Strategic Management

CHAPTER ONE
COMPETITIVE ADVANTAGE

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1.1 Introduction
Competitive advantage is obtained when an organization develops or acquires a set
of attributes (or executes actions) that allow it to outperform its competitors. The
development of theories that help explain competitive advantage has occupied the
attention of the management community for the better part of half a century. This
chapter aims to provide an overview of the key theories in this space. The
overview will span a long timeline, starting from the 1960s to formulations that
were introduced in mid-2013. In the early period, there were two dominant
theories of competitive advantage: the Market-Based View (MBV) and the
Resource-Based View (RBV). The notion of core competencies is closely related to
the resource-based view of strategy. The knowledge-based view and capability-
based view of strategy have also been derived from the resource based view. A
more recent formulation, the relational view of strategy has received considerable
attention. An even more recent proposal proposes a notion of transient advantage
that effectively overturns much of the existing wisdom.

1.2 Competitive advantage and strategic management

The pursuit of competitive advantage is arguably the central theme of the academic
field of strategic management (Furrer 2008; Hoskisson et al. 1999; Porter 1996).
Pearce and Robinson (1988, p. 6) define strategic management as, the set of
decisions and actions resulting in formulation and implementation of strategies
designed to achieve the objectives of an organization Certo and Peter (1990)
define strategic management as, a continuous, iterative process aimed at keeping
an organization as a whole appropriately matched to its environment.
Strategic management is concerned with defining organisational performance,
variables of strategic choice and competitive advantage. Strategic choice
determines the market in which to participate and where to position the
organisation within those markets (concepts which, as we will see in the next
section, are closely aligned with the market-based view of strategy) (Kotha &
Vadlami 1995).

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The prominent role of competitive advantage may derive from both the economic
and military origins of the strategy literature (Whittington 1993). Ramos-
Rodrguez and Ruz-Navarro (2004) identify three roots of strategic management:
economics, sociology and psychology. In their view, transaction cost theory,
agency theory, evolutionary economics and the resource-based view of the firm
derive from the economic roots of the discipline, while contingency theory,
resource-dependence theory, and organisational ecology derive from the
sociological roots. They also argue that organisational behaviour theory and the
structural patterns of Mintzbergs (1978) concepts belong to the psychological
roots of the discipline (Ramos-Rodrguez & Ruz-Navarro 2004). Nag et al.(2007)
carried out a large-scale survey of strategic management scholars in an attempt to
present a fundamental definition of strategic management. They propose the
following definition: The field of strategic management deals with (1) the major
intended and emergent initiatives (2) taken by general managers on behalf of
owners, (3) involving utilisation of resources (4) to enhance the performance (5) of
firms (6) in their external environments (Nag et al. 2007). They substantiate their
findings by carrying out a second study amongst associated disciplines, such as
economics, sociology, marketing and management. Based on this second study,
they augment the definition with the concept of internal organization
(characterized by notions such as process, routines, organizing, internal, practices
and implementation).

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1.3 The Market-Based View (MBV)
The Market-Based View (MBV) of strategy argues that industry factors and
external market orientation are the primary determinants of firm performance
(Bain 1968; Caves & Porter 1977; Peteraf & Bergen 2003; Porter 1980, 1985,
1996). Bains (1968) Structure-Conduct-Performance (SCP) framework and
Porters (1980) five forces model (which is based on the SCP framework) are two
of the best-known theories in this category. The sources of value for the firm are
embedded in the competitive situation characterizing its end-product strategic
position. The strategic position is a firms unique set of activities that are different
from their rivals. Alternatively, the strategic position of a firm is defined by how it
performs similar activities to other firms, but in very different ways. In this
perspective, a firms profitability or performance are determined solely by the
structure and competitive dynamics of the industry within which it operates
(Schendel 1994).

The Market-Based View (MBV) includes the positioning school of theories of

strategy and theories developed in the industrial organisation economics phase of
Hoskissons account of the development of strategic thinking (of which Porters is
one example) (Hoskisson et al. 1999; Mintzberg et al. 1998; Porter 1980). During
this phase, the focus was on the firms environment and external factors.
Researchers observed that the firms performance was significantly dependent on
the industry environment. They viewed strategy in the context of the industry as a
whole and the position of the firm in the market relative to its competitors.

Bain (1968) proposed the Industrial Organisation paradigm, also known as the
Structure- Conduct-Performance (SCP) paradigm. It describes the relationship of
how industry structure affects firm behaviour (conduct) and ultimately firm
performance. Bain (1968) studied a firm with monopolistic structures and found
barriers to entry, product differentiation, number of competitors and the level of
demand that effect firms behaviour. The SCP paradigm was advanced by
researchers (Caves & Porter 1977; Caves 1980; Porter 1980) and explained why

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organisations need to develop strategy in response to the structure of the industry
in which the organisation competes in order to gain competitive advantages. In
formulating strategy, firms commonly make an overall assessment of their own
competitive advantage via an assessment of the external environment based on the
five forces model (Porter 1979; 1985). The five forces under consideration consist
of the following: barriers to entry, threat of substitutes, bargaining power of
suppliers, bargaining power of buyers and rivalry among competitors (Porter
1985). In this perspective, a firms sources of market power explain its relative
performance. Three sources of market power are frequently highlighted:
monopoly, barriers to entry, and bargaining power (Grant 1991). When a firm has a
monopoly, it has a strong market position and therefore performs better (Peteraf
1993). High barriers to entry for new competitors in an industry lead to reduced
competition and hence better performance. Higher bargaining power within the
industry relative to suppliers and customers can also lead to better performance
(Grant 1991).

The five-force model enables organisation to analyse the current situation of their
industry in a structured way. However, the model has limitations. Porters model
assumes a classic perfect market as well as static market structure, which is
unlikely to be found in present-day dynamic markets. In addition, some industries
are complex with multiple inter-relationships, which make it difficult to
comprehend and analyse using the five force model (Wang 2004). Moreover,
Rumelt (1991) stated that the most important determinants of profitability are firm-
specific rather than industry-specific. Prahalad and Hamel (1990) suggested that
competitive advantage based on resources and capabilities is more important than
just solely based on products and market positioning in term of contributing to
sustainable competitive advantages. Contrary to Porters focus on industry,
Penrose (1959) and others (Prahalad & Hamel, 1990; Rumelt 1991) have
emphasized the importance of the (heterogeneous) resources that firms use, as the
primary source of competitive advantage. Furrer et al. (2008) suggested that since
the 1980s onwards, the focus of studies in strategic management has changed from

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the structure of the industry (MBV) to the firms internal structure, with resources
and capabilities. This approach to strategy is known as the Resource-Based View
(RBV), discussed in the next section.

1.4 The Resource-Based View (RBV)

The resource-based view of the firm (RBV) draws attention to the firms internal
environment as a driver for competitive advantage and emphasises the resources
that firms have developed to compete in the environment. During the early strategy
development phase of Hoskissons account of the development of strategic
thinking (Hoskisson et al. 1999), the focus was on the internal factors of the firm.
Researchers such as Ansoff (1965) and Chandler (1962) made important
contributions towards developing the Resource-Based View of strategy (Hoskisson
et al. 1999). From the 1980s onwards, according to Furrer et al. (2008), the focus
of inquiry changed from the structure of the industry, e.g., Structure-Conduct-
Performance (SCP) paradigm and the five forces model) to the firms internal
structure, with resources and capabilities (the key elements of the Resource-Based
View (RBV). Since then, the resource-based view of strategy (RBV) has emerged
as a popular theory of competitive advantage (Furrer et al. 2008; Hoskisson et al.
1999). The origins of the RBV go back to Penrose (1959), who suggested that the
resources possessed, deployed and used by the organisation are really more
important than industry structure. The term resource-based view was coined
much later by Wernerfelt (1984), who viewed the firm as a bundle of assets or
resources which are tied semi-permanently to the firm (Wernerfelt 1984). Prahalad
and Hamel (1990) established the notion of core competencies, which focus
attention on a critical category of resource a firms capabilities. Barney (1991)
also argued that the resources of a firm are its primary source of competitive
advantage. According to Ramos-Rodrguez and Ruz-Navarros (2004)
bibliometric study of the Strategic Management Journal over the years 19802000,
the most prominent contribution to the discipline of strategic management was the
Resource-Based View of strategy. In addition, the papers written by Wernerfelt

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(1984) and Barney (1991) are the two most influential articles in strategic
management research (Ramos-Rodrguez & Ruz-Navarro 2004).

Early researchers simply classified firms resources into three categories: physical,
monetary, and human (Ansoff, 1965). These evolved into more detailed
descriptions of organisational resources (skills and knowledge) and technology
(technical know-how) (Hofer & Schendel 1978). Amit and Shoemaker (1993)
proposed an alternative taxonomy involving physical, human and technological
resources and capabilities. Lee et al. (2001) argued for a distinction between
individual-level and firm-level resources. Miller and Shamsie (1996) classified
resources into two categories: property-based and knowledge-based. Barney
(1991) suggested that other than the general resources of a firm, there are
additional resources, such as physical capital resources, human capital resource
and organisational capital resources. Later, Barney and Wright (1998) add human
resource management-related resources to this list of additional resources of a
firm. These resources can be tangible or intangible (Ray et al. 2004). Wernerfelt
(1984) also discussessed that resources might be tied semi-permanently to the firm.
Barney (1991) drew attention to all assets, capabilities, organizational processes,
firm attributes, information, knowledge etc., controlled by a firm that enable the
firm to conceive of and implement strategies that improve its efficiency and
effectiveness. Ultimately, firms that are able to leverage resources to implement a
value creating strategy not simultaneously being implemented by any current or
potential competitor (Barney 1991) can achieve competitive advantage.

Researchers subscribing to the RBV argue that only strategically important and
useful resources and competencies should be viewed as sources of competitive
advantage (Barney 1991). They have used terms like core competencies (Barney
1991; Prahalad & Hamel 1994), distinctive competencies (Papp & Luftman 1995)
and strategic assets (Amit & Shoemaker 1993; Markides & Williamson 1994) to
indicate the strategically important resources and competencies, which provide a
firm with a potential competitive edge. Strategic assets are, the set of difficult to

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trade and imitate, scarce, appropriable and specialized resources and capabilities
that bestow the firms competitive advantage (Amit & Shoemaker 1993). Powell
(2001) suggested that business strategy can be viewed as a tool to manipulate such
resources to create competitive advantage. Core competencies are distinctive, rare,
valuable firm-level resources that competitors are unable to imitate, substitute or
reproduce (Barney 1991; Prahalad & Hamel 1994). Distinctive competencies refer
to all the things that make the business a success in the marketplace (Papp &
Luftman 1995) Wang (2004) outline an approach to firm-level analysis that
requires stocktaking of a firms internal assets and capabilities. The assets in
question could be physical assets, knowledge assets (intellectual capital) as well as
human resources, which in turn determine the capabilities of a firm. Maier and
Remus (2002, p. 110) use the term resource strategy and define three steps in a
firms resource strategy - competence creation, competence realisation and
competence transaction. Competence creation defines and analyses the markets,
product and service.

