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chapter 3

Strategic analysis
and choice

contents

1 Introduction 4 Strategic choice – options


2 Strategic analysis – analysing the 5 Strategic choice – evaluation and
environment selection
3 Strategic analysis – competences and
capability

learning outcomes
This chapter looks at the key stages of the strategic management process – analysing the
environment in which the organisation is operating and generating options to evaluate and
finally choose before proceeding to implementation. The aim is to present some tools and
techniques that will help. We should not lose sight of the fact, however, that by themselves these
tools and techniques will not provide the answer. Rather, they are a guide to decision-making.
After reading and understanding the contents of the chapter, considering some of the Case
Examples and Test Your Knowledge questions, you should be able to:

䡲 Undertake a PEST analysis and a five forces analysis for an organisation.


䡲 Analyse market segments and the implications for providers of products/services.
䡲 Undertake a competitor analysis and resource audit and explain the implications.
䡲 Define unique resources and core competencies.
䡲 Draw up a value chain for an organisation and the ‘industry’ in which it operates.
䡲 Explain how different types of linkage underpin competitive advantage.
䡲 Undertake a portfolio analysis and a SWOT analysis.
䡲 Identify the development direction options for an organisation.
䡲 Compare three methods of development (internal, acquisition and alliances).
䡲 Understand suitability, acceptability and feasibility.
䡲 Understand the different processes of strategy selection.
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3 STRATEGIC ANALYSIS AND CHOICE 67

1 Introduction
Appraising the environment, the strategic capability of the organisation, the expecta-
tions of its stakeholders and the purpose and mission of the organisation, taken
together, provide a basis for strategic analysis. Such an understanding needs to take
the future into account. Is the current strategy capable of dealing with the changes
taking place in the organisation’s environment? Is it likely to deliver the results
expected by influential stakeholders? It is unlikely that there will be a complete
match between current strategy and the picture that emerges from the strategic
analysis.The extent to which there is a mismatch is the extent of the strategic problem
facing senior managers. It may be that the adjustment required is marginal or there
may be a need for a fundamental realignment of strategy.Assessing the magnitude of
strategic change required and the ability of the organisation to effect such changes is
another important aspect of strategic analysis. Johnson, Scholes and Whittington
(2008) argue that strategic choice is the core of strategic management. It is
concerned with decisions about an organisation’s future and the way in which it
needs to respond to the many pressures and influences identified through strategic
analysis. An issue for many organisations and managers is that they are unable or
unwilling to consider the variety of strategic options open to them.They tend to be
bound by the existing paradigm and resist change.The strategic tools and techniques
explored here are more concerned with enabling managers to be able to question and
challenge than with formalised procedures of planning.

FIGURE 3.1 The rational model (based on Naylor 2003)

Strategic analysis

Appraise
environment
Set mission
and objectives
Analyse
resources

Strategic choice
Strategic control

Monitor
progress
Generate Select
options strategy

Test
assumptions

Strategy implementation

Set functional
strategies

Decide
policies
Determine
structure
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68 STRATEGIC MANAGEMENT

In this chapter we shall look at:


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

2 Strategic analysis – analysing the environment


2.1 Introduction
The difficulty managers face when trying to understand the environment is making sense
of this diversity in a way that can contribute to strategic decision-making. Identifying
many environmental influences may be possible, but of little use because no overall
picture emerges of the really important influences on the organisation.The second diffi-
culty is uncertainty. Managers often claim that the volume and pace of technological
developments mean more and faster change than ever before.Whether or not change is
in fact faster and the changes more unpredictable, it is important to try to understand
future external influences on an organisation, even though it may be difficult to do so.
Managers seek to simplify such complexity by focusing on aspects of the environ-
ment that have been important in the past or confirm their own views.This is natural
when faced with complexity. One of the tasks of the strategic manager is to find ways
in which he or she can break out of the tendency towards oversimplification whilst
still achieving useful and usable analysis. In this section, we provide several frame-
works for understanding how the environment of organisations are provided with
the aim of trying to identify key issues and find ways of coping with complexity.
These frameworks are provided in a series of steps summarised in Figure 3.2.

FIGURE 3.2 Steps in environmental analysis (based on Johnson et al., 2008)

Assess environmental
influences

Identify key competitive


forces

Analyse the organisations


competitive position

Identify key opportunities


and threats

Strategic
Position
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3 STRATEGIC ANALYSIS AND CHOICE 69

1 Assess environmental influences It is useful to take an initial view of the nature of the
organisation’s environment in terms of how uncertain it is. Is it relatively static or
does it show signs of change? In what ways? Is it simple or complex to understand?
This helps in deciding what focus the rest of the analysis is to take and is a prelude
to an audit of environmental influences. Here the aim is to identify which macro-
environmental influences are likely to affect the organisation’s development or
performance.This can be done by considering the ways in which political, econ-
omic, social and technological influences impinge on organisations.
2 Identify competitive forces The second step focuses on the immediate environment of
the organisation – for example, the competitive arena in which the organisation
operates. The aim is to identify the key forces at work in the immediate or
competitive environment and why they are significant.
3 Analyse the organisation’s competitive position That is, how it stands in relation to other
organisations competing for the same resources, or customers, as itself.As we shall
see, this may be done in a number of ways.
4 Opportunities and threats The aim is to develop an understanding of opportunities that
can be built upon and threats which have to be overcome or circumvented.These
need to be considered in terms of the resource base and competencies of the
organisation and will contribute to strategic choice.

2.2 Organisational boundaries


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

stop and think 3.1

What changes have there been in the environment in which your organisation operates?

You can probably identify your own examples fairly easily. What these examples are
likely to have in common is that the changes were brought about by external events,
and organisations were generally unable to control or influence them.This is a signifi-
cant conclusion, especially as the greatest impact on the future of organisations arises
from changes in the external environment, and yet by far the major part of manage-
ment time and effort is directed at the internal environment. Managers tend to be
preoccupied with the near, the immediate and the internal. In part this is because the
external environment is difficult to understand – we shrink from the unfamiliar.
A willingness to look outside the boundaries of the organisation can therefore be
an important source of success. Morgan (1988) argues that, to be successful, organ-
isations must anticipate possible change and position themselves to deal with oppor-
tunities and challenges in a proactive rather than a reactive way. He refers to this as
managing from the ‘outside in’.

‘ Many organisations are preoccupied with “inside out” management.They approach,


understand, and act in relation to their environment in terms that make sense from
internal divisions and perspectives, or in terms of what powerful members want to do.
As a result, they often end up acting in fragmented and inappropriate ways.
Some organisations, on the other hand, try to build from the “outside in”, in the
sense that they try and “embrace” the environment holistically, and shape internal
structures and processes with this wider picture in mind. They use the views and
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70 STRATEGIC MANAGEMENT

needs of customers and other key stakeholders as a mirror through which they can
see and understand their own strengths and weaknesses.And they use these insights
to re-shape their activities and relations with the environment. (Morgan, 1988)

Morgan therefore emphasises the importance of understanding the external environ-
ment.We have already discussed how an organisation’s survival and success depends
upon effective management of relationships with key stakeholders such as customers
and service users, shareholders and suppliers. In this chapter we take this concept of
interdependence further by exploring the relationships that exist between organis-
ations and their external environment.An organisation is part of a large and complex
network of customers, suppliers, competitors and regulators. It is also subject to the
vagaries of the economy, social trends and technological innovation. This can be
represented thematically as three environments (see Figure 3.3).

FIGURE 3.3 The three environments (Stapleton/Open University, 2003)

onmental (resp
nvir on
re d)
Fa
mental (in
v iron flu
en e
nc
ar
Ne

e)
Your
organisation
internal External
environment environment
(control)

䡲 The internal environment comprises the staff, resources and facilities within the
organisation.The internal environment is thought of as the one that managers can
control.We discuss this in chapter 4.
䡲 The near environment includes customers, clients, contractors, suppliers and competi-
tors. Managers cannot control the near environment, but they can influence it.
䡲 The far environment refers to factors that can be neither controlled nor influenced
from within the organisation.We refer to these under the acronym PEST, indicating
political/legal, economic, social, and technological factors (you may have come
across other versions).These are forces to which an organisation can only respond.

case example 3.1


AlphaPharm and BetaPharm are two pharmaceutical other small laboratories. All toxicological testing is
companies. They both develop and sell proprietary carried out by a specialist commercial laboratory, and
pharmaceutical products to health services and clinicians most clinical testing is run under contract by a
on a global basis. They both have similar turnover and number of collaborators. All products are
profitability. But that is where the similarity ends. manufactured on contract, and the products are sold
AlphaPharm is a highly integrated company. It has through agencies or independent sales teams
three large research stations around the world, at (including AlphaPharm in some markets).
which new molecules are synthesised and tested. It These two companies are extreme examples. Even so,
runs its own toxicological testing facilities in its own they do have some things in common: both
laboratories, and devises and manages its own global companies – even AlphaPharm – use contractors to
clinical testing programmes. It manufactures its provide catering services, estate maintenance and
products in its own factories and sells them through security. On the other hand, information collection
its own sales force in all major markets. and collation, planning and marketing are carried out
Although BetaPharm does carry out some laboratory in-house by both organisations – even BetaPharm.
synthesis itself, most of its new products are obtained Source: Based on a case example by Stapleton (2003)
from contract research carried out by a number of
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3 STRATEGIC ANALYSIS AND CHOICE 71

In practice, organisations set the boundaries between their internal and external
environments in different ways. Consider the following cases:
There are many real examples where organisations operating in a similar sector have
set their boundaries differently:
䡲 Marks and Spencer controls its own retail outlets, whereas branded goods manu-
facturers (such as Nestle or Heinz) sell through retailers.
䡲 BMW manufactures most of its engines in-house, whereas GM (General Motors)
increasingly buys them in.
The key points are that organisations have choices about where they set their bound-
aries; these are not fixed and may change over time. The main choice is between
carrying out activities in-house or alternatively outsourcing or using contractors.
Each option has its advantages and disadvantages. In-house activities offer control
and the benefits of experience. But the overhead structure of large organisations can
lead to slower decision-making and reduced responsiveness. Large organisations are
also susceptible to the political opportunism of managers pursuing their own
agenda. On the other hand, outsourcing makes it easier to vary costs if conditions
change. However, there is always likely to be less control over contractors, and
outsourcing offers a reduced opportunity for cumulative learning. These are
summarised in Figure 3.4.

