Strategic Analysis and Choice

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chapter
Strategic analysis and choice
contents
1 2 3
Introduction Strategic analysis analysing the environment Strategic analysis competences and capability
4 5
Strategic choice options Strategic choice evaluation and selection
learning outcomes
This chapter looks at the key stages of the strategic management process analysing the environment in which the organisation is operating and generating options to evaluate and finally choose before proceeding to implementation. The aim is to present some tools and techniques that will help. We should not lose sight of the fact, however, that by themselves these tools and techniques will not provide the answer. Rather, they are a guide to decision-making. After reading and understanding the contents of the chapter, considering some of the Case Examples and Test Your Knowledge questions, you should be able to:
Undertake a PEST analysis and a five forces analysis for an organisation. Analyse market segments and the implications for providers of products/services. Undertake a competitor analysis and resource audit and explain the implications. Define unique resources and core competencies. Draw up a value chain for an organisation and the industry in which it operates. Explain how different types of linkage underpin competitive advantage. Undertake a portfolio analysis and a SWOT analysis. Identify the development direction options for an organisation. Compare three methods of development (internal, acquisition and alliances). Understand suitability, acceptability and feasibility. Understand the different processes of strategy selection.
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3 STRATEGIC ANALYSIS AND CHOICE
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1 Introduction
Appraising the environment, the strategic capability of the organisation, the expectations of its stakeholders and the purpose and mission of the organisation, taken together, provide a basis for strategic analysis. Such an understanding needs to take the future into account. Is the current strategy capable of dealing with the changes taking place in the organisations environment? Is it likely to deliver the results expected by influential stakeholders? It is unlikely that there will be a complete match between current strategy and the picture that emerges from the strategic analysis.The extent to which there is a mismatch is the extent of the strategic problem facing senior managers. It may be that the adjustment required is marginal or there may be a need for a fundamental realignment of strategy.Assessing the magnitude of strategic change required and the ability of the organisation to effect such changes is another important aspect of strategic analysis. Johnson, Scholes and Whittington (2008) argue that strategic choice is the core of strategic management. It is concerned with decisions about an organisations future and the way in which it needs to respond to the many pressures and influences identified through strategic analysis. An issue for many organisations and managers is that they are unable or unwilling to consider the variety of strategic options open to them.They tend to be bound by the existing paradigm and resist change.The strategic tools and techniques explored here are more concerned with enabling managers to be able to question and challenge than with formalised procedures of planning.
FIGURE 3.1 The rational model (based on Naylor 2003)
Strategic analysis Appraise environment Set mission and objectives Analyse resources
Strategic control Monitor progress
Strategic choice
Generate options Test assumptions
Select strategy
Strategy implementation Set functional strategies Decide policies Determine structure
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STRATEGIC MANAGEMENT
In this chapter we shall look at:

1 Strategic analysis This stage, sometimes called situational analysis, can be seen as a stra-
tegic check-up. Managers take a good look at the environment in which they operate and their organisation itself.The starting point is purpose, but analysis is a continual, integrated process where each element cannot be checked without awareness of the others. Strategic direction, environment and the resources of the organisation are tightly interrelated. 2 Strategic choice and evaluation This looks at the main bases of strategic choice and the directions and methods of strategy development.These can be built around market opportunities, product developments, competences and various combinations of these. Methods range from internal development through to a range of alliances. Evaluation is concerned with the key criteria of suitability, feasibility and acceptability.
2 Strategic analysis analysing the environment

2.1 Introduction
The difficulty managers face when trying to understand the environment is making sense of this diversity in a way that can contribute to strategic decision-making. Identifying many environmental influences may be possible, but of little use because no overall picture emerges of the really important influences on the organisation.The second difficulty is uncertainty. Managers often claim that the volume and pace of technological developments mean more and faster change than ever before.Whether or not change is in fact faster and the changes more unpredictable, it is important to try to understand future external influences on an organisation, even though it may be difficult to do so. Managers seek to simplify such complexity by focusing on aspects of the environment that have been important in the past or confirm their own views.This is natural when faced with complexity. One of the tasks of the strategic manager is to find ways in which he or she can break out of the tendency towards oversimplification whilst still achieving useful and usable analysis. In this section, we provide several frameworks for understanding how the environment of organisations are provided with the aim of trying to identify key issues and find ways of coping with complexity. These frameworks are provided in a series of steps summarised in Figure 3.2.
FIGURE 3.2 Steps in environmental analysis (based on Johnson et al., 2008)
Assess environmental inuences
Identify key competitive forces
Analyse the organisations competitive position
Identify key opportunities and threats
Strategic Position
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1 Assess environmental influences It is useful to take an initial view of the nature of the
organisations environment in terms of how uncertain it is. Is it relatively static or does it show signs of change? In what ways? Is it simple or complex to understand? This helps in deciding what focus the rest of the analysis is to take and is a prelude to an audit of environmental influences. Here the aim is to identify which macroenvironmental influences are likely to affect the organisations development or performance.This can be done by considering the ways in which political, economic, social and technological influences impinge on organisations. 2 Identify competitive forces The second step focuses on the immediate environment of the organisation for example, the competitive arena in which the organisation operates. The aim is to identify the key forces at work in the immediate or competitive environment and why they are significant. 3 Analyse the organisations competitive position That is, how it stands in relation to other organisations competing for the same resources, or customers, as itself.As we shall see, this may be done in a number of ways. 4 Opportunities and threats The aim is to develop an understanding of opportunities that can be built upon and threats which have to be overcome or circumvented.These need to be considered in terms of the resource base and competencies of the organisation and will contribute to strategic choice.
2.2 Organisational boundaries

Managers often claim that the volume and pace of technological and other developments means more and faster change now than ever before.Whether or not change is in fact faster, it is important to seek to understand external influences on an organisation, even though this may be difficult. But the problem for managers and strategists is that many of these changes are unpredictable. Consider, for example, the following in the United Kingdom:
The travel industry was sent into recession by the events of 11 September 2001. The construction industry has been hugely affected by the recession andcredit crunch. Companies importing from Europe have been depressed by the strength of the Euro.
stop and think 3.1

What changes have there been in the environment in which your organisation operates?
You can probably identify your own examples fairly easily. What these examples are likely to have in common is that the changes were brought about by external events, and organisations were generally unable to control or influence them.This is a significant conclusion, especially as the greatest impact on the future of organisations arises from changes in the external environment, and yet by far the major part of management time and effort is directed at the internal environment. Managers tend to be preoccupied with the near, the immediate and the internal. In part this is because the external environment is difficult to understand we shrink from the unfamiliar. A willingness to look outside the boundaries of the organisation can therefore be an important source of success. Morgan (1988) argues that, to be successful, organisations must anticipate possible change and position themselves to deal with opportunities and challenges in a proactive rather than a reactive way. He refers to this as managing from the outside in. Many organisations are preoccupied with inside out management.They approach, understand, and act in relation to their environment in terms that make sense from internal divisions and perspectives, or in terms of what powerful members want to do. As a result, they often end up acting in fragmented and inappropriate ways. Some organisations, on the other hand, try to build from the outside in, in the sense that they try and embrace the environment holistically, and shape internal structures and processes with this wider picture in mind. They use the views and
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needs of customers and other key stakeholders as a mirror through which they can see and understand their own strengths and weaknesses.And they use these insights to re-shape their activities and relations with the environment. (Morgan, 1988) Morgan therefore emphasises the importance of understanding the external environment.We have already discussed how an organisations survival and success depends upon effective management of relationships with key stakeholders such as customers and service users, shareholders and suppliers. In this chapter we take this concept of interdependence further by exploring the relationships that exist between organisations and their external environment.An organisation is part of a large and complex network of customers, suppliers, competitors and regulators. It is also subject to the vagaries of the economy, social trends and technological innovation. This can be represented thematically as three environments (see Figure 3.3).
FIGURE 3.3 The three environments (Stapleton/Open University, 2003)
nvir re Fa
onmental (resp on
d)
v en
Ne ar
mental (in iron flu e
nc
e)
External environment Your organisation internal environment (control)
The internal environment comprises the staff, resources and facilities within the
organisation.The internal environment is thought of as the one that managers can control.We discuss this in chapter 4. The near environment includes customers, clients, contractors, suppliers and competitors. Managers cannot control the near environment, but they can influence it. The far environment refers to factors that can be neither controlled nor influenced from within the organisation.We refer to these under the acronym PEST, indicating political/legal, economic, social, and technological factors (you may have come across other versions).These are forces to which an organisation can only respond.
case example 3.1

AlphaPharm and BetaPharm are two pharmaceutical companies. They both develop and sell proprietary pharmaceutical products to health services and clinicians on a global basis. They both have similar turnover and protability. But that is where the similarity ends. AlphaPharm is a highly integrated company. It has three large research stations around the world, at which new molecules are synthesised and tested. It runs its own toxicological testing facilities in its own laboratories, and devises and manages its own global clinical testing programmes. It manufactures its products in its own factories and sells them through its own sales force in all major markets. Although BetaPharm does carry out some laboratory synthesis itself, most of its new products are obtained from contract research carried out by a number of other small laboratories. All toxicological testing is carried out by a specialist commercial laboratory, and most clinical testing is run under contract by a number of collaborators. All products are manufactured on contract, and the products are sold through agencies or independent sales teams (including AlphaPharm in some markets). These two companies are extreme examples. Even so, they do have some things in common: both companies even AlphaPharm use contractors to provide catering services, estate maintenance and security. On the other hand, information collection and collation, planning and marketing are carried out in-house by both organisations even BetaPharm.
Source: Based on a case example by Stapleton (2003)
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In practice, organisations set the boundaries between their internal and external environments in different ways. Consider the following cases: There are many real examples where organisations operating in a similar sector have set their boundaries differently:
Marks and Spencer controls its own retail outlets, whereas branded goods manu-
facturers (such as Nestle or Heinz) sell through retailers.

