Fundamentals of strategy
Chapter 1 Introducing strategy
1.1 Introduction
This book addresses the fundamental strategic issues of importance to managers,
employees, consultants and bankers.
1.2 What is strategy?
Strategy is the long-term direction of an organisation.
o Long-term: The three horizons framework suggests organisations should think of
themselves as comprising three types of business or activity, defined by their
‘horizons’ in times of years.
Horizon 1 businesses: The current core activities. Need defending and
extending, but the expectation is that in the long term they will likely be flat
or declining in terms of profits.
Horizon 2 businesses: Emerging activities that should provide new sources of
profit.
Horizon 3 possibilities: For which nothing is sure. It might generate profits a
few years from the present time.
Strategy involves pushing out Horizon 1 as far as possible, at the same time
as looking to horizons 2 and 3.
o Strategic direction: Strategies follow some kind of long-term direction. Sometimes a
strategic direction only emerges as a coherent pattern over time.
Managers and entrepreneurs try to set the direction of their strategy
according to long-term objectives.
o Organisation: Organisations involve many relationships, both internally and
externally. This is because organisations typically have many internal and external
stakeholders, these are people and groups that depend on the organisation and
upon which the organisation itself depends.
Strategy is also vitally concerned with an organisation’s external boundaries:
questions about what to include within the organisation and how to manage
important relationships with what is kept outside.
The purpose of strategy: mission, vision, values and objectives
The core of a strategist’s job is defining and expressing a clear and motivating purpose for
the organisation.
The stated purpose of the organisation should address two related questions:
o How does the organisation make a difference?
o For whom does the organisations make that difference?
There are four ways in which organisations define their purpose:
o A mission statement aims to provide employees and stakeholders with clarity about
what the organisation is fundamentally there to do. What business are we in?
What would be lost if the organisation did not exist?
How do we make a difference?
o A vision statement is concerned with the future the organisation seeks to create.
The vision expresses an aspiration that will enthuse, gain commitment and stretch
performance.
, What do we want to achieve?
o Statements of corporate values communicate the underlying and enduring core
‘principles’ that guide an organisation’s strategy and define the way that the
organisation should operate.
These values should not change with circumstances.
o Objectives are statements of specific outcomes that are to be achieved. These are
often expressed in precise financial terms.
Strategy statements
Strategy statements should have three main themes: the fundamental goals (mission, vision
or objectives) that the organisation seeks; the scope or domain of the organisation’s
activities; and the particular advantages or capabilities it has to deliver all of these.
o Scope: An organisation’s scope or domain refers to three dimensions: customers or
clients, geographical location, and extent of internal activities.
o Advantage: It describes how the organisation will achieve the objectives it has set for
itself in its chosen domain.
In competitive environments, this refers to the competitive advantage.
o It should be no more than 35 words long. The three themes are deliberately
highly concise.
o Strategy statements are relevant to a wide range of organisations.
Levels of strategy
Strategies can exist at three main levels:
Corporate-level strategy is concerned with the overall scope of an organisation and how
value is added to the constituent businesses of the organisational whole.
o This include geographical scope, diversity of products or services, acquisitions of new
businesses, and how resources are allocated between the different elements of the
organisation.
Business-level strategy is about how the individual businesses should compete in their
particular markets.
o It concerns issues such as innovation, appropriate scale and response to competitor’s
moves.
o It’s about how units should provide best-value services.
Functional strategies are concerned with how the components of an organisation deliver
effectively the corporate- and business-level strategies in terms of resources, processes and
people.
The corporate, business and functional levels underlines the importance of integration in
strategy. Each level needs to be aligned with the others.
1.3 The exploring strategy framework
The exploring strategy framework includes understanding the strategic position of an
organisation; assessing strategic choices for the future; assessing strategic choices for the
future (strategy position); and managing strategy in action.
The framework’s three elements could have been presented in a linear sequence – first
understanding the strategic position, then making strategic choices and finally turning
strategy into action.
o In practice, the elements of strategy do not always follow this linear sequence.
o The three steps are overlapping and interdependent.