FIGURE 3.4 Advantages and disadvantages of in-house and outsourced activities


In-house Outsourced

Advantages

䡲 Control 䡲 Access to specialists


䡲 Reliability 䡲 Flexibility in resource use
䡲 Flexibility 䡲 Reduction in fixed costs
䡲 Accumulated experience 䡲 Economies of scale
䡲 Quality control 䡲 Potential for cost saving

Disadvantages

䡲 High overhead costs 䡲 Loss of expertise in key areas


䡲 Inflexible if requirements change 䡲 Contract/project management skills needed
䡲 Limited economies of scale 䡲 Loss of short-term flexibility
䡲 Extended decision-making process 䡲 Loss of direct quality control
䡲 Lack of specialist skills

What follows from this is that an organisation’s boundaries affect, even define, the
management task. There is no single or right solution, and organisations are
constantly seeking the best balance between control, risk, short- and long-term flexi-
bility, and cost. Understanding that organisations can redefine their boundaries in
their search for this balance is a key aim of this chapter.

2.3 Uncertainty and ‘megatrends’


Since one of the main problems of business planning is coping with uncertainty, it is
useful to consider how uncertain the environment is and why. The macro-environ-
mental influences on organisations include economic conditions, ecology, govern-
ment policy and action demographics, and socio-cultural trends and developments.
This is not an exhaustive list and environmental forces that are especially important
for one organisation may not be the same for another and, over time, their import-
ance may change.
It is useful to consider what broad environmental influences have been particu-
larly important in the past, and what changes are occurring which may make these
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72 STRATEGIC MANAGEMENT

more or less significant in the future for the organisation and its competitors. Finlay
(2000) argues that a useful analysis of the far environment means looking ahead for
a period of five to 10 years but argues that it is also useful to look at megatrends –
those that underpin them and may take decades to work through. He points to
patterns such as:
䡲 Individualism and pluralism of outlook and behaviour driving greater choice in product range
(for example supermarkets and types of table salt or the specialisation of the‘mass’
media increasing the range of periodicals andTV channels).
䡲 Decentralisation and the move to the ‘knowledge age’ where knowledge is more important
than capital.
䡲 Convergence of communication technologies – telephony, television and the internet
together with user-driven content.
䡲 Internationalisation and globalisationThe decline in costs of transport and communications
has made the growing integration of national economies feasible. This has been
helped by the liberalisation of trade through blocs such as the EU. Johnson et al.
discuss the forces that are increasing the globalisation of some markets:
– Global market convergence markets world-wide are converging for a variety of
reasons. In some markets, customer needs and preferences are becoming more
similar. For example, there is increasing homogeneity of consumer tastes in
goods such as soft drinks, jeans and electrical items. Those operating in such
markets may become global customers and may search for suppliers that can
operate on a global basis. Marketing policies, brand names and identities may
then be developed globally.This further generates global demand and expecta-
tions from customers, and may also provide marketing cost advantages for
global operators.
– Cost advantages There may be cost advantages of global operations. This is
especially the case in industries in which large volume, standardised produc-
tion is required for optimum economies of scale, as in some components to the
electronics industry.
– Government Influence Political changes in the 1990s meant that most trading
nations function with market-based economies and their trade policies have
tended to encourage free markets between nations. This has been further
encouraged by technical standardisation of many products between countries,
such as in the airline industry.
– Global competition is therefore increasingly evident, and encourages further glob-
alisation. If the levels of exports and imports between countries are high, it
increases interaction between competitors on a more global scale.
Although changes in the external environment make life difficult for managers, and
may pose threats to the organisation, they can also offer opportunities. Managers who
can understand and monitor their external environment are therefore likely to be more
effective.To be able to do this, it is important that you understand the factors that make
up the external environment of your organisation. Figure 3.5 provides a summary of
some of the questions to ask about key forces at work in the macro-environment.
As we suggested above, the priority an organisation gives to each of these factors
will differ. A multinational corporation might be especially concerned with govern-
ment relations and understanding the policies of national governments in its sector of
operation. It is also likely to be concerned with labour costs and exchange rates, which
will affect its ability to compete with rivals.A small retailer, on the other hand, may be
PEST analysis
primarily concerned with local customer tastes and behaviour. None of these forces
Identification of the
political, economic, social
will remain constant, and managers need to be aware of their changing impact.
and technological influences A PEST analysis identifies the political, economic, social and technological influ-
on an organisation. ences on an organisation.
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3 STRATEGIC ANALYSIS AND CHOICE 73

FIGURE 3.5 PEST analysis of environmental influences

What environmental factors are affecting the organisation?


Which of these are the most important at present?
Which will be in the next few years?

Political/legal Economic factors


monopolies legislation business cycles
environmental protection laws GNP trends
taxation policy interest rates
foreign trade regulations money supply
employment law inflation
government stability unemployment
disposable income
energy availability and cost

Socio-cultural factors Technological


population demographics government spending on research
income distribution government and industry focus on technological
social mobility effort
lifestyle changes new discoveries/development
attitudes to work and leisure speed of technology transfer
consumerism rates of obsolescence
levels of education

The headings in Figure 3.5 can be used as a checklist to consider and prompt analysis
of the different influences. However, although a great deal of information can be
generated in this way, it will be of limited value if it remains merely a listing of influ-
ences. It is important that the models discussed in the rest of the chapter are used to
inform and guide analysis.

case example 3.2


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

It is useful to begin by considering two important questions.


䡲 What are key drivers of change? It may be possible to identify a number of key forces
likely to affect the structure of this industry or market.
䡲 What are the differential impacts of key environmental influences? PEST analysis may also help
examine the differential impact of external influences on organisations, either
historically or any likely future impact.This approach builds on the identification
of key drivers by asking to what extent such influences will affect different organ-
isations or industries differently.
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74 STRATEGIC MANAGEMENT

These sorts of factors can be built into scenario planning.

stop and think 3.2

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

2.4 Identifying key competitive forces – five forces analysis


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

stop and think 3.3

Which other organisations most affect the work of your own organisation?

The near environment comprises all those organisations whose actions influence the
organisation, and which in turn are influenced by its own actions. It therefore
includes organisations that supply the organisation with services, materials or funds.
Your answer is likely to have included suppliers and customers. Most organisations
have some key suppliers of goods and services and are in turn suppliers to other
organisations. A doctor’s practice, for example, ‘supplies’ or refers patients to a
hospital, and a small business may supply specialist services to a bigger firm. You
might also have included competitor organisations: obviously, commercial
companies compete for customers, but charities compete with each other for
resources and influence, and public service organisations compete for funds.
In order to establish a view on the organisation’s competitive position, a business
needs to obtain and consider information about competitors.There are many frame-
works by which this can be done, including looking at the differential impacts of
competitive forecasts on competitors, core competences of competitors, the
different missions of competitors, and so on.The end result of a competitor analysis
should be to indicate where each competitor is strong or weak and vulnerable. One
approach to analysing competitors is the four-point list of the key elements of
competitor analysis put forward by Greenley (1986):
䡲 The nature of competitors and any potential changes: the organisation needs to watch its
environment constantly and, in particular, note who is moving in and out of it.
䡲 The competitors’ objectives and strategies: determine what they are doing and interpret
their actions.This will enable the organisation to formulate effective competitive
strategy and tactics.
䡲 The main strengths and weaknesses of each competitor: these often determine the options
open to a business or organsiation.
䡲 The effects of competitors on your own organisation and its marketing operations: this point is a
reminder that while an organisation is analysing its competitors, they are likely to
be doing the same.
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3 STRATEGIC ANALYSIS AND CHOICE 75

The principal benefit of competitor analysis is to be able to understand how other


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

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

2
Threat of
new entrants

4 3
1
Barganing power Bargaining power
Industry structure
of suppliers of customers

5
Threat of subsitute
products or services
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76 STRATEGIC MANAGEMENT

2.5 Exploring the five forces in more detail

Intensity of competition (industry structure)


Porter suggests that the intensity of competition in an industry depends on:
䡲 the number and strength of competitors;
䡲 the rate of market growth – if the total market is not expanding, companies must
take market share from others to gain growth;
䡲 similarity of products, making it simple for consumers to switch from one brand
to another;
䡲 the level of fixed costs – high fixed costs require companies to maintain volume
and so put downward pressure on prices; and
䡲 the level of exit barriers – if economic, strategic and emotional factors prevent
companies leaving an industry, even when suffering low or negative profitability,
then competition is intensified.
The impact of these forces is illustrated in the table below (Figure 3.7).

