Overview of Strategic Management

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Overview of Strategic Management

Compiled By:
M Towhid Hasan
Assistant Director (Financial Reporting)
ASA-International Holding Limited
ASA Tower (13th floor), 23/3 Khilji Road, Shamoli
Mohammadpur, Dhaka-1207
Table of contents
Strategy evaluation......................................................................................................... 6
Suitability ................................................................................................................... 7
Feasibility ................................................................................................................... 7
Acceptability .............................................................................................................. 7
General approaches ........................................................................................................ 8
The strategy hierarchy.................................................................................................... 9
Historical development of strategic management ........................................................ 10
Birth of strategic management ................................................................................. 10
Growth and portfolio theory .................................................................................... 12
The marketing revolution ......................................................................................... 13
The Japanese challenge ............................................................................................ 13
Gaining competitive advantage................................................................................ 16
The military theorists ............................................................................................... 20
Strategic change ....................................................................................................... 21
Information- and technology-driven strategy .......................................................... 25
Knowledge-driven strategy ...................................................................................... 27
Strategic decision making processes ........................................................................ 28
The psychology of strategic management .................................................................... 28
Reasons why strategic plans fail .................................................................................. 29
Limitations of strategic management ........................................................................... 30
The linearity trap ...................................................................................................... 31
Strategic planning ........................................................................................................ 33
Mission, vision and values ......................................................................................... 34
Mission statements and vision statements ............................................................... 34
Methodologies ............................................................................................................. 36
Situational analysis .................................................................................................... 37
Goals, objectives and targets ..................................................................................... 38
Business model ............................................................................................39

History ......................................................................................................................... 39
Examples ..................................................................................................................... 40
Business model design template ................................................................................ 40
Applications ................................................................................................................ 43
Related concepts ......................................................................................................... 43
Key part of the general corporate strategy ................................................................... 44
Tactics and actions ..................................................................................................... 44
Types of strategies ....................................................................................................... 45
Strategic models ........................................................................................................... 46
Real-life marketing ...................................................................................................... 46
Compiled by: M Towhid Hasan
Customer engagement ................................................................................47

Customer Engagement as a metric ........................................................................... 47
Market segmentation..................................................................................50
"Positive" market segmentation ................................................................................... 50
Positioning ................................................................................................................... 51
Top-Down and Bottom-Up .......................................................................................... 51
Using Segmentation in Customer Retention ................................................................ 52
Process for tagging customers ................................................................................. 52
Price Discrimination .................................................................................................... 54
Cluster analysis ...........................................................................................54

Military strategy .........................................................................................54
Principles of military strategy................................................................................... 54
The two top-level metrics ............................................................................................ 55
The four underlying metrics......................................................................................... 55
Calculations for OEE and TEEP .................................................................................. 56
Overall equipment effectiveness .............................................................................. 56
Total effective equipment performance ................................................................... 56
Loading .................................................................................................................... 57
Availability .............................................................................................................. 57
Performance ............................................................................................................. 58
Quality...................................................................................................................... 58
Further reading ............................................................................................................. 59
OEE as a heuristic ........................................................................................................ 59
Strategies in game theory ............................................................................................. 60
Noted texts on strategy................................................................................................. 60
Six Forces Model.........................................................................................60

Criticisms of the 5 Force model ................................................................................... 60
The threat of the entry of new competitors .............................................................. 62
The intensity of competitive rivalry......................................................................... 63
The bargaining power of customers (buyers) .......................................................... 63
The bargaining power of suppliers .......................................................................... 64
The threat of substitute products or services............................................................ 64
Usage............................................................................................................................ 64
Criticisms ..................................................................................................................... 65
Delta Model .................................................................................................66

Resource-based view ..................................................................................66
Concept ........................................................................................................................ 66
What constitutes "competitive advantage"? ............................................................. 66
Core competency ........................................................................................67

Value chain ..................................................................................................67
Concept ........................................................................................................................ 68
Activities .................................................................................................................. 68
Significance.................................................................................................................. 69
SCOR ........................................................................................................................... 69
Value Reference Model ............................................................................................... 69
Context analysis ..........................................................................................70

Method ......................................................................................................................... 70
Define market or subject .............................................................................................. 75
Trend Analysis ............................................................................................................. 75
Competitor Analysis .................................................................................................... 75
Competition levels ................................................................................................... 76
Competitive forces ................................................................................................... 76
Competitor behavior ................................................................................................ 76
Competitor strategy .................................................................................................. 76
Opportunities and Threats ............................................................................................ 77
Organization Analysis .................................................................................................. 77
Internal analysis ....................................................................................................... 77
Competence analysis ................................................................................................ 77
SWOT-i matrix ............................................................................................................ 77
Strategic Plan ............................................................................................................... 78
Example ....................................................................................................................... 78
Define market........................................................................................................... 79
Trend Analysis ......................................................................................................... 79
Competitor Analysis ................................................................................................ 79
Opportunities and Threats ........................................................................................ 79
Organization Analysis .............................................................................................. 80
SWOT-i matrix ........................................................................................................ 80
Strategic Plan ........................................................................................................... 80
SWOT analysis............................................................................................81
Internal and external factors......................................................................................... 81
Use of SWOT Analysis ................................................................................................ 82
SWOT - landscape analysis ......................................................................................... 83
Corporate planning....................................................................................................... 84
PEST analysis..............................................................................................85
The Model's Factors ..................................................................................................... 85
Applicability of the Factors ......................................................................................... 86
Use of PEST analysis with other models ..................................................................... 86
Gap analysis ................................................................................................87

Gap analysis and new products .................................................................................... 87
Usage gap ................................................................................................................. 88
Market potential ....................................................................................................... 88
Existing usage .......................................................................................................... 88
Product gap .............................................................................................................. 89
Competitive gap ....................................................................................................... 90
International strategic management.........................................................90

Development complexity ............................................................................................. 90
Basic questions............................................................................................................. 90
Performance management .........................................................................95

Where PM is applied .................................................................................................... 95
Benefits ........................................................................................................................ 96
Organizational Development Definitions .................................................................... 97
Strategic thinking .......................................................................................98

Strategic thinking vs. strategic planning ...................................................................... 98
Strategic thinking competencies ................................................................................ 100
Porter generic strategies ..........................................................................100

Cost Leadership Strategy ........................................................................................... 102
Differentiation Strategy ............................................................................................. 103
Variants on the Differentiation Strategy ........................................................... 104
Focus or Strategic Scope ............................................................................................ 105
Recent developments ................................................................................................. 106
Criticisms of generic strategies .................................................................................. 106
Bowman's Strategy Clock ........................................................................106

Strategic information system...................................................................107
Characterization of strategic information systems ..................................................... 107
Overview ................................................................................................................ 107
Porters Competitive Advantage ................................................................................ 108
Differentiation Advantage ......................................................................................... 110
Wisemans Strategic Perspective View ..................................................................... 111
Strategy Formulation
Strategic formulation is a combination of three main processes which are as follows:
Performing a situation analysis, self-evaluation and competitor analysis: both internal

and external; both micro-environmental and macro-environmental.
Concurrent with this assessment, objectives are set. These objectives should be parallel
to a time-line; some are in the short-term and others on the long-term. This involves
crafting vision statements (long term view of a possible future), mission statements (the
role that the organization gives itself in society), overall corporate objectives (both
financial and strategic), strategic business unit objectives (both financial and strategic),
and tactical objectives.
These objectives should, in the light of the situation analysis, suggest a strategic plan.
The plan provides the details of how to achieve these objectives.
Marketing action plan
Placement and execution of required resources are financial, manpower, operational

support, time, technology support
Operating with a change in methods or with alteration in structure
Distributing the specific tasks with responsibility or moulding specific jobs to
individuals or teams.
The process should be managed by a responsible team. This is to keep direct watch on
result, comparison for betterment and best practices, cultivating the effectiveness of
processes, calibrating and reducing the variations and setting the process as required.
Introducing certain programs involves acquiring the requisition of resources: a necessity
for developing the process, training documentation, process testing, and imalgation with
(and/or conversion from) difficult processes.
As and when the strategy implementation processes, there have been so many problems arising
such as human relations, the employee-communication. Such a time, marketing strategy is the
biggest implementation problem usually involves, with emphasis on the appropriate timing of
new products. An organization, with an effective management, should try to implement its plans
without signaling this fact to its competitors.[3]
In order for a policy to work, there must be a level of consistency from every person in an
organization, specially management. This is what needs to occur on both the tactical and
strategic levels of management.
Strategy evaluation
Measuring the effectiveness of the organizational strategy, it's extremely important to

conduct a SWOT analysis to figure out the strengths, weaknesses, opportunities and
threats (both internal and external) of the entity in question. This may require to take
certain precautionary measures or even to change the entire strategy.
In corporate strategy, Johnson and Scholes present a model in which strategic options
are evaluated against three key success criteria:
Suitability (would it work?)

Feasibility (can it be made to work?)
Acceptability (will they work it?)
Suitability
Suitability deals with the overall rationale of the strategy. The key point to consider is
whether the strategy would address the key strategic issues underlined by the
organisation's strategic position.
Does it make economic sense?

Would the organization obtain economies of scale, economies of scope or experience
economy?
Would it be suitable in terms of environment and capabilities?
Tools that can be used to evaluate suitability include:
Ranking strategic options

Decision trees
Feasibility
Feasibility is concerned with whether the resources required to implement the strategy
are available, can be developed or obtained. Resources include funding, people, time
and information.
Tools that can be used to evaluate feasibility include:
cash flow analysis and forecasting

break-even analysis
resource deployment analysis
Acceptability
Acceptability is concerned with the expectations of the identified stakeholders (mainly
shareholders, employees and customers) with the expected performance outcomes,
which can be return, risk and stakeholder reactions.
Return deals with the benefits expected by the stakeholders (financial and nonfinancial). For example, shareholders would expect the increase of their wealth,
employees would expect improvement in their careers and customers would expect
better value for money.
Risk deals with the probability and consequences of failure of a strategy (financial and
non-financial).
Stakeholder reactions deals with anticipating the likely reaction of stakeholders.
Shareholders could oppose the issuing of new shares, employees and unions could
oppose outsourcing for fear of losing their jobs, customers could have concerns over a
merger with regards to quality and support.
Tools that can be used to evaluate acceptability include:
what-if analysis
stakeholder mapping
General approaches
In general terms, there are two main approaches, which are opposite but complement
each other in some ways, to strategic management:
The Industrial Organizational Approach

o based on economic theory deals with issues like competitive rivalry, resource
allocation, economies of scale
o assumptions rationality, self discipline behaviour, profit maximization
The Sociological Approach
o deals primarily with human interactions
o Assumptions bounded rationality, satisfying behaviour, profit sub-optimality.
An example of a company that currently operates this way is Google
Strategic management techniques can be viewed as bottom-up, top-down or

collaborative processes. In the bottom-up approach, employees submit proposals to their
managers who, in turn, funnel the best ideas further up the organization. This is often
accomplished by a capital budgeting process. Proposals are assessed using financial
criteria such as return on investment or cost-benefit analysis. Cost underestimation and
benefit overestimation are major sources of error. The proposals that are approved form
the substance of a new strategy, all of which is done without a grand strategic design or a
strategic architect. The top-down approach is the most common by far. In it, the CEO,
possibly with the assistance of a strategic planning team, decides on the overall direction
the company should take. Some organizations are starting to experiment with
collaborative strategic planning techniques that recognize the emergent nature of
strategic decisions.
Strategic decisions should focus on Outcome, Time remaining, and current

Value/priority. The outcome comprises both the desired ending goal and the plan
designed to reach that goal. Managing strategically requires paying attention to the time
remaining to reach a particular level or goal and adjusting the pace and options
accordingly. Value/priority relates to the shifting, relative concept of value-add.
Strategic decisions should be based on the understanding that the value-add of whatever
you are managing is a constantly changing reference point. An objective that begins with
a high level of value-add may change due to influence of internal and external factors.
Strategic management by definition is managing with a heads-up approach to outcome,
time and relative value, and actively making course corrections as needed.
The strategy hierarchy

In most (large) corporations there are several levels of management. Strategic
management is the highest of these levels in the sense that it is the broadest - applying to
all parts of the firm - while also incorporating the longest time horizon. It gives direction
to corporate values, corporate culture, corporate goals, and corporate missions. Under
this broad corporate strategy there are typically business-level competitive strategies and
functional unit strategies.
Corporate strategy refers to the overarching strategy of the diversified firm. Such a
corporate strategy answers the questions of "which businesses should we be in?" and
"how does being in these businesses create synergy and/or add to the competitive
advantage of the corporation as a whole?"
Business strategy refers to the aggregated strategies of single business firm or a
strategic business unit (SBU) in a diversified corporation. According to Michael Porter,
a firm must formulate a business strategy that incorporates either cost leadership,
differentiation or focus in order to achieve a sustainable competitive advantage and longterm success in its chosen areas or industries. Alternatively, according to W. Chan Kim
and Rene Mauborgne, an organization can achieve high growth and profits by creating
a Blue Ocean Strategy that breaks the previous value-cost tradeoff by simultaneously
pursuing both differentiation and low cost.
Functional strategies include marketing strategies, new product development strategies,
human resource strategies, financial strategies, legal strategies, supply-chain strategies,
and information technology management strategies. The emphasis is on short and
medium term plans and is limited to the domain of each departments functional
responsibility. Each functional department attempts to do its part in meeting overall
corporate objectives, and hence to some extent their strategies are derived from broader
corporate strategies.
Many companies feel that a functional organizational structure is not an efficient way to
organize activities so they have reengineered according to processes or SBUs. A
strategic business unit is a semi-autonomous unit that is usually responsible for its own
budgeting, new product decisions, hiring decisions, and price setting. An SBU is treated
as an internal profit centre by corporate headquarters. A technology strategy, for
example, although it is focused on technology as a means of achieving an organization's
overall objective(s), may include dimensions that are beyond the scope of a single
business unit, engineering organization or IT department.
An additional level of strategy called operational strategy was encouraged by Peter
Drucker in his theory of management by objectives (MBO). It is very narrow in focus
and deals with day-to-day operational activities such as scheduling criteria. It must
operate within a budget but is not at liberty to adjust or create that budget. Operational
level strategies are informed by business level strategies which, in turn, are informed by
corporate level strategies.
Since the turn of the millennium, some firms have reverted to a simpler strategic
structure driven by advances in information technology. It is felt that knowledge
management systems should be used to share information and create common goals.
Strategic divisions are thought to hamper this process. This notion of strategy has been
captured under the rubric of dynamic strategy, popularized by Carpenter and Sanders's
textbook [1]. This work builds on that of Brown and Eisenhart as well as Christensen
and portrays firm strategy, both business and corporate, as necessarily embracing
ongoing strategic change, and the seamless integration of strategy formulation and
implementation. Such change and implementation are usually built into the strategy
through the staging and pacing facets.
Historical development of strategic management

Birth of strategic management
Strategic management as a discipline originated in the 1950s and 60s. Although there
were numerous early contributors to the literature, the most influential pioneers were
Alfred D. Chandler, Philip Selznick, Igor Ansoff, and Peter Drucker.
Alfred Chandler recognized the importance of coordinating the various aspects of
management under one all-encompassing strategy. Prior to this time the various
functions of management were separate with little overall coordination or strategy.
Interactions between functions or between departments were typically handled by a
boundary position, that is, there were one or two managers that relayed information back
and forth between two departments. Chandler also stressed the importance of taking a
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long term perspective when looking to the future. In his 1962 groundbreaking work
Strategy and Structure, Chandler showed that a long-term coordinated strategy was
necessary to give a company structure, direction, and focus. He says it concisely,
structure follows strategy.[4]
In 1957, Philip Selznick introduced the idea of matching the organization's internal
factors with external environmental circumstances.[5] This core idea was developed into
what we now call SWOT analysis by Learned, Andrews, and others at the Harvard
Business School General Management Group. Strengths and weaknesses of the firm are
assessed in light of the opportunities and threats from the business environment.
Igor Ansoff built on Chandler's work by adding a range of strategic concepts and
inventing a whole new vocabulary. He developed a strategy grid that compared market
penetration strategies, product development strategies, market development strategies
and horizontal and vertical integration and diversification strategies. He felt that
management could use these strategies to systematically prepare for future opportunities
and challenges. In his 1965 classic Corporate Strategy, he developed the gap analysis
still used today in which we must understand the gap between where we are currently
and where we would like to be, then develop what he called gap reducing actions.[6]
Peter Drucker was a prolific strategy theorist, author of dozens of management books,
with a career spanning five decades. His contributions to strategic management were
many but two are most important. Firstly, he stressed the importance of objectives. An
organization without clear objectives is like a ship without a rudder. As early as 1954 he
was developing a theory of management based on objectives.[7] This evolved into his
theory of management by objectives (MBO). According to Drucker, the procedure of
setting objectives and monitoring your progress towards them should permeate the entire
organization, top to bottom. His other seminal contribution was in predicting the
importance of what today we would call intellectual capital. He predicted the rise of
what he called the knowledge worker and explained the consequences of this for
management. He said that knowledge work is non-hierarchical. Work would be carried
out in teams with the person most knowledgeable in the task at hand being the temporary
leader.
In 1985, Ellen-Earle Chaffee summarized what she thought were the main elements of
strategic management theory by the 1970s:[8]
Strategic management involves adapting the organization to its business environment.

Strategic management is fluid and complex. Change creates novel combinations of
circumstances requiring unstructured non-repetitive responses.
Strategic management affects the entire organization by providing direction.
Strategic management involves both strategy formation (she called it content) and also
strategy implementation (she called it process).
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Strategic management is partially planned and partially unplanned.

Strategic management is done at several levels: overall corporate strategy, and
individual business strategies.
Strategic management involves both conceptual and analytical thought processes.
Growth and portfolio theory

In the 1970s much of strategic management dealt with size, growth, and portfolio theory.
The PIMS study was a long term study, started in the 1960s and lasted for 19 years, that
attempted to understand the Profit Impact of Marketing Strategies (PIMS), particularly
the effect of market share. Started at General Electric, moved to Harvard in the early
1970s, and then moved to the Strategic Planning Institute in the late 1970s, it now
contains decades of information on the relationship between profitability and strategy.
Their initial conclusion was unambiguous: The greater a company's market share, the
greater will be their rate of profit. The high market share provides volume and
economies of scale. It also provides experience and learning curve advantages. The
combined effect is increased profits.[9] The studies conclusions continue to be drawn on
by academics and companies today: "PIMS provides compelling quantitative evidence
as to which business strategies work and don't work" - Tom Peters.
The benefits of high market share naturally lead to an interest in growth strategies. The
relative advantages of horizontal integration, vertical integration, diversification,
franchises, mergers and acquisitions, joint ventures, and organic growth were discussed.
The most appropriate market dominance strategies were assessed given the competitive
and regulatory environment.
There was also research that indicated that a low market share strategy could also be
very profitable. Schumacher (1973),[10] Woo and Cooper (1982),[11] Levenson (1984),[12]
and later Traverso (2002)[13] showed how smaller niche players obtained very high
returns.
By the early 1980s the paradoxical conclusion was that high market share and low
market share companies were often very profitable but most of the companies in
between were not. This was sometimes called the hole in the middle problem. This
anomaly would be explained by Michael Porter in the 1980s.
The management of diversified organizations required new techniques and new ways of
thinking. The first CEO to address the problem of a multi-divisional company was
Alfred Sloan at General Motors. GM was decentralized into semi-autonomous strategic
business units (SBU's), but with centralized support functions.
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One of the most valuable concepts in the strategic management of multi-divisional

companies was portfolio theory. In the previous decade Harry Markowitz and other
financial theorists developed the theory of portfolio analysis. It was concluded that a
broad portfolio of financial assets could reduce specific risk. In the 1970s marketers
extended the theory to product portfolio decisions and managerial strategists extended it
to operating division portfolios. Each of a companys operating divisions were seen as
an element in the corporate portfolio. Each operating division (also called strategic
business units) was treated as a semi-independent profit center with its own revenues,
costs, objectives, and strategies. Several techniques were developed to analyze the
relationships between elements in a portfolio. B.C.G. Analysis, for example, was
developed by the Boston Consulting Group in the early 1970s. This was the theory that
gave us the wonderful image of a CEO sitting on a stool milking a cash cow. Shortly
after that the G.E. multi factoral model was developed by General Electric. Companies
continued to diversify until the 1980s when it was realized that in many cases a portfolio
of operating divisions was worth more as separate completely independent companies.
The marketing revolution
The 1970s also saw the rise of the marketing oriented firm. From the beginnings of
capitalism it was assumed that the key requirement of business success was a product of
high technical quality. If you produced a product that worked well and was durable, it
was assumed you would have no difficulty selling them at a profit. This was called the
production orientation and it was generally true that good products could be sold without
effort, encapsulated in the saying "Build a better mousetrap and the world will beat a
path to your door." This was largely due to the growing numbers of affluent and middle
class people that capitalism had created. But after the untapped demand caused by the
second world war was saturated in the 1950s it became obvious that products were not
selling as easily as they had been. The answer was to concentrate on selling. The 1950s
and 1960s is known as the sales era and the guiding philosophy of business of the time is
today called the sales orientation. In the early 1970s Theodore Levitt and others at
Harvard argued that the sales orientation had things backward. They claimed that instead
of producing products then trying to sell them to the customer, businesses should start
with the customer, find out what they wanted, and then produce it for them. The
customer became the driving force behind all strategic business decisions. This
marketing orientation, in the decades since its introduction, has been reformulated and
repackaged under numerous names including customer orientation, marketing
philosophy, customer intimacy, customer focus, customer driven, and market focused.
The Japanese challenge
By the late 70s, Americans had started to notice how successful Japanese industry had
become. In industry after industry, including steel, watches, ship building, cameras,
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autos, and electronics, the Japanese were surpassing American and European companies.
Westerners wanted to know why. Numerous theories purported to explain the Japanese
success including:
Higher employee morale, dedication, and loyalty;

