5.

1: Introduction to Unit 5

BB835   The dynamics of strategy

5.1: Introduction to Unit 5

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5.1: Introduction to Unit 5

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5.1: Introduction to Unit 5
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2.1

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5.1: Introduction to Unit 5

Contents
 Introduction
 Planning your work
 Learning outcomes
 Introducing strategic choice
 Moving from analysing to choosing
 The difference between corporate and competitive
strategy
 Exploring the difference between description and
analysis
 Activity 1.1
 Structure of the unit
 Glossary
 References

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5.1: Introduction to Unit 5

Introduction
Previous: 4.4: Stakeholder analysis.

Welcome to Unit 5 Developing strategy: strategic options and strategic choice. To

start, listen to an audio welcome from one of the authors of this unit, Maureen
Meadows.

Audio content is not available in this format.

View transcript - Uncaptioned interactive content

Planning your work

There are six sessions in this unit. You should allow about 33 hours over the next four
weeks to complete these activities.

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5.1: Introduction to Unit 5
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5.1: Introduction to Unit 5
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Organise your work to suit your schedule. You may find it useful to note the
following:

 Activity 3.1 involves two tasks and includes reading a short case
study, so make sure you set aside enough time for both the reading
and the tasks.
 Activities 2.3, 3.1 and 3.2 include substantial online readings, so
you should allow time to read these. You may wish to print off these
readings ahead of the activities and they are listed for you here:
 Goold, M., Campbell, A. and Alexander, M.
(1998) ‘Corporate Strategy and Parenting
Theory’, Long Range Planning, vol. 31, no.
2, pp. 308–314.
 Markides, C.C. and Williamson, P.J. (1994)
‘Related diversification, core competences
and corporate performance’, Strategic
Management Journal, vol. 15, pp. 149–165.

Learning outcomes
By the end of this unit, you should be able to:

 explain the role of the corporate parent in the organisational choice

process
 identify and distinguish between the corporate strategy options and
competitive strategy options available to an organisation
 identify and describe some of the international strategy options that
may be available to an organisation, within the context of corporate
strategy

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5.1: Introduction to Unit 5
 propose and justify criteria which may be used to evaluate the
strategic options available to an organisation
 appraise strategic options using relevant criteria.

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5.1: Introduction to Unit 5

Introducing strategic choice

In Units 2–4 we explored strategic analysis. This involved examining a variety of
approaches that allow managers to develop an understanding of the opportunities and
threats facing their organisations from their external environment, as well as an
appreciation of the strengths and weaknesses of their organisation in terms of their
resources and capabilities. We also introduced the need for managers to identify
stakeholders and understand what they may want from the organisation. These units
represent a review of the first stage of the strategy process: strategic analysis.

Moving from analysing to choosing

In this unit we explore the second phase of the strategy process: strategic choice.
Before outlining the contents and aims of this unit, it is necessary to establish the
relationship between the analysing and choosing stages of the strategy process.

In Unit 1 we noted that strategy can be seen as a process, and this implies a close
relationship between the three stages of the process – analysing, choosing and
implementing. Choice inevitably follows analysis; so, in terms of Figure 1.1 in Unit 1,
we have moved from the first circle (analysis) to the second circle (choice). However,
there is more to this relationship than simple sequencing. The strategy process implies
that choice not only follows analysis, but also is influenced by it. It implies that
analysis and choice must be congruent. By this we mean that the outcomes of the
choice stage of the process (i.e., strategic choices) should be based on the outcomes of
the analysis phase (i.e., they must match). We would argue that managers who have
undertaken analysis but who choose to ignore that analysis are not following a
rational approach to strategy. This does not imply that they are wrong to do so; there
may be very good reasons for this type of behaviour. However, we would argue that if
analysis is worth doing it should be closely related to the choices taken.

The difference between corporate and competitive

strategy
You may already be clear about the difference between corporate and competitive
strategy. However, if you are not or if you would like to refresh your memory, read
the following box.

