Strategy

The key elements are:

• clear, long-term goals

• a profound understanding of the external environment

• an astute appraisal of internal resources and capabilities

• effective implementation

• determination of goals

• industry analysis

• analysis of ressources and capabilities

• strategy implementation

The focus is no longer primarily concerned with using forecasts for detailed planning. Instead, it is increasingly about direction, identity, and exploiting sources of superior profitability.

It is necessary to recognize where the firm is competing, how it is competing, and the direction in which it is developing.

It requires a combination of purpose-led planning (rational design) and a flexible response to changing circumstances (emergence)

No these principles are also applicable to the strategic management of not-for-profit organisations, especially those in competitive environments.

The primary focus when analyzing external influences on a business enterprise is the firm's industry environment, which is examined to evaluate the industry's profit potential and identify sources of competitive advantage.

The centerpiece of the approach for industry analysis is Porter's five forces of competition framework, which connects the industry's structure to competitive intensity and profitability.

The Porter framework aids in predicting how changes in an industry's structure will affect its profitability. Its primary application is in predicting the impact of changes in industry structure on profitability.

Real learning about the Porter five forces framework comes from its application, particularly in analyzing competition and diagnosing the causes of high or low profitability in an industry. Understanding the complexities and subtleties of the model is crucial.

Industry analysis allows for the identification of sources of competitive advantage by recognizing key success factors in an industry.

The value of the Porter framework lies in its practical application. It helps understand disparities in profitability between industries, predict sustained profitability, and recognize strategies with the best potential for financial success.

The text urges the application of the tools of industry analysis, not only in strategic management coursework but also in interpreting everyday business events. Practical application helps understand industry profitability, predict future sustainability, and identify profitable strategies.

The limitations of conventional industry analysis include the limited impact of the industry on firm profitability, the transformative role of competition through creative destruction, and the emergence of "winner-take-all" industries.

The analysis of industry and competition has been extended to include complementary products, especially in industries where these complementarities give rise to network externalities, platform-based competition, and business ecosystems.

Two approaches introduced for analyzing competitive interactions between close rivals are (a) game theory, providing penetrating insights into competition, bargaining, and winning strategies, and (b) competitor analysis, offering a less formal approach to understanding competitors and predicting their behavior.

The microstructure of industries and markets has been examined using segmentation analysis and strategic group analysis to understand industries at a more detailed level and to select advantageous strategic positions.

Complementary products are significant in the extended strategy toolkit, especially in industries where complementarities lead to network externalities, platform-based competition, and the development of business ecosystems.

Game theory is highlighted in the text because, despite its technical rigor, it offers penetrating insights into competition, bargaining, and the design of winning strategies.

In the extended strategy toolkit, competitor analysis is introduced as a less formal approach to understanding competitors and predicting their behavior.

The focus has shifted from the external environment of the firm to its internal environment, recognizing that internal resources and capabilities provide a solid foundation for building strategy.

Internal strengths are emphasized because when a firm's external environment is in a state of flux, internal strengths are likely to be the primary basis upon which the firm can define its identity and strategy.

The chapter follows a systematic approach to identify the resources and capabilities of an organization, then appraises these resources and capabilities in terms of their potential to offer a sustainable competitive advantage and generate profit.

The analysis of resources and capabilities is practically applied by building a picture of an organization's key resources and capabilities, identifying areas of strength and weakness, and devising strategies to exploit strengths and minimize vulnerability to weaknesses.

The core question of resource and capability analysis is understanding what is distinctive about a firm in terms of what it can do better than its competitors and what it cannot. This involves not only analyzing balance sheets, employee competencies, and benchmarking data but also gaining insight into the values, ambitions, and traditions of a company.

The analysis of resources and capabilities is considered intensely practical because it asks practical questions about what a firm can do better than its competitors, involving analysis of tangible factors like balance sheets and employee competencies, as well as intangible factors like the values, ambitions, and traditions of a company.

The concepts of resources and capability analysis will be revisited in future chapters because the resources and capabilities of a firm form the foundation for building competitive advantage. Subsequent chapters will explore how these resources and capabilities are deployed, their intersection with key success factors, and how companies build the capabilities needed to address future challenges.

Strategy formulation and implementation are closely interdependent because the formulation of strategy must consider the organization's capacity for implementation, and the implementation process involves creating strategy.

For the effectiveness of an organization's strategic management process, its strategic planning system must be linked to actions, commitments, monitoring, and the allocation of resources. Operational plans and capital expenditure budgets are critical components.

Strategy implementation involves the entire design of the organization. Understanding the need to reconcile specialization with cooperation and coordination is essential to appreciate the fundamental principles of organizational design.

Operational plans and capital expenditure budgets are considered critical components of a firm's strategic management system.

