strategic analysis and choice

Strategic analysisand choice

contents

1 Introduction2 Strategic analysis – analysing the

environment3 Strategic analysis – competences and

capability

4 Strategic choice – options5 Strategic choice – evaluation and

selection

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:

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

� Analyse market segments and the implications for providers of products/services.

� Undertake a competitor analysis and resource audit and explain the implications.

� Define unique resources and core competencies.

� Draw up a value chain for an organisation and the ‘industry’ in which it operates.

� Explain how different types of linkage underpin competitive advantage.

� Undertake a portfolio analysis and a SWOT analysis.

� Identify the development direction options for an organisation.

� Compare three methods of development (internal, acquisition and alliances).

� Understand suitability, acceptability and feasibility.

� Understand the different processes of strategy selection.

chapter 3

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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, takentogether, provide a basis for strategic analysis. Such an understanding needs to takethe future into account. Is the current strategy capable of dealing with the changestaking place in the organisation’s environment? Is it likely to deliver the resultsexpected by influential stakeholders? It is unlikely that there will be a completematch between current strategy and the picture that emerges from the strategicanalysis.The extent to which there is a mismatch is the extent of the strategic problemfacing senior managers. It may be that the adjustment required is marginal or theremay be a need for a fundamental realignment of strategy.Assessing the magnitude ofstrategic change required and the ability of the organisation to effect such changes isanother important aspect of strategic analysis. Johnson, Scholes and Whittington(2008) argue that strategic choice is the core of strategic management. It isconcerned with decisions about an organisation’s future and the way in which itneeds to respond to the many pressures and influences identified through strategicanalysis. An issue for many organisations and managers is that they are unable orunwilling to consider the variety of strategic options open to them.They tend to bebound by the existing paradigm and resist change.The strategic tools and techniquesexplored here are more concerned with enabling managers to be able to question andchallenge than with formalised procedures of planning.

3 STRATEGIC ANALYSIS AND CHOICE 67

FIGURE 3.1 The rational model (based on Naylor 2003)

Strategic choice

Selectstrategy

Generateoptions

Strategic control

Strategy implementation

Strategic analysis

Determinestructure

Set functionalstrategies

Decidepolicies

Testassumptions

Monitorprogress

Analyseresources

Appraiseenvironment

Set missionand objectives


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 theyoperate and their organisation itself.The starting point is purpose, but analysis is acontinual, integrated process where each element cannot be checked withoutawareness of the others. Strategic direction, environment and the resources of theorganisation 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. Evaluationis concerned with the key criteria of suitability, feasibility and acceptability.

2 Strategic analysis – analysing the environment

2.1 IntroductionThe difficulty managers face when trying to understand the environment is making senseof this diversity in a way that can contribute to strategic decision-making. Identifyingmany environmental influences may be possible, but of little use because no overallpicture emerges of the really important influences on the organisation.The second diffi-culty is uncertainty. Managers often claim that the volume and pace of technologicaldevelopments mean more and faster change than ever before.Whether or not change isin fact faster and the changes more unpredictable, it is important to try to understandfuture 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 naturalwhen faced with complexity. One of the tasks of the strategic manager is to find waysin which he or she can break out of the tendency towards oversimplification whilststill achieving useful and usable analysis. In this section, we provide several frame-works for understanding how the environment of organisations are provided withthe 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 environmentalinfluences

StrategicPosition

Identify key opportunitiesand threats

Analyse the organisationscompetitive position

Identify key competitiveforces


1 Assess environmental influences It is useful to take an initial view of the nature of theorganisation’s environment in terms of how uncertain it is. Is it relatively static ordoes 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 preludeto an audit of environmental influences. Here the aim is to identify which macro-environmental influences are likely to affect the organisation’s development orperformance.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 ofthe organisation – for example, the competitive arena in which the organisationoperates. The aim is to identify the key forces at work in the immediate orcompetitive environment and why they are significant.

3 Analyse the organisation’s competitive position That is, how it stands in relation to otherorganisations competing for the same resources, or customers, as itself.As we shallsee, this may be done in a number of ways.

4 Opportunities and threats The aim is to develop an understanding of opportunities thatcan be built upon and threats which have to be overcome or circumvented.Theseneed to be considered in terms of the resource base and competencies of theorganisation and will contribute to strategic choice.

2.2 Organisational boundariesManagers 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 isin 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 strategistsis that many of these changes are unpredictable. Consider, for example, the followingin the United Kingdom:

� The travel industry was sent into recession by the events of 11 September 2001.� The construction industry has beenhugely affectedby the recession and‘credit crunch’.� Companies importing from Europe have been depressed by the strength of the Euro.

You can probably identify your own examples fairly easily.What these examples arelikely 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 arisesfrom 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 bepreoccupied with the near, the immediate and the internal. In part this is because theexternal environment is difficult to understand – we shrink from the unfamiliar.

A willingness to look outside the boundaries of the organisation can therefore bean 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 asmanaging 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 frominternal 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 thesense that they try and “embrace” the environment holistically, and shape internalstructures and processes with this wider picture in mind.They use the views and


stop and think 3.1

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



needs of customers and other key stakeholders as a mirror through which they cansee and understand their own strengths and weaknesses.And they use these insightsto 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 dependsupon effective management of relationships with key stakeholders such as customersand service users, shareholders and suppliers. In this chapter we take this concept ofinterdependence further by exploring the relationships that exist between organis-ations and their external environment.An organisation is part of a large and complexnetwork of customers, suppliers, competitors and regulators. It is also subject to thevagaries of the economy, social trends and technological innovation. This can berepresented thematically as three environments (see Figure 3.3).

� The internal environment comprises the staff, resources and facilities within theorganisation.The internal environment is thought of as the one that managers cancontrol.We discuss this in chapter 4.

� The near environment includes customers, clients, contractors, suppliers and competi-tors.Managers cannot control the near environment, but they can influence it.

� The far environment refers to factors that can be neither controlled nor influencedfrom within the organisation.We refer to these under the acronym PEST, indicatingpolitical/legal, economic, social, and technological factors (you may have comeacross other versions).These are forces to which an organisation can only respond.

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

Farenvironmental (respond)

Nea

r envi

ronmental (influence)Yourorganisation

internalenvironment

(control)

Externalenvironment

case example 3.1

AlphaPharm and BetaPharm are two pharmaceuticalcompanies. They both develop and sell proprietarypharmaceutical products to health services and clinicianson a global basis. They both have similar turnover andprofitability. But that is where the similarity ends.

AlphaPharm is a highly integrated company. It hasthree large research stations around the world, atwhich new molecules are synthesised and tested. Itruns its own toxicological testing facilities in its ownlaboratories, and devises and manages its own globalclinical testing programmes. It manufactures itsproducts in its own factories and sells them throughits own sales force in all major markets.

Although BetaPharm does carry out some laboratorysynthesis itself, most of its new products are obtainedfrom contract research carried out by a number of

other small laboratories. All toxicological testing iscarried out by a specialist commercial laboratory, andmost clinical testing is run under contract by anumber of collaborators. All products aremanufactured on contract, and the products are soldthrough agencies or independent sales teams(including AlphaPharm in some markets).

These two companies are extreme examples. Even so,they do have some things in common: bothcompanies – even AlphaPharm – use contractors toprovide catering services, estate maintenance andsecurity. On the other hand, information collectionand collation, planning and marketing are carried outin-house by both organisations – even BetaPharm.

Source: Based on a case example by Stapleton (2003)


In practice, organisations set the boundaries between their internal and externalenvironments in different ways. Consider the following cases:There are many real examples where organisations operating in a similar sector haveset their boundaries differently:

� Marks and Spencer controls its own retail outlets, whereas branded goods manu-facturers (such as Nestle or Heinz) sell through retailers.

� 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 betweencarrying out activities in-house or alternatively outsourcing or using contractors.Each option has its advantages and disadvantages. In-house activities offer controland the benefits of experience. But the overhead structure of large organisations canlead to slower decision-making and reduced responsiveness. Large organisations arealso susceptible to the political opportunism of managers pursuing their ownagenda. On the other hand, outsourcing makes it easier to vary costs if conditionschange. However, there is always likely to be less control over contractors, andoutsourcing offers a reduced opportunity for cumulative learning. These aresummarised in Figure 3.4.

What follows from this is that an organisation’s boundaries affect, even define, themanagement task. There is no single or right solution, and organisations areconstantly seeking the best balance between control, risk, short- and long-term flexi-bility, and cost. Understanding that organisations can redefine their boundaries intheir 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 isuseful 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 importantfor 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


In-house Outsourced

Advantages

� Control � Access to specialists� Reliability � Flexibility in resource use� Flexibility � Reduction in fixed costs� Accumulated experience � Economies of scale� Quality control � Potential for cost saving

Disadvantages

� High overhead costs � Loss of expertise in key areas� Inflexible if requirements change � Contract/project management skills needed� Limited economies of scale � Loss of short-term flexibility� Extended decision-making process � Loss of direct quality control� Lack of specialist skills

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



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 fora 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 topatterns such as:

� 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).

� Decentralisation and the move to the ‘knowledge age’ where knowledge is more importantthan capital.

� Convergence of communication technologies – telephony, television and the internettogether with user-driven content.

� Internationalisation and globalisationThe decline in costs of transport and communicationshas made the growing integration of national economies feasible. This has beenhelped 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 moresimilar. For example, there is increasing homogeneity of consumer tastes ingoods such as soft drinks, jeans and electrical items.Those operating in suchmarkets may become global customers and may search for suppliers that canoperate on a global basis. Marketing policies, brand names and identities maythen be developed globally.This further generates global demand and expecta-tions from customers, and may also provide marketing cost advantages forglobal operators.