FIGURE 3.7 Intensity of competition in two industries (based on an example by Stapleton, 2003)
Factors Car manufacturer Internet company

Number of competitors Fewer companies, but increasingly High, although number and
global in nature and nature of competitors is
changing frequently

Market growth Growing slower than supply in Fast but unstable


in main EU market, but subject to
economic cycles

Product similarity Easy for individuals to buy Very easy for customers to buy
similar cars from other suppliers tickets from other sources

Fixed costs High: plant must be kept Low: investment has nearly
utilised at all times all gone on people

Exit barriers High: strong political and historical Very few


expectations of continued existence

Threat of new entrants


Threat of entry to an industry will depend on the extent to which there are barriers to
entry, which most typically are as follows:
䡲 Economies of scale In some industries, economics of scale are extremely important: for
example, in distribution (e.g. brewing) or in sales and marketing (e.g. fast-moving
consumer goods industries).
䡲 The capital requirement of entry The capital cost of entry will vary according to tech-
nology and scale. The cost of setting up a retail clothing business is minimal
compared with the cost of entering capital-intensive industries such as chemicals.
䡲 Access to distribution channels Brewing companies have traditionally invested in bars
and pubs to guarantee the distribution of their products and make it difficult for
competitors to break into their markets.
䡲 Cost advantages independent of size These concern early entries into the market and the
experience gained. It is difficult for a competitor to break into a market if there is
an established operator who knows the market well, has good relationships with
the key buyers and suppliers, and knows how to overcome market and operating
problems.
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3 STRATEGIC ANALYSIS AND CHOICE 77

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


retaliation of an existing firm will be so great as to prevent entry, or mean that
entry would be too costly, this is also a barrier.
䡲 Government policy Legal restraints on competition vary from patent protection, to
regulation to control markets (e.g. over-the-counter pharmaceuticals and insur-
ance), through to direct government action. For example, in the late 1980s and
1990s many public services, such as health services or railways, faced deregulation
and privatisation.
䡲 Differentiation Organisations able to achieve strategies of differentiation provide for
themselves barriers to competitive entry. For example, Marks and Spencer built a
reputation for reliability and quality underpinned by staff training, product and
quality specification and control at supplier level, and strong corporate values
supportive of the quality image.
Barriers to entry differ by industry and by product/market, so it is impossible to
generalise about which are more important than others.

FIGURE 3.8 Threat of new entrants in two industries (based on an example by Stapleton, 2003)
Car manufacturer Internet company

Economies of scale Very high Low

Cost barriers High Low

Government policy Very high Low

Differentiation Hard to establish new brands Moderate

Switching costs Moderate Low

Distribution channels Access very difficult Access moderately


difficult

Overall entry barriers Very high – new entrants very unlikely Very low – new entrants likely

case example 3.3


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

stop and think 3.4

Think about the industry in which your business operates.


(a) What barriers to entry, if any, exist?
(b) To what extent are they likely to prevent entry in the environment concerned?
(c) Is your company trying to prevent the competition of entrants or is it attempting to gain entry, and if so how?

The bargaining power of customers and suppliers


All organisations have to obtain resources and provide goods or services. But the
relationship of buyers and sellers can have similar effects in constraining the strategic
freedom of an organisation and influence the profit margins of that organisation.
Customer power is likely to be high when there is a concentration of buyers.This is
the case in grocery retailing in the United Kingdom, where just a few retailers dominate
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78 STRATEGIC MANAGEMENT

the market. Supplier power is likely to be high when there is a concentration of


suppliers rather than a fragmented source of supply or when‘switching costs’ from one
supplier to another are high, perhaps because a manufacturer’s processes are dependent
on the specialist products of a supplier, as in the aerospace industry.
With some organisations, supplies are intangible goods. For example, for
professional services, such as consultancy or teaching, the availability of skilled staff
is crucial. However, while this may be a significant constraint, the suppliers may not
be organised to exert power.

The threat of substitute products or services


The threat of substitution may take different forms:
䡲 product-for-product substitution by e-mail or by fax, for example;
䡲 substitution of need by a new product or service rendering an existing product or
service superfluous;
䡲 generic substitution which occurs where products or services compete for need; for
example retailers compete for available household expenditure;
䡲 doing without, as with the tobacco industry.
The availability of substitutes can place a ceiling on prices for a company’s products,
or make inroads into the market and so reduce its attractiveness.The key questions are
whether or not a substitute poses the threat of obsolescence or provides a higher
perceived benefit or value and the ease with which buyers can switch to substitutes.

The value of Porter’s five forces model as an analytical framework is to assist the organ-
isation to become more aware of events in its near environment – events that it cannot
control but may be able to influence. It is possible that collaboration between organis-
ations may be a more sensible route to achieving advantage than competing.
Identifying opportunities for collaboration nonetheless requires an understanding of
the structure of industries, and the frameworks above can be used for this purpose.
Collaboration between potential competitors or between buyers and sellers is likely to
be advantageous when the combined costs of buying are less through collaboration
than the internal cost that would be incurred by the organisation operating alone.

case example 3.4


In the developing area of disease management, condition. In the past Salick, owned largely by
pharmaceutical companies and health providers, Zeneca, did this for cancer treatment and Eli Lilly for
such as hospitals, agree to share savings resulting diabetes programmes.
from the optimal management of a defined medical

Johnson et al. (2008) have proposed the following key questions arising from five
forces analysis:
䡲 What are the key forces at work in the competitive environment? These will differ by type of
industry. For example, for computer manufacturers the growing power of chip manu-
facturers and growth in competitive intensity might be regarded as most crucial.
䡲 Are there underlying forces? As identified from the PEST analysis or from an analysis of
global forces, which are driving competitive forces? For example, the competitive
strength of lower-cost high technology manufacturers in the Asia Pacific region is
an underlying and persistent threat to European and US producers.
䡲 Is it likely that the forces will change,and if so,how?
䡲 How do particular competitors stand in relation to these competitive forces? What are their
strengths and weaknesses in relation to the key forces at work?
䡲 What can management do to influence the competitive forces affecting a SBU? Can barriers be built
to entry or power over suppliers or buyers increased?
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3 STRATEGIC ANALYSIS AND CHOICE 79

䡲 Are some industries more attractive than others? Some industries are intrinsically more prof-
itable than others because, for example, entry is more difficult, or buyers and
suppliers are less powerful.

case example 3.5


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

2.6 Analysing the organisation’s competitive position


An industry or sector may be too high a level to provide for a detailed understanding
of competition. The five forces can impact differently on different kinds of players.
For example, Ford and Porsche may be in the same broad industry (automobiles),
but they are positioned differently: they face different kinds of buyer power and
supplier power at the very least. It is often useful to disaggregate. Many industries
contain a range of companies, each of which has different capabilities and competes
on different bases.These competitor differences are captured by the concept of stra-
tegic groups. Customers can also differ significantly. Such customer differences can
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80 STRATEGIC MANAGEMENT

be captured by distinguishing between strategic customers and ultimate consumers


and between different market segments.

Strategic groups
Strategic groups are organisations within an industry or sector with similar strategic
characteristics, following similar strategies or competing on similar bases. These
characteristics are different from those in other strategic groups in the same industry
or sector. For example, in the grocery retailing industry, supermarkets, convenience
stores and corner shops each form different strategic groups. There are many
different characteristics that distinguish between strategic groups but these can be
grouped into two major categories: first, the scope of an organisation’s activities
(such as product range, geographical coverage and range of distribution channels
used); secondly, the resource commitment (such as brands, marketing spend and
extent of vertical integration).
Which of these characteristics are especially relevant in terms of a given industry
needs to be understood in terms of the history and development of that industry and
the forces at work in the environment.

Market segmentation
Market segmentation seeks to identify similarities and differences between groups of
customers or users. This is important because not all users are the same: they have
different characteristics and needs, behave differently, and so on. Markets are there-
fore thought of in terms of market segments, and identifying which organisations
are competing in which market is an important exercise for a strategist.
market segmentation When undertaking a market segmentation analysis, the following should be
Seeks to identify similarities considered:
and differences between
groups of customers (a) There are many bases of market segmentation. Figure 3.9 summarises some of
or users. these. It is important to consider which bases of segmentation are most
important. For example, in industrial markets, segmentation is often thought of
in terms of the industrial classification of buyers: ‘we sell to the car industry’.
However, segmentation by buyer behaviour (or purchase value) might be more
appropriate in some markets. Indeed, it is useful to consider different bases of
segmentation in the same market to help explain the dynamics of that market
and suggest strategic opportunities.
(b) It is important to assess the attractiveness of different market segments and rela-
tive market share within them.
(c) Organisations are most likely to achieve competitive advantage by developing
and building strategies upon their own unique competences. It may therefore be
important for a business to try to identify market segments suited to its particular
competences.

Competitor analysis
As discussed above, a business needs to obtain and consider information about
competitors, and the end result of a competitor analysis should be to indicate where
each competitor is strong or weak and vulnerable.
The key elements are:
(a) Firms must be aware of who their competitors are and how strong each one is. In
any market, the strategic decisions of a firm will often be partly a response to
what a competitor has done already or has the potential to do.
(b) Define who the competitors are.The purpose of analysing competitors is to try to
assess what they will do and respond accordingly. A business therefore needs
to know:
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3 STRATEGIC ANALYSIS AND CHOICE 81

䡲 the competitor’s future goals;


䡲 the assumptions the competitor holds about the industry and its place within it;
䡲 current strategy – how is the competitor competing – on price?;
䡲 capabilities – strengths/weaknesses.
Such intelligence can be found in financial statements, information from customers
and suppliers, inspection of products and services, and so on.

FIGURE 3.9 Some bases of market segmentation (Johnson et al.)


Type of factor Consumer markets Industrial/organisational markets

Characteristics Age, sex, race Industry


of people/ Income Location
organisations Family size Size
Life-cycle stage Technology
Location Profitability
Lifestyle Management

Purchase/use Size of purchase Application


situation Brand loyalty Importance of purchase
Purpose of use Volume
Purchasing behaviour Frequency of purchase
Importance of purchase Purchasing procedure
Choice criteria Choice criteria
Distribution channel

Users’ needs Product similarity Performance requirements


and preferences Price preference Assistance from suppliers
for product Brand preferences Brand preferences
characteristics Desired features Desired features
Quality Quality
Service requirements

stop and think 3.5

What does Coca-Cola compete against?