BMW manufactures most of its engines in-house, whereas GM (General Motors)
increasingly buys them in. The key points are that organisations have choices about where they set their boundaries; these are not fixed and may change over time. The main choice is between carrying out activities in-house or alternatively outsourcing or using contractors. Each option has its advantages and disadvantages. In-house activities offer control and the benefits of experience. But the overhead structure of large organisations can lead to slower decision-making and reduced responsiveness. Large organisations are also susceptible to the political opportunism of managers pursuing their own agenda. On the other hand, outsourcing makes it easier to vary costs if conditions change. However, there is always likely to be less control over contractors, and outsourcing offers a reduced opportunity for cumulative learning. These are summarised in Figure 3.4.
FIGURE 3.4 Advantages and disadvantages of in-house and outsourced activities In-house Advantages Outsourced
Control Reliability Flexibility Accumulated experience Quality control
Access to specialists Flexibility in resource use Reduction in xed costs Economies of scale Potential for cost saving
Disadvantages
High overhead costs Inexible if requirements change Limited economies of scale Extended decision-making process Lack of specialist skills
Loss of expertise in key areas Contract/project management skills needed Loss of short-term exibility Loss of direct quality control
What follows from this is that an organisations boundaries affect, even define, the management task. There is no single or right solution, and organisations are constantly seeking the best balance between control, risk, short- and long-term flexibility, and cost. Understanding that organisations can redefine their boundaries in their search for this balance is a key aim of this chapter.
2.3 Uncertainty and megatrends

Since one of the main problems of business planning is coping with uncertainty, it is useful to consider how uncertain the environment is and why. The macro-environmental influences on organisations include economic conditions, ecology, government policy and action demographics, and socio-cultural trends and developments. This is not an exhaustive list and environmental forces that are especially important for one organisation may not be the same for another and, over time, their importance may change. It is useful to consider what broad environmental influences have been particularly important in the past, and what changes are occurring which may make these
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more or less significant in the future for the organisation and its competitors. Finlay (2000) argues that a useful analysis of the far environment means looking ahead for a period of five to 10 years but argues that it is also useful to look at megatrends those that underpin them and may take decades to work through. He points to patterns such as:
Individualism and pluralism of outlook and behaviour driving greater choice in product range
(for example supermarkets and types of table salt or the specialisation of themass media increasing the range of periodicals andTV channels). Decentralisation and the move to the knowledge age where knowledge is more important than capital. Convergence of communication technologies telephony, television and the internet together with user-driven content. Internationalisation and globalisation The decline in costs of transport and communications has made the growing integration of national economies feasible. This has been helped by the liberalisation of trade through blocs such as the EU. Johnson et al. discuss the forces that are increasing the globalisation of some markets: Global market convergence markets world-wide are converging for a variety of reasons. In some markets, customer needs and preferences are becoming more similar. For example, there is increasing homogeneity of consumer tastes in goods such as soft drinks, jeans and electrical items. Those operating in such markets may become global customers and may search for suppliers that can operate on a global basis. Marketing policies, brand names and identities may then be developed globally.This further generates global demand and expectations from customers, and may also provide marketing cost advantages for global operators. Cost advantages There may be cost advantages of global operations. This is especially the case in industries in which large volume, standardised production is required for optimum economies of scale, as in some components to the electronics industry. Government Influence Political changes in the 1990s meant that most trading nations function with market-based economies and their trade policies have tended to encourage free markets between nations. This has been further encouraged by technical standardisation of many products between countries, such as in the airline industry. Global competition is therefore increasingly evident, and encourages further globalisation. If the levels of exports and imports between countries are high, it increases interaction between competitors on a more global scale. Although changes in the external environment make life difficult for managers, and may pose threats to the organisation, they can also offer opportunities. Managers who can understand and monitor their external environment are therefore likely to be more effective.To be able to do this, it is important that you understand the factors that make up the external environment of your organisation. Figure 3.5 provides a summary of some of the questions to ask about key forces at work in the macro-environment. As we suggested above, the priority an organisation gives to each of these factors will differ. A multinational corporation might be especially concerned with government relations and understanding the policies of national governments in its sector of operation. It is also likely to be concerned with labour costs and exchange rates, which will affect its ability to compete with rivals.A small retailer, on the other hand, may be primarily concerned with local customer tastes and behaviour. None of these forces will remain constant, and managers need to be aware of their changing impact. A PEST analysis identifies the political, economic, social and technological influences on an organisation.
PEST analysis
Identification of the political, economic, social and technological influences on an organisation.
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3 STRATEGIC ANALYSIS AND CHOICE FIGURE 3.5 PEST analysis of environmental influences What environmental factors are affecting the organisation? Which of these are the most important at present? Which will be in the next few years? Political/legal monopolies legislation environmental protection laws taxation policy foreign trade regulations employment law government stability Economic factors business cycles GNP trends interest rates money supply ination unemployment disposable income energy availability and cost Socio-cultural factors population demographics income distribution social mobility lifestyle changes attitudes to work and leisure consumerism levels of education Technological government spending on research government and industry focus on technological effort new discoveries/development speed of technology transfer rates of obsolescence
73
The headings in Figure 3.5 can be used as a checklist to consider and prompt analysis of the different influences. However, although a great deal of information can be generated in this way, it will be of limited value if it remains merely a listing of influences. It is important that the models discussed in the rest of the chapter are used to inform and guide analysis.
case example 3.2

The impact of the EU will differ according to the sector in which you work. If you work in an international commercial concern, EU legislation on competition and freedom of trade will be of major importance, as will the establishment of a single currency. If your organisation operates primarily in its home market, you will nevertheless be faced with foreign competitors as markets become more open. If you are involved in the provision of public services, you will be affected by European legislation on minimum wages and working hours, you may have to comply with requirements to offer contracts to bidders from other European countries, and you are likely to be subject to a high level of regulation. The voluntary sector will also be required to comply, for example, with employee protection and minimum wage legislation.
It is useful to begin by considering two important questions.

What are key drivers of change? It may be possible to identify a number of key forces
likely to affect the structure of this industry or market.

What are the differential impacts of key environmental influences? PEST analysis may also help
examine the differential impact of external influences on organisations, either historically or any likely future impact.This approach builds on the identification of key drivers by asking to what extent such influences will affect different organisations or industries differently.
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These sorts of factors can be built into scenario planning.
stop and think 3.2

Take an organisation with which you are familiar and address the questions at the top of Figure 3.5 to help you conduct a PEST analysis.
2.4 Identifying key competitive forces five forces analysis

So far, we have looked at understanding broad aspects of the environment. However, organisations also have relationships with their near environments, with a particular focus on their competitive situation. Competition takes many forms: for customers and market share, for funds, for staff, etc. Some organisations are the sole providers of their product or service, but such monopolies are now largely restricted to public services or patented products. Most organisations, however, operate in a highly competitive environment, in which they are one of many similar organisations offering similar products or services and competing for the same customers (this applies to many not-for-profit organisations as well as commercial ones).
stop and think 3.3

Which other organisations most affect the work of your own organisation?
The near environment comprises all those organisations whose actions influence the organisation, and which in turn are influenced by its own actions. It therefore includes organisations that supply the organisation with services, materials or funds. Your answer is likely to have included suppliers and customers. Most organisations have some key suppliers of goods and services and are in turn suppliers to other organisations. A doctors practice, for example, supplies or refers patients to a hospital, and a small business may supply specialist services to a bigger firm. You might also have included competitor organisations: obviously, commercial companies compete for customers, but charities compete with each other for resources and influence, and public service organisations compete for funds. In order to establish a view on the organisations competitive position, a business needs to obtain and consider information about competitors.There are many frameworks by which this can be done, including looking at the differential impacts of competitive forecasts on competitors, core competences of competitors, the different missions of competitors, and so on.The end result of a competitor analysis should be to indicate where each competitor is strong or weak and vulnerable. One approach to analysing competitors is the four-point list of the key elements of competitor analysis put forward by Greenley (1986):
The nature of competitors and any potential changes: the organisation needs to watch its
environment constantly and, in particular, note who is moving in and out of it.
The competitors objectives and strategies: determine what they are doing and interpret
their actions.This will enable the organisation to formulate effective competitive strategy and tactics. The main strengths and weaknesses of each competitor: these often determine the options open to a business or organsiation. The effects of competitors on your own organisation and its marketing operations: this point is a reminder that while an organisation is analysing its competitors, they are likely to be doing the same.
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five forces analysis

A means of identifying the forces that affect the level of competition in an industry.
The principal benefit of competitor analysis is to be able to understand how other organisations in the sector are meeting the challenge of satisfying their customers and managing their operations. This information can then be used to improve an organisations current services or products, thereby offering better performance to customers or clients. A long-established model widely used as a framework for analysing the structure and dynamics of the competitive environment of an industry sector is Porters ve forces analysis. Michael Porters work in the 1980s and 1990s on the economic structures of different industries has influenced the way many organisations seek to understand and influence their competitive environment. Although developed as a rational model for calculating the profitability of firms in different industries, it offers a useful analytical framework for many organisations. It is important to recognise that his work applies to sectors, and not to individual organisations. Porter argued that there are five main forces affecting the profitability of industries:
1 how industry structure reflects the intensity of competition between current 2 3 4 5
competitors, and is affected by: the threat of new entrants; the bargaining power of customers; the bargaining power of suppliers; and the threat of substitute products or services.
The forces are represented in diagrammatic form in Figure 3.6. Five forces analysis is a means of identifying the forces that affect the level of competition in an industry, and which might thus help managers to identify bases of competitive strategy. Although designed primarily with businesses in mind, it is of value to most organisations. It is important that, to be of most value, a five forces analysis needs to be carried out at the strategic business unit (SBU) level. If the analysis is at a more generalised level, the variety of influences in the environment will be so great as to reduce the value of the analysis.
FIGURE 3.6 Forces governing competition in an industry (based on Porter, 1980)

2 Threat of new entrants
4 Barganing power of suppliers
1 Industry structure
3 Bargaining power of customers
5 Threat of subsitute products or services
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2.5 Exploring the five forces in more detail

Intensity of competition (industry structure)
Porter suggests that the intensity of competition in an industry depends on:
the number and strength of competitors; the rate of market growth if the total market is not expanding, companies must
take market share from others to gain growth;

similarity of products, making it simple for consumers to switch from one brand
to another; the level of fixed costs high fixed costs require companies to maintain volume and so put downward pressure on prices; and the level of exit barriers if economic, strategic and emotional factors prevent companies leaving an industry, even when suffering low or negative profitability, then competition is intensified. The impact of these forces is illustrated in the table below (Figure 3.7).
FIGURE 3.7 Intensity of competition in two industries (based on an example by Stapleton, 2003) Factors Number of competitors Car manufacturer Fewer companies, but increasingly global in nature Growing slower than supply in in main EU market, but subject to economic cycles Easy for individuals to buy similar cars from other suppliers High: plant must be kept utilised at all times High: strong political and historical expectations of continued existence Internet company High, although number and and nature of competitors is changing frequently Fast but unstable
Market growth
Product similarity Fixed costs Exit barriers
Very easy for customers to buy tickets from other sources Low: investment has nearly all gone on people Very few
Threat of new entrants

Threat of entry to an industry will depend on the extent to which there are barriers to entry, which most typically are as follows:
Economies of scale In some industries, economics of scale are extremely important: for
example, in distribution (e.g. brewing) or in sales and marketing (e.g. fast-moving consumer goods industries). The capital requirement of entry The capital cost of entry will vary according to technology and scale. The cost of setting up a retail clothing business is minimal compared with the cost of entering capital-intensive industries such as chemicals. Access to distribution channels Brewing companies have traditionally invested in bars and pubs to guarantee the distribution of their products and make it difficult for competitors to break into their markets. Cost advantages independent of size These concern early entries into the market and the experience gained. It is difficult for a competitor to break into a market if there is an established operator who knows the market well, has good relationships with the key buyers and suppliers, and knows how to overcome market and operating problems.
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Expected retaliation If a competitor considering entering a market believes that the
retaliation of an existing firm will be so great as to prevent entry, or mean that entry would be too costly, this is also a barrier. Government policy Legal restraints on competition vary from patent protection, to regulation to control markets (e.g. over-the-counter pharmaceuticals and insurance), through to direct government action. For example, in the late 1980s and 1990s many public services, such as health services or railways, faced deregulation and privatisation. Differentiation Organisations able to achieve strategies of differentiation provide for themselves barriers to competitive entry. For example, Marks and Spencer built a reputation for reliability and quality underpinned by staff training, product and quality specification and control at supplier level, and strong corporate values supportive of the quality image. Barriers to entry differ by industry and by product/market, so it is impossible to generalise about which are more important than others.
FIGURE 3.8 Threat of new entrants in two industries (based on an example by Stapleton, 2003) Car manufacturer Economies of scale Cost barriers Government policy Differentiation Switching costs Distribution channels difcult Overall entry barriers Very high High Very high Hard to establish new brands Moderate Access very difcult Very high new entrants very unlikely Internet company Low Low Low Moderate Low Access moderately Very low new entrants likely
case example 3.3

Professional football clubs in the lower divisions in England have found it increasingly difcult to break into the Premiership and sustain a position once promoted. One of the key reasons for this is the level of nance required to obtain the top players and fund the necessary ground improvements and expansion to compete at the higher level.
stop and think 3.4

