sustaining.competitive.advantage.requires.adapting.competencies.to.new.conditions.

The.process.of.building.competitively.valuable.competencies.and.capabilities.involves.managing.human.skills,.knowledge.bases,.and.intellect.and.coordinating.the.efforts.of.related.work.groups..In.addition.there.may.be.the.need.for.collaborative.networking.among.internal.groups.and.with.external.partners..Once.again.senior.managers.have.to.guide.the.process.

The.ongoing.challenge.is.to.broaden,.deepen,.or.modify.competencies.and.capabilities.in.response.to.customer/market.changes..Indeed.a.company.can.be.considered.to.be.a.bundle.of.evolving.competencies.and.capabilities.

Building.core.competencies,.resource.strengths,.and.organisational.capabilities.that.rivals.can’t.match.is.a.sound.basis.for.sustainable.competitive.advantage.

The.keys.to.success.in.building.competencies.and.capabilities.involve:

•. superior.selection

•. training

•. cultural.influences

•. cooperative.networking

•. motivation.

The.important.role.of.training.is.mentioned.on.pages.339–341.

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

a Activity 10.1

Review Illustration Capsule 10.1 on page 334, How General Electric Develops a Talented and Deep Management Team from the textbook.

Identify the four key elements that support General Electric’s efforts to build a talent-rich stable of managers. Has this approach proven to be successful? Explain.

Execution-related aspects of organising the work effort

r Textbook

Part.of.strategy.execution.is.the.organising.of.tasks.and.work.groups.to.carry.out.the.implementation..While.all.organisations.will.have.their.own.way.to.organise.these.tasks.there.are.considerations.that.are.common.to.all.companies.and.these.are.presented.in.Figure.10.3.(page.342).and.discussed.in.detail.on.pages.343–345.

One.of.the.first.decisions.is.to.determine.which.activities.to.perform.internally.and.which.to.outsource..The.advantages.of.outsourcing.activities.are.spelt.out.on.pages.342.with.some.examples.given.of.successful.outsourcing.arrangements..However.there.are.some.dangers.in.excessive.or.unwise.outsourcing.and.these.are.discussed.on.page.344.

The.second.step.is.to.determine.which.activities.will.be.the.main.building.blocks.of.the.organisational.structure.and.the.task.here.(pages.345–346).is.to.determine.which.structures.best.fit.which.strategies.

The.next.challenge.in.implementation.is.to.decide.how.much.authority.and.independence.is.to.be.given.to.each.business.unit.and.employee..The.advantages.and.disadvantages.of.centralised.and.decentralised.structures.are.discussed.on.pages.346–349.and.summarised.well.in.Table.10.1.(page.347)..While.many.organisations.have.moved.towards.more.decentralised.structures.this.creates.challenges.in.maintaining.control.and.capturing.strategic.fit.and.these.issues.are.discussed.on.pages.348–349.

There.are.two.other.issues.that.remain.here.and.the.first.of.these.is.the.need.to.provide.for.some.degree.of.internal.cross-unit.coordination.(pages.349–351)..There.are.many.strategy-critical.activities.that.cut.across.different.functions.and.these.need.to.be.coordinated..The.second.issue.is.to.maintain.collaboration.with.outside.suppliers.and.strategic.allies.(page.351).

Since.the.latest.edition.of.this.text,.the.section.on.organisational.structure.has.been.left.out,.however.in.the.opinion.of.the.writer,.it.is.no.less.important,.regarding.the.execution.of.strategy..In.fact,.strategy.101,.or.even.elementary.management.texts.allude.the.need.of.having.a.strategy.before.a.structure..Mintzberg.engages.with.this.concept.in.his.elaboration.of.the.Design.School.

a Activity 10.2

Review Illustration Capsule 10.2 on page 340 from the textbook, Toyota’s Legendary Production System: A Capability That Translates into Competitive Advantage …

What two TPS techniques do you think are the most unusual? How do you think these help Toyota to pursue a more efficient manufacturing operation?

a Activity 10.3

Complete Exercise 1 on pages 355 of the text.

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

Managing internal operations: Actions that promote good strategy execution

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

r Textbook

From.Figure.11.1.on.page.360.we.can.see.the.five.areas.to.consider.in.this.chapter.are:

•. marshalling.resources

•. instituting.policies.and.procedures

•. adopting.best.practices

•. installing.information.and.operating.systems

•. linking.rewards.and.incentives.to.strategy.execution.

Linking budgets to strategy

Much.of.this.topic.relates.to.setting.budgets.and.allocating.resources.in.order.to.support.effective.strategy.execution..This.is.discussed.on.pages.358–359..This.involves.funding.capital.projects.that.can.make.a.contribution.to.strategy.implementation.and.funding.efforts.to.strengthen.competencies.and.capabilities.or.to.create.new.ones..Often.the.firm.must.shift.resources.–.downsizing.some.areas,.upsizing.others;.killing.those.activities.that.are.no.longer.justified,.and.funding.new.activities.with.a.critical.strategy.role.