䡲 Pepsi in the cola market.
䡲 All other soft drinks.
䡲 Tea and coffee.
䡲 Tap water.

test your knowledge 3.1

(a) What are the generic key drivers of change outlined by Johnson et al.?
(b) What are the key features of a PEST analysis?
(c) Outline the elements of Porter’s five forces analysis.
(d) Define market segmentation.
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82 STRATEGIC MANAGEMENT

3 Strategic analysis – competences and capability


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

FIGURE 3.10 Analysing strategic capability

Resource Audit

Analysing
Competence

Assessing
Balance

Identifying Key Issues


SWOT
CSF’s

Understanding Strategic
Capability

3.2 Resource audit


A resource audit identifies and classifies the resources that an organisation owns or
can access to support its strategies. It should assess: the quantity of resources avail-
able; the nature of those resources; and how far the resources are unique.
Resources can be grouped under four headings:
1 Physical resources An assessment of an organisation’s physical resources should
stretch beyond merely listing the number of machines, buildings, etc., and should
ask questions about the nature of these resources, such as the age, condition,
capability and location of each resource.
2 Human resources should examine the number and types of different skills within an
organisation, but their adaptability must not be overlooked. People’s innovative
capability is of particular importance in ‘fast-moving’ situations.
3 Financial resources include the sources and uses of money, such as obtaining capital,
managing cash, the control of debtors and creditors, and the management of
relationships with suppliers of money (shareholders, bankers, etc.).
4 Intangibles have a value, since when businesses are sold part of the businesses’ value
is ‘goodwill’. In some businesses, such as professional services, goodwill could
represent the major asset of the company resulting from brand names, good
contacts, etc.
The resource audit is really only a basis for further analysis. It should include all resources
the organisation can access to support its strategies and not be narrowly confined to the
unique resources
Resources that create
resources it owns. Strategically important resources may include its network of contacts
competitive advantage and or customers.The list should be used to identify unique resources. Unique resources
are difficult to imitate. are those that create competitive advantage and are difficult to imitate.
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84 STRATEGIC MANAGEMENT

3.3 Analysing competence


The difference in performance of organisations in the same ‘industry’ is rarely
core competences explained by differences in their resource base alone.It will also be determined by the
The activities, skills or way resources are deployed to create competences in the organisation’s separate activities
know-how that distinguish
and the processes of linking these activities together to sustain performance.
a company from its
competitors and through Only some will be core competences.These underpin the organisation’s ability to
which it achieves strategic outperform competition and must be difficult to imitate, or they will not provide a long-
advantage. term advantage.They may also be the basis on which new opportunities are created.

stop and think 3.6

What do you see as core competences of the organisation for which you work or one that is familiar to you?

The key steps in assessing core competencies are as follows:

Value chain analysis


value chain analysis Value chain analysis describes the activities within and around an organisation and
Describes the activities relates them to its competitive strength of the organisation. Value analysis (Miles,
within and around an 1961) was originally introduced as an accounting tool to shed light on the ‘value
organisation, and relates added’ by separate steps in complex manufacturing processes to determine where
them to an analysis of its
cost improvements could be made or value creation improved.
competitive strength.
Michael Porter linked these steps to an analysis of an organisation’s competitive
advantage.The basis of the approach is that organisations are more than a collection
of machines, money and people. These resources are deployed into activities and
organised into routines and systems which ensure that products or services are
produced that are valued by the final consumer or user. Porter argued that under-
standing strategic capability must start with identifying these separate value activi-
ties. Figure 3.11 shows the value chain within an organisation.
1 Primary activities are directly concerned with the creation or delivery of a product or
service and can be grouped into four main areas:
䡲 inbound logistics include materials handling, stock control, transport, etc.;
䡲 operations transform these various inputs into the final product or service:
machining, packaging, assembly, testing, etc.;
䡲 outbound logistics include warehousing, transport, etc. In the case of services, they
may be more concerned with arrangements for bringing customers to the service
if it is at a fixed location;
䡲 marketing and sales provide the means whereby consumers/users are made aware of
the product or service and are able to purchase it.
2 Support activities help to improve the effectiveness or efficiency of primary activities.
They can be divided into four areas:
䡲 procurement – the processes for acquiring the various resource inputs to the primary
activities;
䡲 technology development – all value activities have a ‘technology’ even if it is simply
‘know-how’;
䡲 human resource management – recruiting, managing, training, developing and
rewarding people;
䡲 infrastructure – the systems of planning, finance, information management, etc. and
the routines within the culture (see chapter 4).
The supply chain is about more than just supply chain management. Most organis-
ations are part of a wider value system that is linked to customer and supplier value
chains. Indeed, it is often this specialisation that underpins excellence in creating
value for money. Much of the value creation occurs in the supply and distribution
chains, and this whole process needs to be analysed and understood. For example,
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3 STRATEGIC ANALYSIS AND CHOICE 85

the quality of a car when it reaches the final purchaser is not only influenced by the
activities undertaken within the manufacturing company itself, but is also deter-
mined by the quality of components and the performance of the distributors.
Core competences differ from one organisation to another depending on how the
company is positioned and the strategies it is pursuing.
It is important to identify an organisation’s core competences not only to ensure
continuing good ‘fit’ between these core competences and the changing nature of the
markets or environment, but also because core competences may be the basis on which
the organisation‘stretches’ into new opportunities. So, in deciding which competences
are core, this ability to exploit the competence in more than one market or arena is
another criterion which could be used. Developing ‘added-value’ services and a
geographical spread of markets are two typical ways in which core competences can be
exploited to maintain progress once traditional markets are mature or saturated.

FIGURE 3.11 The value chain (Porter, 1985)

Firm infrastructure

Support Human resource management

Ma
activities

rgi
Technology development

n
Procurement

n
rgi
Ma
Inbound Operations Outbound Marketing Service
logistics logistics and sales

Primary activities

Core competences as value chain


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

Figure 3.12 summarises the relationship between resources, core competences and
competitive advantage.

FIGURE 3.12 Strategic capabilities and competitive advantage (Johnson et al., 2008)

Resources Competences

Threshold resources Threshold


capabilities
• Tangible competences
Threshold
• Intangible
Capabilities for

Unique resources Core competences


competitive
advantages

• Tangible
• Intangible

Core competences may have a variety of bases:


䡲 Cost efficiency The provision of value-for-money products or services (cost
efficiency) is a measure of the level of resources needed to create a given level of
value. Cost efficiency is determined by a number of factors often called ‘cost
drivers’. Innovative ways of managing these cost drivers can create cost reductions
and competitive advantage. They include economies of scale, supply costs,
product/process design and experience.
䡲 Analysing value added (effectiveness) Effectiveness is a measure of the level of value that
can be created from a given level of resources. This is essentially related to how
well the organisation is matching its products or services to the identified needs of
its chosen customers and the competencies that underpin this effectiveness.
Unlike cost analysis, the potential sources of value added, or effectiveness, are
likely to be many and varied. The key question is: what are the critically important
features and the core competencies that underpin the kind of value-added features
needed to perform effectively? For example, are the services that support the
product matched with client expectations and, again, do these represent perceived
value? If organisations are to compete on a value-added basis, it is important to
remember that the detailed assessment of value added must be done from the
viewpoint of the customer or user of the product or service.
䡲 Managing linkages Core competences in separate activities may provide competitive
advantage for an organisation, but over time may be imitated. Core competences
are likely to be more robust and difficult to imitate if they relate to the manage-
ment of linkages within the organisation’s value chain and linkages into the supply
and distribution chains. It is the management of these linkages that provides‘lever-
leverage age’ and levels of performance which are difficult to match. Leverage is a measure
A measure of the of the improvement in performance achieved through the managing of linkages
improvement in
between separate resources and activities.This could create competitive advantage
performance achieved
through the management of
in a number of ways. For example, a decision to hold high levels of finished stock
linkages between separate might ease production-scheduling problems and provide for a faster response
resources and activities. time to the customer.
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3 STRATEGIC ANALYSIS AND CHOICE 87

䡲 In addition to the management of internal linkage, competitive advantage may


also be gained by the ability to complement or co-ordinate the organisation’s own
activities with those of suppliers, channels or customers.This could, for example,
occur through vertical integration, such as attempting to improve performance
through owning more parts of the value system, bringing more linkages inside to
the organisation. In chapter 10 we shall see how total quality management seeks to
improve performance through closer working relationships between the various
specialists within the value system. Performance may sometimes be improved by
reconfiguring the value chain to reduce costs or increase effectiveness.

case example 3.6


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

3.4 Assessing the balance of the organisation


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

Some caution is needed with portfolio analysis:


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

FIGURE 3.13 The Boston Consulting Group portfolio matrix

MARKET SHARE

High Low

Stars Question Marks


High
MARKET GROWTH

Strong and growing quickly Could become stars or fail

Low
Cash Cows Dogs
Milked to supply stars and question marks Keep if profitable otherwise sell

3.5 Identifying key issues


It is only at this stage of the analysis that a sensible assessment can be made of the
major strengths and weaknesses of an organisation and their strategic importance.
The analysis is then useful as a basis against which to judge future courses of action.
In chapter 4 we look at critical success factors as one way of achieving this as part of
our focus on resource planning. Here we shall look at the role of a SWOT analysis.
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3 STRATEGIC ANALYSIS AND CHOICE 89

A SWOT analysis summarises the key issues from an analysis of the business
environment and the strategic capability of an organisation. SWOT stands for
SWOT analysis strengths, weaknesses, opportunities and threats but, rather than just listing these in
Summarises the key issues terms of managers’ perceptions, the idea is to undertake a more structured analysis so
from an analysis of the
as to yield findings that contribute to the formulation of strategy. It brings together
business environment and
the strategic capability of
the main issues raised in this chapter and in chapter 2. The aim is to identify the
an organisation. extent to which the current strategy of an organisation and its more specific strengths
and weaknesses are relevant to, and capable of, dealing with the changes taking place
in the business environment. It can also be used to assess whether there are oppor-
tunities to exploit further the unique resources or core competencies of the organis-
ation.The procedure is:
䡲 identify the key changes in the organisation’s environment following the analyses
outlined in the previous section. It is helpful if the list does not exceed seven or
eight key points that represent the opportunities and threats;
䡲 undertake the same process for the resource profile and competences of the
organisation following the analysis outlined in this section to identify the organ-
isation’s strengths and weaknesses. It is useful to keep the total list to no more than
eight points. It is important to avoid over-generalising this analysis and to keep to
specific points: a statement such as‘poor management’ means very little and could
be interpreted in any number of ways. If it really means that senior managers have
not been good at managing change in the organisation, that is a more specific and
more useful point.
When this is completed, the analysis should look something like that shown in Figure
3.14. This should provide some useful strategic insights. This example is a SWOT
analysis completed by an internal learning and development team within an organis-
ation in the communications sector. Some issues could be either opportunities or
threats, depending on the extent to which the organisation can capitalise on its
strengths.An analysis of perceived weaknesses should also recognise that their import-
ance varies depending on the types of strategy the organisation is likely to pursue.