Competence realisation involves the execution of services, procurement, and

production. Competence transaction involves market logistics, order fulfilment and
maintenance (Maier & Remus 2002).

Some researchers (Del Canto & Gonzalez 1999; Lockett & Thompson 2001; Ray
et al. 2004) distinguished between tangible and intangible resources and conclude
that intangible resources are often the most important ones from a strategic point
of view. They argue that intangible resources are more likely to be a source of
sustained competitive advantage rather than tangible ones. Other researchers
(Barney & Wright 1998; Prahalad& Hamel 1990) treated human resources as the
most valuable type of resource. Prahalad and Hamel (1990) argued that these
should not be locked inside a business unit but should be available for reuse by
other parts of firm wherever a potential use yielding higher returns can be
identified. Ray, Barney and Muhanna (2004) understood the difficulties for a firm
to change its resources. They suggest that redesigning a firms processes, activities

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and routines can enable efficient and effective usage of resources and capabilities
that can achieve sustainable competitive advantage. It has been argued that the
RBV ignores the nature of market demand and only focuses on internal resources
(Hooley et al. 1996). Some authors (Andrew 1971; Chandler 1962, among others)
argued that external and internal elements cannot be separated. Maier and Remus
(2002) defined the concept of fit as a balancing act between the external-oriented
MBV and the internal-oriented RBV. Amit and Schoemnaker (1993) point out the
important link between the firms internal resources and its external market
conditions. Dyer and Singh (1998) as well as Wang (2004) suggested that the link
between the individual firm and the network of relationship in which the firm is
embedded is important for competitive advantage. Wang (2004) suggested that an
inter-organisational level view is useful to analyse business relationships, since
neither the RBV nor the MBV address this specific aspect. Dyer and Singh (1998)
pointed out, in relation to the RBV and MBV, that, the fact that there are clear
contradictions between these views suggests that existing theories of advantage are
not adequate to explain inter-organizational competitive advantage.
In the next two sections, two additional views of strategy (the knowledge-based
view and the capability-based view) will be discussed. These are typically
regarded as special cases of the resource-based view.

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1.5 The Knowledge-Based view
While most researchers subscribing to the RBV regard knowledge as a generic
resource, some researchers (Murray 2000; Teece et al. 1997; Tiwana 2002) suggest
that knowledge has special characteristics that make it the most important and
valuable resource. Hamel and Prahalad (1994) argue that knowledge, know-how,
intellectual assets and competencies are the main drivers of superior performance
in the information age. Evans (2003) and Tiwana (2002) also suggest that
knowledge is the most important resource of a firm. Evans (2003) pointed out that
material resources decrease when used in the firm, while knowledge assets
increase with use. Tiwana (2002) argued that technology, capital, market share or
product sources are easier to copy by other firms while knowledge is the only
resource that is difficult to imitate. Grant (1996) argued that there are two types of
knowledge: information and know-how. Beckmann (1999) proposed a five-level
knowledge hierarchy comprising data, information, knowledge, expertise and
capabilities. Zack (1999) divides organisational knowledge into three categories:
core knowledge, advanced knowledge, and innovative knowledge. Core
knowledge is the basic knowledge that enables a firm to survive in the market in
the short-term. Advanced knowledge provides the firm with similar knowledge as
its rivals and allows the firm to actively complete in the short term. Innovative
knowledge gives the firm its competitive position over its rivals. The firm with
innovative knowledge is able to introduce innovative products or services,
potentially helping it become a market leader (Zack 1999).

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1.6 The Capability-Based View
Grant (1991) argued that capabilities are the source of competitive advantage while
resources are the source of capabilities. Amit and Shoemaker (1993) adopted a
similar position and suggested that resources do not contribute to sustained
competitive advantages for a firm, but its capabilities do. Haas and Hansen (2005),
as well as Long and Vickers-Koch (1995),supported the importance of capabilities
and suggest that a firm can gain competitive advantage from its ability to apply its
capabilities to perform important activities within the firm.

Amit and Shoemaker (1993,) defined capabilities in contrast to resources, as a

firms capacity to deploy resources, usually in combination using organizational
processes, and effect a desired end. They are information-based, tangible or
intangible processes that are firm-specific and developed over time through
complex interactions among the firms resources. Teece et al. (1997) define
dynamic capabilities as, the firms ability to integrate, build, and reconfigure
internal and external competencies to address rapidly changing environments.
Grant (1996) defines organisational capability as, a firms ability to perform
repeatedly a productive task which relates either directly or indirectly to a firms
capacity for creating value through effecting the transformation of inputs to
outputs. Grant (1996) also divides capability into four categories: cross-functional
capabilities, broad-functional capabilities, activity-related capabilities and
specialised capabilities. Sirmon et al. (2003) stressed the importance of
organisational learning. They suggest that capabilities and organisational learning
implicitly and explicitly are a part of any strategy within a firm. It has been argued
(Zack 1999) that the ability to learn and create new knowledge is essential for
gaining competitive advantage. Lee et al. (2001) discussed the influence of internal
capabilities and external networks on firm performance.

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1.7 The Relational View of Strategy
Dyer and Singh (1998) have offered a relational view of competitive advantage
that focuses on dyad/network routines and processes as an important unit of
analysis for understanding competitive advantage. The relational view critiques the
RBVs assumption that resources are owned by a single firm. It has been argued
(Dyer & Singh 1998) that a firms critical resources may extend beyond firm
boundaries. Dyer and Singh (1998) suggest that inter-firm linkages may be a
source of relational rents and competitive advantage. They define a relational rent
as, a supernormal profit jointly generated in an exchange relationship that cannot
be generated by either firm in isolation and can only be created through the joint
idiosyncratic contributions of the specific alliance partners (Dyer & Singh 1998).
They identify four relational rents as sources of competitive advantage: (1)
relation-specific assets, (2) knowledge-sharing routines, (3) complementary
resources and capabilities and (4) effective governance. Dyer and Singh (1998)
stated that, at a fundamental level, relational rents are possible when alliance
partners combine exchange or invest in idiosyncratic assets, knowledge, and
resources/capabilities, and/or they employ effective governance mechanisms that
lower transaction costs or permit the realization of rents through the synergistic
combination of assets, knowledge or capabilities .

The relational view of strategy has become increasingly popular (Ahuja 2000;
Dyer & Singh 1998; Gulati 1998; Gulati et al. 2000; Ring & Van de Venn, 1992a;
Ring & Van de Venn 1992b; Seidmann & Sundararajan 1997; Wang 2004). A
number of authors discussedinter-firm collaboration (Easton 1992; Easton &
Araujo 1997; Ebers 1999; Oliver 1990), business interactions (Wang 2004),
relationships (Perrow 1986; Walter et al. 2001) and networks (Ahuja 2000; Gulati
& Gargiulo 1999; Gulati et al. 2000).An inter-organisational network involves
relationships between two or more firms both in the micro-level and macro-level
contexts (Ebers 1997). The micro-level context involves resources flows,
information flows and flows of mutual expectations between firms. The macro-
level context includes institutional, relational, PESTEL factors (political,

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economic, social, technological, ecological and legal) and regional contingencies
(Ebers 1997). Miles and Snow (1992) discuss the cause of failure in network
organizations. Wang (2004) presented a framework for analysing a business
context in terms of business relationship. The three forms of analysis are market-
level, firm-level and interaction-level. Both market-level and firm-level analysis
are fundamentally inter-organizational in that they analyze a firm from the
perspective of its peers and the external market environment. Thus, market-level
analysis views a firm in the context of its market environment, while firm-level
analysis looks at resources, strengths and capabilities of the firm, but only in the
context of those of its peers. Wang (2004) proposes the notion of a business
arrangement as the fundamental unit of analysis for business relationships. A
business arrangement is, any formal or informal business contract between
different business partners for the purposes of buying, selling, collaboration or
related business activity. These activities could include sharing business
information, buying or selling goods, receiving or providing services, participating
in buy-side or sell-side coalitions, or collaborating on community projects (Wang
2004). The interaction-level analysis refers to the analysis of the distinct business
arrangements of a specific firm. It provides a new and important intra-
organisational unit of analysis that is critical in structuring, analysing and
understanding business relationships. Wang (2004) noted that the relational view
of strategy is also interorganisational, and the unit of analysis is, if anything, even
more coarse-grained for the purposes of interaction-level analysis. While the MBV
of strategy suggests that the primary source of high returns is the bargaining power
of a firm in the market, and the RBV suggests that this (source of high returns) is
the set of unique resources, capabilities and knowledge of a firm, the relational
view suggests that these are the shared knowledge and complementary resources
of the network. Similarly, profit preservation mechanisms in the MBV are market
barriers to entry, while in the RBV these are firm-level barriers to the imitation of
unique resources. In the relational view, these mechanisms include dyadic/network
barriers to imitation and the scarcity of potential partners (that might prevent such
a network from being replicated).

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1.8 Transient Advantage
A recent proposal (McGrath 2013) made an important case for overturning
traditional assumptions about the temporal scope of the strategy formulation and
execution processes. Traditionally, strategies would be formulated with the
understanding that these would then guide the firms behaviour for prolonged
periods of time (months, if not years). Strategies would consequently be
revised/re-formulated on an infrequent basis. This proposal argues that, given the
way the current business environment has evolved, opportunities for leveraging
competitive advantage are transient.

This observation has important implications for the manner in which strategies are
formulated, executed, monitored, assessed and revised. Importantly, this means
that the strategy life-cycle will need to be much shorter, and, necessitate fast
reaction to changing market conditions. This is, arguably, most important for the
market-based view, wherein market positioning responses would have to be much
faster. While internal firm capabilities and resources have not been dynamic
enough in the past to warrant the use of the word transient , that too might change
in the new business environment. The relational view of strategy is also impacted,
given that business networks are also increasingly becoming transient, with virtual
enterprises forming and disbanding with great rapidity.