– Cost advantages There may be cost advantages of global operations. This isespecially the case in industries in which large volume, standardised produc-tion is required for optimum economies of scale, as in some components to theelectronics industry.

– Government Influence Political changes in the 1990s meant that most tradingnations function with market-based economies and their trade policies havetended to encourage free markets between nations. This has been furtherencouraged 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, itincreases interaction between competitors on a more global scale.

Although changes in the external environment make life difficult for managers, andmay pose threats to the organisation, they can also offer opportunities. Managers whocan understand and monitor their external environment are therefore likely to be moreeffective.To be able to do this, it is important that you understand the factors that makeup the external environment of your organisation. Figure 3.5 provides a summary ofsome 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 factorswill differ. A multinational corporation might be especially concerned with govern-ment relations and understanding the policies of national governments in its sector ofoperation. It is also likely to be concerned with labour costs and exchange rates,whichwill affect its ability to compete with rivals.A small retailer, on the other hand, may beprimarily concerned with local customer tastes and behaviour. None of these forceswill remain constant, and managers need to be aware of their changing impact.

A PEST analysis identifies the political, economic, social and technological influ-ences on an organisation.

PEST analysisIdentification of thepolitical, economic, socialand technological influenceson an organisation.

C03_ICSA_STUDY_TEXT_STRAT_OPS_MAN.QXD:ICSA 18/6/09 10:48 2

The headings in Figure 3.5 can be used as a checklist to consider and prompt analysisof the different influences. However, although a great deal of information can begenerated 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 toinform and guide analysis.

It is useful to begin by considering two important questions.

� What are key drivers of change? It may be possible to identify a number of key forceslikely to affect the structure of this industry or market.

� What are the differential impacts of key environmental influences? PEST analysis may also helpexamine the differential impact of external influences on organisations, eitherhistorically or any likely future impact.This approach builds on the identificationof key drivers by asking to what extent such influences will affect different organ-isations or industries differently.


What environmental factors are affecting the organisation?Which of these are the most important at present?Which will be in the next few years?

srotcafcimonocElagel/lacitiloP

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

lacigolonhceTsrotcaflarutluc-oicoS

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

case example 3.2

The impact of the EU will differ according to thesector in which you work. If you work in aninternational commercial concern, EU legislation oncompetition and freedom of trade will be of majorimportance, as will the establishment of a singlecurrency. If your organisation operates primarily in itshome market, you will nevertheless be faced withforeign competitors as markets become more open. Ifyou are involved in the provision of public services,

you will be affected by European legislation onminimum wages and working hours, you may have tocomply with requirements to offer contracts tobidders from other European countries, and you arelikely to be subject to a high level of regulation. Thevoluntary sector will also be required to comply, forexample, with employee protection and minimumwage legislation.

FIGURE 3.5 PEST analysis of environmental influences



These sorts of factors can be built into scenario planning.

2.4 Identifying key competitive forces – five forces analysisSo far, we have looked at understanding broad aspects of the environment. However,organisations also have relationships with their near environments, with a particularfocus on their competitive situation. Competition takes many forms: for customersand market share, for funds, for staff, etc. Some organisations are the sole providers oftheir product or service, but such monopolies are now largely restricted to publicservices or patented products. Most organisations, however, operate in a highlycompetitive environment, in which they are one of many similar organisationsoffering similar products or services and competing for the same customers (thisapplies to many not-for-profit organisations as well as commercial ones).

The near environment comprises all those organisations whose actions influence theorganisation, and which in turn are influenced by its own actions. It thereforeincludes organisations that supply the organisation with services, materials or funds.Your answer is likely to have included suppliers and customers. Most organisationshave some key suppliers of goods and services and are in turn suppliers to otherorganisations. A doctor’s practice, for example, ‘supplies’ or refers patients to ahospital, and a small business may supply specialist services to a bigger firm.Youmight also have included competitor organisations: obviously, commercialcompanies compete for customers, but charities compete with each other forresources and influence, and public service organisations compete for funds.

In order to establish a view on the organisation’s competitive position, a businessneeds to obtain and consider information about competitors.There are many frame-works by which this can be done, including looking at the differential impacts ofcompetitive forecasts on competitors, core competences of competitors, thedifferent missions of competitors, and so on.The end result of a competitor analysisshould be to indicate where each competitor is strong or weak and vulnerable. Oneapproach to analysing competitors is the four-point list of the key elements ofcompetitor analysis put forward by Greenley (1986):

� The nature of competitors and any potential changes: the organisation needs to watch itsenvironment constantly and, in particular, note who is moving in and out of it.

� The competitors’ objectives and strategies: determine what they are doing and interprettheir actions.This will enable the organisation to formulate effective competitivestrategy and tactics.

� The main strengths and weaknesses of each competitor: these often determine the optionsopen to a business or organsiation.

� The effects of competitors on your own organisation and its marketing operations: this point is areminder that while an organisation is analysing its competitors, they are likely tobe doing the same.

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 youconduct a PEST analysis.

stop and think 3.3

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


The principal benefit of competitor analysis is to be able to understand how otherorganisations in the sector are meeting the challenge of satisfying their customersand managing their operations. This information can then be used to improve anorganisation’s current services or products, thereby offering better performance tocustomers or clients.

A long-established model widely used as a framework for analysing the structureand dynamics of the competitive environment of an industry sector is Porter’s fiveforces analysis.

Michael Porter’s work in the 1980s and 1990s on the economic structures ofdifferent industries has influenced the way many organisations seek to understandand influence their competitive environment. Although developed as a rationalmodel for calculating the profitability of firms in different industries, it offers auseful analytical framework for many organisations. It is important to recognise thathis 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 currentcompetitors, and is affected by:

2 the threat of new entrants;3 the bargaining power of customers;4 the bargaining power of suppliers; and5 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 ofcompetitive strategy. Although designed primarily with businesses in mind, it is ofvalue to most organisations.

It is important that, to be of most value, a five forces analysis needs to be carriedout at the strategic business unit (SBU) level. If the analysis is at a more generalisedlevel, the variety of influences in the environment will be so great as to reduce thevalue of the analysis.


five forces analysisA means of identifying theforces that affect the level ofcompetition in an industry.

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

1Industry structure

4Barganing power

of suppliers

3Bargaining power

of customers

2Threat of

new entrants

5Threat of subsituteproducts or services



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:

� the number and strength of competitors;� the rate of market growth – if the total market is not expanding, companies must

take market share from others to gain growth;� similarity of products, making it simple for consumers to switch from one brand

to another;� the level of fixed costs – high fixed costs require companies to maintain volume

and so put downward pressure on prices; and� 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).

Threat of new entrantsThreat of entry to an industry will depend on the extent to which there are barriers toentry, which most typically are as follows:

� Economies of scale In some industries, economics of scale are extremely important: forexample, in distribution (e.g. brewing) or in sales and marketing (e.g. fast-movingconsumer goods industries).

� 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 minimalcompared with the cost of entering capital-intensive industries such as chemicals.

� Access to distribution channels Brewing companies have traditionally invested in barsand pubs to guarantee the distribution of their products and make it difficult forcompetitors to break into their markets.

� Cost advantages independent of size These concern early entries into the market and theexperience gained. It is difficult for a competitor to break into a market if there isan established operator who knows the market well, has good relationships withthe key buyers and suppliers, and knows how to overcome market and operatingproblems.

Factors Car manufacturer Internet company

Number of competitors Fewer companies, but increasingly High, although number andglobal in nature and nature of competitors is

changing frequently

Market growth Growing slower than supply in Fast but unstablein main EU market, but subject toeconomic cycles

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

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

Exit barriers High: strong political and historical Very fewexpectations of continued existence

FIGURE 3.7 Intensity of competition in two industries (based on an example by Stapleton, 2003)


� Expected retaliation If a competitor considering entering a market believes that theretaliation of an existing firm will be so great as to prevent entry, or mean thatentry would be too costly, this is also a barrier.

� Government policy Legal restraints on competition vary from patent protection, toregulation to control markets (e.g. over-the-counter pharmaceuticals and insur-ance), through to direct government action. For example, in the late 1980s and1990s many public services, such as health services or railways, faced deregulationand privatisation.

� Differentiation Organisations able to achieve strategies of differentiation provide forthemselves barriers to competitive entry. For example, Marks and Spencer built areputation for reliability and quality underpinned by staff training, product andquality specification and control at supplier level, and strong corporate valuessupportive of the quality image.

Barriers to entry differ by industry and by product/market, so it is impossible togeneralise about which are more important than others.

The bargaining power of customers and suppliersAll organisations have to obtain resources and provide goods or services. But therelationship of buyers and sellers can have similar effects in constraining the strategicfreedom 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 isthe case in grocery retailing in the United Kingdom,where just a few retailers dominate


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 moderatelydifficult

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

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?

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

case example 3.3

Professional football clubs in the lower divisions inEngland have found it increasingly difficult to breakinto the Premiership and sustain a position oncepromoted. One of the key reasons for this is the level

of finance required to obtain the top players and fundthe necessary ground improvements and expansion tocompete at the higher level.



the market. Supplier power is likely to be high when there is a concentration ofsuppliers rather than a fragmented source of supply or when‘switching costs’ from onesupplier to another are high,perhaps because a manufacturer’s processes are dependenton the specialist products of a supplier, as in the aerospace industry.