FIGURE 3.14 Sample SWOT analysis

STRENGTHS WEAKNESSES
Consultancy skills Admin support
Diversity of background experience and skills Lack of large-scale organisation change experience
Much experience in delivering to meet ‘bottom line’ ‘Business’ experience (i.e. line experience)
business need Global ‘teamwork’
Capability in team and individual development Not sufficiently visible!
Change and transition expertise Multi-cultural imbalance
Knowledge of learning technology
Design and implementation of leadership
Development programmes
Good understanding of the business
Good sector experience

OPPORTUNITIES THREATS
Leadership development and cultural intelligence Credibility with top management
Team development opportunities in new structure Capability of senior management to support
Commissioning/partnering external with external Pressure on numbers
contractors Lack of ‘multiculturalism’/global mind
We have wide skill base which we must be able to focus Infrastructure support in the comapny
as required Lack of funding
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90 STRATEGIC MANAGEMENT

test your knowledge 3.2

(a) Explain what a resource audit should seek to address.


(b) Define ‘core competence’.
(c) Draw Porter’s Value Chain model.
(d) Define leverage.
(e) Draw the BCG portfolio matrix.

4 Strategic choice – options


4.1 Introduction
This section is concerned with the options for strategic choice and covers the basis of
strategic choice, alternative development directions and methods of choosing. Figure
3.15 is an adaptation of Ansoff’s (1965) traditional product/market matrix often
used for generating directions for strategic development. It considers the develop-
ment directions available to an organisation in terms of the market coverage, prod-
ucts and competence base of the organisation. This last dimension is an important
extension by Johnson et al. of the traditional approach. Figure 3.15 is meant to
emphasise that, in the long run, development in any of the boxes is likely to require
the development of competences to cope with a changing situation. So, innovation is
a key ingredient of strategic change.
Figure 3.15 also outlines the broad types of development direction in terms of the
three dimensions of markets, products and competences. These range from strategies
concerned with protecting and building an organisation’s position with its existing prod-
ucts and competences, through to major diversification requiring development and
change of both products and competences to enter or create new market opportunities.
Within this broad ‘steer’ for an organisation there are a number of specific options
concerning both the direction and the method of developing the organisation’s strategies.

FIGURE 3.15 Directions for Strategy Development (Ansoff, 1965; adapted by Johnson et al., 2008)

COMPETENCE

PRODUCTS
Existing New

A B

PROTECT/BUILD PRODUCT
Existing DEVELOPMENT
• Withdrawal • On existing competences
• Consolidation • With new competences
MARKETS

• Market penetration

C D

MARKET DIVERSIFICATION
New DEVELOPMENT
• New segments • On existing competences
• New territories • With new competences
• New uses

DEVELOPMENT
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3 STRATEGIC ANALYSIS AND CHOICE 91

4.2 Generic strategies to protect and build


The ‘grand strategy’ represents the overall direction the business is going to follow
and is connected with the concepts of mission and purpose that were discussed in
chapter 2 and underpin the specific strategic directions an organisation may choose
to follow.Three alternatives are presented in Figure 3.16.

FIGURE 3.16 Selection of grand strategies

Grand strategy What? Why?

Stability, or Continues with same products, markets, Seen to be doing well.


consolidation processes. Prefers low risk and little change.
Focus on steady all-round improvement. Stable environment.
Stakeholders may impose limits.
Growth, or Seeks to add new products, markets and Wants to do much better.
building processes, or Prefers higher risk and change.
Looks for major increases in current Managers motivated to expand.
activity. Volatile environment.
Stakeholders have high expectations.

Retrenchment, Recognises need to cut back on range of Recognises things are going badly.
or withdrawal products or markets. Threatening environment.
Seeks to improve current processes Managers opt for survival policy.
through cutting back. Stakeholders dissatisfied with current
activities.

1 Stability Many businesses, especially small ones, follow a stability strategy. This
means that the business will keep, more or less, the current pattern. If markets
expand, so will the business, but it will not seek to expand faster than that.A stab-
ility strategy will pay off in stable conditions where the business can devote its
efforts to improving its efficiency while not being threatened with external
change. In addition, many organisations are constrained by regulations or the
expectations of key stakeholders. This is especially true of the public sector and
many not-for-profit organisations.
2 Growth strategies are followed by businesses that see themselves as strong and
doing well.Their managers may prefer higher risks and be motivated to expand,
since many equate business size with success. In a volatile environment, growth
may provide a cushion against a downturn in fortunes or a barrier against the
development of a rival.
3 Retrenchment means drawing back. Falling demand in main markets, pressure on
costs through having a poor location, or the loss of key personnel may make it
desirable for a business to scale back. Retrenchment may be the only means for the
organisation to make the internal improvements necessary to face an increasingly
competitive environment. It is often seen as a temporary expedient before the
business adopts a growth or stability strategy starting at the new, lower level.
Ultimately, however, retrenchment could lead to closure.
The three generic strategies can be used in combination.They can be sequenced with
growth followed by stability, or pursued simultaneously in different parts of the SBU.
For example, stability in the current product line may be looked for while the
company prepares to launch a replacement.
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92 STRATEGIC MANAGEMENT

4.3 Product development

case example 3.7


Lego, manufacturer of the brightly coloured plastic consumer research and test marketing. Lego
building bricks, was launched in 1949, and has concentrates on global tastes and buying habits.
always proved popular in an industry renowned for Competition has forced Lego to act internationally
changing tastes and preferences and for innovation. and aggressively. One US company, Tyco, markets
On the strength of this one product, Lego has become products that are almost indistinguishable from Lego.
Europe’s largest and the world’s fourth-largest toy Lego has attempted unsuccessfully to sue for patent
maker. Lego is Danish, family owned and based on infringement and now views this competition as
strong principles. Lego has five stated values: undesirable but stimulating. In the mid-1990s, sales
creativity, innovation, learning, fun and quality. were being affected adversely by changing tastes and
by the growing popularity of computer games. In
The basic strategy is one of product development,
1997 Lego opted for a new range extension and
with Lego developing an enormous number of
began to market construction kits with microchips
variations on its basic product theme. By the mid-
and instructions on CD-ROMS. In 1998 the company
1990s, some 300 different kits (at a wide range of
introduced a new Mindstorms range built around a
prices) were available worldwide. There were 1,700
brick powered by AA batteries. Lego had had the
different parts, including bricks, shapes and
technology for some time but had been waiting until
miniature people, and children could use them to
it could reduce costs to a realistic level.
make almost anything from small cars to large,
complex, working space stations with battery- Lego manufactures in Switzerland, the Czech
operated space trains. Brick colours were selected to Republic, South Korea and the United States as well
as Denmark, making its own tools for the plastic
appeal to both boys and girls; and the more complex
injection moulding machines. Bricks are only
Lego Technic sets were branded and promoted
moulded in Denmark and Switzerland and emphasise
specially to make them attractive to the young
quality. Investments in production and improvements
teenage market.
are thought to be in the region of at least £100
In a typical year Lego replaces one-third of its million per year, though since 2000 profitability has
product range, with many items having only a short fallen and the company has recently re-structured in
lifespan. New ideas are developed over a two-to a bid to stay independent.
three-year period and backed by international
Source: Based on a case in Thompson and Martin (2005)

There are many reasons why companies might have a preference for product develop-
ment. For example, retailers follow the changing needs of their customers by a contin-
uing policy of introducing new product lines. A core competence for successful
organisations is, therefore, the ability to analyse and understand the changing needs of
a particular group of customers or clients. Strategic development can be built around
such a core competence. Similarly, product development may be preferred because the
company has core competences in research and development (R&D). When product
life cycles are short – as with consumer electronics – product development becomes
an essential requirement of an organisation’s strategy, built around a core competence
in R&D or the ability to acquire new products from elsewhere.

stop and think 3.7

What issues arise with the introduction of new products as a development strategy?
Why might it not be sustainable?

Product development may often raise uncomfortable dilemmas for organisations.