Understanding the need to reconcile specialization with cooperation and coordination allows us to appreciate the fundamental principles of organizational design.

The principles of organizational design help determine how best to allocate individuals to organizational units and how to combine these units into broader groupings. This includes choices between basic organizational forms such as functional, divisional, or matrix organizations.

The changing organizational structures of companies in recent years have been influenced both by the demands of their external environments and the opportunities presented by advances in information and communication technologies.

In emerging and technology-based industries, the fundamental source of competitive advantage is nurturing and exploiting innovation, which becomes the focus of strategy formulation.

The fundamental strategic issues in technology-driven industries include the dynamics of competition, the role of resources and capabilities in establishing competitive advantage, and the design of structures and systems to implement strategy. These issues require the application of the basic strategy toolkit.

The unpredictability and instability of technology-driven industries mean that strategic decisions have a very special character. Small differences in timing or technological choices can make the difference between massive value creation and total failure.

The speed and unpredictability of change in technology-driven markets mean that sound strategic decision-making cannot guarantee success. However, managing effectively amid such uncertainty is possible with a strategy based on understanding technological change and its implications for competitive advantage.

The key lessons learned in successfully managing innovation and technological change relate to how the value created by innovation is shared among market players, the design of innovation strategies, competing for standards and platform leadership, and implementing strategies for innovation.

Themes dealt with in the strategic management of technology include appropriating value from innovation, reconciling creativity with commercial discipline, and tailoring strategies to the characteristics of technology, market demand, and industry structure.

The design and implementation of strategies in industries where innovation is a key success factor require close tailoring to the characteristics of technology, market demand, and industry structure. The success of highly innovative companies, such as those listed by BCG, is attributed to strategies closely tailored to their individual circumstances.

The growth in size and scope of firms over the past 200 years has been driven by technology and advances in management, causing the administrative costs of firms to fall relative to the transaction costs of markets.

In terms of vertical scope, the text highlights that there is no universal best solution, and a firm must compare the benefits of vertical integration (avoiding transaction costs and permitting superior coordination) against the benefits of outsourcing (allowing the firm to focus on what it does best).

The dominant trend in the past three decades is for firms to concentrate on fewer stages of their value chains and outsource the rest. However, this involves replacing vertical integration with collaborative arrangements that combine the specialization benefits of outsourcing with the coordination and knowledge-sharing benefits of vertical integration.

In recent decades, the replacement of vertical integration is characterized not by arm’s-length market contracts but by collaborative arrangements that combine the specialization benefits of outsourcing with the coordination and knowledge-sharing benefits of vertical integration.

The text suggests that in subsequent chapters, there will be a return to issues of vertical integration, indicating that further examination and discussion of this topic will be undertaken.

The next chapter following the text will consider offshoring, specifically firms locating different value chain activities in different countries.

The trend for firms to concentrate on fewer stages of their value chains and outsource the rest in recent decades has been primarily influenced by the benefits of specialization in outsourcing and the desire to combine these benefits with the coordination and knowledge-sharing advantages of vertical integration.

Moving from a national to an international business environment represents a quantum leap in complexity. In an international environment, a firm's potential for competitive advantage is influenced not only by its own resources and capabilities but also by the conditions of the national environments in which it operates, including input prices, exchange rates, and institutional and cultural factors.

International strategic decisions are analyzed using the same basic tools of strategy analysis developed in earlier chapters. For example, to determine whether a firm should enter an overseas market, an analysis of the attractiveness of the overseas market (using industry analysis) and the potential of the firm to establish competitive advantage in that market is required.

In designing an international strategy, considerations include whether to enter an overseas market through exporting, licensing, or direct investment. If direct investment is chosen, decisions about setting up a wholly owned subsidiary or a joint venture must be made. Additionally, a suitable organizational structure needs to be designed.

Some companies that have been successful in their home market fail in their overseas expansion due to challenges such as the inability to transfer or replicate resources and capabilities that underpinned their competitive advantage in the home market, as well as problems in designing structures and systems to implement the international strategy.

As the lessons of success and failure from international business are recognized and distilled into better theories and analytical frameworks, the understanding of how to design and implement strategies for competing globally advances. However, there is still much that is not fully understood.

The key determinants of competitive advantage in an international environment include issues related to global scale economies versus local differentiation, decentralized learning and innovation versus worldwide diffusion and replication, and localized flexibilities versus international standardization.

Designing strategies and organizational structures that can reconcile critical trade-offs between global scale economies versus local differentiation, decentralized learning and innovation versus worldwide diffusion and replication, and localized flexibilities versus international standardization remains a key challenge for senior managers in international business.

Diversification's attractions are obvious, yet the experience is often disappointing, and for top management, it is described as a minefield. The diversification experiences of large corporations are often marked by expensive mistakes.