Lower cost structure, including wages;
Effective government industrial policy;
Modernization after WWII leading to high capital intensity and productivity;
Economies of scale associated with increased exporting;
Relatively low value of the Yen leading to low interest rates and capital costs, low
dividend expectations, and inexpensive exports;
Superior quality control techniques such as Total Quality Management and other
systems introduced by W. Edwards Deming in the 1950s and 60s.[14]
Although there was some truth to all these potential explanations, there was clearly
something missing. In fact by 1980 the Japanese cost structure was higher than the
American. And post WWII reconstruction was nearly 40 years in the past. The first
management theorist to suggest an explanation was Richard Pascale.
In 1981, Richard Pascale and Anthony Athos in The Art of Japanese Management
claimed that the main reason for Japanese success was their superior management
techniques.[15] They divided management into 7 aspects (which are also known as
McKinsey 7S Framework): Strategy, Structure, Systems, Skills, Staff, Style, and
Supraordinate goals (which we would now call shared values). The first three of the 7 S's
were called hard factors and this is where American companies excelled. The remaining
four factors (skills, staff, style, and shared values) were called soft factors and were not
well understood by American businesses of the time (for details on the role of soft and
hard factors see Wickens P.D. 1995.) Americans did not yet place great value on
corporate culture, shared values and beliefs, and social cohesion in the workplace. In
Japan the task of management was seen as managing the whole complex of human
needs, economic, social, psychological, and spiritual. In America work was seen as
something that was separate from the rest of one's life. It was quite common for
Americans to exhibit a very different personality at work compared to the rest of their
lives. Pascale also highlighted the difference between decision making styles;
hierarchical in America, and consensus in Japan. He also claimed that American
business lacked long term vision, preferring instead to apply management fads and
theories in a piecemeal fashion.
One year later, The Mind of the Strategist was released in America by Kenichi Ohmae,
the head of McKinsey & Co.'s Tokyo office.[16] (It was originally published in Japan in
1975.) He claimed that strategy in America was too analytical. Strategy should be a
creative art: It is a frame of mind that requires intuition and intellectual flexibility. He
claimed that Americans constrained their strategic options by thinking in terms of
14
analytical techniques, rote formula, and step-by-step processes. He compared the culture
of Japan in which vagueness, ambiguity, and tentative decisions were acceptable, to
American culture that valued fast decisions.
Also in 1982, Tom Peters and Robert Waterman released a study that would respond to
the Japanese challenge head on.[17] Peters and Waterman, who had several years earlier
collaborated with Pascale and Athos at McKinsey & Co. asked What makes an
excellent company?. They looked at 62 companies that they thought were fairly
successful. Each was subject to six performance criteria. To be classified as an excellent
company, it had to be above the 50th percentile in 4 of the 6 performance metrics for 20
consecutive years. Forty-three companies passed the test. They then studied these
successful companies and interviewed key executives. They concluded in In Search of
Excellence that there were 8 keys to excellence that were shared by all 43 firms. They
are:
A bias for action Do it. Try it. Dont waste time studying it with multiple reports and
committees.
Customer focus Get close to the customer. Know your customer.
Entrepreneurship Even big companies act and think small by giving people the
authority to take initiatives.
Productivity through people Treat your people with respect and they will reward you
with productivity.
Value-oriented CEOs The CEO should actively propagate corporate values
throughout the organization.
Stick to the knitting Do what you know well.
Keep things simple and lean Complexity encourages waste and confusion.
Simultaneously centralized and decentralized Have tight centralized control while
also allowing maximum individual autonomy.
The basic blueprint on how to compete against the Japanese had been drawn. But as J.E.
Rehfeld (1994) explains it is not a straight forward task due to differences in culture.[18]
A certain type of alchemy was required to transform knowledge from various cultures
into a management style that allows a specific company to compete in a globally diverse
world. He says, for example, that Japanese style kaizen (continuous improvement)
techniques, although suitable for people socialized in Japanese culture, have not been
successful when implemented in the U.S. unless they are modified significantly.
In 2009, industry consultants Mark Blaxill and Ralph Eckardt suggested that much of the
Japanese business dominance that began in the mid 1970s was the direct result of
competition enforcement efforts by the Federal Trade Commission (FTC) and U.S.
Department of Justice (DOJ). In 1975 the FTC reached a settlement with Xerox
Corporation in its anti-trust lawsuit. (At the time, the FTC was under the direction of
Frederic M. Scherer). The 1975 Xerox consent decree forced the licensing of the
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companys entire patent portfolio, mainly to Japanese competitors. (See "compulsory

license".) This action marked the start of an activist approach to managing competition
by the FTC and DOJ, which resulted in the compulsory licensing of tens of thousands of
patent from some of America's leading companies, including IBM, AT&T, DuPont,
Bausch & Lomb, and Eastman Kodak.[original research?]
Within four years of the consent decree, Xerox's share of the U.S. copier market dropped
from nearly 100% to less than 14%. Between 1950 and 1980 Japanese companies
consummated more than 35,000 foreign licensing agreements, mostly with U.S.
companies, for free or low-cost licenses made possible by the FTC and DOJ. The post1975 era of anti-trust initiatives by Washington D.C. economists at the FTC
corresponded directly with the rapid, unprecedented rise in Japanese competitiveness
and a simultaneous stalling of the U.S. manufacturing economy. [19]
Gaining competitive advantage
The Japanese challenge shook the confidence of the western business elite, but detailed
comparisons of the two management styles and examinations of successful businesses
convinced westerners that they could overcome the challenge. The 1980s and early
1990s saw a plethora of theories explaining exactly how this could be done. They cannot
all be detailed here, but some of the more important strategic advances of the decade are
explained below.
Gary Hamel and C. K. Prahalad declared that strategy needs to be more active and
interactive; less arm-chair planning was needed. They introduced terms like strategic
intent and strategic architecture.[20][21] Their most well known advance was the idea of
core competency. They showed how important it was to know the one or two key things
that your company does better than the competition.[22]
Active strategic management required active information gathering and active problem
solving. In the early days of Hewlett-Packard (H-P), Dave Packard and Bill Hewlett
devised an active management style that they called management by walking around
(MBWA). Senior H-P managers were seldom at their desks. They spent most of their
days visiting employees, customers, and suppliers. This direct contact with key people
provided them with a solid grounding from which viable strategies could be crafted. The
MBWA concept was popularized in 1985 by a book by Tom Peters and Nancy
Austin.[23] Japanese managers employ a similar system, which originated at Honda, and
is sometimes called the 3 G's (Genba, Genbutsu, and Genjitsu, which translate into
actual place, actual thing, and actual situation).
Probably the most influential strategist of the decade was Michael Porter. He introduced
many new concepts including; 5 forces analysis, generic strategies, the value chain,
16
strategic groups, and clusters. In 5 forces analysis he identifies the forces that shape a
firm's strategic environment. It is like a SWOT analysis with structure and purpose. It
shows how a firm can use these forces to obtain a sustainable competitive advantage.
Porter modifies Chandler's dictum about structure following strategy by introducing a
second level of structure: Organizational structure follows strategy, which in turn
follows industry structure. Porter's generic strategies detail the interaction between cost
minimization strategies, product differentiation strategies, and market focus
strategies. Although he did not introduce these terms, he showed the importance of
choosing one of them rather than trying to position your company between them. He
also challenged managers to see their industry in terms of a value chain. A firm will be
successful only to the extent that it contributes to the industry's value chain. This forced
management to look at its operations from the customer's point of view. Every operation
should be examined in terms of what value it adds in the eyes of the final customer.
In 1993, John Kay took the idea of the value chain to a financial level claiming Adding
value is the central purpose of business activity, where adding value is defined as the
difference between the market value of outputs and the cost of inputs including capital,
all divided by the firm's net output. Borrowing from Gary Hamel and Michael Porter,
Kay claims that the role of strategic management is to identify your core competencies,
and then assemble a collection of assets that will increase value added and provide a
competitive advantage. He claims that there are 3 types of capabilities that can do this;
innovation, reputation, and organizational structure.
The 1980s also saw the widespread acceptance of positioning theory. Although the
theory originated with Jack Trout in 1969, it didnt gain wide acceptance until Al Ries
and Jack Trout wrote their classic book Positioning: The Battle For Your Mind (1979).
The basic premise is that a strategy should not be judged by internal company factors but
by the way customers see it relative to the competition. Crafting and implementing a
strategy involves creating a position in the mind of the collective consumer. Several
techniques were applied to positioning theory, some newly invented but most borrowed
from other disciplines. Perceptual mapping for example, creates visual displays of the
relationships between positions. Multidimensional scaling, discriminant analysis, factor
analysis, and conjoint analysis are mathematical techniques used to determine the most
relevant characteristics (called dimensions or factors) upon which positions should be
based. Preference regression can be used to determine vectors of ideal positions and
cluster analysis can identify clusters of positions.
Others felt that internal company resources were the key. In 1992, Jay Barney, for
example, saw strategy as assembling the optimum mix of resources, including human,
technology, and suppliers, and then configure them in unique and sustainable ways.[24]
17
Michael Hammer and James Champy felt that these resources needed to be
restructured.[25] This process, that they labeled reengineering, involved organizing a
firm's assets around whole processes rather than tasks. In this way a team of people saw
a project through, from inception to completion. This avoided functional silos where
isolated departments seldom talked to each other. It also eliminated waste due to
functional overlap and interdepartmental communications.
In 1989 Richard Lester and the researchers at the MIT Industrial Performance Center
identified seven best practices and concluded that firms must accelerate the shift away
from the mass production of low cost standardized products. The seven areas of best
practice were:[26]
Simultaneous continuous improvement in cost, quality, service, and product innovation

Breaking down organizational barriers between departments
Eliminating layers of management creating flatter organizational hierarchies.
Closer relationships with customers and suppliers
Intelligent use of new technology
Global focus
Improving human resource skills
The search for best practices is also called benchmarking.[27] This involves
determining where you need to improve, finding an organization that is exceptional in
this area, then studying the company and applying its best practices in your firm.
A large group of theorists felt the area where western business was most lacking was
product quality. People like W. Edwards Deming,[28] Joseph M. Juran,[29] A. Kearney,[30]
Philip Crosby,[31] and Armand Feignbaum[32] suggested quality improvement techniques
like total quality management (TQM), continuous improvement (kaizen), lean
manufacturing, Six Sigma, and return on quality (ROQ).
An equally large group of theorists felt that poor customer service was the problem.
People like James Heskett (1988),[33] Earl Sasser (1995), William Davidow,[34] Len
Schlesinger,[35] A. Paraurgman (1988), Len Berry,[36] Jane Kingman-Brundage,[37]
Christopher Hart, and Christopher Lovelock (1994), gave us fishbone diagramming,
service charting, Total Customer Service (TCS), the service profit chain, service gaps
analysis, the service encounter, strategic service vision, service mapping, and service
teams. Their underlying assumption was that there is no better source of competitive
advantage than a continuous stream of delighted customers.
Process management uses some of the techniques from product quality management and
some of the techniques from customer service management. It looks at an activity as a
sequential process. The objective is to find inefficiencies and make the process more
effective. Although the procedures have a long history, dating back to Taylorism, the
18
scope of their applicability has been greatly widened, leaving no aspect of the firm free
from potential process improvements. Because of the broad applicability of process
management techniques, they can be used as a basis for competitive advantage.
Some realized that businesses were spending much more on acquiring new customers
than on retaining current ones. Carl Sewell,[38] Frederick F. Reichheld,[39] C.
Gronroos,[40] and Earl Sasser[41] showed us how a competitive advantage could be found
in ensuring that customers returned again and again. This has come to be known as the
loyalty effect after Reicheld's book of the same name in which he broadens the concept
to include employee loyalty, supplier loyalty, distributor loyalty, and shareholder
loyalty. They also developed techniques for estimating the lifetime value of a loyal
customer, called customer lifetime value (CLV). A significant movement started that
attempted to recast selling and marketing techniques into a long term endeavor that
created a sustained relationship with customers (called relationship selling, relationship
marketing, and customer relationship management). Customer relationship management
(CRM) software (and its many variants) became an integral tool that sustained this trend.
James Gilmore and Joseph Pine found competitive advantage in mass customization.[42]
Flexible manufacturing techniques allowed businesses to individualize products for each
customer without losing economies of scale. This effectively turned the product into a
service. They also realized that if a service is mass customized by creating a
performance for each individual client, that service would be transformed into an
experience. Their book, The Experience Economy,[43] along with the work of Bernd
Schmitt convinced many to see service provision as a form of theatre. This school of
thought is sometimes referred to as customer experience management (CEM).
Like Peters and Waterman a decade earlier, James Collins and Jerry Porras spent years
conducting empirical research on what makes great companies. Six years of research
uncovered a key underlying principle behind the 19 successful companies that they
studied: They all encourage and preserve a core ideology that nurtures the company.
Even though strategy and tactics change daily, the companies, nevertheless, were able to
maintain a core set of values. These core values encourage employees to build an
organization that lasts. In Built To Last (1994) they claim that short term profit goals,
cost cutting, and restructuring will not stimulate dedicated employees to build a great
company that will endure.[44] In 2000 Collins coined the term built to flip to describe
the prevailing business attitudes in Silicon Valley. It describes a business culture where
technological change inhibits a long term focus. He also popularized the concept of the
BHAG (Big Hairy Audacious Goal).
Arie de Geus (1997) undertook a similar study and obtained similar results. He identified
four key traits of companies that had prospered for 50 years or more. They are:
19
Sensitivity to the business environment the ability to learn and adjust

Cohesion and identity the ability to build a community with personality, vision, and
purpose
Tolerance and decentralization the ability to build relationships
Conservative financing
A company with these key characteristics he called a living company because it is able
to perpetuate itself. If a company emphasizes knowledge rather than finance, and sees
itself as an ongoing community of human beings, it has the potential to become great
and endure for decades. Such an organization is an organic entity capable of learning (he
called it a learning organization) and capable of creating its own processes, goals, and
persona.
There are numerous ways by which a firm can try to create a competitive advantage some will work but many will not. In order to help firms avoid a hit and miss approach
to the creation of competitive advantage Will Mulcaster [45] suggests that firms engage in
a dialogue that centres around the question "Will the proposed competitive advantage
create Perceived Differential Value?" The dialogue should raise a series of other
pertinent questions, including:"Will the proposed competitive advantage create something that is different from the
competition?"
"Will the difference add value in the eyes of potential customers?" - This question will
entail a discussion of the combined effects of price, product features and consumer
perceptions.
"Will the product add value for the firm?" - Answering this question will require an
examination of cost effectiveness and the pricing strategy.
The military theorists
In the 1980s some business strategists realized that there was a vast knowledge base
stretching back thousands of years that they had barely examined. They turned to
military strategy for guidance. Military strategy books such as The Art of War by Sun
Tzu, On War by von Clausewitz, and The Red Book by Mao Zedong became instant
business classics. From Sun Tzu, they learned the tactical side of military strategy and
specific tactical prescriptions. From Von Clausewitz, they learned the dynamic and
unpredictable nature of military strategy. From Mao Zedong, they learned the principles
of guerrilla warfare. The main marketing warfare books were:
Business War Games by Barrie James, 1984

Marketing Warfare by Al Ries and Jack Trout, 1986
20
Leadership Secrets of Attila the Hun by Wess Roberts, 1987
Philip Kotler was a well-known proponent of marketing warfare strategy.

There were generally thought to be four types of business warfare theories. They are:
Offensive marketing warfare strategies

Defensive marketing warfare strategies
Flanking marketing warfare strategies
Guerrilla marketing warfare strategies
The marketing warfare literature also examined leadership and motivation, intelligence
gathering, types of marketing weapons, logistics, and communications.
By the turn of the century marketing warfare strategies had gone out of favour. It was
felt that they were limiting. There were many situations in which non-confrontational
approaches were more appropriate. In 1989, Dudley Lynch and Paul L. Kordis published
Strategy of the Dolphin: Scoring a Win in a Chaotic World. "The Strategy of the
Dolphin was developed to give guidance as to when to use aggressive strategies and
when to use passive strategies. A variety of aggressiveness strategies were developed.
In 1993, J. Moore used a similar metaphor.[46] Instead of using military terms, he created
an ecological theory of predators and prey (see ecological model of competition), a sort
of Darwinian management strategy in which market interactions mimic long term
ecological stability.
Strategic change
In 1970, Alvin Toffler in Future Shock described a trend towards accelerating rates of
change.[47] He illustrated how social and technological norms had shorter life spans with
each generation, and he questioned society's ability to cope with the resulting turmoil
and anxiety. In past generations periods of change were always punctuated with times of
stability. This allowed society to assimilate the change and deal with it before the next
change arrived. But these periods of stability are getting shorter and by the late 20th
century had all but disappeared. In 1980 in The Third Wave, Toffler characterized this
shift to relentless change as the defining feature of the third phase of civilization (the
first two phases being the agricultural and industrial waves).[48] He claimed that the
dawn of this new phase will cause great anxiety for those that grew up in the previous
phases, and will cause much conflict and opportunity in the business world. Hundreds of
authors, particularly since the early 1990s, have attempted to explain what this means for
business strategy.
21
In 1997, Watts Wacker and Jim Taylor called this upheaval a "500 year delta."[49] They
claimed these major upheavals occur every 5 centuries. They said we are currently
making the transition from the Age of Reason to a new chaotic Age of Access. Jeremy
Rifkin (2000) popularized and expanded this term, age of access three years later in
his book of the same name.[50]
In 1968, Peter Drucker (1969) coined the phrase Age of Discontinuity to describe the
way change forces disruptions into the continuity of our lives.[51] In an age of continuity
attempts to predict the future by extrapolating from the past can be somewhat accurate.
But according to Drucker, we are now in an age of discontinuity and extrapolating from
the past is hopelessly ineffective. We cannot assume that trends that exist today will
continue into the future. He identifies four sources of discontinuity: new technologies,
globalization, cultural pluralism, and knowledge capital.
In 2000, Gary Hamel discussed strategic decay, the notion that the value of all
strategies, no matter how brilliant, decays over time.[52]
In 1978, Dereck Abell (Abell, D. 1978) described strategic windows and stressed the
importance of the timing (both entrance and exit) of any given strategy. This has led
some strategic planners to build planned obsolescence into their strategies.[53]
In 1989, Charles Handy identified two types of change.[54] Strategic drift is a gradual
change that occurs so subtly that it is not noticed until it is too late. By contrast,
transformational change is sudden and radical. It is typically caused by discontinuities
(or exogenous shocks) in the business environment. The point where a new trend is
initiated is called a strategic inflection point by Andy Grove. Inflection points can be
subtle or radical.
In 2000, Malcolm Gladwell discussed the importance of the tipping point, that point
where a trend or fad acquires critical mass and takes off.[55]
In 1983, Noel Tichy wrote that because we are all beings of habit we tend to repeat what
we are comfortable with.[56] He wrote that this is a trap that constrains our creativity,
prevents us from exploring new ideas, and hampers our dealing with the full complexity
of new issues. He developed a systematic method of dealing with change that involved
looking at any new issue from three angles: technical and production, political and
resource allocation, and corporate culture.
In 1990, Richard Pascale (Pascale, R. 1990) wrote that relentless change requires that
businesses continuously reinvent themselves.[57] His famous maxim is Nothing fails
like success by which he means that what was a strength yesterday becomes the root of
weakness today, We tend to depend on what worked yesterday and refuse to let go of
22
what worked so well for us in the past. Prevailing strategies become self-confirming. In
order to avoid this trap, businesses must stimulate a spirit of inquiry and healthy debate.
They must encourage a creative process of self renewal based on constructive conflict.
In 1996, Art Kleiner (1996) claimed that to foster a corporate culture that embraces
change, you have to hire the right people; heretics, heroes, outlaws, and visionaries[58].
The conservative bureaucrat that made such a good middle manager in yesterdays
hierarchical organizations is of little use today. A decade earlier Peters and Austin
(1985) had stressed the importance of nurturing champions and heroes. They said we
have a tendency to dismiss new ideas, so to overcome this, we should support those few
people in the organization that have the courage to put their career and reputation on the
line for an unproven idea.
In 1996, Adrian Slywotzky showed how changes in the business environment are
reflected in value migrations between industries, between companies, and within
companies.[59] He claimed that recognizing the patterns behind these value migrations is
necessary if we wish to understand the world of chaotic change. In Profit Patterns
(1999) he described businesses as being in a state of strategic anticipation as they try to
spot emerging patterns. Slywotsky and his team identified 30 patterns that have
transformed industry after industry.[60]
In 1997, Clayton Christensen (1997) took the position that great companies can fail
precisely because they do everything right since the capabilities of the organization also
defines its disabilities.[61] Christensen's thesis is that outstanding companies lose their
market leadership when confronted with disruptive technology. He called the approach
to discovering the emerging markets for disruptive technologies agnostic marketing,
i.e., marketing under the implicit assumption that no one - not the company, not the
customers - can know how or in what quantities a disruptive product can or will be used
before they have experience using it.
A number of strategists use scenario planning techniques to deal with change. Kees van
der Heijden (1996), for example, says that change and uncertainty make optimum
strategy determination impossible. We have neither the time nor the information
required for such a calculation. The best we can hope for is what he calls the most
skillful process.[62] The way Peter Schwartz put it in 1991 is that strategic outcomes
cannot be known in advance so the sources of competitive advantage cannot be
predetermined.[63] The fast changing business environment is too uncertain for us to find
sustainable value in formulas of excellence or competitive advantage. Instead, scenario
planning is a technique in which multiple outcomes can be developed, their implications
assessed, and their likeliness of occurrence evaluated. According to Pierre Wack,
scenario planning is about insight, complexity, and subtlety, not about formal analysis
and numbers.[64]
23
In 1988, Henry Mintzberg looked at the changing world around him and decided it was
time to reexamine how strategic management was done.[65][66] He examined the strategic
process and concluded it was much more fluid and unpredictable than people had
thought. Because of this, he could not point to one process that could be called strategic
planning. Instead he concludes that there are five types of strategies. They are:
Strategy as plan - a direction, guide, course of action - intention rather than actual
Strategy as ploy - a maneuver intended to outwit a competitor
Strategy as pattern - a consistent pattern of past behaviour - realized rather than intended
Strategy as position - locating of brands, products, or companies within the conceptual
framework of consumers or other stakeholders - strategy determined primarily by factors
outside the firm
Strategy as perspective - strategy determined primarily by a master strategist
In 1998, Mintzberg developed these five types of management strategy into 10 schools
of thought. These 10 schools are grouped into three categories. The first group is
prescriptive or normative. It consists of the informal design and conception school, the
formal planning school, and the analytical positioning school. The second group,
consisting of six schools, is more concerned with how strategic management is actually
done, rather than prescribing optimal plans or positions. The six schools are the
entrepreneurial, visionary, or great leader school, the cognitive or mental process school,
the learning, adaptive, or emergent process school, the power or negotiation school, the
corporate culture or collective process school, and the business environment or reactive
school. The third and final group consists of one school, the configuration or
transformation school, an hybrid of the other schools organized into stages,
organizational life cycles, or episodes.[67]
In 1999, Constantines Mark ides also wanted to reexamine the nature of strategic
planning itself.[68] He describes strategy formation and implementation as an on-going,
never-ending, integrated process requiring continuous reassessment and reformation.
Strategic management is planned and emergent, dynamic, and interactive. J. Moncrieff
(1999) also stresses strategy dynamics.[69] He recognized that strategy is partially
deliberate and partially unplanned. The unplanned element comes from two sources:
emergent strategies (result from the emergence of opportunities and threats in the
environment) and Strategies in action (ad hoc actions by many people from all parts of
the organization).
Some business planners are starting to use a complexity theory approach to strategy.
Complexity can be thought of as chaos with a dash of order. Chaos theory deals with
turbulent systems that rapidly become disordered. Complexity is not quite so
unpredictable. It involves multiple agents interacting in such a way that a glimpse of
structure may appear. Axelrod, R.,[70] Holland, J.,[71] and Kelly, S. and Allison, M.A.,[72]
call these systems of multiple actions and reactions complex adaptive systems. Axelrod
24
asserts that rather than fear complexity, business should harness it. He says this can best
be done when there are many participants, numerous interactions, much trial and error
learning, and abundant attempts to imitate each others' successes. In 2000, E. Dudik
wrote that an organization must develop a mechanism for understanding the source and
level of complexity it will face in the future and then transform itself into a complex
adaptive system in order to deal with it.[73]
Information- and technology-driven strategy
Peter Drucker had theorized the rise of the knowledge worker back in the 1950s. He
described how fewer workers would be doing physical labor, and more would be
applying their minds. In 1984, John Nesbitt theorized that the future would be driven
largely by information: companies that managed information well could obtain an
advantage, however the profitability of what he calls the information float
(information that the company had and others desired) would all but disappear as
inexpensive computers made information more accessible.
Daniel Bell (1985) examined the sociological consequences of information technology,
while Gloria Schuck and Shoshana Zuboff looked at psychological factors.[74] Zuboff, in
her five year study of eight pioneering corporations made the important distinction
between automating technologies and infomating technologies. She studied the
effect that both had on individual workers, managers, and organizational structures. She
largely confirmed Peter Drucker's predictions three decades earlier, about the importance
of flexible decentralized structure, work teams, knowledge sharing, and the central role
of the knowledge worker. Zuboff also detected a new basis for managerial authority,
based not on position or hierarchy, but on knowledge (also predicted by Drucker) which
she called participative management.[75]
In 1990, Peter Senge, who had collaborated with Arie de Geus at Dutch Shell, borrowed
de Geus' notion of the learning organization, expanded it, and popularized it. The
underlying theory is that a company's ability to gather, analyze, and use information is a
necessary requirement for business success in the information age. (See organizational
learning.) In order to do this, Senge claimed that an organization would need to be
structured such that:[76]
People can continuously expand their capacity to learn and be productive,