Conclusions
It is clear from this literature review that there is considerable diversity in how
strategy is conceptualized and in its units of analysis. There is no clear consensus
that any one of the diversity of views is the correct one going into the future. As
with many things, the best view is likely to be a mix of those reviewed in this
paper: the MBV, the RBV, the relational view or their sub-categories. One of the
important lessons that emerged from this literature review is that strategy is
intimately related to the idea of doing . Obtaining a certain market position
involves action on the part of the firm, as does appropriately using one of its
internal, or relational, resources.

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 CHAPTER TWO
Strategic Management

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2.0 Strategic Management - Meaning and Important Concepts

2.1 Strategic Management - An Introduction

Strategic Management is all about identification and description of the strategies that
managers can carry so as to achieve better performance and a competitive advantage for
their organization. An organization is said to have competitive advantage if its
profitability is higher than the average profitability for all companies in its industry.

Strategic management can also be defined as a bundle of decisions and acts which a
manager undertakes and which decides the result of the firms performance. The manager
must have a thorough knowledge and analysis of the general and competitive
organizational environment so as to take right decisions. They should conduct a SWOT
Analysis (Strengths, Weaknesses, Opportunities, and Threats), i.e., they should make best
possible utilization of strengths, minimize the organizational weaknesses, make use of
arising opportunities from the business environment and shouldnt ignore the threats.

Strategic management is nothing but planning for both predictable as well as unfeasible
contingencies. It is applicable to both small as well as large organizations as even the
smallest organization face competition and, by formulating and implementing appropriate
strategies, they can attain sustainable competitive advantage.

It is a way in which strategists set the objectives and proceed about attaining them. It
deals with making and implementing decisions about future direction of an organization.
It helps us to identify the direction in which an organization is moving.

Strategic management is a continuous process that evaluates and controls the business and
the industries in which an organization is involved; evaluates its competitors and sets
goals and strategies to meet all existing and potential competitors; and then reevaluates
strategies on a regular basis to determine how it has been implemented and whether it was
successful or does it needs replacement.

Strategic Management gives a broader perspective to the employees of an

organization and they can better understand how their job fits into the entire
organizational plan and how it is co-related to other organizational members. It is
nothing but the art of managing employees in a manner which maximizes the ability of

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achieving business objectives. The employees become more trustworthy, more committed
and more satisfied as they can co-relate themselves very well with each organizational
task. They can understand the reaction of environmental changes on the organization and
the probable response of the organization with the help of strategic management. Thus the
employees can judge the impact of such changes on their own job and can effectively face
the changes. The managers and employees must do appropriate things in appropriate
manner. They need to be both effective as well as efficient.

One of the major role of strategic management is to incorporate various functional areas
of the organization completely, as well as, to ensure these functional areas harmonize and
get together well. Another role of strategic management is to keep a continuous eye on the
goals and objectives of the organization.

2.2 Vision and Mission Statements

One of the first things that any observer of management thought and practice asks is
whether a particular organization has a vision and mission statement. In addition, one of
the first things that one learns in a business school is the importance of vision and mission
statements.

This article is intended to elucidate on the reasons why vision and mission statements are
important and the benefits that such statements provide to the organizations. It has been
found in studies that organizations that have lucid, coherent, and meaningful vision and
mission statements return more than double the numbers in shareholder benefits when
compared to the organizations that do not have vision and mission statements. Indeed, the
importance of vision and mission statements is such that it is the first thing that is
discussed in management textbooks on strategy.

Some of the benefits of having a vision and mission statement are discussed
below:

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 Above everything else, vision and mission statements provide unanimity of
purpose to organizations and imbue the employees with a sense of belonging and
identity. Indeed, vision and mission statements are embodiments of organizational
identity and carry the organizations creed and motto. For this purpose, they are
also called as statements of creed.
Vision and mission statements spell out the context in which the organization
operates and provides the employees with a tone that is to be followed in the
organizational climate. Since they define the reason for existence of the
organization, they are indicators of the direction in which the organization must
move to actualize the goals in the vision and mission statements.
The vision and mission statements serve as focal points for individuals to identify
themselves with the organizational processes and to give them a sense of direction
while at the same time deterring those who do not wish to follow them from
participating in the organizations activities.
The vision and mission statements help to translate the objectives of the
organization into work structures and to assign tasks to the elements in the
organization that are responsible for actualizing them in practice.
To specify the core structure on which the organizational edifice stands and to
help in the translation of objectives into actionable cost, performance, and time
related measures.
Finally, vision and mission statements provide a philosophy of existence to the
employees, which is very crucial because as humans, we need meaning from the
work to do and the vision and mission statements provide the necessary meaning
for working in a particular organization.

As can be seen from the above, articulate, coherent, and meaningful vision and mission
statements go a long way in setting the base performance and actionable parameters and
embody the spirit of the organization. In other words, vision and mission statements are
as important as the various identities that individuals have in their everyday lives.

It is for this reason that organizations spend a lot of time in defining their vision and
mission statements and ensure that they come up with the statements that provide
meaning instead of being mere sentences that are devoid of any meaning.

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2.3 Setting objectives

The task for strategic planners in setting objectives is to engineer the change that is
needed to ensure that the organization is well-positioned for the future and will continue
to be viable and relevant to the needs of its stakeholders. Sport and recreation
organizations that remain static, when all around them is changing, may find themselves
with a difficult and uncertain future.

In setting objectives, strategic planners should consider how the organization can be
developed to improve, programs, events and facilities

So in setting objectives think about how organizations can be developed through:

Financial Objectives
Financial objectives focus on achieving acceptable profitability in a companys pursuit of
its mission/vision, long-term health, and ultimate survival. Financial objectives signal
commitment to such outcomes as good cash flow, creditworthiness, earnings growth, an
acceptable return on investment, dividend growth, and stock price appreciation.
The following are examples of financial objectives:
Growth in revenues
Growth in earnings
Wider profit margins
Bigger cash flows
Higher returns on invested capital
Attractive economic value added (EVA) performance
Attractive and sustainable increases in market value added (MVA)
A more diversified revenue base

Strategic Market Objectives

Strategic market objectives focus on the companys intent to sustain and improve their
competitive strength and long-term market position through creating customer value.
Strategic objectives focus on winning additional market share, overtaking key
competitors on product quality or customer service or product innovation, achieving
lower overall costs than rivals, boosting the companys reputation with customers,
winning a stronger foothold in international markets, exercising technological leadership,
gaining a sustainable competitive advantage, and capturing attractive growth
opportunities.

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 Increasing the skills of its people, in capability level and/or quantity
Improving facilities and equipment
Increasing the range of products and services and increasing their value to the
participant
Increasing the number of locations through which products and services are
available

Strategic planners need to be mindful of the fact that organizations, in view of their
limited resources, may need to carefully consider and to concentrate their efforts on
achieving the changes that are most necessary. A strategic plan may be impossible to
accomplish if it has a vast and confusing array of objectives. It is often the case that
strategic plans are produced with many pages of objectives and strategies. They look
impressive but the length and complexity is not a formula for success.

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2.4 External Analysis
KNOWLEDGE OBJECTIVES
Studying this chapter should provide you with the strategic management knowledge
needed to:
1. Explain the importance of analyzing and understanding the firms external
environment.
2. Define and describe the general environment and the industry environment.
Discuss the four activities of the external environmental analysis process.
3. Name and describe the general environments six segments.
4. Identify the five competitive forces and explain how they determine an
industrys profit potential.

KNOWLEDGE OBJECTIVES (contd)

Studying this chapter should provide you with the strategic management
knowledge needed to:
5. Define strategic groups and describe their influence on the firm.
6. Describe what firms need to know about their competitors and different
methods (including ethical standards) used to collect intelligence about
them
The External Environment

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The General Environment: Segments and Elements

Industry Environment
The set of factors directly influencing a firm and its competitive actions and
competitive responses
Threat of new entrants
Power of suppliers
Power of buyers
Threat of product substitutes
Intensity of rivalry among competitors

Competitor Analysis
Gathering and interpreting information about all of the companies that the
firm competes against.
Understanding the firms competitor environment complements the insights
provided by studying the general and industry environments.

[22]
Analysis of the External Environments
General environment
Focused on the future
Industry environment
Focused on factors and conditions influencing a firms profitability within an
industry
Competitor environment
Focused on predicting the dynamics of competitors actions, responses and
intentions.
Components of the External Environmental Analysis

Opportunities and Threats

Opportunity
A condition in the general environment that, if exploited, helps a company achieve
strategic competitiveness.
Threat
A condition in the general environment that may hinder a companys efforts to
achieve strategic competitiveness.

[23]
Segments of the General Environment
The Demographic Segment
Population size
Age structure
Geographic distribution
Ethnic mix
Income distribution

Segments of the General Environment (contd)

The Economic Segment
Inflation rates
Interest rates
Trade deficits or surpluses
Budget deficits or surpluses
Personal savings rate
Business savings rates
Gross domestic product
The Political/Legal Segment
Antitrust laws
Taxation laws
Deregulation philosophies
Labor training laws
Educational philosophies and policies
The Sociocultural Segment
Women in the workplace
Workforce diversity
Attitudes about quality of worklife
Concerns about environment
Shifts in work and career preferences
Shifts in product and service preferences

[24]
The Technological Segment
Product innovations
Applications of knowledge
Focus of private and government-supported R&D expenditures
New communication technologies

The Global Segment

Important political events
Critical global markets
Newly industrialized countries
Different cultural and institutional attributes

Industry Environment Analysis

Industry Defined
A group of firms producing products that are close substitutes
Firms that influence one another
Includes a rich mix of competitive strategies that companies use in pursuing
strategic competitiveness and above-average returns
The Five Forces of Competition Model

[25]
Threat of New Entrants: Barriers to Entry
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Government policy
Expected retaliation

Intensity of Rivalry Among Competitors

Industry rivalry increases when:
There are numerous or equally balanced competitors.
Industry growth slows or declines.
There are high fixed costs or high storage costs.
There is a lack of differentiation opportunities or low switching costs.
When the strategic stakes are high.
When high exit barriers prevent competitors from leaving the industry.

