Detailed summary of the book "Fundamentals of Strategy" (Gerry Johnson and others), the third edition. This is the management part of the trade MST 21306. Supplemented by information from slides of the lectures. Use of images and tables.
Samenvatting Inleiding in de Bedrijfskunde 2: Fundamentals of Strategy
Marketing Planning and Strategic management
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Summary FoS Chapter 1: Introducing strategy
1.2 WHAT IS STRATEGY?
There are different definitions of strategy.
Chandler emphasises a logical flow from the determination of goals and objectives to the
allocation of resources.
Porter focuses on deliberate choices, difference and competition.
Mintzberg uses a definition that says strategy is recognizing a pattern (bottom up approach, an
ad hoc procedure)
The definition of the book: Strategy is the long-term direction of an organisation.
The long term: strategies are typically measured over years (sometimes decades).
o Three-horizons framework suggests
organisations should think of themselves
as comprising three types of business or
activity, defined by their ‘horizons’ in
terms of years.
Horizon 1: current core activities
Horizon 2: emerging activities that
should provide new sources of
profit
Horizon 3: typically risky research
and development projects, start-up
ventures, test-market pilots, etc
Strategic direction: over years, strategies follow some kind of long-term direction or
trajectory. Managers try to set the direction of their strategy according to long-term
objectives.
Organisation: organisations involve complex relationships, both internally and
externally. Organisations have many stakeholders (=people and groups that depend on
the organisation and upon which the organisation itself depend). In strategy it is
important to look inside organisations, but it is also crucially to concern an
organisation’s external boundaries.
Strategic decisions are likely to:
Be complex in nature
Be made in situations of uncertainty
Affect operational decisions
Require an integrated approach (both inside and outside an organisation)
Involve considerable change
‘wicked problems for which no unique best solution exists’
Inside an organisation, strategies can exist at three main levels.
Corporate-level strategy: overall purposes and scope of an organisation and how
value is added to the constituent businesses of the organisational whole. Being clear
because determining the range of businesses to include is the basis of other strategic
decisions.
, - Geographical scope, diversity of products/services, acquisition of new
businesses, how resources are allocated between different elements of the
organisation
Business strategy (competitive strategy): how the individual businesses should
compete in their particular markets.
- Innovation, appropriate scale, response to competitors’ moves
- Public sector: how units should provide best-value services
Operational strategy: how the components of an organisation deliver effectively the
corporate- and business level strategies in terms of resources, processes and people.
- Executing a common task
Corporate strategy Operational strategy
Organisation-wide, holistic Routinized
Conceptualisation of issues Techniques and actions
Creating new directions Managing existing resources
Developing new resources Operating within existing strategy
Ambiguous/uncertain Operationally specific
Long term orientation Day to day issues
Strategy statements should have three themes:
1) the fundamental goals (mission, vision or objectives) that the organisation seeks
Mission: the overriding purpose of the organisation (what business are we in?)
Vision (strategic intent): the desired future state of the organisation (what do
we want to achieve?)
Objectives: more precise and ideally quantifiable statements of the
organisation’s goals over some period of time (of specific outcomes that are to
be achieved)
2) the scope or domain of the organisation’s activities
scope: refers to three dimensions: customers or clients; geographical location;
and extent of internal activities (‘vertical integration’)
3) the particular advantages or capabilities (or competitive superiority)
advantages: how the organisation will achieve the objectives it has set of itself
in its chosen scope/domain (in a competitive environment --> competitive
advantage)
Strategy statements should be very short (no more than 35 words) to keep focused on the
essentials and to make it easy to remember and communicate.
1.3 THE EXPLORING STRATEGY MODEL
The exploring strategy model includes understanding the strategic position of an
organisation, assessing strategic choices for the future and managing strategy in action.
, Strategic position: is concerned with the impact on strategy of the external
environment, the organisation’s strategic capability (resources and competences), the
organisation’s purpose and the organisation’s culture.
o Environment: organisations operate in a complex political, economic, social
and technological world. Fundamental question relates to their opportunities
and threats available in the complex and changing environment.
o Strategic capability: each organisation has its own strategic capabilities, made
up of its resources and competences. Fundamental question relates to their
strengths and weaknesses.
o Strategic purpose: the fundamental question is what the organisation’s
strategic purpose is, what the organisation seek to achieve.
corporate governance is important (how to ensure managers stick to
the agreed purpose).
corporate social responsibility and ethics
organisational culture, implying the importance of cultural fit with the
desired strategy.