New strategies usually call for significant budget reallocations.

Instituting policies and procedures that facilitate strategy implementation

There.are.at.least.three.ways.that.new.policies.and.procedures.can.assist.strategy.execution.and.these.are.illustrated.in.Figure.11.1.and.described.on.pages.359–361..Illustration.Capsule.11.1.shows.how.new.policies.and.procedures.can.be.made.to.work.

Policies.and.procedures.provide.top-down.guidance.regarding.expected.behaviours.and.can.help.align.internal.actions.with.strategy,.channelling.efforts.along.the.intended.path.

They.may.also.enforce.consistency.in.performance.of.activities.in.geographically.scattered.units.and.serve.as.powerful.lever.for.changing.corporate.culture.to.produce.a.stronger.fit.with.a.new.strategy.

The.role.of.new.policies.is.to.channel.behaviours.and.decisions.to.promote.strategy.execution..They.can.be.useful.in.counteracting.the.tendencies.of.people.to.resist.the.chosen.strategy..Too.much.policy.can.be.as.stifling.as.wrong.policy.or.as.chaotic.as.no.policy,.but.often,.the.best.policy.is.a.willingness.to.empower.employees.

Adopting best practices and striving for continuous improvement

The.third.circle.from.Figure.10.1.on.page.330.(Chapter.10).concerns.the.adoption.of.best.practice..Searching.out.and.adopting.best.practices.is.integral.to.effective.implementation..One.of.the.key.tools.is.benchmarking..Benchmarking.has.spawned.a.number.of.new.approaches.to.improve.strategy.execution,.including.reengineering,.TQM.and.continuous.improvement.programs..Best.practice.and.benchmarking.techniques.are.discussed.on.pages.361–370.

The.objectives.of.quality.improvement.programs.are.to.instigate.defect-free.manufacture,.leading.to.superior.product.quality.and.superior.customer.service..The.aim.is.total.customer.satisfaction.

In.implementing.a.philosophy.of.continuous.improvement,.management.must.ensure.that.they.instil.enthusiasm.to.do.things.right.throughout.the.company.and.strive.to.achieve.little.steps.forward.each.day,.i.e..Kaizen..Successfully.instigated,.a.continuous.improvement.philosophy.can.ignite.creativity.in.employees.to.improve.performance.of.value-chain.activities..The.leaders.of.the.program.must.preach.that.there.is.no.such.thing.as.good.enough..In.many.cases.this.requires.significant.reform.to.the.corporate.culture.

In.turn.the.text.outlines.the.characteristics.of.business.process.engineering.(pages.363–368),.TQM.(page.364).and.Six.Sigma.Quality.Control.(pages.364–368).and.the.differences.between.these.tools.is.commented.on.on.page.368..The.text.then.goes.on.to.outline.how.the.benefits.of.these.initiatives.can.be.captured.(page.368–370)..The.five.steps.listed.in.this.regard.on.page.369.are.worthy.of.attention.

A.TQM.culture.starts.with.management.commitment.and.the.installation.of.TQM-supportive.employee.practices..This.requires.management.to.empower.employees.to.do.the.right.things..It.also.requires.the.company.to.provide.employees.with.quick.access.to.required.information..Overall,.management.must.preach.that.performance.can.be.improved.

Installing information and operating systems

r Textbook

Appropriate.support.systems.are.essential.to.promote.successful.strategy.execution.

Some.of.the.types.of.support.systems.include:

•. online.data.systems

•. Internet.and.company.intranets

•. electronic.mail

•. web.pages.

Examples.are.given.on.pages.370–371.of.types.of.systems.that.have.been.put.to.good.use..The.author.of.this.Study.Guide.has.also.had.a.good.deal.of.experience.with.SAP,.a.specialist.in.Enterprise.Resource.Planning.(ERP).and.Business.Intelligence.systems..The.direct.benefit.of.using.an.ERP.is.that.it.integrates.all.parts.of.the.business,.reduces.reporting.times.and.offers.managers.and.users.enhanced.visibility.and.process.improvement.

There.are.many.competitors.in.the.ERP.market,.but.predominantly.SAP,.Microsoft,.Oracle.and.Accenture.are.the.bigger.players,.and.ultimately.this.group.makes.up.the.vast.majority.of.market.share.for.ERP.in.large.enterprises.(LEs).and.even.small.to.medium.enterprise.(SMEs)..Think.of.any.franchise.business.and.you.will.see.systems.which.are.easily.replicated.to.each.new.site,.store.or.territory.and.ultimately.backend.systems.which.give.strategic.information.and.data.that.support.management.decisions.and.operations.management.

Mobilising.information.and.creating.systems.to.use.knowledge.effectively.can.yield.competitive.advantage. Innovative,.state-of-the-art.support.systems.can.be.a.basis.for.competitive.advantage.if.they.give.a.firm.capabilities.that.rivals.can’t.match!.The.systems.in.place.must.not.only.provide.information.but.also.act.as.controls..The.roles.and.requirements.of.such.systems.are.explained.on.pages.371–372.