Interpreting Industry Analyses

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Strategic Groups
Strategic Dimensions
Extent of technological leadership
Product quality
Pricing Policies
Distribution channels
Customer service
Competitor Analysis
Competitor Intelligence
The ethical gathering of needed information and data
that provides insight into:
A competitors direction (future objectives)
A competitors capabilities and intentions (current strategy)
A competitors beliefs about the industry (its assumptions)
A competitors capabilities

[27]
2.5 Internal Analysis
No plan- big or small, strategic or tactical- can succeed if it is made without reference to
the context in which it is going to operate. Context reveals the need to plan, the factors
that help or harm a plan, the factors that need manipulation, and the wherewithal required
to operate it. The context which is specific to a firm, and on which it has some amount of
control can be called internal context. This internal context has to be first understood
before one goes about understanding the external context as shown in Figure 4.1. When
internal context is understood, the points that emerge include its strengths, weaknesses,
resources needed and competencies that have to be built. Understanding internal context
is internal analysis, which is defined as follows.
Internal Analysis is an exercise to list a firms resources, strengths, and weaknesses.

Internal Analysis

Internal Analysis is an exercise to list a firms resources, strengths, and weaknesses. An

understanding of a firms resources is a prerequisite to formulation of strategy; this
prescription is an offshoot of a theory called Resource-Based View.
The view of Hitt, Hoskisson and Ireland, the Resource-Based Model of above-average
returns gives some idea of Resource-Based View. According to them, it involves
identification of firms resources and unique capabilities, and determination of the
potential of such resources and capabilities in terms of competitive edge; this is done
before an attractive industry is chosen and a strategy is formulated to utilize its resources
and capabilities vis--vis the opportunities presented by the external environment.
Essentially, it is about determining the unique capabilities of a firm and pitting the same
against the opportunities.
Resource-Based View
Resource-based view (RBV), which is the opposite of Industrial Organization View, lays
emphasis on a companys resources and competitive capability for organizational success.
Jay Barney has proposed this view. Industrial Organization view lays stress on a firms fit
with the external environment.
Concerning which factors are critical to a companys success in terms of profitability,
stability, growth and survival, scholars are divided into two groups. The two groups are:
1. Industrial Organization View proponents and 2.Resource-based View proponents.
These schools are two sides of the same coin in that each view complements the other.

[28]
Simply stated, an analysis on one view is a standard to cross- check the outcome of the
other analysis. Industrial Organization view, which stresses on a firms fit with the
external environment, has been discussed in detail in the previous chapter. Resource-
based view (RBV), which is the opposite of the former, lays emphasis on companys
resources and competitive capability for organizational success. Jay Barney has proposed
this view. Resource-based view theory primarily divides the firms resources into three
categories: (a) physical resources consisting of plant, land, equipment, technology, and
the like, (b) human resources consisting of the manpower, their skills, their work culture,
their training, experience, intelligence, abilities and so on, and (c) organizational
resources consisting of softer aspects of an organization encompassing structure, systems,
processes, patents, trademarks, brand value and so on. Please see Figure 4.2
The Components of Resource-Based View

Physical Resources Human Resources Organizational

Resources
Include: Include:
Plant Skills Include:
Land Work culture Structure
Equipment Training Systems
Experience Processes
Patients
Brand Value

Protagonists of resource-based view pursue organizational analysis devoutly. They

conduct organizational analysis to understand the pattern, nature and size of the resources.
The unique combination of resources, their magnitude and nature, not possessed by any
other firm, constitute the competitive advantage of a firm. For this unique position to be
obtained, a firm has to thoughtfully develop and maintain the resources that no other firm
has, at least in the combination it does. For example, Infosys, the Indian software giant,
developed the best mix of highly motivated manpower, client servicing apparatus, brand
image and an effective selling and execution mechanism.

[29]
RBV theory prescribes that since the objective of the strategic management limb of a firm
is sustainable growth with the help of a sustainable competitive advantage, unstinting
focus on developing and keeping unmatched and valuable resources is essential; such
resources which bestow competitive edge are rare, hard to imitate, and hard to substitute.
Please see Figure 4.3. They are hard to obtain, though most coveted and worthwhile.
These characteristics, also called empirical indicators are the inspiring goals of any
assiduously- run firm; they equip it with efficiency, effectiveness, and thus, a sustainable
competitive advantage.
Characteristics of Resources That Have Potential For Competitive Advantage
Characteristi It implies
c
1 Valuable They help a firm capitalize the opportunities and neutralize threats.
2 Rare They are possessed by very few competitors.
3 Costly to They can not be reproduced since they are either available in
imitate combination or its owners built them over a long period.
4 Non- They have no equivalents and their power can not be usurped.
substitutable
Continuing the example of Infosys, one may easily figure out its three empirical
indicators: (1) its committed manpower, their training systems and effective execution can
be considered as rare, since very few firms possess this combination, (2) the committed
and efficient manpower of Infosys is hard to imitate or duplicate, and (3) there is no
substitute for its committed and efficient manpower in the imaginable near future.
According to other analysts, added to the foregoing indicators, the fourth and the most
important, is being valuable. It implies that it is a source of value in that it has the
potential to fulfill the needs of an organization. (A detailed discussion on these parameters
is presented in the next chapter.) In other words, Infosys enjoys a competitive advantage
due to these rare, inimitable, non-substitutable, and valuable human resources; this shows
that Infosys has adopted Resource-based View to build a competitive advantage.
It is important to note here that since resources are liable to get obsolete, the useful and
currently relevant resources have to be acquired, built and maintained. The relevance of
the candidate resources is judged to a large extent by the external factors such as change
in individuals aspirations, emerging technologies and so on. It means that the relevant
resources that make for competitive advantage are identified after understanding external
factors. In other words, the relationship between external factors and internal factors is as
crucial as the resources themselves and a proper match between them has to be struck;

[30]
this conclusion takes us to the other view- Industrial Organization View, which says that
an organization has to match its resources to the environment in which it operates. Let us
now understand internal analysis, the sequel to subscription to RBV, which is the primary
objective of this chapter.
A purposeful attempt to list the strengths that facilitate organizational success or the
factors that inhibit growth precedes any potentially successful business initiatives. It
requires a deliberate mental exercise, the output of which will be subsequently
documented in most of the cases, if not all. This exercise might take place at the level of a
core group or the leader enjoined to put a firm on its track. Essentially, an analysis, in
general, implies an identification of the reasons or factors that underlie the current or
future status with regard to a particular phenomenon. Strategic analysis, of which internal
analysis is a part and parcel, seeks to ferret out the reasons that facilitate or hinder long-
term growth or survival of an organization.
The process of identifying and evaluating the organizational factors that underlie
sustainable performance and long-term growth of an organization or those that hinder its
growth is referred as internal analysis. This analysis is variously known as internal
analysis, internal situation analysis, organizational analysis, internal environmental
analysis, internal appraisal of firm, internal assessment, and company analysis.
The quintessence of strategy-making, it should be noted, is that the success of an
organization as reflected in its survival and long-term growth is not fortuitous nor is it
guaranteed by a big-bang launch of it by its promoters; there are certain organizational
factors- factors within the organization- that facilitate the organizational success;
likewise, there are certain factors that either slow an organizations performance or have
the potential to finally kill it. The process of identifying and evaluating the organizational
factors that underlie sustainable performance and long-term growth of an organization or
those that hinder its growth is referred as internal analysis. Please Figure 4.4. This
analysis is variously known as internal analysis, internal situation analysis, organizational
analysis, internal environmental analysis, internal appraisal of firm, internal assessment,
and company analysis. Internal audit, which profiles component activities of each
function and evaluates their efficiency, also does the same function.

This analysis or audit cuts open the contours and the taproots of an organization to help
understand the essential links that have the potential to determine its success. It bears

[31]
repetition here that the entire gamut of strategic thought processes and strategic actions is
concerned with operationalizing a grand plan to survive and grow amid competition,
threats and weaknesses by thoughtfully utilizing the opportunities and its strengths. In the
previous two chapters wherein external analysis has been dealt with and which is also a
part of strategic analysis, the strategic factors that lie outside the boundaries of an
organization have been identified. It is needless to say that strategic analysis comprises
both external and internal analyses. This chapter covers the methods and approaches to
analyze and find out the strategic factors that lie inside an organization.

2.6 Process of Internal Analysis

Organization Analysis implies developing a profile of an organization along its lines of its
activities-either along its functions or around the component operations in the
manufacturing of a product or producing service. These functions or activities, when
identified and strung together, give a broad picture about which activities of an
organization are contributing to either better sale of its products and services or their
production or improvement in the firms profits, or reduction in its costs, or boosting the
firms goodwill. For example, design department contributes to production and sale,
manufacturing department or its wings produce goods, distribution system facilitates
marketing, advertising department pushes the sales, marketing department organizes
outflow of goods and services. After identifying these activities or departments or
functions, those which are best contributing to the goals of the firm are evaluated and
ranked. The outcome of such an evaluation is an identification of the most critical
functions of the organization. Internal Analysis can broadly be done under five
approaches: (1) Function Approach (2) Value Chain Approach (3) Internal Factor
Analysis (4) Critical Success Factor Analysis, and (5) SWOT analysis. An overview of
them is presented in Table 4.1.This chapter discusses them in detail one after the other.

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Table-4.1

Approaches to Internal Analysis

Functions Approach
Resources
Strengths
Competencies
Capabilities
Weaknesses
Gaps
Value Chain Approach
Resources
Strengths
Competencies
Capabilities
Weaknesses
Gaps
Internal Factor Analysis
Support and Resistance from
Internal Setting
Suppliers
Competitors
Intermediaries
Customers
Interest Groups

Critical Success Factor Analysis

Resources
Capabilities
Operations
SWOT Analysis
Strengths in Operations & Resources
Weaknesses in Operations & Resources
Further, these activities are studied to understand what factors have contributed to their
current level of output; for example, while higher sales are analyzed for a particular year

[33]
or in a particular department, they may be attributed to particular sales persons, or
particular outlets or particular models of distribution or particular campaigns. Similarly,
for a perceptible rise in the production, certain factors may be clearly found to be
responsible-new production incentive system or adding a new factory or expansion of
production capacity. All such analyses lead to the identification of strengths and
weaknesses of the factors engaged to contribute to the goals of an organization. Simply
stated, organizational analysis is the identification of factors responsible for achievement
of organizational goals besides establishing the strengths and weaknesses of the factors so
identified. It is worthy of note here that analysis in strategic management revolves around
strengths and weaknesses of the organizational factors. Further, the distinct competencies
or critical strengths are also referred to as key internal forces. It is the function of
internal analyst or organizational analyst or internal auditor to identify them.