New patterns of thinking are nurtured,
Collective aspirations are encouraged, and
People are encouraged to see the whole picture together.
Senge identified five disciplines of a learning organization. They are:
25
Personal responsibility, self reliance, and mastery We accept that we are the masters
of our own destiny. We make decisions and live with the consequences of them. When a
problem needs to be fixed, or an opportunity exploited, we take the initiative to learn the
required skills to get it done.
Mental models We need to explore our personal mental models to understand the
subtle effect they have on our behaviour.
Shared vision The vision of where we want to be in the future is discussed and
communicated to all. It provides guidance and energy for the journey ahead.
Team learning We learn together in teams. This involves a shift from a spirit of
advocacy to a spirit of enquiry.
Systems thinking We look at the whole rather than the parts. This is what Senge calls
the Fifth discipline. It is the glue that integrates the other four into a coherent strategy.
For an alternative approach to the learning organization, see Garratt, B. (1987).
Since 1990 many theorists have written on the strategic importance of information,
including J.B. Quinn,[77] J. Carlos Jarillo,[78] D.L. Barton,[79] Manuel Castells,[80] J.P.
Lieleskin,[81] Thomas Stewart,[82] K.E. Sveiby,[83] Gilbert J. Probst,[84] and Shapiro and
Varian[85] to name just a few.
Thomas A. Stewart, for example, uses the term intellectual capital to describe the
investment an organization makes in knowledge. It is composed of human capital (the
knowledge inside the heads of employees), customer capital (the knowledge inside the
heads of customers that decide to buy from you), and structural capital (the knowledge
that resides in the company itself).
Manuel Castells, describes a network society characterized by: globalization,
organizations structured as a network, instability of employment, and a social divide
between those with access to information technology and those without.
Geoffrey Moore (1991) and R. Frank and P. Cook[86] also detected a shift in the nature of
competition. In industries with high technology content, technical standards become
established and this gives the dominant firm a near monopoly. The same is true of
networked industries in which interoperability requires compatibility between users. An
example is word processor documents. Once a product has gained market dominance,
other products, even far superior products, cannot compete. Moore showed how firms
could attain this enviable position by using E.M. Rogers five stage adoption process and
focusing on one group of customers at a time, using each group as a base for marketing
to the next group. The most difficult step is making the transition between visionaries
and pragmatists (See Crossing the Chasm). If successful a firm can create a bandwagon
effect in which the momentum builds and your product becomes a de facto standard.
Evans and Wurster describe how industries with a high information component are being
transformed.[87] They cite Encarta's demolition of the Encyclopedia Britannica (whose
26
sales have plummeted 80% since their peak of $650 million in 1990). Encartas reign
was speculated to be short-lived, eclipsed by collaborative encyclopedias like Wikipedia
that can operate at very low marginal costs. Encarta's service was subsequently turned
into an on-line service and dropped at the end of 2009. Evans also mentions the music
industry which is desperately looking for a new business model. The upstart information
savvy firms, unburdened by cumbersome physical assets, are changing the competitive
landscape, redefining market segments, and disinter mediating some channels. One
manifestation of this is personalized marketing. Information technology allows
marketers to treat each individual as its own market, a market of one. Traditional ideas
of market segments will no longer be relevant if personalized marketing is successful.
The technology sector has provided some strategies directly. For example, from the
software development industry agile software development provides a model for shared
development processes.
Access to information systems have allowed senior managers to take a much more
comprehensive view of strategic management than ever before. The most notable of the
comprehensive systems is the balanced scorecard approach developed in the early 1990s
by Drs. Robert S. Kaplan (Harvard Business School) and David Norton (Kaplan, R. and
Norton, D. 1992). It measures several factors financial, marketing, production,
organizational development, and new product development in order to achieve a
'balanced' perspective.
Knowledge-driven strategy
Most current approaches to business "strategy" focus on the mechanics of management - e.g., Drucker's operational "strategies" -- and as such are not true business strategy. In a
post-industrial world these operationally focused business strategies hinge on
conventional sources of advantage have essentially been eliminated:
Scale used to be very important. But now, with access to capital and a global
marketplace, scale is achievable by multiple organizations simultaneously. In many
cases, it can literally be rented.
Process improvement or best practices were once a favored source of advantage, but
they were at best temporary, as they could be copied and adapted by competitors.
Owning the customer had always been thought of as an important form of competitive
advantage. Now, however, customer loyalty is far less important and difficult to
maintain as new brands and products emerge all the time.
In such a world, differentiation, as elicudated by Michael Porter, Botten and McManus is

the only way to maintain economic or market superiority (i.e., comparative advantage)
over competitors. A company must OWN the thing that differentiates it from
competitors. Without IP ownership and protection, any product, process or scale
27
advantage can be compromised or entirely lost. Competitors can copy them without fear
of economic or legal consequences, thereby eliminating the advantage.
(For an explanation and elucidation of the "post-industrial" worldview, see George
Ritzer and Daniel Bell.)
Strategic decision making processes
Will Mulcaster [88] argues that while much research and creative thought has been
devoted to generating alternative strategies, too little work has been done on what
influences the quality of strategic decision making and the effectiveness with which
strategies are implemented. For instance, in retrospect it can be seen that the financial
crisis of 2008-9 could have been avoided if the banks had paid more attention to the
risks associated with their investments, but how should banks change the way in which
they make decisions in order to improve the quality of their decisions in the future?
Mulcaster's Managing Forces framework addresses this issue by identifying 11 forces
that should be incorporated into the processes of decision making and strategic
implementation. The 11 forces are: Time; Opposing forces; Politics; Perception; Holistic
effects; Adding value; Incentives; Learning capabilities; Opportunity cost; Risk; Style
and are reflected in the mnemonic "TOPHAILORS."
The psychology of strategic management

Several psychologists have conducted studies to determine the psychological patterns
involved in strategic management. Typically senior managers have been asked how they
go about making strategic decisions. A 1938 treatise by Chester Barnard, that was based
on his own experience as a business executive, sees the process as informal, intuitive,
non-routinized, and involving primarily oral, 2-way communications. Bernard says The
process is the sensing of the organization as a whole and the total situation relevant to it.
It transcends the capacity of merely intellectual methods, and the techniques of
discriminating the factors of the situation. The terms pertinent to it are feeling,
judgement, sense, proportion, balance, appropriateness. It is a matter of art
rather than science.[89]
In 1973, Henry Mintzberg found that senior managers typically deal with unpredictable
situations so they strategize in ad hoc, flexible, dynamic, and implicit ways. . He says,
The job breeds adaptive information-manipulators who prefer the live concrete
situation. The manager works in an environment of stimulous-response, and he develops
in his work a clear preference for live action.[90]
In 1982, John Kotter studied the daily activities of 15 executives and concluded that they
spent most of their time developing and working a network of relationships from which
28
they gained general insights and specific details to be used in making strategic decisions.
They tended to use mental road maps rather than systematic planning techniques.[91]
Daniel Isenberg's 1984 study of senior managers found that their decisions were highly
intuitive. Executives often sensed what they were going to do before they could explain
why.[92] He claimed in 1986 that one of the reasons for this is the complexity of strategic
decisions and the resultant information uncertainty.[93]
Shoshana Zuboff (1988) claims that information technology is widening the divide
between senior managers (who typically make strategic decisions) and operational level
managers (who typically make routine decisions). She claims that prior to the
widespread use of computer systems, managers, even at the most senior level, engaged
in both strategic decisions and routine administration, but as computers facilitated (She
called it deskilled) routine processes, these activities were moved further down the
hierarchy, leaving senior management free for strategic decions making.
In 1977, Abraham Zaleznik identified a difference between leaders and managers. He
describes leadershipleaders as visionaries who inspire. They care about substance.
Whereas managers are claimed to care about process, plans, and form.[94] He also
claimed in 1989 that the rise of the manager was the main factor that caused the decline
of American business in the 1970s and 80s.The main difference between leader and
manager is that, leader has followers and manager has subordinates. In capitalistic
society leaders make decisions and manager usually follow or execute.[95] Lack of
leadership is most damaging at the level of strategic management where it can paralyze
an entire organization.[96]
According to Corner, Kinichi, and Keats,[97] strategic decision making in organizations
occurs at two levels: individual and aggregate. They have developed a model of parallel
strategic decision making. The model identifies two parallel processes both of which
involve getting attention, encoding information, storage and retrieval of information,
strategic choice, strategic outcome, and feedback. The individual and organizational
processes are not independent however. They interact at each stage of the process.
Reasons why strategic plans fail

There are many reasons why strategic plans fail, especially:
Failure to execute by overcoming the four key organizational hurdles[98]

o Cognitive hurdle
o Motivational hurdle
o Resource hurdle
o Political hurdle
29
Failure to understand the customer

o Why do they buy
o Is there a real need for the product
o inadequate or incorrect marketing research
Inability to predict environmental reaction
o What will competitors do
Fighting brands
Price wars
o Will government intervene
Over-estimation of resource competence
o Can the staff, equipment, and processes handle the new strategy
o Failure to develop new employee and management skills
Failure to coordinate
o Reporting and control relationships not adequate
o Organizational structure not flexible enough
Failure to obtain senior management commitment
o Failure to get management involved right from the start
o Failure to obtain sufficient company resources to accomplish task
Failure to obtain employee commitment
o New strategy not well explained to employees
o No incentives given to workers to embrace the new strategy
Under-estimation of time requirements
o No critical path analysis done
Failure to follow the plan
o No follow through after initial planning
o No tracking of progress against plan
o No consequences for above
Failure to manage change
o Inadequate understanding of the internal resistance to change
o Lack of vision on the relationships between processes, technology and
organization
Poor communications
o Insufficient information sharing among stakeholders
o Exclusion of stakeholders and delegates
Limitations of strategic management

Although a sense of direction is important, it can also stifle creativity, especially if it is
rigidly enforced. In an uncertain and ambiguous world, fluidity can be more important
than a finely tuned strategic compass. When a strategy becomes internalized into a
corporate culture, it can lead to group think. It can also cause an organization to define
itself too narrowly. An example of this is marketing myopia.
Many theories of strategic management tend to undergo only brief periods of popularity.
A summary of these theories thus inevitably exhibits survivorship bias (itself an area of
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research in strategic management). Many theories tend either to be too narrow in focus
to build a complete corporate strategy on, or too general and abstract to be applicable to
specific situations. Populism or faddishness can have an impact on a particular theory's
life cycle and may see application in inappropriate circumstances. See business
philosophies and popular management theories for a more critical view of management
theories.
In 2000, Gary Hamel coined the term strategic convergence to explain the limited
scope of the strategies being used by rivals in greatly differing circumstances. He
lamented that strategies converge more than they should, because the more successful
ones are imitated by firms that do not understand that the strategic process involves
designing a custom strategy for the specifics of each situation.[52]
Ram Charan, aligning with a popular marketing tagline, believes that strategic planning
must not dominate action. "Just do it!", while not quite what he meant, is a phrase that
nevertheless comes to mind when combatting analysis paralysis.
The linearity trap
It is tempting to think that the elements of strategic management (i) reaching
consensus on corporate objectives; (ii) developing a plan for achieving the objectives;
and (iii) marshalling and allocating the resources required to implement the plan can
be approached sequentially. It would be convenient, in other words, if one could deal
first with the noble question of ends, and then address the mundane question of means.
But in the world in which strategies have to be implemented, the three elements are
interdependent. Means are as likely to determine ends as ends are to determine means.[99]
The objectives that an organization might wish to pursue are limited by the range of
feasible approaches to implementation. (There will usually be only a small number of
approaches that will not only be technically and administratively possible, but also
satisfactory to the full range of organizational stakeholders.) In turn, the range of
feasible implementation approaches is determined by the availability of resources.
And so, although participants in a typical strategy session may be asked to do blue
sky thinking where they pretend that the usual constraints resources, acceptability to
stakeholders , administrative feasibility have been lifted, the fact is that it rarely makes
sense to divorce oneself from the environment in which a strategy will have to be
implemented. Its probably impossible to think in any meaningful way about strategy in
an unconstrained environment. Our brains cant process boundless possibilities, and
the very idea of strategy only has meaning in the context of challenges or obstacles to be
overcome. Its at least as plausible to argue that acute awareness of constraints is the
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very thing that stimulates creativity by forcing us to constantly reassess both means and
ends in light of circumstances.
The key question, then, is, "How can individuals, organizations and societies cope as
well as possible with ... issues too complex to be fully understood, given the fact that
actions initiated on the basis of inadequate understanding may lead to significant
regret?"[100]
The answer is that the process of developing organizational strategy must be iterative. It
involves toggling back and forth between questions about objectives, implementation
planning and resources. An initial idea about corporate objectives may have to be altered
if there is no feasible implementation plan that will meet with a sufficient level of
acceptance among the full range of stakeholders, or because the necessary resources are
not available, or both.
Even the most talented manager would no doubt agree that "comprehensive analysis is
impossible" for complex problems[101]. Formulation and implementation of strategy must
thus occur side-by-side rather than sequentially, because strategies are built on
assumptions which, in the absence of perfect knowledge, will never be perfectly correct.
Strategic management is necessarily a "repetitive learning cycle [rather than] a linear
progression towards a clearly defined final destination."[102] While assumptions can and
should be tested in advance, the ultimate test is implementation. You will inevitably
need to adjust corporate objectives and/or your approach to pursuing outcomes and/or
assumptions about required resources. Thus a strategy will get remade during
implementation because "humans rarely can proceed satisfactorily except by learning
from experience; and modest probes, serially modified on the basis of feedback, usually
are the best method for such learning."[103]
It serves little purpose (other than to provide a false aura of certainty sometimes
demanded by corporate strategists and planners) to pretend to anticipate every possible
consequence of a corporate decision, every possible constraining or enabling factor, and
every possible point of view. At the end of the day, what matters for the purposes of
strategic management is having a clear view based on the best available evidence and
on defensible assumptions of what it seems possible to accomplish within the
constraints of a given set of circumstances. As the situation changes, some opportunities
for pursuing objectives will disappear and others arise. Some implementation
approaches will become impossible, while others, previously impossible or unimagined,
will become viable.
The essence of being strategic thus lies in a capacity for "intelligent trial-and error"[104]
rather than linear adherence to finally honed and detailed strategic plans. Strategic
management will add little value -- indeed, it may well do harm -- if organizational
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strategies are designed to be used as a detailed blueprints for managers. Strategy should
be seen, rather, as laying out the general path - but not the precise steps - by which an
organization intends to create value.[105]Strategic management is a question of
interpreting, and continuously reinterpreting, the possibilities presented by shifting
circumstances for advancing an organization's objectives. Doing so requires strategists to
think simultaneously about desired objectives, the best approach for achieving them, and
the resources implied by the chosen approach. It requires a frame of mind that admits of
no boundary between means and ends.
Strategic planning
Strategic planning is an organization's process of defining its strategy, or direction, and making
decisions on allocating its resources to pursue this strategy, including its capital and people.
Various business analysis techniques can be used in strategic planning, including SWOT
analysis (Strengths, Weaknesses, Opportunities, and Threats ), PEST analysis (Political,
Economic, Social, and Technological), STEER analysis (Socio-cultural, Technological,
Economic, Ecological, and Regulatory factors), and EPISTEL (Environment, Political,
Informatic, Social, Technological, Economic and Legal).
Strategic planning is the formal consideration of an organization's future course. All strategic
planning deals with at least one of three key questions:
1. "What do we do?"
2. "For whom do we do it?"
3. "How do we excel?"
In business strategic planning, the third question is better phrased "How can we beat or avoid
competition?". (Bradford and Duncan, page 1).
In many organizations, this is viewed as a process for determining where an organization is
going over the next year or more -typically 3 to 5 years, although some extend their vision to 20
years.
In order to determine where it is going, the organization needs to know exactly where it stands,
then determine where it wants to go and how it will get there. The resulting document is called
the "strategic plan."
It is also true that strategic planning may be a tool for effectively plotting the direction of a
company; however, strategic planning itself cannot foretell exactly how the market will evolve
and what issues will surface in the coming days in order to plan your organizational strategy.
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Therefore, strategic innovation and tinkering with the 'strategic plan' have to be a cornerstone
strategy for an organization to survive the turbulent business climate.
Mission, vision and values

Mission: Defines the fundamental purpose of an organization or an enterprise, succinctly
describing why it exists and what it does to achieve its Vision. The mission could be either for
the long term or the short term. A corporate mission can last for many years or for the life of the
organization or may change as the organization develops. It is not an objective with a timeline,
but rather the overall goal that is accomplished as organizational goals and objectives are
achieved.
Vision: Defines the desired or intended future state of an organization or enterprise in terms of
its fundamental objective and/or strategic direction. Vision is a long term view, sometimes
describing how the organization would like the world in which it operates to be. For example a
charity working with the poor might have a vision statement which read "A world without
poverty"
It is sometimes used to set out a 'picture' of the organization in the future. A vision statement
provides inspiration, the basis for all the organization's planning. It could answer the question:
"Where do we want to go?"
Values: Beliefs that are shared among the stakeholders of an organization. Values drive an
organization's culture and priorities.
Strategy: Strategy narrowly defined, means "the art of the general" (from Greek stratcgos). A
combination of the ends (goals) for which the firm is striving and the means (policies) by which
it is seeking to get there.
Mission statements and vision statements

Organizations sometimes summarize goals and objectives into a mission statement and/or a
vision statement. Others begin with a vision and mission and use them to formulate goals and
objectives.
While the existence of a shared mission is extremely useful, many strategy specialists question
the requirement for a written mission statement. However, there are many models of strategic
planning that start with mission statements, so it is useful to examine them here.
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A Mission statement tells you the fundamental purpose of the organization. It defines
the customer and the critical processes. It informs you of the desired level of
performance.
A Vision statement outlines what the organization wants to be, or how it wants the
world in which it operates to be. It concentrates on the future. It is a source of
inspiration. It provides clear decision-making criteria.
An advantage of having a statement is that it creates value for those who get exposed to the
statement, and those prospects are managers, employees and sometimes even customers.
Statements create a sense of direction and opportunity. They both are an essential part of the
strategy-making process.
Many people mistake vision statement for mission statement, and sometimes one is simply used
as a longer term version of the other. The Vision should describe why it is important to achieve
the Mission. A Vision statement defines the purpose or broader goal for being in existence or in
the business and can remain the same for decades if crafted well. A Mission statement is more
specific to what the enterprise can achieve itself. Vision should describe what will be achieved in
the wider sphere if the organization and others are successful in achieving their individual
missions.
A mission statement can resemble a vision statement in a few companies, but that can be a grave
mistake. It can confuse people. The mission statement can galvanize the people to achieve
defined objectives, even if they are stretch objectives, provided it can be elucidated in SMART
(Specific, Measurable, Achievable, Relevant and Time-bound) terms. A mission statement
provides a path to realize the vision in line with its values. These statements have a direct
bearing on the bottom line and success of the organization.
Which comes first? The mission statement or the vision statement? That depends. If you have a
new start up business, new program or plan to re engineer your current services, then the vision
will guide the mission statement and the rest of the strategic plan. If you have an established
business where the mission is established, then many times, the mission guides the vision
statement and the rest of the strategic plan. Either way, you need to know your fundamental
purpose - the mission, your current situation in terms of internal resources and capabilities
(strengths and/or weaknesses) and external conditions (opportunities and/or threats), and where
you want to go - the vision for the future. It's important that you keep the end or desired result in
sight from the start. [Citation needed] .
Features of an effective vision statement include:
Clarity and lack of ambiguity
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Vivid and clear picture

Description of a bright future
Memorable and engaging wording
Realistic aspirations
Alignment with organizational values and culture
To become really effective, an organizational vision statement must (the theory states) become
assimilated into the organization's culture. Leaders have the responsibility of communicating the
vision regularly, creating narratives that illustrate the vision, acting as role-models by
embodying the vision, creating short-term objectives compatible with the vision, and
encouraging others to craft their own personal vision compatible with the organization's overall
vision. In addition, mission statements need to be subjected to an internal assessment and an
external assessment. The internal assessment should focus on how members inside the
organization interpret their mission statement. The external assessment which includes all of
the businesses stakeholders is valuable since it offers a different perspective. These
discrepancies between these two assessments can give insight on the organization's mission
statement effectiveness.
Another approach to defining Vision and Mission is to pose two questions. Firstly, "What
aspirations does the organization have for the world in which it operates and has some influence
over?", and following on from this, "What can (and /or does) the organization do or contribute to
fulfill those aspirations?". The succinct answer to the first question provides the basis of the
Vision Statement. The answer to the second question determines the Mission Statement.
Methodologies
There are many approaches to strategic planning but typically a three-step process may be used:
Situation - evaluate the current situation and how it came about.

Target - define goals and/or objectives (sometimes called ideal state)
Path - map a possible route to the goals/objectives
One alternative approach is called Draw-See-Think
Draw - what is the ideal image or the desired end state?