Defining corporate and competitive strategies

Before moving on it may be helpful to establish the distinction between corporate and
competitive strategy. A distinction is offered by Lionel Bourgeois (1986), as follows:

 corporate strategy discusses where a company seeks to compete, a

decision Bourgeois refers to as ‘domain selection’.

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5.1: Introduction to Unit 5
 competitive strategydiscusses how a company seeks to compete, a
decision he refers to as ‘domain navigation’.
 Corporate strategy therefore occurs at a higher level than business or
competitive strategy. It involves choices such as which industries,
markets or segments an organisation should compete in, and whether
and how an organisation should collaborate with another
organisation.
 Competitive strategy follows this decision – having decided where to
compete, competitive strategy focuses on how this may be done.

To illustrate and clarify the distinction, let us consider the domain selection and
navigation options available to the Fiat Motor Company (we discussed Fiat in Unit
3).

Take a moment to consider the diagram below, where Grant (2010, p. 115) sets out
what he sees as the strategic groups in the world automobile industry.

Figure 1.1: Strategic groups within the world automobile industry (Source: Grant, 2010)

As we can see from Figure 1.1, the strategic grouping that Fiat is in (‘Regionally
focused broad-line producers’) suggests that Fiat chooses to compete in the European
automobile industry, providing a range of products to that market. In Bourgeois’
terms, therefore, this is the domain Fiat chooses to compete in (although our earlier
discussion suggests that it may be looking to extend the domains it competes in).
Having selected this domain, Fiat must choose one of the competitive strategic
options available to it (according to Porter, 1985) from the domain navigation menu
(see Figure 1.2), which will determine how it competes within this domain.

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5.1: Introduction to Unit 5

Figure 1.2: The corporate and competitive strategy choices for Fiat

View description - Figure 1.2: The corporate and competitive

strategy choices for Fiat

Exploring the difference between description and

analysis
To complete this unit and the module successfully you need to understand the
difference between description and analysis in academic work. This brief discussion
and Activity 1.1 is designed to help with this.

An issue you face when completing assessments is understanding what you are meant
to do when asked to ‘analyse’, ‘discuss’, ‘describe’ (or any number of other verbs
used by academics). This is an important issue in a module such as this one, where
you are often asked to examine the situation facing an organisation and, using the
tools you have been introduced to, draw conclusions and make recommendations
about the future direction of that organisation.

Many of the frameworks you are being introduced to can be very useful in
‘describing’ the current situation an organisation finds itself in. Porter’s generic
strategies (which you may have met before, and will meet again later in this unit) can
be used to describe how an organisation chooses to compete with its competitors. For
example, Ryanair, the Irish budget airline, chooses to compete by seeking to be the
lowest-cost operator. In comparison, British Airways (BA), its full-service British
‘flag-carrier’ competitor, chooses to compete by pursuing a strategy of broad
differentiation.

But so what? Is simply identifying this difference enough to say you have ‘analysed’
the strategies of these two companies? Yes and no. Yes, it is a good start – you cannot
go on to offer recommendations about the future strategy of either company unless

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5.1: Introduction to Unit 5
you have successfully identified the current strategy. And no – simply describing the
existing strategies is not enough to argue that you have analysed these strategies.
Analysis, as you already know, involves going beyond simple description and actually
answering the ‘So what?’ question. Depending on the question you have been asked
to answer, you might ask yourself whether the competitive strategy you have
identified:

 matches the environmental conditions in which the company operates

 fits with the resources and capabilities you have identified
 is consistent with the strategic aims of the company
 is consistent with the strategic options you have identified and may
recommend to the company.

You may also ask yourself:

 What are the implications of this analysis for the organisation?

 Are there other options that this company can pursue to maximise the
value it is achieving by pursuing this competitive strategy?
 Are there any options the organisation should ignore?

To prepare yourself for what is to follow, and to begin to practise these cognitive
skills, please complete Activity 1.1 before starting your work on the rest of this unit.