2.7 Internal Analysis Vs Organizational Analysis

Organizational Analysis embodies organizational appraisal too, in that the importance
(criticality) of the factors- how strong those factors are in terms of contribution to
organizational goals- is determined.
Organizational Analysis embodies organizational appraisal too, as already explained in
the foregoing, in that the importance (criticality) of the factors- how strong those factors
are in terms of contribution to organizational goals- is determined. This is necessary
because mere listing of factors either serves very little purpose or leaves everything to the
intuition or judgment of a reader. A complete internal analysis or internal audit consists of
profiling of strengths and weaknesses as well as determination of potency of a strength
and gravity of a weakness. In internal analysis or internal audit, comparison of a factors
contribution with the target set or with that of the other similar department or an industry
standard is made to facilitate determination of value of each factor or activity.
Internal Analysis Activity Chain

Identify Evaluate Determine

Challenges of Internal Analysis

The caveat here is that certain factors which were traditionally of strategic importance
cannot remain so in this globalized scenario, at least to some degree if not absolutely. For
example, availability of raw material or cheap labor or governmental protection against
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competitors is no longer a strategic internal factor; this is so because once the borders
between nations are erased, resources and skills freely flow to reach where they are most
needed from where they are abundantly available. This is a new challenge to strategic
analysts operating in this globalized economic order.
A few of the challenges in internal analysis include industry variation and company
variation. To clarify the preceding comment, it has to be stated that what is considered as
a strength in a particular industry may not be so in another industry. For example,
availability of good cotton may be critical to the success of a firm in textile industry but
in electronics industry, raw material is not as critical as that in textile industry. Even in the
same industry, what is critical to one firm may not be so in another firm; for one hotel,
lower costs may be important, but for another hotel, costs dont matter as much as service
does. It implies that criticality varies by company also. Another example would be that
location may be critical to a book retailer selling through a showroom located downtown,
but for a book retailer of mail-order business format, location is not as important.
Internal Analysis Approaches
Internal audit or internal analysis is usually done on traditional functions: production,
marketing, finance, human resources, technology and so on. This is referred to as
Function Approach
Internal audit or internal analysis is usually done around traditional functions: production,
marketing, finance, human resources, technology and so on. This is referred to as
Function Approach. Each of these functions is further broken down to identify critical
sub-functions, and their strength is also determined in terms of their contribution to
organizational goals. A general checklist of functions or sub-functions is given in
The types of functions vary by industry. For example, for a university, curriculum
development may be a function while in a hospital, patient care may be one. For a
consumer goods firm, manufacturing is a vital function while for a large retailing firm,
sourcing/procurement department represents a very critical function.
These functions are each rated in regards to their importance to the firm with the help of a
tool called Internal Factor Evaluation Matrix, the discussion of which is presented a
little later.
The other alternative approach to Function Approach is Value Chain Approach, in which
analysis and evaluation of the nine activities-five primary activities and four subsidiary
ones as identified by Michael Porter-is made to determine where the organization has to
improve further. These activities constitute a standard list of inbound logistics, operations,
outbound logistics, marketing, service, procurement, technology development, human
resources and firm infrastructure. Regardless of the type of organization, value chain

[35]
analysis goes solely along these activities in most of the cases if not all; it is needless to
say that in this analysis, the functions are fixed and standard. The description of this
analysis is presented after the function approach to internal analysis is discussed.
Function Approach
Function Approach concerns itself with the identification and evaluation of strengths and
weaknesses of each function, commonly known as functional department. The functions
that are commonly found include production, marketing, finance, human resources, R&D,
and general management as shown.
Function Approach

R e s e
H u a rc h G
m a & e
n D e v n
F i R e e lo p e S
n s o u m e n r a
a rc e t a l l
n M e
c a rs P r s
e k o
e t d
in u c
g ti
o
n

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 CHAPTER THREE
Strategy Formulation

[37]
3.1 Strategy formulation
It is useful to consider strategy formulation as part of a strategic management process that
comprises three phases: diagnosis, formulation, and implementation. Strategic
management is an ongoing process to develop and revise future-oriented strategies that
allow an organization to achieve its objectives, considering its capabilities, constraints,
and the environment in which it operates.
Diagnosis includes: (a) performing a situation analysis (analysis of the internal
environment of the organization), including identification and evaluation of current
mission, strategic objectives, strategies, and results, plus major strengths and weaknesses;
(b) analyzing the organization's external environment, including major opportunities and
threats; and (c) identifying the major critical issues, which are a small set, typically two
to five, of major problems, threats, weaknesses, and/or opportunities that require
particularly high priority attention by management.

Formulation, the second phase in the strategic management process, produces a clear set
of recommendations, with supporting justification, that revise as necessary the mission
and objectives of the organization, and supply the strategies for accomplishing them. In
formulation, we are trying to modify the current objectives and strategies in ways to make
the organization more successful. This includes trying to create "sustainable" competitive
advantages -- although most competitive advantages are eroded steadily by the efforts of
competitors.
A good recommendation should be: effective in solving the stated problem(s), practical
(can be implemented in this situation, with the resources available), feasible within a
reasonable time frame, cost-effective, not overly disruptive, and acceptable to key
"stakeholders" in the organization. It is important to consider "fits" between resources
plus competencies with opportunities, and also fits between risks and expectations.

There are four primary steps in this phase:

* Reviewing the current key objectives and strategies of the organization, which
usually would have been identified and evaluated as part of the diagnosis
* Identifying a rich range of strategic alternatives to address the three levels of
strategy formulation outlined below, including but not limited to dealing with the
critical issues
* Doing a balanced evaluation of advantages and disadvantages of the alternatives
relative to their feasibility plus expected effects on the issues and contributions
to the success of the organization
* Deciding on the alternatives that should be implemented or recommended.

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In organizations, and in the practice of strategic management, strategies must be
implemented to achieve the intended results. The most wonderful strategy in the history
of the world is useless if not implemented successfully. This third and final stage in the
strategic management process involves developing an implementation plan and then
doing whatever it takes to make the new strategy operational and effective in achieving
the organization's objectives.

The remainder of this chapter focuses on strategy formulation, and is organized into six
sections:
Three Aspects of Strategy Formulation, Corporate-Level Strategy, Competitive Strategy,
Functional Strategy, Choosing Strategies, and Troublesome Strategies.

3.2 THREE ASPECTS OF STRATEGY FORMULATION

The following three aspects or levels of strategy formulation, each with a different focus,
need to be dealt with in the formulation phase of strategic management. The three sets of
recommendations must be internally consistent and fit together in a mutually supportive
manner that forms an integrated hierarchy of strategy, in the order given.

Corporate Level Strategy: In this aspect of strategy, we are concerned with broad
decisions about the total organization's scope and direction. Basically, we consider what
changes should be made in our growth objective and strategy for achieving it, the lines of
business we are in, and how these lines of business fit together. It is useful to think of
three components of corporate level strategy: (a) growth or directional strategy (what
should be our growth objective, ranging from retrenchment through stability to varying
degrees of growth - and how do we accomplish this), (b) portfolio strategy (what should
be our portfolio of lines of business, which implicitly requires reconsidering how much
concentration or diversification we should have), and (c) parenting strategy (how we
allocate resources and manage capabilities and activities across the portfolio -- where do
we put special emphasis, and how much do we integrate our various lines of business).
Competitive Strategy (often called Business Level Strategy): This involves deciding
how the company will compete within each line of business (LOB) or strategic business
unit (SBU).
Functional Strategy: These more localized and shorter-horizon strategies deal with how
each functional area and unit will carry out its functional activities to be effective and
maximize resource productivity.

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3.3 CORPORATE LEVEL STRATEGY
This comprises the overall strategy elements for the corporation as a whole, the grand
strategy, if you please. Corporate strategy involves four kinds of initiatives:
* Making the necessary moves to establish positions in different businesses and
achieve an appropriate amount and kind of diversification. A key part of
corporate strategy is making decisions on how many, what types, and which
specific lines of business the company should be in. This may involve deciding
to increase or decrease the amount and breadth of diversification. It may involve
closing out some LOB's (lines of business), adding others, and/or changing
emphasis among LOB's.
* Initiating actions to boost the combined performance of the businesses the
company has diversified into: This may involve vigorously pursuing rapid-
growth strategies in the most promising LOB's, keeping the other core
businesses healthy, initiating turnaround efforts in weak-performing LOB's with
promise, and dropping LOB's that are no longer attractive or don't fit into the
corporation's overall plans. It also may involve supplying financial, managerial,
and other resources, or acquiring and/or merging other companies with an
existing LOB.
* Pursuing ways to capture valuable cross-business strategic fits and turn them
into competitive advantages -- especially transferring and sharing related
technology, procurement leverage, operating facilities, distribution channels,
and/or customers.
* Establishing investment priorities and moving more corporate resources into the
most attractive LOB's.

It is useful to organize the corporate level strategy considerations and initiatives into a
framework with the following three main strategy components: growth, portfolio, and
parenting. These are discussed in the next three sections.

What Should be Our Growth Objective and Strategies?

Growth objectives can range from drastic retrenchment through aggressive growth.
Organizational leaders need to revisit and make decisions about the growth objectives and
the fundamental strategies the organization will use to achieve them. There are forces
that tend to push top decision-makers toward a growth stance even when a company is in
trouble and should not be trying to grow, for example bonuses, stock options, fame, ego.
Leaders need to resist such temptations and select a growth strategy stance that is
appropriate for the organization and its situation. Stability and retrenchment strategies are
underutilized.

[40]
Some of the major strategic alternatives for each of the primary growth stances
(retrenchment, stability, and growth) are summarized in the following three sub-sections.