See - what is today's situation? What is the gap from ideal and why?
Think - what specific actions must be taken to close the gap between today's situation
and the ideal state?
Plan - what resources are required to execute the activities?
An alternative to the Draw-See-Think approach is called See-Think-Draw
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See - what is today's situation?

Think - define goals/objectives
Draw - map a route to achieving the goals/objectives
In other terms strategic planning can be as follows:
Vision - Define the vision and set a mission statement with hierarchy of goals and
objectives
SWOT - Analysis conducted according to the desired goals
Formulate - Formulate actions and processes to be taken to attain these goals
Implement - Implementation of the agreed upon processes
Control - Monitor and get feedback from implemented processes to fully control the
operation
Situational analysis
When developing strategies, analysis of the organization and its environment as it is at the
moment and how it may develop in the future, is important. The analysis has to be executed at an
internal level as well as an external level to identify all opportunities and threats of the external
environment as well as the strengths and weaknesses of the organizations.
There are several factors to assess in the external situation analysis:
1.
2.
3.
4.
5.
6.
7.
Markets (customers)
Competition
Technology
Supplier markets
Labor markets
The economy
The regulatory environment
It is rare to find all seven of these factors having critical importance. It is also uncommon to find
that the first two - markets and competition - are not of critical importance. (Bradford "External
Situation - What to Consider")
Analysis of the external environment normally focuses on the customer. Management should be
visionary in formulating customer strategy, and should do so by thinking about market
environment shifts, how these could impact customer sets, and whether those customer sets are
the ones the company wishes to serve.
Analysis of the competitive environment is also performed, many times based on the framework
suggested by Michael Porter.
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Goals, objectives and targets

Strategic planning is a very important business activity. It is also important in the public sector
areas such as education. It is practiced widely informally and formally. Strategic planning and
decision processes should end with objectives and a roadmap of ways to achieve those
objectives.
One of the core goals when drafting a strategic plan is to develop it in a way that is easily
translatable into action plans. Most strategic plans address high level initiatives and over-arching
goals, but dont get articulated (translated) into day-to-day projects and tasks that will be
required to achieve the plan. Terminology or word choice, as well as the level a plan is written,
are both examples of easy ways to fail at translating your strategic plan in a way that makes
sense and is executable to others. Often, plans are filled with conceptual terms which dont tie
into day-to-day realities for the staff expected to carry out the plan.
The following terms have been used in strategic planning: desired end states, plans, policies,
goals, objectives, strategies, tactics and actions. Definitions vary, overlap and fail to achieve
clarity. The most common of these concepts are specific, time bound statements of intended
future results and general and continuing statements of intended future results, which most
models refer to as either goals or objectives (sometimes interchangeably).
One model of organizing objectives uses hierarchies. The items listed above may be organized in
a hierarchy of means and ends and numbered as follows: Top Rank Objective (TRO), Second
Rank Objective, Third Rank Objective, etc. From any rank, the objective in a lower rank answers
to the question "How?" and the objective in a higher rank answers to the question "Why?" The
exception is the Top Rank Objective (TRO): there is no answer to the "Why?" question. That is
how the TRO is defined.
People typically have several goals at the same time. "Goal congruency" refers to how well the
goals combine with each other. Does goal A appear compatible with goal B? Do they fit together
to form a unified strategy? "Goal hierarchy" consists of the nesting of one or more goals within
other goal(s).
One approach recommends having short-term goals, medium-term goals, and long-term goals. In
this model, one can expect to attain short-term goals fairly easily: they stand just slightly above
one's reach. At the other extreme, long-term goals appear very difficult, almost impossible to
attain. Strategic management jargon sometimes refers to "Big Hairy Audacious Goals" (BHAGs)
in this context. Using one goal as a stepping-stone to the next involves goal sequencing. A
person or group starts by attaining the easy short-term goals, then steps up to the medium-term,
then to the long-term goals. Goal sequencing can create a "goal stairway". In an organizational
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setting, the organization may co-ordinate goals so that they do not conflict with each other. The
goals of one part of the organization should mesh compatibly with those of other parts of the
organization.
Business model
A business model describes the rationale of how an organization creates, delivers, and
captures value[1] - economic, social, or other forms of value. The process of business
model design is part of business strategy.
In theory and practise the term business model is used for a broad range of informal and
formal descriptions to represent core aspects of a business, including purpose, offerings,
strategies, infrastructure, organizational structures, trading practices, and operational
processes and policies.
History
A brief history of the development of business models might run as follows. The most known
and most basic business model is the shopkeeper model[citation needed]. This involves setting up a
store in a location where potential customers are likely to be and displaying a product or service.
Over the years, business models have become much more sophisticated. The bait and hook
business model (also referred to as the "razor and blades business model" or the "tied products
business model") was introduced in the early 20th century. This involves offering a basic
product at a very low cost, often at a loss (the "bait"), then charging compensatory recurring
amounts for refills or associated products or services (the "hook"). Examples include: razor
(bait) and blades (hook); cell phones (bait) and air time (hook); computer printers (bait) and ink
cartridge refills (hook); and cameras (bait) and prints (hook). An interesting variant of this model
is a software developer that gives away its word processor reader free of charge but charges
several hundred dollars for its word processor writer.
In the 1950s, new business models came from McDonald's Restaurants and Toyota. In the
1960s, the innovators were Wal-Mart and Hypermarkets. The 1970s saw new business models
from FedEx and Toys R Us; the 1980s from Blockbuster, Home Depot, Intel, and Dell
Computer; the 1990s from Southwest Airlines, Netflix, eBay, Amazon.com, and Starbucks.
Poorly thought out business models were a problem with many dot-coms.
Today, the type of business models might depend on how technology is used. For example,
entrepreneurs on the internet have also created entirely new models that depend entirely on
existing or emergent technology. Using technology, businesses can reach a large number of
customers with minimal costs.
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Examples
Auction business model

Bricks and clicks business model
Collective business models
Component business model
Cutting out the middleman model
Direct sales model
Distribution business models, various
Franchise
Freemium business model
Industrialization of services business model
Low-cost carrier business model
Loyalty business models
Monopolistic business model
Multi-level marketing business model
Network effects business model
Online auction business model
Online content business model
Premium business model
Professional open-source model
Pyramid scheme business model
Razor and blades business model (bait and hook)
Servitization of products business model
Subscription business model
Business model design template
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Business model design template: Nine building blocks and their relationships, Osterwalder
2004[2]
Formal descriptions of the business become the building blocks for its activities. Many different
business conceptualizations exist; Osterwalder's work and thesis (2010[1], 2004[2]) propose a
single reference model based on the similarities of a wide range of business model
conceptualizations. With his business model design template, an enterprise can easily describe
their business model
Infrastructure
o Key Activities: The activities necessary to execute a company's business model.
o Key Resources: The resources that are necessary to create value for the
customer.
o Partner Network: The business alliances which complement other aspects of the
business model.
Offering
o Value Proposition: The products and services a business offers. Quoting
Osterwalder (2004), a value proposition "is an overall view of .. products and
services that together represent value for a specific customer segment. It
describes the way a firm differentiates itself from its competitors and is the
reason why customers buy from a certain firm and not from another."
Customers
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Business Model Canvas: Nine business model building blocks, Osterwalder, Pigneur, &
al. 2010[1]
Customer Segments: The target audience for a business' products and services.
Channels: The means by which a company delivers products and services to
customers. This includes the company's marketing and distribution strategy.
o Customer Relationship: The links a company establishes between itself and its
different customer segments. The process of managing customer relationships is
referred to as customer relationship management.
Finances
o Cost Structure: The monetary consequences of the means employed in the
business model. A company's DOC.
o Revenue Streams: The way a company makes money through a variety of
revenue flows. A company's income.
o
o
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Applications
Malone et al.[3] at MIT find that some business models, as defined by them, indeed performed
better than others in a dataset consisting of the largest U.S. firms, in the period 1998 through
2002, while they did not prove whether the existence of a business model mattered.
Related concepts
The process of business model design is part of business strategy. The implementation of a
company's business model into organisational structures (e.g. organigrams, workflows, human
resources) and systems (e.g. information technology architecture, production lines) is part of a
company's business operations.
It is important to understand that business modeling commonly refers to business process design
at the operational level, whereas business models and business model design refer to defining the
business logic of a company at the strategic level.
The brand is a consequence of and has a symbiotic relationship with the business model since
the business model determines the brand promise and the brand equity becomes a feature of the
model. Managing this is a task of integrated marketing.
Business strategy mapping

Business strategy mapping is the discipline of mapping business opportunities from potential to
profitability and the points in between. This method is different from other methods in that it
visually shows how marketing, finance and operational strategies relate to each other and need to
fit together in order to optimize the results of all the strategies. Business Strategy Mapping
assists managers in better understanding how to generate and deliver value to both the customers
and the companies.
Marketing strategy
Marketing strategy is a process that can allow an organization to concentrate its limited
resources on the greatest opportunities to increase sales and achieve a sustainable competitive
advantage[3]. A marketing strategy should be centered on the key concept that customer
satisfaction is the main goal.
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Key part of the general corporate strategy

Marketing strategy is a method of focusing an organization's energies and resources on a course
of action which can lead to increased sales and dominance of a targeted market niche. A
marketing strategy combines product development, promotion, distribution, pricing, relationship
management and other elements; identifies the firm's marketing goals, and explains how they
will be achieved, ideally within a stated timeframe. Marketing strategy determines the choice of
target market segments, positioning, marketing mix, and allocation of resources. It is most
effective when it is an integral component of overall firm strategy, defining how the organization
will successfully engage customers, prospects, and competitors in the market arena. Corporate
strategies, corporate missions, and corporate goals. As the customer constitutes the source of a
company's revenue, marketing strategy is closely linked with sales. A key component of
marketing strategy is often to keep marketing in line with a company's overarching mission
statement[4].
Basic theory:
1. Target Audience
2. Proposition/Key Element
3. Implementation
Tactics and actions

A marketing strategy can serve as the foundation of a marketing plan. A marketing plan contains
a set of specific actions required to successfully implement a marketing strategy. For example:
"Use a low cost product to attract consumers. Once our organization, via our low cost product,
has established a relationship with consumers, our organization will sell additional, highermargin products and services that enhance the consumer's interaction with the low-cost product
or service."
A strategy consists of a well thought out series of tactics to make a marketing plan more
effective. Marketing strategies serve as the fundamental underpinning of marketing plans
designed to fill market needs and reach marketing objectives [5]. Plans and objectives are
generally tested for measurable results.
A marketing strategy often integrates an organization's marketing goals, policies, and action
sequences (tactics) into a cohesive whole. Similarly, the various strands of the strategy , which
might include advertising, channel marketing, internet marketing, promotion and public relations
can be orchestrated. Many companies cascade a strategy throughout an organization, by creating
strategy tactics that then become strategy goals for the next level or group. Each one group is
44
expected to take that strategy goal and develop a set of tactics to achieve that goal. This is why it
is important to make each strategy goal measurable.
Marketing strategies are dynamic and interactive. They are partially planned and partially
unplanned. See strategy dynamics.
Types of strategies
Marketing strategies may differ depending on the unique situation of the individual business.
However there are a number of ways of categorizing some generic strategies. A brief description
of the most common categorizing schemes is presented below:
Strategies based on market dominance - In this scheme, firms are classified based on
their market share or dominance of an industry. Typically there are four types of market
dominance strategies:
o Leader
o Challenger
o Follower
o Nicher
Porter generic strategies - strategy on the dimensions of strategic scope and strategic
strength. Strategic scope refers to the market penetration while strategic strength refers
to the firms sustainable competitive advantage. The generic strategy framework (porter
1984) comprises two alternatives each with two alternative scopes. These are
Differentiation and low-cost leadership each with a dimension of Focus-broad or
narrow.
o Product differentiation (broad)
o Cost leadership (broad)
o Market segmentation (narrow)
Innovation strategies - This deals with the firm's rate of the new product development
and business model innovation. It asks whether the company is on the cutting edge of
technology and business innovation. There are three types:
o Pioneers
o Close followers
o Late followers
Growth strategies - In this scheme we ask the question, How should the firm grow?.
There are a number of different ways of answering that question, but the most common
gives four answers:
o Horizontal integration
o Vertical integration
o Diversification
o Intensification
A more detailed scheme uses the categories [6]:
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Prospector
Analyzer
Defender
Reactor
Marketing warfare strategies - This scheme draws parallels between marketing strategies
and military strategies.
Strategic models
Marketing participants often employ strategic models and tools to analyze marketing
decisions. When beginning a strategic analysis, the 3Cs can be employed to get a broad
understanding of the strategic environment. An Ansoff Matrix is also often used to
convey an organization's strategic positioning of their marketing mix. The 4Ps can then
be utilized to form a marketing plan to pursue a defined strategy.
There are a many companies especially those in the Consumer Package Goods (CPG)
market that adopt the theory of running their business centered on Consumer, Shopper &
Retailer needs. Their Marketing departments spend quality time looking for "Growth
Opportunities" in their categories by identifying relevant insights (both mindsets and
behaviors) on their target Consumers, Shoppers and retail partners. These Growth
Opportunities emerge from changes in market trends, segment dynamics changing and
also internal brand or operational business challenges. The Marketing team can then
prioritize these Growth Opportunities and begin to develop strategies to exploit the
opportunities that could include new or adapted products, services as well as changes to
the 7Ps.
Real-life marketing
Real-life marketing primarily revolves around the application of a great deal of
common-sense; dealing with a limited number of factors, in an environment of imperfect
information and limited resources complicated by uncertainty and tight timescales. Use
of classical marketing techniques, in these circumstances, is inevitably partial and
uneven.
Thus, for example, many new products will emerge from irrational processes and the
rational development process may be used (if at all) to screen out the worst non-runners.
The design of the advertising, and the packaging, will be the output of the creative minds
employed; which management will then screen, often by 'gut-reaction', to ensure that it
is reasonable.
For most of their time, marketing managers use intuition and experience to analyze and
handle the complex, and unique, situations being faced; without easy reference to theory.
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This will often be 'flying by the seat of the pants', or 'gut-reaction'; where the overall
strategy, coupled with the knowledge of the customer which has been absorbed almost
by a process of osmosis, will determine the quality of the marketing employed. This,
almost instinctive management, is what is sometimes called 'coarse marketing'; to
distinguish it from the refined, aesthetically pleasing, form favored by the theorists.
Customer engagement
Customer engagement (CE) refers to the engagement of customers with one another, with a
company or a brand. The initiative for engagement can be either consumer- or company-led or
the medium of engagement can be on or offline.
In March 2006, the Advertising Research Foundation announced the first definition of
customer engagement[4] the first definition of CE at the rethink! 52nd Annual ARF
Convention and Expo:
Engagement is turning on a prospect to a brand idea enhanced by the surrounding
context.
However, the ARF definition was criticized by some for being too broad. [5]
Customer engagement can also refer to the stages consumers travel through as they
interact with a particular brand. This Customer Engagement Cycle, or Customer
Journey, has been described using a myriad of terms but most often consists of 5
different stages: Awareness, Consideration, Inquiry, Purchase and Retention. Marketers
employ Connection Strategy to speak to would-be customers at each stage, with media
that addresses their particular needs and interests. When conducting Search Engine
Marketing & Search Engine Optimization, or placing advertisements, marketers must
devise media and/or keywords and phrases that encourage customer flow through the
Customer Engagement Cycle, towards Purchase.
Because the various definitions often focus on entirely different aspects of CE, they are
not in every case competing definitions but, rather, illuminate CE from different
perspectives. Eric Petersons definition [6] for example frames CE as a metric:
Engagement is an estimate of the degree and depth of visitor interaction against a
clearly defined set of goals.
At the moment the ARF, World Federation of Advertisers [7], Nielsen Media Research,
IAG Research and Simmons Research are in the process of developing a definition and a
metric for CE [3]
Customer Engagement as a metric
47
All marketing practices, including Internet Marketing include measuring the effectiveness of
various media along the Customer Engagement Cycle, as consumers travel from awareness to
Purchase. Often the use of CVP Analysis factors into strategy decisions, including budgets and
media placement.
The CE metric is useful for:
a) Planning:
Identify where CE-marketing efforts should take place; which of the communities that
the target customers participate in are the most engaging?
Specify the way in which target customers engage, or want to engage, with the company
or offering.
b) Measuring Effectiveness: Measure how successful CE-marketing efforts have been at

engaging target customers.
The importance of CE as a marketing metric is reflected in ARFs statement:
The industry is moving toward customer engagement with marketing communications as the
21st century metric of marketing efficiency and effectiveness. [26]
ARF envisages CE exclusively as a metric of engagement with communication, but it is not
necessary to distinguish between engaging with the communication and with the product since
CE behaviour deals with, and is influenced by, involvement with both.
Eric Petersons definition [27] also frames CE as a metric:
Engagement is an estimate of the degree and depth of visitor interaction on the site against a
clearly defined set of goals.
In order to be operational, CE-metrics must be combined with psycho demographics. It is not
enough to know that a website has 500 highly engaged members, for instance; it is imperative to
know what percentage are members of the companys target market[28]. As a metric for
effectiveness, Scott Karp[29] suggests, CE is the solution to the same intractable problems that
have long been a struggle for old media: how to prove value.
The CE-metric is synthetic and integrates a number of variables. The World Federation of
Advertisers calls it consumer-centric holistic measurement [30]. The following items have all
been proposed as components of a CE-metric:
48
Root metrics
Duration of visit
Frequency of visit (returning to the site directly through a URL or bookmark - or

indirectly).
% repeat visits
Recency of visit
Depth of visit (% of site visited)
Click-through rate
Sales
Lifetime value
Action metrics
RSS feed subscriptions
Bookmarks, tags, ratings
Viewing of high-value or medium-value content (as valued from the organisations

point-of-view). Depth of visit can be combined with this variable.
Inquiries
Providing personal information
Downloads
Content resyndication
Customer reviews
Comments: their quality is another indicator of the degree of engagement.
Ratio between posts and comments plus trackbacks.
In selecting the components of a CE-metric, the following issues must be resolved:
49
Flexible metric vs. Industry standard: According to some, CE measurement has

never been one size fits-all but should vary according to industry, organisation,
business goal etc. On the other hand, corporate clients and even agencies also desire
some type of solid index. Internal metrics could, perhaps, be developed in addition to a
comparative, industry-wide one[31]. Other exponents of a flexible CE-metric include Bill
Gassman in his comments to How do you calculate engagement? Part I. Eric Peterson
[6]
shares Gassmans views.
Relative weighting: The relative weighting associated with each CE-component in an

algorithm. For instance, is subscribing to RSS more important than contributing a
comment? If yes how much more important exactly? Relative weighting links up with
the issue of flexible vs. standardised metrics: Is the relative weighting going to be solid
as will be required if the CE-metric is to be standardised or is it going to differ
depending on the industry, organisation, business goals etc?
Component measurability: Most of the components of a CE-metric face problems of

measurement. Duration of visit for example suffers from (a) failing to capture the most
engaged users who like to peruse RSS feeds; (b) inaccuracy arising from leaving a tab
open during breaks, stopping to converse with co-workers, etc.
Length of measurement: For how long must the various CE components be measured
if CE is to reflect loyalty rather than short-term, faddish engagement?
Market segmentation
Market segmentation is a concept in economics and marketing. A market segment is a sub-set
of a market made up of people or organizations sharing one or more characteristics that cause
them to demand similar product and/or services based on qualities of those products such as
price or function.
"Positive" market segmentation

Market segmenting is dividing the market into groups of individual markets with similar
wants or needs that a company divides the market into distinct groups who have distinct
needs, wants, behavior or who might want different products & services. Broadly,
markets can be divided according to a number of general criteria, such as by industry or
public versus private although industrial market segmentation is quite different from
consumer market segmentation, both have similar objectives. All of these methods of
segmentation are merely proxies for true segments, which don't always fit into
convenient demographic boundaries.
Consumer-based market segmentation can be performed on a product specific basis, to
provide a close match between specific products and individuals. However, a number of
generic market segment systems also exist, e.g. the Nielsen Claritas PRIZM system
50
provides a broad segmentation of the population of the United States based on the
statistical analysis of household and geodemographic data.
The process of segmentation is distinct from targeting (choosing which segments to
address) and positioning (designing an appropriate marketing mix for each segment).
The overall intent is to identify groups of similar customers and potential customers; to
prioritize the groups to address; to understand their behavior; and to respond with
appropriate marketing strategies that satisfy the different preferences of each chosen
segment. Revenues are thus improved.
Improved segmentation can lead to significantly improved marketing effectiveness.
Distinct segments can have different industry structures and thus have higher or lower
attractiveness (Michael Porter). With the right segmentation, the right lists can be
purchased, advertising results can be improved and customer satisfaction can be
increased leading to better reputation.
Positioning
Once a market segment has been identified (via segmentation), and targeted (in which
the viability of servicing the market intended), the segment is then subject to positioning.
Positioning involves ascertaining how a product or a company is perceived in the minds
of consumers.
This part of the segmentation process consists of drawing up a perceptual map, which
highlights rival goods within one's industry according to perceived quality and price.
After the perceptual map has been devised, a firm would consider the marketing
communications mix best suited to the product in question.
Top-Down and Bottom-Up

George S. Day (1980) describes model of segmentation as the top-down approach: You
start with the total population and divide it into segments. He also identified an
alternative model which he called the bottom-up approach. In this approach, you start
with a single customer and build on that profile. This typically requires the use of
customer relationship management software or a database of some kind. Profiles of
existing customers are created and analysed. Various demographic, behavioral, and
psychographic patterns are built up using techniques such as cluster analysis. This
process is sometimes called database marketing or micro-marketing. Its use is most
appropriate in highly fragmented markets. McKenna (1988) claims that this approach
treats every customer as a "micro majority". Pine (1993) used the bottom-up approach in
what he called "segment of one marketing". Through this process mass customization is
possible.
51
Creating a market segment may allow a firm or other organistion to set itself apart from
other competitors.
Using Segmentation in Customer Retention

Segmentation is commonly used by organizations to improve their customer retention
programs and help ensure that they are:
Focused on retaining their most profitable customers

Employing those tactics most likely to retain these customers
The basic approach to retention-based segmentation is that a company tags each of its
active customers with 3 values:
Tag #1: Is this customer at high risk of canceling the company's service? (Or
becoming
a
non-user)
One of the most common indicators of high-risk customers is a drop off in usage of the
company's service. For example, in the credit card industry this could be signaled
through a customer's decline in spending on his card.
Tag #2: Is this customer worth retaining?
This determination boils down to whether the post-retention profit generated from the
customer is predicted to be greater than the cost incurred to retain the customer.[1]
Tag #3: What retention tactics should be used to retain this customer?
For customers who are deemed save-worthy, its essential for the company to know
which save tactics are most likely to be successful. Tactics commonly used range from
providing special customer discounts to sending customers communications that
reinforce the value proposition of the given service.
Process for tagging customers

The basic approach to tagging customers is to utilize historical retention data to make
predictions about active customers regarding:
Whether they are at high risk of canceling their service