With some organisations, supplies are intangible goods. For example, forprofessional services, such as consultancy or teaching, the availability of skilled staffis crucial. However, while this may be a significant constraint, the suppliers may notbe organised to exert power.

The threat of substitute products or servicesThe threat of substitution may take different forms:

� product-for-product substitution by e-mail or by fax, for example;� substitution of need by a new product or service rendering an existing product or

service superfluous;� generic substitution which occurs where products or services compete for need; for

example retailers compete for available household expenditure;� 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 arewhether or not a substitute poses the threat of obsolescence or provides a higherperceived 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 cannotcontrol 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 ofthe structure of industries, and the frameworks above can be used for this purpose.Collaboration between potential competitors or between buyers and sellers is likely tobe advantageous when the combined costs of buying are less through collaborationthan the internal cost that would be incurred by the organisation operating alone.

Johnson et al. (2008) have proposed the following key questions arising from fiveforces analysis:

� What are the key forces at work in the competitive environment? These will differ by type ofindustry. For example, for computer manufacturers the growing power of chip manu-facturers and growth in competitive intensity might be regarded as most crucial.

� Are there underlying forces? As identified from the PEST analysis or from an analysis ofglobal forces, which are driving competitive forces? For example, the competitivestrength of lower-cost high technology manufacturers in theAsia Pacific region isan underlying and persistent threat to European and US producers.

� Is it likely that the forces will change,and if so,how?� 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?� 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?

case example 3.4

In the developing area of disease management,pharmaceutical companies and health providers,such as hospitals, agree to share savings resultingfrom the optimal management of a defined medical

condition. In the past Salick, owned largely byZeneca, did this for cancer treatment and Eli Lilly fordiabetes programmes.


� 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 andsuppliers are less powerful.

2.6 Analysing the organisation’s competitive positionAn industry or sector may be too high a level to provide for a detailed understandingof 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 andsupplier power at the very least. It is often useful to disaggregate. Many industriescontain a range of companies, each of which has different capabilities and competeson different bases.These competitor differences are captured by the concept of stra-tegic groups. Customers can also differ significantly. Such customer differences can


case example 3.5

The consolidating steel industry

The five forces framework helps understand thechanging attractiveness nature of an industry.

For a long time, the steel industry was seen as staticand unprofitable. Producers were nationally based,often state owned and frequently unprofitable –between the late 1990s and 2003, more than 50independent steel producers went into bankruptcy inthe United States. The twenty-first century has seen arevolution. For example, during 2006 Mittal Steelpaid $35 billion (£19.6 billion; €28 billion) to buyEuropean steel giant Arcelor, creating the world’slargest steel company. The following year, Indianconglomerate, Tata, bought Anglo-Dutch steelcompany Corus for $l3 billion. These high pricesindicated considerable confidence in being able toturn the industry round.

New entrants

In the last 10 years, two powerful groups haveentered world steel markets. First, after a period ofprivatisation and reorganisation, large Russianproducers, such as Severstal and Evraz, enteredexport markets, exporting 30 million tonnes of steelby 2005. At the same time, Chinese producers havebeen investing in new production facilities, in theperiod 2003–2005 increasing capacity at a rate of30 per cent a year. Since the 1990s, China’s share ofworld capacity has increased more than two times, to25 per cent in 2006, and Chinese producers havebecome the world’s third largest exporter just behindJapan and Russia.

Substitutes

Steel is a nineteenth-century technology, increasinglysubstituted for by other materials such as aluminiumin cars, plastics and aluminium in packaging andceramics and composites in many high-techapplications. Steel’s own technological advancessometimes work to reduce need: thus, steel cans

have become about one-third thinner over the lastfew decades.

Buyer power

Key buyers for steel include the global carmanufacturers, such as Ford, Toyota and Volkswagen,and leading can producers, such as Crown Holdings,which makes one-third of all food cans produced inNorth America and Europe. Such companies buy involume, co-ordinating purchases around the world. Carmanufacturers are sophisticated users, often leading inthe technological development of their materials.

Suppier power

The key raw material for steel producers is iron ore.The big three ore producers – CVRD, Rio Tinto andBHP Billiton – control 70 per cent of the internationalmarket. In 2005, iron ore producers exploited surgingdemand by increasing prices by 72 per cent; in 2006they increased prices by 19 per cent.

Competitive rivalry

The industry has traditionally been very fragmented:in 2000, the world’s top five producers accounted foronly 14 per cent of production. Most steel is sold on acommodity basis, by the tonne. Prices are highlycyclical, as stocks do not deteriorate and tend toflood the market when demand slows. In the latetwentieth century demand growth averaged amoderate 2 per cent per annum. The start of thetwenty-first century saw a boom in demand, drivenparticularly by Chinese growth. Between 2003 and2005, prices of sheet steel for cars and fridgestrebled to $600 (£336; €480) a tonne. Companiessuch as Nucor in the United States, Thyssen-Kruppin Germany as well as Mittal and Tata responded bybuying up weaker players internationally. New steelgiant Mittal accounted for about 10 per cent of worldproduction in 2007. Mittal actually reduced capacityin some of its Western production centres.



be captured by distinguishing between strategic customers and ultimate consumersand between different market segments.

Strategic groupsStrategic groups are organisations within an industry or sector with similar strategiccharacteristics, following similar strategies or competing on similar bases. Thesecharacteristics are different from those in other strategic groups in the same industryor sector. For example, in the grocery retailing industry, supermarkets, conveniencestores and corner shops each form different strategic groups. There are manydifferent characteristics that distinguish between strategic groups but these can begrouped into two major categories: first, the scope of an organisation’s activities(such as product range, geographical coverage and range of distribution channelsused); secondly, the resource commitment (such as brands, marketing spend andextent of vertical integration).

Which of these characteristics are especially relevant in terms of a given industryneeds to be understood in terms of the history and development of that industry andthe forces at work in the environment.

Market segmentationMarket segmentation seeks to identify similarities and differences between groups ofcustomers or users. This is important because not all users are the same: they havedifferent characteristics and needs, behave differently, and so on. Markets are there-fore thought of in terms of market segments, and identifying which organisationsare competing in which market is an important exercise for a strategist.

When undertaking a market segmentation analysis, the following should beconsidered:

(a) There are many bases of market segmentation. Figure 3.9 summarises some ofthese. It is important to consider which bases of segmentation are mostimportant. For example, in industrial markets, segmentation is often thought ofin terms of the industrial classification of buyers: ‘we sell to the car industry’.However, segmentation by buyer behaviour (or purchase value) might be moreappropriate in some markets. Indeed, it is useful to consider different bases ofsegmentation in the same market to help explain the dynamics of that marketand 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 developingand building strategies upon their own unique competences. It may therefore beimportant for a business to try to identify market segments suited to its particularcompetences.

Competitor analysisAs discussed above, a business needs to obtain and consider information aboutcompetitors, and the end result of a competitor analysis should be to indicate whereeach 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. Inany market, the strategic decisions of a firm will often be partly a response towhat 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 toassess what they will do and respond accordingly. A business therefore needsto know:

market segmentationSeeks to identify similaritiesand differences betweengroups of customersor users.


� the competitor’s future goals;� the assumptions the competitor holds about the industry and its place within it;� current strategy – how is the competitor competing – on price?;� capabilities – strengths/weaknesses.

Such intelligence can be found in financial statements, information from customersand suppliers, inspection of products and services, and so on.


Type of factor Consumer markets Industrial/organisational markets

Characteristics Age, sex, race Industryof people/ Income Locationorganisations Family size Size

Life-cycle stage TechnologyLocation ProfitabilityLifestyle Management

Purchase/use Size of purchase Applicationsituation Brand loyalty Importance of purchase

Purpose of use VolumePurchasing behaviour Frequency of purchaseImportance of purchase Purchasing procedureChoice criteria Choice criteria

Distribution channel

Users’ needs Product similarity Performance requirementsand preferences Price preference Assistance from suppliersfor product Brand preferences Brand preferencescharacteristics Desired features Desired features

Quality QualityService requirements

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

stop and think 3.5

What does Coca-Cola compete against?

� Pepsi in the cola market.� All other soft drinks.� Tea and coffee.� 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.



3 Strategic analysis – competences and capability

3.1 Understanding capabilityIn 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 ofstrategy: the resources that an organisation possesses, or needs to possess, as the basisfor a robust strategy.We shift from the sector to the organisation by looking at:

� the organisation’s capabilities, and its important networks of relationships;� how relevant they are to the objectives of the organisation;� what new capabilities and relationships may be needed over time; and� how these should be built or acquired.

By capabilities we mean an organisation’s capacity to engage in a range of productiveactivities. All organisations possess unique bundles of resources, and it is how theseresources are used that determines differences in performance between organis-ations. Resources are not productive in themselves – they need to be converted intocapabilities 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 theresource 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 suggestsan applied and well-practised capability.

Strategic capability can be related to three main factors: the resources available to theorganisation; 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 strategiccapability to fit a changing environment. The major upheavals in many manufac-turing industries during the 1980s were examples of such adjustments in strategiccapability. However, understanding strategic capability is also important as it may bethe ‘leading edge’ of strategic developments. New opportunities may exist bystretching and exploiting the organisation’s unique resources and competencieseither 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 theydevelop 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 willcontribute to the overall assessment. Figure 3.10 provides a systematic way to movefrom an audit of resources to a deeper understanding of strategic capability.

1 Resource audit This identifies the resources ‘available’ to an organisation to supportits strategies. Some may be unique in that they are difficult to imitate, for examplethe location of a facility.