Accurate,.timely.information.is.essential.to.guide.action.in.implementing.strategy..Prompt.feedback.on.implementation.activities.is.needed.before.actions.are.fully.completed..Key.strategic.performance.indicators.must.be.tracked.as.often.as.practical.because.they.provide.the.barometers.of.overall.performance..Information.systems.should.provide.data.on.customers,.operations,.employees,.suppliers/partners/collaborative.allies,.and.of.course,.financial.performance.

The.challenge.in.exercising.adequate.control.over.empowered.employees.lies.in.how.to.ensure.the.actions.of.employees.stay.within.acceptable.bounds..Diagnostic.control.systems.can.be.of.use.with.the.benefit.that.they.relieve.managers.of.the.burden.of.constant.monitoring..Some.of.the.control.methods.include:

•. establishing.boundaries.on.what.not.to.do,.allowing.freedom.to.act.with.limits

•. face-to-face.meetings.to.assess.performance.

The.importance.of.adequate.controls.is.discussed.on.pages.372–373.

Components of an effective reward system

The.last.section.in.this.topic.deals.with.reward.and.incentive.systems..Staff.are.more.likely.to.support.the.execution.of.a.strategy.if.they.feel.adequately.recognised.and.rewarded..Some.of.the.key.motivational.practices.are.explained.on.pages.373–380..Examples.of.how.companies.use.such.reward.systems.are.illustrated.in.Illustration.Capsule.11.3.(page.378).

The.aim.of.the.reward.system.should.be.to.gain.commitment.to.the.changes.necessary.for.successful.strategy.implementation..Monetary.incentives.may.include.salary.rises,.performance.bonuses,.stock.options,.retirement.packages,.promotions.and.perks..The.result.of.these.measures.is.intended.to.inspire.employees.to.do.their.best.and.get.the.employees.to.buy.into.strategy.

There.can.be.non-monetary.elements.as.well..Reorganising.work.to.structure.individual.efforts.in.teams.may.facilitate.a.supportive.climate..A.feature.of.these.programs.is.to.allow.employees.to.participate.in.decisions.about.their.jobs..This.makes.employees’.jobs.seem.interesting.and.satisfying.

Elements.of.both.positive.and.negative.rewards.are.necessary..However,.it.is.generally.recognised.that.challenge.and.competition.is.necessary.for.self-satisfaction..Hence.the.prevailing.view.is.that.positive.approaches.work.better.than.negative.ones..Positive.rewards.can.lead.to.enthusiasm,.effort.and.initiative.

Rewards.are.the.single.most.powerful.tool.to.win.commitment.to.the.strategy..The.objectives.are.to.generously.reward.those.achieving.objectives.and.to.deny.rewards.to.those.who.do.not..As.a.general.principle,.the.company.should.make.strategic.performance.measures.the.dominant.basis.for.designing.incentives..A.properly.designed.reward.structure.is.management’s.most.powerful.strategy-implementing.tool..An.example.of.linking.incentives.to.strategy.execution.is.given.in.Illustration.Capsule.11.2.(page.376).

The.challenge.of.striking.the.right.balance.between.reward.and.punishment.is.described.on.page.375.and.the.importance.of.basing.rewards.on.results.is.stressed.on.pages.375–377.

Some.guidelines.for.designing.effective.compensation.systems.are.outlined.on.pages.379–380..It.is.critical.that.these.guidelines.are.both.communicated.and.understood.

In.summary,.the.guidelines.for.designing.an.effective.compensation.system.are:

•. the.payoff.must.be.a.major,.not.a.minor,.piece.of.the.total.compensation.package

•. the.incentive.plan.should.extend.to.all.employees

•. the.company.must.administer.the.system.with.scrupulous.fairness

•. incentives.must.be.linked.only.to.achieving.the.performance.targets.in.the.strategic.plan.

SummaryIn.this.unit.we.have.covered.a.wide.range.of.the.issues.and.principles.involved.in.implementing.strategy..It.is.by.far.the.hardest.element.of.strategic.management,.because.it.is.where.we.leave.the.realm.of.analysis.and.creative.thinking.and.set.about.convincing.the.organisation.to.accept.and.run.with.the.chosen.strategy..It.is.also.where.most.strategies.that.fail.have.problems.

You.should.focus.most.of.your.attention.on.the.issues.of.leadership.and.building.core.competencies.because.these.lie.at.the.heart.of.the.new.approaches.to.management.including.programs.like.TQM.and.benchmarking..They.are.also.the.keys.to.successful.strategies.into.the.next.era.in.business.

f Activity 10.1

The four key elements employed by this organisation include: transferring managers across divisional, business, or functional lines for sustained periods of time, exhibition of the four ‘E’s by potential executive candidates, proficiency in what is termed ‘workout’, and attendance in the Leadership Development Centre.