Whether they are profitable to retain
What retention tactics are likely to be most effective
The idea is to match up active customers with customers from historic retention data
who share similar attributes. Using the theory that birds of a feather flock together, the
52
approach is based on the assumption that active customers will have similar retention
outcomes as those of their comparable predecessors.[2]
From a technical perspective, the segmentation process is commonly performed using a
combination of predictive analytics and cluster analysis.
Illustration of retention-based segmentation process:
53
Price Discrimination
Where a monopoly exists, the price of a product is likely to be higher than in a
competitive market and the quantity sold less, generating monopoly profits for the seller.
These profits can be increased further if the market can be segmented with different
prices charged to different segments (referred to as price discrimination), charging
higher prices to those segments willing and able to pay more and charging less to those
whose demand is price elastic. The price discriminator might need to create rate fences
that will prevent members of a higher price segment from purchasing at the prices
available to members of a lower price segment. This behaviour is rational on the part of
the monopolist, but is often seen by competition authorities as an abuse of a monopoly
position, whether or not the monopoly itself is sanctioned. Examples of this exist in the
transport industry (a plane or train journey to a particular destination at a particular time
is a practical monopoly) where Business Class customers who can afford to pay may be
charged prices many times higher than Economy Class customers for essentially the
same service. Microsoft and the Video industry generally also price very similar
products at widely varying prices depending on the market they are selling to.
Cluster analysis
Cluster analysis or clustering is the assignment of a set of observations into subsets (called
clusters) so that observations in the same cluster are similar in some sense. Clustering is a
method of unsupervised learning, and a common technique for statistical data analysis used in
many fields, including machine learning, data mining, pattern recognition, image analysis and
bioinformatics.
Military strategy
Military strategy is a policy implemented by military organizations to pursue desired strategic
goals.[1]
Principles of military strategy

1. Objective (Direct every military operation towards a clearly defined, decisive, and
attainable objective)
2. Offensive (Seize, retain, and exploit the initiative)
3. Mass (Concentrate combat power at the decisive place and time)
4. Economy of Force (Allocate minimum essential combat power to secondary efforts)
5. Maneuver (Place the enemy in a disadvantageous position through the flexible
application of combat power)
6. Unity of Command (For every objective, ensure unity of effort under one responsible
commander)
7. Security (Never permit the enemy to acquire an unexpected advantage)
54
8. Surprise (Strike the enemy at a time, at a place, or in a manner for which he is

unprepared)
9. Simplicity (Prepare clear, uncomplicated plans and clear, concise orders to ensure
thorough understanding)
Overall equipment effectiveness (OEE)

(OEE) is a hierarchy of metrics which focus on how effectively a manufacturing
operation is utilized. The results are stated in a generic form which allows comparison
between manufacturing units in differing industries.
OEE measurement is also commonly used as a key performance indicator (KPI) in
conjunction with lean manufacturing efforts to provide an indicator of success.
OEE can be best illustrated by a brief discussion of the six metrics that comprise the
system. The hierarchy consists of two top-level measures and four underlying measures.
The two top-level metrics

Overall equipment effectiveness (OEE) and total effective equipment performance
(TEEP) are two closely related measurements that report the overall utilization of
facilities, time and material for manufacturing operations. These top view metrics
directly indicate the gap between actual and ideal performance.
Overall equipment effectiveness quantifies how well a manufacturing unit performs

relative to its designed capacity, during the periods when it is scheduled to run.
Total effective equipment performance (TEEP) measures OEE against calendar hours,
i.e.: 24 hours per day, 365 days per year.
The four underlying metrics

In addition to the above measures, there are four underlying metrics that provide
understanding as to why and where the OEE and TEEP gaps exist.
The measurements are described below:
Loading: The portion of the TEEP Metric that represents the percentage of total
calendar time that is actually scheduled for operation.
Availability: The portion of the OEE Metric represents the percentage of scheduled
time that the operation is available to operate. Often referred to as Uptime.
Performance: The portion of the OEE Metric represents the speed at which the Work
Center runs as a percentage of its designed speed.
55
Quality: The portion of the OEE Metric represents the Good Units produced as a
percentage of the Total Units Started. Commonly referred to as First Pass Yield FPY.
Calculations for OEE and TEEP

What follows is a detailed presentation of each of the six OEE / TEEP Metrics and
examples of how to perform calculations. The calculations are not particularly
complicated, but care must be taken as to standards that are used as the basis.
Additionally, these calculations are valid at the work center or part number level but
become more complicated if rolling up to aggregate levels.
Overall equipment effectiveness

OEE breaks the performance of a manufacturing unit into three separate but measurable
components: Availability, Performance, and Quality. Each component points to an
aspect of the process that can be targeted for improvement. OEE may be applied to any
individual Work Center, or rolled up to Department or Plant levels. This tool also allows
for drilling down for very specific analysis, such as a particular Part Number, Shift, or
any of several other parameters. It is unlikely that any manufacturing process can run at
100% OEE. Many manufacturers benchmark their industry to set a challenging target,
85% is not uncommon.
Calculation: OEE = Availability x Performance x Quality
Example:
A given Work Center experiences...
Availability of 86.7%
The Work Center Performance is 93.0%.
Work Center Quality is 95.0%.
OEE = 86.7% Availability x 93.0% Performance x 95.0% Quality = 76.6%
Total effective equipment performance

Where OEE measures effectiveness based on scheduled hours, TEEP measures
effectiveness against calendar hours, i.e.: 24 hours per day, 365 days per year.
TEEP, therefore, reports the 'bottom line' utilization of assets.
56
Calculation: TEEP = Loading x OEE

Example:
A given Work Center experiences...
OEE of 34.0%
Work Center Loading is 71.4%
TEEP = 71.4% Loading x 34.0% OEE = 24.3%
Stated another way, TEEP adds a fourth metric 'Loading', Therefore TEEP = Loading x
Availability x Performance x Quality
Loading
The Loading portion of the TEEP Metric represents the percentage of time that an
operation is scheduled to operate compared to the total Calendar Time that is available.
The Loading Metric is a pure measurement of Schedule Effectiveness and is designed to
exclude the effects how well that operation may perform.
Calculation: Loading = Scheduled Time / Calendar Time
Example:
A given Work Center is scheduled to run 5 Days per Week, 24 Hours per Day.
For a given week, the Total Calendar Time is 7 Days at 24 Hours.
Loading = (5 days x 24 hours) / (7 days x 24 hours) = 71.4%
Availability
The Availability portion of the OEE Metric represents the percentage of scheduled time
that the operation is available to operate. The Availability Metric is a pure measurement
of Uptime that is designed to exclude the effects of Quality, Performance, and Scheduled
Downtime Events.
Calculation: Availability = Available Time / Scheduled Time
Example:
57
A given Work Center is scheduled to run for an 8 hour (480 minute) shift.
The normal shift includes a scheduled 30 minute break when the Work Center is
expected to be down.
The Work Center experiences 60 minutes of unscheduled downtime.
Scheduled Time = 480 min - 30 min break = 450 Min
Available Time = 450 min Scheduled - 60 min Unscheduled Downtime = 390 Min
Availability = 390 Avail Min / 450 Scheduled Min = 90%
Performance
The Performance portion of the OEE Metric represents the speed at which the Work
Center runs as a percentage of its designed speed. The Performance Metric is a pure
measurement of speed that is designed to exclude the effects of Quality and Availability.
Calculation: Performance = (Parts Produced * Ideal Cycle Time) / Available Time
Example:
A given Work Center is scheduled to run for an 8 hour (480 minute) shift with a 30
minute scheduled break.
Available Time = 450 Min Sched - 60 Min Unsched Downtime = 390 Minutes
The Standard Rate for the part being produced is 40 Units/Hour or 1.5 Minutes/Unit
The Work Center produces 242 Total Units during the shift. Note: The basis is Total
Units, not Good Units. The Performance metric does not penalize for Quality.
Time to Produce Parts = 242 Units * 1.5 Minutes/Unit = 363 Minutes
Performance = 363 Minutes / 390 Minutes = 93.0%
Quality
The Quality portion of the OEE Metric represents the Good Units produced as a
percentage of the Total Units Started. The Quality Metric is a pure measurement of
Process Yield that is designed to exclude the effects of Availability and Performance.
58
Calculation: Quality = Good Units / Units Started

Example:
A given Work Center produces 230 Good Units during a shift.
242 Units were started in order to produce the 230 Good Units.
Quality = 230 Good Units / 242 Units Started = 95.0%
Further reading
Productivity Press Development Team (1999), "OEE for Operators: Overall Equipment
Effectiveness", Productivity Press, ISBN 978-1-56327-221-9
Hansen, Robert C (2005), Overall Equipment Effectiveness (OEE), Industrial Press,
ISBN (978-0-8311-)3237-8
OEE as a heuristic
OEE is useful as a heuristic, but can break down in several circumstances. For example,
it may be far more costly to run a facility at certain times. Performance and quality may
not be independent of each other or of availability and loading. Experience may develop
over time.
OEE has properties of a geometric mean. As such it punishes variability among its
subcomponents. For example 20 % * 80 % = 16 %, whereas 50 % * 50 % = 25 %. When
there are asymmetric costs associated with one or more of the components, then the
model may become less appropriate.
Consider a system where the cost of error is exceptionally high. In such a condition,
higher quality may be far more important in a proper evaluation of effectiveness than
performance or availability.
OEE also to some extent assumes a closed system and a potentially static one. If one can
bring in additional resources (or lease out unused resources to other projects or business
units) than it may be more appropriate for example to use an expected net present value
analysis.
Variability in flow also can introduce important costs and risks that may merit further
modeling. Sensitivity analysis and measures of change may be helpful.
Strategy visualization
59
Strategies in game theory

In game theory, a strategy refers to one of the options that a player can choose. That is,
every player in a non-cooperative game has a set of possible strategies, and must choose
one of the choices.
Strategies in game theory may be random (mixed) or deterministic (pure). That is, in
some games, players choose mixed strategies.
Noted texts on strategy
The nature of historic texts differs greatly from area to area, and given the nature of
strategy itself, there are some potential parallels between various forms of strategy
noting, for example, the popularity of The Art of War as a business book. Each domain
generally has its own foundational texts, as well as more recent contributions to new
applications of strategy. Some of these are:
Political strategy
Military strategy:
Economic strategy
Business strategy
General strategy
Six Forces Model

The Six Forces Model is a market opportunities analysis model, as an extension to
Porter's Five Forces Model and is more robust than a standard SWOT analysis.
The following forces are identified:
Competition
New entrants
End users/Buyers
Suppliers
Substitutes
Complementary products/ The government/ The public
Criticisms of the 5 Force model

Porter's framework has been challenged by other academics and strategists such as
Stewart Neill, also the likes of Kevin P. Coyne and Somu Subramaniam have stated that
three dubious assumptions underlie the five forces:
60
That buyers, competitors, and suppliers are unrelated and do not interact and collude
That the source of value is structural advantage (creat
(creating
ing barriers to entry)
That uncertainty is low, allowing participants in a market to plan for and respond to
competitive behavior.
An important extension to Porter was found in the work of Brandenburg and Nalebuff in
the mid-1990s. Using game theory
theory, they added the concept of complementors (also
called "the 6th force"), helping to explain the reasoning behind strategic alliances.
alliances The
idea that complementors are the sixth force has often been credited to Andrew Grove,
former CEO of Intel Corporation
Corporation.. According to most references, the sixth force is
government or the public. Martyn Richard Jones, whilst consulting at Groupe Bull,
developed an augmented 5 forces model in Scotland in 1993, it is based on Porter's
model, and includes Government (national and regional) as well as Pressure Groups as
the notional 6th force. This model was the result of work carried out as part of Group
Bulle's Knowledge Asset Management Organization initiative.
It is also perhaps not feasible to evaluate the attractiveness of an industry independent of
the resources a firm brings to that industry. It is thus argued that this theory be coupled
with the Resource-Based
Based View (RBV) in order for the firm to develop a much more
sound strategy.
Porter five forces analysis
A graphical representation
ion of Porter's Five
Forces
Porter's five forces is a framework for the industry analysis and business strategy
development developed by Michael E. Porter of Harvard Business School in 1979. It
uses concepts developing, Industrial Organization (IO) economics to derive five forces
that determine the competitive intensity and therefore attractiveness of a market.
market
61
Three of Porter's five forces refer to competition from external sources. The remainder is
internal threats. It is useful to use Porter's five forces in conjunction with SWOT analysis
(Strengths, Weaknesses, Opportunities, and Threats).
Porter referred to these forces as the micro environment, to contrast it with the more
general term macro environment. They consist of those forces close to a company that
affect its ability to serve its customers and make a profit. A change in any of the forces
normally, requires a business unit to re-assess the marketplace given the overall change
in industry information. The overall industry attractiveness does not imply that every
firm in the industry will return the same profitability. Firms are able to apply their core
competencies, business model or network to achieve a profit above the industry average.
A clear example of this is the airline industry. As an industry, profitability is low and yet
individual companies, by applying unique business models, have been able to make a
return in excess of the industry average.
Porter's five forces include - three forces from 'horizontal' competition: threat of
substitute products, the threat of established rivals, and the threat of new entrants; and
two forces from 'vertical' competition: the bargaining power of suppliers and the
bargaining power of customers.
This five forces analysis, is just one part of the complete Porter strategic models. The
other elements are the value chain and the generic strategies.[citation needed]
The threat of the entry of new competitors

Profitable markets that yield high returns will draw firms. This results in many new
entrants, which eventually will decrease profitability. Unless the entry of new firms can
be blocked by incumbents, the profit rate will fall towards a competitive level (perfect
competition).
The existence of barriers to entry (patents[1], rights, etc.)The most attractive segment is
one in which entry barriers are high and exit barriers are low. Few new firms can enter
and non-performing firms can exit easily.
Economies of product differences
Brand equity
Switching costs or sunk costs
Capital requirements
Access to distribution
Customer loyalty to established brands
Absolute cost advantages
Learning curve advantages
Expected retaliation by incumbents
Government policies
62
Industry profitability; the more profitable the industry the more attractive it will be to
new competitors
The intensity of competitive rivalry

For most industries, the intensity of competitive rivalry is the major determinant of the
competitiveness of the industry.
Sustainable competitive advantage through innovation.

Competition between online and offline companies; click-and-mortar -v- brick-andmortar
Level of advertising expense.
Powerful competitive strategy
The visibility of proprietary items on the Web.[1]
[2] used by a company which can intensify competitive pressures on their rivals. How
will competition react to a certain behavior by another firm? Competitive rivalry is
likely to be based on dimensions such as price, quality, and innovation. Technological
advances protect companies from competition. This applies to products and services.
Companies that are successful with introducing new technology, are able to charge
higher prices and achieve higher profits, until competitors imitate them. Examples of
recent technology advantage in have been mp3 players and mobile telephones. Vertical
integration is a strategy to reduce a business' own cost and thereby intensify pressure on
its rival.
The bargaining power of customers (buyers)

The bargaining power of customers is also described as the market of outputs: the ability
of customers to put the firm under pressure, which also affects the customer's sensitivity
to price changes.
Buyer concentration to firm concentration ratio

Degree of dependency upon existing channels of distribution
Bargaining leverage, particularly in industries with high fixed costs
Buyer volume
Buyer switching costs relative to firm switching costs
Buyer information availability
Ability to backward integrate
Availability of existing substitute products
Buyer price sensitivity
Differential advantage (uniqueness) of industry products
RFM Analysis
63
The bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs. Suppliers of
raw materials, components, labor, and services (such as expertise) to the firm can be a
source of power over the firm, when there are few substitutes. Suppliers may refuse to
work with the firm, or, e.g., charge excessively high prices for unique resources.
Supplier switching costs relative to firm switching costs

Degree of differentiation of inputs
Impact of inputs on cost or differentiation
Presence of substitute inputs
Supplier concentration to firm concentration ratio
Employee solidarity (e.g. labor unions)
Supplier competition - ability to forward vertically integrate and cut out the buyer
Ex. If you are making cookies and there is only one person who sells flour, you have no
alternative but to buy it from him.
The threat of substitute products or services

The existence of products outside of the realm of the common product boundaries
increases the propensity of customers to switch to alternatives:
Buyer propensity to substitute

Relative price performance of substitute
Buyer switching costs
Perceived level of product differentiation
Number of substitute products available in the market
Ease of substitution. Information-based products are more prone to substitution, as
online product can easily replace material product.
Substandard product
Quality depreciation
Usage
Strategy consultants occasionally use Porter's five forces framework when making a
qualitative evaluation of a firm's strategic position. However, for most consultants, the
framework is only a starting point or "checklist" they might use[citation needed]. Like all
general frameworks, an analysis that uses it to the exclusion of specifics about a
particular situation is considered na?ve.
According to Porter, the five forces model should be used at the line-of-business
industry level; it is not designed to be used at the industry group or industry sector level.
64
An industry is defined at a lower, more basic level: a market in which similar or closely
related products and/or services are sold to buyers. (See industry information.) A firm
that competes in a single industry should develop, at a minimum, one five forces
analysis for its industry. Porter makes clear that for diversified companies, the first
fundamental issue in corporate strategy is the selection of industries (lines of business)
in which the company should compete; and each line of business should develop its
own, industry-specific, five forces analysis. The average Global 1,000 company
competes in approximately 52 industries (lines of business).
Criticisms
Porter's framework has been challenged by other academics and strategists such as
Stewart Neill. Similarly, the likes of Kevin P. Coyne [3] and Somu Subramaniam have
stated that three dubious assumptions underlie the five forces:
That buyers, competitors, and suppliers are unrelated and do not interact and collude.
That the source of value is structural advantage (creating barriers to entry).
That uncertainty is low, allowing participants in a market to plan for and respond to
competitive behavior.
An important extension to Porter was found in the work of Adam Brandenburger and
Barry Nalebuff in the mid-1990s. Using game theory, they added the concept of
complementors (also called "the 6th force"), helping to explain the reasoning behind
strategic alliances. The idea that complementors are the sixth force has often been
credited to Andrew Grove, former CEO of Intel Corporation. According to most
references, the sixth force is government or the public. Martyn Richard Jones, whilst
consulting at Groupe Bull, developed an augmented 5 forces model in Scotland in 1993.
It is based on Porter's model and includes Government (national and regional) as well as
Pressure Groups as the notional 6th force. This model was the result of work carried out
as part of Groupe Bull's Knowledge Asset Management Organisation initiative.
Porter indirectly rebutted the assertions of other forces, by referring to innovation,
government, and complementary products and services as "factors" that affect the five
forces.[2]
It is also perhaps not feasible to evaluate the attractiveness of an industry independent of
the resources a firm brings to that industry. It is thus argued that this theory be coupled
with the Resource-Based View (RBV) in order for the firm to develop a much more
sound strategy.
65
Delta Model
Delta Model is a customer-based approach to Strategic management.[1][2][3] Compared to
a philosophical focus on the characteristics of a product (product economics), the model
is based on customer economics. The customer-centric model was developed by Dean
Wilde and Arnoldo Hax.
Resource-based view
The resource-based view (RBV) is a business management tool used to determine the
strategic resources available to a company. The fundamental principle of the RBV is that
the basis for a competitive advantage of a firm lies primarily in the application of the
bundle of valuable resources at the firm's disposal The VRIO model also constitutes a
part of RBV.
Concept
The key points of the theory are:
1. Identify the firms potential key resources.
2. Evaluate whether these resources fulfill the following (VRIN) criteria:
o Valuable - A resource must enable a firm to employ a value-creating strategy,
by either outperforming its competitors or reduce its own weaknesses
o Rare - To be of value, a resource must be by definition rare. In a perfectly
competitive strategic factor market for a resource, the price of the resource will
be a reflection of the expected discounted future above-average returns
o In-imitable - If a valuable resource is controlled by only one firm it could be a
source of a competitive advantage.
o Non-substitutable - Even if a resource is rare, potentially value-creating and
imperfectly imitable, an equally important aspect is lack of substitutability
3. Care for and protect resources that possess these evaluations because doing so can
improve organizational performance
What constitutes "competitive advantage"?