Examples of costly failures in diversification mentioned in the text include Exxon's attempt to build Exxon Office Systems, Vivendi's diversification from water and environmental services into media, entertainment, and telecoms, and Royal Bank of Scotland's quest to transform itself into a financial services giant.

Despite costly failures and meager rewards for shareholders, the urge to diversify continues to captivate senior managers. The divergence between managerial and shareholder goals is identified as part of the problem, with diversification often being the fastest route to building vast corporate empires.

Hubris is identified as a further problem hindering successful diversification. Success in one line of business can lead to top management becoming overly confident about achieving similar success in other businesses.

For companies to survive and prosper over the long term, they must change, and this involves redefining the businesses in which they operate. Diversification has played a key role in the evolution of most companies that have survived for more than half a century.

Better strategic analysis of diversification decisions is essential for companies to avoid the errors that corporate executives have made in the past. Clear and explicit objectives for diversification, with a focus on value creation, are emphasized.

Tools for evaluating diversification decisions have developed greatly in recent years, moving from vague notions of synergy to more precise analysis of the sources of economies of scope on both the supply and demand sides. The role of transaction costs and administrative costs that can offset diversification synergies is also considered in rigorous analysis.

While corporate strategies in the form of vertical integration, multinational expansion, and diversification have the potential to create value, their success ultimately depends on the effectiveness of corporate strategy implementation.

The success of corporate strategies is highlighted to depend on the effectiveness with which corporate headquarters manages companies comprising multiple business units

The four principal types of activities through which corporate management creates value within companies with multiple business units are:

1. Managing the business portfolio

2. Managing linkages among businesses

3. Managing individual businesses

4. Managing change and development

The key consideration in managing linkages among businesses is to ensure that the potential gains from exploiting economies of scope are not outweighed by the costs of managing the added complexity.

The key advantage of multibusinesses is not being captives of a single industry. Exploiting this advantage involves fostering processes, structures, and attitudes that encourage new initiatives and create a willingness to let go of the past.

The contentious and perplexing issue highlighted in the text is corporate governance. Although there is broad agreement on the goal of corporate governance—ensuring long-term value maximization while considering the interests of multiple stakeholders—establishing a system that achieves this goal remains elusive.

Establishing corporate systems that are invulnerable to self-serving managers, short-term-oriented shareholders, human greed and stupidity, and bureaucratic inertia represents a design challenge that is unlikely to be realized.

Mergers and acquisitions can be useful tools for acquiring particular resources and capabilities, for reinforcing a firm’s position within an industry, and for achieving diversification or horizontal expansion.

Empirical research shows that despite the plausibility of the goals underlying mergers and acquisitions, most fail to achieve these goals, and the gains primarily flow to the shareholders of the acquired companies.

The disappointing outcomes of many mergers and acquisitions may be attributed to the tendency for them to be motivated by the desire for growth rather than for profitability. CEO hubris, leading to a succession of acquisitions that may result in failure or restructuring, reinforces the pursuit of growth.

The second factor contributing to the poor performance consequences of many mergers is the unforeseen difficulties of post-merger integration.

The diversity of mergers and their outcomes makes it very difficult to generalize about the types of mergers or the approaches to integration that are associated with success.

Unlike mergers and acquisitions, the consequences of failure in strategic alliances are usually less costly.

As the business environment becomes more complex and turbulent, the advantages of strategic alliances become increasingly apparent, offering flexibility and reconciling specialization with the ability to integrate a broad array of resources and capabilities.

Business leaders responsible for formulating and implementing their companies’ strategies face challenges due to the dynamism and unpredictability of today’s business environment. Businesses need to compete at a higher level along a broader front.

The two developments that support business leaders are:

1. Emerging concepts and theories, including complexity theory, principles of self-organization, real option analysis, organizational identity, network analysis, and new thinking concerning innovation, knowledge management, and leadership.

2. Innovation and learning resulting from adaptation and experimentation by companies, with examples from both long-established and technology-based companies.

Long-established companies like IBM and P&G have embraced open innovation as a response to the challenges in today’s business environment.

Technology-based companies such as Google, W. L. Gore, Microsoft, and Facebook have introduced radically new approaches to project management, human resource management, and strategy formulation.

In emerging-market countries, novel approaches include government involvement in business (China), new initiatives in managing integration in multibusiness corporations (Samsung), new approaches to managing ambidexterity (Infosys), and new forms of employee engagement (Haier).

It is important not to overemphasize either the obsolescence of existing principles or the need for radically new approaches to strategic management. Many features of today’s business environment are extensions of well-established trends rather than fundamental discontinuities.

One of the most important lessons from major corporate failures in the 21st century, from Enron and WorldCom to Royal Bank of Scotland and Eastman Kodak, is the realization that the rigorous application of the tools of strategy analysis outlined in this book might have helped these firms avoid their misdirected odysseys.