This approach has proven to be highly successful for the organisation. Today, General Electric is widely considered to be one of the best-managed companies in the world, partly because of its concerted effort to develop outstanding managers.

f Activity 10.2

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

Topic 11 Culture, leadership and

strategic execution

IntroductionPlanet Google

As Google celebrates its 10th birthday, its control of the Internet seems unassailable. But is the search engine as benign as its creators intended? Gerard Wright reports.

This.is.a.Google.search..Eric.Schmidt.has.just.introduced.himself,.waiting,.unannounced.and.unassuming,.until.a.conversation.finishes..He.is.a.tallish.man.with.a.face.surprisingly.youthful.for.its.53.years,.its.upper.reaches.obscured.by.large,.rimless.glasses.

The.meeting.has.been.planned.and.co-coordinated.across.ocean.and.continent.over.several.weeks:.a.sit-down.with.the.CEO.of.the.world-changing,.future-challenging,.multi-billion-dollar.company.that.is.Google..We.each.have.a.minder;.polite,.diligent.young.men,.at.least.one.of.whom.has.an.already.staggering.to-do.list:.the.examination.and.explanation.of.the.company’s.philosophy,.prospects.and.challenges.on.its.tenth.anniversary.

All.that.is.missing.is.a.place.to.stage.the.interview..A.conference.room.door.is.opened..Schmidt.looks.in,.the.occupants.look.up..It’s.taken..So.is.the.next.one.

Schmidt.(Dr.Schmidt,.with.a.PhD.in.electrical.engineering.and.computer.sciences,.as.his.business.card.introduces.him).speaks.matter.of.factly.and.his.pronouncements.can.sound.science-fictional,.but.it’s.clear.his.public.ego.has.long.since.abandoned.the.commute.to.this.corner.of.California’s.Silicon.Valley..“I.let.go.of.that.a.long.time.ago,”.says.the.chief.executive.who.can’t.command.his.own.conference.room.as.we.walk.along.a.hallway.

Recalls.Miriam.Rivera,.one.of.the.company’s.first.in-house.lawyers:.“Less.management.was.a.hallmark.of.Google’s.early.days..There.wasn’t.much.of.a.desire.for,.and.respect.for,.management.”

Google’s.“campus”,.or.Googleplex,.in.Mountain.View,.one.of.a.string.of.suburbs.along.the.101.Freeway.south.of.San.Francisco,.is.spacious.and.airy,.a.network.of.two-storey,.glass-enclosed.buildings.redesigned.in.2004..In.ways.large.and.small.it.mirrors.Google’s.outlook.and.ambitions:.a.company.that.is.the.21st.century.version.of.the.quintessential.American.dream,.but.is.no.longer.of.America..As.of.July,.52.per.cent.of.its.revenue.comes.from.outside.the.country..Its.websites.are.two.of.the.10.most.viewed.in.India..Its.social.networking.site.dominates.discourse.in.Brazil..Last.year.it.answered.47.3.per.cent.of.the.world’s.internet.search.queries.(61.9.per.cent.in.June.in.the.US),.around.250.million.a.day.

This.is.reflected.on.a.computer.screen.in.the.building’s.lobby..It.is.an.image.of.Earth,.a.real-time.satellite.view.of.the.globe,.surrounded.by.the.infinity.of.space..The.planet.slowly.rotates.and,.as.it.does,.coloured.beams.of.light.shoot.into.the.atmosphere..These.represent.Google.searches,.2800.a.second,.in.English,.French,.Spanish,.Portuguese,.German.

This.place.is.where.the.internet.resides,.which.is.almost.everywhere..The.exception.is.Africa,.sunlit.and.arid.across.its.northern.third,.timeless.and.disconnected,.but.otherwise.the.image.on.this.oversized.flat.screen.is.beyond.cool,.and.a.powerful,.wordless.statement.–.Earth.in.the.grip.of.Google.

The.globe.revolves..It’s.11am.in.Mountain.View..The.familiar,.beloved.continental.outline.between.the.Pacific.and.Indian.oceans.appears..A.beam.of.light.shoots.up..The.cursor.scrolls.across.it..At.2am,.western.time,.a.search.request.has.been.typed.in.Bunbury..Ditto.at.4am.in.Horsham.and.Moe.

The.layout.of.the.Google.offices.was.conceived.in.a.way.that.echoed.the.conceits.and.personalities.of.its.youthful.founders,.both.25.when.the.company.was.launched.in.1998..Larry.Page.and.Sergey.Brin.overlaid.the.design.blueprint.with.a.map.of.the.world,.with.a.view.to.naming.conference.rooms.and.other.meeting.places.by.their.proximity.to.the.world’s.cities..Thus,.the.small.square.room.on.the.second.floor,.with.whiteboard,.table,.chairs.and.phone,.with.Timbuktu.affixed.to.one.of.its.windows.

Back.at.the.search,.another.assistant.answers.the.request.for.space..She.tells.Schmidt.that.Santiago.may.be.available..“Santiago?”.Schmidt.replies,.perplexed..“Where’s.that?”