2 Assessing competence This requires analysing how resources are being deployed to createcompetencies in separate activities, and the processes through which these activitiesare linked together. Although an organisation will need to reach a threshold level ofcompetence in all the activities it undertakes, it is only some of these activities that arecore competences underpinning the organisation’s ability to outperform competition.

3 Balance These various analyses concerning resources and competences usuallyrelate to separate strategic business units.An organisation’s overall strategic capa-bility will also be influenced by the extent to which its resources and strategicbusiness 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.


3.2 Resource auditA resource audit identifies and classifies the resources that an organisation owns orcan 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 shouldstretch beyond merely listing the number of machines, buildings, etc., and shouldask 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 anorganisation, but their adaptability must not be overlooked. People’s innovativecapability 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 ofrelationships with suppliers of money (shareholders, bankers, etc.).

4 Intangibles have a value, since when businesses are sold part of the businesses’ valueis ‘goodwill’. In some businesses, such as professional services, goodwill couldrepresent the major asset of the company resulting from brand names, goodcontacts, etc.

The resource audit is really only a basis for further analysis. It should include all resourcesthe organisation can access to support its strategies and not be narrowly confined to theresources it owns. Strategically important resources may include its network of contactsor customers.The list should be used to identify unique resources. Unique resourcesare those that create competitive advantage and are difficult to imitate.


FIGURE 3.10 Analysing strategic capability

Resource Audit

Understanding StrategicCapability

Identifying Key IssuesSWOTCSF’s

AssessingBalance

AnalysingCompetence

unique resourcesResources that createcompetitive advantage andare difficult to imitate.



3.3 Analysing competenceThe difference in performance of organisations in the same ‘industry’ is rarelyexplained by differences in their resource base alone.It will also be determined by theway resources are deployed to create competences in the organisation’s separate activitiesand the processes of linking these activities together to sustain performance.

Only some will be core competences.These underpin the organisation’s ability tooutperform competition and must be difficult to imitate,or they will not provide a long-term advantage.They may also be the basis on which new opportunities are created.

The key steps in assessing core competencies are as follows:

Value chain analysisValue chain analysis describes the activities within and around an organisation andrelates them to its competitive strength of the organisation. Value analysis (Miles,1961) was originally introduced as an accounting tool to shed light on the ‘valueadded’ by separate steps in complex manufacturing processes to determine wherecost improvements could be made or value creation improved.

Michael Porter linked these steps to an analysis of an organisation’s competitiveadvantage.The basis of the approach is that organisations are more than a collectionof machines, money and people. These resources are deployed into activities andorganised into routines and systems which ensure that products or services areproduced 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 orservice and can be grouped into four main areas:

� inbound logistics include materials handling, stock control, transport, etc.;� operations transform these various inputs into the final product or service:

machining, packaging, assembly, testing, etc.;� outbound logistics include warehousing, transport, etc. In the case of services, they

may be more concerned with arrangements for bringing customers to the serviceif it is at a fixed location;

� marketing and sales provide the means whereby consumers/users are made aware ofthe 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:

� procurement – the processes for acquiring the various resource inputs to the primaryactivities;

� technology development – all value activities have a ‘technology’ even if it is simply‘know-how’;

� human resource management – recruiting, managing, training, developing andrewarding people;

� infrastructure – the systems of planning, finance, information management, etc. andthe 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 valuechains. Indeed, it is often this specialisation that underpins excellence in creatingvalue for money. Much of the value creation occurs in the supply and distributionchains, and this whole process needs to be analysed and understood. For example,

core competencesThe activities, skills orknow-how that distinguisha company from itscompetitors and throughwhich it achieves strategicadvantage.

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?

value chain analysisDescribes the activitieswithin and around anorganisation, and relatesthem to an analysis of itscompetitive strength.


the quality of a car when it reaches the final purchaser is not only influenced by theactivities 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 thecompany is positioned and the strategies it is pursuing.

It is important to identify an organisation’s core competences not only to ensurecontinuing good ‘fit’ between these core competences and the changing nature of themarkets or environment,but also because core competences may be the basis on whichthe organisation‘stretches’ into new opportunities. So, in deciding which competencesare core, this ability to exploit the competence in more than one market or arena isanother criterion which could be used. Developing ‘added-value’ services and ageographical spread of markets are two typical ways in which core competences can beexploited to maintain progress once traditional markets are mature or saturated.

Core competences as value chainCore competences must meet a number of challenging criteria.They must not onlyprovide value to the buyer, but must also be difficult for competitors to imitate, sothey will be rare, complex (because they are not explained by one factor but by linkedfactors), 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 mightnot be the most visible. Useful ways of identifying core competences are:

� identify strategic business units (SBUs) that are clearly successful;� 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 thecompany’s brand, the excellence of its service, etc. In particular, it is important toconcentrate on primary reasons for success in which the SBU scores better thancompetition;

� ‘unpack’ each of these bases of success. These can be regarded as the secondaryreasons 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’;

� unpack each of the secondary reasons for success. How is the company able tosolve buyers’ problems, and so on? This requires the managers to get down totertiary reasons for success at operational levels of detail;

� look for patterns of explanation. It is unlikely that any one factor explains a corecompetence. It is more likely that there are linked factors.


FIGURE 3.11 The value chain (Porter, 1985)

Primary activities

Supportactivities

Firm infrastructure

Human resource management

Technology development

Procurement

Margin

Inboundlogistics

Operations Outboundlogistics

Marketingand sales

Service Mar

gin



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

Core competences may have a variety of bases:

� Cost efficiency The provision of value-for-money products or services (costefficiency) is a measure of the level of resources needed to create a given level ofvalue. Cost efficiency is determined by a number of factors often called ‘costdrivers’. Innovative ways of managing these cost drivers can create cost reductionsand competitive advantage. They include economies of scale, supply costs,product/process design and experience.

� Analysing value added (effectiveness) Effectiveness is a measure of the level of value thatcan be created from a given level of resources. This is essentially related to howwell the organisation is matching its products or services to the identified needs ofits chosen customers and the competencies that underpin this effectiveness.Unlike cost analysis, the potential sources of value added, or effectiveness, arelikely to be many and varied. The key question is: what are the critically importantfeatures and the core competencies that underpin the kind of value-added featuresneeded to perform effectively? For example, are the services that support theproduct matched with client expectations and, again, do these represent perceivedvalue? If organisations are to compete on a value-added basis, it is important toremember that the detailed assessment of value added must be done from theviewpoint of the customer or user of the product or service.

� Managing linkages Core competences in separate activities may provide competitiveadvantage for an organisation, but over time may be imitated. Core competencesare 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 supplyand distribution chains. It is the management of these linkages that provides‘lever-age’ and levels of performance which are difficult to match.Leverage is a measureof the improvement in performance achieved through the managing of linkagesbetween separate resources and activities.This could create competitive advantagein a number of ways. For example, a decision to hold high levels of finished stockmight ease production-scheduling problems and provide for a faster responsetime to the customer.

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

leverageA measure of theimprovement inperformance achievedthrough the management oflinkages between separateresources and activities.

Threshold resources• Tangible• Intangible

Thresholdcompetences

Resources Competences

Thre

shol

dca

pabi

litie

sC

apab

iliti

esfo

rco

mpe

titi

vead

vant

ages

Unique resources• Tangible• Intangible

Core competences



� In addition to the management of internal linkage, competitive advantage mayalso be gained by the ability to complement or co-ordinate the organisation’s ownactivities with those of suppliers, channels or customers.This could, for example,occur through vertical integration, such as attempting to improve performancethrough owning more parts of the value system, bringing more linkages inside tothe organisation. In chapter 10 we shall see how total quality management seeks toimprove performance through closer working relationships between the variousspecialists within the value system. Performance may sometimes be improved byreconfiguring the value chain to reduce costs or increase effectiveness.

3.4 Assessing the balance of the organisationThe 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 theway that links are managed between these separate activities and within the widervalue system. However, an organisation’s strategic capability will also be determinedby the extent to which the organisation’s business units are balanced as a whole.

Portfolio analysis examines the balance of an organisation’s SBUs. It is a keyaspect of strategic capability to ensure that the portfolio is strong. Portfolio analysiscan be used to describe the current range of SBUs and to assess the ‘strength’ of themix both historically and against future scenarios. The Boston Consultancy Group(BCG) proposed one of the first ways of classifying business units – according tomarket growth and relative market share. Figure 3.13 shows this original matrix andthe description and characterisation of each of the sections.

� Star – an SBU that has a high market share in a growing market.The SBU may bespending heavily to gain that share, but costs should be reducing over time and, itis to be hoped, at a rate faster than that of the competition.

� Question mark (or‘problem child’) is also in a growing market, but does not have a highmarket share. It may be necessary to spend heavily to increase market share, but ifso, it is unlikely that the SBU is achieving sufficient cost-reduction benefits tooffset such investments.

� Cash cow has a high market share in a mature market. Because growth is low andmarket conditions are more stable, the need for heavy marketing investment isless. But high relative market share means that the SBU should be able to maintainunit cost levels below those of competitors.The cash cow should then be a cashprovider, perhaps to finance ‘question marks’.

� 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 ofcompany time and resources.

case example 3.6

In the United Kingdom, Direct Line insurancerevolutionised the household and motor insurancemarkets in the 1990s by cutting out the need for

insurance brokers and going direct to individualhouseholders.

portfolio analysisAnalyses the balance of anorganisation’s strategicbusiness units.