Activity 1.1
Timing: Allow 40 minutes for this activity.

Purpose: To prepare yourself to answer the ‘So what?’ question throughout the
rest of BB835.

Task: How attractive is the rail industry in the

Gulf states?
Read the following extract, which concerns the rail system in the Gulf states. Briefly
assess the attractiveness of the Gulf region for European train system manufacturers.
As you conduct the analysis, make sure you ask yourself ‘What does this mean?’ in
relation to the European train companies.

Making tracks

Bosses in the US$165 billion global rail industry have been flocking to the Gulf, lured
by the prospect of an investment boom. Every country in the region has drawn up
plans for ambitious rail projects. Qatar and Kuwait are spending around US$10 billion
each, and the United Arab Emirates is spending twice that. On their shopping lists are
monorails, bullet-trains and local metros, the first of which opened in Dubai in 2009.

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5.1: Introduction to Unit 5
Not to be outdone, Saudi Arabia is spending US$15 billion to increase the size of its
rail network nearly five fold. A high-speed rail service between Mecca and Medina
opened in 2010, taking traffic away from the kingdom’s notoriously crash-prone
roads. And this is just the beginning. All these planned national lines will eventually
be connected into a regional network, at a further cost of at least US$14 billion.
Leaders of the Gulf Co-operation Council have agreed on plans for a great railway
bazaar from Jordan to Oman, though it may be two decades before their ambitious
scheme is fully realised.

The main beneficiaries will be Europe’s rail giants, many of which are keen to move
beyond their mature home markets. American manufacturers have little experience
with metros and high-speed trains, and most Asian rivals lack the necessary foreign-
sales know-how. Europe is the industry’s hub, accounting for 70 per cent of sales and
much of the innovation. Now the Gulf beckons as a lucrative export market.

Steaming ahead of the pack is France’s Alstom, closely followed by Siemens of

Germany and Bombardier of Canada. ‘The intake is phenomenal,’ says Michael
Clausecker, director-general of Unife, Europe’s railway-industry association, which
predicts 25 per cent growth between 2006 and 2016. Not all of the new demand is
coming from the Middle East, however. Countries including China, France and
Britain have pledged stimulus money for trains, and on 16 April 2009 Barack Obama
outlined plans for an extra US$13 billion to fund rail infrastructure to unclog
America’s airports and highways.

But the richest pickings are undoubtedly to be found in the Gulf. Its cities are choking
with traffic, as anyone who has driven to or from Dubai’s airport will know. Even
sheikhs get stuck in their limousines. ‘They have realised that public transport is not
just for poor people,’ says Chris Antonopoulos, head of sales at Bombardier’s rail
division. But congestion is not the only motivation. Gulf states are preparing for a
post-oil future, built around services, and that requires infrastructure. Giant train sets,
like skyscrapers, also appeal as status symbols. ‘There is an element of showing off,’
says Philippe Mellier, president of Alstom Transport.

The Middle East is an almost ideal market for European manufacturers. It has no
state-owned competitors to demand the transfer of expensively developed technology,
as is often the case in Asia, where European trainmakers are reluctant to offer their
best products for fear of breeding new rivals. The Middle East also has short
replacement cycles, thanks to heat and sand, which means bigger follow-on contracts.
And of course, there is plenty of money. Or is there?

When oil prices fell in 2008 and the Gulf’s fortunes tumbled, the industry worried.
Were the gleaming tracks in the Arab desert a mirage? On 7 April 2009 an industry-
wide sigh of relief could be heard when Saudi Arabia awarded the first contract for a
line connecting the country from north to south. This is not the British ‘railway
mania’ of the 1840s, but the boom is on. ‘We’ve seen no evidence of projects being
cancelled,’ says Chris Jackson, editor of Railway Gazette International. On the
contrary, manufacturers are struggling to satisfy Gulf demand.

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5.1: Introduction to Unit 5
(Adapted from The Economist, 2009)

View feedback - Task: How attractive is the rail industry in the Gulf
states?

