Strategy seeks to create a competitive advantage that generates superior and sustainable financial/non-financial returns over the long run. It also seeks to provide a direction for an organisation by specifying its objectives, developing a plan to achieve those objectives, and allocating resources to implement the plan. It can be summarised into two questions:
The strategy is usually encapsulated by the mission, vision and value statements.
Strategy can operate on three levels:
In order to create a competitive advantage, we require a fit or consistency with the firm's external and internal environments. Practically we need to understand the business landscape and we need to choose a position in the business landscape with respect to the target market and value proposition. An industry analysis can utilise Porter's Five Forces model:
The ultimate objective of the analysis is to determine if a profitable and defensible position exists within the industry. Porter suggested that there are three generic strategies on which companies compete:
The target market is defined by the scope:
The ultimate objective is to maximise the wedge between the willingness to pay and company's costs. The low cost competitor tries to reduce costs, the differentiated competitor tried to increase differentiation and the dual competitor tries both (very hard).
We want to ensure external consistency in the strategy. This can be with an acid test, asking if unique and valuable products/services are being offered to stakeholders. If so, you have likely achieved internal and external consistency, if not, you likely need to change the value proposition, target market and/or business landscape.
Formulating strategy is complex but necessary. Strategy can serve as a decision support (addressing the issue of rationality, simplifying decision making and limiting search costs) and as a coordinating device (providing an internal framework for buy-in, monitoring and measuring).
Strategy can be planned (top down) or emergent (bottom up). Most realised strategy is emergent. Planned strategy is deliberate and linear, whereas emergent strategy is iterative and constantly developed.
Strategy is a constantly evolving field with changing foci. Contemporary strategy is about creating sustainable competitive advantages that generate superior and sustainable returns in the long run. In practice, emergent strategies prevail but analytical frameworks provide the initial momentum.
Frameworks provide a set of criteria for structuring information. A business strategy framework helps develop a effective business strategy by providing a system for gathering and analysing business information based on a set criteria with the purpose of developing business goals and an integrated plan for long term comparative advantage. Strategy frameworks differ in their focus on sources of competitive advantage, and can be used individually or in combination with each other as there is no singularly accepted model. Despite positive performance impacts, only 20% of firms have a formal strategic planning process.
SWOT stands for:
These can be assembled into a matrix of positive and negative against internal and external traits. SWOT is popular because it can be done quickly, buy can be expanded on after the initial draft. It is also easy to understand which can be useful for communicating to professionals who aren't trained in management.
PESTLE stands for:
PESTLE is an external environmental analysis tool, and is usually used as inputs to O and T in SWOT analysis. It is low cost and simple, but may be too simple and cause “paralysis by analysis”. Both SWOT and PESTLE can be useful starters in analysis.
Diversification is moving into a new line of business. The business can be:
Diversity can create more value from the firm's existing capabilities but comes at a (bureaucratic) cost.
There are three tests to know if shareholder value will increase:
The value chain consists of the business activities. Backward integration is moving into activities previously done by suppliers. Forward integration is moving into activities previously done by buyers. Internalisation of activities can reduce costs and/or improve offerings, but must be weighed against bureaucratic overhead.
Organises business units on two dimensions, (industry) growth rate vs market share. It assumes that the firms with the largest market share would have the largest profit margin (due to economies of scale and experience effects). Market growth is used as a measure of a market's attractiveness. Strategic planning is determined by the interplay of both factors. There are four possible strategies that can be proposed:
The matrix can be split into four quadrants:
| High market share | Low market share | |
|---|---|---|
| High market growth | Stars | ??? |
| Low market growth | Cash Cows | Dogs |
Stars are the rapid growth and expansion units. The ??? are new ventures, they can be risky but can become successful. Cash cows provide the ability to find stars and ???. Dogs should consider divestment.
This framework is useful for companies with multiple lines and business units. It can help to compare the internal business units. It is also simple and accessible. It neglects synergies between businesses. The assumption that market share and profitability may not be correct. It ignores other indicators of market attractiveness.
The competitive forces model consists of:
The five forces are:
The basic premise is that some industries earn consistently higher profits than others. This can be due to systematic differences in “industry structure”. Industry analysis involves understanding these forces that determine the intensity of the rivalry and inherent profit potential of each industry, which involves understanding:
Hence, the basic premise of the model is: strategy requires understanding the structure and dynamics of your industry and aligning your organisation with this environment.
It can be difficult to make money when all of the forces are strong. However, not all forces are of equal importance to every industry. It can be possible to carve out a defensible position by mitigating or influencing forces.
Industry analysis reveals two ways of competing:
This yields three generic strategies or positions for competing:
It is important not to get stuck in the middle, trying to pursue cost and differentiation.
Value chain analysis is focused on sustainability. It involves holistically analysing the value chain and looking for places to:
The goal is to optimise performance, coordinate along the value chain and provide a consistent fit that locks out competitors. It seeks to maximise the difference between WtP (or value to customers) and cost to customers to provide a sustainable competitive edge.