Some caution is needed with portfolio analysis:

� There can be practical difficulties in deciding what exactly ‘high’ and ‘low’ meanin a particular situation.

� The analysis should be applied to SBUs (i.e. a bundle of products or services andthe associated market segments), not to whole markets.

� Corporate management must develop the ability and devote the time to reviewingthe role of each SBU in the overall mix of company activities.This is an importantresponsibility of the corporate centre. Some are sceptical of whether the corporatecentre 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.

� The original BCG analysis concentrated on the needs of a business to plan its cashflow requirements across its portfolio.Thus, cash cows will be used to create thefunds needed for innovation and the development of question marks and stars.However, little is said about the behavioural implications of such a strategy. Howdoes central management motivate the managers of cash cows, who see all theirhard-earned surpluses being invested in other businesses?

� In many organisations the critical resource to be planned and balanced will not becash, but innovative capacity. Question marks and stars are very demanding onthese types of resource.

� 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 difficultiesif they are the brain child of people with power within the organisation. Otherdogs may have a useful place in the portfolio.They may be necessary to completethe product range and provide a credible presence in the market.

3.5 Identifying key issuesIt is only at this stage of the analysis that a sensible assessment can be made of themajor 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 ofour focus on resource planning. Here we shall look at the role of a SWOT analysis.

FIGURE 3.13 The Boston Consulting Group portfolio matrix

woLhgiH

High

Low

Stars Question MarksliafrosratsemocebdluoCylkciuqgniworgdnagnortS

Cash Cows DogsMilked to supply stars and question marks Keep if profitable otherwise sell

MARKET SHARE

MA

RK

ET

GR

OW

TH


A SWOT analysis summarises the key issues from an analysis of the businessenvironment and the strategic capability of an organisation. SWOT stands forstrengths, weaknesses, opportunities and threats but, rather than just listing these interms of managers’ perceptions, the idea is to undertake a more structured analysis soas to yield findings that contribute to the formulation of strategy. It brings togetherthe main issues raised in this chapter and in chapter 2. The aim is to identify theextent to which the current strategy of an organisation and its more specific strengthsand weaknesses are relevant to, and capable of, dealing with the changes taking placein 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:

� identify the key changes in the organisation’s environment following the analysesoutlined in the previous section. It is helpful if the list does not exceed seven oreight key points that represent the opportunities and threats;

� undertake the same process for the resource profile and competences of theorganisation 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 thaneight points. It is important to avoid over-generalising this analysis and to keep tospecific points: a statement such as‘poor management’means very little and couldbe interpreted in any number of ways. If it really means that senior managers havenot been good at managing change in the organisation, that is a more specific andmore useful point.

When this is completed, the analysis should look something like that shown in Figure3.14. This should provide some useful strategic insights. This example is a SWOTanalysis completed by an internal learning and development team within an organis-ation in the communications sector. Some issues could be either opportunities orthreats, depending on the extent to which the organisation can capitalise on itsstrengths.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.


SWOT analysisSummarises the key issuesfrom an analysis of thebusiness environment andthe strategic capability ofan organisation.

SESSENKAEWSHTGNERTSConsultancy skills Admin supportDiversity of background experience and skills Lack of large-scale organisation change experienceMuch 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 imbalanceKnowledge of learning technologyDesign and implementation of leadershipDevelopment programmesGood understanding of the businessGood sector experience

STAERHTSEITINUTROPPOLeadership development and cultural intelligence Credibility with top managementTeam development opportunities in new structure Capability of senior management to supportCommissioning/partnering external with external Pressure on numberscontractors Lack of ‘multiculturalism’/global mindWe have wide skill base which we must be able to focus Infrastructure support in the comapnyas required Lack of funding

FIGURE 3.14 Sample SWOT analysis



4 Strategic choice – options

4.1 IntroductionThis section is concerned with the options for strategic choice and covers the basis ofstrategic choice, alternative development directions and methods of choosing. Figure3.15 is an adaptation of Ansoff’s (1965) traditional product/market matrix oftenused 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 importantextension by Johnson et al. of the traditional approach. Figure 3.15 is meant toemphasise that, in the long run, development in any of the boxes is likely to requirethe development of competences to cope with a changing situation. So, innovation isa key ingredient of strategic change.

Figure 3.15 also outlines the broad types of development direction in terms of thethree dimensions of markets, products and competences. These range from strategiesconcerned with protecting and building an organisation’s position with its existing prod-ucts and competences, through to major diversification requiring development andchange 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 optionsconcerning both the direction and the method of developing the organisation’s strategies.


(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.

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

• On existing competences• With new competences

PRODUCTDEVELOPMENT

B

• Withdrawal• Consolidation• Market penetration

PROTECT/BUILD

PRODUCTS

MA

RK

ETS

New

New

Existing

Existing

A

• On existing competences• With new competences

DIVERSIFICATION

D

• New segments• New territories• New uses

MARKETDEVELOPMENT

C

DEVELOPMENT

COMPETENCE


4.2 Generic strategies to protect and buildThe ‘grand strategy’ represents the overall direction the business is going to followand is connected with the concepts of mission and purpose that were discussed inchapter 2 and underpin the specific strategic directions an organisation may chooseto follow.Three alternatives are presented in Figure 3.16.

1 Stability Many businesses, especially small ones, follow a stability strategy. Thismeans that the business will keep, more or less, the current pattern. If marketsexpand, 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 itsefforts to improving its efficiency while not being threatened with externalchange. In addition, many organisations are constrained by regulations or theexpectations of key stakeholders. This is especially true of the public sector andmany not-for-profit organisations.

2 Growth strategies are followed by businesses that see themselves as strong anddoing well.Their managers may prefer higher risks and be motivated to expand,since many equate business size with success. In a volatile environment, growthmay provide a cushion against a downturn in fortunes or a barrier against thedevelopment of a rival.

3 Retrenchment means drawing back. Falling demand in main markets, pressure oncosts through having a poor location, or the loss of key personnel may make itdesirable for a business to scale back. Retrenchment may be the only means for theorganisation to make the internal improvements necessary to face an increasinglycompetitive environment. It is often seen as a temporary expedient before thebusiness 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 withgrowth 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 thecompany prepares to launch a replacement.


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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.tnerruchtiwdefisitassidsredlohekatS.kcabgnittuchguorht

activities.

FIGURE 3.16 Selection of grand strategies



4.3 Product development

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 successfulorganisations is, therefore, the ability to analyse and understand the changing needs ofa particular group of customers or clients. Strategic development can be built aroundsuch a core competence. Similarly, product developmentmay be preferred because thecompany has core competences in research and development (R&D).When productlife cycles are short – as with consumer electronics – product development becomesan essential requirement of an organisation’s strategy, built around a core competencein R&D or the ability to acquire new products from elsewhere.

Product development may often raise uncomfortable dilemmas for organisations.While new products may be vital, the process of creating a broad product line isexpensive, risky and potentially unprofitable, because most new products never reachthe market and, of those that do, relatively few succeed. In practice, rapid rates of new

case example 3.7

Lego, manufacturer of the brightly coloured plasticbuilding bricks, was launched in 1949, and hasalways proved popular in an industry renowned forchanging tastes and preferences and for innovation.On the strength of this one product, Lego has becomeEurope’s largest and the world’s fourth-largest toymaker. Lego is Danish, family owned and based onstrong principles. Lego has five stated values:creativity, innovation, learning, fun and quality.

The basic strategy is one of product development,with Lego developing an enormous number ofvariations on its basic product theme. By the mid-1990s, some 300 different kits (at a wide range ofprices) were available worldwide. There were 1,700different parts, including bricks, shapes andminiature people, and children could use them tomake almost anything from small cars to large,complex, working space stations with battery-operated space trains. Brick colours were selected toappeal to both boys and girls; and the more complexLego Technic sets were branded and promotedspecially to make them attractive to the youngteenage market.

In a typical year Lego replaces one-third of itsproduct range, with many items having only a shortlifespan. New ideas are developed over a two-tothree-year period and backed by international

consumer research and test marketing. Legoconcentrates on global tastes and buying habits.Competition has forced Lego to act internationallyand aggressively. One US company, Tyco, marketsproducts that are almost indistinguishable from Lego.Lego has attempted unsuccessfully to sue for patentinfringement and now views this competition asundesirable but stimulating. In the mid-1990s, saleswere being affected adversely by changing tastes andby the growing popularity of computer games. In1997 Lego opted for a new range extension andbegan to market construction kits with microchipsand instructions on CD-ROMS. In 1998 the companyintroduced a new Mindstorms range built around abrick powered by AA batteries. Lego had had thetechnology for some time but had been waiting untilit could reduce costs to a realistic level.

Lego manufactures in Switzerland, the CzechRepublic, South Korea and the United States as wellas Denmark, making its own tools for the plasticinjection moulding machines. Bricks are onlymoulded in Denmark and Switzerland and emphasisequality. Investments in production and improvementsare thought to be in the region of at least £100million per year, though since 2000 profitability hasfallen and the company has recently re-structured ina bid to stay independent.

Source: Based on a case in Thompson and Martin (2005)

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 introduction can depress profitability as organisations struggle to learn newcompetences needed to debug production, train salespeople, etc. Johnson et al. arguethat managers should ensure that the processes of innovation in the organisation areappropriate for the situation that they face.There are choices about how new ideas andimprovements might be fostered in the organisation and a further choice concerns themethod by which innovation will be secured – whether it should be through theorganisation’s own internal efforts, by acquiring innovations (e.g. products, processesor whole companies) or by alliances and partnerships. The relative merits of thesedifferent 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 moreexperienced in judging value for money. Such shifts at the customer end requireresponses from the organisation.These may be concerned not with the basic featuresof the product or service, but with the need to improve other aspects of the customerexperience, for example the quality of information provided to clients that have beenregarded as peripheral.