Think about the industry in which your business operates. (a) What barriers to entry, if any, exist? (b) To what extent are they likely to prevent entry in the environment concerned? (c) Is your company trying to prevent the competition of entrants or is it attempting to gain entry, and if so how?
The bargaining power of customers and suppliers

All organisations have to obtain resources and provide goods or services. But the relationship of buyers and sellers can have similar effects in constraining the strategic freedom of an organisation and influence the profit margins of that organisation. Customer power is likely to be high when there is a concentration of buyers.This is the case in grocery retailing in the United Kingdom, where just a few retailers dominate
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the market. Supplier power is likely to be high when there is a concentration of suppliers rather than a fragmented source of supply or whenswitching costs from one supplier to another are high, perhaps because a manufacturers processes are dependent on the specialist products of a supplier, as in the aerospace industry. With some organisations, supplies are intangible goods. For example, for professional services, such as consultancy or teaching, the availability of skilled staff is crucial. However, while this may be a significant constraint, the suppliers may not be organised to exert power.
The threat of substitute products or services

The threat of substitution may take different forms:
product-for-product substitution by e-mail or by fax, for example; substitution of need by a new product or service rendering an existing product or
service superfluous; generic substitution which occurs where products or services compete for need; for example retailers compete for available household expenditure; doing without, as with the tobacco industry. The availability of substitutes can place a ceiling on prices for a companys products, or make inroads into the market and so reduce its attractiveness.The key questions are whether or not a substitute poses the threat of obsolescence or provides a higher perceived benefit or value and the ease with which buyers can switch to substitutes. The value of Porters five forces model as an analytical framework is to assist the organisation to become more aware of events in its near environment events that it cannot control but may be able to influence. It is possible that collaboration between organisations may be a more sensible route to achieving advantage than competing. Identifying opportunities for collaboration nonetheless requires an understanding of the structure of industries, and the frameworks above can be used for this purpose. Collaboration between potential competitors or between buyers and sellers is likely to be advantageous when the combined costs of buying are less through collaboration than the internal cost that would be incurred by the organisation operating alone.
case example 3.4

In the developing area of disease management, pharmaceutical companies and health providers, such as hospitals, agree to share savings resulting from the optimal management of a dened medical condition. In the past Salick, owned largely by Zeneca, did this for cancer treatment and Eli Lilly for diabetes programmes.
Johnson et al. (2008) have proposed the following key questions arising from five forces analysis:
What are the key forces at work in the competitive environment? These will differ by type of
industry. For example, for computer manufacturers the growing power of chip manufacturers and growth in competitive intensity might be regarded as most crucial. Are there underlying forces? As identified from the PEST analysis or from an analysis of global forces, which are driving competitive forces? For example, the competitive strength of lower-cost high technology manufacturers in the Asia Pacific region is an underlying and persistent threat to European and US producers. Is it likely that the forces will change,and if so,how? How do particular competitors stand in relation to these competitive forces? What are their strengths and weaknesses in relation to the key forces at work? What can management do to influence the competitive forces affecting a SBU? Can barriers be built to entry or power over suppliers or buyers increased?
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Are some industries more attractive than others? Some industries are intrinsically more prof-
itable than others because, for example, entry is more difficult, or buyers and suppliers are less powerful.
case example 3.5

The consolidating steel industry The ve forces framework helps understand the changing attractiveness nature of an industry. For a long time, the steel industry was seen as static and unprotable. Producers were nationally based, often state owned and frequently unprotable between the late 1990s and 2003, more than 50 independent steel producers went into bankruptcy in the United States. The twenty-rst century has seen a revolution. For example, during 2006 Mittal Steel paid $35 billion (19.6 billion; 28 billion) to buy European steel giant Arcelor, creating the worlds largest steel company. The following year, Indian conglomerate, Tata, bought Anglo-Dutch steel company Corus for $l3 billion. These high prices indicated considerable condence in being able to turn the industry round. New entrants In the last 10 years, two powerful groups have entered world steel markets. First, after a period of privatisation and reorganisation, large Russian producers, such as Severstal and Evraz, entered export markets, exporting 30 million tonnes of steel by 2005. At the same time, Chinese producers have been investing in new production facilities, in the period 20032005 increasing capacity at a rate of 30 per cent a year. Since the 1990s, Chinas share of world capacity has increased more than two times, to 25 per cent in 2006, and Chinese producers have become the worlds third largest exporter just behind Japan and Russia. Substitutes Steel is a nineteenth-century technology, increasingly substituted for by other materials such as aluminium in cars, plastics and aluminium in packaging and ceramics and composites in many high-tech applications. Steels own technological advances sometimes work to reduce need: thus, steel cans have become about one-third thinner over the last few decades. Buyer power Key buyers for steel include the global car manufacturers, such as Ford, Toyota and Volkswagen, and leading can producers, such as Crown Holdings, which makes one-third of all food cans produced in North America and Europe. Such companies buy in volume, co-ordinating purchases around the world. Car manufacturers are sophisticated users, often leading in the technological development of their materials. Suppier power The key raw material for steel producers is iron ore. The big three ore producers CVRD, Rio Tinto and BHP Billiton control 70 per cent of the international market. In 2005, iron ore producers exploited surging demand by increasing prices by 72 per cent; in 2006 they increased prices by 19 per cent. Competitive rivalry The industry has traditionally been very fragmented: in 2000, the worlds top ve producers accounted for only 14 per cent of production. Most steel is sold on a commodity basis, by the tonne. Prices are highly cyclical, as stocks do not deteriorate and tend to ood the market when demand slows. In the late twentieth century demand growth averaged a moderate 2 per cent per annum. The start of the twenty-rst century saw a boom in demand, driven particularly by Chinese growth. Between 2003 and 2005, prices of sheet steel for cars and fridges trebled to $600 (336; 480) a tonne. Companies such as Nucor in the United States, Thyssen-Krupp in Germany as well as Mittal and Tata responded by buying up weaker players internationally. New steel giant Mittal accounted for about 10 per cent of world production in 2007. Mittal actually reduced capacity in some of its Western production centres.
2.6 Analysing the organisations competitive position

An industry or sector may be too high a level to provide for a detailed understanding of competition. The five forces can impact differently on different kinds of players. For example, Ford and Porsche may be in the same broad industry (automobiles), but they are positioned differently: they face different kinds of buyer power and supplier power at the very least. It is often useful to disaggregate. Many industries contain a range of companies, each of which has different capabilities and competes on different bases.These competitor differences are captured by the concept of strategic groups. Customers can also differ significantly. Such customer differences can
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be captured by distinguishing between strategic customers and ultimate consumers and between different market segments.
Strategic groups
Strategic groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases. These characteristics are different from those in other strategic groups in the same industry or sector. For example, in the grocery retailing industry, supermarkets, convenience stores and corner shops each form different strategic groups. There are many different characteristics that distinguish between strategic groups but these can be grouped into two major categories: first, the scope of an organisations activities (such as product range, geographical coverage and range of distribution channels used); secondly, the resource commitment (such as brands, marketing spend and extent of vertical integration). Which of these characteristics are especially relevant in terms of a given industry needs to be understood in terms of the history and development of that industry and the forces at work in the environment.
Market segmentation
Market segmentation seeks to identify similarities and differences between groups of customers or users. This is important because not all users are the same: they have different characteristics and needs, behave differently, and so on. Markets are therefore thought of in terms of market segments, and identifying which organisations are competing in which market is an important exercise for a strategist. When undertaking a market segmentation analysis, the following should be considered: (a) There are many bases of market segmentation. Figure 3.9 summarises some of these. It is important to consider which bases of segmentation are most important. For example, in industrial markets, segmentation is often thought of in terms of the industrial classification of buyers: we sell to the car industry. However, segmentation by buyer behaviour (or purchase value) might be more appropriate in some markets. Indeed, it is useful to consider different bases of segmentation in the same market to help explain the dynamics of that market and suggest strategic opportunities. (b) It is important to assess the attractiveness of different market segments and relative market share within them. (c) Organisations are most likely to achieve competitive advantage by developing and building strategies upon their own unique competences. It may therefore be important for a business to try to identify market segments suited to its particular competences.
market segmentation
Seeks to identify similarities and differences between groups of customers or users.
Competitor analysis
As discussed above, a business needs to obtain and consider information about competitors, and the end result of a competitor analysis should be to indicate where each competitor is strong or weak and vulnerable. The key elements are: (a) Firms must be aware of who their competitors are and how strong each one is. In any market, the strategic decisions of a firm will often be partly a response to what a competitor has done already or has the potential to do. (b) Define who the competitors are.The purpose of analysing competitors is to try to assess what they will do and respond accordingly. A business therefore needs to know:
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the competitors future goals; the assumptions the competitor holds about the industry and its place within it; current strategy how is the competitor competing on price?; capabilities strengths/weaknesses.
Such intelligence can be found in financial statements, information from customers and suppliers, inspection of products and services, and so on.
FIGURE 3.9 Some bases of market segmentation (Johnson et al.) Type of factor Characteristics of people/ organisations Consumer markets Age, sex, race Income Family size Life-cycle stage Location Lifestyle Size of purchase Brand loyalty Purpose of use Purchasing behaviour Importance of purchase Choice criteria Product similarity Price preference Brand preferences Desired features Quality Industrial/organisational markets Industry Location Size Technology Protability Management Application Importance of purchase Volume Frequency of purchase Purchasing procedure Choice criteria Distribution channel Performance requirements Assistance from suppliers Brand preferences Desired features Quality Service requirements
Purchase/use situation
Users needs and preferences for product characteristics
stop and think 3.5

What does Coca-Cola compete against?
Pepsi in the cola market. All other soft drinks. Tea and coffee. Tap water.
test your knowledge 3.1

(a) What are the generic key drivers of change outlined by Johnson et al.? (b) What are the key features of a PEST analysis? (c) Outline the elements of Porters five forces analysis. (d) Define market segmentation.
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3 Strategic analysis competences and capability

3.1 Understanding capability
In chapter 2 we discussed how organisations fit into their competitive environment. In this chapter, we shift the emphasis from the external to the internal context of strategy: the resources that an organisation possesses, or needs to possess, as the basis for a robust strategy.We shift from the sector to the organisation by looking at:

the organisations capabilities, and its important networks of relationships; how relevant they are to the objectives of the organisation; what new capabilities and relationships may be needed over time; and how these should be built or acquired.
By capabilities we mean an organisations capacity to engage in a range of productive activities. All organisations possess unique bundles of resources, and it is how these resources are used that determines differences in performance between organisations. Resources are not productive in themselves they need to be converted into capabilities by being managed and co-ordinated. It is these resultant capabilities that, if hard to imitate, are the main source of competitive advantage. Strategy, from the resource perspective, is therefore about choosing among and committing to longterm paths of capability development. Organisational capabilities are also often referred to as organisational competences, although strictly a capability refers to the potential and competence suggests an applied and well-practised capability. Strategic capability can be related to three main factors: the resources available to the organisation; the competence with which the activities of the organisation are undertaken; and the balance of resources, activities and business units within the organisation. Many of the issues of strategic development are concerned with changing strategic capability to fit a changing environment. The major upheavals in many manufacturing industries during the 1980s were examples of such adjustments in strategic capability. However, understanding strategic capability is also important as it may be the leading edge of strategic developments. New opportunities may exist by stretching and exploiting the organisations unique resources and competencies either in ways which competitors find difficult to match or in genuinely new directions, or both. This requires organisations to be more innovative in the way they develop and exploit their resources and competencies. Before reviewing the range of analytical methods that help an organisation understand strategic capability, it is necessary to see how the various analyses will contribute to the overall assessment. Figure 3.10 provides a systematic way to move from an audit of resources to a deeper understanding of strategic capability.
1 Resource audit This identifies the resources available to an organisation to support
its strategies. Some may be unique in that they are difficult to imitate, for example the location of a facility. 2 Assessing competence This requires analysing how resources are being deployed to create competencies in separate activities, and the processes through which these activities are linked together. Although an organisation will need to reach a threshold level of competence in all the activities it undertakes, it is only some of these activities that are core competences underpinning the organisations ability to outperform competition. 3 Balance These various analyses concerning resources and competences usually relate to separate strategic business units. An organisations overall strategic capability will also be influenced by the extent to which its resources and strategic business units are balanced as a whole. 4 Identifying key issues This is best undertaken as a means of summarising the key strategic insights which have emerged from other analyses.
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3 STRATEGIC ANALYSIS AND CHOICE FIGURE 3.10 Analysing strategic capability
83
Resource Audit
Analysing Competence
Assessing Balance
Identifying Key Issues SWOT CSFs
Understanding Strategic Capability
3.2 Resource audit

