Chapter 1: Introduction strategy
1.2 What is strategy?
Strategy: is the long-term direction of an organization.
The definition of strategy consist of three key elements:
1. The long term. The importance of a long-term perspective on strategy is emphasized by the
‘three-horizons’’ framework. The three-horizons framework suggests organizations should
think of themselves as comprising three types of business or activity, defined by their
‘horizons’ in terms of years.
a. Horizon 1 businesses are basically the current core activities, they need defending
and extending but the expectation is that in the long term they will likely be flat or
declining in terms of
profit.
b. Horizon 2 businesses
are emerging activities
that should provide
new sources of profit.
c. Horizon 3 businesses
are risky research and
development projects,
start-up ventures,
test-market pilots.
These might generate
profit only a couple of
years from the
present time.
The key point taken from the three-horizons framework is that managers need to avoid
focusing on the short-term issues of their existing activities. Strategy involves pushing out
Horizon 1 as far as possible, at the same time looking to Horizon 2 and 3.
2. Strategic direction. Sometimes a strategic direction only emerges as a coherent pattern over
time. Typically, however, managers and entrepreneurs try to set the direction of their
strategy according to long-term objectives. In private sector the strategic direction is most of
the time maximizing profit for shareholders.
3. Organization. Organizations involve complex relationships, both internally and externally.
This is because organizations typically have many internal and external stakeholders, in other
words people and groups that depend on the organization and upon which the organization
itself depends. In strategy, therefore, it is always important to look inside organizations, and
to consider the people involved and their different interest and views. Additionally, Strategy
is also crucially concerned with an organization’s external boundaries: in other words,
questions about what to include within the organization and how to manage important
relationships with what is kept outside.
,1.2.2 Levels of strategy
Inside an organization, strategies can exist at three main levels:
1. Corporate-level strategy: is concerned with the overall scope of an organization and how
value is added to the constituent businesses of the organizational whole (geographical scope,
diversity of products and services, acquisitions of new businesses, allocation of resources).
Being clear about corporate-level strategy is important: determining the range of businesses
to include is the basis of other strategic decisions, such as acquisitions and alliances.
2. Business-level strategy: is about how the individual businesses should compete in their
particular markets. Business-level strategy typically concerns issues such as innovation,
appropriate scale and response to competitors’ moves. Where the businesses are units
within a larger organization, business-level strategies should clearly fit with corporate –level
strategy.
3. Operation strategies: are concerned with how the components of an organization deliver
effectively the corporate – and business-level strategies in terms of resources, processes and
people. The success of a business strategy depends on the operational decisions. Therefore
operational strategies must be closely linked to business-level strategy.
This need to link the corporate, business and operational levels underlines the importance of
integration in strategy. Each level needs to be aligned with the others. The demands of integrating
levels define an important characteristic of strategy: strategy is typically complex.
1.2.3 strategy statements
Strategy statement: should have three main themes: the fundamental goals ( mission, vision or
objectives) that the organizations seeks; the scope or domain the organization’s activities; and the
particular advantages or capabilities it has to deliver all of these.
1. Goals:
a. Mission: This relates to goals, and refers to the overriding purpose of the
organization. What business are we in?
b. Vision: this too relates to goals, refers to the desired future state of the organization.
What do we want to achieve?
c. Objectives: These are more precise and ideally quantifiable statements of the
organization’s goals over some period of time. What do we have to achieve in the
coming period?
2. Scope/domain: An organization’s scope or domain refers to three dimensions: (1) customers
or clients; (2) geographical location; (3) and extent of internal activities (‘vertical integration’)
3. Advantage: Describes how the organization will achieve the objectives it has set for itself in
its chose domain. In competitive environments, this refers to the competitive advantage.
1.3 The exploring strategy model
The exploring strategy model includes understanding the strategic position, of an organization;
assessing strategic choices for the future; and managing strategy in action. The elements can be seen
in a linear sequence – first understanding the strategic position, then making strategic choices and
finally turning strategy into action. In practice the elements do not always follow this linear
sequence. The interconnected circles are designed to emphasize this potentially non-linear nature of
strategy. Position, choices and action should be seen closely related, and in practice none has priority
over another. The Exploring strategy model thus provides a comprehensive and integrated
,framework for analyzing an organization’s position, considering the choices it has and putting
strategies into action.
1.3.1 strategic position
The strategic position is concerned with the impact on strategy of the external environment, the
organization’s strategic capability (resources and competences), the organization’s purpose and the
organization’s culture. Understanding these four factors is central for evaluating future strategy.
(1) Environment. The fundamental questions relates to opportunities and threats available to
the organization in this complex and changing environment (chapter 2).
(2) Strategic capability. The fundamental question on capability regards the organization’s
strengths and weaknesses (chapter 3).
(3) Strategic purpose. The third fundamental question is: what is the organization’s strategic
purpose; what does is seek to achieve? Here the issue of corporate governance is important:
how to ensure that managers stick to the agreed purpose. Questions of purpose and
accountability raise issues of corporate social responsibility and ethics: is the purpose an
appropriate one and are managers sticking to it. Purpose and ethics will in turn be closely
associated with organization culture, implying the importance of cultural fit with the desired
strategy (chapter 4).