The need to develop competences or products even to survive in existing marketsis underlined by the consequences of not doing so. It is likely that the performancemay become so poor in relation to that of competitors or other providers that theorganisation becomes a target for acquisition, particularly by organisations whichhave core competences in corporate turnaround.

4.4 Market developmentMost organisations have developed in ways that have resulted in limited coverage ofthe 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 thecurrent 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 mightrequire some modification of the product to suit it to new segments. For example,a manufacturer of branded grocery products for the premium market may enterthe mainstream market through ‘own-brand’ sales to supermarkets. This willrequire the development of new competences in, for example, key account selling.

2 Development of new uses for existing products For example, manufacturers of stainless steelhave progressively found new applications for the products that were originallyused for cutlery and tableware. Innovation such as this will require competencesin analysing each potential market and assessing the particular requirements ofthe product.

3 Geographical spread either nationally or internationally into new markets. Again, thismay require some adjustment to product features or marketing methods. It willalso require other competences, for example in language and cultural awareness.There are important practical implications for organisations planning to increasetheir global participation, including the need to reassess the way in which theorganisation’s structure, design and control will need to change.


case example 3.8

McDonald’s expanded internationally by identifyingnew types of location as well as new countries. Thiscontinued growth also required competences inreducing opening costs of new outlets and being

prepared to make minor adjustments to the standardoffering in each country in which it operated in orderto be accepted by customers.



diversificationDirections of developmentthat take the organisationaway from its presentmarkets and its presentproducts at the same time.

related diversificationDevelopment beyond thepresent product and market,but still within the broadconfines of the current industry.

4.5 DiversificationDiversification is a term used in many different ways. Here, diversification involvesdirections of development that takes the organisation away from its present marketsand its present products at the same time.

Diversification is traditionally considered under two broad headings:

1 Related diversification This is development beyond the present product andmarket, but still within the broad confines of the ‘industry’ (i.e. value chain) inwhich the company operates. For example, Unilever is a diversified corporation,but virtually all of its interests are in the fast-moving consumer goods industry.

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

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

Manufacturer

Machinerymanufacture

Product/processresearch/design

Raw materialsmanufacture

Componentsmanufacture

Marketinginformation

Repairs andservicing

Distributionoutlets

FORWARDINTEGRATION

Complementarycapabilities

Competitiveproducts

By-productsComplementary

products

Transport

Machinesupply

FinancingRaw materials

supplyComponents

supply

Transport

HORIZONTALINTEGRATION

BACKWARDINTEGRATION

case example 3.9

In a bid to reduce premiums and improve customerservice in the UK car insurance industry, Direct Lineset up a limited number of wholly owned repair anddevelopment centres. These were intended to be

‘centres of excellence’ that would be supported by alarger network of recommended but independentlyowned garages.


� Forward integration refers to development into activities concerned with a company’soutputs (i.e. are further forward in the value chain), such as transport, distribution, etc.

� Vertical integration describes either backward or forward integration into adjacentactivities in the value chain.Horizontal integration refers to development into activi-ties that are competitive with, or directly complementary to, a company’s presentactivities. For example,many organisations have realised that there are opportunitiesin other markets for the exploitation of the organisation’s core competencies.

It needs to be recognised that the ‘ownership’ of more value activities within thevalue chain does not guarantee improved performance or better value for moneyfor the consumer or client. Indeed, there has been some degree of disillusionmentwith related diversification as a strategy, and more emphasis on improvingperformance within the value system through external linkages and the manage-ment of relationships with the various parties in the supply and distributionchains.The ability to achieve this could be a core competence. It would include theneed to ensure that innovation and improvement of value for money are occurringwithin the other organisations (i.e. suppliers and distributors).

2 Unrelated diversification is where the organisation moves beyond the confinesof its current industry. It can be divided into three categories:

(a) It may involve extension into new markets and new products by exploiting thecurrent core competencies of the organisation.

(b) It may involve the creation of genuinely new markets. It requires very goodmarket knowledge and the creativity to better provide for market needs.

(c) The most extreme form of unrelated diversification is where new competencesare developed for new market opportunities. Not surprisingly, this extreme endof 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 verticalintegration, which moves the organisation into activities that are adjacent in thevalue chain (e.g. supply or distribution) but which are entirely unrelated to theorganisation’s current competences. Developments of this kind seek to take advan-tage of synergy, the idea that the whole can be greater than the sum of the parts. Butjoining individuals or work groups together does not always result in harmony!Diversified companies seek synergistic relationships as follows:

� Market synergy – sales of one product reinforcing sales of another; sharing distri-bution channels; applying brand names across many products, and so on.

� Operating synergy – filling out product ranges to occupy spare capacity; sharing infre-quently used resources; recycling.

� Technological synergy – sharing product or process technology among divisions;exploiting patents throughout world markets.

� Financial synergy – allocating funds among units to gain the best return; usingfinancial strength to raise new capital at low cost.

� 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 areinconclusive. The sum total of the research is, according to Johnson et al., unclearapart from one important message: successful diversification is difficult to achieve inpractice. There is some evidence that profitability does increase with diversity, butonly up to the limit of complexity, beyond which this relationship reverses. Thisraises 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).


unrelated diversificationWhere the organisationmoves beyond the confinesof its current industry.

synergyThe idea that the whole canbe greater than the sum ofthe parts.



The theoretical benefits of synergy through diversification are often difficult toachieve in practice.This is particularly supported in the research on diversificationthrough acquisition.

In the mid-1990s many large diversified organisations were choosing to splitinto separate companies, each with a much more clearly defined core business ormarket focus.

An important conclusion of many research studies is that the likely success ofdiversification is extremely dependent on the circumstances of an organisation, suchas 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 developmentThe first part of this section was concerned with strategic choices at the broad orgeneric level – the basis on which the more detailed strategies we have looked at in thelast 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: internaldevelopment; acquisition (or disposal); and joint development (or alliances).

Internal developmentInternal development (also known as ‘organic growth’) involves building up theorganisation’s own resource base and competences to develop strategy. For manyorganisations, internal development has been the primary method of strategy develop-ment, and there are some compelling reasons why this should be so, particularly withproducts that are highly technical in design or method of manufacture. Businesses willchoose to develop new products themselves, since the process of development is seenas the best way of acquiring the necessary core competences to compete successfully inthe market place. Indeed, these core competences may also spawn further new productsand create new market opportunities.A similar argument applies to the development ofnew markets by direct involvement. For example, many manufacturers still choose toforgo the use of agents, as they feel that the direct involvement gained from having theirown sales force is of advantage in gaining a full understanding of the market.

Advantages Possible draw backs

Organic growth Lower risk SlowAllows for ongoing learning Lack of early knowledge – may beMore control misjudgements

Acquisition Fast Premium price may have to be paidBuys presence, market High risk if any misjudgement

share and expense Preferred organization may not beavailable

May be difficult to sell unwantedassets

Strategic Cheaper than takeover Possible lack of controlalliance Access to market knowledge Potential managerial differences

Useful if acquisition and problemsimpractical

Joint venture As for strategic alliance plus: As for strategic alliance� Greater incentive and closer

contract� Can lock out other competitors

more effectively

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

internal developmentWhere strategies aredeveloped by building upthe organisation’s ownresource base andcompetences.


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

Mergers and acquisitionsAcquisition is where an organisation develops its resources and competencies bytaking over another organisation. Development by acquisition tends to go in wavesand also tends to be selective in terms of industry sector. For example, in the UnitedKingdom, between 1985 and 1987, high street retailing takeovers were common.

A compelling reason to develop by acquisition is the speed with which it allows thecompany to enter new product or market areas. In some cases the product or marketis changing so rapidly that this becomes the only way of successfully entering themarket, since the process of internal development is too slow. Another reason foracquisition is the lack of resources or competence to develop a strategy internally.Acompany may be acquired for its R&D expertise or its knowledge of a particular typeof 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 orprice/earnings (P/E) ratio of a company is high, then a firm with a low share valueor P/E ratio may be a tempting target. Indeed, this is one of the major stimuli for themore aggressively acquisitive companies. Sometimes there are reasons of costefficiency which make acquisition look favourable.This could arise because an estab-lished company may have achieved efficiencies that would be difficult to matchquickly by internal development. The necessary innovation and organisationallearning would be too slow.


acquisitionWhere an organisationdevelops its resources andcompetences by taking overanother.

case example 3.10

In December 2005, NTL confirmed that it hadapproached Virgin Mobile over merging the firms.NLT proposed to use the Virgin brand to offer internetaccess, TV and fixed line and mobile telephony. Thesituation at that time is outlined below, illustratingthe factors to be weighed up by those involved.

NTL provides domestic phone, television and internetservices and data, voice and internet services toorganisations in the United Kingdom. The parentcompany emerged from bankruptcy protection in2003 and is currently merging with Telewest, anothercable operator. NTL/Telewest has a total of fivemillion subscribers and employs 10,000 people. Itdoes not have a good reputation for customer service.

Virgin Mobile is part of the Virgin Group and waslaunched in November 1999. Virgin is a ‘virtual’operator, using the T-Mobile network, and has fivemillion customers on a mixture of pre-pay andcontract deals. The company employs 1,400 staff inthe United Kingdom.