3.4 Growth Strategies

All growth strategies can be classified into one of two fundamental categories:
concentration within existing industries or diversification into other lines of business or
industries. When a company's current industries are attractive, have good growth
potential, and do not face serious threats, concentrating resources in the existing
industries makes good sense. Diversification tends to have greater risks, but is an
appropriate option when a company's current industries have little growth potential or are
unattractive in other ways. When an industry consolidates and becomes mature, unless
there are other markets to seek (for example other international markets), a company may
have no choice for growth but diversification.
There are two basic concentration strategies, vertical integration and horizontal growth.
Diversification strategies can be divided into related (or concentric) and unrelated
(conglomerate) diversification. Each of the resulting four core categories of strategy
alternatives can be achieved internally through investment and development, or externally
through mergers, acquisitions, and/or strategic alliances -- thus producing eight major
growth strategy categories.
Comments about each of the four core categories are outlined below, followed by some
key points about mergers, acquisitions, and strategic alliances.
1. Vertical Integration: This type of strategy can be a good one if the company has a
strong competitive position in a growing, attractive industry. A company can grow by
taking over functions earlier in the value chain that were previously provided by suppliers
or other organizations ("backward integration"). This strategy can have advantages, e.g.,
in cost, stability and quality of components, and making operations more difficult for
competitors. However, it also reduces flexibility, raises exit barriers for the company to
leave that industry, and prevents the company from seeking the best and latest
components from suppliers competing for their business.
A company also can grow by taking over functions forward in the value chain previously
provided by final manufacturers, distributors, or retailers ("forward integration"). This
strategy provides more control over such things as final products/services and
distribution, but may involve new critical success factors that the parent company may
not be able to master and deliver. For example, being a world-class manufacturer does
not make a company an effective retailer.
Some writers claim that backward integration is usually more profitable than forward
integration, although this does not have general support. In any case, many companies
have moved toward less vertical integration (especially backward, but also forward)

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during the last decade or so, replacing significant amounts of previous vertical integration
with outsourcing and various forms of strategic alliances.

2. Horizontal Growth: This strategy alternative category involves expanding the

company's existing products into other locations and/or market segments, or increasing
the range of products/services offered to current markets, or a combination of both. It
amounts to expanding sideways at the point(s) in the value chain that the company is
currently engaged in. One of the primary advantages of this alternative is being able to
choose from a fairly continuous range of choices, from modest extensions of present
products/markets to major expansions -- each with corresponding amounts of cost and
risk.

3. Related Diversification (aka Concentric Diversification): In this alternative, a

company expands into a related industry, one having synergy with the company's existing
lines of business, creating a situation in which the existing and new lines of business
share and gain special advantages from commonalities such as technology, customers,
distribution, location, product or manufacturing similarities, and government access. This
is often an appropriate corporate strategy when a company has a strong competitive
position and distinctive competencies, but its existing industry is not very attractive.
4. Unrelated Diversification (aka Conglomerate Diversification): This fourth major
category of corporate strategy alternatives for growth involves diversifying into a line of
business unrelated to the current ones. The reasons to consider this alternative are
primarily seeking more attractive opportunities for growth in which to invest available
funds (in contrast to rather unattractive opportunities in existing industries), risk
reduction, and/or preparing to exit an existing line of business (for example, one in the
decline stage of the product life cycle). Further, this may be an appropriate strategy
when, not only the present industry is unattractive, but the company lacks outstanding
competencies that it could transfer to related products or industries. However, because it
is difficult to manage and excel in unrelated business units, it can be difficult to realize
the hoped-for value added.
Mergers, Acquisitions, and Strategic Alliances: Each of the four growth strategy
categories just discussed can be carried out internally or externally, through mergers,
acquisitions, and/or strategic alliances. Of course, there also can be a mixture of internal
and external actions.
Various forms of strategic alliances, mergers, and acquisitions have emerged and are used
extensively in many industries today. They are used particularly to bridge resource and
technology gaps, and to obtain expertise and market positions more quickly than could be
done through internal development. They are particularly necessary and potentially

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useful when a company wishes to enter a new industry, new markets, and/or new parts of
the world.
Despite their extensive use, a large share of alliances, mergers, and acquisitions fall far
short of expected benefits or are outright failures. For example, one study published in
Business Week in 1999 found that 61 percent of alliances were either outright failures or
"limping along." Research on mergers and acquisitions includes a Mercer Management
Consulting study of all mergers from 1990 to 1996 which found that nearly half
"destroyed" shareholder value; an A. T. Kearney study of 115 multibillion-dollar, global
mergers between 1993 and 1996 where 58 percent failed to create "substantial returns for
shareholders" in the form of dividends and stock price appreciation; and a Price-
Waterhouse-Coopers study of 97 acquisitions over $500 million from 1994 to 1997 in
which two-thirds of the buyer's stocks dropped on announcement of the transaction and a
third of these were still lagging a year later.
Many reasons for the problematic record have been cited, including paying too much,
unrealistic expectations, inadequate due diligence, and conflicting corporate cultures;
however, the most powerful contributor to success or failure is inadequate attention to the
merger integration process. Although the lawyers and investment bankers may consider a
deal done when the papers are signed and they receive their fees, this should be merely an
incident in a multi-year process of integration that began before the signing and continues
far beyond.

Stability Strategies
There are a number of circumstances in which the most appropriate growth stance for a
company is stability, rather than growth. Often, this may be used for a relatively short
period, after which further growth is planned. Such circumstances usually involve a
reasonable successful company, combined with circumstances that either permit a period
of comfortable coasting or suggest a pause or caution. Three alternatives are outlined
below, in which the actual strategy actions are similar, but differing primarily in the
circumstances motivating the choice of a stability strategy and in the intentions for future
strategic actions.
1. Pause and Then Proceed: This stability strategy alternative (essentially a timeout)
may be appropriate in either of two situations: (a) the need for an opportunity to rest,
digest, and consolidate after growth or some turbulent events - before continuing a growth
strategy, or (b) an uncertain or hostile environment in which it is prudent to stay in a
"holding pattern" until there is change in or more clarity about the future in the
environment.
2. No Change: This alternative could be a cop-out, representing indecision or timidity in
making a choice for change. Alternatively, it may be a comfortable, even long-term

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strategy in a mature, rather stable environment, e.g., a small business in a small town with
few competitors.
3. Grab Profits While You Can: This is a non-recommended strategy to try to mask a
deteriorating situation by artificially supporting profits or their appearance, or otherwise
trying to act as though the problems will go away. It is an unstable, temporary strategy in
a worsening situation, usually chosen either to try to delay letting stakeholders know how
bad things are or to extract personal gain before things collapse. Recent terrible examples
in the USA are Enron and WorldCom.
Retrenchment Strategies
Turnaround: This strategy, dealing with a company in serious trouble, attempts to
resuscitate or revive the company through a combination of contraction (general, major
cutbacks in size and costs) and consolidation (creating and stabilizing a smaller, leaner
company). Although difficult, when done very effectively it can succeed in both retaining
enough key employees and revitalizing the company.
Captive Company Strategy: This strategy involves giving up independence in
exchange for some security by becoming another company's sole supplier, distributor, or a
dependent subsidiary.
Sell Out: If a company in a weak position is unable or unlikely to succeed with a
turnaround or captive company strategy, it has few choices other than to try to find a
buyer and sell itself (or divest, if part of a diversified corporation).
Liquidation: When a company has been unsuccessful in or has none of the previous
three strategic alternatives available, the only remaining alternative is liquidation, often
involving a bankruptcy. There is a modest advantage of a voluntary liquidation over
bankruptcy in that the board and top management make the decisions rather than turning
them over to a court, which often ignores stockholders' interests.

What Should Be Our Portfolio Strategy?

This second component of corporate level strategy is concerned with making decisions
about the portfolio of lines of business (LOB's) or strategic business units (SBU's), not the
company's portfolio of individual products.
Portfolio matrix models can be useful in reexamining a company's present portfolio. The
purpose of all portfolio matrix models is to help a company understand and consider
changes in its portfolio of businesses, and also to think about allocation of resources
among the different business elements. The two primary models are the BCG Growth-
Share Matrix and the GE Business Screen (Porter, 1980, has a good summary of these).
These models consider and display on a two-dimensional graph each major SBU in terms
of some measure of its industry attractiveness and its relative competitive strength
The BCG Growth-Share Matrix model considers two relatively simple variables: growth
rate of the industry as an indication of industry attractiveness, and relative market share as

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an indication of its relative competitive strength. The GE Business Screen, also
associated with McKinsey, considers two composite variables, which can be customized
by the user, for (a) industry attractiveness (e.g, one could include industry size and growth
rate, profitability, pricing practices, favored treatment in government dealings, etc.) and
(b) competitive strength (e.g., market share, technological position, profitability, size,
etc.)
The best test of the business portfolio's overall attractiveness is whether the combined
growth and profitability of the businesses in the portfolio will allow the company to attain
its performance objectives. Related to this overall criterion are such questions as:
* Does the portfolio contain enough businesses in attractive industries?
* Does it contain too many marginal businesses or question marks?
* Is the proportion of mature/declining businesses so great that growth will be
sluggish?
* Are there some businesses that are not really needed or should be divested?
* Does the company have its share of industry leaders, or is it burdened with too
many businesses in modest competitive positions?
* Is the portfolio of SBU's and its relative risk/growth potential consistent with the
strategic goals?
* Do the core businesses generate dependable profits and/or cash flow?
It is important to consider diversification vs. concentration while working on portfolio
strategy, i.e., how broad or narrow should be the scope of the company. It is not always
desirable to have a broad scope. Single-business strategies can be very successful (e.g.,
early strategies of McDonald's, Coca-Cola, and BIC Pen). Some of the advantages of a
narrow scope of business are: (a) less ambiguity about who we are and what we do; (b)
concentrates the efforts of the total organization, rather than stretching them across many
lines of business; (c) through extensive hands-on experience, the company is more likely
to develop distinctive competence; and (d) focuses on long-term profits. However,
having a single business puts "all the eggs in one basket," which is dangerous when the
industry and/or technology may change. Diversification becomes more important when
market growth rate slows. Building stable shareholder value is the ultimate justification
for diversifying -- or any strategy.

What Should Be Our Parenting Strategy?

This third component of corporate level strategy, relevant for a multi-business company
(it is moot for a single-business company), is concerned with how to allocate resources
and manage capabilities and activities across the portfolio of businesses. It includes
evaluating and making decisions on the following:
* Priorities in allocating resources (which business units will be stressed)

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 * What are critical success factors in each business unit, and how can the company
do well on them
* Coordination of activities (e.g., horizontal strategies) and transfer of capabilities
among business units
* How much integration of business units is desirable.

3.5 COMPETITIVE (BUSINESS LEVEL) STRATEGY

In this second aspect of a company's strategy, the focus is on how to compete successfully
in each of the lines of business the company has chosen to engage in. The central thrust is
how to build and improve the company's competitive position for each of its lines of
business. A company has competitive advantage whenever it can attract customers and
defend against competitive forces better than its rivals. Companies want to develop
competitive advantages that have some sustainability (although the typical term
"sustainable competitive advantage" is usually only true dynamically, as a firm works to
continue it). Successful competitive strategies usually involve building uniquely strong
or distinctive competencies in one or several areas crucial to success and using them to
maintain a competitive edge over rivals. Some examples of distinctive competencies are
superior technology and/or product features, better manufacturing technology and skills,
superior sales and distribution capabilities, and better customer service and convenience.