The value chain consists of:
The whole chain seeks to maximise margin.
The strategy development begins with a question. It requires analysing the five competitive forces, defining the industry and players and analysing their influence on profitability. The organisation needs to be positioned appropriately to create a competitive advantage, which required finding opportunities or influencing the forces. An appropriate competitive strategy needs to be formulated to counter the forces, choosing a generic strategy to implement. Finally, the strategy needs to be implemented in the organisation, with a holistic value chain analysis.
The framework faces criticism as it:
The framework doesn't explain why some firms perform better than others in the same environment.
Created in response to Porter's externally focused paradigms. It is internally focused on a firm's core competencies and capabilities. The main idea is that the focus on competencies enables firms:
Core competencies are an organisation's collective learning about how to coordinate production skills and integrate technologies. There are three tests to identify core competencies:
The capabilities are more broadly the entire value chain of management expertise.
Firms have a portfolio of core competencies which exist across SBUs. This encourages inter-firm learning, collaboration and communication. The product portfolios and core products should be based on the core competencies. There should be continuous investment in core competencies and embedded skills to sustain the long term advantage. Incremental acquisition of core competencies helps safeguard against core rigidities, imitation and substitution.
This framework is criticised for being too internally focused and ignores market forces.
Attempts to combine internal and external perspectives on strategy. The main idea is that competitive advantage comes from a firm's ownership of valuable internal resources as determined by external market forces. This allows firms to build at lower cost and/or produce better quality products quicker than competitors. It motivates firms to focus on core business identified as sources of long term competitive advantage. Resources and capabilities are the interface between the firm and the strategy. Competitive advantage arises from ownership o:
Resource heterogeneity is when no two companies have the same set of resources. Resource immobility is when the differences among firms tend to be long lasting as often time and costs are large to develop new resources.
The five external market test of value are:
To present a strategy with a RBV:
There tends to be poor communication between the strategy and those implementing it. Closing this gap by engaging people at all levels of the organisation is important in successfully executing strategy.
A balanced scorecard can be used to close this gap. It provides a framework that can translate a company's vision and strategy into a coherent and linked set of performance measures including outcome measures and performance drivers. It incorporates four perspectives:
This tries to balance measures of:
Strategy is central to all of these, and their analysis can give insight into the strategy.
Entrepreneurship is the process if designing, launching and running a new business by orgainising the necessary resources and assuming the necessary risks and rewards. A entrepreneur is a person who organises and manages any enterprise with considerable initiative and risk. There has been a recent boost of entrepreneurship due to:
Entrepreneurial personality traits consist of:
Entrepreneurs tend to be suspicious of market research and the use of predictive information. There is the use of effectuation (future is unpredictable but can be shaped) over causation (predictibility of the future), which can be useful in the unpredictable start-up phase to reduce risks. Five principles forming effectual logic:
To set up an entrepreneurial firm, you need:
Despite this, the failure rates for new companies are high.
Innovation is doing things that are new. Intrapreneurs are the leaders of innovation and new idea generation development within firms. There are two types of innovation:
It is important to balance between exploration and exploitation.
The exploration trap is when companies focus too much on exploration and exhibit too many underdeveloped ideas and too little distinctive competence. The exploitation trap is when companies focus too much on exploitation and find themselves in sub-optimal sable equilibria. A balanced organisation is referred to as ambidextrous.
Exploration is possible in a culture which supports:
People who are good intrapreneurs:
To create the climate for exploration:
Leadership is the ability to influence people towards the attainment of organisational goals. Effective leadership can:
A leader differs from a manager.
Different theories of leadership exist, and try to characterise different aspects of it.
Likewise there are different approaches to leadership.
In order to succeed at innovation, we need to:
Innovation leadership characteristics include:
A team is a unit of two or more people with complimentary skills, regularly interacting and working toward a common goal. Teams can enhance performance and employee benefits. Teams can also lower costs and enhance the organisation. Teams also can have downsides, such as: unclear expectations, conflicts, insufficient information sharing and work duplication.
Teams form in five stages:
Conflict is normal and can be productive. There are two types of conflict:
The team leader's role is to air and resolve conflict. Conflict can arise from:
There are four key management practices:
Businesses are built on strategy informing operating practices, which intern flow through measures of performance, rewards and recognition, behaviour and culture and back to operating practices. Operational excellence can be defined as: Delivered In Full On Time (Efficiency), In Spec (Quality and Effectiveness), being DIFOTIS. A high DIFOTIS (90%+) and excellence in customer focus and value creation leads to wealth creation. Effective competition requires compromise in offerings, as a more specialised firm will be able to out compete a more general firm in some cases, finding a niche.
There are some fundamental laws in operations management: Supply chain management supports inspecting the entire supply chain, beyond the company's processes, in analysing the company. Improving parts outside the company can still improve the company. The collaborative value chain is a buyer and seller working together to increase value. It is becoming the dominant supply chain method.