While new products may be vital, the process of creating a broad product line is
expensive, risky and potentially unprofitable, because most new products never reach
the market and, of those that do, relatively few succeed. In practice, rapid rates of new
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3 STRATEGIC ANALYSIS AND CHOICE 93

product introduction can depress profitability as organisations struggle to learn new


competences needed to debug production, train salespeople, etc. Johnson et al. argue
that managers should ensure that the processes of innovation in the organisation are
appropriate for the situation that they face.There are choices about how new ideas and
improvements might be fostered in the organisation and a further choice concerns the
method by which innovation will be secured – whether it should be through the
organisation’s own internal efforts, by acquiring innovations (e.g. products, processes
or whole companies) or by alliances and partnerships. The relative merits of these
different methods of strategy development will be discussed below.
In the long term, product development is unlikely to be sustainable without devel-
oping or acquiring new competences, for example because customers become more
experienced in judging value for money. Such shifts at the customer end require
responses from the organisation.These may be concerned not with the basic features
of the product or service, but with the need to improve other aspects of the customer
experience, for example the quality of information provided to clients that have been
regarded as peripheral.
The need to develop competences or products even to survive in existing markets
is underlined by the consequences of not doing so. It is likely that the performance
may become so poor in relation to that of competitors or other providers that the
organisation becomes a target for acquisition, particularly by organisations which
have core competences in corporate turnaround.

4.4 Market development


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

case example 3.8


McDonald’s expanded internationally by identifying prepared to make minor adjustments to the standard
new types of location as well as new countries. This offering in each country in which it operated in order
continued growth also required competences in to be accepted by customers.
reducing opening costs of new outlets and being
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94 STRATEGIC MANAGEMENT

4.5 Diversification
Diversification is a term used in many different ways. Here, diversification involves
diversification
directions of development that takes the organisation away from its present markets
Directions of development
that take the organisation and its present products at the same time.
away from its present Diversification is traditionally considered under two broad headings:
markets and its present
products at the same time. 1 Related diversification This is development beyond the present product and
related diversification market, but still within the broad confines of the ‘industry’ (i.e. value chain) in
Development beyond the which the company operates. For example, Unilever is a diversified corporation,
present product and market, but virtually all of its interests are in the fast-moving consumer goods industry.
but still within the broad
confines of the current industry.

FIGURE 3.17 Related diversification for a manufacturer (Johnson et al., 2008)

BACKWARD
INTEGRATION

Raw materials Components Machinery Product/process


manufacture manufacture manufacture research/design

Raw materials Components Machine


Financing
supply supply supply

Transport

HORIZONTAL
INTEGRATION

Competitive Complementary
products capabilities

Manufacturer

Complementary
By-products
products

FORWARD
INTEGRATION

Distribution Marketing Repairs and


Transport
outlets information servicing

䡲 Backward integration refers to development into activities that are concerned with the
inputs into the company’s current business (i.e. are further back in the value
chain), for example raw materials and machinery.

case example 3.9


In a bid to reduce premiums and improve customer ‘centres of excellence’ that would be supported by a
service in the UK car insurance industry, Direct Line larger network of recommended but independently
set up a limited number of wholly owned repair and owned garages.
development centres. These were intended to be
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3 STRATEGIC ANALYSIS AND CHOICE 95

䡲 Forward integration refers to development into activities concerned with a company’s


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

Does diversification improve perfomance?


The various attempts to demonstrate the effects of diversification on performance are
inconclusive. The sum total of the research is, according to Johnson et al., unclear
apart from one important message: successful diversification is difficult to achieve in
practice. There is some evidence that profitability does increase with diversity, but
only up to the limit of complexity, beyond which this relationship reverses. This
raises the significant issue of whether managers can cope with large, diverse organis-
ations. The evidence on this is particularly stark for service-based businesses
(Clayton, 1992).
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96 STRATEGIC MANAGEMENT

The theoretical benefits of synergy through diversification are often difficult to


achieve in practice. This is particularly supported in the research on diversification
through acquisition.
In the mid-1990s many large diversified organisations were choosing to split
into separate companies, each with a much more clearly defined core business or
market focus.
An important conclusion of many research studies is that the likely success of
diversification is extremely dependent on the circumstances of an organisation, such
as the level of industry growth, market structures and the firm’s size. Related diversi-
fiers also tend to out-perform those using unrelated diversification strategies.

4.6 Other methods of strategy development


The first part of this section was concerned with strategic choices at the broad or
generic level – the basis on which the more detailed strategies we have looked at in the
last sections are constructed. But for many of these directions there are different poten-
tial methods of development.These methods can be divided into three types: internal
development; acquisition (or disposal); and joint development (or alliances).

FIGURE 3.18 Alternative growth strategies (Thompson and Martin, 2005)


Advantages Possible draw backs

Organic growth Lower risk Slow


Allows for ongoing learning Lack of early knowledge – may be
More control misjudgements

Acquisition Fast Premium price may have to be paid


Buys presence, market High risk if any misjudgement
share and expense Preferred organization may not be
available
May be difficult to sell unwanted
assets

Strategic Cheaper than takeover Possible lack of control


alliance Access to market knowledge Potential managerial differences
Useful if acquisition and problems
impractical

Joint venture As for strategic alliance plus: As for strategic alliance


䡲 Greater incentive and closer
contract
䡲 Can lock out other competitors
more effectively

Internal development
internal development Internal development (also known as ‘organic growth’) involves building up the
Where strategies are organisation’s own resource base and competences to develop strategy. For many
developed by building up
organisations, internal development has been the primary method of strategy develop-
the organisation’s own
resource base and
ment, and there are some compelling reasons why this should be so, particularly with
competences. products that are highly technical in design or method of manufacture. Businesses will
choose to develop new products themselves, since the process of development is seen
as the best way of acquiring the necessary core competences to compete successfully in
the market place. Indeed, these core competences may also spawn further new products
and create new market opportunities.A similar argument applies to the development of
new markets by direct involvement. For example, many manufacturers still choose to
forgo the use of agents, as they feel that the direct involvement gained from having their
own sales force is of advantage in gaining a full understanding of the market.
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3 STRATEGIC ANALYSIS AND CHOICE 97

The implications of this to the management of innovation in the organisation


should be clear.Whatever strategic directions of development are being pursued, the
organisation must have high levels of competence in the management of innovation.
If these are not present then further consideration should be given to whether
internal development is the best development method. Perhaps the necessary compe-
tences in innovation should be acquired.

Mergers and acquisitions


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

case example 3.10


In December 2005, NTL confirmed that it had company has a quickly growing subscriber base, a
approached Virgin Mobile over merging the firms. good customer service team, and, most importantly, a
NLT proposed to use the Virgin brand to offer internet good brand. NTL hopes to captalise on that success
access, TV and fixed line and mobile telephony. The and re-brand itself as Virgin. Key questions that will
situation at that time is outlined below, illustrating affect the success of the merger are:
the factors to be weighed up by those involved. 䡲 Will Virgin Mobile’s young customers be affluent
NTL provides domestic phone, television and internet and settled enough to buy NTL’s premium cable
services and data, voice and internet services to television packages?
organisations in the United Kingdom. The parent 䡲 Will NTL/Telewest households buy into the Virgin
company emerged from bankruptcy protection in brand and forget about ‘NTL hell’, as one
2003 and is currently merging with Telewest, another customer website has labeled it?
cable operator. NTL/Telewest has a total of five Cable firms have found it difficult enough to hawk
million subscribers and employs 10,000 people. It their television and telephony packages, so one might
does not have a good reputation for customer service. question whether a quadruple sell will deliver. Virgin,
Virgin Mobile is part of the Virgin Group and was in turn, is under pressure from keenly priced
launched in November 1999. Virgin is a ‘virtual’ competitors such as Tesco Mobile.
operator, using the T-Mobile network, and has five In the end this deal is not about technology; it is
million customers on a mixture of pre-pay and about branding. And investors – and Sir Richard –
contract deals. The company employs 1,400 staff in will have to ask themselves whether the ever-flexible
the United Kingdom. Virgin brand can be stretched yet again.
As a virtual network operator, Virgin Mobile has Source: Based on material from www.bbc.co.uk
precious few real assets. But Sir Richard Branson’s

A compelling reason to develop by acquisition is the speed with which it allows the
company to enter new product or market areas. In some cases the product or market
is changing so rapidly that this becomes the only way of successfully entering the
market, since the process of internal development is too slow. Another reason for
acquisition is the lack of resources or competence to develop a strategy internally. A
company may be acquired for its R&D expertise or its knowledge of a particular type
of production system. International developments are often pursued through acqui-
sition because of market knowledge.
There are also financial motives for acquisitions. If the share value or
price/earnings (P/E) ratio of a company is high, then a firm with a low share value
or P/E ratio may be a tempting target. Indeed, this is one of the major stimuli for the
more aggressively acquisitive companies. Sometimes there are reasons of cost
efficiency which make acquisition look favourable.This could arise because an estab-
lished company may have achieved efficiencies that would be difficult to match
quickly by internal development. The necessary innovation and organisational
learning would be too slow.
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98 STRATEGIC MANAGEMENT

stop and think 3.8

Are mergers and acquisitions always a good thing for an organisation?


What issues might arise with implementation?

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

Joint developments and strategic alliances


Strategic alliances involve some form of agreement between two or more companies
where they share resources and activities to pursue a strategy. Joint development of new
strategies has become increasingly popular, particularly since the early 1980s, because
organisations cannot always cope with increasingly complex environments (such as
globalisation) from internal resources and competences alone.They may see the need
to obtain materials, skills, innovation, finance or access to markets, and recognise that
these may be as readily available through co-operation as through ownership.
There is a variety of arrangements for joint developments and alliances. Some are
very formalised but, at the other extreme, there can be loose arrangements of co-
operation and informal networking with no shareholding or ownership involved.
The reasons why these different forms of alliance occur are concerned with the assets
involved in the alliance.These assets may not just be financial or physical, but could
also include access to market, skills and intellectual property.
Joint ventures are also alliances, but involve the exchange of minority sharehold-
ings between the companies, or the establishment of an independent company
jointly owned by the organisations that start it. The organisations remain inde-
pendent, but set up a newly created organisation jointly owned by the parents. The
joint venture was a favoured means of beginning collaborative adventures between
eastern and western European firms in the early 1990s, with eastern European firms
providing labour, entry to markets and sometimes plants, and western companies
providing expertise and finance.
Faulkner’s (1995) study of international strategic alliances confirmed that the
primary motivation to form alliances was the need for specific resources and
competences to survive and succeed in globalising markets – particularly where
technologies were also changing. Partners were chosen with these issues in mind.
However, the success of alliances tended to be more dependent on how they were
managed and the way in which the partners fostered the evolution of the partner-
ship, for example attitudes to commitment, trust and cultural sensitivity, clear
organisational arrangements and the desire of all partners to achieve organisational
learning from the alliance rather than to use partners to substitute for their lack
of competences.
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3 STRATEGIC ANALYSIS AND CHOICE 99

test your knowledge 3.3

(a) Outline Ansoff’s view of generic strategies.