1.3.2 strategic choices
Strategic choices involve the options for strategy in terms of both the directions in which strategy
might move and the methods by which strategy might be pursued.
(1) Business strategy. There are strategic choices in terms of how the organization seeks to
compete at the individual business level. The fundamental question here, then, is how should
the business unit compete?
(2) Corporate strategy and diversification. The highest level of an organization is typically
concerned with issues of corporate scope; in other words, which businesses to include in the
portfolio. This relates to the appropriate degree of diversification, with regard to products
offered and markets served . Corporate level strategy is also concerned with internal
relationships, both between business units and with the corporate head office.
, (3) International strategy. The fundamental question is: where internationally should the
organization compete.
(4) Innovative strategy. Fundamental strategy questions are whether the organization is
innovative appropriately and how it should respond to the innovations of competitors.
(5) Acquisitions and alliances. The fundamental question is whether to buy another company,
ally or to go it alone.
1.3.3 strategy in action
Strategy in action is concerned with how chose strategies are actually put into practice.
(1) Structuring an organization to support successful performance. A key question is here how
centralized or structured should the organizational structure be.
(2) Systems are required to control the way in which strategy is implemented.
(3) Leading strategic change is typically an important part of putting strategy into action.
1.4 strategy development processes
There are two broad accounts of strategy development:
1. The rational-analytic view of strategy development is the conventional account. Here
strategies are developed through rational and analytical processes, led typically by top
managers. There is a linear sequence. The basis assumption in this rational-analytic view is
that strategies are typically intended, in other words the product of deliberate choices.
(Chandler & Porter)
2. The emergent strategy view is the alternative broad explanation of how strategies develop.
In this view, strategies often do not simply develop as intended or planned, but tend to
emerge in organizations over time as a result of ad hoc, incremental, or even accidental
actions. (Mintzberg)
The rational-analytic and emergent views of strategy development are not mutually exclusive.
, Chapter 2: The environment
2.2 The macro-environment
This section introduces two interrelated tools – PESTEL and scenarios – for analyzing the broad
macro-environment of an organization. PESTEL provides a wide overview and scenarios build on this
in order to consider how the macro-environment might change.
2.2.1 The PESTEL framework
The PESTEL framework categorizes environmental factors into key types. PESTEL highlights six
environmental factors in particular: political, economic, social, technological, ecological and legal.
This range of factors underlines that the environment is not just about economic forces: there is an
important non-market environment.
Politics highlights the role of the state and other political forces. The state is often important
as a direct economic actor, for instance as potential customer, supplier or owner of
businesses. But there are also influences from various political movements, campaign groups
and concerned media.
Economic refers to macro-economic factors such as exchange rates, business cycles and
differential economic growth rates around the world.
Social influences include changing cultures and demographics (aging, cultural change).
Technological influences refer to influences such as the internet, nano-technology or the rise
of new composite materials.
Ecological stands specifically for ‘green’ environmental issues, such as pollution, waste and
climate change.
Legal embraces legislative and regulatory constraints or changes (tax treatments, or
restrictions concerning acquisitions).
,Based on this list many factors can be thought of, therefore it is necessary to step back eventually to
identify the key drivers for change. Key drivers for change are the environmental factors lilely to
have a high impact on the future or failure of strategy. Without a clear sense of the key drivers for
change, managers will not be able to take decisions that allow for effective action.
2.2.2 Building scenarios
Scenarios analysis are carried out to allow for different possibilities and help prevent managers from
closing their minds to alternatives. Thus scenarios offer plausible alternative views of how the
business environment might develop in the future. Scenarios typically build on PESTEL analysis and
key drivers for change, but do not offer a single forecast of how the environmental change. While
there are many ways to carry out scenario analysis, five basic steps are often followed.
(1) Defining scenario scope is an important first step. Scope refers to the subject of the scenario
analysis and the time span. The subjects can be global industries, or particular geographical
regions and markets. The appropriate time span is determined partly by the expected life of
investments.
(2) Identifying the key drivers for change comes next. Here PESTEL analysis can be used to
uncover issues likely to have a major impact upon the future of the industry, region or
market. There are three criteria to key drivers which are (I) have a high potential impact; (II)
are uncertain; (III) are largely independent from each other.
(3) Developing scenario ‘stories’. Having selected opposing key drivers for change, it is
necessary to knit together plausible stories that incorporate both key drivers and other
factors into a coherent whole.
(4) Identifying impacts of alternatives scenarios on organizations is the next key stage of
scenario building. It is important for an organization to carry out robustness checks in the
face of each plausible scenario and to develop contingency plans in case they happen.
(5) Establishing early warning systems. Organizations should identify indicators that might give
early warning about the final direction of environmental change, and at the same time set up
systems to monitor these.
,2.3 industries and sectors
An industry is a group of firms producing products and services that are essentially the same.