As a virtual network operator, Virgin Mobile hasprecious few real assets. But Sir Richard Branson’s

company has a quickly growing subscriber base, agood customer service team, and, most importantly, agood brand. NTL hopes to captalise on that successand re-brand itself as Virgin. Key questions that willaffect the success of the merger are:

� Will Virgin Mobile’s young customers be affluentand settled enough to buy NTL’s premium cabletelevision packages?

� Will NTL/Telewest households buy into the Virginbrand and forget about ‘NTL hell’, as onecustomer website has labeled it?

Cable firms have found it difficult enough to hawktheir television and telephony packages, so one mightquestion whether a quadruple sell will deliver. Virgin,in turn, is under pressure from keenly pricedcompetitors such as Tesco Mobile.

In the end this deal is not about technology; it isabout branding. And investors – and Sir Richard –will have to ask themselves whether the ever-flexibleVirgin brand can be stretched yet again.

Source: Based on material from www.bbc.co.uk


The overriding problem with acquisition lies in the ability to integrate the newcompany into the activities of the old, which often centres around problems ofcultural fit.Where acquisition is being used to acquire new competences, this ‘clashof cultures’ may simply arise because the organisational routines are so different ineach organisation.

Reasons for mergers may be similar to those for acquisitions. However, mergersare usually the result of organisations coming together voluntarily because they areactively seeking benefits of synergy.

The research evidence on the financial consequences of mergers and acquisitionsis 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 maytake the acquiring company some considerable time to gain any financial benefitfrom acquisitions. Some studies confirm the importance of non-economic factorssuch as previous experience of acquisitions and decisions on whether to remove orretain executives of the acquired company and the often-ignored management ofpost-acquisition cultural issues.

Joint developments and strategic alliancesStrategic alliances involve some form of agreement between two or more companieswhere they share resources and activities to pursue a strategy. Joint development of newstrategies has become increasingly popular, particularly since the early 1980s, becauseorganisations cannot always cope with increasingly complex environments (such asglobalisation) from internal resources and competences alone.They may see the needto obtain materials, skills, innovation, finance or access to markets, and recognise thatthese may be as readily available through co-operation as through ownership.

There is a variety of arrangements for joint developments and alliances. Some arevery 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 assetsinvolved in the alliance.These assets may not just be financial or physical, but couldalso 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 companyjointly owned by the organisations that start it. The organisations remain inde-pendent, but set up a newly created organisation jointly owned by the parents.Thejoint venture was a favoured means of beginning collaborative adventures betweeneastern and western European firms in the early 1990s, with eastern European firmsproviding labour, entry to markets and sometimes plants, and western companiesproviding expertise and finance.

Faulkner’s (1995) study of international strategic alliances confirmed that theprimary motivation to form alliances was the need for specific resources andcompetences to survive and succeed in globalising markets – particularly wheretechnologies were also changing. Partners were chosen with these issues in mind.However, the success of alliances tended to be more dependent on how they weremanaged and the way in which the partners fostered the evolution of the partner-ship, for example attitudes to commitment, trust and cultural sensitivity, clearorganisational arrangements and the desire of all partners to achieve organisationallearning from the alliance rather than to use partners to substitute for their lackof competences.


stop and think 3.8

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

What issues might arise with implementation?

mergersOrganisations that cometogether voluntarily to seekbenefits of synergy.


5 Strategic choice – evaluation and selection

5.1 IntroductionThis section discusses how strategic options can be evaluated and the processes bywhich organisations might select strategies for the future.The aim is to look at thecontribution that different types of technique, some of which we have alreadydiscussed, 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 circumstancesin 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 thestrategy were implemented and the extent to which these would be in line withthe expectations of stakeholders.

3 Feasibility – whether the strategy could be made to work in practice.This means anemphasis on more detailed assessment of the practicalities of resourcing and stra-tegic capability.

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

5.2 Assessing suitabilitySuitability concerns whether a strategy addresses the circumstances in which theorganisation is operating. Establishing the suitability of options is a useful startingpoint as it establishes the strategic logic behind a particular strategy. Assessing thesuitability of strategic options can be a useful basis on which to screen options before



(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?

FIGURE 3.19 A framework for the evaluation and selection of strategies

StrategicAnalysis

StrategicOptions

Feasibility

Assessment ofSuitability

Acceptability

Selection ofStrategies

suitabilityConcerns whether astrategy addresses thecircumstances in which theorganisation is operating.


more detailed analyses are undertaken. In reviewing strategies, it is important tocheck that strategies are consistent with the needs of the environment, the resourcesand values of the organisation, and its mission.

� Mission and objectives Does the strategy fit the current mission and objectives of theorganisation? Is it acceptable to the strategic leader and other influential stake-holders? (This issue is developed further at 5.4 below.)

� Effect on the strategic perspective Does the strategy proposed have the potential forimproving the general competitive position of the organisation? It should seek tobecome and remain an effective competitor.

� Current strategic position (SWOT) Is the strategy appropriate for the current economicand competitive environment? Is the strategy able to capitalise and build oncurrent strengths, competencies and opportunities, and avoid weaknesses andpotential threats?To what extent is the strategy able to take advantage of emergingtrends in the environment, the market and the industry?

� Skills, competencies and resources Are the strategies being pursued and considered suffi-ciently consistent that skills, competencies and resources are not spread orstretched in any disadvantageous way? Does any new proposal exploit key organ-isational competencies? For current businesses and strategies, can the organisationeffectively add value, or would a divestment strategy be more appropriate?

� Culture Does the strategy fit the culture and values of the organisation? If not, whatare the implications of going ahead?

� Simplicity Is the strategy simple and understandable? Is the strategy one that couldbe communicated easily, and about which people are likely to be enthusiastic?

Summarising the above, is there congruence between the environment, values andresources?

5.3 Analysing feasibilityFeasibility is concerned with whether an organisation has the resources and compe-tences to deliver a strategy.

� Issues of implementation and change Is the strategy feasible in resource terms? Can it beimplemented effectively? Is it capable of achieving the objectives that it addresses?Can the organisation cope with the extent and challenge of the change implied bythe option?

� Finance and other resource availability A lack of any key resource can place a constraint oncertain possible developments.

� Ability to meet key success factors A strategic alternative is not feasible if the key successfactors dictated by the industry and customer demand, such as quality, price andservice level, cannot be met.

� Competitive advantage The effectiveness of a strategy will be influenced by the abilityof the organisation to create and sustain competitive advantage.When formulatinga strategy it is important to consider the likely response of competitors in order toensure that the necessary flexibility is incorporated into the implementationplans.A company which breaks into a currently stable industry or market may wellthreaten the market shares and profitability of other companies and force them torespond with, e.g., price cuts, product improvements or aggressive promotioncampaigns.The new entrant should be prepared for this and be ready to counter it.

� 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 anddecisively once a window of opportunity is spotted. Competitors may attempt toseize the same opportunity.Timing is also an implementation issue.


feasibilityConcerns whether anorganisation has theresources and competencesto deliver a strategy.


5.4 Assessing acceptabilityStrategies also have to be acceptable or desirable to a variety of different stakeholders.Acceptability is therefore concerned with the expected performance outcomes,such as risk or return, if a strategy is implemented.

� Strategic needs The ability of the strategy to satisfy the objectives of the organisationand help to close any identified planning gap. Timing may be important. Theability of the strategy to produce results in either the short or the longer termshould be assessed in the light of the needs and priorities of the firm.

� The level of expected returns Investment decisions might concern the purchase of newtechnology or new plant, the acquisition of another company, or financing thedevelopment and launch of a new product.The ability to raise money, and the costinvolved, are key influences alongside two other strategic issues:– Does the proposed investment make sense strategically?– Will the investment provide an adequate financial return?

� Synergy Effective synergy should lead to a better concentration of resources comparedwith competitors. What are the prospects for synergy in bringing an all-roundimprovement to the organisation? Diversification into products and markets withwhich the organization has no experience, and which may require different skills,may fit poorly alongside existing strategies and fail to provide synergy.

� Risk Risk, vulnerability, opportunity and timing are linked.Where organisations,having spotted an opportunity, act quickly, there is always danger that someimportant 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 andassessing the risks, the greater the chance it has of reducing and controlling therisks. However, if managers delay too long, the opportunity or the initiative maybe lost to a competitor who is more willing to accept the risk.

� Stakeholder needs and preferences The issues here are the expectations and hopes of keystakeholders, the ability of the organisation to implement the strategy and achievethe desired results, and the willingness of stakeholders to accept the inherent risksin a particular strategy.

Strategic changes may affect existing resources and the strategies to which they arecommitted. Shareholders, bankers, managers, employees and customers can all beaffected, 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 ofthe 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.

5.5 Selecting strategiesThis final section is concerned not so much with what the strategic choices are, butwith how the process of strategic choice and selection of strategies can be undertakenwithin organisations.

Prioritising criteriaSome prioritisation of criteria may be a useful starting point.A useful starting pointis to consider the purpose of the organisation. It is clearly important to take intoaccount the view of those in the leadership team developing the criteria as well as


acceptabilityConcerns the expectedperformance outcomes,such as risk or return, if astrategy is implemented.

stop and think 3.9

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



other significant stakeholders. In not-for-profit organisations, the criteria may gobeyond considerations of generating the added value necessary for survival and mayconsider other matters, such as the levels of service to the community, or individualsthe organisation serves. In addition, the culture and style of such organisations do notalways lend themselves to precise evaluation. Figure 3.20 suggests ways in whichpriorities may vary between commercial and not-for-profit organisations.