Some Defensive Tactics are:

* Raise Structural Barriers: block avenues challengers can take in mounting an
offensive
* Increase Expected Retaliation: signal challengers that there is threat of strong
retaliation if they attack
* Reduce Inducement for Attacks: e.g., lower profits to make things less attractive
(including use of accounting techniques to obscure true profitability). Keeping
prices very low gives a new entrant little profit incentive to enter.
The general experience is that any competitive advantage currently held will eventually
be eroded by the actions of competent, resourceful competitors. Therefore, to sustain its
initial advantage, a firm must use both defensive and offensive strategies, in elaborating
on its basic competitive strategy.

3.6 Cooperative Strategies

Another group of "competitive" tactics involve cooperation among companies. These
could be grouped under the heading of various types of strategic alliances, which have
been discussed to some extent under Corporate Level growth strategies. These involve an
agreement or alliance between two or more businesses formed to achieve strategically
significant objectives that are mutually beneficial. Some are very short-term; others are
longer-term and may be the first stage of an eventual merger between the companies.
Some of the reasons for strategic alliances are to: obtain/share technology, share
manufacturing capabilities and facilities, share access to specific markets, reduce

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financial/political/market risks, and achieve other competitive advantages not otherwise
available. There could be considered a continuum of types of strategic alliances, ranging
from: (a) mutual service consortiums (e.g., similar companies in similar industries pool
their resources to develop something that is too expensive alone), (b) licensing
arrangements, (c) joint ventures (an independent business entity formed by two or more
companies to accomplish certain things, with allocated ownership, operational
responsibilities, and financial risks and rewards), (d) value-chain partnerships (e.g., just-
in-time supplier relationships, and out-sourcing of major value-chain functions).

Summary:
Strategy formulation is the course of action companies take to achieve their defined
goals.
All employees of an organization should be aware of the companys objectives,
mission, and purpose.
A strategic plan enables a company to evaluate resources, allocate budgets, and
maximize ROI (return on investment).
The lack of a strategic plan will result in an organization being without direction or
focus. The company will be reactive rather than proactive.
The six steps for strategy formulation are: define the organization, define the
strategic mission, define the strategic objectives, define the competitive strategy,
implement strategies, and evaluate progress.
Defining the organization requires a company to identify its customers by end
benefits sought, by specific target markets, or by technology.
Defining the strategic mission ensures that the company is able to identify its
values, the nature of its business, its competitive advantage, and its vision for the
future.
Strategic objectives should be defined based on performance targets and may
include increases in market share, customer service improvements, corporate
expansion, sales increases, production methods, etc.
Competitive strategy includes an evaluation of the overall industry and marketplace,
the nature of the competitions position, and the companys internal strengths and
weaknesses.
A company must implement its strategic plan in order to achieve success. It must
develop appropriate tactics, which are the action steps for meeting the strategies
directives.
Strategies must be evaluated and revised on a regular basis in order to meet the
changing needs and challenges of the marketplace and business environment.

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 CHAPTER FOUR
Strategy Execution

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4.1 Strategy Execution (Literature Review)
The need to formulate and then execute a preconceived plan is probably as old as
humanity itself. Even before the advent of modern civilization, human beings depended
on their superior ability to organize into cooperative groups to achieve critical social
goals, such as the acquisition of food or the creation of shelters. But the earliest literature
on how to plan and execute strategies seems to be tied to a different organized activity:
warfare. Among the best-known texts is Sun Tzus The Art of War, which dates back to
the fourth century B.C.
The idea of planning and executing business strategies no doubt has deep roots, but
most of the literature on the subject dates back only to around the mid- to late 20th
century. Much of this literature deals with strategy development rather than execution.
Henry Mintzberg, author of Strategy Safari: A Guided Tour Through the Wilds of
Strategic Management, divides the literature into 10 distinct schools of thought.
The key concepts of the so-called Design School, for example, continue to form the basis
of many undergraduate and MBA strategy courses. SWOT is a prescriptive process that
allows the assessment of Strengths and Weaknesses of the organization in light of the
Opportunities and Threats in its environment.
Some authors have organized the strategy literature into academic or functional
categories. For example, strategy-related research is found in the fields of management,
marketing, economics, finance, and industrial organization. The literature most pertinent
to this report is found in the fields of management and marketing. Management literature
(Barney 1997; Bracker 1980) tends to focus on the common themes of environmental
analysis, resource utilization, and goal attainment. The focus on how to implement
strategy is a relatively recent development, driven by studies showing that even good
plans often fail due to the poor execution of those plans. The well-known Malcolm
Baldrige Criteria for Performance Excellence, which were designed to give U.S.
businesses a performance advantage in the global marketplace, state that action plan
development represents the critical stage in planning when general strategies and goals
are made specific so that effective company-wide understanding and deployment are
possible (Ford and Evans 2000; NIST 1998).Malcolm Baldrige standards also note the
importance of execution itself, stating, An approach must exist for implementing action
plans. The approach must consider how critical requirementsincluding human resource
plans, key processes, performance measures, and resourceswill be aligned and
deployed (Ford and Evans 2000).
Indeed, the ability to align organizational factors has become a major component

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of strategy execution. Organizations with a high degree of employee alignment tend to
generate better shareholder returns (Watson Wyatt Worldwide, 2006). But alignment isnt
easy and, although U.S. firms have made progress in aligning their workforces with their
business strategies, they still have a way to go, according to the Saratoga and
PricewaterhouseCoopers 2005/2006 Human Capital Index Report. Fully 80% of 288
surveyed firms said their workforces were more aligned
with business strategies in 2004 than they were three years prior, but nearly one in
three considered themselves somewhat aligned at best (Bokina 2005). In another
study, Towers Perrin (2005) reports that senior management may not be doing enough to
align employees with organizational goals.

4.2 Factors Influencing the Execution of Strategy

This section of the report highlights the primary factors that drive strategy execution as
well as those factors that serve as barriers to such execution. This analysis is based on the
AMA/HRI Strategy Execution Survey 2006 as well HRIs environmental scan of the
literature on strategy execution.
The AMA/HRI survey asked respondents to provide feedback on a range of factors
that affect organizations ability to execute strategy. Survey participants rated each
factor on a 5-point scale in which 1 = very little and 5 = very much. The table below
shows the extent to which respondents believe that the following factors influence their
organizations ability to execute strategic plans today and the extent
to which they believe they will in 10 years:

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Top Ten Factors Influencing Strategic Execution Today and in Ten Years

The rest of this section examines the role that customer focus, workforce capabilities,
technology, and various other factors play in influencing strategy execution based on the
survey and literature review.

4.3 Factors That Influence the Ability to Execute Strategy

Customer Needs and Demands
The needs and demands of customers easily surfaced as the top factor influencing
an organizations ability to execute its strategyboth today and in 10 years, according to
the AMA/HRI Strategy Execution Survey 2006. On a 5-point scale, customer needs and
demands averaged 4.08 as a factor today and 4.42 as a factor in 10 years. Changing
markets and customer needs influence both the types of strategies that organizations adopt
and the ways in which they execute those strategies. A fractured market, for example,
might require an organization to meet market demands via multiple strategic initiatives.
This can make strategic efforts more complex and, so, more difficult to execute.
Yet, ignoring customers changing needs and demands isnt an option. According to a
customer loyalty study of more than 1,000 U.S. consumers by Accenture, a majority of
customers share their opinions about a companys service or products with others,
whether satisfied or dissatisfied (Customer Loyalty, 2005).
A failure to execute major customer-driven strategies, no matter how challenging such
strategies may be, is likely to result in the eventual demise of an organization.
Focusing on customer obligations can also make other types of strategic initiatives more
difficult to carry out. After all, organizations often want to channel resourcesincluding

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time, effort, financial, and human resourcesto customer-focused strategies. When you
are competing for resources with other business units, the most powerful argument you
can make is that important customers want it and will commit, says Joseph L. Bower,
co-editor with Clark G. Gilbert of From Resource Allocation to Strategy (Lagace 2006).
So, if an organization wants to execute a strategy that isnt directly linked to serving
customers such as the implementation of a new internal information technology system
then that strategy may have a difficult time getting the resources it needs. Indeed, the
AMA/HRI study clearly shows that a lack of adequate resources is the main barrier to
strategy execution today.

Workforce Capability
Another top factor influencing an organizations ability to execute its strategic plans both
today and in 10 years is workforce capability, according to the AMA/HRI Strategy
Execution Survey 2006. On a 5-point scale, workforce capability averaged 3.64 as a factor
today and 4.06 as a factor in 10 years. Why are such capabilities so important? A
workforce made up of talented and engaged people is a huge advantage in executing
strategy, but employees can also be viewed, from some perspectives, as a risk. In an
interview with Leaders magazine,
Mark V.Mactas, chairman and CEO of Towers Perrin, noted that to execute well,
organizations must understand that people are both a core component of risk and
one of the principal avenues to risk mastery (Turning Risk, 2006). Especially in
todays knowledge economy, with many companies pursing multiple strategies, execution
is doomed to failure unless workers understand the strategies, have the skills and talent to
implement them, and are motivated to do so. Risks associated with factors such as high
labor costs and turnover can also cause employers to stumble. Until our technologists
crack the code of artificial intelligence, successful companies will need to depend to a
greater extent than ever on human intelligence, innovation, and inspiration, says Mactas.

Technology
Technological change is also ranked among the top factors influencing an organizations
ability to execute its strategic plans both today and in 10 years, according to the
AMA/HRI Strategy Execution Survey 2006. On a 5-point scale, technological changes
averaged 3.60 as a factor today and 4.08 as a factor in 10 years. That is, it is projected to
be second only to customer demands in terms of its future importance to strategy
execution. Other research also supports the view that technology is expected to be a key
factor in organizations ability to adopt new business models and execute strategy.