Industries and sectors are often made up of several markets. A market is a group of customers for
specific products or services that are essentially the same. This section concentrates on industry
analysis, starting with Michael Porter’s Fiver forces framework and then introduces two additional
concepts, complementors and industry life cycles.
2.3.1 Competitive forces – The five forces framework
Porters five forces framework helps identify the attractiveness of an industry in terms of five
competitive forces. The five forces together constitute an industry’s ‘structure’:
(1) Competitive rivalry. The more competitive rivalry there is, the worse it is for incumbents
(existing players). Competitive rivals are organizations with similar products and services
aimed at the same customer group. Five factors tend to define the extent of rivalry in an
industry market:
a. Competitor balance. Balance between competitors in the market, who is dominant
one and who follows?
b. Industry growth rate. Partly based on the stages of the industry life cycles, different
stages create different competitive conditions.
c. High fixed cost. Industries with high fixed costs, perhaps because they require large
investments in capital equipment or initial research, tend to be highly rivalrous.
Large production is needed to cut prices, initiating price wars. Only large increments
are possible causing short-term over-capacity and leading to increased competition.
d. High exit barriers. Excess capacity persists and consequently fight to maintain
market share.
e. Low differentiation. Because products are almost the same competitors can only
differentiate by competing on price.
(2) The threat of entry. How easy it is to enter the industry influences the degree of
competition. Barriers to entry are the factors that need to be overcome by new entrants If
they are to compete in an industry. Five important entry barriers are:
a. Scale and experience. In some industries, economies of scale are extremely
important (auto industry). The effect of scaling is increased where there are high
investments requirements to entry. Barriers to entry also come from experience curve
effects that give incumbents a cost advantage because they have learnt how to do
things more efficiently than inexperienced entrant could possibly do.
b. Access to supply or distribution channels. In many industries manufactures have had
control over supply and/or distribution channels. Examples of this are loyalty of
suppliers and customers or vertical integration.
c. Expected retaliation. Retaliation could take the form of a price war or a marketing
blitz. Just the knowledge that incumbents are prepared to retaliate is often
sufficiently discoursing to act as a barrier.
d. Legislation or government action. Legal restraints on new entry vary from patent
protection to regulation of markets, through to direct government actions.
e. Differentiation. Differentiation means providing a product or service with higher
perceived value than the competition. Differentiation reduces the threat of entry
because of increasing customer loyalty.
, (3) Threats of substitutes. Substitutes are products or services that offer a similar benefit to an
industry’s products or services, but have a different nature. Substitutes can reduce demand
for a particular type of product as customers to alternatives. There are two important points
to bear in mind about substitutes.
a. The price/performance ratio is critical to substitution threats. A substitute is still an
effective threat even if more expensive, so long as it offers performance advantages
that customers value. It is the ratio of price to performance that matters, rather than
simple price.
b. Extra-industry effects are the core of the substitution concept. Substitutes come
from outside the incumbents industry and should not be confused with competitors
threats from within the industry. The higher the threat of substitution, the less
attractive the industry is likely to be.
(4) Power of buyers. Buyers are the organizations immediate customers, not necessarily the
ultimate consumers. If buyers are powerful, they can demand cheap prices or product or
service improvements liable to reduce profit. Buying power is likely to be high when some of
the following three conditions prevail:
a. Concentrated buyers. Where a few large customers account for the majority of
sales, buyer power is increased. If a product or service accounts for a high
percentage of the buyers’ total purchases, their power is also likely to increase.
b. Low switching cost. Where buyers can easily switch between one supplier and
another.
c. Buyer competition threat. If the buyer has the capability to supply itself, or if it has
the possibility of acquiring such a capability, it tends to be powerful (backward
vertical integration).
(5) The power of suppliers. Suppliers are those who supply the organization with that what it
needs to produce the product or service. The factors increasing supplier power are the
converse to those for buyer power.
a. Concentrated suppliers. Where just a few producers dominate supply, suppliers
have more power over buyers.
b. High switching costs. If it is expensive or disruptive to move from one supplier to
another, then the buyer becomes relatively dependent and correspondingly weak.
c. Supplier competition threat. Suppliers have increased power where they are able to
cut out buyers who are acting as intermediaries (forward vertical integration).
2.3.2 Complementors and industry life cycles
Five forces analysis can be supplemented by analysis of complementors and industry life cycles.
Some analysts argue that industry analyses need to include a ‘sixth force’: organization that are
complementors rather than simple competitors. An organization is your complementor if it enhances
your business attractiveness to customers or suppliers (Ex. Microsoft and McAfee). Complementarity
implies a significant shift in perspective. While Porter’s five forces sees organizations as battling
against each other for share of industry value, complementors may cooperate to increase the total
value available. Opportunities for cooperation can be seen through a value net: a map of
organizations in a business environment demonstrating opportunities for value-creating cooperation
as well as competition.
The power of the five forces typically varies with the stages of the industry life cycle. The industry
life-cycle concept proposes that industries typically have four stages.