A competitive advantage can be attained if the current strategy is value-creating, and not
currently being implemented by present or possible future competitors. Although a
competitive advantage has the ability to become sustained, this is not necessarily the
case. A competing firm can enter the market with a resource that has the ability to
invalidate the prior firm's competitive advantage, which results in reduced (read: normal)
66
rents. Sustainability in the context of a sustainable competitive advantage is independent

with regards to the time-frame.
Core competency
A core competency is a specific factor that a business sees as being central to the way it,
or its employees, works. It fulfills three key criteria:
1. It provides consumer benefits
2. It is not easy for competitors to imitate
3. It can be leveraged widely too many products and markets.
A core competency can take various forms, including technical/subject matter knowhow, a reliable process and/or close relationships with customers and suppliers.[1] It may
also include product development or culture, such as employee dedication.
Core competencies are particular strengths relative to other organizations in the industry
which provide the fundamental basis for the provision of added value. Core
competencies are the collective learning in organizations, and involve how to coordinate
diverse production skills and integrate multiple streams of technologies. It is
communication, an involvement and a deep commitment to working across
organizational boundaries. Few companies are likely to build world leadership in more
than five or six fundamental competencies.
The value chain is a systematic approach to examining the development of competitive
advantage. It was created by M. E. Porter in his book, Competitive Advantage (1980).
The chain consists of a series of activities that create and build value. They culminate in
the total value delivered by an organization. The 'margin' depicted in the diagram is the
same as added value. The organization is split into 'primary activities' and 'support
activities'.
Value chain
67
Fig: Popular Visualization
The value chain, also known as value chain analysis, is a concept from business
management that was first described and popularized by Michael Porter in his 1985 bestseller, Competitive Advantage: Creating and Sustaining Superior Performance.[1]
Concept
A value chain is a chain of activities for a firm operating in a specific industry. The
business unit is the appropriate level for construction of a value chain, not the divisional
level or corporate level. Typically, the described value chain and the documentation of
processes, assessment and auditing of adherence to the process routines are at the core of
the quality certification of the business, e.g. ISO 9001.
Activities
The value chain categorizes the generic value-adding activities of an organization. The
"primary activities" include: inbound logistics, operations (production), outbound
logistics, marketing and sales (demand), and services (maintenance). The "support
activities" include: administrative infrastructure management, human resource
management, technology (R&D), and procurement. The costs and value drivers are
identified for each value activity.
68
Significance
The value chain framework quickly made its way to the forefront of management
thought as a powerful analysis tool for strategic planning. The simpler concept of value
streams, a cross-functional process which was developed over the next decade,[2] had
some success in the early 1990s[3].
The value-chain concept has been extended beyond individual firms. It can apply to
whole supply chains and distribution networks. The delivery of a mix of products and
services to the end customer will mobilize different economic factors, each managing its
own value chain. Value chain analysis has also been successfully used in large
Petrochemical Plant Maintenance Organizations to show how Work Selection, Work
Planning, Work Scheduling and finally Work Execution can (when considered as
elements of chains) help drive. Value chain analysis has also been employed in the
development sector as a means of identifying poverty reduction strategies by upgrading
along the value chain [4].
SCOR
The Supply-Chain Council, a global trade consortium in operation with over 700
member companies, governmental, academic, and consulting groups participating in the
last 10 years, manages the Supply-Chain Operations Reference (SCOR), the de facto
universal reference model for Supply Chain including Planning, Procurement,
Manufacturing, Order Management, Logistics, Returns, and Retail; Product and Service
Design including Design Planning, Research, Prototyping, Integration, Launch and
Revision, and Sales including CRM, Service Support, Sales, and Contract Management
which are congruent to the Porter framework. The SCOR framework has been adopted
by hundreds of companies as well as national entities as a standard for business
excellence, and the US DOD has adopted the newly-launched Design-Chain
Operations Reference (DCOR) framework for product design as a standard to use for
managing their development processes. In addition to process elements, these reference
frameworks also maintain a vast database of standard process metrics aligned to the
Porter model, as well as a large and constantly researched database of prescriptive
universal best practices for process execution.
Value Reference Model

A Value Reference Model (VRM) developed by the global not-for-profit Value Chain
Group offers an open source semantic dictionary for value chain management
encompassing one unified reference framework representing the process domains of
product development, customer relations and supply networks.
69
The integrated process framework guides the modeling, design, and measurement of
business performance by uniquely encompassing the plan, govern and execute
requirements for the design, product, and customer aspects of business.
The Value Chain Group claims VRM to be next generation Business Process
Management that enables value reference modeling of all business processes and
provides product excellence, operations excellence, and customer excellence.
Six business functions of the Value Chain:
Research and Development

Design of Products, Services, or Processes
Production
Marketing & Sales
Distribution
Customer Service
Context analysis
Context analysis is a method to analyze the environment in which a business operates.
Environmental scanning mainly focuses on the macro environment of a business. But
context analysis considers the entire environment of a business, its internal and external
environment. This is an important aspect of business planning. One kind of context
analysis, called SWOT analysis, allows the business to gain an insight into their
strengths and weaknesses and also the opportunities and threats posed by the market
within which they operate. The main goal of a context analysis, SWOT or otherwise, is
to analyze the environment in order to develop a strategic plan of action for the business.
Method
Figure 1 depicts the sequence of activities involved in conducting context analysis and it
also depicts the data output of each activity.
The left side of the figure shows the process (activities) of the method; mainly consisting
of three analyses on different organizational levels: trend analysis (macro environment),
competitor analysis (meso environment) and organization analysis (micro environment).
These activities are described in the table below and are further elaborated in the next
section.
Activities
Activity
Sub Activity
Description
70
This refers to having a concrete description to which

market you are going to analyze.
Define market
Political
analysis
trend Determine those political factors/changes that can have
impact on the organization.
Economical trend
analysis
Trend Analysis
Social
analysis
Identify economical factors/trends that can have impact on

the organization.
trend Identify social factors/trends that can have impact on the
Technological
trend analysis
organization.
Identify technological factors/trends that have impact on
the organization.
Demographic trend Identify those demographic factors/trends that have an

analysis
impact on the organization
Determine for each of the four competition levels how the

Determine
competition levels organization competes opposed to its competition.
For each competitive force determine how the level of
Analyze
competitive forces competition is within the industry.
Competitor
Analysis
Analyze
competitor
behavior
Analyze how the competition's offense and defense tactics

are.
Determine
competitor
strategies
Determine out of the two strategies ( low-cost and

differentiation) how to compete with the competition.
Based on the trend analysis and the competition analysis
determine the opportunities and threats the organization
faces with regard to the market.
Define
opportunities and
threats
Organization
Analysis
Conduct internal
analysis
Analyze the internal environment of the organization.

Identify the organizations strengths and weaknesses
71
Conduct
competence
analysis
Analyze the organization and identify its competences.
Create SWOT-I
Matrix
Create a matrix which depicts the strengths, weaknesses,

opportunities and threats identified previously.
Develop strategic
plan
Based on the SWOT-I matrix compare the strengths,

weaknesses, opportunities and threats identified with the
identified competences and determine a strategic plan.
The right side of the figure shows the data that result from each activity. As previously
mentioned, the ultimate goal of this method is to devise a strategic plan. This is thus the
main data output of the method. The strategic plan is composed of three output data
resulting from the three main analysis activities: Trend analysis, Competitor analysis and
Organization analysis data. These are further subdivided into individual data outputs
corresponding with the activity steps of the method. The following table provides a
description of all the resulting data from the method.
Data
Data
Definition (source)
TREND ANALYSIS
Analysis of the trends that can be of influence to an organization. This

analysis aids organizations in making timely decisions about their
activities and organization. Trend analysis consists of political trend
analysis, economical trend analysis, social trend analysis, technological
trend analysis and demographic trend analysis.
POLITICAL TREND
Political trends are short and long term changes in governmental

policies.
ECONOMICAL TREND
Economical trends to changes to for example the rise or fall of

prosperity and spending of consumers, globalization etc.
TECHNOLOGICAL
TREND
Technological trends are changes due to ever changing technological

developments. The main issue here is for the organization to determine
how they can take advantage hereof to make money.
SOCIAL TREND
Social trends are changes in what is or is not important to people within
72
the society.
DEMOGRAPHICAL
TREND
Demographic trends are changes in the population. For example, its

size, age groups, religion, salaries etc. An organization needs to pay
attention to these changes because this can effect the demand.
COMPETITOR
ANALYSIS
It is important for an organization to know who the competition is, how

they operate and how powerful they are in order to survive in a
particular market.
COMPETITION
LEVEL
Companies compete on several levels, like on the basis of the needs of

consumers, general competition, product competition and brand
competition. The organization should concentrate on all four levels to
be able to understand the demand.
CONSUMER NEEDS
This level is the level of competition that refers to the needs and desires
of consumers. A company should ask: What are the desires of the
consumers?
GENERAL
COMPETITION
This level of competition refers to the kind of demand consumers have.

(for example: do consumers prefer shaving with electric razor or a
razor blade)
PRODUCT
This level refers to the type of demand. Thus what types of products do
consumers prefer?
BRAND
This level refers to brand competition. Which brands are preferable to a

consumer?
COMPETITIVE
FORCE
Forces that determine the organizations level of competition within a

particular market. There are six forces that have to be taken into
consideration, power of the competition, threat of new entrants,
bargaining power of buyers and suppliers, threat of substitute products
and the importance of complementary products.
COMPETITION
POWER
Competition power refers to identifying who your direct competitors

are.
NEW ENTRANTS
Regarding this competitive force, an organization should ask them:

how easy is it for a newcomer to enter the market and are there already
73
newcomers who have entered?

The bargaining power of buyers refers to how much influence the
BARGAINING POWER
company has on the buyers. Can they persuade the buyers to do
OF BUYERS
business with them?
BARGAINING POWER The bargaining power of suppliers is how much influence does a
OF SUPPLIERS
supplier have over a company.
COMPLEMENTARY
PRODUCTS
Complementary products are products or services that can diminish the

demand of a companies products and services.
SUBSTITUTE
PRODUCTS
A company should answer the following: Which products can

potentially be used instead of ours?
COMPETITOR
BEHAVIOR
Refer to the defensive and offensive actions of the competition.
COMPETITOR
STRATEGY
These strategies refer to how an organization competes with other

organizations. And these are only two, low price strategy and product
differentiation.
OPPORTUNITIES AND These refer to the opportunities and strengths of the organization with
THREATS
regard to the market.
ORGANIZATION
ANALYSIS
This analysis refers to which knowledge and skills are present within
an organization.
STRENGTH
Factors within an organization that results in a market advantage.
WEAKNESS
Aspects that are needed in the market but which the organization is
unable to comply with.
COMPETENCE
The combination between knowledge, skills and technology that

organizations have or still have to achieve.
SWOT-i MATRIX
A description if the strengths, weaknesses and opportunities and threats

of an organization. The matrix can be used to determine how to use
organizations strengths to exploit the opportunities in the market and to
address its weaknesses and defend itself against threats in the market.
74
STRATEGIC PLAN
This is a strategic plan of action for the organization as a result of

conducting context analysis. The trend and competitor analysis gives
insight to the opportunities and threats in the market and the internal
analysis gives insight to the competences of the organization. And by
combining these competences and opportunities and strengths a
strategic plan can be developed.
In the following sections a complete elaboration is given of the activities of the method
presented in this section.
Define market or subject

The first step of the method is to define a particular market (or subject) one wishes to
analyze and focus all analysis techniques on what was defined. A subject, for example,
can be a newly proposed product idea.
Trend Analysis
The next step of the method is to conduct a trend analysis. Trend analysis is an analysis
of macro environmental factors in the external environment of a business, also called
PEST analysis. It consists of analyzing political, economical, social, technological and
demographic trends. This can be done by first determining which factors, on each level,
are relevant for the chosen subject and to score each item as to specify its importance.
This allows the business to identify those factors that can influence them. They cant
control these factors but they can try to cope with them by adapting themselves. The
trends (factors) that are addressed in PEST analysis are Political, Economical, Social and
Technological; but for context analysis Demographic trends are also of importance.
Demographic trends are those factors that have to do with the population, like for
example average age, religion, education etc. Demographic information is of importance
if, for example during market research, a business wants to determine a particular market
segment to target. The other trends are described in environmental scanning and PEST
analysis. Trend analysis only covers part of the external environment. Another important
aspect of the external environment that a business should consider is its competition.
This is the next step of the method, competitor analysis.
Competitor Analysis
As one can imagine, it is important for a business to know who its competition is, how
they do their business and how powerful they are so that they can be on the defense and
offense. In Competitor analysis a couple of techniques are introduced how to conduct
75
such an analysis. Here I will introduce another technique which involves conducting
four sub analyses, namely: determination of competition levels, competitive forces,
competitor behavior and competitor strategy.
Competition levels
Businesses compete on several levels and it is important for them to analyze these levels
so that they can understand the demand. Competition is identified on four levels:
Consumer needs: level of competition that refers to the needs and desires of consumers.
A business should ask: What are the desires of the consumers?
General competition: The kind of consumer demand. For example: do consumers
prefer shaving with electric razor or a razor blade?
Brand: This level refers to brand competition. Which brands are preferable to a
consumer?
Product: This level refers to the type of demand. Thus what types of products do
consumers prefer?
Another important aspect of a competition analysis is to increase the consumer insight.

For example: [Ducati] has, by interviewing a lot of their customers, concluded that their
main competitor is not another bicycle, but sport-cars like [Porsche] or [GM]. This will
of course influence the competition level within this business.
Competitive forces
These are forces that determine the level of competition within a particular market.
There are six forces that have to be taken into consideration, power of the competition,
threat of new entrants, bargaining power of buyers and suppliers, threat of substitute
products and the importance of complementary products. This analysis is described in
Porter 5 forces analysis.
Competitor behavior
Competitor behaviors are the defensive and offensive actions of the competition.
Competitor strategy
These strategies refer to how an organization competes with other organizations. And
these are: low price strategy and product differentiation strategy.
76
Opportunities and Threats

The next step, after the trend analysis and competitor analysis are conducted, is to
determine threats and opportunities posed by the market. The trends analysis revealed a
set of trends that can influence the business in either a positive or a negative manner.
These can thus be classified as either opportunities or threats. Likewise, the competitor
analysis revealed positive and negative competition issues that can be classified as
opportunities or threats.
Organization Analysis
The last phase of the method is an analysis of the internal environment of the
organization, thus the organization itself. The aim is to determine which skills,
knowledge and technological fortes the business possesses. This entails conducting an
internal analysis and a competence analysis.
Internal analysis
The internal analysis, also called SWOT analysis, involves identifying the organizations
strengths and weaknesses. The strengths refer to factors that can result in a market
advantage and weaknesses to factors that give a disadvantage because the business is
unable to comply with the market needs.
Competence analysis
Competences are the combination of a business knowledge, skills and technology that
can give them the edge versus the competition. Conducting such an analysis involves
identifying market related competences, integrity related competences and functional
related competences.
SWOT-i matrix
The previous sections described the major steps involved in context analysis. All these
steps resulted in data that can be used for developing a strategy. These are summarized
in a SWOT-i matrix. The trend and competitor analysis revealed the opportunities and
threats posed by the market. The organization analysis revealed the competences of the
organization and also its strengths and weaknesses. These strengths, weaknesses,
opportunities and threats summarize the entire context analysis. A SWOT-i matrix,
depicted in the table below, is used to depict these and to help visualize the strategies
that are to be devised. SWOT- i stand for Strengths, Weaknesses, Opportunities, Threats
and Issues. The Issues refer to strategic issues that will be used to devise a strategic plan.
77
Opportunities (O1, O2, ..., On) Threats (T1, T2, ..., Tn)
Strengths (S1, S2, ..., Sn)
S1O1...SnO1
...
S1On...SnOn
Weaknesses (W1, W2, ..., Wn) W1O1...WnO1

...
W1On...WnOn
S1T1...SnT1
...
S1Tn...SnTn
W1T1...WnT1
...
W1Tn...WnTn
This matrix combines the strengths with the opportunities and threats, and the
weaknesses with the opportunities and threats that were identified during the analysis.
Thus the matrix reveals four clusters:
Cluster strengths and opportunities: use strengths to take advantage of opportunities.

Cluster strengths and threats: use strengths to overcome the threats
Cluster weaknesses and opportunities: certain weaknesses hamper the organization
from taking advantage of opportunities therefore they have to look for a way to turn
those weaknesses around.
Cluster weaknesses and threats: there is no way that the organization can overcome
the threats without having to make major changes.
Strategic Plan
The ultimate goal of context analysis is to develop a strategic plan. The previous
sections described all the steps that form the stepping stones to developing a strategic
plan of action for the organization .The trend and competitor analysis gives insight to the
opportunities and threats in the market and the internal analysis gives insight to the
competences of the organization. And these were combined in the SWOT-i matrix. The
SWOT-i matrix helps identify issues that need to be dealt with. These issues need to be
resolved by formulating an objective and a plan to reach that objective, a strategy.
Example
Joe Arden is in the process of writing a business plan for his business idea, Arden
Systems. Arden Systems will be a software business that focuses on the development of
software for small businesses. Joe realizes that this is a tough market because there are
many software companies that develop business software. Therefore, he conducts
context analysis to gain insight into the environment of the business in order to develop
a strategic plan of action to achieve competitive advantage within the market.
78
Define market
First step is to define a market for analysis. Joe decides that he wants to focus on small
businesses consisting of at most 20 employees.
Trend Analysis
Next step is to conduct trend analysis. The macro environmental factors that Joe should
take into consideration are as follows:
Political trend: Intellectual property rights

Economical trend: Economic growth
Social trend: Reduce operational costs; Ease for conducting business administration
Technological trend: Software suites; Web applications
Demographic trend: Increase in the graduates of IT related studies
Competitor Analysis
Following trend analysis is competitor analysis. Joe analyzes the competition on four
levels to gain insight into how they operate and where advantages lie.
Competition level:
o Consumer need: Arden Systems will be competing on the fact that consumers
want efficient and effective conducting of a business
o Brand: There are software businesses that have been making business software
for a while and thus have become very popular in the market. Competing based
on brand will be difficult.
o Product: They will be packaged software like the major competition.
Competitive forces: Forces that can affect Arden Systems are in particular:
o The bargaining power of buyers: the extent to which they can switch from one
product to the other.
o Threat of new entrants: it is very easy for someone to develop a new software
product that can be better than Arden's.
o Power of competition: the market leaders have most of the cash and customers;
they have to power to mold the market.
Competitor behavior: The focus of the competition is to take over the position of the
market leader.
Competitor strategy: Joe intends to compete based on product differentiation.
Opportunities and Threats

Now that Joe has analyzed the competition and the trends in the market he can define
opportunities and threats.
79
Opportunities:
o Because the competitors focus on taking over the leadership position, Arden can
focus on those segments of the market that the market leader ignores. This
allows them to take over where the market leader shows weakness.
o The fact that there are new IT graduates, Arden can employ or partner with
someone that may have a brilliant idea.
Threats:
o IT graduates with fresh idea's can start their own software businesses and form a
major competition for Arden Systems.
Organization Analysis
After Joe has identified the opportunities and threats of the market he can try and figure
out what Arden System's strengths and weaknesses are by doing an organization
analysis.
Internal Analysis:
o Strength: Product differentiation
o Weakness: Lacks innovative people within the organization
Competence analysis:
o Functional related competence: Arden Systems provides system functionalities
that fit small businesses.
o Market related competence: Arden Systems has the opportunity to focus on a
part of the market which is ignored.
SWOT-i matrix
After the previous analyses, Joe can create a SWOT-i matrix to perform SWOT analysis.
Opportunities
Strengths
Threats
Product differentiation, market leader ignores

market segment
Weaknesses
Lack of innovation, increase in IT

graduates
Strategic Plan
After creating the SWOT-i matrix, Joe is now able to devise a strategic plan.
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Focus all software development efforts to that part of the market which is ignored by
market leaders, small businesses.
Employ recent innovative It graduates to stimulate the innovation within Arden Systems.
SWOT analysis
SWOT analysis is a strategic planning method used to evaluate the Strengths,
Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It
involves specifying the objective of the business venture or project and identifying the
internal and external factors that are favorable and unfavorable to achieve that objective.
The technique is credited to Albert Humphrey, who led a convention at Stanford
University in the 1960s and 1970s using data from Fortune 500 companies.
A SWOT analysis must first start with defining a desired end state or objective. A
SWOT analysis may be incorporated into the strategic planning model. Strategic
Planning, including SWOT and SCAN analysis, has been the subject of much research.
Strengths: attributes of the person or company that are helpful to achieving the
objective(s).
Weaknesses: attributes of the person or company that are harmful to achieving
the objective(s).
Opportunities: external conditions that are helpful to achieving the objective(s).
Threats: external conditions which could do damage to the objective(s).
Identification of SWOTs is essential because subsequent steps in the process of planning

for achievement of the selected objective may be derived from the SWOTs.
First, the decision makers have to determine whether the objective is attainable, given
the SWOTs. If the objective is NOT attainable a different objective must be selected and
the process repeated.
The SWOT analysis is often used in academia to highlight and identify strengths,
weaknesses, opportunities and threats[citation needed]. It is particularly helpful in identifying
areas for development[citation needed].
Internal and external factors

The aim of any SWOT analysis is to identify the key internal and external factors that
are important to achieving the objective. These come from within the company's unique
value chain. SWOT analysis groups key pieces of information into two main categories:
Internal factors The strengths and weaknesses internal to the organization.
81
External factors The opportunities and threats presented by the external

environment to the organization. - Use a PEST or PESTLE analysis to help
identify factors
The internal factors may be viewed as strengths or weaknesses depending upon their
impact on the organization's objectives. What may represent strengths with respect to
one objective may be weaknesses for another objective. The factors may include all of
the 4P's; as well as personnel, finance, manufacturing capabilities, and so on. The
external factors may include macroeconomic matters, technological change, legislation,
and socio-cultural changes, as well as changes in the marketplace or competitive
position. The results are often presented in the form of a matrix.
SWOT analysis is just one method of categorization and has its own weaknesses. For
example, it may tend to persuade companies to compile lists rather than think about what
is actually important in achieving objectives. It also presents the resulting lists
uncritically and without clear prioritization so that, for example, weak opportunities may
appear to balance strong threats.
It is prudent not to eliminate too quickly any candidate SWOT entry. The importance of
individual SWOTs will be revealed by the value of the strategies it generates. A SWOT
item that produces valuable strategies is important. A SWOT item that generates no
strategies is not important.
Use of SWOT Analysis

The usefulness of SWOT analysis is not limited to profit-seeking organizations. SWOT
analysis may be used in any decision-making situation when a desired end-state
(objective) has been defined. Examples include: non-profit organizations, governmental
units, and individuals. SWOT analysis may also be used in pre-crisis planning and
preventive crisis management. SWOT analysis may also be used in creating a
recommendation during a viability study.
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SWOT - landscape analysis
The SWOT-landscape systematically deploys the relationships between overall objective and underlying SWOTfactors and provides an interactive, query-able 3D landscape.
The SWOT-landscape grabs different managerial situations by visualizing and

foreseeing the dynamic performance of comparable objects according to findings by
Brendan Kitts, Leif Edvinsson and Tord Beding (2000).[6]
Changes in relative performance are continually identified. Projects (or other units of
measurements) that could be potential risk or opportunity objects are highlighted.
SWOT-landscape also indicates which underlying strength/weakness factors that have
had or likely will have highest influence in the context of value in use (for ex. capital
value fluctuations).
83
Corporate planning
As part of the development of strategies and plans to enable the organization to achieve
its objectives, then that organization will use a systematic/rigorous process known as
corporate planning. SWOT alongside PEST/PESTLE can be used as a basis for the
analysis of business and environmental factors.[7]
Set objectives defining what the organization is going to do

Environmental scanning
o Internal appraisals of the organization's SWOT, this needs to include an
assessment of the present situation as well as a portfolio of
products/services and an analysis of the product/service life cycle
Analysis of existing strategies, this should determine relevance from the results
of an internal/external appraisal. This may include gap analysis which will look
at environmental factors
Strategic Issues defined key factors in the development of a corporate plan
which needs to be addressed by the organization
Develop new/revised strategies revised analysis of strategic issues may mean
the objectives need to change
Establish critical success factors the achievement of objectives and strategy
implementation
Preparation of operational, resource, projects plans for strategy implementation
Monitoring results mapping against plans, taking corrective action which may
mean amending objectives/strategies.[8]
Using SWOT to analyze the market position of a small management consultancy with
specialism in HRM.[8]
Strengths
Weaknesses
Reputation in
marketplace
Shortage of consultants Well established

at operating level
position with a well
rather than partner
defined market niche
level
Large consultancies
operating at a minor
level
Expertise at partner
level in HRM
consultancy
Unable to deal with