The.yurts.–.small,.noise-proof.meeting.rooms.that.can.be.quickly.assembled.in.any.open.space.–.are.occupied..Every.third.person.walking.the.hallways.seems.to.be.engrossed.in.an.open.laptop.computer..A.partly.opened.door.beckons.and.an.interview.space.is.found..Schmidt.scans.my.business.card.quoting.a.decade-old.Hotmail.address.–.Microsoft!.Those.bastards!.“We’ll.have.to.get.you.a.Gmail.address,”.he.says.

(The Australian.Magazine,.September.2008)

The.15th.edition.of.this.textbook.had.Google.as.one.of.its.case.studies..(Indeed.this.case.was.used.as.a.final.examination.case.in.one.particular.trimester.this.unit.was.offered)..Google.is.an.extremely.interesting.case.to.study.mainly.because.it.is.so.well.known.as.the.major.search.engine.but.also.because.of.its.unusual.culture.and.strong.leadership..Some.of.this.is.evident.in.the.extract.above.from.Reading.11.1

This.topic.covers.Chapter.12.of.the.textbook.which.explores.the.two.remaining.managerial.tasks.that.shape.the.outcome.of.efforts.to.execute.a.company’s.strategy..These.two.tasks.include.(1).creating.a.strategy-supportive.corporate.culture.and.(2).exerting.the.internal.leadership.needed.to.drive.the.implementation.of.strategic.initiatives.forward.

In.this.final.topic.we.will.complete.our.discussion.of.implementing.strategy.by.considering.the.important.issues.of.culture.and.leadership.and.their.impact.on.implementing.strategy.

Objectives

•. identify.the.key.features.of.a.company’s.corporate.culture

•. differentiate.between.strong.and.weak.cultures

•. identify.the.characteristics.of.unhealthy.cultures

117MNG00716 Topic 11 – Culture, leadership and strategic execution

•. outline.the.characteristics.of.an.adaptive.culture

•. analyse.the.link.between.culture.and.strategy.execution

•. describe.the.steps.needed.to.change.a.problem.culture

•. outline.the.links.between.culture,.values.and.ethics

•. assess.the.actions.needed.by.leaders.if.strategy.execution.is.to.have.a.good.chance.of.success.

Materials required

Reading11.1.‘Planet.Google’.(online),.available:.http://www.theaustralian.com.au/news/

features/planet-google/story-e6frg8h6–1111117404083..Accessed.March.24.2010.

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

Corporate culture

r Textbook

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

Examples of corporate culture

Features.of.the.corporate.culture.at.Wal-Mart:

•. dedication.to.customer.satisfaction

•. zealous.pursuit.of.low.costs

•. belief.in.treating.employees.as.partners

•. Sam.Walton’s.legendary.frugality

•. ritualistic.Saturday.morning.meetings

•. executive.commitment.to.visit.stores,.talk.to.customers,.solicit.employees’.suggestions.

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

r Reading 11.1

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

a Activity 11.1

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

In.trying.to.identify.and.describe.a.culture.there.are.a.number.of.factors.to.consider.and.these.are.outlined.on.pages.386–390..Corporate.culture.usually.comes.from.the.founder.or.early.leader,.and.becomes.entrenched.through.an.influential.individual.or.work.group..The.culture.becomes.reflected.in.policies,.vision,.or.strategies.and.traditions,.supervisory.practices,.employee.attitudes..Organisational.politics.reinforce.the.culture..The.culture.also.dictates.the.way.relationships.with.stakeholders.are.developed.

Corporate.culture.is.sustained.through.the.continuity.of.leadership.and.HR.policies.that.select.new.employees.based.on.how.well.their.personalities.‘fit’.the.culture..The.culture.becomes.entrenched.further.by.the.systematic.indoctrination.of.new.employees..A.culture.can.also.be.evident.in.the.behaviour.of.senior.employees.to.reinforce.core.values..Culture.is.also.evidenced.by.features.like.story-telling.of.company.legends.and.ceremonies.honouring.employees.who.display.cultural.ideals.

This.is.considered.on.pages.388–389..This.is.followed.by.a.listing.and.brief.discussion.of.a.number.of.ways.in.which.the.established.culture.can.be.perpetuated.(page.389).

It.also.needs.to.be.reckoned.that.sub-cultures.can.arise.within.organisations.and.pose.problems.for.the.established.culture..This.issue.is.highlighted.on.page.390.

Culture.can.contribute.to.–.or.hinder.–.successful.strategy.execution..This.is.because.the.requirements.for.successful.strategy.execution.may.–.or.may.not.–.be.compatible.with.the.culture..Overall,.a.close.match.between.culture.and.strategy.promotes.effective.strategy.execution.