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5.1: Introduction to Unit 5

Structure of the unit

During Unit 5 we shall focus on four main themes. These are:

1. The role of the corporate parent

We define what we mean by a corporate parent in Session 5.2.
. Many organisations are multilayered entities operating complex
structures. In simple organisations, there may be no distinction
between corporate parent and child. However in many organisations
(especially global organisations), corporate parents may sit a long
way away – geographically and organisationally – from their
strategic business units (SBUs). This creates a debate about what
role the parent should perform. We need to understand the potential
influence of the corporate parent before we look at the different levels
of strategic choices an organisation may make.
2. We answer the question ‘What is corporate strategy?’ The first level
of strategic choice is corporate strategy. In Session 5.3 we explore the
work of Igor Ansoff, whose classic work on growth vectors (Ansoff,
1965, 1987) provides a useful framework to explore the choices an
organisation faces at this level of the strategic choice process.
3. We answer the question ‘What is competitive strategy?’ The second
level of strategic choice is competitive strategy, and in Session 5.4 we
revisit the work of Michael Porter and other authors who have
discussed the critical question of how organisations choose to
compete with each other for the attention and money of their
customers.
4. We discuss how we can evaluate these choices. We close the unit by
looking at how strategic management authors have suggested that
managers decide between the various options available to them.

When you are ready, move on to 5.2: The role of the corporate parent.

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Glossary
Congruence
Congruence is a state of coming together or agreement
Corporate parent
The concept of corporate parenting is concerned with the influence that the
corporate headquarters seeks to have on its strategic business units (or
subsidiaries). It is concerned with the variety of relationships that are possible,
and the positive or negative outcomes that may follow from an active
corporate parenting role being adopted by the corporate centre.
Strategic business unit
A business unit within a larger organisation that is distinguishable from other
business units because it serves a defined external market where management
can conduct strategic planning in relation to products and markets.

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References
Ansoff, H.I. (1965) Corporate Strategy, New York,: McGraw–Hill.

Bourgeois, L.J. (1986) Strategic Management: from Concept to

Implementation, Fort Worth, TX: Dryden Press.

The Economist (2009) ‘Making tracks’, 25 April.

Grant, R.M. (2010), Contemporary Strategy Analysis (7th edn), Wiley,

Chichester, UK.

Porter, M.E. (1985) Competitive Advantage, New York, Free Press.

Smith, P.A. (2010), ‘Multibillion-dollar rail projects link Gulf cities’, March 2010, pp.
48–9 available online at:
http://findarticles.com/p/articles/mi_m2742/is_409/ai_n52938122/
(Accessed 31 August 2011).

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5.1: Introduction to Unit 5

Task: How attractive is the rail industry in

the Gulf states?
Feedback
The article suggests this is an extremely favourable market segment for European
train manufacturers to attempt to enter. In particular, there are few if any barriers to
entry; there are no incumbent companies within the industry, meaning that existing
industry rivalry is low; and there appear to be many customers who are willing to buy.

If that is where we stop our analysis, we have completed only half of the job. We have
concluded that the industry is attractive, but so what?

Well, we can make these further observations.

 There are considerable opportunities here and these rail companies

would be wise to look at these opportunities seriously. But do any of
the companies have the necessary resources and capabilities to enable
them to bid for, win and successfully deliver the contracts that appear
to be available? If not, how can the companies go about obtaining
these resources? Is there a possibility of some form of collaborative
strategy?
 Will operating in this region mean that the companies cannot take
advantage of other opportunities that arise in the industry? Or will it
limit their ability to fulfil existing contractual obligations elsewhere?
 How much of a threat is posed by the global economic downturn
mentioned in the extract (and its potential impact on oil prices)? Is
this seemingly excellent opportunity as good as it appears?
 How much of a risk is there in operating in this region of the world?
Do the companies have sufficient awareness of the impact of cultural
differences, or the political complexion of this region, to contemplate
entering this market?