(d) Define ‘diversification’.
(c) What types of diversification are there?
(d) What types of joint strategy development are there?

5 Strategic choice – evaluation and selection


5.1 Introduction
This section discusses how strategic options can be evaluated and the processes by
which organisations might select strategies for the future. The aim is to look at the
contribution that different types of technique, some of which we have already
discussed, can make to evaluating and selecting strategies.
When assessing strategies, three types of evaluation criteria can be used:
1 Suitability – a broad assessment of whether the strategy addresses the circumstances
in which the organisation is operating, for example the extent to which new strat-
egies would fit with the future trends and changes in the environment.
2 Acceptability – the expected performance outcomes (such as the return or risk) if the
strategy were implemented and the extent to which these would be in line with
the expectations of stakeholders.
3 Feasibility – whether the strategy could be made to work in practice.This means an
emphasis on more detailed assessment of the practicalities of resourcing and stra-
tegic capability.

FIGURE 3.19 A framework for the evaluation and selection of strategies

Strategic Strategic
Analysis Options

Assessment of
Suitability

Acceptability Feasibility

Selection of
Strategies

Figure 3.19 shows how these various aspects of evaluation and selection can be fitted
together, and builds on the issues previously discussed concerning strategic analysis
and strategic options.

5.2 Assessing suitability


suitability
Suitability concerns whether a strategy addresses the circumstances in which the
Concerns whether a
strategy addresses the
organisation is operating. Establishing the suitability of options is a useful starting
circumstances in which the point as it establishes the strategic logic behind a particular strategy. Assessing the
organisation is operating. suitability of strategic options can be a useful basis on which to screen options before
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100 STRATEGIC MANAGEMENT

more detailed analyses are undertaken. In reviewing strategies, it is important to


check that strategies are consistent with the needs of the environment, the resources
and values of the organisation, and its mission.
䡲 Mission and objectives Does the strategy fit the current mission and objectives of the
organisation? Is it acceptable to the strategic leader and other influential stake-
holders? (This issue is developed further at 5.4 below.)
䡲 Effect on the strategic perspective Does the strategy proposed have the potential for
improving the general competitive position of the organisation? It should seek to
become and remain an effective competitor.
䡲 Current strategic position (SWOT) Is the strategy appropriate for the current economic
and competitive environment? Is the strategy able to capitalise and build on
current strengths, competencies and opportunities, and avoid weaknesses and
potential threats?To what extent is the strategy able to take advantage of emerging
trends in the environment, the market and the industry?
䡲 Skills, competencies and resources Are the strategies being pursued and considered suffi-
ciently consistent that skills, competencies and resources are not spread or
stretched in any disadvantageous way? Does any new proposal exploit key organ-
isational competencies? For current businesses and strategies, can the organisation
effectively add value, or would a divestment strategy be more appropriate?
䡲 Culture Does the strategy fit the culture and values of the organisation? If not, what
are the implications of going ahead?
䡲 Simplicity Is the strategy simple and understandable? Is the strategy one that could
be communicated easily, and about which people are likely to be enthusiastic?
Summarising the above, is there congruence between the environment, values and
resources?

5.3 Analysing feasibility


Feasibility is concerned with whether an organisation has the resources and compe-
feasibility tences to deliver a strategy.
Concerns whether an
organisation has the 䡲 Issues of implementation and change Is the strategy feasible in resource terms? Can it be
resources and competences implemented effectively? Is it capable of achieving the objectives that it addresses?
to deliver a strategy. Can the organisation cope with the extent and challenge of the change implied by
the option?
䡲 Finance and other resource availability A lack of any key resource can place a constraint on
certain possible developments.
䡲 Ability to meet key success factors A strategic alternative is not feasible if the key success
factors dictated by the industry and customer demand, such as quality, price and
service level, cannot be met.
䡲 Competitive advantage The effectiveness of a strategy will be influenced by the ability
of the organisation to create and sustain competitive advantage.When formulating
a strategy it is important to consider the likely response of competitors in order to
ensure that the necessary flexibility is incorporated into the implementation
plans.A company which breaks into a currently stable industry or market may well
threaten the market shares and profitability of other companies and force them to
respond with, e.g., price cuts, product improvements or aggressive promotion
campaigns.The new entrant should be prepared for this and be ready to counter it.
䡲 Timing Timing is related to opportunity, on the one hand, and risk and vulner-
ability, on the other. It may be important for an organisation to act quickly and
decisively once a window of opportunity is spotted. Competitors may attempt to
seize the same opportunity.Timing is also an implementation issue.
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3 STRATEGIC ANALYSIS AND CHOICE 101

5.4 Assessing acceptability


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

stop and think 3.9

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

5.5 Selecting strategies


This final section is concerned not so much with what the strategic choices are, but
with how the process of strategic choice and selection of strategies can be undertaken
within organisations.

Prioritising criteria
Some prioritisation of criteria may be a useful starting point. A useful starting point
is to consider the purpose of the organisation. It is clearly important to take into
account the view of those in the leadership team developing the criteria as well as
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102 STRATEGIC MANAGEMENT

other significant stakeholders. In not-for-profit organisations, the criteria may go


beyond considerations of generating the added value necessary for survival and may
consider other matters, such as the levels of service to the community, or individuals
the organisation serves. In addition, the culture and style of such organisations do not
always lend themselves to precise evaluation. Figure 3.20 suggests ways in which
priorities may vary between commercial and not-for-profit organisations.

FIGURE 3.20 Are some criteria more important? (Lynch, 1997)

Criteria in commercial organisations

Strategy option 1 Mission and


objectives?

Strategy option 2 Building on


strengths?

Strategy option 3 Overcoming


weakness?

Criteria in not-for-profit organisations

Strategy option 1 Mission

Strategy option 2 Source

Strategy option 3 Decentralised


decision making

䡲 Criteria in commercial organisations For most organisations, the priority of the criteria
will be established by the mission and objectives. Criteria also involve the need to
balance the interests of different stakeholders. It would be a mistake to consider
only those criteria that can be put into numbers. For example, many organisations
will have guidelines related to customer quality and satisfaction, while others will
include service to the broader community.These may not be easy to quantify, but
are no less important. All these need to be reflected in the criteria for selection of
strategy options.
䡲 Criteria in not-for-profit organisations All not-for-profit organisations will need to create
added value. However, beyond this, the criteria may need to reflect strongly the
important aspects of the service or the value to the community appropriate to the
mission. Great care needs to be taken in not-for-profit organisations that any quan-
tified criteria do not come to dominate the strategy selection when such measures
are inappropriate. Criteria in not-for-profit organisations also need to take into
account the different decision-making processes and beliefs that motivate many
such organisations.The reliance on voluntary support, the strong sense of mission
and belief in the work of the organisation and the style of the organisation may not
lend themselves to the simple choice from a series of options. Not-for-profit organ-
isations may be concerned with a high degree of loyalty to a mission, which is often
clear, but the organisation may be decentralised with local decision-making. If this
is the case, then a centralised evaluation of options is difficult.
One comparison of the criteria with those of commercial organisations is shown in
Figure 3.21.
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3 STRATEGIC ANALYSIS AND CHOICE 103

FIGURE 3.21 Criteria in commercial and not-for-profit organisations (Lynch, 1997)


Commercial organisation Not-for-profit organisation

䡲 Quantified 䡲 Qualitative
䡲 Unchanging 䡲 Variable
䡲 Consistent 䡲 Conflicting
䡲 Unified 䡲 Complex
䡲 Operational 䡲 Ambiguous
䡲 Clear 䡲 Non-operational
䡲 Measurable 䡲 Non-measurable

Whilst evaluating strategy options in not-for-profit organisations may be more


diffuse and open-ended, there may be more similarities than Lynch (2003) suggests.
For organisations such as Body Shop International, there are a wide range of stake-
holders to consider. By the same token, not-for-profit organisations may need to
focus on the needs and expectations of potential funders such as government, whose
policies they may seek to challenge.
Different parts of the organisation will have varying perspectives on the evaluation
criteria. For example, the centre represented by corporate headquarters is likely to
have a different view from an SBU.

Strategic decision-making processes


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

stop and think 3.10

How is strategy decided in your organisation?


How does the ‘planning system’ gather its data?

If there is greater reliance on strategic change emerging from decisions taken within the
organisation by managers close to the market, their suppliers and so on, these
managers must feel that they have the authority to make change decisions. In both
cases appropriate strategic leadership is required to direct activity.This section looks
at how decision-making occurs in practice.
Decision-making is a process related to the existence of a problem, and it is often
talked about in terms of problem-solving.A problem, in simple terms, exists when an
undesirable situation has arisen which requires action to change it.The organisation
would like to see something different or better happening and be achieving different
results. However, in many instances the problem situation is very complex and can
only be partially understood or controlled, and therefore strategic decisions are not
so much designed to find ideal or perfect answers but to improve the situation as
much as possible.
While there will always be an objective element in a strategic decision, other, more
subjective influences will also play a part. Figure 3.22 shows that the ultimate
decision will have been affected by three elements:
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104 STRATEGIC MANAGEMENT

䡲 results from whatever analyses have been used to evaluate the data available;
䡲 intuition and perspective of the person or people involved. Past experiences and
their willingness to trust the reliability and validity of the information that they
have will both be influential issues;
䡲 the political realities of the various alternatives.The contingent decision is the one
that people believe can be implemented – it is not necessarily the option that on
paper promises the highest rewards.To be effective, all managers must be able to
handle the political issues associated with stakeholder priorities and pressures.