� Criteria in commercial organisations For most organisations, the priority of the criteriawill be established by the mission and objectives. Criteria also involve the need tobalance the interests of different stakeholders. It would be a mistake to consideronly those criteria that can be put into numbers. For example,many organisationswill have guidelines related to customer quality and satisfaction,while others willinclude service to the broader community.These may not be easy to quantify, butare no less important.All these need to be reflected in the criteria for selection ofstrategy options.

� Criteria in not-for-profit organisations All not-for-profit organisations will need to createadded value. However, beyond this, the criteria may need to reflect strongly theimportant aspects of the service or the value to the community appropriate to themission. 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 measuresare inappropriate. Criteria in not-for-profit organisations also need to take intoaccount the different decision-making processes and beliefs that motivate manysuch organisations.The reliance on voluntary support, the strong sense of missionand belief in the work of the organisation and the style of the organisation may notlend themselves to the simple choice from a series of options.Not-for-profit organ-isationsmay be concernedwith a high degree of loyalty to amission,which is oftenclear, but the organisation may be decentralised with local decision-making. If thisis the case, then a centralised evaluation of options is difficult.

One comparison of the criteria with those of commercial organisations is shown inFigure 3.21.

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

Strategy option 1

Strategy option 2

Strategy option 3

Mission

Source

Decentraliseddecision making

Criteria in not-for-profit organisations

Strategy option 1

Strategy option 2

Strategy option 3

Mission andobjectives?

Building onstrengths?

Overcomingweakness?

Criteria in commercial organisations


Whilst evaluating strategy options in not-for-profit organisations may be morediffuse 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 tofocus on the needs and expectations of potential funders such as government, whosepolicies they may seek to challenge.

Different parts of the organisation will have varying perspectives on the evaluationcriteria. For example, the centre represented by corporate headquarters is likely tohave a different view from an SBU.

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

If there is greater reliance on strategic change emerging from decisions taken within theorganisation by managers close to the market, their suppliers and so on, thesemanagers must feel that they have the authority to make change decisions. In bothcases appropriate strategic leadership is required to direct activity.This section looksat how decision-making occurs in practice.

Decision-making is a process related to the existence of a problem, and it is oftentalked about in terms of problem-solving.A problem, in simple terms, exists when anundesirable situation has arisen which requires action to change it.The organisationwould like to see something different or better happening and be achieving differentresults. However, in many instances the problem situation is very complex and canonly be partially understood or controlled, and therefore strategic decisions are notso much designed to find ideal or perfect answers but to improve the situation asmuch as possible.

While there will always be an objective element in a strategic decision,other,moresubjective influences will also play a part. Figure 3.22 shows that the ultimatedecision will have been affected by three elements:


Commercial organisation Not-for-profit organisation

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

stop and think 3.10

How is strategy decided in your organisation?

How does the ‘planning system’ gather its data?

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



� results from whatever analyses have been used to evaluate the data available;� intuition and perspective of the person or people involved. Past experiences and

their willingness to trust the reliability and validity of the information that theyhave will both be influential issues;

� the political realities of the various alternatives.The contingent decision is the onethat people believe can be implemented – it is not necessarily the option that onpaper promises the highest rewards.To be effective, all managers must be able tohandle the political issues associated with stakeholder priorities and pressures.

Decision-making, therefore, involves both information and people. While the stra-tegic leader requires an appropriate information system, he or she must also ensurethat 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 adegree of ‘fire fighting’ rather than making positive strategic decisions. Here,decision-making is fragmented and likely to be inadequate for internal cohesion andsynergy and where there is likely to be considerable in-fighting. Thompson andMartin (2005) argue that such organisations have the following characteristics:

� irrational decision-making (processes);� weak decision-making/leadership (people);� rigidity, reluctance to change and negative politics;� conflicting perspectives and interests;� over-hasty decisions (decisive!) which are difficult to implement;� lack of clear purpose;� dissolution and absolution (of problems) instead of resolution and solution;� unhelpful personal objectives;� stakeholder conflicts;� poor information;� inadequate measurement and control; and� managers’ inability to take a holistic perspective.

Organisations should evaluate the extent to which any, or all, of these factors arepresent in the decisions their managers are making. Improvements could then fosterincreased 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 somemanagers appear to‘get things right’ while others‘get things wrong’.Thompson andMartin (2005) argue that there are three sets of factors that make up the context inwhich this is exercised.These include the decision-makers’:

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

The political realitiesof various alternatives

Analysis andlogical conclusions/recommendations

from the dataavailable

The decision-maker's

perspective,intuition or'gut feel'


� skills and values, together with aspects of their personality (personal factors);� authority and accountability within the organisation (structural factors); and� understanding and awareness (environmental factors).

Managers make judgments about:

� reality – strategic awareness of the organisation and its environment which is basedupon interpretation and meaning systems;

� action – what to do about perceived strategic issues;� values – concerning expected and desired results and outcomes from the decision.

Figure 3.23 suggests how these are interconnected.

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 withcash difficulties, for example, might need a strategy based upon immediate rational-isation or consolidation. A liquid company evaluating growth options has greaterflexibility.The choice will also be affected by managers’ relative power and influence,their perception of the risks involved, and their willingness to pursue certain coursesof 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 madeabout how to deal with it.This choice reflects action judgment, and there are optionsfrom which to choose:

� continue to rely on approaches which have worked well in the past;� from a position of leadership, take decisive action, reflecting an entrepreneurial style;� involve others in formal analysis, discussion and planning;� possibly involving others, adopt a trial-and-error approach to craft a new strategy

adaptively or incrementally; or� seek input from an expert, maybe an external consultant.


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

Personalfactors

Environmentalfactors

Structuralfactors

Reality leads to

based on

Awareness

Judgement

Action

Values

Perceptions:meaning systems

Willingness and ability to act




(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

� The ability to sense changes in the environment is

important because perceived changes in environmental

influences signal the possible need to change strategy.

They reveal opportunities and warn of threats. These can

be built into a SWOT (strengths, weaknesses,

opportunities and threats) analysis.

� Clarifying the nature of the environment helps provide an

initial view on appropriate ways of understanding the

influences of that environment. In simple, static

conditions, historical analysis and forecasting may be

sensible. In more dynamic conditions, scenario planning

may be important. As the environment becomes more

complex, the design of organisation structure and

development of a learning culture is important.

� Carrying out an initial audit of environmental influences,

begining at the macro level with an understanding of

political, economic, social and technological influences,

can provide an overall view of the variety of forces at work.

This can also help identify key influences and drivers of

change and provide the basis of examining the extent to

which these have differential impact on industries or

organisations within industries.

� Five forces analysis provides a means of identifying the

forces that determine the nature of the competitive

environment, especially in terms of barriers to entry, the

power of buyers and suppliers, the threat of substitutes

and other reasons for the extent of competitive intensity. It

can also be used to examine the benefits of collaboration

within industries.

� The choice of ‘good’ strategies by an organisation can

only be partly guided by general principles of strategic ‘fit’

between the business environment and the resource

base of organisations. Many competitors may achieve

similar degrees of fit, yet some outperform others. This

difference results from the way in which resources are

deployed to create competences in separate activities,

how these are matched to the requirements for particular

types of strategy and the competence with which these

activities are linked together to improve value for money

in products or services.

� Value chain analysis can be a useful way of describing

and analysing these important relationships between an

organisation’s resources, competences and strategies. An

analysis also needs to identify which competences are

core to the success of strategy and how these core

competences can provide the basis of new opportunities.

The analysis of competences is useful for understanding

an organisation at the level of the strategic business unit.

In addition, a judgment needs to be made on the strength

or weakness of the portfolio of strategic business units.

� Specific techniques for analysing resources and

competences may provide only a partial picture. There is

a need to pull these together to give an overall

assessment of strategic capability. This may be done

through a SWOT analysis or by assessing the extent to

which the resources and competences relate to the

critical success factors.

� A development strategy for the future has three elements:

the broad basis of the strategy, the direction of

development and the method of development. These

three elements must be compatible with each other.

� Development directions can be identified by assessing

the various combinations of products and markets

leading to four broad categories: protect and build

(current products in current markets); product

development (for existing markets); market development

(with existing products); and diversification (away from

existing products and markets).

� Key determinants in choosing new directions are the

organisation’s competences. Core competences provide a

basis on which to develop and exploit new market

opportunities. A further choice is needed – that of the

method of development. There are three broad choices:

internal development; acquisition; and joint development.

Internal development has the major benefit of building

organisational competences through learning. Mergers

and acquisitions are common, largely because of their



speed and the ability to acquire competences not already

held ‘in-house’. However, the track record of acquisitions is

not good. Strategic alliances have many different forms and

are increasingly popular methods of development. Themost

successful appear to be those where partners have positive

attitudes to managing and developing the partnership and

are concerned to use the alliance to develop their own

competences, rather than simply using the partner to

substitute for competences they lack themselves.

� Strategies can be assessed against three criteria:

suitability, acceptability and feasibility. Suitability is a

broad assessment of whether a strategy addresses the

circumstances in which the organisation is operating.

Suitability tests can be used to compare the relative

merits of various strategies before more detailed analysis.

This is a process of screening and can involve different

techniques, such as ranking, decision trees or scenario

planning. The acceptability of a strategy relates to three

issues: the expected return from a strategy; the level of

risk; and the likely reaction of stakeholders. Feasibility is

concerned with whether an organisation has the

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?


strategic analysis and choice

Documents

strategic tools

strategic capability

core of strategic management

strategic management

pest analysis

forces analysis

competitor analysis

portfolio analysis