Strategic choices: involves the options for strategy in terms of both the directions
(e.g. diversify into new products, enter new markets, transform existing
products/markets through radical innovation) in which strategy might move and the
methods () by which strategy might be pursued.
Business strategy: how the organisation seek to compete (on scale,
price, quality?) at the individual business level. Fundamental question
is how the business unit should compete.
Corporate strategy and diversification: the highest level of an
organisation is typically concerned with issues of corporate scope
(which businesses to include in the portfolio) and with internal
relationships. Relates to the appropriate degree of diversification.
International strategy: form of diversification into new geographical
markets (in what countries?)
Innovation strategy: most organisations have to innovate constantly to
survive. Fundamental questions are whether the organisation is
innovating appropriately and how it should respond to competitors’
innovations.
Acquisitions and alliances: organisations have to make choices about
methods for pursuing their strategies. Fundamental question is whether
to buy another company, ally or to go it alone.
Strategic in action: is concerned with how chosen strategies are actually put into
practice.
Structuring an organisation to support successful performance.
Structure matters for who is in charge and who is accountable.
Systems are required to control the way in which strategy is
implemented with the help of planning and performance systems.
Leading strategic change is typically an important part of putting
strategy into action, e.g. the speed and comprehensiveness of change.
,1.4 STRATEGY DEVELOPMENT PROCESSES
There are two broad accounts of strategy development.
o The rational-analytic view of strategy development is the conventional account.
Strategies are developed through rational and analytical processes, led typically by top
managers. Lead to a strategic plan with the following elements: the strategy statement;
mission, vision and objectives; environmental analysis; capability analysis; strategic
options and proposed strategies; resources; and key changes. There is a linear
sequence. This view is associated with Alfred Chandler and Michael Porter.
o The emergent strategy view is the alternative broad explanation of how strategies
develop. In this view strategies do nog simply develop as intended or planned, but
tend to emerge in organisations over time as a result of ad hoc, incremental or even
accidental actions. Often formed at the bottom of the organisation. This view is
associated with Henry Mintzberg.
It is generally sensible for managers to start with a rational-analytical approach. However, it is
also sensible to allow for emergence and learning in action, and the roles of culture and
politics in organisations should not be overlooked. So strategy develops both through rational-
analytic processes and through emergence.
, Summary FoS Chapter 2: The environment
2.1 INTRODUCTION
There are different layers of a business environment, namely the macro-environment, the
industry or sector and the competitors and the markets. For a firm it is important to identify
the key impactful firm-external items, either positive (opportunities) or negative (threats).
2.2 MACRO-ENVIRONMENT
The PESTEL framework categorizes environmental factors (societal influences) into key
types. Organisations needs to consider both market and non-market aspects of strategy.
PESTEL assumes that the combined impact of some factors will be more important than other
factors and the focus should be on their future impact.
> Politics: the role of state and other political forces. Influences from various political
movements, campaign groups or concerned media. The state is often both the owner
and key customer for defence companies.
> Economics: macro-economic factors such as exchange rates, business cycles and
differential economic growth rates around the world. Organisations can be affected by
the prosperity of the economy.
> Social: changing cultures and demographics (e.g. aging population). Changing cultural
attitudes can also raise challenges.
> Technological: influences such as the internet, nano technology and rise of new
composite materials.
> Ecological: ‘green’ environmental issues, like pollution, waste and climate change.
> Legal: legislative and regulatory constraints or changes, like restrictions or
liberalisation.
Key drivers for change are the environmental factors likely to have a high impact on the
future success or failure of strategy. The PESTEL analysis provides the broad ‘data’ from
which to identify key drivers of change. These key drivers can be used to construct scenarios
of alternative possible futures. Scenarios are not to predict but to encourage managers to be
alert to a range of possible futures. There are five basic steps in carrying out scenario
analyses:
1) Defining scenario scope. Scope refers to the subject of the scenario analysis and the
time span. The appropriate time span is determined partly by the expected life of
investments.
2) Identifying the key drivers for change. PESTEL analysis can be used to find issues
with a major impact upon the future of the industry, region or market.
» Uncertainty; worthwhile considering different possible scenarios?
» Mutual independence; the drivers are capable of producing significantly
divergent or opposing outcomes?
3) Developing scenario ‘stories’. (=Plausible, alternative views of how the business
environment might develop in the future.) Knit together plausible stories that
incorporate both key drivers and other factors into a coherent whole.
4) Identify impacts of alternative scenarios on organisations. It is important for an
organisation to carry out robustness checks in the face of each plausible scenario and
to develop contingency plans in case they happen.
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