FUNDAMENTALS OF STRATEGY

Gerry Johnson

Kevan Scholes Sheffield Hallam University

Richard Whittington Said Business School, University of Oxford

Prentice Hall FINANCIAL TIMES

An imprint of Pearson Education Harlow, England • London • New York • Boston • San Francisco -Toronto

Sydney • Tokyo • Singapore • Hong Kong • Seoul • Taipei • New Delhi

Cape Town • Madrid • Mexico City • Amsterdam • Munich • Paris • Milan

Contents

Preface Getting the Most from Fundamentals of Strategy Guided Tour

XI

xiii

xvi

1 Introducing Strategy

1.1 Introduction 1.2 What is strategy?

1.2.1 The characteristics of strategic decisions 1.2.2 Levels of strategy 1.2.3 The vocabulary of strategy

1.3 Strategic management 1.3.1 The strategic position 1.3.2 Strategic choices 1.3.3 Strategy in action

1.4 Strategy development processes Summary Recommended key readings References Case example: Electrolux

2 2 2 7 8 12 14 15 16 16 18 18 19 20

2 The Environment

2.1 2.2

2.3

2.4

Introduction The macro-environment 2.2.1 The PESTEL framework 2.2.2 Building scenarios Industries and sectors 2.3.1 Competitive forces - the five forces framework 2.3.2 Implications of five forces analysis 2.3.3 Key issues in using the five forces framework 2.3.4 The industry life cycle Competitors and markets 2.4.1 Strategic groups 2.4.2 Market segments 2.4.3 Identifying the strategic customer 2.4.4 Understanding what customers value - critical

success factors

23

24 25 25 27 29 30 35 37 38 41 42 46 47

48

2.5 Opportunities and threats Summary 51 Recommended key readings 51 References 52 Case example: Global forces and the European brewing industry 54

Strategic Capability 59 3.1 Introduction 60 3.2 Foundations of strategic capability 60

3.2.1 Resources and competences 61 3.2.2 Threshold capabilities 63 3.2.3 Unique resources and core competences 63

3.3 Cost efficiency 65 3.4 Capabilities for achieving and sustaining competitive

advantage 67 3.4.1 Value of strategic capabilities 68 3.4.2 Rarity of strategic capabilities 68 3.4.3 Inimitable strategic capabilities 69 3.4.4 Non-substitutability of strategic capabilities 72 3.4.5 Dynamic capabilities 73

3.5 Diagnosing strategic capability 74 3.5.1 The value chain and value network 74 3.5.2 Benchmarking 79 3.5.3 SWOT 81

Summary 83 Recommended key readings 84 References 84 Case example: Making eBay work 86

Strategic Purpose 89 4.1 Introduction 90 4.2 Corporate governance 91

4.2.1 The governance chain 91 4.2.2 Different governance structures 96

4.3 Corporate social responsibility 100 4.3.1 Laissez-faire 100 4.3.2 Enlightened self-interest 101 4.3.3 A forum for stakeholder interaction 101 4.3.4 Shapers of society 102

4.4 Stakeholder expectations 105 4.4.1 Stakeholder mapping 107

4.5 Values, mission, vision and objectives 112 4.5.1 Corporate values 112

CONTENTS

4.5.2 Mission and Vision Statements 112 4.5.3 Objectives 114

Summary 115 Recommended key readings 115 References 116 Case example: (PRODUCT) RED and Gap 117

5 Culture and Strategy 121 5.1 Introduction 122 5.2 Strategic drift 123

5.2.1 Strategies change incrementally 125 5.2.2 The tendency towards strategic drift 125 5.2.3 A period of flux 127 5.2.4 Transformational change or death 127

5.3 What is culture and why is it important? 128 5.3.1 National and regional cultures 129 5.3.2 Organisational culture 129 5.3.3 Organisational subcultures 132 5.3.4 Culture's influence on strategy 132 5.3.5 Analysing culture: the cultural web 134 5.3.6 Undertaking cultural analysis 136

Summary 140 Recommended key readings 140 References 140 Case example: Marks & Spencer (A) 142

6 Business-Level Strategy 147 6.1 Introduction 148 6.2 Bases of competitive advantage: the 'strategy clock' 149

6.2.1 Price-based strategies (routes 1 and 2) 152 6.2.2 (Broad) differentiation strategies (route 4) 153 6.2.3 The hybrid strategy (route 3) 155 6.2.4 Focused differentiation (route 5) 156

6.3 Sustaining competitive advantage 157 6.3.1 Sustaining price-based advantage 157 6.3.2 Sustaining differentiation-based advantage 159 6.3.3 Strategic lock-in 160 6.3.4 Responding to competitive threat 160

6.4 Competition and collaboration 163 Summary 166 Recommended key readings 166 References 167 Case example: Madonna: still the reigning queen of pop? 168

7 Strategie Directions and Corporate-Level Strategy 171 7.1 Introduction 172 7.2 Strategic directions 173

7.2.1 Market penetration 174 7.2.2 Consolidation 175 7.2.3 Product development 176 7.2.4 Market development 177 7.2.5 Diversification 177

7.3 Reasons for diversification 179 7.3.1 Related diversification 182 7.3.2 Unrelated diversification 184 7.3.3 Diversification and performance 186

7.4 Value creation and the corporate parent 187 7.4.1 Value-adding and value-destroying activities

of corporate parents 187 7.5 Portfolio matrices 192

7.5.1 The growth/share (or BCG) matrix 192 7.5.2 The directional policy (GE-McKinsey) matrix 194

Summary 196 Recommended key readings 196 References 197 Case example: The Virgin Group 199

8 International Strategy 203 8.1 Introduction 204 8.2 Internationalisation drivers 205 8.3 National and international sources of advantage 210

8.3.1 Porter's National Diamond 210 8.3.2 The international value network 213

8.4 International strategies 215 8.5 Market selection and entry 218

8.5.1 Market characteristics 218 8.5.2 Competitive characteristics 220 8.5.3 Entry modes 223

Summary 226 Recommended key readings 226 References 226 Case example: Lenovo Computers: East meets West 228

9 Strategy Methods and Evaluation 231 9.1 Introduction 232 9.2 Methods of pursuing strategies 232

9.2.1 Organic development 233

CONTENTS

9.2.2 Mergers and acquisitions 233 9.2.3 Strategic alliances 236

9.3 Strategy evaluation 240 9.3.1 Suitability 241 9.3.2 Acceptability 246 9.3.3 Feasibility 253

Summary 256 Recommended key readings 256 References 256 Case example: Tesco conquers the world? 258

10 Strategy in Action 261 10.1 Introduction 262 10.2 Structures 263

10.2.1 The functional structure 263 10.2.2 The multidivisional structure 265 10.2.3 The matrix structure 267

10.3 Organisational processes 269 10.3.1 Direct supervision 269 10.3.2 Planning processes 270 10.3.3 Cultural processes 271 10.3.4 Performance targeting processes 273 10.3.5 Market processes 274

10.4 Managing strategic change 276 10.4.1 Roles in managing change 276 10.4.2 Styles of managing change 278 10.4.3 Levers for managing change 281

Summary 285 Recommended key readings 286 References 286 Case example: NHS Direct 288

Glossary 293 Index of Names 299 General Index 302 Publisher's Acknowledgements 312