A resource audit identifies and classifies the resources that an organisation owns or can access to support its strategies. It should assess: the quantity of resources available; the nature of those resources; and how far the resources are unique. Resources can be grouped under four headings:
1 Physical resources An assessment of an organisations physical resources should
stretch beyond merely listing the number of machines, buildings, etc., and should ask questions about the nature of these resources, such as the age, condition, capability and location of each resource. 2 Human resources should examine the number and types of different skills within an organisation, but their adaptability must not be overlooked. Peoples innovative capability is of particular importance in fast-moving situations. 3 Financial resources include the sources and uses of money, such as obtaining capital, managing cash, the control of debtors and creditors, and the management of relationships with suppliers of money (shareholders, bankers, etc.). 4 Intangibles have a value, since when businesses are sold part of the businesses value is goodwill. In some businesses, such as professional services, goodwill could represent the major asset of the company resulting from brand names, good contacts, etc. The resource audit is really only a basis for further analysis. It should include all resources the organisation can access to support its strategies and not be narrowly confined to the resources it owns. Strategically important resources may include its network of contacts or customers.The list should be used to identify unique resources. Unique resources are those that create competitive advantage and are difficult to imitate.
unique resources
Resources that create competitive advantage and are difficult to imitate.
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3.3
core competences
The activities, skills or know-how that distinguish a company from its competitors and through which it achieves strategic advantage.
Analysing competence
The difference in performance of organisations in the same industry is rarely explained by differences in their resource base alone. It will also be determined by the way resources are deployed to create competences in the organisations separate activities and the processes of linking these activities together to sustain performance. Only some will be core competences.These underpin the organisations ability to outperform competition and must be difficult to imitate, or they will not provide a longterm advantage.They may also be the basis on which new opportunities are created.
stop and think 3.6

What do you see as core competences of the organisation for which you work or one that is familiar to you?
The key steps in assessing core competencies are as follows:
Value chain analysis

value chain analysis
Describes the activities within and around an organisation, and relates them to an analysis of its competitive strength.
Value chain analysis describes the activities within and around an organisation and relates them to its competitive strength of the organisation. Value analysis (Miles, 1961) was originally introduced as an accounting tool to shed light on the value added by separate steps in complex manufacturing processes to determine where cost improvements could be made or value creation improved. Michael Porter linked these steps to an analysis of an organisations competitive advantage.The basis of the approach is that organisations are more than a collection of machines, money and people. These resources are deployed into activities and organised into routines and systems which ensure that products or services are produced that are valued by the final consumer or user. Porter argued that understanding strategic capability must start with identifying these separate value activities. Figure 3.11 shows the value chain within an organisation.
1 Primary activities are directly concerned with the creation or delivery of a product or
service and can be grouped into four main areas:

inbound logistics include materials handling, stock control, transport, etc.; operations transform these various inputs into the final product or service:
machining, packaging, assembly, testing, etc.; outbound logistics include warehousing, transport, etc. In the case of services, they may be more concerned with arrangements for bringing customers to the service if it is at a fixed location; marketing and sales provide the means whereby consumers/users are made aware of the product or service and are able to purchase it. Support activities help to improve the effectiveness or efficiency of primary activities. They can be divided into four areas: procurement the processes for acquiring the various resource inputs to the primary activities; technology development all value activities have a technology even if it is simply know-how; human resource management recruiting, managing, training, developing and rewarding people; infrastructure the systems of planning, finance, information management, etc. and the routines within the culture (see chapter 4).
The supply chain is about more than just supply chain management. Most organisations are part of a wider value system that is linked to customer and supplier value chains. Indeed, it is often this specialisation that underpins excellence in creating value for money. Much of the value creation occurs in the supply and distribution chains, and this whole process needs to be analysed and understood. For example,
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the quality of a car when it reaches the final purchaser is not only influenced by the activities undertaken within the manufacturing company itself, but is also determined by the quality of components and the performance of the distributors. Core competences differ from one organisation to another depending on how the company is positioned and the strategies it is pursuing. It is important to identify an organisations core competences not only to ensure continuing good fit between these core competences and the changing nature of the markets or environment, but also because core competences may be the basis on which the organisationstretches into new opportunities. So, in deciding which competences are core, this ability to exploit the competence in more than one market or arena is another criterion which could be used. Developing added-value services and a geographical spread of markets are two typical ways in which core competences can be exploited to maintain progress once traditional markets are mature or saturated.
FIGURE 3.11 The value chain (Porter, 1985)
Firm infrastructure Support activities Human resource management Technology development Procurement
n rgi Ma Ma rgi n
Inbound logistics
Operations
Outbound logistics
Marketing and sales
Service
Primary activities
Core competences as value chain

Core competences must meet a number of challenging criteria.They must not only provide value to the buyer, but must also be difficult for competitors to imitate, so they will be rare, complex (because they are not explained by one factor but by linked factors), or so embedded in organisational practice or knowledge as to be, in effect, tacit. It may be necessary therefore to identify aspects of the organisation that might not be the most visible. Useful ways of identifying core competences are:
identify strategic business units (SBUs) that are clearly successful; identify the bases of perceived value by the customers.These can be thought of as
the primary reasons for success and can be concerned with the reputation of the companys brand, the excellence of its service, etc. In particular, it is important to concentrate on primary reasons for success in which the SBU scores better than competition; unpack each of these bases of success. These can be regarded as the secondary reasons for success. This is likely to give rise to broad explanations, such as being able to find ways of solving the problems that buyers might get themselves into; unpack each of the secondary reasons for success. How is the company able to solve buyers problems, and so on? This requires the managers to get down to tertiary reasons for success at operational levels of detail; look for patterns of explanation. It is unlikely that any one factor explains a core competence. It is more likely that there are linked factors.
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Figure 3.12 summarises the relationship between resources, core competences and competitive advantage.
FIGURE 3.12 Strategic capabilities and competitive advantage (Johnson et al., 2008)
Resources Competences
Capabilities for competitive advantages
Threshold capabilities
Threshold resources Tangible Intangible
Threshold competences
Unique resources Tangible Intangible
Core competences
Core competences may have a variety of bases:

Cost efficiency The provision of value-for-money products or services (cost
leverage
A measure of the improvement in performance achieved through the management of linkages between separate resources and activities.
efficiency) is a measure of the level of resources needed to create a given level of value. Cost efficiency is determined by a number of factors often called cost drivers. Innovative ways of managing these cost drivers can create cost reductions and competitive advantage. They include economies of scale, supply costs, product/process design and experience. Analysing value added (effectiveness) Effectiveness is a measure of the level of value that can be created from a given level of resources. This is essentially related to how well the organisation is matching its products or services to the identified needs of its chosen customers and the competencies that underpin this effectiveness. Unlike cost analysis, the potential sources of value added, or effectiveness, are likely to be many and varied. The key question is: what are the critically important features and the core competencies that underpin the kind of value-added features needed to perform effectively? For example, are the services that support the product matched with client expectations and, again, do these represent perceived value? If organisations are to compete on a value-added basis, it is important to remember that the detailed assessment of value added must be done from the viewpoint of the customer or user of the product or service. Managing linkages Core competences in separate activities may provide competitive advantage for an organisation, but over time may be imitated. Core competences are likely to be more robust and difficult to imitate if they relate to the management of linkages within the organisations value chain and linkages into the supply and distribution chains. It is the management of these linkages that providesleverage and levels of performance which are difficult to match. Leverage is a measure of the improvement in performance achieved through the managing of linkages between separate resources and activities.This could create competitive advantage in a number of ways. For example, a decision to hold high levels of finished stock might ease production-scheduling problems and provide for a faster response time to the customer.
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In addition to the management of internal linkage, competitive advantage may
also be gained by the ability to complement or co-ordinate the organisations own activities with those of suppliers, channels or customers.This could, for example, occur through vertical integration, such as attempting to improve performance through owning more parts of the value system, bringing more linkages inside to the organisation. In chapter 10 we shall see how total quality management seeks to improve performance through closer working relationships between the various specialists within the value system. Performance may sometimes be improved by reconfiguring the value chain to reduce costs or increase effectiveness.
case example 3.6

In the United Kingdom, Direct Line insurance revolutionised the household and motor insurance markets in the 1990s by cutting out the need for insurance brokers and going direct to individual householders.
3.4 Assessing the balance of the organisation

The previous section was concerned with analysing the competences of an organisation by looking in detail at the separate activities that are undertaken and also the way that links are managed between these separate activities and within the wider value system. However, an organisations strategic capability will also be determined by the extent to which the organisations business units are balanced as a whole. Portfolio analysis examines the balance of an organisations SBUs. It is a key aspect of strategic capability to ensure that the portfolio is strong. Portfolio analysis can be used to describe the current range of SBUs and to assess the strength of the mix both historically and against future scenarios. The Boston Consultancy Group (BCG) proposed one of the first ways of classifying business units according to market growth and relative market share. Figure 3.13 shows this original matrix and the description and characterisation of each of the sections.
Star an SBU that has a high market share in a growing market.The SBU may be
portfolio analysis
Analyses the balance of an organisations strategic business units.
spending heavily to gain that share, but costs should be reducing over time and, it is to be hoped, at a rate faster than that of the competition. Question mark (orproblem child) is also in a growing market, but does not have a high market share. It may be necessary to spend heavily to increase market share, but if so, it is unlikely that the SBU is achieving sufficient cost-reduction benefits to offset such investments. Cash cow has a high market share in a mature market. Because growth is low and market conditions are more stable, the need for heavy marketing investment is less. But high relative market share means that the SBU should be able to maintain unit cost levels below those of competitors. The cash cow should then be a cash provider, perhaps to finance question marks. Dog has a low share in static or declining markets and is thus the worst of all combi nations. Dogs may be a cash drain and use up a disproportionate amount of company time and resources.
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Some caution is needed with portfolio analysis:

There can be practical difficulties in deciding what exactly high and low mean
in a particular situation. The analysis should be applied to SBUs (i.e. a bundle of products or services and the associated market segments), not to whole markets. Corporate management must develop the ability and devote the time to reviewing the role of each SBU in the overall mix of company activities. This is an important responsibility of the corporate centre. Some are sceptical of whether the corporate centre really does add value to the company through these processes of buying, selling, developing or running down individual units to keep the portfolio balanced. They suggest that the free market might allocate resources more effectively. The original BCG analysis concentrated on the needs of a business to plan its cash flow requirements across its portfolio.Thus, cash cows will be used to create the funds needed for innovation and the development of question marks and stars. However, little is said about the behavioural implications of such a strategy. How does central management motivate the managers of cash cows, who see all their hard-earned surpluses being invested in other businesses? In many organisations the critical resource to be planned and balanced will not be cash, but innovative capacity. Question marks and stars are very demanding on these types of resource. The position of dogs is often misunderstood. Certainly, there may be some products that need immediate deletion but even then there may be political difficulties if they are the brain child of people with power within the organisation. Other dogs may have a useful place in the portfolio.They may be necessary to complete the product range and provide a credible presence in the market.
FIGURE 3.13 The Boston Consulting Group portfolio matrix

MARKET SHARE High Low
MARKET GROWTH
High
Stars Strong and growing quickly
Question Marks Could become stars or fail
Low
Cash Cows Milked to supply stars and question marks
Dogs Keep if protable otherwise sell
3.5 Identifying key issues

It is only at this stage of the analysis that a sensible assessment can be made of the major strengths and weaknesses of an organisation and their strategic importance. The analysis is then useful as a basis against which to judge future courses of action. In chapter 4 we look at critical success factors as one way of achieving this as part of our focus on resource planning. Here we shall look at the role of a SWOT analysis.
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SWOT analysis
Summarises the key issues from an analysis of the business environment and the strategic capability of an organisation.
A SWOT analysis summarises the key issues from an analysis of the business environment and the strategic capability of an organisation. SWOT stands for strengths, weaknesses, opportunities and threats but, rather than just listing these in terms of managers perceptions, the idea is to undertake a more structured analysis so as to yield findings that contribute to the formulation of strategy. It brings together the main issues raised in this chapter and in chapter 2. The aim is to identify the extent to which the current strategy of an organisation and its more specific strengths and weaknesses are relevant to, and capable of, dealing with the changes taking place in the business environment. It can also be used to assess whether there are opportunities to exploit further the unique resources or core competencies of the organisation.The procedure is:
identify the key changes in the organisations environment following the analyses
outlined in the previous section. It is helpful if the list does not exceed seven or eight key points that represent the opportunities and threats; undertake the same process for the resource profile and competences of the organisation following the analysis outlined in this section to identify the organisations strengths and weaknesses. It is useful to keep the total list to no more than eight points. It is important to avoid over-generalising this analysis and to keep to specific points: a statement such aspoor management means very little and could be interpreted in any number of ways. If it really means that senior managers have not been good at managing change in the organisation, that is a more specific and more useful point. When this is completed, the analysis should look something like that shown in Figure 3.14. This should provide some useful strategic insights. This example is a SWOT analysis completed by an internal learning and development team within an organisation in the communications sector. Some issues could be either opportunities or threats, depending on the extent to which the organisation can capitalise on its strengths.An analysis of perceived weaknesses should also recognise that their importance varies depending on the types of strategy the organisation is likely to pursue.
FIGURE 3.14 Sample SWOT analysis
STRENGTHS Consultancy skills Diversity of background experience and skills Much experience in delivering to meet bottom line business need Capability in team and individual development Change and transition expertise Knowledge of learning technology Design and implementation of leadership Development programmes Good understanding of the business Good sector experience OPPORTUNITIES Leadership development and cultural intelligence Team development opportunities in new structure Commissioning/partnering external with external contractors We have wide skill base which we must be able to focus as required WEAKNESSES Admin support Lack of large-scale organisation change experience Business experience (i.e. line experience) Global teamwork Not sufciently visible! Multi-cultural imbalance
THREATS Credibility with top management Capability of senior management to support Pressure on numbers Lack of multiculturalism/global mind Infrastructure support in the comapny Lack of funding
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(a) Explain what a resource audit should seek to address. (b) Define core competence. (c) Draw Porters Value Chain model. (d) Define leverage. (e) Draw the BCG portfolio matrix.
4 Strategic choice options

4.1 Introduction
This section is concerned with the options for strategic choice and covers the basis of strategic choice, alternative development directions and methods of choosing. Figure 3.15 is an adaptation of Ansoffs (1965) traditional product/market matrix often used for generating directions for strategic development. It considers the development directions available to an organisation in terms of the market coverage, products and competence base of the organisation. This last dimension is an important extension by Johnson et al. of the traditional approach. Figure 3.15 is meant to emphasise that, in the long run, development in any of the boxes is likely to require the development of competences to cope with a changing situation. So, innovation is a key ingredient of strategic change. Figure 3.15 also outlines the broad types of development direction in terms of the three dimensions of markets, products and competences. These range from strategies concerned with protecting and building an organisations position with its existing products and competences, through to major diversification requiring development and change of both products and competences to enter or create new market opportunities. Within this broad steer for an organisation there are a number of specific options concerning both the direction and the method of developing the organisations strategies.
FIGURE 3.15 Directions for Strategy Development (Ansoff, 1965; adapted by Johnson et al., 2008)
COMPETENCE
PRODUCTS Existing A PROTECT/BUILD Existing MARKETS Withdrawal Consolidation Market penetration C MARKET DEVELOPMENT New segments New territories New uses B PRODUCT DEVELOPMENT On existing competences With new competences New
D DIVERSIFICATION On existing competences With new competences
New
DEVELOPMENT
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4.2 Generic strategies to protect and build

The grand strategy represents the overall direction the business is going to follow and is connected with the concepts of mission and purpose that were discussed in chapter 2 and underpin the specific strategic directions an organisation may choose to follow.Three alternatives are presented in Figure 3.16.
FIGURE 3.16 Selection of grand strategies Grand strategy Stability, or consolidation What? Continues with same products, markets, processes. Focus on steady all-round improvement. Seeks to add new products, markets and processes, or Looks for major increases in current activity. Recognises need to cut back on range of products or markets. Seeks to improve current processes through cutting back. Why? Seen to be doing well. Prefers low risk and little change. Stable environment. Stakeholders may impose limits. Wants to do much better. Prefers higher risk and change. Managers motivated to expand. Volatile environment. Stakeholders have high expectations. Recognises things are going badly. Threatening environment. Managers opt for survival policy. Stakeholders dissatised with current activities.
Growth, or building
Retrenchment, or withdrawal
1 Stability Many businesses, especially small ones, follow a stability strategy. This
means that the business will keep, more or less, the current pattern. If markets expand, so will the business, but it will not seek to expand faster than that.A stability strategy will pay off in stable conditions where the business can devote its efforts to improving its efficiency while not being threatened with external change. In addition, many organisations are constrained by regulations or the expectations of key stakeholders. This is especially true of the public sector and many not-for-profit organisations. 2 Growth strategies are followed by businesses that see themselves as strong and doing well.Their managers may prefer higher risks and be motivated to expand, since many equate business size with success. In a volatile environment, growth may provide a cushion against a downturn in fortunes or a barrier against the development of a rival. 3 Retrenchment means drawing back. Falling demand in main markets, pressure on costs through having a poor location, or the loss of key personnel may make it desirable for a business to scale back. Retrenchment may be the only means for the organisation to make the internal improvements necessary to face an increasingly competitive environment. It is often seen as a temporary expedient before the business adopts a growth or stability strategy starting at the new, lower level. Ultimately, however, retrenchment could lead to closure. The three generic strategies can be used in combination.They can be sequenced with growth followed by stability, or pursued simultaneously in different parts of the SBU. For example, stability in the current product line may be looked for while the company prepares to launch a replacement.
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4.3 Product development

case example 3.7
Lego, manufacturer of the brightly coloured plastic building bricks, was launched in 1949, and has always proved popular in an industry renowned for changing tastes and preferences and for innovation. On the strength of this one product, Lego has become Europes largest and the worlds fourth-largest toy maker. Lego is Danish, family owned and based on strong principles. Lego has ve stated values: creativity, innovation, learning, fun and quality. The basic strategy is one of product development, with Lego developing an enormous number of variations on its basic product theme. By the mid1990s, some 300 different kits (at a wide range of prices) were available worldwide. There were 1,700 different parts, including bricks, shapes and miniature people, and children could use them to make almost anything from small cars to large, complex, working space stations with batteryoperated space trains. Brick colours were selected to appeal to both boys and girls; and the more complex Lego Technic sets were branded and promoted specially to make them attractive to the young teenage market. In a typical year Lego replaces one-third of its product range, with many items having only a short lifespan. New ideas are developed over a two-to three-year period and backed by international consumer research and test marketing. Lego concentrates on global tastes and buying habits. Competition has forced Lego to act internationally and aggressively. One US company, Tyco, markets products that are almost indistinguishable from Lego. Lego has attempted unsuccessfully to sue for patent infringement and now views this competition as undesirable but stimulating. In the mid-1990s, sales were being affected adversely by changing tastes and by the growing popularity of computer games. In 1997 Lego opted for a new range extension and began to market construction kits with microchips and instructions on CD-ROMS. In 1998 the company introduced a new Mindstorms range built around a brick powered by AA batteries. Lego had had the technology for some time but had been waiting until it could reduce costs to a realistic level. Lego manufactures in Switzerland, the Czech Republic, South Korea and the United States as well as Denmark, making its own tools for the plastic injection moulding machines. Bricks are only moulded in Denmark and Switzerland and emphasise quality. Investments in production and improvements are thought to be in the region of at least 100 million per year, though since 2000 protability has fallen and the company has recently re-structured in a bid to stay independent.
Source: Based on a case in Thompson and Martin (2005)
There are many reasons why companies might have a preference for product development. For example, retailers follow the changing needs of their customers by a continuing policy of introducing new product lines. A core competence for successful organisations is, therefore, the ability to analyse and understand the changing needs of a particular group of customers or clients. Strategic development can be built around such a core competence. Similarly, product development may be preferred because the company has core competences in research and development (R&D). When product life cycles are short as with consumer electronics product development becomes an essential requirement of an organisations strategy, built around a core competence in R&D or the ability to acquire new products from elsewhere.
stop and think 3.7

What issues arise with the introduction of new products as a development strategy? Why might it not be sustainable?
Product development may often raise uncomfortable dilemmas for organisations. While new products may be vital, the process of creating a broad product line is expensive, risky and potentially unprofitable, because most new products never reach the market and, of those that do, relatively few succeed. In practice, rapid rates of new
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product introduction can depress profitability as organisations struggle to learn new competences needed to debug production, train salespeople, etc. Johnson et al. argue that managers should ensure that the processes of innovation in the organisation are appropriate for the situation that they face.There are choices about how new ideas and improvements might be fostered in the organisation and a further choice concerns the method by which innovation will be secured whether it should be through the organisations own internal efforts, by acquiring innovations (e.g. products, processes or whole companies) or by alliances and partnerships. The relative merits of these different methods of strategy development will be discussed below. In the long term, product development is unlikely to be sustainable without developing or acquiring new competences, for example because customers become more experienced in judging value for money. Such shifts at the customer end require responses from the organisation.These may be concerned not with the basic features of the product or service, but with the need to improve other aspects of the customer experience, for example the quality of information provided to clients that have been regarded as peripheral. The need to develop competences or products even to survive in existing markets is underlined by the consequences of not doing so. It is likely that the performance may become so poor in relation to that of competitors or other providers that the organisation becomes a target for acquisition, particularly by organisations which have core competences in corporate turnaround.
4.4 Market development