Strategy-supportive.cultures.shape.the.mood.and.temperament.of.the.work.force.–.positively.affecting.organisational.energy,.work.habits,.and.operating.practices..The.culture.may.provide.standards,.values,.informal.rules.and.peer.pressures.that.nurture.and.motivate.people.to.do.their.jobs.in.ways.that.promote.good.strategy.execution..It.can.also.strengthen.employee.identification.with.the.company,.its.performance.targets,.and.strategy.

Strategy-supportive.cultures.stimulate.people.to.take.on.the.challenge.of.realising.the.company’s.vision,.do.their.jobs.competently.and.with.enthusiasm,.and.collaborate.with.others.to.execute.the.strategy..The.optimal.condition.is.a.work.environment.that.promotes.‘can.do’.attitudes.and.accepts.change..This.can.breed.the.capabilities.needed.to.execute.strategy.effectively.

Strong and weak cultures

A.distinction.can.be.made.between.strong-culture.and.weak-culture.organisations.and.the.characteristics.of.both.types.of.culture.are.outlined.on.pages.390–392..Companies.with.a.strong.culture.conduct.business.according.to.a.clear,.widely-understood.philosophy..Management.spends.considerable.time.communicating.and.reinforcing.values.and.these.values.are.widely.shared.and.deeply.rooted..Such.companies.often.have.a.values.statement.and.carefully.screen.new.employees.to.be.sure.they.will.‘fit.in’..They.also.provide.visible.rewards.for.those.following.norms,.and.penalties.for.those.who.don’t.

A.culture.comes.to.be.strong.through.a.leader.who.establishes.values.consistent.with.customer.needs,.competitive.conditions.and.the.strategic.requirements.of.the.company..This.instils.a.deep,.abiding.commitment.to.espoused.values.and.business.philosophy:.Practising.what.is.preached!.There.is.also.a.genuine.concern.for.the.wellbeing.of.customers,.employees.and.shareholders.

Strong.cultures.promote.good.strategy.execution.where.there’s.fit..They.hurt.execution.where.there’s.little.fit.

Weak.culture.companies.have.many.subcultures.where.few.values.and.norms.are.widely.shared..They.have.few.strong.traditions.and.little.cohesion.among.the.departments..This.is.evidenced.by.weak.employee.allegiance.to.the.company’s.vision.and.strategy.and.a.lack.of.a.strong.sense.of.company.identity.

The.characteristics.of.low.performance.cultures.include.a.politicised.internal.environment.where.issues.are.resolved.on.the.basis.of.turf.–.a.culture.of.disparate.sub-units..There.is.usually.hostility.to.change.such.that.experimentation.and.efforts.to.alter.the.status.quo.are.discouraged..Employees.avoid.risks.because.of.the.fear.of.failure..Low-performance.cultures.promote.managers.who.are.more.concerned.about.process.than.about.results..They.also.demonstrate.an.aversion.to.look.outside.for.superior.practices,.preferring.instead.a.‘must-be-invented.here’.syndrome.

Some.cultures.are.particularly.unhealthy.and.the.text.discusses.four.of.these.unhealthy.characteristics.on.pages.392–394.

High performance and adaptive cultures

The.text.outlines.some.features.of.a.high-performance.culture.(pages.394–395).and.compares.this.with.adaptive.cultures.(pages.395–396).where.the.emphasis.is.on.the.willingness.to.accept.change..The.changes.that.are.made.must.satisfy.the.interests.of.the.stakeholders.if.the.culture.is.to.remain.adaptive.

Culture and strategy execution

The.need.for.culture.and.strategy.execution.to.be.aligned.closely.cannot.be.over-emphasised..If.the.culture.is.supportive.of.a.company’s.execution.process.than.success.is.much.more.likely.to.occur..This.is.discussed.in.detail.on.pages.396–398.with.three.major.benefits.of.a.close.fit.spelt.out.on.page.397..The.onus.is.on.management.to.ensure.this.fit.remains.close.to.encourage.employee.behaviour.and.commitment.to.the.execution.effort.

Changing a problem culture

If.the.culture.is.weak.or.unhealthy.then.it.needs.to.be.changed.if.there.is.to.be.a.successful.implementation.of.the.strategy..Competent.leadership.is.the.first.step.in.bringing.about.a.change.and.the.sequence.of.steps.that.needs.to.be.taken.is.illustrated.in.Figure.12.1.(page.399).and.then.described.in.detail.on.page.398.to.the.bottom.of.page.402..In.order.to.bring.about.a.change.in.culture,.sceptics.have.to.be.convinced.and.ways.of.doing.this.are.indicated.on.page.400..After.a.compelling.case.has.been.made.for.change.substantive.actions.need.to.be.taken..These.actions.are.set.out.on.pages.400–401..As.well.as.these.substantive.actions.there.needs.to.be.some.symbolic.culture-changing.actions.and.some.examples.are.given.of.what.these.symbols.might.be.such.as.reduced.executive.perks.and.employee.recognition.ceremonies.