Identified market for
multi-disciplinary
consultancy in areas
assignments because of other than HRM
size or lack of ability
Other small
consultancies looking
to invade the
marketplace
Opportunities
Threats
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PEST analysis
PEST analysis stands for "Political, Economic, Social, and Technological analysis" and
describes a framework of macro-environmental factors used in the environmental
scanning component of strategic management. Some analysts added Legal and
rearranged the mnemonic to SLEPT;[1] inserting Environmental factors expanded it to
PESTEL or PESTLE, which is popular in the UK.[2] The model has recently been further
extended to STEEPLE and STEEPLED, adding education and demographic factors. It is
a part of the external analysis when conducting a strategic analysis or doing market
research, and gives an overview of the different macro environmental factors that the
company has to take into consideration. It is a useful strategic tool for understanding
market growth or decline, business position, potential and direction for operations.
The growing importance of environmental or ecological factors in the first decade of the
21st century have given rise to green business and encouraged widespread use of an
updated version of the PEST framework. STEER analysis systematically considers
Socio-cultural, Technological, Economic, Ecological, and Regulatory factors.
The Model's Factors
Political factors are how and to what degree a government intervenes in the economy.
Specifically, political factors include areas such as tax policy, labour law, environmental
law, trade restrictions, tariffs, and political stability. Political factors may also include
goods and services which the government wants to provide or be provided (merit goods)
and those that the government does not want to be provided (demerit goods or merit
bads). Furthermore, governments have great influence on the health, education, and
infrastructure of a nation.
Economic factors include economic growth, interest rates, exchange rates and the
inflation rate. These factors have major impacts on how businesses operate and make
decisions. For example, interest rates affect a firm's cost of capital and therefore to what
extent a business grows and expands. Exchange rates affect the costs of exporting goods
and the supply and price of imported goods in an economy
Social factors include the cultural aspects and include health consciousness, population
growth rate, age distribution, career attitudes and emphasis on safety. Trends in social
factors affect the demand for a company's products and how that company operates. For
85
example, an aging population may imply a smaller and less-willing workforce (thus
increasing the cost of labor). Furthermore, companies may change various management
strategies to adapt to these social trends (such as recruiting older workers).
Technological factors include ecological and environmental aspects, such as R&D

activity, automation, technology incentives and the rate of technological change. They
can determine barriers to entry, minimum efficient production level and influence
outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and
lead to innovation.
Environmental factors include weather, climate, and climate change, which may
especially affect industries such as tourism, farming, and insurance.Furthermore,
growing awareness to climate change is affecting how companies operate and the
products they offer--it is both creating new markets and diminishing or destroying
existing ones.
Legal factors include discrimination law, consumer law, antitrust law, employment law,
and health and safety law. These factors can affect how a company operates, its costs,
and the demand for its products.
Applicability of the Factors

The model's factors will vary in importance to a given company based on its industry
and the goods it produces. For example, consumer and B2B companies tend to be more
affected by the social factors, while a global defense contractor would tend to be more
affected by political factors.[3] Additionally, factors that are more likely to change in the
future or more relevant to a given company will carry greater importance. For example,
a company who has borrowed heavily will need to focus more on the economic factors
(especially interest rates).[4]
Furthermore, conglomerate companies who produce a wide range of products (such as
Sony, Disney, or BP) may find it more useful to analyze one department of its company
at a time with the PESTEL model, thus focusing on the specific factors relevant to that
one department. A company may also wish to divide factors into geographical relevance,
such as local, national, and global (also known as LoNGPESTEL).
Use of PEST analysis with other models

The PEST factors, combined with external micro-environmental factors and internal
drivers, can be classified as opportunities and threats in a SWOT analysis.
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Gap analysis
In business and economics, gap analysis is a tool that helps a company to compare its
actual performance with its potential performance.
The goal of gap analysis is to identify the gap between the optimized allocation and
integration of the inputs, and the current level of allocation. This helps provide the
company with insight into areas which could be improved. The gap analysis process
involves determining, documenting and approving the variance between business
requirements and current capabilities. Gap analysis naturally flows from benchmarking
and other assessments. Once the general expectation of performance in the industry is
understood, it is possible to compare that expectation with the company's current level of
performance. This comparison becomes the gap analysis. Such analysis can be
performed at the strategic or operational level of an organization.
Gap analysis is a formal study of what a business is doing currently and where it wants
to go in the future. It can be conducted, in different perspectives, as follows:
1.
2.
3.
4.
Organization (e.g., human resources)

Business direction
Business processes
Information technology
Gap analysis provides a foundation for measuring investment of time, money and human
resources required to achieve a particular outcome (e.g. to turn the salary payment
process from paper-based to paperless with the use of a system). Note that 'GAP
analysis' has also been used as a means for classification of how well a product or
solution meets a targeted need or set of requirements. In this case, 'GAP' can be used as a
ranking of 'Good', 'Average' or 'Poor'. This terminology does appear in the PRINCE2
project management publication from the OGC (Office of Government Commerce).
Gap analysis and new products

The need for new products or additions to existing lines may have emerged from
portfolio analyses, in particular from the use of the Boston Consulting Group Growthshare matrix, or the need will have emerged from the regular process of following trends
in the requirements of consumers. At some point a gap will have emerged between what
the existing products offer the consumer and what the consumer demands. That gap has
to be filled if the organization is to survive and grow.
To identify a gap in the market, the technique of gap analysis can be used. Thus an
examination of what profits are forecasted for the organization as a whole compared
87
with where the organization (in particular its shareholders) 'wants' those profits to be
represents what is called the 'planning gap': this shows what is needed of new activities
in general and of new products in particular.
The planning gap may be divided into three main elements:
Usage gap
This is the gap between the total potential for the market and the actual current usage by
all the consumers in the market. Clearly two figures are needed for this calculation:
market potential
existing usage
Market potential
The maximum number of consumers available will usually be determined by market
research, but it may sometimes be calculated from demographic data or government
statistics. Ultimately there will, of course, be limitations on the number of consumers.
For guidance one can look to the numbers using similar products. Alternatively, one can
look to what has happened in other countries.[citation needed] 2010}} The increased
affluence of all the major Western economies means that such a lag can now be much
shorter
The maximum potential individual usage, or at least the maximum attainable average
usage (there will always be a spread of usage across a range of customers), will usually
be determined from market research figures. It is important, however, to consider what
lies behind such usage.
Existing usage
The existing usage by consumers makes up the total current market, from which market
shares, for example, are calculated. It is usually derived from marketing research, most
accurately from panel research such as that undertaken by the Nielsen Company but also
from ad hoc work. Sometimes it may be available from figures collected by government
departments or industry bodies; however, these are often based on categories which may
make sense in bureaucratic terms but are less helpful in marketing terms.
The 'usage gap' is thus:
usage gap = market potential existing usage
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This is an important calculation to make. Many, if not most marketers, accept the
existing market size, suitably projected over the timescales of their forecasts, as the
boundary for their expansion plans. Although this is often the most realistic assumption,
it may sometimes impose an unnecessary limitation on their horizons. The original
market for video-recorders was limited to the professional users who could afford the
high prices involved. It was only after some time that the technology was extended to the
mass market.
In the public sector, where the service providers usually enjoy a monopoly, the usage
gap will probably be the most important factor in the development of the activities. But
persuading more consumers to take up family benefits, for example, will probably be
more important to the relevant government department than opening more local offices.
The usage gap is most important for the brand leaders. If any of these has a significant
share of the whole market, say in excess of 30 per cent, it may become worthwhile for
the firm to invest in expanding the total market. The same option is not generally open to
the minor players, although they may still be able to target profitably specific offerings
as market extensions.
All other gaps relate to the difference between the organization's existing sales (its
market share) and the total sales of the market as a whole. This difference is the share
held by competitors. These gaps will, therefore, relate to competitive activity.
Product gap
The product gap, which could also be described as the segment or positioning gap,
represents that part of the market from which the individual organization is excluded
because of product or service characteristics. This may have come about because the
market has been segmented and the organization does not have offerings in some
segments, or it may be because the positioning of its offering effectively excludes it
from certain groups of potential consumers, because there are competitive offerings
much better placed in relation to these groups.
This segmentation may well be the result of deliberate policy. Segmentation and
positioning are very powerful marketing techniques; but the trade-off, to be set against
the improved focus, is that some parts of the market may effectively be put beyond
reach. On the other hand, it may frequently be by default; the organization has not
thought about its positioning, and has simply let its offerings drift to where they now are.
The product gap is probably the main element of the planning gap in which the
organization can have a productive input; hence the emphasis on the importance of
corrects positioning.
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Competitive gap
What is left represents the gap resulting from the competitive performance. This
competitive gap is the share of business achieved among similar products, sold in the
same market segment, and with similar distribution patterns - or at least, in any
comparison, after such effects have been discounted. Needless to say, it is not a factor in
the case of the monopoly provision of services by the public sector.
The competitive gap represents the effects of factors such as price and promotion, both
the absolute level and the effectiveness of its messages. It is what marketing is popularly
supposed to be about.
International strategic management
International Strategic Management (ISM) is an ongoing management planning
process aimed at developing strategies to allow an organization to expand abroad and
compete internationally. Strategic planning is used in the process of developing a
particular international strategy.
An organization must be able to determine what products or services they intend to sell,
where and how the organization will make these products or services, where they will
sell them, and how the organization will acquire the necessary resources for these tasks.
Even more importantly an organization must have a strategy on how it expects to
outperform its competitors.
Development complexity
When an organization moves from being a domestic entity to an international
organization it must consider the possible broad complexities that accompany such a
decision. In a domestic country, an organization must only consider one national
government, a single currency and accounting system, one political and legal system,
and usually a similar culture. Entering into one or more foreign countries can involve
multiple governments, currencies, accounting systems, legal systems, and a large variety
of languages and cultures. This can create numerous barriers to entry for an organization
looking to expand internationally.
Basic questions
In foreign countries, there are the possibility of:
local languages required in many situations.

very diverse cultures, both between countries and sometimes even within countries.
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often volatile politics.

varied economic systems.
scarcity of skilled labor, with possible costs in training labor or redesigning procedures.
poorly-developed financial markets and government-controlled capital flows, in some of
the countries.
problems and exorbitant costs in obtaining market research data.
limited advertising, subjected to lots of restrictions.
possible low literacy rates, not to mention the possibility of making mistakes in the
language when advertising.
currency exchange fluctuations.
inadequate or limited communication/
mandatory worker participation in management in some countries.
legal restrictions on laying off of workers.
Transnational strategy management

Transnational strategy management is the study of the strategic management involved in
building, developing and managing the operations of companies whose activities stretch
across national boundaries.[1] Transnational management largely revolves around
multinational enterprise's (general known as MNE) which are international companies
that have substantial,direct investment in foreign countries and actively manage and
regard those operations as integral parts of the company, both strategically and
organizationally.[1] The past quarter century has witnessed rapid changes in the global
economy as the volume of cross-border trading and investments grow rapidly and
barriers to the free flow of goods, services and capital have decreased. The world is
progressing toward an economic system that is more favourable for international
business.[2] Having worldwide operations gives a company access to multiple markets
and low-cost resources, opens up new sources of knowledge and broadens the options
for strategic moves for competing with domestic and international rivals. However, with
all these opportunities come the challenges of managing strategies, organizations and
operations that are innately more complex, diverse and uncertain.[1] These and many
more give rise to the study of transnational management.
Multinational strategy
Multinational strategy treats the world as a portfolio of national opportunities and the
aim of this approach is to build flexibility to respond to national differences through
strong, resourceful and entrepreneurial national operations[1] A multinational strategy is
also referred to as localization strategy, since the technique focuses on increasing
profitability by creating products and services that are tailored to match the tastes and
preferences that are spread throughout different cultures [3] A company adopts this
approach to focus on the revenue, and they produce different products and provide
different service based on national differences for a customers preference, industry
91
characteristics, and government regulations [1] For instance, some computer companies
may sell less functional products with basic price to lower income countries in order to
meet target countries' needs. A multinational strategy is highly focused on
decentralization and is nationally self-sufficient [1]
Global strategy
Global strategy is when a company focuses on developing global efficiency to achieve
the best cost and quality possible [1] A global strategy is highly concentrated on force for
global integration. With this technique a company views an organization by a single
market place and their primary goal is to have standardized goods and services that
correlate to the needs of consumers worldwide [4] When a company adopts a global
strategy, products are standardized across national markets. In addition, there are several
benefits for implementing a global strategy which include cost reduction, higher quality
of products, customer satisfaction, and an increase in competitive power. A company
may take those advantages to achieve satisfying revenues and successful business
operations in foreign countries. Products and pricing strategies in the global market are
the primary consideration for global stategies; therefore, a global strategy is highly
centralized. Moreover, a global strategy emphasizes economies of scale, and it often
lacks responsiveness to local markets[1]
International strategy
International strategy treats overseas units as offshoots of domestic strategy. The goal of
international strategy is to establish cost advantages through centralized global scale
operations [1] When a company implements this strategy they are able to develop a
notion where they create the core competency in the home country, and use this to have
a competitive weapon in the foreign markets [5] Low cost strategy is the primary factor to
consider when a firm adopts an International strategy. When a firm implements an
international strategy, companies adopt similar market techniques worldwide, and all
activities are concentrated at the home country. In addition, it also transfers core
competencies to foreign markets. In order to enhance competitive power with other
countries in foreign markets, a company should fully develop their business strategy at
the home country before entering into foreign countries.
Transnational strategy
Transnational strategy is an approach that builds on each of the previously mentioned
strategies: multinational, global, and international. The multinational strategy is
concentrated on developing differentiation among different regional operations to satisfy
local market needs, a global strategy is focused on economies of scale and creating low
costs, and an international strategy is focused on innovation [1] However, with a
92
transnational strategy, "when a company decide[s] to adopt this approach, the first
important factor to consider is which key resources and capabilities are best centralized
within the home country operation, not only to realize scale of economies but also to
protect core competencies, and provide the necessary corporate management" [6] In
addition, a transnational strategy is the most difficult management approach to
implement, but if successfully implemented, a company will have a competitive
advantage by achieving efficiencies, flexibility, and learning concurrently.
In order for a company to effectively manage using a transnational strategy they
must attain three strategic objectives: global efficiency, multinational flexibility
and worldwide learning. To develop a worldwide advantage, a company must
achieve the three objectives, namely:
1. Build global-scale efficiency in new and existing activities.

2. Develop multinational flexibility to manage diverse country-specific risks and
opportunities.
3. Create the ability to learn from international exposure and opportunities and
exploit that learning on a worldwide basis.
These strategic objectives are also known as a competitive advantage which a company
must develop in order to optimize its achievements [1] A company's competitive
advantage should help managers identify which strategies fit the company's needs [7] In
order to achieve sustainable competitive advantage, multinational enterprises need to
develop these different and, at times, conflicting objectives [1] Hence, a company that
desires to achieve worldwide advantage should exploit all of its sources of global
competitive advantage to develop these objectives. In the development of these strategic
objectives, a multinational enterprise can leverage the scale economies that are
potentially available in its different worldwide activities; it can exploit the differences in
sourcing and market opportunities among the many countries in which it operates, and it
can also capitalize on the diversity of its activities and operations to create synergies or
develop economies of scope [1]
The Three strategic objectives:
Global efficiency is a strategic objective used with a global strategy in order to

create profits and reduce costs. Economic efficiency, generally speaking, is the
ratio of the value of its outputs to the value of its inputs, but in the case of a
multinational enterprise, its global efficiency can be enhanced by increasing the
93
value of its output (that is, securing higher revenues) or lowering the value of its
inputs(that is, lowering costs) [1] This is to say efficiency improvement is not just
cost reduction but also revenue enhancement. Both can also be accomplished if it
is within the reach of a company.
Multinational flexibility is a major element of worldwide competitiveness. It is
the ability of a company to manage the risks and exploit the opportunities that
arise from the diversity and volatility of the global environment [1] Examples of
such diversity and volatility include macroeconomic risks, political risk,
competitive risks and resource risks. Diversities and volatilities vary across
countries and change over time, making flexibility a key strategic management
requirement. Also, multinational flexibility requires management to scan its
broad environment to detect changes and discontinuities and then respond to the
new situation in the context of the worldwide business [1]
Worldwide learning is a key asset for multinational enterprise, and they build
off of the diversity of different environments which they operate in. This
diversity exposes a company to multiple stimuli, allows it to develop diverse
capabilities, and provides broader learning opportunities than are available to
purely domestic companies [1] With the advancement in technology it has made it
much easier for companies to share information among sub units.
Companies Successfully Implementing a Transnational Approach
When looking at multinational enterprise, one can easily find that many
successful companies owe their success to their unique transnational approach.
As an example, Nike Inc, is one of the well known sports accessory brands
worldwide, with the design of the logo it was first introduced in Portland State
University, and it represents the wing of the Greek Goddess Nike. [12]. Using
celebrity endorsements, Nike has built a transnational strategy by adapting their
campaigns to specific regions and using famous athletes that are recognizable in
those regions, thus showing that Nike is flexible to local responsiveness, which is
one of the strategic capabilities needed in order to obtain a true transnational
strategy [13] In order to capture Global Efficiencies Nike has nicely designed a
management strategy where they build factories in cheap labour countries to
increase their revenues as a top transnational company [14]
Honda is the world's largest manufacturer of motorcycles, as well as the world's
largest manufacturer of internal combustion engines measured by volume,
producing more than 14 million internal combustion engines each year [15] Honda
started as a small company in Japan in 1947 which only produced motorcycles,
but with research and design, developing and improving the engine and horse
power, Honda kept gaining more market share in the global market [16] The
Hondells recorded "Little Honda" in 1964, and found themselves entered into the
American pop culture as the subject in hit songs, proving to show innovation
94
throughout their companies overall structure and also capturing economies of

scale through manufacturing of products [17] Honda is a true example of a
successful transnational company in the automobile industry.
In the food industry, McDonald's is a fast food company that is very successful in
the global market. McDonalds is known as a typical American fast food
restaurant; the price and the way it is designed for children makes the business
attractive and very convenient for consumers. The product is mostly
standardized, but McDonalds adapts to local needs when entering into foreign
countries. When McDonalds entered into China it was seen differently from the
Westernized McDonalds and the Chinese perceive McDonalds as a high level
and expensive restaurant [41] All McDonalds' maintain the special design and
the American free style, and share worldwide learning throughout all operations
[42] As a result, McDonalds is able to implement a transnational company
strategy and benefit from minimum wage labour, advanced technology, and
ability to adapt to specific needs within a culture.
Performance management
Performance management includes activities to ensure that goals are consistently being
met in an effective and efficient manner. Performance management can focus on
performance of the organization, a department, processes to build a product or service,
employees, etc. Information in this topic will give you some sense of the overall
activities involved in performance management. Then you might enhance your
understanding by reviewing closely related library topics referenced from the sidebar.
For a description of Performance Management in the context of Information
Technology, please see IT Performance Management.
Where PM is applied
The PM approach is used most often in the workplace but applies wherever people
interactschools, churches, community meetings, sports teams, health setting,
governmental agencies, and even political settings. PM principles are needed wherever
in the world people interact with their environments to produce desired effects. Cultures
are different but the laws of behavior are the same worldwide. Armstrong and baron
(1998) defined it as A strategic and integrated approach to increasing the effectiveness
of organizations by improving the performance of the people who work in them and by
developing the capabilities of teams and individual contributors
It is possible to get all employees to reconcile personal goals with organizational goals.
One can turn around any marginal business and increase productivity and profitability
95
for any organization, with the transparent and hidden forces embedded in this process. It
can be applied by organisations or a single department or section inside an organisation;
as well as an individual person.
The process is a natural, self-inspired performance process and are appropriately named
the self-propelled performance process (SPPP).
It is claimed that the self-propelled performance management system is:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
the fastest known method for career promotion;

the quickest way for career advancement;
the surest way for career progress;
the best ingredient in career path planning;
the only true and lasting virtue for career success;
the most neglected part in teachings about management and leadership principles;
the most complete and sophisticated application of performance management;
the best integration of human behaviour research findings, with the latest management,
leadership and organisational development principles;
the best automated method for organisational change, development, growth,
performance and profit;
the quickest way for career building, career development and moving up on the stepping
stones of the corporate career ladder;
the surest and fastest way for increased motivation, productivity, growth, performance
and profitability for both the individual and the organisation;
the best career builder and career booster for any career; and
inspirational, as it gets people moving, makes them self-starters in utilising own talents
and initiative, automatically like magic.
First of all, deriving from the strategic plan, a commitment analysis must be done, where
a job mission statement is drawn up for each job. The job mission statement is a job
definition in terms of purpose, customers, product and scope. The aim with this analysis
is to determine the continuous key objectives and performance standards for each job
position.
Following the commitment analysis, is the work analysis of a particular job in terms of
the reporting structure and job description. If a job description is not available, then a
systems analysis can be done to draw up a job description. The aim with this analysis is
to determine the continuous critical objectives and performance standards for each job.
Benefits
Managing employee or system performance facilitates the effective delivery of strategic
and operational goals. There is a clear and immediate correlation between using
96
performance management programs or software and improved business and

organizational results.
For employee performance management, using integrated software, rather than a
spreadsheet based recording system, may deliver a significant return on investment
through a range of direct and indirect sales benefits, operational efficiency benefits and
by unlocking the latent potential in every employees work day i.e. the time they spend
not actually doing their job. Benefits may include :
Direct financial gains
Grow sales
Reduce costs
Stop project overruns
Aligns the organization directly behind the CEO's goals
Decreases the time it takes to create strategic or operational changes by communicating
the changes through a new set of goals
Motivated workforce
Optimizes incentive plans to specific goals for over achievement, not just business as
usual
Improves employee engagement because everyone understands how they are directly
contributing to the organisations high level goals
Create transparency in achievement of goals
High confidence in bonus payment process
Professional development programs are better aligned directly to achieving business
level goals
Improved management control
Flexible, responsive to management needs

Displays data relationships
Helps audit / comply with legislative requirements
Simplifies communication of strategic goals scenario planning
Provides well documented and communicated process documentation
Organizational Development Definitions
In organizational development (OD), performance can be thought of as Actual Results

vs Desired Results. Any discrepancy, where Actual is less than Desired, could constitute
the performance improvement zone. Performance management and improvement can be
thought of as a cycle:
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1. Performance planning where goals and objectives are established

2. Performance coaching where a manager intervenes to give feedback and adjust
performance
3. Performance appraisal where individual performance is formally documented and
feedback delivered
A performance problem is any gap between Desired Results and Actual Results.
Performance improvement is any effort targeted at closing the gap between Actual
Results and Desired Results.
Other organizational development definitions are slightly different. The US
Government's Office of Personnel Management indicates that Performance Management
consists of a system or process whereby:
1.
2.
3.
4.
5.
Work is planned and expectations are set

Performance of work is monitored
Staff ability to perform is developed and enhanced
Performance is rated or measured and the ratings summarized
Top performance is rewarded[1]
Strategic thinking
Recent strategic thought points ever more clearly towards the conclusion that the critical
strategic question is not What?, but Why? The work of Mintzberg[1] and others who
draw a distinction between strategic planning (defined as systematic programming of
pre-identified strategies) and strategic thinking (a more integrated perspective on the
organization) supports that conclusion.[2][3][4] Intensified exploration of strategy from
new directions is now coming together in the concept of what is being called strategic
thinking.[5] At this point, there is no generally accepted definition of the term, no
common agreement as to its role or importance, and no standardized list of key
competencies of strategic thinkers.[6] However, many agree that traditional models of
strategy making (which are primarily based on strategic planning) are not working.[7]
Strategic thinking vs. strategic planning