Most organisations have developed in ways that have resulted in limited coverage of the market by their products. If the organisations aspirations outstrip the opportunities in existing markets, it is natural to look for opportunities to exploit the current products in other markets.Three common ways of doing this are as follows:
1 Extension into market segments which are not currently served, although this might
require some modification of the product to suit it to new segments. For example, a manufacturer of branded grocery products for the premium market may enter the mainstream market through own-brand sales to supermarkets. This will require the development of new competences in, for example, key account selling. 2 Development of new uses for existing products For example, manufacturers of stainless steel have progressively found new applications for the products that were originally used for cutlery and tableware. Innovation such as this will require competences in analysing each potential market and assessing the particular requirements of the product. 3 Geographical spread either nationally or internationally into new markets. Again, this may require some adjustment to product features or marketing methods. It will also require other competences, for example in language and cultural awareness. There are important practical implications for organisations planning to increase their global participation, including the need to reassess the way in which the organisations structure, design and control will need to change.
case example 3.8

McDonalds expanded internationally by identifying new types of location as well as new countries. This continued growth also required competences in reducing opening costs of new outlets and being prepared to make minor adjustments to the standard offering in each country in which it operated in order to be accepted by customers.
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4.5 Diversification
diversification
Directions of development that take the organisation away from its present markets and its present products at the same time.
Diversication is a term used in many different ways. Here, diversification involves directions of development that takes the organisation away from its present markets and its present products at the same time. Diversification is traditionally considered under two broad headings:
1 Related diversication This is development beyond the present product and
related diversification
Development beyond the present product and market, but still within the broad confines of the current industry.
market, but still within the broad confines of the industry (i.e. value chain) in which the company operates. For example, Unilever is a diversified corporation, but virtually all of its interests are in the fast-moving consumer goods industry.
FIGURE 3.17 Related diversification for a manufacturer (Johnson et al., 2008)
BACKWARD INTEGRATION Raw materials manufacture Components manufacture Machinery manufacture Product/process research/design
Raw materials supply
Components supply
Machine supply
Financing
Transport
HORIZONTAL INTEGRATION Competitive products Manufacturer Complementary products FORWARD INTEGRATION Distribution outlets Transport Marketing information Repairs and servicing By-products Complementary capabilities
Backward integration refers to development into activities that are concerned with the
inputs into the companys current business (i.e. are further back in the value chain), for example raw materials and machinery.
case example 3.9

In a bid to reduce premiums and improve customer service in the UK car insurance industry, Direct Line set up a limited number of wholly owned repair and development centres. These were intended to be centres of excellence that would be supported by a larger network of recommended but independently owned garages.
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Forward integration refers to development into activities concerned with a companys
outputs (i.e. are further forward in the value chain), such as transport, distribution, etc. Vertical integration describes either backward or forward integration into adjacent activities in the value chain. Horizontal integration refers to development into activities that are competitive with, or directly complementary to, a companys present activities. For example, many organisations have realised that there are opportunities in other markets for the exploitation of the organisations core competencies. It needs to be recognised that the ownership of more value activities within the value chain does not guarantee improved performance or better value for money for the consumer or client. Indeed, there has been some degree of disillusionment with related diversification as a strategy, and more emphasis on improving performance within the value system through external linkages and the management of relationships with the various parties in the supply and distribution chains.The ability to achieve this could be a core competence. It would include the need to ensure that innovation and improvement of value for money are occurring within the other organisations (i.e. suppliers and distributors).
unrelated diversification
Where the organisation moves beyond the confines of its current industry.
2 Unrelated diversication is where the organisation moves beyond the confines
of its current industry. It can be divided into three categories: (a) It may involve extension into new markets and new products by exploiting the current core competencies of the organisation. (b) It may involve the creation of genuinely new markets. It requires very good market knowledge and the creativity to better provide for market needs. (c) The most extreme form of unrelated diversification is where new competences are developed for new market opportunities. Not surprisingly, this extreme end of the diversification spectrum is less common. One of the reasons why diversification strategies run into difficulties is that organisations misjudge the degree of relatedness involved.This is a clear danger in vertical integration, which moves the organisation into activities that are adjacent in the value chain (e.g. supply or distribution) but which are entirely unrelated to the organisations current competences. Developments of this kind seek to take advantage of synergy, the idea that the whole can be greater than the sum of the parts. But joining individuals or work groups together does not always result in harmony! Diversified companies seek synergistic relationships as follows:
Market synergy sales of one product reinforcing sales of another; sharing distri-
synergy
The idea that the whole can be greater than the sum of the parts.
bution channels; applying brand names across many products, and so on.
Operating synergy filling out product ranges to occupy spare capacity; sharing infre-
quently used resources; recycling. Technological synergy sharing product or process technology among divisions; exploiting patents throughout world markets. Financial synergy allocating funds among units to gain the best return; using financial strength to raise new capital at low cost. Management synergy applying core competences learnt in one sector to another; transferring managers with special skills to areas where they are most needed.
Does diversification improve perfomance?

The various attempts to demonstrate the effects of diversification on performance are inconclusive. The sum total of the research is, according to Johnson et al., unclear apart from one important message: successful diversification is difficult to achieve in practice. There is some evidence that profitability does increase with diversity, but only up to the limit of complexity, beyond which this relationship reverses. This raises the significant issue of whether managers can cope with large, diverse organisations. The evidence on this is particularly stark for service-based businesses (Clayton, 1992).
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The theoretical benefits of synergy through diversification are often difficult to achieve in practice. This is particularly supported in the research on diversification through acquisition. In the mid-1990s many large diversified organisations were choosing to split into separate companies, each with a much more clearly defined core business or market focus. An important conclusion of many research studies is that the likely success of diversification is extremely dependent on the circumstances of an organisation, such as the level of industry growth, market structures and the firms size. Related diversifiers also tend to out-perform those using unrelated diversification strategies.
4.6 Other methods of strategy development

The first part of this section was concerned with strategic choices at the broad or generic level the basis on which the more detailed strategies we have looked at in the last sections are constructed. But for many of these directions there are different potential methods of development.These methods can be divided into three types: internal development; acquisition (or disposal); and joint development (or alliances).
FIGURE 3.18 Alternative growth strategies (Thompson and Martin, 2005) Advantages Organic growth Lower risk Allows for ongoing learning More control Fast Buys presence, market share and expense Possible draw backs Slow Lack of early knowledge may be misjudgements Premium price may have to be paid High risk if any misjudgement Preferred organization may not be available May be difcult to sell unwanted assets Possible lack of control Potential managerial differences and problems As for strategic alliance
Acquisition
Strategic alliance
Cheaper than takeover Access to market knowledge Useful if acquisition impractical As for strategic alliance plus: Greater incentive and closer contract Can lock out other competitors more effectively
Joint venture
Internal development
internal development
Where strategies are developed by building up the organisations own resource base and competences.
Internal development (also known as organic growth) involves building up the organisations own resource base and competences to develop strategy. For many organisations, internal development has been the primary method of strategy development, and there are some compelling reasons why this should be so, particularly with products that are highly technical in design or method of manufacture. Businesses will choose to develop new products themselves, since the process of development is seen as the best way of acquiring the necessary core competences to compete successfully in the market place. Indeed, these core competences may also spawn further new products and create new market opportunities.A similar argument applies to the development of new markets by direct involvement. For example, many manufacturers still choose to forgo the use of agents, as they feel that the direct involvement gained from having their own sales force is of advantage in gaining a full understanding of the market.
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The implications of this to the management of innovation in the organisation should be clear.Whatever strategic directions of development are being pursued, the organisation must have high levels of competence in the management of innovation. If these are not present then further consideration should be given to whether internal development is the best development method. Perhaps the necessary competences in innovation should be acquired.
Mergers and acquisitions

acquisition
Where an organisation develops its resources and competences by taking over another.
Acquisition is where an organisation develops its resources and competencies by taking over another organisation. Development by acquisition tends to go in waves and also tends to be selective in terms of industry sector. For example, in the United Kingdom, between 1985 and 1987, high street retailing takeovers were common.
case example 3.10

In December 2005, NTL conrmed that it had approached Virgin Mobile over merging the rms. NLT proposed to use the Virgin brand to offer internet access, TV and xed line and mobile telephony. The situation at that time is outlined below, illustrating the factors to be weighed up by those involved. NTL provides domestic phone, television and internet services and data, voice and internet services to organisations in the United Kingdom. The parent company emerged from bankruptcy protection in 2003 and is currently merging with Telewest, another cable operator. NTL/Telewest has a total of ve million subscribers and employs 10,000 people. It does not have a good reputation for customer service. Virgin Mobile is part of the Virgin Group and was launched in November 1999. Virgin is a virtual operator, using the T-Mobile network, and has ve million customers on a mixture of pre-pay and contract deals. The company employs 1,400 staff in the United Kingdom. As a virtual network operator, Virgin Mobile has precious few real assets. But Sir Richard Bransons company has a quickly growing subscriber base, a good customer service team, and, most importantly, a good brand. NTL hopes to captalise on that success and re-brand itself as Virgin. Key questions that will affect the success of the merger are:
Will Virgin Mobiles young customers be afuent

and settled enough to buy NTLs premium cable television packages? Will NTL/Telewest households buy into the Virgin brand and forget about NTL hell, as one customer website has labeled it? Cable rms have found it difcult enough to hawk their television and telephony packages, so one might question whether a quadruple sell will deliver. Virgin, in turn, is under pressure from keenly priced competitors such as Tesco Mobile. In the end this deal is not about technology; it is about branding. And investors and Sir Richard will have to ask themselves whether the ever-exible Virgin brand can be stretched yet again.
Source: Based on material from www.bbc.co.uk
A compelling reason to develop by acquisition is the speed with which it allows the company to enter new product or market areas. In some cases the product or market is changing so rapidly that this becomes the only way of successfully entering the market, since the process of internal development is too slow. Another reason for acquisition is the lack of resources or competence to develop a strategy internally. A company may be acquired for its R&D expertise or its knowledge of a particular type of production system. International developments are often pursued through acquisition because of market knowledge. There are also financial motives for acquisitions. If the share value or price/earnings (P/E) ratio of a company is high, then a firm with a low share value or P/E ratio may be a tempting target. Indeed, this is one of the major stimuli for the more aggressively acquisitive companies. Sometimes there are reasons of cost efficiency which make acquisition look favourable.This could arise because an established company may have achieved efficiencies that would be difficult to match quickly by internal development. The necessary innovation and organisational learning would be too slow.
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stop and think 3.8

Are mergers and acquisitions always a good thing for an organisation? What issues might arise with implementation?
mergers
Organisations that come together voluntarily to seek benefits of synergy.
The overriding problem with acquisition lies in the ability to integrate the new company into the activities of the old, which often centres around problems of cultural fit.Where acquisition is being used to acquire new competences, this clash of cultures may simply arise because the organisational routines are so different in each organisation. Reasons for mergers may be similar to those for acquisitions. However, mergers are usually the result of organisations coming together voluntarily because they are actively seeking benefits of synergy. The research evidence on the financial consequences of mergers and acquisitions is again inconclusive. However, some of the findings do act as a reminder that acquisition is not an easy or a guaranteed route to improving financial performance. It may take the acquiring company some considerable time to gain any financial benefit from acquisitions. Some studies confirm the importance of non-economic factors such as previous experience of acquisitions and decisions on whether to remove or retain executives of the acquired company and the often-ignored management of post-acquisition cultural issues.
Joint developments and strategic alliances