Analysis can raise as many or more questions than it answers. A critical perspective,
and frequent use of the ‘So what?’ question, will be useful as you progress through
B835 and in your future managerial career.

Side note: To find out more about rail projects in the Gulf, read Smith (2010), ‘Multibillion-dollar rail
projects link Gulf cities’.

Back

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5.1: Introduction to Unit 5

Figure 1.2: The corporate and competitive

strategy choices for Fiat
Description
This diagram is in the form of two boxes, side by side. The box on the left is labelled
‘Domain selection’, and the box on the right is labelled ‘Domain navigation’. The box
on the left has a list of menu options, under four headings. The first heading is
Region, and the options are Africa, Asia, Australasia, Europe, North America and
South America. The option Europe is in bold. The second heading is Country, and the
options are Bulgaria, France, Germany, Hungary, Italy, Russia, Spain and the United
Kingdom. All of these options are in bold. The third heading is Industry, and the
options are Aircraft, Automobiles, Banking, Heavy Industry, Mining and Shipping.
The option Automobiles is in bold. The fourth heading is Market. The options are
Broad-line, Intermediate-line, Narrow-line, Specialist, Luxury and Performance. The
option Broad-line is in bold The box on the right has five menu options, each with a
small empty tick-box beside it. The options are overall cost leadership, differentiation,
cost focus, differentiation focus, and integrated cost and differentiation.

Back

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5.1: Introduction to Unit 5

Uncaptioned interactive content

Transcript
My name is Maureen Meadows, and I’m one of the authors of this unit, which
discusses how organisations generate strategic options and choose between them.

You may remember that at the beginning of the module, we suggested that the
strategy process has three stages – analysing, choosing and implementing. Units 2, 3,
and 4 have focused on the analysis stage of the strategy process; you’ve looked at
external analysis, internal analysis and stakeholder analysis.

In this unit we’ll be looking at the second stage of the process, which is all about
strategic choice. Having carried out your analysis, how do you choose between the
strategic options that you’re faced with?

Our first key theme will be corporate parenting. We’ll look at the idea that, in multi
business organisations, the corporate parent can define the scope of the organisation,
perhaps across industries and markets, and potentially add value to its strategic
business units. You might think of the example of Virgin, which licenses its brand to
companies within the Virgin group.

A second major theme is corporate strategy; where should the organisation choose
to compete? There are a number of tools that can assist with the organisation’s
strategic decision-making at this level.

You may have met Ansoff’s growth matrix before; it’s a tool that helps us to explore
the choices that an organisation might be faced with at the corporate level. The matrix
points out that we can take existing products into new markets – think, for example,
of McDonald’s geographic expansion.

Or we can broaden our product range, like a computer company that starts to sell
printers and software to existing customers.

Or we can try to do both at the same time – taking new products to new markets; and
the matrix reminds us that this can be the riskiest strategy of all.

A third important theme of the unit is competitive strategy, which considers howto
compete. You’ve certainly met the work of Michael Porter before. We’ll look at
Porter’s argument that organisations compete on two criteria – cost and
differentiation. An example of a strategy based on cost leadership would be Ireland’s
Ryanair, and its attempts to be the world’s lowest cost airline.

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5.1: Introduction to Unit 5
A differentiated strategy might be based on unique technical expertise, such as
Apple’s design skills, or Pixar’s prowess at animation. We’ll also reflect on whether
these two criteria – cost and differentiation - can be successfully integrated.

Our final theme is to address the question of how our strategic choices can be
evaluated.

We close the unit by looking at some tools for evaluating the strategic options that
you may be faced with. So, by the end of the unit, we hope you’ll understand the role
of the corporate parent in the strategic choice process, and be able to identify some of
the options available to an organisation, both at the corporate and the competitive
strategy levels.

You should also be able to list and apply some criteria for determining whether the
options available are appropriate and consistent with the analysis we’ve been
conducting in the previous units.

Back

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