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

Culture, ethics and core values

The.heart.of.a.company’s.continuing.culture.will.be.in.its.values..Values.were.discussed.in.earlier.topics.and.some.examples.of.core.values.are.illustrated.in.Table.12.1.(page.404)..The.text.gives.some.examples.of.the.link.between.culture.and.values.on.pages.403–405.

In.Figure.12.2.(page.405).it.is.shown.that.a.company’s.stated.values.and.ethical.principles.have.two.roles.in.culture.building:.helping.to.create.the.appropriate.work.climate.and.providing.employees.with.guidance.about.how.they.are.expected.to.behave.

a Activity 11.2

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

Once.core.values.and.an.ethical.stance.have.been.determined.(and.this.is.no.easy.task).these.values.have.to.be.instilled.into.the.company’s.norms..The.text.discusses.how.these.core.values.can.be.‘hammered.in’.(page.406).

In.the.broader.global.context.it.becomes.more.important.but.more.difficult.to.establish.a.strategy–culture.fit.that.travels.across.country.borders..The.challenge.is.to.develop.corporate.values.that.have.universal.appeal..Some.suggestions.as.to.how.this.might.be.achieved.are.given.on.pages.407–408.

a Activity 11.3

Review Illustration Capsule 12.2 from the textbook, The Culture-Change Effort at Alberto-Culver’s North American Division.

What resulted from this organisation’s concerted effort to implement cultural change?

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

Leading the strategy execution process

r Textbook

The.leadership.challenges.are.significant.and.diverse.in.managing.the.strategy.process.

For.the.most.part,.leading.the.strategy-execution.process.has.to.be.top-down.and.driven.by.mandates.to.get.things.done.and.show.good.results.

In.general,.leading.the.drive.for.good.strategy.execution.and.operating.excellence.calls.for.several.actions.on.the.part.of.the.manager.in.charge..The.rest.of.the.topic.summarises.the.actions.that.a.leader.needs.to.take.to.drive.for.good.strategy.execution.(page.409).and.the.rest.of.the.topic.is.an.expansion.of.these.five.points..(Note.much.of.the.following.topic.material.comes.from.the.existing.edition.of.the.textbook,.but.it.could.still.be.considered.relevant.and.hence.it.is.still.included.in.this.Study.Guide.)

1. Staying on top of how well things are going

Regular.visits.to.the.field.and.talking.with.many.different.people.at.many.different.levels.–.to.stay.on.top.of.how.well.the.strategy.execution.process.is.going,.a.manager.needs.to.develop.a.broad.network.of.contacts.and.sources.of.information,.both.formal.and.informal.

The.regular.channels.include.talking.with.key.subordinates,.attending.presentations.and.meetings,.reading.reviews.of.the.latest.operating.results,.talking.to.customers,.watching.the.competitive.reactions.of.rival.firms,.exchanging.emails.and.holding.telephone.conversations.with.people.in.outlying.locations,.making.onsite.visits,.and.listening.to.rank-and-file.employees.

One.of.the.best.ways.for.executives.in.charge.of.strategy.execution.to.stay.on.top.of.things.is.by.making.use.of.the.technique.often.labelled.‘managing.by.walking.around’.

2. Putting constructive pressure on the organisation to achieve good results

Managers.have.to.be.out.front.in.mobilising.organisational.energy.behind.the.drive.for.good.strategy.execution.and.operating.excellence..A.culture.where.there.is.constructive.pressure.to.achieve.good.results.is.a.valuable.contributor.to.good.strategy.execution.and.operating.excellence..Results-oriented.cultures.are.permeated.with.a.spirit.of.achievement.and.have.a.good.track.record.in.meeting.or.beating.performance.targets.

Successfully.leading.the.effort.to.instil.a.spirit.of.high.achievement.into.the.culture.generally.entails.such.leadership.actions.and.managerial.practices.as:

•. treating.employees.with.dignity.and.respect

•. making.champions.of.people.who.turn.in.winning.performances

•. encouraging.employees.to.use.initiative.and.creativity.in.performing.their.work

•. setting.stretch.objectives.and.clearly.communicating.an.expectation.that.company.personnel.are.to.give.their.best.in.achieving.performance.targets

•. granting.employees.enough.autonomy.to.stand.out,.excel,.and.contribute

•. using.the.full.range.of.motivational.techniques.and.compensation.incentives.to.inspire.company.personnel,.nurture.a.results-oriented.work.climate,.and.enforce.high-performance.standards

•. celebrating.individual,.group,.and.company.successes.

3. Leading the development of better competencies and capabilities

A.third.avenue.to.better.strategy.execution.and.operating.excellence.is.proactively.strengthening.organisational.competencies.and.competitive.capabilities..This.often.requires.top.management.intervention..Aside.from.leading.efforts.to.strengthen.existing.competencies.and.capabilities,.effective.strategy.leaders.try.to.anticipate.changes.in.customer-market.requirements.and.proactively.build.new.competencies.and.capabilities.that.offer.a.competitive.edge.over.rivals.