Strategic alliances involve some form of agreement between two or more companies where they share resources and activities to pursue a strategy. Joint development of new strategies has become increasingly popular, particularly since the early 1980s, because organisations cannot always cope with increasingly complex environments (such as globalisation) from internal resources and competences alone.They may see the need to obtain materials, skills, innovation, finance or access to markets, and recognise that these may be as readily available through co-operation as through ownership. There is a variety of arrangements for joint developments and alliances. Some are very formalised but, at the other extreme, there can be loose arrangements of cooperation and informal networking with no shareholding or ownership involved. The reasons why these different forms of alliance occur are concerned with the assets involved in the alliance.These assets may not just be financial or physical, but could also include access to market, skills and intellectual property. Joint ventures are also alliances, but involve the exchange of minority shareholdings between the companies, or the establishment of an independent company jointly owned by the organisations that start it. The organisations remain independent, but set up a newly created organisation jointly owned by the parents. The joint venture was a favoured means of beginning collaborative adventures between eastern and western European firms in the early 1990s, with eastern European firms providing labour, entry to markets and sometimes plants, and western companies providing expertise and finance. Faulkners (1995) study of international strategic alliances confirmed that the primary motivation to form alliances was the need for specific resources and competences to survive and succeed in globalising markets particularly where technologies were also changing. Partners were chosen with these issues in mind. However, the success of alliances tended to be more dependent on how they were managed and the way in which the partners fostered the evolution of the partnership, for example attitudes to commitment, trust and cultural sensitivity, clear organisational arrangements and the desire of all partners to achieve organisational learning from the alliance rather than to use partners to substitute for their lack of competences.
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(a) Outline Ansoffs view of generic strategies. (d) Define diversification. (c) What types of diversification are there? (d) What types of joint strategy development are there?
5 Strategic choice evaluation and selection

5.1 Introduction
This section discusses how strategic options can be evaluated and the processes by which organisations might select strategies for the future. The aim is to look at the contribution that different types of technique, some of which we have already discussed, can make to evaluating and selecting strategies. When assessing strategies, three types of evaluation criteria can be used:
1 Suitability a broad assessment of whether the strategy addresses the circumstances
in which the organisation is operating, for example the extent to which new strategies would fit with the future trends and changes in the environment. 2 Acceptability the expected performance outcomes (such as the return or risk) if the strategy were implemented and the extent to which these would be in line with the expectations of stakeholders. 3 Feasibility whether the strategy could be made to work in practice.This means an emphasis on more detailed assessment of the practicalities of resourcing and strategic capability.
FIGURE 3.19 A framework for the evaluation and selection of strategies
Strategic Analysis Assessment of Suitability
Strategic Options
Acceptability
Feasibility
Selection of Strategies
Figure 3.19 shows how these various aspects of evaluation and selection can be fitted together, and builds on the issues previously discussed concerning strategic analysis and strategic options.
5.2 Assessing suitability

suitability
Concerns whether a strategy addresses the circumstances in which the organisation is operating.
Suitability concerns whether a strategy addresses the circumstances in which the organisation is operating. Establishing the suitability of options is a useful starting point as it establishes the strategic logic behind a particular strategy. Assessing the suitability of strategic options can be a useful basis on which to screen options before
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more detailed analyses are undertaken. In reviewing strategies, it is important to check that strategies are consistent with the needs of the environment, the resources and values of the organisation, and its mission.
Mission and objectives Does the strategy fit the current mission and objectives of the
organisation? Is it acceptable to the strategic leader and other influential stakeholders? (This issue is developed further at 5.4 below.) Effect on the strategic perspective Does the strategy proposed have the potential for improving the general competitive position of the organisation? It should seek to become and remain an effective competitor. Current strategic position (SWOT) Is the strategy appropriate for the current economic and competitive environment? Is the strategy able to capitalise and build on current strengths, competencies and opportunities, and avoid weaknesses and potential threats?To what extent is the strategy able to take advantage of emerging trends in the environment, the market and the industry? Skills, competencies and resources Are the strategies being pursued and considered sufficiently consistent that skills, competencies and resources are not spread or stretched in any disadvantageous way? Does any new proposal exploit key organisational competencies? For current businesses and strategies, can the organisation effectively add value, or would a divestment strategy be more appropriate? Culture Does the strategy fit the culture and values of the organisation? If not, what are the implications of going ahead? Simplicity Is the strategy simple and understandable? Is the strategy one that could be communicated easily, and about which people are likely to be enthusiastic?
Summarising the above, is there congruence between the environment, values and resources?
5.3 Analysing feasibility

feasibility
Concerns whether an organisation has the resources and competences to deliver a strategy.
Feasibility is concerned with whether an organisation has the resources and competences to deliver a strategy.
Issues of implementation and change Is the strategy feasible in resource terms? Can it be
implemented effectively? Is it capable of achieving the objectives that it addresses? Can the organisation cope with the extent and challenge of the change implied by the option? Finance and other resource availability A lack of any key resource can place a constraint on certain possible developments. Ability to meet key success factors A strategic alternative is not feasible if the key success factors dictated by the industry and customer demand, such as quality, price and service level, cannot be met. Competitive advantage The effectiveness of a strategy will be influenced by the ability of the organisation to create and sustain competitive advantage.When formulating a strategy it is important to consider the likely response of competitors in order to ensure that the necessary flexibility is incorporated into the implementation plans.A company which breaks into a currently stable industry or market may well threaten the market shares and profitability of other companies and force them to respond with, e.g., price cuts, product improvements or aggressive promotion campaigns.The new entrant should be prepared for this and be ready to counter it. Timing Timing is related to opportunity, on the one hand, and risk and vulnerability, on the other. It may be important for an organisation to act quickly and decisively once a window of opportunity is spotted. Competitors may attempt to seize the same opportunity.Timing is also an implementation issue.
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5.4 Assessing acceptability

acceptability
Concerns the expected performance outcomes, such as risk or return, if a strategy is implemented.
Strategies also have to be acceptable or desirable to a variety of different stakeholders. Acceptability is therefore concerned with the expected performance outcomes, such as risk or return, if a strategy is implemented.
Strategic needs The ability of the strategy to satisfy the objectives of the organisation
and help to close any identified planning gap. Timing may be important. The ability of the strategy to produce results in either the short or the longer term should be assessed in the light of the needs and priorities of the firm. The level of expected returns Investment decisions might concern the purchase of new technology or new plant, the acquisition of another company, or financing the development and launch of a new product.The ability to raise money, and the cost involved, are key influences alongside two other strategic issues: Does the proposed investment make sense strategically? Will the investment provide an adequate financial return? Synergy Effective synergy should lead to a better concentration of resources compared with competitors. What are the prospects for synergy in bringing an all-round improvement to the organisation? Diversification into products and markets with which the organization has no experience, and which may require different skills, may fit poorly alongside existing strategies and fail to provide synergy. Risk Risk, vulnerability, opportunity and timing are linked. Where organisations, having spotted an opportunity, act quickly, there is always danger that some important consideration will be overlooked. For example, managerial competence may be stretched. Many of these issues are qualitative and require judgment. The longer the time the organisation spends in considering the implications and assessing the risks, the greater the chance it has of reducing and controlling the risks. However, if managers delay too long, the opportunity or the initiative may be lost to a competitor who is more willing to accept the risk. Stakeholder needs and preferences The issues here are the expectations and hopes of key stakeholders, the ability of the organisation to implement the strategy and achieve the desired results, and the willingness of stakeholders to accept the inherent risks in a particular strategy.
Strategic changes may affect existing resources and the strategies to which they are committed. Shareholders, bankers, managers, employees and customers can all be affected, and their relative power and influence will prove significant. The willingness of each party to accept particular risks may also vary.The power and influence of the strategic leader will be very important in the choice of major strategic changes, and his or her ability to convince other stakeholders will be crucial.
stop and think 3.9

In this section we examined the criteria that can be employed to evaluate strategy. But are some more useful or important than others?
5.5 Selecting strategies

This final section is concerned not so much with what the strategic choices are, but with how the process of strategic choice and selection of strategies can be undertaken within organisations.
Prioritising criteria
Some prioritisation of criteria may be a useful starting point. A useful starting point is to consider the purpose of the organisation. It is clearly important to take into account the view of those in the leadership team developing the criteria as well as
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other significant stakeholders. In not-for-profit organisations, the criteria may go beyond considerations of generating the added value necessary for survival and may consider other matters, such as the levels of service to the community, or individuals the organisation serves. In addition, the culture and style of such organisations do not always lend themselves to precise evaluation. Figure 3.20 suggests ways in which priorities may vary between commercial and not-for-profit organisations.
FIGURE 3.20 Are some criteria more important? (Lynch, 1997)
Criteria in commercial organisations Strategy option 1 Mission and objectives? Building on strengths? Overcoming weakness?
Strategy option 2
Strategy option 3
Criteria in not-for-profit organisations Strategy option 1 Mission
Strategy option 2
Source
Strategy option 3
Decentralised decision making
Criteria in commercial organisations For most organisations, the priority of the criteria
will be established by the mission and objectives. Criteria also involve the need to balance the interests of different stakeholders. It would be a mistake to consider only those criteria that can be put into numbers. For example, many organisations will have guidelines related to customer quality and satisfaction, while others will include service to the broader community.These may not be easy to quantify, but are no less important. All these need to be reflected in the criteria for selection of strategy options. Criteria in not-for-profit organisations All not-for-profit organisations will need to create added value. However, beyond this, the criteria may need to reflect strongly the important aspects of the service or the value to the community appropriate to the mission. Great care needs to be taken in not-for-profit organisations that any quantified criteria do not come to dominate the strategy selection when such measures are inappropriate. Criteria in not-for-profit organisations also need to take into account the different decision-making processes and beliefs that motivate many such organisations.The reliance on voluntary support, the strong sense of mission and belief in the work of the organisation and the style of the organisation may not lend themselves to the simple choice from a series of options. Not-for-profit organisations may be concerned with a high degree of loyalty to a mission, which is often clear, but the organisation may be decentralised with local decision-making. If this is the case, then a centralised evaluation of options is difficult. One comparison of the criteria with those of commercial organisations is shown in Figure 3.21.
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3 STRATEGIC ANALYSIS AND CHOICE FIGURE 3.21 Criteria in commercial and not-for-profit organisations (Lynch, 1997) Commercial organisation Not-for-prot organisation
103
Quantied Unchanging Consistent Unied Operational Clear Measurable
Qualitative Variable Conicting Complex Ambiguous Non-operational Non-measurable
Whilst evaluating strategy options in not-for-profit organisations may be more diffuse and open-ended, there may be more similarities than Lynch (2003) suggests. For organisations such as Body Shop International, there are a wide range of stakeholders to consider. By the same token, not-for-profit organisations may need to focus on the needs and expectations of potential funders such as government, whose policies they may seek to challenge. Different parts of the organisation will have varying perspectives on the evaluation criteria. For example, the centre represented by corporate headquarters is likely to have a different view from an SBU.
Strategic decision-making processes

It was emphasised in chapter 1 that strategies can emerge as well as be formulated or prescribed. Strategic change results from decisions taken and implemented in response to perceived opportunities or threats. Managing change therefore requires strategic awareness and learning, which implies the ability to recognise and interpret signals from the environment. Such signals enter the organisation all the time and in many different ways. It is essential that they are monitored and filtered so that the important messages reach decision-makers. If strategic change is to some degree dependent on a planning system, then that planning system must gather the appropriate data.
stop and think 3.10