, The strategic position is concerned with the impact on strategy of the macro environment
and industry environment, the organisation’s strategic capability, and the organisation’s
stakeholders and culture.
o Macro-environment: At the macro level, organisations are influenced by political,
economic, social, technological, ecological and legal forces. This relates to the
opportunities and threats available to the organisation in complex, changing
environments.
o Industry environment: At the industry level of analysis, competitors, suppliers and
customers present challenges to an organisation. They could also present
opportunities and threats.
o Strategic capability: Each organisation has its own strategic capabilities, made up of
its resources and competences. Strengths and weaknesses are important.
o Stakeholders: There are many actors who hold a ‘stake’ in the future of every
organisation – not just the owners, but employees, customers, suppliers and more.
An organisation’s key stakeholders should define its purpose.
Understanding their different interests to identify this purpose is important.
The 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. An
organisation might have a range of strategic directions open to it: the organisation could
diversify into new products; it could enter new international markets; or it could transform
its existing products and markets through radical innovation.
o Business strategy and models: There are strategic choices in terms of how the
organisation seeks to compete at the individual business level.
What strategy and business model should a company use to compete?
o Corporate strategy and diversification: The highest level of an organisation is typically
concerned with issues of corporate scope, in other words which businesses to
include in the portfolio.
An important consideration is how to manage the internal relationships of
the group both between business units and with the corporate head-office.
It needs to be concerned with which method to use for growth: buy another
company, ally or go it alone by using its own resources to develop internally.
Managing strategy in action is about how strategies are formed and how they are
implemented.
o Structuring: An organisation to support successful performance. How centralised
or structured should the organisational structure be?
o Systems: Required to control the way in which strategy is implemented.
o Leading strategic change: An important part of putting strategy into action.
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 by top
managers.
The plan begins with statements of the overall strategy and mission, vision
and objectives. Then the macro-environmental and industry analyses
followed by capability analyses.
, o The emergent strategy view is the alternative broad explanation of how strategies
develop. Good ideas and opportunities often come from practical experience at
the bottom of the organisation. This is learning from experience.
It is generally sensible for managers to start with a rational-analytical approach, and this is
what many of the tools and concepts in this book are designed to help with.
Chapter 2 Macro-environment analysis
2.1 Introduction
The business environment creates both opportunities and threats for organisations.
Environments can be considered in terms of a series of ‘layers’: macro-environment, industry
(sector), competitors/markets, organisation.
Macro-environment consists of broad environmental factors that impact to a greater or
lesser extent many organisations, industries and sectors.
2.2 PESTEL analysis
PESTEL analysis highlights six environmental factors in particular:
o Politics: It’s about the direct state involvement and political exposure.
The role of the state: The state is often important as a direct economic actor,
for instance as a customer, supplier, owner or regulator or businesses.
Exposure to civil society organisations: Civil society comprises a whole range
of organisations that are liable to raise political issues, including political
lobbyists, campaign groups, social media or traditional media.
o Economics: Macro-economic factors such as currency exchange rates, interest rates
and fluctuating economic growth rates around the world.
A key concept for analysing macro-economic trends is the economic cycle.
Economic growth rates have an underlying tendency to rise and fall in
regular cycles. Some industries are vulnerable to economic cycles:
Discretionary spend industries: Where purchasers can easily put off
their spending for year or so, there tend to be strong cyclical effects.
Many people can choose to delay or curtail spending.
High fixed cost industries: Industries suffer from economic
downturns because high fixed costs in plant, equipment or labour
tend to encourage competitive price-cutting to ensure maximum
capacity utilisation.
o Social: Social elements influencing demand can be analysed under the following four
headings:
Demographics: Ageing populations in many Western societies create
opportunities and threats for both private and public sectors.
Distribution: Changes in wealth distribution influence the relative sizes of
markets.
Geography: Industries and markets can be concentrated in particular
locations.
Culture: Changing cultural attitudes can also raise strategic challenges.
Small worlds are particularly likely in societies where economic activity is
geographically concentrated or where social elites have similar backgrounds.
Brokers between different networks are often sources of innovation, as they
can bring new ideas and members from one network to another.