Proactively.building.new.competences.and.capabilities.ahead.of.rivals.to.gain.a.competitive.edge.is.strategic.leadership.of.the.best.kind,.but.strengthening.the.company’s.resource.base.in.reaction.to.newly.developed.capabilities.of.pioneering.rivals.occurs.more.frequently.

4. Displaying ethical integrity and leading social responsibility initiatives

For.an.organisation.to.avoid.the.pitfalls.of.scandal.and.disgrace.and.consistently.display.the.intent.to.conduct.its.business.in.a.socially.acceptable.manner,.the.CEO.and.those.around.the.CEO.must.be.openly.and.unswervingly.committed.to.ethical.conduct.and.socially.redeeming.principles.and.core.values.

Leading.the.effort.to.operate.the.company’s.business.in.an.ethically.principled.fashion.has.three.pieces:

•. the.CEO.and.other.senior.executives.must.set.an.excellent.example.in.their.actions.and.decisions

•. top.management.must.declare.unequivocal.support.for.the.company’s.ethical.code.and.take.an.uncompromising.stand.on.expecting.all.company.personnel.to.conduct.themselves.in.an.ethical.fashion.at.all.times

•. top.management.must.be.prepared.to.act.as.the.final.arbiter.on.hard.calls.

The.16th.edition.of.the.text.suggests.some.actions.that.senior.executives.need.to.do.if.they.are.serious.about.enforcing.ethical.behaviour.(page.444).

As.well.as.the.creation.of.an.effective.ethics.compliance.process.leaders.need.to.demonstrate.genuine.commitment.to.a.strategy.of.social.responsibility..Business.leaders.who.want.their.companies.to.be.regarded.as.exemplary.corporate.citizens.must.not.only.see.that.their.companies.operate.ethically.but.also.take.a.lead.role.in.crafting.a.social.responsibility.strategy.that.positively.improves.the.wellbeing.of.employees,.the.environment,.the.communities.in.which.they.operate,.and.society.at.large..What.separates.companies.that.make.a.sincere.effort.to.carry.their.weight.in.being.good.corporate.citizens.from.companies.that.are.content.to.do.only.what.is.legally.required.of.them.are.company.leaders.who.believe.strongly.that.just.making.a.profit.is.not.good.enough..Such.leaders.are.committed.to.a.higher.standard.of.performance.that.includes.social.and.environmental.metrics.as.well.as.financial.and.strategic.metrics.

5. Leading the process of making corrective adjustments

The.leadership.challenge.of.making.corrective.adjustments.is.twofold:.deciding.when.adjustments.are.needed.and.deciding.what.adjustments.to.make.

The.process.of.corrective.action.varies.according.to.the.situation..Some.suggestions.of.the.processes.that.might.be.involved.are.given.on.page.446.of.the.16th.edition.of.the.text.

Success.in.initiating.corrective.actions.usually.hinges.on.a.thorough.analysis.of.the.situation,.the.exercise.of.good.business.judgment.in.deciding.what.actions.to.take,.and.good.implementation.of.the.corrective.actions.that.are.initiated.

A.final.word.on.managing.the.process.of.crafting.and.executing.strategy:.The.best.tests.of.good.strategic.leadership.are.whether.the.company.has.a.good.strategy.and.whether.the.strategy.execution.effort.is.delivering.the.hoped.for.results..If.these.two.conditions.exist,.the.chances.are.excellent.that.the.company.has.good.strategic.leadership.

SummaryIn.summary,.it.is.worth.repeating.that.culture.can.contribute.to.–.or.hinder.–.successful.strategy.execution..This.is.because.the.requirements.for.successful.strategy.execution.may.–.or.may.not.–.be.compatible.with.the.culture..Overall,.a.close.match.between.culture.and.strategy.promotes.effective.strategy.execution..And.culture.needs.to.be.supported.by.strong.leadership.practice..We.outlined.some.of.the.actions.needed.to.be.taken.by.managers.if.the.strategy.is.to.be.successfully.implemented.

You.have.now.reached.the.end.of.the.information.contained.in.this.unit..Not.only.have.you.been.presented.with.the.content.of.strategic.models.but.the.application.of.these.has.also.been.addressed.and.you.have.had.the.opportunity.of.applying.them.yourself.to.a.number.of.case.studies..It.has.been.assumed.that.you.have.a.good.knowledge.of.functional.and.process.management.from.your.previous.studies..From.this.base.this.unit.has.tried.to.link.them.into.a.holistic.approach.to.strategic.management.of.an.organisation.

Although.there.has.been.a.concentration.on.larger,.commercial.organisations,.the.concepts,.approaches.and.methods.of.thinking.about.organisational.development.can.be.applied.to.all.types.of.organisations..This.is,.again,.to.emphasise.the.importance.of.comparative.analysis.in.organisations.and.analytical.perspectives.on.how.organisations.tend.to.behave.under.contingent.circumstances..Your.task.is.also.to.understand.the.ways.in.which.these.can.be.applied.in.various.organisational.contexts.

f Activity 11.3

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

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