How is strategy decided in your organisation? How does the planning system gather its data?
If there is greater reliance on strategic change emerging from decisions taken within the organisation by managers close to the market, their suppliers and so on, these managers must feel that they have the authority to make change decisions. In both cases appropriate strategic leadership is required to direct activity.This section looks at how decision-making occurs in practice. Decision-making is a process related to the existence of a problem, and it is often talked about in terms of problem-solving.A problem, in simple terms, exists when an undesirable situation has arisen which requires action to change it.The organisation would like to see something different or better happening and be achieving different results. However, in many instances the problem situation is very complex and can only be partially understood or controlled, and therefore strategic decisions are not so much designed to find ideal or perfect answers but to improve the situation as much as possible. While there will always be an objective element in a strategic decision, other, more subjective influences will also play a part. Figure 3.22 shows that the ultimate decision will have been affected by three elements:
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results from whatever analyses have been used to evaluate the data available; intuition and perspective of the person or people involved. Past experiences and
their willingness to trust the reliability and validity of the information that they have will both be influential issues; the political realities of the various alternatives.The contingent decision is the one that people believe can be implemented it is not necessarily the option that on paper promises the highest rewards.To be effective, all managers must be able to handle the political issues associated with stakeholder priorities and pressures.
FIGURE 3.22 Strategic decision-making (Thompson and Martin, 2005)
Analysis and logical conclusions/ recommendations from the data available
The decisionmaker's perspective, intuition or 'gut feel'
The political realities of various alternatives
Decision-making, therefore, involves both information and people. While the strategic leader requires an appropriate information system, he or she must also ensure that a good mix of people has been gathered, and manage them well. In some organisations there may be a lack of objectivity in decision-making and a degree of fire fighting rather than making positive strategic decisions. Here, decision-making is fragmented and likely to be inadequate for internal cohesion and synergy and where there is likely to be considerable in-fighting. Thompson and Martin (2005) argue that such organisations have the following characteristics:

irrational decision-making (processes); weak decision-making/leadership (people); rigidity, reluctance to change and negative politics; conflicting perspectives and interests; over-hasty decisions (decisive!) which are difficult to implement; lack of clear purpose; dissolution and absolution (of problems) instead of resolution and solution; unhelpful personal objectives; stakeholder conflicts; poor information; inadequate measurement and control; and managers inability to take a holistic perspective.
Organisations should evaluate the extent to which any, or all, of these factors are present in the decisions their managers are making. Improvements could then foster increased co-operation and sharing and allow managers who do seem to be perpetually fire fighting to be more proactive in seizing new opportunities. Managers strategic decisions are also affected by their personal judgmental abilities, and understanding judgment can, therefore, help us to explain why some managers appear toget things right while othersget things wrong.Thompson and Martin (2005) argue that there are three sets of factors that make up the context in which this is exercised.These include the decision-makers:
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skills and values, together with aspects of their personality (personal factors); authority and accountability within the organisation (structural factors); and understanding and awareness (environmental factors).
Managers make judgments about:

reality strategic awareness of the organisation and its environment which is based
upon interpretation and meaning systems; action what to do about perceived strategic issues; values concerning expected and desired results and outcomes from the decision. Figure 3.23 suggests how these are interconnected.
FIGURE 3.23 Judgment and strategic decision-making (Thompson and Martin, 2005)
Personal factors Structural factors
Perceptions: meaning systems Judgement Reality
Willingness and ability to act
leads to
Action
bas ed on
Values
Awareness Environmental factors
Decision-makers need to understand what is (reality), what matters (values) and what to do about it (action).Their choice will be based upon their conceptualisation of what might be a better alternative to the current situation. A company with cash difficulties, for example, might need a strategy based upon immediate rationalisation or consolidation. A liquid company evaluating growth options has greater flexibility.The choice will also be affected by managers relative power and influence, their perception of the risks involved, and their willingness to pursue certain courses of action. In practice, strategic decision-making involves determining how unusual the situation is.Where they perceive that there is a degree of normality to the events, the likelihood is that managers will continue to rely on traditional routines and approaches. However, where the situation is seen as more unusual, a decision has to be made about how to deal with it.This choice reflects action judgment, and there are options from which to choose: continue to rely on approaches which have worked well in the past; from a position of leadership, take decisive action, reflecting an entrepreneurial style; involve others in formal analysis, discussion and planning; possibly involving others, adopt a trial-and-error approach to craft a new strategy adaptively or incrementally; or seek input from an expert, maybe an external consultant.

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(a) Outline the three key elements for evaluating a strategy. (b) How might strategic options be screened? (c) List the main techniques for analysing acceptability. (d) Outline the part of judgment in strategic decision-making.
chapter summary
The ability to sense changes in the environment is
important because perceived changes in environmental influences signal the possible need to change strategy. They reveal opportunities and warn of threats. These can be built into a SWOT (strengths, weaknesses, opportunities and threats) analysis. activities are linked together to improve value for money in products or services.
Value chain analysis can be a useful way of describing

and analysing these important relationships between an organisations resources, competences and strategies. An analysis also needs to identify which competences are core to the success of strategy and how these core competences can provide the basis of new opportunities. The analysis of competences is useful for understanding an organisation at the level of the strategic business unit. In addition, a judgment needs to be made on the strength or weakness of the portfolio of strategic business units.
Clarifying the nature of the environment helps provide an

initial view on appropriate ways of understanding the influences of that environment. In simple, static conditions, historical analysis and forecasting may be sensible. In more dynamic conditions, scenario planning may be important. As the environment becomes more complex, the design of organisation structure and development of a learning culture is important.
Specific techniques for analysing resources and

competences may provide only a partial picture. There is a need to pull these together to give an overall assessment of strategic capability. This may be done through a SWOT analysis or by assessing the extent to which the resources and competences relate to the critical success factors.
Carrying out an initial audit of environmental influences,

begining at the macro level with an understanding of political, economic, social and technological influences, can provide an overall view of the variety of forces at work. This can also help identify key influences and drivers of change and provide the basis of examining the extent to which these have differential impact on industries or organisations within industries.
A development strategy for the future has three elements:

the broad basis of the strategy, the direction of development and the method of development. These three elements must be compatible with each other.
Five forces analysis provides a means of identifying the

forces that determine the nature of the competitive environment, especially in terms of barriers to entry, the power of buyers and suppliers, the threat of substitutes and other reasons for the extent of competitive intensity. It can also be used to examine the benefits of collaboration within industries.
Development directions can be identified by assessing

the various combinations of products and markets leading to four broad categories: protect and build (current products in current markets); product development (for existing markets); market development (with existing products); and diversification (away from existing products and markets).
The choice of good strategies by an organisation can

only be partly guided by general principles of strategic fit between the business environment and the resource base of organisations. Many competitors may achieve similar degrees of fit, yet some outperform others. This difference results from the way in which resources are deployed to create competences in separate activities, how these are matched to the requirements for particular types of strategy and the competence with which these
Key determinants in choosing new directions are the

organisations competences. Core competences provide a basis on which to develop and exploit new market opportunities. A further choice is needed that of the method of development. There are three broad choices: internal development; acquisition; and joint development. Internal development has the major benefit of building organisational competences through learning. Mergers and acquisitions are common, largely because of their
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3 STRATEGIC ANALYSIS AND CHOICE speed and the ability to acquire competences not already held in-house. However, the track record of acquisitions is not good. Strategic alliances have many different forms and are increasingly popular methods of development. The most successful appear to be those where partners have positive attitudes to managing and developing the partnership and are concerned to use the alliance to develop their own competences, rather than simply using the partner to substitute for competences they lack themselves.
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broad assessment of whether a strategy addresses the circumstances in which the organisation is operating. Suitability tests can be used to compare the relative merits of various strategies before more detailed analysis. This is a process of screening and can involve different techniques, such as ranking, decision trees or scenario planning. The acceptability of a strategy relates to three issues: the expected return from a strategy; the level of risk; and the likely reaction of stakeholders. Feasibility is concerned with whether an organisation has the resources and competences to deliver a strategy.
Strategies can be assessed against three criteria:

suitability, acceptability and feasibility. Suitability is a
practice questions
Section A 1.1 1.2 1.3 1.4 1.5 1.6 (4 marks each)
Using an example, distinguish between corporate strategy and business unit strategy. Briefly describe TWO of the fallacies in strategic planning highlighted by Mintzberg. Define social responsibility in the context of an organisation. Outline what is meant by the term 'corporate mission' and give an example. What is meant by the term 'Human Capital'? Why might an organisation conduct a PEST analysis? (20 marks each)
Section B 1.7 (a) (b)
Outline the limitations of the rational model of strategic management. Discuss how an incrementalist view seeks to overcome these. organisation.
1.8 Outline how a resource planning system might be used to improve the strategic management and operations of an 1.9 Business trends sometimes appear to contradict one another. Today organisations often simultaneously negotiate mergers and acquisitions yet also plan de-mergers and management buy-outs. (a) (b) 1.10 (a) (b) Why might a business seek to diversify? Using examples discuss the types of diversification that are available. way of addressing complaints about slow delivery, inaccurate billing and poor product quality. (a) (b) 1.12 (a) (b) Outline the different components of strategic planning at its different levels and show the relationship between these components. How might a stakeholder analysis help you to establish goals at different levels? Explain the term 'Critical Success Factors'. What systems might be involved in this organisation to measure and enhance CSFs? (c) To what extent might these systems be suited to technology based solutions? What organisational issues should be addressed before agreeing to a merger? As an employee shareholder, what questions would you seek to ask of managers contemplating a management buy-out?
1.11 Consultants advising a mail order business supplying clothes have raised the issue of Critical Success Factors as a
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Strategic Analysis and Choice

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Strategic Analysis and Choice

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C03_ICSA_STUDY_TEXT_STRAT_OPS_MAN.

Strategic analysis and choice

Strategic choice options Strategic choice evaluation and selection

3 STRATEGIC ANALYSIS AND CHOICE

Strategic control Monitor progress

Generate options Test assumptions

Strategy implementation Set functional strategies Decide policies Determine structure

In this chapter we shall look at:

2 Strategic analysis analysing the environment

Identify key competitive forces

Analyse the organisations competitive position

Identify key opportunities and threats

3 STRATEGIC ANALYSIS AND CHOICE

2.2 Organisational boundaries

stop and think 3.1

mental (in iron flu e

case example 3.1

3 STRATEGIC ANALYSIS AND CHOICE

facturers (such as Nestle or Heinz) sell through retailers.

Control Reliability Flexibility Accumulated experience Quality control

2.3 Uncertainty and megatrends

case example 3.2

It is useful to begin by considering two important questions.

likely to affect the structure of this industry or market.

These sorts of factors can be built into scenario planning.

stop and think 3.2

2.4 Identifying key competitive forces five forces analysis

stop and think 3.3

3 STRATEGIC ANALYSIS AND CHOICE

five forces analysis

FIGURE 3.6 Forces governing competition in an industry (based on Porter, 1980)

4 Barganing power of suppliers

3 Bargaining power of customers

5 Threat of subsitute products or services

2.5 Exploring the five forces in more detail

take market share from others to gain growth;

Product similarity Fixed costs Exit barriers

Threat of new entrants

3 STRATEGIC ANALYSIS AND CHOICE

Expected retaliation If a competitor considering entering a market believes that the

case example 3.3

stop and think 3.4

The bargaining power of customers and suppliers

The threat of substitute products or services

case example 3.4

3 STRATEGIC ANALYSIS AND CHOICE

case example 3.5

2.6 Analysing the organisations competitive position

3 STRATEGIC ANALYSIS AND CHOICE

Users needs and preferences for product characteristics

stop and think 3.5

test your knowledge 3.1

3 Strategic analysis competences and capability

3 STRATEGIC ANALYSIS AND CHOICE FIGURE 3.10 Analysing strategic capability

Identifying Key Issues SWOT CSFs

Understanding Strategic Capability

3.2 Resource audit

stop and think 3.6

The key steps in assessing core competencies are as follows:

Value chain analysis

service and can be grouped into four main areas:

3 STRATEGIC ANALYSIS AND CHOICE

Marketing and sales