In the view of F. Graetz, strategic thinking and planning are distinct, but interrelated
and complementary thought processes that must sustain and support one another for
effective strategic management. Graetz's model holds that the role of strategic thinking is
"to seek innovation and imagine new and very different futures that may lead the
company to redefine its core strategies and even its industry". Strategic planning's role is
"to realize and to support strategies developed through the strategic thinking process and
to integrate these back into the business".[3]
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According to J. M. Liedtka, strategic thinking differs from strategic planning along the
following dimensions of strategic management:[8]
Strategic Thinking
Strategic Planning
Vision of the Future
Only the shape of the future can be predicted.
A future that is predictable

and specifiable in detail.
Strategic
Formulation and
Implementation
The roles of formulation

Formulation and implementation are
and implementation can be
interactive rather than sequential and discrete.
neatly divided.
Managerial Role in
Strategy Making
Senior executives obtain

the needed information
Lower-level managers have a voice in
from lower-level managers,
strategy-making, as well as greater latitude to
and then use it to create a
respond opportunistically to developing
plan which is, in turn,
conditions.
disseminated to managers
for implementation.
Control
Relies on self-reference a sense of strategic

intent and purpose embedded in the minds of
managers throughout the organization that
guides their choices on a daily basis in a
process that is often difficult to measure and
monitor from above.
Asserts control through

measurement systems,
assuming that organizations
can measure and monitor
important variables both
accurately and quickly.
Managerial Role in
Implementation
All managers understand the larger system,

the connection between their roles and the
functioning of that system, as well as the
interdependence between the various roles
that comprise the system.
Lower-level managers need

only know his or her own
role well and can be
expected to defend only his
or her own turf.
Strategy Making
Sees strategy and change as inescapably

linked and assumes that finding new strategic The challenge of setting
options and implementing them successfully strategic direction is
is harder and more important than evaluating primarily analytic.
them.
Process and Outcome
Sees the planning process itself as a critical
Focus is on the creation of

the plan as the ultimate
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value-adding element.
objective.
Strategic thinking competencies

Liedtka observed five major attributes of strategic thinking in practice that resemble
competencies.[8]
The first competency, a systems perspective, refers to being able to understand
implications of strategic actions. "A strategic thinker has a mental model of the complete
end-to-end system of value creation, his or her role within it, and an understanding of the
competencies it contains."[8]
A second competency underlying strategic thinking is intent focused which means more
determined and less distractible than rivals in the marketplace. Crediting Hamel and
Prahalad with popularizing the concept, Liedtka describes strategic intent as "the focus
that allows individuals within an organization to marshal and leverage their energy, to
focus attention, to resist distraction, and to concentrate for as long as it takes to achieve a
goal."[8]
Thinking in time means being able to hold past, present and future in mind at the same
time to create better decision making and speed implementation. "Strategy is not driven
by future intent alone. It is the gap between todays reality and intent for the future that
is critical."[8] Scenario planning is a practical application for incorporating "thinking in
time" into strategy making.[9]
A fourth strategic thinking competency is being hypothesis driven, ensuring that both
creative and critical thinking are incorporated into strategy making. This competency
explicitly incorporates the scientific method into strategic thinking. [Citation needed]
The final strategic thinking competency is intelligent opportunism, which means being
responsive to good opportunities. "The dilemma involved in using a well-articulated
strategy to channel organizational efforts effectively and efficiently must always be
balanced against the risks of losing sight of alternative strategies better suited to a
changing environment."[8]
Porter generic strategies

Michael Porter has described a category scheme consisting of three general types of
strategies that are commonly used by businesses to achieve and maintain competitive
advantage. These three generic strategies are defined along two dimensions: strategic
scope and strategic strength. Strategic scope is a demand-side dimension (Porter was
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originally an engineer, then an economist before he specialized in strategy) and looks at

the size and composition of the market you intend to target. Strategic strength is a
supply-side dimension and looks at the strength or core competency of the firm. In
particular he identified two competencies that he felt were most important: product
differentiation and product cost (efficiency).
He originally ranked each of the three dimensions (level of differentiation, relative
product cost, and scope of target market) as either low, medium, or high, and juxtaposed
them in a three dimensional matrix. That is, the category scheme was displayed as a 3 by
3 by 3 cubes. But most of the 27 combinations were not viable.
Porter's Generic Strategies
In his 1980 classic Competitive Strategy: Techniques for Analyzing Industries and
Competitors, Porter simplifies the scheme by reducing it down to the three best
strategies. They are cost leadership, differentiation, and market segmentation (or focus).
Market segmentation is narrow in scope while both cost leadership and differentiation
are relatively broad in market scope.
Empirical research on the profit impact of marketing strategy indicated that firms with a
high market share were often quite profitable, but so were many firms with low market
share. The least profitable firms were those with moderate market share. This was
sometimes referred to as the hole in the middle problem. Porters explanation of this is
that firms with high market share were successful because they pursued a cost leadership
strategy and firms with low market share were successful because they used market
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segmentation to focus on a small but profitable market niche. Firms in the middle were
less profitable because they did not have a viable generic strategy.
Combining multiple strategies is successful in only one case. Combining a market
segmentation strategy with a product differentiation strategy is an effective way of
matching your firms product strategy (supply side) to the characteristics of your target
market segments (demand side). But combinations like cost leadership with product
differentiation are hard (but not impossible) to implement due to the potential for
conflict between cost minimization and the additional cost of value-added
differentiation.
Since that time, some commentators have made a distinction between cost leadership,
that is, low cost strategies, and best cost strategies. They claim that a low cost strategy is
rarely able to provide a sustainable competitive advantage. In most cases firms end up in
price wars. Instead, they claim a best cost strategy is preferred. This involves providing
the best value for a relatively low price.
Cost Leadership Strategy
This strategy involves the firm winning market share by appealing to cost-conscious or
price-sensitive customers. This is achieved by having the lowest prices in the target
market segment, or at least the lowest price to value ratio (price compared to what
customers receive). To succeed at offering the lowest price while still achieving
profitability and a high return on investment, the firm must be able to operate at a lower
cost than its rivals. There are three main ways to achieve this.
The first approach is achieving a high asset turnover. In service industries, this may
mean for example a restaurant that turns tables around very quickly, or an airline that
turns around flights very fast. In manufacturing, it will involve production of high
volumes of output. These approaches mean fixed costs are spread over a larger number
of units of the product or service, resulting in a lower unit cost, i.e the firm hopes to take
advantage of economies of scale and experience curve effects. For industrial firms, mass
production becomes both a strategy and an end in itself. Higher levels of output both
require and result in high market share, and create an entry barrier to potential
competitors, who may be unable to achieve the scale necessary to match the firms low
costs and prices.
The second dimension is achieving low direct and indirect operating costs. This is
achieved by offering high volumes of standardized products, offering basic no-frills
products and limiting customization and personalization of service. Production costs are
kept low by using fewer components, using standard components, and limiting the
number of models produced to ensure larger production runs. Overheads are kept low by
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paying low wages, locating premises in low rent areas, establishing a cost-conscious
culture, etc. Maintaining this strategy requires a continuous search for cost reductions in
all aspects of the business. This will include outsourcing, controlling production costs,
increasing asset capacity utilization, and minimizing other costs including distribution,
R&D and advertising. The associated distribution strategy is to obtain the most extensive
distribution possible. Promotional strategy often involves trying to make a virtue out of
low cost product features.
The third dimension is control over the supply/procurement chain to ensure low costs.
This could be achieved by bulk buying to enjoy quantity discounts, squeezing suppliers
on price, instituting competitive bidding for contracts, working with vendors to keep
inventories low using methods such as Just-in-Time purchasing or Vendor-Managed
Inventory. Wal-Mart is famous for squeezing its suppliers to ensure low prices for its
goods. Dell Computer initially achieved market share by keeping inventories low and
only building computers to order. Other procurement advantages could come from
preferential access to raw materials, or backward integration.
Some writers posit that cost leadership strategies are only viable for large firms with the
opportunity to enjoy economies of scale and large production volumes. However, this
takes a limited industrial view of strategy. Small businesses can also be cost leaders if
they enjoy any advantages conducive to low costs. For example, a local restaurant in a
low rent location can attract price-sensitive customers if it offers a limited menu, rapid
table turnover and employs staff on minimum wage. Innovation of products or processes
may also enable a startup or small company to offer a cheaper product or service where
incumbents' costs and prices have become too high. An example is the success of lowcost budget airlines who despite having fewer planes than the major airlines, were able
to achieve market share growth by offering cheap, no-frills services at prices much
cheaper than those of the larger incumbents.
A cost leadership strategy may have the disadvantage of lower customer loyalty, as
price-sensitive customers will switch once a lower-priced substitute is available. A
reputation as a cost leader may also result in a reputation for low quality, which may
make it difficult for a firm to rebrand itself or its products if it chooses to shift to a
differentiation strategy in future.
Differentiation Strategy
Differentiation is aimed at the broad market that involves the creation of a product or
services that is perceived throughout its industry as unique. The company or business
unit may then charge a premium for its product. This specialty can be associated with
design, brand image, technology, features, dealers, network, or customers service.
Differentiation is a viable strategy for earning above average returns in a specific
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business because the resulting brand loyalty lowers customers' sensitivity to price.
Increased costs can usually be passed on to the buyers. Buyers loyalty can also serve as
an entry barrier-new firms must develop their own distinctive competence to
differentiate their products in some way in order to compete successfully. Examples of
the successful use of a differentiation strategy are Hero Honda, Asian Paints, HLL, Nike
athletic shoes, Perstorp BioProducts, Apple Computer, and Mercedes-Benz automobiles.
A differentiation strategy is appropriate where the target customer segment is not pricesensitive, the market is competitive or saturated, customers have very specific needs
which are possibly under-served, and the firm has unique resources and capabilities
which enable it to satisfy these needs in ways that are difficult to copy. These could
include patents or other Intellectual Property (IP), unique technical expertise (e.g.
Apple's design skills or Pixar's animation prowess), talented personnel (e.g. a sports
team's star players or a brokerage firm's star traders), or innovative processes. Successful
brand management also results in perceived uniqueness even when the physical product
is the same as competitors. This way, Chiquita was able to brand bananas, Starbucks
could brand coffee, and Nike could brand sneakers. Fashion brands rely heavily on this
form of image differentiation.
Some research does suggest that a differentiation strategy is more likely to generate
higher profits than is a low cost strategy because differentiation creates a better entry
barrier. A low-cost strategy is more likely, however, to generate increases in market
share. This however, may result from a limited understanding of 'profits'. Differentiation
strategies are indeed likely to result in higher gross and net profit margins due to the
pricing power created by perceived uniqueness and high customer satisfaction. However,
these higher prices will also likely result in lower sales volumes and lower asset
turnovers. As such, the effects on Returns on Capital are likely to be neutral. As
illustrated in the Dupont ratio therefore, a firm can achieve high profitability and Returns
on Capital by being either a successful differentiator (with high margins and low
volumes) or a successful cost leader (with low margins and high volumes). One strategy
is not necessarily more profitable than the other.
Variants on the Differentiation Strategy
The shareholder value model holds that the timing of the use of specialized knowledge
can create a differentiation advantage as long as the knowledge remains unique [1]. This
model suggests that customers buy products or services from an organization to have
access to its unique knowledge. The advantage is static, rather than dynamic, because the
purchase is a one-time event.
The unlimited resources model utilizes a large base of resources that allows an
organization to outlast competitors by practicing a differentiation strategy. An
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organization with greater resources can manage risk and sustain losses more easily than
one with fewer resources. This deep-pocket strategy provides a short-term advantage
only. If a firm lacks the capacity for continual innovation, it will not sustain its
competitive position over time.
Focus or Strategic Scope
This dimension is not a separate strategy per se, but describes the scope over which the
company should compete based on cost leadership or differentiation. The firm can
choose to compete in the mass market (like Wal-Mart) with a broad scope, or in a
defined, focused market segment with a narrow scope. In either case, the basis of
competition will still be either cost leadership or differentiation.
In adopting a narrow focus, the company ideally focuses on a few target markets (also
called a segmentation strategy or niche strategy). These should be distinct groups with
specialized needs. The choice of offering low prices or differentiated products/services
should depend on the needs of the selected segment and the resources and capabilities of
the firm. It is hoped that by focusing your marketing efforts on one or two narrow
market segments and tailoring your marketing mix to these specialized markets, you can
better meet the needs of that target market. The firm typically looks to gain a
competitive advantage through product innovation and/or brand marketing rather than
efficiency. It is most suitable for relatively small firms but can be used by any company.
A focused strategy should target market segments that are less vulnerable to substitutes
or where a competition is weakest to earn above-average return on investment.
Examples of firm using a focus strategy include Southwest Airlines, with provides shorthaul point-to-point flights in contrast to the hub-and-spoke model of mainstream
carriers, and Family Dollar, which targets poor urban American families who cannot
drive to Wall-Marts in the suburbs because they do not own a car.
In adopting a broad focus scope, the principle is the same: the firm must ascertain the
needs and wants of the mass market, and compete either on price (low cost) or
differentiation (quality, brand and customization) depending on its resources and
capabilities. Wall Mart has a broad scope and adopts a cost leadership strategy in the
mass market. Pixar also targets the mass market with its movies, but adopts a
difrentiation strategy, using its unique capabilities in story-telling and animation to
produce signature animated movies that are hard to copy, and for which customers are
willing to pay to see and own. Apple also targets the mass market with its iPhone and
iPod products, but combines this broad scope with a differentiation strategy based on
design, branding and user experience that enables it to charge a price premium due to the
perceived unavailability of close substitutes.
105
Recent developments
Michael Treacy and Fred Wiersema (1993) have modified Porter's three strategies to
describe three basic "value disciplines" that can create customer value and provide a
competitive advantage. They are operational excellence, product leadership, and
customer intimacy.
Criticisms of generic strategies
Several commentators have questioned the use of generic strategies claiming they lack
specificity, lack flexibility, and are limiting.
In particular, Miller (1992) questions the notion of being "caught in the middle". He
claims that there is a viable middle ground between strategies. Many companies, for
example, have entered a market as a niche player and gradually expanded. According to
Baden-Fuller and Stopford (1992) the most successful companies are the ones that can
resolve what they call "the dilemma of opposites".
A popular post-Porter model was presented by W. Chan Kim and Rene Mauborgne in
their 1999 Harvard Business Review article "Creating New Market Space". In this article
they described a "value innovation" model in which companies must look outside their
present paradigms to find new value propositions. Their approach fundamentally goes
against Porter's concept that a firm must focus either on cost leadership or on
differentiation. They later went on to publish their ideas in the book Blue Ocean
Strategy.
An up-to-date critique of generic strategies and their limitations, including Porter,
appears in Bowman, C. (2008) Generic strategies: a substitute for thinking? [1]
Bowman's Strategy Clock

Bowman's Strategy Clock is a model used in marketing to analyse the position of a
company.Ceated by Swetha Balasubramanyum It was developed by Cliff Bowman and
David Faulkner as an elaboration of the three Porter generic strategies. Bowman's
Strategy Clock represents eight possible strategies in four quadrants defined by the axes
of price and perceived added value. The resulting star shape is reminiscent of a clock
face, giving this tool its name.
Reference: Bowman, C. and Faulkner, D. (1996) Competitive and Corporate Strategy,
Irwin;
106
The Strategy Clock: Bowman's Competitive Strategy Options the 'Strategy Clock' is
based upon the work of Cliff Bowman (see C. Bowman and D. Faulkner 'Competitive
and Corporate Strategy - Irwin - 1996). It's another suitable way to analyze a company's
competitive position in comparison to the offerings of competitors. As with Porter's
Generic Strategies, Bowman considers competitive advantage in relation to cost
advantage or differentiation advantage. There are six core strategic options:
Value \
Price
Low price
Hybrid
Low cost base and
High added
reinvestment in low
value
price and
differentiation
Medium price
Differentiation
High price
Focused differentiation
Perceived added value by user, Perceived added value to a

yielding market share benefits particular segment warranting a
or allowing price premium
premium price
Raise prices
Mediocre
added
value
\|/
-- * -/|\
Cost leader
Low added
Segment specific
value
to get higher margins. Works in de

facto industry standard position.
Risk losing market share to
competitors.
Increased price & low value

Risks losing market share; only feasible in monopoly position.
Strategic information system

The concept of Strategic Information Systems or "SIS" was first introduced into the field
of information systems in 1982-83 by Dr. Charles Wiseman, President of a newly
formed consultancy called "Competitive Applications,"
Characterization of strategic information systems
Overview
Strategic systems are information systems that are developed in response to corporate
business initiative. They are intended to give competitive advantage to the organization.
They may deliver a product or service that is at a lower cost, that is differentiated, that
focuses on a particular market segment, or is innovative. Some of the key ideas of
storefront writers are summarized.
107
General Definition
Strategic information systems are those computer systems that implement business
strategies; they are those systems where information services resources are applied to
strategic business opportunities in such a way that the computer systems have an impact
on the organizations products and business operations. Strategic information systems
are always systems that are developed in response to corporate business initiative.
Some of the more common ways of thinking about gaining competitive advantage are:
Deliver a product or a service at a lower cost

Deliver a product or service that we differentiated
Focus on a specific market segment
Innovation
Porters Competitive Advantage

Dr. Michael E. Porter, Professor of Business Administration, Harvard Business School,
Has addressed his ideas in two keystone books. Competitive Strategy: Techniques for
Analyzing Industries and Competitors, and his newer book, Competitive Advantage,
present a framework for helping firms actually create and sustain a competitive
advantage in their industry in either cost or differentiation. Dr. Porters theories on
competitive advantage are not tied to information systems, but are used by others to
involve information services technologies._In his book, Dr. Porter says that there are
two central questions in competitive strategy:
How structurally attractive is the industry?

What is the firms relative position in the industry?
The primary activities are:
Inbound logistics, which includes the receipt and storage of material, and the general
management of supplies.
Operations, which are the manufacturing steps or the service steps.
Outbound logistics, which are associated with collecting, storing, and physically
distributing the product to buyers. In some companies this is a significant cost, and
buyers value speed and consistency.
Marketing and sales includes customer relations, order entry, and price management.
After-sales services cover the support of the product in the field, installation, customer
training, and so on.
108
The support activities are shown across the top because they are a part of all of the
firms operations. They are not directed to the customer, but they allow the firm to
perform its primary activities. The four generic types of support activities are:
Procurement, which includes the contracting for and purchase of raw materials, or any
items used by the enterprise. Part of procurement is in the purchasing department, but it
is also spread throughout the organization.
Technology development may simply cover operational procedures, or many be
involved with the use of complex technology. Today, sophisticated technology is
pervasive, and cuts across all activities; it is not just an R&D function.
Human resource management is the recruiting, training, and development of people.
Obviously, the cuts across every other activity.
Firm infrastructure is a considerable part of the firm, including the accounting
department, the legal department, the planning department, government relations, and so
on.
Again, this type of detail is best obtained by classical systems analysis methods. Some of
the cost drivers which must be analyzed, understood, and controlled are:
Scale. The appropriate type of scale must be found. Policies must be set to reinforce
economies of scale in scale-sensitive activities.
Learning. The learning curve must be understood and managed. As the organization tries
to learn from competitors, it must strive to keep its own learning proprietary.
Capacity Utilization. Cost can be controlled by the leveling of throughput.
Linkages. Linkages should be exploited within the value chain. Work with suppliers and
channels can reduce costs.
Interrelationships. Shared activities can reduce costs.
Integration. The possibilities for integration or de-integration should be examined
systematically.
Timing. If the advantages of being the first mover or a late mover are understood, they
can be exploited.
Policies. Policies that enhance the low-cost position or differentiation should be
emphasized.
Location. When viewed as a whole, the location of individual activities can be
optimized.
Institutional Factors. Institutional factors should be examined to see whether their
change may be helpful.
Care must be taken in the evaluation and perception of cost drivers because there are
pitfalls if the thinking is incremental and indirect activities are ignored. Even though the
manufacturing activities, for example, are obvious candidates for analyses, they should
not have exclusive focus. Linkages must be exploited and cross-subsidies avoided.
Porter gives five steps to achieving cost leadership:
Identify the appropriate value chain and assign costs and assets to it.
109
Identify the cost drivers of each value activity and see how they interact.
Determine the relative costs of competitors and the sources of cost differences.
Develop a strategy to lower relative cost position through controlling cost drivers or
reconfiguring the value chain.
Est. the cost reduction strategy for sustainability.
Differentiation Advantage
Differentiation is the second of Porters two types of competitive advantage. In the
differentiation strategy, one or more characteristics that are widely value by buyers are
selected. The purpose is to achieve and sustain performance that is superior to any
competitor in satisfying those buyer needs._A differentiator selectively adds costs in
areas that are important to the buyer. Thus, successful differentiation leads to premium
prices, and these lead to above-average profitably if there is approximate cost parity. To
achieve this, efficient forms of differentiation must be picked, and costs must be reduced
in areas that are irrelevant to the buyer needs._Buyers are like sellers in that they have
their own value chains. The product being sold will represent one purchased input, but
the seller may affect the buyers activities in other ways. Differentiation can lower the
buyers cost and improve the buyers performance, and thus create value, or competitive
advantage, for the buyer. The buyer may not be able to assess all the value that a firm
provides, but it looks for signals of value, or perceived value.
A few typical factors which may lower the buyers costs are:
Less idle time

Lower risk of failure
Lower installation costs
Faster processing time
Lower labor costs
Longer useful life and so on.
Porter lists seven steps to achieving differentiation:
Determine the identity of the real buyer.

Understand the buyers value chain, and the impact of the sellers product on it.
Determine the purchasing criteria of the buyer.
Assess possible sources of uniqueness in the firms value chain.
Identify the cost of these sources of uniqueness.
Choose the value activities that create the most valuable differentiation for the buyer
relative to the costs incurred.
Test the chosen differentiation strategy for sustainability.
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Wisemans Strategic Perspective View

Wiseman points out that the whole idea is designed to introduce the strategic perspective
on information systems, stimulate the systematic search for SIS opportunities, and
evaluate and select a set of projects that are expected to secure the greatest competitive
advantage for the firm. In the idea-generation meetings of Phases B, C, and E of the
process, there are always seven explicit steps:
Give a Tutorial on Competitive Strategy. Introduce the concepts of strategic thrusts,

strategic targets, and competitive strategy.
Apply SIS Concepts to Actual Cases. Develop an understanding of SIS possibilities and
their strategic thrusts and targets.
Review the Companys Competitive Position. Try to understand its presents business
position and its strategies.
Brainstorm for SIS Opportunities. Generate SIS ideas in small groups.
Discuss the SIS Opportunities. Use the experience of the group to correlate and
condense the SIS ideas.
Evaluate the SIS Opportunities. Consider the competitive significance of the SIS ideas.
Detail the SIS Blockbusters. Select the best SIS ideas, and detail their competitive
advantages and key implementation issues.
Wiseman says that typical SIS idea-generation meetings will last for days. Each step
takes about two hours, at least. The process generates many good SIS ideas, and a few
will always be considered well worth implementation. Top management begins to focus
their attention on SIS opportunities. The ideas that are generated can produce significant
competitive advantage.
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