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Todays organizations increasingly look toward new business models rather than just new
product lines to challenge the competition. In this environment, information technology is
expected to become an increasingly critical tool, according to surveyed business leaders
in more than 4,000 firms in 23 countries. The survey, conducted by the Economist
Intelligence Unit and commissioned by SAP, found that more than 80% of respondents
cited technology as being a key factor in their firms ability to adapt business models and
execute strategy (Survey Shows, 2005). More than half (54%) said they would pursue
competitive advantage via new business models as opposed to new products. In addition,
respondents cited speed of strategy execution and innovation as their primary challenge
over the next five years. Henning Kagermann, CEO of SAP, said, We are entering the
next wave of computing where IT is aligned with business and used as a driver of
competitive advantage rather than simply a tool to drive down costs.

4.4 Barriers to Strategy Execution

Developing a sound strategy is only half the battle; the more difficult task is confronting
the obstacles that prevent leaders from executing their strategies. There are a multitude of
reasons proffered to explain why planning and execution sometimes fail to deliver
expected performance. A survey by Marakon Associates suggests that organizations
realize only 63% of the financial performance they expect from their strategic plans
(Mankins and Steele 2005). Nearly 200 firms around the world with sales of more than
$500 million participated in the fall 2004 survey. Among the top factors linked to
unrealized performance were insufficient resources, poorly communicated strategy,
vaguely defined execution actions, and unclear accountabilities. The AMA/HRI Strategy
Execution Survey 2006 and HRI research found that, as in the Marakon Associates survey,
a lack of adequate resources was viewed as the primary barrier today. Other top barriers
include government regulations, lack of follow-through, inadequate
communication/feedback, and competitive pressures. In the future, the largest barrier is
expected to be unfavorable economic conditions. The table below reflects these responses
and shows the extent to which respondents believe that the following factors hinder their
organizations ability to execute strategic plans today and the extent to which they believe
these factors will hinder them in 10 years, rated on a 5-point scale, where 1 = very little
and 5 = very much.

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 Top Ten Factors Hindering Strategic Execution Today and in Ten Years

The HRI literature review also turned up a number of barriers to strategy execution, both
internal and external. A 2005 eePulse study of firms that were using new tactics to pursue
new strategies found that external factors tended to be most problematic for strategy
execution. Survey participants in this study, who tended to be executives from companies
around the world, mentioned such factors as government regulations, board interference,
customers that no longer fit, and difficulty in striking business deals or alliances with the
right partners as deterrents to strategy execution (Welbourne 2005).
But internal barriers shouldnt be underrated. Internal organizational factors such as a
firms lack of clarity about its strategic direction, goals, or accountability are often the
culprit behind the inability to execute strategies. What some firms believe are strategies
may be mission statements or financial projections that do little to provide direction,
according to Alan Brache, executive director of business solutions for Kepner-Tregoe (Is
Your Strategy, 2006). Too often, strategies use inaccurate assumptions, fail to generate
the support of key stakeholders, are not kept current, or are ineffectively
communicated.When launching new initiatives, such as entering a new market,
introducing a new product, or relocating operations, it is particularly important to have a
clear strategy. Otherwise, the success of the project may be affected by too few resources,
too many competing projects, or failure to meet budgetary or scheduling goals. According
to Brache, Companies must close the gaps in project management by implementing a
real strategic plan that sets forth products and services to be offered, markets and
customers to be served, investments to be made, an analysis of the competition, and
financial and nonfinancial measures that will tell leaders when they are on the

[54]
right path (p. 66). Right Management Consultants (McKnight, 2005) point to a number
of situations that have the potential to block execution:
Insufficient coordination among top managers or among different departments
Failure to engage employees in the strategy: sometimes they just dont understand
it, dont connect with it, dont share executives sense of urgency or excitement, or
simply dont believe they can make a difference
Unwillingness among line managers to implement the changes needed
Absence of the right metrics for the right things

Lack of Adequate Resources

Not having enough resources surfaced as the top factor hindering an organizations
ability to execute its strategic plans today, according to the AMA/HRI Strategy Execution
Survey 2006. Too often, it seems, top managers strategic ambitions outstrip the resources
theyre willing or able to allocate in order to attain their goals. In addition to the problem
of having too few resources, the way in which limited resources are allocated can be
another factor affecting the ability to execute
strategy. How an organization allocates its resources can affect the execution of its
strategy in ways the firm hadnt intended (Lagace 2006). For example, allocating too
many resources to a single research project may inadvertently commit the organization to
whatever innovations stem from this research, even if those innovations dont align well
with the companys stated mission or its other strategic goals. In effect, the allocation of
resources to an idea can drive organizational strategy.

Government Regulations
Respondents to the AMA/HRI Strategy Execution Survey 2006 see government
regulations as a major barrier to the execution of organizational strategy, second only to a
scarcity of resources. Moreover, respondents expect government regulations to remain
one of the top barriers 10 years into the future. Some experts point to the Sarbanes-Oxley
Act (SOX) and the USA Patriot Act as examples of legislation that impede organizational
actions. Boards are becoming more diligent about insisting on understanding regulators
expectations and the potential liability attached to decisions. According to Thomas P.
Vartanian, a law firm partner, directors must oversee, question and challenge the material
issues the company confronts and are increasingly likely to seek independent advice for
reassurance (Vartanian 2006). But many directors feel that SOX discourages the risk that
drives corporate growth. According to the 32nd Annual Board of Directors

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Study released in February 2006 by Korn/Ferry International, more than half (58%) of
board directors say the SOX requirements should be dropped or amended
because they force stagnation by making companies overly cautious.

4.5 State-of-the-Art (Strategy Execution)

In this section, we have created a fictional organization called The Strategy Execution
Company, or TSEC, which is intended to represent a large, global organization that has a
reputation for executing its strategies well. This organization is based on HRIs research
in the field of strategy alignment metrics, on its work with various organizations and
executive teams, on a review of the literature on strategy execution, and on data from the
AMA/HRI Strategy Execution Survey 2006. It should be noted, however, that every
organization is unique and so needs to adjust its strategy execution approach to its own
markets, customers, culture, capabilities, and employees.
TSEC and Its Strategic Challenge
TSEC has a well-known set of brand-name products in multiple markets. It has various
divisions, each of which is among the top three in its market. TSEC takes pride in its
ability to anticipate shifts in the market and rapidly reposition its business units to execute
in the new markets. This agility has been the key to its growth and success. At TSEC, the
role of corporate headquarters is to provide strategy development leadership, set global
standards, identify efficiency and synergy opportunities at the global level, and monitor
performance. Although corporate headquarters does some preliminary planning in terms
of how to execute
major strategies, most of the daily strategy execution and alignment issues tend to be
worked out at the division levels. Because TSEC is a large, global corporation,
we will focus this strategy execution example on the strategic business unit (SBU) level.
Well call it TSECs CustFo Division. The fictional CustFo is number two in its market
and is striving to become number one. Companies have traditionally survived in this
market segment by innovating in the areas of marketing and logistics. CustFo is a brand
name in its market and is continuously fighting to improve its market share without
having to sacrifice its margins.
In recent times, CustFo executives have been struggling with the bifurcation in their
marketplace. After a thorough analysis of current customers and market trends, CustFo
discovered that customers were becoming segmented into two groups. The first segment
was filled with CustFos traditional customers, who need

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no-frills services, guaranteed quality, and low prices. The second segment contains
customers who need a complete set of consultative services along with guaranteed
quality. CustFo discovered that these customers are willing to pay higher prices to obtain
the expertise they need. For executives at CustFo, the strategy question was
straightforward: Should the organization improve its capability of entering the high end of
the market? The answer was a clear yes.Unless CustFo acted quickly, its competitors
would take away the growing second segment, those customers who need consultative
services. It wasnt difficult to convince corporate HQ of the need. Indeed, the bifurcation
of markets was occurring in other divisions of TSEC as well, so headquarters was eager
to see how this could be effectively addressed at CustFo. The executive team recognized
that CustFo would need to adopt a two-pronged strategy, but there were many questions
about how to manage it. How could they, for example, develop the expertise to execute
this strategy? And how could they develop new competencies without diluting their
traditional expertise?

Laying the Groundwork for Execution

To solve these problems, CustFo executives decided to build a strategy execution
profile, which is a table of business approaches, behaviors, and processes that are
required to enable an organization to optimally execute strategies. The profile
components were categorized in the same manner as CustFos Strategic Alignment
Questionnaire, a tool that TSEC uses in virtually all of its strategy execution initiatives.
The idea is that, after the planning is completed, CustFo can measure its
organizational alignment and, therefore, its readiness to execute its strategy. Once
CustFos executives had created the strategy execution profile, it became clear that
CustFo would be unable to execute the solutions strategy without a significant addition of
talent and expertise. Using the logic of the requirements, coupled with their marketing
analysis, the CustFo executives were able to convince TSEC corporate executives of their
need.

Executing a Difficult Strategy

One of CustFos first steps was to administer its Strategic Alignment Questionnaire to
gauge how well people understood the new strategy and how prepared they were to
implement it. The results were used to create a strategy execution plan for CustFo and

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guide the implementation process. To capture what it called the solutions business,
CustFo had to do more than just leverage its existing customer relationships. It had to
learn to be more aggressive and innovative without sacrificing its traditional focus on
consistency, efficiency, and effectiveness. The new executives from the acquired firms
had built strategies that
required innovation to compete with the well-established firms. In many ways, CustFo
and the companies it acquired were in very different businesses, although they were in the
same industry.
The Potential for Culture Clashes
The executives and employees of the new acquisitions had competencies and cultures that
were typical for smaller, more agile companies. Their strategy was to innovate, find what
the customer wanted, and then create a way to deliver what was needed. Experimentation
was key to their success. And, of course, their willingness to try new approaches and take
risks meant that they were less consistent in following procedures and processes.
Sometimes their experiments failed and everyone had to scramble to quickly save or
replace the product, driving costs higher and losing time. But the failures were more than
offset by the successes. In contrast, CustFos managers and employees were very
consistent in their behavior. Following procedures and processes in CustFo was, to a large
degree, the secret to the success of the organization. For many, this kind of consistency
felt as if it were a major strategy in itself. Employees were proud of their ability to
execute precisely, rapidly, and quickly. They had years of experience in improving their
processes, cutting costs, and passing on the savings to customers. They approached most
of their business problems from a deliberate, analytical perspective that minimized
mistakes, and saved time and resources. These differences in strategic awareness and
behavior were underscored by differences in the core strategic values of creativity and
growth. CustFos managers and employees were very oriented to incremental
improvement, while the new companies managers and employees were most interested in
finding new and different ways to do business. Additionally, the new employees felt that
their strategy called for a balance between maximizing profits and gaining market share,
while CustFos employees were clearly focused on maximizing profits even while
maintaining quality.

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