FIGURE 3.22 Strategic decision-making (Thompson and Martin, 2005)

Analysis and The decision-


logical conclusions/ maker's
recommendations perspective,
from the data intuition or
available 'gut feel'

The political realities


of various alternatives

Decision-making, therefore, involves both information and people. While the stra-
tegic leader requires an appropriate information system, he or she must also ensure
that a good mix of people has been gathered, and manage them well.
In some organisations there may be a lack of objectivity in decision-making and a
degree of ‘fire fighting’ rather than making positive strategic decisions. Here,
decision-making is fragmented and likely to be inadequate for internal cohesion and
synergy and where there is likely to be considerable in-fighting. Thompson and
Martin (2005) argue that such organisations have the following characteristics:
䡲 irrational decision-making (processes);
䡲 weak decision-making/leadership (people);
䡲 rigidity, reluctance to change and negative politics;
䡲 conflicting perspectives and interests;
䡲 over-hasty decisions (decisive!) which are difficult to implement;
䡲 lack of clear purpose;
䡲 dissolution and absolution (of problems) instead of resolution and solution;
䡲 unhelpful personal objectives;
䡲 stakeholder conflicts;
䡲 poor information;
䡲 inadequate measurement and control; and
䡲 managers’ inability to take a holistic perspective.
Organisations should evaluate the extent to which any, or all, of these factors are
present in the decisions their managers are making. Improvements could then foster
increased co-operation and sharing and allow managers who do seem to be perpetu-
ally fire fighting to be more proactive in seizing new opportunities.
Managers’ strategic decisions are also affected by their personal judgmental abili-
ties, and understanding judgment can, therefore, help us to explain why some
managers appear to‘get things right’ while others‘get things wrong’.Thompson and
Martin (2005) argue that there are three sets of factors that make up the context in
which this is exercised.These include the decision-makers’:
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3 STRATEGIC ANALYSIS AND CHOICE 105

䡲 skills and values, together with aspects of their personality (personal factors);
䡲 authority and accountability within the organisation (structural factors); and
䡲 understanding and awareness (environmental factors).
Managers make judgments about:
䡲 reality – strategic awareness of the organisation and its environment which is based
upon interpretation and meaning systems;
䡲 action – what to do about perceived strategic issues;
䡲 values – concerning expected and desired results and outcomes from the decision.
Figure 3.23 suggests how these are interconnected.

FIGURE 3.23 Judgment and strategic decision-making (Thompson and Martin, 2005)

Personal Structural
factors factors

Perceptions: Willingness and ability to act


meaning systems

Judgement

Reality leads to Action

bas
ed
on

Values

Awareness

Environmental
factors

Decision-makers need to understand ‘what is’ (reality), ‘what matters’ (values) and
‘what to do about it’ (action).Their choice will be based upon their conceptualisa-
tion of what might be a better alternative to the current situation. A company with
cash difficulties, for example, might need a strategy based upon immediate rational-
isation or consolidation. A liquid company evaluating growth options has greater
flexibility.The choice will also be affected by managers’ relative power and influence,
their perception of the risks involved, and their willingness to pursue certain courses
of action.
In practice, strategic decision-making involves determining how unusual the situ-
ation is.Where they perceive that there is a degree of normality to the events, the like-
lihood is that managers will continue to rely on traditional routines and approaches.
However, where the situation is seen as more unusual, a decision has to be made
about how to deal with it.This choice reflects action judgment, and there are options
from which to choose:
䡲 continue to rely on approaches which have worked well in the past;
䡲 from a position of leadership, take decisive action, reflecting an entrepreneurial style;
䡲 involve others in formal analysis, discussion and planning;
䡲 possibly involving others, adopt a trial-and-error approach to craft a new strategy
adaptively or incrementally; or
䡲 seek input from an expert, maybe an external consultant.
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106 STRATEGIC MANAGEMENT

test your knowledge 3.4

(a) Outline the three key elements for evaluating a strategy.


(b) How might strategic options be screened?
(c) List the main techniques for analysing acceptability.
(d) Outline the part of judgment in strategic decision-making.

chapter summary

䡲 The ability to sense changes in the environment is activities are linked together to improve value for money
important because perceived changes in environmental in products or services.
influences signal the possible need to change strategy. 䡲 Value chain analysis can be a useful way of describing
They reveal opportunities and warn of threats. These can and analysing these important relationships between an
be built into a SWOT (strengths, weaknesses, organisation’s resources, competences and strategies. An
opportunities and threats) analysis. analysis also needs to identify which competences are
core to the success of strategy and how these core
䡲 Clarifying the nature of the environment helps provide an
initial view on appropriate ways of understanding the competences can provide the basis of new opportunities.
The analysis of competences is useful for understanding
influences of that environment. In simple, static
an organisation at the level of the strategic business unit.
conditions, historical analysis and forecasting may be
In addition, a judgment needs to be made on the strength
sensible. In more dynamic conditions, scenario planning
or weakness of the portfolio of strategic business units.
may be important. As the environment becomes more
䡲 Specific techniques for analysing resources and
complex, the design of organisation structure and
competences may provide only a partial picture. There is
development of a learning culture is important.
a need to pull these together to give an overall
䡲 Carrying out an initial audit of environmental influences,
assessment of strategic capability. This may be done
begining at the macro level with an understanding of
through a SWOT analysis or by assessing the extent to
political, economic, social and technological influences,
which the resources and competences relate to the
can provide an overall view of the variety of forces at work.
critical success factors.
This can also help identify key influences and drivers of
䡲 A development strategy for the future has three elements:
change and provide the basis of examining the extent to the broad basis of the strategy, the direction of
which these have differential impact on industries or development and the method of development. These
organisations within industries. three elements must be compatible with each other.
䡲 Five forces analysis provides a means of identifying the 䡲 Development directions can be identified by assessing
forces that determine the nature of the competitive the various combinations of products and markets
environment, especially in terms of barriers to entry, the leading to four broad categories: protect and build
power of buyers and suppliers, the threat of substitutes (current products in current markets); product
and other reasons for the extent of competitive intensity. It development (for existing markets); market development
can also be used to examine the benefits of collaboration (with existing products); and diversification (away from
within industries. existing products and markets).
䡲 The choice of ‘good’ strategies by an organisation can 䡲 Key determinants in choosing new directions are the
only be partly guided by general principles of strategic ‘fit’ organisation’s competences. Core competences provide a
between the business environment and the resource basis on which to develop and exploit new market
base of organisations. Many competitors may achieve opportunities. A further choice is needed – that of the
similar degrees of fit, yet some outperform others. This method of development. There are three broad choices:
difference results from the way in which resources are internal development; acquisition; and joint development.
deployed to create competences in separate activities, Internal development has the major benefit of building
how these are matched to the requirements for particular organisational competences through learning. Mergers
types of strategy and the competence with which these and acquisitions are common, largely because of their
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3 STRATEGIC ANALYSIS AND CHOICE 107

speed and the ability to acquire competences not already broad assessment of whether a strategy addresses the
held ‘in-house’. However, the track record of acquisitions is circumstances in which the organisation is operating.
not good. Strategic alliances have many different forms and Suitability tests can be used to compare the relative
are increasingly popular methods of development. The most merits of various strategies before more detailed analysis.
successful appear to be those where partners have positive This is a process of screening and can involve different
attitudes to managing and developing the partnership and techniques, such as ranking, decision trees or scenario
are concerned to use the alliance to develop their own planning. The acceptability of a strategy relates to three
competences, rather than simply using the partner to issues: the expected return from a strategy; the level of
substitute for competences they lack themselves. risk; and the likely reaction of stakeholders. Feasibility is
䡲 Strategies can be assessed against three criteria: concerned with whether an organisation has the
suitability, acceptability and feasibility. Suitability is a resources and competences to deliver a strategy.

practice questions
Section A (4 marks each)
1.1 Using an example, distinguish between corporate strategy and business unit strategy.
1.2 Briefly describe TWO of the fallacies in strategic planning highlighted by Mintzberg.
1.3 Define social responsibility in the context of an organisation.
1.4 Outline what is meant by the term 'corporate mission' and give an example.
1.5 What is meant by the term 'Human Capital'?
1.6 Why might an organisation conduct a PEST analysis?

Section B (20 marks each)


1.7
(a) Outline the limitations of the rational model of strategic management.
(b) Discuss how an incrementalist view seeks to overcome these.
1.8 Outline how a resource planning system might be used to improve the strategic management and operations of an
organisation.
1.9 Business trends sometimes appear to contradict one another. Today organisations often simultaneously negotiate
mergers and acquisitions yet also plan de-mergers and management buy-outs.
(a) What organisational issues should be addressed before agreeing to a merger?
(b) As an employee shareholder, what questions would you seek to ask of managers contemplating a management buy-out?
1.10
(a) Why might a business seek to diversify?
(b) Using examples discuss the types of diversification that are available.
1.11 Consultants advising a mail order business supplying clothes have raised the issue of Critical Success Factors as a
way of addressing complaints about slow delivery, inaccurate billing and poor product quality.
(a) Explain the term 'Critical Success Factors'.
(b) What systems might be involved in this organisation to measure and enhance CSFs? (c) To what extent might these
systems be suited to technology based solutions?
1.12
(a) Outline the different components of strategic planning at its different levels and show the relationship between
these components.
(b) How might a stakeholder analysis help you to establish goals at different levels?
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